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UNITED STATES
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 No. 1-13426
THE SPORTS AUTHORITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3511120
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3383 N. State Road 7 - Ft. Lauderdale, Florida 33319
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(Address of principal executive offices) (Zip Code)
(954) 735-1701
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on which Registered
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Common Stock, $.01 par value The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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. [X]
State the aggregate market value of the voting and nonvoting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing: $78,655,983 at the close of business
on April 3, 2000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 32,208,176 Shares of
Common Stock outstanding as of April 3, 2000.
Documents Incorporated by Reference: the Company's Proxy Statement dated
April 28, 2000, incorporated partially in Parts II and III hereof.
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PART I
FORWARD LOOKING STATEMENTS
Certain statements contained in or incorporated by reference in this Form
10-K and the Company's 1999 Annual Report to Stockholders constitute "forward
looking statements" made in reliance on the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. As such, they involve risks
and uncertainties that could cause actual results to differ materially from
those set forth in such forward looking statements. The Company's forward
looking statements are based on assumptions about, or include statements
concerning, many important factors, including without limitation, changes in
discretionary consumer spending and consumer preferences, particularly as they
relate to athletic footwear, apparel and sporting equipment and the Company's
particular merchandise mix and retail locations; the Company's ability to
effectively implement its merchandising, marketing, store expansion and
refurbishment, electronic commerce, and other strategies; competition from other
retailers (including internet and direct manufacturer sales); unseasonable
weather; fluctuating sales margins; product availability; and capital spending
levels. The Company undertakes no obligation to release publicly the results of
any revisions to these forward looking statements to reflect events or
circumstances after the date such statements were made.
ITEM 1. BUSINESS
GENERAL
With sales of $1.5 billion in fiscal 1999, the Company is the largest
full-line sporting goods retailer in the United States. The Company's business
strategy is to offer customers extensive selections of quality, brand name
athletic footwear, apparel and sporting equipment, and high levels of customer
service. At January 29, 2000, the Company directly operated 201 stores as well
as two temporary clearance centers, substantially all in excess of 40,000 gross
square feet, including 198 stores in 32 states across the United States and five
stores in Canada. The Company ceased operating its five stores in Canada in
March 2000. Mega Sports Co., Ltd., which is now 8.4% owned by the Company, is a
joint venture which operates another 19 stores in Japan under a license
agreement with the Company. The Company also owns 19.9% of
TheSportsAuthority.com, Inc., a joint venture which, since November of 1999, has
operated the retail e-commerce site WWW.THESPORTSAUTHORITY.COM as a "clicks"
shopping alternative augmenting the Company's "bricks" store presence. Under the
terms of the joint venture agreement, the Company's ownership interest can
increase to 49.9%.
The Company was incorporated in Delaware in 1987. In 1990, the Company was
acquired by Kmart Corporation. Following public offerings in November 1994 and
October 1995, Kmart no longer owns any interest in the Company.
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INDUSTRY OVERVIEW
According to the National Sporting Goods Association, total U.S. retail
sales of sporting goods (including athletic footwear, apparel and sporting
equipment) was approximately $44 billion in 1998. The retail sporting goods
industry is comprised of four principal categories of retailers: (i) traditional
sporting goods retailers, (ii) specialty sporting goods retailers, (iii) large
format sporting goods retailers and (iv) mass merchandisers. In addition, a
variety of other retailers sell various types of sporting goods, principally
athletic footwear and apparel. Sporting goods retailing in the United States is
characterized by intensive competition among retailers, increasing competition
from new channels of distribution such as catalogs and electronic commerce, and
consolidation among vendors.
BUSINESS STRATEGY
The Company is focused on serving consumers who participate and/or are
interested in almost any type of sport, leisure or recreational activity. The
stores offer the extensive selection and competitive pricing associated with
category dominant retailers while, at the same time, offering quality brand
names and high levels of customer service. The key elements of this strategy are
as follows:
STORE FORMAT. The Company operates large format stores, substantially all
of which are in excess of 40,000 gross square feet. This format enables the
Company to provide under one roof an extensive selection of merchandise for
sports and leisure activities that ordinarily are associated with specialty
shops and pro shops, such as golf, tennis, snow skiing, cycling, hunting,
fishing, bowling, archery, boating and water sports, as well as for activities
ordinarily associated with traditional sporting goods retailers, such as team
sports, physical fitness, and men's, women's and children's athletic and active
apparel and footwear. The average store offers approximately 29,500 active SKUs
(excluding discontinued items) across 18 major departments.
QUALITY BRAND NAME SPORTING GOODS. The Company's merchandising strategy is
to offer strong assortments in quality brand name sporting goods in its
merchandise classifications. The Company's comprehensive merchandise assortment
includes over 700 brand names, including Adidas, Asics, Champion, Coleman,
Columbia, Easton, Head, Huffy, K2, Mongoose, New Balance, Nike, Penn, Prince,
Proform, Rawlings, Reebok, Rollerblade, Russell, Shakespeare, Spalding, Taylor
Made, Teva, Timberland and Wilson. In 1999, the Company added Izod, Cross Creek,
Orlimar and Titleist Golf apparel to its apparel and golf merchandise
assortments as well as Salomon and Adams brand names.
CUSTOMER SERVICE. The Company seeks to distinguish itself from other large
format sporting goods retailers, traditional sporting goods retailers and mass
merchandisers by emphasizing high levels of customer service. In addition, the
Company seeks to hire many sales associates who are sports enthusiasts skilled
in various disciplines.
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PRICING: ALWAYS PRICED RIGHT. The Company's pricing policy is to market
merchandise at prices that are always competitive in the market at the time. The
Company also seeks to be a price leader on certain highly identifiable items.
FOCUS ON MULTI-STORE MARKETS. The Company seeks to establish a significant
presence in each of its markets and pursues a store expansion strategy that
primarily focuses on opening multiple stores in its markets. This focus enables
the Company to obtain significant market penetration and to leverage management
and advertising expenses, thereby achieving greater economies of scale. In
addition, the Company believes its multi-store market strategy results in
greater name recognition and enhanced customer convenience in each market. The
Company believes that achieving greater market penetration will enable it to
compete more effectively and increase profitability and return on capital over
the long term.
E-COMMERCE. TheSportsAuthority.com, Inc. offers an online channel for
customers to purchase a wide selection of athletic footwear, apparel and
sporting equipment, as well as announcing special promotional events and
providing store locator and corporate information. The site also hosts a
consumer-to-consumer Internet auction that enables consumers throughout the
United States to buy and sell used sporting goods conveniently. The Company
anticipates future enhancements to include the integration of sports related
content and community programs, corporate communications features, concept shops
for key vendors, and additional product information such as specific brand size
charts, pull-down options, photo enhancements and flexibility to view multiple
colors of an item. The Company's joint venture partner, Global Sports
Interactive, Inc. a, a wholly-owned subsidiary of Global Sports, Inc., is
contributing the technological, organizational and working capital requirements
of the joint venture, as well as dedicated marketing funds to promote online
traffic. The Company licenses trademarks and service marks, domain names,
content, purchasing power and vendor relationships to the joint venture. The
Company has an initial ownership in TheSportsAuthority.com of 19.9%, which will
automatically increase to 49.9% if certain performance criteria are met by
either TheSportsAuthority.com or the Company. In addition, the Company has an
option to purchase additional shares of TheSportsAuthority.com, up to 49.9%, in
certain events.
STORES
The Company's stores are located primarily in regional strip or power
centers that generally have tenants that are value-oriented large format
retailers, and a small percentage are located in malls and stand alone
locations. The markets in which the stores are located are listed in Item 2.
The Company engaged in a rapid expansion program until mid-1998, when it
substantially reduced its store expansion program and began a comprehensive
review of its real estate processes. In the third quarter of 1998, the Company
announced its intention to close 18 underperforming stores (of which two were to
be relocated) as part of a comprehensive restructuring plan. The Company
completed 15 store closings in the first quarter of 1999, and as a result of
changing market conditions and favorable rent concessions, the Company has
decided not to close the remaining three stores. The Company temporarily
reopened two of the previously
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closed stores as clearance outlets in October 1999. In the fourth quarter of
1999, the Company announced its intention to close its remaining five stores in
Canada. These stores were subsequently closed in March 2000. See Note 4 of
the Notes to Consolidated Financial Statements contained in Part II, Item 8. The
Company opened three new full-line stores in 1999.
The Company anticipates growth in the number of stores to be modest over
the next few years with five new stores planned to open in 2000 (two of which
will be relocations of existing stores). Expansion in future years will depend,
among other things, on general economic and business conditions affecting
consumer confidence and spending and, in particular, the level of consumer
demand for sporting goods; the availability of adequate capital; desirable
locations at acceptable terms; qualified management personnel; the Company's
ability to manage the operational aspects of its growth; and comparable store
performance.
While the Company's expansion program in recent years has included opening
stores in Canada and Japan, the Company has exited the Canadian market and
reduced its ownership interest in its joint venture in Japan. See "Restructuring
of the Company's Joint Venture in Japan" below. The Company has no current plans
for expansion outside the United States, but will continue to evaluate expansion
opportunities.
The Company's expansion strategy focuses primarily on multi-store markets
where it can achieve significant market penetration and can leverage management
personnel, distribution and advertising expenses while minimizing
cannibalization of sales at existing stores. In analyzing markets, the Company
evaluates the market's potential in terms of total number of store locations.
Sites are selected based on demographics (such as income levels and
distribution, age and family size), population, regional access, co-tenancy,
available lease or purchase terms, visibility, parking, and distance from
competition.
The Company traditionally has obtained new store locations through
long-term operating leases. On an operating lease basis, the cost of opening a
new store is approximately $2.2 million, consisting primarily of the investment
in inventory, the cost of furniture, fixtures and equipment and pre-opening
expenses, such as the costs associated with training employees, stocking the
store and grand opening advertising. If the site requires a retrofit of an
existing building, costs (excluding furniture, fixtures and equipment) can be
significantly higher. The Company currently plans to finance substantially all
of its new stores with operating leases, assuming availability and appropriate
terms.
The Company believes customers want an easy shopping environment and
therefore seeks to make shopping at its stores as convenient as possible through
its extensive in-store signage and department placement. The Company has
developed and tested a new store prototype featuring specialty stores within a
store so customers can shop by sport, interactive kiosks, in-store customer
clinics and demonstrations, and a wide array of audio visual entertainment. The
Company is also enhancing its presentation with improved fixtures, signage,
adjacencies, and increased point-of-purchase information.
5
In 1999, the Company spent approximately $9.5 million refurbishing its
stores. Seven stores received comprehensive remodels featuring improved
departmental adjacencies modeled after the new store prototype. This included
interactive and audio visual developments as well as new shopping areas
specifically focused on youth and team sports fans. One hundred nineteen stores
received basic renovations that included new category end cap signage and
widening the aisles to accommodate new aisle bin fixtures for small and impulse
merchandise and to improve customer traffic flow. The Company expects that its
capital expenditures in 2000 will be approximately $30.0-$35.0 million,
primarily related to refurbishments of existing stores and upgrades of
information systems.
STORE OPERATIONS AND CUSTOMER SERVICE
Each store displays merchandise in accordance with centrally developed
presentation standards. These standards are designed to provide logical
department adjacencies to promote convenience and multiple purchases of related
items. The layouts for each department are also centrally developed to ensure
that each store utilizes display techniques to highlight merchandise and present
a consistent and attractive shopping environment.
The Company divides selling and non-selling functions in order to allow its
sales associates to devote their full attention to assisting customers.
Non-selling duties, such as receiving and stocking, are performed immediately
before and after store operating hours. In order to enhance sales and payroll
productivity, the Company implemented a sales-based compensation plan for all
footwear associates in late 1999.
In March 2000 the Company entered into a five year contract with RMS
Networks to create, produce and broadcast via satellite WTSA-The Sports
Authority Network, the first in-store sports retailer network, for all of the
Company's stores. The network is an opportunity to increase the frequency and
length of customer visits and the dollars spent during each visit. Programming
will entertain and inform customers with sports news and event highlights,
sports segments and consumer tutorials promoting in-store merchandise, vendor
advertising, and professional team and athlete profiles. The network will also
be used to broadcast corporate communications such as merchandise training, new
product introductions and promotional initiatives to employees nationwide.
Project costs are estimated to be $15 million, which will be funded by RMS
Networks.
MERCHANDISING
The Company's merchandising strategy focuses on offering a broader and
deeper selection of quality, brand name merchandise than is generally available
in traditional sporting goods retailers. The Company's comprehensive merchandise
assortment consists of a wide variety of athletic footwear, apparel, sporting
equipment and accessories and is designed to meet the sporting goods needs of
its customers, from the sports enthusiast to the weekend athlete. The Company
continuously introduces new products under its Hot-New-Now program. The average
store offers
6
approximately 29,500 active SKUs (excluding discontinued items) across more than
300 merchandise classifications.
The Company also tailors merchandise assortment and store space allocation
to reflect customer preferences at each store location. This is accomplished by
considering geographical as well as demographic differences by store and
involves differentiation in brands, sizes, colors, fabrication and seasonality
of the assortment. For example, not all stores carry stationary bicycles or
feature water shops.
The Company's stores offer an extensive selection of both hard lines, which
consist of equipment for team sports, fitness, outdoor sports, golf, racquet
sports, cycling, water sports, marine, snow sports and general merchandise, and
soft lines, which consist of athletic and active footwear and apparel. During
the past three years, hard lines constituted approximately 51% of the Company's
sales, apparel constituted approximately 21%, and footwear constituted
approximately 28%.
The hard lines and soft lines sold by the Company include the following
merchandise categories:
ATHLETIC AND ACTIVE APPAREL: This category consists of both casual and
leisure apparel, as well as apparel designed and fabricated for specific sports,
in men's, women's and children's assortments. Casual and leisure apparel
includes basic and seasonal T-shirts, shorts, sweats and warm ups. Performance
specific apparel includes offerings for sports such as golf, tennis, running,
fitness, soccer, baseball, football, hockey, and skiing. The apparel category
also includes NCAA and professional league licensed apparel.
ATHLETIC AND ACTIVE FOOTWEAR: The footwear selection includes casual
footwear intended for day to day streetwear, as well as athletic shoes for
running and walking, tennis, fitness and crosstraining, basketball and hiking.
In addition, the Company carries specialty footwear including a complete line of
cleated shoes for baseball, football, soccer and golf. Important categories
within the footwear department are recreational and hockey skates, socks and
accessories.
OUTDOOR SPORTS: A large assortment of merchandise is carried in the
stores aimed at outdoor sports enthusiasts. Included are camping equipment,
including tents, sleeping bags and cooking appliances; fishing gear, including
rods, reels, tackle and accessories; optics, including binoculars and scopes;
knives and cutlery; archery equipment and accessories; and marine and water
sports equipment, including navigational electronics, diving and snorkeling
equipment, water skis, inflatable boats and rafts and accessories. The Company
discontinued the sales of handguns in all of its locations in early 1999 and
reduced its rifle and other hunting assortment.
RECREATIONAL SPORTS: Team sports include a full range of equipment and
accessories for such sports as basketball, baseball, soccer, football, hockey
and lacrosse. The golf department includes a complete assortment of golf clubs
and club sets, bags, balls, teaching aids and accessories. The racquet
7
sports department covers the needs of participants in tennis, racquetball,
squash, badminton and platform or paddle ball. The Company offers services such
as racquet stringing and trial demo periods.
FITNESS SPORTS: The fitness department is comprised of complete
assortments for aerobic and anaerobic workouts, including treadmills, stationary
bicycles and steppers for aerobic and home gyms, weight benches, dumbbells and
free weights for anaerobic. In addition, the department carries a selection of
boxing equipment and accessories. Finally, the department features items
designed for wellness and relaxation, such as massagers and magna-therapy, and
nutritional supplements. An extension of the fitness category is the cycling
department, which focuses on all terrain, touring, 20" BMX and freestyle
bicycles. In addition, the Company carries accessories such as gloves, helmets,
and water bottles.
WINTER SPORTS: The Company offers a complete line of ski apparel,
including technical outerwear, bib pants, thermal underwear, sweaters and
accessories. The Company also offers a complete line of skis and ski equipment,
including Alpine and cross country skis, snowboards, boots, bindings, goggles,
and accessories, as well as technical services to support new sales and tune-ups
on customer owned product.
PURCHASING
The Company maintains its own central buying staff and a central
replenishment and allocation staff. This staff manages the planning system,
allocates fashion and seasonal merchandise, replenishes basic merchandise and
coordinates the distribution of all merchandise.
Under the Company's merchandise planning system, the merchandise mix for
each store is selected by the central buying staff in consultation with field
management. The system allows the Company to manage its sales and inventory
levels by store at the subclass level. The Company also uses an automated
allocation system to allocate non-reorderable merchandise to stores based on
planned sales and inventory at the SKU level, as well as recent sales trends and
inventory position. The Company also utilizes an automated replenishment system
for approximately 40% of its active assortment. This replenishment system
balances in-stock positions to satisfy customer demand with the costs associated
with carrying such inventory.
The Company currently purchases merchandise from approximately 750 vendors
and, in fiscal 1999, the Company's largest vendor, Nike, Inc., accounted for
approximately 13% of its total merchandise purchased. The Company does not
maintain any material long-term or exclusive commitments or arrangements to
purchase from any vendor. The Company is either the largest or one of the
largest customers for many of its vendors. The Company believes it will continue
to obtain sufficient merchandise for all of its stores on a timely basis.
DISTRIBUTION
In late 1997, the Company opened its first regional distribution center
("RDC") near Atlanta, Georgia. The RDC serves as a flow-through facility to
receive and allocate merchandise to the
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Company's stores. Merchandise is received at the RDC, made "floor ready" as
necessary, and subsequently allocated and distributed to Company stores. At
year-end, the RDC serviced 147 stores. In addition, the Company maintains an
off-site receiving facility in Chino, California. The Company relocated its
receiving facility in Chino in April 2000 to a larger facility in order to
expand the number of stores serviced from 4 to 27, to establish flow-through
cross-dock facilities, and to handle merchandise imports. Merchandise not
processed by the centralized distribution network is shipped directly to each
store by vendors.
MANAGEMENT INFORMATION SYSTEMS
Since its inception, the Company has implemented management information
systems that integrate purchasing, receiving, sales and perpetual inventory data
on a daily basis. These systems include the functions of automated
replenishment, automated merchandising planning and allocation, electronic data
interchange, daily tracking of in-stock levels by item and location and a "data
warehouse" which gives corporate buying staff access to sales information on a
class and sub-class level. Additionally, the Company began a significant
revamping of its merchandise management systems in 1999, which it expects to
complete in the third quarter of 2000.
The Company currently employs point-of-sale terminals in all of its stores,
which provide price look-up capabilities and SKU-level sales data, capture
customer telephone data and initiate requests for authorization of the different
credit and check tenders accepted by the Company. The Company also utilizes IBM
AS/400 computers and hand held radio frequency terminals at store level as
in-store processors to record merchandise receipts, produce price tickets,
maintain SKU-level perpetual inventories and for general data inquiry. These
in-store processors communicate interactively with central AS/400 computers to
exchange data generated at store level and the Company's corporate offices.
These processors are intended to provide local management with the ability to
more closely manage inventory productivity and merchandise space planning, as
well as reduce the amount of employee time spent on non-selling functions.
ADVERTISING AND PROMOTION
The Company advertises its products and seeks to build name recognition and
market share through direct mail, newspaper advertising, broadcast media,
billboards and sports sponsorships. The focus on multi-store markets enables the
Company to leverage a substantial portion of its advertising costs. In addition,
the Company uses variable levels of advertising among different markets based on
return and approaches each advertising event with a season-based theme.
In November 1999 the Company engaged Andersen Consulting to conduct a
comprehensive review of the Company's advertising effectiveness. Based on the
results of this review, the Company expects to initiate changes covering ad
content, timing and medium by mid 2000.
Also in November 1999, the Company launched its private label credit card
to benefit from incremental sales, enhance its brand image, increase customer
loyalty and regular customer communication, maximize promotional offers,
capitalize on direct mail opportunities, increase
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average purchase dollars per transaction, increase shopping frequency, and
obtain access to a substantial customer database.
COMPETITION
The retail sporting goods industry is comprised of the following four
principal categories of retailers:
TRADITIONAL SPORTING GOODS RETAILERS. Traditional sporting goods retailers
tend to have relatively small stores, generally ranging in size from 5,000 to
20,000 square feet, frequently located in malls or strip centers (e.g., Modell's
Sporting Goods, Champs, Dunham's, MVP Sports and Hibbett Sporting Goods). These
stores typically carry limited quantities of each item in their assortment and
generally offer a more limited selection at higher prices than large format
stores.
SPECIALTY SPORTING GOODS RETAILERS. Specialty sporting goods retailers
include specialty shops, ranging in size from 1,000 to 10,000 square feet,
frequently located in malls or strip centers (e.g., Bike USA, Busy Body Fitness,
Edwin Watts, Foot Locker, Footstar, Foot Action, The Athlete's Foot, The Finish
Line and West Marine), and also include pro shops that often are single store
operations. These stores typically carry a wide assortment of one specific
product category, such as athletic shoes or golf or tennis equipment, and
generally have higher prices than large format stores.
LARGE FORMAT SPORTING GOODS RETAILERS. Large format stores such as the
Company's stores generally range in size from 30,000 to 70,000 square feet,
offer a broad selection of brand name sporting goods merchandise and tend to be
either anchor stores in strip malls or free-standing locations (e.g., Galyan's,
Gart Sports, Oshman's and Dick's Clothing and Sporting Goods). In addition,
other large format sporting goods retailers compete with certain product
categories sold by the Company (e.g., REI in outdoor sporting products).
MASS MERCHANDISERS. Mass merchandisers are large stores, generally ranging
in size from 50,000 to 200,000 square feet, featuring sporting equipment as part
of their overall assortment, and are located primarily in strip centers or
free-standing locations (e.g., Wal*Mart, Target and Kmart). These stores have
limited selection and fewer brand names and also typically do not offer the
customer service offered by sporting goods retailers.
In addition, a variety of other retailers sell various types of sporting
goods, principally athletic footwear and apparel. Sporting goods retailing in
the United States is characterized by intensive competition, increasing
competition from new channels of distribution such as catalogs and electronic
commerce, and consolidation among vendors.
The Company believes that the principal strengths with which it competes
are customer service, a broad assortment of brand name merchandise, ease of
shopping and a competitive pricing strategy.
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TRADEMARKS AND SERVICE MARKS
The Company uses "The Sports Authority" as its trade name and applies to
qualify to do business as such in each jurisdiction where it operates stores.
The Company's retail identity is comprised of the trade name, as well as a
family of trademarks and service marks featuring the word AUTHORITY, many of
which are registered (or the subject of pending applications) in the U.S. Patent
and Trademark Office, the Canadian Trade-Marks Office, the Japanese Patent
Office and other applicable offices around the world. Marks registered in the
U.S. Patent and Trademark Office include AUTHORITY(R), THE SPORTS AUTHORITY(R),
THE SPORTS AUTHORITY & Design(R), THE SKI AUTHORITY(R), GOLF AUTHORITY(R),
TENNIS AUTHORITY(R) and TEAM SPORTS AUTHORITY(R), among others. The Company
vigorously protects its trademarks, service marks and trade name from
infringement throughout the world by strategic registration and enforcement
efforts. Use of these marks is under license from The Sports Authority Michigan,
Inc., a wholly-owned subsidiary of the Company.
ASSOCIATES
As of January 29, 2000, the Company had a total of approximately 5,900
full-time and approximately 6,300 part-time associates. Of these, approximately
11,300 were employed in the Company's stores and approximately 900 were employed
in corporate office positions, regional and district positions, and the
Company's Atlanta regional distribution center. None of the Company's associates
is covered by a collective bargaining agreement. The Company endeavors to
promote new store management from its existing personnel. The Company believes
that its relationships with its associates are good.
SEASONALITY
The Company's annual business cycle is seasonal, with higher sales and
correlated profits occurring in the second and fourth quarters. In fiscal 1999,
the Company's sales trended as follows: 23.9% in the first quarter, 25.8% in the
second quarter, 21.9% in the third quarter and 28.4% in the fourth quarter.
RESTRUCTURING OF THE COMPANY'S JOINT VENTURE IN JAPAN
In March 1999, the Company and JUSCO Co., Ltd., a major Japanese retailer
that owns 9.4% of the Company's outstanding shares, entered into a comprehensive
restructuring of the ownership, service and license agreements governing their
joint venture, Mega Sports Co., Ltd. Mega Sports was formed in 1995 for the
purpose of developing and operating The Sports Authority stores in Japan. At the
end of 1999, Mega Sports operated 19 stores in Japan. More information
concerning the restructuring appears under the caption "Certain Transactions" on
page 16 of the Company's Proxy Statement dated April 28, 2000, which is
incorporated by reference into Item 13 below.
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ITEM 2. PROPERTIES
The following table sets forth certain information regarding the markets in
which the Company had stores as of January 29, 2000.
UNITED STATES REGIONS/METROPOLITAN AREA NUMBER OF STORES
NORTHEAST
Baltimore....................................................................................... 4
Boston ......................................................................................... 6
Hartford/North Haven............................................................................ 4
New York ....................................................................................... 29
Portland, ME ................................................................................... 1
Philadelphia ................................................................................... 9
Providence...................................................................................... 2
Washington, D.C. ............................................................................... 14
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SUBTOTAL NORTHEAST......................................................................... 69
SOUTHEAST
Augusta, GA..................................................................................... 1
Atlanta......................................................................................... 11
Charleston...................................................................................... 1
Charlotte....................................................................................... 3
Chattanooga..................................................................................... 1
Fayetteville.................................................................................... 1
Ft. Myers....................................................................................... 1
Gainesville, FL................................................................................. 1
Greensboro...................................................................................... 1
Greenville, SC.................................................................................. 1
Jacksonville.................................................................................... 2
Memphis......................................................................................... 1
Montgomery...................................................................................... 1
Myrtle Beach.................................................................................... 1
Naples.......................................................................................... 1
Nashville....................................................................................... 2
New Orleans..................................................................................... 1
Norfolk/Hampton................................................................................. 3
Orlando......................................................................................... 7
Pensacola....................................................................................... 1
Southeast Florida............................................................................... 16
Tampa/St. Petersburg............................................................................ 10
Winston-Salem................................................................................... 1
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SUBTOTAL SOUTHEAST......................................................................... 69
MIDWEST
Chicago......................................................................................... 15 *
Detroit......................................................................................... 7
Madison, WI..................................................................................... 1
Omaha..........................................................................................1
St. Louis....................................................................................... 6
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SUBTOTAL MIDWEST........................................................................... 30 *
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SOUTHWEST
Dallas.......................................................................................... 1
El Paso......................................................................................... 1
Las Vegas....................................................................................... 2
Little Rock..................................................................................... 1
Phoenix......................................................................................... 7
Tucson.......................................................................................... 1
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SUBTOTAL SOUTHWEST......................................................................... 13
NORTHWEST
Anchorage....................................................................................... 1
Seattle/Tacoma.................................................................................. 3
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SUBTOTAL NORTHWEST......................................................................... 4
WEST
Honolulu........................................................................................ 3
Fresno.......................................................................................... 1
Los Angeles..................................................................................... 2 *
Sacramento...................................................................................... 2
San Diego....................................................................................... 5
----
SUBTOTAL WEST.............................................................................. 13 *
----
SUBTOTAL UNITED STATES.............................................................................. 198 *
----
CANADA/METROPOLITAN AREA**
Toronto......................................................................................... 5
----
SUBTOTAL CANADA..................................................................................... 5
----
TOTAL ALL COUNTRIES................................................................................. 203 *
====
- -----------------------
* These totals include two stores closed in the first quarter of 1999 and
temporarily reopened as clearance outlets in October 1999.
** These locations were closed in March 2000. See Note 4 of the Notes to
Consolidated Financial Statements contained in Part II, Item 8.
As of January 29, 2000, the Company occupied 18 owned stores and 185 stores
pursuant to long-term leases. The leases typically provide for an initial 10 to
25 year term with multiple five-year renewal options. In most cases, the
Company's leases provide for minimum annual rent subject to periodic
adjustments, plus other charges, including a proportionate share of taxes,
insurance and common area maintenance. Fifty-nine of the Company's store leases
are guaranteed by Kmart. In 1999, the Company sold eight owned store sites
pursuant to a sale-leaseback agreement with SPI Holdings, LLC for an aggregate
sales price of $46.8 million, which was primarily used to pay down existing
debt. The Company continues to operate stores in these locations under long-term
operating leases.
The Company leases a building at 3383 N. State Road 7, Fort Lauderdale,
Florida, containing approximately 106,000 square feet, that houses its corporate
offices, with a remaining primary term of 8 years with two 10-year renewal
options.
13
In 1999, the Company assigned, subleased or terminated the leases for three
of the stores that were closed in the first quarter of 1999 and continues its
efforts to dispose of the leases and properties for all other closed stores.
ITEM 3. LEGAL PROCEEDINGS
The Company is one of thirty-three defendants, including firearms
manufacturers and retailers, in CITY OF CHICAGO AND COUNTY OF COOK V. BERETTA
U.S.A. CORP. ET AL, Circuit Court of Cook County, Illinois, which was served on
the Company on November 23, 1998. The complaint is based on legal theories of
public nuisance and negligent entrustment of firearms and alleges that the
defendant retailers sell firearms in the portion of Cook County outside Chicago
that are found illegally in Chicago. The complaint seeks damages allocated among
the defendants exceeding $358.1 million to compensate the City of Chicago and
Cook County for their alleged costs (of which the complaint enumerates a total
of $153 million) resulting from the alleged public nuisance. The complaint also
seeks punitive damages and injunctive relief imposing additional regulations on
the methods the defendant retailers use to sell firearms in Cook County. On
February 10, 2000, the Court dismissed the complaint's negligent entrustment
count. The plaintiffs filed an amended complaint with the Court's permission on
March 27, 2000, which contains both the public nuisance and negligent
entrustment counts.
Pursuant to a business decision made in late 1998, the Company announced in
April 1999 that it would cease selling handguns in the United States, and the
Company ceased selling handguns in the Chicago area by May 1999. In recent
years, handguns have constituted less than 1% of the Company's total sales. In
addition, the Company believes that it has complied with all applicable laws and
regulations governing the sale of firearms and intends to defend itself
vigorously in this suit.
On March 15, 2000, the plaintiffs in IN RE THE SPORTS AUTHORITY, INC.
SHAREHOLDERS LITIGATION, C.A. No. 16373NC, voluntarily dismissed the action
without prejudice. As reported in the Company's Form 10-K for 1998, this action
had been filed in the Court of Chancery of the State of Delaware in New Castle
County in May 1998 with respect to the merger agreement dated May 7, 1998
between the Company and Venator Group, Inc., which was terminated by mutual
agreement in September 1998.
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is traded on the New York Stock Exchange
(the "NYSE") under the symbol "TSA". The following table sets forth, for the
fiscal quarters indicated, the high and low market prices for the Common Stock
as reported on the NYSE.
HIGH LOW
---- ---
Fiscal 1998
1st Quarter ............................... $ 17.06 $ 10.75
2nd Quarter ............................... 18.75 13.44
3rd Quarter ............................... 14.31 4.06
4th Quarter ............................... 8.13 3.81
Fiscal 1999
1st Quarter ............................... 8.50 4.00
2nd Quarter ............................... 8.06 2.81
3rd Quarter ............................... 4.38 2.19
4th Quarter ............................... 3.25 1.63
As of April 3, 2000, the Company had approximately 1,779 shareholders of
record.
DIVIDEND POLICY
The Company did not declare any dividends in 1998 or 1999 and intends to
retain its earnings to finance future internal investments. Therefore, the
Company does not anticipate paying any cash dividends in the foreseeable future.
The declaration and payment of dividends, if any, is subject to the discretion
of the Board of Directors of the Company and to certain limitations under the
General Corporation Law of the State of Delaware. In addition, certain
agreements contain restrictions on the Company's ability to pay dividends. The
timing, amount and form of dividends, if any, will depend, among other things,
on the Company's results of operations, financial condition, cash requirements
and other factors deemed relevant by the Board of Directors.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below reflects the
historical results of operations, financial position and operating data of the
Company for the periods indicated and should be read in conjunction with the
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
herein.
Fiscal Year Ended (1)
-------------------------------------------------------------------------------
January 29, January 24, January 25, January 26, January 28,
2000 1999 1998 1997 1996
---------------- --------------- --------------- --------------- --------------
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $ 1,492,860 $ 1,599,660 $ 1,464,565 $ 1,271,296 $ 1,046,652
Gross profit 360,564 390,959 419,537 365,373 292,427
License fees and rental income 1,829 841 3,345 3,165 2,772
Selling, general and administrative expenses 394,963 410,730 365,363 304,955 245,886
Pre-opening expense 1,609 11,194 10,570 11,408 9,140
Goodwill amortization 1,963 1,963 1,963 1,963 1,963
Store exit costs 8,861 39,446 4,302 - -
Corporate restructuring (700) 3,930 - - -
Impairment of long-lived assets 88,751 13,457 - - -
------------ ------------ ------------ ------------ ------------
Operating (loss) income (133,054) (88,920) 40,684 50,212 38,210
Interest, net 15,287 11,965 5,952 2,180 820
Gain on deconsolidation of joint venture (5,001) - - - -
------------ ------------ ------------ ------------ ------------
(Loss) income before income taxes and
extraordinary gain (143,340) (100,885) 34,732 48,032 37,390
Income tax expense (benefit) 22,721 (35,028) 14,730 19,597 15,305
Minority interest - (2,066) (2,191) (1,570) (245)
------------ ------------ ------------ ------------ ------------
(Loss) income before extraordinary gain (166,061) (63,791) 22,193 30,005 22,330
Extraordinary gain, net of tax of $3,678 5,517 - - - -
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (160,544) $ (63,791) $ 22,193 $ 30,005 $ 22,330
============ ============ ============ ============ ============
Basic earnings (loss) per common share:
(Loss) income before extraordinary gain $ (5.19) $ (2.01) $ 0.70 $ 0.96 $ 0.72
Extraordinary gain .17 - - - -
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (5.02) $ (2.01) $ 0.70 $ 0.96 $ 0.72
============ ============ ============ ============ ============
Diluted earnings (loss) per common share:
(Loss) income before extraordinary gain $ (5.19) $ (2.01) $ 0.70 $ 0.94 $ 0.71
Extraordinary gain .17 - - - -
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (5.02) $ (2.01) $ 0.70 $ 0.94 $ 0.71
============ ============ ============ ============ ============
PERCENT OF SALES DATA:
Gross margin 24.2% 24.4% 28.6% 28.8% 27.9%
Selling, general and administrative expenses 26.5 25.7 24.9 24.0 23.4
Operating (loss) income (8.9) (5.6) 2.8 4.0 3.7
(Loss) income before income taxes and
extraordinary gain (9.6) (6.3) 2.4 3.8 3.6
16
SELECTED CONSOLIDATED FINANCIAL DATA, CONTINUED
Fiscal Year Ended (1)
-------------------------------------------------------------------------------
January 29, January 24, January 25, January 26, January 28,
2000 1999 1998 1997 1996
---------------- --------------- --------------- --------------- --------------
SELECTED FINANCIAL AND OPERATING DATA:
End of period stores 203 226 199 168 136
Comparable store sales (decrease) increase (3.4)% (3.7)% (2.2)% 3.3% 1.1%
Inventory turnover 2.9 3.1 3.1 3.2 3.2
Weighted average sales per square foot $ 172 $ 177 $ 193 $ 203 $ 214
Weighted average sales per store
(IN THOUSANDS) 7,390 7,661 8,334 8,819 9,231
Average sale per transaction 45.67 46.53 46.54 45.99 44.85
End of period inventory net of accounts
payable per store (IN THOUSANDS) 1,250 831 900 729 823
Capital expenditures (IN THOUSANDS) 31,640 84,561 114,271 102,165 55,321
Depreciation and amortization (IN THOUSANDS) 46,908 47,921 37,314 28,506 20,339
BALANCE SHEET DATA - END OF PERIOD:
(IN THOUSANDS)
Working capital $ 62,102 $ 30,545 $ 99,710 $ 175,997 $ 81,878
Total assets 643,003 897,454 807,990 750,158 521,317
Long-term debt 126,029 173,248 157,439 152,021 -
Stockholders' equity 116,110 272,912 333,551 310,317 277,528
- ------------------
(1) The fiscal years ended January 29, 2000 and January 28, 1996 consisted
of 53 weeks. All other fiscal years shown each consisted of 52 weeks.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the Company's statement of operations data
as a percent of sales for the periods indicated.
Fiscal Year Ended
--------------------------------------------
January 29, January 24, January 25,
2000 1999 1998
----------- ----------- ------------
Sales 100.0% 100.0 % 100.0 %
Cost of merchandise sold, including
buying and occupancy costs 75.8 75.6 71.4
----------- ----------- ------------
Gross margin 24.2 24.4 28.6
License fees and rental income (0.1) (0.1) (0.2)
Selling, general and administrative expenses 26.5 25.7 24.9
Pre-opening expense 0.1 0.7 0.7
Goodwill amortization 0.1 0.1 0.1
Store exit costs 0.6 2.5 0.3
Corporate restructuring - 0.3 -
Impairment of long-lived assets 5.9 0.8 -
----------- ----------- ------------
Operating (loss) income (8.9) (5.6) 2.8
Interest, net 1.0 0.7 0.4
Gain on deconsolidation of joint venture (0.3) - -
----------- ----------- ------------
(Loss) income before income taxes and
extraordinary gain (9.6) (6.3) 2.4
Income tax expense (benefit) 1.5 (2.2) 1.0
Minority interest - (0.1) (0.1)
----------- ----------- ------------
(Loss) income before extraordinary gain (11.1) (4.0) 1.5
Extraordinary gain, net of tax 0.3 - -
----------- ----------- ------------
Net (loss) income (10.8)% (4.0)% 1.5 %
=========== =========== ============
The following table sets forth the Company's store openings and closings
for the periods indicated.
Fiscal Year Ended
--------------------------------------------
January 29, January 24, January 25,
2000 1999 1998
----------- ------------ ------------
Beginning number of stores 226 199 168
Openings 3 30 31
Closings (15) (3) -
Deconsolidation of joint venture (13) - -
----------- ------------ ------------
Ending number of stores - full line 201 226 199
Clearance store openings 2 - -
----------- ------------ ------------
Total stores 203 226 199
=========== ============ ============
18
FISCAL YEARS ENDED JANUARY 29, 2000 (FISCAL 1999) AND JANUARY 24, 1999 (FISCAL
1998)
Sales for the 53 weeks ended January 29, 2000 were $1,492.9 million, a
$106.8 million, or 6.7% decrease from sales of $1,599.7 million for the fiscal
year ended January 24, 1999. Sales in fiscal 1998 include $84.9 million from
Mega Sports Co., Ltd. ("Mega Sports"), the Company's Japanese joint venture. The
Company discontinued consolidation of Mega Sports in 1999 due to a reduction of
its ownership interest in the joint venture. Additionally, the Company closed 15
stores in the first quarter of 1999 pursuant to its previously announced
restructuring plans. The prior year includes sales of $78.8 million from closed
stores, as compared to $11.3 million in 1999.
Excluding the impact of the deconsolidation of Mega Sports and the store
closings, sales increased $45.6 million, or 2.9%. Of the 2.9% increase, $85.6
million, or 5.3%, was attributable to stores opening in 1998 and 1999 which had
no comparable sales in the prior year, and approximately $15.7 million, or 1.0%,
was attributable to adding six days to the 1999 fiscal year. (See Note 2 of the
Notes to Consolidated Financial Statements.) These increases were offset by a
decrease in comparable store sales of $55.7 million, or 3.4%, excluding the
impact of store closings and declines in the hunting category due to the Company
discontinuing the sale of handguns in all locations in early 1999 and reducing
its rifle and hunting assortment. The decrease in comparable store sales
reflected continued weakness in the key categories of footwear, golf and men's
apparel, which have trended negatively for several consecutive quarters. During
1999, the Company implemented a number of initiatives to reverse these trends,
including revising its merchandising and pricing approach, testing and
evaluating new marketing strategies and developing incentive selling programs.
License fees and rental income was $1.8 million in 1999, compared to $0.8
million in 1998. In 1999, license fees included $1.6 million in royalty fee
income under a license agreement between the Company and Mega Sports. (See Note
3 of the Notes to Consolidated Financial Statements.) Prior to 1999,
intercompany royalty fees were eliminated due to consolidation of Mega Sports in
the Company's results of operations. Royalty fees under a license agreement with
TheSportsAuthority.com, Inc. which commenced in the fourth quarter of 1999, were
nominal in the current fiscal year. The Company also has a license arrangement
for the sale of diving merchandise in three stores. Sales of licensee
merchandise are excluded from the Company's total sales.
The major components of cost of merchandise sold are merchandise costs
(including distribution) and, to a lesser extent, occupancy costs. Cost of
merchandise sold increased from 75.6% of sales in 1998 to 75.8% of sales in
1999, an increase of 0.2% of sales. This increase was attributable to an
increase in occupancy costs of 0.3% of sales resulting from the decline in sales
productivity. Merchandise costs were 67.4% of sales for both 1999 and 1998. In
1999, merchandise costs included a $28.9 million charge related to excess
markdowns taken to address aged inventory, liquidations at closing stores and
inventory shrink. The prior year included a $24.1 million inventory writedown
related primarily to aged inventory and store closings. Excluding these charges,
merchandise costs decreased 0.5%, from 65.9% of sales in 1998 to 65.4% of sales
in 1999, as a result of improved purchase markons.
Selling, general and administrative ("SG&A") expenses in 1999 were $395.0
million, or 26.5% of sales, compared to $410.7 million, or 25.7% of sales in the
prior year. The increase as a percentage of
19
sales resulted from the decline in sales productivity and an increase in
advertising expenditures to drive traffic into the stores.
Pre-opening expense in 1999 was $1.6 million, or 0.1% of sales, compared to
$11.2 million, or 0.7% of sales in 1998. The decrease in expense reflected the
reductions in store openings, from 30 stores in 1998 to three full-line format
stores in 1999. During 1999, the Company also opened two clearance stores, on a
test basis, in previously closed locations. No pre-opening expense was incurred
on these openings. Pre-opening expense consists principally of store payroll
expense for associate training and store preparation prior to a store opening,
operating expenses and grand-opening advertising costs.
In the fourth quarter of 1999, the Company recorded charges aggregating
$156.5 million, of which $28.9 million was applicable to the inventory related
charges discussed previously, and $127.6 million was comprised of the following:
$8.9 million for store exit costs; $88.8 million for asset impairments,
including goodwill of $46.9 million; $28.8 million for tax charges, net of
expected tax refunds; and $1.3 million for cumulative translation losses related
to the Canadian subsidiary.
Store exit costs relate to the closing of five Canadian stores and two
stores in the United States. The charge represents estimated costs to be
incurred beyond the store closing date, including rent, common area maintenance
charges, real property taxes and employee severance. (See Note 4 of the Notes to
Consolidated Financial Statements.) The Company's decision to exit its Canadian
operations was based on poor performance in the stores as well as the Company's
strategic plan to focus Company resources on domestic markets. All five stores
were closed in March 2000. The two United States stores are being closed due to
the opening of new stores in close proximity to these locations. Canadian store
sales were $28.4 million, $31.0 million and $29.3 million in 1999, 1998 and
1997, respectively, and operating losses excluding restructuring charges were
$4.4 million, $3.7 million and $4.0 million, respectively.
Based on continued declines in store operating performance, the Company
evaluated the recoverability of its store-level assets pursuant to Financial
Accounting Standards No. 121 ("SFAS 121"). The Company recorded a $41.9 million
impairment charge on property and equipment at 40 stores based on a
determination that the carrying value of assets at these locations exceeded
estimated future cash flows. Estimated future cash flows were based on the
Company's fiscal year 2000 budget and internal projections for years beyond
2000. The charge included $1.9 million related to the five Canadian stores which
closed in March 2000, $0.5 million for the two domestic locations expected to
close in 2000 and $1.4 million for two owned locations which closed in 1999.
An impairment charge of $46.9 million on the Company's enterprise-level
goodwill was recognized pursuant to a change in the Company's method of
measuring the recoverability of goodwill. Prior to 1999, the Company measured
the recoverability of goodwill using the projected, undiscounted cash flows
method. In 1999, the Company changed its method for measuring impairment to the
market value method, whereby impairment is measured by the excess of the
Company's net book value over its market capitalization. Since the excess of the
Company's net book value over its market capitalization exceeded the carrying
value of the Company's goodwill, the remaining value of goodwill was written
off.
20
In conjunction with closing the Canadian subsidiary, the Company recognized
$1.3 million in cumulative translation adjustments, previously a component of
stockholders' equity, as required by Financial Accounting Standards No. 52. This
charge is included in SG&A expenses.
Corporate restructuring of ($0.7) million related to the settlement of the
Company's obligation under an employment contract with a former executive. The
initial reserve for this obligation was included in the Company's 1998
restructuring charge. As a result of the settlement, the Company reversed the
remaining reserve under this contract in 1999.
Operating loss was $133.1 million, or (8.9)% of sales in 1999, as compared
to $88.9 million, or (5.6)% of sales in 1998. Operating loss before pre-opening
expense, goodwill amortization and restructuring charges was $32.6 million, or
(2.2)% of sales in 1999, versus $18.9 million, or (1.2)% of sales for the
preceding year.
Interest, net was $15.3 million, or 1.0% of sales in 1999, compared to
$12.0 million, or 0.7% of sales in 1998. The increase of $3.3 million was due to
an increase in current borrowings under the Company's revolving credit
facilities, combined with an increase in the Company's borrowing rate. The
Company's weighted average interest rate on revolving credit borrowings was 7.4%
in 1999, compared to 6.6% in 1998.
In March 1999, the Company reduced its ownership interest in Mega Sports
and, as a result, discontinued consolidation of the results of Mega Sports in
1999 and recorded a gain on deconsolidation of $5.0 million, or 0.3% of sales.
See Note 3 of the Notes to Consolidated Financial Statements.
Income tax expense on loss before extraordinary gain was $22.7 million in
1999, compared to an income tax benefit of $35.0 million in 1998. The current
year tax expense includes a provision for a valuation allowance of $37.6 million
on the Company's U.S. deferred tax assets at the beginning of the year, and a
$5.7 million writeoff of Canadian deferred tax assets. The valuation allowance
was recorded pursuant to Financial Accounting Standards No. 109. The Company's
cumulative losses in recent years have created a presumption that the deferred
tax assets may not be realizable. Accordingly, the Company provided a valuation
allowance for all its net deferred tax assets as of January 29, 2000. The
writeoff of Canadian deferred tax assets related to the Company's decision to
exit its Canadian operations. These charges were partially offset by an
estimated $18.7 million tax refund expected to be generated by the carryback of
the Company's 1999 net operating loss. The Company's effective tax rate in 1998
was 34.7%. The Company expects its effective tax rate will be nominal in 2000 as
net operating loss carryforwards and other deductions can be used to offset
future taxable income, if any.
In the third quarter of 1999, the Company recorded an extraordinary gain of
$5.5 million, net of tax, on the early extinguishment of $23.5 million in
principal amount of its 5.25% Convertible Subordinated Notes (the "Notes"), due
in September 2001. The Company purchased the Notes on the open market for $14.0
million, excluding accrued interest.
As a result of the foregoing factors, the Company's 1999 net loss was
$160.5 million, as compared to $63.8 million in the prior year.
21
FISCAL YEARS ENDED JANUARY 24, 1999 (FISCAL 1998) AND JANUARY 25, 1998 (FISCAL
1997)
Sales for the fiscal year ended January 24, 1999 were $1,599.7 million,
a $135.1 million, or 9.2% increase over sales of $1,464.6 million for the fiscal
year ended January 25, 1998. In August 1998, the Company began directly selling
winter sports apparel and hardlines in its North American stores. Previously,
winter sports merchandise was sold under a license agreement with a third party
and was excluded from total sales of the Company. The agreement was terminated
effective August 1, 1998. Of the 9.2% sales increase in 1998, 2.0% was
attributable to the inclusion of sales of $29.3 million from Company-operated
winter sports departments.
Of the remaining increase in total sales, 7.3%, or $107.2 million, was
attributable to non-winter sports sales in 31 stores opened in 1997 which had no
comparable store sales in the prior year, and 6.2%, or $91.1 million, was
attributable to the 30 stores opened in 1998. These increases were partially
offset by a 5.6%, or $80.0 million, decrease in comparable store sales,
excluding winter sports product sales, and an 0.7%, or $12.5 million, decrease
in non-comparable sales related to the three store closings in early 1998. The
decrease in comparable store sales resulted from declines in specific categories
such as footwear, fitness and golf.
License fees and rental income in 1998 were $0.8 million, or 0.1% of sales,
compared to $3.3 million, or 0.2% of sales, in the prior year. The decline
resulted from the termination in 1998 of the Company's license agreement
covering the sale of winter sports merchandise in North American stores. Under
the agreement, the Company had received a fee of approximately 10% of licensee
merchandise sales.
Cost of merchandise sold, including buying and occupancy costs, increased
4.2% of sales, from 71.4% in 1997 to 75.6% in 1998. Merchandise costs increased
3.8% of sales, of which 1.5% was attributable to a $24.1 million inventory
writedown taken to address aged inventory and anticipated markdowns at stores
scheduled to close in 1999. Merchandise costs in 1998 reflect full year
operating costs associated with the Company's first regional distribution center
("RDC"), which opened in November 1997 and became fully operational in 1998. The
Company did not fully realize logistics savings expected as a result of the
transition from direct store to regional distribution due to productivity and
allocation problems encountered in the start-up phase of the RDC.
SG&A expenses as a percent of sales were 25.7% in 1998, compared to 24.9%
in the prior year. The 0.8% of sales increase was attributable to negative
leveraging as a result of a decrease in sales productivity in 1998 compared to
1997.
Pre-opening expense in 1998 was $11.2 million, compared to $10.6 million in
the prior year. The Company opened 30 stores in 1998 versus 31 stores in 1997;
however, pre-opening expense increased $0.6 million due to higher pre-opening
occupancy charges at three stores opened in 1998.
In 1998, the Company recorded total restructuring charges of $56.8 million,
consisting of: $39.4 million for store exit costs related to 18 planned store
closings; $3.9 million for corporate restructuring; and $13.5 million for asset
impairments at six stores. The Company completed 15 store closings in early
1999. As a result of changing market conditions and favorable rent concessions,
the Company
22
determined that it would not close the remaining three stores, and has reversed
the reserve balances for these locations. (See Note 4 of the Notes to
Consolidated Financial Statements). The Company recorded $3.9 million in
employment contract obligations to several departing executives in conjunction
with changes to internal processes and strategic business functions.
Operating loss was $88.9 million, or (5.6)% of sales in 1998, as compared to
operating income of $40.7 million, or 2.8% of sales, in 1997. Operating loss
before pre-opening expense, goodwill amortization and restructuring charges was
$18.9 million, or (1.2)% of sales in 1998, as compared to income of $57.5
million, or 3.9% of sales in 1997.
Interest, net was $12.0 million in 1998, as compared to $6.0 million in
1997. The increase of $6.0 million was primarily attributable to an increase in
short-term borrowings as well as a decrease in interest income from short-term
investments.
Income tax benefit in 1998 was $35.0 million with an effective tax rate of
34.7%, as compared to income tax expense in 1997 of $14.7 million with an
effective tax rate of 42.4%. The decrease in the effective tax rate was due, in
part, to a $4.2 million tax charge included in the 1998 restructuring charges.
The charge related primarily to a writedown of deferred tax assets of the
Canadian subsidiary based on a determination that a portion of the subsidiary's
net operating losses may expire before being utilized. Exclusive of this charge,
the 1998 effective tax rate was 38.9%.
As a result of the foregoing factors, net loss in 1998 was $63.8 million,
or (4.0)% of sales, as compared to net income of $22.2 million, or 1.5% of
sales, in 1997.
The results of operations for 1998 and 1997 include Mega Sports. Due to a
reduction in the Company's ownership interest in the joint venture, the Company
discontinued consolidation of Mega Sports beginning in fiscal 1999. Net losses
of the joint venture were $4.2 million in 1998 and $4.5 million in 1997, of
which the Company's share was $2.1 million and $2.3 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
needs and for capital expenditures on hardware and software upgrades, store
refurbishments and new store openings. In 1999 these capital requirements were
generally funded by revolving credit borrowings and real estate sale/leasebacks.
Cash flows generated by (used for) operating, investing and financing activities
for 1999, 1998 and 1997 are summarized below. The net (decrease) increase in
cash and cash equivalents was ($4.2) million in 1999, $1.3 million in 1998 and
($90.6) million in 1997.
Net cash (used for) provided by operations was ($78.9) million in 1999, as
compared to $7.5 million in 1998 and ($2.0) million in 1997. The decrease in
operating cash flows in 1999 was primarily due to management's decision to
accelerate payments to vendors during the fourth quarter to alleviate vendor
concerns after bankruptcy filings by other sporting goods retailers.
Consequently, inventory financed by accounts payable decreased from 49.0% in
1998 to 26.9% in 1999. The remaining decrease resulted from payments of $10.3
million for store exit costs under the 1998 and 1997 store
23
closing plans, and $1.7 million under several employment contracts with former
executives. In 1999, the Company recorded additional reserves for stores
expected to close in 2000. The Company estimates that it will pay a total of
$12.7 million in store exit costs during fiscal 2000 under the store closing
plans approved in 1997, 1998 and 1999.
Net cash provided by (used for) investing was $11.1 million in 1999, as
compared to ($78.2) million in 1998 and ($112.8) million in 1997. The increase
in cash provided by investing activities resulted from the sale-leaseback of
eight owned properties during 1999 for an aggregate sales price of $46.8
million, combined with a decline in capital expenditures due to a decrease in
store openings. Capital expenditures were $31.6 million in 1999, and consisted
of $13.6 million for upgrades to information systems, $9.5 million to refurbish
existing stores, $5.6 million for three new stores, and $2.9 million for RDC and
corporate improvements.
Net cash provided by financing activities was $63.6 million in 1999 as
compared to $72.0 million in 1998 and $24.1 million in 1997. Cash provided by
financing activities consisted principally of borrowings under the revolving
credit facility between the Company and a group of lenders led by Fleet Retail
Finance Inc. (formerly BankBoston Retail Finance, Inc.) dated April 13, 1999,
("Credit Facility"). In December 1999, the Credit Facility was amended to
increase maximum borrowings from $200 million to $275 million and to extend the
maturity date of the facility from April 2002 to September 2003. The Credit
Facility is secured by inventories, and borrowings are limited to a borrowing
base determined largely with reference to eligible inventories. Borrowings
increased $80.3 million in 1999, and were used to fund working capital needs,
store refurbishment, upgrades to information systems and early retirement of
long-term debt. The early retirement of debt reduced the outstanding principal
amount of the Company's Notes, which mature in September 2001, by $23.5 million.
The Company's working capital at January 29, 2000 was $62.1 million,
compared with $30.5 million at January 24, 1999, an increase of $31.6 million.
The increase resulted primarily from the deconsolidation of Mega Sports, which
had negative working capital at January 24, 1999 of $22.0 million.
The Company substantially cut back its expansion program in 1999, and
intends to similarly limit expansion in 2000. It plans to open five new stores,
and to finance the stores with operating leases. The Company estimates capital
expenditures in 2000 will be approximately $30.0 - $35.0 million, primarily for
refurbishment of existing stores and upgrades of information systems.
During the first quarter of 2000, the Company purchased an additional $76.0
million in principal amount of its Notes for $56.2 million, excluding interest.
The purchases reduced the remaining outstanding principal amount of the Notes to
$50.0 million. The Company has announced its intention to purchase Notes from
time to time, as conditions warrant.
The Company believes that anticipated cash flows from operations, combined
with borrowings under the Credit Facility, will be sufficient to fund working
capital and finance capital expenditures through the next 12 months.
24
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended,
which is required to be adopted by the Company in fiscal year 2001. The Company
generally does not use derivatives; accordingly, management does not anticipate
that the adoption of the new Statement will have a significant effect on
earnings or the financial position of the Company.
YEAR 2000
In prior years, the Company disclosed the nature and progress of its plans
to become Year 2000 compliant. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information and non-information technology systems, and
believes those systems responded successfully to the Year 2000 date change.
The Company expensed as incurred approximately $2.7 million on its Year 2000
compliance project, and expects no material costs in the future. The Company is
not aware of any material problems resulting from Year 2000 issues, either with
its internal systems or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the Year 2000 to ensure that any latent
Year 2000 issues that may arise are resolved promptly.
SEASONALITY AND INFLATION
The Company's annual business cycle is seasonal, with higher sales and
correlated profits occurring in the second and fourth quarters. In fiscal 1999,
the Company's sales trended as follows: 23.9% in the first quarter, 25.8% in the
second quarter, 21.9% in the third quarter and 28.4% in the fourth quarter.
Management does not believe inflation had a material effect on the
financial statements for the periods presented.
FORWARD LOOKING STATEMENTS
Refer to Forward Looking Statements in Part I.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company has no material exposure to the market risks covered by this
Item.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Management's Responsibility for Financial Reporting 27
Report of Independent Certified Public Accountants 28
Report of Independent Certified Public Accountants 29
Consolidated Statements of Operations for the fiscal years ended
January 29, 2000, January 24, 1999 and January 25, 1998 30
Consolidated Balance Sheets, as of January 29, 2000 and January 24, 1999 31
Consolidated Statements of Changes in Stockholders' Equity for the fiscal
years ended January 29, 2000, January 24, 1999 and January 25, 1998 32
Consolidated Statements of Cash Flows for the fiscal years ended
January 29, 2000, January 24, 1999 and January 25, 1998 33
Notes to Consolidated Financial Statements 34
26
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the integrity and consistency of all
financial information presented in this Annual Report. The financial statements
have been prepared in accordance with generally accepted accounting principles
and include certain amounts based on Management's best estimates and judgments
as required.
Management has developed and maintains a system of accounting and controls
designed to provide reasonable assurance that the Company's assets are protected
from improper use and that accounting records provide a reliable basis for the
preparation of financial statements. This system includes policies which require
adherence to ethical business standards and compliance with all laws to which
the Company is subject. This system is continually reviewed, improved and
modified in response to changing business conditions and operations. The
Company's comprehensive internal audit program provides for constant evaluation
of the adequacy of and adherence to Management's established policies and
procedures; the extent of the Company's system of internal accounting controls
recognizes that the cost should not exceed the benefits derived. Management
believes that assets are safeguarded and financial information is reliable.
The financial statements of the Company have been audited by Ernst & Young
LLP, independent certified public accountants. Their report, which appears
herein, is based upon their audit conducted in accordance with generally
accepted auditing standards. These standards include a review of the systems of
internal controls and tests of transactions to the extent considered necessary
by them for purposes of supporting their opinion.
The Audit Committee of the Board of Directors is comprised solely of
Directors who are not officers or employees of the Company. The Committee is
responsible for recommending to the Board of Directors the selection of
independent certified public accountants. It meets periodically and monitors the
financial, accounting and auditing procedures of the Company in addition to
reviewing the Company's financial reports. The Company's independent certified
public accountants and The Sports Authority's internal auditors have full and
free access to the Audit Committee.
/s/ MARTIN E. HANAKA /s/ GEORGE R. MIHALKO
- ----------------------- -----------------------
Martin E. Hanaka George R. Mihalko
Chief Executive Officer Chief Financial Officer
27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS
THE SPORTS AUTHORITY, INC.
We have audited the accompanying consolidated balance sheet of The Sports
Authority, Inc. as of January 29, 2000, and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Sports
Authority, Inc. at January 29, 2000, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 4 to the Consolidated Financial Statements, in 1999 the
Company changed its method for measuring impairment of goodwill.
/s/ ERNST & YOUNG LLP
Miami, Florida
March 27, 2000
28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF THE SPORTS AUTHORITY, INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
The Sports Authority, Inc. and its subsidiaries at January 24, 1999, and the
results of their operations and their cash flows for each of the two years in
the period ended January 24, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
April 6, 1999
29
THE SPORTS AUTHORITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Year Ended
-------------------------------------------
January 29, January 24, January 25,
2000 1999 1998
----------- ----------- -----------
Sales $ 1,492,860 $ 1,599,660 $ 1,464,565
License fees and rental income 1,829 841 3,345
----------- ----------- -----------
1,494,689 1,600,501 1,467,910
----------- ----------- -----------
Cost of merchandise sold, including buying and
occupancy costs 1,132,296 1,208,701 1,045,028
Selling, general and administrative expenses 394,963 410,730 365,363
Pre-opening expense 1,609 11,194 10,570
Goodwill amortization 1,963 1,963 1,963
----------- ----------- -----------
1,530,831 1,632,588 1,422,924
----------- ----------- -----------
Store exit costs 8,861 39,446 4,302
Corporate restructuring (700) 3,930 --
Impairment of long-lived assets 88,751 13,457 --
----------- ----------- -----------
96,912 56,833 4,302
----------- ----------- -----------
Operating (loss) income (133,054) (88,920) 40,684
----------- ----------- -----------
Interest:
Interest expense 17,657 13,197 8,544
Interest income (2,370) (1,232) (2,592)
----------- ----------- -----------
Interest, net 15,287 11,965 5,952
----------- ----------- -----------
Gain on deconsolidation of joint venture (5,001) -- --
----------- ----------- -----------
(Loss) income before income taxes and
extraordinary gain (143,340) (100,885) 34,732
Income tax expense (benefit) 22,721 (35,028) 14,730
Minority interest -- (2,066) (2,191)
----------- ----------- -----------
(Loss) income before extraordinary gain (166,061) (63,791) 22,193
Extraordinary gain, net of tax of $3,678 5,517 -- --
----------- ----------- -----------
Net (loss) income $ (160,544) $ (63,791) $ 22,193
=========== =========== ===========
Basic and diluted earnings (loss) per common share:
(Loss) income before extraordinary gain $ (5.19) $ (2.01) $ 0.70
Extraordinary gain .17 -- --
----------- ----------- -----------
Net (loss) income $ (5.02) $ (2.01) $ 0.70
=========== =========== ===========
Weighted average common shares outstanding:
Basic 32,003 31,768 31,513
=========== =========== ===========
Diluted 32,003 31,768 31,816
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements
30
THE SPORTS AUTHORITY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
January 29, January 24,
2000 1999
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 11,814 $ 16,007
Merchandise inventories 347,273 367,951
Receivables and other current assets 55,264 55,377
--------- ---------
Total current assets 414,351 439,335
Net property and equipment 213,638 341,371
Other assets and deferred charges 15,014 67,928
Goodwill - net of accumulated amortization of $17,585
at January 24, 1999 -- 48,820
--------- ---------
Total Assets $ 643,003 $ 897,454
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 93,584 $ 180,117
Accrued payroll and other current liabilities 111,392 139,468
Current debt 130,544 75,623
Taxes other than income taxes 12,894 13,582
Income taxes 3,835 --
--------- ---------
Total current liabilities 352,249 408,790
Long-term debt 126,029 173,248
Other long-term liabilities 48,615 46,659
--------- ---------
Total liabilities 526,893 628,697
--------- ---------
Commitments and contingencies
Minority interest -- (4,155)
Stockholders' Equity:
Common stock, $.01 par value; 100,000 shares authorized;
32,264 and 31,951 shares issued, respectively 323 320
Additional paid-in capital 251,991 251,024
Deferred compensation (574) (531)
(Accumulated deficit) retained earnings (135,109) 25,435
Treasury stock, 55 and 56 shares, respectively, at cost (521) (527)
Accumulated other comprehensive loss -- (2,809)
--------- ---------
Total stockholders' equity 116,110 272,912
--------- ---------
Total Liabilities and Stockholders' Equity $ 643,003 $ 897,454
========= =========
See accompanying Notes to Consolidated Financial Statements
31
THE SPORTS AUTHORITY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Accumulated
Retained Other
Common Stock Additional Earnings Comprehensive
-------------------- Paid-in Deferred (Accumulated Treasury Income
Shares Amount Capital Compensation Deficit) Stock (Loss) Total
--------------------------------------------------------------------------------------
Balance, January 26, 1997 31,466 $ 315 $ 245,621 $ (2,177) $ 67,033 $ (381) $ (94) $ 310,317
Common stock issued under stock plans 68 1 1,054 (124) 931
Common stock retired under stock plans (112) (1) (1,143) 144 (1,000)
Amortization of deferred compensation 672 672
Options issued under stock option plan 125 (125) --
Stock options exercised 127 1 1,504 1,505
Treasury stock acquired (10) (21) 21 (113) (113)
COMPREHENSIVE INCOME (LOSS):
Net income 22,193 22,193
Cumulative translation adjustment (954) (954)
---------
Comprehensive income 21,239
--------------------------------------------------------------------------------------
Balance, January 25, 1998 31,539 316 247,140 (1,589) 89,226 (494) (1,048) 333,551
Common stock issued under stock plans 140 2 1,445 (794) 653
Common stock re-issued under stock plans 105 1 999 1,000
Common stock retired under stock plans (2) (25) 25 --
Amortization of deferred compensation 1,827 1,827
Stock options exercised 120 1 1,465 1,466
Treasury stock acquired (7) (33) (33)
COMPREHENSIVE LOSS:
Net loss (63,791) (63,791)
Cumulative translation adjustment (1,761) (1,761)
---------
Comprehensive loss (65,552)
--------------------------------------------------------------------------------------
Balance, January 24, 1999 31,895 320 251,024 (531) 25,435 (527) (2,809) 272,912
Common stock issued under stock plans 322 3 1,012 (660) 355
Common stock retired under stock plans (2) (25) 25 --
Common stock cancelled under stock plans (7) (20) (20)
Treasury stock re-issued 1 6 6
Amortization of deferred compensation 592 592
COMPREHENSIVE LOSS:
Net loss (160,544) (160,544)
Cumulative translation adjustment 2,809 2,809
---------
Comprehensive loss (157,735)
--------------------------------------------------------------------------------------
Balance, January 29, 2000 32,209 $ 323 $ 251,991 $ (574) $(135,109) $ (521) $ -- $ 116,110
======================================================================================
See accompanying Notes to Consolidated Financial Statements
32
THE SPORTS AUTHORITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended
-------------------------------------
January 29, January 24, January 25,
2000 1999 1998
--------- --------- ---------
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net (loss) income $(160,544) $ (63,791) $ 22,193
Adjustment to reconcile net (loss) income to operating cash flows:
Depreciation and amortization 46,908 47,921 37,314
Gain on deconsolidation of joint venture (5,001) -- --
Gain on extinguishment of debt (9,195) -- --
Cumulative translation adjustment 1,439 (1,761) (954)
Minority interest in net loss of joint venture -- (2,066) (2,191)
Loss on sale or disposal of property and equipment 3,023 375 225
Impairment of long-lived assets 88,751 13,457 --
Accrual for store exit costs 8,861 39,446 4,302
Corporate restructuring (700) 3,930 --
Change in deferred tax assets 43,313 (25,107) (10,994)
Decrease (increase) in other assets 3,167 (7,552) (2,517)
(Decrease) increase in other long-term liabilities (1,340) 5,993 4,908
Cash (used for) provided by current assets and liabilities:
Increase in income taxes receivable (21,313) -- --
Increase in inventories (5,544) (40,289) (48,085)
(Decrease) increase in accounts payable (64,801) 31,605 (8,644)
Other - net (5,921) 5,344 2,487
--------- --------- ---------
Net cash (used for) provided by operations (78,897) 7,505 (1,956)
--------- --------- ---------
INVESTING
Capital expenditures (31,640) (84,561) (114,271)
Net proceeds from sale of property and equipment 45,845 9 1,349
Deconsolidation of joint venture (3,127) -- --
Other - net (16) 6,353 172
--------- --------- ---------
Net cash provided by (used for) investing 11,062 (78,199) (112,750)
--------- --------- ---------
FINANCING
Short-term borrowings, net 80,277 54,155 16,425
Proceeds from long-term debt -- 16,578 5,418
Payments on long-term debt (14,015) -- --
Proceeds from sale of stock 353 2,068 2,403
Proceeds from sale of (purchase of) treasury stock 6 (33) (113)
Debt issuance costs (2,158) -- (43)
Reduction in capital lease obligations (821) (769) --
--------- --------- ---------
Net cash provided by financing 63,642 71,999 24,090
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,193) 1,305 (90,616)
Cash and cash equivalents at beginning of year 16,007 14,702 105,318
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,814 $ 16,007 $ 14,702
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid, net of amount capitalized $ 15,375 $ 15,854 $ 7,666
Income taxes (refunded) paid, net (7,177) 3,291 28,136
See accompanying Notes to Consolidated Financial Statements
33
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: THE COMPANY
The Sports Authority, Inc. ("The Sports Authority" or "Company") is the
largest full-line sporting goods retailer in the United States. At January 29,
2000, the Company operated 201 full-line stores as well as two temporary
clearance centers, substantially all in excess of 40,000 square feet, including
198 stores in 32 states across the United States and five stores in Canada. The
Company ceased operating its five stores in Canada in March 2000.
The Company's Japanese joint venture, Mega Sports Co., Ltd. ("Mega Sports")
operates 19 THE SPORTS AUTHORITY stores in Japan pursuant to its license
agreement with the Company. The Company is a minority owner in Mega Sports,
which was formed in January 1995 pursuant to the Company's joint venture
agreement with JUSCO Co., Ltd. ("JUSCO"), a major Japanese retailer which owns
9.4% of the Company's outstanding stock.
The Company also owns 19.9% of TheSportsAuthority.com, Inc., a joint
venture with Global Sports Interactive, Inc., a wholly-owned subsidiary of
Global Sports, Inc., which operates the e-commerce business of the Company.
Under the terms of the joint venture agreement, the Company's ownership interest
can increase up to 49.9%. In addition, the Company has the option to purchase
additional shares of TheSportsAuthority.com, Inc., up to 49.9%, upon certain
events.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are described below.
BASIS OF FINANCIAL STATEMENT PRESENTATION: The Company prepares its
financial statements in conformity with generally accepted accounting
principles. These principles require management to (1) make estimates and
assumptions that affect the reported amounts of assets and liabilities, (2)
disclose contingent assets and liabilities at the date of the financial
statements and (3) report amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
FISCAL YEAR: During 1999, the Company revised its fiscal calendar to end
the 1999 fiscal year on Saturday, January 29, 2000, and to cause all succeeding
years to end on the Saturday closest to the end of January. This change added
six days to the 1999 fiscal year, which were included in the Company's results
of operations. Prior to 1999, the Company's fiscal year ended on the Sunday
prior to the last Wednesday in January. The 1999 fiscal year consisted of 53
weeks. The 1998 and 1997 fiscal years each consisted of 52 weeks and ended on
January 24, 1999 and January 25, 1998, respectively.
BASIS OF CONSOLIDATION: The Company includes its wholly-owned and
majority-owned subsidiaries in the consolidated financial statements. All
intercompany transactions and amounts have been eliminated in consolidation.
34
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
EARNINGS PER SHARE: A reconciliation of the basic and diluted EPS
computations is illustrated below:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
-------------------------------------
BASIC EPS COMPUTATION
(Loss) income before extraordinary gain $(166,061) $ (63,791) $ 22,193
--------- --------- ---------
Weighted average common shares 32,003 31,768 31,513
--------- --------- ---------
Basic earnings (loss) before extraordinary gain
per common share $ (5.19) $ (2.01) $ 0.70
========= ========= =========
DILUTED EPS COMPUTATION
(Loss) income before extraordinary gain $(166,061) $ (63,791) $ 22,193
--------- --------- ---------
Weighted average common shares 32,003 31,768 31,513
Effect of stock options -- -- 303
--------- --------- ---------
Total shares 32,003 31,768 31,816
--------- --------- ---------
Diluted earnings (loss) before extraordinary gain
per common share $ (5.19) $ (2.01) $ 0.70
========= ========= =========
The computation of diluted EPS for all years presented excludes shares
issuable under the Company's 5.25% Convertible Subordinated Notes because the
issuance of the shares would be antidilutive. For 1999 and 1998, the computation
also excludes the effect of stock options, which would be antidilutive due to
the Company's net losses.
CASH AND CASH EQUIVALENTS: The Company considers cash on hand in stores,
deposits in banks, certificates of deposit and short-term marketable securities
with original maturities of 90 days or less to be cash and cash equivalents.
INVENTORIES: Merchandise inventories are valued on a first-in, first-out
(FIFO) basis at the lower of cost or market using the retail inventory method.
PROPERTY AND EQUIPMENT: Land, buildings, leasehold improvements and
furniture, fixtures and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives of related assets on the straight-line method
for financial statement purposes and on accelerated methods for income tax
purposes. Most store properties are leased and improvements are amortized over
the term of the lease but not more than 10 years. Other estimated useful lives
include 40 years for building, seven years for store fixtures and five years for
other furniture, fixtures and equipment.
35
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
IMPAIRMENT OF PROPERTY AND EQUIPMENT: In accordance with Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company evaluates the carrying value of property and equipment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. An impairment loss is recorded when the net book
value of assets exceed their fair value, as measured by projected undiscounted
future cash flows.
GOODWILL: Prior to the Company's Initial Public Offering ("IPO") on
November 23, 1994, the Company was a wholly-owned subsidiary of Kmart
Corporation ("Kmart"). Goodwill represents the excess of Kmart's cost to acquire
the Company over the fair value of the assets as of March 2, 1990, the date
Kmart acquired the Company. The Company has historically amortized goodwill over
40 years using the straight-line method, and has evaluated the recoverability of
its carrying value using projected undiscounted cash flows. In 1999, the Company
changed the method by which it evaluates the recoverability of goodwill to the
market value method. As a result of this change, the Company recorded an
impairment charge for the remaining carrying value of its goodwill. (See Note 4
of the Notes to Consolidated Financial Statements.)
FINANCIAL INSTRUMENTS: The following methods and assumptions were used to
estimate fair value of the Company's financial instruments:
/bullet/ The carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to
their short-term nature.
/bullet/ The fair value of the Company's note receivable is based on
current interest rates and repayment terms of the note.
/bullet/ The carrying value of current debt approximates fair value due
to its short term-nature.
/bullet/ Market prices were used to determine the fair value of the
5.25% Convertible Subordinated Notes (the "Notes").
As of January 29, 2000, the Notes outstanding had a carrying value of
$126.0 million and a fair value of $92.0 million, and the note receivable had a
carrying value of $5.2 million and a fair value of $4.6 million.
REVENUE RECOGNITION, LICENSE FEES AND RENTAL INCOME: Merchandise sales are
recognized at the point of sale. The Company has license agreements with Mega
Sports and TheSportsAuthority.com, Inc. under which the Company receives royalty
fees. (See Note 3 of the Notes to Consolidated Financial Statements.)
Additionally, the Company sells diving merchandise in three locations through a
license agreement under which the Company receives a percentage of product sales
in exchange for rent and services. Such license fees and rental income are
recognized on an accrual basis. Sales of licensee merchandise are excluded from
total sales.
36
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ADVERTISING COSTS: Production costs are expensed upon first showing of the
advertising, and other advertising costs are generally expensed as incurred. The
Company participates in cooperative advertising with its vendors under which a
portion of advertising costs are reimbursed to the Company. Advertising
expenditures, net of cooperative advertising reimbursements, were $51.4 million,
$47.0 million and $42.1 million in 1999, 1998 and 1997, respectively.
PRE-OPENING COSTS: In 1999, the Company adopted Statement of Position No.
98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires that start-up and pre-opening costs be expensed as incurred effective
for fiscal years beginning after December 15, 1998. Previously, start-up costs
were expensed in the month the store opened. The adoption of SOP 98-5 did not
have a material impact on the Company's consolidated results of operations or
financial position in 1999.
STORE CLOSING COSTS: The Company provides for future net lease obligations,
severance payments and other expenses related to store closings in the period
that the Company commits to a plan of exit. Reserves are evaluated periodically
based on actual costs, and are adjusted for material changes in estimates.
INCOME TAXES: The Company provides for income taxes currently payable or
receivable, deferred income taxes resulting from temporary differences between
the book and tax bases of assets and liabilities, and valuation allowances on
its deferred tax assets in accordance with Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes."
FOREIGN CURRENCY TRANSLATION: The financial statements of the Company's
foreign subsidiaries were maintained in their functional currencies and
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. Assets and liabilities were translated at current
exchange rates existing at the balance sheet date and stockholders' equity was
translated at historical exchange rates. Revenues and expenses were translated
at the average exchange rate for the period. In 1999, the Company recognized
cumulative translation adjustments of $2.8 million due to the deconsolidation of
Mega Sports and discontinuance of operations in Canada.
COMPREHENSIVE INCOME: Comprehensive income (loss) represents the change in
equity arising from non-owner sources, including net income (loss) and other
comprehensive income items such as foreign currency translation adjustments and
minimum pension liability adjustments. The Company's comprehensive income (loss)
consists of net income (loss) and foreign currency translation adjustments.
37
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NEW ACCOUNTING PRONOUNCEMENT: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended, which is required to be adopted by the
Company in fiscal year 2001. The Company generally does not use derivatives;
accordingly, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
RECLASSIFICATION: Certain amounts in the prior year's financial statements
have been reclassified to conform to the current year's presentation.
NOTE 3: RELATED PARTY TRANSACTIONS
JAPANESE JOINT VENTURE:
In March 1999, the Company sold 32% of its 51% ownership interest in Mega
Sports to JUSCO for $1.1 million. In May 1999, JUSCO made an additional capital
contribution to the joint venture, not matched by the Company, which further
reduced the Company's ownership to 8.4%. As a minority owner, the Company
discontinued consolidation of the joint venture in 1999, and recorded a $5.0
million gain on deconsolidation.
The Company has a license agreement with Mega Sports which permits Mega
Sports to use certain trademarks, technology and know-how of the Company in
exchange for royalty fees of 1.0% of Mega Sports' gross sales in 1999, 1.1% in
2000 and 1.2% in 2001 through 2005. Mega Sports has the option of extending the
new license agreement for three ten-year periods expiring in 2035. The Company's
results of operations in 1999 include royalty fees of $1.6 million pursuant to
the license agreement. In 1998 and prior years, royalty fees were eliminated due
to consolidation of the joint venture in the Company's results of operations.
JUSCO provides management and other services to Mega Sports pursuant to a
services agreement with the joint venture, for which it receives a fee equal to
1.0% of Mega Sports' gross sales and reimbursement of reasonable expenses. The
Company's financial statements for fiscal 1998 and 1997 include fees paid by
Mega Sports to JUSCO totaling $849,000 and $487,000, respectively.
E-COMMERCE JOINT VENTURE:
In May 1999, the Company entered into a license agreement with
TheSportsAuthority.com, Inc. ("TSA.com") which licenses certain trademarks,
service marks, domain names, content, purchasing power and vendor relationships
to the joint venture. The license agreement expires on December 31, 2014 or upon
the earlier termination of other agreements with or relating to TSA.com. The
Company and TSA.com also entered into an e-commerce agreement under which the
Company will furnish certain purchasing, merchandising and management services,
for which TSA.com will reimburse all reasonable
38
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
costs incurred, while TSA.com will furnish all the services necessary to operate
the e-commerce website. Royalty fees under the license agreement included in the
Company's operating results in 1999 were nominal.
NOTE 4: RESTRUCTURING AND IMPAIRMENT CHARGES
STORE EXIT COSTS:
In 1999, the Company recorded store exit costs of $8.9 million, of which
$6.2 million related to the announced closure of five stores in Canada. The
Company is discontinuing its Canadian operations based on poor store performance
and its decision to focus Company resources on domestic markets. Remaining exit
costs of $2.7 million related to the planned closure of two stores in the United
States and, to a lesser extent, the adjustment of reserves established for the
1998 and 1997 store closing plans. Canadian store sales were $28.4 million,
$31.0 million and $29.3 million in 1999, 1998 and 1997, respectively, and
operating losses excluding restructuring charges were $4.4 million, $3.7 million
and $4.0 million, respectively.
The Company recorded store exit charges of $39.4 million in 1998 for the
planned closure of eighteen underperforming stores, including two in Canada. As
a result of favorable market and lease factors, the Company decided not to close
three stores, and has reversed its store exit reserves for these locations. The
remaining fifteen stores were closed in the first quarter of 1999. The Company
paid approximately $8.6 million in lease and related costs, $1.2 million in
other exit costs and $0.5 million in employee severance payments to
approximately 500 employees during 1999.
The 1997 charge of $4.3 million related to the closing of three stores and
two off-site receiving facilities. The two receiving facilities were
consolidated into the Company's regional distribution center, which opened in
November 1997. As of January 29, 2000, reserves under the 1997 store closing
plan consisted primarily of the remaining lease obligation for one store.
During 1999, the Company evaluated the adequacy of its store exit reserves
based on current information with respect to the marketability of these
locations. Based on this evaluation, the Company increased its reserves for
lease and other exit costs at certain locations. This increase was partially
offset by a reduction in reserves for two lease assignments and one sublease
completed in 1999, as well as the reversal of reserves for stores that will
remain open. The net effect of these adjustments was to increase reserves by
approximately $0.7 million.
39
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Following is a reconciliation of store exit reserves:
Lease and
Related Fixed Employee
(IN THOUSANDS) Obligations Assets Severance Other Total
------------------------------------------------------------
Balance at January 25, 1998 $ 2,015 $ 1,823 $ 50 $ 350 $ 4,238
Reserves for 1998 store closing plan 26,571 11,777 657 441 39,446
Reclassification of accrued step rent 4,443 4,443
Payments and asset disposals (610) (4,336) (36) (130) (5,112)
-------- -------- -------- -------- --------
Balance at January 24, 1999 32,419 9,264 671 661 43,015
Reserves for 1999 store closing plan 7,540 -- 251 372 8,163
Adjustment of prior year reserves 413 (494) (189) 969 699
Reclassification of accrued step rent 673 -- -- -- 673
Payments and asset disposals (8,573) (8,496) (485) (1,193) (18,747)
-------- -------- -------- -------- --------
Balance at January 29, 2000 $ 32,472 $ 274 $ 248 $ 809 $ 33,803
======== ======== ======== ======== ========
CORPORATE RESTRUCTURING:
In 1998, the Company recorded a $3.9 million charge for employment contract
obligations to several departing executives. The Company charged payments of
$1.7 million and $0.6 million to the reserve in 1999 and 1998, respectively, and
has substantially satisfied its remaining obligations under these contracts. In
the first quarter of 1999, the Company negotiated the settlement of one contract
and reduced the corporate restructuring reserve by $0.7 million.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company recorded impairment charges on property and equipment of $41.9
million and $13.5 million in 1999 and 1998, respectively. The impairment charges
were recorded pursuant to SFAS 121, which requires that long-lived assets be
evaluated for impairment whenever events and circumstances, including
consecutive loss years, indicate that the carrying value of assets may not be
recoverable. The Company wrote off assets at 40 stores in 1999, and six stores
in 1998, based on a determination that the carrying value of assets at these
locations exceeded estimated future cash flows. The 1999 charge includes $2.4
million for stores being closed or relocated. Of this amount, $1.9 million
relates to the five Canadian stores which were closed in March 2000, $0.5
million relates to the two domestic stores expected to be closed by the third
quarter of 2000 and $1.4 million relates to two owned properties which were
closed in 1999. The remainder of the 1999 charge relates to 33 stores which
continue in operation.
40
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In 1999, the Company changed its method of evaluating the recoverability of
goodwill from the undiscounted cash flow method to the market value method.
Under the market value method, impairment is measured by the excess of the
Company's net book value over its market capitalization. The Company believes
the market value method is preferable because it results in a more objective
measurement of recoverability and better reflects the value of goodwill as
perceived by investors. Since the excess of the Company's net book value over
its market capitalization exceeded the carrying value of the Company's goodwill,
the change in method resulted in the write off of the remaining carrying value
of goodwill of $46.9 million, or ($1.47) per share. This change represents a
change in method which is inseparable from a change in estimate and,
accordingly, the effect of the change has been reflected as an impairment charge
in the accompanying 1999 statement of operations.
NOTE 5: RECEIVABLES AND OTHER CURRENT ASSETS
Receivables and other current assets consists of the following:
January 29, January 24,
(IN THOUSANDS) 2000 1999
-----------------------
Income taxes receivable $ 22,976 $ --
Other receivables, net of allowances of $1,820
and $1,571, respectively 18,289 24,801
Prepaid expenses 13,999 19,453
Deferred income taxes (See Note 8) -- 11,123
--------- ---------
Total $ 55,264 $ 55,377
========= =========
NOTE 6: PROPERTY AND EQUIPMENT
Net property and equipment consists of the following:
January 29, January 24,
(IN THOUSANDS) 2000 1999
-----------------------
Land $ 38,946 $ 68,581
Buildings 64,991 98,936
Leasehold improvements 60,566 96,130
Furniture, fixtures and equipment 186,464 206,521
Property under capital leases 2,332 7,192
Construction in progress 140 27
--------- ---------
353,439 477,387
Less - accumulated depreciation and amortization (139,801) (136,016)
--------- ---------
Total $ 213,638 $ 341,371
========= =========
41
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7: OTHER ASSETS AND DEFERRED CHARGES
Other assets and deferred charges consists of the following:
January 29, January 24,
(IN THOUSANDS) 2000 1999
-----------------------
Deferred income taxes (See Note 8) $ -- $ 32,201
Note receivable 5,182 5,280
Lease acquisition costs, net of amortization 4,363 10,123
Debt issuance costs and loan fees 2,837 2,095
Deferred loss on sale/leaseback of property 2,235 --
Leasehold and other deposits 397 17,703
Other -- 526
--------- ---------
Total $ 15,014 $ 67,928
========= =========
In June 1996, the Company paid Kmart $5.5 million in principal and accrued
interest in exchange for a participation in a privately placed mortgage note.
Under the terms of the mortgage note, principal is receivable annually and
interest semi-annually over the remaining period of 16 years at an interest rate
of 8.4%.
Lease acquisition costs consist primarily of the acquisition of nine leases
of two former sporting goods retailers. The costs of the leases were deferred
and are being amortized on a straight-line basis over the remaining lease terms
of the stores. In 1999, lease acquisition costs of $3.0 million related to five
stores were written off as impaired. The Company sold its rights under one lease
in conjunction with the sale-leaseback of eight owned properties in 1999.
Debt issuance costs relate to the Company's long-term convertible debt and
are being amortized over the five-year term of the debt using the effective
interest method. The Company wrote off $0.3 million in debt issuance costs in
conjunction with its purchase of Notes in 1999. Loan fees relate to the Credit
Facility and are being amortized on a straight-line basis over the term of the
Agreement.
During 1999, the Company sold eight properties under a sale-leaseback
agreement with SPI Holdings, LLC. The properties were sold for an aggregate
sales price of $46.8 million, and resulted in a loss on sale of $3.1 million.
The Company recognized $0.9 million of this loss in 1999, representing the
excess of the carrying value of the assets sold over their fair market value.
The remaining loss was deferred and is being amortized over the lease term,
which is 20 years for all properties. Proceeds from the sale were used primarily
to pay down existing debt.
42
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Leasehold deposits in 1998 consisted primarily of store leasing costs in
Japan which are now excluded from the Company's consolidated financial
statements due to the deconsolidation of Mega Sports.
NOTE 8: INCOME TAXES
(Loss) income before income taxes is as follows:
(IN THOUSANDS) 1999 1998 1997
----------------------------------
United States $(130,985) $ (88,332) $ 43,149
Foreign (12,355) (12,553) (8,417)
--------- --------- --------
Total $(143,340) $(100,885) $ 34,732
========= ========= ========
The provision (benefit) for income taxes consists of:
(IN THOUSANDS) 1999 1998 1997
---------------------------------
Current:
Federal $(18,599) $ (5,441) $ 19,471
State and local 1,685 (1,500) 3,300
-------- -------- --------
(16,914) (6,941) 22,771
-------- -------- --------
Deferred:
Federal 34,012 (22,012) (4,917)
State and local 3,596 (6,050) (1,388)
Foreign 5,705 (25) (1,736)
-------- -------- --------
43,313 (28,087) (8,041)
-------- -------- --------
Total $ 26,399 $(35,028) $ 14,730
======== ======== ========
The provision (benefit) for income taxes is included in the Company's Statements
of Operations as follows:
(IN THOUSANDS) 1999 1998 1997
---------------------------------
Income tax expense (benefit) $ 22,721 $(35,028) $ 14,730
Income tax expense on extraordinary gain 3,678 -- --
-------- -------- --------
Total $ 26,399 $(35,028) $ 14,730
======== ======== ========
43
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A reconciliation of the federal statutory rate to the Company's effective tax
rate follows:
(IN THOUSANDS) 1999 1998 1997
----------------------------------------------------------
Federal statutory rate $(50,169) (35.0)% $(35,310) (35.0)% $ 12,156 35.0%
State and local taxes, net of federal tax benefit 3,433 2.4 (4,908) (5.0) 1,243 3.6
Change in valuation allowance 61,958 43.2 -- -- -- --
Goodwill 17,087 11.9 687 0.7 687 2.0
Foreign tax rate differential (1,167) (0.8) 3,617 3.5 412 1.2
Other (4,743) (3.3) 886 1.1 232 0.6
-------- ------ -------- ------ -------- ------
Total $ 26,399 18.4% $(35,028) (34.7)% $ 14,730 42.4%
======== ====== ======== ====== ======== ======
Deferred tax assets and liabilities resulted from the following:
January 29, January 24,
(IN THOUSANDS) 2000 1999
-------- --------
Deferred tax assets:
Short-term:
Inventory $ 774 $ 920
Accruals and other liabilities 11,167 9,829
Other -- 374
-------- --------
Total short-term 11,941 11,123
-------- --------
Long-term:
Accruals and other liabilities 12,323 6,930
Property and equipment - foreign -- 972
Canada excess liabilities 3,221 2,501
Restructuring charges 26,848 24,018
Net operating loss carryforwards 13,212 --
AMT credit carryforwards 1,274 --
Other 1,796 1,925
-------- --------
Total long-term 58,674 36,346
-------- --------
Total deferred tax assets 70,615 47,469
Less: valuation allowance (61,958) --
-------- --------
Deferred tax assets, net of allowance 8,657 47,469
-------- --------
Deferred tax liabilities:
Short-term:
Other -- 11
-------- --------
Total short-term -- 11
-------- --------
Long-term:
Property and equipment 7,763 3,762
Other 894 383
-------- --------
Total long-term 8,657 4,145
-------- --------
Total deferred tax liabilities 8,657 4,156
-------- --------
Net deferred tax assets $ -- $ 43,313
======== ========
44
THE SPORTS AUTHORITY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company has a net operating loss carryforward for federal income tax
purposes of approximately $21.5 million, net of a federal net operating loss
carryback claim of $57.2 million. The federal net operating loss carryforward
will expire in the Company's fiscal year ending January 2020. In addition, the
Company has $1.3 million of federal alternative minimum tax credit carryforwards
which are not subject to expiration. The Company has state income tax net
operating loss carryforwards of approximately $114.1 million, also expiring in
varying amounts through the Company's fiscal year ending January 2020. The
federal and state net operating loss and tax credit carryforwards could be
subject to limitation if, within any three year period prior to the expiration
of the applicable carryforward period, there is a more than 50% change in the
ownership of the Company.
In 1999, the Company established a valuation allowance in the amount of
$62.0 million for its net deferred tax assets because the realization of
deferred tax assets in excess of deferred tax liabilities cannot be reasonably
assured given the recent cumulative losses incurred by the Company.
Additionally, the Company wrote off approximately $5.7 million of deferred tax
assets attributable to its Canadian subsidiary. The deferred tax assets will not
be realized due to the Company's decision to terminate its operation in Canada.
The Company had previously written down the Canadian deferred tax assets by $3.6
million during 1998.
NOTE 9: CURRENT DEBT
Current debt consists of the following:
January 29, January 24,
(IN THOUSANDS) 2000 1999
--------------------
Revolving credit facility $129,725 $ 49,472
Current portion of capital lease obligations 819 1,707
Short-term loans -- 24,444
-------- --------
Total $130,544 $ 75,623
======== ========
On April 13, 1999, the Company entered into a three year, $200 million
revolving credit facility (the "Credit Facility") with a group of lenders led by
BankBoston Retail Finance Inc. (now Fleet Retail Finance Inc.) to replace the
Company's prior $160 million revolving credit facility which matured on April
26, 1999. In December 1999, the Credit Facility was amended to increase maximum
borrowings to $275 million and to extend the term of the Credit Facility to
September 2003. Borrowings bear interest at the election of the Company at
either the Base Rate or the Eurodollar Rate, both as defined in the Credit
Facility. The Eurodollar Rate includes an interest rate margin, which is 1.75%
to 2.25% under the amended Credit Facility, compared to the initial margin of
1.75%. The Company's weighted average interest rates on revolving credit
borrowings were 7.4% and 6.6% in 1999 and 1998, respectively.
45
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Credit Facility limits borrowings to a borrowing base determined
largely with reference to eligible inventory balances.
Short-term loans in 1998 consisted of bank loans owed by Mega Sports, which
are now excluded from the Company's consolidated financial statements due to the
deconsolidation of Mega Sports.
NOTE 10: LONG-TERM DEBT
Long-term debt consists of the following:
January 29, January 24,
(IN THOUSANDS) 2000 1999
--------------------
5.25% Convertible Subordinated Notes $126,029 $149,500
Term loans -- 19,217
Long-term portion of capital lease obligations -- 4,531
-------- --------
Total $126,029 $173,248
======== ========
The 5.25% Convertible Subordinated Notes mature on September 15, 2001, and
are convertible at the option of the holders into an aggregate of 3,861,774
shares of the Company's common stock at any time until the maturity date, at a
conversion price of $32.635 per share, subject to adjustment in certain events.
Interest is payable semi-annually, on March 15 and September 15 of each year.
The Notes are redeemable at the option of the Company at any time on or after
September 15, 1999 at declining redemption prices beginning with 102.1% of par
at September 15, 1999. The Notes are unsecured obligations of the Company
subordinated in right of payment to all existing and future Senior Indebtedness,
as defined in the Indenture pursuant to which the Notes were issued.
In August 1999, the Company purchased $23.5 million principal amount of
Notes on the open market, for a purchase price of $14.0 million excluding
interest. The Company recorded an extraordinary gain on the transaction of $5.5
million, net of tax. Subsequent to January 29, 2000, an additional $76.0 million
principal amount of Notes were acquired for an aggregate purchase price of $56.2
million.
Term loans in 1998 related to a series of unsecured loans between Mega
Sports and several Japanese banks, which are now excluded from the Company's
financial statements due to the deconsolidation of Mega Sports.
Interest expense in the accompanying Consolidated Statements of Operations
is net of capitalized interest of $762,000 and $844,000 in 1998 and 1997,
respectively. No amounts were capitalized in 1999.
46
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11: OTHER LONG-TERM LIABILITIES
Other long-term liabilities consists of the following:
January 29, January 24,
(IN THOUSANDS) 2000 1999
----------------------
Step rent accrual $28,737 $24,398
Long-term portion of store exit reserve 19,878 21,414
Other -- 847
------- -------
Total $48,615 $46,659
======= =======
A majority of the Company's store leases contain fixed escalation clauses.
Rental expense for such leases is recognized on a straight-line basis with
adjustments to the corresponding step rent accrual.
The store exit reserve consists primarily of accrued lease obligations and
costs, net of estimated future sublease income, related to the Company's store
closing plans. (See Note 4 of the Notes to Consolidated Financial Statements.)
NOTE 12: COMMITMENTS AND CONTINGENCIES
Prior to the Company's IPO on November 23, 1994, the Company was a
wholly-owned subsidiary of Kmart. Kmart continues to guarantee approximately 59
leases in effect or committed to as of the date of the IPO. Pursuant to a Lease
Guaranty, Indemnification and Reimbursement Agreement ("Indemnification
Agreement"), the Company has agreed to indemnify Kmart for any losses incurred
by Kmart as a result of actions or omissions on the part of the Company, as well
as for all amounts paid by Kmart pursuant to Kmart's guarantees of the Company's
leases. In addition, Kmart has certain rights to acquire leased stores
guaranteed by Kmart if its losses or unreimbursed guaranty payments exceed
certain levels or the Company fails to meet certain financial performance
ratios.
Leases with respect to five of the Company's stores serve as collateral for
certain mortgage pass-through certificates (the "Certificates"). The
Certificates include a provision which would permit the holders of the mortgage
pass-through certificates to require the Company or, upon the Company's failure,
Kmart, to repurchase the underlying mortgage notes in certain events, including
the failure by the Company to make payments of rent under the related lease, the
failure by Kmart to maintain required debt ratings or the termination of the
guarantee by Kmart of the Company's obligations under the related lease. In the
event the Company is required to repurchase all of the underlying mortgage
notes, the Company would be obligated to either refinance or pay approximately
$26 million.
47
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The lease with respect to one of the Company's stores serves as collateral
for a privately placed mortgage note
(the "Note") which is also secured by leases of adjacent tenants. The Note, of
which the principal amount is $3.5 million, may be put back to Kmart in certain
events, including a decline in Kmart's debt rating. Under the Indemnification
Agreement, the Company must reimburse Kmart for "losses" in connection with the
Company's allocable share of Kmart's payments on the put of the Note.
The Company is one of thirty-three defendants, including firearms
manufacturers and retailers, in CITY OF CHICAGO AND COUNTY OF COOK V. BERETTA
U.S.A. CORP. ET AL, Circuit Court of Cook County, Illinois, which suit was
served on the Company on November 23, 1998. The complaint is based on legal
theories of public nuisance and negligent entrustment of firearms and alleges
that the defendant retailers sell firearms in the portion of Cook County outside
Chicago that are found illegally in Chicago. The complaint seeks damages
allocated among the defendants exceeding $358.1 million to compensate the City
of Chicago and Cook County for their alleged costs (of which the complaint
enumerates a total of $153 million) resulting from the alleged public nuisance.
The complaint also seeks punitive damages and injunctive relief imposing
additional regulations on the methods the defendant retailers use to sell
firearms in Cook County. On February 10, 2000, the Court dismissed the
complaint's negligent entrustment count. The plaintiffs filed an amended
complaint with the Court's permission on March 27, 2000, which contains both the
public nuisance and negligent entrustment counts.
There are various other claims, lawsuits and pending actions against the
Company incident to its operations. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the Company's
liquidity, financial position or results of operations.
NOTE 13: LEASES
The Company conducts operations primarily in leased facilities. Store
leases are generally for terms of 10 to 25 years with multiple five-year renewal
options which allow the Company to extend the term of the lease up to 25 years
beyond the initial noncancellable term. Certain leases require the Company to
pay additional amounts, including rental payments based on a percentage of
sales, and executory costs related to taxes, maintenance and insurance. Some
selling space has been sublet to other retailers in certain of the leased
facilities. The Company also leases certain equipment used in the course of
operations under operating leases.
48
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Future minimum lease payments under noncancelable operating leases at
January 29, 2000 were as follows:
(IN THOUSANDS)
Year:
2000 $ 102,298
2001 99,088
2002 96,864
2003 94,157
2004 94,555
Later years 823,462
------------
Total minimum lease payments 1,310,424
Less: minimum sublease rental income (12,701)
------------
Net minimum lease payments $ 1,297,723
============
A summary of operating lease rental expense and short-term rentals follows:
(IN THOUSANDS) 1999 1998 1997
-------------------------------------
Minimum rentals $ 89,482 $ 101,866 $ 86,148
Percentage rentals (69) 80 292
Less: sublease rentals (1,038) (1,023) (967)
--------- --------- ---------
Total $ 88,375 $ 100,923 $ 85,473
========= ========= =========
NOTE 14: EMPLOYEE RETIREMENT PLANS
Employees of the Company who meet certain requirements as to age and
service are eligible to participate in The Sports Authority 401(k) Savings and
Profit Sharing Plan and certain executives are eligible to participate in The
Sports Authority Supplemental 401(k) Savings and Profit Sharing Plan. The
Company's expense related to these plans was $2.4 million, $2.5 million and $2.3
million in 1999, 1998 and 1997, respectively.
The Company has an unfunded supplemental executive retirement plan for
certain executives of the Company. Pension benefits earned under the plan are
primarily based on years of service at the level of Vice President or higher
after June 1990 and average compensation, including salary and bonus. Pension
expense was $761,000, $779,400 and $443,800 in 1999, 1998 and 1997,
respectively, and the accrued pension liability was $1.6 million and $1.2
million as of January 29, 2000 and January 24, 1999, respectively.
The Company has assumed all obligations for senior executives previously
covered under the Kmart supplemental executive retirement plan. The vested
benefit obligation for pension benefits under the Kmart plan was $299,000 and
$311,000 as of January 29, 2000 and January 24, 1999, respectively.
49
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 15: STOCK PURCHASE, STOCK OPTION AND RESTRICTED STOCK PLANS
In connection with the IPO, the Company adopted the Management Stock
Purchase Plan (the "Management Plan") and the Employee Stock Purchase Plan (the
"Employee Plan"). Under the Management Plan, the Company's senior management
personnel were required, prior to May 1996, to receive a minimum of 20%, and
were permitted to elect to receive up to 100%, of their annual incentive bonuses
in the form of restricted common stock of the Company at a 20% discount from
fair value. In addition, certain senior management personnel were given a
one-time opportunity to invest up to $1.0 million each to purchase restricted
common stock at the time of the IPO, at a 20% discount from the IPO price, net
of the underwriting discount. For each restricted share of common stock so
purchased, the Company granted the employee an option to purchase one additional
restricted share of common stock at the IPO price, less the underwriting
discount. Restricted shares of common stock purchased or acquired through
exercise of options granted under the Management Plan are restricted from sale
or transfer for three years from the date of purchase, except in the event of a
change in control of the Company, as defined in the plan, and certain other
events.
The Employee Plan allows the Company's employees to purchase shares of the
Company's common stock at a 15% discount from its fair market value. Shares
purchased through the Employee Plan are restricted from sale or transfer for one
year from the date of purchase, except in the event of a change in control of
the Company, as defined in the plan, and certain other events.
Under the 1994 Stock Option Plan (the "1994 Plan"), as amended, 2,274,591
shares of the Company's common stock have been reserved for option grants. Under
the 1996 Stock Option and Restricted Stock Plan (the "1996 Plan"), the number of
shares reserved for grants is 2,250,000, of which 1,950,000 are reserved for
grants of options and 300,000 are reserved for the grant of restricted shares.
The exercise price of options to be granted under these plans may not be less
than the fair market value per share of common stock at grant date, except that
options granted in lieu of a bonus may be granted at a price not less than 80%
of the fair market value. The Compensation Committee of the Board (the
"Committee") has sole discretion to determine the vesting and exercisability
provisions of each option granted, except that no option may become exercisable
and no option which is not granted in lieu of a bonus may vest until the
optionee has completed at least one year of employment after the date of grant.
Exercisability is accelerated on a change in control of the Company, as defined
in the plan, and in certain other events. The term of each option may not exceed
ten years from the date of grant. The Committee has sole discretion to determine
the restricted period for each grant of restricted shares under the 1996 Plan,
but in no event may the restricted period be less than six months after the date
of grant. The restricted period is accelerated on a change in control of the
Company, as defined in the plan, and in certain other events.
50
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In May 1999, the stockholders approved the Performance Unit Plan. Under
this plan, executive officers and certain other employees are eligible to
receive cash payments based upon the Company's attainment of an earnings per
share target measured over a three-year performance period unless otherwise
specified by the Committee. The number of target performance units (with an
initial unit value of $1.00 and a maximum unit value of $2.00) are established
at the beginning of a performance period for each participant based on the
participant's role and responsibilities and competitive levels of long-term
compensation. The Plan is designed to be self-funding out of the Company's
earnings and involves no stockholder dilution. The first eligible payments under
the Plan will be for the two-year measurement period ending with 2000. No
compensation expense was recognized under this plan in 1999.
The Company recognizes compensation expense for the discount on restricted
common stock purchased under the Management Plan. Such discounts are recognized
as expense on a straight-line basis over the three-year period during which the
shares are restricted from sale or transfer. The Company also recognizes
compensation expense over the restricted period for shares granted under the
1996 Plan. The Company's expense related to the Management Plan and 1996 Plan
was $343,000, $903,000 and $510,000 in 1999, 1998 and 1997, respectively.
A summary of stock option activity is as follows:
1999 1998 1997
----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,934,197 $ 12.36 2,323,885 $ 14.86 2,014,136 $ 13.34
Granted 1,469,725 3.97 1,314,321 9.81 627,599 19.21
Exercised - - (120,413) 12.18 (130,395) 11.91
Canceled (1,543,995) 11.32 (583,596) 16.65 (187,455) 15.20
------------ --------- ----------
Outstanding at end of year 2,859,927 8.61 2,934,197 12.36 2,323,885 14.86
============ ========== ==========
Exercisable at end of year 773,202 14.35 1,105,226 12.72 726,936 11.91
============ ========== ==========
Weighted average fair value of
options granted during year $ 1.82 $ 4.06 $ 8.31
51
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of stock options outstanding at January 29, 2000 is as follows:
Options Outstanding Options Exercisable
-------------------------------------------------------------- ------------------------------------------
Weighted Average Weighted Average Weighted
Range of Outstanding at Remaining Exercise Price Exercisable at Average
Exercise Prices January 29, 2000 Life (in years) January 29, 2000 Exercise Price
- ------------------------------------------------------------------------------------ ------------------------------------------
$ 2.81 - $ 5.00 1,356,840 8.9 $ 3.89 39,565 $ 4.25
5.01 - 10.75 481,700 7.7 9.19 23,250 10.75
10.76 - 24.88 1,021,387 4.2 14.62 710,387 15.03
--------- -------
2,859,927 7.0 8.61 773,202 14.35
========= =======
Available for
grant at end of
year 1,163,856
=========
The Company used the Black-Scholes option pricing model with the following
weighted average assumptions in determining the fair value of options granted:
expected volatility of 43% for 1999 and 37% for 1998 and 1997; risk-free
interest rates of 5.6%, 5.2% and 6.4% for 1999, 1998 and 1997, respectively; and
an expected life of 5 years.
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25")
and related interpretations in accounting for its plans. Since the exercise
prices of stock options granted equal or exceed the market value of the
Company's stock on date of grant, no compensation cost has been recognized for
the stock option plans. Had Statement of Financial Accounting Standards No. 123
been applied, compensation expense under the stock option plans and the Employee
Plan would have been $0.8 million, $2.7 million and $3.2 million for 1999, 1998
and 1997, respectively, and net (loss) income and earnings (loss) per common
share would have been as follows:
(IN THOUSANDS, EXCEPT PER
SHARE DATA) 1999 1998 1997
-------------------------------------------------
Net (loss) income As reported $ (160,544) $ (63,791) $ 22,193
Pro forma (161,301) (65,517) 20,286
Basic and diluted earnings
(loss) per common share As reported $ (5.02) $ (2.01) $ 0.70
Pro forma (5.04) (2.06) 0.64
52
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 16: SHAREHOLDER RIGHTS PLAN
In September 1998, the Company's Board of Directors adopted a Shareholder
Rights Plan and declared a dividend distribution of one "Right" per outstanding
share of common stock. Each Right entitles the stockholder to buy a unit
consisting of one one-thousandth of a share of Series A Junior Participating
Preferred Shares (a "Unit") or, in certain circumstances, a combination of
securities and assets of equivalent value at a purchase price of $50 per Unit,
subject to adjustment. Each Unit carries voting and dividend rights that are
intended to produce the equivalent of one share of common stock.
The Rights become exercisable only if (i) a person or group acquires 20% or
more of the Company's outstanding common stock, or (ii) a person or group
announces a tender offer for 20% or more of the Company's outstanding common
stock. In certain events the Rights entitle each stockholder to receive shares
of common stock having a value equal to two times the exercise price of the
Right, and the Rights of the acquiring person or group will become null and
void. These events include, but are not limited to (i) a merger in which the
Company is the surviving corporation, and (ii) acquisition of 20% or more of the
Company's outstanding common stock other than through a tender offer that
provides fair value to all stockholders. If the Company is acquired in a merger
in which it is not the surviving corporation, or more than 50% of its assets or
earning power is sold or transferred, each holder of a Right will have the right
to receive, upon exercise, common shares of the acquiring company. The Company
can redeem each Right for $.01 at any time prior to the Rights becoming
exercisable. Rights that are not redeemed or exercised will expire on October 5,
2001.
53
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 17: QUARTERLY HIGHLIGHTS (UNAUDITED)
1999 Quarter Ended
-----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) April July October January
--------------- -------------- -------------- -------------------
Sales $ 356,517 $ 385,550 $ 327,255 $ 423,538
Operating (loss) income (3,962) 7,787 (13,744) (123,135)(a)(c)
(Loss) income before extraordinary gain (1,471) 2,265 (10,748) (156,107)(a)(b)(c)
Net (loss) income (1,471) 2,265 (5,231) (156,107)
Diluted earnings (loss) before extraordinary gain
per common share (0.05) 0.07 (0.33) (4.85)
Diluted earnings (loss) per common share (0.05) 0.07 (0.16) (4.85)
1998 Quarter Ended
-----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) April July October January
--------------- -------------- -------------- -------------------
Sales $ 346,464 $ 427,238 $ 366,973 $ 458,985
Operating (loss) income (4,263) 8,696 (98,913)(d) 5,560(e)
Net (loss) income (3,746) 3,827 (64,888)(d) 1,016(e)
Diluted earnings (loss) per common share (0.12) 0.12 (2.04) 0.03
(a) During the fourth quarter of 1999, the Company recorded charges as
follows: $8.9 million for store exit costs; $88.8 million for asset
impairments; and $1.3 million for cumulative translation losses related
to the Canadian subsidiary. The Company also recorded inventory-related
charges aggregating $28.9 million for excess markdowns, liquidations in
connection with store closings and inventory shrink.
(b) During the fourth quarter of 1999, the Company recorded $28.8 million
for tax charges (net of expected tax refunds).
(c) During the fourth quarter of 1999, the Company reduced bonus and other
accruals by approximately $3.1 million.
(d) During the third quarter of 1998, the Company recorded special charges
as follows: $39.4 million for store exit costs; $3.9 million for
corporate restructuring; and $13.5 for asset impairments. The Company
also recorded merchandise cost adjustments aggregating $24.1 million
for excess markdowns and liquidations in connection with store
closings.
(e) Fourth quarter adjustments in 1998 had the effect of increasing
operating income and net income by approximately $6.5 million and $3.8
million, respectively. These adjustments related primarily to
reductions of bonus and other miscellaneous accruals.
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information concerning a change in the Company's independent public
accountants is contained under the caption "Ratification of the Appointment of
Independent Public Accountants" on page 24 of the Company's Proxy Statement
dated April 28, 2000.
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their business experience during
at least the past five years, are as follows:
Martin E. Hanaka, age 50. Mr. Hanaka was elected as Chairman in November
1999, after having been elected Chief Executive Officer in September 1998, and
having been elected as Vice Chairman and as a Director of the Company in
February 1998. From August 1994 until October 1997, Mr. Hanaka served as
President and Chief Operating Officer and as a director of Staples, Inc., an
office supply retailer. Mr. Hanaka's extensive retail career has included
serving as Executive Vice President of Marketing and as President and Chief
Operating Officer of Lechmere, Inc. from September 1992 through July 1994, and
serving in various capacities for 20 years at Sears Roebuck & Co., most recently
as Vice President in charge of Sears Brand Central.
James R. Tener, age 51. Mr. Tener joined the Company in June 1999 as
Executive Vice President and Chief Operating Officer. He previously served as
Executive Vice President for Store Operations of OfficeMax, Inc. an office
supply retailer, from April 1996 to May 1999, as Chief Operating Officer of
Busybody Inc., a specialty fitness equipment retailer, from March 1995 to April
1996, and as Senior Vice President for Operations of Pier 1 Imports, Inc., a
decorative home furnishings retailer, from December 1989 to August 1994.
George R. Mihalko, age 45. Mr. Mihalko joined the Company in September 1999
as Executive Vice President and Chief Financial Officer. He previously served as
Senior Vice President, Chief Financial Officer and Treasurer of Pamida Holding
Corporation, a general merchandise retailer, from 1995 to July 1999, and as Vice
President and Treasurer of Pier 1 Imports, Inc. a decorative home furnishings
retailer, from 1993 to 1995.
Henry Flieck, age 52. Mr. Flieck joined the Company in October 1998 as
Executive Vice President, Growth & Development. Mr. Flieck previously served as
Senior Vice President of Real Estate for Staples, Inc., an office supply
retailer, from 1989 to 1998.
Arthur Quintana, age 50. Mr. Quintana joined the Company in October 1998 as
Senior Vice President, Supply Chain. He previously served as Vice President,
Inventory Management and Logistics at Sunglass Hut International, Inc. from July
1997 to October 1998, and prior to that as Vice President of Replenishment at
Office Depot, an office supply retailer, from 1990 to 1997.
There is no family relationship between any of these executive officers or
between any such officer and any Director of the Company. The remaining
information required by this Item 10 is incorporated herein by reference to the
information under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" beginning on pages 5 and 16,
respectively, of the Company's Proxy Statement dated April 28, 2000.
56
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the information under the caption "Executive Compensation" on page
8 of the Company's Proxy Statement dated April 28, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by
reference to the information under the caption "Stock Ownership" on page 3 of
the Company's Proxy Statement dated April 28, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the information under the caption "Certain Transactions" on page 16
of the Company's Proxy Statement dated April 28, 2000.
57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed with, and as a part of, this Annual
Report on Form 10-K.
1. FINANCIAL STATEMENTS.
"Index to Financial Statements" contained in Part II, Item 8.
2. FINANCIAL STATEMENT SCHEDULES.
The schedules have been omitted because they are not applicable or not
required.
3. EXHIBITS.
3.1 Restated Certificate of Incorporation of the Company,
incorporated herein by reference to Exhibit 3.1 to the Form
10-K for 1994.
3.2 Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company, incorporated herein by
reference to Exhibit 3.1 to the Form 10-Q for the third
quarter of 1998.
3.3 Amended and Restated Bylaws of the Company, incorporated
herein by reference to Exhibit 3.2 to the Form 10-Q for the
third quarter of 1998.
4.1 Indenture, dated as of September 20, 1996, between the Company
and The Bank of New York, as Trustee, relating to the
Company's $149,500,000 5.25% Convertible Subordinated Notes
due September 15, 2001 (including forms of note), incorporated
herein by reference to Exhibit 4.1 to Registration Statement
No. 333-16877 on Form S-3.
4.2 Registration Rights Agreement, dated as of September 20, 1996,
between the Company and Goldman, Sachs & Co., relating to the
Company's $149,500,000 5.25% Convertible Subordinated Notes
due September 15, 2001, incorporated herein by reference to
Exhibit 4.2 to Registration Statement No. 333-16877 on Form
S-3.
58
4.3* Amended and Restated Rights Agreement dated as of February
1, 2000 between the Company and American Stock Transfer and
Trust Company, as Rights Agent.
10.1 Lease Guaranty, Indemnification and Reimbursement Agreement,
dated November 23, 1994, as amended, between the Company and
Kmart Corporation, incorporated herein by reference to Exhibit
10.3 to the Form 10-K for 1994.
10.2 Employee Stock Purchase Plan, as amended, incorporated herein
by reference to Exhibit 10.9 to the Form 10-Q for the second
quarter of 1995.
10.3 Supplemental 401(k) Savings and Profit Sharing Plan,
incorporated herein by reference to Exhibit 10.19 to the Form
10-K for 1996.
10.4 1996 Stock Option and Restricted Stock Plan, incorporated
herein by reference to Exhibit 10.2 to the Form 10-Q for the
second quarter of 1997.
10.5 Supplemental Executive Retirement Plan, as amended,
incorporated herein by reference to Exhibit 10.3 to the Form
10-Q for the second quarter of 1997.
10.6 Management Stock Purchase Plan, as amended, incorporated
herein by reference to Exhibit 10.1 to the Form 10-Q for the
third quarter of 1997.
10.7 Deferred Compensation Plan, incorporated herein by reference
to Exhibit 10.19 to the Form 10-K for 1997.
10.8 Annual Incentive Bonus Plan, as amended, incorporated herein
by reference to Exhibit A to the Company's Proxy Statement
dated April 28, 1998.
10.9 Director Stock Plan, as amended February 1, 1999, incorporated
herein by reference to Exhibit 10.26 to the Form 10-K for
1998.
10.10 Amendment No. 1 to Director Stock Plan, incorporated herein by
reference to Exhibit 10.3 to the Form 10-Q for the third
quarter of 1999.
59
10.11 Amended and Restated 1994 Stock Option Plan, incorporated
herein by reference to Exhibit A to the Company's Proxy
Statement dated April 26, 1999.
10.12 Performance Unit Plan, incorporated herein by reference to
Exhibit B to the Company's Proxy Statement dated April 26,
1999.
10.13 Termination Agreement dated October 11, 1999 between the
Company and Anthony F. Crudele, incorporated herein by
reference to Exhibit 10.2 to the Form 10-Q for the third
quarter of 1999.
10.14* Employment Agreement dated January 11, 2000 between the
Company and Martin E. Hanaka.
10.15* Form of Severance Agreement dated January 11, 2000 between the
Company and each of Jim Tener, George Mihalko, Henry Flieck
and Arthur Quintana.
10.16 Amended and Restated Joint Venture Agreement dated as of March
12, 1999 between the Company and JUSCO Co., Ltd., incorporated
by reference to Exhibit 10.19 to the Form 10-K for 1998.
10.17 Amended and Restated License Agreement dated as of March 26,
1999 between the Company and Mega Sports Co., Ltd.,
incorporated by reference to Exhibit 10.20 to the Form 10-K
for 1998.
10.18 Amended and Restated Services Agreement dated as of March
26, 1999 between the Company and Mega Sports Co., Ltd.,
incorporated by reference to Exhibit 10.21 to the Form 10-K
for 1998.
10.19 Guaranty dated as of March 12, 1999 from JUSCO Co., Ltd. to
the Company, incorporated by reference to Exhibit 10.22 to the
Form 10-K for 1998.
10.20 Agreement dated as of March 12, 1999 between the Company and
JUSCO Co., Ltd., incorporated by reference to Exhibit 10.23 to
the Form 10-K for 1998.
60
10.21 Loan and Security Agreement dated as of April 13, 1999 between
BankBoston Retail Finance Inc., as Agent for the Lenders
referenced therein, and the Company and its wholly-owned
United States subsidiaries, incorporated by reference to
Exhibit 10.24 to the Form 10-K for 1998.
10.22 First Amendment to Loan and Security Agreement dated as of
April 13, 1999 between BankBoston Retail Finance Inc., as
Agent for the Lenders referenced therein, and the Company and
its wholly-owned United States subsidiaries, dated as of
November 17, 1999, incorporated herein by reference to Exhibit
10.4 to the Form 10-Q for the third quarter of 1999.
10.23 Second Amendment to Loan and Security Agreement dated as of
April 13, 1999 between BankBoston Retail Finance Inc., as
Agent for the Lenders referenced therein, and the Company and
its wholly-owned United States subsidiaries, dated as of
December 14, 1999, incorporated by reference to Exhibit 10.1
to the Form 8-K dated December 17, 1999.
10.24 Agreement for Purchase and Sale and Leaseback, dated May 14,
1999, between the Company and SPI Holdings, LLC, incorporated
by reference to Exhibit 10.2 to the Form 10-Q for the second
quarter of 1999.
10.25 Letter Agreement, dated June 14, 1999, between the Company and
SPI Holdings, LLC, including form of Lease Agreement attached
thereto, incorporated by reference to Exhibit 10.3 to the Form
10-Q for the second quarter of 1999.
10.26 Second Amendment to Agreement for Purchase and Sale and
Leaseback, dated May 14, 1999, dated as of July 29, 1999,
incorporated by reference to Exhibit 10.4 to the Form 10-Q for
the second quarter of 1999.
10.27 Third Amendment to Agreement for Purchase and Sale and
Leaseback, dated May 14, 1999, dated as of August 31, 1999,
incorporated by reference to Exhibit 10.5 to the Form 10-Q for
the second quarter of 1999.
10.28* E-Commerce Venture Agreement between the Company and Global
Sports Interactive, Inc. dated May 7, 1999.
61
10.29* Amendment No. 1 to E-Commerce Venture Agreement between the
Company and Global Sports Interactive, Inc. dated May 14,
1999.
10.30* E-Commerce Agreement between the Company and
TheSportsAuthority.com, Inc. dated May 14, 1999.
10.31* E-Commerce Services Agreement between TheSportsAuthority.com,
Inc. and Global Sports Interactive, Inc. dated May 14, 1999.
10.32* License Agreement between the Company, The Sports Authority
Michigan, Inc. and TheSportsAuthority.com, Inc. dated May
14, 1999.
10.33* Agreement between the Company and Global Sports, Inc. dated
May 14, 1999.
18.1* Letter regarding change in accounting principles.
21.1* Subsidiaries of the Company.
23.1* Consent of Ernst & Young LLP.
23.2* Consent of PricewaterhouseCoopers LLP.
27.1* Financial Data Schedule
- ---------------------
* Filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
Reports on Form 8-K were filed on (1) November 12, 1999 containing
information under Item 5; (2) December 17, 1999 containing information
under Items 5 and 7; and (3) January 11, 2000 containing information
under Item 8.
62
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
its behalf by the undersigned, thereunto duly authorized.
THE SPORTS AUTHORITY, INC.
Date: APRIL 27, 2000 By: /S/ MARTIN E. HANAKA
-------------------- --------------------------------
Martin E. Hanaka,
Chief Executive Officer
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 and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ MARTIN E. HANAKA Chief Executive Officer and APRIL 27, 2000
- ----------------------------------- Director (Principal Executive
Martin E. Hanaka Officer)
/S/ GEORGE R. MIHALKO Executive Vice President and APRIL 27, 2000
- ----------------------------------- Chief Financial Officer
George R. Mihalko (Principal Financial Officer)
/S/ EVA L. CLAWSON Vice President and APRIL 27, 2000
- ----------------------------------- Controller
Eva L. Clawson (Principal Accounting Officer)
/S/ A. DAVID BROWN Director APRIL 27, 2000
- -----------------------------------
A. David Brown
/S/ NICHOLAS A. BUONICONTI Director APRIL 27, 2000
- -----------------------------------
Nicholas A. Buoniconti
/S/ MARY ELIZABETH BURTON Director APRIL 27, 2000
- -----------------------------------
Mary Elizabeth Burton
/S/ CYNTHIA R. COHEN Director APRIL 27, 2000
- -----------------------------------
Cynthia R. Cohen
/S/ STEVE DOUGHERTY Director APRIL 27, 2000
- -----------------------------------
Steve Dougherty
63
/S/ JULIUS W. ERVING Director APRIL 27, 2000
- -----------------------------------
Julius W. Erving
/S/ CAROL FARMER Director APRIL 27, 2000
- -----------------------------------
Carol Farmer
/S/ CHARLES H. MOORE Director APRIL 27, 2000
- -----------------------------------
Charles H. Moore
64
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
4.3* Amended and Restated Rights Agreement dated as of February 1,
2000 between the Company and American Stock Transfer and Trust
Company, as Rights Agent.
10.14* Employment Agreement dated January 11, 2000 between the Company
and Martin E. Hanaka.
10.15* Form of Severance Agreement dated January 11, 2000 between the
Company and each of Jim Tener, George Mihalko, Henry Flieck and
Arthur Quintana.
10.28* E-Commerce Venture Agreement between the Company and Global
Sports Interactive, Inc. dated May 7, 1999.**
10.29* Amendment No. 1 to E-Commerce Venture Agreement between the
Company and Global Sports Interactive, Inc. dated May 14,
1999.**
10.30* E-Commerce Agreement between the Company and
TheSportsAuthority.com, Inc. dated May 14, 1999.**
10.31* E-Commerce Services Agreement between TheSportsAuthority.com,
Inc. and Global Sports Interactive, Inc. dated May 14, 1999.**
10.32* License Agreement between the Company, The Sports Authority
Michigan, Inc. and TheSportsAuthority.com, Inc. dated May 14,
1999.**
10.33* Agreement between the Company and Global Sports, Inc. dated May
14, 1999.
18.1* Letter regarding change in accounting principles.
21.1* Subsidiaries of the Company.
23.1* Consent of Ernst & Young LLP.
23.2* Consent of PricewaterhouseCoopers LLP.
27.1* Financial Data Schedule
- --------------------
* Filed as part of this Annual Report on Form 10-K.
** Confidential treatment has been requested as to certain portions of this
exhibit. A complete copy of this agreement, including the redacted terms,
has been separately filed with the Securities and Exchange Commission.
65