UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the quarterly period ended July 28, 1996
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 1-13322
Sports & Recreation, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1643157
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) identification number)
4701 W. Hillsborough Avenue Tampa, FL 33614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 813/886-9688
Former name, former address and former fiscal year, if changed since last
report
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date 20,008,758 as of July 28, 1996.
<PAGE>
SPORTS & RECREATION, INC.
Index to Form 10-Q
July 28, 1996
Page Number
Part I - Financial Information
Item 1 - Financial Statements
Condensed Balance Sheets 3
Statements of Operations 4
Statements of Stockholders' Equity 5
Statements of Cash Flows 6
Note to Financial Statements 7
Item 2 - Management's Discussion and Analysis 8
Part II - Other Information 12
Signatures 13
<PAGE>
SPORTS & RECREATION, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
January 28, 1996 July 28, 1996
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $3,590 $3,259
Inventories 236,234 210,774
Other current assets 9,223 25,802
Total current assets 249,047 239,835
Property and Equipment - net 218,269 272,824
Other Assets 17,527 17,563
Total Assets $484,843 $530,222
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term liabilities $497 $497
Accounts payable and other current liabilities 57,576 71,774
Total current liabilities 58,073 72,271
Long term liabilities, less current maturities 239,240 303,399
Total liabilities 297,313 375,670
Stockholders' Equity
Common stock, $.01 par value, 100,000,000 shares
authorized, 19,769,059 and 20,008,758 issued
and outstanding, respectively 198 200
Additional paid-in capital 147,006 147,604
Retained earnings 40,326 6,748
Total stockholders' equity 187,530 154,552
Total Liabilities & Stockholders' Equity $484,843 $530,222
See Note to Financial Statements.
3
<PAGE>
SPORTS & RECREATION, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 30, July 28, July 30, July 28,
1995 1996 1995 1996
Sales $124,935 $169,014 $235,678 $312,672
Cost of sales including
buying & occupancy costs 91,997 152,388 176,750 263,223
Gross Profit 32,938 16,626 58,928 49,449
Non-recurring and other charges --- 32,763 --- 32,763
Operating expenses 24,431 31,512 45,729 61,207
Income (loss) from operations 8,507 (47,649) 13,199 (44,521)
Interest expense 2,525 5,066 4,416 8,751
Income (loss) before
provision (benefit)
for income taxes 5,982 (52,715) 8,783 (53,272)
Provision (benefit) for
income taxes 2,241 (19,482) 3,324 (19,694)
Net Income (loss) $3,741 $(33,233) $5,459 $(33,578)
Net income (loss) per
common share $0.19 $(1.67) $0.27 $(1.69)
Weighted average shares
outstanding 20,090 19,918 20,121 19,858
Stores opened during period 6 1 11 5
Stores open at end of period 67 85 67 85
See Note to Financial Statements.
4
<PAGE>
SPORTS & RECREATION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWENTY-SIX WEEKS ENDED JULY 30, 1995 AND JULY 28,
1996
(IN THOUSANDS)
(UNAUDITED)
Additional
Common Stock Paid in Retained
Shares Par Value Capital Earnings Total
Balance, January 29, 1995 19,723 $197 $146,595 $33,330 $180,122
Issuance of common stock 21 158 158
Tax benefit from exercise of
options 37 37
Net income 5,459 5,459
Balance July 30, 1995 19,744 $197 $146,790 $35,048 $185,776
Balance, January 28, 1996 19,769 $198 $147,006 $40,326 $187,530
Issuance of common stock 240 2 598 600
Tax benefit from exercise of options
Net loss (33,578) (33,578)
Balance July 28, 1996 20,009 $200 $147,604 $6,748 $154,552
See Note To Financial Statements.
5
<PAGE>
SPORTS & RECREATION, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Twenty-Six Weeks Ended
July 30, 1995 July 28, 1996
Decrease in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss) 5,459 (33,578)
Adjustments to reconcile net
income to cash used in operating activities:
Depreciation and amortization 2,800 4,150
Gain on asset sales --- (223)
Goodwill amortization 171 171
Deferred loan cost amortization 254 262
Non-recurring & other charges --- 32,763
Deferred income tax expense (benefit) 3,681 (17,607)
Decrease (increase) in accounts receivable (557) 850
Decrease (increase) in inventories (40,504) 25,460
Decrease (increase) in prepaid expenses and other 345 (1,801)
Decrease in other assets (240) (1,474)
Increase (decrease) in accounts payable 18,735 (11,114)
Increase in accrued expenses 1,198 5,742
Increase in other current liabilities 561 1,582
Increase in deferred rent 180 221
Increase (decrease) in income taxes payable (3,095) 398
Net cash used in operating activities (11,012) 5,802
Cash flow from investing activities:
Capital expenditures (34,969) (7,806)
Net collections under note receivable 190 25
Net cash used in investing activities (34,779) (7,781)
Cash flows from financing activities:
Proceeds from sale of common stock-net and
tax benefit of options exercised 196 600
Stock purchase loan --- (304)
Net borrowings under
revolving credit agreements 45,553 4,345
Repayments of long term debt (220) (267)
Loan costs --- (2,726)
Net cash provided by financing activities 45,529 1,648
Net (decrease) increase in cash
and cash equivalents (262) (331)
Cash, beginning of period 4,904 3,590
Cash, end of period $4,642 $3,259
6
<PAGE>
SPORTS & RECREATION, INC.
NOTE TO FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all material adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Interim results are not necessarily indicative of results for a full year.
The financial statements should be read in conjunction with the audited
financial statements and notes thereto for the fiscal year ended January 28,
1996 contained in the Company's Form 10-K dated April 26, 1996.
(2) Contingencies
Pending Litigation - In March 1995, two identical actions were filed
against the Company, its executive officers and certain of its directors. During
Fiscal 1995, the two actions were merged into one class action suit which is
currently pending certification by the court. The lawsuit purports to be on
behalf of purchasers of the Company's common stock from July 14, 1994 through
March 13, 1995. The complaint asserts claims under the federal securities laws,
and alleges that the Company artificially inflated the price of its common stock
during the class period. The complaint did not specify the amount of damages
sought. The claim is currently being negotiated for settlement.
(3) Subsequent Events
Subsequent to July 29, 1996, the Company entered into $40 million of
interest rate swap transactions, with an effective date of August 12, 1996.
These agreements were the result of the June 6, 1996 Bank Credit Agreement. The
Company is currently negotiating with AMR for a Distribution and Logistics
Agreement.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations for the second quarter of fiscal 1996 should be read in conjunction
with the discussion and analysis set forth in Form 10-K filed April 26, 1996 for
the fiscal year ended January 28, 1996.
The Company opened one new store in Augusta, Georgia during the quarter and
operates 85 stores in 29 states. On June 4, 1996 the Company entered into a $285
million, 2-year Revolving Credit Facility with a group of banks. The new credit
facility combined the prior $200 million dollar facility and the $85 million tax
retention operating lease.
Results of Operations
The Company announced in June 1996 that it would take one-time charges in
the range of $50 million to $60 million in its second quarter. The components of
the $55 million in charges are as follows:
Cost of Sales:
Inventory write down for obsolete
and slow-moving merchandise $22.8
-----
Non-recurring and other charges:
Disposition of and imparement of
under performing assets $30.1
Provisions related to employee benefits 5.5
Charges for certain litigation matters 3.5
Other charges 3.7
----
$32.8
-----
Total $55.0
=====
The following table sets forth certain operating data as a percentage of
sales for the periods indicated:
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 30, July 28, July 30, July 28,
1995 1996 1995 1996
--------- --------- ------- ---------
Sales 100.0% 100.0% 100.0%
Cost of sales including buying
and occupancy costs 73.6 90.2 75.0 84.2
----- ------- ------ ------
Gross profit 26.4 9.8 25.0 15.8
Non-recurring &other charges -- 19.4 -- 10.5
Operating expenses 19.6 18.6 19.4 19.6
----- ------- ----- ------
Income from operations 6.8 (28.2) 5.6 (14.2)
Interest expense-net 2.0 3.0 1.9 2.8
----- ------- ----- ------
Income before provision
for income taxes 4.8 (31.2) 3.7 (17.0)
Provision for income taxes 1.8 (11.5) 1.4 (6.3)
----- ------- ----- ------
Net Income 3.0% (19.7)% 2.3% (10.7)%
===== ======= ===== ======
8
<PAGE>
Thirteen Weeks Ended (Second Quarter) July 28, 1996 Compared To Thirteen
Weeks Ended July 30, 1995
The Company opened one new store in its second quarter compared to six new
stores in the same quarter last year, ending the quarter with 85 stores this
year compared to 67 stores last year.
Sales for the second quarter increased 35.3% to an all-time record of $169.0
million compared with sales of $124.9 million in the second quarter of the prior
year. Same store sales for the second fiscal quarter increased by 8.2%. While
these same store sales were very favorable, they are not comparable due to the
substantial influence of a company wide-inventory clearance sale which began in
mid-June. During the quarter, the company sold $18.2 million of clearance-
related merchandise. It is not possible for management to compute the impact
that the sale had on same store sales, however, the Company was experiencing
slightly positive comparable store sales prior to the start of the inventory
clearance.
Gross profit for the second quarter was $16.6 million, or 9.8% of sales, as
compared to $32.9 million or 26.4% of sales for the second quarter of the prior
year. The primary difference in gross margin relates to the inventory write down
and the ensuing clearance sales. The following table illustrates the impact of
these two events on the reported gross margin.
(dollars in thousands) Thirteen Weeks Ended
July 30, 1995 July 28, 1996
% $ % $
Reported gross margin 26.4% $32.9 7.8% $16.6
Effect of the $22.2 million
inventory write down ---- ---- 13.2 22.2
Effect of selling $18 million
of clearance merchandise at
zero gross profit ---- ---- 2.7% 0
Adjusted gross margin 26.4% $32.9 25.7% $38.8
===== ===== ===== =====
Of the 70 basis point difference, 40 basis points relate to higher buying and
occupancy costs in the current quarter than the prior year.
Operating expenses for the first quarter were $31.5 million, or 18.6% of
sales, as compared to $24.4 million, or 19.6% of sales, for the second quarter
of the prior year. This decrease as a percentage of sales was achieved primarily
through a 119 basis point reduction in payroll and payroll related expenses
compared to the prior year.
Loss from operations in the second quarter was $47.6 million, or (28.2)% of
sales, due to the $55 million charge previously discussed. The Company posted
income from operations of $8.5 million, or 6.8% of sales, in the prior year.
Interest expense for the second quarter increased to $5.1 million, or 3.0%
of sales, as compared to $2.5 million, or 2.0% of sales for the prior year's
second quarter. Approximately half of the increase was due to increased
borrowings under the Company's $285 million revolving credit facility, and the
other half of the increase was due primarily to lower capitalized interest. The
Company's revolving credit facility increased primarily due to the $58 million
tax retention operating lease being combined into the facility.
Due to the pre-tax loss resulting from the aforementioned charges, the
Company recorded an estimated tax benefit of $19.5 million at an effective tax
rate of 37%. In the prior year, the Company recorded a tax expense of $2.2
million at an effective tax rate of 37.5%.
For the second quarter the Company posted a net loss of $33.2 million or
(19.7)% of sales, as compared to net income of $3.7 million or 3.0% of sales,
for the same quarter of the prior year. The net loss in the second quarter of
this year was attributable to the after-tax effect ($34.6 million) of the
charges discussed above.
9
<PAGE>
Twenty-Six Weeks Ended July 28, 1996 Compared To Twenty-Six Weeks
Ended July 30, 1995
The Company opened 5 new stores in its first half compared to eleven new
stores in the same twenty-six weeks last year.
Sales for the first twenty-six weeks this year increased 32.7% to a record
first half sales of $312.7 million compared to sales of $235.7 million in the
comparable period last year. Same store sales for this twenty-six week period
increased 4.1%. While these same store sales were favorable, they are not truly
comparable, because sales were influenced by an inventory clearance in the
second quarter of this fiscal year.
Gross profit for the twenty-six week period of the current year was $49.4
million, or 15.8% of sales, as compared to $58.9 million, or 25.0% of sales for
the prior year. The Company incurred an inventory write-down charge of $22.2
million, or 7.1% of sales, discussed more fully above.
In addition to the $22.2 million inventory charge, the Company incurred a
$32.8 million charge in the second quarter of the current year, for
non-recurring and other charges discussed above.
Operating expenses for the twenty-six weeks of the current year were $61.2
million, 19.6% of sales, as compared to $45.7 million, or 19.4% of sales, for
the twenty-six weeks of the prior year. The increase as a percent of sales was
due to first quarter operating expenses incurred by stores open less than one
year.
Loss from operations in the twenty-six weeks of this year was $44.5 million
or (14.2)% of sales as compared to income of $13.2 million, or 5.6% of sales, in
the twenty-six weeks of the prior year. The loss in the current year was
attributable to the $55 million in charges taken in the second quarter of the
current year.
Interest expense for the first half of the current year was $8.8 million or
2.8% of sales, as compared to $4.4 million, or 1.9% of sales, for the comparable
period in the prior year. Approximately half of the increase was the result of
increased borrowings on the Company's revolving credit facility and the other
half of the increase was due primarily to lower capitalized interest.
The Company's income tax benefit for the first quarter was $19.7 million
with an effective tax benefit of 37.0% compared to a tax expense of $3.3 million
in the prior year with an effective tax rate of 37.9%.
The Company posted a net loss of $33.6 million or (10.7)% of sales, as
compared to a net income of $5.5 million or 2.3% of sales for the same period of
the prior year. The net loss for the twenty-six week of the current year was
attributable to $55 million of charges for inventory, non-recurring and other
items incurred in the second quarter resulting in a net charge after-tax of
$34.6 million.
10
<PAGE>
Liquidity and Capital Resources
The Company's primary capital requirements have been to support capital
investment for new stores, to purchase inventory for new stores, to meet
seasonal working capital needs, and to retire indebtedness. Historically, the
Company's working capital needs peak in the fiscal fourth quarter.
Operating activities provided cash of $5.8 million for the twenty-six weeks
of fiscal 1996 as compared to cash used of $11.0 million for the same period of
fiscal 1995. The improvement was primarily due to decreased inventories
associated with the inventory clearance sale during the second quarter. The
positive cash impact caused by the decrease in inventories was partially offset
by decreased leverage on trade accounts payable.
Net cash of $7.8 million was used in investing activities during the first
twenty-six weeks of fiscal 1996 compared to net cash used in investing during
the first twenty-six weeks of fiscal 1995 of $34.8 million. This decrease was
primarily related to new store construction. In the current year, the Company
completed construction on five new stores. Last year, the Company had completed
eleven new stores and had six others under construction.
Cash flows from financing activities provided $1.6 million for the first
twenty-six weeks of 1996 compared to $45.5 million for the first twenty-six
weeks of fiscal 1995. The decrease was due to lower borrowings on the Company's
revolving line of credit from the prior year, the result of lower investing
activities for new stores and increased cash from the inventory clearance.
As of July 28, 1996, the Company had $3.0 million of capital lease
obligations and $74.8 million of 4 1/4% Convertible Subordinate Notes Due 2000
outstanding and had drawn $219.4 million on its $285.0 million revolving credit
facility.
During the second quarter of the current year, the Company terminated the
existing $200 million revolving credit facility and its $85 million lease
facility and entered into a new two year $285 million revolving line of credit.
The credit facility limits the amount of capital expenditures to $16 million for
fiscal 1996.
Management believes its current cash position, along with expected net cash
provided by operating activities and its $285 million of credit facility will be
sufficient to fund its store expansion and working capital requirements.
Seasonality and Inflation
The Company's business is seasonal in nature, with its highest sales and
operating profitability historically occurring during the fiscal fourth quarter,
which includes the Christmas selling season. The Company recorded 32.8% of its
sales and 30.5% of its income from operations, prior to the one time $2,096
charge for management change and store relocation charges, in the fourth quarter
in fiscal 1995. In the future, the number and timing of the opening of new
stores may impact this historical trend.
The Company does not believe that inflation had a material effect on its
results from operations for the first twenty-six weeks of fiscal 1996 or 1995.
There can be no assurance, however, that Company's business will not be affected
by inflation in the future.
11
<PAGE>
SPORTS & RECREATION, INC.
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of the Security-Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
1) Exhibits.
Exhibit 11 - Weighted Average Shares Outstanding Calculation
Exhibit 27 - Financial Data Schedule
2) Reports on Form 8-K.
On or about April 20, 1996, the Company filed with the Commission a
current report on Form 8-K (including the exhibit thereto) dated
April 15, 1996 relating to a change in the Company's Certifying
Accountants.
12
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sports & Recreation, Inc.
(Registrant)
9/11/96 /S/ Stephen Bebis
Date Chairman of the Board, Chief
Executive Officer and President
9/11/96 /S/ Raymond P. Springer
Date Executive Vice President and
Chief Financial Officer
13
SPORTS & RECREATION, INC.
EXHIBIT 11
WEIGHTED AVERAGE SHARES OUTSTANDING CALCULATION
FOR THE PERIOD ENDED JULY 28, 1996
PRIMARY
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 28, 1996 July 28,1996
Weighted average common
stock shares outstanding 19,918,395 19,858,470
Weighted average stock
issued assuming exercise
of stock options using the
treasury stock method at average
market price 0 (1) 0 (1)
Total weighted average
shares outstanding 19,918,395 19,858,470
Net Loss $(33,233,323) $(33,577,963)
Primary Loss Per Share $(1.67) $(1.69)
FULLY DILUTED
Weighted average common
stock shares outstanding 19,918,395 19,858,470
Weighted average stock
issued assuming exercise
of stock options using the
treasury stock method at
the higher of average market
price or ending market price 0 (1) 0 (1)
Weighted average stock issued
assuming the as adjusted method
for the 4 1/4% Convertible Subordinated
Notes Due 2000 0 (2) 0 (2)
Total weighted average
shares outstanding 19,918,395 19,858,470
Net loss as reported $(33,233,323) $(33,577,963)
Interest adjustment net of
tax for the 4 1/4% Convertible
Subordinated Notes 0 (2) 0 (2)
Net Loss $(33,233,323) $(33,577,963)
Fully diluted loss per $(1.67) $(1.69)
(1) Not reported under GAAP as conversion would be anti-dilutive.
(2) Not reported under GAAP as conversion would be anti-dilutive, and dilution
less than 3%.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SPORTS & RECREATION, INC. FOR THE
SIX MONTHS ENDED
JULY 28, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jan-28-1996
<PERIOD-START> Jan-29-1996
<PERIOD-END> Jul-28-1996
<CASH> 3,259
<SECURITIES> 0
<RECEIVABLES> 4,077
<ALLOWANCES> 0
<INVENTORY> 210,774
<CURRENT-ASSETS> 239,835
<PP&E> 293,949
<DEPRECIATION> 21,125
<TOTAL-ASSETS> 530,222
<CURRENT-LIABILITIES> 77,271
<BONDS> 74,750
200
0
<COMMON> 0
<OTHER-SE> 154,352
<TOTAL-LIABILITY-AND-EQUITY> 530,222
<SALES> 312,672
<TOTAL-REVENUES> 312,672
<CGS> 252,323
<TOTAL-COSTS> 263,223
<OTHER-EXPENSES> 93,970
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,751
<INCOME-PRETAX> (53,272)
<INCOME-TAX> (19,694)
<INCOME-CONTINUING> (33,578)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,578)
<EPS-PRIMARY> (1.69)
<EPS-DILUTED> (1.69)
</TABLE>
