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: August 3, 1997
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 September 10, 1997, there were 5,148,833.5 shares of Voting Common
Stock, par value $.01, and 7,736,680.5 shares of Class A Common Stock,
par value $.01, of the registrant outstanding.
<PAGE>
SPORTMART, INC.
QUARTERLY PERIOD ENDED AUGUST 3, 1997
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of August 3, 1997 and
February 2, 1997 1
Consolidated Statements of Operations for the thirteen
weeks ended August 3, 1997 and July 28, 1996 and the
twenty-six weeks ended August 3, 1997 and July 28, 1996 2
Consolidated Statements of Stockholders' Equity
for the twenty-six weeks ended August 3, 1997 and
the fifty-three weeks ended February 2, 1997 3
Consolidated Statements of Cash Flows for the twenty-six
weeks ended August 3, 1997 and July 28, 1996 4
Notes to Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-12
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AUGUST 3, 1997 AND FEBRUARY 2, 1997
(Amounts in thousands, except share data)
<TABLE>
ASSETS August 3 February 2,
1997 1997
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 2,816
Due from related parties 578 624
Merchandise inventories, net 147,906 162,913
Prepaid expenses and other assets 7,339 5,035
Income taxes receivable - 11,044
Advertising co-op receivable, net 5,349 2,338
Assets held for sale 2,569 2,631
Deferred income taxes 6,300 6,300
Total current assets 170,041 193,701
Property and equipment, net 58,216 61,750
Other assets 3,950 3,868
Deferred income taxes 7,278 7,278
$239,485 $266,597
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Outstanding checks, net $ 832 -
Revolving line of credit due 2001 75,942 93,175
Mortgage payable 775 -
Current portion of capitalized lease obligations 323 307
Accounts payable 48,962 44,922
Accrued expenses:
Salaries and wages 3,393 3,338
Taxes other than income 6,213 8,049
Advertising 1,932 5,014
Reserve for store closings 8,881 16,319
Other 8,429 13,377
Total current liabilities 155,682 184,501
Capitalized lease obligations, net of current portion 3,244 3,409
Other long-term liabilities 4,876 4,768
163,802 192,678
Commitments and contingencies - -
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 August 3, 1997 and February 2, 1997 52 52
Class A common stock, non-voting; $.01 par value,
50,000,000 shares authorized; 7,736,680 and 7,694,734
shares issued and outstanding on August 3, 1997 and
February 2, 1997, respectively 77 77
Additional paid-in capital 79,939 79,842
Cumulative translation adjustment (36) (36)
Retained earnings (4,349) (6,016)
Total stockholders' equity 75,683 73,919
$239,485 $266,597
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share data)
(Unaudited)
<TABLE>
Thirteen Weeks Ended Twenty-six Weeks Ended
August 3, July 28, August 3, July 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $125,287 $146,079 $229,219 $262,289
Cost of sales, including buying, distribution
and occupancy 94,839 108,986 176,150 199,576
Gross profit 30,448 37,093 53,069 62,713
Operating expenses:
Store 19,884 22,100 37,390 42,368
General and administrative 4,741 4,855 9,451 9,491
Store pre-opening - 384 - 501
Operating income 5,823 9,754 6,228 10,353
Other expense:
Interest expense, net (1,550) (1,947) (3,412) (3,913)
Other expense (20) (161) (38) (314)
(1,570) (2,108) (3,450) (4,227)
Income from operations before income taxes 4,253 7,646 2,778 6,126
Income tax provision 1,701 3,211 1,111 2,568
Net income $ 2,552 $4,435 $1,667 $3,558
Net income per share $ .20 $ .35 $ .13 $ .28
Weighted average number of
common shares outstanding 12,876,610 12,835,137 12,862,438 12,817,582
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
(Unaudited)
<TABLE>
Voting Class A Additional Cumulative Total
Common Stock Common Stock Paid-in Translation Retained Stockholders'
Shares Amount Shares Amount Capital Adjustment Earnings Equity
<S> <C> <C> <C> <C> <C
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 1 173 - - 174
Exercise of stock options - - 8,430 - 32 - - 32
Cumulative translation adjustment - - - - - (24) - (24)
Net loss, fiscal 1996 - - - - - - (27,059) (27,059)
Balances, February 2, 1997 5,148,833 52 7,694,734 77
Issuance of 41,946 of Class A
common shares under stock
purchase plan - - 41,946 - 97 - - 97
Net income - - - - - - 1,667 1,667
Balances August 3, 1997 5,148,833 $ 52 7,736,680 $ 77 $79,939 $ (36) $(4,349) $75,683
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
Twenty-six Weeks Ended
August 3, July 28,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 1,667 $ 3,558
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,480 5,514
Other adjustment - (44)
Deferred income tax provision - (5)
Net decrease (increase) in assets:
Merchandise inventories 15,007 (4,763)
Prepaid expenses and other assets (2,304) 8,183
Income taxes receivable 11,044 -
Advertising co-op receivable (3,011) (1,682)
Other assets-noncurrent (451) (54)
Net increase (decrease) in liabilities:
Accounts payable 4,749 (2,046)
Accrued expenses (17,958) (10,058)
Other long-term liabilities 108 668
Net cash provided by (used in) operating activities 14,331 (729)
Cash flows from investing activities:
Purchase of property and equipment (2,032) (8,899)
Proceeds from sale of property and equipment 455 -
Purchase of assets held pending sale 62 (1,317)
Advances to related parties (135) (454)
Repayment of advances to related parties 181 353
Net cash used in investing activities (1,469) (10,317)
Cash flows from financing activities:
Proceeds from issuance of Class A common stock 97 173
Principal payments under capital lease obligations and
long-term debt (149) (5,535)
Outstanding checks, net 832 2,655
Proceeds from mortgage payable 775 -
Advances on lines of credit 71,212 106,972
Repayment on lines of credit (88,445) (97,236)
Net cash (used in) provided by financing activities (15,678) 7,029
Net (decrease) increase in cash and cash equivalents (2,816) (4,017)
Cash and cash equivalents at beginning of period 2,816 4,017
Cash and cash equivalents at end of period $ - $ -
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
SPORTMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Sportmart, Inc. and Subsidiary (the "Company") operates in one
business segment which is the retail sporting goods business. As
of September 10, 1997, the Company operated 59 superstores located
in the United States. The eleven Canadian locations in the process
of liquidation as of February 2, 1997 have all been closed as of
September 10, 1997.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
Sportmart, Inc. and Sportdepot 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. and Subsidiary
as of August 3, 1997 and the consolidated results of its operations
and its cash flows for the thirteen week and twenty-six week periods
ended August 3, 1997 and July 28, 1996. Due to the seasonal nature of
the business, results for interim periods are not indicative of a
full year's operations.
These consolidated financial statements should be read in conjunction
with the Company's audited financial statements for the fiscal year
ended February 2, 1997 included in the Company's Form 10-K.
Net Income Per Share
Net income per share is based on 12,876,610 and 12,835,137 weighted
average common shares outstanding for the thirteen weeks ended
August 3, 1997 and July 28, 1996, respectively. Net income per share
is based on 12,862,438 and 12,817,582 weighted average common shares
outstanding for the twenty-six weeks ended August 3, 1997 and
July 28, 1996.
<PAGE>
3. Non-Recurring Items
During the fourth quarter of fiscal 1996, the Company recorded a
non-recurring pre-tax charge of $33.2 million of which approximately
$850,000 related to termination benefits. The majority of the charge
was related to costs associated with exiting the Canadian market.
Included in the original charge of store closings was severance,
lease buy-out costs, inventory write-down costs, unamortized
portions of nonrecoverable capital improvements, as well as other
miscellaneous exit costs. As of August 3, 1997, the reserve is
approximately $6.7 million due to the payout of the lease costs and
severance payments. The Company believes the original estimates for
these non-recurring costs continue to be appropriate.
<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 Twenty-six Weeks Ended
August 3, July 28, August 3, July 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Income statement data:
Net sales 100.0 % 100.0% 100.0% 100.0%
Cost of sales, including buying,
distribution and occupancy 75.7 74.6 76.9 76.1
Gross profit 24.3 25.4 23.1 23.9
Operating expenses:
Store expenses 15.9 15.1 16.3 16.2
General and administrative expenses 3.8 3.4 4.1 3.6
Store pre-opening expenses - .3 - .2
Operating income 4.6 6.6 2.7 3.9
Interest expense, net (1.2) (1.3) (1.5) (1.5)
Other expense - (.1) - ( .1)
Income before income taxes 3.4 5.2 1.2 2.3
Income tax provision 1.4 2.2 .5 1.0
Net income 2.0% 3.0% .7% 1.3%
Number of stores at end of period 59 70
</TABLE>
Thirteen Weeks Ended August 3, 1997 Compared to Thirteen Weeks Ended
July 28, 1996
Net sales decreased from $146.1 million in the thirteen weeks ended
July 28, 1996 to $125.3 million in the thirteen weeks ended August 3, 1997.
The net sales decrease was primarily attributable to the Company's
decision to exit the Canadian market at the end of fiscal 1996.
Net sales in comparable stores decreased 4.0% during the thirteen weeks
ended August 3, 1997. Management believes that comparable store sales have
been negatively effected by the continuing impact of competition and the
re-positioning of the Company into businesses that historically have
generated higher gross margins. The Company realized sales increases during
the quarter in golf, men's and women's sportswear, men's active sportswear
and cleated shoes. The apparel categories previously noted represent areas
where the Company has expanded its offerings of higher margin private
branded merchandise as part of its strategic re-positioning. Nevertheless,
the comparable store sales performance was negatively impacted by soft
sales of abdominal exercisers, in-line skates, and outdoor categories
throughout the quarter. In an effort to improve the overall sales
performance, the Company has increased planned advertising expenditures
during the second half of the year. The increased spending will be focused
in broadcast and direct mail advertisements. The direct mail
advertisements will focus on members of our improved frequent buyer
program, PLAY!BUY!PLAY!, which was introduced during the second quarter.
The program was designed to build customer loyalty and to aid in the
targeted marketing of the Company's best customers. PLAY!BUY!PLAY! members
<PAGE>
receive preferred pricing on certain items, accumulate points toward free
gift certificates, and receive advanced promotional mailings and catalogs.
Gross profit after buying, distribution, and occupancy costs decreased $6.6
million during the thirteen week period ended August 3, 1997, to $30.4
million, a 17.9% decrease, due in part to lower sales volume. Gross
profit, as a percentage of net sales, decreased 1.1% primarily due to
accruing a higher shrinkage reserve based on last year's full year results.
In addition, distribution and occupancy costs caused the gross profit
percentage to decrease due to lower sales volume.
Store expenses decreased from $22.1 million in the thirteen week period
ended July 28, 1996, to $19.9 million in the thirteen week period ended
August 3, 1997, a 10.0% decrease. This decrease was primarily due to the
closure of the eleven Canadian locations. As a percentage of net sales,
store expenses increased from 15.1% in the thirteen week period ended
July 28, 1996, to 15.9% in the thirteen week period ended August 3, 1997,
primarily due to increased advertising expenditures.
General and administrative expenses decreased slightly from $4.9 million
in the thirteen weeks ended July 28, 1996, to $4.7 million in the thirteen
weeks ended August 3, 1997, a 2.3% decrease. As a percentage of net sales,
general and administrative expenses increased from 3.4% in the thirteen
weeks ended July 28, 1996, to 3.8% in the thirteen weeks ended August 3,
1997, primarily due to lower sales volume.
Net interest expense decreased from $2.0 million in the thirteen week
period ended July 28, 1996, to $1.6 million in the thirteen week period
ended August 3, 1997. Net interest expense as a percentage of net sales
decreased from 1.3% in the thirteen week period ended July 28, 1996, to
1.2% in the thirteen week period ended August 3, 1997. These decreases are
due to the lower debt level during the second quarter of fiscal 1997
compared to the second quarter of fiscal 1996.
For the thirteen week periods ended August 3, 1997, and July 28, 1996, the
statements of operations reflect a provision for federal, state, and
provincial income taxes based on the Company?s expected annual tax rates.
Twenty-six Weeks Ended August 3, 1997 compared to Twenty-six Weeks
Ended July 28, 1996
Net sales decreased from $262.3 million in the twenty-six weeks ended
July 28, 1996 to $229.2 million in the twenty-six weeks ended August 3,
1997. The net sales decrease was primarily attributable to the Company's
decision to exit the Canadian market at the end of fiscal 1996.
Net sales in comparable stores decreased 3.7% during the twenty-six weeks
ended August 3, 1997 as compared to the twenty-six week period ended
July 28, 1996. Management believes that comparable store sales have been
negatively effected by the continuing impact of competition and the
re-positioning of the Company into businesses that historically have
generated higher gross margins. The Company realized sales increases
during the first half of fiscal 1997 in golf, men's and women's sportswear,
<PAGE>
men's active sportswear and cleated shoes. The apparel categories
previously noted represent areas where the Company has expanded its
offerings of higher margin private branded merchandise as part of its
strategic re-positioning. Nevertheless, the comparable store sales
performance was negatively impacted by soft sales of abdominal exercisers,
in-line skates, and outdoor categories throughout the twenty-six week
period.
Gross profit after buying, distribution, and occupancy costs decreased
$9.6 million during the twenty-six week period ended August 3, 1997, to
$53.1 million, a 15.4% decrease, due in part to lower sales volume.
Gross profit, as a percentage of net sales, decreased .8% primarily due
to accruing a higher shrinkage reserve based on last year's full year
results. In addition, distribution and occupancy costs caused the gross
profit percentage to decrease due to lower sales volume.
Store expenses decreased from $42.4 million in the twenty-six week period
ended July 28, 1996, to $37.4 million in the twenty-six week period ended
August 3, 1997, a 11.8% decrease. This decrease was primarily due to the
closure of the eleven Canadian locations. As a percentage of net sales,
store expenses increased slightly from 16.2% in the twenty-six week period
ended July 28, 1996, to 16.3% in the twenty-six week period ended August 3,
1997.
General and administrative expenses was unchanged at $9.5 million for the
twenty-six week periods ended July 28, 1996 and August 3, 1997. As a
percentage of net sales, general and administrative expenses increased
from 3.6% in the twenty-six week period ended July 28, 1996, to 4.1% in the
twenty-six weeks ended August 3, 1997, primarily due to lower sales volume.
Net interest expense decreased from $3.9 million in the twenty-six week
period ended July 28, 1996, to $3.4 million in the twenty-six week period
ended August 3, 1997. The decrease in net interest expense is due to the
lower debt level during fiscal 1997. Net interest expense as a percentage
of net sales remained unchanged at 1.5% for the twenty-six week periods
ended July 28, 1996 and August 3, 1997.
For the twenty-six week periods ended August 3, 1997, and July 28, 1996,
the statements of operations reflect a provision for federal, state, and
provincial income taxes based on the Company's expected annual tax rates.
Liquidity and Capital Resources
As of August 3, 1997, the Company had working capital of $14.4 million
compared to $9.2 million as of February 2, 1997. Net cash provided by
operating activities was $14.3 million for the twenty-six weeks ended
August 3, 1997, versus net cash used in operating activities of $.7
million for the twenty-six weeks ended July 28, 1996. The primary
differences between the $14.3 million net cash provided by operations
during the twenty-six weeks ended August 3, 1997, and the $.7 million
net cash used in operations during the twenty-six weeks ended July 28,
1996, is related to changes in merchandise inventories, prepaid expenses,
income taxes receivable, accounts payable, and accrued expenses. The
<PAGE>
Company experienced a $15.0 million decrease in merchandise inventories
during the first twenty-six weeks of fiscal 1997 in contrast to a $4.8
million increase in merchandise inventories during the same period in the
prior year. The decrease in merchandise inventories during the first
twenty-six weeks of fiscal 1997 is primarily due to the elimination of the
Canadian inventory from the exiting of the Canadian market. Prepaid
expenses increased $2.3 million during the first twenty-six weeks of fiscal
1997 versus an $8.2 million decrease during the first twenty-six weeks of
1996. The increase during the first twenty-six weeks of fiscal 1997 is due
to prepaid rent payments. Income taxes receivable decreased $11.0 million
during the first twenty-six weeks of fiscal 1997 due to the receipt of
federal income tax refunds related to the net operating loss carryback.
There was no income tax receivable during the first twenty-six weeks of
fiscal 1996. Accounts payable increased $4.7 million during the first
twenty-six weeks of fiscal 1997 compared to a decrease of $2.1 million
during the first twenty-six weeks of fiscal 1996. The accounts payable
increase during the first twenty-six weeks of fiscal 1997 is primarily due
to the seasonal build-up of US store inventory; however, overall inventory
decreased as a result of the liquidation of the Canadian inventory.
Accrued expenses decreased $18.0 during the first twenty-six weeks of 1997
compared to a $10.1 decrease during the first twenty-six weeks of fiscal
1996. The decrease in accrued expenses during the first twenty-six weeks
of 1997 is due to charges against the reserve established for closing the
Canadian operations.
Net cash used in investing activities decreased from $10.3 million for the
twenty-six week period ended July 28, 1996, to $1.5 million for the
twenty-six week period ended August 3, 1997. The net cash used in investing
activities during the twenty-six week period ended August 3, 1997, was
primarily the result of $2.0 million in capital expenditures partially
offset by $.5 million of cash received for the sale of certain Canadian
fixed assets. The net cash used in investing activities for the twenty-six
week period ended July 28, 1996, was primarily due to $8.9 million in
capital expenditures and $1.3 million in additional assets held for sale.
Net cash used in financing activities for the first twenty-six weeks of
fiscal 1997 of $15.7 million was primarily due to $17.2 million of net
repayments on the lines of credit. The net cash provided by financing
activities for the first twenty-six weeks of fiscal 1996 of $7.0 million
was primarily due to $9.7 million of net advances on the lines of credit
and $2.7 million in bank overdrafts partially offset by $5.5 million in
reduced long-term debt.
The Company has available a $135.0 million revolving credit agreement with
a syndicate of banks. This revolving line of credit funds both seasonal
and general capital requirements. In order to comply with 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. This revolving line of credit requires the maintenance of
minimum net worth and a maximum debt to inventory ratio. As of August 3,
1997, the Company was in compliance with all covenants of this agreement.
In June 1997, the Company amended this credit agreement to lower the
minimum net worth requirement in order to provide the Company with greater
operating flexibility. As of September 10, 1997, approximately $79.0 million
in cash borrowings and $6.1 million in letters of credit (to support
imported merchandise and certain real estate transactions) were outstanding
under this line of credit.
<PAGE>
The Company's primary on-going cash requirements for fiscal 1997 relate to
capital expenditures relating to the improvement of existing operations.
The Company does not plan to open any new stores during fiscal 1997. As of
August 3, 1997, the Company has invested approximately $2.0 million in
capital expenditures of which $1.5 million related to the renovation of
existing stores and distribution centers and $.5 million related to upgrades
in the Company's management information systems. In addition, the Company
plans to invest, during the remainder of fiscal 1997, $2.9 million to
renovate existing stores and distribution centers and $1.1 million to
upgrade the Company's management information systems. The Company expects
to be able to fund its working capital requirements with a combination of
anticipated cash flows from operations, bank borrowings and normal trade
credit agreements.
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.
In order to reduce its exposure to fluctuations in interest rates, the
Company entered into interest rate cap agreements for a notional amount
totaling $50.0 million during fiscal 1997. In April, 1997, the Company
entered into an interest rate cap on $25.0 million of its revolving line
of credit which expires in one year and places a ceiling on LIBOR at 6.0%.
In July, 1997, the Company entered into a second interest rate cap for
$25.0 million of its revolving line of credit which expires in two years
and places a ceiling on LIBOR at 6.0%.
During the course of operating in Canada, the Company entered into foreign
currency contracts to hedge intercompany loans and other commitments in
currencies other than its Canadian subsidiary's functional currency.
During the course of closing down operations in Canada, the Company has
continued to enter into such contracts. 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 August 3, 1997, the Company had approximately $4.7
million of open foreign currency contracts with various settlement dates
prior to September, 1997.
<PAGE>
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 to the Company. For fiscal years 1996 and
1995, the second and fourth fiscal quarters combined accounted for
approximately 56% and 58%, respectively, of the Company's fiscal year net
sales. In both fiscal 1996 and 1995, the fourth fiscal quarter was
significantly impacted by non-recurring charges and, in addition, the fourth
quarter of fiscal 1995 was impacted by discontinued operations; 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 and it anticipates that such
trend may continue through fiscal 1997. 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 operations 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 twenty-six weeks ended
August 3, 1997.
Impact of Recent Accounting Pronouncements
In June 1997 the FASB issued SFAS Statement No. 130, "Reporting Comprehensive
Income." This statement, effective for fiscal years beginning after
December 15, 1997, would require the company to report components of
comprehensive income in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income is
defined by Concepts Statement No. 6, "Elements of Financial Statements" as
the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company does not
believe that SFAS Statement No. 130 will have a material impact on its
financial statements.
In June 1997 the FASB issued SFAS Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement,
effective for financial statements for periods beginning after December 15,
1997, requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis that it is
used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Company does not believe that SFAS
Statement No. 131 will have a material impact on its financial statements.
Private Securities Litigation Reform Act of 1995
The statements which are not historical facts contained in this Quarterly
Report on Form 10-Q are forward looking statements that involve risks and
uncertainties. The risks and uncertainties contained in the Quarterly
Report include but are not limited to, product demand and market acceptance
risks, the effect of economic conditions generally, and retail and sporting
goods business conditions specifically, the impact of competition,
development of private brand products, customer acceptance of the Four
Worlds concept, commercialization and technological difficulties, capacity
and supply constraints or difficulties, the results of financing efforts,
changes in consumer preferences and trends, the adequacy of reserves for
discontinued operations, the ability to settle lease obligations for closed
stores, the effect of the Company's accounting policies, weather conditions,
<PAGE>
and other risks detailed in the Company's Securities and Exchange Commission
filings. The words "believes", "anticipates", "estimates", "expects", and
words of similar import used in this Quarterly Report as they relate to the
Company or its Management are generally intended to identify such forward
looking statements.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Annual Meeting of Stockholders of the Company was held on
June 27, 1997.
(b) 1. The Stockholders voted to elect three directors to the
Company's Board of Directors, with the following votes:
<TABLE>
Authority Broker
Directors For Against Withheld Abstentions Non-Votes
<S> <C> <C> <C> <C> <C>
C. Mark Scott 4,841,938 ____ 60,909 ____ ____
Jerome S. Gore 4,841,978 ____ 60,869 ____ ____
Lawrence J. Ring 4,842,038 ____ 60,809 ____ ____
</TABLE>
(c) 2. The Stockholders also voted to ratify and approve
a Restricted Stock Plan.
Authority Broker
For Against Withheld Abstentions Non-Votes
3,748,312 113,231 ____ 13,791 1,027,513
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
Exhibit 10.56 - Employment and Change in Control Agreement
between Registrant and C. Mark Scott.
Exhibit 11 - Statement regarding computation of earnings
per share.
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K.
None.
<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: 9/17/97 By: /S/ Andrew S. Hochberg
Chief Executive Officer
Date: 9/17/97 By: /S/ Thomas T. Hendrickson
Executive Vice President and
Chief Financial Officer
<PAGE>
<TABLE> SPORTMART, INC. AND SUBSIDIARY
COMPUTATION OF LOSS PER SHARE
(Amounts in thousands except per share data)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
August 3, July 28, August 3, July 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Financial statement computations:
Income from operations before income taxes $4,253 $ 7,646 $2,778 $6,126
Income tax provision 1,701 3,211 1,111 2,568
Net income 2,552
Net income per share:
Shares used in primary income per share computation:
Weighted average shares outstanding 12,868 12,835 12,858 12,818
Net additional shares assuming options exercised and
proceeds used to purchase treasury shares (1) 8
Common and common equivalent shares 12,876 12,835 12,862 12,818
Primary income per share $ .20 $ .35 $ .13 $ .28
Shares used in fully diluted income per share computation:
Weighted average shares outstanding 12,868 12,835 12,858 12,818
Net additional shares assuming options exercised and
proceeds used to purchase treasury shares (1) 8
Common and common equivalent shares 12,876 12,835 12,862 12,818
Fully diluted income per share $ .20 $ .35 $ .13 $ .28
</TABLE>
(1) Certain common stock equivalents are antidilutive; therefore, they
are not included in the calculation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-END> AUG-03-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 147,906,468
<CURRENT-ASSETS> 169,209,246
<PP&E> 100,681,365
<DEPRECIATION> (42,465,366)
<TOTAL-ASSETS> 238,653,680
<CURRENT-LIABILITIES> 154,850,180
<BONDS> 0
0
0
<COMMON> 128,855
<OTHER-SE> 75,554,739
<TOTAL-LIABILITY-AND-EQUITY> 238,653,680
<SALES> 229,048,983
<TOTAL-REVENUES> 229,219,451
<CGS> 176,150,160
<TOTAL-COSTS> 176,150,160
<OTHER-EXPENSES> 46,840,926
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,412,670
<INCOME-PRETAX> 2,777,761
<INCOME-TAX> 1,111,104
<INCOME-CONTINUING> 1,666,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,666,657
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENT
This Employment and Change in Control Agreement (the Agreement )
is entered into by and between Sportmart, Inc. a Delaware corporation
(the Company ) and C. Mark Scott ( Executive ) and shall be effective
as of June 27, 1997 (the Effective Date ).
WHEREAS, Executive is employed by the Company as its President;
and
WHEREAS, the parties hereto agree that it is in their mutual best
interest to encourage Executive's full attention and dedication to the
Company by providing for compensation or benefits in the event of a
Change in Control of the Company or Executive's termination, under the
terms and conditions set forth herein.
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. Employment and Term. The Company hereby agrees to employ
Executive, and Executive hereby accepts employment by the Company in
accordance with the terms and conditions set forth herein. Subject to
the provisions contained in this Agreement, the term of this Agreement
shall be three (3) years, commencing on the Effective Date. This
Agreement shall terminate on the third anniversary following the
Effective Date. At that time, the parties agree to renegotiate the
terms and condition of the Executive's employment with the Company.
2. Title and Duties of Executive. The Executive shall have the
title of President, except that in the event of a Change in Control
(as defined herein) or other business combination involving the
Company and another individual, entity or group in which more than 25%
of the outstanding securities of the Company are acquired by another
individual, entity or group either from the Company or otherwise, the
Company may, in its sole discretion, change Executive's title to the
executive vice president level with responsibility for merchandising
and marketing only. Executive' s current duties shall include
management of merchandising, plans and other duties that may be
assigned by the Company's Chief Executive Officer and/or the Board of
Directors of the Company. Except for changes caused by a period of
disability as described in Section 4(b) herein, and except for the
changes allowed by this Section, during the term of this Agreement,
the Company agrees not to materially change Executive's duties or take
any other action against the Executive which results in a material
diminution in the authority, duties or responsibilities of the
Executive. Executive will devote his full-time energies and skills to
the performance of his duties for the Company.
3. Compensation and Benefits. The compensation and benefits
of Executive shall be reviewed by Company on an annual basis. The
Company agrees not to reduce the Executive's annual base salary by
more than five percent in any calendar year. The Company also agrees
not to reduce the benefits of the Executive except that the Company
may reduce the Executive's benefits proportionately as part of a
company-wide benefit reduction or as may be required by law. The
parties further acknowledge that Executive is a participant in the
Sportmart, Inc. Key Employee Incentive Plan and as a participant he
will be eligible for no less than 40% of his salary as a bonus during
the term of this Agreement.
<PAGE>
4. Termination of Employment - Death or Disability.
(a) Death of Executive. In the event Executive shall die
during the term of employment hereunder, this Agreement shall
terminate as of the date of Executive's death. Following such
termination of this Agreement, the Company shall have no further
liability with respect to Executive's employment, except to pay to
Executive's estate or beneficiaries, as appropriate, the Executive's
then current base salary for three months, Executive's pro-rated
accrued bonus for the year of his death, and other benefits payable
under any employee benefit plan of the Company in which Executive was
a participant; provided, however, that Executive's estate shall have
the right to exercise any unexercised stock options granted by the
Company to Executive pursuant to the Company's stock option plan and
any option agreement then in effect.
(b) Disability of Executive. In the event Executive
becomes disabled during the term of employment hereunder, and is
thereby unable to perform the essential functions of his position,
with or without accommodation, this Agreement shall terminate as of 30
days after the date such disability is established. As used in this
subparagraph, the term disabled or "disability" means suffering from
a physical or mental impairment which renders the Executive
substantially unable to perform the essential functions of his
position in a satisfactory manner, as confirmed by competent medical
evidence, for a period of 180 consecutive days or for more than 180
days in a twelve-month period. The date on which Executive's
disability is established shall be the 181st consecutive day on which
the impaired condition continues or the 181st day in which the
impaired conditions exists within a twelve-month period. The Company
shall give Executive written notice of its intent to terminate this
Agreement pursuant to this Section. Following such termination of
this Agreement, the Company shall have no further liability with
respect to Executive's employment, except to pay to Executive the
value of any accrued salary or other compensation, including his pro-
rated bonus, due Executive up to the date of his termination and
other benefits payable under any employee benefit plan of the Company
in which Executive was a participant; provided, however, that
Executive shall have the right pursuant to paragraph 7 (c) of this
Agreement to exercise any unexercised stock options granted by the
Company to Executive pursuant to the Company's stock option plan and
any option agreement then in effect. During the period the
Executive's impaired condition exists as described herein, the Company
agrees not to reduce the level of Executive's compensation. During
the period the Executive's impaired condition exists as described
herein, the Company also agrees not to reduce the level of the
Executive's benefits except as required by law.
5. Termination of Employment - Cause; Good Reason.
(a) Cause. The Company has the right to terminate this
Agreement for Cause (i) immediately upon written notice, if
Executive engages in conduct which the Company reasonably believes is
of a criminal nature and detrimental to the interests of the Company;
(ii) immediately upon written notice, if Executive materially breaches
a fiduciary duty owed to the Company; (iii) upon thirty days written
notice, if Executive refuses or materially fails to perform his
obligations under this Agreement, and fails to cure such deficiency
within said notice period; and (iv) immediately upon written notice if
executive knowingly commits a significant violation of Company policy.
<PAGE>
(b) Good Reason. The Executive has the right to terminate
this Agreement for Good Reason within 18 months following a Change
in Control, as defined herein. A termination for "Good Reason" shall
mean, the occurrence of any of the following, without Executive's
prior written consent, after a Change in Control of the Company:
(i) the assignment to the Executive of any material duties
inconsistent in any respect with the Executive's position (including
status, offices, titles and reporting requirements), authority, duties
or responsibilities, or any other material action by the Company which
results in a diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action which is remedied by the Company
within 30 days after receipt of written notice thereof given by the
Executive; or
(ii) a reduction in the Executive's annual base salary in an
amount exceeding 5 percent or, other than changes occasioned by a
substitution or modification of general welfare plans that are
generally applicable to all employees and do not discriminate against
the Executive, a material reduction in benefits and other
compensation; or
(iii) the Company requiring the Executive to be based at any
office or location more than 50 miles from the Executive's prior
office or location.
6. Change in Control.
For purposes of this Agreement, a "Change in Control" shall mean
the happening of any of the following events:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of twenty-five percent (25%) or more of the
combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors
(the"Outstanding Company Voting Securities"); provided, however, that
the following acquisitions shall not constitute a Change in Control of
the Company: (1) any acquisition directly from the Company (excluding
an acquisition by virtue of the exercise of a conversion privilege),
(2) any acquisition by the Company, (3) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company, or (4) any
acquisition by any corporation pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or
consolidation, the conditions described in clauses (A) and (B) of
subsection (c) of this Section are satisfied; or
(b) Individuals who, as of the effective date of this
Agreement, constitute the Board of Directors of the Company (the
"Incumbent Board of the Company") cease for any reason to constitute
at least a majority of the Board of Directors of the Company;
provided, however, that any individual becoming a director subsequent
to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board of the Company
shall be considered as though such individual were a member of the
Incumbent Board of the Company, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of either an actual or threatened election contest (as contemplated by
Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or
<PAGE>
on behalf of a Person other than the Board of Directors of the
Company; or
(c) Approval by the shareholders of the Company of a
reorganization (including a plan of reorganization under applicable
bankruptcy law), merger or consolidation, in each case, unless,
following such reorganization, merger or consolidation, (A) more than
fifty percent (50%) of, respectively, the then outstanding share of
common stock of the corporation resulting from such reorganization,
merger or consolidation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger or
consolidation, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (other than any changes
in the proportions as may result from the conversion of the Company's
Class A Common Stock into shares of voting securities of the
corporation resulting from such reorganization, merger or
consolidation) and (B) at least a majority of the members of the
board of directors of the corporation resulting from such
reorganization, merger or consolidation were members of the Incumbent
Board of the Company at the time of the execution of the initial
agreement providing for such reorganization, merge or consolidation;
or
(d) Approval by the shareholders of the Company of the sale
or other disposition of all or substantially all of the assets of the
Company other than to a corporation with respect to which, following
such sale or other disposition, (A) more than fifty percent (50%) of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately
prior to such sale or other disposition of the Outstanding Company
Voting Securities, as the case may be, (other than any changes in the
proportions as may result from the conversion of the Company's Class A
Common Stock into shares of voting securities of the corporation
resulting from such reorganization, merger or consolidation) and (B)
at least a majority of the members of the board of directors of such
corporation were members of the Incumbent Board of the Company at the
time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of the Company.
7. Severance. In the event the Company terminates Executive
without Cause or Executive terminates this Agreement for Good Reason,
the Company shall pay Executive the following severance:
(a) Executive's base salary through the month during which
termination occurred, plus any other amount due at the time of
termination under any bonus plan of the Company plus any accrued but
unpaid bonus; and
<PAGE>
(b) A lump sum payment of $300,000; and
(c) Any grant of options to purchase shares of Company
stock which are exercisable and grants of restricted stock held by
Executive which have vested pursuant to the terms of the plans and
programs (and the agreements and other documents thereunder) pursuant
to which such stock options or restricted stock has been granted; and
(d) Subject to Executive's compliance with Sections 9, 10,
11 (a), (b), (c) and (d) herein, monthly severance payments equal to
Executive's monthly base salary at the time of termination. Such
monthly severance payments shall commence in the month following
termination (to be paid on or about the 30th of the month) and shall
continue for eighteen months. Only in the event of a termination of
Executive without cause and in consideration of the above benefits,
Executive agrees to immediately notify the Company of other
employment, and to the extent Executive receives compensation from
other employment, the severance payments provided herein shall be
correspondingly reduced; and
(e) All vested, nonforfeitable amounts owing or accrued at
the Date of Termination under any other compensation and benefit
plans, programs, and arrangements in which Executive theretofore
participated will be paid under the terms and conditions of the plans,
programs, and arrangements (and agreements and documents thereunder)
pursuant to which such compensation and benefits were granted.
7.A. Executive's Right to Terminate; Severance. Without limiting
any other rights the Executive shall have pursuant to this Agreement
and as an alternative to the rights in Section 7 hereof, the
Executive shall have the right to unilaterally terminate this
Agreement by tendering his voluntary resignation to the Company within
180 days after a Change in Control which occurs without Executive's
prior written consent. In the event Executive so terminates this
Agreement, Company shall pay Executive the following severance:
(a) Executive's base salary through the month during which
termination occurred, plus any other amount due at the time of
termination under any bonus plan of the Company plus any accrued but
unpaid bonus; and
(b) A lump sum payment of $300,000; and
(c) Any grant of options to purchase shares of Company
stock which are exercisable and grants of restricted stock held by
Executive which have vested pursuant to the terms of the plans and
programs (and the agreements and other documents thereunder) pursuant
to which such stock options or restricted stock has been granted; and
(d) Subject to Executive's compliance with Sections 9,
10, 11 (a), (b), (c) and (d) herein, monthly severance payments equal
to Executive's monthly base salary at the time of termination. Such
monthly severance payments shall commence in the month following
termination (to be paid on or about the 30th of the month) and shall
continue for twelve months. In the event of a unilateral termination
of this Agreement by Executive and in consideration of the above
benefits, Executive agrees to immediately notify the Company if he
accepts other employment, and to the extent Executive receives
compensation from other employment, the severance payments provided
herein shall be correspondingly reduced; and
<PAGE>
(e) All vested, nonforfeitable amounts owing or accrued at
the Date of Termination under any other compensation and benefit
plans, programs, and arrangements in which Executive theretofore
participated will be paid under the terms and conditions of the plans,
programs, and arrangements (and agreements and documents thereunder)
pursuant to which such compensation and benefits were granted.
However, in the event Executive consents in writing to the Change in
Control, Executive shall be deemed to have waived the right to receive
the severance described in this Section. A refusal to sign the
consent as described herein may not be used in any way as a reason to
terminate Executive for Cause.
(f) In the event Executive elects to unilaterally terminate
this Agreement pursuant to this Section 7.A. Executive shall provide
Company 90 days advance written notice of the termination of this
Agreement. During the 90 day period between the giving of notice and
the termination date, Executive, at Company's sole option, agrees to
continue working for Company in his then current capacity and to
further put forth his best efforts to ensure the orderly transition of
his job responsibilities to other executives.
8. Termination; No Further Liability. In the event the Company
terminates the Executive for Cause or Executive terminates the
Agreement without Good Reason or Executive resigns his employment and
terminates this Agreement prior to a Change in Control as defined in
this Agreement, the Company shall have no further liability with
respect to Executive's employment, except to pay the Executive the
value of any accrued salary or other compensation due Executive up to
the date of his termination and other benefits payable under any
employee benefit plan in which Executive was a participant. The
Company and the Executive agree to provide 30 days written notice of
their intent to terminate this Agreement without Cause or for Good
Reason, as applicable, at any time within the term of this Agreement.
Except as otherwise specifically provided in this Agreement, if
Executive resigns for any other reason he will provide the Company 30
days written notice and this Agreement will terminate upon receipt of
such notice by the Company.
9. Confidential Information. During his employment and at all
times thereafter, Executive shall keep secret and retain Confidential
Information in the strictest confidence, and shall not, without the
prior written consent of the Company, furnish, make available, or
disclose to any third party, any Confidential Information. As used in
this Agreement, Confidential Information shall mean any information
relating to the business or affairs of the Company or its products,
including, but not limited to, sales inventory analysis reports such
as the 509 report, the 588 report, 595 report, other related reports
and by whatever name change designated hereafter; memoranda, letters,
reports, notebooks, books of accounts, drawings, prints, models, and
other materials or records of a proprietary nature; records and policy
materials relating to research, finance, accounting, sales, sales
projections, personnel, management, advertising, inventory, data
processing, expansion plans, and operations; materials particularly
relating to operations, such as price lists, vendor lists, customer
lists, customer service requirements, costs of providing services and
goods, payroll and payroll matrix information, technical data, and
equipment maintenance costs, or other proprietary information used by
the Company; provided, however, Confidential Information shall not
include any information which is in the public domain or becomes known
in the industry through no wrongful act on the part of Executive or
<PAGE>
breach of this Agreement. Executive acknowledges that the
Confidential Information is vital, sensitive, confidential and
proprietary to the Company.
10. Return of Company Materials Upon Termination. Executive
agrees that all records or documents containing Confidential
Information, whether or not prepared by Executive, are and shall
remain the property of the Company, and that upon termination of his
employment, Executive shall immediately return to the Company all
such items in his possession, as well as all copies thereof.
11. Post-Employment Matters. Executive acknowledges that his
employment with the Company has special, unique and extraordinary
value to the Company; that the Company has a lawful interest in
protecting its investment in training Executive and entrusting its
Confidential Information to him; and that the Company would be
irreparably damaged if Executive were to provide services to any
person or entity in violation of this Agreement; and that the
restrictions, prohibitions and other provision of this Section are
reasonable, fair and equitable in scope, terms, and duration, are
necessary to protect the legitimate business interests of the Company,
and are a material inducement to the Company to enter into this
Agreement.
(a) Non-Competition. Without the consent in writing of the
Board, upon the Executive's date of termination for any reason,
Executive will not, for a period of two years thereafter, acting alone
or in conjunction with others, directly or indirectly (i) engage
(either as owner, investor, partner, stockholder, employer, employee,
consultant, advisor or director (other than as below) in a retail
business in the continental United States and Canada that has gross
sales of sporting goods, athletic footwear and/or athletic apparel in
excess of 20% of its total retail sales ; (ii) induce any vendors of
the Company or any of its subsidiaries with whom Executive has had
contacts or relationships, directly or indirectly, during and within
the scope of his employment with the Company or any of its
subsidiaries, to curtail or cancel their business with such companies
or any of them; or (iii) induce, or attempt to influence, any employee
of the Company or any of its subsidiaries to terminate his/her
employment with the Company. The provisions of subparagraphs (i),
(ii), and (iii) above are separate and distinct commitments
independent of each of the other subparagraphs. It is agreed that the
ownership of not more than five percent of the equity securities of
any company having securities listed on an exchange or regularly
traded in the over-the-counter market shall not, of itself, be deemed
inconsistent with clause (i) of this paragraph (a), nor shall service
as a member of a board of directors on which Executive is serving on
the date of termination (including any successor board thereto) be
deemed, of itself, to be inconsistent with clause (i) of this
paragraph (a). However, this paragraph 11 (a) will not apply in the
event of a Change in Control during the term of this Agreement as
defined in paragraph 6 herein.
(b) Cooperation With Regard to Litigation. Executive
agrees to cooperate with the Company (including following Executive's
date of termination for any reason), on a reasonable basis when
cooperation would not unreasonably interfere with Executive's
employment by making himself available to testify on behalf of the
Company or any subsidiary or affiliate of the Company, in any action,
suit, or proceeding, whether civil, criminal, administrative, or
investigative, and to assist the Company, or any subsidiary or
<PAGE>
affiliate of the Company, in any such action, suit, or proceeding, by
providing information and meeting and consulting with the Board and
its representatives or counsel, or representatives or counsel of or to
the Company, or any subsidiary or affiliate of the Company, as
requested; provided, however, this subsection (b) shall not apply to
any action between the Executive and the Company to enforce this
Agreement. The Company agrees to reimburse Executive, on an after-tax
basis, for all expenses actually incurred in connection with his
provision of testimony or assistance.
(c) Release of Employment Claims. Executive agrees, as a
condition to receipt of the severance payments and benefits provided
hereunder, that he will execute a release agreement, in a form
satisfactory to the Company, releasing any and all claims arising out
of Executive's employment (other than enforcement of this Agreement).
(d) Remedy. Without limiting the right of the Company to
pursue all of its legal and equitable remedies available for violation
by Executive of the covenants contained in this Section, it is
expressly agreed by the Executive and the Company that any such other
remedies cannot fully compensate the Company for any such violation
and that the Company shall be entitled to injunctive relief to prevent
any such violation.
(e) Survival. Notwithstanding any provision of this
Agreement to the contrary, the provisions of this Section 11 shall
survive the termination or expiration of this Agreement, shall be
valid and enforceable, and shall be a condition precedent to the
Executive (or his or her beneficiaries) receiving any amounts payable
hereunder.
12. Excise Tax Limit . If Executive becomes entitled to one or
more payments (with a "payment" including, without limitation, the
vesting of an option or other non-cash benefit or property), whether
pursuant to the terms of this Termination Agreement or any other plan,
arrangement, or agreement with the Company or any affiliated company
(the "Total Payments"), which are or could become subject to the tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any similar tax that may hereafter be
imposed, whether under federal, state, local or foreign law) (the
"Excise Tax"), the Company shall either (1) reduce or eliminate the
Total Payments, but only to the extent necessary, such that no amount
of the Total Payments shall be subject to the Excise Tax or (2) make
the Total Payments to the Executive, whichever places Executive in the
better after tax position as mutually agreed by the parties.
If the Company does reduce or eliminate Total Payments to
Executive as described herein to avoid the Total Payments being
subjected to the Excise Tax, the Company agrees to indemnify and hold
Executive harmless from any tax, penalty or other charge or liability
imposed upon Executive resulting directly or indirectly from a Total
Payments (in whole or in part) being subject to the Excise Tax after
giving effect to any reduction directed by the Company pursuant to the
preceding sentence, or from any tax, penalty or other charge or
liability resulting directly or indirectly from the Company's
obligation to indemnify and hold Executive harmless hereunder,
including investigation and attorneys fees and expenses.
13. Governing Law. This Agreement is governed by and is to be
construed, administered, and enforced in accordance with the laws of
the State of Illinois, without regard to Illinois conflicts of law
principles, except insofar as federal laws and regulations may be
applicable. If under the governing law, any portion of this Agreement
<PAGE>
is at any time deemed to be in conflict with any applicable statute,
rule, regulation, ordinance, or other principle of law, such portion
shall be deemed to be modified or altered to the extent necessary to
conform thereto or, if that is not possible, to be omitted from this
Agreement. The invalidity of any such portion shall not affect the
force, effect, and validity of the remaining portion hereof. If any
court determines that any provision of Section 10 is unenforceable
because of the duration or geographic scope of such provision, it is
the parties' intent that such court shall have the power to modify the
duration or geographic scope of such provision, as the case may be,
to the extent necessary to render the provision enforceable and, in its
modified form, such provision shall be enforced.
14. Arbitration. The parties agree that any claim or dispute
arising out of or relating to this Agreement or Executive's employment
with the Company will be submitted to and decided by arbitration
pursuant to the American Arbitration Act and conducted in accordance
with applicable rules and procedures used by the American Arbitration
Association for the arbitration of employment disputes. Claims and
disputes subject to this arbitration provision shall include, but not
be limited to, any claim arising under this Agreement, the Civil
Rights Act of 1964, as amended, the Civil Rights Act of 1991, the
Americans with Disabilities Act, the Age Discrimination in Employment
Act, the Fair Labor Standards Act, the National Labor Relations Act,
the Employee Retirement Income Security Act, the Family and Medical
Leave Act; the statutory law of any state or locality regarding trade
secrets, employment, discrimination in employment, termination of
employment, or wage payment; and the common law of any state relating
to employment contracts, wrongful discharge, defamation, or any other
matter arising under common law.
Notwithstanding the above, the parties agree that this
arbitration provision does not apply to: (i) claims for workers'
compensation benefits or unemployment compensation benefits; and (ii)
claims by the Company for injunctive or equitable relief, including
but not limited to claims related to unauthorized disclosure of
confidential information, trade secrets, intellectual property, or
unfair competition. It is further agreed that claims relating to
employee benefits under the Company's insurance, disability and
retirement plans must be raised pursuant to the procedures set forth
in those plans, and that the parties may pursue arbitration only if the
matter is not resolved pursuant to those procedures.
The parties understand and agree that any result reached by the
arbitrator shall be binding, that no appeal may be taken. The parties
further understand that upon a finding of liability, the Arbitrator
is empowered to award all relief permitted under law including any
and all compensatory and punitive damages and attorneys fees
permitted under the applicable federal, state and/or local law.
Either party can seek a judgment upon the arbitration award, which may
be entered by any court having jurisdiction. Executive further
understands and agrees that by signing this Agreement, he is waiving
his right to have a trial by judge or jury of any claim or dispute
covered by this arbitration provision. The parties further
acknowledge and agree that, other than as expressly set forth herein,
this arbitration provision does not alter or add to the substantive
legal rights, remedies and defenses of either party as provided by
federal or applicable state law.
<PAGE>
15. General Provisions.
(a) Notices. Any notice required by this Agreement shall
be deemed sufficient if sent by registered or certified mail, postage
prepaid, with return receipt requested. Notices shall be addressed to
the parties as follows:
If to Executive: C. Mark Scott
996 Grove Street
Winnetka, Illinois 60093
If to the Company: Sportmart, Inc.
1400 South Wolf Road, Suite 200
Wheeling, Illinois 60090
Attn: General Counsel
Each party may change his or its address by written notice in
accordance with this Section. Notices shall be deemed effective at the
time of their actual receipt or refusal of receipt.
(b) Severability. If any provision in this Agreement is
held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remaining provisions shall continue in full force
and without being impaired or invalidated in any way.
(c) Entire Agreement. This Agreement supersedes and cancels
any and all previous and contemporaneous oral or written agreements
between the parties hereto with respect to the employment of Executive
by the Company and contains all of the covenants and agreements
between the parties with respect to such employment. Each party to
this Agreement acknowledges that no representations, inducements or
agreements, oral or otherwise, that have not been embodied herein, and
no other agreement, statement or promise not contained in this
Agreement, shall be valid or binding.
(d) Modification and Waiver. No amendment, modification,
or discharge of this Agreement shall be valid or binding unless set
forth in writing and duly executed by each of the parties hereto. Any
waiver or consent by any party to any breach of or any variation from
any provision of this Agreement shall be valid only if in writing and
only in the specific instance in which it is given, and such waiver or
consent shall not be construed as a waiver of any subsequent breach of
any other provision or as a consent with respect to any similar
instance or circumstance.
(e) Headings. The section, paragraph, and subparagraph
headings are for reference only and shall not define or limit the
provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
SPORTMART, INC.
By: /S/ Andrew S. Hochberg
Title: Chief Executive Officer
EXECUTIVE: /S/ C. Mark Scott
<PAGE>
