SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended: October 27, 1996
Commission File Number: 0-20672
SPORTMART, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2702213
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 South Wolf Road, Wheeling, Illinois 60090
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (847) 520-0100
Indicate by check mark whether the registrant 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).
Yes X No
Indicate by check mark whether the registrant has been subject to
such filing requirements for the past 90 days.
Yes X No
As of December 3, 1996, there were 5,148,833.5 shares of Voting
Common Stock, par value $.01, and 7,694,734.5 shares of Class A Common
Stock, par value $.01, of the registrant outstanding.
<PAGE>
SPORTMART, INC.
QUARTERLY PERIOD ENDED OCTOBER 27, 1996
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of October 27, 1996
and January 28, 1996 . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the thirteen
weeks ended October 27, 1996 and October 29, 1995 and
the thirty-nine weeks ended October 27, 1996 and
October 29, 1995 . . . . . . . . . . . . . . 2
Consolidated Statements of Stockholders' Equity
for the thirty-nine weeks ended October 27, 1996 and
the fifty-two weeks ended January 28, 1996 . . 3
Consolidated Statements of Cash Flows for the thirty-
nine weeks ended October 27, 1996 and October 29, 1995 . 4
Notes to Consolidated Financial Statements . . 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . 8-13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . 15
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-i-
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 27, 1996 AND JANUARY 28, 1996
(Amounts in thousands, except share data)
ASSETS October 27, January 28,
1996 1996
(unaudited)
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Current assets:
Cash and cash equivalents $ - $ 4,017
Due from related parties 1,404 1,348
Merchandise inventories 190,553 174,952
Prepaid expenses and other assets 10,468 16,442
Advertising co-op receivable 6,259 5,547
Assets held pending sale and leaseback 4,284 2,883
Deferred income taxes 4,347 4,347
Total current assets 217,315 209,536
Property and equipment, net 73,588 72,040
Other assets 4,822 3,745
Deferred income taxes 2,220 2,178
$297,945 $287,499
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 289 $ -
Revolving line of credit due 2001
(See Note 6) 104,706 -
Bank notes payable - 18,213
Current portion of long-term debt and
capitalized lease obligations 299 7,221
Accounts payable 60,723 67,297
Accrued expenses:
Salaries and wages 3,236 3,297
Taxes other than income 6,085 6,912
Advertising 1,160 7,959
Other 10,372 18,314
Total current liabilities 186,870 129,213
Long-term bank notes payable - 30,000
Long-term debt, net of current portion - 18,800
Capitalized lease obligations, net of
current portion 3,489 4,008
Other long-term liabilities 5,590 4,682
195,949 186,703
Commitments and contingencies - -
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Stockholders' equity:
Preferred stock; $.01 par value;
5,000,000 shares authorized; none issued - -
Voting common stock; $.01 par value;
50,000,000 shares authorized; 5,148,833
shares issued and outstanding on October
27, 1996 and January 28, 1996 52 52
Class A common stock, non-voting;
$.01 par value, 50,000,000 shares
authorized; 7,694,734 and 7,625,538
shares issued and outstanding on October
27, 1996 and January 28, 1996,
respectively 76 76
Additional paid-in capital 79,842 79,637
Cumulative translation adjustment (32) (12)
Retained earnings 22,058 21,043
Total stockholders' equity 101,996 100,796
$297,945 $287,499
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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<TABLE> SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share data)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 27, October 29, October 27, October 29,
1996 1995 1996 1995
(restated) (restated)
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Net sales $111,659 $105,020 $373,948 $342,107
Cost of sales, including
buying, distribution and
occupancy 87,005 81,592 286,581 262,015
Gross profit 24,654 23,428 87,367 80,092
Operating expenses:
Store 21,545 20,767 63,913 59,731
General and administrative 4,739 4,130 14,230 11,931
Store pre-opening 406 674 907 1,135
Operating (loss) income (2,036) (2,143) 8,317 7,295
Other income (expense):
Interest expense, ne (2,106) (1,233) (6,019) (3,427)
Other income 555 482 241 740
(1,551) (751) (5,778) (2,687)
(Loss) income from continuing
operations before income taxes (3,587 (2,894) 2,539 4,608
Income tax benefit (provision) 1,507 1,216 (1,062) (1,927)
(Loss) income from continuing
operations (2,080) (1,678) 1,477 2,681
Loss from discontinued operations,
(net of income tax benefit of $8
and $216 for the 13 and 39 weeks
ended October 29, 1995,
respectively) - (12) - (323)
(Loss) income before extraordinary
item (2,080) (1,690) 1,477 2,358
Extraordinary item,( net of income
tax benefit of $335 for the 13 and
39 weeks ended October 27, 1996 (462) - (462) -
Net (loss) income $ (2,542) $ (1,690) $ 1,015 $ 2,358
Net (loss) income per share from
continuing operations $ (.16) $ (.13) $ .12 $ .21
Net loss per share from
discontinued operations - - - (.03)
Net loss per share from extra-
ordinary item (.04) - (.04) -
Net (loss) income per share $ (.20) $ (.13) $ .08 $ .18
Weighted average number of
common shares outstanding 12,835,137 12,774,370 12,823,434 12,771,091
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
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<TABLE>
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
Voting Class A Additional Cumulative Total
Common Stock Common Stock Paid-in Translation Retained Stockholder's
Shares Amount Shares Amount Capital Adjustment Earnings Equity
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Balances, January 29, 1995 5,125,537 $ 52 7,625,538 $ 76 $79,431 - $27,488 $107,047
Issuance of 23,296 common
shares under stock
purchase plan 23,296 - - - 206 - - 206
Cumulative translation
adjustment - - - - - $(12) - (12)
Net loss - - - - - - (6,445) (6,445)
Balances, January 28, 1996 5,148,833 52 7,625,538 76 79,637 (12) 21,043 100,796
Issuance of 60,766 of Class A
common shares under stock
purchase plan - - 60,766 - 173 - - 173
Exercise of stock options - - 8,430 - 32 - - 32
Cumulative translation adjustment - - - - - (20) - (20)
Net income - - - - - - 1,015 1,015
Balances, October 27, 1996
(unaudited) 5,148,833 $52 7,694,734 $76 $79,842 $ (32) $22,058 $101,996
The accompanying notes are an intgeral part of these
consolidated financial statements.
</TABLE>
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<TABLE>
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Thirty-nine Weeks Ended
October 27, October 29,
1996 1995
(restated)
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Cash flows from operating activities:
Net income from continuing operations $ 1,477 $ 2,681
Loss from discontinued operations - (323)
Extraordinary item, net of tax (462) -
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortizati on 8,363 6,368
Gain on disposition of capital lease - (322)
Other adjustment (20) 156
Deferred income tax provision (42) -
Net (increase) decrease in assets:
Merchandise inventories (15,601) (66,153)
Prepaid expenses and other assets 5,974 (4,309)
Advertising co-op receivable (712) 2,538
Other assets-noncurrent (1,076) (1,712)
Net increase (decrease) in liabilities:
Accounts payable (6,574) 54,058
Accrued expenses (14,285) (10,607
Other long-term liabilities 908 796
Net cash used in operating activities (22,050) (16,829)
Cash flows from investing activities:
Purchase of property and equipment (11,693) (16,933)
Purchase of assets held pending sale and
leaseback (1,401) (3,087)
Advances to related parties (373) (373)
Repayment of advances to related parties 318 -
Net cash used in investing activities (13,149) (20,393)
Cash flows from financing activities:
Proceeds from issuance of common stock 205 206
Principal payments under capital lease
obligations and long-term debt (5,605) (1,707)
Early extinguishment of debt (20,200) -
Payments on construction loan - (3,357)
Bank overdraft 289 -
Advances on lines of credit 218,573 160,831
Repayment on lines of credit (162,080) (120,950)
Net cash provided by financing activities 31,182 35,023
Net (decrease) increase in cash and cash equivalents (4,017) (2,199)
Cash and cash equivalents at beginning of period 4,017 3,165
Cash and cash equivalents at end of period $ - $ 966
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
SPORTMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Sportmart, Inc. (the "Company") operates in one business segment
which is the retail sporting goods business. As of December 3,
1996, the Company had 70 superstores located in the United States
and Canada.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
S p o r t m a r t , I n c . a n d S p o r t d e p o t
Stores Inc., its wholly-owned subsidiary. Sportmart Canada, Inc.
was incorporated in April 1994 and the first store in Canada
opened in March 1995. In addition Sportdepot Stores Inc. was
incorporated in January 1995 as a wholly-owned subsidiary of
Sportmart Canada, Inc. In October 1995, Sportmart Canada, Inc.
was amalgamated into Sportdepot Stores Inc. All significant
intercompany transactions and balances have been eliminated.
Principles of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, 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, the accompanying
unaudited consolidated financial statements contain all
adjustments (consisting solely of normal recurring accruals)
necessary to present fairly the consolidated financial position of
Sportmart, Inc. as of October 27, 1996 and the consolidated
results of its operations and its cash flows for the thirteen and
thirty-nine week periods ended October 27, 1996 and October 29,
1995. Because of the seasonal nature of the business, results for
interim periods are not indicative of a full year's operations.
T h ese consolidated financial statements should be read in
conjunction with the Company's audited financial statements for
the fiscal year ended January 28, 1996 included in the Company's
Form 10-K as filed on April 29, 1996 with the Securities and
Exchange Commission.
Net Loss/Income Per Share
Net loss per share from continuing operations, discontinued
operations, extraordinary item and net loss per share are based on
12,835,137 and 12,774,370 weighted average common shares
outstanding for the thirteen weeks ended October 27, 1996 and
October 29, 1995, respectively. Net income per share from
continuing operations, discontinued operations, extraordinary item
and net income per share are based on 12,823,434 and 12,771,091
weighted average common shares outstanding for the thirty-nine
weeks ended October 27, 1996 and October 29, 1995, respectively.
<PAGE>
3. Foreign Currency Translation
The consolidated financial statements and transactions of the
Company's Canadian subsidiary are maintained in their functional
currency (Canadian dollars) and translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No.
52. Foreign currency balance sheet accounts are translated into
United States dollars at the rate of exchange in effect at the end
of the period. Income and expenses are translated at the average
rates of exchange in effect during the year. Translation
adjustments have been accumulated in a separate component of
stockholders' equity. Such adjustments do not affect cash flow
and are unrealized.
During the course of operating in Canada, the Company enters into
transactions in currencies other than its Canadian subsidiary's
functional currency. Realized and unrealized gains and losses
relating to these transactions which arise as a result of changes
in currency exchange rates are recognized in income as incurred.
In addition, the Company enters into forward exchange and option
contracts to hedge intercompany loans and its commitments in
currencies other than the Canadian subsidiary's functional
currency. The gains and losses arising from these foreign
currency contracts are recognized in income as offsets to the
gains and losses resulting from the underlying hedged transaction.
The net gains and losses on these transactions for the thirty-nine
week period ended October 27, 1996 were not material. As of
October 27, 1996, the Company had outstanding approximately $40.0
million in forward exchange and option contracts with various
settlement dates prior to January 1997.
4. Non-Recurring Charge
During the fourth quarter of fiscal 1995, the Company recorded a
pre-tax charge of $5.7 million associated with non-recurring
charges. Approximately 79% of the charge was related to costs
associated with the closing of a store in Chicago, Illinois (River
North) and a clearance store in Wheeling, Illinois. The River
North location was closed as of the end of fiscal 1995 and the
Wheeling store was closed in May of fiscal 1996. Included in the
original charge of store closings was severance, lease buy-out
c o sts, inventory write-down costs, unamortized portions of
nonrecoverable capital improvements, as well as other
miscellaneous exit costs. The remainder of the non-recurring
charge at the end of fiscal 1995 was primarily due to severance
for certain corporate and store personnel. As of October 27,
1996, the reserve is approximately $2.7 million due to the payout
of the lease costs, severance payments and write-off of inventory
costs. The Company believes the original estimates for these non-
recurring costs continue to appear reasonable.
5. Discontinued Operations
During the fourth quarter of fiscal 1995, the Company announced
its strategic decision to discontinue the operations of its No
Contest division. The No Contest division is accounted for as
discontinued operations, and accordingly, its operations are
segregated in the accompanying income statements. Net sales,
operation costs and expenses, other income and expense, and income
taxes for fiscal year 1995 have been reclassified for amounts
<PAGE>
associated with the discontinued units. A reserve was established
for the estimated costs of disposal of the business segment of
$2.9 million ($1.7 million after tax). The reserve included
estimated lease buy-out costs for approximately one year of
occupancy costs per location, severance payments, inventory write-
d o wn costs, unamortized portions of nonrecoverable capital
improvements as well as other miscellaneous exit costs. As of
October 27, 1996, the reserve is approximately $161,000 due to the
payout of the lease costs, severance payments and write-off of
inventory costs. The Company believes the original estimates for
total costs to dispose of the business segment continue to appear
reasonable.
6. Financing Arrangements
On September 6, 1996, the Company entered into a $135.0 million
revolving credit agreement with Bankers Trust. The new credit
facility has a five year term and is secured by the inventory and
personal property of the Company. Interest is due monthly on
outstanding borrowings based on LIBOR (London Interbank Offered
Rate) plus a fee ranging up to 2.50% depending on the maintenance
of certain financial ratios. The Company also has the option to
borrow at the prime rate plus 1.00%. This new revolving line of
credit requires the maintenance of minimum net worth and maximum
debt to inventory ratios. The proceeds from this new credit
facility were used to repay all borrowings outstanding under the
previous revolving credit facility and the loans from Allstate.
In order to comply with the Emerging Issues Task Force (EITF)
Issue No. 95-22 regarding classification of certain debt
instruments, the borrowings under this revolving line of credit
have been classified as current liabilities. However, based the
terms of the agreement and the Company's current business plan the
Company believes the amount outstanding under the revolving line of
credit will be due and payable in September 2001.
7. Extraordinary Item
As a result of the termination of the previous revolving credit
facility and the loans from Allstate, the Company incurred an
extraordinary charge of approximately $460,000, net of income
taxes of $335,000, in the third quarter.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
The following table sets forth, for the periods indicated, certain
income statement data of the Company expressed as a percentage of net
sales and the number of stores open at the end of each period:
<TABLE>
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 27, October 29, October 27, October 29,
1996 1995 1996 1995
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Income statement data: (restated) (restated)
Net sales 100.0 % 100.0% 100.0% 100.0%
Cost of sales,including
buying,distribution and
occupancy 77.9 77.7 76.6 76.6
Gross profit 22.1 22.3 23.4 23.4
Operating expenses:
Store expenses 19.3 19.8 17.1 17.5
General and administrative
expenses 4.2 3.9 3.8 3.5
Store pre-opening expenses .4 .6 .2 .3
Operating (loss) income (1.8) (2.0) 2.3 2.1
Interest expense, net (1.9) (1.3) (1.6) (1.0)
Other income, net .5 .5 - .2
(Loss) income from continuing
operations before income taxes (3.2) (2.8) .7 1.3
Income tax benefit (provision) 1.3 (1.2) (.3) (.5)
(Loss) income from continuing
operations (1.9)% (1.6)% .4% .8%
Number of stores at end of
period 70 63
</TABLE>
<PAGE>
Thirteen Weeks Ended October 27, 1996 Compared to Thirteen Weeks Ended
October 29, 1995
Net sales from continuing operations increased from $105.0 million in
the thirteen weeks ended October 29, 1995 to $111.7 million in the
thirteen weeks ended October 27, 1996, a 6.4% increase. The net sales
increase in the thirteen weeks ended October 27, 1996 was primarily
attributable to the inclusion of operating results of new stores
opened since October 29, 1995.
Net sales in comparable stores decreased 3.8% during the quarter ended
October 27, 1996. Management believes that comparable store sales have
been negatively impacted by continuing impact of competition and the
re-positioning of the Company into businesses that management believes
will be more profitable. The Company's strategy is to evolve from a
sports generalist toward four strong specialty businesses, or Four Worlds;
team sports, footwear, fitness and outdoor lifestyle. Within each world,
floor space and inventory dollars are being allocated to better reflect
the consumer's interest and maximize profitability per square foot. For
example, the Company discontinued the sales of low margin firearms in
several stores during the quarter. For the third quarter ended October 27,
1996 apparel and footwear business have shown strong results, particularly
sales of our private brand merchandise. However, these results were not
enough to offset declines in hardlines merchandise. Additionally, the
Company did not repeat a clearance promotion during the quarter which
negatively affected comparable store sales but positively impacted
merchandise margin. The sales volumes and operating results in the Canadian
locations were significantly less than their U.S. counterparts.
Gross profit after buying, distribution and occupancy costs increased
$1.2 million during the quarter ended October 27, 1996 to $24.7
million, a 5.2% increase, due primarily to a higher level of sales.
Gross profit as a percentage of net sales decreased .2% primarily due
to an increase in distribution and occupancy costs related to new
stores which offset the percentage of net sales improvement in the
merchandise cost of sales in this thirteen week period.
Store expenses increased from $20.8 million in the period ended October
29, 1995 to $21.6 million in the period ended October 27, 1996, a 3.8%
increase. This increase was primarily due to the inclusion of
operating expenses in the thirteen weeks ended October 27, 1996 for the
new stores opened since October 29, 1995. As a percentage of net
sales, store expenses decreased from 19.8% in the period ended October
29, 1995 to 19.3% in the period ended October 27, 1996 primarily due
t o decreases in net advertising expenses as well as improved
efficiencies in overall regional expense categories.
General and administrative expenses increased from $4.1 million in the
thirteen weeks ended October 29, 1995 to $4.7 million in the thirteen
weeks ended October 27, 1996, a 14.6% increase. This increase was due
primarily to additional salary expense for employees added since
October 1995. As a percentage of net sales, general and administrative
expenses increased from 3.9% in the period ended October 29, 1995 to
4.2% in the period ended October 27, 1996 due to the additional
expenditures discussed above and the comparable store sales declines.
<PAGE>
Operating loss decreased slightly from $2.1 million for the thirteen
weeks ended October 29, 1995 to $2.0 million for the thirteen weeks
ended October 27, 1996. Operating loss also decreased as a percentage
of net sales from 2.0% for the thirteen weeks ended October 29, 1995 to
1.8% in the thirteen weeks ended October 27, 1996 primarily due to the
decrease in direct store expenses.
Net interest expense as a percentage of net sales increased from 1.3%
to 1.9% due to higher average borrowings and increased interest rates
over the prior year. Total borrowings were higher than the previous
year primarily due to the capital expenditures related to the opening
of new stores since October 1995. Other income as a percentage of net
sales was unchanged at .5%.
For the periods ended October 27, 1996 and October 29, 1995, the
statements of operations reflect a provision for federal, state and
provincial income taxes based on the Company's expected annual tax
rates.
Thirty-nine Weeks Ended October 27, 1996 Compared to Thirty-nine Weeks
Ended October 29, 1995
Net sales from continuing operations increased from $342.1 million in
the thirty-nine weeks ended October 29, 1995 to $374.0 million in the
thirty-nine weeks ended October 27, 1996, a 9.3% increase. The net
sales increase in the thirty-nine weeks ended October 27, 1996 was
primarily attributable to the inclusion of operating results for new
stores opened since October 29, 1995.
Net sales in comparable stores decreased 3.7% during the thirty-nine
week period ended October 27, 1996. Management believes that
comparable store sales were modestly impacted by cannibalization from
new stores which overlapped the customer base of existing stores as a
result of the Company's strategy to dominate certain markets.
Additionally, comparable store sales were adversely affected by
increased competition and cooler weather in the Midwest during the
first quarter than experienced in the prior year coupled with weak
sales in in-line skates and bicycles through the first half of the
year. Finally, comparable store sales were adversely affected by the
re-positioning of the Company into more profitable businesses. Several
personnel and organizational changes have been made to address the
Company's comparable store sales performance. These include new senior
executives in merchandising, marketing, and store operations and a new
organizational structure of the buying staff. The sales volumes and
operating results in the Canadian locations have been significantly
less than their U.S. counterparts.
Gross profit after buying, distribution and occupancy costs increased
$7.3 million during the thirty-nine week period ended October 27, 1996
to $87.4 million, a 9.1% increase, due primarily to a higher level of
sales. Gross profit as a percentage of net sales was unchanged at
23.4%. Even though the merchandise cost of sales, as a percentage of
net sales, decreased during the thirty-nine week period, this favorable
variance was offset by increased occupancy costs as a percentage of net
sales due to the inclusion of the new stores.
<PAGE>
Store expenses increased from $59.7 million in the period ended October
29, 1995 to $63.9 million in the period ended October 27, 1996, a 7.0%
increase. This increase was primarily due to the inclusion of
operating expenses in the thirty-nine weeks ended October 27, 1996 for
the new stores opened since October 29, 1995. As a percentage of net
sales, store expenses decreased from 17.5% in the period ended October
29, 1995 to 17.1% in the period ended October 27, 1996 due primarily to
decreases in net advertising expenses as well as improved efficiencies
in overall regional expense categories.
General and administrative expenses increased from $11.9 million in the
thirty-nine weeks ended October 29, 1995 to $14.2 million in the
thirty-nine weeks ended October 27, 1996, a 19.3% increase. This
i n c r e ase was due primarily to additional computer equipment
depreciation and lease costs and additional personnel related costs for
employees added since October 1995. As a percentage of net sales,
general and administrative expenses increased from 3.5% in the period
ended October 29, 1995 to 3.8% in the period ended October 27, 1996 due
to the additional expenditures discussed above and the comparable store
sales declines.
Operating income increased from $7.3 million for the thirty-nine weeks
ended October 29, 1995 to $8.3 million for the thirty-nine weeks ended
October 27, 1996. As a percentage of net sales, operating income
increased from 2.1% for the thirty-nine weeks ended October 29, 1995 to
2.3% in the thirty-nine weeks ended October 27, 1996 primarily due to
the decrease in direct store expenses.
Net interest expense as a percentage of net sales increased from 1.0%
to 1.6% due to higher average borrowings and increased interest rates
over the prior year. Total borrowings were higher than the previous
year primarily due to the capital expenditures related to the opening
of new stores in fiscal year 1995 and 1996. Other income decreased
slightly as a percentage of net sales from (.2)% to (.0)% for the
thirty-nine weeks ended October 29, 1996 and October 27, 1996,
respectively.
For the periods ended October 27, 1996 and October 29, 1995, the
statements of operations reflect a provision for federal, state and
provincial income taxes based on the Company's expected annual tax
rates.
<PAGE>
Liquidity and Capital Resources
As of October 27, 1996, the Company had working capital of $30.4
million as compared to $80.3 million as of January 28, 1996. The most
significant factor in the decrease in working capital was the
classification of the Company's bank borrowings to current liabilities
in accordance with an EITF consensus as described in the attached
financial statements (see Note 6). Without giving effect to this
characterization as a current liability of the Company's borrowings that
are due in 2001, a portion of these bank borrowings would have been
classified as long-term and working capital would have been approximately
$50.0 million higher. Net cash used in operating activities was $22.0
million for the thirty-nine weeks ended October 27, 1996, versus $16.8
million for the thirty-nine weeks ended October 29, 1995. The primary
differences between the $22.0 net cash used in operations during the
thirty-nine weeks ended October 27, 1996 and the $16.8 million in the prior
year is related to changes in merchandise inventories, prepaid expenses and
other assets and accrued expenses. The $15.6 million increase in merchandise
inventories from January 28, 1996 to October 27, 1996 is less than the
$66.2 million increase during the same period in the prior year due to the
Company's efforts in reducing average per store inventories by 13.2% from
October 29, 1995. The $6.0 million decrease in prepaid expenses and other
assets from January 28, 1996 to October 27, 1996 is more than the $4.3
million increase during the same period in the prior year due to $2.3
million payment from the liquidator for the closing of the No Contest
division, $1.6 million decrease in the prepaid income taxes due to estimated
quarterly tax payments coupled with $2.0 million decrease in deferred
capitalizable preopening for the four new stores opened since January 28,
1996. Net cash used during the thirty-nine weeks ended October 27, 1996
also reflects a $14.3 million decrease in accrued expenses from January
28, 1996 primarily related to reductions in amounts accrued for advertising,
fixed assets and the reserve for store closings.
Net cash used in investing activities decreased from $20.4 million in
fiscal 1995 to $13.1 million in fiscal 1996. The net cash used in
investing activities in fiscal 1996 was primarily the result of $11.7
m i l lion in capital expenditures coupled with $1.7 million in
expenditures for the purchase and construction of certain properties
for future store locations which the Company intends to sell and lease
back from unaffiliated third parties. The net cash used in investing
activities in fiscal 1995 was primarily the result of $16.9 million in
capital expenditures and $3.1 million in expenditures for the purchase
and construction of certain properties for future store locations which
the Company intends to sell and leaseback from unaffiliated third
parties.
Net cash provided by financing activities for the first thirty-nine
weeks of fiscal 1996 of $31.2 million was primarily due to $56.5
million net advances on the lines of credit partially offset by $20.2
million in early extinguishment of debt and $5.4 million of principal
payments on the Allstate loans. The net cash provided by financing
activities in fiscal 1995 was primarily due to $39.9 million net
advances on the lines of credit partially offset by $5.1 million in
principal payments under capital lease obligations and long-term debt
and payments on the construction loan.
<PAGE>
On September 6, 1996, the Company entered into a $135.0 million
revolving credit agreement with Bankers Trust. The proceeds from this
new credit facility were used to repay all borrowings outstanding under
the previous revolving credit facility and the loans from Allstate.
The new credit facility has a five year term and is secured by the
inventory and personal property of the Company. Interest is due
monthly on outstanding borrowings based on LIBOR plus a fee ranging up
to 2.50% depending on the maintenance of certain financial ratios. The
Company also has the option to borrow at the prime rate (8.25% at
October 27, 1996) plus 1.00%. This new revolving line of credit
requires the maintenance of minimum net worth and maximum debt to
inventory ratios. The new facility provides the Company with less
restrictive convenants and greater borrowing availability than the
p r evious revolving credit facility. As of December 3, 1996,
approximately $116.7 million was outstanding under the revolving line
of credit. The Company, historically, has experienced its peak
borrowing levels during the year near the end of November.
In order to comply with the Emerging Issues Task Force Issue No. 95-22
regarding classification of certain debt instruments, the borrowings under
this revolving line of credit have been classified as current liabilities.
However, based on the terms of the agreement and the Company's business
plan, the Company believes the amount outstanding under the revolving
line of credit will be due and payable in September 2001.
The Company's primary on-going cash requirements for fiscal 1996 relate
to capital expenditures relating to improvement of existing operations.
As of October 27, 1996, the Company had invested approximately $5.5
million in capital expenditures related to the opening of the four
stores in Wisconsin and Vancouver. In addition, the Company plans to
i n vest, during fiscal 1996, approximately $4.5 million in the
r e n o v a tion of existing stores and distribution centers and
approximately $3.2 million to upgrade its management information
systems of which $4.0 million and $2.0 million, respectively, has
already been expended as of October 27, 1996. The Company expects to
be able to fund its working capital requirements and expansion plans
with a combination of anticipated cash flow from operations, bank
borrowings, normal trade credit agreements and the continued use of
lease financing.
Foreign Currency and Interest Rate Risk Management
Derivative financial instruments are utilized by the Company to reduce
interest rate and foreign currency exchange risks. The Company does
not use derivatives for speculative trading purposes.
In March 1995, the Company entered into an interest rate swap
agreement, a form of derivative, with a major financial institution.
This agreement became effective in August 1995 and expires in August
1998. This agreement effectively converts $10.0 million of its
floating rate bank debt (based on LIBOR plus a fee determined by
financial performance) to a fixed rate of 7.54% (plus the same fee) and
requires settlement on a quarterly basis. The difference in interest
between the fixed rate and effective LIBOR interest rate is recognized
as an adjustment to interest expense in the period incurred.
<PAGE>
During the course of operating in Canada, the Company enters into
forward exchange and option contracts to hedge intercompany loans and
other commitments in currencies other than its Canadian subsidiary's
functional currency. Realized and unrealized gains and losses arising
from these foreign currency contracts are recognized in income as
offsets to gains and losses resulting from the underlying hedged
transaction. As of October 27, 1996, the Company had approximately
$40.0 million of open forward exchange and option contracts with
various settlement dates prior to January, 1997.
Seasonality and Inflation
The second and fourth fiscal quarters, which respectively include
Father's Day and Christmas, have historically contributed the greatest
volume of net sales and income before taxes. For fiscal years 1995 and
1994, the second and fourth fiscal quarters combined accounted for
approximately 58% and 57%, respectively, of the Company's fiscal year
net sales. The loss before taxes was significantly impacted in the
fourth quarter of fiscal 1995 by the charges which resulted primarily
from closing the No Contest operations and two Sportmart locations,
however, typically, the second and fourth quarters account for
substantially all of the Company s income before taxes. In contrast,
the Company has consistently experienced net losses in the third
quarter. Inventory levels, which gradually increase beginning in
February, generally reach their peak in November and then fall to their
lowest level following the December holiday season. Although the
o p e rations of the Company are influenced by general economic
conditions, the Company does not believe that inflation has had a
material effect on the results of operations during the thirty-nine
weeks ended October 27, 1996.
Private Securities Litigation Reform Act of 1995
The statements which are not historical facts contained in this filing
are forward looking statements that involve risks and uncertainties,
including, but not limited to, product demand and market acceptance
risks, the effect of economic conditions, the impact of competition,
development of private brand products, capacity and supply constraints
or difficulties, the results of financing efforts, the Company s
ability to manage its expansion efforts in new markets, including
Canada, the effect of the Company's accounting policies, and other
risks detailed in the Company's Securities and Exchange Commission
filings.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
Exhibit 4.1 - * Sportmart, Inc. Restricted Stock Plan
Exhibit 11 - Statement regarding computation of loss
per share.
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K.
None.
* Exhibit is incorporated herein by reference to same-numbered
Exhibit to Registrant s Form S-8 Registration Statement No. 333-16389.
<PAGE>
SIGNATURES
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.
SPORTMART, INC.
Date: 12/11/96 By: /S/ ANDREW S. HOCHBERG
Andrew S. Hochberg, Chief Executive
Officer
Date: 12/11/96 By: /S/ THOMAS T. HENDRICKSON
Thomas T. Hendrickson, Executive
Vice President and
Chief Financial Officer
<PAGE>
<TABLE>
EXHIBIT 11
SPORTMART, INC. AND SUBSIDIARY
COMPUTATION OF INCOME PER SHARE
(Amounts in thousands except per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 27, October 29, October 27, October 29,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Financial statement computations:
(Loss) income from continuing
operations before income taxes $(3,587) $ (2,894) $2,539 $4,608
Income tax benefit (provision) 1,507 1,216 (1,062) (1,927)
(Loss) income from continuing operations (2,080) (1,678) 1,477 2,681
Loss from discontinued operations - (12) - (323)
(Loss) income before extraordinary item (2,080) (1,690) 1,477 2,358
Loss from extraordinary item, net of tax (462) - (462) -
Net (loss) income (2,542) $ (1,690) $1,015 $2,358
Net income per share:
Shares used in primary earnings per share
computation:
Weighted average shares outstanding 12,835 12,774 12,823 12,771
Net additional shares assuming options
exercised and proceeds used to purchase
treasury shares (1) - - - -
Common and common equivalent shares 12,835 12,774 12,823 12,771
Primary (loss) earnings per share from
continuing operations $ (.16) $ (.13) $ .12 $ .21
Primary loss per share from discontinued
operations - - - (.03)
Primary loss per share from extraordinary
item (.04) - (.04) -
Primary (loss) earnings per share $ (.20) $ (.13) $ .08 $ .18
Shares used in fully diluted earnings
per share computation:
Weighted average shares outstanding 12,835 12,774 12,823 12,771
Net additional shares assuming options
exercised and proceeds used to
purchase treasury shares (1) - - - -
Common and common equivalent shares 12,835 12,774 12,823 12,771
Fully diluted (loss) earnings per share
from continuing operations $ (.16) $ (.13) $ .12 $ .21
Fully diluted loss per share from
discontinued operations - - - (.03)
Fully diluted loss per share from
extraordinary item (.04) - (.04) -
Fully diluted (loss) earnings per share $ (.20) $ (.13) $ .08 $ .18
(1) Certain common stock equivalents are antidilutive and therefore
are not included in the calculation.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-END> OCT-27-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 190,552,604
<CURRENT-ASSETS> 217,314,614
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 297,944,743
<CURRENT-LIABILITIES> 186,869,635
<BONDS> 0
0
0
<COMMON> 128,435
<OTHER-SE> 101,867,965
<TOTAL-LIABILITY-AND-EQUITY> 297,944,743
<SALES> 373,530,176
<TOTAL-REVENUES> 373,947,654
<CGS> 286,580,613
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,019,765
<INCOME-PRETAX> 2,539,311
<INCOME-TAX> 1,061,698
<INCOME-CONTINUING> 1,477,613
<DISCONTINUED> 0
<EXTRAORDINARY> (462,183)
<CHANGES> 0
<NET-INCOME> 1,015,431
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
