Analysis

SPENCER SPORTING GOODS

Exhibit 2

Income Statements
(000 omitted)

1994 1995 1996 1997 1998

Net sales $ 2,412 $ 3,597 $ 5,406 $ 7,197
Cost of goods sold 1,977 2,988 4,536 6,045
Gross profit 435 609 870 1,152
Operating, selling and
administrative expense 334 501 753 1,005
Interest expense 2 3 3 3
Purchase discounts taken (15) (24) (21) (18)
Profit before taxes 114 129 135 162
Income taxes 48 57 60 72
Profit after taxes 66 72 75 90
Dividends paid 33 36 37 45

Purchases $ 2,190 $ 3,096 $ 4,678 $ 6,191

Balance Sheets as at December 31

(000 omitted)

Cash $ 36 $ 33 $ 25 $ 15
Accounts receivbable, net 402 624 898 1,196
Inventory 198 306 448 594
Total current assets 636 963 1,371 1,805
Fixed assets, net 57 63 66 75
Deferred charges 12 15 22 31
Other assets 33 37 51 59
Total assets 738 1,078 1,510 1,970

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 Analysis

Notes payable, bank $ 24 $ 38 $ 40 $ 40

Accounts payable 246 505 872 1,277
Miscellaneous accruals 24 55 80 90
Total current liabilities 294 598 992 1,407
Capital stock 375 375 375 375
Retained earnings 69 105 143 188
Total liabilities and owners' equity 738 1,078 1,510 1,970

Ratio Analysis

ROE: 0.15 0.15 0.14 0.16 Basically flat

Profit Margin 0.03 0.02 0.01 0.01 Margins declining fairly drama
Asset Turnover 3.3 3.3 3.6 3.7 Turnover improved slightly
Leverage 1.66 2.25 2.92 3.50 Leverage is increasing
Levbop 2.43 3.15 3.80
Retention Rate 50% 50% 49% 50% Paying out quite a lot in dividen
g* 0.08 0.08 0.09
g 0.49 0.50 0.33 Sales growth is a long way ove

Detail Ratios:
Current Ratio 2.16 1.61 1.38 1.28 Declining
Days sales in cash 5.448 3.349 1.688 0.761 Cash being eaten up by the inve
DSO 60.8 63.3 60.6 60.7 Collections are flat, but they are
Inventory Turns 9.98 9.76 10.13 10.18 Inventory Turns have actually i
Fixed Asset Turns 42.32 57.10 81.91 95.96 Fixed Asset turns are improving

Payable Period 41.00 59.54 68.04 75.29 Marked decline in Payable Peri
Misc Accruals/Sales 0.01 0.02 0.01 0.01 Flat as a % of Sales
Debt/Assets 0.03 0.04 0.03 0.02 Notes Payable from the Bank h
Interest Coverage: 57.00 43.00 45.00 54.00 Lots of Interest Coverage, at lea

Percentage Income Stmt:

Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 82.0% 83.1% 83.9% 84.0%
Gross profit 18.0% 16.9% 16.1% 16.0% Gross Profit has fallen from 18
Operating, selling and
administrative expense 13.8% 13.9% 13.9% 14.0% SG&A is flat
Interest expense 0.1% 0.1% 0.1% 0.0%
Purchase discounts taken -0.6% -0.7% -0.4% -0.3% Purchase discounts taken has d
Profit before taxes 4.7% 3.6% 2.5% 2.3% total drop

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 Analysis

Income taxes 2.0% 1.6% 1.1% 1.0%

Profit after taxes 2.7% 2.0% 1.4% 1.3%

Other Ratios:
Purchase Discounts Taken/Purchases 0.68% 0.78% 0.45% 0.29%
Deferred Charges Turnover 201 240 246 232 Somewhat better but pretty flat
Other Assets Turnover 73 97 106 122 Also better
misc. accruals ### 0.01529 0.01480 0.01251
Tax Rate 42.11% 44.19% 44.44% 44.44%

Assumptions:
Sales Growth 33%
COGS % 84%
Interest Expense (Flat on existing loan) 7.50%
Purchase Discounts Taken/Purch 0.68%
Note Payable 40.00
Days Sales in Cash 0.76
Days Sales Outstanding 60.7
Inventory Turns 10.2
Fixed Asset Turns 96.0
Deferred Charges 232.2
Other Assets 122.0
Payable Periods 45.0
misc accruals: ###
Capital Stock 375
Tax Rate 44%
Retention Ratio 50%
Loan on Receivables: 60%
Loan on Inventories: -

Projections:

Net sales $ 2,412 $ 3,597 $ 5,406 $ 7,197 $ 9,572

Cost of goods sold 1,977 2,988 4,536 6,045 8,040
Gross profit 435 609 870 1,152 1,532
Operating, selling and
administrative expense 334 501 753 1,005 1,337
Interest expense (on existing note) 2 3 3 3 3
New Interest Expense: 72
Purchase discounts taken (15) (24) (21) (18) -57

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 Analysis

Profit before taxes 114 129 135 162 178

Income taxes 48 57 60 72 79
Profit after taxes $ 66 $ 72 $ 75 $ 90 $ 99
Dividends paid 33 36 37 45 49

Purchases $ 2,190 $ 3,096 $ 4,678 $ 6,191 8,387

Cash (required) $ 36 $ 33 $ 25 $ 15 $ 20
Accounts receivbable, net 402 624 898 1,196 1,591
Inventory 198 306 448 594 941
Total current assets 636 963 1,371 1,805 2,551
Fixed assets, net 57 63 66 75 100
Deferred charges 12 15 22 31 41
Other assets 33 37 51 59 78
Total assets 738 1,078 1,510 1,970 2,771

Notes payable, bank $ 24 $ 38 $ 40 $ 40 994

Accounts payable 246 505 872 1,277 1,034
Miscellaneous accruals 24 55 80 90 120
Total current liabilities 294 598 992 1,407 2,148
Capital stock 375 375 375 375 375
Retained earnings 69 105 143 188 237
Total liabilities and owners' equity 738 1,078 1,510 1,970 2,761

Funding Requirement: 10

Collateral: 1998
Receiveables: 954
Inventory: 0
Total: 954

Interest Coverage:
EBIT/Int. Exp 3.4

Leverage:
D/A: 36.3%

Sustainable Growth:
ROE: 0.16 0.16

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Analysis

Profit Margin 0.01 0.01

Asset Turnover 3.65 3.45
Leverage 3.50 4.52
Levbop 3.80 4.92
Retention Rate 0.50 0.50
g* 0.09 0.09
g 0.33 0.33

Sustainable growth analysis:

NOW: Increas ret.
ROE: 0.16 0.16

Profit Margin 0.01 0.01

Asset Turnover 3.65 3.65
Leverage 3.50 3.50
Levbop 3.80 3.80
Retention Rate 0.50 1.00
g* 0.09 0.17
g 0.40 0.40

Profit Margin Breakdown:

1997 Act. Suggest:
Net sales 100% 100%
Cost of goods sold 84% 84%
Gross profit 16% 16%
Operating, selling and
administrative expe 14% 14%
Interest expense 0.04% 0%
Purchase discounts ta -0.25% -0.25%
Profit before taxes 2% 2%
Income taxes 1% 1%
Profit after taxes 1% 1%

Asset Turnover Breakdown:

Detail Ratios: 1997 Actual
Days sales in cash 0.76 0.76
DSO 60.66 60.66
Inventory Turns (based 12.12 12.12
Fixed Asset Turns 95.96 95.96
Def. Charges Turns 232.16 232.16

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Analysis

OA Turns 121.98 121.98

Asset Turnover: 3.65 3.65

Projected ROA: 4.6% 4.5%

Leverage: 3.50 3.50
Projected ROE: 16.0% 15.7%

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 Analysis

Forecast
1999 2000 2001 2002 2003 2004

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 Analysis

Basically flat

Margins declining fairly dramatically

Turnover improved slightly
Leverage is increasing

Paying out quite a lot in dividends, but this is his source of income and the absolute amount isn't much

Sales growth is a long way over g*, cash is being eaten up and leverage is increasing

Cash being eaten up by the investments in A/R and Inventory needed to support the sales growth
Collections are flat, but they are not particularly fast
Inventory Turns have actually improved slightly, but are basically flat
Fixed Asset turns are improving. Is this efficiency or, in the face of fast growth are CAPEX being avoided ?

Marked decline in Payable Periods-stretching suppliers to deal with cash crunch

Flat as a % of Sales
Notes Payable from the Bank have stayed pretty constant, not getting new money from them--that's why he's now asking the ba
Lots of Interest Coverage, at least now

Gross Profit has fallen from 18% to 16%, appears to be some evidence of discounting/price competition

SG&A is flat

Purchase discounts taken has dropped

2.5%

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 Analysis

Somewhat better but pretty flat

Also better

$ 12,731 $ 16,932 $ 22,519 $ 29,951 $ 39,835 $ 52,980

10,694 14,223 18,916 25,159 33,461 44,503
2,037 2,709 3,603 4,792 6,374 8,477

1,778 2,364 3,145 4,182 5,563 7,398

75 98 130 171 227 301
95 127 168 224 298 396
-75 -100 -133 -177 -236 -314

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 Analysis

165 220 294 392 522 695

73 98 131 174 232 309
$ 92 $ 122 $ 163 $ 218 $ 290 $ 386
46 61 82 109 145 193

11,004 14,636 19,465 25,889 34,432 45,795

$ 27 $ 35 $ 47 $ 62 $ 83 $ 110
2,116 2,814 3,742 4,977 6,620 8,804
1,251 1,664 2,213 2,943 3,914 5,206
3,393 4,513 6,002 7,983 10,617 14,121
133 176 235 312 415 552
55 73 97 129 172 228
104 139 185 246 327 434
3,685 4,901 6,518 8,669 11,530 15,335

1,309 1,728 2,285 3,026 4,012 5,323

1,357 1,804 2,400 3,192 4,245 5,646
159 212 282 375 498 663
2,825 3,744 4,967 6,593 8,755 11,631
375 375 375 375 375 375
283 344 426 535 680 873
3,483 4,464 5,768 7,502 9,810 12,879

202 437 751 1,167 1,721 2,456

1999 2000 2001 2002 2003 2004

1,269 1,688 2,245 2,986 3,972 5,283
0 0 0 0 0 0
1,269 1,688 2,245 2,986 3,972 5,283

2.0 2.0 2.0 2.0 2.0 2.0

41.0% 44.2% 46.6% 48.4% 49.7% 50.7%

0.14 0.17 0.20 0.24 0.27 0.31

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 Analysis

0.01 0.01 0.01 0.01 0.01 0.01

3.45 3.45 3.45 3.45 3.45 3.45
5.60 6.81 8.14 9.53 10.93 12.29
6.02 7.45 9.06 10.82 12.67 14.54
0.50 0.50 0.50 0.50 0.50 0.50
0.07 0.09 0.11 0.14 0.16 0.18
0.33 0.33 0.33 0.33 0.33 0.33

Increas ret.

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 Analysis

ng avoided ?

hat's why he's now asking the bank

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 EVA

Senarios 3: With margins improved to around 19% and collections improved he can now grow, at
his sustainable growth rate, or even faster here sales growth is 20%
1998 1999 2000 2001 2002
Net sales 8,636 10,364 12,436 14,924 17,908
Cost of goods sold 6,995 8,395 10,073 12,088 14,506
Gross profit 1,641 1,969 2,363 2,836 3,403
Operating, selling and
administrative expense 1,206 1,447 1,737 2,084 2,501
Interest expense (on existing note) 3 3 3 3 3
New Interest Expense: 81 96 114 136 162
Purchase discounts taken (145) (171) (206) (247) (296)
Profit before taxes 496 594 714 859 1,033
Income taxes 220 264 318 382 459
Profit after taxes 275 330 397 477 574
AT profits before interest 322 385 462 555 665
Capital Charge 303 364 437 524 629
EVA-asset 19 21 26 31 37

Capital Base 2,021 2,426 2,911 3,493 4,192

Dividends paid 138 165 198 239 287

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