-----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, NExdXqZkArDr0A57URJze8VpWKaHx61Abf/F10BBHiqdd/OMd8V9Wt4ZoKoQSD9d llgm4JUiojZZVGutN4SJLg== 0000926236-02-000115.txt : 20020627 0000926236-02-000115.hdr.sgml : 20020627 20020627162615 ACCESSION NUMBER: 0000926236-02-000115 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020329 FILED AS OF DATE: 20020627 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: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10704 FILM NUMBER: 02689446 BUSINESS ADDRESS: STREET 1: 1901 DIPLOMAT DRIVE CITY: FARMERS BRANCH STATE: TX ZIP: 75234-8914 BUSINESS PHONE: 9724849484 10-K 1 ssg10k02a.txt FORM 10-K FOR FISCAL YEAR ENDED MARCH 29, 2002 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 29, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File number 1-10704 Sport Supply Group, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 75-2241783 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1901 Diplomat Drive, Farmers Branch, Texas 75234 - 8914 ------------------------------------------ ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 484-9484 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 Over-the-counter Bulletin Board 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 June 1, 2002 based on the closing price of the common stock on the Over the Counter Bulletin Board on such date, was approximately $4,600,000. Indicated below is the number of outstanding shares of each class of the registrant's common stock, as of June 1, 2002. Title of Each Class of Common Stock Number Outstanding ----------------------------------- ------------------ Common Stock, $.01 par value 8,917,244 shares DOCUMENTS INCORPORATED BY REFERENCE Document Part of the Form 10-K --------------------------------------------- --------------------- Proxy Statement for Annual Meeting of Stockholders to be held on September 26, 2002 Part III TABLE OF CONTENTS Item Page ---- ---- PART I 1 Business.......................................... 3 2 Properties........................................ 9 3 Legal Proceedings................................. 10 4 Submission of Matters to a Vote of Security Holders 10 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters............................. 10 6 Selected Financial Data........................... 12 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 13 8 Financial Statements and Supplementary Data....... 21 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 37 PART III 10 Directors and Executive Officers of the Registrant 37 11 Executive Compensation............................ 37 12 Security Ownership of Certain Beneficial Owners and Management.................................. 37 13 Certain Relationships and Related Transactions.... 37 PART IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 37 15 Signatures........................................ 38 PART I. Item 1. Business. General Sport Supply Group, Inc. is a leading direct mail marketer of sporting goods, physical education, recreational and leisure products and equipment to the institutional market in the United States. The institutional market is generally comprised of schools, colleges, universities, government agencies, military facilities, athletic clubs, athletic teams and dealers, youth sports leagues and recreational organizations. We offer products directly to the institutional market primarily through: (i.) a variety of distinctive, information-rich catalogs; (ii.) sales personnel strategically located in certain large metropolitan areas; (iii.) in-bound and out-bound telemarketers; (iv.) a team of experienced bid and quote personnel and (v.) the Internet. Our marketing efforts are supported by a customer database of over 250,000 names, a call center at our headquarters located in Farmers Branch, Texas, a custom-designed 180,000 square foot distribution center, world-wide sourcing, and domestic manufacturing facilities. We currently offer approximately 10,000 sports related equipment products to over 100,000 customers. We believe that over the past few years the sales of sports related, physical education, recreational and leisure products in the United States have experienced increased competition and declining participation in traditional sports activities. There has been a rapidly growing shift from in-store and on-site sales to satisfying the product and service needs of the market through printed catalogs, broadcast and cable infomercials, home shopping channels, direct telephone marketing and the Internet. This shift has occurred due to the convenience of home shopping for the time constrained dual-career consumer households, the expanded direct access to customers outside of major cities and the increasingly high levels of product fulfillment and customer service offered by leading direct marketing companies. We believe the institutional sporting goods market is highly fragmented and that many of our competitors lack the necessary capital, support systems, and economies of scale to effectively exploit the institutional market for the long-term. Nevertheless, additional competition has had an impact on our business. We are positioned to grow our business because of our long-term customer relationships, our Information Technology (IT) and Internet platform, our high capacity order-taking, processing and fulfillment, our well-developed expertise in catalog design and merchandising and our superior sourcing capabilities. One of the most important contributions of the IT platform is that its order processing and fulfillment capabilities are integrated with all of our websites. Each website is strategically targeted to a specific customer group or product line. Our websites enable our customers to place orders, access account information, track orders, and perform routine customer service inquires on a real-time basis, twenty-four hours a day, seven days a week. This functionality allows for more convenience and added flexibility for our customers, many of whom are part-time coaches and volunteers that have careers and parenting responsibilities. We believe the majority of our customers have access to the Internet and view placing orders and accessing their account information over the Internet as a significant benefit. We have experienced increased e-commerce activity through our websites and believe that an increasing portion of our customer base will use the Internet as the predominant method of quoting, ordering, and procuring their products, along with performing customer service inquiries. Our sourcing, warehousing, distribution and fulfillment capabilities, and our fully integrated SAP information system, provide the necessary capacities, logistics, information and technological capabilities to meet the demands and growth potential of e-commerce and business expansion. We view the continued migration of our customers to our websites as vital to our future growth and success. We are a Delaware corporation incorporated in 1982. In 1988, we became the successor of an operating division of Aurora Electronics, Inc. (f/k/a BSN Corp. and referred to herein as "Aurora"). Before completing the initial public offering of 3,500,000 shares of our common stock in April 1991, we were a wholly-owned subsidiary of Aurora. As of March 29, 2002, we had two wholly-owned subsidiaries: Athletic Training Equipment Company, Inc., a Delaware Corporation ("ATEC") and Sport Supply Group Asia, Ltd., a Hong Kong Corporation. Our ATEC subsidiary purchased substantially all of the assets of Athletic Training Equipment Company, Inc., a Nevada corporation in December 1997. On September 25, 2000, we acquired the stock of Sport Supply Group Asia, Ltd., a Hong Kong corporation from Emerson Radio Corporation. (See Item 13 -- "Certain Relationships and Related Transactions"). Effective March 2001, Sport Supply Group, Inc. is a majority-owned subsidiary of Emerson Radio Corp. Our executive offices are located at 1901 Diplomat Drive, Farmers Branch, Texas 75234-8914 and our telephone number is (972) 484-9484. Our Internet website, sportsupplygroup.com, provides certain additional information about us. Products We believe we manufacture and distribute one of the broadest lines of sporting goods, physical education, recreational and leisure products and equipment to the institutional market. We offer approximately 10,000 products for sale. Our product lines include, but are not limited to: archery, baseball, softball, basketball, camping, football, tennis and other racquet sports, gymnastics, indoor recreation, physical education, soccer, field and floor hockey, lacrosse, track and field, volleyball, weight lifting, fitness equipment, outdoor playground equipment, and early childhood development products. We believe brand recognition is important to the institutional market. Most of our products are marketed under trade names or trademarks owned or licensed by us. We believe many of our trade names and trademarks are well recognized among institutional customers. We intend to continue to expand our product and brand name offerings by actively pursuing product, trademark and trade name licensing arrangements and acquisitions. Our trademarks, servicemarks, and trade names include, but are not limited to, the following: * Voit[R] -- institutional sports related equipment and products, including inflated balls and baseball and softball products -- (licensed from Voit Sports, Inc. - 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, a subsidiary of Riddell Sports, Inc. - see discussion below). * Huffy[R] -- early childhood development products (sublicensed from Huffy Sports Company - see discussion below). * Alumagoal[R] -- track and field equipment, including starting blocks, hurdles, pole vault and high jump standards and crossbars. * AMF[R] -- gymnastics equipment (licensed from AMF Bowling, Inc. - see discussion below). * ATEC [R] -- pitching machines and related baseball and softball training equipment. * Blastball[R] -- youth recreational baseball. * BSN[R] -- sport balls. * Champion -- barbells, dumbbells and weight lifting benches and machines. * Curvemaster[R] -- baseball and softball pitching machines. * Fibersport -- pole vaulting equipment. * Flag A Tag[R] -- flag football belts. * Gamecraft - physical education, recreational game tables and coaching 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[R] -- 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. * Toppleball[R] -- recreational ball games. * U.S. Games, Inc.[R] -- physical education equipment for exercise, games and childhood development. The Voit license permits us to use the Voit[R] trademark in connection with manufacturing, advertising, and selling specified sports related equipment and products, including inflated balls for all sports and baseball and softball products to certain institutional customers. We are required to pay annual royalties under the license. Subject to the terms of the license agreement, we are permitted to use the Voit trademark through December 31, 2004. The Huffy sublicense permits us to use the Huffy[R] trademark in connection with manufacturing, advertising, selling and distributing certain sports related products and equipment to institutional customers. We are required to pay annual royalties under the sublicense subject to the terms of the sublicense agreement. The term of the sublicense expires September 30, 2003. In February 1992, we acquired two separate licenses to use several trade names, styles, and trademarks (including, but not limited to, MacGregor[R]). On December 21, 2000, the license relating to the use of the MacGregor[R] trademark was amended and restated in its entirety. The amended and restated license permits us to manufacture, promote, sell, and distribute to designated customers throughout the world, specified sports related equipment and products relating to baseball, softball, basketball, soccer, football, volleyball, and general exercise. The amended and restated license requires us to pay an annual royalty based upon sales of MacGregor branded products, with the minimum annual royalty set at $100,000. The amended and restated license is exclusive with respect to certain customers and non-exclusive with respect to others. The amended and restated license has an original term of forty (40) years, but will automatically renew for successive forty (40) year periods unless terminated in accordance with the terms of the license. We have converted a substantial portion of our products to the MacGregor[R] brand, which is believed to be a widely recognized trade name in the sporting goods industry. See Part I. Item 1. -- "Business - Sales and Marketing". On August 19, 1993, we 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. We are required to pay an annual royalty under the license. The minimum royalty increases by a predetermined percentage each year the license agreement is in effect. Subject to the terms of the AMF license, we are permitted to use the AMF name through December 31, 2002 with the option to renew the agreement through December 31, 2003. In addition to the foregoing, we have acquired (or had issued) a number of patents relating to products sold by us. We also have a number of patent applications pending before the U.S. Patent and Trademark Office. Sales and Marketing We believe we are the largest seller of sporting goods and sports leisure products to the institutional market in the United States. The institutional market is made up of well over 500,000 potential customers, most clearly defined as: 1) Out-of-School Customers including youth sports leagues, recreational departments and organizations, churches and private athletic organizations; 2) In-School Customers including all levels of public and private schools and their related athletic and recreational departments; 3) Government Customers including federal, state and local agencies; and 4) Resale and Specialty Customers including sporting goods resellers and specialty organizations. We solicit and sell our products through 10 different direct mail catalogs, an inside sales and customer service staff of over 100 people, an outside sales force of over 20 people traveling in significant metropolitan sales territories, and fifteen Internet sites. We have marketing efforts directed towards the following athletic and leisure activities: Football, Baseball, Softball, Basketball, Soccer, Track and Field, Training and Fitness, Camping, Outdoor Recreation, Early Childhood Development, Table Games, Playground Recreation, Tennis and Volleyball. We believe we are also a brand leader in the institutional sporting goods and sports leisure market, marketing our products under a variety of private label and well recognized name brands including: BSN Sports, MacGregor[R], Reebok Team Uniforms, Spalding, PortaPit, Champion Barbell, Voit[R], Huffy[R], AMF[R] and Flag-A-Tag[R]. We believe our mailing list of over 250,000 customer and target prospects is one of our most valuable intangible assets. We also have licenses and marketing alliances with national organizations including, YMCA, Hershey Chocolate USA, and Antigua[R] In 1996, we entered into an advertising and distribution agreement with Hershey Chocolate USA. Pursuant to this agreement, we market and distribute promotional fund raising literature and programs to our customers, and service the fund raising needs of many nontraditional customers. The current agreement expires on May 15, 2004 with a two year renewal option. During fiscal year 1999, we acquired two team dealers. These team dealer acquisitions continue to service the local institutional customers and teams with a full line of athletic products. We also use this local presence to expand our product sales to the local institutional customer base. Conlin Bros., Inc., located in Southern California, was acquired in January 1999. Larry Black Sporting Goods, Inc. in Oklahoma and Kansas, was acquired in February 1999. During October 1999, we further expanded by acquiring two more local team dealers: Spaulding Athletic, located in Little Rock Arkansas, and LAKCO Team Sports, located in Southern California. During fiscal year 1998, we acquired certain assets of Athletic Training Equipment Company, Inc., a Nevada Corporation. ATEC manufactures and markets pitching machines and other baseball and softball training equipment to sporting goods dealers and other sporting goods institutions. These products are marketed using catalogs and outside sales representatives to service the dealers. ATEC has one of the broadest and most versatile lines of pitching machines in the market today. With the use of the latest technology, ATEC has continued to meet the training needs of professional, college, high school and youth baseball and softball leagues. We have fifteen Internet sites listed below: BSNsports.com -- targets the longstanding customer of SSG who recognizes the BSN sports name LeagueDirect.com -- targets Little League and other league sports US-Games.com -- targets the early childhood development buyer ChampionBarbell.com -- targets fitness BSNgsanaf.com -- targets the government NewEnglandCamp.com -- targets camping and outdoor leisure Portapit.com -- targets track and field eSportsonline.com -- targets all customers ATECsports.com -- website for ATEC Officialfundraising.com -- targets all customers interested in fundraising Flagatag.com -- targets flag football and intramural leagues Blastball.com -- targets users of our exclusive Blastball product ConlinSports.com -- targets the West Coast sports customer familiar with the Conlin Sports name PEplanet.com -- targets the early childhood and physical education market RolDri.com -- targets dealers servicing the tennis market Each website is strategically targeted to a specific customer group or product line. Our websites enable our customers to place orders, access account information, track orders, and perform routine customer service inquiries on a real-time basis, twenty-four hours a day, seven days a week. This functionality allows for more convenience and added flexibility for our customers. Over the years, we believe we have established a market leader position by constantly updating and expanding our product lines and targeting selling efforts to specific customer profiles. We have historically targeted one market -- institutional sporting goods customers. We also target individual consumers on our esportsonline.com website and to a lesser extent retail customers and participants in our new associate programs. The associate program allows independent third parties to promote our products and services on their website and share in a percentage of the revenue. Customers Our revenues are not dependent upon any single customer. Instead, we enjoy a very large and diverse customer base. Our 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, team dealers and certain large retail sporting goods chains. We believe our customer base in the United States is the largest in the institutional direct mail market for sports related equipment. Many of our 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. Approximately 8%, 7%, 9%, and 7% of our sales in the fiscal years 2002, 2001, 2000, and 1999, respectively, were to agencies of the United States Government, a majority of which were sales to military installations. We have a contract with the General Services Administration (the "GSA Contract") that grants us an "approved" status when attempting to make sales to military installations or other governmental agencies. The existing GSA Contract expires December 31, 2006. Under the GSA Contract, we agree to sell approximately 550 products to United States Government agencies and departments at catalog prices or at prices consistent with any discount provided to our other customers. Products sold to the United States Government under the GSA Contract are always sold at our lowest offered price. We also sell products to United States Government customers from a NAF contract (Non-Appropriated Funds). Our entire product line is included on this contract and offers pricing to the U.S. Government at discounted prices that are consistent with any discount provided to our other customers. This contract is administered by the United States Air Force and is scheduled to expire on September 30, 2003. Seasonal Factors and Backlog Historically, our revenues are lowest in the quarter ending December and peak in the quarter ending March. Our revenues reflect a level cycle during the quarters ending June and September. The peak in revenues in the quarter ending March is primarily due spring and summer sports, favorable outdoor weather conditions and school needs before summer closing. We had a backlog of approximately $2,015,000 at March 29, 2002, $2,638,000 at March 30, 2001, $2,329,000 at September 29, 2000 and $2,458,000 at October 1, 1999. Manufacturing and Suppliers We manufacture, assemble and distribute many of our products from four of our facilities. See Item 2. -- "Properties" for details. Gym mats and netting are manufactured in our two Anniston, Alabama plants. Baseball and softball pitching machines are manufactured/assembled at our ATEC subsidiary in Sparks, Nevada. Items of steel and aluminum construction, such as soccer, football and baseball field equipment, are principally manufactured at our facilities in Farmers Branch, Texas. Certain products manufactured by us are custom-made (such as tumbling mats ordered in color or size specifications), while others are standardized. The principal raw materials used by us 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, and wood. During the past year we began the process of outsourcing many of the products historically manufactured by us, including products such as game tables and fitness equipment. Products have been outsourced to both domestic and international vendors. Outsourcing these products has enabled us to consolidate plants and reduce our manufacturing requirements. We have closed manufacturing facilities in California and Alabama and reduced the size of our manufacturing facilities in Texas by approximately 50%. Outsourcing these products has also enabled us to (i.) reduce our cost of goods in many of these products, (ii.) reduce our inventory requirements, (iii.) reduce many selling prices to our customers and (iv.) improve our remaining manufacturing efficiencies by focusing on longer production runs of fewer products. We believe selling products to our customers at more competitive prices will have a positive impact on our revenue base. Items not manufactured by us are purchased from various suppliers primarily located in the United States, Taiwan, Australia, the Philippines, Thailand, the People's Republic of China, Pakistan, Sweden and Canada. We have no significant purchase contracts with any major supplier of finished products, and most products purchased from suppliers are readily available from other sources. We purchase most of our finished product in U.S. dollars and are, therefore, not subject to direct foreign exchange rate differences. See Part II. Item 7. - Management Discussion and Analysis - Certain Factors that May Affect the Company's Business or Future Operating Results". Competition We compete in the institutional sporting goods market principally with local sporting goods dealers, retail sporting goods stores, other direct mail catalog marketers and providers of sporting goods on the Internet. We have identified approximately 15 other direct mail companies in the institutional market. We believe that most of these competitors are substantially smaller than us in terms of geographic coverage, products, e- commerce capability and revenues. We compete in the institutional market principally on the basis of: brand, price, product availability and customer service. We believe we have an advantage in the institutional market over traditional sporting goods retailers and team dealers because our selling prices do not include comparable price markups attributable to traditional multi-distribution channel markups. In addition, our ability to control the availability of goods we source enables us to respond more rapidly to customer demand. We believe our direct mail competitors operate primarily as wholesalers and distributors. Government Regulation Many of our products are subject to 15 U.S.C.A. SS 2051-2084 (1998 and Supp. 2002), 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 that 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 our products, we are periodically subject to product liability claims resulting from personal injuries. We may become involved in various lawsuits incidental to our business, some of which relate to claims allegedly resulting in substantial permanent paralysis. Significantly increased product liability claims continue to be asserted successfully against manufacturers and distributors of sports equipment throughout the United States resulting in general uncertainty as to the nature and extent of manufacturers' and distributors' liability for personal injuries. See Item 3. -- "Legal Proceedings". Since September 11, 2001, product liability insurance has become much more expensive, more restrictive and more difficult to obtain. We recently renewed our general product liability insurance through March 2003. There can be no assurance that our general product liability insurance will be sufficient to cover any successful product liability claims made against us. In our opinion, any ultimate liability arising out of currently pending product liability claims will not have a material adverse effect on our financial condition or results of operations. However, any claims substantially in excess of our insurance coverage, or any substantial claim not covered by insurance, could have a material adverse effect on our financial condition and results of operations. Employees On May 3, 2002, we had approximately 373 full-time employees, of whom 81 were involved in our manufacturing operations. We also hire part-time and temporary employees primarily during the summer months. None of our employees are represented by unions, and we believe our relations with employees are good. Directors and Executive Officers -------------------------------- Year First Became Director or Name Age Position Officer ---- --- -------- ------- Geoffrey P. Jurick 61 Chairman of the Board and Chief 1996 Executive Officer John P. Walker 39 President and Director 1996 Terrence M. Babilla 40 Chief Operating Officer, 1995 Executive Vice President, General Counsel and Secretary Eugene J.P. Grant 54 Executive Vice President, Sales 1999 and Marketing Michael P. Glassman 56 Vice President, Sales and 2001 Marketing Robert K. Mitchell 50 Chief Financial Officer 2000 Douglas E. Pryor 46 Senior Vice President, Sourcing 1999 and International Operations Kenneth A. Corby 41 Vice President, Corporate 1998 Development John C. Bals 44 Vice President, Sales of 2002 Sporting Goods Division Thomas P. Treichler 58 Director 1997 Peter G. Bunger 62 Director 1996 Johnson C.S. Ko 51 Director 1996 Item 2. Properties. The following table sets forth the material properties owned or leased by us or any of our subsidiaries: Approximate Square Lease Expires Facility Purpose Footage Location or is Owned ---------------- ------- -------- -------------- Manufacturing and corporate 135,000 Farmers December, 2004 headquarters (1) Branch, TX Warehouse and fulfillment 181,000 Farmers December, 2004 processing (2) Branch, TX Manufacturing 62,500 Sparks, NV July, 2004 Manufacturing 35,000 Anniston, AL Owned Manufacturing 45,000 Anniston, AL Owned (1) Approximately 40,000 square feet are utilized by Emerson Radio Corporation. (2) Approximately 35,000 square feet are utilized by Emerson Radio Corporation. We believe the facilities used in our operations are in satisfactory condition and adequate for our present and anticipated future operations. However, we are currently reviewing the possibility of consolidating the facilities located in Farmers Branch into one facility when the leases expire in 2004. In addition to the facilities listed above, we lease space in various locations, primarily for use as sales offices. Item 3. Legal Proceedings. Periodically, we become involved in various claims and lawsuits incidental to our business. In management's opinion, any ultimate liability arising out of currently pending claims will not have a material adverse effect on our financial condition or results of operations. However, any claims substantially in excess of our insurance coverage, or any substantial claim that may not be covered by insurance or any significant monetary settlement, could have a material adverse effect on our financial condition or results of operations. Item 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. Our common stock, par value $.01 per share (the "Common Stock") is quoted on the Over-the-counter Bulletin Board under the symbol SSPY. As of April 30, 2002, there were 1,259 holders of the Common Stock (including individual security position listings). The following table sets forth the high/low sales range for the periods indicated. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Common Stock Fiscal Year Fiscal Quarter High Low ----------- --------------- ------ ------ 1999 Ended December 9.313 5.875 Ended March 11.875 7.750 Ended June 10.750 8.750 Ended September 10.313 8.125 2000 Ended December 8.438 5.688 Ended March 8.250 5.938 Ended June 6.125 3.875 Ended September 4.875 2.188 2001 Ended December 2.938 0.750 Ended March 2.375 1.063 2002 Ended June 1.500 1.270 Ended September 1.350 0.760 Ended December 1.250 0.850 Ended March 1.100 0.960 We have not declared dividends in the past three fiscal years. We currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. On May 28, 1997, the Board of Directors approved the repurchase of up to 1,000,000 shares of our issued and outstanding common stock in the open market and/or privately negotiated transactions. On October 28, 1998, the Board of Directors approved a second repurchase program of up to an additional 1,000,000 shares of our issued and outstanding common stock in the open market and/or privately negotiated transactions. As of March 29, 2002, we repurchased approximately 1,333,000 shares of our issued and outstanding common stock in the open market and privately negotiated transactions. Any future purchases will be subject to price and availability of shares, working capital availability and any alternative capital spending programs. Our bank agreement currently prohibits the repurchase of any additional shares without the bank's prior consent. On January 14, 1998, we issued 50,000 shares of restricted stock to John P. Walker, President and a Director of Sport Supply Group, Inc., 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). These shares vested over a two-year period. We did not receive any cash proceeds from the issuance of these shares. On January 12, 2001, we issued 1,629,629 shares of restricted stock out of our treasury stock to Emerson Radio Corp. ("Emerson"), our largest stockholder. Emerson paid $1.35 in cash for each share of stock, for a total purchase price of $2.2 million. All of the shares issued in this transaction were issued in a non-public offering pursuant to Section 4(2) of the Securities Act of 1933, as amended. Proceeds of the sale were used to pay off our term loan with Comerica Bank. Item 6. Selected Financial Data (Unaudited). The following sets forth selected historical financial information. The data has been derived from our audited financial statements. The amounts are in thousands, except for per share data. The historical information should be read in conjunction with Item 7. -- "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes thereto included in Item 8. -- "Financial Statements and Supplementary Data". SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (UNAUDITED) ( Amounts in thousands, except for per share data ) Fiscal Six Fiscal Fiscal Fiscal Eleven Year Months Year Year Year Months Ended Ended Ended Ended Ended Ended March 29, March 30, Sept 29, Oct 1, Oct 2, Sep 26, Statement of Earnings Data: 2002 2001(2) 2000 1999 1998 1997 (1) (3) -------- -------- -------- -------- -------- -------- Net revenues $ 103,601 $ 50,337 $ 119,321 $ 112,880 $ 101,935 $ 83,318 Gross profit 29,495 13,936 36,170 37,283 32,303 26,811 Operating profit (loss) (2,790) (2,411) (437) 8,445 7,782 4,226 Interest expense 986 957 2,022 1,196 474 757 Other income, net 193 14 17 63 215 83 Earnings (loss) from continuing operations (3,582) (2,123) (1,518) 4,623 4,964 2,576 Loss from discontinued operations (3) -- -- -- -- -- (2,574) -------- -------- -------- -------- -------- -------- Net earnings (loss) $ (3,582) $ (2,123) $ (1,518) $ 4,623 $ 4,964 $ 2 ======== ======== ======== ======== ======== ======== Earnings (loss) per common share and common equivalent share: (notes 1, 2 and 3) Net earnings (loss) per common share from continuing operations $ (0.40) $ (0.27) $ (0.21) $ 0.63 $ 0.62 $ 0.32 Net loss per common share from discontinued operations -- -- -- -- -- (0.32) -------- -------- -------- -------- -------- -------- Net earnings (loss) per common share - basic $ (0.40) $ (0.27) $ (0.21) $ 0.63 $ 0.62 $ - ======== ======== ======== ======== ======== ======== Net earnings (loss) per common share from continuing operations - diluted $ (0.40) $ (0.27) $ (0.21) $ 0.60 0.60 0.32 Net loss per common share from discontinued operations - diluted -- -- -- -- -- (0.32) -------- -------- -------- -------- -------- -------- Net earnings (loss) per common share - diluted $ (0.40) $ (0.27) $ (0.21) $ 0.60 $ 0.60 $ 0.00 ======== ======== ======== ======== ======== ======== Weighted average common and common equivalent shares: Weighted average common shares outstanding - basic 8,917 7,964 7,273 7,390 8,026 8,146 Weighted average common shares outstanding - diluted 8,917 7,964 7,273 7,728 8,237 8,151 At At At At At At March 29, March 30, Sept 29, Oct 1, Oct 2, Sep 26, Balance Sheet Data: 2002 2001 (2) 2000 1999 1998 1997 (1) (3) -------- -------- -------- -------- -------- -------- Working capital $ 26,977 $ 28,383 $ 30,771 $ 31,873 $ 25,245 $ 24,006 Total assets 67,307 73,584 73,687 73,249 54,804 50,484 Long-term obligations, net 17,000 17,333 19,034 18,426 5,161 4,418 Total liabilities 30,258 32,955 33,150 31,141 13,626 11,527 Stockholders equity 37,049 40,629 40,537 42,108 41,178 38,957 Notes to Selected Financial Data (Unaudited) (1) During 1997, we changed our 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. (2) During 2001, we changed our financial reporting year-end from September 30 to March 31. Therefore, the fiscal year ended March 30, 2001 is a transition period consisting of six calendar months. (3) On May 20, 1996 we disposed of substantially all of the assets (other than cash and accounts receivable) of the Gold Eagle Division to a privately held corporation.
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 our continuing operations as a percentage of net revenues. For the For the For the For the 12 Months 6 Months 12 Months 12 Months Ended Ended Ended Ended March 29, March 30, Sept. 29, Oct. 1, 2002 2001 2000 1999 ------- ------- ------- ------- Net revenues (in thousands) $103,601 $ 50,337 $119,321 $112,880 100.0% 100.0% 100.0% 100.0% Cost of sales 71.5% 72.3% 69.7% 66.9% Selling, general and administrative expenses 30.8% 31.3% 29.2% 25.6% Internet expenses 0.3% 0.6% 1.0% 0.0% Nonrecurring charges 0.0% 0.5% 0.5% 0.0% ------- ------- ------- ------- Operating profit (loss) (2.6%) (4.7%) (0.4%) 7.5% ======= ======= ======= ======= 2002 Compared to 2001 The following table summarizes certain financial information relating to our results of operations for the fiscal year ended March 29, 2002 and the comparable twelve months ended March 30, 2001: 2002 2001 ----------- ----------- Net Revenues $103,601,428 $113,060,806 Gross Profit $29,495,185 $32,252,079 SG&A $31,928,924 $34,274,170 Internet expenses $355,766 $1,352,635 Nonrecurring charges -- $253,239 Net loss $(3,582,428) $(3,559,452) Net Revenues. Net revenues decreased approximately $9.5 million (8.4%) for the fiscal year ended March 29, 2002 as compared to the comparable twelve months ended March 30, 2001. The decrease in net revenues was primarily the result of a general slow-down in the economy, reduced participation in traditional youth sports, a reduced sales force, and the discontinuation of certain unprofitable and low margin product lines. Gross Profit. Gross profit decreased approximately $2.8 million (8.7%) for the fiscal year ended March 29, 2002 as compared to the same period in fiscal 2001. As a percentage of net revenues, gross profit remained at 28.5% for the fiscal year ended March 29, 2002 as compared to the comparable twelve months ended March 30, 2001. The decrease in gross profit is directly attributable to the decrease in net revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased approximately $2.3 million (6.8%) for the fiscal year ended March 29, 2002 as compared to the same period in fiscal 2001. As a percentage of net revenues, selling, general and administrative expenses increased to 30.8% from 30.3% for the fiscal year ended March 29, 2002 as compared to the comparable twelve months ended March 30, 2001. The decrease in selling, general and administrative expenses for the fiscal year ended March 29, 2002 as compared to the comparable twelve months ended March 30, 2001 is primarily a result of the following: (i.) A decrease in payroll related expense of approximately $1.2 million primarily a result of reduced headcount. (ii.) A decrease in selling and promotional expenses of approximately $774,000 primarily a result of reduced catalog expenses. (iii.) A decrease in depreciation and amortization expense of approximately $276,000 primarily a result of assets reaching their full depreciation levels. (iv.) A decrease in tax expense of approximately $195,000 primarily a result of lower sales & use tax expense. We have realized a full twelve months benefit of our cost reduction plans that were implemented in fiscal 2000. We do not anticipate further significant decreases in our selling, general & administrative expenses. Internet Expenses. Internet related expenses decreased approximately $1.0 million (73.7%) for the fiscal year ended March 29, 2002 as compared to the comparable twelve months ended March 30, 2001. These expenses are related to the continued support and enhancement of our websites and web development to post electronic catalogs on our websites. Internet expenses were significantly higher in the twelve months ended March 30, 2001 as we were still developing our e-commerce sites. We anticipate that the current level of internet related expense is consistent with what we expect going forward. Nonrecurring Charges. In the twelve months ended March 30, 2001, we consolidated our manufacturing facility located in Cerritos, CA with our facilities located in Anniston, AL. In association with this plant consolidation, we recorded additional nonrecurring expenses of approximately $114,000. In addition, we recorded approximately $139,000 of nonrecurring expenses in the twelve month period ended March 30, 2001 related to the accelerated amortization of loan fees due to the change in lenders in March 2001. Interest Expense. Interest expense decreased approximately $1.1 million (51.8%) for the fiscal year ended March 29, 2002 as compared to comparable twelve months ended March 30, 2001. This increase is due to lower average borrowings and lower interest rates. Other Income, Net. Other income increased approximately $163,000 for the fiscal year ended March 29, 2002 as compared to the comparable twelve months ended March 30, 2001. This increase is due primarily to the casualty gain on insurance proceeds received for assets lost in a flood that occurred in our corporate facility. These proceeds were used to purchase replacement assets. Income Tax Provision (Benefit). The benefit for income taxes decreased approximately $2.1 million to a benefit of $0 in the fiscal year ended March 29, 2001 as compared to the comparable twelve months ended March 30, 2001. We have a net operating loss carryforward included in net deferred tax assets that can be used to offset future taxable income and can be carried forward for 15 to 20 years. As such, realization of our net deferred tax assets is dependent on generating sufficient taxable income, either through operations or tax planning strategies, prior to the expiration of loss carryforwards. Based upon our operating results for the fiscal year ended March 29, 2002, we have not provided an income tax benefit related to our loss before income taxes. The amount of our existing net deferred tax assets considered realizable could be reduced or eliminated if their use becomes more restricted under the provisions of SFAS No. 109, "Accounting for Income Taxes". Net Loss. Net loss increased approximately $23,000 for the fiscal year ended March 29, 2002 as compared to the comparable twelve months ended March 30, 2001. Net loss per share decreased to $(0.40) from $(0.45) for the fiscal year ended March 29, 2002 as compared to the comparable twelve months ended March 30, 2001. The weighted average shares outstanding increased by approximately 12.0% for the fiscal year ended March 29, 2002, respectively as compared to the comparable twelve months ended March 30, 2001. The increase in weighted average shares outstanding is primarily due to the sale of treasury stock to Emerson Radio Corp in January 2001. 2001 Compared to 2000 The following table summarizes certain financial information relating to our results of operations for the six month period ended March 30, 2001 and the comparable six month period ended March 31, 2000: 2001 2000 ---------- ---------- Net Revenues $50,336,524 $56,596,700 Gross Profit $13,935,999 $17,853,869 SG&A $15,775,650 $16,366,932 Internet expenses $317,808 $101,322 Nonrecurring charges $253,239 $605,000 Net loss $(2,122,515) $(80,669) Net Revenues. Net revenues decreased approximately $6.3 million (11.1%) for the six month period ended March 30, 2001 as compared to the same period in fiscal 2000. We believe the decrease in net revenues was primarily a result of competitive pressures in the marketplace, a decline in youth baseball registrations, unusually cold and wet weather in warm weather states delaying spring sports, a reduction in our sales force, a reduction in the number of catalogs mailed and a general slow-down in the economy. Gross Profit. Gross profit decreased approximately $3.9 million (21.9%) for the six month period ended March 30, 2001 as compared to the same period in fiscal 2000. As a percentage of net revenues, gross profit decreased to 27.7% from 31.5% for the six month period ended March 30, 2001 as compared to the same period in fiscal 2000. Gross profit decreased due to product mix shifts and pricing pressure in the institutional sporting goods marketplace. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased approximately $591,000 (3.6%) for the six month period ended March 30, 2001 as compared to the same period in fiscal 2000. As a percentage of net revenues, selling, general and administrative expenses increased to 31.3% from 28.9% for the six month period ended March 30, 2001 as compared to the same period in fiscal 2000. The decrease in selling, general and administrative expenses for the six month period ended March 30, 2001 as compared to the six month period ended March 31, 2000 is primarily a result of the following: (i.) A decrease in selling and promotional expense of approximately $565,000. This decrease is primarily a result of lower catalog expense as part of our cost reduction programs initiated this year. (ii.) A decrease in payroll related expense of approximately $364,000. This is a result of reduced headcount, primarily in the sales and sales administration areas. (iii.) A decrease in legal fees of approximately $200,000. This is primarily the result of a reduction in litigation. (iv.) A decrease in facility expenses of approximately $156,000. This is primarily a result of lower rent and telephone expense due to renegotiations of certain leases and contracts. These decreases in selling, general and administrative expenses were partially offset by an increase of approximately $632,000 in computer related expenses and an increase of approximately $104,000 in license and royalty related expenses. Fiscal 2001 was the first year of normal, fully functional MIS department operating expenses. The increase in license and royalty related expenses is primarily due to the Amended and Restated License Agreement with MacMark, entered in on December 21, 2000, which requires us to pay an annual royalty based upon sales of MacGregor branded products, with the minimum annual royalty set at $100,000. Internet Expenses. We incurred Internet related expenses of approximately $318,000 for the six month period ended March 30, 2001 as compared to approximately $101,000 for the six month period ended March 31, 2000. These expenses were related to the continued support and enhancement of our websites and web development to post electronic catalogs on the websites. We incurred approximately $1.1 million of Internet expenses during fiscal year 2000 to develop and launch fully functional e-commerce web sites that offer our customers electronic on-line catalogs, customer specific pricing, on-line ordering and other on-line customer service functions. This development effort was completed in fiscal 2000. Nonrecurring Charges. In the six months ended March 30, 2001, we consolidated our manufacturing facility located in Cerritos, CA with our facilities located in Anniston, AL. In association with this plant consolidation, we recorded additional nonrecurring expenses of approximately $114,000 in the six month period ended March 30, 2001. In addition, we recorded approximately $139,000 of nonrecurring expenses in the six month period ended March 30, 2001 related to the accelerated amortization of loan fees due to the change in lenders in March 2001. In the six month period ended March 31, 2000, we recorded a nonrecurring charge related to the settlement of two lawsuits in the amount of $605,000. Interest Expense. Interest expense increased approximately $25,000 (2.7%) for the six month period ended March 30, 2001 as compared to the same period in fiscal 2000. This increase is due to higher average borrowings. Other Income, Net. Other income increased approximately $12,000 for the six month period ended March 30, 2001 as compared to the same period in fiscal 2000. Income Tax Provision (Benefit). The benefit for income taxes increased approximately $1.2 million to a benefit of $1.2 million in the six months ended March 30, 2001 as compared to the same period in fiscal 2000. Our effective tax rate decreased to 36.7% in the six month ended March 30, 2001 as compared to 46.2% for the same period in fiscal 2000. Net Loss. Net loss increased approximately $2.0 million for the six month period ended March 30, 2001 as compared to the same period in fiscal 2000. Net loss per share increased to $(0.27) from $(0.01) for the six month period ended March 30, 2001 as compared to the same period in fiscal 2000. The weighted average shares outstanding increased by approximately 9.5% for the six month period ended March 30, 2001, respectively as compared to the same period in fiscal 2000. The increase in weighted average shares outstanding is primarily due to the sale of treasury stock to Emerson Radio Corp. 2000 Compared to 1999 The following table summarizes certain financial information relating to our results of operations for the fiscal years ended September 29, 2000 and October 1, 1999: 2000 1999 ----------- ----------- Net Revenues $119,320,982 $112,879,817 Gross Profit $36,169,949 $37,282,908 SG&A $34,865,452 $28,838,366 Internet expenses $1,136,149 -- Nonrecurring charges $605,000 -- Net earnings (loss) $(1,517,606) $4,622,839 Net Revenues. Net revenues for the fiscal year ended September 29, 2000 ("fiscal 2000") increased by approximately $6.4 million (5.7%) as compared to the fiscal year ended October 1, 1999 ("fiscal 1999"). The increase in net revenues reflected increases in revenues associated primarily with our team dealers, fund-raising product sales and in-school and out-of-school sales increases. Gross Profit. Gross profit for fiscal 2000 decreased by approximately $1.1 million (3.0%) as compared to fiscal 1999. As a percentage of net revenues, gross profit decreased to 31.9% in fiscal 2000 from 34.8% for fiscal 1999. A portion of the decrease in gross profit is due to $500,000 in one-time vendor rebates that were recorded during fiscal 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2000 increased by approximately $6.0 million (20.9%) as compared to fiscal 1999. As a percentage of net revenues, selling, general and administrative expenses increased to 30.8% for fiscal year 2000 as compared to 26.9% for fiscal 1999. The increase in these expenses as a percentage of net revenues for fiscal year 2000 as compared to fiscal year 1999 was primarily due to the following factors: (i.) An increase in payroll and related costs of approximately $3.3 million primarily as a result of the increased number of outside sales employees, the employees of companies acquired during the second quarter of the prior year and first quarter of fiscal year 2000 and temporary help related to increased receivable collection efforts. (ii.) An increase in computer related expenses of approximately $1.1 million primarily as the result of higher operating costs of maintaining our IT system and support after the system was implemented. (iii.) An increase in depreciation and amortization expense of approximately $771,000. This is primarily the result of hardware and software acquisitions related to our successful implementation of our IT information system. (iv.) An increase in selling and promotional expense of approximately $539,000 primarily as a result of higher catalog expenses. (v.) An increase in facility related expense of $448,000. This is primarily due to the full year impact of the additional facilities acquired during the second quarter of the prior year and the additional facilities acquired in first quarter of fiscal year 2000. Internet Expenses. We incurred Internet related expenses of approximately $1.1 million for the year ended September 29, 2000. These expenses related to significant enhancements, including the creation of shopping cart capabilities and full integration with our SAP system. Nonrecurring Charges. We successfully negotiated the settlement of two lawsuits. Consequently, in fiscal year 2000, we recorded a non-recurring charge related to these claims in the amount of $605,000. Operating Profit. Operating profit decreased from a profit of $8.4 million in fiscal 1999 to a loss of $437,000 in fiscal 2000. The decrease in operating profit was due to reduced margins and increased SG&A expenses, as described above. Interest Expense. Interest expense increased in fiscal 2000 by approximately $826,000 (69.0%) to $2.0 million compared to $1.2 million in fiscal 1999. The increase in interest expense resulted from increased overall levels of borrowing. The higher borrowing levels were the result of the: (i.) cash payments for the acquisitions of Spaulding and LAKCO in October 1999; (ii.) stock repurchased under our stock buyback program; (iii.) cash paid for our IT/ERP, Internet system implementation and Internet development; and (iv.) funding the growth of inventories. In addition, our borrowing rates increased as a result of amendments to our credit agreement. Other Income, Net. Other income decreased approximately $46,000 in fiscal 2000 as compared to fiscal 1999. Income Tax Provision (Benefit). The benefit for income taxes increased approximately $3.6 million to a benefit of $924,000 in fiscal 2000 from a provision of $2.7 million in fiscal 1999. Our effective tax rate increased to 37.8% in fiscal 2000 from 36.8% in fiscal 1999. Net Earnings (Loss). Net earnings decreased approximately $6.1 million to a net loss of $1.5 million in fiscal 2000 from net earnings of $4.6 million in fiscal 1999. As a percentage of the net revenues, net earnings decreased to (1.4%) in fiscal 2000 from 4.3% in fiscal 1999. Earnings per share before dilution from continuing operations decreased to $(0.21) per share in fiscal 2000 from $0.63 per share in fiscal 1999. Fiscal year 2000 included a decrease of approximately 5.9% in weighted average shares outstanding. Liquidity and Capital Resources Our working capital decreased approximately $1.4 million during the fiscal year ended March 29, 2002, from $28.4 million at March 30, 2001 to $27.0 million at March 29, 2002. The decrease in working capital is primarily a result of a decrease of approximately $2.7 million in inventories, an increase in accrued liabilities of approximately $1.7 million, and a decrease in cash of approximately $700,000. The working capital decreases are partially offset by a decrease in trade accounts payable of $4.1 million. We have a credit agreement with Congress Financial Corporation to finance our working capital requirements through March 2004. The credit agreement provides for a $25 million revolving credit facility. Borrowings under the Credit Agreement are subject to an accounts receivable and inventory collateral base and are secured by substantially all of our assets. We are required to maintain certain net worth levels and as of March 29, 2002 we were in compliance with this requirement. As of March 29, 2002, we had total available borrowings under our senior credit facility of approximately $21.4 million of which approximately $16.8 million were outstanding. We believe we can satisfy our short-term and long-term working capital requirements to support our current operations from borrowings under our credit facility and cash flows from operations. The following table sets forth our contractual obligations at March 29, 2002 for the periods shown: Due in Due in Due within two to four to one year three years five years Thereafter Total ------------------------------------------------------------ Notes payable $ 49,899 $16,940,846 $ 25,202 $ -- $17,015,947 Capital lease obligations 23,233 34,091 -- -- 57,324 Leases 1,935,988 2,472,415 16,085 -- 4,424,488 ------------------------------------------------------------ Total $2,009,120 $19,447,352 $ 41,287 $ -- $21,497,759 ============================================================ On May 28, 1997, the Board of Directors approved the repurchase of up to 1,000,000 shares of our issued and outstanding common stock in the open market and/or privately negotiated transactions. On October 28, 1998, the Board of Directors approved a second repurchase program of up to an additional 1,000,000 shares of our issued and outstanding common stock in the open market and/or privately negotiated transactions. As of March 29, 2002, we repurchased approximately 1,333,000 shares of our issued and outstanding common stock in the open market and privately negotiated transactions. Any future purchases will be subject to price and availability of shares, working capital availability and any alternative capital spending programs. Our bank agreement currently prohibits the repurchase of any additional shares without the bank's prior consent. We do not currently have any material commitments for capital expenditures. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements require us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses. We consider certain accounting policies related to inventories and trade accounts receivables, impairment of long lived assets and valuation of deferred tax assets to be critical policies due to the estimation processes involved in each. 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 us and weighted-average cost for items purchased for resale. The inventory allowance for obsolete or slow moving items is determined based upon our periodic assessment of the net realizable value of our inventory. If actual market conditions are less favorable than those we have projected, additional inventory write-downs may be required. Trade Accounts Receivable We extend credit based upon evaluations of a customer's financial condition and provide for any anticipated credit losses in our financial statements based upon management's estimates and ongoing reviews of recorded allowances. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Intangible Assets We have significant intangible assets related to goodwill and other acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgements. Changes in strategy and/or market conditions could significantly impact these judgements and require adjustments to recorded asset balances. Income Taxes We record a valuation allowance to reduce the amount of our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event that we determined that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, if it were determined that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. 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 our beliefs as well as assumptions made by and information currently available to us. When used in this report, the words "anticipate", "believe", "estimate", "expect", "predict", "intend", "project" and similar expressions are intended to identify forward looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected or projected. Among the key factors that may have a direct bearing on our results are set forth below. Future trends for revenues and profitability remain difficult to predict. We continue to face many risks and uncertainties, including: 1. general and specific market and economic conditions; 2. reduced sales to the United States Government due to changes in Government spending; 3. unanticipated disruptions or slowdowns; 4. high fixed costs; 5. competitive factors; 6. risk of nonpayment of accounts receivable; 7. foreign supplier related issues; 8. use of deferred tax asset; and 9. return to profitability. The general economic condition in the U.S. could affect pricing and availability on raw materials such as metals, petroleum and other commodities used in manufacturing certain products and certain purchased finished goods as well as transportation costs. As announced by major freight carriers, including UPS, freight costs are increasing. If these cost increases continue, we will be forced to increase prices or recognize lower margins. Any material price increases to the customer could have an adverse effect on revenues and any price increases from vendors could have an adverse effect on our costs. Professional sports have a significant impact on the market conditions for each individual sport. Collective bargaining, labor disputes, lockouts or strikes by a professional sport (particularly Major League Baseball) could have a negative impact on our revenues. Sales to the U.S. Government have declined and if this decline continues, it could adversely affect our results of operations. Our ability to provide high quality customer service, process and fulfill orders and manage inventory depends on: (i.) the efficient and uninterrupted operation of our call center, distribution center and manufacturing facilities and our management information systems and (ii.) the timely performance of vendors, catalog printers and shipping companies. Any material disruption or slowdown in the operation of our call center, distribution center, manufacturing facilities or management information systems, or comparable disruptions or slowdowns suffered by our principal service providers, could cause delays in our ability to receive, process and fulfill customer orders and may cause orders to be canceled, lost or delivered late, goods to be returned or receipt of goods to be refused. We ship approximately 70% of our products using United Parcel Service ("UPS"). A strike by UPS or any of our other major carriers could adversely affect our results of operations due to not being able to deliver our products in a timely manner and using other more expensive freight carriers. UPS and the International Brotherhood of Teamsters began negotiations in late January 2002 on a new contract to replace the five year agreement that expires on July 31, 2002. No assurance can be made that an agreement will be reached. Although we have analyzed the cost benefit effect of using other carriers, we continue to utilize UPS for the majority of our small package shipments. Operations and maintenance of our call center, distribution center, manufacturing facilities and management information systems involve substantial fixed costs. Paper and postage are significant components of our operating costs. Catalog mailings entail substantial paper, postage, and human resources costs, including costs associated with catalog development. If net sales are substantially below expectations, our results of operations will be adversely affected. Paper-based packaging products, such as shipping cartons, constitute a significant element of distribution expense. Paper prices have been historically volatile. Future price increases could have a material adverse affect on our results of operations. Postage for catalog mailings is also a significant element of our operating expense. Postage rates increase periodically and can be expected to increase in the future. There can be no assurance that future increases will not adversely impact our operating margins. We will be able to further reduce our paper and postage costs if we continue to migrate portions of our business to the Internet because we will be less reliant on paper catalogs. The institutional market for sporting goods and leisure products is highly competitive and there are no significant barriers to enter this market. The size of this market has encouraged the entry of new competitors as well as increased competition from established companies. We are facing significant competition. These competitors include large retail operations that also sell to the institutional market, other catalog and direct marketing companies, team dealers, and Internet sellers. Increased competition could result in pricing pressures, increased marketing expenditures and loss of market share and could have a material adverse effect on our results of operations. We continue to closely monitor orders and the creditworthiness of our customers. We have made allowances for the amount we believe to be adequate to properly reflect the risk to accounts receivable; however, unforeseen market or economic conditions may compel us to increase the allowances. We derive a significant portion of our revenues from sales of products purchased directly from foreign suppliers located primarily in the Far East. In addition, we believe foreign manufacturers produce many of the products we purchase from domestic suppliers. We are subject to risks of doing business abroad, including delays in shipments, adverse fluctuations in foreign currency exchange rates, increases in import duties, decreases in quotas, changes in custom regulations, acts of God (such as earthquakes), war and political turmoil. The occurrence of any one or more of the foregoing could adversely affect our operations. The amount of our existing net deferred tax assets considered realizable could be reduced in the near term if the successful execution of tax planning strategies does not occur or estimates of future taxable income during the carryforward period are reduced. Our ability to return to profitability is dependent on the success of our revenue enhancement programs, manufacturing facilities restructuring and cost reductions. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We own no marketable securities nor do we have investments that are subject to market risk. Item 8. Financial Statements and Supplementary Data. Index to Financial Statements Page ----------------------------- ---- Report of Independent Auditors 22 Consolidated Balance Sheets as of March 29, 2002, March 30, 2001, and September 29, 2000 23 Consolidated Statements of Operations for the Fiscal Year Ended March 29, 2002, the Six Months Ended March 30, 2001, and the Years Ended September 29, 2000, and October 1, 1999 24 Consolidated Statements of Stockholders' Equity for the Fiscal Year Ended March 29, 2002 the Six Months Ended March 30, 2001 and the Years Ended September 29, 2000, and October 1, 1999 25 Consolidated Statements of Cash Flows for the Fiscal Year Ended March 29, 2002, the Six Months Ended March 30, 2001 and the Years Ended September 29, 2000, and October 1, 1999 26 Notes to Consolidated Financial Statements 27 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Sport Supply Group, Inc.: We have audited the accompanying consolidated balance sheets of Sport Supply Group, Inc. and subsidiaries as of March 29, 2002, March 30, 2001, and September 29, 2000 and the related consolidated statements of operations, stockholders' equity, and cash flows for the fiscal year ended March 29, 2002, the six month period ended March 30, 2001 and each of the two fiscal years in the period ended September 29, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sport Supply Group, Inc. and subsidiaries as of March 29, 2002, March 30, 2001 and September 29, 2000, and the consolidated results of their operations and their cash flows for the fiscal year ended March 29, 2002, the six month period ended March 30, 2001 and each of the two fiscal years in the period ended September 29, 2000 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Dallas, Texas May 10, 2002 SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 29, March 30, September 29, 2002 2001 2000 ----------- ----------- ----------- CURRENT ASSETS : Cash and equivalents $ 586,911 1,271,096 112,017 Accounts receivable: Trade, less allowance for doubtful accounts of $524,000 at March 29, 2002, $929,000 at March 30, 2001 and $836,000 at Sept. 29, 2000 18,824,829 19,128,835 21,699,695 Other 235,008 287,866 727,830 Inventories, net 18,368,392 21,050,539 19,853,059 Other current assets 560,362 847,212 1,152,639 Deferred tax assets 1,659,039 1,418,835 1,341,203 ----------- ----------- ----------- Total current assets 40,234,541 44,004,383 44,886,443 ----------- ----------- ----------- DEFERRED CATALOG EXPENSES 2,017,280 2,436,756 1,552,838 PROPERTY, PLANT AND EQUIPMENT : Land 8,663 8,663 8,663 Buildings 1,605,102 1,605,102 1,605,102 Computer Equipment & Software 11,231,120 11,635,763 11,589,567 Machinery and equipment 6,358,546 6,397,134 6,402,708 Furniture and fixtures 1,673,683 1,540,484 1,521,374 Leasehold improvements 2,384,335 2,434,451 2,425,562 ----------- ----------- ----------- 23,261,449 23,621,597 23,552,976 Less -- Accumulated depreciation and amortization (13,310,710) (12,214,075) (11,131,183) ----------- ----------- ----------- 9,950,739 11,407,522 12,421,793 ----------- ----------- ----------- DEFERRED TAX ASSETS 3,841,186 4,081,390 2,866,910 COST IN EXCESS OF NET ASSETS ACQUIRED, less accumulated amortization of $2,171,000 at March 29, 2002, $1,887,000 at March 30, 2001, and $1,745,000 at Sept. 29, 2000 7,442,432 7,726,516 7,867,222 TRADEMARKS less accumulated amortization of $1,114,000 at March 29, 2002, $1,646,000 at March 30, 2001, and $1,547,000 at Sept. 29, 2000 3,044,888 3,192,523 3,235,996 OTHER ASSETS less accumulated amortization of $589,000 at March 29, 2002 $655,000 at March 30, 2001, and $451,000 at Sept. 29, 2000 775,839 735,254 855,613 ----------- ----------- ----------- $ 67,306,905 $ 73,584,344 $ 73,686,815 =========== =========== =========== CURRENT LIABILITIES : Accounts payable 9,532,407 13,613,835 9,871,068 Other accrued liabilities 3,652,310 1,929,357 2,604,680 Notes payable and capital lease obligations, current portion 73,132 78,604 1,639,458 ----------- ----------- ----------- Total current liabilities 13,257,849 15,621,796 14,115,206 ----------- ----------- ----------- NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of current portion 17,000,139 17,333,451 19,034,345 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY : Preferred stock, par value $0.01, 100,000 shares authorized, no shares outstanding - - - Common stock, par value $0.01, 20,000,000 shares authorized, 9,362,397, 9,359,759, 9,350,731 shares issued at March 29, 2002, March 30, 2001, and Sept. 29, 2000 8,917,244, 8,914,606, and 7,275,949 shares outstanding at March 29, 2002, March 30, 2001, and Sept. 29, 2000 93,624 93,598 93,507 Additional paid-in capital 48,101,331 48,099,109 59,785,587 Accumulated deficit (7,344,756) (3,762,328) (1,639,813) Treasury stock, at cost, 445,153, at March 29, 2002 and March 30, 2001, and 2,074,782 at Sept. 29, 2000 (3,801,282) (3,801,282) (17,702,017) ----------- ----------- ----------- 37,048,917 40,629,097 40,537,264 ----------- ----------- ----------- $ 67,306,905 $ 73,584,344 $ 73,686,815 =========== =========== =========== The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For The Year Ended March 29, 2002, The Six Month Period Ended March 30, 2001, The Year Ended September 29 2000, and The Year Ended October 1, 1999 ------------ ------------ ----------- ----------- 2002 2001 2000 1999 ------------ ------------ ----------- ----------- Net revenues $ 103,601,428 $ 50,336,524 $119,320,982 $112,879,817 Cost of sales 74,106,243 36,400,525 83,151,033 75,596,909 ------------ ------------ ----------- ----------- Gross profit 29,495,185 13,935,999 36,169,949 37,282,908 Selling, general and administrative expenses 31,928,924 15,775,650 34,865,452 28,838,366 Internet expenses 355,766 317,808 1,136,149 - Nonrecurring charges - 253,239 605,000 - ------------ ------------ ----------- ----------- Earnings (loss) before interest, other income, and taxes (2,789,505) (2,410,698) (436,652) 8,444,542 Interest expense (985,509) (957,270) (2,021,763) (1,196,112) Other income, net 192,586 14,400 16,924 62,738 ------------ ------------ ----------- ----------- Earnings (loss) before provision for income taxes (3,582,428) (3,353,568) (2,441,491) 7,311,168 Income tax provision (benefit) - (1,231,053) (923,885) 2,688,329 ------------ ------------ ----------- ----------- Net earnings (loss) $ (3,582,428) $ (2,122,515) $ (1,517,606) $ 4,622,839 ============ ============ =========== =========== Earnings (loss) per share: Net earnings (loss) - basic $ (0.40) $ (0.27) $ (0.21) $ 0.63 ============ ============ =========== =========== Net earnings (loss) - diluted $ (0.40) $ (0.27) $ (0.21) $ 0.60 ============ ============ =========== =========== Weighted average number of common shares outstanding - basic 8,917,244 7,963,989 7,272,570 7,390,274 ============ ============ =========== =========== Weighted average number of common shares outstanding - diluted 8,917,244 7,963,989 7,272,570 7,727,777 ============ ============ =========== =========== The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For The Year Ended March 29, 2002, The Six Month Period Ended March 30, 2001, The Year Ended September 29, 2000, and The Year Ended October 1, 1999 Common Stock Additional Treasury Stock ------------------- Paid in Accumulated ----------------------- Shares Amount Capital Deficit Shares Amount Total --------- ------- ---------- ---------- --------- ----------- ---------- Balance, October 2, 1998 9,243,195 $ 92,432 $59,100,187 $(4,745,046) 1,488,492 $(13,269,861) $41,177,712 Issuances of common stock upon exercises of outstanding options 81,445 814 598,071 598,885 Issuances of common stock 8,601 86 73,036 73,122 Purchase of treasury stock 595,900 (4,603,987) (4,603,987) Reissuances of treasury shares (27,910) (25,050) 267,496 239,586 Net earnings (comprehensive income) 4,622,839 4,622,839 --------- ------- ---------- ---------- --------- ----------- ---------- Balance, October 1, 1999 9,333,241 $ 93,332 $59,743,384 $ (122,207) 2,059,342 $(17,606,352) $42,108,157 --------- ------- ---------- ---------- --------- ----------- ---------- Issuances of common stock upon exercises of outstanding options 5,000 50 50 Issuances of common stock 12,490 125 51,503 51,628 Purchase of treasury stock 16,420 (112,437) (112,437) Reissuances of treasury shares (9,300) (980) 16,772 7,472 Net loss (comprehensive loss) (1,517,606) (1,517,606) --------- ------- ---------- ---------- --------- ----------- ---------- Balance, September 29, 2000 9,350,731 $ 93,507 $59,785,587 $(1,639,813) 2,074,782 $(17,702,017) $40,537,264 --------- ------- ---------- ---------- --------- ----------- ---------- Issuances of common stock 9,028 91 14,257 14,348 Sale of treasury shares (11,700,735) (1,629,629) 13,900,735 2,200,000 Net loss (comprehensive loss) (2,122,515) (2,122,515) --------- ------- ---------- ---------- --------- ----------- ---------- Balance, March 30, 2001 9,359,759 $ 93,598 $48,099,109 $(3,762,328) 445,153 $ (3,801,282) $40,629,097 --------- ------- ---------- ---------- --------- ----------- ---------- Issuances of common stock 2,638 26 2,222 2,248 Net loss (comprehensive loss) (3,582,428) (3,582,428) --------- ------- ---------- ---------- --------- ----------- ---------- Balance, March 29, 2002 9,362,397 $ 93,624 $48,101,331 $(7,344,756) 445,153 $ (3,801,282) $37,048,917 ========= ======= ========== ========== ========= =========== ========== The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For The Year Ended March 29, 2002, The Six Month Period Ended March 30, 2001, The Year Ended September 29 2000, and The Year Ended October 1, 1999 2002 2001 2000 1999 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES : Net earnings (loss) $ (3,582,428) $ (2,122,515) $ (1,517,606) $ 4,622,839 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,572,600 1,556,419 2,855,172 2,072,117 Provision for allowances for accounts receivable 351,306 220,884 319,025 411,512 Changes in assets and liabilities: (Increase) decrease in accounts receivable 5,558 2,789,939 1,902,706 (6,602,602) (Increase) decrease in inventories 2,682,147 (1,197,480) (565,986) (3,039,248) (Increase) decrease in deferred catalog expenses and other current assets 706,326 (578,491) 284,757 57,542 Increase (decrease) in accounts payable (4,081,428) 3,742,767 1,161,798 602,636 (Increase) decrease in deferred taxes (240,204) (77,632) (279,015) (157,870) Increase (decrease) in accrued liabilities 1,722,953 (675,323) 170,301 (1,012,097) (Increase) decrease in other assets (187,490) (140,580) (284,426) 132,638 (Increase) decrease in noncurrent deferred tax assets 240,204 (1,214,480) (765,671) 2,557,950 ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activites 189,544 2,303,508 3,281,055 (354,583) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES : Acquisitions of property, plant & equipment (537,194) (97,030) (2,025,608) (6,438,359) Payments for acquisitions, net of cash acquired - - (854,093) (4,260,100) Proceeds from sale of investments - - - 23,891 ----------- ----------- ----------- ----------- Net cash used in investing activities (537,194) (97,030) (2,879,701) (10,674,568) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES : Proceeds from issuances of notes payable - 17,134,214 2,205,620 21,099,089 Payments of notes payable and capital lease obligations, net (338,784) (20,395,961) (2,643,581) (7,211,099) Proceeds from common stock issuances 2,248 2,214,348 59,150 911,593 Purchase of treasury stock - - (112,437) (4,603,987) ----------- ----------- ----------- ----------- Net cash (used in) provided by financing activities (336,536) (1,047,399) (491,248) 10,195,596 ----------- ----------- ----------- ----------- NET CHANGE IN CASH AND EQUIVALENTS (684,186) 1,159,079 (89,894) (833,555) Cash and equivalents, beginning of period 1,271,096 112,017 201,911 1,035,466 ----------- ----------- ----------- ----------- Cash and equivalents, end of period $ 586,910 $ 1,271,096 $ 112,017 $ 201,911 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION : Cash paid during the period for interest $ 986,297 $ 824,353 $ 2,169,859 $ 1,181,529 =========== =========== =========== =========== Cash paid during the period for income taxes $ 55,287 $ 73,435 $ 204,455 $ 160,000 =========== =========== =========== =========== We acquired the assets of certain entities. In connection with these acquisitions, liabilities were assumed as follows: Fair value of assets acquired $ - $ - $ 1,968,685 $ 8,296,490 Cash paid for the acquisitions, net - - (854,093) (4,260,100) Debt issued for the acquisitions - - (275,000) (700,000) ----------- ----------- ----------- ----------- Liabilities assumed $ - $ - $ 839,592 $ 3,336,390 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 29, 2002 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Background Sport Supply Group, Inc. ("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 us effective September 30, 1988. We were a wholly-owned subsidiary of Aurora before our initial public offering in April 1991. Effective March 2001, Sport Supply Group, Inc is a majority- owned subsidiary of Emerson Radio Corp. Our financial statements do not include any purchase accounting adjustments to reflect our acquisition by Emerson Radio Corp. Our operations are all within one financial reporting segment: manufacturing and marketing of sports related equipment and leisure products to institutional customers in the United States. We manufacture many of the products we sell. Manufactured items include, but are not limited to: 1.) Tennis, volleyball, and other sports nets; 2.) Steel and aluminum construction items, such as soccer and field hockey goals; 3.) track and field equipment; and 4.) Gymnastic equipment and exercise mats. Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of SSG and our wholly owned subsidiaries, Athletic Training Equipment Company, Inc., a Delaware corporation ("ATEC") and Sport Supply Group Asia Limited, a Hong Kong corporation ("SSGA"). All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements also include estimates and assumptions made by us that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses, provisions for and the disclosure of contingent assets and liabilities. Actual results could materially differ from those estimates. Certain financial information for previous fiscal years has been reclassified to conform to the fiscal 2002 presentation. Change in Fiscal Year In May 2001, we changed our financial reporting year end from September 30 to March 31. Accordingly, the fiscal year ended March 30, 2001 is a transition period consisting of six months. We operate on a 52/53 week year ending on the Friday closest to March 31. All twelve month periods reflected in the consolidated statements of operations consist of 52 weeks. The six month period ended March 30, 2001 consisted of 26 weeks. 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 us and weighted-average cost for items purchased for resale. As of March 29, 2002, March 30, 2001, and September 29, 2000, inventories consisted of the following: Inventory Data: Mar. 29, 2002 Mar. 30, 2001 Sept. 29, 2000 --------------- ---------- ---------- ---------- Raw materials $ 2,153,634 $ 3,727,855 $ 3,300,001 Work-in-process 257,653 376,683 536,550 Finished and purchased goods 17,121,730 18,226,706 17,148,643 ---------- ---------- ---------- Inventory, Gross 19,533,017 22,331,244 20,985,194 Less inventory allowance for obsolete or slow moving items (1,164,625) (1,280,705) (1,132,135) ---------- ---------- ---------- Inventory, Net $18,368,392 $21,050,539 $19,853,059 ========== ========== ========== The inventory allowance for obsolete or slow moving items is determined based upon our periodic assessment of the net realizable value of our inventory. As of March 29, 2002, March 30, 2001, and September 29, 2000, approximately 23%, 30%, and 28%, respectively, of total ending inventories were products manufactured by us with the balance being products purchased from outside suppliers. Sales of products manufactured by us accounted for approximately 26%, 30%, 31%, and 36% of total net revenues in fiscal 2002, 2001, 2000, and 1999, respectively. Accounts Receivable and Concentration of Credit Risk Financial instruments that potentially subject us to concentration of credit risk are accounts receivable. Accounts receivable represent sales of sporting goods and leisure products to all levels of public and private schools, colleges, universities, and military academies, municipal and governmental agencies, military facilities, churches, clubs, camps, hospitals, youth sport leagues, nonprofit organizations, team dealers, and certain other retailers. We did not have any individual customers that accounted for more than 10% of outstanding accounts receivable as of March 29, 2002, March 30, 2001, or September 29, 2000. The majority of our sales are to publicly funded institutional customers. We extend credit based upon evaluations of a customer's financial condition and provide for any anticipated credit losses in our financial statements based upon management's estimates and ongoing reviews of recorded allowances. The allowance for doubtful accounts was approximately $524,000, $929,000, and $836,000 as of March 29, 2002, March 30, 2001, and September 29, 2000, respectively. Advertising and Deferred Catalog Expenses We expense 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 that include order forms for our products. Production costs, primarily printing and postage, associated with catalogs are amortized using the straight-line method over twelve months which approximates average usage of the catalogs produced. Our advertising expenses for the fiscal year ended March 29, 2002, the six month period ended March 30, 2001, and the fiscal years ended September 29, 2000 and October 1, 1999, were approximately $3,026,000, $1,312,000, $4,122,000, and $3,571,000, respectively. Internet Expenses We expense the operating and development costs of our Internet websites as incurred. Hardware and related software modules that interface with our SAP AS/400 system are capitalized and subsequently amortized over the remaining estimated useful life of the assets. Property, Plant, and Equipment Property, plant and equipment are 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 to ten years Computer Equipment and Software Three years to ten years Furniture and Fixtures Five years Leasehold Improvements Remaining lease term Intangible Assets Cost in excess of net assets acquired relates to acquisitions made by us. Trademarks and servicemarks relate to costs incurred in connection with the licensing agreements for the use of certain trademarks and servicemarks in conjunction with the sale of our 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 net assets acquired Principally thirty to forty years Trademarks and servicemarks Five to forty years Patents Seven to eleven years We periodically assess the recoverability of the carrying value of intangible assets in relation to projected earnings and projected undiscounted cash flows. Based on our assessment, we believe our investments in intangible assets are fully realizable as of March 29, 2002. The cost of intangible assets and related accumulated amortization are removed from our accounts during the year in which they become fully amortized. Income Taxes Deferred tax assets and liabilities are determined quarterly 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 are 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 Our policy is to recognize revenue upon shipment of inventory, and record an estimate against revenues for possible returns based upon our historical return rate. Subject to certain limitations, customers have the right to return product within 30 days if they are not completely satisfied. We believe sales are final upon shipment of inventory based upon the following criteria under SFAS 48 and SAB 101: - Our price to our customers is fixed at the time an order is placed. - The customers have paid, or are obligated to pay, us. - The customers' obligation to pay does not change in the event of theft, damaged product, etc. (A claim must be filed to issue credit.) - Customers are verified through credit investigations for economic substance before products are shipped. - We are not obligated for future performance to any of our customers. - Future returns can be reasonably estimated based on historical data. Recent Pronouncements In August 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). This statement supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121), but carries over the key guidance from SFAS No. 121 in establishing the framework for the recognition and measurement of long-lived assets to be disposed of by sale and addresses significant implementation issues. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with early adoption permitted. We are in the process of evaluating the effects this statement will have on our financial reporting and disclosures. In June 2001, the Financial Accounting Standards Board issued Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which requires that goodwill not be amortized but instead be tested for impairment at least annually by reporting unit. We have adopted SFAS 142 effective March 30, 2002. We are still in the process of evaluating the relevant provisions of SFAS 142 and have not yet determined whether SFAS 142 will have an immediate effect on the financial statements upon adoption. However amortization of goodwill, which amounted to approximately $284,000 for fiscal year ended March 29, 2002, before any tax effects, will cease upon adoption of SFAS 142. On September 30, 2000, we adopted the provisions of the Emerging Issues Task Force, EITF 00-10, Accounting for Shipping and Handling Fees and Costs. Prior to September 30, 2000, we netted shipping fees against shipping costs. The net difference was included in cost of sales in our consolidated statements of operations. The provisions of EITF 00-10 provide that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided and should be classified as revenue. Accordingly, we have classified shipping and handling fees as revenues in our consolidated statements of operations for the fiscal year ended March 29, 2002. Previous periods have been restated to conform to fiscal 2002 presentation. 2. STOCKHOLDERS' EQUITY: Stock Options We maintain 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. Under the stock option plan, the exercise price of options will not be less than: (i.) the fair market value of the common stock at the date of grant; or (ii.) 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 ten years from the grant date, or five 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 (or a Stock Option Committee comprised of members of the Board of Directors). The following table contains transactional data for our stock option plan. Exercise Price or Stock Option Plan Shares Weighted Avg. Price ----------------- --------- ------------------- Outstanding at October 2, 1998 860,286 $7.30 Granted 328,625 $8.52 Exercised (81,445) $6.63 Forfeited (19,667) $6.75 --------- ------------------- Outstanding at October 1, 1999 1,087,799 $7.695 Granted 44,375 $7.43 Exercised (5,000) $6.50 Forfeited (199,308) $7.90 --------- ------------------- Outstanding at September 29, 2000 927,866 $7.64 Granted 9,375 $1.46 Exercised -- -- Forfeited (30,312) $7.87 --------- ------------------- Outstanding at March 30, 2001 906,929 $7.65 Granted 29,375 $1.30 Exercised -- -- Forfeited (10,125) $8.09 --------- ------------------- Outstanding at March 29, 2002 926,179 $7.45 ========= =================== Stock Options Outstanding Stock Options Exercisable as of Mar. 29, 2002 as of Mar. 29, 2002 -------------------------------------------------- -------------------- Wtd. Avg. Wtd. Avg. Wtd. Avg. Range of Remaining Exercise Exercise Exercise Prices Shares Life Price Shares Price --------------- --------- --------- ------ ------- ----- $0.95 - $9.44 926,179 5.8 years $7.45 896,178 $7.57 All options granted under the stock option plan during the year ended March 29, 2002, six month period ended March 30, 2001, and the years ended September 29, 2000 and October 1, 1999 were at exercise prices equal to or greater than the fair market value of our stock on the date of the grant. In addition to options granted pursuant to the stock option plan, we periodically grant options to purchase shares of our common stock that are not reserved for issuance under the stock option plan ("non-plan options"). Such exercise prices were equal to or greater than the fair market value of our common stock on the dates of grant. At March 30, 2001 there were options to acquire 100,000 shares of common stock for $6.88 per share that were issued outside the plan. These options expired on May 3, 2001, unexercised. As of March 29, 2002, there were a total of 926,179 options outstanding with exercise prices ranging from $0.95 per share to $9.44 per share. As of March 29, 2002, 896,178 of the total options outstanding were fully vested with 30,001 vesting through April 2003. As of March 30, 2001, 921,094 of the total options outstanding were fully vested with 85,835 options vesting through November 2002. As of September 29, 2000, 875,781 of the total options outstanding were fully vested with 152,085 options vesting through November 2002. As of October 1, 1999, there were 1,187,799 options (including non-plan options) outstanding with exercise prices ranging from $6.125 per share to $9.44 per share. As of October 1, 1999, 630,712 of the total options outstanding were fully vested with 557,087 options vesting through July 2002. As of October 2, 1998, there were 960,286 options (including non-plan options) outstanding with exercise princes ranging from $5.60 per share to $8.38 per share. Pro forma information regarding net income and net income per share has been determined as if we had accounted for employee stock options subsequent to December 31, 1995 under the fair value method. 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: (i.) risk- free interest rates of 4.15%, 4.29%, 5.93% and 5.63% in 2002, 2001, 2000, and 1999 respectively; (ii.) dividend yield of 0% for all years; (iii.) expected volatility of 39%, 55%, 49%, and 30% in 2002, 2001, 2000 and 1999, respectively; and (iv.) weighted average expected life for each option of 3 years. The weighted average fair value of employee stock options granted in 2002, 2001, 2000, and 1999 are $0.41, $0.59, $2.41 and $2.34, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period; therefore, our proforma effect will not be fully realized until the completion of one full vesting cycle. Our pro forma information is as follows: For the Fiscal For the Six For the Fiscal For the Fiscal Year Ended Months Ended Year Ended Year Ended Mar. 29, 2002 Mar. 30, 2001 Sept. 29, 2000 Oct. 1, 1999 ---------- ---------- ---------- --------- Net income (loss): As reported $(3,582,428) $(2,122,515) $(1,517,606) $4,622,839 Pro forma $(3,593,138) $(2,390,606) $(1,988,647) $4,119,255 Earnings (loss) per share: As reported - basic $(0.40) $(0.27) $(0.21) $0.63 As reported - diluted $(0.40) $(0.27) $(0.21) $0.60 Pro forma earnings (loss) - basic $(0.40) $(0.30) $(0.27) $0.56 Pro forma earnings (loss) - diluted $(0.40) $(0.30) $(0.27) $0.53
Repurchase of Common Stock On May 28, 1997, we approved the repurchase of up to 1,000,000 shares of our issued and outstanding common stock in the open market and/or privately negotiated transactions. On October 28, 1998, we approved a second repurchase program of up to an additional 1,000,000 shares of our issued and outstanding common stock in the open market and/or privately negotiated transactions. As of March 30, 2001 we repurchased approximately 1,333,000 shares of our issued and outstanding common stock in the open market and privately negotiated transactions. Any future purchases will be subject to price and availability of shares, working capital availability and any of our alternative capital spending programs. Our bank agreement currently prohibits the repurchase of any additional shares without the bank's prior consent. Net Earnings Per Common Share The following table sets forth the computation of basic and diluted earnings per share: For the Six For the Fiscal Month Period For the Fiscal For the Fiscal Year Ended Ended Year Ended Year Ended Mar. 29, 2002 Mar. 30, 2001 Sept. 29, 2000 Oct. 1, 1999 ---------- ---------- --------- --------- Numerator: Net earnings (loss) $(3,582,428) $(2,122,515) $(1,517,606) $4,622,839 ========== ========== ========= ========= Denominator: Weighted average shares outstanding 8,917,244 7,963,989 7,272,570 7,390,274 Effect of dilutive securities: Warrants -- -- -- 148,577 Employee stock options -- -- -- 188,926 ---------- ---------- --------- --------- Adjusted weighted average shares and assumed conversions 8,917,244 7,963,989 7,272,570 7,727,777 ========== ========== ========= ========= Per Share Calculations: Basic earnings (loss) per share $(0.40) $(0.27) $(0.21) $0.63 ========== ========== ========= ========= Diluted earnings (loss) per share $(0.40) $(0.27) $(0.21) $0.60 ========== ========== ========= ========= Securities excluded from weighted average shares diluted because their effect would be antidilutive 926,179 2,006,929 2,027,866 --
3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS: As of March 29, 2002, March 30, 2001 and September 29, 2000, notes payable and capital lease obligations consisted of the following: 2002 2001 2000 ---------- ---------- ---------- Note payable under revolving line of credit, interest ranging from prime minus 0.25% to prime plus 1.0% (4.75% at Mar. 29, 2002, 8.50% at Mar. 30, 2001, and 8.53% - 10.50% at Sept. 29, 2000) and LIBOR (4.35% at Mar. 29, 2002) due Mar. 27, 2004 and collateralized by substantially all $16,838,905 $17,088,314 $17,804,126 assets. Term loan, paid in full January 15, 2001 -- -- 2,500,000 Promissory note, paid in full December 20, 2001 -- -- 79,214 Capital lease obligation, interest at 9%, payable in annual installments of principal and interest Totaling $55,000 through August 2005. 158,682 196,038 196,038 Other 75,684 127,703 94,425 ---------- ---------- ---------- Total 17,073,271 17,412,055 20,673,803 Less - current portion (73,132) (78,604) (1,639,458) ---------- ---------- ---------- Long-term debt and capital lease obligations, net $17,000,139 $17,333,451 $19,034,345 ========== ========== ==========
Credit Facilities We have a Loan and Security Agreement with Congress Financial Corporation to finance our working capital requirements through March 2004. This agreement provides for revolving loans and letters of credit which, in the aggregate, cannot exceed the lesser of $25 million or a "Borrowing Base" amount based on specified percentages of eligible accounts receivable and inventories. We are required to maintain certain net worth levels and as of March 29, 2002 we were in compliance with this requirement. As of March 29, 2002, we had total available borrowings under our senior credit facility of approximately $21.4 million of which approximately $16.8 million were outstanding. Amounts outstanding under the senior credit facility are secured by substantially all the assets of the Sport Supply Group, Inc. and its subsidiaries. Pursuant to the Loan and Security Agreement, we are restricted from, among other things, paying cash dividends and entering into certain transactions without the lender's prior consent and we are required to maintain certain net worth levels. Maturities of our capital lease obligations and borrowings under the senior credit facility as of March 29, 2002, by fiscal year and in the aggregate, are as follows: 2003 $ 73,132 2004 16,909,987 2005 64,950 2006 25,202 Thereafter -- ------------ Total 17,073,271 Less current portion (73,132) ------------ Total long term portion $ 17,000,139 ============ As of March 29, 2002 the carrying value of our long-term debt approximates its fair value. 4. INCOME TAXES: As of March 29, 2002, March 30, 2001, and September 29, 2000 the components of the net deferred tax assets and liabilities are as follows: 2002 2001 2000 ---------- ---------- ---------- Current deferred tax assets (liabilities): --------------------------- Allowances for doubtful accounts $ 198,910 $ 315,904 $ 389,000 Inventories 1,068,038 959,270 897,767 Other accrued liabilities 392,091 143,661 54,436 Valuation allowance for deferred tax assets -- -- -- ---------- ---------- ---------- Total current deferred tax assets, net of valuation allowance $ 1,659,039 $ 1,418,835 $ 1,341,203 Noncurrent deferred tax assets (liabilities): ------------------------------ Cost in excess of net assets acquired $ (212,890) $ (298,034) $ (218,807) Other intangible assets (3,172,755) (2,921,841) (2,892,670) Net operating loss 8,926,654 6,815,029 5,492,151 carryforward Minimum tax credit carryforward 486,236 486,236 486,236 Valuation allowance for deferred tax assets (2,186,059) -- -- ---------- ---------- ---------- Total non current deferred tax assets, net of valuation allowance $ 3,841,186 $ 4,081,390 $ 2,866,910 ========== ========== ========== We have a net operating loss carryforward that can be used to offset future taxable income and can be carried forward for 15 to 20 years. As of March 29, 2002 we have net deferred tax assets of approximately $5.5 million, inclusive of a $2.2 million valuation allowance. We believe the net deferred tax assets will be realized through tax planning strategies available in future periods and future profitable operating results. Although realization is not assured, we believe it is more likely than not that all of the net deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if the successful execution of tax planning strategies does not occur or estimates of future taxable income during the carryforward period are reduced. The income tax provision (benefit) in the accompanying statements of operations for the fiscal year ended March 29, 2002, the six month period ended March 30, 2001 and the fiscal years ended September 29, 2000, and October 1, 1999 consisted of the following: 2002 2001 2000 1999 ---------- ---------- ---------- ---------- Current $ -- $ (6,333) $ 118,115 $ 288,249 Deferred -- (1,224,720) (1,042,000) 2,400,080 ---------- ---------- ---------- ---------- Income tax provision (benefit) $ -- $(1,231,053) $ (923,885) $ 2,688,329 ========== ========== ========== ========== The provision (benefit) for income taxes in the accompanying statements of operations for the fiscal year ended March 29, 2002, the six month period ended March 30, 2001 and the fiscal years ended September 29, 2000, and October 1, 1999 differ from the statutory federal rate as follows: 2002 2001 2000 1999 ---------- ---------- ---------- ---------- Income tax provision (benefit) at statutory federal rate $(1,269,060) $(1,140,213) $ (830,107) $2,485,797 Permanent differences 65,965 -- -- -- State income taxes, net of federal effect (605,116) (105,254) (75,865) 124,964 Increase in valuation reserve 2,186,059 -- -- -- Other (377,848) 14,414 (17,913) 77,568 ---------- ---------- ---------- ---------- Total provision (benefit) for income taxes $ -- $(1,231,053) $ (923,885) $ 2,688,329 ========== ========== ========== ========== 5. ACQUISITIONS: During October 1999, we acquired, for cash and the assumption of certain liabilities, certain assets of LAKCO, Inc. and Spaulding, Inc., both distributors of sporting goods equipment to the institutional market. On September 25, 2000, we acquired the stock of Sport Supply Group Asia Limited, a shell corporation, from Emerson Radio. We have accounted for these acquisitions using the purchase method and, as such, our results of operations are combined with the acquired company's results of operations subsequent to the acquisition date. No proforma information for the above acquisitions is presented herein because the proforma information, individually or in aggregate, would not materially differ from actual results. 6. COMMITMENTS AND CONTINGENCIES: Leases We lease a portion of our office, warehouse, distribution, fulfillment, computer equipment and manufacturing locations under noncancelable operating leases with terms ranging from one to five years. The majority of our 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: 2003 1,935,988 2004 1,505,941 2005 966,474 2006 15,009 2007 1,076 --------- Total $4,424,488 ========= Rent expense was approximately $2,199,000, $1,056,000, $1,935,000 and $1,815,000 for the fiscal year ended March 29, 2002, for the six month period ended March 30, 2001, and the fiscal years ended September 29, 2000, and October 1, 1999, respectively. Product Liability and Other Claims Because of the nature of our products, we are periodically subject to product liability claims resulting from personal injuries. From time to time we may become involved in various lawsuits incidental to our business, some of which may relate to 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 manufacturers' and distributors' liability for personal injuries. See Part I. Item 3. - "Legal Proceedings". There can be no assurance that our general product liability insurance will be sufficient to cover any successful claim made against us. In our opinion, any ultimate liability arising out of currently pending product liability and other claims will not have a material adverse effect on our financial condition or results of operations. However, any claims substantially in excess of our insurance coverage, or any substantial claim not covered by insurance, could have a material adverse effect on our results of operations and financial condition. During 2000, we successfully negotiated the settlement of two outstanding lawsuits. Consequently, we recorded a nonrecurring charge related to these claims in the amount of $605,000, which is included in Nonrecurring charges on the Consolidated Statement of Operations. 7. EMPLOYEES' SAVINGS PLAN: Effective June 1, 1993, we established a defined contribution profit sharing plan (the "401(k) Plan") for the benefit of eligible employees. All employees with 90 days of service and who have attained the age of 21 are eligible to participate in the 401(k) Plan. Employees may contribute up to 20% of their compensation, subject to certain limitations, which qualifies under the compensation deferral provisions of Section 401(k) of the U.S. Internal Revenue Code. The 401(k) Plan contains provisions that allow us to make discretionary contributions during each plan year. Employer contributions for the fiscal year ended March 29, 2002, six month period ended March 30, 2001, and the fiscal years ended September 29, 2000, and October 1, 1999 were approximately $0, $26,000, $89,000, and $84,000, respectively. We pay all administrative expenses of the 401(k) Plan. 8. UNAUDITED STATEMENT OF OPERATIONS DATA: The following table sets forth certain information regarding our results of operations for each full quarter within the fiscal year ended March 29, 2002, the six month period ended March 30, 2001 and the fiscal year ended September 29, 2000, with amounts in thousands, except for per share data. Due to rounding, quarterly amounts may not fully sum to yearly amounts. 2002 Fiscal Year 2001 Fiscal Year ---------------- ---------------- Twelve Six Month Months Qtr Qtr Qtr Qtr Period Qtr Qtr Statement of Ended ended ended ended ended ended ended ended Operations Data: Mar. June Sept. Dec. Mar. Mar. Dec. Mar. ---------------- ------- ------ ------ ------ ------ ------ ------ ------ Net revenues $103,601 $27,955 $28,245 $17,043 $30,358 $50,336 $18,201 $32,135 Gross profit 29,495 7,939 7,888 4,832 8,835 13,936 4,917 9,019 Operating profit (loss) (note 1) (2,790) (266) (246) (3,112) 834 (2,411) (2,994) 583 Interest expense 985 332 261 219 173 957 533 424 Other income, net 193 75 -- 11 107 14 2 12 Income tax provision (benefit) -- (189) (186) 375 -- (1,231) (1,297) 66 Net earnings (loss) $ (3,582) $ (333) $ (322) $(3,695) $ 768 $(2,123) $(2,228) $ 105 ------- ------ ------ ------ ------ ------ ------ ------ Net earnings (loss) per share - basic and diluted $(0.40) $(0.04) $(0.04) $(0.41) $0.09 $(0.27) $(0.31) $0.01 Weighted average shares outstanding - basic 8,917 8,915 8,915 8,915 8,917 7,964 7,270 8,643 diluted 8,917 8,915 8,915 8,915 8,917 7,964 7,273 8,649 2000 Fiscal Year ------------------ Qtr Qtr Qtr Qtr Statement of ended ended ended ended Operations Data: Year Dec. Mar. June Sept. ------- ------ ------ ------ ------ Net revenues $119,321 $20,070 $36,526 $30,757 $31,968 Gross profit 36,170 6,341 11,514 9,400 8,915 Operating profit (loss) (note 1) (437) (1,330) 2,110 (81) (1,136) Interest expense 2,022 414 519 445 644 Other income (expense), net 17 (6) 8 (2) 17 Income tax provision (benefit) (924) (643) 572 (199) (655) Net earnings (loss) $ (1,518) $(1,107) $ 1,027 $ (329) $(1,108) ------- ------ ------ ------ ------ Net earnings (loss) per share - basic and diluted $(0.21) $(0.15) $0.14 $(0.05) $(0.15) Weighted average shares outstanding - basic 7,273 7,270 7,270 7,273 7,273 Diluted 7,273 7,270 7,273 7,273 7,273 (1) The 2nd quarter of fiscal year 2000 includes $605,000 of nonrecurring charges. The 2nd quarter of fiscal year 2001 includes $253,239 of nonrecurring charges.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 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 September 26, 2002, 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 September 26, 2002, 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 September 26, 2002, 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 September 26, 2002, 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 Page 51 (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, 10.2.1, 10.3, 10.4, 10.5,10.5.1, 10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10. 27, 10.31, and 10.32]. (b) Reports on Form 8-K. A report on Form 8-K was filed with the Securities and Exchange Commission on May 14, 2001 relating to a press release concerning the Company's change of fiscal year-end from September 30 to March 31. (c) Exhibits. See Index. 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 our behalf by the undersigned, thereunto duly authorized. Dated: June 27, 2002 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 June 27, 2002 by the following persons on behalf of the registrant and in the capacities indicated. Signature Title --------- ----- /s/ Geoffrey P. Jurick Chairman of the Board and ---------------------- Chief Executive Officer Geoffrey P. Jurick /s/ John P. Walker President ---------------------- John P. Walker /s/ Robert K. Mitchell Chief Financial Officer ---------------------- Robert K. Mitchell /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 SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES Schedule II -- Valuation and Qualifying Accounts For The Year Ended March 29, 2002, The Six Month Period Ended March 30, 2001, The Year Ended September 29, 2000, and The Year Ended October 1, 1999 ------------Additions-------------- Balance at Charged to Charged to Balance at Beginning costs and other End of of Period expense accounts(1) Deductions(2) Period ---------- ---------- ----------- ---------- ---------- Allowance for Doubtful Accounts ------------------------------- Year ended March 29, 2002 $ 929,128 $ 351,306 $ - $ 756,028 $ 524,406 Six Month period ended March 30, 2001 $ 836,356 $ 220,884 $ - $ 128,112 $ 929,128 Year ended September 29, 2000 $ 465,497 $ 319,025 $ 503,612 $ 451,778 $ 836,356 Year ended October 1, 1999 $ 372,340 $ 411,512 $ - $ 318,355 $ 465,497 Inventory Allowance ------------------- Year ended March 29, 2002 $ 1,280,705 $ 526,072 $ - $ 642,152 $ 1,164,625 Six Month period ended March 30, 2001 $ 1,132,135 $ 150,000 $ - $ 1,430 $ 1,280,705 Year ended September 29, 2000 $ 1,064,903 $ 34,616 $ 297,364 $ 264,748 $ 1,132,135 Year ended October 1, 1999 $ 425,920 $ - $ 1,498,822 $ 859,839 $ 1,064,903 (1) Amounts consist primarily of reserves added for acquired entities. (2) Amounts consist primarily of asset write-offs.
INDEX TO EXHIBITS Exhibit Nbr. Description of Exhibit --------------------------------------------------------------------------- 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). 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)). 10.1 Employment Agreement entered into by and between the Company and Terrence M. Babilla (incorporated by reference from Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended April 13, 1999). 10.1.1 Amendment Number One to Employment Agreement between the Company and Terrence M. Babilla dated to be effective as of February 25, 2000 (incorporated by reference from Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 2000). 10.2 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 April 13, 1999). 10.2.1 Amendment Number One to Employment Agreement between the Company and John P. Walker dated to be effective as of February 25, 2000 (incorporated by reference from Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended June 30, 2000). 10.4 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). 10.5 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). 10.5.1 Amendment No. 1 to Stock Option Agreement by and between the Company and John P. Walker (incorporated by reference from Exhibit 10.8 to the Company's Report on Form 10-Q for the quarter ended April 3, 1998). Exhibit Nbr. Description of Exhibit --------------------------------------------------------------------------- 10.6 Form of Non-Qualified Stock Option Agreement by and between the Company and John P. Walker (incorporated by reference from Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended July 2, 1999). 10.7 Restricted Stock 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 April 3, 1998). 10.8 Consulting and Separation Agreement dated as of September 16, 1994 by and between the Company and Jerry L. Gunderson (incorporated by reference from Exhibit 10.4 to the Company's Report on Form 10-K for the year ended December 31, 1996). 10.9 Form of Severance Agreement entered into between the Company and each of Messrs. John P. Walker and Terrence M. Babilla (incorporated by reference from Exhibits 10.2 and 10.3 to the Company's Report on Form 10-Q for the quarter ended April 12, 1999). 10.10 Form of Severance Agreement entered into between the Company and Doug Pryor (incorporated by reference from Exhibit 10.7 to the Company's Report on Form 10-Q for the quarter ended April 3, 1998). 10.11 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)). 10.13 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)). 10.14 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). 10.15 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)). 10.16 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)). 10.17 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). 10.18 Amendment No. 1 to AMF Licensing Agreement (incorporated by reference from Exhibit 10 to the Company's Report on Form 10-Q for the quarter ended January 1, 1999). 10.19 Amended Lease Agreement entered into between the Company and ACQUIPORT DFWIP, Inc., dated as of July 13, 1998 (incorporated by reference from Exhibit 10 to the Company's Report on Form 10-Q filed on August 14, 1998). 10.19.1 Amended Lease Agreement entered into between the Company and ACQUIPORT DFWIP, Inc., dated as of July 30, 2000 (incorporated by reference from Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended June 30, 2000). 10.20 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)). Exhibit Nbr. Description of Exhibit --------------------------------------------------------------------------- 10.21 Industrial Lease Agreement, dated April 25, 1994, by and between the Company and Centre Development Co. regarding the property at 13700 Benchmark (incorporated by reference from Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1994). 10.21.1 Amendment to Industrial Lease Agreement, dated July 8, 1994, by and between the Company and Centre Development Co. regarding the property at 13700 Benchmark (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). 10.23 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). 10.24 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). 10.25 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). 10.25.1 Letter Agreement dated October 18, 1997 amending the Management Services Agreement (incorporated by reference from Exhibit 10.31.1 to the Company's Report on Form 10-K for the year ended September 26, 1997). 10.26 Lease Agreement by and between Athletic Training Equipment Company, Inc. and The Northwestern Mutual Life Insurance Company, dated January 29, 1999 regarding the property located in Sparks, NV (incorporated by reference from Exhibit 10.4 to the Company's Report on Form 10-Q for the quarter ended April 2, 1999). 10.27 Employment Agreement entered into by and between the Company and Michael Glassman dated April 1, 2001 (incorporated by reference from Exhibit 10.27 to the Company's Report on Form 10-K for the year ended March 30, 2001). 10.28 Services Agreement between the Company and EJB Development dated March 1, 2001 (incorporated by reference from Exhibit 10.27 to the Company's Report on Form 10-K for the year ended March 30, 2001). 10.29 Loan and Security Agreement dated March 27, 2001 by and between the Company and Congress Financial Corporation (incorporated by reference from Exhibit 10.29 to the Company's Report on Form 10- K for the year ended March 30, 2001). 10.30 Amended and Restated License Agreement dated as of December 21, 2000 by and between MacMark Corporation, Equilink Licensing Corporation and the Company (incorporated by reference from Exhibit 10.23.2 from the Company's Report on Form 10-Q for the quarter ended December 29, 2000.) 10.31 (*) Form of Severance Agreement entered into between the Company and Mitch Labov dated March 24, 1999. 10.32 (*) Form of Severance Agreement entered into between the Company and John Bals dated February 8, 2002. 21 (*) Subsidiaries of the Registrant. 23.1 (*) Consent of Independent Auditors. 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-10.31 3 exh10-31a.txt FORM OF SEVERANCE AGREEMENT EXHIBIT 10.31 NON-COMPETITION, CONFIDENTIALITY AND SEVERANCE AGREEMENT This Non-Competition, Confidentiality and Severance Agreement (this "Agreement") is made as of March 24, 1999, by and between Sport Supply Group, Inc., a Delaware corporation ("Employer"), and Mitch Labov ("Employee"). RECITALS: WHEREAS, Employee has requested that Employer pay Employee a specified severance amount if Employee is terminated without cause (as described in Paragraph 1 below) by Employer; WHEREAS, Employer has agreed to the severance arrangement described herein so long as Employee agrees to abide by the terms and provisions of this Agreement. WHEREAS, but for Employee's promises and representations made herein, Employer would not have agreed to the payment of severance as set forth herein; NOW, THEREFORE, in consideration of the covenants and agreements of the parties herein contained, the parties to this Agreement agree as follows: 1. Severance. Employee acknowledges and agrees that Employee is an employee at will and may be terminated by Employer at any time with or without cause (as described below). Notwithstanding the foregoing, in consideration for the promises made by Employee herein, including but not limited to Employee's agreement regarding non-competition and nondisclosure of Confidential Information below, Employer agrees as follows: If Employee is terminated by Employer without cause, Employer agrees to pay Employee his then current bi- weekly salary (i.e., happening every two weeks) for a period of twenty-four (24) bi-weekly periods from the date of termination (less all amounts required to be deducted or withheld therefrom and all amounts owed or due by Employee to Employer). In exchange for Employer's agreement to make such severance payments to Employee and other promises made by Employer herein, Employee agrees that upon the termination of his employment without cause he will sign and deliver to Employer a Release in the form of Exhibit A attached hereto. If Employee revokes the Release pursuant to Section 4 thereof or otherwise, or does not sign the release, Employer shall not be obligated to pay any severance to Employee. Employee acknowledges that he shall not be entitled to the severance payments referenced above (but he will continue to be obligated by all the provisions that survive termination of this Agreement, including without limitation Sections 2, 3 and 4) if Employee (i) dies, (ii) resigns, (iii) is absent from employment or unable to satisfactorily perform his essential job functions, by reason of physical or mental illness or disability for more than thirty (30) days in the aggregate in any twelve (12) month period, or (iv) is terminated for cause. For the purposes of this Agreement, a discharge "for cause" shall mean a discharge resulting from a determination by Employer that Employee: (i) has committed a crime involving moral turpitude, including fraud, theft or embezzlement; (ii) has failed and/or refused to follow the policies, practices, directives, or orders established by Employer's Board of Directors; (iii) has committed acts of gross negligence or misconduct to the detriment of Employer; (iv) has been insubordinate and/or has persistently failed to perform his duties hereunder; or (v) has breached any of the terms or provisions of this Agreement (including, but not limited to, a breach of Section 2, 3 or 4 hereof). Except as set forth in this Section and/or required by federal or state law, Employer will have no other obligations to Employee if Employee is terminated with or without cause. 2. Confidentiality (a) In exchange for and in consideration for the promises made by Employee herein, including promises made by Employee regarding noncompetition in Section 3 herein as well as Employee's agreement to execute the attached Release in the event of Employee's discharge from employment without cause, Employer promises and agrees to provide Employee with confidential, nonpublic information (in addition to any such information previously obtained by Employee in the course of his employment) consistent with the duties of an individual in Employee's position, including but not limited to Employer's customer, supplier, and distributor lists, trade secrets, plans, manufacturing techniques, sales, marketing and expansion strategies, 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 (referred to hereinafter as "Confidential Information"). Employee acknowledges that such Confidential Information constitutes valuable, special and unique assets of the Employer and that his access to and knowledge of the Confidential Information is essential to the performance of his duties under this Agreement. In consideration for Employer's promises herein, Employee 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 considered Confidential Information owned by Employer and Employee agrees that Employee will not (i) disclose any Confidential Information to any person or entity other than in connection with his employment for Employer in accordance with Employer's policy, or (ii) make use of any Confidential Information for his own purposes or for the benefit of any other person or entity, other than Employer. Employee further represents and warrants that, on or prior to the date of this Agreement, he has not (i) disclosed any Confidential Information to any person or entity other than in connection with his employment for Employer in accordance with Employer's policy or (ii) made use of any Confidential Information for his own purposes or for the benefit of any other person or entity, other than Employer. (b) Employee acknowledges and agrees that all manuals, drawings, blueprints, letters, notes, notebooks, reports, financial records (including, without limitation, budgets, business plans and financial statements), 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 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 of his employment with Employer, whether voluntary of involuntary. 3. Non-Compete Covenant. Employee acknowledges that the Confidential Information specified above is valuable to the Employer and that, therefore, its protection and maintenance constitutes a legitimate interest to be protected by the Employer by the enforcement of this covenant not to compete. Therefore, in consideration for the promises made by Employer herein, including but not limited to Employer's promises regarding the payment of severance benefits set forth in Section 1 and the provision of Confidential Information set forth in Section 2 herein, Employee covenants and agrees that, (i) during the term of his employment by the Employer (or an affiliate of Employer) and (ii) for a period commencing upon the termination of Employee's employment by Employer (or an affiliate of Employer) and ending upon the second anniversary thereof, Employee will not, directly or indirectly, either as an individual or as an employer, employee, consultant, partner, officer, director, shareholder, substantial investor, trustee, agent, advisor, or consultant or in any other capacity whatsoever, of any person or entity (other than the Employer): (a) conduct or assist others in conducting any business in any market area in the United States related to the promotion, marketing, distribution, manufacturing, sourcing, importing, bidding and/or sale of sports related equipment and/or supplies to institutional customers (including, without limitation, schools, government agencies, municipalities, military facilities, athletic clubs, youth sport leagues, recreational organizations, sporting goods dealers, etc.) or any other business that generates more than 10% of Employer's revenues at the time of termination (the "Employer's Business"); (b) recruit, hire, assist others in recruiting or hiring, discuss employment with or refer to others for employment (collectively referred to as "Recruiting Activity") any person who is, or within the twenty-four (24) month period immediately preceding the date of any such Recruiting Activity was, at any time, an employee of, or a consultant to, the Employer or its affiliates; or (c) (i) communicate to any competing entity or enterprise any competitive non-public information concerning any past, present or identified prospective client or customer of, or supplier to, Employer; or (ii) call on, solicit or hire or attempt to call on, solicit or hire any of the customers, suppliers, clients, licensors, licensees, manufacturers, distributors, dealers or independent salespersons of the Employer or any of its affiliates which are engaged in the Employer's Business or that conduct business with Employer in the United States; or induce, attempt to induce or assist any other person or entity in inducing or attempting to induce, directly or indirectly, any such customer, supplier, client, licensor, licensee, manufacturer, dealer, distributor or independent salesperson to discontinue their relationship with the Employer or its affiliates. The existence of any claim or cause of action of Employee against Employer, or any officer, director, or shareholder of Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants of Employee contained in this Section 3. In addition, the provisions of this Section 3 shall continue to be binding upon Employee in accordance with its terms, notwithstanding the termination of Employee for any reason. If Employee violates any covenant contained in this Section 3 and Employer brings legal action for injunctive or other relief, Employer shall not, as a result of the time involved in obtaining the relief, be deprived of the benefit of the full period of any such covenant. Accordingly, the covenants of Employee contained in this Section 3 shall be deemed to have durations as specified above, which periods shall commence upon the later of (i) the termination of Employee's employment with Employer, and (ii) the date of entry by a court of competent jurisdiction of a final, non- appealable judgment enforcing the covenants of Employee in this Section 3. During any period of time in which Employee is in breach of this covenant not to compete, the parties agree that the time period of this covenant shall be extended for an amount of time that Employee is in breach hereof. Employee understands and agrees that the scope of this covenant contained in this Section 3 is reasonable as to time, area, and persons and is necessary to protect the proprietary and legitimate business interests of the Employer, and but for such covenant 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 benefits Employee has accepted 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. If any part of this Section is declared invalid, unenforceable, or void as to time, area, or persons, the validity and enforceability of the remainder will not be affected. Should a court of competent jurisdiction determine this covenant unenforceable as written, the parties agree that the court shall modify this covenant to the extent necessary to make it enforceable. The alleged breach of any other provision of this Agreement asserted by Employee shall not be a defense to claims arising from Employer's enforcement of this covenant. The provisions of Sections 1, 2, 3 4, 5, 6, 10 and 12 shall survive any termination or expiration of this Agreement. 4. Proprietary Information. Employee hereby assigns to Employer all of Employee's right, title and interest to, and shall promptly disclose to Employer, all ideas, inventions, products, services, discoveries or improvements (whether or not patentable) conceived or developed solely or jointly by Employee during the term of this Agreement (a) which relate to the business or the actual or anticipated research or development of Employer, (b) which result from any work performed by Employee for Employer, or (c) for which equipment, supplies, facilities or Confidential Information of Employer was used. Employee agrees to execute any further documents and/or patents that Employer requests and will otherwise assist Employer (at Employer's expense) in protecting Employer's rights to such ideas, inventions, products, services, discoveries or improvements. Employee hereby appoints Employer as his attorney-in-fact, with full power of substitution, to execute and deliver such documents or patents on behalf of Employee. Employee represents to Employer that Employee has not conceived or reduced to practice any ideas, inventions, products, services, discoveries or improvements at the time of signing this Agreement. 5. Injunctive Relief. Each party acknowledges that a remedy at law for any breach or attempted breach of this Agreement will be inadequate, agrees that each party will be entitled to specific performance and injunctive and other equitable relief in case of any breach or attempted breach and agrees not to use as a defense that any party has an adequate remedy at law. This Agreement shall be enforceable in a court of equity, or other tribunal with jurisdiction, by a decree of specific performance, and appropriate injunctive relief may be applied for and granted in connection herewith. Such remedy shall not be exclusive and shall be in addition to any other remedies now or hereafter existing at law or in equity, by statute or otherwise. No delay or omission in exercising any right or remedy set forth in this Agreement shall operate as a waiver thereof or of any other right or remedy and no single or partial exercise thereof shall preclude any other or further exercise thereof or the exercise of any other right or remedy. 6. Binding Nature. The rights and obligations of Employer under this Agreement will inure to the benefit of and will be binding upon the successors and assigns of Employer. 7. Confidentiality. Employee further agrees to keep the terms of this Agreement wholly and completely confidential. Further, Employee agrees not to disclose the amount, terms, substance, or contents of this Agreement to any person or persons, excluding only his spouse, his attorneys, his tax advisors and any government agency to which he is required by law to reveal the terms of this Agreement. 8. 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 it 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 that 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. 9. 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. 10. 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 that would require the application of the law of any other jurisdiction. 11. 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: If to Employer: Conlin Bros., Inc. Sport Supply Group, Inc. Attention: Mitch Labov Attention: Chief Executive Officer [ deleted for confidentiality ] 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. 12. Submission to Jurisdiction. Each party agrees that this Agreement is performable in Dallas, Dallas County, Texas, and that any action or proceeding arising out of or related in any way to this Agreement shall be brought solely in a court of competent jurisdiction sitting in Dallas, Dallas county, Texas. 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 hereby irrevocably waive, to the fullest extent permitted by law, any objection which it 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. 13. 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. 14. Assignment. The rights and obligations of Employer may, without the consent of Employee, be assigned by Employer to any parent, subsidiary, affiliate, or successor of Employer. Employee may not assign any of his rights or obligations under this Agreement. 15. Entire Agreement. This Agreement (along with the Exhibit) 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 and the Exhibit. All prior or contemporaneous agreements between the parties with respect to the subject matter of this Agreement being expressly superseded by this Agreement and the Exhibit. 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. 16. Attorneys' Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to receive from the other its reasonable attorneys' fees, costs, and necessary disbursements in addition to any other relief to which such party may be entitled. IN WITNESS WHEREOF, the parties to this Agreement have executed and delivered this Agreement on the date first above written. EMPLOYER: SPORT SUPPLY GROUP, INC. By: --------------------------------------- John P. Walker President, Chief Operating Officer and Chief Financial Officer EMPLOYEE: --------------------------------------- Mitch Labov EXHIBIT A RELEASE This Release (this "Agreement") is made and entered into on ____________, ___ (the "Effective Date") by and between Sport Supply Group, Inc., a Delaware corporation (the "Company") and Mitch Labov ("Labov"). WHEREAS, the Company and Labov entered into that certain Non- Competition, Confidentiality and Severance Agreement dated March 24, 1998 (the "Severance Agreement"). WHEREAS, Labov's execution and delivery of this Agreement is a condition precedent to Labov being paid pursuant to the terms of the Severance Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Labov agree as follows: 1. Covenants and Agreements of Labov. Labov acknowledges and agrees that the consideration he has accepted and received pursuant to the Severance Agreement is not otherwise due to him. In consideration for the compensation in the Severance Agreement, the receipt and sufficiency of which are hereby acknowledged, Labov voluntarily and knowingly: a.Nondisparagement of Company. Agrees that after the date hereof, he will not say, publish or do anything that casts the Company or any of the Company's affiliates (including, without limitation, successors, assigns, officers, directors, or employees), any of its products or the industry or management of the Company or any of the Company's affiliates in an unfavorable light, or disparage or injure the Company's or any of the Company's affiliate's goodwill, business reputation or relationship with existing or potential suppliers, vendors, customers, employees, contractors, investors or the financial community in general, or the goodwill or business reputation of the Company's or any of the Company's affiliates' employees, former employees, officers, directors, consultants or contractors. Notwithstanding the foregoing, nothing herein shall prohibit Labov from truthfully testifying in a hearing, deposition or other legal proceeding in which Labov could be criminally or civilly sanctioned for the failure to respond truthfully. b.Release. Hereby waives, releases and forever discharges and covenants not to sue the Company and/or its predecessors; successors; partners; affiliates, parents, or subsidiaries; assigns, employee retirement, health and welfare benefit plans and the fiduciaries thereof; officers; administrators; employees; former employees; directors; trustees; shareholders; representatives; attorneys; and agents, from all claims, liabilities, demands, actions, or causes of action, in contract, tort or otherwise, including but not limited to all wrongful discharge claims, all tort, intentional tort, personal injury, negligence, defamation, and contract claims, any claim for attorneys' fees, or any claim arising from any federal, state or local civil rights and/or employment legislation (including but not limited to Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act, and any claim for benefits, including but not limited to those arising under the Employee Retirement Income Security Act of 1974 ("ERISA")), known or hereafter discovered by Labov, on account of or connected with or growing out of, directly or indirectly, Labov's employment and termination thereof or any act or omission by the Company or its agents occurring on or before the Effective Date. By execution hereof, Labov represents, covenants, and warrants that no claims released or waived herein have been previously conveyed, assigned, or transferred in any manner, whether in whole or in part, to any persons, entity, or other third party. Labov expressly represents that he is competent and authorized to release and/or waive any claim he may have against the Company on any basis whatsoever. c.Acknowledgment. Acknowledges that as of Effective Date: (i) Labov's employment by the Company is lawfully and voluntarily terminated; (ii) Labov has received all due and owing pay for all labor and services performed by him for the Company; (iii) he has received or been compensated for all salary, vacation time, sick leave, compensatory time, reimbursable expenses, car allowance, personal injuries, bonuses, profit-sharing, retirement, health, welfare, pension, all rights under all employee benefits to which he may have been entitled as of the Effective Date; (iv) he will promptly reimburse the Company for all personal expenses incurred by Labov, including, without limitation, travel advances; and (v) there are no other agreements, whether written or oral, between Labov and the Company, other than certain Stock Option Agreements that Labov may have, and the Severance Agreement. The options governed by the Stock Option Agreements, if any, may be exercised for a period of one-hundred twenty (120) days after the Effective Date; thereafter, the Stock Option Agreements will be deemed to be terminated and of no further force or effect. d.Transition. Agrees to cooperate and assist the Company in the training of Labov's successor during the period of time in which Labov is being paid pursuant to the Severance Agreement. 2. Conditions. It is expressly understood that the obligations and agreements of the Company pursuant to this Agreement and the Severance Agreement are expressly subject to the continuing performance by Labov of the obligations, covenants and agreements assumed by him pursuant hereto. In the event the Company's Board of Directors in good faith determines Labov breached any representation, agreement, covenant or obligation contained herein or in said Severance Agreement, the agreements, covenants and obligations of the Company pursuant hereto and the Severance Agreement shall terminate and be of no further force or effect, without prejudice to any other right the Company may have hereunder to performance of the agreements and obligations assumed by Labov hereunder and the Severance Agreement. 3. Return of Property. Labov further agrees to return to the Company (Attention: President), simultaneously with the execution of this Agreement, all computers, computer disks or other magnetic storage data, facsimile machines, telephones, credit cards, calling cards, keys, security codes, and other property of the Company in Labov's possession or control and all documents, records, notebooks, mailing lists, business proposals, contracts, agreements and other repositories containing information concerning the Company or its business, whether copies or originals (including but not limited to all correspondence, client and/or customer lists, vendor agreements, minutes or agenda(s) for any meeting, hand-written notes, journals, computer printouts or programs, office memoranda, other tangible items or materials). 4. Revocation of this Agreement. Labov further acknowledges and agrees that he has the right to discuss all aspects of this Agreement with a private attorney, and that he has done so to the extent he desires. Labov acknowledges and understands that he has twenty-one (21) days to sign this Agreement after receipt of it in order to fully consider all of its terms. Labov further acknowledges and understands that this Agreement may be revoked by him in writing within seven (7) days from the date he signs it, and that this Agreement shall not become effective or enforceable until eight (8) days after Labov has signed this Agreement. 5. Full and Final Settlement. This Agreement is contractual, not a mere recital, and is a full and final settlement of any and all claims each party hereto may have against the other and its affiliates on any basis whatsoever, and shall be binding on the each party hereto and their heirs, personal representative(s), estate, successors and assigns. 6. Entire Agreement. This Agreement and the Severance Agreement constitute the entire understanding Labov has with the Company and supersedes any previous agreements (other than the Severance Agreement), whether oral or written, between the Company and Labov. No other promises or agreements regarding the matters addressed herein shall be binding unless they are in writing and signed by Labov and the Company. 7. No Continuing Waiver. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. Any waiver must be in writing and signed by the party entitled to performance. 8. Attorneys' Fees. If any civil action, whether at law or in equity, is necessary to enforce or interpret any of the terms of this Agreement, the prevailing party shall 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. 9. Confidentiality. Labov further agrees to keep the terms of this Agreement and the Severance Agreement wholly and completely confidential. Further, Labov agrees not to disclose the amount, terms, substance, or contents of this Agreement or the Severance Agreement to any person or persons, excluding only his spouse, his attorneys, his tax advisors and any government agency to which he is required by law to reveal the terms of this Agreement or the Severance Agreement. In addition, Labov agrees not to use or disclose any Confidential Information as defined in the Severance Agreement. 10. Injunctive Relief. Each party acknowledges that a remedy at law for any breach or attempted breach of this Agreement will be inadequate, agrees that each party will be entitled to specific performance and injunctive and other equitable relief in case of any breach or attempted breach and agrees not to use as a defense that any party has an adequate remedy at law. This Agreement shall be enforceable in a court of equity, or other tribunal with jurisdiction, by a decree of specific performance, and appropriate injunctive relief may be applied for and granted in connection herewith. Such remedy shall not be exclusive and shall be in addition to any other remedies now or hereafter existing at law or in equity, by statute or otherwise. No delay or omission in exercising any right or remedy set forth in this Agreement shall operate as a waiver thereof or of any other right or remedy and no single or partial exercise thereof shall preclude any other or further exercise thereof or the exercise of any other right or remedy. 11. 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 that would require the application of the law of any other jurisdiction. 12. Submission to Jurisdiction. Each party agrees that this Agreement is performable in Dallas, Dallas County, Texas, and that any action or proceeding arising out of our related in any way to this Agreement shall be brought solely in a court of competent jurisdiction sitting in Dallas, Dallas County, Texas. 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 hereby irrevocably waive, to the fullest extent permitted by law, any objection which it 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. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on ___________,_______. SPORT SUPPLY GROUP, INC. By: _____________________________________ _______________________________ Name: John P. Walker Mitch Labov Title: President, Chief Operating Officer and Chief Financial Officer EX-10.32 4 exh10-32a.txt FORM OF SEVERANCE AGREEMENT EXHIBIT 10.32 NON-COMPETITION, CONFIDENTIALITY AND SEVERANCE AGREEMENT This Non-Competition, Confidentiality and Severance Agreement (this "Agreement") is made as of February 8, 2002, by and between Sport Supply Group, Inc., a Delaware corporation ("Employer"), and John Bals ("Employee"). RECITALS: WHEREAS, Employee has requested that Employer pay Employee a specified severance amount if Employee is terminated without cause (as described in Paragraph 1 below) by Employer; WHEREAS, Employer has agreed to the severance arrangement described herein so long as Employee agrees to abide by the terms and provisions of this Agreement. WHEREAS, but for Employee's promises and representations made herein, Employer would not have agreed to the payment of severance as set forth herein; NOW, THEREFORE, in consideration of the covenants and agreements of the parties herein contained, the parties to this Agreement agree as follows: 1. Severance. Employee acknowledges and agrees that Employee is an employee at will and may be terminated by Employer at any time with or without cause (as described below). Notwithstanding the foregoing, in consideration for the promises made by Employee herein, including but not limited to Employee's agreement regarding non-competition and nondisclosure of Confidential Information below, Employer agrees as follows: If Employee is terminated by Employer without cause, Employer agrees to pay Employee his then current bi- weekly salary (i.e., happening every two weeks) for a period of twenty-four (24) bi-weekly periods from the date of termination (less all amounts required to be deducted or withheld therefrom and all amounts owed or due by Employee to Employer). In exchange for Employer's agreement to make such severance payments to Employee and other promises made by Employer herein, Employee agrees that upon the termination of his employment without cause he will sign and deliver to Employer a Release in the form of Exhibit A attached hereto (as such Release may be modified by Employer due to changes in applicable law). If Employee revokes the Release pursuant to Section 4 thereof or otherwise, or does not sign the release, Employer shall not be obligated to pay any severance to Employee. Employee acknowledges that he shall not be entitled to the severance payments referenced above (but he will continue to be obligated by all the provisions that survive termination of this Agreement, including without limitation Sections 2, 3 and 4) if Employee (i) dies, (ii) resigns, (iii) is absent from employment or unable to satisfactorily perform his essential job functions, by reason of physical or mental illness or disability for more than thirty (30) days in the aggregate in any twelve (12) month period, or (iv) is terminated for cause. For the purposes of this Agreement, a discharge "for cause" shall mean a discharge resulting from a determination by Employer that Employee: (i) has committed a crime involving moral turpitude, including fraud, theft or embezzlement; (ii) has failed and/or refused to follow the policies, practices, directives, or orders established by Employer's Board of Directors; (iii) has committed acts of gross negligence or misconduct to the detriment of Employer; (iv) has been insubordinate and/or has persistently failed to perform his duties as described on Exhibit B attached hereto; or (v) has breached any of the terms or provisions of this Agreement (including, but not limited to, a breach of Section 2, 3 or 4 hereof). Except as set forth in this Section and/or required by federal or state law, Employer will have no other obligations to Employee if Employee is terminated with or without cause. 2. Confidentiality (a) In exchange for and in consideration for the promises made by Employee herein, including promises made by Employee regarding noncompetition in Section 3 herein as well as Employee's agreement to execute the attached Release in the event of Employee's discharge from employment without cause, Employer promises and agrees to provide Employee with confidential, nonpublic information (in addition to any such information previously obtained by Employee in the course of his employment) consistent with the duties of an individual in Employee's position, including but not limited to Employer's customer, supplier, and distributor lists, trade secrets, plans, manufacturing techniques, sales, marketing and expansion strategies, 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 (referred to hereinafter as "Confidential Information"). Employee acknowledges that such Confidential Information constitutes valuable, special and unique assets of the Employer and that his access to and knowledge of the Confidential Information is essential to the performance of his duties under this Agreement. In consideration for Employer's promises herein, Employee 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 considered Confidential Information owned by Employer and Employee agrees that Employee will not (i) disclose any Confidential Information to any person or entity other than in connection with his employment for Employer in accordance with Employer's policy, or (ii) make use of any Confidential Information for his own purposes or for the benefit of any other person or entity, other than Employer. Employee further represents and warrants that, on or prior to the date of this Agreement, he has not (i) disclosed any Confidential Information to any person or entity other than in connection with his employment for Employer in accordance with Employer's policy or (ii) made use of any Confidential Information for his own purposes or for the benefit of any other person or entity, other than Employer. (b) Employee acknowledges and agrees that all manuals, drawings, blueprints, letters, notes, notebooks, reports, financial records (including, without limitation, budgets, business plans and financial statements), 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 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 of his employment with Employer, whether voluntary of involuntary. 3. Non-Compete Covenant. Employee acknowledges that the Confidential Information specified above is valuable to the Employer and that, therefore, its protection and maintenance constitutes a legitimate interest to be protected by the Employer by the enforcement of this covenant not to compete. Therefore, in consideration for the promises made by Employer herein, including but not limited to Employer's promises regarding the payment of severance benefits set forth in Section 1 and the provision of Confidential Information set forth in Section 2 herein, Employee covenants and agrees that, (i) during the term of his employment by the Employer (or an affiliate of Employer) and (ii) for a period commencing upon the termination of Employee's employment by Employer (or an affiliate of Employer) and ending upon the first anniversary thereof, Employee will not, directly or indirectly, either as an individual or as an employer, employee, consultant, partner, officer, director, shareholder (except as a shareholder 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), substantial investor, trustee, agent, advisor, or consultant or in any other capacity whatsoever, of any person or entity (other than the Employer): (a) conduct or assist others in conducting any business in any market area in the United States related to the promotion, marketing, distribution, manufacturing, sourcing, importing, bidding and/or sale of sports related equipment and/or supplies to institutional customers (including, without limitation, schools, government agencies, municipalities, military facilities, athletic clubs, youth sport leagues, recreational organizations, sporting goods dealers, etc.) or any other business that generates more than 10% of Employer's revenues at the time of termination (the "Employer's Business"); (b) recruit, hire, assist others in recruiting or hiring, discuss employment with or refer to others for employment (collectively referred to as "Recruiting Activity") any person who is, or within the twenty-four (24) month period immediately preceding the date of any such Recruiting Activity was, at any time, an employee of, or a consultant to, the Employer or its affiliates; or (c) (i) communicate to any competing entity or enterprise any competitive non-public information concerning any past, present or identified prospective client or customer of, or supplier to, Employer; or (ii) call on, solicit or hire or attempt to call on, solicit or hire any of the customers, suppliers, clients, licensors, licensees, manufacturers, distributors, dealers or independent salespersons of the Employer or any of its affiliates which are engaged in the Employer's Business or that conduct business with Employer in the United States; or induce, attempt to induce or assist any other person or entity in inducing or attempting to induce, directly or indirectly, any such customer, supplier, client, licensor, licensee, manufacturer, dealer, distributor or independent salesperson to discontinue their relationship with the Employer or its affiliates. The existence of any claim or cause of action of Employee against Employer, or any officer, director, or shareholder of Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants of Employee contained in this Section 3. In addition, the provisions of this Section 3 shall continue to be binding upon Employee in accordance with its terms, notwithstanding the termination of Employee for any reason. If Employee violates any covenant contained in this Section 3 and Employer brings legal action for injunctive or other relief, Employer shall not, as a result of the time involved in obtaining the relief, be deprived of the benefit of the full period of any such covenant. Accordingly, the covenants of Employee contained in this Section 3 shall be deemed to have durations as specified above, which periods shall commence upon the later of (i) the termination of Employee's employment with Employer, and (ii) the date of entry by a court of competent jurisdiction of a final, non- appealable judgment enforcing the covenants of Employee in this Section 3. During any period of time in which Employee is in breach of this covenant not to compete, the parties agree that the time period of this covenant shall be extended for an amount of time that Employee is in breach hereof. Employee understands and agrees that the scope of this covenant contained in this Section 3 is reasonable as to time, area, and persons and is necessary to protect the proprietary and legitimate business interests of the Employer, and but for such covenant 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 benefits Employee has accepted 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. If any part of this Section is declared invalid, unenforceable, or void as to time, area, or persons, the validity and enforceability of the remainder will not be affected. Should a court of competent jurisdiction determine this covenant unenforceable as written, the parties agree that the court shall modify this covenant to the extent necessary to make it enforceable. The alleged breach of any other provision of this Agreement asserted by Employee shall not be a defense to claims arising from Employer's enforcement of this covenant. The provisions of Sections 1, 2, 3 4, 5, 6, 10 and 12 shall survive any termination or expiration of this Agreement. 4. Proprietary Information. Employee hereby assigns to Employer all of Employee's right, title and interest to, and shall promptly disclose to Employer, all ideas, inventions, products, services, discoveries or improvements (whether or not patentable) conceived or developed solely or jointly by Employee during the term of this Agreement (a) which relate to the business or the actual or anticipated research or development of Employer, (b) which result from any work performed by Employee for Employer, or (c) for which equipment, supplies, facilities or Confidential Information of Employer was used. Employee agrees to execute any further documents and/or patents that Employer requests and will otherwise assist Employer (at Employer's expense) in protecting Employer's rights to such ideas, inventions, products, services, discoveries or improvements. Employee hereby appoints Employer as his attorney-in-fact, with full power of substitution, to execute and deliver such documents or patents on behalf of Employee. Employee represents to Employer that Employee has not conceived or reduced to practice any ideas, inventions, products, services, discoveries or improvements at the time of signing this Agreement. 5. Injunctive Relief. Each party acknowledges that a remedy at law for any breach or attempted breach of this Agreement will be inadequate, agrees that each party will be entitled to specific performance and injunctive and other equitable relief in case of any breach or attempted breach and agrees not to use as a defense that any party has an adequate remedy at law. This Agreement shall be enforceable in a court of equity, or other tribunal with jurisdiction, by a decree of specific performance, and appropriate injunctive relief may be applied for and granted in connection herewith. Such remedy shall not be exclusive and shall be in addition to any other remedies now or hereafter existing at law or in equity, by statute or otherwise. No delay or omission in exercising any right or remedy set forth in this Agreement shall operate as a waiver thereof or of any other right or remedy and no single or partial exercise thereof shall preclude any other or further exercise thereof or the exercise of any other right or remedy. 6. Binding Nature. The rights and obligations of Employer under this Agreement will inure to the benefit of and will be binding upon the successors and assigns of Employer. 7. Confidentiality. Employee further agrees to keep the terms of this Agreement wholly and completely confidential. Further, Employee agrees not to disclose the amount, terms, substance, or contents of this Agreement to any person or persons, excluding only his spouse, his attorneys, his tax advisors and any government agency to which he is required by law to reveal the terms of this Agreement. 8. 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 it 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 that 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. 9. 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. 10. 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 that would require the application of the law of any other jurisdiction. 11. 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: If to Employer: John Bals Sport Supply Group, Inc. [ deleted for confidentiality ] Attention: Chief Executive Officer 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. 12. Submission to Jurisdiction. Each party agrees that this Agreement is performable in Dallas, Dallas County, Texas, and that any action or proceeding arising out of or related in any way to this Agreement shall be brought solely in a court of competent jurisdiction sitting in Dallas, Dallas county, Texas. 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 hereby irrevocably waive, to the fullest extent permitted by law, any objection which it 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. 13. 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. 14. Assignment. The rights and obligations of Employer may, without the consent of Employee, be assigned by Employer to any parent, subsidiary, affiliate, or successor of Employer. Employee may not assign any of his rights or obligations under this Agreement. 15. Entire Agreement. This Agreement (along with the Exhibits) 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 and the Exhibit. All prior or contemporaneous agreements between the parties with respect to the subject matter of this Agreement being expressly superseded by this Agreement and the Exhibit. 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. 16. Attorneys' Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to receive from the other its reasonable attorneys' fees, costs, and necessary disbursements in addition to any other relief to which such party may be entitled. IN WITNESS WHEREOF, the parties to this Agreement have executed and delivered this Agreement on the date first above written. EMPLOYER: SPORT SUPPLY GROUP, INC. By: --------------------------------------- John P. Walker President EMPLOYEE: --------------------------------------- John Bals EXHIBIT A RELEASE This Release (this "Agreement") is made and entered into on ____________, ___ (the "Effective Date") by and between Sport Supply Group, Inc., a Delaware corporation (the "Company") and John Bals ("Bals"). WHEREAS, the Company and Bals entered into that certain Non- Competition, Confidentiality and Severance Agreement dated ______________ (the "Severance Agreement"). WHEREAS, Bals's execution and delivery of this Agreement is a condition precedent to Bals being paid pursuant to the terms of the Severance Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Bals agree as follows: 1. Covenants and Agreements of Bals. Bals acknowledges and agrees that the consideration he has accepted and received pursuant to the Severance Agreement is not otherwise due to him. In consideration for the compensation in the Severance Agreement, the receipt and sufficiency of which are hereby acknowledged, Bals voluntarily and knowingly: a. Nondisparagement of Company. Agrees that after the date hereof, he will not say, publish or do anything that casts the Company or any of the Company's affiliates (including, without limitation, successors, assigns, officers, directors, or employees), any of its products or the industry or management of the Company or any of the Company's affiliates in an unfavorable light, or disparage or injure the Company's or any of the Company's affiliate's goodwill, business reputation or relationship with existing or potential suppliers, vendors, customers, employees, contractors, investors or the financial community in general, or the goodwill or business reputation of the Company's, or any of the Company's affiliates', employees, former employees, officers, directors, consultants or contractors. Notwithstanding the foregoing, nothing herein shall prohibit Bals from truthfully testifying in a hearing, deposition or other legal proceeding in which Bals could be criminally or civilly sanctioned for the failure to respond truthfully. b. Release. Hereby waives, releases and forever discharges and covenants not to sue the Company and/or its predecessors; successors; partners; affiliates, parents, or subsidiaries; assigns, employee retirement, health and welfare benefit plans and the fiduciaries thereof; officers; administrators; employees; former employees; directors; trustees; shareholders; representatives; attorneys; and agents, from all claims, liabilities, demands, actions, or causes of action, in contract, tort or otherwise, including but not limited to all wrongful discharge claims, all tort, intentional tort, personal injury, negligence, defamation, and contract claims, any claim for attorneys' fees, or any claim arising from any federal, state or local civil rights and/or employment legislation (including but not limited to Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act, and any claim for benefits, including but not limited to those arising under the Employee Retirement Income Security Act of 1974 ("ERISA")), known or hereafter discovered by Bals, on account of or connected with or growing out of, directly or indirectly, Bals's employment and termination thereof or any act or omission by the Company or its agents occurring on or before the Effective Date. By execution hereof, Bals represents, covenants, and warrants that no claims released or waived herein have been previously conveyed, assigned, or transferred in any manner, whether in whole or in part, to any persons, entity, or other third party. Bals expressly represents that he is competent and authorized to release and/or waive any claim he may have against the Company on any basis whatsoever. c. Acknowledgment. Acknowledges that as of Effective Date: (i) Bals's employment by the Company is lawfully and voluntarily terminated; (ii) Bals has received all due and owing pay for all labor and services performed by him for the Company; (iii) he has received or been compensated for all salary, vacation time, sick leave, compensatory time, reimbursable expenses, car allowance, personal injuries, bonuses, profit-sharing, retirement, health, welfare, pension, all rights under all employee benefits to which he may have been entitled as of the Effective Date; (iv) he will promptly reimburse the Company for all personal expenses incurred by Bals, including, without limitation, travel advances; and (v) there are no other agreements, whether written or oral, between Bals and the Company, other than certain Stock Option Agreements that Bals may have, and the Severance Agreement. The options governed by the Stock Option Agreements, if any, may be exercised for a period of one-hundred twenty (120) days after the Effective Date; thereafter, the Stock Option Agreements will be deemed to be terminated and of no further force or effect. d. Transition. Agrees to cooperate and assist the Company in the training of Bals's successor during the period of time in which Bals is being paid pursuant to the Severance Agreement. 2. Conditions. It is expressly understood that the obligations and agreements of the Company pursuant to this Agreement and the Severance Agreement are expressly subject to the continuing performance by Bals of the obligations, covenants and agreements assumed by him pursuant hereto. In the event the Company's Board of Directors in good faith determines Bals breached any representation, agreement, covenant or obligation contained herein or in said Severance Agreement, the agreements, covenants and obligations of the Company pursuant hereto and the Severance Agreement shall terminate and be of no further force or effect, without prejudice to any other right the Company may have hereunder to performance of the agreements and obligations assumed by Bals hereunder and the Severance Agreement. 3. Return of Property. Bals further agrees to return to the Company (Attention: President), simultaneously with the execution of this Agreement, all computers, computer disks or other magnetic storage data, facsimile machines, telephones, credit cards, calling cards, keys, security codes, and other property of the Company in Bals's possession or control and all documents, records, notebooks, mailing lists, business proposals, contracts, agreements and other repositories containing information concerning the Company or its business, whether copies or originals (including but not limited to all correspondence, client and/or customer lists, vendor agreements, minutes or agenda(s) for any meeting, hand-written notes, journals, computer printouts or programs, office memoranda, other tangible items or materials). 4. Revocation of this Agreement. Bals further acknowledges and agrees that he has the right to discuss all aspects of this Agreement with a private attorney, and that he has done so to the extent he desires. Bals acknowledges and understands that he has twenty-one (21) days to sign this Agreement after receipt of it in order to fully consider all of its terms. Bals further acknowledges and understands that this Agreement may be revoked by him in writing within seven (7) days from the date he signs it, and that this Agreement shall not become effective or enforceable until eight (8) days after Bals has signed this Agreement. 5. Full and Final Settlement. This Agreement is contractual, not a mere recital, and is a full and final settlement of any and all claims each party hereto may have against the other and its affiliates on any basis whatsoever, and shall be binding on the each party hereto and their heirs, personal representative(s), estate, successors and assigns. 6. Entire Agreement. This Agreement and the Severance Agreement constitute the entire understanding Bals has with the Company and supersedes any previous agreements (other than the Severance Agreement), whether oral or written, between the Company and Bals. No other promises or agreements regarding the matters addressed herein shall be binding unless they are in writing and signed by Bals and the Company. 7. No Continuing Waiver. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. Any waiver must be in writing and signed by the party entitled to performance. 8. Attorneys' Fees. If any civil action, whether at law or in equity, is necessary to enforce or interpret any of the terms of this Agreement, the prevailing party shall 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. 9. Confidentiality. Bals further agrees to keep the terms of this Agreement and the Severance Agreement wholly and completely confidential. Further, Bals agrees not to disclose the amount, terms, substance, or contents of this Agreement or the Severance Agreement to any person or persons, excluding only his spouse, his attorneys, his tax advisors and any government agency to which he is required by law to reveal the terms of this Agreement or the Severance Agreement. In addition, Bals agrees not to use or disclose any Confidential Information as defined in the Severance Agreement. 10. Injunctive Relief. Each party acknowledges that a remedy at law for any breach or attempted breach of this Agreement will be inadequate, agrees that each party will be entitled to specific performance and injunctive and other equitable relief in case of any breach or attempted breach and agrees not to use as a defense that any party has an adequate remedy at law. This Agreement shall be enforceable in a court of equity, or other tribunal with jurisdiction, by a decree of specific performance, and appropriate injunctive relief may be applied for and granted in connection herewith. Such remedy shall not be exclusive and shall be in addition to any other remedies now or hereafter existing at law or in equity, by statute or otherwise. No delay or omission in exercising any right or remedy set forth in this Agreement shall operate as a waiver thereof or of any other right or remedy and no single or partial exercise thereof shall preclude any other or further exercise thereof or the exercise of any other right or remedy. 11. 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 that would require the application of the law of any other jurisdiction. 12. Submission to Jurisdiction. Each party agrees that this Agreement is performable in Dallas, Dallas County, Texas, and that any action or proceeding arising out of our related in any way to this Agreement shall be brought solely in a court of competent jurisdiction sitting in Dallas, Dallas County, Texas. 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 hereby irrevocably waive, to the fullest extent permitted by law, any objection which it 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. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on ___________,_______. SPORT SUPPLY GROUP, INC. By: _________________ __________________ Name: John P. Walker John Bals Title: President EX-21 5 exh21a.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Athletic Training Equipment Company, Inc. ("ATEC") Sport Supply Group Asia ("SSGA") EX-23.1 6 exh23-1a.txt CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 No.'s 33-42056, 33-48514, 33-80028, 333-27193, and 333-36314 of our report dated May 10, 2002, with respect to the consolidated financial statements and schedule of Sport Supply Group, Inc. included in this Form 10-K for the fiscal year ended March 29, 2002. ERNST & YOUNG LLP Dallas, Texas June 26, 2002 -----END PRIVACY-ENHANCED MESSAGE-----