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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended January 29, 2000
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 March 31, 2000, there were outstanding 7,470,778 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 $13,562,000.
Documents Incorporated by Reference
Part III of this Form 10-K is incorporated by reference from the
Registrant's 2000 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.
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
Market Price of Common Stock and Related Stockholder
Item 5. Matters................................................. 13
Item 6. Selected Financial Data................................. 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 16
Quantitative and Qualitative Disclosures about Market
Item 7a. Risk.................................................... 22
Item 8. Financial Statements and Supplementary Data............. 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 23
Part III................................................................ 24
Item 10. Directors and Executive Officers of the Registrant...... 24
Item 11. Executive Compensation.................................. 26
Security Ownership of Certain Beneficial Owners and
Item 12. Management.............................................. 26
Item 13. Certain Relationships and Related Transactions.......... 26
Part IV................................................................. 27
Exhibits, Financial Statement Schedules, and Reports on
Item 14. Form 8-K................................................ 27
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, and the impact of seasonality and weather conditions.
These factors are discussed in more detail elsewhere in this report,
including, without limitation, under the captions "Business and Properties,"
"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.
Trademarks
Gart Sports(R), Gart Sports Superstore(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.
i
PART I
ITEM 1. and ITEM 2. Business and Properties
General
Gart Sports Company and its subsidiaries (collectively, 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. The Company's business strategy is to provide its
customers with an extensive selection of high quality, brand name merchandise
at competitive prices with quality customer service. The Company operated 127
sporting goods stores in 16 states as of January 29, 2000, the end of its 1999
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 in 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.
Founded in 1928, the Company operates under the Gart Sports and Sportmart
names in California, Colorado, Illinois, Utah, Washington, Idaho, Minnesota,
Wyoming, Ohio, Oregon, Wisconsin, Montana, New Mexico, Nevada, Indiana and
Iowa. 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 five 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, (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, (iii) specialty sporting goods stores,
consisting of specialty stores and pro shops, generally specializing in one
product category of sporting goods, (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, and (v) internet based retailers, consisting of on-line internet
retailers who are relatively new to the industry and sell a full line of
products via the internet.
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,
other large format sporting goods retailers, and internet based 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 a high level of 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 high-quality, brand name apparel and equipment at
competitive prices designed to appeal to both the casual
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sporting goods customer and sports enthusiast for their complete sporting
goods needs. The Company carries over 100,000 active SKUs, including
popular brands such as Adidas, Coleman, Columbia, Easton, FootJoy, K2, New
Balance, Nike, Rawlings, Reebok, Rollerblade, Rossignol, Russell, Salomon,
Spalding, Speedo and Wilson. The Company's customer service, expert
technicians and specialty store presentation enable it to purchase directly
from manufacturers the full product lines typically available only in
specialty stores and pro shops, such as Armour, Callaway, Cleveland, Cobra,
Taylor Made, and Titleist golf accessories, Diamondback bikes, The North
Face apparel and accessories and Volkl and Volant ski equipment.
Customer Service. The Company's objective is to provide the quality of
customer service generally associated with specialty sporting goods stores
and pro shops. The Company has committed increased resources to its
customer service program in an effort to achieve these high standards. The
newly created Director of Customer Service position will focus on several
initiatives that will increase the customer service level in our stores.
These initiatives include improved associate training, labor scheduling,
and incentive programs designed to heighten associate awareness of customer
service and improve our ability to address customer needs. The Company will
increase its use of an independent professional shopping service to monitor
the stores' compliance with these initiatives and all customer service
procedures. In addition, the Company offers its customers special services
including special order capability, equipment rental, on site repair
centers, discount ski lift tickets, and hunting and fishing licenses. The
Company strives to provide the highest level of technical support.
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 floor plan.
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.
Internet Based Commerce. Although the Company does not currently sell
products on the internet, it continues to review various opportunities.
Merchandising
The Company offers its customers over 100,000 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 customer service emphasis,
expert technicians and specialty store presentation, the Company has direct
vendor access to full lines of top name brands.
2
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 increased as a percentage of sales in fiscal
1999 compared to fiscal 1998 due to a better assortment of products as a
result of improved assortment management and buying disciplines.
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
-----------------------------------
1999 1998 1997(1)
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
Hardlines................................ 50.3% 47.9% 49.4%
Softlines:
Apparel................................ 25.2 26.0 30.4
Footwear............................... 24.5 26.1 20.2
----- ----- -----
Subtotal............................. 49.7 52.1 50.6
----- ----- -----
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 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 Lange Rossignol Tyrolia
Atomic Gordini Leki Salomon Vans
Bogner Grandoe Marker Scott Volant
Burton Head Nils Skea Volkl
Columbia Helly Hansen Nordica Spyder
Descente K2 Obermeyer Tecnica
Duofold Kombi Quiksilver The North Face
Dynastar Lamar Roffe Thule
In addition to offering the most widely known and available popular brands,
the Company's stores also carry 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 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
Footwear, In-line Skates and General Apparel
The Company's 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 snow-shoeing. 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 Reebok Tecnica
Antiqua Danner Mitre Rollerblade Teva
Asics Danskin Mizuno Russell The North Face
Avia Fila Moving Comfort Salomon Thorlo
Bauer Hi-Tech New Balance Saucony Tyr
Birkenstock K2 Nike Skechers Vans
Browning K-Swiss No Fear Sorel
Champion Marika Puma Speedo
Columbia Logo Athletic Quiksilver Sketchers
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
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 Nicklaus Spalding
Armour Golf FootJoy Nike Taylor Made
Callaway Head Odyssey Titleist
Cleveland Izod Club Orlimar Wilson
Cobra Maxfli Precept
Dunlop McGregor Prince
Ektelon Mizuno Reebok
In addition to offering the most widely known and available popular brands,
the Company has direct vendor access to prestigious brands such as Callaway,
Cobra, Cleveland, Taylor Made, Titleist, and Armour Golf that
4
are generally not found in large format stores. Most of the Company's stores
have a tennis stringing and a re-gripping center and several stores rent
rackets. Many stores feature indoor putting greens and driving cages, and one
store features a rooftop tennis court, enabling customers to try out equipment
prior to purchase.
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, Giro and Thule. 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, including eye and ear protection, gun cabinets and safes. In
particular markets, our stores provide a complete selection of sporting arms,
scopes, clothing and hunting licenses. The Company carries such top brand
names as:
Benelli Columbia Homak Smith & Wesson
Beretta Daisy Leupold Weatherby
Browning Flambeau Remington Winchester
Bushnell Glock Ruger
Fishing. The Company's stores offer a broad range of freshwater and salt
water fishing equipment, accessories, and fishing licenses. In particular
markets, several stores offer instructional fishing courses on topics such as
fly tying and salt water fishing. The Company sells equipment and accessories
from widely known fishing equipment and accessory manufacturers including the
following:
Berkley Daiwa Hodgman Shakespeare
Browning Eagle Claw Penn Shimano
Columbia Fin Nor Ross Stillwater
Cortland Flambeau Scientific Angler
Camping. The Company's stores typically carry a wide selection of outdoor
products for most types of camping, back-packing, canoeing, kayaking, and
outdoor activities. In particular markets, the Company offers products from a
broad range of companies, including the following:
Coghlan's Garmin Kelty Slumberjack
Coleman Igloo Lowe Alpine The North Face
Eastpak Jansport Magellan Wenzel
Eureka JWA Camping Peak 1
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 a superstore prototype designed to feature the quality
and variety of brand
5
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
a 40,000 square foot superstore and smaller single-store markets with a 33,000
square foot superstore. The Company has determined that the superstore format
provides the best opportunity for growth.
The Company's superstores average approximately 40,000 square feet in size.
Each store is designed to provide ample space for customers to shop the
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 do various levels of remodeling in 29 stores during fiscal 2000. In
certain stores, the Company plans to improve the shopping environment with
clearer sight lines, more appealing 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.
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. In addition, many of the
Company's stores feature specialized brand shops for vendors such as Nike,
Columbia, 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 is in the process of rolling out an exciting new fixturing
program that will affect virtually every superstore in the chain. It will
utilize a set of apparel fixtures, accessories, signage and graphics that will
clearly define these categories and sub-categories to create a more customer
friendly environment. The Company is currently negotiating with apparel
vendors to use these same fixtures in developing vendor shop areas. This
coordinated effort will produce a completely integrated, flexible apparel
fixture program.
The Company's 18 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 14 stores in enclosed shopping
malls average 14,000 square feet and carry a selection of merchandise that
appeals to the mall-oriented shopper, focusing on apparel and footwear. Three
of the mall locations are mall anchors. The Company's five resort stores range
in size from 14,000 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.
Operations and Training
Typically, the Company's superstores have 55 to 80 sales associates and
technicians, while its non-superstores employ a staff of approximately 20 to
25. Additional seasonal support is hired during Father's day, Back-to-School,
Thanksgiving, Christmas and for the annual Sniagrab pre-season ski sale.
The Company employs a Store Manager, a Sales Manager and Merchandise Manager
in each store. The Store Manager reports to a District Manager who is
responsible for a number of stores within a limited geographic region. There
are currently 17 District Managers who report to two Regional Vice Presidents.
Each region has two Merchandise Apparel Managers responsible for implementing
the visual layouts of the apparel and footwear areas.
6
The Company has hired two regional trainers to train and educate its
associates in the serviceable areas such as ski, golf, tennis, and home
fitness. The goal of the Company is to improve the customer shopping
experience in our stores by providing better customer service.
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 topics,
time management, staff selection, scheduling, employee training, customer
service and retail selling skills. The management trainee then becomes a
manager in training in one of the Company's stores. Upon completion of this
program, management is eligible to be promoted to the position of Store, Sales
or Merchandise Manager.
The Company's stores are typically open seven days a week, 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.
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.
The following table sets forth the location, by state, of the Company's
stores, as of January 29, 2000:
Total Number
State Superstores Resort Stores Other Stores of Stores
----- ----------- ------------- ------------ ------------
California.............. 30 -- -- 30
Colorado................ 11 3 14 28
Illinois................ 15 -- -- 15
Utah.................... 4 1 9 14
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................. 90 5 32 127
=== === === ===
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 one to three additional
stores in fiscal 2000.
Management Information Systems
Over the last five years the Company has installed sophisticated management
information systems which use JDA, E-3 Replenishment, and Arthur Planning
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 fully
7
integrated management information systems track purchasing, sales and
inventory transfers down to the SKU level and have allowed the Company to
improve overall inventory management by identifying individual SKU activity
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 has implemented a
state-of-the-art data warehouse application that allows its merchandising
staff to analyze product and pricing strategies, its operations staff to
optimize its investments in store labor, and its executive staff to monitor
all of the key business performance indicators on a daily basis. The Company
has implemented Radio Frequency (RF) Scanning for all of its stores and is
continuing to roll out this technology to its distribution centers this year.
This technology allows the Company to streamline its merchandise handling and
inventory management. RF technology, along with expansion of the Company's EDI
initiatives, will result in lower overall cost of inventory ownership and
improved accuracy in merchandise requirements forecasting.
Other information technology placed into production during fiscal 1999
includes:
. In-store advertising and product information sign systems;
. Corporate-wide electronic office systems, including e-mail;
. New Payroll and Human Resources Management System (Lawson); and
. Store Intranet for on-line access to the Standard Operating Procedures
manual, advertising events, corporate directives, etc.
The Company's continuing development of enhancements to its management
information systems includes store-level merchandise planning and allocation
capability, and automated systems management software. These enhancements are
intended to:
. Improve the Company's merchandise flow from its suppliers through its
distribution facilities and to its stores;
. Improve customer service through the reduction and automation of other
tasks in the stores;
. Reduce distribution costs by allowing vendors to pre-package orders by
store;
. Provide for more effective store assortments;
. Provide additional detailed information on key business performance
indicators; and
. Enhance overall systems reliability, availability, and service-ability.
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, Back-to-School, and on specific sales and promotional events,
including the annual Sniagrab sale.
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
8
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
sports 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 merchandise purchasing department is composed of two Senior
Vice Presidents of Merchandising, two 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 Planning, Replenishment, Allocation, and Merchandise Control
Department is responsible for merchandise distribution, inventory control, and
the Replenishment Purchasing and Allocation System. This group acts as the
central processing intermediary between the buying staff and the Company's
stores. The group also coordinates the inventory levels necessary for each
advertising promotion with the buying staff and Advertising Department,
tracking the effectiveness of each ad to allow the buying staff and
Advertising Department to determine the relative success of each promotional
program. In addition, the group's other duties include implementation of price
changes, creation of all vendor purchase orders, and determination of the
adequate amount of inventory for each store.
The Company purchases merchandise from over 1,000 vendors and has no long-
term purchase commitments. During fiscal 1999, Nike, the Company's largest
vendor, represented approximately 12.8% 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 store floor space;
reduced transportation costs, 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
9
to the distribution center or to both. The E-3 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 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 150-mile radius from
Denver and to its stores receiving merchandise from the Company's Fontana,
California and Woodridge, Illinois distribution centers. The Company believes
its three distribution centers are adequate to service the Company's current
and expanding 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 five
general categories of sporting goods retailers with which the Company
competes: large format sporting goods stores, traditional sporting goods
stores, specialty sporting goods stores, mass merchandisers and internet based
retailers.
Large Format Sporting Goods Stores. Stores in this category include Galyans,
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 products.
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.
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.
Internet Based Retailers. This category consists of on-line internet
retailers such as Fogdog Sports, dsports.com, mvp.com and Global Sports
Interactive. These competitors are relatively new and sell a full line of
sporting goods products via the internet.
The Company believes that although it will continue to face competition from
retailers in each of these categories, the most significant competition is
expected to 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; Dick's Clothing and Sporting Goods in Ohio;
10
Galyans in Indiana, Illinois, 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 a high level 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 13 of the Company's non-
superstore format stores have expired or are expiring by the end of fiscal
2000. Two of such stores are occupied on a month-to-month basis, four of such
stores will be closed and seven stores are subject to leases with an option to
renew or relocate. 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 acquisition of
two Jumbo Sports stores in Denver, CO in November 1999, will result in the
closing of two non-superstore locations. 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 90 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 is contingently liable 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 and has entered into an agreement to sell the
property. The closing of the sale is subject to numerous regulatory licensing
and re-zoning requirements.
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 addition, the Company leases a warehouse in Denver, Colorado.
The lease for the 76,000 square foot warehouse expires in 2001.
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.
11
Employees
At March 31, 2000, the Company employed approximately 4,900 individuals, 44%
of whom were employed on a full-time basis and 56% 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.
The Company received a letter from the U.S. Department of Labor Wage and
Hour Division (the "DOL") in Minnesota, dated April 7, 2000, stating that the
DOL had received information indicating that the Company may not be in full
compliance with the Fair Labor Standards Act with regard to the payment of
overtime. The compliance review by the DOL is in the preliminary stage and at
this time, the Company has no reason to believe that the outcome of the
compliance review will be material to the Company.
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 1999.
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 March 31, 2000, there were approximately
246 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 fiscal 1999 and 1998:
High Low
------- -------
Fiscal Year 1999
First quarter.............................................. $ 8.125 $ 5.750
Second quarter............................................. $ 7.750 $ 5.625
Third quarter.............................................. $ 7.000 $ 4.500
Fourth quarter............................................. $ 6.750 $ 4.625
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
The Company has never declared or paid any dividends on its Common Stock.
The Company plans to retain earnings 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.
During fiscal 1999, the Board of Directors authorized a discretionary
program to purchase up to $3,000,000 of its common stock, par value, $.01 per
share, on the open market or in privately negotiated transactions using the
Company's currently available cash. As of March 31, 2000, the Company had
purchased 192,500 shares of its stock at a cost of approximately $1.2 million.
13
ITEM 6. Selected Financial Data
The selected data presented below under the caption "Statement of Operations
Data" and "Net cash provided by (used in)" for each of the fiscal years in the
three-year period ended January 29, 2000 (fiscal 1999), and the 28 day period
ended January 31, 1998 and the "Balance Sheet Data" as of January 29, 2000 and
January 30, 1999 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 "Net cash provided by (used in)" for each of the
fiscal years in the two year period ended January 4, 1997 (fiscal 1996) and
the "Balance Sheet Data" as of January 31, 1998, January 3, 1998, January 4,
1997 and 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 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. The results for fiscal years 1999 and 1998 are
comparable to each other, but these results are not comparable to the
transition period ended January 31, 1998 or fiscal 1997, 1996, and 1995, which
represent the results of Gart Sports only, before the acquisition of
Sportmart.
Fiscal Years 28 days ended Fiscal Years (1)
---------------------- January 31, ----------------------------------
1999 1998 1998 1997 1996 1995
---------- ---------- ------------- ---------- ---------- ----------
(Dollars in thousands, except per share)
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 680,995 $ 658,047 $ 38,825 $ 228,379 $ 204,126 $ 176,829
Cost of goods sold,
buying, distribution
and occupancy.......... (517,482) (503,430) (31,924) (164,289) (148,420) (131,455)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ 163,513 154,617 6,901 64,090 55,706 45,374
Operating expenses...... (150,985) (148,348) (11,360) (52,721) (47,604) (42,876)
Merger integration
costs.................. -- (2,923) (3,377) (395) -- --
---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. 12,528 3,346 (7,836) 10,974 8,102 2,498
Interest expense........ (10,615) (9,302) (525) (983) (1,601) (2,281)
Other income, net....... 856 353 38 776 637 576
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 2,769 (5,603) (8,323) 10,767 7,138 793
Income tax (expense)
benefit................ (996) 2,185 318 (4,083) (2,681) (285)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 1,773 $ (3,418) $ (8,005) $ 6,684 $ 4,457 $ 508
---------- ---------- ---------- ---------- ---------- ----------
Basic earnings (loss)
per share.............. $ 0.23 $ (0.45) $ (1.11) $ 1.21 $ 0.81 $ 0.09
========== ========== ========== ========== ========== ==========
Weighted average shares
of common stock
outstanding............ 7,632,696 7,676,816 7,212,267 5,501,673 5,512,886 5,681,811
========== ========== ========== ========== ========== ==========
Diluted earnings (loss)
per share.............. $ 0.23 $ (0.45) $ (1.11) $ 1.19 $ 0.81 $ 0.09
========== ========== ========== ========== ========== ==========
Weighted average shares
of common stock and
common stock
equivalents
outstanding............ 7,701,427 7,676,816 7,212,267 5,596,823 5,512,886 5,681,811
========== ========== ========== ========== ========== ==========
OTHER DATA:
Number of stores at
beginning of period.... 125 123 63 60 60 61
Number of stores opened
or acquired............ 7 6 60 (2) 5 5 5
Number of stores
closed................. (5) (4) -- (2) (5) (6)
---------- ---------- ---------- ---------- ---------- ----------
Number of stores at end
of period.............. 127 125 123 63 60 60
========== ========== ========== ========== ========== ==========
Total gross square feet
at end of period....... 4,600,738 4,361,335 4,206,197 1,605,963 1,453,520 1,326,158
Comparable store sales
increase
(decrease)(3).......... (0.6%) (4.5%) 10.0% 5.6% 4.4% (4.1%)
EBITDA(4)............... $ 27,577 $ 15,043 $ (6,633) $ 15,040 $ 12,396 $ 6,568
NET CASH PROVIDED BY
(USED IN):
Operating activities... 1,708 16,667 (15,395) 8,548 22,076 11,541
Investing activities... (9,360) (16,120) 483 (4,430) (3,377) (3,615)
Financing activities... 4,716 (6,140) 18,326 40 (16,820) (3,289)
BALANCE SHEET DATA (at
end of period):
Working capital........ $ 104,853 $ 94,439 $ 108,844 $ 39,886 $ 34,133 $ 44,806
Total assets........... 344,248 335,119 319,435 121,291 96,435 93,658
Long-term debt......... 105,900 100,000 105,600 -- -- 17,000
Redeemable common
stock, net............ -- -- -- 1,904 860 554
Stockholders' equity... 65,894 63,466 68,757 42,613 36,883 32,502
- -------
14
(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 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
1999 began on January 31, 1999 and ended on January 29, 2000 and included
52 weeks of operations; fiscal 1998 began on February 1, 1998 and ended on
January 30, 1999 and included 52 weeks of operations.
(2) Represents the 59 Sportmart stores acquired on January 9, 1998 and one new
store opened in January 1998.
(3) 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.
(4) 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 measure 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.
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. During 1998, the Company adopted an annual fiscal
reporting period that ends on the Saturday closest to the end of January.
Accordingly, fiscal 1999 began on January 31, 1999 and ended on January 29,
2000 and included 52 weeks of operations. 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 significant countries in which the entity
holds assets and reports revenue. 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 are 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. The results for fiscal years 1999 and 1998 are
comparable to each other, but these results are not comparable to the
transition period ended January 31, 1998 or fiscal 1997 which represents 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 1999 Fiscal 1998 January 31, 1998 Fiscal 1997
------------- -------------- ------------------- -------------
Dollars % Dollars % Dollars % Dollars %
------- ----- ------- ----- ------------------- ------- -----
Net sales............... $681.0 100.0% $658.0 100.0% $ 38.8 100.0% $228.4 100.0%
Cost of goods sold,
buying, distribution
and occupancy.......... 517.5 76.0 503.4 76.5 31.9 82.2 164.3 71.9
------ ----- ------ ----- -------- -------- ------ -----
Gross profit............ 163.5 24.0 154.6 23.5 6.9 17.8 64.1 28.1
Operating expenses...... 151.0 22.2 148.3 22.5 11.4 29.4 52.7 23.2
Merger integration
costs.................. -- -- 2.9 0.4 3.4 8.8 0.4 0.2
------ ----- ------ ----- -------- -------- ------ -----
Operating income
(loss)................. 12.5 1.8 3.4 0.6 (7.9) (20.4) 11.0 4.7
Interest expense, net... 10.6 1.5 9.3 1.4 0.5 1.3 1.0 0.4
Other income, net....... 0.9 0.1 0.3 -- 0.1 0.3 0.8 0.4
------ ----- ------ ----- -------- -------- ------ -----
Income (loss) before
income taxes........... 2.8 0.4 (5.6) (0.8) (8.3) (21.4) 10.8 4.7
Income tax expense
(benefit).............. 1.0 0.1 (2.2) (0.3) (0.3) (0.8) 4.1 1.8
------ ----- ------ ----- -------- -------- ------ -----
Net income (loss)....... $ 1.8 0.3% $ (3.4) (0.5)% $ (8.0) (20.6)% $ 6.7 2.9%
====== ===== ====== ===== ======== ======== ====== =====
Number of stores at end
of period.............. 127 125 123 63
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 1999 as compared to Fiscal 1998
The Company's fiscal 1999 consists of the 52-week period ended January 29,
2000. These results are comparable to fiscal 1998, but are not comparable to
the transition period ended January 31, 1998, or fiscal 1997 which represents
the results of Gart Sports prior to the acquisition of Sportmart.
Net Sales. Net sales increased $23.0 million, or 3.5%, to $681.0 million in
fiscal 1999 compared to $658.0 million in fiscal 1998. The increase in net
sales is primarily attributed to the opening of seven new superstores
resulting in $22.2 million in net sales and $4.4 million of increased sales
from new stores opened late in fiscal 1998, which are not yet considered
comparable, partially offset by $3.6 million in lost sales from the closing of
five smaller format stores. Comparable store sales decreased 0.6% for the same
period, primarily due to lower sales in licensed apparel, footwear, and in-
line skates. The decrease in licensed apparel is primarily due to the Broncos
not repeating as Super Bowl champions. The footwear and in-line skate segments
of the industry continued to be very competitive in fiscal 1999. The decline
in sales of these items was partially offset by strong sales of outdoor
products and hard-goods.
Gross Profit. Gross profit for fiscal 1999 was $163.5 million or 24.0% of
net sales as compared to $154.6 million or 23.5% of net sales for fiscal 1998.
The increase in gross profit is primarily a result of the synergies realized
from the acquisition of Sportmart and improved assortment management and
buying disciplines. These increases were partially offset by higher occupancy
costs due to new stores opened in fiscal 1999.
Operating Expenses and Merger Integration Costs. Operating expenses in
fiscal 1999 were $151.0 million, or 22.2% of net sales compared to $151.3
million, or 23.0% of net sales for fiscal 1998. There were no integration
costs in fiscal 1999. In fiscal 1998, 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. Excluding integration costs from fiscal
1998, operating expenses increased from $145.2 million or 22.1% of net sales
in fiscal 1998 to $151.0 million or 22.2% of net sales in fiscal 1999. This
increase is primarily due to the increase in the number of superstores
compared to the prior year and bonuses earned in fiscal 1999.
Operating Income. As a result of the factors described above, operating
income for fiscal 1999 was $12.5 million or 1.8% of net sales compared to $3.4
million or 0.6% of net sales in fiscal 1998.
Interest Expense, Net. Interest expense, net for fiscal 1999 increased to
$10.6 million, or 1.5% of net sales, from $9.3 million, or 1.4% of net sales.
The increase from the prior year is primarily due to an increase in average
interest-bearing debt for the year attributable to new store inventories and
an increase in the effective borrowing rate as a result of rising interest
rates.
Income Taxes. The Company's income tax expense for fiscal 1999 was $1.0
million compared to an income tax benefit of $2.2 million in fiscal 1998. The
Company's effective tax rate decreased to 36% in fiscal 1999, from 39% in
fiscal 1998, as a result of lower state taxes.
17
Fiscal 1998 as compared to pro forma combined 1997 amounts (see note 3 to the
consolidated financial statements)
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 which represents the results of Gart
Sports prior to the acquisition of Sportmart.
Net Sales. Net sales were $658.0 million for fiscal 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 products
decreased due to unseasonably warm weather.
Gross Profit. Gross profit was $154.6 million during fiscal 1998 or 23.5% 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 and
merger integration costs for fiscal 1998 were $151.2 million, or 22.9% 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 $3.4 million or 0.6% 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 $9.4 million, or 1.4% of net sales.
Interest Expense. Interest expense for fiscal 1998 was 1.4% of net sales or
$9.3 million. The increase from prior periods is primarily due to increased
debt levels as compared to fiscal 1997 and 1996, due to the assumption of the
Sportmart debt.
Income Tax Benefit. The Company's income tax benefit for fiscal 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").
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.
18
Gross Profit. Gross profit was $6.9 million during the Transition Period or
17.8% of net sales. The month of January is a 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 consistent.
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.
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
ended
Fiscal Fiscal January 31, Fiscal
1999 1998 1998 1997
-------- -------- ----------- -------
Cash provided by (used in) operating
activities.......................... $ 1,708 $ 16,667 $(15,395) $ 8,548
Cash provided by (used in) investing
activities.......................... (9,360) (16,120) 483 (4,430)
Cash provided by (used in) financing
activities.......................... 4,716 (6,140) 18,326 40
Capital expenditures................. $ 12,339 $ 14,709 $ 437 $ 4,466
Long-term debt (at end of period).... 105,900 100,000 105,600 --
Working capital (at end of period)... 104,853 94,439 108,844 39,886
Current ratio (at end of period)..... 1.66 1.60 1.84 1.61
Long-term debt to equity ratio (at
end of period)...................... 1.61 1.58 1.54 --
Cash provided by operating activities in fiscal 1999 was primarily the
result of net income, adjusted for depreciation and amortization, offset by
increased inventory purchases as a result of the seven new superstores opened
during fiscal 1999.
Cash used in investing activities in fiscal 1999 was primarily for capital
expenditures. These expenditures were primarily for the opening of seven new
superstores, remodeling of existing stores and the purchase or enhancement of
certain information systems. These cash uses were partially offset by cash
received from the sale of marketable securities.
19
Cash provided by financing activities in fiscal 1999 represents net proceeds
from borrowings on the Company's revolving line of credit reduced by payments
made on capital leases and the purchase of treasury stock. At the time of the
Sportmart acquisition, the Company refinanced Sportmart debt of $86.2 million
under the Credit Agreement referred to below.
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 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 will be reduced during
the first quarter of fiscal 2000, as certain earnings levels have been
achieved, to 0.0% and 1.50%, respectively. There was $134.7 million
outstanding under the Credit Agreement at April 1, 2000, and $33.8 million was
available for borrowing. The increase in long-term debt since fiscal year end
1999 is primarily attributable to seasonal inventory purchases and decreases
in accounts payable.
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.
Based on management's discussion 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. See note 20 to the Consolidated Financial Statements.
Capital expenditures are projected to be approximately $12.0 million in
fiscal 2000. These capital expenditures will be for store remodeling, store
fixtures, information systems, distribution center facilities, and ski
rentals. 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 40,000 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 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 2000. 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
20
agreement. The interest rate cap agreement was for a notional amount totaling
$25.0 million, placed an interest rate ceiling on LIBOR at 6.0% and expired 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.
Seasonality and Inflation
The following table sets forth the Company's unaudited consolidated
quarterly results of operations for each of the quarters in fiscal 1999 and
1998. 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 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales................................ $151.9 $172.6 $155.5 $201.0
% of full year........................... 22.3% 25.4% 22.8% 29.5%
Operating income (loss).................. $ 1.8 $ 3.6 $ (1.5) $ 8.6
Fiscal 1998
Net sales................................ $155.2 $169.1 $142.6 $191.1
% of full year........................... 23.6% 25.7% 21.7% 29.0%
Operating income (loss).................. $ (2.5) $ 6.0 $ (7.5) $ 7.4
The fourth quarter has historically been the strongest quarter for the
Company. For fiscal 1999 and 1998, the fourth quarter contributed 29.5% and
29.0%, respectively, of net sales. Comparable store sales for the fourth
quarter of fiscal 1999 increased 1.6%, although they were negatively impacted
by weak licensed apparel sales. Licensed apparel sales decreased primarily due
to the Denver Broncos not repeating as Super Bowl champions. The negative
impact of licensed apparel sales was more than offset by strong sales in
outdoor products and hard goods. 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. Second, 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
Beginning in fiscal 1999, the Company is expensing pre-opening costs in the
period in which they are incurred in conformity with Statement of Position 98-
5 ("SOP 98-5") Reporting on the Costs of Start-Up Activities. SOP 98-5 broadly
defines start-up activities as those one-time activities related to, among
other things, opening a new facility. Prior to fiscal 1999, the Company
capitalized such costs and amortized the balance over the fiscal year in which
it opened the new facility. The implementation of SOP 98-5 slightly affects
21
quarterly results; however on an annual basis, there is no financial impact.
Generally, the Company incurs approximately $125,000 of pre-opening costs per
new store.
Year 2000 Compliance
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based
on operations since January 1, 2000, the Company does not expect any
significant impact to its ongoing business as a result of the "Year 2000
issue." However, it is possible that the full impact of the date change, which
was of concern due to computer programs that use two digits instead of four
digits to define years, has not been fully recognized. The Company believes
that any such problems are likely to be minor and correctable. In addition,
the Company could still be negatively affected if its suppliers are adversely
affected by the Year 2000 or similar issues. The Company currently is not
aware of any significant Year 2000 issues that have arisen for its suppliers.
The Company expended $901,000 on its Year 2000 readiness efforts including
replacing some outdated, non-compliant hardware and software as well as
identifying and remediating Year 2000 problems.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
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 was used to lock in a maximum rate if
interest rates rose, but enabled the Company to otherwise pay lower market
rates. The cap agreement was for a notional amount totaling $25.0 million,
placed an interest rate ceiling on LIBOR of 6.0%, and expired in August 1999.
Based on the Company's overall interest rate exposure at January 29, 2000, 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 $680,000 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 (see Item 2 -- Properties discussion),
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 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 1999,
1998, the transition period, or fiscal 1997.
The fair value of the Company's investments in marketable equity securities
at January 29, 2000 was $195,000. 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 29, 2000, a 50% increase or decrease in the market price of such
securities would result in an increase or decrease of approximately $98,000 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.
22
As of January 29, 2000, the fair value of the Company's investments in
marketable equity securities was $574,000 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.
23
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..... 49 President, Chief Executive Officer and Chairman of
the Board
Thomas T. Hendrickson... 45 Executive Vice President, Chief Financial Officer
and Treasurer
Greg Waters............. 39 Senior Vice President -- Store Operations
Arthur S. Hagan......... 61 Senior Vice President -- Merchandising
James M. Van Alstyne.... 39 Senior Vice President -- Merchandising
Michael McCaghren....... 40 Senior Vice President -- Chief Information Officer
Jonathan D. Sokoloff.... 42 Director
Jonathan Seiffer........ 28 Director
Gordon D. Barker........ 54 Director
Peter R. Formanek....... 56 Director
Larry J. Hochberg....... 62 Director
Andrew S. Hochberg...... 37 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.
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 since 1991. Mr. Waters was
employed by Herman's World of Sporting Goods from 1983 until 1991, most
recently as a District Manager.
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.
James M. Van Alstyne. Mr. Van Alstyne became Senior Vice President --
Merchandising in April 2000. Mr. Van Alstyne joined the Company in 1986 as a
Buyer and held that position until 1993. Mr. Van Alstyne
24
returned to the Company in 1998 as Vice President Merchandising -- Hardlines
and held that position until April 2000. Prior to rejoining the Company, Mr.
Van Alstyne served as Western Regional Sales Manager, National Sales Manager
and then Vice President of Sales for the U.S., Latin America and Australia for
Easton Sports, Inc. from 1993 to 1998.
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), RiteAid Corporation (a national drug
store chain) 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 December 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. He is also a director
of several private companies.
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 from 1994 to 1997. Mr.
Barker is also a director of United Natural Foods (a distributor of natural
food products) listed under the NASDQ Exchange symbol UNFI. Mr. Barker also
currently serves as C.E.O. of Snyder Drug Stores, a mid-western chain of
approximately 150 corporate and affiliate drug stores.
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 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 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. Larry J. Hochberg is the father of Andrew S.
Hochberg.
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
25
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.
The remaining information required by this Item 10 is incorporated herein by
reference, when filed, to the Company's Proxy Statement for its 2000 Annual
Meeting of Stockholders expected to be held on or about June 14, 2000.
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 2000 Annual Meeting of Stockholders expected to be held on or about
June 14, 2000.
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 2000 Annual Meeting of Stockholders expected to be held on or about
June 14, 2000.
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 2000 Annual Meeting of Stockholders expected to be held on or about
June 14, 2000.
26
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 presented 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)
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)
10.4a -- Amendment to Gart Sports Management Equity Plan (incorporated
by reference to the Registrant's Form 14-A filed May 7, 1999)
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 File No. 33-69118)
10.7 -- Form of Executive Severance Agreements (incorporated by
reference to the registration form 10-K for the year ended
January 30, 1999)
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)
27
Exhibit
Number Description
------- -----------
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)
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)
28
Exhibit
Number Description
------- -----------
10.22a -- Amendment to 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
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 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 Contest 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)
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)
29
Exhibit
Number Description
------- -----------
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 Sportmart, Inc.'s Report on Form
10-K for the year ended February 2, 1997, File No. 000-20672)
10.37 -- Deferred Compensation Plan of Gart Bros. Sporting Goods
Company, dated January 1, 1999
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
The Company filed a Current Report on Form 8-K with the Commission dated
October 6, 1999 to report, under Item 5, that the registrant issued a press
release on October 6, 1999, to announce its Board of Directors had authorized
a discretionary program to purchase up to $3,000,000 of its common stock, par
value, $.01 per share, on the open market or in privately negotiated
transactions using the Company's currently available cash.
30
GART SPORTS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999.... F-3
Consolidated Statements of Operations for the 52 weeks ended January 29,
2000 and January 30, 1999, the 28 days ended January 31, 1998, and the
52 weeks ended January 3, 1998............................................. F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) for the 52 weeks ended January 29, 2000 and January 30, 1999, the
28 days ended January 31, 1998, and the 52 weeks ended January 3, 1998..... F-5
Consolidated Statements of Cash Flows for the 52 weeks ended January 29,
2000 and January 30, 1999, the 28 days ended January 31, 1998, and the
52 weeks ended January 3, 1998............................................. F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Gart Sports Company:
We have audited the accompanying consolidated balance sheets of Gart Sports
Company and subsidiaries (Company) as of January 29, 2000 and January 30, 1999
and the related consolidated statements of operations, stockholders' equity
and comprehensive income (loss) and cash flows for the 52 weeks ended January
29, 2000 and January 30, 1999, the 28 days ended January 31, 1998, and the 52
weeks ended January 3, 1998. 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 29, 2000 and January 30, 1999
and the results of their operations and their cash flows for the 52 weeks
ended January 29, 2000 and January 30, 1999, the 28 days ended January 31,
1998, and the 52 weeks ended January 3, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Denver, Colorado
March 14, 2000
F-2
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share and Per Share Amounts)
January 29, January 30,
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents............................. $ 7,843 $ 10,779
Accounts receivable, net of allowance for doubtful
accounts of $266 and $122, respectively.............. 6,871 8,376
Note receivable....................................... 165 147
Inventories........................................... 240,891 223,837
Prepaid expenses and other assets..................... 6,722 8,377
Deferred income taxes................................. 1,533 373
-------- --------
Total current assets................................ 264,025 251,889
-------- --------
Property and equipment, net............................ 60,441 59,033
Favorable leases acquired, net of accumulated
amortization of $4,891 and $2,503, respectively....... 12,536 19,107
Assets held for sale................................... 1,729 1,653
Other assets, net of accumulated amortization of $810
and $457, respectively................................ 5,517 3,437
-------- --------
Total assets........................................ $344,248 $335,119
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $127,410 $126,478
Current portion of capital lease obligations.......... 417 376
Accrued expenses...................................... 31,345 30,596
-------- --------
Total current liabilities........................... 159,172 157,450
Long-term debt......................................... 105,900 100,000
Capital lease obligations, less current portion........ 2,276 2,693
Deferred rent.......................................... 5,292 3,768
Deferred income taxes.................................. 5,714 7,742
-------- --------
Total liabilities................................... 278,354 271,653
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. 3,000,000 shares
authorized at January 29, 2000 and January 30, 1999;
none issued.......................................... -- --
Common stock, $.01 par value. 22,000,000 shares
authorized at January 29, 2000 and January 30, 1999;
7,694,617 and 8,030,429 shares issued and 7,507,078
and 7,652,764 shares outstanding, respectively....... 77 80
Additional paid-in capital............................ 55,990 55,685
Unamortized restricted stock compensation............. (1,770) (21)
Accumulated other comprehensive loss.................. (574) (1,762)
Retained earnings..................................... 13,393 11,620
-------- --------
67,116 65,602
Treasury stock, 187,539 and 377,665 common shares,
respectively, at cost................................ (1,222) (2,108)
Notes receivable from stockholders.................... -- (28)
-------- --------
Total stockholders' equity.......................... 65,894 63,466
-------- --------
Total liabilities and stockholders' equity.......... $344,248 $335,119
======== ========
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 52 weeks 28 days 52 weeks
ended ended ended ended
January 29, January 30, January 31, January 3,
2000 1999 1998 1998
------------ ----------- ----------- ----------
Net sales...................................................... $ 680,995 $ 658,047 $ 38,825 $ 228,379
Cost of goods sold, buying, distribution and occupancy......... 517,482 503,430 31,924 164,289
------------ ----------- ----------- ----------
Gross profit............................................. 163,513 154,617 6,901 64,090
Operating expenses............................................. 150,985 148,348 11,360 52,721
Merger integration costs....................................... -- 2,923 3,377 395
------------ ----------- ----------- ----------
Operating income (loss).................................. 12,528 3,346 (7,836) 10,974
------------ ----------- ----------- ----------
Nonoperating income (expense):
Interest expense............................................. (10,615) (9,302) (525) (983)
Other income, net............................................ 856 353 38 776
------------ ----------- ----------- ----------
(9,759) (8,949) (487) (207)
------------ ----------- ----------- ----------
Income (loss) before income taxes........................ 2,769 (5,603) (8,323) 10,767
Income tax expense (benefit)................................... 996 (2,185) (318) 4,083
------------ ----------- ----------- ----------
Net income (loss)........................................ $ 1,773 $ (3,418) $ (8,005) $ 6,684
============ =========== =========== ==========
Earnings (loss) per share:
Basic........................................................ $ 0.23 $ (0.45) $ (1.11) $ 1.21
============ =========== =========== ==========
Diluted...................................................... $ 0.23 $ (0.45) $ (1.11) $ 1.19
============ =========== =========== ==========
Weighted average shares of common stock outstanding............ 7,632,696 7,676,816 7,212,267 5,501,673
============ =========== =========== ==========
Weighted average shares of common stock and common stock
equivalents outstanding...................................... 7,701,427 7,676,816 7,212,267 5,596,823
============ =========== =========== ==========
See accompanying notes to consolidated financial statements.
F-4
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands, Except Share Amounts)
Accumu-
Unamortized lated Notes
restricted other Compre- receivable Total
Additional stock compre- hensive from stock-
Common paid-in compen- hensive Retained income Treasury stock- holders'
stock capital sation loss earnings (loss) stock holders equity
------ ---------- ----------- ------- -------- ------- -------- ---------- --------
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
equity 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
Net income.............. -- -- -- -- 1,773 $ 1,773 -- -- 1,773
Unrealized gain on
equity securities...... -- -- -- 1,188 -- 1,188 -- -- 1,188
-------
Comprehensive income.... $ 2,961
=======
Purchase of 156,200
shares of treasury
stock.................. -- -- -- -- -- (979) -- (979)
Retirement of treasury
stock.................. (3) (1,862) -- -- -- 1,865 -- --
Issuance of common
stock.................. -- 72 -- -- -- -- -- 72
Receipts on notes
receivable............. -- -- -- -- -- -- 28 28
Issuance of restricted
stock.................. -- 2,252 (2,252) -- -- -- -- --
Cancellation of
restricted stock....... -- (157) 157 -- -- -- -- --
Amortization of
restricted stock....... -- -- 346 -- -- -- -- 346
---- -------- -------- ------ -------- -------- ----- --------
Balances at January 29,
2000................... $ 77 $ 55,990 $ (1,770) $ (574) $ 13,393 $ (1,222) $ -- $ 65,894
==== ======== ======== ====== ======== ======== ===== ========
See accompanying notes to consolidated financial statements.
F-5
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
52 weeks 52 weeks 28 days 52 weeks
ended ended ended ended
January 29, January 30, January 31, January 3,
2000 1999 1998 1998
----------- ----------- ----------- ----------
Cash flows from operating
activities:
Net income (loss)............... $ 1,773 $ (3,418) $ (8,005) $ 6,684
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization.. 14,193 11,826 1,165 3,290
Deferred income taxes.......... 996 (1,626) 270 182
Loss (gain) on disposition of
assets........................ (156) (1,525) 2 98
Increase in deferred rent...... 1,524 1,391 73 467
Deferred Compensation.......... 97 -- -- --
Changes in operating assets and
liabilities:
Accounts receivables, net..... 1,505 (3,755) (600) 507
Inventories................... (17,054) (9,023) 4,464 (18,150)
Prepaid expenses.............. 84 (3,859) 1,835 (416)
Other assets.................. (2,935) (511) 1,438 (1,321)
Accounts payable.............. 932 46,670 (1,722) 13,324
Accrued expenses and other
current liabilities.......... 749 (19,503) (14,315) 3,883
-------- -------- -------- --------
Net cash provided by (used
in) operating activities.... 1,708 16,667 (15,395) 8,548
-------- -------- -------- --------
Cash flows from investing
activities:
Net impact of acquisition on
cash........................... -- -- 916 --
Sale (purchase) of marketable
securities..................... 2,979 (3,529) -- --
Purchases of property and
equipment...................... (12,339) (14,709) (437) (4,466)
Proceeds from sale of property
and equipment.................. -- 2,118 4 36
-------- -------- -------- --------
Net cash provided by (used
in) investing activities.... (9,360) (16,120) 483 (4,430)
-------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from long-term debt.... 206,350 171,943 105,600 67,850
Principal payments on long-term
debt........................... (200,450) (177,543) (86,285) (67,850)
Principal payments on capital
lease obligations.............. (377) (340) (27) --
Purchase of treasury stock...... (979) (243) -- (37)
Receipts on notes receivable.... 172 181 13 127
Proceeds from the sale of common
stock under option plans....... -- 34 -- --
Payment of financing fees....... -- (172) (975) (50)
-------- -------- -------- --------
Net cash provided by (used
in) financing activities.... 4,716 (6,140) 18,326 40
-------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents........ (2,936) (5,593) 3,414 4,158
Cash and cash equivalents at
beginning of period............. 10,779 16,372 12,958 8,800
-------- -------- -------- --------
Cash and cash equivalents at end
of period....................... $ 7,843 $ 10,779 $ 16,372 $ 12,958
======== ======== ======== ========
Supplemental disclosure of cash
flow information:
Cash paid during the period for
interest, net.................. $ 10,067 $ 9,075 $ 487 $ 473
======== ======== ======== ========
Cash paid (received) during the
period for income taxes........ $ (494) $ 52 $ 2 $ 2,668
======== ======== ======== ========
Supplemental disclosure of non-
cash financing activities:
Issuance of restricted stock.... $ 2,252
========
Retirement of treasury stock.... $ 1,865
========
See accompanying notes to consolidated financial statements.
F-6
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 29, 2000 and January 30, 1999
(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 29, 2000 the Company operated 127
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 29, 2000 (fiscal 1999), 52
weeks ended January 30, 1999 (fiscal 1998) and the 52 weeks ended January 3,
1998 (fiscal 1997). 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.
(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.
During fiscal 1999, the Company sold certain marketable securities,
resulting in a realized gain of approximately $220,000, before taxes, which
has been recognized as other income. The Company utilized the specific
identification method to determine the cost basis of the securities sold.
During fiscal 1999, approximately $1.4 million of unrealized holding gains
arose, before the reclassification adjustment of the realized gain included in
income before taxes.
In fiscal 1998 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.
F-7
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During fiscal 1999, the Company sold certain marketable securities,
resulting in a realized gain of approximately $220,000, before taxes, which has
been recognized as other income. The Company utilized the specific
identification method to determine the cost basis of the securities sold. During
fiscal 1999, approximately $1.4 million of unrealized holding gains arose,
before the reclassification adjustment of the realized gain included in income
before taxes.
(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 $2,097,000 higher at January 29, 2000 and $1,835,000 higher at
January 30, 1999.
(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 the estimated useful lives of the
software, which range from three to five 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 $549,000 and
$680,000 of capitalized costs for fiscal 1999 and 1998, respectively.
(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.
F-8
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the fiscal year in which it opened the new facility. The implementation of SOP
98-5 slightly affects quarterly results; however on an annual basis, there is
no financial impact. Generally, the Company incurs approximately $125,000 of
pre-opening costs per new store.
(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. Net advertising costs, which are
included in operating expenses, were $17,019,000 for fiscal 1999, $19,306,000
for fiscal 1998, $1,610,000 for the transition period ended January 31, 1998,
and $7,377,000 for fiscal 1997 which represents 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
The Company uses 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 is recorded on
the date of grant only if the current market price of the underlying stock
exceeds 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 as if the fair-value-based method defined in SFAS
No. 123 had been applied.
(n) Fair Value of Financial Instruments
The Company's financial instruments' carrying values approximate their fair
values.
(o) 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 non-
F-9
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
owner sources. Accumulated other comprehensive income (loss) is comprised of
unrealized holding gains (losses) on the Company's marketable securities.
(p) 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.
(q) Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) Acquisitions
Sportmart Inc.
The Company acquired Sportmart, Inc. on January 9, 1998. Sportmart operated
59 stores in the midwest and western United States. 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.
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 after the merger.
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 1997, 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.
F-10
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 period.
Fiscal 1997(1)
---------------------
(unaudited)(in
thousands,
except share amounts)
Net sales............................................. $ 687,542
=========
Loss from continuing operations(2).................... (22,506)
=========
Basic loss per share from continuing operations(3).... $ (2.95)
=========
- --------
(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.
(2) 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.
(3) 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.
Jumbo Sports, Inc., store locations
On November 4, 1999, the Company reached an agreement to acquire two Denver
store locations from Jumbo Sports, Inc., d.b.a. Sports & Recreation. Under the
agreement the Company took immediate possession of the two sites and the
current inventory. The real estate was sold to a third party and leased by the
Company. This acquisition was accounted for as a purchase and the inventory
acquired was recorded at fair value, less estimated selling costs.
(4) Accounts Receivable
Activity in the allowance for doubtful accounts is as follows (in
thousands):
28 days ended
Fiscal Fiscal January 31, Fiscal
1999 1998 1998 1997
------ ------ ------------- ------
Allowance for doubtful accounts at
beginning of period................. $ 122 $ 345 $ 212 $ 180
Additions............................ 548 -- 131 36
Amounts charged against the allow-
ance................................ (417) (247) (6) (4)
Recoveries of amounts previously
charged............................. 13 24 8 --
----- ----- ----- -----
Allowance for doubtful accounts at
end of period....................... $ 266 $ 122 $ 345 $ 212
===== ===== ===== =====
F-11
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(5) 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.
(6) 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 has entered
into an agreement to sell the property. The closing of the sale is subject to
numerous regulatory licensing and re-zoning requirements. This asset is
classified as long-term at January 29, 2000 as it is uncertain if this sale
will close within a year.
(7) Property and Equipment
Property and equipment consist of the following (in thousands):
January 29, January 30,
2000 1999
----------- -----------
Land................................................ $ -- $ --
Buildings and leasehold improvements................ 38,474 36,307
Capitalized lease property.......................... 1,936 1,936
Data processing equipment and software.............. 9,370 5,728
Furniture, fixtures and office equipment............ 38,383 32,311
Equipment held for rental........................... 1,891 1,509
Less accumulated depreciation and amortization...... (29,613) (18,758)
-------- --------
Property and equipment, net....................... $ 60,441 $ 59,033
======== ========
Depreciation expense was $11,149,000 for fiscal 1999, $9,317,000 for fiscal
1998, $989,000 for the transition period ended January 31, 1998, and
$2,973,000 for fiscal 1997. Amortization of equipment held for rental is
included in cost of goods sold and was $478,000 for fiscal 1999, $458,000 for
fiscal 1998, $39,000 for the transition period ended January 31, 1998, and
$432,000 for fiscal 1997.
Depreciation expense for software systems totaled $790,000 for fiscal 1999,
$454,000 for fiscal 1998, $37,000 for the transition period ended January 31,
1998 and $407,000 for fiscal 1997. The net book value of computer software was
$3,667,000 and $1,438,000 at January 29, 2000 and January 30, 1999,
respectively.
(8) 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 $2,388,000 for fiscal 1999, $2,220,000 for fiscal 1998 and
$150,000 for the transition period ended January 31, 1998. During fiscal 1999
the Company reduced its valuation allowance for deferred tax assets related to
pre-acquisition operating losses of Sportmart (see note 13). This revaluation
resulted in a reduction of $4,183,000 to the favorable leases originally
recorded in connection with the Sportmart acquisition. 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.
F-12
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) Accrued Expenses
Accrued expenses consist of the following (in thousands):
January 29, January 30,
2000 1999
----------- -----------
Accrued compensation and benefits.................... $ 8,426 $ 6,071
Accrued sales and property taxes..................... 11,019 10,581
Accrued store closing reserve........................ 897 1,355
Accrued severance, relocation and stay bonus......... 196 1,315
Accrued advertising.................................. 2,603 2,730
Other................................................ 8,204 8,544
-------- --------
Accrued expenses................................... $ 31,345 $ 30,596
======== ========
(10) 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 (8.50% at January 29, 2000)
plus .25% or LIBOR (5.86% at January 29, 2000) 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%. These earnings
levels were attained as of the end of fiscal 1999, as a result, the margin
rates on prime and LIBOR borrowings will be reduced during the first quarter
of fiscal 2000 to 0.0% and 1.50%, respectively. 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 29, 2000, $105,900,000 was outstanding under the agreement and
$57,976,000 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.
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.
(11) Store Closing Activities
The Company provides a provision for store closing when the decision to
close a store 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 did not record any additional
provisions for store closings in fiscal 1999.
F-13
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Activity in the provision for closed stores is as follows (in thousands):
28 days
Fiscal ended
--------------- January 31, Fiscal
1999 1998 1998 1997
------ ------- ----------- ------
Provision for closed stores at
beginning of period.................. $1,355 $ 5,789 $ 211 $ 490
Additions............................. -- 1,242 -- --
Assumption of provision due to
acquisition.......................... -- -- 6,047 --
Decreases............................. (458) (5,676) (469) (279)
------ ------- ------ -----
Provision for closed stores at end of
period............................... $ 897 $ 1,355 $5,789 $ 211
====== ======= ====== =====
(12) 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
had been transferred to the Company's borrowings, as it used 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 was the
underlying principal amount used in determining the interest payments
exchanged over the term of the contract. The notional amount did 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 expired in August 1999.
The contract placed a ceiling on LIBOR of 6.0%, and effectively limited the
Company's LIBOR based borrowings to a maximum interest rate of 6.0% plus
1.75%. The Company paid a premium which was amortized over the effective life
of the contract.
The Company was 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 was limited to any accrued interest receivable. The
Company considered the risk of default to be remote, and instead relied on its
credit policies when evaluating its counterparties. The Company did not hold
any collateral on the aforementioned agreement, and did not pledge any
collateral.
(13) 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 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.
F-14
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Income tax expense (benefit) consists of the following (in thousands):
28 days
Fiscal ended
------------ January 31, Fiscal
1999 1998 1998 1997
---- ------- ----------- ------
Current:
Federal................................... $ -- $ (469) $(490) $3,247
State..................................... -- (90) (98) 654
---- ------- ----- ------
-- (559) (588) 3,901
Deferred:
Federal................................... 803 (1,292) 127 217
State..................................... 193 (334) 143 (35)
---- ------- ----- ------
996 (1,626) 270 182
---- ------- ----- ------
$996 $(2,185) $(318) $4,083
==== ======= ===== ======
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
Fiscal ended
---------- January 31, Fiscal
1999 1998 1998 1997
---- ---- ----------- ------
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 5.0 4.1 3.4
Effective rate change on deferred taxes... -- -- (5.1) --
Valuation allowance....................... -- 2.0 (30.2) --
Interest on tax contingency............... -- -- -- 3.6
Change in state rate apportionment fac-
tors..................................... (5.2) -- -- --
Other, net--primarily permanent differ-
ences.................................... 2.2 (2.0) 1.0 (3.1)
---- ---- ----- ----
36.0% 39.0% 3.8% 37.9%
==== ==== ===== ====
F-15
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 29, January 30,
2000 1999
----------- -----------
Assets:
Accounts receivable................................ $ 182 $ 298
Tax credit carryforwards........................... 2,043 2,043
Net operating loss carryforwards................... 22,435 25,116
Accrued compensation and benefits.................. 1,196 1,158
Accrued occupancy.................................. 1,116 1,028
Other accrued expenses............................. 1,277 1,367
-------- --------
28,249 31,010
-------- --------
Liabilities:
Property and equipment............................. (2,803) (3,791)
Inventories........................................ (9,667) (10,194)
Prepaid expenses................................... (680) (785)
-------- --------
(13,150) (14,770)
-------- --------
Total net asset before valuation allowance......... 15,099 16,240
Less valuation allowance........................... (19,280) (23,609)
-------- --------
Net deferred tax liability......................... $ (4,181) $ (7,369)
======== ========
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 $4,329,000 during fiscal 1999 based upon
current tax planning strategies and management estimates of future taxable
income. Management believes it is more likely than not that a portion of the
pre-acquisition operating losses will be utilized. As such, the valuation
allowance established in the prior year has been reduced to its current
amount.
The Company has net operating loss carryforwards of approximately
$64,600,000 of which $12,504,000 will expire in 2012, $28,300,000 will expire
in 2013, and $16,923,000 will expire in 2019. In addition, the Company also
has tax credit carryforwards of $2,043,000 which have no expiration date.
(14) 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 18 years and provide for
minimum annual rental payments plus contingent rentals based upon a percentage
of sales in excess of stipulated amounts. The
F-16
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
gross amount of capitalized lease property and related accumulated
amortization recorded under capital leases is included in Property and
Equipment.
The Company has noncancelable operating leases primarily for stores,
distribution facilities and equipment, expiring at various dates from 2000 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 in excess of a specified
amount. Eight of the leases, three 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 $1,528,000 in fiscal 1999,
$1,391,000 in fiscal 1998, $51,000 for the transition period ended January 31,
1998 and $466,000 for fiscal 1997.
Total rent expense under these lease agreements was as follows (in
thousands):
28 days
Fiscal ended
------------------ January 31, Fiscal
1999 1998 1998 1997
-------- -------- ----------- --------
Base rentals...................... $ 48,222 $ 42,408 $ 2,907 $ 12,250
Contingent rentals................ 195 97 32 172
Sublease rental income............ (37) (40) (5) (64)
-------- -------- ------- --------
$ 48,380 $ 42,465 $ 2,934 $ 12,358
======== ======== ======= ========
At January 29, 2000, 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 be
paid to
Capital Operating related
Fiscal Years leases leases Total parties
------------ ------- --------- -------- -------
2000..................................... $ 665 $ 47,402 $ 48,067 $ 2,386
2001..................................... 673 45,486 46,159 2,431
2002..................................... 685 42,133 42,818 2,516
2003..................................... 648 40,119 40,767 2,627
2004..................................... 235 37,833 38,068 2,214
Thereafter............................. 608 271,596 272,204 7,736
------- -------- -------- -------
Total minimum lease payments........... $ 3,514 $484,569 $488,083 $19,910
======== ======== =======
Less imputed interest (at rates ranging
from 9.0% to 10.75%).................. 821
-------
Present value of future minimum rentals
of which $417 is included in current
liabilities, at January 29, 2000...... $ 2,693
=======
The total future minimum lease payments include amounts to be paid to
related parties and are shown net of $3,304,000 of noncancellable sublease
payments and exclude estimated executory costs, which are principally real
estate taxes, maintenance, and insurance.
F-17
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In connection with the transfer of certain leased stores to a former
affiliate in 1991, the Company remains liable as assignor on two 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 on these
leases, exclusive of any variable rent or cost reimbursement that might be
required, were as follows at January 29, 2000 (in thousands):
Fiscal year:
2000.............................................................. $ 1,633
2001.............................................................. 1,568
2002.............................................................. 1,540
2003.............................................................. 1,540
2004.............................................................. 1,479
Thereafter........................................................ 8,725
-------
Total minimum lease payments.................................... $16,485
=======
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.
(15) 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, $300,000 in fiscal 1999,
$277,000 in fiscal 1998, $-0- for the transition period ended January 31, 1998
and $134,000 in fiscal 1997. The Company provided an additional discretionary
contribution of $166,000 for fiscal 1997, but did not make such a contribution
during the transition period ended January 31, 1998, fiscal 1998, or fiscal
1999.
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 pre-tax 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 maintained through calendar 1998 to
ensure maximum reimbursement opportunity for plan participants.
F-18
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 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
continued to vest under the terms of the plan. The shares were fully vested on
August 1, 1999.
The Company recorded approximately $80,000 of unamortized compensation as a
reduction to stockholders' equity. This amount was amortized to compensation
expense on a straight-line basis over the remaining vesting period.
(16) Deferred Compensation Plan
During fiscal 1999, the Company began a nonqualified Deferred Compensation
Plan (the "DCP") for certain members of management. Eligible employees may
contribute a portion of base salary or bonuses to the plan annually. The DCP
provides for additional matching contributions by the Company, with
limitations similar to the Company's 401(k) plan, as well as discretionary
contributions in an amount determined by the Company prior to the end of each
plan year. The Company made no matching contributions to the DCP during 1999.
(17) Stock Option Plans
Management Equity Plan
The Company 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. The plan was amended by a vote of the
stockholders at the annual meeting of stockholders held on June 16, 1999. The
stockholders voted to amend the Management Equity Plan to increase the number
of shares and options authorized to be granted from 1,500,000 to 1,750,000
shares and options. As of January 29, 2000, 147,600 purchased shares of common
stock, 974,950 options, and 316,250 shares of restricted stock 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 bore interest
at 8% per annum, and were secured by the common stock purchased. The notes
were due October 17, 1999 and were paid in full at that time. 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. Restricted stock
was granted to certain employees of the Company and has a cliff vesting after
five years from the grant date. Upon grant of the restricted stock the Company
recorded approximately $2.3 million of unamortized compensation as a reduction
to stockholders' equity. This amount is being amortized to compensation
expense on a straight-line basis over the vesting period.
F-19
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 had accelerated
vesting. All such persons had immediately vested options upon termination, and
had one year to exercise such options. As of January 9, 1998, 1,153,573
Sportmart options were exchanged for 190,457 Gart substitute options.
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 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
Granted..................................... 233,000 6.64
Exercised................................... -- --
Canceled.................................... (145,518) 16.73
---------
Balance at January 29, 2000.................. 1,021,931 $ 9.07 451,520
=========
F-20
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Canceled options are a result of employee terminations.
At January 29, 2000 and January 30, 1999, the weighted-average remaining
contractual life of outstanding options were 6.80 and 7.00 years,
respectively.
The per share weighted-average fair value of stock options granted during
fiscal years 1999 and 1998 was $4.16 and $10.06 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 interest 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 1998:
Expected volatility........................................... 54%
Risk free interest rates...................................... 5.68%
Expected life of options...................................... 6 to 10 years
Expected dividend yield....................................... 0%
The following weighted-average assumptions were used for grants issued in
fiscal 1999:
Expected volatility........................................... 73.4%
Risk free interest rate....................................... 5.5%
Expected life of options...................................... 6 years
Expected dividend yield....................................... 0%
The following table summarizes the status of outstanding stock options as of
January 29, 2000:
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- 6.625........... 572,800 6.3 $ 5.68 290,920 $ 5.13
7.75- 9.00............ 70,000 8.9 8.82 12,000 9.00
14.00-15.63............ 379,131 7.2 14.24 148,600 14.12
--------- -------
$ 5.13-15.63............ 1,021,931 6.8 $ 9.07 451,520 $ 8.19
========= =======
F-21
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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
Fiscal ended
-------------- January 31, Fiscal
1999 1998 1998 1997
------ ------- ----------- ------
Net income (loss), as reported........... $1,773 $(3,418) $(8,005) $6,684
====== ======= ======= ======
Net income (loss), pro forma............. $1,072 $(4,209) $(8,029) $6,477
====== ======= ======= ======
Earnings (loss) per share, pro forma:
Basic.................................. $ 0.14 $ (0.55) $ (1.11) $ 1.18
====== ======= ======= ======
Diluted................................ $ 0.14 $ (0.55) $ (1.11) $ 1.16
====== ======= ======= ======
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, Rocky Mountain
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.
(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 1999 and 1998, $42,000 for the
transition period ended January 31, 1998 and $250,000 for fiscal 1997.
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
F-22
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 was 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
Fiscal ended
------------- January 31, Fiscal
1999 1998 1998 1997
------ ------ ----------- ------
Base rentals................................ $1,732 $1,808 $ 167 $ 359
Contingent rentals.......................... 39 50 9 15
------ ------ ----- -----
$1,771 $1,858 $ 176 $ 374
====== ====== ===== =====
(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 have been 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.
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. The Company has accrued $1,100,000 in the consolidated
financial statements. No penalties are expected to be assessed relating to
this matter. At January 29, 2000, the LIFO inventory and other associated
temporary differences continue to be classified as long-term net deferred tax
liabilities since final settlement terms have not been negotiated.
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 consolidated
financial condition, results of operations, or liquidity.
In addition, the Company is currently under examination for the fiscal tax
year ended September 1997. No adjustments have been proposed at this time.
F-23
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 condition, 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 (loss) per share.
Fiscal Fiscal 28 Days Ended Fiscal
1999 1998 January 31, 1998 1997
---------- ----------- ---------------- ----------
Net income (loss)....... $1,773,000 $(3,418,000) $(8,005,000) $6,684,000
Weighted average shares
of common stock
outstanding............ 7,632,696 7,676,816 7,212,267 5,501,673
---------- ----------- ----------- ----------
Basic earnings (loss)
per share.............. $ 0.23 $ (0.45) $ (1.11) $ 1.21
========== =========== =========== ==========
Number of shares used
for diluted earnings
(loss) per share:
Weighted average shares
of common stock
outstanding........... 7,632,696 7,676,816 7,212,267 5,501,673
Dilutive securities --
stock options........ 68,731 -- -- 95,150
---------- ----------- ----------- ----------
Weighted average shares
of common stock and
common stock
equivalents
outstanding............ 7,701,427 7,676,816 7,212,267 5,596,823
---------- ----------- ----------- ----------
Diluted earnings (loss)
per share.............. $ 0.23 $ (0.45) $ (1.11) $ 1.19
========== =========== =========== ==========
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.
F-24
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(23) Quarterly Financial Data (unaudited)
First Second Third Fourth
quarter quarter quarter quarter Annual
-------- -------- -------- --------- --------
(in thousands, except per share amounts)
Fiscal 1999
Net sales.................... $151,933 $172,562 $155,495 $ 201,005 $680,995
Gross profit................. 35,791 40,594 34,317 52,811 163,513
Net income (loss)............ (110) 514 (2,512) 3,881 1,773
Basic earnings (loss) per
share....................... (0.01) 0.07 (0.33) 0.51 0.23
Diluted earnings (loss) per
share....................... (0.01) 0.07 (0.33) 0.51 0.23
Fiscal 1998
Net sales.................... $155,217 $169,057 $142,583 $ 191,190 $658,047
Gross profit................. 34,310 42,171 29,900 48,236 154,617
Net income (loss)............ (2,832) 2,299 (5,982) 3,097 (3,418)
Basic earnings (loss) per
share....................... (0.37) 0.30 (0.78) 0.40 (0.45)
Diluted earnings (loss) per
share....................... (0.37) 0.29 (0.78) 0.40 (0.45)
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
19, 2000 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 T. 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 19, 2000.
Signature Title
- ----------------------------- ---------------------------------
Chairman, President and Chief
/s/ JOHN DOUGLAS MORTON Executive Officer
- -----------------------------
John Douglas Morton
Executive Vice President, Chief Financial
/s/ THOMAS T. HENDRICKSON Officer and Treasurer (Principal Financial
- ----------------------------- and Accounting Officer)
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