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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended January 30, 1999
Commission file number 000-23515
GART SPORTS COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
84-1242802
(I.R.S. Employer Identification No.)
1001 Lincoln Avenue
Denver, Colorado 80203
(Address of principal executive office)(Zip Code)
(303) 861-1122
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of April 7, 1999, there were outstanding 7,684,103 shares of the
registrant's common stock, $.01 par value, and the aggregate market value of
the shares (based upon the closing price on that date of the shares on the
Nasdaq National Market) held by non-affiliates was approximately $19,224,000.
Documents Incorporated by Reference
Part III of this Form 10-K is incorporated by reference from the
Registrant's 1999 definitive proxy statement to be filed with the Securities
and Exchange Commission no later than 120 days after the end of the
Registrant's fiscal year.
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TABLE OF CONTENTS
Page
----
Part I.................................................................. 1
Items 1. & 2. Business and Properties................................. 1
Item 3. Legal Proceedings....................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..... 12
Part II................................................................. 13
Item 5. Market Price of Common Stock and Related Stockholder
Matters................................................. 13
Item 6. Selected Financial Data................................. 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 16
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk.................................................... 24
Item 8. Financial Statements and Supplementary Data............. 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 25
Part III................................................................ 26
Item 10. Directors and Executive Officers of the Registrant...... 26
Item 11. Executive Compensation.................................. 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 28
Item 13. Certain Relationships and Related Transactions.......... 28
Part IV................................................................. 28
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................ 28
Index to Consolidated Financial Statements.............................. F-1
NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K, including
without limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of Gart Sports Company (the "Company"), or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include, but are not
limited to, the effect of economic conditions generally, and retail and
sporting goods business conditions specifically, the impact of competition in
existing and future markets, the exercise of control over the Company by
certain stockholders and the conflicts of interest that might arise among the
Company, such stockholders and their affiliates, the Company's ability to
successfully anticipate merchandising and market trends and customers'
purchasing preferences, the impact of seasonality and weather conditions and
the effect on the Company's computer systems and business due to date changes
from years beginning with "19" to "20." These factors are discussed in more
detail elsewhere in this report, including, without limitation, under the
captions "Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Relationships and Related
Transactions." Given these uncertainties, prospective investors are cautioned
not to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce
the result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
Gart Sports(R), Gart Sports Superstores(R), Gart Bros. Sporting Goods
Company(R), Sportmart(R), Sniagrab(R), Sportscastle(R), Gart Sports Company(R)
and SWAT(R) are federally registered trademarks of the Company. In addition,
the Company claims common law rights to its trademarks listed above and
various other trademarks and service marks. All other trademarks or registered
trademarks appearing in this Annual Report are trademarks or registered
trademarks of the respective companies that utilize them.
PART I
ITEM 1. and ITEM 2. Business and Properties
General
Gart Sports Company (the "Company" or "Gart Sports") is one of the leading
sporting goods retailers in the midwest and western United States and the
leading full-line sporting goods retailer in the Rocky Mountain region in
terms of sales and number of stores. The Company's business strategy is to
provide its customers with an extensive selection of high quality, brand name
merchandise at competitive prices with exceptional customer service. The
Company operated 125 sporting goods stores in 16 states as of January 30,
1999, the end of its 1998 fiscal year. The Company's executive offices are
located at 1001 Lincoln Avenue, Denver, Colorado 80203, and its telephone
number is (303) 861-1122. The Company's web site, which is not part of this
Annual Report is http://www.gartsports.com.
The Company acquired Sportmart, Inc. ("Sportmart") on January 9, 1998 in a
transaction involving the issuance of 2,180,656 shares of the Company's Common
Stock, par value $.01 (the "Common Stock"), in exchange for all the
outstanding common stock of Sportmart. At the time of the Sportmart
acquisition, Sportmart operated 59 stores in the midwest and western United
States, none of which overlapped with markets served by Gart Sports stores.
With the Sportmart acquisition, the Company became the second largest,
publicly traded, full-line sporting goods retailer in the United States, based
upon revenues.
Founded in 1928, the Company operates under the Gart Sports and Sportmart
names in Colorado, California, Illinois, Utah, Idaho, Minnesota, Washington,
Ohio, Wyoming, Montana, Oregon, Wisconsin, Indiana, Iowa, Nevada and New
Mexico. The Company was incorporated in Delaware in 1993 and operates through
its wholly-owned subsidiaries, Gart Bros. Sporting Goods Company ("Gart
Bros.") and Sportmart.
Industry Overview
The retail sporting goods industry is comprised of four principal categories
of retailers: (i) large format sporting goods stores, which typically range
from 30,000 to 100,000 square feet in size and emphasize high sales volumes
and a large number of SKUs in a warehouse-style store, (ii) traditional
sporting goods stores, which typically range in size from 5,000 to 20,000
square feet and carry a more limited assortment of merchandise and are often
viewed by their customers as convenient neighborhood stores, (iii) specialty
sporting goods stores, consisting of specialty stores and pro shops, generally
specializing in one product category of sporting goods, and (iv) mass
merchandisers, including discount retailers, warehouse clubs and department
stores, which although generally price competitive, have limited customer
service and a more limited selection.
The sporting goods industry in the United States is characterized by
fragmented competition, limited assortments from traditional sporting goods
retailers, customer preference for one-stop shopping convenience and the
growing importance of delivering value to the customer through selection,
service and price. The Company believes that these characteristics of the
sporting goods industry make the Company's superstore format particularly well
suited to grow and increase the Company's market share relative to traditional
sporting goods stores, specialty sporting goods retailers, mass merchandisers
and other large format sporting goods retailers.
Business Strategy
The Company's business strategy is to provide its customers with an
extensive selection of high quality, brand name merchandise at competitive
prices with exceptional customer service. The key elements of the Company's
business strategy are the following:
Broad Assortment of Quality, Brand Name Products. The Company offers a
wide selection of quality, brand name apparel and equipment at competitive
prices designed to appeal to both the casual sporting
1
goods customer and the sports enthusiast for their complete sporting goods
needs. The Company carries 50,000 active SKUs, including popular brands
such as Coleman, Columbia, K2, Nike, Rawlings, Reebok, Rollerblade,
Rossignol, Spalding, Speedo and Wilson. The Company's customer service,
expert technicians and specialty store presentation enable it to purchase
directly from manufacturers, full product lines that are typically only
available in specialty stores and pro shops, such as Callaway, Cobra,
Taylor Made and Armour Golf golf clubs, The North Face apparel and
equipment, Glock and Weatherby firearms, Volkl and Volant ski equipment and
Burton snowboard equipment.
Exceptional Customer Service. The Company has always made customer
service its top priority in its stores. The Company's strategy is to
provide its customers with a high level of service that is generally
associated with specialty sporting goods stores and pro shops. Efforts are
made to hire sales associates and sports technicians who are knowledgeable
and enthusiastic about the products they sell or service. The Company
supports its sales associates by providing ongoing training with respect to
the performance attributes and technical aspects of its merchandise,
including conducting regular manufacturers' clinics. An initial training
program, "Base Basics," gives the sales associates the resources to
interact with customers. In addition, the Company offers special customer
services such as equipment rental, on-site repair centers, instructional
courses, discounted ski lift tickets and hunting and fishing licenses.
Attractive Shopping Environment. The Company seeks to offer a uniquely
attractive shopping environment that showcases the breadth of the Company's
product offerings and reinforces the Company's distinctive brand image. The
Company's brightly lit stores are designed to project a clean, upscale
atmosphere, with a user-friendly layout featuring wide aisles, well-
organized merchandise displays and clearly defined departments arranged in
a logical and convenient floorplan. The Company believes that this
customer-oriented shopping environment helps distinguish its stores from
the warehouse format offered by many of its competitors.
Customized Merchandise Mix. The Company tailors its product mix to local
demographics and lifestyles based on the Company's experience and market
research. Purchasing decisions are made on a regional, and sometimes a
store by store, basis and store operations work directly with the Company's
buyers to revise the product mix in each store. Various factors typically
influence the product mix in a particular market, such as disposable
income, professional and amateur sports activities, specific regional and
seasonal activities, and recreational licenses.
Promotional Advertising and Marketing. The Company uses a promotional
pricing and advertising strategy focused on the creation of "events" to
drive traffic and sales in its stores. Each event is based upon either a
key shopping period such as the winter holidays, Father's Day, and Back-to-
School or a specific sales or promotional event, including the annual
Sniagrab ("bargains" spelled backwards) sale, which the Company believes is
the largest pre-season ski and snowboard sale in the United States. The
Company's strategy of clustering stores in major markets enables it to
employ an aggressive advertising strategy on a cost-effective basis,
utilizing newspaper, radio and television.
As part of the integration of the Sportmart stores, the Company has
established a four year store remodel schedule, expanded the brand name
product mix in the Sportmart stores and increased the frequency of Sportmart's
advertising.
Merchandising
The Company offers its customers over 50,000 active SKUs of high quality
brand name merchandise in over 100 categories of sporting goods and apparel.
The Company provides an assortment of products typically found only in a large
format sporting goods store with the presentation and service typical of
specialty stores and pro shops. As a result of its exceptional customer
service, expert technicians and specialty store presentation, the Company has
direct vendor access to full lines of brands not typically found in its
warehouse format sporting goods competitors.
2
Historically, the largest percentage of Gart Sports stores have been based
in the Rocky Mountain region, resulting in a heavier concentration of winter
sporting equipment and apparel than a typical warehouse format sporting goods
store. The Company believes that the quality and breadth of its winter sports
merchandise has contributed to its strong reputation in the Rocky Mountain
region compared to other large format competitors with less experience
marketing winter sporting goods. In addition, the Company believes that its
ability to manage the complex inventory requirements of the winter product
line, which is characterized by a short selling season and peak selling
periods at the beginning and end of the selling season, gives it an important
competitive advantage. Hardlines decreased as a percentage of sales in 1998
compared to 1997 due to the warm weather in markets of some of the stores.
The following table sets forth the percentage of total net sales for each
major product category for each of the Company's last three fiscal years:
Fiscal Years
-----------------------------------
1998 1997(1) 1996(1)
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
Hardlines................................ 47.9% 49.4% 48.7%
Softlines:
Apparel................................. 26.0 30.4 30.9
Footwear................................ 26.1 20.2 20.4
----- ----- -----
Subtotal............................. 52.1 50.6 51.3
----- ----- -----
Total................................ 100.0% 100.0% 100.0%
===== ===== =====
(1) Historical Gart Sports only balances.
Winter Equipment and Apparel
The Company believes that its stores offer the widest selection of ski and
snowboard merchandise in the Rocky Mountain region. This extensive selection
consists of winter sports apparel, accessories and equipment, including a
broad selection of apparel and equipment for nordic (cross country) skiing.
Gart Sports has become a leader in the snowboard industry, which began in the
early 1990s, with its wide range of snowboard-related products, including
snowboards, boots, bindings and apparel. The Company offers products from a
wide variety of well-known winter sports equipment and apparel suppliers,
including the following:
Airwalk Elan Kombi Quiksilver Spyder
Atomic Fisher Lamar RD Tecnica
Bogner Gordini Lange Roffe The North Face
Burton Grandoe Leki Rossignol Thule
Columbia Head Marker Salomon Tyrolia
Descente Helly Hansen Nils Santa Cruz Vans
Duofold K2 Nordica Scott Volant
Dynastar Karhu Obermeyer Skea Volkl
In addition to offering the most widely known and available popular brands,
Gart Sports stores carry full lines of winter equipment and apparel from
manufacturers that are typically only available in specialty stores, such as
Volkl, Volant, The North Face and Bogner.
Many stores also rent winter sports equipment, including skis, snowboards,
boots and poles. The rental equipment ranges from entry-level products
designed for beginners to advanced products for more accomplished skiers and
snowboarders. Other services offered in these stores include advanced demo ski
programs, custom boot fitting, complete ski and snowboard repair facilities,
each with specialized equipment, and the convenience of in-store discounted
lift ticket sales to area resorts.
3
The Company has strengthened the winter equipment and apparel category in
the Sportmart stores as appropriate. In addition, the Company introduced a
larger breadth and depth of merchandise, additional quality name brands, and
more specialized customer service to the Sportmart stores.
Footwear, In-line Skates and General Apparel
The Company stores carry a complete line of athletic footwear, sportswear
and apparel designed for a wide variety of activities and performance levels.
Footwear is available for such diverse activities as basketball, baseball,
football, soccer, tennis, golf, aerobics, running, walking, cycling, hiking,
cross-training, wrestling and snowshoeing. The Company is also a major
retailer of in-line skates and ice skates. The Company's wide variety of
sportswear and apparel include a broad selection of licensed apparel for
professional and college teams. Special services in this area include in-line
skate repair, bearing and wheel changes, and training and safety programs
designed to help new skate owners safely develop their in-line skating skills.
The Company's extensive variety of well-known apparel and footwear vendors
includes the following:
Adidas Converse Merrell Puma Sorel
Antiqua Danner Mitre Quiksilver Speedo
Asics Danskin Mizuno Reebok Starter
Avia Fila Moving Comfort Polo Sport Tecnica
Bauer Hi-Tech Nautica Rollerblade Teva
Birkenstock K2 New Balance Russell The North Face
Browning K-Swiss Nike Salomon Thorlo
Champion Logo Athletic No Fear Saucony Tyr
Columbia Marika Pro Player Sketchers Vans
Sportmart historically had higher footwear sales as a percentage of store
sales than Gart Sports stores. The Company believes that this success is
partially attributable to Sportmart's self-service format and display of
footwear and has implemented a modified self-service format in the new Gart
Sports stores.
General Athletics, Exercise and Outdoor Recreation
General Athletics, Exercise, Optics and Timing. The Company offers a broad
range of brand name equipment for traditional team sports, including football,
baseball, basketball, hockey, volleyball and soccer. The Company also carries
a variety of fitness equipment, including treadmills, stationary bicycles,
stair climbers, weight machines and free weights, and equipment for
recreational activities including table tennis, darts, badminton, croquet and
horseshoes. In addition, the Company offers home delivery and in-home set up
of exercise equipment and outdoor equipment (such as basketball hoops and
trampolines). The Company's stores carry brands such as:
Adidas Easton Sports Lifetime Products Spalding
Baush & Lomb Everlast Mizuno Swiss Army
Bike Athletic Franklin Motorola Thorlo
Bolle Freestyle Nike Timex
Brine Hillerich & Bradsby Pentax Wilson
Buck Knives Huffy Sports Rawlings
Bushnell Icon/ProForm Reebok
4
Historically, Sportmart excelled in the general athletics category through
its presentation and selection of exercise and team sports equipment. The
Company has expanded the product mix and presentation in this category in its
Gart Sports stores.
Golf and Tennis. The Company maintains a wide assortment of golf and tennis
apparel and equipment to cater to every type of sporting goods customer,
ranging from the recreational athlete to the most avid sports enthusiast. The
Company offers products from a wide variety of well-known golf and racquet
sports equipment and apparel suppliers, including the following:
Adams Etonic Nike Taylor Made
Callaway Head Odyssey Titleist
Cleveland Izod Club Orlimar Armour Golf
Cobra Maxfli Precept Wilson
Ektelon Mizuno Prince Yonex
Footjoy McGregor Reebok
Hogan Nicklaus Spalding
In addition to offering the most widely known and available popular brands,
the Company has direct vendor access to full lines of prestigious brands such
as Callaway, Cobra, Taylor Made and Armour Golf that are generally not found
in large format stores. Most of the Company's stores have a golf club repair
center and a tennis stringing and a re-gripping center and several stores rent
rackets. Many stores feature indoor putting greens and driving ranges, and one
store features a rooftop tennis court, enabling customers to try out equipment
prior to purchase. The Company introduced a broader variety of merchandise,
including higher end products, and service offerings in the golf departments
of most of the Sportmart stores.
Cycling. In most of its stores, the Company offers a selection of bicycles,
including mountain bikes, BMX and youth bikes, from such manufacturers as
Diamondback, Mongoose, Nishiki and Huffy. The Company's stores carry cycling
apparel, accessories and components from suppliers such as Bell, Descente,
Nike, Shimano, Specialized, Giro and Thule. The Company also offers all of the
attachments necessary for carrying bicycles on a Thule car roof rack. Most of
the Company's stores have their own bicycle repair facility where work can be
performed on all makes and models of bikes, including those purchased from
other retailers.
Water Sports. The Company carries a broad array of products designed for a
variety of water sports, including recreational and competitive swimming,
water skiing, canoeing, knee boarding, wake boarding, body boarding and
surfing. Suppliers of these products include HO, O'Brien and O'Neill.
Swimsuits and accessories are available from Jansen, Mossimo, Nike,
Quiksilver, Sideout, Speedo and Tyr. In addition, the Company carries
snorkeling equipment and wet suits.
Hunting, Fishing and Camping Apparel and Equipment
Hunting. The Company carries a broad selection of hunting equipment and
accessories. Many stores provide a complete selection of sporting arms,
scopes, reloading supplies, clothing and hunting licenses. The Company also
offers the expertise of an in-house gunsmith. The Company carries such top
brand names as:
Beretta Colt Leupold Smith & Wesson
Browning Columbia Redfield Weatherby
Bushnell Glock Remington Winchester
Fishing. The Company's stores offer a broad range of freshwater and fly
fishing equipment, accessories and fishing licenses. To complement this
department, several stores offer instructional fly fishing courses on
5
topics such as fly tying, line winding and casting. The Company sells
equipment and accessories from widely known fishing equipment and accessory
manufacturers including the following:
Berkley Daiwa Penn Shakespeare
Browning Eagle Claw Ross Shimano
Cortland Hodgman Scientific Angler Stillwater
Camping. The Company's stores typically carry a wide selection of outdoor
products for most types of camping and outdoor activities. The Company offers
products from a broad range of companies including the following:
American Camper Igloo Kelty Slumberjack
Coleman/Peak1 Inside Edge Lowe Alpine Swiss Army Knife
Eureka Jansport Magellan The North Face
Garmin
The Company's Stores
Store Design
The Company creates a dynamic shopping atmosphere that appeals broadly to
both the casual sporting goods customer and the sports enthusiast. Based on
more than 70 years of experience in the sporting goods retail industry, the
Company has developed two superstore prototypes designed to feature the
quality and variety of brand name merchandise, the breadth of product
selection and the high levels of customer service that are the foundation of
the Company's strong reputation. The Company typically penetrates larger,
multiple store markets primarily with its 42,000 square foot prototype
superstore and smaller single-store markets with its 33,000 square foot
prototype superstore. The Company has determined that these superstore formats
provide the best opportunity for growth.
The prototype superstore layout features a racetrack configuration with
apparel and specialty brand shops in the middle of the store and the specialty
hardlines departments along the outside of the racetrack. The lighting,
flooring and color scheme is designed to enhance the presentation of the
merchandise and avoid a warehouse-type atmosphere. The apparel is displayed
prominently to showcase the quality brand names. In addition, many of the
Company's stores feature specialized brand shops for vendors such as Nike,
Columbia, The North Face and Adidas, which offer a broad array of vendor-
specific products in specialized, image-enhancing fixtures. The visibility of
the branded apparel and the feature shops emphasize the quality image and
brand assortment of the Company's stores.
Specialty departments are located adjacent to other related departments and
apparel assortments to increase customer convenience and to stimulate cross-
purchasing. The specialty departments display merchandise on low racking to
allow customers easy access to products and to promote storewide visibility
and easy department identification. The specialty departments use the walls
effectively to display merchandise in order to convey the depth and breadth of
product selection. Department layouts are adjusted periodically to make room
for seasonal products.
The Company's superstores average approximately 42,000 square feet in size.
Each store is designed to provide ample space for the store's customers to
shop the Company's extensive depth of product. Generally, 80% of store space
is dedicated to selling while 20% is used for office and non-retail functions.
The Company plans to remodel 17 stores in fiscal 1999. In certain stores, the
Company plans to improve the shopping environment with clearer sight lines,
warmer flooring and color schemes and improved visual design. In some
instances, department size and adjacencies will be tailored to regional and
seasonal needs to improve the stores' shopability.
6
The Company's 20 non-superstore freestanding and strip center stores more
closely resemble traditional sporting goods stores and range in size from
9,000 to 31,000 square feet. The Company's 16 stores in enclosed shopping
malls average 13,000 square feet and carry a selection of merchandise that
appeals to the mall-oriented shopper, focusing on apparel and footwear. The
Company's six resort stores range in size from 7,000 to 27,000 square feet and
provide a broader merchandise selection and lower prices than typically
available in resort areas, while offering a high level of customer service.
Customer Service
The Company's objective is to provide the exceptional level of service
generally associated with specialty sporting goods stores and pro shops. To
accomplish this high standard, the Company's strategy is to hire sales
associates and sports technicians who are knowledgeable and enthusiastic about
the products they sell or service. Sales associates are required to attend
product training clinics sponsored by individual vendors as well as Company
sponsored seminars on topics such as customer service and selling skills. An
independent professional shopping service randomly monitors the stores for
compliance with the Company's customer service standards. In addition, the
Company offers its customers special services including special order
capability, equipment rental, on-site repair centers, instructional courses,
discounted ski lift tickets and hunting and fishing licenses. The Company
strives to provide the highest level of technical support.
Operations and Training
Typically, the Company's superstores have 55 to 80 sales associates and
technicians, while its non-superstore stores employ a staff of approximately
20 to 25. Additional part-time sales associates are hired during the holiday
season and for the Sniagrab pre-season ski sale.
The Company employs a store manager, a sales and merchandise manager in each
store. Store managers report to a district manager having responsibility for
all stores in a limited geographic region. There are currently 17 district
managers who report to three regional managers.
The Company's new store managers are either promoted internally or hired as
trainees. The Company places significant emphasis on training store-level
management. Training new store managers is a two-step process which involves
participation in a formalized training program covering, among other things,
time management, staff selection, scheduling, employee training, customer
service and retail selling skills. The management trainee then becomes a
manager in training at one of the Company's stores. Upon completion of this
program, management trainees are eligible to be promoted to the position of
sales or merchandise manager and later to store manager.
The Company's stores are open seven days a week, generally from 9:00 a.m. to
9:00 p.m., Monday through Saturday; and 10:00 a.m. to 6:00 p.m. on Sunday.
Store hours are adjusted for individual markets as necessary.
Site Selection and Location
In choosing appropriate markets, the Company considers the demographic and
lifestyle characteristics of a market, including, among other factors, the
following: levels of disposable income; local population and buying patterns;
enthusiasm for outdoor recreation; popularity of collegiate and professional
sports teams; and level of affinity for regional sports activities.
7
The following table sets forth the location, by state, of the Company's
stores, as of April 7, 1999:
Total Number
State Superstores Resort Stores Other Stores of Stores
----- ----------- ------------- ------------ ------------
Colorado................ 8 3 18 29
California.............. 27 -- -- 27
Illinois................ 15 -- -- 15
Utah.................... 4 2 9 15
Washington.............. 9 -- -- 9
Idaho................... 1 -- 6 7
Minnesota............... 5 -- -- 5
Wyoming................. -- 1 3 4
Ohio.................... 3 -- -- 3
Oregon.................. 3 -- -- 3
Wisconsin............... 2 -- -- 2
Montana................. 2 -- -- 2
New Mexico.............. 2 -- -- 2
Nevada.................. 1 -- -- 1
Indiana................. 1 -- -- 1
Iowa.................... 1 -- -- 1
--- --- --- ---
Total............... 84 6 36 126
=== === === ===
The Company plans to open new stores primarily in existing markets to
further leverage the Company's fixed cost structure, advertising program and
distribution system. The Company intends to open four additional stores in
fiscal 1999.
Management Information Systems
Over the last five years the Company has installed sophisticated management
information systems which use JDA retail software operating on an IBM AS/400
platform. The Company utilizes IBM 4680 and 4690 point-of-sale systems that
incorporate scanning, price look-up, zone pricing support and store level
access to the Company's merchandise information system. The Company's
management information systems fully integrate purchasing and sales reporting
and inventory information down to the SKU level and have allowed the Company
to improve overall inventory management by identifying individual SKU movement
and projecting trends and replenishment needs on a timely basis. These systems
have enabled the Company to increase margins by reducing inventory investment,
strengthening in-stock positions, reducing the Company's historical shrinkage
levels, and creating store level perpetual inventories and automatic inventory
replenishment on basic items of merchandise. The Company is continuing to
invest in hardware and software, and has hired additional systems staff to
assist in the development of enhancements such as data warehousing and
electronic data interchange to improve the Company's ability to systematically
manage its inventory. In addition, the Company has installed a frame relay
data and voice communications system to enhance the overall efficiency of the
management information systems.
The Company's continuing development of enhancements to its management
information systems includes data warehousing, advanced use of electronic data
interchange, radio frequency portable data terminals, and store-level planning
and allocation capability. These enhancements are intended to:
. Improve the Company's management of the flow of merchandise from supplier
through distribution facilities and retail stores;
. Improve customer service through the reduction and automation of other
tasks in the stores;
. Reduce distribution costs;
. Provide for more effective store assortments; and
. Provide detailed information on key business performance indicators.
8
Advertising and Promotion
The Company's comprehensive marketing program is designed to promote the
Company's quality image and extensive selection of brand name products at
competitive prices. The program is centered on extensive newspaper advertising
supplemented by television, radio and billboard ads. The advertising strategy
is focused on weekly newspaper advertising utilizing both four-page pre-
printed flyer inserts and standard run of press (ROP) advertising, with
additional emphasis on key shopping periods, such as the winter holidays,
Father's Day and Back-to-School, and on specific sales and promotional events,
including the annual Sniagrab sale, which the Company believes is the largest
pre-season ski and snowboard sales event in the United States.
The Company's strategy of clustering stores in major markets enables it to
employ an aggressive advertising strategy on a cost-effective basis through
the use of newspaper, radio and television advertising. The Company's goal is
to be one of the dominant sporting goods advertisers in each of its markets.
The Company advertises in major metropolitan newspapers as well as regional
newspapers circulated in areas surrounding its store locations. Newspaper
advertising typically consists of weekly promotional ads with three-color
inserts on a semi-monthly basis. Television advertising is generally
concentrated three to four days prior to a promotional event or key shopping
period. Radio advertising is used primarily to publicize specific promotions
in conjunction with newspaper advertising or to announce a public relations
promotion or grand opening. Billboards emphasizing the Company's image and
high quality brand name merchandise are strategically located on high traffic
thoroughfares near store locations. Vendor payments under cooperative
advertising arrangements with the Company as well as vendor buy-ins to sponsor
sporting events and programs have significantly contributed to the Company's
advertising leverage.
The Company's advertising is designed to create an "event" in the stores and
to drive customer traffic with advertisements promoting a wide variety of sale
priced merchandise appropriate for the current holiday or event. In addition
to holidays, the Company's events include the Sniagrab sale, celebrity
autograph sessions, events related to local sports teams, race sponsorships
and registrations, vendor demonstrations and other activities that attract
customers to its stores. The Company's marketing program is administered by an
in-house staff.
The Company sponsors tournaments and amateur competitive events in an effort
to align itself with both the serious sports enthusiast and the recreational
athlete. The Company is also recognized as a major sponsor of professional
sport teams in its markets, including, from time to time, the Denver Broncos,
Colorado Rockies, Chicago Bulls, Cubs, Blackhawks and Bears, the Los Angeles
Dodgers, the Seattle Supersonics, the Minnesota Twins and Vikings, the
Milwaukee Brewers and the San Francisco Giants.
Purchasing and Distribution
The Company's purchasing department is composed of two Senior Vice
Presidents of Merchandising, four Vice Presidents and 19 buyers. The buying
group has an average of approximately 15 years of retail experience. In
addition to merchandise procurement, the buying staff is also responsible for
determining initial pricing and working with the allocation and replenishment
groups to establish stock levels and product mix. The buying staff also
regularly communicates with store operations to monitor shifts in consumer
tastes and market trends.
The Company's merchandise allocation and control department (the "MAC
Group") is responsible for merchandise distribution, inventory control, and
the E3 Replenishment Purchasing and Allocation System. It acts as the central
processing intermediary between the buying staff and the Company's stores. The
MAC Group also coordinates the inventory levels necessary for each advertising
promotion with the buying staff and the advertising department. The MAC Group
tracks the effectiveness of each ad to allow the buying staff and the
advertising department to determine the relative success of each promotional
program. In addition, the MAC Group implements price changes, creates all
reorders of basic merchandise purchases, determining minimum/maximum levels
for individual stores on particular items.
9
The Company purchases merchandise from over 1,000 vendors and has no long-
term purchase commitments. During fiscal 1998, Nike, the Company's largest
vendor, represented approximately 13.4% of the Company's purchases. No other
vendor represented more than 5.0%.
The Company utilizes a "hub and spoke" distribution system in which vendors
ship directly to central distribution centers serving regional stores.
Management believes that its distribution system has the following advantages
as compared to a direct delivery (i.e., drop shipping) system utilized by
other retailers: reduced individual store inventory investment; more timely
replenishment of store inventory needs; better use of relatively higher cost
store floor space; and easier returns to vendors. This "hub and spoke"
distribution system is utilized by many major volume retailers such as Wal-
Mart, Toys "R" Us and Circuit City.
The Company has three regional distribution centers: (1) a 240,000 square
foot facility located in Denver, Colorado, (2) a 202,500 square foot facility
located in Fontana, California, and (3) a 141,000 square foot facility located
in Woodridge, Illinois. Inventory arriving at the distribution centers is
allocated directly to the stores or to the distribution center or to both.
Seasonal and limited purchase inventory is fully distributed to all stores.
Big ticket and bulk items (such as treadmills, indoor games and bicycles) are
allocated to the stores largely on a percentage basis with the balance
remaining in the distribution centers for future replenishment. An automated
reorder system regularly replenishes the stores by allocating merchandise from
the distribution centers based on each store's sales. This system has
significantly reduced the need for back-stock in the stores. The E3
replenishment system that generates the purchase of the vast majority of the
"basics" that the Company sells utilizes the "hub and spoke" distribution
method. The Company plans to continue adding SKUs to this automated reorder
system.
The Company operates tractor trailers for delivering merchandise from its
Denver distribution center to its Colorado stores and contracts with common
carriers to deliver merchandise to its stores outside a 400 mile radius from
Denver and to its stores receiving merchandise from the Company's Fontana,
California and Woodridge, Illinois distribution centers. The Company believes
that its three distribution centers are adequate to service the Company's
current and expansion needs for the foreseeable future.
Competition
The retail sporting goods industry is highly fragmented and intensely
competitive. While the Company's competition differs by market, there are four
general categories of sporting goods retailers with which the Company
competes: large format sporting goods stores, traditional sporting goods
stores, specialty sporting goods stores and mass merchandisers.
Large Format Sporting Goods Stores. Stores in this category include Galyans,
Jumbo Sports, The Sports Authority, Sport Chalet and Oshman's, typically range
from 30,000 to 100,000 square feet in size and tend to be destination
(freestanding or strip shopping center anchor) locations. Most large format
sporting goods stores emphasize high sales volumes and a large number of SKUs.
Traditional Sporting Goods Stores. This category consists of traditional
sporting goods chains, such as Big 5 and Hibbetts, as well as local
independent sporting goods retailers. These stores typically range in size
from 5,000 to 20,000 square feet and are frequently located in regional malls
and strip shopping centers. Traditional chains and local sporting goods stores
often carry a more limited assortment of merchandise and are commonly viewed
by their customers as convenient neighborhood stores.
Specialty Sporting Goods Stores. This category consists of specialty stores
and pro shops specializing in certain categories of sporting goods. Examples
include such national retail chains as The Athlete's Foot, Champs, Finish
Line, Foot Locker, Just for Feet, REI, Pro Discount Golf and Nevada Bob's.
These retailers are highly focused, selling generally only one product
category such as athletic footwear, ski or snowboard equipment, backpacking
and mountaineering, or golf and tennis equipment and apparel.
10
Mass Merchandisers. Stores in this category include discount retailers such
as Target, Kmart and Wal-Mart, warehouse clubs such as Costco, and department
stores such as JC Penney and Sears. These stores range in size from
approximately 50,000 to 200,000 square feet and are primarily located in
regional malls and strip shopping centers. Sporting goods merchandise and
apparel represent a small portion of the total merchandise in these stores and
the selection is often more limited than in other sporting goods retailers.
Although generally price competitive, the Company believes that discount and
department stores have limited customer service because the store personnel
often lack product expertise in the selling of sporting goods.
The Company believes that although it will continue to face competition from
retailers in each of these categories, the most significant competition will
be from the large format sporting goods stores. The Company faces direct
competition from large format sporting goods stores, including Sport Chalet in
California; The Sports Authority in California, Illinois and Washington; Jumbo
Sports in Colorado, Illinois and Iowa; Dick's Clothing and Sporting Goods in
Ohio; Galyans (a subsidiary of The Limited) in Indiana, Minnesota and Ohio;
and Oshman's in California, Minnesota, New Mexico, Utah and Washington. The
principal competitive factors include store location and image, product
selection, quality and price, and customer service. Increased competition in
markets in which the Company has stores, the adoption by competitors of
innovative store formats and retail sales methods or the entry of new
competitors or the expansion of operations by existing competitors in the
Company's markets could have a material adverse effect on the Company's
business, financial condition and operating results. In addition, certain of
the Company's competitors have substantially greater resources than the
Company. The Company believes that the principal strengths with which it
competes are its broad selection and competitive prices combined with superior
customer service and brand names typically available only in specialty stores
and pro shops.
Properties
The Company currently leases all of its store locations. Most leases provide
for the payment of minimum annual rent subject to periodic adjustments, plus
other charges, including a proportionate share of real estate taxes, insurance
and common area maintenance. The Company has identified certain markets for
strategic repositioning and plans to address the positioning of each store as
leases expire and as opportunities arise. Leases for ten of the Company's non-
superstore format stores have expired or are expiring by the end of fiscal
1999. Four of such stores are occupied on a month-to-month basis, two of such
stores will be closed and four stores are subject to leases with an option to
renew or relocate. In addition, the lease for one Sportmart store was
terminated in 1998 by mutual agreement. As part of its repositioning strategy,
the Company regularly evaluates whether to renew store leases in existing
locations or to strategically relocate some of the stores to better locations
and replace them with larger stores. The Company believes that at store
locations where it chooses to remain and renew expired leases, the Company can
do so on favorable terms. Leases for the Company's 84 Superstores expire
between 2000 and 2018. The Company anticipates that all of its new stores will
have long-term leases, typically 15 years, with multiple five-year renewal
options.
Seven of the leases for the Company's stores are with partnerships, the
partners of which are certain former officers or directors of Sportmart
(including Messrs. Larry and Andrew Hochberg, currently directors of the
Company) and their family members (the "Hochberg Partnerships"). In addition,
the Company leases from Hochberg Partnerships three stores that the Company no
longer occupies but sublets. See "Certain Relationships and Related
Transactions."
In addition, as a result of the closing of Sportmart's Canadian subsidiary,
the Company remains secondarily liable for two leases the Company has assigned
in Canada and has a contingent liability behind two other parties with respect
to a portion of a third location in Canada. The Company has sublet the former
Sportmart corporate offices in Wheeling, Illinois.
The Company owns a vacant Sportmart store located in Edmonton, Canada, which
is being marketed for sale. In December 1998, the Company sold a five-acre
tract of land located in Orland Park, Illinois.
11
The Company also leases its three regional distribution centers. The lease
for the 240,000 square foot distribution center in Denver, Colorado, expires
in 2004 with a ten year renewal option. The lease for the 202,500 square foot
distribution center in Fontana, California expires in 2008, assuming all
options are exercised. The lease for the 141,000 square foot distribution
center in Woodridge, Illinois expires in 2007, assuming all options are
exercised.
In January 1998, the Company entered into a lease for approximately 22,000
square feet of additional corporate office space located adjacent to the
Denver Sportscastle store. This lease expires in 2017.
Employees
At April 7, 1999, the Company employed approximately 5,500 individuals, 47%
of whom were employed on a full-time basis and 53% of whom were employed on a
part-time (less than 32 hours per week) basis. Due to the seasonal nature of
the Company's business, total employment fluctuates during the year. The
Company considers its employee relations to be good. None of the Company's
employees are covered by a collective bargaining agreement.
Trademarks and Tradenames
The Company uses the Gart Sports(R), Gart Bros. Sporting Goods Company(R),
Gart Sports Superstore(R), Sniagrab(R), Sportscastle(R), Gart Sports
Company(R) and SWAT(R) trademarks and trade names, which have been registered
with the United States Patent and Trademark Office. Sportmart(R) and
Sportmart's corporate logo are federally registered servicemarks of the
Company. The Company also owns numerous other trademarks and servicemarks
which involve the manufacturing of soft goods, advertising slogans,
promotional event names and store names used in its business.
ITEM 3. Legal Proceedings
The Company is from time to time involved in various legal proceedings
incidental to the conduct of its business. The Company believes that the
outcome of all such pending legal proceedings to which it is a party will not
in the aggregate have a material adverse effect on the Company's business,
financial condition, or operating results.
On July 24, 1997, the Internal Revenue System proposed adjustments to the
1992 and 1993 consolidated federal income tax returns of the Company and its
former parent company, now Thrifty PayLess Holdings, Inc., a subsidiary of
RiteAid Corporation, and the manner in which LIFO inventories were
characterized on such returns. See Note 20 to the Consolidated Financial
Statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were put to a vote of security holders during the fourth quarter
of fiscal 1998.
12
PART II
ITEM 5. Market Price of Common Stock and Related Stockholder Matters
The Common Stock began trading on the Nasdaq National Market on January 9,
1998 under the symbol "GRTS." As of April 7, 1999, there were approximately
257 holders of record of Common Stock. The number of holders of Common Stock
does not include the beneficial owners of Common Stock whose shares are held
in the name of banks, brokers, nominees or other fiduciaries. The table below
sets forth the reported high and low closing sales prices of the Common Stock
on the Nasdaq National Market during the periods presented:
High Low
------- -------
For Fiscal Year 1999
First quarter (through April 26, 1999)..................... $ 8.125 $ 5.750
For Fiscal Year 1998
First quarter ............................................. $17.250 $12.750
Second quarter............................................. $18.000 $12.500
Third quarter.............................................. $16.375 $ 6.750
Fourth quarter............................................. $10.375 $ 5.625
For the 28 Day Period Ended January 31, 1998................ $14.000 $12.500
The Company has never declared or paid any dividends on its Common Stock.
The Company plans to retain earnings, if any, to finance future growth and has
no current plans to pay cash dividends to stockholders. The payment of any
future cash dividends will be at the sole discretion of the Company's Board of
Directors and will depend upon, among other things, future earnings, capital
requirements, and the general financial condition of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources." In addition, the Company's
revolving line of credit limits the amount of dividends that may be declared
or paid on the Common Stock.
13
ITEM 6. Selected Financial Data
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for and as of the end of each of the
fiscal years in the three-year period ended January 30, 1999, and the 28 day
period ended January 31, 1998 are derived from the Company's audited
consolidated financial statements included elsewhere in this report and should
be read in conjunction therewith. This data should be read in conjunction with
the consolidated financial statements of the Company, the notes thereto and
other financial information of the Company included elsewhere in this report.
The "Statement of Operations Data" and "Balance Sheet Data" for each of the
fiscal years in the two year period ended January 6, 1996 are derived from
audited consolidated financial statements not included in this report.
Management does not believe that the results of operations for the
transition period are necessarily indicative of future results, due to the
effects of seasonality and costs associated with the Sportmart acquisition.
Therefore, the results of operations for the transition period are not
comparable to other presented periods. Fiscal year 1998 results are not
comparable to the transition period ended January 31, 1998, or fiscal 1997,
1996, 1995 and 1994 which represent the results of Gart Sports only, before
the acquisition of Sportmart.
28 days ended Fiscal Years (1)
Fiscal January 31, ------------------------------------------
Year 1998 1998 1997 1996 1995 1994
--------- ------------- --------- --------- --------- ---------
(Dollars in thousands, except per share)
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 658,047 $ 38,825 $ 228,379 $ 204,126 $ 176,829 $ 171,866
Cost of goods sold,
buying, distribution
and occupancy.......... (503,912) (31,924) (164,289) (148,420) (131,455) (124,892)
--------- --------- --------- --------- --------- ---------
Gross profit............ 154,135 6,901 64,090 55,706 45,374 46,974
Operating expenses...... (148,348) (11,360) (52,721) (47,604) (42,876) (39,949)
Merger integration
costs.................. (2,923) (3,377) (395) -- -- --
--------- --------- --------- --------- --------- ---------
Operating income
(loss)................. 2,864 (7,836) 10,974 8,102 2,498 7,025
Interest expense........ (8,820) (525) (983) (1,601) (2,281) (1,746)
Other income, net....... 353 38 776 637 576 490
--------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes........... (5,603) (8,323) 10,767 7,138 793 5,769
Income tax (expense)
benefit................ 2,185 318 (4,083) (2,681) (285) (2,209)
--------- --------- --------- --------- --------- ---------
Net income (loss)....... $ (3,418) $ (8,005) $ 6,684 $ 4,457 $ 508 $ 3,560
========= ========= ========= ========= ========= =========
Basic earnings (loss)
per share.............. $ (.45) $ (1.11) $ 1.21 $ 0.81 $ 0.09 $ 0.62
========= ========= ========= ========= ========= =========
Weighted average shares
of common stock
outstanding............ 7,676,816 7,212,267 5,501,673 5,512,886 5,681,811 5,784,918
========= ========= ========= ========= ========= =========
OTHER DATA:
Number of stores at
beginning of period.... 123 63 60 60 61 58
Number of stores opened
or acquired............ 6 60 (/4/) 5 5 5 5
Number of stores
closed................. (4) -- (2) (5) (6) (2)
--------- --------- --------- --------- --------- ---------
Number of stores at end
of period.............. 125 123 63 60 60 61
========= ========= ========= ========= ========= =========
Total gross square feet
at end of period....... 4,361,335 4,206,197 1,605,963 1,453,520 1,326,158 1,210,003
Comparable store sales
increase
(decrease)(2).......... (4.5%) 10.0% 5.6% 4.4% (4.1%) (2.8%)
EBITDA(3)............... $ 15,043 $ (6,633) $ 15,040 $ 12,396 $ 6,568 $ 10,115
Net cash provided by
(used in):
Operating activities... 16,809 (15,395) 8,548 22,076 11,541 (3,108)
Investing activities... (16,120) 483 (4,430) (3,377) (3,615) (5,349)
Financing activities... (6,282) 18,326 40 (16,820) (3,289) 8,061
BALANCE SHEET DATA (at
end of period):
Working capital........ $ 97,239 $ 111,845 $ 39,886 $ 34,133 $ 44,806 $ 49,415
Total assets........... 335,119 319,435 121,291 96,435 93,658 95,666
Long-term debt......... 100,000 105,600 -- -- 17,000 19,672
Redeemable common
stock, net............ -- -- 1,904 860 554 --
Stockholders' equity... 63,466 68,757 42,613 36,883 32,502 32,761
- --------
(1) During 1995, Gart Sports adopted an annual fiscal reporting period that
ends on the first Saturday in January. Accordingly, fiscal 1997 began on
January 5, 1997 and ended on January 3, 1998 and included 52 weeks of
operations; fiscal 1996 began on January 7, 1996 and ended on January 4,
1997 and included 52 weeks of
14
operations; and fiscal 1995 began on January 1, 1995 and ended on January
6, 1996 and included 53 weeks of operations. During 1998, the Company
adopted an annual fiscal reporting period that ends on the Saturday closest
to the end of January. Accordingly, fiscal 1998 began on February 1, 1998
and ended on January 30, 1999 and included 52 weeks of operations.
(2) Stores enter the comparable store sales base at the beginning of their
14th month of operation. The 59 Sportmart stores acquired on January 9,
1998 are included in comparable store sales bases utilizing historical
Sportmart comparable store data.
(3) EBITDA is earnings (loss) before income taxes plus interest expense and
other financing costs and depreciation and amortization. Gart Sports
believes that, in addition to cash flows from operations and net income
(loss), EBITDA is a useful financial performance measurement for
assessing operating performance as it provides an additional basis to
evaluate the ability of Gart Sports to incur and service debt and to fund
capital expenditures. In evaluating EBITDA, Gart Sports believes that
consideration should be given, among other things, to the amount by which
EBITDA exceeds interest costs for the period, how EBITDA compares to
principal repayments on debt for the period and how EBITDA compares to
capital expenditures for the period. To evaluate EBITDA, the components
of EBITDA such as revenue and operating expenses and the variability of
such components over time should also be considered. EBITDA should not be
construed, however, as an alternative to operating income (loss) (as
determined in accordance with generally accepted accounting principles
(GAAP)) as an indicator of Gart Sports' operating performance or to cash
flows from operating activities (as determined in accordance with GAAP)
as a measure of liquidity. Gart Sports' method of calculating EBITDA may
differ from methods used by other companies, and as a result, EBITDA
measures disclosed herein may not be comparable to other similarly titled
measures used by other companies.
(4) Represents the 59 Sportmart stores acquired on January 9, 1998 and one
new store opened in January 1998.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the notes thereto and the Company's consolidated
financial statements and notes thereto, included elsewhere in this report.
During 1995, the Company adopted an annual fiscal reporting period that ends
on the first Saturday in January. Accordingly, fiscal 1997 began on January 5,
1997 and ended on January 3, 1998 and included 52 weeks of operations. Fiscal
1996 began on January 7, 1996 and ended on January 4, 1997 and included 52
weeks of operations. Fiscal 1995 began on January 1, 1995 and ended on January
6, 1996 and included 53 weeks of operations. During 1998, the Company adopted
an annual fiscal reporting period that ends on the Saturday closest to the end
of January. Accordingly, fiscal 1998 began on February 1, 1998 and ended on
January 30, 1999 and included 52 weeks of operations. The 28 day period
following the end of fiscal 1997 through January 31, 1998 has been reported as
a transition period.
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information", which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, major customers and the material countries in which the entity holds
assets and reports revenues. The Company is a leading retailer of sporting
goods in the midwest and western United States. Given the economic
characteristics of the store formats, the similar nature of the products sold,
the type of customer and method of distribution, the operations of the Company
are aggregated in one reportable segment.
Management does not believe that the results of operations for the
transition period is necessarily indicative of future results, due to the
effects of seasonality and costs associated with the Sportmart acquisition.
Therefore, the results of operations for the transition period are not
comparable to other presented periods. Fiscal year 1998 results are not
comparable to the transition period ended January 31, 1998, or fiscal 1997 and
1996, which represent the results of Gart Sports prior to the acquisition of
Sportmart.
Results of Operations
The following table sets forth for the periods indicated, certain income and
expense items expressed as a percentage of net sales and the number of stores
open at the end of each period:
28 days ended
Fiscal 1998 January 31, 1998 Fiscal 1997 Fiscal 1996
-------------- ------------------ ------------- -------------
Dollars % Dollars % Dollars % Dollars %
------- ----- ------------------ ------- ----- ------- -----
Net sales............... $658.0 100.0% $ 38.8 100.0% $228.4 100.0% $204.1 100.0%
Cost of goods sold,
buying, distribution
and occupancy.......... 503.9 76.6 31.9 82.2 164.3 71.9 148.4 72.7
------ ----- ------- -------- ------ ----- ------ -----
Gross profit............ 154.1 23.4 6.9 17.8 64.1 28.1 55.7 27.3
Operating expenses...... 148.3 22.5 11.4 29.4 52.7 23.2 47.6 23.4
Merger integration
costs.................. 2.9 0.4 3.4 8.8 0.4 0.2 -- --
------ ----- ------- -------- ------ ----- ------ -----
Operating income
(loss)................. 2.9 0.5 (7.9) (20.4) 11.0 4.7 8.1 3.9
Interest expense, net... 8.8 1.3 0.5 1.3 1.0 0.4 1.6 0.8
Other income............ 0.3 -- 0.1 0.3 0.8 0.4 0.6 0.4
------ ----- ------- -------- ------ ----- ------ -----
Income (loss) before
income taxes........... (5.6) (0.8) (8.3) (21.4) 10.8 4.7 7.1 3.5
Income tax expense
(benefit).............. (2.2) (0.3) (0.3) (0.8) 4.1 1.8 2.7 1.3
------ ----- ------- -------- ------ ----- ------ -----
Net income (loss)....... $ (3.4) (0.5)% $ (8.0) (20.6)% $ 6.7 2.9% $ 4.4 2.2%
====== ===== ======= ======== ====== ===== ====== =====
Number of stores at end
of period.............. 125 123 63 60
16
Newly opened stores enter the comparable store sales base at the beginning
of their 14th month of operation. The 59 Sportmart stores acquired on January
9, 1998 are included in the comparable store sales base utilizing historical
Sportmart comparable store data.
Inventories are stated at the lower of last-in, first-out (LIFO) cost or
market. The Company considers cost of goods sold to include the direct costs
of merchandise, plus certain internal costs associated with procurement,
warehousing, handling and distribution. In addition to the full cost of
inventory, cost of goods sold includes related occupancy costs and
amortization and depreciation of leasehold improvements and rental equipment.
Operating expenses include controllable and non-controllable store expenses
(except occupancy), non-store expenses and depreciation and amortization not
associated with cost of goods sold.
Fiscal 1998
The Company's fiscal 1998 consists of the 52-week year ended January 30,
1999. Note that these results are not comparable to the transition period
ended January 31, 1998, or fiscal 1997 and 1996, which represent the results
of Gart Sports prior to the acquisition of Sportmart.
Net Sales. Net sales were $658.0 million for fiscal year 1998 versus $666.3
million on a pro forma combined basis utilizing comparable fiscal periods, for
the prior year. The decrease in net sales is attributable to a comparable
store sales decrease of 4.5% for the year and an increase of $28.2 million
from new stores opened offset by $6.8 million of lost sales from closed
stores. Comparable store sales decreased due to weak apparel and winter
related product sales. Apparel sales decreased primarily due to weak licensed
product sales due to the shift in the timing of Superbowl-related items into
the first quarter of fiscal 1999 from the fourth quarter of fiscal 1998, as
well as the impact of the NBA lockout. Sales of winter-related product
decreased due to unseasonably warm weather.
Gross Profit. Gross profit was $154.1 million during fiscal 1998 or 23.4% of
net sales compared to $160.1 million or 24.0% on a pro-forma combined basis,
utilizing comparable periods for the prior year. Merchandise margins were
consistent with the 1997 Company's margins on a pro forma combined basis
utilizing comparable fiscal periods. However, gross margin was negatively
impacted by higher occupancy costs including the favorable lease amortization
established in conjunction with the merger.
Operating Expenses and Merger Integration Costs. Operating expenses for the
year ended January 30, 1999 were $151.3 million, or 23.0% of net sales versus
$157.8 million or 23.7% on a pro-forma combined basis, utilizing comparable
periods for the prior year. Operating expenses included $6.0 million of merger
integration costs that are not recurring. Of these costs, $2.9 million were
recorded as a non-recurring charge, and $3.1 million were included in other
operating expenses. These costs consist primarily of $0.7 million of
professional fees, $1.3 million of stay bonuses to employees at the Sportmart
corporate headquarters, $0.5 million of travel and moving expenses, $1.6
million of costs associated with re-ticketing merchandise in the Sportmart
stores, and $1.3 million of expenses to keep the Sportmart corporate office
open during the first part of 1998.
Operating Income. As a result of the factors described above, operating
income for fiscal 1998 was $2.9 million or 0.5% of net sales compared to $2.4
million or 0.4% of net sales on a pro-forma combined basis, utilizing
comparable periods for the year. Excluding the integration costs of $6.0
million, operating income would have been $8.9 million, or 1.4% of net sales.
Interest Expense. Interest expense for the year ended January 30, 1999 was
1.3% of net sales or $8.8 million. The increase from prior periods is
primarily due to increased debt levels as compared to fiscal 1997 and 1996,
due to the refinancing of Sportmart debt under the Credit Agreement.
Income Tax Benefit. The Company's income tax benefit for 1998 was $2.2
million. The Company's effective tax rate was 39%.
Transition Period ended January 31, 1998
The Company's transition period consists of the 28 days of operations for
Gart Sports, which includes 22 days of operations for Sportmart (from the date
of acquisition on January 9, 1998) (the "Transition Period").
17
Net Sales. Net sales were $38.8 million for the Transition Period. Net sales
were evenly distributed between the Gart Sports stores and the Sportmart
stores. Gart Sports stores were bolstered by licensed promotional apparel
sales related to the Denver Broncos' winning of the Super Bowl, contributing
to a 31.8% increase in comparable Gart Sports store sales offset by a 3.6%
decline in comparable Sportmart stores sales subsequent to the acquisition.
The Sportmart acquisition added an additional 59 superstores to the Company's
sales base.
Gross Profit. Gross profit was $6.9 million during the Transition Period or
17.8% of net sales. The month of January is an historically slow sales period
for Sportmart in which promotional clearance events are held. Such events
generally result in higher cost of sales as a percentage of net sales and
correspondingly lower gross profit margins.
Operating Expenses. Operating expenses for the period ended January 31, 1998
were $11.4 million, or 29.4% of net sales. Operating expenses associated with
the Sportmart stores increased as a percentage of net sales primarily due to
the decline in net sales while fixed costs remained constant.
Merger Integration Costs. Merger integration costs were $3.4 million. These
costs consist primarily of $653,000 of professional fees, $700,000 of stay
bonuses to employees at the Sportmart corporate headquarters, $63,000 of
travel expense, $1,153,000 of lease buyouts, $220,000 of obsolete equipment
write down, $78,000 of debt fee expense, $505,000 of severance, moving and
employee welfare costs, and $5,000 of other costs.
Operating Loss. As a result of the factors described above, the operating
loss for the Transition Period was $7.9 million.
Interest Expense. Interest expense for the four week period ended January
31, 1998 was 1.3% of net sales or $0.5 million. In conjunction with the
Sportmart acquisition, the Company refinanced the Sportmart debt of
approximately $86.2 million under a new credit agreement.
Income Tax Benefit. The Company's income tax benefit for the Transition
Period was $0.3 million. The Company's effective tax rate was 3.8% primarily
due to the Company recording a valuation allowance against the deferred tax
assets generated by the operations of Sportmart for the Transition Period.
Fiscal 1997 as compared to Fiscal 1996
Net Sales. Net sales increased $24.3 million to $228.4 million or 11.9% in
fiscal year 1997 compared to $204.1 million in fiscal year 1996. The increase
in net sales is attributable to a comparable store sales increase of 5.6% and
an increase of 6.1% from new stores opened offset by $0.6 million in lost
sales from closed stores. Comparable store sales increases were partly due to
strong sales in golf equipment, snowboards, athletic hardlines and activewear.
During the year, the Company opened four superstores and one freestanding
store and closed two freestanding stores.
Gross Profit. Gross profit for fiscal 1997 was $64.1 million or 28.1% of net
sales as compared to $55.7 million, or 27.3% of net sales for fiscal 1996.
This increase as a percentage of net sales was primarily the result of
improved margins in hardlines and apparel and lower depreciation expense
related to rental goods included in cost of goods sold, buying, distribution
and occupancy.
Merger Integration Costs. Merger integration costs of $0.4 million were
recognized in the third and fourth quarters of fiscal 1997. These costs
consisted primarily of $309,000 of professional fees and $84,000 of travel
expenses related to the Sportmart acquisition.
Operating Expenses. Operating expenses in fiscal 1997 were $52.7 million, or
23.2% of net sales compared to $47.6 million, or 23.4% of net sales for the
period ended January 4, 1997. The decrease as a percentage of net sales is due
primarily to a decrease in corporate overhead expenses offset by increases in
store payroll and advertising costs.
18
Operating Income. As a result of the factors described above, operating
income for the fiscal year 1997 increased 35.8% to $11.0 million or 4.7% of
net sales, from $8.1 million, or 3.9% of net sales in fiscal year 1996.
Interest Expense. Interest expense for the year ending January 3, 1998
decreased 37.5% to $1.0 million or 0.4% of net sales from $1.6 million, or
0.8% of net sales in the year ended January 4, 1997. The decrease is primarily
due to a decrease in average outstanding debt for the year, combined with more
favorable interest rates.
Other Income. Other income for the year ended January 3, 1998 increased $0.2
million or 33.3% over the year ended January 4, 1997 of $0.6 million. The
increase was primarily due to proceeds received in connection with a lessor's
buy-out of one of the Company's store leases.
Income Taxes. The Company's income tax expense for the fiscal year 1997 was
$4.1 million compared to $2.7 million for fiscal year 1996. The Company's
effective tax rate increased to 37.9% from 37.6% in fiscal year 1996.
Liquidity and Capital Resources
The Company's primary capital requirements are for inventory, capital
improvements, and pre-opening expenses to support the Company's expansion
plans, as well as for various investments in store remodeling, store fixtures
and ongoing infrastructure improvements.
Cash Flow Analysis
28 days
Fiscal ended Fiscal Fiscal
Year January 31, Year Year
1998 1998 1997 1996
-------- ----------- ------- --------
Cash provided by/(used in) by
operating activities................ $ 16,809 $(15,395) $ 8,548 $ 22,076
Cash provided by/(used in) investing
activities.......................... (16,120) 483 (4,430) (3,377)
Cash provided by/(used in) financing
activities.......................... (6,282) 18,326 40 (16,820)
Capital expenditures................. $ 14,709 $ 437 $ 4,466 $ 3,634
Long-term debt (at end of period).... 100,000 105,600 -- --
Working capital (at end of period)... 97,239 111,845 39,886 34,133
Current ratio (at end of period)..... 1.62 1.86 1.61 1.70
Debt to equity ratio (at end of
period)............................. 1.58 1.54 -- --
Cash provided by operating activities in fiscal year 1998 was primarily the
result of non-cash charges offsetting the net loss and increases in accounts
payable related to the addition of ski-related product in the Sportmart
stores. These sources of cash were offset by increases in inventory, prepaid
expenses, receivables, and decreases in accrued expenses.
Cash used in investing activities in fiscal year 1998 was primarily for
capital expenditures. These expenditures were primarily for the opening of six
new superstores, renovations and improvements to existing stores as well as
the purchase of certain information systems.
Cash used in financing activities in fiscal year 1998 was primarily for
principal payments made on long-term debt. At the time of the acquisition, the
Company refinanced Sportmart debt of $86.2 million under the Credit Agreement.
The decrease in long-term debt from the Transition Period is primarily from
principal payments made as a result of cash generated by operations, as
discussed above. There was $137.0 million outstanding under the Credit
Agreement at April 3, 1999. The increase in long-term debt since fiscal year
end 1998 is primarily attributable to seasonal purchases of inventory, capital
expenditures, and decreases in accounts payable and accrued expenses.
Historically, the Company's liquidity and capital needs have been met by
cash from operations and borrowings under a revolving line of credit with
CIT/Business Credit, Inc. ("CIT"). In connection with the
19
Sportmart acquisition, this agreement was replaced with a new revolving line
of credit facility (the "Credit Agreement") with a group of lenders including
CIT as agent. The long term debt currently consists of the Credit Agreement,
which allows the Company to borrow up to 70% of its eligible inventories (as
defined in the Credit Agreement) during the year and up to 75% of its eligible
inventories for any consecutive 90 day period in a fiscal year. Borrowings are
limited to the lesser of $175 million or the amount calculated in accordance
with the borrowing base, and are secured by substantially all trade
receivables, inventories and intangible assets. The lenders may not demand
repayment of principal absent an occurrence of default under the Credit
Agreement prior to January 9, 2003. The Credit Agreement contains certain
covenants, including financial covenants that require the Company to maintain
a specified minimum level of net worth at all times and restrict the Company's
ability to pay dividends. Loan interest is payable monthly at Chase Manhattan
Bank's prime rate plus a margin rate that cannot exceed 0.25% or, at the
option of the Company, at Chase Manhattan Bank's LIBOR rate plus a margin that
cannot exceed 1.75%. The margin rate on prime and LIBOR borrowings can be
reduced, if certain earnings levels are achieved, to as low as 0.0% and 1.50%,
respectively. As of January 30, 1999, the Company had not achieved these
specified earnings levels. There was $137 million outstanding under the Credit
Agreement at April 3, 1999, and $26.0 million was available for borrowing.
The Internal Revenue Service has proposed adjustments to the 1992 and 1993
consolidated federal income tax returns of the Company and its former parent,
now Thrifty PayLess Holdings, Inc., a subsidiary of RiteAid Corporation, due
to the manner in which LIFO inventories were characterized on such returns.
These adjustments could result in up to approximately $9.7 million of a long-
term deferred tax liability being accelerated, which would have a negative
impact on liquidity in the near term. See Note 20 to the Consolidated
Financial Statements.
Capital expenditures to support all of the Company's expansion plans as well
as various investments in store remodelings, store fixtures, ski rentals and
ongoing infrastructure improvements are projected to be approximately $11.4
million in fiscal 1999. These capital expenditures will be for five store
openings, fixturing, refurbishing Sportmart stores, remodeling of existing
stores, information systems and distribution center facilities. The Company
leases all of its store locations and intends to continue to finance its new
stores with long-term operating leases. Based upon historical data, newly
constructed superstores require a cash investment of approximately $1.8
million for a 45,000 square foot store and $1.5 million for a 33,000 square
foot store. Superstores constructed in existing retail space historically have
required additional capital investments of approximately $700,000 in leasehold
improvements per location. The level of capital improvements will be affected
by the mix of new construction versus renovation of existing retail space. The
Company expects similar trends in new store investment for the foreseeable
future.
The Company believes that cash generated from operations, combined with
funds available under the Credit Agreement, will be sufficient to fund
projected capital expenditures and other working capital requirements through
fiscal 1999. The Company intends to utilize the Credit Agreement to meet
seasonal fluctuations in cash flow requirements.
Foreign Currency and Interest Rate Risk Management
In connection with the Sportmart acquisition, certain derivative financial
instruments were acquired. The instruments were utilized to reduce interest
rate and foreign currency exchange risks. The Company does not use derivatives
for speculative trading purposes.
The assumed contracts consisted of one interest rate cap agreement and
various foreign currency option contracts. These agreements were transferred
from Sportmart's credit agreement to the Company's credit agreement. The
interest rate cap agreement is for a notional amount totaling $25.0 million,
places an interest rate ceiling on LIBOR at 6.0% and expires in August 1999.
In connection with its Canadian operations (which were closed in 1997),
Sportmart had entered into foreign currency contracts to hedge intercompany
loans and other commitments in currencies other than its Canadian subsidiary's
functional currency. All of these foreign currency contracts expired prior to
fiscal 1998.
20
Seasonality and Inflation
The following table sets forth the Company's unaudited consolidated
quarterly results of operations for each of the quarters in fiscal 1998 and
1997. This information is unaudited, but is prepared on the same basis as the
annual financial information and, in the opinion of management, reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the periods presented. The results of
operations for any quarter are not necessarily indicative of the results for
any future period.
Fiscal 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales................................ $155.2 $169.1 $142.6 $191.1
% of full year........................... 23.6% 25.7% 21.7% 29.0%
Operating income (loss).................. $ (2.6) $ 5.7 $ (7.7) $ 7.5
Fiscal 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales................................ $ 47.4 $ 48.0 $ 55.7 $ 77.3
% of full year........................... 20.8% 21.0% 24.4% 33.8%
Operating income......................... $ 1.8 $ 0.4 $ 0.0 $ 8.8
The fourth quarter has historically been the strongest quarter for the
Company. For fiscal 1998 and 1997, the fourth quarter contributed 29.0% and
33.8%, respectively, of net sales. Comparable store sales for the fourth
quarter of fiscal 1998 were negatively impacted due to weak licensed apparel
and winter-related product sales. Licensed apparel sales decreased due to the
NBA lockout and the shift in the timing of Super Bowl-related items to fiscal
1999 from the fourth quarter of fiscal 1998. Winter related product sales were
negatively impacted by unseasonably warm weather during the fourth quarter of
fiscal 1998. The Company believes that two primary factors contribute to this
seasonality. First, sales of cold weather sporting goods, and purchases of ski
and snowboard merchandise during these quarters in anticipation of the ski and
snowboard season. As is the case with most retailers, holiday sales contribute
significantly to the Company's operating results. As a result of these
factors, inventory levels, which gradually increase beginning in April,
generally reach their peak in November and then decline to their lowest level
following the December holiday season. Any decrease in sales for the fourth
quarter, whether due to a slow holiday selling season, poor snowfall in ski
areas near the Company's markets or otherwise, could have a material adverse
effect on the Company's business, financial condition and operating results
for the entire fiscal year.
Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation has a material impact
on the Company's results of operations. The Company believes that it is
generally able to pass along any inflationary increases in costs to its
customers.
Impact of Recent Accounting Pronouncements
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, which requires
the Company to report the change in its net assets from nonowner sources.
Accumulated other comprehensive loss is comprised of unrealized holding losses
on the Company's marketable securities as of January 30, 1999. The Company has
chosen to disclose comprehensive income in the Consolidated Statements of
Stockholders' Equity, and prior year information has been restated to conform
to the SFAS No. 130 requirements.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-5 ("SOP 98-5") Reporting on the Costs
of Start-Up Activities, effective for fiscal years beginning after
21
December 15, 1998 and encouraging earlier adoption. SOP 98-5 broadly defines
start-up activities as those one-time activities related to, among other
things, opening a new facility. In general, SOP 98-5 requires the Company to
expense, as incurred, those costs such as pre-opening payroll and store
supplies. Currently, the Company capitalizes such costs and amortizes the
balance over the fiscal year in which it opens a new facility. Pursuant to SOP
98-5, the Company will have to incur expenses prior to having available the
sales generated to absorb such costs. Generally, the Company incurs
approximately $125,000 per new store of pre-opening costs. The Company has not
yet adopted SOP 98-5, but will adopt it in fiscal 1999, which will slightly
affect quarterly results. On an annual basis, there will be no financial
impact.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement No. 133"), effective for fiscal
years beginning after June 15, 1999. Statement No.133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
The Company has not yet adopted Statement No. 133, but will comply with the
requirements of this Statement when required. As the Company's use of
derivatives and hedging is not significant, the Company believes that the
adoption of Statement No. 133 will not affect the Company's consolidated
financial position, results of operations, or cash flows.
In the first quarter of 1998, the AICPA's Accounting Standards Executive
Committee issued Statement of Position ("SOP 98-1"), Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. This SOP requires
that entities capitalize certain internal-use software costs once specific
criteria are met. The Company adopted SOP 98-1 in 1998 resulting in $680,000
of capitalized costs that would have otherwise been expensed.
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information", which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, major customers and the material countries in which the entity holds
assets and reports revenues. The Company is a leading retailer of sporting
goods in the midwest and western United States. Given the economic
characteristics of the store formats, the similar nature of the products sold,
the types of customer and method of distribution, the operations of the
Company are aggregated into one reportable segment.
Year 2000 Compliance
Historically, most computer databases, as well as embedded microprocessors
in computer systems and industrial equipment, were designed with date data
fields which used only two digits of the year. Most computer programs,
computers, and embedded microprocessors controlling equipment were programmed
to assume that all two digit dates were preceded by "19", causing "00" to be
interpreted as the year 1900. This formerly common practice could cause a
computer system ("IT") or embedded microprocessor to fail to properly
recognize a year that begins with "20", rather than "19". This in turn could
result in computer system miscalculations or failures, as well as failures of
equipment controlled by date-sensitive microprocessors ("Non-IT"), and is
generally referred to as the "Year 2000 problem."
State of Year 2000 Readiness. In 1995 the Company began to formulate a plan
to address its Year 2000 issues that now includes eight phases: Awareness,
Inventory, Assessment, Remediation, Testing, Implementation, Certification and
Maintenance. Awareness involves ensuring that employees who deal with the
Company's computer assets, and all managers, executives and directors,
understand the nature of the Year 2000 problem and the adverse effects on the
business operations of the Company that would result from the failure to
become and remain Year 2000 ready. Inventory involves the identification of
all computer assets of the Company (both information technology systems and
embedded microprocessors). Assessment involves the determination as to whether
such assets will properly recognize a year that begins with "20", rather than
"19". Computer hardware, software and firmware, and embedded microprocessors,
that, among other things, properly recognize a year beginning with "20" are
said to be "Year 2000 ready". Remediation involves the repair or replacement
of computer assets that are not Year 2000 ready. Testing involves the
validation of the actions taken in the
22
Remediation phase. Implementation is the installation and integration of
remediated and tested computer assets into an overall information technology
and embedded microprocessor system that is Year 2000 ready. Certification is
the final testing phase to ensure full interface between systems. Maintenance
is the process of ensuring that remediated systems are not corrupted by the
installation of new technology.
Awareness. The Company completed the Awareness phase of its Year 2000 plan
in the third fiscal quarter of 1998. The Company believes that all employees
who deal with the Company's computer assets, and the Company's management,
appreciate the importance of Year 2000 readiness and understand that achieving
such readiness is primarily a business problem, not merely a technology
problem. The Company has also communicated directly with approximately 27% of
its approximately 5,000 vendors of goods and services in an attempt to elicit
information from its key vendors regarding the state of their Year 2000
readiness. The Company believes that the vendors contacted represent
approximately 80% of its key business partners from both a merchandise and
operational perspective.
Internal Computer Systems. The Company began its assessment of its internal
computer systems in 1995. All core applications were identified, assessed and
ranked for critical importance to the operations of the Company. Since then,
the Company has replaced or modified 76% of its Point of Sale systems and 95%
of its Personal Computer and Local/Wide Area Network systems for Year 2000
compliance. Merchandise, Accounting and Sales systems are in various stages of
the validation and implementation phases. Some systems have completed the
implementation phase and are running in production but will be included in
further testing efforts. The Company currently plans to have completed
remediation of all computer systems which are critical to its operations by
October 1999. Some non-critical systems may not be remediated, however, until
after January 2000.
Embedded Microprocessors. The Company has completed its assessment of the
potential for Year 2000 problems with respect to embedded microprocessors in
its Non-IT equipment, merchandise inventory, warehouse and distribution
facilities, and corporate offices. Based on the Company's assessment, it
believes that its equipment and systems that contain embedded computer
technology present little Year 2000 exposure or risk. Based on information
from its merchandise vendors, the Company believes that its resale merchandise
does not have Year 2000 compliance issues. The Company has assessed its
mission critical, non-information systems service providers and does not
believe that these service providers pose a substantial Year 2000 compliance
risk.
Testing and Certification. The Company has not yet begun testing of its
critical computer systems in an integrated environment. The Company has begun
testing of individual pieces of software related to its Point of Sale
software. Certain risks exist if this testing and certification is delayed
beyond the existing schedule, including but not limited to, the inability to
complete any additional remediation identified in a timely manner.
Vendors. Fortunately, the Year 2000 problem will not completely materialize
until after the Company's peak annual selling period, the December holiday
season. The problems that may occur following the December holiday season will
be when inventory levels are the lowest. As of the date of this report, the
Company is not aware that any of its key vendors will experience a business
interruption. The Company has not, however, obtained responses from all of its
vendors who received a questionnaire from the Company in its effort to
identify a key vendor that may not be Year 2000 ready and, therefore, may
adversely affect the Company's business.
The Costs to Address the Company's Year 2000 Issues. The Company has
incurred costs of approximately $796,000 as of April 4, 1999 with respect to
its Year 2000 plan, excluding internal resources which have been recognized
for separately. This amount has come from the general operating budget of the
Company's Management Information Systems department and from funds budgeted
for capital expenditures. No significant Management Information Systems
projects have been deferred due to the Company's Year 2000 plan. The Company
currently estimates the total cost of completing its Year 2000 plan will not
exceed $2 million. This estimate is based on currently available information,
will be updated as the Company completes its assessment of third party
relationships and proceeds with its testing and implementation, and may need
to be increased upon receipt of more information from vendors of material
goods and services and upon the design and implementation of the Company's
contingency plan.
23
The Company's Year 2000 Risks. If any computer hardware, software
applications, or embedded microprocessors critical to the Company's operations
have been overlooked in the assessment or remediation phases, if any of the
Company's remediated or replaced internal computer systems fail the testing
phase, or if some of the Company's key business partners do not become Year
2000 ready in a timely manner, there could be a material adverse effect on the
Company's results of operations, liquidity and financial condition of a
magnitude which the Company has not yet fully analyzed. In addition, the
Company has not yet been assured that (1) the computer systems of all of its
key vendors of goods and services will be Year 2000 ready in a timely manner or
(2) the computer systems of third parties with which the Company's computer
systems exchange data will be Year 2000 ready in a timely manner and in a
manner compatible with continued data exchange with the Company's computer
systems.
The Company believes that its most significant Year 2000 risks are:
. Failure of its mission critical information systems service providers to
timely make their systems Year 2000 compliant;
. Failure of the Company to timely complete implementation of its new
payroll processing system, which it anticipates completing by July 1999;
and
. Failure of one or more first tier mission critical merchandise vendors or
service providers to supply merchandise or services for an extended
period of time.
The Company's Contingency Plan. The Company is in the process of developing
a business contingency plan to address Year 2000 risks and expects to have it
completed by July 1999.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to a variety of market risks, including the effects of
changes in interest rates in the market value of its investments and foreign
currency exchange rates. However, the effects of changes in these market risks
on the Company's earnings generally has been small relative to other factors
that also affect earnings, such as sales and operating margins.
The Company's primary interest rate risk exposure results from the Company's
long-term debt agreement. The Company's long-term debt bears interest at
variable rates that are tied to either the U.S. prime rate or LIBOR at the time
of the borrowing. At the end of each 90-day period, the interest rates on the
Company's outstanding borrowings are changed to reflect current prime or LIBOR
rates. Therefore, the Company's interest expense changes as prime or LIBOR
change.
Historically, the Company has not relied upon derivative financial
instruments to mitigate the risk associated with changes in interest rates.
However, in connection with the Sportmart acquisition, the Company acquired one
interest rate cap agreement that Sportmart had used to reduce its interest rate
risk. The interest rate cap is used to lock in a maximum rate if interest rates
rise, but enables the Company to otherwise pay lower market rates. The cap
agreement is for a notional amount totaling $25.0 million, places an interest
rate ceiling on LIBOR of 6.0%, and expires in August 1999.
Based on the Company's overall interest rate exposure at January 30, 1999,
including the interest rate cap agreement, a hypothetical instantaneous
increase or decrease of one percentage point in interest rates applied to all
financial instruments would change the Company's after-tax earnings by
approximately $600,000 over a 12-month period.
The Company's exposure to foreign currency exchange rates is limited because
the Company does not operate any stores outside of the United States. In
connection with the acquisition of Sportmart, the Company acquired one store in
Canada which Sportmart had closed prior to the acquisition. The Company is
currently attempting to sell this store, but until then, the Company is exposed
to the risk that a change in exchange rates between the U.S. and Canada would
cause the Company's other comprehensive income to change due to foreign
24
currency translation gains or losses. However, the Company does not consider
the market risk exposure relating to foreign currency change to be material.
Foreign currency fluctuations did not have a material impact on the Company
during fiscal 1998, the transition period, fiscal 1997 or fiscal 1996.
The fair value of the Company's investments in marketable equity securities
at January 30, 1999 was $1.8 million. The fair value of these investments will
fluctuate as the quoted market prices of such securities fluctuate. Based on
the Company's marketable equity securities portfolio and quoted market prices
at January 30, 1999, a 50 percent increase or decrease in the market price of
such securities would result in an increase or decrease of $.9 million in the
fair value of the marketable equity securities portfolio. Although changes in
quoted market prices may affect the fair value of the marketable equities
securities portfolio and cause unrealized gains or losses, such gains or
losses would not be realized unless the investments are sold.
As of January 30, 1999, the fair value of the Company's investments in
marketable equity securities was $1.8 million less than the original cost of
those investments. Such unrealized holding loss has not been recognized in the
Company's consolidated statement of operations, but rather has been recorded
as a component of stockholders' equity in other comprehensive loss. The actual
gain or loss that the Company will realize when such investments are sold will
depend on the fair value of such securities at the time of sale.
ITEM 8. Financial Statements and Supplementary Data
The financial statements and supplementary financial information required by
this Item and included in this report are listed in the Index to Consolidated
Financial Statements appearing on page F-1.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
25
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The executive officers and directors of the Company are as follows:
Name Age Position
---- --- --------
John Douglas Morton.... 48 President, Chief Executive Officer and Chairman
of the Board
Thomas T. Hendrickson.. 44 Executive Vice President, Chief Financial
Officer and Treasurer
Thomas B. Nelson....... 33 Senior Vice President -- Development and
Administration and Legal Affairs, Secretary
Greg Waters............ 38 Senior Vice President -- Store Operations
Arthur S. Hagan........ 60 Senior Vice President -- Merchandising
Kenneth T. Snyder...... 53 Senior Vice President -- Merchandising
Michael McCaghren...... 39 Senior Vice President -- Chief Information
Officer
Jonathan D. Sokoloff... 41 Director
Jonathan Seiffer....... 27 Director
Gordon D. Barker....... 53 Director
Peter R. Formanek...... 55 Director
Larry J. Hochberg...... 61 Director
Andrew S. Hochberg..... 36 Director
John Douglas Morton. Mr. Morton became President, Chief Executive Officer
and Chairman of the Board in May 1995. Mr. Morton joined Gart Sports in 1986
as Division Manager of Gart Sports' Utah region. In 1988 he was promoted to
Division Vice President of that region and in 1990 to Vice President of
Operations for Gart Sports. In 1994 Mr. Morton was promoted to Executive Vice
President of Gart Sports with responsibility for Stores, Distribution and
Marketing. Prior to joining Gart Sports he served in various positions with
Wolfe's Sporting Goods (a seven-store sporting goods retailer) from 1972 to
1980 including Merchandise Manager -- Ski, Camping, Golf and Tennis, Store
Manager, and Operations Manager. From 1980 until joining Gart Sports he served
as a District Manager for Malone and Hyde's sporting goods division (a 40-
store retail sporting goods retailer). Mr. Morton has worked for over 30 years
in the sporting goods retail industry.
Thomas T. Hendrickson. Mr. Hendrickson became Executive Vice President,
Chief Financial Officer and Treasurer of the Company in January 1998. Mr.
Hendrickson previously served as the Executive Vice President and Chief
Financial Officer of Sportmart which position he held since September 1996. He
joined Sportmart in January 1993 as Vice President -- Financial Operations. In
March 1993 he was named Chief Financial Officer of Sportmart and in March 1995
he was named Senior Vice President and Chief Financial Officer of Sportmart.
From 1987 until joining Sportmart, Mr. Hendrickson was employed as the Vice
President and Controller of Millers Outpost Stores.
Thomas B. Nelson. Mr. Nelson became Senior Vice President -- Development and
Administration and Legal Affairs in January 1998. He joined the Company in
1986 as Director of Management Information Systems. In 1988, he was promoted
to Project Manager and Assistant to the President; and in 1991 to Corporate
Secretary. In 1993, he was promoted to Vice President -- Real Estate and Legal
Affairs, and in 1995, his responsibilities were expanded to include
Construction and Store Design, Expense Control, Team Sales and Sports
Services. Mr. Nelson worked as a Sales Associate/Assistant Manager for the
Company in Denver, Colorado from 1979 until 1983.
Greg Waters. Mr. Waters joined the Company in April 1998 as Senior Vice
President -- Store Operations. Prior to joining the Company, Mr. Waters served
as the western Regional Vice President for The Sports Authority since 1994 and
as a District Manager for The Sports Authority from 1991 until 1994. Mr.
Waters was employed by Herman's World of Sporting Goods from 1983 until 1991,
most recently as a District Manager.
26
Arthur S. Hagan. Mr. Hagan became Senior Vice President -- Merchandising in
January 1998. Mr. Hagan joined the Company in 1988 as the Company's Division
Merchandise Manager for Golf, Tennis, Ski Clothing/Equipment and Garden
Furniture and was promoted to Vice President -- Store Operations in 1995 and
to Senior Vice President -- Store Operations in May 1997. He was President and
owner of Hagan Sports Ltd. (a six-store sporting goods retailer acquired by
the Company in 1987) and President and Chief Executive Officer of Aspen Leaf
of Colorado, Inc. (a 12-store ski equipment and apparel retailer). Mr. Hagan
has over 30 years retailing experience.
Kenneth T. Snyder. Mr. Snyder joined the Company in 1993 as a Divisional
Merchandise Manager of Footwear, Athletics and Exercise Equipment. In 1994,
his responsibilities were expanded to include Licensed Products and
Accessories. In 1996, Mr. Snyder was promoted to Vice President -- Merchandise
Manager, and in 1998, he was promoted to Senior Vice President --
Merchandising. Mr. Snyder's past experience includes Divisional Vice
President Textiles/Tabletop/Smallwares at May D&F in Denver, Colorado (a
subsidiary of May Department Stores Company) from 1987 to 1993; and prior to
1987, numerous management positions at the Denver Dry Goods Company in Denver,
Colorado.
Michael McCaghren. Mr. McCaghren became Senior Vice President--Chief
Information Officer of the Company in March 1999. Prior to joining the
Company, he was most recently Senior Vice President--Systems, Merchandise
Planning, Allocation and Replenishment, Logistics and Corporate Administration
at Jumbo Sports (a sporting goods retailer) where he was employed from 1997 to
1999. Before joining Jumbo Sports, for approximately one year, Mr. McCaghren
was National Director at GSI Outsourcing Inc., an information systems
outsourcing subsidiary of ADP, Inc. From 1991 to 1996, he was Senior Vice
President and Chief Information Officer of Eli Witt Company, a grocery
wholesaler.
Jonathan D. Sokoloff. Mr. Sokoloff became a Director of the Company in April
1993. Mr. Sokoloff has been a partner of Leonard Green & Associates, L.P.
("LGA"), a merchant banking firm and the general partner of Green Equity
Investors, L.P. ("GEI"), the holder of approximately 61.4% of the outstanding
Common Stock, since 1990, and was employed at Drexel Burnham Lambert
Incorporated, from 1985 through 1990, most recently as a managing director. He
has been an executive officer and equity owner of Leonard Green & Partners,
L.P. ("LGP"), a merchant banking firm affiliated with LGA, since its formation
in 1994, and is also a director of Twinlab Corporation (a manufacturer and
marketer of nutritional supplements) and several private companies.
Jonathan Seiffer. Mr. Seiffer became a Director of the Company in December
1998. Since December 1997, Mr. Seiffer has been a vice president of LGP. From
October 1994 until September 1997, Mr. Seiffer was an associate at LGP. Prior
to October 1994, Mr. Seiffer was a member of the corporate finance department
of Donaldson, Lufkin & Jenrette Securities Corporation.
Gordon D. Barker. Mr. Barker became a Director of the Company in April 1998.
Mr. Barker was the Chief Executive Officer and a Director of Thrifty Payless
Holdings, Inc. ("Thrifty Payless"), a subsidiary of RiteAid Corporation, from
1996 until its acquisition by RiteAid Corporation in 1997. He previously
served in various capacities at Thrifty Payless since 1968, including as Chief
Operating Officer from 1994 to 1996 and as President 1994 to 1997. Mr. Barker
is also a director of Consep Inc. (a manufacturer and distributor of
agricultural pest control products) and several private companies.
Peter R. Formanek. Mr. Formanek became a Director of the Company in April
1998. Mr. Formanek was co-founder of AutoZone Inc., a retailer of aftermarket
automotive parts, and served as President and Chief Operating Officer of
AutoZone, Inc. from 1986 until his retirement in 1994. He currently is a
director of The Perrigo Company, a manufacturer of store brand over-the-
counter drug and personal care products and vitamins, and Borders Group, Inc.,
the second largest operator of book superstores and the largest operator of
mall-based bookstores in the United States.
Larry J. Hochberg. Mr. Hochberg became a Director of the Company in April
1998. Mr. Hochberg served as a Director of Sportmart from the time he co-
founded it in 1970 until Sportmart's acquisition by Gart Sports in
27
January 1998. Mr. Hochberg also co-founded Children's Bargain Town (now part
of Toys "R" Us) which he sold in 1969. Mr. Hochberg is a graduate of
Northwestern University School of Law. He served on the Executive Committee
and the Board of Directors of the International Mass Retailing Association
from 1993 to 1998. Mr. Hochberg currently is National Chairman of the Unity
Campaign for the United Jewish Committees.
Andrew S. Hochberg. Mr. Hochberg became a Director of the Company in April
1998. Mr. Hochberg was Chief Executive Officer of Sportmart from September
1996 until Sportmart's acquisition by Gart Sports in January 1998. Mr.
Hochberg joined Sportmart in 1987 as Director of Real Estate. From 1990 to
1993 he was Senior Vice President and Chief Financial Officer of Sportmart.
From 1993 to 1995 he was Executive Vice President of Sportmart. He was
promoted to President of Sportmart in 1995 and to Chief Executive Officer in
1996. Mr. Hochberg served as a director of Sportmart from 1986 until 1998.
Larry J. Hochberg is the father of Andrew S. Hochberg.
The remaining information required by this Item 10 is incorporated herein by
reference, when filed, to the Company's Proxy Statement for its 1999 Annual
Meeting of Stockholders expected to be held on or about June 16, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information required to be set forth in Item 11 has been omitted and will be
incorporated herein by reference, when filed, to the Company's Proxy Statement
for its 1999 Annual Meeting of Stockholders expected to be held on or about
June 16, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required to be set forth in Item 12 has been omitted and will be
incorporated herein by reference, when filed, to the Company's Proxy Statement
for its 1999 Annual Meeting of Stockholders expected to be held on or about
June 16, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required to be set forth in Item 13 has been omitted and will be
incorporated herein by reference, when filed, to the Company's Proxy Statement
for its 1999 Annual Meeting of Stockholders expected to be held on or about
June 16, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS:
See Index to Consolidated Financial Statements on page F-1 hereof.
2. FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
consolidated financial statements or notes thereto.
3. EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Amended and Restated Agreement of Merger, dated as of December
2, 1997 by and among the Registrant, Gart Bros. Sporting Goods
Company, GB Acquisition, Inc. and Sportmart, Inc. (incorporated
by reference to the Registrant's Registration Statement, File
No. 333-42355)
3.1 -- Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to the Registrant's Registration
Statement, File No. 333-42355)
28
Exhibit
Number Description
------- -----------
3.2 -- Amended and Restated Bylaws of Registrant (incorporated by
reference to the Registrant's Registration Statement, File
No. 333-42355)
4.1 -- Form of Common Stock Certificate (incorporated by reference
to the Registrant's Registration Statement, File No. 333-
42355)
10.1 -- Financing Agreement between The CIT Group/Business Credit,
Inc. (as Agent and a Lender) and Gart Bros Sporting Goods
Company and Sportmart, Inc., dated January 9, 1998
(incorporated by reference to the Registrant's Report on Form
8-K filed January 13, 1998)
10.2 -- Registration Rights Agreement between Registrant and certain
former shareholders of Sportmart, Inc. (incorporated by
reference to the Registrant's Registration Statement, File
No. 333-42355)
10.3 -- Registration Rights Agreement between Registrant and Green
Equity Investors, L.P. (incorporated by reference to the
Registrant's Report on Form 8-K filed January 13, 1998)
10.4 -- Gart Sports Management Equity Plan (incorporated by
reference to the Registrant's Registration Statement, File
No. 333-42355)
10.5 -- Gart Sports Employee Benefit Plan (incorporated by reference
to the Registrant's Registration Statement, File No. 333-
42355)
10.6 -- Gart Sports Bonus Plan (incorporated by reference to the
Registrant's Registration Statement, File No. 33-69118)
10.7 -- Form of Executive Severance Agreements
10.8 -- Consulting Agreements between Registrant and Larry J.
Hochberg and Andrew S. Hochberg (incorporated by reference to
the Registrant's Registration Statement, File No. 333-42355)
10.9 -- Consulting Agreement between Registrant and John A.
Lowenstein (incorporated by reference to the Registrant's
Report on Form 8-K filed January 13, 1998)
10.10 -- Management Services Agreement among Registrant, Gart Bros.
Sporting Goods Company and Leonard Green & Associates, L.P.
(incorporated by reference to the Registrant's Registration
Statement, File No. 333-42355)
10.11 -- Tax Indemnity Agreement dated as of September 25, 1992 among
Pacific Enterprises, TCH Corporation, Thrifty Corporation and
Big 5 Holdings, Inc. (incorporated by reference to the
Registrant's Registration Statement, File No. 33-69118)
10.12 -- Tax Sharing Agreement dated as of September 25, 1992 among
TCH Corporation and its then subsidiaries, including the
Registrant (incorporated by reference to the Registrant's
Registration Statement, File No. 333-42355)
10.13 -- Indemnification Allocation Agreement dated April 20, 1994
among Thrifty Payless Holdings, Inc., the Registrant and MC
Sports Company (incorporated by reference to the Registrant's
Registration Statement, File No. 333-42355)
10.14 -- Indemnification and Reimbursement Agreement dated April 20,
1994 among Thrifty Payless Holdings, Inc., and its then
subsidiaries, including the Registrant (incorporated by
reference to the Registrant's Registration Statement, File
No. 333-42355)
29
Exhibit
Number Description
------- -----------
10.15 -- Sportmart, Inc. 1996 Restricted Stock Plan (as amended and
restated) (incorporated by reference to Sportmart, Inc.'s
Report on Form 10-Q for the quarter ended July 28, 1996, File
No. 000-20672)
10.16 -- Sportmart, Inc. Stock Option Plan, as amended (incorporated
by reference to Sportmart, Inc.'s Registration Statement, File
No. 33-50726)
10.17 -- Sportmart, Inc. Director's Plan (incorporated by reference to
Sportmart, Inc.'s Registration Statement, File No. 33-50726)
10.18 -- Tax Indemnification Agreement (incorporated by reference to
Sportmart, Inc.'s Registration Statement, File No. 33-50726)
10.19 -- Form of Indemnification Agreement between Sportmart, Inc. and
each of its former directors (incorporated by reference to
Sportmart, Inc.'s Registration Statement, File No. 33-50726)
10.20 -- Lease between Sportmart, Inc. and H-C Developers, as agent
for the beneficiaries of American National Bank and Trust
Company Trust No. 30426 for the Sportmart store in Niles,
Illinois, as amended (incorporated by reference to Sportmart,
Inc.'s Registration Statement, File No. 33-50726)
10.21 -- Lease between Sportmart, Inc. and American National Bank and
Trust Company, as Trustee under Trust No. 32490 for the
Sportmart store in Calumet City, Illinois, as amended
(incorporated by reference to Sportmart, Inc.'s Registration
Statement, File No. 33-50726)
10.22 -- Lease between Sportmart, Inc. and American National Bank and
Trust Company, as Trustee under Trust No. 42371 for the
Sportmart store in Schaumburg, Illinois, as amended
(incorporated by reference to Sportmart, Inc.'s Registration
Statement, File No. 33-50726)
10.23 -- Lease between Sportmart, Inc. and American National Bank and
Trust Company, as Trustee under Trust No. 54277 for the
Sportmart store in Chicago (Lakeview), Illinois, as amended
(incorporated by reference to Sportmart, Inc.'s Registration
Statement, File No. 33-50726)
10.24 -- Lease between Sportmart, Inc. and American National Bank and
Trust Company, as Trustee under Trust No. 56691 for the
Sportmart store in Wheeling, Illinois, as amended
(incorporated by reference to Sportmart, Inc.'s Registration
Statement, File No. 33-50726)
10.25 -- Lease between Sportmart, Inc. and Lake County Trust Company,
as Trustee under Trust No. 3737 for the Sportmart store in
Merrillville, Indiana, as amended (incorporated by reference
to Sportmart, Inc.'s Registration Statement, File No. 33-
50726)
10.26 -- Lease between Sportmart, Inc. and North Riverside Limited
Partnership for the Sportmart facility in North Riverside,
Illinois, as amended (incorporated by reference to Sportmart,
Inc.'s Registration Statement, File No. 33-50726)
10.27 -- Lease between Sportmart, Inc. No Context division and North
County Associates, L.P. for the Sportmart No Contest store in
Ferguson, Missouri, as amended (incorporated by reference to
Sportmart, Inc.'s Registration Statement, File No. 33-50726)
10.28 -- Agency Agreement between Registrant and Hilco/Great American
Group, Inc. (incorporated by reference to Sportmart, Inc.'s
Report on Form 10-K for the year ended February 2, 1997, File
No. 000-20672)
30
Exhibit
Number Description
------- -----------
10.29 -- First Amendment to Lease between Sportmart, Inc. and
Roosevelt Associated Limited Partnership for the Sportmart
store at Lombard, Illinois (incorporated by reference to
Sportmart, Inc.'s Report on Form 10-K for the year ended
February 2, 1997, File No. 000-20672)
10.30 -- Lease between Sportmart, Inc. and American National Bank and
Trust Company of Chicago as Trustee under Trust No. 42371 for
the Sportmart store in Schaumburg, Illinois (incorporated by
reference to Sportmart, Inc.'s Report on Form 10-K for the
year ended February 2, 1997, File No. 000-20672)
10.31 -- Lease between Sportmart, Inc. and H-C Developers, as Agent
for American National Bank and Trust Company of Chicago, as
Trustee under Trust No. 30426 for the Sportmart store in
Niles, Illinois (incorporated by reference to Sportmart,
Inc.'s Report on Form 10-K for the year ended February 2,
1997, File No. 000-20672)
10.32 -- First Amendment to lease between Sportmart, Inc. and
Merrillville Partners Limited Partnership for the Sportmart
store in Merrillville, Illinois (incorporated by reference to
Sportmart, Inc.'s Report on Form 10-K for the year ended
February 2, 1997, File No. 000-20672)
10.33 -- Second Amendment to Lease between Sportmart, Inc. and North
Riverside Associates Limited Partnership for the Sportmart
store in North Riverside, Illinois (incorporated by reference
to Sportmart, Inc.'s Report on Form 10-K for the year ended
February 2, 1997, File No. 000-20672)
10.34 -- Third Amendment to Lease between Sportmart, Inc. and Torrence
Properties for the Sportmart store in Calumet City, Illinois
(incorporated by reference to Sportmart, Inc.'s Report on Form
10-K for the year ended February 2, 1997, File No. 000-20672)
10.35 -- Third Amendment to Lease between Sportmart, Inc. and North
Riverside Associates Limited Partnership for the Sportmart
store in North Riverside, Illinois (incorporated by reference
to Sportmart, Inc.'s Report on Form 10-K for the year ended
February 2, 1997, File No. 000-20672)
10.36 -- Post-Employment Medical Benefits Plan for Larry Hochberg
(incorporated by reference to Sportmart, Inc.'s Report on Form
10-K for the year ended February 2, 1997, File No. 000-20672)
21.1 -- Subsidiaries of Registrant (incorporated by reference to the
Registrant's Report on Form 10-K for the transition period
ended January 31, 1998, File No. 000-23515)
23.1 -- Consent of KPMG LLP
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
None
31
GART SPORTS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of January 30, 1999, January 31, 1998, and
January 3, 1998......................................................... F-3
Consolidated Statements of Operations for the 52 weeks ended January 30,
1999, 28 days ended January 31, 1998, and the 52 weeks ended January 3,
1998 and January 4, 1997................................................ F-4
Consolidated Statements of Stockholders' Equity for the 52 weeks ended
January 30, 1999, 28 days ended January 31, 1998, and the 52 weeks ended
January 3, 1998 and January 4, 1997..................................... F-5
Consolidated Statements of Cash Flows for the 52 weeks ended January 30,
1999, 28 days ended January 31, 1998, and the 52 weeks ended January 3,
1998 and January 4, 1997................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gart Sports Company:
We have audited the accompanying consolidated balance sheets of Gart Sports
Company and subsidiaries (Company) as of January 30, 1999, January 31, 1998,
and January 3, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the 52 weeks ended January 30, 1999,
28 days ended January 31, 1998, and the 52 weeks ended January 3, 1998 and
January 4, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gart
Sports Company and subsidiaries as of January 30, 1999, January 31, 1998, and
January 3, 1998, and the results of their operations and their cash flows for
the 52 weeks ended January 30, 1999, 28 days ended January 31, 1998, and the
52 weeks ended January 3, 1998 and January 4, 1997, in conformity with
generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 11, 1999
F-2
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share and Per Share Amounts)
January 30, January 31, January 3,
1999 1998 1998
----------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents (including
restricted cash of $5,700 at January 31,
1998).................................... $ 10,779 $ 16,372 $ 12,958
Accounts receivable, net of allowance for
doubtful accounts of $122, $345, and
$212, respectively....................... 8,376 4,621 1,520
Note receivable........................... 1,294 1,436 --
Inventories............................... 223,837 214,814 88,849
Prepaid expenses and other assets......... 8,377 2,751 1,852
Deferred income taxes..................... 373 390 226
Assets held for sale...................... 1,653 1,708 --
-------- -------- --------
Total current assets.................... 254,689 242,092 105,405
-------- -------- --------
Property and equipment, net................ 59,033 55,990 14,266
Favorable leases acquired, net of
accumulated amortization of $2,503 and
$150, respectively........................ 18,647 19,111 --
Other assets, net of accumulated
amortization of $457, $147 and $1,067,
respectively.............................. 2,750 2,242 1,620
-------- -------- --------
Total assets............................ $335,119 $319,435 $121,291
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $126,478 $ 79,808 $ 44,250
Current portion of capital lease
obligations.............................. 376 340 --
Accrued expenses.......................... 30,596 50,099 21,269
-------- -------- --------
Total current liabilities............... 157,450 130,247 65,519
Long-term debt............................. 100,000 105,600 --
Capital lease obligations, less current
portion................................... 2,693 3,069 --
Deferred rent.............................. 3,768 2,377 2,304
Deferred income taxes...................... 7,742 9,385 8,951
-------- -------- --------
Total liabilities....................... 271,653 250,678 76,774
-------- -------- --------
Commitments and contingencies
Redeemable common stock, 147,600 shares
issued, net of notes receivable from
stockholders of $80 ...................... -- -- 1,904
Stockholders' equity:
Preferred stock, $.01 par value. 3,000,000
shares authorized at January 30, 1999 and
January 31, 1998 and 1,000,000 shares
authorized at January 3, 1998; none
issued................................... -- -- --
Common stock, $.01 par value. 22,000,000
shares authorized at January 30, 1999 and
January 31,1998 and 8,000,000 shares
authorized at January 3, 1998; 8,030,429,
8,025,876 and 5,697,620 shares issued and
7,652,764, 7,679,550 and 5,351,294 shares
outstanding, respectively................ 80 80 57
Additional paid-in capital................ 55,685 55,651 21,378
Unamortized restricted stock
compensation............................. (21) (80) --
Accumulated other comprehensive loss...... (1,762) -- --
Retained earnings......................... 11,620 15,038 23,043
-------- -------- --------
65,602 70,689 44,478
Treasury stock, 377,665, 346,326 and
346,326 common shares, respectively, at
cost..................................... (2,108) (1,865) (1,865)
Notes receivable from stockholders........ (28) (67) --
-------- -------- --------
Total stockholders' equity.............. 63,466 68,757 42,613
-------- -------- --------
Total liabilities and stockholders'
equity................................. $335,119 $319,435 $121,291
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Amounts)
52 weeks 28 days 52 weeks 52 weeks
ended ended ended ended
January 30, January 31, January 3, January 4,
1999 1998 1998 1997
----------- ----------- ---------- ----------
Net sales........................ $ 658,047 $ 38,825 $ 228,379 $ 204,126
Cost of goods sold, buying,
distribution and occupancy...... 503,912 31,924 164,289 148,420
--------- --------- --------- ---------
Gross profit................. 154,135 6,901 64,090 55,706
Operating expenses............... 148,348 11,360 52,721 47,604
Merger integration costs......... 2,923 3,377 395 --
--------- --------- --------- ---------
Operating income (loss)...... 2,864 (7,836) 10,974 8,102
--------- --------- --------- ---------
Nonoperating income (expense):
Interest expense................ (8,820) (525) (983) (1,601)
Other income, net............... 353 38 776 637
--------- --------- --------- ---------
(8,467) (487) (207) (964)
--------- --------- --------- ---------
Income (loss) before income
taxes....................... (5,603) (8,323) 10,767 7,138
Income tax expense (benefit)..... (2,185) (318) 4,083 2,681
--------- --------- --------- ---------
Net income (loss)............ $ (3,418) $ (8,005) $ 6,684 $ 4,457
========= ========= ========= =========
Earnings (loss) per share:
Basic........................... $ (.45) $ (1.11) $ 1.21 $ 0.81
========= ========= ========= =========
Diluted......................... $ (.45) $ (1.11) $ 1.19 $ 0.81
========= ========= ========= =========
Weighted average shares of common
stock outstanding............... 7,676,816 7,212,267 5,501,673 5,512,886
========= ========= ========= =========
Weighted average shares of common
stock and common stock
equivalents outstanding......... 7,676,816 7,212,267 5,596,823 5,512,886
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, Except Share Amounts)
Unamortized Accumu-
restricted lated Notes
stock other Compre- receivable Total
Additional compen- compre- hensive from stock-
Common paid-in sation hensive Retained income Treasury stock- holders'
stock capital awards loss earnings (loss) stock holders equity
------ ---------- ----------- ------- -------- ------- -------- ---------- --------
Balances at January 6,
1996................... $57 $22,259 -- -- $11,902 $(1,716) -- $32,502
Net income.............. -- -- -- -- 4,457 $ 4,457 -- -- 4,457
=======
Purchase of 21,500
shares of treasury
stock.................. -- -- -- -- -- (112) -- (112)
Adjustment for
redeemable common stock
purchased as treasury
shares................. -- 112 -- -- -- -- -- 112
Increase in redemption
amount of redeemable
common stock during the
year................... -- (76) -- -- -- -- -- (76)
--- ------- ---- ------- ------- ------- ---- -------
Balances at January 4,
1997................... 57 22,295 -- -- 16,359 (1,828) -- 36,883
Net income.............. -- -- -- -- 6,684 $ 6,684 -- -- 6,684
=======
Purchase of 7,050 shares
of treasury stock...... -- -- -- -- -- (37) -- (37)
Adjustment for
redeemable common stock
purchased as treasury
stock.................. -- 37 -- -- -- -- -- 37
Increase in redemption
amount of redeemable
common stock during the
year................... -- (954) -- -- -- -- -- (954)
--- ------- ---- ------- ------- ------- ---- -------
Balances at January 3,
1998................... 57 21,378 -- -- 23,043 (1,865) -- 42,613
Net loss................ -- -- -- -- (8,005) $(8,005) -- -- (8,005)
=======
Issuance of 2,180,656
shares to acquire
Sportmart.............. 22 32,290 (80) -- -- -- -- 32,232
Redeemable common stock
147,600 shares
reclassified to
equity................. 1 1,983 -- -- -- -- (80) 1,904
Receipts on notes
receivable............. -- -- -- -- -- -- 13 13
--- ------- ---- ------- ------- ------- ---- -------
Balances at January 31,
1998................... 80 55,651 (80) -- 15,038 (1,865) (67) 68,757
Net loss................ -- -- -- -- (3,418) $(3,418) -- -- (3,418)
Net unrealized loss on
marketable securities.. -- -- -- (1,762) -- (1,762) -- -- (1,762)
-------
Comprehensive loss...... $(5,180)
=======
Purchase of 31,339
shares of treasury
stock.................. -- -- -- -- -- (243) -- (243)
Receipts on notes
receivable............. -- -- -- -- -- -- 39 39
Exercise of stock
options for 4,553
shares................. -- 34 -- -- -- -- -- 34
Amortization of
restricted stock....... -- -- 59 -- -- -- -- 59
--- ------- ---- ------- ------- ------- ---- -------
Balances at January 30,
1999................... $80 $55,685 $(21) $(1,762) $11,620 $(2,108) $(28) $63,466
=== ======= ==== ======= ======= ======= ==== =======
See accompanying notes to consolidated financial statements.
F-5
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
52 weeks 28 days 52 weeks 52 weeks
ended ended ended ended
January 30, January 31, January 3, January 4,
1999 1998 1998 1997
----------- ----------- ---------- ----------
Cash flows from operating
activities:
Net income (loss)................ $ (3,418) $ (8,005) $ 6,684 $ 4,457
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization... 11,826 1,165 3,290 3,657
Deferred income taxes........... (1,626) 270 182 783
(Gain)/loss on disposition of
assets......................... (1,525) 2 98 47
Increase in deferred rent....... 1,391 73 467 671
Changes in operating assets and
liabilities
Receivables, net............... (3,613) (600) 507 (8)
Inventories.................... (9,023) 4,464 (18,150) (2,051)
Prepaid expenses............... (3,859) 1,835 (416) (305)
Income taxes receivable........ -- -- -- 1,189
Other assets................... (511) 1,438 (1,321) --
Accounts payable............... 46,670 (1,722) 13,324 8,534
Accrued expenses............... (19,503) (14,315) 3883 5,102
--------- -------- -------- --------
Net cash provided by (used in)
operating activities......... 16,809 (15,395) 8,548 22,076
--------- -------- -------- --------
Cash flows from investing
activities:
Net impact of acquisition on
cash............................ -- 916 -- --
Purchases of marketable
securities...................... (3,529) -- -- --
Purchases of property and
equipment....................... (14,709) (437) (4,466) (3,634)
Proceeds from sale of property
and equipment................... 2,118 4 36 257
--------- -------- -------- --------
Net cash provided by (used in)
investing activities......... (16,120) 483 (4,430) (3,377)
Cash flows from financing
activities:
Proceeds from long-term debt..... 171,943 105,600 67,850 60,400
Principal payments on long-term
debt............................ (177,543) (86,285) (67,850) (77,400)
Principal payments on capital
lease obligations............... (340) (27) -- --
Purchase of treasury stock....... (243) -- (37) (112)
Receipts on notes receivable from
stockholders.................... 39 13 127 342
Proceeds from exercise of stock
options......................... 34 -- -- --
Payment of financing fees........ (172) (975) (50) (50)
--------- -------- -------- --------
Net cash provided by (used in)
financing activities......... (6,282) 18,326 40 (16,820)
--------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents......... (5,593) 3,414 4,158 1,879
Cash and cash equivalents at
beginning of period.............. 16,372 12,958 8,800 6,921
--------- -------- -------- --------
Cash and cash equivalents at end
of period........................ $ 10,779 $ 16,372 $ 12,958 $ 8,800
========= ======== ======== ========
Supplemental disclosures of cash
flow information:
Cash paid during the period for
interest, net................... $ 9,075 $ 487 $ 473 $ 1,668
========= ======== ======== ========
Cash paid during the period for
income taxes.................... $ 52 $ 2 $ 2,668 $ 1,212
========= ======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 30, 1999, January 31, 1998, and January 3, 1998
(1) Description of Business and Business Combination
(a) Description of Business
Gart Sports Company (Company), a Delaware corporation, operates in one
business segment through its wholly owned subsidiary, Gart Bros. Sporting
Goods Company (Gart Bros.). As of January 30, 1999 the Company operated 125
retail sporting goods stores in 16 states in the midwest, rocky-mountain, and
western United States.
(b) Purchase Business Combination
On January 9, 1998, Gart Bros. acquired all of the outstanding common stock
of Sportmart, Inc. (Sportmart), a sporting goods retailer operating in the
midwest and western United States.
(2) Summary of Significant Accounting Policies
(a) Consolidation
The consolidated financial statements present the financial position,
results of operations and cash flows of Gart Sports Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Fiscal Year
The Company has a 52-53 week fiscal reporting year ending on the Saturday
closest to the end of January. Prior to the acquisition effective date of
January 9, 1998, the Company ended its 52-53 week fiscal year on the first
Saturday in January. The fiscal years referred to in these consolidated
financial statements are the 52 weeks ended January 30, 1999 (fiscal 1998), 52
weeks ended January 3, 1998 (fiscal 1997) and the 52 weeks ended January 4,
1997 (fiscal 1996). These consolidated financial statements also include the
period from January 4, 1998 through January 31, 1998 (the "transition
period"). The transition period represents results of operations for 28 days
of Gart Sports Company and 22 days of Sportmart.
(c) Cash and Cash Equivalents
The Company considers cash on hand in stores, bank deposits and highly
liquid investments as cash and cash equivalents.
At January 31, 1998 the Company had approximately $5.7 million cash on
deposit with Sportmart's former primary lender, Banker's Trust, which was
required in order to terminate the Sportmart lending relationship. The balance
constituted collateral equal to 110% of outstanding Letters of Credit issued
on behalf of Sportmart prior to the acquisition, which was released during
fiscal 1998. The cash was restricted as to withdrawal and usage.
(d) Marketable Securities
The Company's marketable equity securities are classified as "available-for-
sale" and carried at fair value in the accompanying consolidated balance
sheet. Fair values are determined using publicly available pricing
information. Unrealized holding gains and losses on such securities are
included in other comprehensive income or loss and are shown as a component of
stockholders' equity as of the end of each period.
The increase in other comprehensive loss and the corresponding decrease in
marketable securities totaling $1,762,000, resulted in no cash receipts or
payments and accordingly were excluded from the consolidated statement of cash
flows for fiscal 1998.
F-7
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(e) Inventories
The Company accounts for inventories at the lower of cost or market. Cost is
determined using the average cost of items purchased and applying the dollar
value last-in, first-out (LIFO) inventory method. The Company's dollar value
LIFO pools are computed using the Inventory Price Index Computation (IPIC)
method. If the first-in, first-out (FIFO) method of inventory valuation at the
lower of cost or market had been used instead of the LIFO method, inventories
would have been $1,835,000 higher at January 30, 1999. At January 30, 1998,
and January 3, 1998, the replacement cost of inventory approximated its
carrying value.
(f) Property and Equipment
Property and equipment are recorded at cost. Property under capital leases
is stated at the present value of future minimum lease payments. Depreciation
is provided on the straight-line method over the estimated useful lives of the
assets, which range from three to nine years for furniture, fixtures and
equipment, and three years for equipment held for rental. Property held under
capital leases and leasehold improvements is amortized on the straight-line
method over the shorter of the lease term or estimated useful life of the
asset. Maintenance and repairs which do not extend the useful life of the
respective assets are charged to expense as incurred.
The Company capitalizes the costs of major purchased software systems and
the external costs associated with customizing those systems; related training
costs are expensed as incurred. Depreciation of purchased software systems is
calculated using the straight-line method over an estimated useful life of
three years.
In the first quarter of 1998, the AICPA's Accounting Standards Executive
Committee issued Statement of Position ("SOP") 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. This SOP requires
that entities capitalize certain internal-use software costs once specific
criteria are met. The Company adopted SOP 98-1 in 1998 resulting in $680,000
of capitalized costs that would have otherwise been expensed.
(g) Accounting for Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews long-lived tangible and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(h) Other Assets
Other assets are amortized using the interest method. Loan origination costs
are amortized over the term of the related debt.
(i) Pre-Opening Expenses
Non-capital costs associated with the opening of a new store are deferred
prior to the opening and charged to expense ratably from the date the store is
opened through the end of the fiscal year in which the store is opened.
F-8
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In April 1998, the AICPA's Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities, effective for fiscal years beginning after December 15, 1998. This
SOP broadly defines start-up activities as those one-time activities related
to, among other things, opening a new facility. In general, SOP 98-5 requires
the Company to expense as incurred those costs such as pre-opening payroll and
store supplies. Currently, the Company capitalizes such costs and amortizes
the balances over the entire fiscal year in which it opens a new facility.
Pursuant to SOP 98-5, the Company will have to incur expenses prior to having
available the sales to absorb such costs. The Company incurs approximately
$125,000 of pre-opening costs per new store. The Company will adopt SOP 98-5
in fiscal year 1999, which may slightly affect quarterly results. On an annual
basis, there will be no financial impact.
(j) Advertising Costs
Advertising costs are expensed in the period in which the advertising
occurs. The Company participates in various advertising and marketing
cooperative programs with its vendors, who, under these programs, reimburse
the Company for certain costs incurred. A receivable for cooperative
advertising to be reimbursed is recorded as a decrease to expense at the same
time the advertising costs are expensed. Advertising costs, which are included
in operating expenses, were $19,306,000 for fiscal year 1998, $1,610,000 for
the transition period ended January 31, 1998, and $7,377,000, and $5,877,000
for fiscal years 1997 and 1996, respectively, which represent historical, Gart
Sport only balances.
(k) Income Taxes
The Company files a consolidated U.S. federal income tax return using a tax
year ending on the Saturday closest to the end of September. Income taxes are
accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in operations in the period that includes the enactment date.
(l) Earnings (Loss) Per Share
Basic earnings per share (EPS) is computed by dividing earnings (loss)
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in earnings. In loss periods, including common
stock equivalents would be anti-dilutive and, accordingly, no impact is
provided for common stock equivalents.
(m) Stock Option Plans
During 1996, the Company chose to continue to use the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25), and related interpretations. As such, for fixed plans,
compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. As
required by the Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), the Company has
provided pro forma net income (loss) disclosures for employee stock option
grants made in 1995 and later years as if the fair-value-based method defined
in SFAS 123 had been applied.
F-9
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(n) Fair Value of Financial Instruments
The Company's financial instruments' carrying values approximate their fair
values.
(o) Derivative Financial Instruments
Derivative financial instruments are utilized by the Company to reduce
interest rate risk. The Company does not use derivatives for speculative
trading purposes.
(p) Comprehensive Income
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, which requires
the Company to report the change in its net assets from nonowner sources.
Accumulated other comprehensive loss is comprised of unrealized holding losses
on the Company's marketable securities as of January 30, 1999. The Company has
chosen to disclose comprehensive income in the Consolidated Statements of
Stockholders' Equity, and prior year information has been restated to conform
to the SFAS No. 130 requirements.
(q) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ significantly from those estimates.
(r) Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) Acquisition
The Company acquired Sportmart, Inc. on January 9, 1998. Sportmart operated
59 stores in the midwest and western United States. Subsequent to the
acquisition, the Company operates Sportmart as a wholly owned subsidiary. The
acquisition was accounted for as a purchase.
The Company issued 2,180,656 shares of common stock with an estimated fair
value of $32,121,000 in exchange for 5,148,834 shares of voting and 7,817,394
shares of non-voting Sportmart, Inc. common stock and 250,000 shares of
restricted stock based upon a conversion ratio of 0.165014 to one. In
addition, the Company assumed all of the outstanding and unexercised stock
options under Sportmarts' existing stock option plans, with an estimated fair
value of approximately $191,000.
The aggregate purchase price was approximately $36,982,000 including direct
acquisition costs of $4,670,000. The direct acquisition costs include
$3,000,000 paid to Leonard Green and Associates, L.P. (LGA), a related party,
for financial advisory and investment banking services related to the
acquisition.
F-10
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table sets forth the allocation of the purchase price for the
assets acquired and liabilities assumed (in thousands):
Current assets..................................................... $144,559
Property and equipment............................................. 42,284
Favorable leases................................................... 19,261
Other assets....................................................... 944
--------
207,048
--------
Current liabilities................................................ 80,682
Long-term debt..................................................... 86,285
Other long-term liabilities........................................ 3,099
--------
170,066
--------
Net assets acquired.............................................. $ 36,982
========
The Company recorded no excess of cost over the fair value of net assets
acquired.
The Company closed Sportmart's corporate headquarters in Wheeling, Illinois,
consolidating all corporate functions into the Company's Denver, Colorado
corporate offices. As a result, the Company assumed liabilities at the
acquisition date of approximately $6,352,000 related to the following
obligations (in thousands):
Lease buy-out penalty................................................ $1,100
Employee severance costs............................................. 4,452
Employee relocation costs............................................ 800
The above liabilities assumed consist of the closure of duplicate
administrative functions, the reduction of corporate personnel, costs and
losses incurred to close the Wheeling facility and to move certain Sportmart
personnel from Wheeling to Denver.
The following unaudited pro forma financial information presents the
combined results of operations of Gart Sports Company and Sportmart, Inc. as
if the acquisition had occurred as of the beginning of 1996, after giving
effect to certain adjustments, including amortization of favorable leases,
depreciation expense, and related income tax effects. No adjustments have been
made in the statement of operations to conform accounting policies and
practices or anticipated cost savings and synergies.
The pro forma financial information does not necessarily reflect the results
of operations that would have occurred had Gart Sports Company and Sportmart,
Inc. constituted a single entity during such periods.
Fiscal year
----------------------
1997(1) 1996(2)
---------- ----------
(unaudited)
(in thousands,
except share amounts)
Net sales.......................................... $ 687,542 $ 718,737
========== ==========
Loss from continuing operations(3)................. (22,506) (21,195)
========== ==========
Basic loss per share from continuing
operations(4)..................................... $ (2.95) $ (2.78)
========== ==========
- --------
(1) Includes the 52 weeks ended January 3, 1998 for Gart Sports Company and
the 53 weeks ended November 2, 1997 for Sportmart, Inc., as a meaningful
comparable annual period for Sportmart, Inc. was not available due to the
business combination on January 9, 1998.
F-11
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2) Includes the 52 weeks ended January 4, 1997 for Gart Sports Company and
the 53 weeks ended February 2, 1997 for Sportmart, Inc.
(3) The historical statement of operations of Sportmart for the 53 weeks
ended November 2, 1997 and February 2, 1997 includes a non-recurring pre-
tax charge for exit costs of approximately $33,200,000, primarily
associated with exiting the Canadian market and closing the stores in
Canada. Costs associated with closing the stores include severance costs,
lease buy-out costs, inventory write-downs, write-offs of unamortized
leasehold improvements, as well as other miscellaneous exit costs. The
effect of such exit costs was an increase to pro forma combined loss from
continuing operations by $20,584,000 and the pro forma loss per share
from continuing operations by $2.70.
(4) Pro forma loss per share has been computed based on the pro forma net
loss and the pro forma weighted average common shares outstanding for the
periods presented. The pro forma weighted average common shares
outstanding have been computed by adjusting Gart Sports Company weighted
average common shares outstanding by the shares of Gart Sports Company
Common Stock to be issued to the stockholders of Sportmart. The dilutive
effect of outstanding options to purchase shares of common stock of Gart
Sports, outstanding stock options of Sportmart to be converted into
options to purchase Gart Sports Company Common Stock, on the calculation
of pro forma earnings per share is not material.
Following the completion of the merger, approximately 72% of the common
stock of the Company was held by former Gart Sports Company stockholders and
approximately 28% was held by former Sportmart stockholders. Green Equity
Investors, whose general partner is LGA, owned approximately 61% of the
outstanding common stock of the Company.
(4) Business Acquisition and Consolidation Expenses
The Company recorded merger integration costs of $2,923,000 in fiscal 1998,
$3,377,000 during the transition period ended January 31, 1998 and $395,000
during the third and fourth quarters of fiscal 1997. The costs relate to the
acquisition of Sportmart and are reported as merger integration costs in the
consolidated statements of operations. The largest component of such costs
relates to the termination of duplicate equipment leases and stay on bonuses
for Sportmart employees.
These expenses consisted of the following (in thousands):
Fiscal Transition Fiscal
1998 period 1997
------ ---------- ------
Lease buy-out expenses.............................. $ -- $1,153 $ --
Stay on bonuses -- Sportmart employees.............. 1,277 700 --
Professional fees................................... 736 653 309
Severance -- Gart Sports Company employees.......... 87 505 --
Obsolete equipment write downs...................... -- 220 --
Travel and moving expenses.......................... 513 63 84
Other............................................... 310 83 2
------ ------ ----
$2,923 $3,377 $395
====== ====== ====
F-12
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(5) Accounts Receivable
Activity in the allowance for doubtful accounts is as follows (in
thousands):
28 days ended Fiscal years
Fiscal January 31, -------------
1998 1998 1997 1996
------ ------------- ------ ------
Allowance for doubtful accounts at
beginning of period................. $ 345 $212 $ 180 $ 269
Additions............................ -- 131 36 42
Amounts charged against the
allowance........................... (247) (6) (4) (131)
Recoveries of amounts previously
charged............................. 24 8 -- --
----- ---- ----- ------
Allowance for doubtful accounts at
end of period....................... $ 122 $345 $ 212 $ 180
===== ==== ===== ======
(6) Note Receivable
The Company has a note receivable from the landlord of the Northridge
Sportmart store, with an annual interest rate of 10.5%. Principal and interest
are due in monthly installments through July 1, 2005. The agreement contains a
right of offset provision.
(7) Assets Held for Sale
At the effective date of the acquisition of Sportmart, the Company acquired
certain assets classified as Held for Sale. Assets held for sale relate to
discontinued Canadian operations and consist of land and buildings in
Edmonton, Alberta, Canada currently being marketed. The Company anticipates
that an agreement to sell or otherwise dispose of these assets will be
consummated during fiscal 1999.
(8) Property and Equipment
Property and equipment consist of the following (in thousands):
January 30, January 31, January 3,
1999 1998 1998
----------- ----------- ----------
Land.................................... $ -- $ 1,493 $ 118
Buildings and leasehold improvements.... 36,307 30,841 6,868
Capitalized lease property.............. 1,936 1,936 --
Data processing equipment and software.. 5,728 3,910 1,837
Furniture, fixtures and office
equipment.............................. 32,311 26,818 13,586
Equipment held for rental............... 1,509 3,723 3,723
Less accumulated depreciation and
amortization........................... (18,758) (12,731) (11,866)
-------- -------- --------
Property and equipment, net........... $ 59,033 $ 55,990 $ 14,266
======== ======== ========
Depreciation expense was $9,317,000 for fiscal 1998, $989,000 for the
transition period ended January 31, 1998, and $2,973,000 and $3,390,000 for
fiscal years 1997 and 1996, respectively. Amortization of equipment held for
rental is included in cost of goods sold and was $458,000 for fiscal 1998,
$39,000 for the transition period ended January 31, 1998, and $432,000 and
$836,000 for fiscal years 1997 and 1996, respectively.
Depreciation expense for software systems totaled $454,000 for fiscal 1998,
$37,000 for the transition period ended January 31, 1998 and $407,000 and
$408,000 for fiscal years 1997 and 1996, respectively. The net book value of
computer software was $1,438,000, $643,000 and $480,000 at January 30, 1999,
January 31, 1998 and January 3, 1998, respectively.
F-13
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) Favorable Leases
Favorable leases acquired in the Sportmart acquisition are primarily the
result of net current market rents of Sportmart store locations exceeding the
contractual lease rates. The Company originally recorded $19,261,000 of
favorable leases in connection with the purchase, based upon independent
appraisals. The Company is amortizing the identified intangible amounts over
the existing terms of the leases on a straight-line basis. Amortization
expense was $2,220,000 for fiscal 1998 and $150,000 for the transition period
ended January 31, 1998. The Company closed one of these stores during fiscal
1998 and wrote off the associated remaining unfavorable lease balance of
$1,755,000 against the related store closing reserve.
(10) Accrued Expenses
Accrued expenses consist of the following (in thousands):
January 30, January 31, January 3,
1999 1998 1998
----------- ----------- ----------
Accrued compensation and benefits....... $ 6,071 $ 8,720 $ 4,131
Accrued sales and property taxes........ 10,581 10,394 3,812
Accrued store closing reserve........... 1,355 5,789 211
Accrued severance, relocation and stay
bonus.................................. 1,315 7,152 --
Accrued advertising..................... 2,730 3,852 2,225
Other................................... 8,544 14,192 10,890
------- ------- -------
Accrued expenses...................... $30,596 $50,099 $21,269
======= ======= =======
(11) Long-Term Debt
On January 9, 1998, the Company entered into a financing agreement with a
commercial finance company. The agreement includes a line of credit feature
that allows the Company to borrow up to $175,000,000 limited to an amount
equal to 70% of eligible inventory (as defined in the agreement). The maximum
percentage may be increased, upon election by the Company, to 75% of eligible
inventory for one consecutive 90-day period each fiscal year. Borrowings are
secured by substantially all accounts receivables, inventories and intangible
assets. The commercial finance company may not demand repayment of principal,
absent an occurrence of default under the agreement, prior to January 9, 2003.
Currently, interest is payable monthly at prime (7.75% at January 30, 1999)
plus .25% or LIBOR (4.95% at January 30, 1999) plus 1.75%, per annum.
Beginning February 1, 1999, if earnings before income taxes, depreciation and
amortization is greater than $25 million for the prior four fiscal quarters,
interest is payable monthly at prime or LIBOR plus 1.50%. The terms of the
agreement provide for an annual collateral management fee of $100,000 and for
a line of credit fee, payable monthly, of .375% per annum on the unused
portion of the line of credit. The agreement contains certain covenants,
including financial covenants which require the Company to maintain a
specified level of minimum net worth at all times and restricts the payment of
dividends on common stock. At January 30, 1999, $100,000,000 was outstanding
under the agreement and $46,406,000 was available for borrowing, as calculated
using 70% of eligible inventory. The Company's policy is to classify
borrowings under revolving credit facilities as long-term debt since the
Company has the ability, and the intent, to maintain these obligations for
longer than one year.
Prior to January 9, 1998 the Company had a financing agreement with the same
commercial finance company. The agreement included a borrowing base feature
that allowed the Company to borrow up to 60% of its eligible inventories (as
defined in the agreement) for the period January through June and up to 65% of
its eligible inventories for the period July through December. Borrowings were
limited to the lesser of $50,000,000 or the amount calculated in accordance
with the borrowing base, and were secured by substantially all accounts
F-14
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
receivables, inventories, and intangible assets. The commercial finance
company could not demand repayment of principal, absent an occurrence of a
default under the agreement, prior to April 20, 2001. Loan interest was
payable monthly at the prime rate plus 0.25% or, at the option of the Company,
at the LIBOR rate plus 1.5%. The other terms of the agreement mirrored the
existing agreement regarding fees and covenants. No amounts were outstanding
under the financing agreement at January 3, 1998 and $50,000,000 was available
for borrowing.
The Company paid a one time fee of $875,000 to secure the credit facility,
and is amortizing the amount over the life of the contract on the interest
method.
(12) Store Closing Activities
The Company provides a provision for store closing when the decision to
close a retail unit is made. The provision consists of the incremental costs
which are expected to be incurred, including future net lease obligations,
utilities and property taxes, employee costs and other expenses directly
related to the store closing.
In connection with the acquisition of Sportmart, the Company acquired
certain discontinued operations that had been previously reserved for,
including Sportmart's Canadian subsidiary and four stores in the United States
leased from related parties. The Company recorded a provision for one store
closing during fiscal 1998.
Activity in the provision for closed stores is as follows (in thousands):
28 days
ended Fiscal years
Fiscal January 31, --------------
1998 1998 1997 1996
------- ----------- ------ ------
Provision for closed stores at
beginning of period................... $ 5,789 $ 211 $ 490 $ --
Additions.............................. 1,242 -- -- 490
Assumption of provision due to
acquisition........................... -- 6,047 -- --
Decreases.............................. (5,676) (469) (279) --
------- ------ ------ -----
Provision for closed stores at end of
period................................ $ 1,355 $5,789 $ 211 $ 490
======= ====== ====== =====
(13) Financial Instruments and Risk Management
Derivative financial instruments were acquired in the merger with Sportmart.
The instruments were utilized to reduce interest rate risk on Sportmart's
variable borrowings and foreign currency exchange risks associated with
Sportmart's discontinued Canadian subsidiary. The interest rate cap agreement
has been transferred to the Company's borrowings, as it uses a similar debt
structure. The foreign currency exchange agreements have settled and no new
hedge contracts are planned.
The contract or notional amount of the interest rate cap agreement is the
underlying principal amount used in determining the interest payments
exchanged over the term of the contract. The notional amount does not
represent exposure to credit loss for the Company.
In order to reduce its exposure to fluctuations in interest rates, Sportmart
entered into a interest rate cap agreement for a notional amount totaling
$25.0 million prior to the acquisition. The contract expires in August 1999.
The contract places a ceiling on LIBOR of 6.0%, and effectively limits the
Company's LIBOR based borrowings to a maximum interest rate of 6.0% plus
1.75%. The Company pays a premium which is amortized over the effective life
of the contract.
F-15
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company is exclusively a principal counterparty to the interest rate cap
agreement. The Company's exposure to credit risk due to nonperformance by any
of its counterparties is limited to any accrued interest receivable. The
Company considers the risk of default to be remote, and instead relies on its
credit policies when evaluating its counterparties. The Company does not hold
any collateral on the aforementioned agreement, and has not pledged any
collateral.
(14) Income Taxes
Prior to April 21, 1994, the Company's financial results were included in
the consolidated U.S. federal income tax returns of its former parent.
Pursuant to the tax sharing agreement between the Company and its former
parent, which was effective from September 25, 1992 up to and including April
20, 1994, the Company recorded income taxes computed assuming the Company
filed a separate income tax return. The tax sharing agreement also provided
for the treatment of tax loss carrybacks, indemnifications, resolution of
disputes, and other matters that may arise as a result of its former parent's
pending Internal Revenue Service (IRS) examination.
Income tax expense (benefit) consists of the following (in thousands):
28 days
ended Fiscal years
Fiscal January 31, --------------
1998 1998 1997 1996
------- ----------- ------ ------
Current:
Federal................................ $ (469) $(490) $3,247 $1,535
State.................................. (90) (98) 654 363
------- ----- ------ ------
(559) (588) 3,901 1,898
------- ----- ------ ------
Deferred:
Federal................................ (1,292) 127 217 785
State.................................. (334) 143 (35) (2)
------- ----- ------ ------
(1,626) 270 182 783
------- ----- ------ ------
$(2,185) $(318) $4,083 $2,681
======= ===== ====== ======
The effective income tax rate on income (loss) before income taxes differs
from the U.S. federal statutory rate for the following reasons:
28 days ended Fiscal years
Fiscal January 31, --------------
1998 1998 1997 1996
------ ------------- ------ ------
U.S. federal statutory rate........... 34.0% 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State and local taxes, net of
federal benefit.................... 5.0 4.1 3.4 3.3
Effective rate change on deferred
taxes.............................. (5.1) -- --
Valuation allowance................. 2.0 (30.2) -- --
Interest on tax contingency......... -- -- 3.6 --
Other, net.......................... (2.0) 1.0 (3.1) 0.3
---- ----- ------ ------
39.0% 3.8% 37.9% 37.6%
==== ===== ====== ======
F-16
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented
below (in thousands):
January 30, January 31, January 3,
1999 1998 1998
----------- ----------- ----------
Assets
Accounts receivable..................... $ 298 $ 414 $ 79
Property and equipment.................. -- -- 368
Tax credit carryforwards................ 2,043 2,043 1,163
Net operating loss carryforwards........ 25,116 15,992 --
Accrued compensation and benefits....... 1,158 3,846 873
Accrued occupancy....................... 1,028 777 763
Other accrued expenses.................. 1,367 3,111 254
-------- -------- --------
31,010 26,183 3,500
-------- -------- --------
Liabilities
Property and equipment.................. (3,791) (3,717) --
Inventories............................. (10,194) (7,522) (12,057)
Prepaid expenses........................ (785) (217) (168)
-------- -------- --------
(14,770) (11,456) (12,225)
-------- -------- --------
Total asset (liability) before valuation
allowance.............................. 16,240 14,727 (8,725)
Less valuation allowance................ (23,609) (23,722) --
-------- -------- --------
Net deferred tax liability.............. $ (7,369) $ (8,995) $ (8,725)
======== ======== ========
The noncurrent deferred tax liability consists primarily of basis
differences in property and equipment and differences between the tax and book
bases of LIFO inventories acquired in the business combination, net of
applicable alternative minimum tax credit carryforwards. The LIFO basis
difference is classified as noncurrent as this inventory is not expected to be
liquidated or replaced within one year.
The Company established a valuation allowance of $21,230,000 in connection
with the acquisition of Sportmart on January 9, 1998. In the transition
period, the Company incurred a loss, primarily relating to Sportmart
operations and established an additional valuation allowance of $2,492,000.
The valuation allowance decreased $113,000 during fiscal 1998. The utilization
of pre-acquisition operating losses and tax credit carryforwards are subject
to limitations imposed by Internal Revenue Code Section 382. As a result,
management believes that uncertainties exist such that it is more likely than
not that a substantial portion of the Company's deferred tax assets will not
be realized in the future.
The Company has net operating loss carryforwards of approximately
$64,600,000 of which $15,754,000 will expire in 2012, $28,300,000 will expire
in 2013, and $20,546,000 will expire in 2019. In addition, the Company also
has tax credit carryforwards of $2,043,000 which have no expiration date.
(15) Leases
The Company is obligated for two leased properties which are classified as
capital leases for financial reporting purposes. Both capital leases are with
partnerships substantially owned by certain directors of the Company and their
family members. The lease terms range from 15 to 21 years and provide for
minimum annual rental payments plus contingent rentals based upon a percentage
of sales in excess of stipulated amounts. The gross amount of capitalized
lease property and related accumulated amortization recorded under capital
leases is included in Property and Equipment.
F-17
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has noncancelable operating leases primarily for stores,
distribution facilities and equipment, expiring at various dates from 1999 to
2018. These leases generally contain renewal options for periods ranging from
three to ten years and require the Company to pay all executory costs such as
real estate taxes, maintenance and insurance. Certain leases include
contingent rentals based upon a percentage of sales over a specified amount.
Nine of the leases, four of which relate to closed store locations, are with
partnerships, the partners of which are directors of the Company and their
family members. Minimum rentals include noncash rent expense related to the
amortization of deferred rent totaling $1,391,000 in fiscal 1998, $51,000 for
the transition period ended January 31, 1998 and $466,000 and $671,000 for
fiscal years 1997 and 1996, respectively.
Total rent expense under these lease agreements was as follows (in
thousands):
28 DAYS
ENDED FISCAL YEARS
FISCAL JANUARY 31, ----------------
1998 1998 1997 1996
------- ----------- ------- -------
Base rentals......................... $42,408 $2,907 $12,250 $11,231
Contingent rentals................... 97 32 172 142
Sublease rental income............... (40) (5) (64) (64)
------- ------ ------- -------
$42,465 $2,934 $12,358 $11,309
======= ====== ======= =======
At January 30, 1999, future minimum lease payments under noncancelable
leases, with initial or remaining lease terms in excess of one year, were as
follows (in thousands):
AMOUNTS TO
CAPITAL OPERATING BE PAID TO
FISCAL YEARS LEASES LEASES TOTAL RELATED PARTIES
------------ ------- --------- -------- ---------------
1999............................ $ 665 $ 44,243 $ 44,908 $ 2,328
2000............................ 665 44,285 44,950 1,988
2001............................ 673 42,270 42,943 1,835
2002............................ 685 39,391 40,076 1,920
2003............................ 648 37,247 37,895 2,031
Thereafter...................... 843 289,514 290,357 9,156
------ -------- -------- -------
Total minimum lease payments.. 4,179 $496,950 $501,129 $19,258
======== ======== =======
Less imputed interest (at
rates ranging from 9.0% to
10.75%)...................... 1,110
------
Present value of future mini-
mum rentals of which $376 is
included in current liabili-
ties, at January 30, 1999.... $3,069
======
The total future minimum lease payments include amounts to be paid to
related parties and are shown net of $3,860,000 of noncancellable sublease
payments and exclude estimated executory costs, which are principally real
estate taxes, maintenance, and insurance.
In connection with the transfer of certain leased stores to a former
affiliate in 1991, the Company remains liable as assignor on eight leases. The
former affiliate has agreed to indemnify the Company for any losses it may
incur as assignor, however, such indemnification is unsecured. In addition,
the Company remains liable as assignor on three leases as a result of the
Sportmart acquisition. The remaining future minimum lease payments
F-18
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on these leases, exclusive of any variable rent or cost reimbursement that
might be required, were as follows at January 30, 1999 (in thousands):
FISCAL YEAR:
1999............................................................... $ 1,856
2000............................................................... 1,582
2001............................................................... 1,516
2002............................................................... 1,488
2003............................................................... 1,488
Thereafter......................................................... 9,771
-------
Total minimum lease payments..................................... $17,701
=======
In the event of default on the lease obligations, and failure by the
assignee to indemnify the Company, the Company would incur a loss to the
extent of any remaining obligations, less any obligation mitigated by the
lessor re-leasing the property.
(16) EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
During 1995, the Company amended its qualified defined contribution profit
sharing plan to include a 401(k) plan feature for all eligible employees. The
amended plan provides for tax deferred contributions by eligible employees and
for discretionary matching contributions by the Company. Participants vest in
the Company's contributions at a rate of 20% per year after the first year of
service. The plan provides for discretionary contributions, if any, by the
Company in amounts determined annually by the Board of Directors. The Company
contributed in the form of matching contributions $277,000 for fiscal 1998, $-
0- for the transition period ended January 31, 1998 and $134,000 and $126,000
in fiscal years 1997 and 1996, respectively. The Company provided an
additional discretionary contribution of $166,000 and $174,000 for fiscal
years 1997 and 1996, respectively, but did not make such a contribution during
the transition period ended January 31, 1998 and during fiscal 1998.
Sportmart had a noncontributory profit sharing plan for eligible employees.
The plan was merged into the Sportmart Incentive Savings Plan and the merged
plan was terminated as of January 8, 1998. No contributions were made after
December 31, 1997. Former Sportmart employees became eligible to enroll in the
Company's 401(k) plan in April 1998 based upon the Company's eligibility
criteria.
Health and Welfare Plan
Sportmart maintained a trust account whereby pretax dollars could be
withheld through payroll deductions and could be utilized for certain
qualifying expenses under Section 125 of the Internal Revenue Service code.
The plan was discontinued in March 1998 and all payroll contributions were
ceased. Eligible employees may enroll in the Company's Section 125 cafeteria
plan in April 1998. The trust account was be maintained through calendar 1998
to ensure maximum reimbursement opportunity for plan participants.
Sportmart, Inc. Restricted Stock Plan
In July 1996 the Board of Directors of Sportmart, Inc. and its stockholders
adopted the 1996 Restricted Stock Plan. At the acquisition date, pursuant to
the Change in Control provisions of the plan, 250,000 shares of Sportmart
common stock reserved for four participants were converted to 41,252 shares of
Gart Sports' common
F-19
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
stock. Of this amount, 28,876 shares were issued to former Sportmart senior
management who are no longer employed by the Company, and therefore became
fully vested with no restrictions on resale. The balance of 12,376 shares were
issued to one individual who remained with the Company, and will continue to
vest under the terms of the plan. Until fully vested at August 1, 1999, these
shares cannot be sold or transferred.
The Company recorded approximately $80,000 of unamortized compensation as a
reduction to stockholders' equity. This amount is being amortized to
compensation expense on a straight-line basis over the remaining vesting
period.
(17) Stock Option Plans
Management Equity Plan
The Company has adopted a management equity plan (the Management Equity
Plan) which authorizes the issuance of common stock plus grants of options to
purchase shares of authorized but unissued common stock up to 1,500,000
combined shares and options. As of January 30, 1999, 147,600 shares of common
stock and 813,800 options have been issued and remain outstanding under the
Management Equity Plan. The purchased shares were paid for with a combination
of cash and notes that bear interest at 8% per annum, are secured by the
common stock purchased, and have full recourse to the makers. The notes are
due October 17, 1999; however, 25% of any pre-tax bonus earned as an employee
of the Company may be used to reduce the employee's note. As of January 30,
1999, $28,000 remained outstanding on the notes. Stock options are granted
with an exercise price equal to the estimated fair value of the underlying
stock, at the date of grant. All stock options have a ten-year term and vest
20% per year over five years from the date of grant.
Activity in redeemable common stock and related notes receivable from
stockholders for the periods indicated was as follows (dollars in thousands):
Redeemable Notes Total
Common Stock receivable redeemable
----------------- from common
Shares Amount stockholders stock, net
-------- ------- ------------ ----------
Balance at January 3, 1998...... 147,600 $ 1,984 $ (80) $ 1,904
Receipts on notes receivable
from stockholders.............. -- -- 13 13
Decrease in redemption amount
during the period.............. -- (1) -- (1)
Reclassification of redeemable
common stock to equity......... (147,600) (1,983) 67 (1,916)
-------- ------- ----- -------
Balance at January 31, 1998..... -- $ -- $ -- $ --
======== ======= ===== =======
Substitute Company Options
In connection with the acquisition of Sportmart, options outstanding under
the 1992 Sportmart, Inc. Stock Option Plans were assumed by the Company. The
substitute options were modified to Gart options utilizing the same conversion
ratio of .165014 to one as the common stock and dividing the exercise price of
the previous options by the conversion ratio.
The holders of the substitute options continue with the same vesting periods
as the original grants, except that those holders whose employment with
Sportmart terminated within six months of the acquisition date have
accelerated vesting. All such persons have immediately vested options upon
termination, and have one year to exercise such options. As of January 9,
1998, 1,153,573 Sportmart options were exchanged for 190,457 Gart substitute
options.
F-20
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On March 9, 1998 the Compensation Committee of the Board of Directors
revalued certain substitute options issued in conjunction with the
acquisition. All options to purchase shares for those employees remaining with
the Company, after the acquisition, with exercise prices greater than $14.00
were revalued to $14.00, the closing price of the Company's common stock on
that date.
Stock option activity during the periods indicated for both of the Company's
plans was as follows:
Weighted
average
Number of exercise Options
options price exercisable
--------- -------- -----------
Balance at January 6, 1996................... 229,850 $ 5.13 33,170
Granted..................................... 213,900 5.13
Canceled.................................... (11,200) 5.13
--------
Balance at January 4, 1997................... 432,550 5.13 74,660
Granted..................................... 185,500 14.00
Canceled.................................... (34,750) 5.13
--------
Balance at January 3, 1998................... 583,300 7.95 149,000
Granted..................................... -- --
Canceled.................................... -- --
Exchanged................................... 190,457 30.91
--------
Balance at January 31, 1998.................. 773,757 13.60 310,894
Granted..................................... 342,975 13.39
Exercised................................... (4,553) 5.80
Canceled.................................... (177,730) 27.25
--------
Balance at January 30, 1999.................. 934,449 10.97 372,361
========
Canceled options are a result of employee terminations.
At January 30, 1999 and January 31, 1998, the weighted-average remaining
contractual life of outstanding options were 7.00 and 7.18 years,
respectively.
The per share weighted-average fair value of stock options granted during
fiscal years 1998 and 1997 was $10.06 and $9.50 on the date of grant or
exchange using the Black Scholes option-pricing model (which incorporates a
present value calculation) with the following weighted-average assumptions
used for grants issued in fiscal years 1997, 1996 and 1995:
Expected volatility........................................... 45%
Risk free rates............................................... 5.47% to 6.66%
Expected life of options...................................... 1 to 10 years
Expected dividend yield....................................... 0%
The following weighted-average assumptions were used for grants issued in
fiscal year 1998:
Expected volatility........................................... 54%
Risk free rates............................................... 5.68%
Expected life of options...................................... 6 to 10 years
Expected dividend yield....................................... 0%
F-21
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following table summarizes the status of outstanding stock options as of
January 30, 1999:
Options outstanding Options exercisable
-------------------------------- --------------------
Remaining Weighted Weighted
Number of contractual average Number of average
options life (in exercise options exercise
Range of exercise prices outstanding years) price exercisable price
------------------------ ----------- ----------- -------- ----------- --------
$ 5.13.................. 380,800 6.2 $ 5.13 235,560 $ 5.13
9.00.................. 60,000 9.9 9.00 -- --
12.12-19.79............ 459,966 7.8 14.40 104,474 14.90
20.45-30.30............ 21,586 0.1 28.99 21,586 28.99
37.12-93.93............ 12,097 2.4 41.52 10,741 42.07
------- -------
$ 5.13-93.93............ 934,449 7.0 $10.97 372,361 $10.32
======= =======
The Company applies APB No. 25 in accounting for the Management Equity Plan
and Substitute Option Plan, accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's consolidated net
income would have been reduced, loss increased, to the pro forma amounts
indicated below (in thousands, except share amounts):
28 days ended Fiscal Year
Fiscal Year January 31, -------------
1998 1998 1997 1996
----------- ------------- ------ ------
Net income (loss), as reported..... $(3,418) $(8,005) $6,684 $4,457
======= ======= ====== ======
Net income (loss), pro forma....... $(4,209) $(8,029) $6,477 $4,401
======= ======= ====== ======
Earnings (loss) per share, pro
forma:
Basic............................. $ (.55) $ (1.11) $ 1.18 $ .80
======= ======= ====== ======
Diluted........................... $ (.55) $ (1.11) $ 1.16 $ .80
======= ======= ====== ======
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income (loss) amounts
presented above because compensation cost is reflected over the options'
vesting period of five years and compensation cost for options granted prior
to January 1, 1995 is not considered.
(18) Enterprise-Wide Operating Information
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information", which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, major customers and the material countries in which the entity holds
assets and reports revenues.
The Company is a retailer of sporting goods in the midwest and western
United States. Given the economic characteristics of the store formats, the
similar nature of the products sold, the type of customer and method of
distribution, the operations of the Company are aggregated into one reportable
segment.
Prior to the acquisition of Sportmart by the Company, Sportmart operated
certain stores in Canada. Sportmart discontinued such Canadian operations
prior to the Company's acquisition of Sportmart. Therefore, net sales per the
accompanying consolidated statements of operations do not include any amounts
from stores located outside of the United States.
F-22
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(19) Related Party Transactions
The Company has a management services agreement with LGA whereby LGA
receives an annual retainer fee plus reasonable expenses for providing certain
management, consulting and financial planning services. The management
services agreement also provides that LGA may receive reasonable and customary
fees and reasonable expenses from time to time for providing financial
advisory and investment banking services in connection with major financial
transactions that may be undertaken in the future. The management services
agreement terminates April 20, 2004. The minimum management fee is $500,000
per year for the remaining term of the agreement. The Company paid a
management fee to LGA of $500,000 for fiscal 1998, $42,000 for the transition
period ended January 31, 1998 and $250,000 and $120,000 for fiscal years 1997
and 1996, respectively.
During 1998 the Company had noncancelable consulting agreements with certain
former Sportmart executives, who are Directors of the Company. The Company
paid a fee equal to 50% of their base salary as in effect at September 26,
1997 and reasonable expenses for a period of one year. The consultants agreed
to be available, from time to time, to advise the Company on strategic issues,
planning, merchandising and operational issues related to the acquisition of
Sportmart. In addition, the Company is paying a severance benefit in equal
installments over eighteen months equal to 100% of the base salary as of
September 26, 1997, commencing on January 9, 1998.
The Company leases certain properties from related parties. Rent expense
under these lease agreements was as follows (in thousands):
28 days
ended Fiscal Years
Fiscal January 31, -------------
1998 1998 1997 1996
------ ----------- ------ ------
Base rentals................................ $1,808 $167 $ 359 $ 651
Contingent rentals.......................... 50 9 15 --
------ ---- ------ ------
$1,858 $176 $ 374 $ 651
====== ==== ====== ======
(20) Contingencies
Tax Contingency
Under the terms of the Company's tax sharing agreement with its former
parent, the Company is responsible for its share, on a separate return basis,
of any tax payments associated with proposed deficiencies or adjustments, and
related interest and penalties charged to the controlled group which may arise
as a result of an assessment by the IRS.
On July 24, 1997, the IRS proposed adjustments to the Company's and former
parent's 1992 and 1993 federal income tax returns in conjunction with the
former parent's IRS examination. The proposed adjustments related to the
manner in which LIFO inventories were characterized on such returns. The
Company recorded approximately $9,700,000 as a long-term net deferred tax
liability for the tax effect of the LIFO inventory basis difference. The IRS
has asserted that this basis difference should be reflected in taxable income
in 1992 and 1993. The Company has taken the position that the inventory
acquired in connection with the acquisition of its former parent was
appropriately allocated to its inventory pools. The IRS has asserted the
inventory was acquired at a bargain purchase price and should be allocated to
a separate pool and liquidated as inventory turns.
F-23
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Based on management's discussions with the Company's former parent, the
Company believes the potential accelerated tax liability, which could have a
negative effect on liquidity in the near term, ranges from approximately
$2,500,000 to $9,700,000. The range of loss from possible assessed interest
charges resulting from the proposed adjustments range from approximately
$580,000 to $3,300,000. As the Company believes that no amount is more
probable than another within the range, the minimum interest exposure of
$580,000 has been accrued in the consolidated financial statements. No
penalties are expected to be assessed relating to this matter. At January 30,
1999, the LIFO inventory and other associated temporary differences continue
to be classified as long-term net deferred tax liabilities as the Company does
not believe the matter will be resolved within a year.
The Company has reviewed the various matters that are under consideration
and believes that it has adequately provided for any liability that may result
from this matter. In the opinion of management, any additional liability
beyond the amounts recorded that may arise as a result of the IRS examination
will not have a material adverse effect on the Company's financial condition,
results of operations, or liquidity.
Legal Proceedings
The Company is a party to various legal proceedings and claims arising in
the ordinary course of business. Management believes that the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
(21) Authorization Of Stock And Common Stock Split
On October 16, 1997, the stockholders approved an increase in the authorized
number of shares of common stock to 8,000,000. The Board of Directors of the
Company effected common stock splits on October 16, 1997 and December 1, 1997
resulting in a cumulative 2.0 for 1.0 stock split. In the accompanying
consolidated financial statements, all numbers of common shares and per share
amounts have been restated to reflect the common stock splits retroactively.
Upon the consummation of the Sportmart acquisition, the stockholders
approved an increase in the authorized number of shares to 22,000,000 shares
of Gart Common Stock, par value $.01 per share, and 3,000,000 shares of Gart
Preferred Stock, par value $.01 per share.
(22) Earnings (Loss) Per Share
The following table sets forth the computations of basic and diluted
earnings per share.
Fiscal 28 Days Ending Fiscal Fiscal
1998 January 31, 1998 1997 1996
----------- ---------------- ---------- ----------
Net income (loss)
available to common
stockholders........... $(3,418,000) $(8,005,000) $6,684,000 $4,457,000
Weighted average shares
of common stock
outstanding............ 7,676,816 7,212,267 5,501,673 5,512,886
----------- ----------- ---------- ----------
Basic earnings (loss)
per share.............. $ (0.45) $ (1.11) $ 1.21 $ 0.81
=========== =========== ========== ==========
Number of shares used
for diluted earnings
per share:
Weighted average shares
of common stock
outstanding........... 7,676,816 7,212,267 5,501,673 5,512,886
Dilutive securities--
stock options......... -- -- 95,150 --
----------- ----------- ---------- ----------
Weighted average shares
of common stock and
common stock
equivalents
outstanding ........... 7,676,816 7,212,267 5,596,823 5,512,886
----------- ----------- ---------- ----------
Diluted earnings (loss)
per share.............. $ (0.45) $ (1.11) $ 1.19 $ 0.81
=========== =========== ========== ==========
F-24
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of the Company's stock options were excluded from the computation of
diluted loss per share for fiscal 1998 and the transition period since their
effect was anti-dilutive. Options to purchase 488,150 and 432,550 shares of
stock at prices ranging from $5.13 to $14.00 and $5.13 were excluded from the
fiscal 1997 and 1996 calculations, respectively.
(23) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER ANNUAL
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 1998
Net sales...................... $155,217 $169,057 $142,583 $191,190 $658,047
Gross profit................... 34,165 41,875 29,693 48,402 154,135
Net income (loss).............. (2,832) 2,299 (5,982) 3,097 (3,418)
Basic earnings per share....... (0.37) .30 (.78) .40 (0.45)
Diluted earnings per share..... (0.37) .29 (.78) .40 (0.45)
FISCAL 1997
Net sales...................... $ 47,357 $ 48,020 $ 55,675 $ 77,327 $228,379
Gross profit................... 13,446 11,787 13,348 25,509 64,090
Net income..................... 1,150 125 48 5,361 6,684
Basic earnings per share....... 0.21 0.02 0.01 0.97 1.21
Diluted earnings per share..... 0.21 0.02 0.01 0.95 1.19
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on April 28, 1999 on its behalf by the undersigned, thereunto duly authorized.
GART SPORTS COMPANY
/s/ JOHN DOUGLAS MORTON
By: _________________________________
John Douglas Morton
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers or directors
of the Registrant, by virtue of their signatures to this report, appearing
below, hereby constitute and appoint John Douglas Morton and Thomas
Hendrickson, or any one of them, with full power of substitution, as
attorneys-in-fact in their names, places and stead to execute any and all
amendments to this report in the capacities set forth opposite their names and
hereby ratify all that said attorneys-in-fact do by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 28, 1999.
Signature Title
--------- -----
/s/ JOHN DOUGLAS MORTON Chairman, President and Chief Executive
___________________________________________ Officer
John Douglas Morton
/s/ THOMAS T. HENDRICKSON Executive Vice President, Chief Financial
___________________________________________ Officer and Treasurer
Thomas T. Hendrickson
/s/ JONATHAN D. SOKOLOFF Director
___________________________________________
Jonathan D. Sokoloff
/s/ JONATHAN SEIFFER Director
___________________________________________
Jonathan Seiffer
/s/ GORDON D. BARKER Director
___________________________________________
Gordon D. Barker
/s/ PETER R. FORMANEK Director
___________________________________________
Peter R. Formanek
/s/ LARRY J. HOCHBERG Director
___________________________________________
Larry J. Hochberg
/s/ ANDREW S. HOCHBERG Director
___________________________________________
Andrew S. Hochberg
II-1