-----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, Q2WIJOok8r1hQTJVR3vW9C0yJG+TBvunBo+4TMPXekVxJ0J1whsXRBpMwOzejCi8 eyoYyxCoeXh26KsbmR4agQ== 0000926236-03-000106.txt : 20030711 0000926236-03-000106.hdr.sgml : 20030711 20030711161034 ACCESSION NUMBER: 0000926236-03-000106 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030328 FILED AS OF DATE: 20030711 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: 03783911 BUSINESS ADDRESS: STREET 1: 1901 DIPLOMAT DRIVE CITY: FARMERS BRANCH STATE: TX ZIP: 75234-8914 BUSINESS PHONE: 9724849484 10-K 1 ssg03q4.txt FORM 10-K FOR FISCAL YEAR ENDED MARCH 28, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 28, 2003 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 Number) 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 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2) Yes _______ No X The aggregate market value of the voting and non voting common equity held by non-affiliates of the registrant on September 27, 2002 based on the closing price of the common stock on the Over the Counter Bulletin Board as of the last business day of the registrant's most recently completed second quarter, was approximately $6,200,000. Indicated below is the number of outstanding shares of each class of the registrant's common stock, as of June 1, 2003. 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 or about August 28, 2003 Part III TABLE OF CONTENTS Item Page ---- ---- PART I 1 Business........................................... 3 2 Properties......................................... 10 3 Legal Proceedings.................................. 11 4 Submission of Matters to a Vote of Security Holders 11 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters.............................. 11 6 Selected Financial Data............................ 12 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 14 7A Quantitative and Qualitative Disclosure About Market Risk...................................... 23 8 Financial Statements and Supplementary Data........ 23 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 41 PART III 10 Directors and Executive Officers of the Registrant. 41 11 Executive Compensation............................. 41 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters... 41 13 Certain Relationships and Related Transactions..... 41 14 Controls and Procedures............................ 41 15 Principal Accountant Fees and Services............. 41 PART IV 16 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 42 PART I. Item 1. Business. -------- General Sport Supply Group, Inc. is a 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. Satisfying the product and service needs of the sporting goods market has increasingly shifted from in-store and on-site sales to printed catalogs, broadcast and cable infomercials, home shopping channels, direct telephone marketing and the Internet. This shift has allowed increased competition and expanded product offerings to customers across the country from direct marketing companies. We are positioned to grow our business because of our long-term customer relationships, expansive product lines, 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 our IT platform is that our order processing and fulfillment capabilities are integrated throughout our operations, including 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 provides more convenience and added flexibility for our customers, many of whom are part- time coaches and volunteers who 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. While the majority of our customers' orders are received directly by telephone and through the mail, we continue to experience increased e-commerce activity through our websites and believe that in the future 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. In fiscal year 2003, orders placed over the internet have increased from approximately $3 million in the prior year to approximately $5 million this year. 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 28, 2003, 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. In December 1997, our ATEC subsidiary purchased substantially all of the assets of Athletic Training Equipment Company, Inc., a Nevada corporation. On September 25, 2000, we acquired the stock of Sport Supply Group Asia, Ltd., from Emerson Radio Corp. (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, www.sportsupplygroup.com, provides certain additional information about us. Our Forms 10-K, Forms 10-Q and other SEC filings including Forms 3, 4 and 5 are made available free of charge on our website, www.sportsupplygroup.com as soon as reasonably practical after they are filed electronically with the SEC. 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 over 10,000 products for sale. We manufacture approximately 1,000 of these products and obtain the remainder from external manufacturers. Our product lines include, but are not limited to: archery, baseball, softball, basketball, camping, football, tennis and other racquet sports, gymnastics, indoor recreational games and game tables, 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 and physical education related equipment and products -- (licensed from Voit Corporation. - see discussion below). * MacGregor[R] -- certain equipment and accessories relating to baseball, softball, basketball, soccer, football, volleyball, and general exercise (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, and soccer goals. * 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 Barbell-- 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. * 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, football equipment * 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. In December 1986, we entered into an agreement with Voit Corporation. 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, with a minimum annual royalty of $100,000. Subject to the terms of the license agreement, we are permitted to use the Voit[R] trademark through December 31, 2004. 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 with MacMark, Equilink and Riddel 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[R] 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" and Part I. Item 7. - "Risks and Uncertainties." On August 19, 1993, we entered into an exclusive license agreement with AMF Bowling, Inc. to use the AMF[R] 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. The minimum royalty for the contract year ending December 31, 2002 was approximately $108,000. The estimated royalty for the contract year ending December 31,2003 is approximately $100,000. Subject to the terms of the AMF license, we are permitted to use the AMF[R] name through December 31, 2003. In 1996, we entered into an advertising and distribution agreement with Hershey Chocolate USA. Pursuant to this agreement, we market and distribute promotional fundraising literature and programs to our customers, and service the fundraising needs of many nontraditional customers, subject to the provisions of the agreement. The current agreement expires on May 15, 2004 with a two year renewal option. We are currently in the process of renegotiating the terms of this agreement with Hershey. If this agreement is not revised to our satisfaction, we will either exercise our right to terminate this agreement early or expand our fundraising product offering to include other confectionery brands. In June 1998, we entered into an agreement with the Huffy Corporation. 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 minimum royalty increases by a predetermined percentage each year the license agreement is in effect. The minimum royalty for the contract year ending September 30, 2002 was approximately $87,000. The estimated royalty for the contract year ending September 30, 2003 is approximately $85,000.The term of the sublicense expires September 30, 2003. We are currently in the process of conducting cost benefit analyses of our Huffy[R] and AMF[R] license agreements. We believe we may be able to convert some of our license branded products to brands that are owned by us without sacrificing a loss in revenues. If we conclude that we can successfully convert product that is currently branded under the AMF[R] or Huffy[R] name to product that is branded under a name we own, we will make such a conversion and permit the applicable license agreements to expire thereby reducing our royalty expenses. 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 United States 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 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 12 different direct mail catalogs, an internal sales and customer service staff of over 75 people, an external sales force of over 15 people traveling in significant metropolitan sales territories, and 15 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, Indoor Recreation 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], Wilson, Mizuno, Spalding, Port-A-Pit, Champion Barbell, Voit[R], ATEC[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 assets. We also have licenses and marketing alliances with national organizations including, YMCA, Hershey Chocolate USA, American Heart Association and American Diabetes Association. During fiscal year 1999, we acquired two team dealers. A team dealer is a local sporting goods store that sells its products primarily to teams in its local market. These team dealer acquisitions service the local institutional customers and teams with a full line of athletic products. 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 acquired 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 designed and launched 15 Internet 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 inquiries on a real-time basis, twenty-four hours a day, seven days a week. This functionality allows added convenience and flexibility for our customers. We maintain and operate these websites. Our 15 Internet sites are listed below: BSNsports.com -- targets primarily middle schools, high schools, colleges, and municipalities LeagueDirect.com -- targets Little League and other league sports US-Games.com -- targets elementary schools and the early childhood development buyer ChampionBarbell.com -- targets fitness BSNgsanaf.com -- targets government entities NewEnglandCamp.com -- targets camps and outdoor leisure Portapit.com -- targets track and field eSportsonline.com -- targets direct consumers 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 RolDri.com -- targets dealers servicing the tennis market ThinkSportz -- targets direct consumers of baseball products 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 and physical education customers. We also target individual consumers on our esportsonline.com and ThinkSportz.com websites. Our new Associate Program is a revenue sharing program, with independent third parties called "associates." These associates receive a percentage of revenue generated by the purchase of our products for orders directed through the associate's website. More than 1,000 entities have joined the Associate Program because they can generate revenues by promoting a full-line sporting goods store on their website without taking any inventory or credit risk. Typically, the Associate Agreement may be terminated by either party upon 30 days notice. 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. 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. We believe our customer base in the United States is the largest in the institutional direct mail market for sports related equipment. Approximately 8%, 8%, 7%, and 9% of our sales in the fiscal years 2003, 2002, 2001, and 2000, 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 385 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 (Non-Appropriated Funds) contract. Our entire product line is included on this contract and offers pricing to the United States 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. Not withstanding the foregoing, no material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government. 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 in June and in September. The peak in revenues in the quarter ending March is primarily due to spring and summer sports, favorable outdoor weather conditions and school needs before summer closing. We had a backlog of approximately $2,936,000 at March 28, 2003, $2,015,000 at March 29, 2002, $2,638,000 at March 30, 2001, and $2,329,000 at September 29, 2000. Manufacturing and Suppliers We manufacture, assemble and distribute many of our products from four of our facilities. See Item 2. -- "Properties" for details. Several vinyl and netting products are manufactured in our two Anniston, Alabama plants. Baseball and softball pitching machines are manufactured and 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. Most of our manufactured products are standardized. Certain products manufactured by us are custom-made (such as tumbling mats ordered in color or size specifications). 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, and steel and aluminum tubing. We are now outsourcing many of the products previously manufactured by us, including products such as game tables and fitness equipment. Products have been outsourced to both domestic and international vendors. In fiscal year 2003, we opened a sourcing office in Hong Kong. We now have more control of our sourcing through direct negotiation of terms with manufacturers, conducting on-site quality control and a local presence. Outsourcing these products has enabled us to (i.) reduce our cost of goods in many of these products, (ii.) reduce our manufacturing facility costs, (iii.) reduce many selling prices to our customers and (iv.) improve our remaining manufacturing efficiencies by focusing on longer production runs of fewer products. Outsourcing these products also requires us to carry more inventory due to the longer lead times from overseas. We believe selling products to our customers at more competitive prices will have a positive impact on our revenue base. 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 available from other sources. We purchase most of our finished product in United States 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 marketing and internet 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, customer base 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 expansive product lines and availability of goods we source enable 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". In recent years, product liability insurance has become much more expensive, more restrictive and more difficult to obtain. There can be no assurance that our general product liability insurance will be sufficient to cover any successful product liability claims made against us. In our opinion, any ultimate liability arising out of currently pending product liability claims will not have a material adverse effect on our financial condition or results of operations. However, any claims substantially in excess of our insurance coverage, or any substantial claim not covered by insurance, could have a material adverse effect on our financial condition and results of operations. Employees On April 30, 2003, we had approximately 340 full-time employees, of whom approximately 65 were involved in our manufacturing operations. We also hire part-time and temporary employees during peak seasons. 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 62 Chairman of the Board and Chief 1996 Executive Officer John P. Walker 40 President and Director 1996 Terrence M. Babilla 41 Chief Operating Officer, Executive 1995 Vice President, General Counsel and Secretary Robert K. Mitchell 51 Chief Financial Officer 1999 Thomas P. Treichler 59 Director 1997 Peter G. Bunger 63 Director 1996 Carl D. Harnick 68 Director 2003 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 Warehouse 31,000 Farmers December, 2003 Branch, TX Manufacturing 62,500 Sparks, NV December, 2006 Manufacturing 35,000 Anniston, AL Owned Manufacturing 45,000 Anniston, AL Owned (1) Approximately 40,000 square feet are utilized by Emerson Radio Corp. (2) Approximately 35,000 square feet are utilized by Emerson Radio Corp. 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 in 2004. The purpose of the consolidation would be to improve efficiencies, take advantage of economies of scale and reduce property taxes. 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. --------------------------------------------------- No matter was submitted by us to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. --------------------------------------------------------------------- Trading Price Range and Dividends 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, 2003, there were 1,122 holders of the Common Stock (including individual security position listings). The following table sets forth the high and low sales range for the periods indicated. 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. 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 ----------- --------------- ------ ------ 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 2003 Ended June 1.300 1.070 Ended September 1.600 1.280 Ended December 1.750 1.400 Ended March 2.100 1.550 We have not declared dividends in the past three fiscal years. Pursuant to the Loan and Security Agreement we have with Congress Financial Corporation, we are restricted from paying cash dividends without the lender's prior consent. We do not intend to pay cash dividends in the foreseeable future. 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. Securities Authorized for Issuance under Equity Compensation Plans The following table sets forth information regarding our equity compensation plans as of March 29, 2002. See Note 2 to the Consolidated Financial Statements for further information. ---------------------------------------------------------------------------- Number of Number of securities to be Weighted securities issued upon average remaining exercise of exercise price available for outstanding of outstanding future issuance options, warrants options, warrants under equity and rights and rights compensation plans (a) (b) (c) ---------------------------------------------------------------------------- Equity compensation plans approved by security holders 308,442 $6.695 1,244,349 ---------------------------------------------------------------------------- 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 Fiscal Six Fiscal Fiscal Fiscal Year Year Months Year Year Year Ended Ended Ended Ended Ended Ended March 28, March 29, March 30, Sept 29, Oct 1, Oct 2, Statement of Earnings Data: 2003 2002 2001 (1) 2000 1999 1998 -------- -------- -------- -------- -------- -------- Net revenues $ 102,617 $ 103,601 $ 50,337 $ 119,321 $ 112,880 $ 101,935 Gross profit 30,029 29,495 13,936 36,170 37,283 32,303 Operating profit (loss) (943) (2,790) (2,411) (437) 8,445 7,782 Interest expense 629 986 957 2,022 1,196 474 Other income, net (11) 193 14 17 63 215 Earnings (loss) before cumulative effect of accounting change (1,561) (3,582) (2,123) (1,518) 4,623 4,964 Cumulative effect of accounting change (7,442) -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net earnings (loss) $ (9,003) $ (3,582) $ (2,123) $ (1,518) $ 4,623 $ 4,964 ======== ======== ======== ======== ======== ======== Earnings (loss) per common share and common equivalent share: Net earnings (loss) per common share before cumulative effect of accounting change - basic $ (0.18) $ (0.40) $ (0.27) $ (0.21) $ 0.63 $ 0.62 Cumulative effect of accounting change - basic (0.83) -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net earnings (loss) per common share - basic $ (1.01) $ (0.40) $ (0.27) $ (0.21) $ 0.63 $ 0.62 ======== ======== ======== ======== ======== ======== Net earnings (loss) per common share before cumulative effect of accounting change - diluted $ (0.18) $ (0.40) $ (0.27) $ (0.21) $ 0.60 $ 0.60 Cumulative effect of accounting change - diluted (0.83) -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net earnings (loss) per common share - diluted $ (1.01) $ (0.40) $ (0.27) $ (0.21) $ 0.60 $ 0.60 ======== ======== ======== ======== ======== ======== Weighted average common and common equivalent shares: Weighted average common shares outstanding - basic 8,917 8,917 7,964 7,273 7,390 8,026 Weighted average common shares outstanding - diluted 8,917 8,917 7,964 7,273 7,728 8,237 At At At At At At March 28, March 29, March 30, Sept 29, Oct 1, Oct 2, Balance Sheet Data: 2003 2002 2001 (1) 2000 1999 1998 -------- -------- -------- -------- -------- -------- Working capital $ 27,716 $ 26,977 $ 28,383 $ 30,771 $ 31,873 $ 25,245 Total assets 61,996 67,307 73,584 73,687 73,249 54,804 Long-term obligations, net 17,612 17,000 17,333 19,034 18,426 5,161 Total liabilities 33,950 30,258 32,955 33,150 31,141 13,626 Stockholders equity 28,046 37,049 40,629 40,537 42,108 41,178 NOTES TO SELECTED FINANCIAL DATA (UNAUDITED) (1) 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.
Item 7. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations. --------------------- 2003 Compared to 2002 The following table summarizes certain financial information relating to our results of operations for the fiscal year ended March 28, 2003 and the fiscal year ended March 29, 2002: 2003 2002 ----------- ----------- Net Revenues $102,617,413 $103,601,428 Gross Profit 30,029,166 29,495,185 SG&A 30,511,651 31,928,924 Internet expenses 460,845 355,766 Interest expense 629,026 985,509 Other income, net 11,398 192,586 Net loss before cumulative effect of accounting change (1,560,958) (3,582,428) Cumulative effect of accounting change 7,442,432 -- Net loss $ (9,003,390) $ (3,582,428) Net Revenues. Net revenues decreased approximately $984,000 (1.0%) for the fiscal year ended March 28, 2003 as compared to the fiscal year ended March 29, 2002. The decrease in net revenues was primarily the result of revenue losses in our Team Dealer operations and decreases in school spending for athletic programs. Gross Profit. Gross profit increased approximately $534,000 (1.8%) for the fiscal year ended March 28, 2003 as compared to the same period in fiscal 2002. As a percentage of net revenues, gross profit increased to 29.3% for the fiscal year ended March 28, 2003 as compared to 28.5% for the fiscal year ended March 29, 2002. The increase in gross profit is attributable to the consolidation of several of our plants, exiting certain unprofitable product lines and improved product sourcing. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased approximately $1.4 million (4.4%) for the fiscal year ended March 28, 2003 as compared to the same period in fiscal 2002. As a percentage of net revenues, selling, general and administrative expenses decreased to 29.7% from 30.8% for the fiscal year ended March 28, 2003 as compared to the fiscal year ended March 29, 2002. The decrease in selling, general and administrative expenses for the fiscal year ended March 28, 2003 as compared to the fiscal year ended March 29, 2002 is primarily a result of the following: (i.) A decrease in payroll and related expense of approximately $1.1 million; primarily a result of reduced headcount. (ii.) A decrease in depreciation and amortization expense of approximately $366,000; primarily a result of assets reaching their full depreciation levels and the discontinuation of goodwill amortization. (iii.) A decrease in auditing and legal expenses of approximately $185,000; primarily a result of lower audit fees due to our change in fiscal year from September to March which resulted in more audit work in the prior year. Internet Expenses. Internet related expenses increased approximately $105,000 (29.5%) for the fiscal year ended March 28, 2003 as compared to the fiscal year ended March 29, 2002. These expenses are related to the continued support and enhancement of our websites and web development to post electronic catalogs on our websites. Interest Expense. Interest expense decreased approximately $356,000 (36.2%) for the fiscal year ended March 28, 2003 as compared to the fiscal year ended March 29, 2002. This decrease is due to lower average borrowings and lower interest rates. Other Income, Net. Other income decreased approximately $181,000 for the fiscal year ended March 28, 2003 as compared to the fiscal year ended March 29, 2002. This decrease is due primarily to the casualty gain on insurance proceeds received in the prior year for assets lost in a flood that occurred in our corporate facility. These proceeds were used to purchase replacement assets. Net Loss before Cumulative Effect of Accounting Change. Net loss before cumulative effect of accounting change for the fiscal year ended March 28, 2003 decreased by $2.0 million (56.4%) as compared to the fiscal year ended March 29, 2002. Cumulative Effect of Accounting Change. On March 30, 2002 we adopted Financial Accounting Standards Board Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 requires that goodwill not be amortized but instead be tested for impairment at least annually by reporting unit. Goodwill is required to be tested for impairment in a transitional test upon adoption and then at least annually by reporting unit. As a result of our impairment testing, we recorded a non-cash "cumulative effect of accounting change" impairment write down of approximately $7.4 million. We now have no remaining goodwill on our financial statements. Net Loss. Net loss increased approximately $5.4 million for the fiscal year ended March 28, 2003 as compared to the fiscal year ended March 29, 2002. Net loss per share increased to $(1.01) from $(0.40) for the fiscal year ended March 28, 2003 as compared to the fiscal year ended March 29, 2002. This increase is due to the cumulative effect of accounting change. 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 Interest expense 985,509 2,046,656 Other income, net 192,586 29,433 Income tax benefit -- 2,085,736 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 was 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 was primarily a result of the following: (i.) A decrease in payroll and 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. 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 because we were still developing our e-commerce sites. 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, which included employee termination costs, facility closure costs and moving costs. 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 our change in lenders in March 2001. During the quarter ended March 2001, we mutually agreed with our lender to an early termination of the credit agreement so that we could establish a credit arrangement with a lender that could better service our working capital needs. This change in lenders resulted in a lower interest rate and increased borrowing availability. 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 decrease was 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 was 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, 2002 as compared to the comparable twelve months ended March 30, 2001. Based upon our operating results for the fiscal year ended March 29, 2002, we did not provide an income tax benefit related to our loss before 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, as compared to the comparable twelve months ended March 30, 2001. The increase in weighted average shares outstanding was 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 Interest expense 957,270 932,391 Other income, net 14,400 1,904 Income tax benefit 1,231,053 69,203 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 was 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 in 2001. (ii.) A decrease in payroll related expense of approximately $364,000. This decreases 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 decrease is primarily the result of a reduction in litigation. (iv.) A decrease in facility expenses of approximately $156,000. This decrease 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 was primarily due to the Amended and Restated License Agreement with MacMark, entered into 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 for the six month period ended March 30, 2001, nonrecurring expenses of approximately $114,000 which included employee termination costs, facility closure and moving costs. 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. During the quarter ended March 2001, we mutually agreed with our lender to an early termination of the credit agreement so that we could establish a credit arrangement with a lender that could better service our working capital needs. This change in lenders resulted in a lower interest rate and increased borrowing availability. In the six month period ended March 31, 2000, we recorded a nonrecurring charge related to the settlement of two different lawsuits in the amount of $605,000. The first lawsuit involved a former employee. The second lawsuit related to a marketing program. No previous accrual was made because the final settlement was not measurable nor probable at the balance sheet date. 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 was 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 as compared to the same period in fiscal 2000. The increase in weighted average shares outstanding was primarily due to the sale of treasury stock to Emerson Radio Corp. Liquidity and Capital Resources Our working capital increased approximately $739,000 during the fiscal year ended March 28, 2003, from $27.0 million at March 29, 2002 to $27.7 million at March 28, 2003. The increase in working capital is primarily the result of an increase in cash of approximately $1.6 million, an increase in inventories of approximately $1.2 million, and an increase in trade accounts receivable of approximately $932,000. These increases wer partially offset by an increase in trade accounts payable of $2.3 million and an increase in accrued liabilities of approximately $792,000. 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 our 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 28, 2003 we were in compliance with this requirement. As of March 28, 2003, we had total available borrowings under our senior credit facility of approximately $22.4 million, of which approximately $17.5 million were outstanding. Congress Financial Corporation has expressed an interest in extending this credit agreement. We intend to have a long-term credit agreement in place well in advance of March 2004. Although no assurance can be made, we believe we will be able to extend the term of our credit agreement with Congress Financial Corporation prior to its maturity date of March 27, 2004. 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. We have undertaken revenue enhancement programs in the past two fiscal years, including our associate programs in which associates share in the revenue generated from their website links to our websites. We have also initiated successful marketing alliances with American Heart Association and American Diabetes Association. See Part I. Item 1. "Business - Sales and Marketing" for more information on these programs. The following table sets forth our contractual obligations at March 28, 2003 for the periods shown: Due in Due in Due within two to four to one year three years five years Thereafter Total ------------------------------------------------------------ Notes payable $ 53,563 $17,595,180 $ -- $ -- $17,648,743 Capital lease obligations 17,519 16,573 -- -- 34,092 Leases 1,790,962 1,674,007 226,154 -- 3,691,123 ------------------------------------------------------------ Total $1,862,044 $19,285,760 $226,154 $ -- $21,373,958 ============================================================ 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 28, 2003, we had 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 credit agreement currently prohibits the repurchase of any additional shares without the lender's prior consent. As of March 28, 2003, we did not 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 requires us to make estimates and judgments 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 weighted-average and standard 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 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 acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments. Changes in strategy and/or market conditions could significantly impact these judgments 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 determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, if we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Certain Factors that May Affect Our Business or Future Operating Results ------------------------------------------------------------------------ This report contains various forward looking statements and information that are based on our beliefs as well as assumptions made by and information currently available to us. When used in this report, the words "anticipate," "believe," "estimate," "expect," "predict," "intend," "project" and similar expressions are intended to identify forward looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected or projected. Several key factors that may have a direct bearing on our results are set forth below. Future trends for revenues and profitability remain difficult to predict. We continue to face many risks and uncertainties, including: 1. general and specific market and economic conditions; 2. budgetary restrictions of schools and government agencies; 3. unanticipated disruptions or slowdowns in operations; 4. high fixed costs; 5. competitive factors; 6. continuation of existing license agreement; 7. foreign supplier related issues; 8. use of deferred tax asset; and 9. product liability and insurance. General and Specific Market and Economic Conditions --------------------------------------------------- The general economic condition in the United States could affect pricing and availability of raw materials such as metals, petroleum and other commodities used in manufacturing certain products and certain purchased finished goods as well as transportation costs. Any material price increases to our customers could have an adverse effect on revenues and any price increases from vendors could have an adverse effect on our costs. Professional sports have a significant impact on the market conditions for each individual sport. Collective bargaining, labor disputes, lockouts or strikes by a professional sport could have a negative impact on our revenues. Budgetary Restrictions of Schools and Government Agencies --------------------------------------------------------- Much of our business is dependent on the budgetary allowances of schools, as well as local, state and federal government agencies. Restrictions to the funding or budgeted spending of these entities could adversely affect our results of operations. Unanticipated Disruptions or Slowdowns in Operations ---------------------------------------------------- Our ability to provide high quality customer service, process and fulfill orders and manage inventory depends on: (i.) the efficient and uninterrupted operation of our call center, distribution center, manufacturing facilities, and management information systems and (ii.) the timely performance of vendors, catalog printers and shipping companies. Any material disruption or slowdown in the operation of our call center, distribution center, manufacturing facilities or management information systems, or comparable disruptions or slowdowns suffered by our principal service 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"). As experienced in 1997, a strike by UPS or any of our other major carriers could adversely affect our results of operations due to not being able to deliver our products in a timely manner and using other more expensive freight carriers. Although we have analyzed the cost-benefit effect of using other carriers, we continue to utilize UPS for the majority of our small package shipments and believe this is most advantageous to our company. In addition to the foregoing, the International Longshore and Warehouse Union ("ILWU"), which is the union of dock workers that move the cargo (such as import containers) along the West Coast, reached a contract agreement on November 23, 2002 with the Pacific Maritime Association ("PMA"), a group of global ship owners and terminal operators. A strike by the ILWU, or lockout by the PMA, as experienced in September 2002, would significantly slow the receipt of our import products and could cause delays in our ability to process and fulfill customer orders. Any strike or lockout could also cause an increase in backlog and freight charges such as port congestion surcharges, extended peak season surcharges, charges as a result of force majeure clauses, etc. High Fixed Costs ---------------- Operations and maintenance of our call center, distribution center, manufacturing facilities and management information systems involve substantial fixed costs. Paper, packaging, shipping and postage are significant components of our costs. Catalog marketing entails substantial paper, postage, and costs associated with catalog development. Each of these is subject to price fluctuations. Competitive Factors ------------------- The institutional market for sporting goods and leisure products is highly competitive and there are no significant barriers to enter this market. The size of this market has encouraged the entry of new competitors as well as increased competition from established companies. Competitors include large retail operations that also sell to the institutional market, other catalog and direct marketing companies, team dealers, and Internet sellers. Increased competition could result in pricing pressures, increased marketing expenditures and loss of market share and could have a material adverse effect on our results of operations. Continuation of Existing License Agreement ------------------------------------------ In February 1992, we acquired two separate licenses to use several trade names, styles, and trademarks (including, but not limited to, MacGregor[R]). On December 21, 2000, the license relating to the use of the MacGregor[R] trademark was amended and restated in its entirety. The license agreement permits us to manufacture, promote, sell, and distribute to designated customers throughout the world, specified sports related equipment and products relating to baseball, softball, basketball, soccer, football, volleyball, and general exercise. The license agreement requires us to pay royalties based upon sales of MacGregor[R] branded products, with the minimum annual royalty set at $100,000. Futhermore, the license agreement is exclusive with respect to certain customers and non-exclusive with respect to others. The license agreement has an original term of 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. Termination of this license agreement could have a material adverse effect on our results of operations. Foreign Supplier Related Issues ------------------------------- Approximately 30% of our total product costs are from products purchased directly from foreign suppliers located primarily in the Far East. In addition, we believe foreign manufacturers produce many of the products we purchase from domestic suppliers. We are subject to risks of doing business abroad, including delays in shipments, adverse fluctuations in foreign currency exchange rates, increases in import duties, decreases in quotas, changes in custom regulations, acts of God (such as earthquakes), war and political turmoil. The occurrence of any one or more of the foregoing could adversely affect our operations. Use of Deferred Tax Asset ------------------------- We believe our net deferred tax assets will be realized through tax planning strategies available in future periods and future profitable operating results. Although realization is not assured, we believe it is more likely than not that our remaining net deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced or eliminated in the near term if certain tax planning strategies are not successfully executed or estimates of future taxable income during the carryforward period are reduced. If we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Product Liability and Insurance ------------------------------- Because of the nature of our products, we are periodically subject to product liability claims resulting from personal injuries. We may become involved in various lawsuits incidental to our business, some of which relate to claims allegedly resulting in substantial permanent paralysis. Significantly increased product liability claims continue to be asserted successfully against manufacturers and distributors of sports equipment throughout the United States resulting in general uncertainty as to the nature and extent of manufacturers' and distributors' liability for personal injuries. See Item 3. -- "Legal Proceedings". In recent years, product liability insurance has become much more expensive, more restrictive and more difficult to obtain. There can be no assurance that our general product liability insurance will be sufficient to cover any successful product liability claims made against us. In our opinion, any ultimate liability arising out of currently pending product liability claims will not have a material adverse effect on our financial condition or results of operations. However, any claims substantially in excess of our insurance coverage, or any substantial claim not covered by insurance, could have a material adverse effect on our financial condition and results of operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- An increase in interest rates could have a material adverse effect on our results of operations and our financial position. Assuming borrowing levels remain at the same level for fiscal year 2004 as at the end of fiscal year 2003, each additional 1% increase in interest rates would increase interest expense by approximately $150,000 to $200,000. Item 8. Financial Statements and Supplementary Data. ------------------------------------------- Index to Financial Statements Page ----------------------------- ---- Report of Independent Auditors 24 Consolidated Balance Sheets as of March 28, 2003, March 29, 2002, and March 30, 2001 25 Consolidated Statements of Operations for the Fiscal Year Ended March 28, 2003, the Fiscal Year ended March 29, 2002, the Six Months Ended March 30, 2001, and the Year Ended September 29, 2000 26 Consolidated Statements of Stockholders' Equity for the Fiscal Year Ended March 28, 2003, the Fiscal Year ended March 29, 2002, the Six Months Ended March 30, 2001 and the Year Ended September 29, 2000 27 Consolidated Statements of Cash Flows for the Fiscal Year Ended March 28, 2003, the Fiscal Year ended March 29, 2002, the Six Months Ended March 30, 2001 and the Year Ended September 29, 2000 28 Notes to Consolidated Financial Statements 29 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 28, 2003 and March 29, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two fiscal years in the period ended March 28, 2003, the six month period ended March 30, 2001 and the fiscal year ended September 29, 2000. Our audits also included the financial statement schedule listed in the Index to Exhibits at Item 16(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 28, 2003, and March 29, 2002, and the consolidated results of their operations and their cash flows for each of the two fiscal years ended March 28, 2003, the six month period ended March 30, 2001 and the fiscal year 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. As discussed in Note 1 to the consolidated financial statements, Sport Supply Group, Inc. and subsidiaries changed its method of accounting for goodwill end other purchased intangible assets during the year ended March 28, 2003. ERNST & YOUNG LLP Dallas, Texas May 10, 2003 SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 28, March 29, 2003 2002 ----------- ----------- CURRENT ASSETS : Cash and equivalents $ 2,142,302 $ 586,911 Accounts receivable: Trade, less allowance for doubtful accounts of $500,000 at March 28, 2003 and $524,000 at March 29, 2002 19,756,947 18,824,829 Other 488,728 235,008 Inventories, net 19,564,314 18,368,392 Other current assets 576,653 560,362 Deferred tax assets 1,525,472 1,659,039 ----------- ----------- Total current assets 44,054,416 40,234,541 ----------- ----------- DEFERRED CATALOG EXPENSES 1,912,346 2,017,280 PROPERTY, PLANT AND EQUIPMENT : Land 8,663 8,663 Buildings 1,605,102 1,605,102 Computer Equipment & Software 11,461,375 11,231,120 Machinery and equipment 6,558,502 6,358,546 Furniture and fixtures 1,508,393 1,673,683 Leasehold improvements 2,497,209 2,384,335 ----------- ----------- 23,639,244 23,261,449 Less -- Accumulated depreciation and amortization (15,119,308) (13,310,710) ----------- ----------- 8,519,936 9,950,739 ----------- ----------- DEFERRED TAX ASSETS 3,974,753 3,841,186 COST IN EXCESS OF NET ASSETS ACQUIRED, less accumulated amortization of $2,171,000 at March 29, 2002 - 7,442,432 TRADEMARKS less accumulated amortization of $995,000 at March 28, 2003 and $1,114,000 at March 29, 2002 2,926,288 3,044,888 OTHER ASSETS less accumulated amortization of $798,000 at March 28, 2003 and $589,000 at March 29, 2002 607,900 775,839 ----------- ----------- $ 61,995,639 $ 67,306,905 =========== =========== CURRENT LIABILITIES : Accounts payable $ 11,823,287 $ 9,532,407 Other accrued liabilities 4,443,990 3,652,310 Notes payable and capital lease obligations, current portion 71,082 73,132 ----------- ----------- Total current liabilities 16,338,359 13,257,849 ----------- ----------- NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of current portion 17,611,753 17,000,139 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY : Preferred stock, par value $0.01, 100,000 shares authorized, no shares outstanding - - Common stock, par value $0.01, 20,000,000 shares authorized, 9,362,397 shares issued at March 28, 2003 and March 29, 2002, and 8,917,244 shares outstanding at March 28, 2003 and March 29, 2002 93,624 93,624 Additional paid-in capital 48,101,331 48,101,331 Accumulated deficit (16,348,146) (7,344,756) Treasury stock, at cost, 445,153 shares, at March 28, 2003 and March 29, 2002 (3,801,282) (3,801,282) ----------- ----------- Total Stockholders' Equity 28,045,527 37,048,917 ----------- ----------- $ 61,995,639 $ 67,306,905 =========== =========== 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 28, 2003, The Year Ended March 29, 2002, The Six Month Period Ended March 30, 2001, and The Year Ended September 29, 2000 ------------ ------------ ----------- ----------- 2003 2002 2001 2000 ------------ ------------ ----------- ----------- Net revenues $ 102,617,413 $ 103,601,428 $ 50,336,524 $119,320,982 Cost of sales 72,588,247 74,106,243 36,400,525 83,151,033 ------------ ------------ ----------- ----------- Gross profit 30,029,166 29,495,185 13,935,999 36,169,949 Selling, general and administrative expenses 30,511,651 31,928,924 15,775,650 34,865,452 Internet expenses 460,845 355,766 317,808 1,136,149 Nonrecurring charges - - 253,239 605,000 ------------ ------------ ----------- ----------- Operating loss (943,330) (2,789,505) (2,410,698) (436,652) Interest expense (629,026) (985,509) (957,270) (2,021,763) Other income, net 11,398 192,586 14,400 16,924 ------------ ------------ ----------- ----------- Net loss before income taxes and cumulative effect of accounting change (1,560,958) (3,582,428) (3,353,568) (2,441,491) Income tax benefit - - (1,231,053) (923,885) ------------ ------------ ----------- ----------- Net loss before cumulative effect of accounting change (1,560,958) (3,582,428) (2,122,515) (1,517,606) Cumulative effect of accounting change (7,442,432) - - - ------------ ------------ ----------- ----------- Net loss $ (9,003,390) $ (3,582,428) $ (2,122,515) $ (1,517,606) ============ ============ =========== =========== Loss per share: Net loss per share before cumulative effect of accounting change - basic $ (0.18) $ (0.40) $ (0.27) $ (0.21) ============ ============ =========== =========== Cumulative effect of accounting change - basic $ (0.83) $ - $ - $ - ============ ============ =========== =========== Net loss per share - basic $ (1.01) $ (0.40) $ (0.27) $ (0.21) ============ ============ =========== =========== Net loss per share before cumulative effect of accounting change - diluted $ (0.18) $ (0.40) $ (0.27) $ (0.21) ============ ============ =========== =========== Cumulative effect of accounting change - diluted $ (0.83) $ - $ - $ - ============ ============ =========== =========== Net loss per share - diluted $ (1.01) $ (0.40) $ (0.27) $ (0.21) ============ ============ =========== =========== Weighted average number of common shares outstanding - basic 8,917,244 8,917,244 7,963,989 7,272,570 ============ ============ =========== =========== Weighted average number of common shares outstanding - diluted 8,917,244 8,917,244 7,963,989 7,272,570 ============ ============ =========== =========== 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 28, 2003, The Year Ended March 29, 2002, The Six Month Period Ended March 30, 2001, and The Year Ended September 29, 2000 Common Stock Additional Treasury Stock ------------------- Paid in Accumulated ----------------------- Shares Amount Capital Deficit Shares Amount Total --------- ------- ---------- ----------- --------- ----------- ---------- 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 --------- ------- ---------- ----------- --------- ----------- ---------- Net loss (comprehensive loss) (9,003,390) (9,003,390) --------- ------- ---------- ----------- --------- ----------- ---------- Balance, March 28, 2003 9,362,397 $ 93,624 $48,101,331 $(16,348,146) 445,153 $ (3,801,282) $28,045,527 ========= ======= ========== =========== ========= =========== ========== 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 28, 2003, The Year Ended March 29, 2002, The Six Month Period Ended March 30, 2001, and The Year Ended September 29, 2000 2003 2002 2001 2000 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES : Net loss $ (9,003,390) $ (3,582,428) $ (2,122,515) $(1,517,606) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,172,387 2,572,600 1,556,419 2,855,172 Provision for allowances for accounts receivable 451,367 351,306 220,884 319,025 Cumulative effect of accounting change 7,442,432 - - - Changes in assets and liabilities: (Increase) decrease in accounts receivable (1,637,205) 5,558 2,789,939 1,902,706 (Increase) decrease in inventories (1,195,922) 2,682,147 (1,197,480) (565,986) (Increase) decrease in deferred catalog expenses and other current assets 88,643 706,326 (578,491) 284,757 Increase (decrease) in accounts payable 2,290,880 (4,081,428) 3,742,767 1,161,798 (Increase) decrease in deferred taxes 133,567 (240,204) (77,632) (279,015) Increase (decrease) in accrued liabilities 791,680 1,722,953 (675,323) 170,301 Increase in other assets (30,912) (187,490) (140,580) (284,426) (Increase) decrease in noncurrent deferred tax assets (133,567) 240,204 (1,214,480) (765,671) ----------- ----------- ----------- ----------- Net cash provided by operating activites 1,369,960 189,544 2,303,508 3,281,055 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES : Acquisitions of property, plant & equipment (424,133) (537,194) (97,030) (2,025,608) Payments for acquisitions, net of cash acquired - - - (854,093) ----------- ----------- ----------- ----------- Net cash used in investing activities (424,133) (537,194) (97,030) (2,879,701) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES : Proceeds from issuances of notes payable 112,456,629 123,834,275 17,134,214 2,205,620 Payments of notes payable and capital lease obligations (111,847,065) (124,173,058) (20,395,961) (2,643,581) Proceeds from common stock issuances - 2,248 2,214,348 59,150 Purchase of treasury stock - - - (112,437) ----------- ----------- ----------- ----------- Net cash (used in) provided by financing activities 609,564 (336,535) (1,047,399) (491,248) ----------- ----------- ----------- ----------- NET CHANGE IN CASH AND EQUIVALENTS 1,555,391 (684,185) 1,159,079 (89,894) Cash and equivalents, beginning of period 586,911 1,271,096 112,017 201,911 ----------- ----------- ----------- ----------- Cash and equivalents, end of period $ 2,142,302 $ 586,911 $ 1,271,096 $ 112,017 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION : Cash paid during the period for interest $ 686,518 $ 986,297 $ 824,353 $ 2,169,859 =========== =========== =========== =========== Cash paid during the period for income taxes $ 88,697 $ 55,287 $ 73,435 $ 204,455 =========== =========== =========== =========== 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 Cash paid for the acquisitions, net - - - (854,093) Debt issued for the acquisitions - - - (275,000) ----------- ----------- ----------- ----------- Liabilities assumed $ - $ - $ - $ 839,592 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 28, 2003 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: direct marketing of sports related equipment and leisure products to institutional customers in the United States. We source most of the products we sell and also manufacture some of the products we sell. Manufactured products include, but are not limited to: 1) Football, baseball and track and field equipment; 2.) Tennis, volleyball, and other sports nets; 3.) Steel and aluminum construction items, such as football, basketball, soccer and field hockey goals; and 4.) Track and field, gymnastics and physical education 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 2003 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 standard cost method for items manufactured by us and weighted-average cost for items purchased for resale. As of March 28, 2003 and March 29, 2002, inventories consisted of the following: Inventory Data: Mar. 28, 2003 Mar. 29, 2002 --------------- ------------ ------------ Raw materials $ 2,095,242 $ 2,153,634 Work-in-process 318,165 257,653 Finished and purchased goods 18,223,657 17,121,730 ------------ ------------ Inventory, Gross 20,637,064 19,533,017 Less inventory allowance for obsolete or slow moving items (1,072,750) (1,164,625) ------------ ------------ Inventory, Net $ 19,564,314 $ 18,368,392 ============ ============ 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 28, 2003 and March 29, 2002, approximately 24% and 23%, 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 24%, 26%, 30%, and 31% of total net revenues in fiscal 2003, 2002, 2001, and 2000, 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 28, 2003 or March 29, 2002. 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 $500,000 and $524,000, a as of March 28, 2003 and March 29, 2002, respectively. Advertising and Deferred Catalog Expenses We expense advertising costs as incurred, except for production costs related to direct-response catalog activities, which are capitalized. Direct response catalogs are product and order reference books for our customers. Production and distribution costs, primarily printing and postage, associated with catalogs are amortized over twelve months which approximates customer usage of the catalogs produced. Our catalog amortization for the fiscal year ended March 28, 2003, the fiscal year ended March 29, 2002, the six month period ended March 30, 2001, and the fiscal year September 29, 2000 were approximately $3,161,000 $3,026,000, $1,312,000, and $4,122,000, 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 costs of maintenance and repairs are charged to expense as incurred. Significant renewals and improvements 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 to ten years Computer Equipment and Software Three to ten years Furniture and Fixtures Five years Leasehold Improvements Remaining lease term Intangible Assets Trademarks relate to costs incurred in connection with the acquisition or 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 deposits, capitalized loan and financing fees and patents. Capitalized loan and financing fees are amortized over the term of the credit agreement. Amortization of intangible assets is provided by the straight-line method as follows: 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 28, 2003. 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 60 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. Shipping and Handling 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 28, 2003. Previous periods have been restated to conform to fiscal 2003 presentation. Stock-based Compensation We have stock option plans under which certain officers and employees have been granted options. All the options have been granted at prices equal to the market value of the shares at the time of the grant and expire on the tenth anniversary of the grant date. Our stock-based compensation is measured in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no compensation expense is recognized for fixed option plans because the exercise prices of Employee stock options equal or exceed the market prices of the underlying stock on the dates of grant. The following table represents the effect on net loss and loss per share if we had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," to stock based Employee compensation. For the For the For the For the Fiscal Fiscal Six Fiscal Year Ended Year Ended Months Ended Year Ended Mar. 28, Mar. 29, Mar. 30, Sept. 29, 2003 2002 2001 2000 ---------- ---------- ---------- ---------- Net loss, as reported $(9,003,390) $(3,582,428) $(2,122,515) $(1,517,606) Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects $(2,826) $(10,710) $(268,091) $(471,041) Pro forma loss $(9,006,216) $(3,593,138) $(2,390,606) $(1,988,647) Loss per share - basic and diluted: As reported $(1.01) $(0.40) $(0.27) $(0.21) Pro forma $(1.01) $(0.40) $(0.30) $(0.27) Recent Pronouncements In June 2002, the Financial Accounting Standards Board issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires that a liability be recognized for exit and disposal costs only when the liability has been incurred and when it can be measured at fair value. This statement is effective for exit and disposal activities that are initiated after December 31, 2002. This statement will impact the timing of our recognition of liabilities for cost associated with exit or disposal activities. In August 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 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 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 have adopted SFAS 144 effective March 30, 2002 and it did not have an impact on our financial statements when adopted. Adoption of Recent Pronouncements In June 2001, the Financial Accounting Standards Board issued Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 requires that goodwill not be amortized but instead be tested for impairment at least annually by reporting unit. We adopted SFAS 142 effective March 30, 2002. As a result, we ceased recording amortization of goodwill on March 30, 2002. Had we ceased amortizing goodwill as of the beginning of fiscal 2002, net loss for the fiscal year ended March 29, 2002 would have decreased by $284,000 ($0.03 per basic and diluted share). Goodwill is required to be tested for impairment in a transitional test upon adoption and then at least annually by reporting unit. Goodwill impairment testing must also be performed more frequently if events or other changes in circumstances indicate that goodwill might be impaired. Under the provisions of SFAS 142, a two step process is used to evaluate goodwill impairment. Under step one of the evaluation process, the carrying value of a reporting unit is compared to its fair value to determine if a potential goodwill impairment exists. Under step two of the evaluation process, if a potential goodwill impairment is identified during step one, then the amount of goodwill impairment, if any, is measured using a hypothetical purchase price allocation approach. The results of our step one analysis indicated that we had a potential impairment of goodwill. In our step two analysis, the fair value of the goodwill was determined through a third party appraisal. The appraisal determined fair value to be the price that the assets could be sold for in a current arms-length transaction between willing parties. As a result of our step two impairment testing, we recorded a non-cash "cumulative effect of accounting change" increase in our net loss of approximately $7.4 million. As of March 28, 2003 and March 29, 2002, we had $0 and $7.4 million of goodwill recorded on our consolidated balance sheet, respectively. 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 our Board of Directors (or a Stock Option Committee comprised of members of our 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 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 Granted 19,375 $1.69 Exercised -- -- Forfeited (637,112) $7.64 --------- ------------------- Outstanding at March 28, 2003 308,442 $6.695 ========= =================== Options Outstanding Options Exercisable -------------------------------------- --------------------- Weighted Weighted Weighted Average Average Average Range of Amount Remaining Exercise Amount Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price --------------- ----------- ---------------- -------- ----------- -------- $0.95 - $2.00 58,125 8.71 $ 1.46 34,791 $ 1.38 $6.13 - $7.50 91,817 4.88 7.07 91,817 7.07 $7.88 - $9.44 158,500 6.25 8.40 158,500 8.40 ------- ------- 308,442 6.30 $ 6.695 285,108 $ 7.11 ======= ======= All options granted under the stock option plan were at exercise prices equal to or greater than the fair market value of our stock on the date of the grant. As of March 28, 2003, there were a total of 308,442 options outstanding with exercise prices ranging from $0.95 to $9.44. As of March 28, 2003, 285,108 of the total options outstanding were fully vested with an additional 23,334 vesting through January 2006. As of March 29, 2002, there were a total of 926,179 options outstanding. As of March 29, 2002, 896,178 of the total options outstanding were fully vested with an additional 30,001 vesting through April 2003. As of March 30, 2001, 921,094 of the total options outstanding were fully vested with an additional 85,835 options vesting through November 2002. As of September 29, 2000, 875,781 of the total options outstanding were fully vested with an additional 152,085 options vesting through November 2002. 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 4.10%, 4.15%, 4.29%, and 5.93% in 2003, 2002, 2001, and 2000 respectively; (ii.) dividend yield of 0% for all years; (iii.) expected volatility of 36%, 39%, 55%, and 49% in 2003, 2002, 2001, and 2000, respectively; and (iv.) weighted average expected life for each option of 3 years. The weighted average fair value of employee stock options granted in 2003, 2002, 2001, and 2000 are $0.49, $0.41, $0.59, and $2.41, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period; therefore, our pro forma effect will not be fully realized until the completion of one full vesting cycle. Our pro forma information is as follows: For the For the For the For the Fiscal Fiscal Six Fiscal Year Year Months Year Ended Ended Ended Ended Mar. 28, Mar. 29, Mar. 30, Sept. 29, 2003 2002 2001 2000 ---------- ---------- ---------- ---------- Net loss: As reported $(9,003,390) $(3,582,428) $(2,122,515) $(1,517,606) Pro forma $(9,006,216) $(3,593,138) $(2,390,606) $(1,988,647) Loss per share - basic and diluted: As reported $(1.01) $(0.40) $(0.27) $(0.21) Pro forma $(1.01) $(0.40) $(0.30) $(0.27) 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 28, 2003 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 credit agreement currently prohibits the repurchase of any additional shares without the lender's prior consent. Net Earnings Per Common Share The following table sets forth the computation of basic and diluted earnings per share: For the For the For the For the Fiscal Fiscal Six Month Fiscal Year Year Period Year Ended Ended Ended Ended Mar. 28, Mar. 29, Mar. 30, Sept. 29, 2003 2002 2001 2000 ---------- ---------- ---------- ---------- Numerator: --------- Net loss $(9,003,390) $(3,582,428) $(2,122,515) $(1,517,606) ========== ========== ========== ========== Denominator: ----------- Weighted average shares outstanding 8,917,244 8,917,244 7,963,989 7,272,570 Effect of dilutive securities: Warrants -- -- -- -- Employee stock options -- -- -- -- ---------- ---------- ---------- ---------- Adjusted weighted average shares and assumed conversions 8,917,244 8,917,244 7,963,989 7,272,570 ========== ========== ========== ========== Per Share Calculations: ---------------------- Basic and diluted loss per share $(1.01) $(0.40) $(0.27) $(0.21) ========== ========== ========== ========== Securities excluded from weighted average shares diluted because their effect would be antidilutive 308,442 926,179 2,006,929 2,027,866 3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS: As of March 28, 2003 and March 29, 2002, notes payable and capital lease obligations consisted of the following: 2003 2002 ---------- ---------- Note payable under revolving line of credit, Interest ranging from prime minus 0.25% to prime plus 1.0% (4.25% at Mar. 28, 2003 and 4.75% at Mar. 29, 2002) and LIBOR (3.76% at Mar. 28, 2003 and 4.35% at Mar. 29, 2002) due Mar. 27, 2004 and collateralized by substantially all assets. $17,521,601 $16,838,905 Capital lease obligation, interest at 9%, payable in annual installments of principal and interest Totaling $55,000 through August 2005. 117,963 158,682 Other 43,271 75,684 ---------- ---------- Total 17,682,835 17,073,271 Less - current portion (71,082) (73,132) ---------- ---------- Long-term debt and capital lease obligations, net $17,611,753 $17,000,139 ========== ========== 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 28, 2003 we were in compliance with this requirement. As of March 28, 2003, we had total available borrowings under our senior credit facility of approximately $22.4 million of which approximately $17.5 million were outstanding. Amounts outstanding under the senior credit facility are secured by substantially all the assets of the Sport Supply Group, Inc. and our 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 28, 2003, by fiscal year and in the aggregate, are as follows: 2004 $ 71,082 2005 17,586,551 2006 25,202 Thereafter -- ------------ Total 17,682,835 Less current portion (71,082) ------------ Total long term portion $ 17,611,753 ============ As of March 28, 2003 the carrying value of our long-term debt approximates its fair value. 4. INCOME TAXES: As of March 28, 2003 and March 29, 2002 the components of the net deferred tax assets and liabilities are as follows: 2003 2002 ---------- ---------- Current deferred tax assets (liabilities): --------------------------- Allowances for doubtful accounts $ 189,800 $ 198,910 Inventories 933,698 1,068,038 Other accrued liabilities 401,975 392,091 Valuation allowance for deferred tax assets -- -- ---------- ---------- Total current deferred tax assets, net of valuation allowance $ 1,525,472 $ 1,659,039 Noncurrent deferred tax assets (liabilities): ------------------------------ Depreciation expense $ (95,745) $ (212,890) Intangible assets including goodwill and SAP costs (414,755) (3,172,755) Net operating loss 9,560,691 8,926,654 Tax credit 486,236 486,236 Valuation allowance for deferred tax assets (5,561,674) (2,186,059) ---------- ---------- Total non current deferred tax assets, net of valuation allowance $ 3,974,753 $ 3,841,186 ========== ========== 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 28, 2003 we have net deferred tax assets of approximately $5.5 million, inclusive of a $5.6 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 our remaining net deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced or eliminated in the near term if certain tax planning strategies are not successfully executed or estimates of future taxable income during the carryforward period are reduced. The income tax provision (benefit) in the accompanying statements of operations for the fiscal year ended March 28, 2003, the fiscal year ended March 29, 2002, the six month period ended March 30, 2001 and the fiscal year ended September 29, 2000 consisted of the following: 2003 2002 2001 2000 ---------- ---------- ---------- ---------- Current $ -- $ -- $ (6,333) $ 118,115 Deferred -- -- (1,224,720) (1,042,000) ---------- ---------- ---------- ---------- Income tax benefit $ -- $ -- $(1,231,053) $ (923,885) ========== ========== ========== ========== The provision (benefit) for income taxes in the accompanying statements of operations for the fiscal year ended March 28, 2003, the fiscal year ended March 29, 2002, the six month period ended March 30, 2001 and the fiscal year ended September 29, 2000 differ from the statutory federal rate as follows: 2003 2002 2001 2000 ---------- ---------- ---------- ---------- Income tax benefit at statutory federal rate $(3,061,153) $(1,269,060) $(1,140,213) $ (830,107) Permanent differences 37,683 65,965 -- -- State income taxes, net of federal effect (352,145) (605,116) (105,254) (75,865) Increase in valuation reserve 3,375,615 2,186,059 -- -- Other -- (377,848) 14,414 (17,913) ---------- ---------- ---------- ---------- Total benefit for income taxes $ -- $ -- $(1,231,053) $ (923,885) ========== ========== ========== ========== 5. COMMITMENTS AND CONTINGENCIES: Leases We lease a significant 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: 2004 1,790,962 2005 1,333,661 2006 340,346 2007 225,045 2008 1,109 --------- Total $3,691,123 ========= Rent expense was approximately $2,288,000, $2,199,000, $1,056,000, and $1,935,000 for the fiscal year ended March 28, 2003, the fiscal year ended March 29, 2002, the six month period ended March 30, 2001, and the fiscal year ended September 29, 2000, respectively. Product Liability and Other Claims Because of the nature of our products and industry, 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. 6. EMPLOYEES' SAVINGS PLAN: Effective June 1, 1993, we established a defined contribution profit sharing plan (our "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 our 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 United States Internal Revenue Code. Our 401(k) Plan contains provisions that allow us to make discretionary contributions during each plan year. Employer contributions for the fiscal year ended March 28, 2003, the fiscal year ended March 29, 2002, the six month period ended March 30, 2001, and the fiscal year ended September 29, 2000 were approximately $0, $0, $26,000, and $89,000, respectively. We pay all administrative expenses of our 401(k) Plan. 7. 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 28, 2003, the fiscal year ended March 29, 2002, and the six month period ended March 30, 2001, with amounts in thousands, except for per share data. Due to rounding, quarterly amounts may not fully sum to yearly amounts. 2003 Fiscal Year ---------------- Qtr Qtr Qtr Qtr Statement of ended ended ended ended Operations Data: Year June Sept. Dec. Mar. --------------- ------- ------ ------ ------ ------ Net revenues $102,617 $26,773 $26,087 $18,518 $31,238 Gross profit 30,029 8,139 8,032 5,067 8,791 Operating profit (loss) (943) 513 175 (2,380) 749 Interest expense 629 168 147 136 177 Other income (expense), net 11 (8) 4 21 (6) Income tax provision (benefit) -- 127 10 (136) -- Net earnings (loss) before Cumulative effect of Accounting change 1,561 210 22 (2,359) 566 Cumulative effect of Accounting change (7,442) (7,442) -- -- -- Net earnings (loss) $(9,003) $(7,232) $22 $(2,359) $566 Net earnings (loss) per share Basic and diluted $(1.01) $(0.81) $0.00 $(0.26) $0.06 Weighted average shares outstanding - basic 8,917 8,917 8,917 8,917 8,917 diluted 8,917 8,917 8,917 8,917 8,917 2002 Fiscal Year 2001 Fiscal Year ---------------- ---------------- Six Month Qtr Qtr Qtr Qtr Period Qtr Qtr Statement of ended ended ended ended ended ended ended Operations Data: Year 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 (1) 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. -------------------- During our two most recent fiscal years, no independent accountant who was engaged as the principal accountant to audit our financial statements, or any independent accountant who was engaged to audit a significant subsidiary on whom the principal accountant expressed reliance in its report has resigned or was dismissed. 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 on or about August 28, 2003, which information is incorporated herein by reference, and Part I. Item 1. -- "Business - Directors and Executive Officers". 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 on or about August 28, 2003, 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 on or about August 28, 2003, 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 or about August 28, 2003, which information is incorporated herein by reference. Item 14. Controls and Procedures ----------------------- Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14.) Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 15. Principal Accountant Fees and Services -------------------------------------- See the discussion under the caption "Principal Accountant Fees and Services" contained in the Proxy Statement for the Annual Meeting of Stockholders to be held on or about August 28, 2003, which information is incorporated herein by reference. PART IV. Item 16. 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 45 (a) (3) Management Contract or Compensatory Plan. [See Index to Exhibits]. [Each of the following Exhibits described on the Index to Exhibits is a management contract or compensatory plan: Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10. 27, 10.31, 10.32, and 10.33]. (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 our change of fiscal year-end from September 30 to March 31. (c) Exhibits. See Index to Exhibits SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 11, 2003 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 below on July 11, 2003 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/ Carl D. Harnick Director ---------------------- Carl D. Harnick /s/ Peter G. Bunger Director ---------------------- Peter G. Bunger /s/ Thomas P. Treichler Director ---------------------- Thomas P. Treichler CERTIFICATIONS I, Geoffrey P. Jurick, certify that: 1. I have reviewed this annual report on Form 10-K of Sport Supply Group, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 11, 2003 By: /s/ Geoffrey P. Jurick -------------------------- Geoffrey P. Jurick Chief Executive Officer I, Robert K. Mitchell, certify that: 1. I have reviewed this annual report on Form 10-K of Sport Supply Group, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 11, 2003 By: /s/ Robert K. Mitchell -------------------------- Robert K. Mitchell Chief Financial Officer SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES Schedule II -- Valuation and Qualifying Accounts For The Year Ended March 28, 2003, The Year Ended March 29, 2002, The Six Month Period Ended March 30, 2001, and The Year Ended September 29, 2000 -------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 28, 2003 $ 524,406 $ 451,367 $ - $ 475,687 $ 500,086 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 (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 Form of Severance Agreement entered into between the Company and Mitch Labov dated March 24, 1999 (incorporated by reference from Exhibit 10.31 to the Company's Report on Form 10-K for the fiscal year ended March 29, 2002). 10.2 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 fiscal year ended March 30, 2001). 10.3 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). 10.4 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 fiscal year ended November 1, 1996). 10.5 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 2, 1999). 10.6 Form of Severance Agreement 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). 10.7 Form of Severance Agreement entered into between the Company and John Bals dated February 8, 2002 (incorporated by reference from Exhibit 10.32 to the Company's Report on Form 10-K for the fiscal year ended March 29, 2002). 10.8 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)). 10.9 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)). 10.10 Registration Rights Agreement by and among the Company, Emerson and Emerson Radio (Hong Kong) Limited (incorporated by reference from Exhibit 4(b) to the Company's Report on Form 8-K filed on December 12, 1996). Exhibit Nbr. Description of Exhibit --------------------------------------------------------------------------- 10.11 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)). 10.12 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)). 10.13 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). 10.14 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). 10.15 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). 10.15.1 Second Amendment to 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). 10.16 Lease, dated July 28, 1989, by and between Merit Investment Partners, L.P. and the Company (incorporated by reference from Exhibit 10.14 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 10.17 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). 10.17.1 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). 10.18 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). 10.19 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). 10.20 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). 10.21.1 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 fiscal year ended September 26, 1997). 10.22 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). Exhibit Nbr. Description of Exhibit --------------------------------------------------------------------------- 10.22.1 First Amendment to 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 10.2 to the Company's Report on Form 10-Q for the quarter ended June 28, 2002). 10.23 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 fiscal year ended March 30, 2001). 10.24 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). 10.24.1 First Amendment to Loan and Security Agreement dated October 1, 2002 by and between the Company and Congress Financial Corporation (incorporated by reference from Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended December 27, 2002). 10.25 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). 10.26 Employment Agreement by and between the Company and Eugene J.P. Grant dated January 1, 2001 (incorporated by reference from Exhibit 10.1 from the Company's Report on Form 10-Q for the quarter ended June 28, 2002). 10.27 Employment Agreement by and between the Company and Wayne Merritt dated January 16, 2003 (incorporated by reference from Exhibit 10.1 from the Company's Report on Form 10-Q for the quarter ended December 27, 2002). 10.28 (*) Form of Indemnification Agreement by and between the Company and the Company's General Counsel and Carl D. Harnick dated April 1, 2003. 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.) 99.1 (*) Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 (*) Certification of the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ----------------------------- ( * ) = Filed Herewith EX-10.28 3 exh10-28.txt FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.28 INDEMNIFICATION AGREEMENT This Agreement is made effective as of April 1, 2003, by and between Sport Supply Group, Inc., a Delaware corporation (the "Company"), and Carl Harnick ("Director"). W I T N E S S E T H: WHEREAS, public companies have experienced increasing difficulty in obtaining directors' and officers' liability insurance, significantly higher premiums than had historically been charged, and reductions in the coverage of such insurance; and WHEREAS, although the Company currently maintains such insurance, there can be no assurance that such insurance will be available to the Company and Director in the future, and that the cost of such insurance, if obtainable, may not be acceptable to the Company; and WHEREAS, the Company, in order to induce Director to serve or to continue to serve the Company, has agreed to provide Director with the benefits contemplated by this Agreement; NOW, THEREFORE, in consideration of the promises, conditions, representations, and warranties set forth herein, the Company and Director hereby agree as follows: 1. Definitions. The following terms, as used herein, shall have the following respective meanings: "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act")), other than Emerson Radio Corp. (including all of its successors and assigns, and any stockholder of Emerson Radio Corp. receiving the Company's common stock as a result of a pro rata distribution of the Company's Common Stock made by Emerson Radio Corp.) or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 20% or more of the total voting power represented by the Company's then outstanding voting securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease, for any reason, to constitute a majority of the Board of Directors, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for sale or disposition by the Company of all or substantially all of the Company's assets. "Claim" means any threatened, pending, or completed action, suit, or proceeding, or any inquiry or investigation, whether conducted by or on behalf of the Company or any other party, that Director in good faith believes might lead to the institution of any such action, suit, or proceeding, whether civil, criminal, administrative, investigative, or other. "Covered Act" means any breach of duty, neglect, error, misstatement, misleading statement, omission, or other act done or wrongfully attempted by Director or any of the foregoing alleged by any claimant or any event or occurrence related to the fact that Director is or was a director, officer, employee, agent, or fiduciary of the Company or is or was serving at the request of the Company as a director, officer, employee, trustee, agent, or fiduciary of another corporation, partnership, joint venture, trust, or other entity. "Determination" means a determination, based on the facts known at the time, by: (i) A majority vote of a quorum of disinterested directors; (ii) Special, independent legal counsel in a written opinion prepared at the request of a majority of a quorum of disinterested directors or pursuant to Section 4(a); (iii) A majority of the disinterested stockholders of the Company; or (iv) A final adjudication by a court of competent jurisdiction. "Determined" shall have a correlative meaning. "Excluded Claim" means any Claim: (i) Based upon or attributable to Director gaining in fact any personal profit or advantage to which Director is not entitled; (ii) For the return by Director of any remuneration paid to Director without the previous approval of the stockholders of the Company which is illegal; (iii) For an accounting of profits in fact made from the purchase or sale by Director of securities of the Company within the meaning of Section 16 of the Act or similar provisions of any state law; (iv) Resulting from Director's knowingly fraudulent, dishonest, or willful misconduct; or (v) Any claim for which indemnification is prohibited by applicable law. "Expenses" means any expense incurred by Director as a result of a Claim or Claims made against him for Covered Acts including, without limitation, attorneys' fees and all other costs, expenses, and obligations paid or incurred in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing to defend, be a witness in, or participate in any Claim relating to any Covered Act, but shall not include Fines. "Fines" means any fine, penalty or, with respect to an employee benefit plan, any excise tax or penalty assessed with respect thereto. "Losses" means any amount that Director is legally obligated to pay as a result of a Claim or Claims made against him for Covered Acts including, without limitation, damages and judgments and sums paid in settlement of a Claim or Claims, but shall not include Fines. 2. Maintenance of Directors' and Officers' Liability Insurance. (a) The Company hereby covenants and agrees that, so long as Director shall continue to serve as a director of the Company and thereafter so long as Director shall be subject to any Claim for any Covered Act, the Company, subject to Section 2(c), shall use its best efforts to maintain in full force and effect directors' and officers' liability insurance. (b) In all policies of directors' and officers' liability insurance maintained by the Company, Director shall be named as an insured in such a manner as to provide Director the same rights and benefits, subject to the same limitations, as are accorded to the Company's directors or officers most favorably insured by such policy. (c) The Company shall have no obligation to maintain directors' and officers' liability insurance if the Board of Directors of the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance is disproportionate to the amount of coverage provided, or the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit. 3. Indemnification. The Company shall indemnify Director and hold him harmless from any and all Losses, Expenses, and Fines to the fullest extent authorized, permitted, or not prohibited (i) by the General Corporation Law of the State of Delaware (the "GCL"), or any other applicable law (including judicial, regulatory, or administrative interpretations or readings thereof), the Company's Amended and Restated Certificate of Incorporation, or Amended and Restated Bylaws as in effect on the date hereof, or (ii) by any amendment thereof or other statutory provisions authorizing or permitting such indemnification that is adopted after the date hereof, subject to the further provisions of this Agreement. In the event that after the date hereof the Company provides any greater right of indemnification, in any respect, to any other person serving as an officer or director of the Company, then such greater right of indemnification shall inure to the benefit of and shall be deemed to be incorporated in this Agreement. 4. Excluded Coverage. (a) The Company shall have no obligation to indemnify Director for and hold him harmless from any Loss, Expense, or Fine which has been Determined to constitute an Excluded Claim, provided that in the event of a Change in Control, then with respect to all matters thereafter arising concerning the rights of Director to indemnity payments and Expense advances under this Agreement, or any other agreements or bylaws now or hereafter in effect relating to Claims for Covered Acts, a Determination with respect to an Excluded Claim shall be made only by a court of competent jurisdiction or by special, independent legal counsel selected by Director and approved by the Company (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Company or Director. In the event that Director and the Company are unable to agree on the selection of the special, independent legal counsel, such special, independent legal counsel shall be selected by lot from among at least five law firms designated by Director, each in the State of Delaware or Dallas, Texas, having more than thirty-five (35) attorneys and having a rating of "av" or better in the then current Martindale-Hubbell Law Directory. Such selection shall be made in the presence of Director (and Director's legal counsel or either of them, as Director may elect). Such special, independent legal counsel, among other things, shall determine whether and to what extent Director would be permitted to be indemnified under applicable law and shall render its written opinion to the Company and Director to such effect. If there has been a Determination that the Company is not obligated to indemnify Director as a result of an Excluded Claim (whether by special, independent legal counsel or otherwise), Director shall have the right to commence litigation in any court in the State of Delaware having subject matter jurisdiction thereof, and in which venue is proper, challenging any such Determination; provided that the Company shall be entitled to be reimbursed by Director (who hereby agrees to reimburse the Company) for all such amounts theretofore paid with respect to such Excluded Claim (only upon a final judicial Determination that Director is not entitled to indemnification made with respect thereto as to which all rights of appeal therefrom have been exhausted or lapsed) and the Company shall be obligated to indemnify or advance any additional amounts to Director until such a judicial Determination has been made. (b) The Company shall use its best efforts to make the Determination contemplated herein promptly. Upon request by Director, in connection with any matter for which indemnification or reimbursement may be sought hereunder, the Company agrees to promptly make a Determination whether such matter constitutes an Excluded Claim. In this connection, the Company agrees: (i) if the Determination is to be made by a majority of disinterested directors of the Company or a committee thereof, such Determination shall be made not later than fifteen (15) days after a written request for a Determination (a "Request") is delivered to the Company by Director; (ii) if the Determination is to be made by special, independent legal counsel, such Determination shall be made not later than ninety (90) days after a Request is delivered to the Company by Director; and (iii) if the Determination is to be made by the stockholders of the Company, such Determination shall be made not later than one hundred fifty (150) days after a Request is delivered to the Company by Director. The failure to make a Determination within the above-specified time periods shall constitute a Determination approving full indemnification or reimbursement of Director. All costs of making the Determination shall be borne solely by the Company. (c) The Company shall have no obligation to indemnify Director and hold him harmless for any Loss, Expense, or Fine to the extent that Director is actually and finally reimbursed for such Loss, Expense, or Fine by the Company pursuant to the Company's Amended and Restated Bylaws or otherwise. (d) The Company shall have no obligation to indemnify Director and hold him harmless for any Fines to the extent that such indemnification is prohibited by the GCL. 5. Indemnification Procedures. (a) Promptly after receipt by Director of notice of the commencement of or the threat of commencement of any Claim, Director shall, if indemnification with respect thereto is being sought from the Company under this Agreement, notify the Company of the commencement thereof, provided that failure to so notify the Company shall not relieve the Company from any liability that it may have to Director under this Agreement unless such failure materially and adversely affects the rights of the Company thereunder. (b) If, at the time of the receipt of such notice, the Company has directors' and officers' liability insurance in effect, the Company shall give prompt and proper notice of the commencement of such Claim to the insurer. The Company shall thereafter take all necessary or desirable action to pay or to cause such insurer to pay, on behalf of Director, all Losses, Expenses, and Fines payable as a result of such Claim in accordance with the terms of such policies. (c) To the extent the Company does not, at the time of the commencement of or the threat of commencement of such Claim, have applicable directors' and officers' liability insurance, or if the full amount of any Expenses arising out of such action, suit, or Claim will not be payable under such insurance then in effect, the Company shall be obligated to pay the Expenses relating to any such Claim in advance of the final disposition thereof and the Company, if appropriate, shall be entitled to assume the defense of such Claim, with counsel satisfactory to Director, upon the delivery to Director of written notice of its election so to do. After delivery of such notice, the Company will not be liable to Director under this Agreement for any legal or other Expenses subsequently incurred by Director in connection with such defense other than reasonable costs of investigation, provided that Director shall have the right to employ its counsel in any such Claim but the fees and expenses of such counsel incurred after delivery of notice from the Company of its assumption of such defense shall be at the Director's expense, provided further that if (i) the employment of counsel by Director has been previously authorized by the Company, (ii) Director shall have reasonably concluded that there may be a conflict of interest between the Company and Director in the conduct of any such defense, or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such action, the fees and expenses of counsel shall be at the expense of the Company. (d) All payments on account of the Company's indemnification obligations under this Agreement shall be made promptly, but in any event within thirty (30) days of Director's written request therefor, provided that all payments on account of the Company's obligations under Paragraph 5(c) of this Agreement prior to the final disposition of any Claim, shall be made within ten (10) days of Director's written request therefor. (e) Director agrees that he will reimburse the Company for all Losses, Expenses, and Fines paid by the Company on behalf of Director in connection with any Claim against Director in the event and only to the extent that a Determination shall have been made by a court in a final adjudication from which there is no further right of appeal that the Director is not entitled to be indemnified by the Company for such amounts because the Claim is an Excluded Claim or because Director is otherwise not entitled to payment under this Agreement. 6. Final Determination; Settlement. The Company shall pay all Losses or Fines for which Director is indemnified hereunder upon final determination thereof. The Company shall have no obligation to indemnify Director under this Agreement for any amounts paid in settlement of any Claim effected without the Company's prior written consent. The Company shall not settle any claim in any manner which would impose any Fine or any obligation on Director without Director's written consent. Neither the Company nor Director shall unreasonably withhold their consent to any proposed settlement. 7. Rights Not Exclusive. The rights provided hereunder shall not be deemed exclusive of any other rights to which Director may be entitled under any charter provision, bylaw, agreement, vote of stockholders or of disinterested directors or otherwise, both as to action in his official capacity and as to action in any other capacity by holding such office, and shall continue after Director ceases to serve the Company as a director. 8. Enforcement. (a) Director's right to indemnification shall be enforceable by Director only in the state courts of the State of Delaware and shall be enforceable notwithstanding any adverse Determination. In any such action, if a prior adverse Determination has been made, the burden of proving that indemnification is required under this Agreement shall be on Director. The Company shall have the burden of proving that indemnification is not required under this Agreement if no prior adverse Determination shall have been made. (b) In the event that any action is instituted by Director under this Agreement, or to enforce or interpret any of the terms of this Agreement, Director shall be entitled to be paid all court costs and expenses, including reasonable counsel fees, incurred by Director with respect to such action, unless the court determines that each of the material assertions made by Director as a basis for such action were not made in good faith or were frivolous. 9. Severability. In the event that any provision of this Agreement is determined by a court to require the Company to do or to fail to do an act which is in violation of applicable law, such provision shall be limited or modified in its application to the minimum extent necessary to avoid a violation of law, and, as so limited or modified, such provision and the balance of this Agreement shall be enforceable in accordance with its terms. 10. Choice of Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. 11. Consent to Jurisdiction. The Company and Director each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding that arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware. 12. Successors and Assigns. This Agreement shall be (i) binding upon all successors and assigns of the Company (including any transferee of all or substantially all of its assets and any successor by merger or otherwise by operation of law) and (ii) shall be binding on and inure to the benefit of the heirs, personal representatives, and estate of Director. 13. Amendment. No amendment, modification, termination, or cancellation of this Agreement shall be effective unless made in a writing signed by each of the parties hereto. 14. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Director, who shall execute all instruments required and shall do everything that may be necessary to secure such rights, including the execution of such documents as may be necessary to enable the Company effectively to bring suit to enforce such rights. IN WITNESS WHEREOF, the Company and Director have executed this Agreement as of the day and year first above written. SPORT SUPPLY GROUP, INC. By: _____________________________ John P. Walker President _____________________________ Carl Harnick Director EX-21 4 exh21.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Athletic Training Equipment Company, Inc. ("ATEC") Sport Supply Group Asia ("SSGA") EX-23.1 5 exh23-1.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, 2003, 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 28, 2003. ERNST & YOUNG LLP Dallas, Texas July 11, 2003 EX-99.1 6 exh99-1.txt CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Sport Supply Group, Inc., (the "Company") for the fiscal year ended March 28, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey P. Jurick, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or Section15(d) of the Securities Exchange Act of 1934 as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: July 11, 2003 By: /s/ Geoffrey P. Jurick -------------------------- Geoffrey P. Jurick Chief Executive Officer This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by section 906 has been provided to Sport Supply Group, Inc. and will be retained by Sport Supply Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 7 exh99-2.txt CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Sport Supply Group, Inc., (the "Company") on Form 10-K for the fiscal year ended March 28, 2003 as filed with the Securities and Exchange Commission on July 11,2003, I, Geoffrey P. Jurick, Chief Executive Officer, certify pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: July 11, 2003 By: /s/ Robert K. Mitchell -------------------------- Robert K. Mitchell Chief Financial Officer This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by section 906 has been provided to Sport Supply Group, Inc. and will be retained by Sport Supply Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----