-----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, FazKpKhpBFRj4Q1KL+Hf7xL4wCOwzVy+6usPKU73kb4K0AwtCV29hv0QXzzoC0wA stlEUgNjgITOgAqwZG8d2A== 0000926236-00-000165.txt : 20010101 0000926236-00-000165.hdr.sgml : 20010101 ACCESSION NUMBER: 0000926236-00-000165 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000929 FILED AS OF DATE: 20001228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPORT SUPPLY GROUP INC CENTRAL INDEX KEY: 0000872855 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 752241783 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10704 FILM NUMBER: 797719 BUSINESS ADDRESS: STREET 1: 1901 DIPLOMAT DRIVE CITY: FARMERS BRANCH STATE: TX ZIP: 75234-8914 BUSINESS PHONE: 9724849484 10-K 1 0001.txt FISCAL YEAR END 2000 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 29, 2000. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File number 1-10704 Sport Supply Group, Inc. (Exact name of registrant as specified in its charter) Delaware 75-2241783 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1901 Diplomat Drive, Farmers Branch, Texas 75234 - 8914 ------------------------------------------ ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 484-9484 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ----------------------------- ------------------------ Common Stock, $ .01 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on December 22, 2000 based on the closing price of the common stock on the New York Stock Exchange on such date, was approximately $8,000,000. Indicated below is the number of outstanding shares of each class of the registrant's common stock, as of December 22, 2000. Title of Each Class of Common Stock Number Outstanding ----------------------------------- ------------------ Common Stock, $.01 par value 7,279,165 DOCUMENTS INCORPORATED BY REFERENCE Document Part of the Form 10-K -------------------------------------------- --------------------- Proxy Statement for Annual Meeting of Stockholders to be held on January 26, 2001 Part III TABLE OF CONTENTS Item Page ---- ---- PART I 1 Business.......................................... 3 2 Properties........................................ 10 3 Legal Proceedings................................. 10 4 Submission of Matters to a Vote of Security Holders 11 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters............................. 12 6 Selected Financial Data........................... 13 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............. 14 8 Financial Statements and Supplementary Data....... 20 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 39 PART III 10 Directors and Executive Officers of the Registrant 40 11 Executive Compensation............................ 40 12 Security Ownership of Certain Beneficial Owners and Management.................................. 40 13 Certain Relationships and Related Transactions.... 40 PART IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 41 15 Signatures........................................ 42 16 Index to Exhibits.................................. 43 PART I. Item 1. Business. General Sport Supply Group, Inc. is a leading direct mail marketer of sports related equipment and leisure products 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 and several manufacturing facilities. We currently offer approximately 10,000 sports related equipment products to our over 100,000 customers. In recent years, we believe sales of sports related equipment in the United States has been characterized by a rapidly growing shift in non-store sales through media such as printed catalogs, broadcast and cable infomercials, home shopping channels, and the Internet. This growth is due to the convenience of home shopping for the time constrained dual-career consumer households and the increasingly high level of customer service offered by leading direct marketing firms. We believe the institutional sporting goods market is highly fragmented and that most of our competitors lack the necessary capital, support systems, and economies of scale to effectively exploit available opportunities for growth. We believe that we are well positioned to grow our business because of our high capacity order-taking, processing and fulfillment, our well-developed expertise in catalog design and merchandising and our recently implemented SAP/AS400 ERP Information Technology platform. One of the most important contributions of SAP is that the data available in the system is channeled to a host of websites. Each website is strategically targeted to a specific customer group or product line. Our websites enable our customers to place orders, access account information, track orders, and perform routine customer service inquires on a real-time basis, twenty-four hours a day, seven days a week. This functionality allows for more convenience and added flexibility for our customers, many of whom are part-time coaches with day jobs and parenting responsibilities. We believe the majority of customers have access to the Internet and view placing orders and accessing their account information over the Internet as a significant benefit. We also believe that, in the future, a large portion of our customer base will use the Internet as the predominant method of quoting, ordering, and procuring their products, along with performing customer service inquiries. Our sourcing, warehousing, distribution and fulfillment capabilities and our fully integrated SAP information system, provide the necessary capacities, logistics and information technological support to meet the demands and growth potential of E-Commerce. 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 the completion of 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 September 29, 2000, we had two wholly-owned subsidiaries. We acquired substantially all of the assets of Athletic Training Equipment Company, Inc, ("ATEC"), a Delaware corporation in December, 1997. On September 25, 2000, we acquired the stock of Sport Supply Group Asia, Ltd., a Hong Kong corporation. SSG Asia was acquired for US $1,267 from Emerson Radio Corporation. (See Item 13 -- "Certain Relationships and Related Transactions"). Our executive offices are located at 1901 Diplomat Drive, Farmers Branch, Texas 75234-8914 and our telephone number is (972) 484-9484. Our Internet website, sportsupplygroup.com, provides certain additional information about us. Products We believe we manufacture and distribute one of the broadest lines of sports related equipment and leisure products to the institutional market. We offer approximately 10,000 sporting goods and sports and recreational leisure products, over 3,000 of which we manufacture. Our product lines include, but are not limited to: archery, baseball, softball, basketball, camping, football, tennis and other racquet sports, gymnastics, indoor recreation, physical education, soccer, field and floor hockey, lacrosse, track and field, volleyball, weight lifting, fitness equipment, outdoor playground equipment, and early childhood development products. We believe brand recognition is important to the institutional market. Most of our products are marketed under trade names or trademarks owned or licensed to us. We believe many of our trade names and trademarks are well recognized among institutional purchasers of sports related equipment. 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: * Official Factory Direct Equipment Supplier of Little League Baseball -- (see discussion below). * Voit[R] -- institutional sports related equipment and products, including inflated balls and baseball and softball products -- (licensed from Voit Sports, Inc. - see discussion below). * MacGregor[R] -- certain equipment and accessories relating to baseball, softball, basketball, soccer, football, volleyball, and general exercise (e.g., dumbbells, curling bars, etc.) (licensed from MacMark Corporation - see discussion below). See also Part I. Item 1. -"Sales and Marketing" and- Item 3. "Legal Proceedings". * Huffy[R] -- early childhood development products (sublicensed from Huffy Corporation (see discussion below)). * Alumagoal[R] -- track and field equipment, including starting blocks, hurdles, pole vault and high jump standards and crossbars. * AMF[R] -- gymnastics equipment (licensed from AMF Bowling, Inc. - (see discussion below)). * ATEC [R] -- pitching machines and related baseball and softball training equipment. * BSN[R] -- sport balls * Champion -- barbells, dumbbells and weight lifting benches and machines. * Curvemaster[R] -- baseball and softball pitching machines. * Fibersport -- pole vaulting equipment. * Flag A Tag[R] -- flag football belts. * Gamecraft -- field and floor hockey equipment, soccer equipment, scorebooks, coaching equipment and table tennis equipment. * GSC Sports -- gymnastics equipment. * Hammett & Sons -- indoor table-top games. * Maxpro[R] -- products include, among others, football practice dummies, baseball, and other protective helmets and pads (other than football protective equipment), baseball chest protectors and baseball mitts and gloves (licensed from Proacq Corp., a subsidiary of Riddell Sports Inc.). * New England Camp and Supply -- camping and outdoor recreational equipment and accessories. * North American Recreation[R] -- billiard, table tennis and other game tables. * Passon's Sports -- mail order catalogs. * Pillo Polo[R] -- recreational polo and hockey games. * Port-A-Pit[R] -- high jump and pole-vault landing pits. * Pro Base[R] -- baseball bases. * Pro Down[R] -- football down markers. * Pro Net -- nets, net assemblies and frames and practice cages. * Rol-Dri[R] and Tidi-Court -- golf course and tennis court maintenance equipment. * Safe-Squat -- specialty weight lifting squat machines. * Toppleball[R] -- recreational ball games. * U.S. Games, Inc.[R] -- goals, nets, and playing equipment for physical exercise games and mail order catalogs. The Voit license permits us to use the Voit[R] trademark in connection with the manufacture, advertisement, and sale to certain institutional customers of specified sports related equipment and products, including inflated balls for all sports and baseball and softball products. We are required to pay annual royalties under the license. The initial term of the Voit license expired on December 31, 1989, and was subject to three renewal options for consecutive terms of five years each. Subject to the terms of the license agreement, we are permitted to use the Voit trademark through December 31, 2004. The Huffy sublicense permits us to use the Huffy[R] trademark in connection with manufacturing, advertising, selling and distributing certain sports related products and equipment to institutional customers. We are required to pay annual royalties under the sublicense subject to the terms of the sublicense agreement. The term of the sublicense expires September 30, 2003. In February 1992, we acquired two separate licenses to use several trade names, styles, and trademarks (including, but not limited to, MacGregor[R]). On December 21, 2000, the license relating to the use of the MacGregor[R] trademark was amended and restated in its entirety. The amended and restated license permits us to manufacture, promote, sell, and distribute designated customers throughout the world, specified institutional sports related equipment and products relating to baseball, softball, basketball, soccer, football, volleyball, and general exercise. The amended and restated license requires us to pay an annual royalty based upon sales of MacGregor branded products, with the minimum annual royalty set at $100,000. The amended and restated license is exclusive with respect to certain customers and non-exclusive with respect to others. The amended and restated license has an original term of forty (40) years, but will automatically renew for successive forty (40) year periods unless terminated in accordance with the terms of the license. We have converted a substantial portion of our products to the MacGregor[R] brand, which is believed to be a widely recognized trade name in the sporting goods industry. See Part I. Item 1. -- "Business - Sales and Marketing" and Item 3. -- "Legal Proceedings". On August 19, 1993, we entered into an exclusive license agreement with AMF Bowling, Inc. to use the AMF name in connection with the promotion and sale of certain gymnastics equipment in the United States and Canada. We are required to pay an annual royalty under the license. The minimum royalty increases by a predetermined percentage each year the license agreement is in effect. Subject to the terms of the AMF license, we are permitted to use the AMF name through December 31, 2001. On December 15, 1995, we entered into an agreement with Little League Baseball, Incorporated that, among other things, names us as the "Official Factory Direct Equipment Supplier of Little League Baseball". This agreement is scheduled to expire on April 15, 2001. We have an option to extend the agreement through December 31, 2001, in exchange for a fee, but do not know at this time if we will extend this agreement. In addition to the foregoing, we have acquired (or had issued) a number of patents relating to products sold by us. We also have a number of patent applications pending before the U.S. Patent and Trademark Office. Sales and Marketing We believe we are the largest seller of sporting goods and sports leisure products to the institutional market in the United States. The institutional market is made up of well over 500,000 potential customers, most clearly defined as: 1) Out-of-School Customers including youth sports leagues, recreational departments and organizations, churches and private athletic organizations; 2) In-School Customers including all levels of public and private schools and their related athletic and recreational departments; 3) Government Customers including federal, state and local agencies; and 4) Resale and Specialty Customers including sporting goods resellers and specialty organizations. We solicit and sell our products through 10 different direct mail catalogs, an inside sales and customer service staff of over 100 people, an outside sales force of over 30 people traveling in significant metropolitan sales territories, and ten internet sites. We mailed approximately 1,700,000 million catalogs during fiscal 2000. We have marketing efforts directed towards the following athletic and leisure activities: Football, Baseball, Basketball, Soccer, Track and Field, Training and Fitness, Camping, Outdoor Recreation, Early Childhood Development, Table Games, Playground Recreation, Tennis and Volleyball. We believe we are also a brand leader in the institutional sporting goods and sports leisure market, marketing our products under a variety of private label and well recognized name brands including: BSN Sports, MacGregor[R], Reebok Team Uniforms, Spaulding, PortaPit, Champion Barbell, Voit[R], Huffy[R], AMF[R] and Flag-A-Tag[R]. We believe our mailing list of over 250,000 customer and target prospects is one of our most valuable intangible assets. We also have licenses and marketing alliances with national organizations including Little League Baseball[TM], Major League Baseball[R] YMCA, Hershey Chocolate USA, Antigua[R], and Amway Corp. We are the "Exclusive Official Factory Direct Equipment Supplier of Little League Baseball". This affiliation allows us direct marketing rights through April 15, 2001 to the 7,700 chartered Little Leagues in the USA, representing more than 2.0 million participants. In 1996, we entered into a five-year advertising and distribution agreement with Hershey Chocolate USA. We are currently in discussions with Hershey to extend this agreement. Pursuant to this agreement, we market and distribute promotional fund raising literature and programs to our customers, and service the fund raising needs of many nontraditional customers. In an effort to maximize the performance of the catalogs and increase market penetration, we have begun the process of opening "Team Hubs" in key underperforming markets. The purpose of these hubs is to provide a local presence and allow field sales representatives to make live presentations to customers and potential customers. These local team sales hubs focus on promoting product to the institutional and youth sports markets. During fiscal year 1999, we expanded our local team sales hubs by acquiring two local team dealers. These local team sales hub acquisitions continue to service the local institutional customers and teams with a full line of athletic products. We will also use this local presence to expand our product sales to the local institutional customer base. Conlin Bros., Inc., located in Southern California, was acquired in January 1999. Larry Black Sporting Goods, Inc. in Oklahoma and Kansas, was acquired in February 1999. During October 1999, we further expanded our local team sales hubs by acquiring two more local team dealers: Spaulding Athletic, located in Little Rock Arkansas, and LAKCO Team Sports, located in Southern California. Conlin and LAKCO Team Sports have been consolidated with our existing facility in California. During fiscal year 1998, we acquired Athletic Training Equipment Company, Inc. ("ATEC"). ATEC manufactures and markets pitching machines and other baseball 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. During the past two years, we have made a significant investment in launching the ten Internet sites listed below: bsnsports.com -- targets the longstanding customer of SSG who recognizes the BSN sports name leaguedirect.com -- targets Little League and other league sports us-games.com -- targets the early childhood development buyer championbarbell.com -- targets fitness bsngsanaf.com -- targets the government newenglandcamp.com -- targets camping and outdoor leisure portapit.com -- targets track and field esportsonline.com -- targets all customers atec-sports.com -- website for ATEC officialfundraising.com -- targets all customers interested in fundraising Each website is strategically targeted to a specific customer group or product line. Our websites enable our customers to place orders, access account information, track orders, and perform routine customer service inquires on a real-time basis, twenty-four hours a day, seven days a week. This functionality allows for more convenience and added flexibility for our customers. Over the years, we believe we have established a market leader position by constantly updating and expanding our product lines and targeting selling efforts to specific customer profiles. We have historically targeted one market-- institutional sporting goods customers. We are beginning to target individual consumers on our esportsonline.com website. Sales growth is the result of strengthening our marketing and selling expertise and constantly updating our product lines while expanding our selling and distribution channels. Customers Our revenues are not dependent upon any single customer. Instead, we enjoy a very large and diverse customer base. Our customers include all levels of public and private schools, colleges, universities and military academies, municipal and governmental agencies, military facilities, churches, clubs, camps, hospitals, youth sports leagues, non-profit organizations, team dealers and certain large retail sporting goods chains. We believe our customer base in the United States is the largest in the institutional direct mail market for sports related equipment. Many of our institutional customers typically receive annual appropriations for sports related equipment, which appropriations are generally spent in the period preceding the season in which the sport or athletic activity occurs. Approximately 9%, 7% and 7% of our sales in fiscal years 2000, 1999, and 1998 respectively, were to 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, 2001. Although we intend to extend the expiration date of this contract, no assurance can be made that it will be extended. Under the GSA Contract, we agree to sell approximately 750 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 have a separate contract with the General Services Administration for the sale of approximately 10 camp related products with terms similar to the GSA Contract. This contract is scheduled to expire August 31, 2002. Although we intend to extend the expiration date of this contract, no assurance can be made that it will be extended. We also sell products not covered by the GSA Contract to United States Government customers, although the appropriation process for purchases of these products differs. These sales are made through an U.S. Government non-appropriated fund contract. This contract is administered by the United States Air Force and is scheduled to expire on September 30, 2001. Seasonal Factors and Backlog Historically, our revenues are lowest in the first fiscal quarter and peak in the second fiscal quarter. Our revenues reflect a level cycle during the third and fourth fiscal quarters. The peak in revenues in the second fiscal quarter is primarily due to the volume generated by spring and summer sports, favorable outdoor weather conditions and school needs before summer closing. We had a backlog of approximately $2,329,000 at September 29, 2000 and $2,458,000 at October 1, 1999. Manufacturing and Suppliers We manufacture, assemble and distribute many of our products from seven of our facilities. See Item 2. -- "Properties" for details. Game tables, gym mats, netting, and tennis and baseball field equipment are manufactured in our three Anniston, Alabama plants. Gymnastics equipment is manufactured at our facility in Cerritos, California. Baseball and softball pitching machines are manufactured at our ATEC subsidiary in Sparks, Nevada. Items of steel and aluminum construction, such as soccer field equipment and weight equipment, are principally manufactured at our facilities in Farmers Branch, Texas. Certain products manufactured by us are custom-made (such as tumbling mats ordered in color or size specifications), while others are standardized. The principal raw materials used by us in manufacturing are, for the most part, readily available from several different sources. Such raw materials include foam, vinyl, nylon thread, steel and aluminum tubing, wood, slate and cloth. Items not manufactured by us are purchased from various suppliers primarily located in the United States, Taiwan, Australia, the Philippines, Thailand, the People's Republic of China, Pakistan, Sweden and Canada. We have no significant purchase contracts with any major supplier of finished products, and most products purchased from suppliers are readily available from other sources. We purchase most of our finished product in U.S. dollars and are, therefore, not subject to direct foreign exchange rate differences. Competition We compete in the institutional sporting goods market principally with local sporting goods dealers, retail sporting goods stores, other direct mail catalog marketers and providers of sporting goods on the Internet. We have identified approximately 15 other direct mail companies in the institutional market. We believe that most of these competitors are substantially smaller than us in terms of geographic coverage, products, E-Commerce capability and revenues. We compete in the institutional market principally on the basis of: brand, price, product availability and customer service. We believe we have an advantage in the institutional market over traditional sporting goods retailers and team dealers because our selling prices do not include comparable price markups attributable to traditional multi-distribution channel markups. In addition, our ability to control the availability of goods we manufacture enables us to respond more rapidly to customer demand. We believe our direct mail competitors operate primarily as wholesalers and distributors, with little or no manufacturing capability. Government Regulation Many of our products are subject to 15 U.S.C.A. SS 2051-2084 (1998 and Supp. 1998), 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". 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 November 17, 2000, we had approximately 551 full-time employees, of whom 176 were involved in our manufacturing operations. We also hire part- time and temporary employees primarily during the summer months. None of our employees are represented by unions, and we believe our relations with employees are good. EXECUTIVE OFFICERS OF THE COMPANY (As of December 27, 2000) First Fiscal Year Became Name Age Present Position Officer ---- --- ----------------- ------- Geoffrey P. Jurick 59 Chairman of the Board and 1996 Chief Executive Officer John P. Walker 37 President 1996 Terrence M. Babilla 38 Chief Operating Officer, 1995 Executive Vice President, General Counsel and Secretary Robert K. Mitchell 48 Chief Financial Officer 2000 Douglas E. Pryor 44 Vice President, Manufacturing 1999 and Purchasing Eugene J.P. Grant 53 Vice President, Strategic 1999 Planning Kenneth A. Corby 39 Vice President, Corporate 1998 Development All officers are elected for terms of one year, or until their successors are duly elected. Item 2. Properties. The following table sets forth the material properties owned or leased by the Company or our subsidiaries: Approximate Square Lease Expires Facility Purpose Footage Location or is Owned ---------------- ------- -------- -------------- Manufacturing and corporate 135,000 Farmers December, 2004 headquarters Branch, TX Warehouse and fulfillment 181,000 Farmers December, 2004 processing Branch, TX Gymnastic equipment 45,000 Cerritos, CA December, 2001 manufacturing Pitching equipment 62,500 Sparks, NV July, 2004 manufacturing Foam and netting product 35,000 Anniston, AL Owned manufacturing Game table manufacturing 45,000 Anniston, AL Owned Foam Manufacturing 38,500 Anniston, AL November, 2001 We believe the facilities used in our operations are in satisfactory condition and adequate for our present and anticipated future operations. 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 (such as the claim described below) or any significant monetary settlement, could have a material adverse effect on our financial condition or results of operations. On June 18, 1999 we filed a lawsuit for declaratory relief in the United States District Court for the Northern District of Texas against MacMark Corporation ("MacMark") and Equilink Licensing Corp., both of which are controlled by Riddell Sports, Inc. Subsequently, we added Riddell Sports Corp. as a defendant. The lawsuit arose out of a notice delivered by MacMark purportedly terminating our rights under our license to use the MacGregor[R] trademark. The license was perpetual and royalty free subject to certain limited termination rights. MacMark stated in it's notice that it considered there to be continuing and material breaches of the license agreement and that such breaches were incurable, all of which we disputed. On December 21, 2000, the parties settled this lawsuit by entering into an Amended and Restated License Agreement. The Amended and Restated License Agreement clarifies and expands many of our rights regarding the use of the MacGregor trademark, including additional product offerings, use of the Internet and a broader geographic scope. The Amended and Restated License Agreement also requires us to pay an annual royalty based upon sales of MacGregor branded products, with the minimum annual royalty set at $100,000. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Our common stock, par value $.01 per share (the "Common Stock") is traded on the New York Stock Exchange, Inc. ("NYSE") under the symbol GYM. The NYSE recently adopted new continued listing requirements that require a listed company to have both $50 million of stockholders' equity and $50 million of market capitalization. Since we do not meet the NYSE's newly adopted continued listing requirements, the NYSE notified us that trading of our common stock on the NYSE will be suspended. We have requested that a Committee of the Board of Directors of the NYSE review this decision. We anticipate a hearing with the NYSE on or before January 31, 2001. We have also applied for listing of our common stock on the American Stock Exchange ("AMEX"). The AMEX has declined our application because we do not meet the $3.00 minimum price requirement and because of the default under our bank agreement (which has subsequently been favorably resolved) as more fully described in Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations: Liquidity and Capital Resources". We have appealed the AMEX ruling and expect a hearing in January 2001. No assurance can be made that the NYSE will continue to list our common stock or that the AMEX will approve our application to list our shares of common stock. As of November 8, 2000, there were 1,713 holders of the Common Stock (including individual security position listings). The following table sets forth the high/low sales range for the periods indicated. Common Stock Fiscal Year Fiscal Quarter High Low ----------- -------------- ------ ----- 1999 First 9.313 5.875 Second 11.875 7.750 Third 10.750 8.750 Fourth 10.313 8.125 2000 First 8.438 5.688 Second 8.250 5.938 Third 6.125 3.875 Fourth 4.875 2.188 We have not declared dividends in the past three fiscal years and currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. On May 28, 1997, the Board of Directors approved the repurchase of up to 1,000,000 shares of our issued and outstanding common stock in the open market and/or privately negotiated transactions. On October 28, 1998, the Board of Directors approved a second repurchase program of up to an additional 1,000,000 shares of our issued and outstanding common stock in the open market and/or privately negotiated transactions. As of September 29, 2000, we repurchased approximately 1,333,000 shares of our issued and outstanding common stock in the open market and privately negotiated transactions. Any future purchases will be subject to price and availability of shares, working capital availability and any alternative capital spending programs. Our bank agreement currently prohibits the repurchase of any additional shares without the bank's prior consent. On January 14, 1998, we issued 50,000 shares of restricted stock to John P. Walker, President and a Director of Sport Supply Group, Inc., in a privately negotiated transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended (i.e. a transaction by an issuer not involving a public offering). These shares vested over a two-year period. We did not receive any cash proceeds from the issuance of these shares. 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 Fiscal Eleven Fiscal Year Year Months Year Months Ended Ended Ended Ended Ended Sept 29, Oct 1, Oct 2, Sep 26, Nov 1, Statement of Earnings Data: 2000 1999 1998 1997 (1) 1996 ------- ------- ------- ------- ------- Net revenues $113,334 $107,069 $ 97,292 $ 79,109 $ 80,521 Gross profit 36,170 37,283 32,303 26,811 25,001 Operating profit (loss) (437) 8,445 7,782 4,226 (65) Interest expense 2,022 1,196 474 757 1,372 Other income, net 17 63 215 83 38 Earnings (loss) from continuing operations (1,518) 4,623 4,964 2,576 (964) Loss from discontinued operations (2) -- -- -- (2,574) (17,773) Net earnings (loss) $ (1,518) $ 4,623 $ 4,964 $ 2 $(18,737) ======= ======= ======= ======= ======= Earnings (loss) per common share and common equivalent share: (notes 1 and 2) Net earnings (loss) per common share from continuing operations $ (0.21) $ 0.63 $ 0.62 $ 0.32 $ (0.14) Net loss per common share from discontinued operations -- -- -- (0.32) (2.64) ------- ------- ------- ------- ------- Net earnings (loss) per common share $ (0.21) $ 0.63 $ 0.62 $ 0.00 $ (2.78) ======= ======= ======= ======= ======= Net earnings (loss) per common share from continuing operations - assuming dilution $ (0.21) $ 0.60 $ 0.60 $ 0.32 $ (0.14) Net loss per common share from discontinued operations - assuming dilution -- -- -- (0.32) (2.63) ------- ------- ------- ------- ------- Net earnings (loss) per common share - assuming dilution $ (0.21) $ 0.60 $ 0.60 $ 0.00 $ (2.77) ======= ======= ======= ======= ======= Weighted average common and common equivalent shares: (note 1) Weighted average common shares outstanding 7,273 7,390 8,026 8,146 6,747 Weighted average common shares outstanding 7,273 7,728 8,237 8,151 6,768 - assuming dilution Cash dividends declared per common share -- -- -- -- -- At At At At At Sept 29, Oct 1, Oct 2, Sep 26 Nov 1, Balance Sheet Data: 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- Working capital $ 30,771 $ 31,873 $ 25,245 $ 24,006 $ 21,322 Total assets 73,687 73,249 54,804 50,484 70,009 Long-term obligations, net 19,034 18,426 5,161 4,418 24,338 Total liabilities 33,150 31,141 13,626 11,527 40,846 Stockholders equity 40,537 42,108 41,178 38,957 29,163
NOTES TO SELECTED FINANCIAL DATA (UNAUDITED) (1) During 1997, we changed our financial reporting year-end from October 31 to September 30. Therefore, the fiscal year ended September 26, 1997 is a transition period consisting of eleven calendar months. (2) On May 20, 1996 we disposed of substantially all of the assets (other than cash and accounts receivable) of the Gold Eagle Division to a privately held corporation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following table sets forth, for the periods indicated, certain items related to our continuing operations as a percentage of net revenues. For the For the For the 12 Months 12 Months 12 Months Ended Sept. 29, Ended Oct. 1, Ended Oct. 2, 2000 1999 1998 ---- ---- ---- Net revenues (in thousands) $113,333 $107,069 $97,292 100.0% 100.0% 100.0% Cost of sales 68.1% 65.2% 66.8% Selling, general and administrative expenses 30.8% 26.9% 24.0% Internet 1.0% -- -- Non-Recurring Charges 0.5% -- 1.2% Operating profit (loss) (0.4%) 7.9% 8.0% 2000 Compared to 1999 The following table summarizes certain financial information relating to our results of operations for the fiscal years ended September 29, 2000 and October 1, 1999: 2000 1999 ----------- ----------- Net Revenues $113,333,785 $107,068,508 Gross Profit $36,169,949 $37,282,908 SG&A $34,865,452 $28,838,366 Internet expenses $1,136,149 -- Non-recurring charges $605,000 -- Net Earnings (loss) $(1,517,606) $4,622,839 Net Revenues. Net revenues for the fiscal year ended September 29, 2000 ("fiscal 2000") increased by approximately $6.3 million (5.9%) as compared to the fiscal year ended October 1, 1999 ("fiscal 1999"). The increase in net revenues reflects increases in revenues associated primarily with our team dealers, fund-raising product sales and in-school and out-of-school sales increases. Gross Profit. Gross profit for fiscal 2000 decreased by approximately $1.1 million (3.0%) as compared to fiscal 1999. As a percentage of net revenues, gross profit decreased to 31.9% in fiscal 2000 from 34.8% for fiscal 1999. A portion of the decrease in gross profit is due to $500,000 in one-time vendor rebates that were recorded during fiscal 1999. We expect to continue to experience a lower gross profit as a percentage of net revenue as compared to the previous year due to expected increases in bid-related, fund raising products and team dealer sales, because revenues associated with such customer groups have lower margins than those we have historically experienced. Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2000 increased by approximately $6.0 million (20.9%) as compared to fiscal 1999. As a percentage of net revenues, selling, general and administrative expenses increased to 30.8% for fiscal year 2000 as compared to 26.9% for fiscal 1999. The increase in these expenses as a percentage of net revenues was primarily due to the following factors: (i.) An increase in payroll and related costs of approximately $3.3 million for fiscal year 2000 as compared to fiscal year 1999. This increase was primarily a result of the increased number of outside sales employees, the employees of companies acquired during the second quarter of the prior year and first quarter of fiscal year 2000 and temporary help related to increased receivable collection efforts. (ii.) An increase in computer related expenses of approximately $1.1 million for fiscal year 2000 as compared to fiscal year 1999. This is primarily the result of higher operating costs of maintaining the SAP/AS400 system and support after the system was implemented. (iii.) An increase in depreciation and amortization expense of approximately $771,000 for fiscal year 2000 as compared to fiscal year 1999. This is primarily the result of hardware and software acquisitions related to our successful implementation of the SAP/AS400 ERP information system. Currently, the depreciation for the SAP/AS400 is approximately $1.0 million annually. (iv.) An increase in selling and promotional expense of approximately $539,000 for fiscal year 2000 as compared to fiscal year 1999. This is primarily a result of higher catalog expense. (v.) An increase in facility related expense of $448,000 for fiscal year 2000 as compared to fiscal year 1999. This is primarily due to the full year impact of the additional facilities acquired during the second quarter of the prior year and the additional facilities acquired in first quarter of fiscal year 2000. We are attempting to reduce future operating expenses by migrating customers to our fully integrated websites, reducing catalog and other marketing expenditures, renegotiating certain leases and contracts, consolidating operations and reducing manufacturing overhead. Internet Expense. We incurred Internet related expenses of approximately $1.1 million for the year ended September 29, 2000. These expenses are related to significant enhancements, including the creation of shopping cart capabilities and full integration with our SAP system. Internet expenses are expected to decrease in fiscal year 2001 because additional significant enhancements are not planned. Non-recurring Charges. We successfully negotiated the settlement of two lawsuits. Consequently, in fiscal year 2000, we recorded a non-recurring charge related to these claims in the amount of $605,000. Operating Profit. Operating profit decreased from a profit of $8.4 million in 1999 to a loss of $437,000 in fiscal 2000. The decrease in operating profit is due to reduced margins and increased SG&A expenses, as described above. Interest Expense. Interest expense increased in fiscal 2000 by approximately $826,000 (69.0%) to $2.0 million compared to $1.2 million in fiscal 1999. The increase in interest expense resulted from increased overall levels of borrowing. The higher borrowing levels are a result of the: (i.) cash payments for the acquisitions of Spaulding and LAKCO in October 1999; (ii.) stock repurchased under our stock buyback program; (iii.) cash paid for the SAP/AS400 ERP, Internet system implementation and Internet development; and (iv.) funding the growth of inventories. In addition, our borrowing rates have increased as a result of the amendments to our credit agreement. Assuming interest rates stay the same, we expect interest expense in fiscal year 2001 to be similar to fiscal year 2000. Other Income, Net. Other income decreased approximately $46,000 in fiscal 2000 as compared to fiscal 1999. Provision (Benefit) for Income Taxes. The benefit for income taxes increased approximately $3.6 million to a benefit of $924,000 in fiscal 2000 from a provision of $2.7 million in fiscal 1999. Our effective tax rate increased to 37.8% in fiscal 2000 from 36.8% in fiscal 1999. 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. No valuation allowance has been recorded for our deferred tax assets because we believe it is more likely than not such assets will be realized. We believe the deferred tax assets will be realized by future profitable operating results. Realization of our net deferred tax asset is dependent on generating sufficient taxable income prior to expiration of loss carryforwards. Although realization is not assured, we believe it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. See Note 4 to the consolidated financial statements included in Item 8 -- "Financial Statements and Supplementary Data". Net Earnings (Loss). Net earnings decreased approximately $6.1 million to a net loss of $1.5 million in fiscal 2000 from net earnings of $4.6 million in fiscal 1999. As a percentage of the net revenues, net earnings decreased to (1.4%) in fiscal 2000 from 4.3% in fiscal 1999. Earnings per share before dilution from continuing operations decreased to $(0.21) per share in fiscal 2000 from $0.63 per share in fiscal 1999. Fiscal year 2000 includes a decrease of approximately 5.9% in weighted average shares outstanding. The weighted average shares outstanding is expected to increase during fiscal 2001 as a result of the issuance of approximately 1,630,000 of our shares of common stock to Emerson Radio Corp on or before January 15, 2001. See Item 7. - "Management's Discussion and Analysis of Financial Condition and Results of Operations: Liquidity and Capital Resources". 1999 Compared to 1998 The following table summarizes certain financial information relating to our results of operations for the fiscal years ended October 1,1999 and October 2, 1998: 1999 1998 ----------- ----------- Net Revenues $107,068,508 $97,291,991 Gross Profit $37,282,908 $32,303,198 SG&A $28,838,366 $23,336,972 Net Earnings $4,622,839 $4,964,311 Net Revenues. Net revenues for the fiscal year ended October 1, 1999 ("fiscal 1999") increased by approximately $9.8 million (10.1%) as compared to the fiscal year ended October 2, 1998 ("fiscal 1998"). The increase in net revenues reflects increases in revenues associated primarily with the acquisitions of Larry Black Sporting Goods and Conlin Brothers and increased ATEC sales. Gross Profit. Gross profit for fiscal 1999 increased by approximately $5.0 million (15.4%) as compared to fiscal 1998. As a percentage of net revenues, gross profit increased to 34.8% in fiscal 1999 from 33.2% for fiscal 1998. Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 1999 increased by approximately $5.5 million (23.6%) as compared to fiscal 1998. As a percentage of net revenues, operating expenses increased to 26.9% for fiscal year 1999 as compared to 24.0% for fiscal 1998. The increase in these expenses as a percentage of net revenues was primarily due to the following factors: (i.) An increase in payroll costs associated with the additional employees hired during the fiscal year. The number of employees increased by approximately 100 full-time employees. (ii.) An increase in operating expenses, including catalog and advertising expense, and rent and utilities related to acquisition facilities. (iii.) An increase in the allowance for doubtful accounts receivable. During the year the accounts receivable days sales outstanding increased. (iv.) An increase in depreciation and amortization expense is primarily the result of hardware and software acquisitions related to our successful Year 2000 compliant SAP/AS400 ERP information system implementation and Internet technology. The depreciation of the IT system began in May 1999. These increases were partially offset by decreases in our insurance expenses. During fiscal years 1998 and 1999 we embarked on a significant computer conversion, Year 2000 project and made capital expenditures of over $8,800,000, plus operating leases and maintenance agreements for the IBM AS/400 and NT office network hardware. MIS department operating expenses during fiscal 1998 and fiscal 1999 totaled over $1,700,000. Operating Profit. Operating profit increased by approximately $662,000 (8.5%) to a profit of $8.4 million in fiscal 1999, as compared to $7.8 million in fiscal 1998. As a percentage of net revenues, operating profit decreased to 7.9% in fiscal 1999 from 8.0% for fiscal 1998. Interest Expense. Interest expense increased in fiscal 1999 by approximately $722,000 (152.4%) to $1.2 million compared to $474,000 in fiscal 1998. The increase in interest expense resulted from increased overall levels of borrowing. The increase in borrowings under the senior credit facility reflects: (i.) cash payments for the Larry Black, Conlin and Flag- A-Tag acquisitions; (ii.) stock repurchased under our stock buyback program; (iii.) cash paid for the Year 2000 project, SAP/AS400 ERP system implementation and Internet technology development; and (iv.) funding the growth of receivables and inventories. Other Income, Net. Other income decreased approximately $152,000 in fiscal 1999 as compared to fiscal 1998. Provision for Income Taxes. The provision for income taxes increased approximately $129,000 to a provision of $2.7 million in fiscal 1999 from a provision of $2.6 million in fiscal 1998. Our effective tax rate increased to 36.8% in fiscal 1999 from 34.0% in fiscal 1998. The increase in the tax rate from fiscal 1998 to fiscal 1999 is the result of a reduction in Net Operating Loss carryforward benefit and state income taxes. See Note 4 to the consolidated financial statements included in Item 8 -- "Financial Statements and Supplementary Data". Net Earnings. Net Earnings decreased approximately $341,000 to $4.6 million in fiscal 1999 from $5.0 million in fiscal 1998. As a percentage of the net revenues, net earnings decreased to 4.3% in fiscal 1999 from 5.1% in fiscal 1998. Earnings per share before dilution from continuing operations increased to $0.63 per share in fiscal 1999 from $0.62 per share in fiscal 1998. Fiscal year 1999 includes a decrease of approximately 6.2% in weighted average shares outstanding. Liquidity and Capital Resources Our working capital decreased approximately $1.1 million during the fiscal year ended September 29, 2000, from $31.9 million at fiscal year ended October 1, 1999 to $30.8 million at September 29, 2000. The decrease in working capital is primarily a result of an increase in trade payables and a decrease in trade receivables. The decrease in working capital was partially offset by an increase in inventories. We have a credit agreement with Comerica Bank-Texas to finance our working capital requirements. The credit agreement provides for a revolving credit facility and a term loan. As of September 29, 2000, we had total borrowings under our senior credit facility of approximately $20.3 million. This balance included a term loan of $2.5 million and loans outstanding under the revolving credit facility of $17.8 million. The net increase from 1999 to 2000 of approximately $260,000 in borrowings under the revolving credit facility was a result of increased working capital needs. On September 13, 2000, we entered into an amendment to the credit agreement. Several changes were made to the credit agreement, including reducing the credit facility from $40 million to $27.5 million and amending the fixed charge coverage ratio. At fiscal year end, we were not in compliance with the revised fixed charge coverage ratio and were, therefore, in default. Comerica Bank-Texas agreed to waive this default and eliminate the fixed charge coverage ratio pursuant to an amendment to the credit agreement including, among other terms, our pay off of the term loan by January 15, 2001. The term loan currently has an outstanding balance of approximately $2.2 million. On December 22, 2000, Emerson Radio Corp., our largest stockholder, offered to purchase 1,629,629 shares of our common stock from us for $1.35 per share in cash, for a total purchase price of $2.2 million. The $1.35 per share purchase price represented a 20% premium to the closing price of our common stock on December 22, 2000. Emerson's offer was contingent on Comerica making certain amendments to the senior secured credit facility before December 28, 2000, including eliminating the fixed charge coverage ratio. Emerson agreed to finalize this purchase on or before January 15, 2001. Our Board agreed that selling additional shares to Emerson for $1.35 per share and using the proceeds to pay off the term loan was in our best interests and approved Emerson's offer. Emerson will own 4,303,329 shares, or approximately 48.3%, of our issued and outstanding shares as a result of such purchase. Emerson also owns warrants to purchase an additional 1 million shares of our common stock for $7.50 per share. On December 27, 2000, we entered into an amendment to the credit agreement whereby we agreed to (i) pay off the term loan by January 15, 2001 with the proceeds from the Emerson transaction mentioned above, (ii) pay Comerica a $15,000 waiver fee, (iii) delete the fixed charge coverage ratio and add an interest coverage ratio and (iv) pay Comerica a $250,000 fee if the credit facility is not refinanced by March 30, 2001. Based on Emerson's agreement to purchase shares of common stock for $2.2 million and our intent to use these proceeds to pay off the term loan by January 15, 2001, and Comerica waving existing defaults and modifying financial statement covenants, we have classified our Comerica credit facility as long term. We believe we will meet all of our new credit facility covenants at least through September 29, 2001. Although the maturity date on our revolving note is October 2, 2002, it is our intent to refinance our credit facility with a different lender prior to March 30, 2001. We are currently negotiating proposals from other lenders. We do not have a commitment for replacing our current lender. There can be no assurance that such financing will be available prior to March 30, 2001 or that, if available, such financing will be available on acceptable terms. If we are able to refinance the credit facility on acceptable terms, then we will incur fees and expenses associated with such refinancing, including writing off approximately $150,000 in unamortized loan fees on our balance sheet. If we are unable to refinance the credit facility on acceptable terms, then we will retain Comerica as our senior lender and incur a $250,000 payment obligation. We believe we can satisfy our short-term and long-term working capital requirements to support our current operations for at least the next 12 months from borrowings under a credit facility (whether it is our existing credit facility or a replacement credit facility) and cash flows from operations. 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 September 29, 2000, the Company repurchased approximately 1,333,000 shares of our issued and outstanding common stock in the open market and privately negotiated transactions. Any future purchases will be subject to price and availability of shares, working capital availability and any alternative capital spending programs. Our bank agreement currently prohibits the repurchase of any additional shares without the bank's prior consent. The refinancing proposals we are currently negotiating will similarly restrict stock repurchases. During October 1999, we acquired certain assets of LAKCO, Inc. and Spaulding, Inc., both distributors of sporting goods equipment to the institutional market. We have accounted for these acquisitions using the purchase method and, as such, our results of operations are combined with the results of operations of the acquired companies subsequent to the acquisition date. No proforma information is presented herein because the proforma information would not materially differ from actual results. We do not currently have any material commitments for capital expenditures. Certain Factors that May Affect the Company's Business or Future Operating Results This report contains various forward looking statements and information that are based on our beliefs as well as assumptions made by and information currently available to us. When used in this report, the words "anticipate", "believe", "estimate", "expect", "predict", "intend", "project" and similar expressions are intended to identify forward looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected or projected. Among the key factors that may have a direct bearing on our results are set forth below. Future trends for revenues and profitability remain difficult to predict. We continue to face many risks and uncertainties, including: 1. general and specific market and economic conditions; 2. reduced sales to the United States Government due to a reduction in Government spending; 3. unanticipated disruptions or slowdowns; 4. high fixed costs; 5. competitive factors; 6. risk of nonpayment of accounts receivable; 7. foreign supplier related issues; The general economic condition in the U.S. could affect pricing on raw materials such as metals and other commodities used in the manufacturing of certain products as well as finished goods. Any material price increases to the customer could have an adverse effect on revenues and any price increases from vendors could have an adverse effect on our costs. Approximately 9% of our fiscal year 2000 sales were made to the U.S. Government, a majority of which were made to military installations. Anticipated reductions in U.S. Government spending could reduce funds available to various government customers for sports related equipment, which could adversely affect our results of operations. Our ability to provide high quality customer service, process and fulfill orders and manage inventory depends on: (i.) the efficient and uninterrupted operation of our call center, distribution center and manufacturing facilities and our management information systems and (ii.) the timely performance of vendors, catalog printers and shipping companies. Any material disruption or slowdown in the operation of our call center, distribution center, manufacturing facilities or management information systems, or comparable disruptions or slowdowns suffered by our principal service providers, could cause delays in our ability to receive, process and fulfill customer orders and may cause orders to be canceled, lost or delivered late, goods to be returned or receipt of goods to be refused. We ship approximately 50% 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. Operations and maintenance of our call center, distribution center, manufacturing facilities and management information systems involve substantial fixed costs. Catalog mailings entail substantial paper, postage, merchandise acquisition and human resources costs, including costs associated with catalog development. If net sales are substantially below expectations, our results of operations may be adversely affected. Paper and postage are significant components of our operating costs. Paper stock represents the largest element of the cost of printed merchandise. Paper-based packaging products, such as shipping cartons, constitute a significant element of distribution expense. Paper prices have been historically volatile. Future price increases could have a material adverse affect on our results of operations. Postage for catalog mailings is also a significant element of our operating expense. Postage rates increase periodically and can be expected to increase in the future. There can be no assurance that future increases will not adversely impact our operating margins. We will be able to reduce our paper and postage costs if we successfully migrate a significant portion of our business to the Internet because we will be less reliant on paper catalogs. The institutional market for sporting goods and leisure products is highly competitive and there are no significant barriers to enter this market. The recent growth in this market has encouraged the entry of many new competitors as well as increased competition from established companies. We are facing significant competitors and new competition from new entrants. These competitors include large retail operations that also sell to the institutional market, other catalog and direct marketing companies, team dealers, and Internet sellers. Increased competition could result in pricing pressures, increased marketing expenditures and loss of market share and could have a material adverse effect on our results of operations We continue to closely monitor orders and the creditworthiness of our customers. We have not experienced abnormal increases in losses associated with accounts receivable; however, we have experienced an increase in days sales outstanding. We have made allowances for the amount we believe to be adequate to properly reflect the risk to accounts receivable; however, unforeseen market conditions may compel us to increase the allowances. We derive a significant portion of our revenues from sales of products purchased directly from foreign suppliers located primarily in the Far East. In addition, we believe foreign manufacturers produce many of the products we purchase from domestic suppliers. We are subject to risks of doing business abroad, including delays in shipments, adverse fluctuations in foreign currency exchange rates, increases in import duties, decreases in quotas, changes in custom regulations, acts of God (such as earthquakes) and political turmoil. The occurrence of any one or more of the foregoing could adversely affect our operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We own no marketable securities nor have investments that are subject to market risk. The interest on borrowings under our senior credit facility is based on the prime rate. As our borrowing levels have increased, a significant increase in interest rates could have a material adverse effect on our financial condition and results of operations. Assuming borrowing levels remain constant for fiscal 2001 at the same level as at the end of fiscal year 2000, a 3% increase in interest rates would increase interest expense by more than $500,000. Most financial and economic experts are not predicting a significant increase in prime borrowing rates during the coming year. Item 8. Financial Statements and Supplementary Data. Index to Financial Statements Page ----------------------------- ---- Report of Independent Auditors 21 Consolidated Balance Sheets as of September 29, 2000 and October 1, 1999 22 Consolidated Statements of Operations for the Years Ended September 29, 2000, October 1, 1999 and October 2, 1998 23 Consolidated Statements of Stockholders' Equity for the Years Ended September 29, 2000, October 1, 1999 and October 2, 1998 24 Consolidated Statements of Cash Flows for the Years Ended September 29, 2000, October 1, 1999, and October 2, 1998 25 Notes to Consolidated Financial Statements 26 Supplemental Financial Information (Unaudited) 38 Financial statement schedules are omitted as the required information is presented in the consolidated financial statements or the notes thereto or is not necessary. REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Sport Supply Group, Inc.: We have audited the accompanying consolidated balance sheets of Sport Supply Group, Inc. and subsidiaries as of September 29, 2000 and October 1, 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended September 29, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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 September 29, 2000 and October 1, 1999, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended September 29, 2000 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Dallas, Texas November 20, 2000 except for Note 3, as to which the date is December 27, 2000 SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 29, October 1, 2000 1999 ---------- ---------- CURRENT ASSETS : Cash and equivalents $ 112,017 $ 201,911 Accounts receivable: Trade, less allowance for doubtful accounts of $836,000 at Sept. 29, 2000 and $465,000 at Oct. 1, 1999 21,699,695 22,926,169 Other 727,830 975,956 Inventories, net 19,853,059 18,509,262 Other current assets 1,152,639 911,972 Deferred tax assets 1,341,203 1,062,188 ---------- ---------- Total current assets 44,886,443 44,587,458 ---------- ---------- DEFERRED CATALOG EXPENSES 1,552,838 2,078,262 PROPERTY, PLANT AND EQUIPMENT : Land 8,663 8,663 Buildings 1,605,102 1,605,102 Computer equipment and software 11,589,567 10,038,530 Machinery and equipment 6,402,708 6,192,272 Furniture and fixtures 1,521,374 1,286,745 Leasehold improvements 2,425,562 2,368,439 ---------- ---------- 23,552,976 21,499,751 Less--Accumulated depreciation and amortization (11,131,183) (8,889,925) ---------- ---------- 12,421,793 12,609,826 ---------- ---------- DEFERRED TAX ASSETS 2,866,910 2,101,239 COST IN EXCESS OF TANGIBLE NET ASSETS ACQUIRED, less accumulated amortization of $1,745,000 at Sept. 29, 2000 and $1,464,000 at Oct. 1, 1999 7,867,222 7,937,809 TRADEMARKS, less accumulated amortization of $1,547,000 at Sept. 29, 2000 and $1,339,000 at Oct. 1, 1999 3,235,996 3,079,010 OTHER ASSETS, less accumulated amortization of $451,000 at Sept. 29, 2000 and $1,058,000 at Oct. 1, 1999 855,613 855,375 ---------- ---------- $73,686,815 $73,248,979 ========== ========== CURRENT LIABILITIES : Accounts payable $ 9,871,068 $ 7,975,509 Other accrued liabilities 2,604,680 2,328,549 Notes payable and capital lease obligations, current portion 1,639,458 2,410,839 ---------- ---------- Total current liabilities 14,115,206 12,714,897 NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of current portion 19,034,345 18,425,925 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, 9,350,731 and 9,333,241 shares issued at Sept. 29, 2000 and Oct. 1, 1999, 7,275,949 and 7,273,899 shares outstanding at Sept. 29, 2000 and Oct. 1, 1999, respectively 93,507 93,332 Additional paid-in capital 59,785,587 59,743,384 Accumulated deficit (1,639,813) (122,207) Treasury stock, at cost, 2,074,782 shares at Sept. 29, 2000 and 2,059,342 shares at Oct. 1, 1999 (17,702,017) (17,606,352) ---------- ---------- 40,537,264 42,108,157 ---------- ---------- $73,686,815 $73,248,979 ========== ========== The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended September 29, 2000, October 1, 1999, and October 2, 1998 ------------ ------------ ----------- 2000 1999 1998 ------------ ------------ ----------- Net revenues $ 113,333,785 $ 107,068,508 $ 97,291,991 Cost of sales 77,163,836 69,785,600 64,988,793 ------------ ------------ ----------- Gross profit 36,169,949 37,282,908 32,303,198 Selling, general and administrative expenses 34,865,452 28,838,366 23,336,972 Internet expenses 1,136,149 - - Nonrecurring charges 605,000 - 1,184,024 ------------ ------------ ----------- Earnings (loss) before interest other income, and taxes (436,652) 8,444,542 7,782,202 Interest expense (2,021,763) (1,196,112) (473,899) Other income, net 16,924 62,738 215,090 ------------ ------------ ----------- Earnings (loss) before provision for income taxes (2,441,491) 7,311,168 7,523,393 Income tax provision (benefit) (923,885) 2,688,329 2,559,082 ------------ ------------ ----------- Net earnings (loss) $ (1,517,606) $ 4,622,839 $ 4,964,311 ============= ============ =========== Earnings (loss) per share: Net earnings (loss) - basic $ (0.21) $ 0.63 $ 0.62 ------------ ------------ ----------- Net earnings (loss) - diluted $ (0.21) $ 0.60 $ 0.60 ------------ ------------ ----------- Weighted average number of common shares outstanding - basic 7,272,570 7,390,274 8,025,606 ============= ============ =========== Weighted average number of common shares outstanding - diluted 7,272,570 7,727,777 8,236,530 ============= ============ =========== 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 September 29, 2000, The Year Ended October 1, 1999, The Year Ended October 2, 1998 Additional Retained Common Stock Paid in Earnings or Treasury Stock Shares Amount Capital (Deficit) Shares Amount Total --------- ------- ---------- ---------- --------- ----------- ---------- Balance, September 26, 1997 9,158,749 $ 91,588 $58,574,218 $(9,709,357) 1,074,365 $ (9,999,130) $38,957,319 Issuances of common stock upon exercises of outstanding options 73,387 734 502,370 503,104 Issuances of common stock 11,059 110 70,293 70,403 Purchase of treasury stock 433,725 (3,486,453) (3,486,453) Reissuances of treasury shares (46,694) (19,598) 215,722 169,028 Net earnings (comprehensive income) 4,964,311 4,964,311 --------- ------- ---------- ---------- --------- ----------- ---------- Balance, October 2, 1998 9,243,195 $ 92,432 $59,100,187 $(4,745,046) 1,488,492 $(13,269,861) $41,177,712 --------- ------- ---------- ---------- --------- ----------- ---------- Issuances of common stock upon exercises of outstanding options 81,445 814 598,071 598,885 Issuances of common stock 8,601 86 73,036 73,122 Purchase of treasury stock 595,900 (4,603,987) (4,603,987) Reissuances of treasury shares (27,910) (25,050) 267,496 239,586 Net earnings (comprehensive income) 4,622,839 4,622,839 --------- ------- ---------- ---------- --------- ----------- ---------- Balance, October 1, 1999 9,333,241 $ 93,332 $59,743,384 $ (122,207) 2,059,342 $(17,606,352) $42,108,157 --------- ------- ---------- ---------- --------- ----------- ---------- Issuances of common stock upon exercises of outstanding options 5,000 50 50 Issuances of common stock 12,490 125 51,503 51,628 Purchase of treasury stock 16,420 (112,437) (112,437) Reissuances of treasury shares (9,300) (980) 16,772 7,472 Net loss (comprehensive loss) (1,517,606) (1,517,606) --------- ------- ---------- ---------- --------- ----------- ---------- Balance, September 29, 2000 9,350,731 $ 93,507 $59,785,587 $(1,639,813) $2,074,782 $(17,702,017) $40,537,264 ========= ======= ========== ========== ========= =========== ========== The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended September 29, 2000, October 1, 1999, and October 2, 1998
2000 1999 1998 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES : Net earnings (loss) $(1,517,606) $ 4,622,839 $ 4,964,311 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,855,172 2,072,117 1,390,178 Provision for (recovery of) allowances for accounts receivable 319,025 411,512 (428,756) Changes in assets and liabilities: (Increase) decrease in accounts receivable 1,902,706 (6,602,602) 346,687 (Increase) decrease in inventories (565,986) (3,039,248) (1,041,239) (Increase) decrease in deferred catalog expenses and other current assets 284,757 57,542 (1,125,628) Increase (decrease) in accounts payable 1,161,798 602,636 1,221,250 (Increase) decrease in deferred taxes (279,015) (157,870) 1,165,360 Increase (decrease) in accrued liabilities 170,301 (1,012,097) (688,080) (Increase) decrease in other assets (284,426) 132,638 (29,294) (Increase) decrease in noncurrent deferred tax assets (765,671) 2,557,950 1,179,706 Other - - (22,091) ---------- ---------- ---------- Net cash provided by (used in) operating activites 3,281,055 (354,583) 6,932,404 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES : Acquisitions of property, plant & equipment (2,025,608) (6,438,359) (2,969,139) Payments for acquisitions, net of cash acquired (854,093) (4,260,100) (1,500,682) Proceeds from sale of investments - 23,891 14,044 ---------- ---------- ---------- Net cash provided by (used in) investing activities (2,879,701) (10,674,568) (4,455,777) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES : Proceeds from issuances of notes payable 2,205,620 21,099,089 2,916,984 Payments of notes payable and capital lease obligation (2,643,581) (7,211,099) (2,217,006) Proceeds from common stock issuances 59,150 911,593 742,535 Purchase of treasury stock (112,437) (4,603,987) (3,486,453) ---------- ---------- ---------- Net cash provided by (used in) financing activities (491,248) 10,195,596 (2,043,940) ---------- ---------- ---------- NET CHANGE IN CASH AND EQUIVALENTS (89,894) (833,555) 432,687 Cash and equivalents, beginning of period 201,911 1,035,466 602,779 ---------- ---------- ---------- Cash and equivalents, end of period $ 112,017 $ 201,911 $ 1,035,466 ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION : Cash paid during the period for interest $ 2,169,859 $ 1,181,529 $ 502,414 ========== ========== ========== Cash paid during the period for income taxes $ 204,455 $ 160,000 $ 6,671 ========== ========== ========== The Company acquired the assets of certain entities. In connection with these acquisitions, liabilities were assumed as follows: Fair value of assets acquired $ 1,968,685 $ 8,296,490 $ 2,388,750 Cash paid for the acquisitions, net (854,093) (4,260,100) (1,500,682) Debt issued for the acquisitions (275,000) (700,000) (588,068) ---------- ---------- ---------- Liabilities assumed $ 839,592 $ 3,336,390 $ 300,000 ========== ========== ========== The accompanying notes are an integral part of these financial statements.
SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2000 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. Our operations are all within one financial reporting segment: manufacturing and marketing of sports related equipment and leisure products to institutional customers in the United States. We manufacture many of the products we sell. Manufactured items include, but are not limited to: 1.) Tennis, volleyball, and other sports nets; 2.) Steel and aluminum construction items, such as soccer and field hockey goals and volleyball, pole vault, and high jump standards; 3.) track and field equipment; 4.) Gymnastic equipment and exercise mats; 5.) Weight lifting equipment; and 6.) Tabletop games and various plastic items. 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 ("SSGA"), a Hong Kong corporation. 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 2000 presentation. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out and weighted-average cost methods for items manufactured by us and weighted-average cost for items purchased for resale. As of September 29, 2000 and October 1, 1999 inventories (excluding inventories related to discontinued operations) consisted of the following: Inventory Data: Sept. 29, 2000 Oct. 1, 1999 ----------- ----------- Raw materials $ 3,300,001 $ 3,209,581 Work-in-process 536,550 435,904 Finished and purchased goods 17,148,643 15,928,680 ----------- ----------- Inventory, Gross 20,985,194 19,574,165 Less inventory allowance for obsolete or slow moving items (1,132,135) (1,064,903) ----------- ----------- Inventory, Net $ 19,853,059 $ 18,509,262 =========== =========== 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 September 29, 2000 and October 1, 1999, approximately 28% and 27%, 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 31% and 36% of total net revenues in fiscal 2000 and 1999, respectively. Advertising and Deferred Catalog Expenses We expense the production costs of advertising as incurred, except for production costs related to direct-response advertising activities, which are capitalized. Direct response advertising consists primarily of catalogs that include order forms for our products. Production costs, primarily printing and postage, associated with catalogs are amortized using the straight-line method over twelve months which approximates average usage of the catalogs produced. Our advertising expenses for the fiscal years ended September 29, 2000, October 1, 1999 and October 2, 1998 were approximately $4,122,000, $3,571,000 and $2,864,000, 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 over the remaining estimated useful life of the assets. Property, Plant, and Equipment Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the related assets using the straight-line method. Leasehold improvements and property and equipment leased under capital lease obligations are amortized over the terms of the related leases or their estimated useful lives, whichever is shorter. The cost of maintenance and repairs is charged to expense as incurred. Significant renewals and betterments are capitalized and depreciated over the remaining estimated useful lives of the related assets. Depreciation of property, plant and equipment is provided by the straight-line method as follows: Buildings Thirty to forty years Machinery and Equipment Five years to ten years Computer Equipment and Software Three years to ten years Furniture and Fixtures Five years Intangible Assets Cost in excess of tangible net assets acquired relates to acquisitions made by us. Trademarks and servicemarks relate to costs incurred in connection with the licensing agreements for the use of certain trademarks and servicemarks in conjunction with the sale of our products. Other intangible assets are classified as other assets and consist principally of patents. Amortization of intangible assets is provided by the straight-line method as follows: Cost in excess of tangible net Principally thirty assets acquired to forty years Trademarks and servicemarks Five to forty years Patents Seven to eleven years We periodically assess the recoverability of the carrying value of intangible assets in relation to projected earnings and projected undiscounted cash flows. Based on our assessment, we believe our investments in intangible assets are fully realizable as of September 29, 2000. 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 annually based upon the estimated future tax effects of the differences in the tax bases of existing assets and liabilities and the related financial statement carrying amounts, using currently enacted tax laws and rates in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (See Note 4). Net Earnings (Loss) Per Share of Common Stock Net earnings (loss) per share of common stock are based upon the weighted average number of common and common equivalent shares outstanding. Outstanding stock options and common stock purchase warrants are treated as common stock equivalents when dilution results from their assumed exercise. Revenue Recognition Our policy is to recognize revenue upon shipment of inventory and record an estimate against revenues for possible returns based upon our historical return rate. Subject to certain limitations, customers have the right to return product within 30 days if they are not completely satisfied. We believe sales are final upon shipment of inventory based upon the following criteria under SFAS 48 and SAB 101: - Our price to our customers is fixed at the time an order is placed. - The customers have paid, or are obligated to pay, us. - The customers' obligation to pay does not change in the event of theft, damaged product, etc. (A claim must be filed to issue credit.) - Customers are verified through credit investigations for economic substance before products are shipped. - We are not obligated for future performance to any of our customers. - Future returns can be reasonably estimated based on historical data. Recent Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended, which we were required to adopt on September 30, 2000. SFAS 133 requires that all derivatives be recorded on the balance sheet at fair value. Changes in derivatives that are not hedges are adjusted to fair value through income. Changes in derivatives that meet the Statement's hedge criteria will either be offset through income, or recognized in other comprehensive income until the hedged item is recognized in earnings. The adoption of SFAS 133 on September 30, 2000 did not have any impact on our financial condition, results of operations or cash flows. 2. STOCKHOLDERS' EQUITY: Stock Options We maintain a stock option plan that provides up to 2,000,000 shares of common stock for awards of incentive and non-qualified stock options to directors and employees. Under the stock option plan, the exercise price of options will not be less than: (i.) the fair market value of the common stock at the date of grant; or (ii.) not less than 110% of the fair market value for incentive stock options granted to certain employees, as more fully described in the Amended and Restated Stock Option Plan. Options expire ten years from the grant date, or five years from the grant date for incentive stock options granted to certain employees, or such earlier date as determined by the Board of Directors of the Company (or a Stock Option Committee comprised of members of the Board of Directors). The following table contains transactional data for the Company's stock option plan. Exercise Price or Stock Option Plan Shares Weighted Avg. Price ----------------- --------- ------------------- Outstanding at September 26, 1997 1,040,573 $7.26 Granted 286,675 $7.65 Exercised (73,387) $6.86 Forfeited (393,575) $8.06 --------- Outstanding at October 2, 1998 860,286 $7.30 Granted 328,625 $8.52 Exercised (81,445) $6.63 Forfeited (19,667) $6.75 --------- Outstanding at October 1, 1999 1,087,799 $7.695 Granted 44,375 $7.43 Exercised (5,000) $6.50 Forfeited (199,308) $7.90 --------- Outstanding at September 29, 2000 927,866 $7.64 ========= Stock Options Outstanding Stock Options Exercisable as of Sept 29, 2000 as of Sept. 29, 2000 -------------------------------------------------- -------------------- Wtd. Avg. Wtd. Avg. Wtd. Avg. Range of Remaining Exercise Exercise Exercise Prices Shares Life Price Shares Price --------------- --------- --------- ------ ------- ----- $6.125 - $9.44 927,866 7.1 years $7.64 875,781 $7.46
All options granted under the stock option plan during the fiscal years ended on September 29, 2000, October 1, 1999, October 2, 1998 and the eleven month period ended on September 26, 1997 were at exercise prices equal to or greater than the fair market value of our stock on the date of the grant. On January 23, 1997, certain officers' options were repriced to $7.50 which was above the current fair market value. In addition to options granted pursuant to the stock option plan, we periodically grant options to purchase shares of our common stock that are not reserved for issuance under the stock option plan ("non-plan options"). Such exercise prices were equal to or greater than the fair market value of our common stock on the dates of grant. There are currently options to acquire 100,000 shares of common stock for $6.88 per share that were issued outside the plan. These options are scheduled to expire on May 3, 2001. As of September 29, 2000, there were a total of 1,027,866 options (including non-plan options) outstanding with exercise prices ranging from $6.125 per share to $9.44 per share. As of September 29, 2000, 875,781 of the total options outstanding were fully vested with 152,085 options vesting through November 2002. As of October 1, 1999, there were 1,187,799 options (including non-plan options) outstanding with exercise prices ranging from $6.125 per share to $9.44 per share. As of October 1, 1999, 630,712 of the total options outstanding were fully vested with 557,087 options vesting through July 2002. As of October 2, 1998, there were 960,286 options (including non-plan options) outstanding with exercise princes ranging from $5.60 per share to $8.38 per share. As of October 2, 1998, 505,284 of the total options outstanding were fully vested with 455,002 options vesting through January 2001. 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 5.93%, 5.63% and 5.34% in 2000, 1999 and 1998 respectively; (ii.) dividend yield of 0% for all years; (iii.) expected volatility of 49%, 30% and 25% in 2000, 1999 and 1998, respectively; and (iv.) weighted average expected life for each option of 3 years. The weighted average fair value of employee stock options granted in 2000, 1999 and 1998 are $2.41, $2.34 and $1.81, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period; therefore, our proforma effect will not be fully realized until the completion of one full vesting cycle. Our pro forma information is as follows: For the Fiscal For the Fiscal For the Fiscal Year Ended Year Ended Year Ended Sept. 29, 2000 Oct, 1, 1999 Oct. 2, 1998 -------------- ------------ ------------ Net income (loss): As reported $(1,517,606) $4,622,839 $4,964,311 Pro forma $(1,988,647) $4,119,255 $4,526,870 Earnings (loss) per share: As reported $(0.21) $0.63 $0.62 As reported - with dilution $(0.21) $0.60 $0.60 Pro forma earnings (loss) $(0.27) $0.56 $0.56 Pro forma dilutive $(0.27) $0.53 $0.53 Dividends During January 1996, we terminated our annual cash dividend policy. Common Stock Purchase Warrants Pursuant to a Securities Purchase Agreement dated November 27, 1996 between Emerson Radio Corp. ("Emerson") and us, Emerson acquired directly from us 5-year warrants to acquire 1,000,000 shares of Common Stock at an exercise price of $7.50 per share, subject to standard antidilution adjustments, for an aggregate cash consideration of $500,000. The warrants are scheduled to expire on December 10, 2001. 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 September 29, 2000, we repurchased approximately 1,333,000 shares of our issued and outstanding common stock in the open market and privately negotiated transactions. Any future purchases will be subject to price and availability of shares, working capital availability and any of our alternative capital spending programs. Our bank agreement currently prohibits the repurchase of any additional shares without the bank's prior consent. Net Earnings Per Common Share The following table sets forth the computation of basic and diluted earnings per share: For the For the For the Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Sept. 29, Oct. 1, Oct. 2, 2000 1999 1998 ---------- --------- --------- Numerator: ---------- Net earnings (loss) $(1,517,606) $4,622,839 $4,964,311 ========== ========= ========= Denominator: ----------- Weighted average shares outstanding 7,272,570 7,390,274 8,025,606 Effect of dilutive securities: Warrants 0 148,577 94,884 Employee stock options 0 188,926 116,040 ---------- --------- --------- Adjusted weighted average shares and assumed conversions 7,272,570 7,727,777 8,236,530 ========== ========= ========= Per Share Calculations: ---------------------- Basic earnings (loss) per share $(0.21) $0.63 $0.62 ========== ========= ========= Diluted earnings (loss) per share $(0.21) $0.60 $0.60 ========== ========= ========= Securities excluded from weighted average shares diluted because their effect would be antidilutive 2,027,866 0 6,250
3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS: As of fiscal years ended September 29, 2000 and October 1, 1999, notes payable and capital lease obligations consisted of the following: 2000 1999 ---------- ---------- Note payable under revolving line of credit, interest ranging from prime minus 0.25% to prime plus 1.0% (8.53% - 10.50% at Sept. 29, 2000, and 7.75% at Oct. 1, 1999) due Oct. 2, 2002 and collateralized by substantially all assets. $17,804,126 $11,044,264 Term loan, interest at prime plus 2% (11.50%) at Sept. 29, 2000 and 7.13% at Oct. 1, 1999) , payable in monthly installments of $125,000 plus accrued interest through Oct. 2, 2002 and collateralized by substantially all assets. 2,500,000 9,000,000 Promissory note, interest at 7.75%, payable in monthly installments of $29,167 plus accrued interest through February 2001. 79,214 466,667 Capital lease obligation, interest at 9%, payable in annual installments of principal and interest totaling $55,000 through August 2005. 196,038 230,311 Other 94,425 95,522 ---------- ---------- Total 20,673,803 20,836,764 Less - current portion (1,639,458) (2,410,839) ---------- ---------- Long-term debt and capital lease obligations, net $19,034,345 $18,425,925 ========== ==========
Credit Facilities We have a credit agreement with Comerica Bank-Texas to finance our working capital requirements. The credit agreement provides for a revolving credit facility and a term loan. As of September 29, 2000, we had total borrowings under our senior credit facility of approximately $20.3 million. This balance included a term loan of $2.5 million and loans outstanding under the revolving credit facility of $17.8 million. On September 13, 2000, we entered into an amendment to the credit agreement. Several changes were made to the credit agreement, including reducing the credit facility from $40 million to $27.5 million and amending the fixed charge coverage ratio to provide that we were not permitted to have a fixed charge coverage ratio less than .95 to 1.00 in any two consecutive months. Our fixed charge coverage ratio was less than .95 to 1.00 at the end of September 2000. Consequently, we were in default. Comerica Bank-Texas agreed to waive this default and eliminate the fixed charge coverage ratio pursuant to an amendment to the credit agreement including, among other terms, the pay off of the term loan by January 15, 2001. The term loan currently has an outstanding balance of approximately $2.2 million. On December 22, 2000, Emerson Radio Corp., our largest stockholder, offered to purchase 1,629,629 shares of our common stock from us for $1.35 per share in cash, for a total purchase price of $2.2 million. The $1.35 per share purchase price represented a 20% premium to the closing price of our common stock on December 22, 2000. Emerson's offer was contingent on Comerica making certain amendments to the senior secured credit facility before December 28, 2000, including eliminating the fixed charge coverage ratio. Emerson agreed to finalize this purchase on or before January 15, 2001. Our Board agreed that selling additional shares to Emerson for $1.35 per share and using the proceeds to pay off the term loan was in our best interests and approved Emerson's offer. Emerson will own 4,303,329 shares, or approximately 48.3%, of our issued and outstanding shares as a result of such purchase. Emerson also owns warrants to purchase an additional 1 million shares of our common stock for $7.50 per share. On December 27, 2000, we entered into an amendment to the credit agreement whereby we agreed to (i) pay off the term loan by January 15, 2001 with the proceeds from the Emerson transaction mentioned above, (ii) pay Comerica a $15,000 waiver fee, (iii) delete the fixed charge coverage ratio and add an interest coverage ratio and (iv) agree to pay Comerica a $250,000 fee if the credit facility is not refinanced by March 30, 2001. We believe we will meet all future terms and conditions, including covenants, of our credit facility through the end of fiscal 2001. Although the maturity date on our revolving note is October 2, 2002, it is our intent to refinance our credit facility with a different lender prior to March 30, 2001. We are currently negotiating proposals from other lenders. We do not have a commitment for replacing our current lender. There can be no assurance that such financing will be available prior to March 30, 2001 or that, if available, such financing will be available on acceptable terms. If we are able to refinance the credit facility on acceptable terms, then we will incur fees and expenses associated with such refinancing, including writing off approximately $150,000 in unamortized loan fees on our balance sheet. If we are unable to refinance the credit facility on acceptable terms, then we will retain Comerica as our senior lender and incur a $250,000 payment obligation. Based on Emerson's agreement to purchase shares of common stock for $2.2 million and our intent to use these proceeds to pay off the term loan by January 15, 2001, and Comerica waving existing defaults and modifying financial statement covenants, we have classified our Comerica credit facility as long term. We believe we will meet all of our new credit facility covenants at least through September 29, 2001. Maturities of our capital lease obligations and borrowings under the senior credit facility as of September 29, 2000, by fiscal year and in the aggregate, are as follows: 2001 $ 1,639,458 2002 1,065,461 2003 17,871,436 2004 72,246 2005 25,202 Thereafter 0 ---------- Total 20,673,803 Less Current Portion (1,639,458) ---------- Total Long term Portion $19,034,345 ========== As of September 29, 2000 the carrying value of our long term debt approximates its fair value. 4. INCOME TAXES: As of the fiscal years ended September 29, 2000 and October 1, 1999, the components of the net deferred tax assets and liabilities are as follows: 2000 1999 --------- --------- Current deferred tax assets (liabilities): Allowances for doubtful accounts $ 389,000 $ 239,696 Inventories 897,767 817,890 Other accrued liabilities 54,436 4,602 --------- --------- Total $1,341,203 $1,062,188 ========= ========= Noncurrent deferred tax assets (liabilities): Cost in excess of tangible net $ (218,807) $ (216,222) assets acquired Other intangible assets (2,892,670) (2,687,228) Net operating loss carryforward 5,492,151 4,504,802 Minimum tax credit carryforward 486,236 499,887 --------- --------- Total $2,866,910 $2,101,239 ========= ========= 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. No valuation allowance has been recorded for our deferred tax assets because we believe it is more likely than not such assets will be realized. We believe the deferred tax assets will be realized by future profitable operating results. Realization of our net deferred tax asset is dependent on generating sufficient taxable income prior to expiration of loss carryforwards. Although realization is not assured, we believe it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if 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 years ended September 29, 2000, October 1, 1999 and October 2, 1998 consisted of the following: 2000 1999 1998 --------- --------- --------- Current $ 118,115 $ 288,249 $ 214,016 Deferred (1,042,000) 2,400,080 2,345,066 --------- --------- --------- Income tax provision (benefit) $ (923,885) $2,688,329 $2,559,082 ========= ========= ========= The provision (benefit) for income taxes related to continuing operations in the accompanying statements of operations for the fiscal years ended September 29, 2000, October 1, 1999 and October 2, 1998, differ from the statutory federal rate as follows: 2000 1999 1998 -------- --------- --------- Income tax provision (benefit) at statutory federal rate $(830,107) $2,485,797 $2,557,954 State income taxes, net of federal effect (75,865) 124,964 -- Other (17,913) 77,568 1,128 -------- --------- --------- Total provision (benefit) for Income taxes $(923,885) $2,688,329 $2,559,082 ======== ========= ========= 5. ACQUISITIONS: During October 1999, we acquired, for cash and the assumption of certain liabilities, certain assets of LAKCO, Inc. and Spaulding, Inc., both distributors of sporting goods equipment to the institutional market. On September 25, 2000, we acquired the stock of Sports Supply Group Asia Limited, a shell corporation, from Emerson Radio. We have accounted for these acquisitions using the purchase method and, as such, our results of operations are combined with the acquired company's results of operations subsequent to the acquisition date. No proforma information for the above acquisitions is presented herein because the proforma information, individually or in aggregate, would not materially differ from actual results. 6. MAJOR CUSTOMERS AND CONCENTRATION OF BUSINESS RISK: Our customers include all levels of public and private schools, colleges, universities, and military academies, municipal and governmental agencies, military facilities, churches, clubs, camps, hospitals, youth sports leagues, non-profit organizations, team dealers and certain large retail sporting goods chains. We did not have any individual customers that accounted for more than 10% of net revenues for the fiscal years ended September 29, 2000, October 1, 1999, and October 2, 1998. The majority of our sales are to publicly funded institutional customers. We extend credit based upon an evaluation 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. 7. COMMITMENTS AND CONTINGENCIES: Leases We lease a portion of our office, warehouse, distribution, fulfillment, computer equipment and manufacturing locations under noncancelable operating leases with terms ranging from one to five years. The majority of our leases contain renewal options that extend the leases beyond the current lease terms. Future minimum lease payments under noncancelable operating leases for office, warehouse, computer equipment and manufacturing locations, with remaining terms in excess of one year are as follows: 2001 $1,970,732 2002 1,745,807 2003 1,578,912 2004 1,460,689 2005 305,372 --------- Total $7,061,512 ========= Rent expense was approximately $1,935,000, $1,815,000 and $1,645,000 for fiscal years 2000, 1999 and 1998, respectively. Severance Agreements In July 1998, an officer retired and we recorded a nonrecurring pre-tax charge for the year ended October 2, 1998 for $1.2 million relating to the retirement. Product Liability and Other Claims Because of the nature of our products, we are periodically subject to product liability claims resulting from personal injuries. From time to time we may become involved in various lawsuits incidental to our business, some of which may relate to injuries allegedly resulting in substantial permanent paralysis. Significantly increased product liability claims continue to be asserted successfully against manufacturers throughout the United States resulting in general uncertainty as to the nature and extent of manufacturers' and distributors' liability for personal injuries. See Part I. Item 3. - "Legal Proceedings". There can be no assurance that our general product liability insurance will be sufficient to cover any successful claim made against us. In our opinion, any ultimate liability arising out of currently pending product liability and other claims will not have a material adverse effect on our financial condition or results of operations. However, any claims substantially in excess of our insurance coverage, or any substantial claim not covered by insurance, could have a material adverse effect on our results of operations and financial condition. During 2000, we successfully negotiated the settlement of two outstanding lawsuits. Consequently, we recorded a nonrecurring charge related to these claims in the amount of $605,000, which is included in Nonrecurring Charges on the Consolidated Income Statement. 8. EMPLOYEES' SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN: Effective June 1, 1993, we established a defined contribution profit sharing plan (the "401(k) Plan") for the benefit of eligible employees. All employees with one year of service and who have attained the age of 21 are eligible to participate in the 401(k) Plan. Beginning January 1, 2001, the one year waiting period will be reduced to 90 days. Employees may contribute up to 20% of their compensation, subject to certain limitations, which qualifies under the compensation deferral provisions of Section 401(k) of the U.S. Internal Revenue Code. The 401(k) Plan contains provisions that allow us to make discretionary contributions during each plan year. Employer contributions for the fiscal years ended September 29, 2000, October 1, 1999 and October 2, 1998 were approximately $89,000, $84,000 and $78,000 respectively. We pay all administrative expenses of the 401(k) Plan. Effective July 1, 1997, we established an Employee Stock Purchase Plan for the benefit of eligible employees. All eligible employees are allowed to purchase shares of SSG Common Stock at a 15% discount from the market price. 9. UNAUDITED QUARTERLY STATEMENT OF OPERATIONS The following table sets forth certain information regarding our results of operations for each full quarter within the fiscal years ended September 29, 2000 and October 1, 1999, with amounts in thousands, except for per share data. Due to rounding, quarterly amounts may not fully sum to yearly amounts. 2000 Fiscal Year 1999 Fiscal Year ------------------------------------------- ------------------------------------------- Statement of 1st 2nd 3rd 4th 1st 2nd 3rd 4th Earnings Data: Year Qtr Qtr Qtr Qtr Year Qtr Qtr Qtr Qtr(1) ------- ------ ------ ------ ------ ------- ------ ------ ------ ------ Net revenues $113,334 $19,035 $34,794 $29,045 $30,460 $107,069 $14,870 $35,476 $26,310 $30,412 Gross profit 36,170 6,341 11,514 9,400 8,915 37,283 5,079 12,139 10,025 10,040 Operating profit or (loss)(note 1) (437) (1,330) 2,110 (81) (1,136) 8,445 (751) 5,172 3,179 845 Interest expense 2,022 414 519 445 644 1,196 165 334 371 326 Other income (expense), net 17 (6) 8 (2) 17 63 18 13 21 11 Net earnings (loss) $(1,518) $(1,107) $1,027 $(329) $(1,108) $4,623 $(560) $3,020 $1,759 $404 ------- ------ ------ ------ ------ ------- ------ ------ ------ ------ Net earnings (loss) per Common Share $(0.21) $(0.15) $0.14 $(0.05) $(0.15) $0.63 $(0.07) $0.41 $0.24 $0.06 Net earnings (loss) per Common Share -assuming dilution $(0.21) $(0.15) $0.14 $(0.05) $(0.15) $0.60 $(0.07) $0.39 $0.22 $0.05 Weighted average Common Shares outstanding 7,273 7,270 7,270 7,273 7,273 7,390 7,607 7,388 7,360 7,281 Weighted average Common Shares outstanding - assuming dilution 7,273 7,270 7,273 7,273 7,273 7,728 7,607 7,748 7,826 7,673 (1) The 2nd quarter of fiscal year 2000 includes $605,000 of nonrecurring charges.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. See the discussion under the captions "Election of Directors" and "Executive Compensation and Other Information" contained in the Proxy Statement for the Annual Meeting of Stockholders to be held January 26, 2001, which information is incorporated herein by reference, and Item 1. -- "Business - Executive Officers of the Company". Item 11. Executive Compensation. See the discussion under the caption "Executive Compensation and Other Information" contained in the Proxy Statement for the Annual Meeting of Stockholders to be held January 26, 2001, which information, except the Performance Graph and the Report of the Compensation Committee and Stock Option Committee on Executive Compensation, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. See the discussion under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement for the Annual Meeting of Stockholders to be held January 26, 2001, which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. See the discussion under the caption "Certain Relationships and Related Transactions" contained in the Proxy Statement for the Annual Meeting of Stockholders to be held on January 26, 2001, which information is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) (1) Financial Statements. See Item 8. (a) (2) Supplemental Schedule Supporting Financial Statements. See Item 8. (a) (3) Management Contract or Compensatory Plan. [See Index]. [Each of the following Exhibits described on the Index to Exhibits is a management contract or compensatory plan: Exhibits 10.1, 10.1.1, 10.2, 10.2.1, 10.3, 10.4, 10.5, 10.5.1, 10.6, 10.7, 10.8, 10.9, 10.10 and 10.11.]. (b) Reports on Form 8-K. A report on Form 8-K was filed with the Securities and Exchange Commission on December 13, 1999 to report our engagement of PaineWebber Incorporated. A report on Form 8-K was filed with the Securities and Exchange Commission on May 30, 2000 relating to a press release concerning approval from the New York Stock Exchange for continued listing of Sport Supply Group, Inc. (c) Exhibits. See Index. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized. Dated: December 27, 2000 SPORT SUPPLY GROUP, INC. By: /s/ Geoffrey P. Jurick ---------------------- Geoffrey P. Jurick Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on December 27, 2000 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 Geoffrey P. Jurick Chief Executive Officer /s/ John P. Walker President John P. Walker /s/ Robert K. Mitchell Chief Financial Officer Robert K. Mitchell /s/ Johnson C. S. Ko Director Johnson C. S. Ko /s/ Peter G. Bunger Director Peter G. Bunger /s/ Thomas P. Treichler Director Thomas P. Treichler 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)). 4.2 Warrant Agreement entered into between the Company and Emerson relating to the purchase of up to 1,000,000 shares of the Company's common stock for $7.50 per share, which expires on December 10, 2001 (incorporated by reference from Exhibit 4(a) to the Company's Report on Form 8-K dated December 12, 1996). 10.1 Employment Agreement entered into by and between the Company and Terrence M. Babilla (incorporated by reference from Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended April 13, 1999). 10.1.1 Amendment Number One to Employment Agreement between the Company and Terrence M. Babilla dated to be effective as of February 25, 2000 (incorporated by reference from Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 2000). 10.2 Employment Agreement by and between the Company and John P. Walker (incorporated by reference from Exhibit 10.4 to the Company's Report on Form 10-Q for the quarter ended April 13, 1999). 10.2.1 Amendment Number One to Employment Agreement between the Company and John P. Walker dated to be effective as of February 25, 2000 (incorporated by reference from Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended June 30, 2000). 10.3 Employment Agreement by and between the Company and Eugene Grant (incorporated by reference from Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended April 3, 1998). 10.4 Non-Qualified Stock Option Agreement by and between the Company and Geoffrey P. Jurick (incorporated by reference from Exhibit 10.5 to the Company's Report on Form 10-Q for the quarter ended August 1,1997). 10.5 Non-Qualified Stock Option Agreement by and between the Company and John P. Walker (incorporated by reference from Exhibit 10.6 to the Company's Report on Form 10-Q for the quarter ended August 1, 1997). 10.5.1 Amendment No. 1 to Stock Option Agreement by and between the Company and John P. Walker (incorporated by reference from Exhibit 10.8 to the Company's Report on Form 10-Q for the quarter ended April 3, 1998). Exhibit Nbr. Description of Exhibit ------- ---------------------------------------------------------------- 10.6 Form of Non-Qualified Stock Option Agreement by and between the Company and John P. Walker (incorporated by reference from Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended July 2, 1999). 10.7 Restricted Stock Agreement by and between the Company and John P. Walker (incorporated by reference from Exhibit 10.6 to the Company's Report on Form 10-Q for the quarter ended April 3, 1998). 10.8 Consulting and Separation Agreement dated as of September 16, 1994 by and between the Company and Jerry L. Gunderson (incorporated by reference from Exhibit 10.4 to the Company's Report on Form 10-K for the year ended December 31, 1996). 10.9 Form of Severance Agreement entered into between the Company and each of Messrs. John P. Walker and Terrence M. Babilla (incorporated by reference from Exhibits 10.2 and 10.3 to the Company's Report on Form 10-Q for the quarter ended April 12, 1999). 10.10 Form of Severance Agreement entered into between the Company and Doug Pryor (incorporated by reference from Exhibit 10.7 to the Company's Report on Form 10-Q for the quarter ended April 3, 1998). 10.11 Form of Indemnification Agreement entered into between the Company and each of the directors of the Company and the Company's General Counsel (incorporated by reference from Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 10.12 Sport Supply Group, Inc. Employee Stock Purchase Plan (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-27191)). 10.13 Sport Supply Group, Inc. Amended and Restated Stock Option Plan (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-27193)). 10.14 Registration Rights Agreement by and among the Company, Emerson and Emerson Radio (Hong Kong) Limited (incorporated by reference from Exhibit 4(b) to the Company's Report on Form 8-K filed on December 12, 1996). 10.15 Assignment of Agreement and Inventory Purchase Agreement to Affiliate by Aurora (incorporated by reference from Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 10.16 Form of Tax Indemnity Agreement by and between the Company and Aurora (incorporated by reference from Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No. 33-39218)). 10.17 Master Agreement, dated as of February 19, 1992, by and between MacMark Corporation, MacGregor Sports Products, Inc. and Aurora (incorporated by reference from Exhibit 10.21 to the Company's Report on Form 10-K for the year ended 1991). 10.18 Perpetual License Agreement, dated as of February 19, 1992, by and between MacMark Corporation, Equilink Licensing Corporation, and Aurora (incorporated by reference from Exhibit 10.22 to the Company's Report on Form 10-K for the year ended 1991). Exhibit Nbr. Description of Exhibit ------- ---------------------------------------------------------------- 10.19 Perpetual License Agreement, dated as of February 19, 1992, by and between MacGregor Sports Products, Inc. and Aurora (incorporated by reference from Exhibit 10.23 to the Company's Report on Form 10-K for the year ended 1991). 10.20 Trademark Maintenance Agreement, dated as of February 19, 1992, by and between MacMark Corporation, Equilink Licensing Corporation, and Aurora (incorporated by reference from Exhibit 10.24 to the Company's Report on Form 10-K for the year ended 1991). 10.21 Trademark Maintenance Agreement, dated as of February 19, 1992, by and between MacGregor Sports Products, Inc. and Aurora (incorporated by reference from Exhibit 10.25 to the Company's Report on Form 10-K for the year ended 1991). 10.22 Trademark Security Agreement, dated as of February 19, 1992, by and between MacGregor Sports Products, Inc. and Aurora (incorporated by reference from Exhibit 10.26 to the Company's Report on Form 10-K for the year ended 1991). 10.23 Amendment No. 1 to Perpetual License Agreement and Trademark Maintenance Agreement dated as of November 1, 1992, by and between MacMark Corporation, Equilink Licensing Corporation and the Company (incorporated by reference from Exhibit 10.24 to the Company's Report on Form 10-K for the year ended 1992). 10.23.1 Amendment No. 2 to Perpetual License Agreement and Trademark Maintenance Agreement dated October 7, 1999 by and between MacMark Corporation, Equilink Licensing Corporation and the Company (incorporated by reference from Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended December 31, 1999). 10.24 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). 10.25 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). 10.26 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). 10.26.1 Amended Lease Agreement entered into between the Company and ACQUIPORT DFWIP, Inc., dated as of July 30, 2000 (incorporated by reference from Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended June 30, 2000).. 10.27 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)). 10.28 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). 10.28.1 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). 10.29 Lease, dated December 2, 1991, by and between Injans Investments and the Company regarding the property located in Cerritos. CA (incorporated by reference from Exhibit 10.20 to the Company's Report on Form 10-K for the year ended December 31, 1991). Exhibit Nbr. Description of Exhibit ------- ---------------------------------------------------------------- 10.29.1 First Amendment to Standard Industrial Lease dated September 12, 1996 by and between Injans Investments and the Company regarding the property located in Cerritos, CA (incorporated by reference from Exhibit 10.23.1 to the Company's Report on Form 10-K for the year ended November 1, 1996). 10.30 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). 10.31 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). 10.32 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). 10.32.1 Letter Agreement dated October 18, 1997 amending the Management Services Agreement (incorporated by reference from Exhibit 10.31.1 to the Company's Report on Form 10-K for the year ended September 26, 1997). 10.33 Credit Agreement dated April 26, 1999 by and between the Company and Comerica Bank (incorporated by reference from Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended April 2, 1999). 10.33.1(*) First Amendment to Credit Agreement dated September 13, 2000 by and between the Company and Comerica Bank. 10.34 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). 21 (*) Subsidiaries of the Registrant 23.1 (*) Consent of Independent Auditors. 27.1 (*) Financial Data Schedule. 99 Pledge and Security Agreement, dated December 10, 1996 by Emerson in favor of Congress Financial Corporation (incorporated by reference from Exhibit 99 to the Company's Report on Form 8-K filed on December 12, 1996.) ( * ) Filed Herewith EX-10.33.1 2 0002.txt EXHIBIT 10.33.1 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of September 13, 2000. The parties hereto are SPORT SUPPLY GROUP, INC., a Delaware corporation ("Borrower"), and COMERICA BANK-TEXAS, a state banking association ("Bank"). RECITALS: A. Borrower and Bank are parties to that certain Credit Agreement dated as of April 26, 1999 (which, as the same has been and may be amended, modified, supplemented or restated from time to time, is herein called the "Credit Agreement"), providing for, among other things, the Bank's agreement to extend credit to Borrower pursuant to a specific advance facility and a revolving credit facility. B. The existing indebtedness of Borrower under the specific advance facility is evidenced by that certain Specific Advance Facility Promissory Note dated April 26, 1999, executed by Borrower and payable to the order of Bank in the original principal amount of $10,000,000.00, as the same may be amended, modified, supplemented or restated from time to time (the "SAF Note"), and the existing indebtedness of Borrower under the revolving credit facility is evidenced by that certain Revolving Credit Note dated April 26, 1999, executed by Borrower and payable to the order of Bank in the original principal amount of $30,000,000.00, as the same may be amended, modified supplemented or restated from time to time (the "Revolving Credit Note", and together with the SAF Note, collectively referred to as the "Notes"). The Credit Agreement, the Notes and all other documents and instruments now or hereafter governing, evidencing, guaranteeing, securing or otherwise relating to payment of all or any part of the indebtedness evidenced by the Notes are herein collectively called the "Loan Documents." C. Borrower and Bank desire to amend the Credit Agreement (i) to reduce and extend the commitment under the revolving credit facility, (ii) to terminate the commitment under the specific advance facility, (iii) to convert the indebtedness evidenced by the SAF Note into a term loan, (iv) to change the interest rates for the respective Notes, (v) to amend certain covenants and provisions of the Credit Agreement, and (vi) otherwise as provided herein. D. Bank and Borrower desire to enter into this Amendment to provide for all of the foregoing and to ratify and confirm the Loan Documents. AGREEMENTS: In consideration of the premises and the mutual agreements herein set forth, Borrower and Bank hereby agree as follows: Article I Definitions Section 1.1 Definitions. Capitalized terms used and not otherwise defined in this Amendment shall have their respective meanings as set forth in the Credit Agreement. Article II Amendments to Credit Agreement Section 2.1 Conlin Bros., Inc. Effective as of the date hereof, Section 4.1 of the Credit Agreement is hereby amended to read in its entirety as follows: 4.1 Preservation of Existence, Etc. Except as hereinafter provided, preserve and maintain its existence and except where the failure to do any of the following would not have a Material Adverse Effect, preserve and maintain such of its rights, licenses, and privileges as are material to the business and operations conducted by it; qualify and remain qualified to do business in each jurisdiction in which such qualification is material to its business and operations or ownership of its properties, continue to conduct and operate its business substantially as conducted and operated during the present and preceding calendar year; at all times maintain, preserve and protect all of its franchises and trade names and preserve all the remainder of its property and keep the same in good repair, working order and condition; and from time to time make, or cause to be made, all needed and proper repairs, renewals, replacements, betterments and improvements thereto. Notwithstanding the foregoing, Conlin Bros., Inc may be dissolved, liquidated or merged into Borrower or Athletic Training Equipment Company, Inc., so long as such dissolution, liquidation or merger results in all assets of Conlin Bros., Inc. being owned by Borrower or Athletic Training Equipment Company, Inc. Further, in the event such dissolution, liquidation or merger does not occur by November 15, 2000, Borrower shall cause Conlin Bros., Inc. to execute and deliver to Bank on or before such date a Guaranty, a Security Agreement (All Assets), a Security Agreement (Intellectual Property), and such UCC financing statements as Bank may require, all in form and substance satisfactory to Bank in its sole discretion. Section 2.2 Reporting Requirements. Effective as of the date hereof, (a) the phrase "one hundred twenty (120) days" appearing in subsection (b) of Section 4.3 of the Credit Agreement is hereby amended to read "ninety (90) days", and (b) subsections (d), (e), (f), (g), (h) and (i) of Section 4.3 of the Credit Agreement are hereby amended to read in their respective entireties as follows: (d) as soon as available, and in any event within fifteen (15) days after and as of each Borrowing Base Reporting Date, agings and reports of accounts receivable of Borrower and such of the Borrower Parties as may be required by the Bank, in form and detail satisfactory to Bank; (e) as soon as available, and in any event within thirty (30) days after and as of the end of each calendar month, agings and reports of accounts payable of Borrower and such of the Borrower Parties as may be required by the Bank, in form and detail satisfactory to Bank; (f) as soon as available, and in any event within fifteen (15) days after and as of each Borrowing Base Reporting Date, a listing of Inventory of Borrower and such of the Borrower Parties as may be required by the Bank, in form and detail satisfactory to Bank; (g) as soon as available, and in any event within fifteen (15) days after and as of each Borrowing Base Reporting Date, a stock status report of Inventory as is presently prepared by Borrower, and of agings and reports of both accounts receivable and accounts payable, in the form of Exhibit F attached to this Agreement; (h) simultaneously with the Financial Statements to be delivered to Bank pursuant to subsections (b) and (c) above, a Compliance Certificate certified as being true and correct by the chief financial officer or other officer acceptable to Bank of Borrower and, as applicable, each Borrower Party; (i) within fifteen (15) days after and as of each Borrowing Base Reporting Date, a Borrowing Base Certificate certified as being true and correct by the chief financial officer or other officer acceptable to Bank of Borrower and, as applicable, each Borrower Party; Section 2.3 Collateral Audits. Effective as of the date hereof, Section 4.14 of the Credit Agreement is hereby amended to read in its entirety as follows: 4.14 Collateral Audits. Permit Bank to conduct audits of any Borrower Party's Accounts and Inventory as often as Bank deems such audits to be desirable. Upon Bank's request, Borrower shall reimburse Bank for the reasonable costs and expenses expended by Bank in connection with such audits, such expenses not to exceed $5,000.00 per audit. Without limiting Bank's right to conduct more frequent audits, Bank acknowledges that it currently intends to conduct two (2) such audits of Accounts and Inventory during each successive 12 month period beginning on or after September 13, 2000; provided however, so long as no Event of Default has occurred and is continuing, any additional audit conducted by Bank shall be at the sole cost and expense of Bank. Section 2.4 Capital Structure, Business Objects or Purpose. Effective as of the date hereof, Section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows: 5.1 Capital Structure, Business Objects or Purpose. Except as hereinafter provided, purchase, acquire or redeem any of its equity ownership interests, or enter into any reorganization or recapitalization or reclassify its equity ownership interests, or make any material change in its capital structure or general business objects or purpose. Notwithstanding the foregoing, Conlin Bros., Inc may be dissolved, liquidated or merged into Borrower or Athletic Training Equipment Company, Inc., so long as such dissolution, liquidation or merger results in all assets of Conlin Bros., Inc. being owned by Borrower or Athletic Training Equipment Company, Inc. Section 2.5 Acquisitions. Effective as of the date hereof, Section 5.6 of the Credit Agreement is hereby amended to read in its entirety as follows: 5.6 Acquisitions. Purchase or otherwise acquire or become obligated for the purchase of all or substantially all of the assets or business interests of any Person or any shares of stock or other ownership interests of any Person or in any other manner effectuate or attempt to effectuate an expansion of present business by acquisition. Section 2.6 Dividends. Effective as of the date hereof, Section 5.7 of the Credit Agreement is hereby amended to read in its entirety as follows: 5.7 Dividends. Declare or pay dividends on, or make any other distribution (whether by reduction of capital or otherwise) in respect of any shares of its capital stock or other ownership interests. Section 2.7 Investments. Effective as of the date hereof, Section 5.8 of the Credit Agreement is hereby amended to read in its entirety as follows: 5.8 Investments. Make or allow to remain outstanding any investment (whether such investment shall be of the character of investment in shares of stock, evidences of indebtedness or other securities or otherwise) in, or any loans, advances or extensions of credit to, any Person, other than: (a) Borrower's current ownership interests in those Subsidiaries of Borrower identified on Schedule 3.5 attached hereto; and (b) any investment in direct obligations of the United States of America or any agency thereof, or in certificates of deposit issued by Bank, maintained consistent with Borrower's or such Subsidiary's business practices prior to the date hereof; provided, that no such investment shall mature more than ninety (90) days after the date when made or the issuance thereof. Section 2.8 Capital Expenditures. Effective as of the date hereof, Section 5.16 of the Credit Agreement is hereby amended to read in its entirety as follows: 5.16 Capital Expenditures. Acquire or expend for, or commit to acquire or expend for, capital assets by lease (including any Capitalized Lease Obligations), purchase or otherwise in an aggregate amount that exceeds $500,000 for the period from and including June 1, 2000 to and including March 31, 2001 or for any 12 month period ending thereafter. Section 2.9 Remedies. Effective as of the date hereof, Section 6.2 of the Credit Agreement is hereby amended to read in its entirety as follows: 6.2. Remedies Upon Event of Default. Upon the occurrence and at any time during the existence or continuance of any Event of Default, but without impairing or otherwise limiting the Bank's right to demand payment of all or any portion of the Indebtedness which is payable on demand, at Bank's option, Bank may give notice to Borrower declaring all or any portion of the Indebtedness remaining unpaid and outstanding, whether under the Notes or otherwise, to be due and payable in full without presentation, demand, protest, notice of dishonor, notice of intent to accelerate, notice of acceleration or other notice of any kind, all of which are hereby expressly waived, whereupon all such Indebtedness shall immediately become due and payable. Furthermore, upon the occurrence of a Default or Event of Default and at any time during the existence or continuance of any Default or Event of Default, but without impairing or otherwise limiting the right of Bank, if reserved under any Loan Document, to make or withhold financial accommodations at its discretion, to the extent not yet disbursed, any commitment by Bank to make any further loans to Borrower, issue any further Letters of Credit or effect any further Foreign Exchange Transactions for Borrower's account under this Agreement shall automatically terminate; provided, should such Default or Event of Default be cured to Bank's satisfaction, Bank may, but shall be under no obligation to, reinstate any such commitment by written notice to Borrower. Notwithstanding the foregoing, in the case of an Event of Default under Section 6.1(i), and notwithstanding the lack of any notice, demand or declaration by Bank, the entire Indebtedness remaining unpaid and outstanding shall become automatically due and payable in full, and any commitment by Bank to make any further loans to Borrower, issue any further Letters of Credit or effect any further Foreign Exchange Transactions for Borrower's account shall be automatically and immediately terminated, without any requirement of notice or demand by Bank upon Borrower, each of which are hereby expressly waived by Borrower. Furthermore, upon the occurrence of a Default or Event of Default and at any time during the existence or continuance of any Default or Event of Default, the Bank may record the Mortgage in the appropriate records of Calhoun County, Alabama, and Borrower shall pay or reimburse Bank for any and all filing fees, recording costs, mortgage tax, stamp tax or other amounts payable in connection therewith; and upon Bank's request, Borrower shall obtain and deliver to Bank or pay or reimburse Bank for obtaining an appraisal, survey, mortgagee title policy, environmental audit and such other documents and information as Bank may reasonably request. The foregoing rights and remedies are in addition to any other rights, remedies and privileges Bank may otherwise have or which may be available to it, whether under this Agreement, any other Loan Document, by law, or otherwise. Section 2.10 Successors and Assigns; Participation. Effective as of the date hereof, the last sentence of Section 7.7 of the Credit Agreement is hereby amended to read in its entirety as follows: Notwithstanding the foregoing, Bank will not assign to any third party more than forty-nine percent (49%) of its interests in any of the Loans, Notes or obligations to Bank under the Loan Documents without the prior written consent of Borrower; provided, however, that (a) no such consent by Borrower shall be required in the case of any assignment to any Affiliate of Bank, and (b) no such consent shall be required if any Default or Event of Default shall have occurred and be continuing. Section 2.11 New Definitions. Effective as of the date hereof, the Defined Terms Addendum to the Credit Agreement is hereby amended to add the following definitions, which definitions shall read in their respective entireties as follows: "Borrowing Base Reporting Date" means each of the 15th day of each calendar month and the last day of each calendar month. "Change in Control" shall mean (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), other than the Excluded Persons, of Equity Interests representing more than 51% of either the aggregate ordinary voting power or the aggregate equity value represented by the issued and outstanding Equity Interests in Borrower; or (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of Borrower by Persons who were not nominated by the board of directors of Borrower. "Equity Interests" shall mean shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person. "Excluded Persons" means (a) Emerson Radio Corp., a Delaware corporation, and its successors, Subsidiaries or other Affiliates, and (b) Geoffrey P. Jurick. "Leverage Ratio" shall mean, in respect of any Person and as of any applicable date of determination thereof, the ratio of (a) Debt as of such date to (b) EBITDA for the twelve-month period immediately preceding the date of determination thereof (excluding EBITDA of any entity acquired by Borrower during such twelve-month period for any portion of the period preceding the acquisition). "Swingline Loan" shall mean an advance made, or to be made, under the swingline facility to or for the credit of Borrower by the Bank pursuant to Section 1.3 of the Loan Terms, Conditions and Procedures Addendum. "Term Loan" shall mean the renewal, extension and modification, but not extinguishment or novation, of Indebtedness under the SAF Loan in the amount of $2,500,000, in accordance with Section 2.1 of the Loan Terms, Conditions and Procedures Addendum. "Term Note" shall mean the Variable Rate-Installment Note dated September 13, 2000, in the original principal amount of $2,500,000 made by Borrower payable to the order of the Bank, as the same may be renewed, extended, modified, increased or restated from time to time, such Term Note being in renewal, extension and modification, but not extinguishment or novation, of a portion of the Indebtedness evidenced by the SAF Note. Section 2.12 Amended Definitions. Effective as of the date hereof, the following definitions set forth in the Defined Terms Addendum to the Credit Agreement are hereby amended to read in their respective entireties as follows: "Borrowing Base Limitation" shall mean the sum of: (a) eighty-five percent (85%) of Eligible Accounts; and (b) the lesser of $20,000,000 or sixty percent (60%) of Eligible Inventory. "Current Liabilities" shall mean, in respect of a Person and as of any applicable date of determination, (a) all liabilities of such Person that should be classified as current in accordance with GAAP, but excluding any portion of the principal of the Indebtedness classified as current at such time, plus (b) to the extent not otherwise included, all liabilities of the Borrower to any of its Affiliates whether or not classified as current in accordance with GAAP. "Loans" shall mean, collectively, the Revolving Loans and the Term Loan, and "Loan" shall mean any of them. "Notes" shall mean, collectively, whether one or more, the Revolving Credit Note and the Term Note, and "Note" shall mean any of them. "Revolving Credit Maturity Date" shall mean October 2, 2002, or such earlier date on which the entire unpaid principal amount of all Revolving Loans becomes due and payable whether by the lapse of time, demand for payment, acceleration or otherwise; provided, however, if any such date is not a Business Day, then the Revolving Credit Maturity Date shall be the next succeeding Business Day. "Revolving Credit Maximum Amount" shall mean (a) the lesser of (i) $25,000,000 or (ii) the Borrowing Base Limitation. "Revolving Credit Note" shall mean the Revolving Credit Note dated September 13, 2000 in the original principal amount of $25,000,000 made by Borrower payable to the order of the Bank, as the same may be renewed, extended, modified, increased or restated from time to time, such Revolving Credit Note being in renewal, extension and modification, but not extinguishment or novation, of that certain Revolving Credit Note dated April 26, 1999, executed by Borrower and payable to the order of Bank in the original principal amount of $30,000,000. "Revolving Loans" shall mean an advance made, or to be made, under the revolving credit loan facility to or for the credit of Borrower by the Bank pursuant to the Loan Terms, Conditions and Procedures Addendum, and shall include Swingline Loans. "Unused Commitment Fee Percentage" shall mean the applicable percentage set forth below, which shall be determined from time to time in accordance with the following schedule based on the Leverage Ratio: Leverage Ratio Unused Commitment Fee Percentage -------------- -------------------------------- Equal to or greater than 3.5:1.0 0.35% Less than 3.5:1.0 0.15% Section 2.13 Financial Covenants. Effective as of the date hereof the Financial Covenants Addendum is hereby amended to read in its entirety as set forth on Annex I hereto. Section 2.14 Deleted Definitions. Effective as of the date hereof, Section 1.1 of the Defined Terms Addendum to the Credit Agreement is hereby amended to delete the definitions of "SAF Loan Maximum Amount" and "SAF Loan Termination Date" in their entireties. Section 2.15 Swingline Facility. Effective as of the date hereof, Section 1.3 of the Loan Terms, Conditions and Procedures Addendum to the Credit Agreement is hereby amended to add the following provisions to the end thereof: Subject to the terms and conditions of the Loan Documents, Borrower may request that Revolving Loans be made as Swingline Loans from time to time from September 13, 2000 until (but not including) the Revolving Credit Maturity Date, provided that the aggregate principal amount of Swingline Loans at any time outstanding shall not exceed $2,000,000. Borrower may use the swingline facility provided herein by borrowing, prepaying the Swingline Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions of the Loan Documents. The proceeds of each Swingline Loan shall be used by the Borrower solely for its short-term cash needs for working capital. Each Swingline Loan shall, from and after the date of such Swingline Loan, bear interest at a per annum rate equal to the Applicable Interest Rate provided in the Revolving Credit Note for the Prime Rate Balance (as defined in the Revolving Credit Note) and during the existence of an Event of Default at the Default Rate and shall be due and payable in accordance with the terms of the Revolving Credit Note. Borrower shall not be entitled to designate any Swingline Loan as a Eurodollar Balance (as defined in the Revolving Credit Note) or to convert any Swingline Loan to a Eurodollar Balance. Borrower may request Swingline Loans by submitting a Request for Advance in accordance with the foregoing provisions of this Section 1.3. Borrower and the Bank may enter into a separate agreement providing for Swingline Loans and principal reductions of Swingline Loans to occur automatically at such times as Borrower and the Bank may agree. So long as such an agreement is in effect, in addition to Borrower's right to request Swingline Loans by means of a Request for Advance and to make prepayments of Swingline Loans as provided in the Loan Documents for Revolving Loans, Swingline Loans and principal reductions of Swingline Loans will occur automatically in accordance with such Agreement. Section 2.16 Use of Proceeds. Effective as of the date hereof, Section 1.6 of the Loan Terms, Conditions and Procedures Addendum to the Credit Agreement is hereby amended to read in its entirety as follows: 1.6 Use of Proceeds of Revolving Loans. The proceeds of Revolving Loans shall be used for working capital needs of Borrower. Section 2.17 Fees. Effective as of the date hereof, Section 1.8 of the Loan Terms, Conditions and Procedures Addendum to the Credit Agreement is hereby amended to read in its entirety as follows: 1.8 Fees. (a) Unused Commitment Fee. Borrower shall pay to Bank an unused commitment fee in an amount equal to the product of (i) the Unused Commitment Fee Percentage multiplied by (ii) the difference between (A) $25,000,000 and (B) sum of the aggregate outstanding principal balance of all Revolving Loans plus the Letter of Credit Liabilities plus the Foreign Exchange Transaction Liabilities. Such fee shall be computed on a quarterly basis and shall be payable quarterly in arrears as of the end of each of Borrower's fiscal quarters. Bank shall invoice Borrower for such fees, which invoice shall be due and payable within fifteen (15) days after receipt. (b) Change in Control Fee. Upon the occurrence of any Change in Control, promptly and in any event within 90 days after such occurrence, Borrower shall pay to Bank a fee in the amount equal to (i) 1.00% of the Revolving Credit Maximum Amount if such Change in Control occurs prior to October 2, 2001, and (ii) 0.75% of the Revolving Credit Maximum Amount if such Change in Control occurs on or after October 2, 2001; provided, however, that such fee shall not be payable if Borrower refinances the Indebtedness with Bank or one of its direct Affiliates on or before the date such fee would otherwise be due. Neither Bank nor any of its Affiliates has any obligation to refinance the Indebtedness. Section 2.18 Letters of Credit. Effective as of the date hereof, the amount "5,000,000" appearing in subsection (a) of Section 1.9 of the Loan Terms, Conditions and Procedures Addendum to the Credit Agreement is hereby amended to read "$1,500,000". Section 2.19 Lock Box. Effective as of the date hereof, Section 1 of the Loan Terms, Conditions and Procedures Addendum to the Credit Agreement is hereby amended to add the following Section 1.11 thereto, which Section 1.11 shall read in its entirety as follows: 1.11 Lock Box; Crediting Collections. At any time, Bank may elect to require that Borrower and each other Borrower Party comply with the terms, provisions and covenants set forth in this Section 1.11. From and after such election, Borrower and each other Borrower Party which shall pledge or purport to pledge Accounts as security for all or any part of the Indebtedness, shall maintain, at all times during the term of this Agreement, a depository account ("Depository Account") and lock box ("Lockbox") arrangement acceptable to Bank. At any time during the term hereof and for any reason, upon notification to Borrower by Bank, Borrower and each other Borrower Party shall, in every invoice issued by Borrower or such other Borrower Party, direct all Account Debtors to send their payments directly to the post office box established by the aforesaid Lockbox arrangement. Each Depository Account shall be in the name of Bank. Borrower irrevocably authorizes and shall cause each such other Borrower Party to irrevocably authorize the Bank to transfer to the Depository Account any funds that have been deposited into any other accounts or that Bank has otherwise received. Except to the extent otherwise provided below, if Borrower or any such other Borrower Party receives any payments from any Account Debtor, Borrower hereby agrees and shall cause each such other Borrower Party to agree that all such payments shall be the sole and exclusive property of Bank, and such Borrower or Borrower Party, as applicable, shall hold such payments in trust as Bank's trustee and immediately deliver said payments to the Depository Account. Bank shall have all right, title and interest in all of the items from time to time in the Depository Account and their proceeds; provided, however, that until such time as Bank, in its sole discretion, delivers to Borrower a notice of activation of cash control (an "Activation Notice"), Borrower and/or such other Borrower Parties may withdraw amounts, if any, held in the Depository Account to pay ordinary and necessary operating expenses. The receipt of any check, wire transfer or other item of payment by Bank shall not be considered a payment on account until the Business Day on which, as of 10:00 A.M., Dallas, Texas time, the same is honored by Bank's depository bank with respect thereto and final settlement thereof is reflected by irrevocable credit to Bank's account in such bank. All payments so received by Bank shall be applied in payment of the Indebtedness in such order as Bank, in its sole discretion, may elect which may be, but shall not be limited to, the following: first, to Bank's costs and expenses; then, to interest; then, to principal on such Loans as Bank may elect (in inverse order of their maturities if principal amounts are due in installments); and then, to other Indebtedness. Section 2.20 SAF Loans; Term Loan. Effective as of the date hereof, (a) the commitment of Bank to make SAF Loans is hereby terminated, and no further SAF Loans will be made; (b) outstanding Indebtedness under the SAF Loans in the aggregate amount of $5,000,000 shall be renewed, extended and modified, but not extinguished, as a Revolving Loan under the Credit Agreement; and (c) the remaining outstanding Indebtedness under the SAF Loans in the aggregate amount of $2,500,000 shall be renewed, extended and modified, but not extinguished pursuant to a Term Note in the form of Annex III hereto (the "Term Note") and shall bear interest and be payable as provided therein. Accordingly, effective as of the date hereof, Section 2 of the Loan Terms, Conditions and Procedures Addendum to the Credit Agreement is hereby amended to delete Sections 2.1, 2.2 and 2.3 in their entireties, and such sections are hereby replaced with the following Sections 2.1 and 2.2, which sections shall read in their respective entireties as follows: Section 2.1. Term Loan. Subject to the terms and conditions of the Loan Documents, on and as of September 13, 2000, (a) the commitment of the Bank to make SAF Loans is terminated, and no further SAF Loans will be made; (b) the outstanding Indebtedness under the SAF Loans in the aggregate amount of $5,000,000 shall be renewed, extended and modified, but not extinguished, as a Revolving Loan, and (c) the remaining outstanding Indebtedness under the SAF Loans in the aggregate amount of $2,500,000 shall be renewed, extended and modified, but not extinguished, pursuant to the Term Note. Section 2.2. Repayment of and Interest on Term Loan. The Indebtedness from time to time outstanding under and evidenced by the Term Note shall bear interest at a rate per annum equal to the Applicable Interest Rate and during the existence of an Event of Default at the Default Rate and shall otherwise be repaid in accordance with the terms of the Term Note. Borrower shall not be permitted to reborrow any amounts repaid under the Term Note. Section 2.21 Excess Cash Flow. Effective as of the date hereof, Section 3 of the Loan Terms, Conditions and Procedures Addendum is hereby amended to add Section 3.9 to the end thereof, which Section 3.9 shall read in its entirety as follows: 3.9 Mandatory Prepayment of Excess Cash Flow. Following the end of each calendar month, commencing with the month ending August 31, 2000, Borrower shall prepay all or a portion of the Term Loan in an aggregate amount equal to the lesser of $100,000 or the amount by which EBITDA of Borrower and its Subsidiaries on a consolidated basis for such month exceeds the aggregate amount of all scheduled payments of principal and interest required or paid during such month in respect of any and all Debt of Borrower and its Subsidiaries on a consolidated basis, including without limitation Capitalized Lease Obligations and the scheduled payment on the Term Loan. Each prepayment pursuant to this Section shall be made on or before the date on which financial statements are delivered or required to be delivered, whichever is the first to occur, pursuant to Section 4.3 with respect to the month for which such calculation is being made. Section 2.22 Amendment to Exhibits. Effective as of the date hereof, (a) Exhibit A (Form of Borrowing Base Certificate) to the Credit Agreement is hereby amended to read in its entirety as set forth on Annex IV hereto, and (b) Exhibit B (Form of Compliance Certificate) to the Credit Agreement is hereby amended to read in its entirety as set forth on Annex V hereto. Article III Conditions Precedent Section 3.1 Conditions. The effectiveness of this Amendment is subject to satisfaction of the following conditions precedent, unless waived in writing by Bank: (a) Documents. Concurrently with the execution and delivery of this Amendment, Borrower shall execute (or cause to be executed) and deliver to Bank, and as appropriate there shall be filed and recorded, the following: (i) A Revolving Credit Note in the form of Annex II hereto (the "Revolving Note"), executed by Borrower, in renewal, extension and modification, but not extinguishment or novation, of the Indebtedness evidenced by the existing Revolving Credit Note and a portion of the Indebtedness evidenced by the SAF Note; (ii) The Variable Rate-Installment Note in the form of Annex III hereto (the "Term Note", and together with the New Revolving Note, the "Renewal Notes"), executed by Borrower, in partial renewal, extension and modification, but not extinguishment or novation, of the existing Indebtedness evidenced by the SAF Note; (iii) A Security Agreement (Intellectual Property) executed by each of Borrower and the Guarantor; (iv) Financing Statements required or requested by Bank to perfect all security interests to be conferred on Bank under the Loan Documents and to accord bank a perfected security position in the Collateral, subject only to Permitted Encumbrances; (v) Mortgage on the Property, executed by Borrower, provided that such Mortgage shall not be recorded unless and until an Event of Default occurs, as provided in the Credit Agreement; (vi) the Certificate of Corporate Authority and Incumbency including the Unanimous Consent of Board of Directors of Borrower and Guarantor; and (vii) such other documents and instruments as Bank may reasonably require. (b) Authority Documents. Bank shall have received: (i) copies of resolutions of the board of directors, of each Borrower Party evidencing approval of the transactions contemplated by the Loan Documents, and authorizing the execution, delivery and performance by each Borrower Party of each Loan Document to which it is a party or by which it is otherwise bound, which resolutions shall have been certified by a duly authorized officer, of each Borrower Party as of the date of this Amendment as being complete, accurate and in full force and effect; (ii) incumbency certifications of a duly authorized officer, of each Borrower Party, in each case, identifying those individuals who are authorized to execute the Loan Documents for and on behalf of such Person(s), respectively, and to otherwise act for and on behalf of such Person(s); (iii) certified copies of each of such Person(s)' certificates of incorporation and bylaws, and all amendments thereto; and (iv) certificates of existence, good standing and authority to do business, as applicable, certified substantially contemporaneously with the date of this Agreement, from the state or other jurisdiction of each of such Person(s)' organization. (c) Licenses, Permits, Approvals, Etc. To the extent necessary and applicable, Borrower shall have received any and all necessary authorizations, approvals and consents from all applicable Governmental Authorities in respect of the borrowing by Borrower of the Loans, the Loan Documents and the transactions contemplated by any Loan Document. (d) UCC Lien Search. Bank shall have received UCC, tax lien and judgment lien record and copy searches satisfactory to Bank. (e) Casualty Insurance. Borrower shall have furnished to Bank, or cause to have been furnished to Bank, in form and content and in amounts and with companies satisfactory to Bank, casualty insurance policies, with loss payable and mortgagee clauses in favor of Bank, relating to the assets and properties (including, but not limited to, the Collateral) of Borrower any applicable Borrower Party. (f) Approval of Bank Counsel. All actions, proceedings, instruments and documents required to carry out the borrowings and transactions contemplated by this Agreement or any other Loan Document or incidental thereto, and all other related legal matters, shall have been reasonably satisfactory to and approved by legal counsel for Bank, and said counsel shall have been furnished with such certified copies of actions and proceedings and such other instruments and documents as they shall have reasonably requested. (g) Compliance with Certain Documents and Agreements. Each Borrower Party shall have each performed and complied with all agreements and conditions contained in the Loan Documents applicable to it and which are then in effect. (h) Other Documents and Instruments. Bank shall have received such other instruments and documents (not inconsistent with the terms hereof) as Bank may reasonably request in connection with the making of the Loans hereunder, and all such instruments and documents shall be reasonably satisfactory in form and substance to Bank. (i) Representations and Warranties. The representations and warranties contained herein or in any Loan Documents shall be true and correct as of the date hereof, as if made on the date hereof. (j) No Event of Default. No Event of Default shall have occurred and be continuing and no Default shall exist, unless such Event of Default or Default has been specifically waived in writing by Bank. (k) Corporate and Partnership Proceedings. All corporate and partnership proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto, shall be satisfactory to Bank. (l) Fees, Costs and Expenses. Borrower shall have paid all fees, costs and expenses (including legal fees) incurred by Bank in connection with the Credit Agreement, this Amendment, the other Loan Documents and the transactions contemplated thereby, including without limitation the preparation, negotiation, execution, administration, filing and recording thereof, and an amount for payment of estimated post-closing fees and expenses. (m) Amendment Fee. Borrower shall have paid to Bank on the date hereof an amendment fee in the amount of $62,500, and any other fees payable pursuant to any other agreement between Borrower and Bank. Article IV Guarantor Consent Section 4.1 Guarantor Consent. Guarantor hereby joins in this Amendment to evidence Guarantor's consent to the execution by Borrower of this Amendment, to confirm that the Guaranty heretofore executed by Guarantor (the "Guaranty") applies and shall continue to apply to all Indebtedness of Borrower including the Renewal Notes, and to acknowledge that without such consent and confirmation, Bank would not execute this Amendment. Notwithstanding any payment or payments made by Guarantor under the Guaranty or any set-off or application of any of Guarantor's funds by Bank, Guarantor shall never be subrogated in any of Bank's rights against Borrower or any other person or entity or any Collateral or offset rights held by Bank for payment of the Indebtedness, nor shall Guarantor have any right of indemnity, reimbursement or contribution against Borrower or any other person or entity for Guarantor's payment of any part of the Indebtedness. Guarantor agrees that it shall never be entitled to be subrogated to any of Bank's rights against Borrower or any other person or entity or any Collateral or offset rights held by Bank for payment of the Indebtedness until complete performance of all of the obligations of Borrower and other applicable parties under the Loan Documents and final termination of Bank's obligation--if any--to make any further advances under the Notes or provide any other financial accommodations to Borrower or any other applicable party under the Loan Documents. The provisions of this paragraph shall control over any inconsistent provision set forth in the Guaranty. Article V Ratification, Representations and Warranties Section 5.1 Ratification. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Credit Agreement and any other Loan Document, and except as expressly modified and superseded by this Amendment, the terms and provisions of the Credit Agreement, and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Borrower and Bank agree that the Credit Agreement, as amended hereby and the other Loan Documents shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. Except as expressly set forth in this Amendment, nothing herein shall in any manner diminish, impair or extinguish the Notes, any of the Indebtedness evidenced thereby, or any of the other Loan Documents. Any and all security agreements, negative pledge agreements and other security documents heretofore executed and delivered by Borrower and Guarantor, or either of them, in connection with the Agreement, and all liens, assignments, security interests and covenants created, granted or evidenced thereby are hereby ratified, confirmed, brought forward, renewed and extended and shall continue as security for all of the Indebtedness, including without limitation the Renewal Notes, in addition to and cumulative of all other security for the Indebtedness. Section 5.2 Representations and Warranties. Borrower and Guarantor each hereby represent and warrant to Bank that (i) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and/or delivered in connection herewith have been authorized by all requisite corporate action on the part of Borrower and each Guarantor and will not violate the Articles of Incorporation or Bylaws of Borrower or any Guarantor; (ii) the representations and warranties contained in the Credit Agreement, as amended hereby, and any other Loan Document are true and correct on and as of the date hereof as though made on and as of the date hereof, except to the extent such representations and warranties relate to an earlier date; (iii) Borrower and Guarantor are in full compliance with all covenants and agreements contained in the Credit Agreement, as amended hereby; and (iv) all indebtedness, liabilities and obligations heretofore secured by any Lien on property or assets of Borrower or Guarantor, including without limitation patents, trademarks and the real property located in Calhoun County, Alabama, have been paid in full and as a result such Liens have been discharged. As soon as practicable after the date hereof, and in any event no later than September 30, 2000, Borrower and Guarantor shall deliver to Bank appropriate written releases in form and substance satisfactory to Bank of all such Liens, executed by the respective Lien holders. Article VI Miscellaneous Section 6.1 Survival of Representations and Warranties. All representations and warranties made in the Credit Agreement or any other document or documents relating thereto, including, without limitation, any Loan Document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Bank or any closing shall affect the representations and warranties or the right of Bank to rely upon them. Section 6.2 Reference to Agreement. Each of the Loan Documents, including the Agreement and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Credit Agreement, as amended hereby, are hereby amended so that any reference in such Loan Documents to the Credit Agreement shall mean a reference to the Credit Agreement, as amended hereby. Section 6.3 Expenses of Bank. As provided in the Agreement, Borrower agrees to pay on demand all reasonable costs and expenses incurred by Bank in connection with the preparation, negotiation and execution of this Amendment and the other Loan Documents executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including, without limitation, the reasonable costs and fees of Bank's legal counsel, and all reasonable costs and expenses incurred by Bank in connection with the enforcement or preservation of any rights under the Credit Agreement, as amended hereby, or any other Loan Document, including, without limitation, the reasonable costs and fees of Bank's legal counsel. Section 6.4 Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 6.5 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN DALLAS, TEXAS, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. Section 6.6 Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Bank and Borrower and their respective successors and assigns, except Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Bank. Section 6.7 Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. Section 6.8 Effect of Waiver. No consent or waiver, express or implied, by Bank to or for any breach of or deviation from any covenant or condition of the Credit Agreement shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. Section 6.9 Headings. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. Section 6.10 RELEASE. EACH OF BORROWER AND GUARANTOR HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES BANK, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH BORROWER OR GUARANTOR MAY NOW OR HEREAFTER HAVE AGAINST BANK, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY "ADVANCES", INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE AGREEMENT, OR THE OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT. NOTICE PURSUANT TO TEX. BUS. & COMM. CODE [S]26.02 THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF, INCLUDING THE GUARANTY, TOGETHER CONSTITUTE A WRITTEN CREDIT AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [Remainder of this page intentionally left blank] EXECUTED effective as of the date first set forth above. BANK: ---- COMERICA BANK-TEXAS, a state banking association By: ___________________ Name: ___________________ Title: ___________________ BORROWER: -------- SPORT SUPPLY GROUP, INC., a Delaware corporation By: ___________________ Name: ___________________ Title: ___________________ GUARANTOR: --------- ATHLETIC TRAINING EQUIPMENT COMPANY, INC., a Delaware corporation By: ___________________ Name: ___________________ Title: ___________________ __________________________ Witness to Guarantor Signature Page INDEX TO ANNEXES ---------------- ANNEX I - Financial Covenants Addendum ANNEX II - Revolving Credit Note ANNEX III - Term Note ANNEX IV - Form of Borrowing Base Certificate ANNEX V - Form of Compliance Certificate ANNEX I FINANCIAL COVENANTS ADDENDUM ---------------------------- SECTION 1. FINANCIAL COVENANTS 1.1 Historical Fixed Charge Coverage Ratio. Maintain a Historical Fixed Charge Coverage Ratio of not less than (a) 1.0:1.0 at all times during the period from and including March 31, 2000 to and including March 31, 2001, provided that Borrower shall be permitted to have a Historical Fixed Charge Coverage Ratio of not less than 0.95 to 1.00 in any two non-consecutive months, and (b) 1.5:1.0 at all times thereafter. 1.2 Debt-to-Tangible Net Worth Ratio. Maintain a Debt-to-Tangible Net Worth Ratio at all times of not more than 1.5:1.0. 1.3 Current Ratio. Maintain a Current Ratio at all times of not less than 1.5:1.0. ANNEX II REVOLVING CREDIT NOTE --------------------- ANNEX III TERM NOTE --------- ANNEX IV FORM OF BORROWING BASE CERTIFICATE ---------------------------------- This Borrowing Base Certificate for the period beginning _______________________ and ending _______________________ ("Current Period") is delivered pursuant to that certain Credit Agreement dated to be effective as of April 26, 1999 by and between COMERICA BANK - TEXAS ("Bank") and SPORT SUPPLY GROUP, INC. ("Borrower"), as amended by that certain First Amendment to Credit Agreement dated as of September 13, 2000 (such Credit Agreement, as the same has been and may be renewed, extended, amended, modified, supplemented or restated from time to time, the "Credit Agreement"). Terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement. Line ---- 1. Total Accounts _____________, ____ $_________ 2. Ineligible Accounts as of the end of the Current Period (See Credit Agreement): (a) All Accounts unpaid more than 90 days (120 days for ATEC Accounts) from the invoice date $_________ (b) All of the Accounts of Account Debtor(s) where 50% of the Accounts of such Account Debtor(s) are unpaid more than 90 days from invoice date, net of the amount included in Line 2(a) for Account Debtor(s) $_________ (c) Intercompany and Affiliate Accounts $_________ (d) Foreign Accounts (not secured by letter of credit) $_________ (e) Accounts subject to any dispute or set off or contra account $_________ (f) Other Accounts which do not satisfy the criteria set forth in the Credit Agreement for "Eligible Accounts" $_________ 3. Total ineligible Accounts as of the end of the Current Period (Add Line 2(a) through Line 2(f) $_________ 4. Total Eligible Accounts as of the end of the Current Period (Line 1 minus Line 3) $_________ 5. Accounts Advance Factor is 85% .85 6. Accounts component of Borrowing Base (Line 4 multiplied by Line 5) $_________ 7. Total Inventory (good and merchantable condition, not obsolete or discontinued, and properly classified as "raw materials" or "finished goods" under GAAP) as of the end of the Current Period. $_________ 8. Ineligible Inventory as of the end of the Current $_________ Period (See Credit Agreement) (a) Work in process, miscellaneous supplies, consigned goods, Inventory located outside U.S. and goods in transit $_________ (b) Inventory subject to repurchase, Lien or security interest (other than to Bank) $_________ (c) Inventory Bank has designated as ineligible $_________ 9. Total ineligible Inventory as of the end of the Current Period (Add Line 8(a) through Line 8(c) $_________ 10. Total Eligible Inventory as of the end of the current Period (Line 7 minus Line 9) $_________ 11. Inventory Advance factor is 60% .60 12. Inventory component of Borrowing Base (Lesser of $20,000,000, or Line 10 multiplied by Line 11) $_________ 13. Borrowing Base (Line 6 plus Line 12) $_________ 14. Enter lesser of $25,000,000 or Line 13 $_________ 15. Aggregate amount of Revolving Loans outstanding $_________ 16. Letter of Credit Liabilities $_________ 17. Foreign Exchange Transaction Liabilities $_________ 18. Amount available for borrowing, if positive, or amount to be repaid, if negative (Line 14 minus the sum of Lines 15, 16 and 17) $_________ The undersigned hereby certifies that the above information and computations are true and not misleading as of the date hereof, and that no Default or Event of Default has occurred and is continuing. BORROWER: -------- SPORT SUPPLY GROUP, INC., a Delaware corporation By: ___________________ Name: ___________________ Title: ___________________ ANNEX V FORM OF COMPLIANCE CERTIFICATE ------------------------------ This Compliance Certificate is executed and delivered to Comerica Bank- Texas ("Bank") by Sport Supply Group, Inc. ("Borrower") this ___ day of ____________, 19__. All capitalized terms used but not defined herein, shall have the meanings given to such terms in that certain Credit Agreement, dated as of April 26, 1999, between Bank and Borrower, as amended by that certain First Amendment to Credit Agreement dated as of September 13, 2000 (such Credit Agreement, as the same has been and may be renewed, extended, amended, modified, supplemented or restated from time to time, the "Credit Agreement"). The undersigned hereby certifies to Bank as follows: (1) The undersigned is the duly elected, qualified and acting ________ ___________ of Borrower and, as such, is authorized to make and deliver this Certificate. (2) The undersigned has reviewed the provisions of the Credit Agreement and confirms that, as of the date hereof: (a) the representations and warranties contained in Section 3 of the Credit Agreement are true and correct in all material respects on and as of the date hereof with the same force and effect as though made on and as of the date hereof; (b) no Default or Event of Default has occurred and is continuing, and Borrower has complied with all of the terms, covenants and conditions set forth in the Credit Agreement; and (c) attached hereto as Schedule A is a report prepared by the undersigned setting forth information and calculations that demonstrate compliance (or noncompliance) with each of the covenants set forth in the Financial Covenants Addendum to the Credit Agreement. The foregoing certificate is given in my capacity as _______________________ of Borrower, and not in my individual capacity. SPORT SUPPLY GROUP, INC., a Delaware corporation By: ___________________ Name: ___________________ Title: ___________________ SCHEDULE A TO COMPLIANCE CERTIFICATE ------------------------------------ 1. Historical Fixed Charge Coverage Ratio (a) EBITDA for the twelve (12) immediately preceding months, excluding EBITDA for such period of any entities acquired during such period $_________ (b) Aggregate of (i) Current Maturities Under Capitalized Lease Obligations, (ii) Current Maturities of Long Term Indebtedness and (iii) interest payments due for 12-month period following the date of determination $_________ (c) Historical Fixed Charge Coverage Ratio [(a) to (b)]: ___ to 1.0 (d) Financial Covenants Addendum presently requires the Historical Fixed Charge Coverage Ratio to be not less than: ___ to 1.0 Covenant Satisfied ______________________ Covenant Not Satisfied ______________________ Covenant Not Tested ______________________ 2. Debt-to-Tangible Net Worth Ratio (a) Borrower's Debt (less Subordinated Debt) $_________ (b) Borrower's Tangible Net Worth: $_________ (c) Ratio of (i) Borrower's Debt (less Subordinated Debt) to (ii) Borrower's Tangible Net Worth [(a) to (b)]: ___ to 1.0 (d) Financial Covenants Addendum presently requires the Debt to Tangible Net Worth Ratio to be not more than: 1.5 to 1.0 Covenant Satisfied ______________________ Covenant Not Satisfied ______________________ Covenant Not Tested ______________________ 3. Current Ratio (a) Borrower's Current Assets $_________ (b) Borrower's Current Liabilities $_________ (c) Ratio of (i) Borrower's Current Assets to (ii) Borrower's Current Liabilities [(a) to (b)]: ___ to 1.0 (d) Financial Covenants Addendum presently requires Borrower to maintain a Current Ratio of not less than: 1.5 to 1.0 Covenant Satisfied ______________________ Covenant Not Satisfied ______________________ Covenant Not Tested ______________________ 4. Excess Cash Flow (a) EBITDA for immediately preceding month $_________ (b) Aggregate of all scheduled payments of principal and interest required or paid during such month in respect of all Debt, including Capitalized Lease Obligations and the scheduled payment on the Term Loan $_________ (c) Excess Cash Flow [Line (a) minus Line (b)] $_________ 1 (a) 1.0:1.0 at all times during the period from and including March 31, 2000, to and including March 31, 2001, provided that Borrower shall be permitted to have a Historical Fixed Charge Coverage Ratio of not less than 0.95 to 1.00 in any two non-consecutive months, and (b) 1.5:1.0 at all times thereafter. EX-21 3 0003.txt EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Athletic Training Equipment Company, Inc. ("ATEC") Sport Supply Group Asia ("SSGA") EX-23.1 4 0004.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement Form S-3 No. 33-71574 of Sport Supply Group, Inc. and in the related Prospectus and in the Registration Statements on Form S-8 No. 33-42056, 33-48514, 33-80028, 333-27191, 333-27193, and 333-36314 of our report dated November 20, 2000, except for Note 3 as to which the date is December 27, 2000, with respect to the consolidated financial statements of Sport Supply Group, Inc. included in this Form 10-K for the year ended September 29, 2000. ERNST & YOUNG LLP Dallas, Texas December 27, 2000 EX-27 5 0005.txt
5 12-MOS SEP-29-2000 SEP-29-2000 112,017 0 21,591,525 836,000 19,853,059 44,886,443 23,552,976 11,131,183 73,686,815 14,115,206 0 0 0 93,507 40,443,757 73,686,815 113,333,785 113,333,785 77,163,836 36,606,601 16,924 0 2,021,763 (2,441,491) (923,885) (1,517,606) 0 0 0 (1,517,606) (0.21) (0.21)
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