<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
SPORTMART, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
SPORTMART, INC.
1400 SOUTH WOLF ROAD, SUITE 200
WHEELING, ILLINOIS 60090
December 17, 1997
Dear Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Sportmart Meeting") of Sportmart, Inc. ("Sportmart"), which will be held at
9:00 a.m., Central Time, on Friday, January 9, 1998, at the Northbrook Hilton,
located at 2855 N. Milwaukee Avenue, Northbrook, Illinois.
At this important meeting you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated as of
September 28, 1997 and amended and restated as of December 2, 1997 (the "Merger
Agreement"), by and among Sportmart, Gart Sports Company ("Gart Sports"), Gart
Bros. Sporting Goods Company, a wholly-owned subsidiary of Gart Sports ("Gart
Bros."), and GB Acquisition, Inc., a wholly-owned subsidiary of Gart Sports
("Merger Sub"), and the merger (the "Merger") of Merger Sub with and into
Sportmart whereby Sportmart will become a wholly-owned subsidiary of Gart
Sports.
If the Merger is approved, and becomes effective, each outstanding share of
Common Stock, par value $.01 per share, of Sportmart ("Sportmart Voting Common
Stock") and each share of Class A Common Stock, par value $.01 per share, of
Sportmart ("Sportmart Class A Common Stock" and together with Sportmart Voting
Common Stock, the "Sportmart Common Stock") issued and outstanding immediately
prior to the effective time of the Merger (the "Effective Time") shall be
converted into, and shall thereafter represent only, the right to receive a
fractional share (the "Conversion Ratio") of Gart Common Stock as determined by
the conversion formula (the "Conversion Formula") set forth in the Merger
Agreement.
The Conversion Formula is designed so that upon consummation of the Merger,
current Sportmart stockholders will own approximately 27 1/2%, and current Gart
Sports stockholders will own approximately 72 1/2%, of the outstanding shares of
Gart Common Stock on a fully diluted basis. The Conversion Ratio is expected to
be approximately .164860, but can fluctuate due to changes in the market prices
of Sportmart Class A Common Stock and Sportmart Voting Common Stock that will
affect the number and value of "in-the-money" stock options used in the
Conversion Formula. The exact Conversion Ratio will be determined based on the
weighted average closing price of Sportmart Class A Common Stock and Sportmart
Voting Common Stock (the "Weighted Average Price of Sportmart Common Stock") on
the last full day of trading prior to the closing, which is expected to occur on
the same day as the Sportmart Meeting. If the closing occurs after such date,
the actual number of shares of Gart Common Stock to be issued to holders of
Sportmart Common Stock will not be determined until after the Sportmart Meeting.
The Conversion Ratio will fluctuate less than .001 for each $0.50 change in the
Weighted Average Price of Sportmart Common Stock. For a discussion of the
Conversion Formula, see "The Merger Agreement -- Conversion of Shares" in the
accompanying Proxy Statement/Prospectus. Under Delaware law, Sportmart
stockholders are not entitled to any appraisal rights with respect to the
Merger.
Houlihan, Lokey, Howard & Zukin, Inc. ("Houlihan Lokey") was retained by
Sportmart to render an opinion as to the fairness, from a financial point of
view, of the Merger to the Sportmart stockholders. As discussed in the
accompanying Proxy Statement/Prospectus, Houlihan Lokey has delivered to the
Sportmart Board of Directors its written opinion, dated September 28, 1997,
that, as of the date of such opinion and subject to certain assumptions, factors
and limitations set forth in such opinion, the Merger is fair to the holders of
the Sportmart Common Stock from a financial point of view. A copy of Houlihan
Lokey's opinion is
<PAGE> 3
attached as Appendix C to the accompanying Proxy Statement/Prospectus, and you
are urged to read it in its entirety.
YOUR BOARD OF DIRECTORS UNANIMOUSLY HAS DETERMINED THAT THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE IN THE BEST INTERESTS OF
SPORTMART AND ITS STOCKHOLDERS, UNANIMOUSLY HAS APPROVED THE TERMS OF THE MERGER
AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
Larry J. Hochberg, Chairman of the Board of Sportmart, Andrew S. Hochberg,
Chief Executive Officer of Sportmart, John A. Lowenstein, Chief Operating
Officer of Sportmart, and certain other members of the Hochberg family and
affiliates controlled by certain members of the Hochberg family have entered
into a stockholder agreement pursuant to which they have agreed upon the terms
set forth therein to vote shares of Sportmart Voting Common Stock representing
approximately 65% of the total voting power of the outstanding Sportmart Voting
Common Stock in favor of the Merger Agreement and the Merger. Accordingly,
approval and adoption of the Merger Agreement and the Merger at the Sportmart
Meeting are assured.
You should not return certificates for Sportmart Common Stock with the
enclosed proxy card. You should not forward your stock certificates until you
have received a transmittal letter from the exchange agent.
It is important that your shares be represented at the Sportmart Meeting,
regardless of the number you hold. Therefore, please sign, date and return your
proxy card as soon as possible, whether or not you plan to attend the Sportmart
Meeting. This will not prevent you from voting your shares in person if you
subsequently choose to attend the Sportmart Meeting.
Sincerely,
/s/ LARRY J. HOCHBERG
Larry J. Hochberg
Chairman of the Board
2
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SPORTMART, INC.
1400 SOUTH WOLF ROAD, SUITE 200
WHEELING, ILLINOIS 60090
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 9, 1998
---------------------
A Special Meeting of Stockholders (the "Sportmart Meeting") of Sportmart,
Inc., a Delaware corporation ("Sportmart") will be held on Friday, January 9,
1998, at the Northbrook Hilton, located at 2855 N. Milwaukee Avenue, Northbrook,
Illinois, commencing at 9:00 a.m., Central Time, for the following purposes
which are described more fully in the accompanying Proxy Statement/Prospectus:
(1) To consider and vote upon a proposal to approve and adopt an
Amended and Restated Agreement and Plan of Merger, dated as of September
28, 1997 and amended and restated on December 2, 1997 (the "Merger
Agreement"), by and among Sportmart, Gart Sports Company, a Delaware
corporation ("Gart Sports"), Gart Bros. Sporting Goods Company, a Colorado
corporation and wholly-owned subsidiary of Gart Sports ("Gart Bros."), and
GB Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of
Gart Sports ("Merger Sub"), and the merger (the "Merger") of Merger Sub
with and into Sportmart whereby Sportmart will become a wholly-owned
subsidiary of Gart Sports.
If the Merger is approved, and becomes effective, each outstanding
share of Common Stock, par value $.01 per share, of Sportmart ("Sportmart
Voting Common Stock") and each share of Class A Common Stock, par value
$.01 per share, of Sportmart ("Sportmart Class A Common Stock" and together
with Sportmart Voting Common Stock, the "Sportmart Common Stock") issued
and outstanding immediately prior to the effective time of the Merger (the
"Effective Time") shall be converted into, and shall thereafter represent
only, the right to receive a fractional share (the "Conversion Ratio") of
Gart Common Stock as determined by the conversion formula (the "Conversion
Formula") set forth in the Merger Agreement.
The Conversion Formula is designed so that upon consummation of the
Merger, current Sportmart stockholders will own approximately 27 1/2%, and
current Gart Sports stockholders will own approximately 72 1/2%, of the
outstanding shares of Gart Common Stock on a fully diluted basis. The
Conversion Ratio is expected to be approximately .164860, but can fluctuate
due to changes in the market prices of Sportmart Class A Common Stock and
Sportmart Voting Common Stock that will affect the number and value of
"in-the-money" stock options used in the Conversion Formula. The exact
Conversion Ratio will be determined based on the weighted average closing
price of Sportmart Class A Common Stock and Sportmart Voting Common Stock
(the "Weighted Average Price of Sportmart Common Stock") on the last full
day of trading prior to the closing, which is expected to occur on the same
day as the Sportmart Meeting. If the closing occurs after such date, the
actual number of shares of Gart Common Stock to be issued to holders of
Sportmart Common Stock will not be determined until after the Sportmart
Meeting. The Conversion Ratio will fluctuate less than .001 for each $0.50
change in the Weighted Average Price of Sportmart Common Stock. For a
discussion of the Conversion Formula, see "The Merger
Agreement -- Conversion of Shares" in the accompanying Proxy
Statement/Prospectus.
(2) To transact such other business as may properly come before the
meeting or any adjustments or postponements thereof.
The Board of Directors has fixed the close of business on November 14, 1997
as the record date for the determination of the holders of Sportmart Common
Stock entitled to notice of, and to vote at, the Sportmart Meeting. Accordingly,
only holders of record of Sportmart Common Stock at the close of business on
such date will be entitled to notice of, and to vote at, the Sportmart Meeting
or any adjournments or postponements thereof.
<PAGE> 5
The Merger is more particularly described in the accompanying Proxy
Statement/Prospectus, and a copy of the Merger Agreement is attached thereto as
Appendix A. The affirmative vote of the holders of a majority of the outstanding
shares of Sportmart Voting Common Stock, at a meeting at which a quorum is
present, is necessary for the approval and adoption of the Merger Agreement and
the Merger. Under the General Corporation Law of the State of Delaware, holders
of Sportmart Common Stock are not entitled to any appraisal rights with respect
to the Merger.
Larry J. Hochberg, Chairman of the Board of Sportmart, Andrew S. Hochberg,
Chief Executive Officer of Sportmart, John A. Lowenstein, Chief Operating
Officer of Sportmart, and certain other members of the Hochberg family and
affiliates controlled by certain members of the Hochberg family have entered
into a stockholder agreement pursuant to which they have agreed upon the terms
set forth therein to vote shares of Sportmart Voting Common Stock representing
approximately 65% of the total voting power of the outstanding Sportmart Voting
Common Stock in favor of the Merger Agreement and the Merger. Accordingly,
approval and adoption of the Merger Agreement and the Merger at the Sportmart
Meeting are assured.
Your Board of Directors unanimously has determined that the Merger is fair
to and in the best interests of Sportmart and its stockholders, unanimously has
approved the Merger Agreement (and the transactions contemplated thereby) and
unanimously recommends that the holders of Sportmart Voting Common Stock vote
"FOR" approval and adoption of the Merger Agreement and the Merger.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPORTMART MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPORTMART MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING
THE SPORTMART MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS RETURNED A
PROXY.
By Order of the Board of
Directors,
/s/ JOHN LOWENSTEIN
John A. Lowenstein
Corporate Secretary
December 17, 1997
2
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SPORTMART, INC.
[GART LOGO] GART SPORTS COMPANY [SPORTMART LOGO]
PROXY STATEMENT AND PROSPECTUS
This Proxy Statement/Prospectus is being furnished to holders of Common
Stock, par value $.01 per share ("Sportmart Voting Common Stock"), and holders
of Class A Common Stock, par value $.01 per share ("Sportmart Class A Common
Stock" and, together with Sportmart Voting Common Stock, the "Sportmart Common
Stock"), of Sportmart, Inc., a Delaware corporation ("Sportmart"), in connection
with the solicitation of proxies by the Board of Directors of Sportmart for use
at the Special Meeting of Sportmart stockholders (including any and all
adjournments or postponements thereof, the "Sportmart Meeting") to be held on
January 9, 1998, at the Northbrook Hilton, 2855 N. Milwaukee Avenue, Northbrook,
Illinois, commencing at 9:00 a.m., Central Time, and at any adjournment or
postponement thereof.
At the Sportmart Meeting, holders of record of Sportmart Voting Common
Stock as of the close of business on November 14, 1997 will consider and vote
upon a proposal to approve and adopt an Amended and Restated Agreement and Plan
of Merger, dated as of September 28, 1997 and amended and restated as of
December 2, 1997 (the "Merger Agreement"), by and among Sportmart, Gart Sports
Company, a Delaware corporation ("Gart Sports"), Gart Bros. Sporting Goods
Company, a Colorado corporation and wholly-owned subsidiary of Gart Sports
("Gart Bros."), and GB Acquisition, Inc. a Delaware corporation and wholly-owned
subsidiary of Gart Sports ("Merger Sub"), and the merger (the "Merger") of
Merger Sub with and into Sportmart whereby Sportmart will become a wholly-owned
subsidiary of Gart Sports. Upon consummation of the Merger, each outstanding
share of Sportmart Common Stock issued and outstanding immediately prior to the
effective time of the Merger (the "Effective Time") shall be converted into, the
right to receive a fractional share (the "Conversion Ratio") of Gart Common
Stock as determined by the conversion formula (the "Conversion Formula") set
forth in the Merger Agreement.
The Conversion Formula is designed so that upon consummation of the Merger,
current Sportmart stockholders will own approximately 27 1/2%, and current Gart
Sports stockholders will own approximately 72 1/2%, of the outstanding shares of
Gart Common Stock on a fully diluted basis. The Conversion Ratio is expected to
be approximately .164860, but can fluctuate due to changes in the market prices
of Sportmart Class A Common Stock and Sportmart Voting Common Stock that will
affect the number and value of "in-the-money" stock options used in the
Conversion Formula. The exact Conversion Ratio will be determined based on the
weighted average closing price of Sportmart Class A Common Stock and Sportmart
Voting Common Stock (the "Weighted Average Price of Sportmart Common Stock") on
the last full day of trading prior to the closing, which is expected to occur on
the same day as the Sportmart Meeting. If the closing occurs after such date,
the actual number of shares of Gart Common Stock to be issued to holders of
Sportmart Common Stock will not be determined until after the Sportmart Meeting.
The Conversion Ratio will fluctuate less than .001 for each $0.50 change in the
Weighted Average Price of Sportmart Common Stock. For a discussion of the
Conversion Formula and the number of shares to be issued assuming various
closing prices and the risks associated with any volatility thereof, see "The
Merger Agreement -- Conversion of Shares."
(Continued on next page)
---------------------
All information contained in this Proxy Statement/Prospectus relating to
Gart Sports, Gart Bros. and Merger Sub has been supplied by Gart Sports, and all
information contained in this Proxy Statement/Prospectus relating to Sportmart
has been supplied by Sportmart.
This Proxy Statement/Prospectus, the accompanying Notice of Sportmart
Meeting and the accompanying proxy card are first being mailed to Sportmart
stockholders on or about December 19, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY SPORTMART STOCKHOLDERS.
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS DECEMBER 17, 1997.
<PAGE> 7
(Continued from previous page)
This Proxy Statement/Prospectus also constitutes the prospectus of Gart
Sports with respect to the shares of Gart Common Stock to be issued in the
Merger in exchange for outstanding shares of Sportmart Common Stock.
Both Sportmart Voting Common Stock and Sportmart Class A Common Stock are
listed on the Nasdaq National Market ("Nasdaq"), and the listing of Gart Common
Stock on Nasdaq under the trade symbol "GRTS" has been approved subject to
notice of issuance. There is no current trading market for Gart Common Stock.
The closing prices of Sportmart Voting Common Stock (Nasdaq Symbol: "SPMT") and
Sportmart Class A Common Stock (Nasdaq symbol: "SPMTA") as reported on Nasdaq on
December 16, 1997 were $2.50 and $2.44 per share, respectively. There can be no
assurance as to the market price of Sportmart Voting Common Stock or Sportmart
Class A Common Stock at any time prior to the Merger or as to the market price
of Gart Common Stock at any time thereafter. Stockholders are urged to obtain
current market quotations.
The Registration Statement of which this Proxy Statement/Prospectus is a
part also registers for resale shares of Gart Common Stock to be issued
hereunder to the Sportmart Principals (defined herein) in the Merger. Such
shares of Gart Common Stock registered for resale pursuant to the Registration
Statement are referred to herein as the "Resale Shares." The Sportmart
Principals have not advised Gart of any specific plans for the distribution of
the Resale Shares covered by this Proxy Statement/Prospectus, but it is
anticipated that the Resale Shares will be offered for sale under this Proxy
Statement/Prospectus from time to time primarily in transactions (which may
include block transactions) on Nasdaq or in negotiated transactions, or any
combination of these and other methods of sale, at prices related to prevailing
market prices or at negotiated prices. The Sportmart Principals, their pledgees,
donees, transferees or distributees, or their respective successors-in-interest
(collectively, the "Selling Shareholders") may sell their shares directly or
through agents, dealers or underwriters. A Selling Shareholder may, from time to
time, sell short the Gart Common Stock, and in such instances, this Proxy
Statement/Prospectus may be delivered in connection with such short sales and
the Resale Shares offered hereby may be used to cover such short sales. The
Selling Shareholders may sell some, all, or none of their shares offered hereby.
Gart Sports will not receive any proceeds from the sale of the Resale Shares by
the Selling Shareholders. Gart Sports has agreed to bear all expenses (other
than underwriting discounts and selling commissions, and fees and expenses of
counsel and other advisors to the Selling Shareholders) in connection with the
registration of the Resale Shares being offered by the Selling Shareholders. See
"Selling Shareholders of Sportmart" and "Plan of Distribution."
ii
<PAGE> 8
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY GART SPORTS, SPORTMART OR ANY OTHER
PERSON. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS NOT
LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF GART SPORTS OR SPORTMART SINCE THE DATE HEREOF
OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
iii
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY..................................................... 1
RISK FACTORS................................................ 11
DIVIDEND POLICY............................................. 16
SELECTED HISTORICAL FINANCIAL DATA OF SPORTMART............. 17
SELECTED HISTORICAL FINANCIAL DATA OF GART SPORTS........... 19
UNAUDITED PRO FORMA SELECTED FINANCIAL AND OTHER OPERATING
DATA...................................................... 21
COMPARATIVE PER SHARE DATA OF GART SPORTS AND SPORTMART..... 22
THE SPORTMART MEETING....................................... 23
THE MERGER.................................................. 25
THE MERGER AGREEMENT........................................ 41
STOCKHOLDER AGREEMENT....................................... 49
INFORMATION REGARDING SPORTMART............................. 51
SPORTMART MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 56
COMPARISON OF RIGHTS OF STOCKHOLDERS OF SPORTMART
AND GART SPORTS........................................... 63
DESCRIPTION OF SPORTMART CAPITAL STOCK...................... 65
SPORTMART MARKET PRICE DATA AND DIVIDEND INFORMATION........ 70
CERTAIN TRANSACTIONS OF SPORTMART........................... 71
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 72
INFORMATION REGARDING GART SPORTS........................... 75
GART SPORT MANAGEMENT....................................... 85
GART SPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 91
CERTAIN TRANSACTIONS OF GART SPORTS......................... 97
PRINCIPAL STOCKHOLDERS OF GART SPORTS....................... 99
DESCRIPTION OF GART SPORTS CAPITAL STOCK.................... 100
SHARES ELIGIBLE FOR FUTURE SALE............................. 102
SELLING SHAREHOLDERS OF SPORTMART........................... 103
PLAN OF DISTRIBUTION........................................ 104
LEGAL MATTERS............................................... 105
EXPERTS..................................................... 105
AVAILABLE INFORMATION....................................... 105
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A -- MERGER AGREEMENT.............................. A-1
APPENDIX B -- STOCKHOLDER AGREEMENT......................... B-1
APPENDIX C -- FAIRNESS OPINION OF HOULIHAN, LOKEY,
HOWARD & ZUKIN, INC....................................... C-1
APPENDIX D -- AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF GART SPORTS COMPANY...................... D-1
APPENDIX E -- AMENDED AND RESTATED BYLAWS OF GART SPORTS
COMPANY................................................... E-1
APPENDIX F -- TAX OPINION OF KATTEN MUCHIN & ZAVIS.......... F-1
</TABLE>
iv
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus. Capitalized terms used and not defined in this
summary have the meanings ascribed thereto elsewhere in this Proxy
Statement/Prospectus. All references to Gart Sports in this Proxy Statement/
Prospectus refer to Gart Sports Company and its subsidiaries, unless the context
suggests otherwise. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained or incorporated by
reference in this Proxy Statement/Prospectus and the Appendices hereto.
Stockholders are urged to read this Proxy Statement/Prospectus and the
Appendices hereto in their entirety.
THE COMPANIES
Gart Sports. Gart Sports is one of the leading sporting goods retailers in
the western United States and the leading full-line sporting goods retailer in
the Rocky Mountain Region in terms of sales and number of stores. Founded in
1928, Gart Sports operates 63 stores in Colorado, Utah, Idaho, Wyoming, Montana,
Nevada, New Mexico and Washington. Gart Sports stores are designed to create a
dynamic shopping atmosphere that appeals to both the casual sporting goods
customer and the sports enthusiast by combining the selection and competitive
prices associated with other large format sporting goods retailers with the
upscale shopping environment, customer service and brand names typically
available only in specialty stores and pro shops.
Gart Sports Company was incorporated in Delaware in 1993 and operates
through its wholly-owned subsidiary, Gart Bros. Sporting Goods Company. Gart
Sports' executive offices are located at 1000 Broadway, Denver, CO 80203, and
its telephone number is (303) 861-1122. Gart Sports' web site is
http://www.gartsports.com. This web site is not part of this Proxy
Statement/Prospectus.
Sportmart. Sportmart is a leading sporting goods superstore retailer and
was a pioneer of the superstore concept in 1971. As of November 2, 1997,
Sportmart operated 59 stores, with 16 stores in the Chicago metropolitan area,
13 stores in the Los Angeles metropolitan area, 11 stores in the San
Francisco/Sacramento area, five stores in the Minneapolis metropolitan area,
three stores in each of the Seattle and Columbus, Ohio metropolitan areas, two
stores in each of the San Diego, Milwaukee and Portland areas and one store in
each of the Cleveland and Des Moines areas.
Sportmart, Inc. was incorporated in Delaware in 1992. Sportmart's executive
offices are located at 1400 South Wolf Road, Suite 200, Wheeling, Illinois
60090.
THE SPORTMART MEETING
Date, Place and Time. The Sportmart Meeting is scheduled to be held on
Friday, January 9, 1998 at 9:00 a.m., Central Time, at the Northbrook Hilton,
2855 N. Milwaukee Avenue, Northbrook, Illinois (including any and all
adjournments or postponements thereof).
Record Date; Shares Entitled to Vote. The Sportmart Board of Directors has
fixed the close of business on November 14, 1997 as the record date for the
determination of the holders of Sportmart Common Stock entitled to notice of,
and to vote at, the Sportmart Meeting. Accordingly, only holders of record of
shares of Sportmart Voting Common Stock at the close of business on November 14,
1997 are entitled to vote at the Sportmart Meeting. As of November 14, 1997,
there were 5,148,833.5 shares of Sportmart Voting Common Stock outstanding, held
by 188 holders of record. Each holder of record of shares of Sportmart Voting
Common Stock on the record date is entitled to cast one vote per share on each
matter to be acted upon or which may properly come before the Sportmart Meeting.
Purpose of the Meeting. The purpose of the Sportmart Meeting is to consider
and vote upon a proposal to approve and adopt the Merger Agreement and the
Merger, and to consider and vote upon such other matters as may properly be
brought before the Sportmart Meeting.
1
<PAGE> 11
Vote Required; Recommendation of the Sportmart Board of Directors. The
approval and adoption of the Merger Agreement and the Merger requires the
affirmative vote of the holders of at least a majority of the outstanding shares
of Sportmart Voting Common Stock.
Larry J. Hochberg, Chairman of the Board of Sportmart, Andrew S. Hochberg,
Chief Executive Officer of Sportmart, John A. Lowenstein, Chief Operating
Officer of Sportmart and certain other members of the Hochberg family and
affiliates controlled by certain members of the Hochberg family (the "Sportmart
Principals"), have entered into a Stockholder Agreement, dated as of September
28, 1997 as amended and restated on December 2, 1997, with Gart Sports and Gart
Bros. (the "Stockholder Agreement") pursuant to which they have agreed upon the
terms set forth therein to vote shares of Sportmart Voting Common Stock
representing approximately 65% of the total voting power of the outstanding
Sportmart Voting Common Stock in favor of the Merger Agreement and the Merger.
The Stockholder Agreement is attached to this Proxy Statement/Prospectus as
Appendix B. See "Stockholder Agreement."
THE BOARD OF DIRECTORS OF SPORTMART HAS UNANIMOUSLY DETERMINED THAT THE
MERGER IS FAIR TO AND IN THE BEST INTERESTS OF SPORTMART AND ITS STOCKHOLDERS,
UNANIMOUSLY HAS APPROVED THE MERGER AGREEMENT (AND THE TRANSACTIONS CONTEMPLATED
THEREBY) AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF SPORTMART VOTING COMMON
STOCK VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
Gart Sports' Board of Directors and a majority of the stockholders of Gart
Sports have approved the Merger Agreement, and no further Gart Sports
stockholder action is required.
THE MERGER
Risk Factors. For a discussion of certain risk factors that Sportmart
stockholders should take into account in determining whether to approve and
adopt the Merger Agreement and Merger, see "Risk Factors."
The Merger. Pursuant to the Merger Agreement, at the effective time of the
Merger (the "Effective Time") (i) Merger Sub will be merged with and into
Sportmart, which will be the surviving corporation of the Merger and will become
a wholly-owned subsidiary of Gart Sports and (ii) each outstanding share of
Sportmart Common Stock issued and outstanding immediately prior to the Effective
Time shall be converted into the right to receive a fractional share (the
"Conversion Ratio") of Gart Common Stock as determined by the conversion formula
(the "Conversion Formula") set forth in the Merger Agreement.
The Conversion Formula is designed so that upon consummation of the Merger,
current Sportmart stockholders will own approximately 27 1/2%, and current Gart
Sports stockholders will own approximately 72 1/2%, of the outstanding shares of
Gart Common Stock on a fully diluted basis. The Conversion Ratio is expected to
be approximately .164860, but can fluctuate due to changes in the market prices
of Sportmart Class A Common Stock and Sportmart Voting Common Stock that will
affect the number and value of "in-the-money" stock options used in the
Conversion Formula. The exact Conversion Ratio will be determined based on the
weighted average closing price of Sportmart Class A Common Stock and Sportmart
Voting Common Stock (the "Weighted Average Price of Sportmart Common Stock") on
the last full day of trading prior to the closing, which is expected to occur on
the same day as the Sportmart Meeting. If the closing occurs after such date,
the actual number of shares of Gart Common Stock to be issued to holders of
Sportmart Common Stock will not be determined until after the Sportmart Meeting.
The Conversion Ratio will fluctuate less than .001 for each $0.50 change in the
Weighted Average Price of Sportmart Common Stock. For a discussion of the
Conversion Formula and the number of shares to be issued assuming various
closing prices and the risks associated with any volatility thereof, see "The
Merger Agreement -- Conversion of Shares."
As provided in the Merger Agreement, each option to purchase shares of
Sportmart Common Stock (each a "Sportmart Stock Option") which is outstanding
immediately prior to the Effective Time shall become and represent an option to
purchase the number of shares of Gart Common Stock, increased to the nearest
whole share, determined by multiplying (i) the number of shares of Sportmart
Common Stock subject
2
<PAGE> 12
to such Sportmart Stock Option immediately prior to the Effective Time by (ii)
the Conversion Ratio, at an exercise price per share of Gart Common Stock
(increased to the nearest whole cent) equal to the exercise price per share of
Sportmart Common Stock immediately prior to the Effective Time divided by the
Conversion Ratio. The Merger Agreement permits the Sportmart Board of Directors
to accelerate the vesting of certain Sportmart Stock Options. See "The Merger
Agreement -- Conversion of Sportmart Options."
On September 26, 1997, the last full trading day prior to the date on which
Gart Sports and Sportmart issued a press release announcing the execution of the
Merger Agreement, the closing prices per share of Sportmart Voting Common Stock
and Sportmart Class A Common Stock, as reported on Nasdaq, were $4.25 and $3.47,
respectively. On December 16, 1997, the most recent practicable date prior to
the printing of this Proxy Statement/Prospectus, the closing prices per share of
Sportmart Voting Common Stock and Sportmart Class A Common Stock, as reported on
Nasdaq, were $2.50 and $2.44, respectively.
Pursuant to the Merger Agreement, the Board of Directors of Gart Sports
after the Merger will consist of seven Directors. Four of these Directors shall
be the current members of the Gart Sports Board of Directors, John Douglas
Morton, Jonathan D. Sokoloff and Jennifer Holden Dunbar, and two additional
Directors shall be nominated by Gart Sports. The Merger Agreement permits Gart
Sports to supplement or amend this list prior to the Effective Time (with the
consent of Sportmart which shall not be unreasonably withheld). The remaining
two Directors (the "Sportmart Nominees") shall be two members of the Sportmart
Board of Directors to be designated within 30 days after the Effective Time by a
majority of the persons who constitute the Sportmart Board of Directors
immediately prior to the Effective Time to fill the Sportmart Nominee positions.
Gart Sports has agreed in the Merger Agreement that Larry Hochberg and Andrew
Hochberg, or their nominees, will be nominated to serve as directors for a one
year term commencing at Gart Sports' 1998 annual meeting of stockholders to fill
the positions held by the Sportmart Nominees, and Gart Sports will use its best
efforts to cause the election thereof, provided that the Sportmart Principals
own at least 75% of the Gart Common Stock that they received in the Merger
(provided that if the Sportmart Principals own more than 50% but less than 75%
of the Gart Common Stock that they received in the Merger, Gart Sports agrees
that one of Larry Hochberg or Andrew Hochberg (in Gart Sports' discretion) will
be nominated) and that one of them (in Gart Sports' discretion) will be
nominated at Gart Sports' 1999 annual meeting of stockholders provided that the
Sportmart Principals own at least 50% of the Gart Common Stock that they
received in the Merger. Green Equity Investors, L.P. ("GEI"), which will hold
approximately 61% of the outstanding Gart Common Stock following the Effective
Time, has agreed to vote in favor of the Sportmart Nominees and not to vote for
or otherwise cause or cooperate in their removal as Directors, other than for
cause, during the periods referred to above. See "The Merger -- Directors and
Executive Officers of Gart Sports after the Merger."
Reasons for the Merger. For a discussion of the factors considered by the
Boards of Directors of Gart Sports and Sportmart in reaching their decisions
with respect to the Merger, the Merger Agreement, and the transactions
contemplated thereby, see "The Merger -- Joint Reasons for the Merger;"
" -- Sportmart Reasons for the Merger;" and "-- Recommendation of the Board of
Directors."
Opinion of Financial Advisor. Houlihan Lokey Howard & Zukin ("Houlihan
Lokey") has delivered its written opinion, dated September 28, 1997, to the
Board of Directors of Sportmart to the effect that, based upon and subject to
various considerations set forth in such opinion, as of the date of such
opinion, the consideration to be received by holders of Sportmart Common Stock
in the Merger is fair, from a financial point of view, to the holders of
Sportmart Common Stock. The full text of the opinion of Houlihan Lokey which
sets forth assumptions made, general procedures followed, matters considered and
limits of review undertaken, is attached to this Proxy Statement/Prospectus as
Appendix C and is incorporated herein by reference. Holders of Sportmart Common
Stock are urged to read Houlihan Lokey's opinion carefully and in its entirety.
See "The Merger -- Opinion of Financial Advisor to Sportmart."
Interests of Certain Persons in the Merger. In considering the
recommendations of the Sportmart Board of Directors, holders of Sportmart Common
Stock should consider that certain of Sportmart's executive officers and
directors have certain interests in the Merger that are in addition to the
interests of holders of Sportmart Common Stock generally. These interests
include the accelerated vesting of options under the
3
<PAGE> 13
Sportmart Director's Plan and restricted shares of Sportmart Common Stock under
the Sportmart, Inc. Restricted Stock Plan; the nomination of two additional
directors to the Gart Sports Board of Directors by the Sportmart Board of
Directors; certain severance benefits to various officers of Sportmart; the
execution by certain officers and directors of Sportmart of consulting
agreements with Gart Bros. and Sportmart, the guaranty by Gart Bros. of certain
leases between Sportmart and various entities partially owned or controlled by
various Sportmart directors and officers; and certain indemnification rights of
the executive officers and directors of Sportmart. These interests potentially
create a conflict of interest and are described in greater detail under "The
Merger -- Interests of Certain Persons in the Merger." The Sportmart Board of
Directors was aware of these interests when it approved the Merger Agreement.
Effective Time of the Merger. It is anticipated that the Merger will become
effective as promptly as practicable after the requisite Sportmart stockholder
approval has been obtained and all other conditions to the Merger have been
satisfied or waived. See "The Merger Agreement -- Conditions."
Conditions. The respective obligations of Sportmart and Gart Sports to
effect the Merger are subject to, among other conditions, the approval and
adoption of the Merger Agreement and the Merger by the stockholders of
Sportmart. See "The Merger Agreement -- Conditions." In addition, Gart Sports
may terminate the Merger Agreement if, prior to the first date on which all
closing conditions have been satisfied or waived (the "Conditional Date") and
(a) prior to February 1, 1998, Sportmart's Net Worth (as defined under "The
Merger Agreement -- Termination") falls below $70 million, or (b) after February
1, 1998, Sportmart's Net Worth falls below $67.5 million, or prior to February
2, 1998, the sum of Sportmart's long term debt (including current and long-term
capital lease obligations), short term debt, Accounts Payable (as defined in the
Merger Agreement) and Accrued Liabilities (as defined in the Merger Agreement)
shall exceed the following amounts as of any of the following dates occurring
prior to the Conditional Date: $163,328,000 at October 5, 1997; $178,008,000 at
November 2, 1997; $194,212,000 at November 30, 1997; $155,880,000 at January 4,
1998; or $154,265,000 at February 1, 1998. See "The Merger
Agreement -- Termination."
Termination Fee. If (i) any merger, consolidation or other business
combination involving Sportmart or any subsidiary of Sportmart or the
acquisition of all or any significant part of the assets or capital stock
(including but not limited to a majority voting interest) of Sportmart or any
subsidiary of Sportmart (an "Acquisition Transaction") shall have been made
known to Sportmart or have been proposed directly to its stockholders generally
or any person shall have publicly announced an intention (whether or not
conditional) to enter into an Acquisition Transaction and thereafter the
approval of the Merger by Sportmart's stockholders is not obtained; or (ii)
Sportmart terminates the Merger Agreement because its Board of Directors has
determined in good faith that a proposal for an Acquisition Transaction is a
Superior Proposal (as defined under "The Merger Agreement -- No Solicitation")
and Sportmart enters into a definitive agreement with any person or entity with
respect to such Acquisition Transaction or the Acquisition Transaction which
gave rise to such termination (or any revision of such Acquisition Transaction),
as the case may be, within nine months after the termination of the Merger
Agreement or such Acquisition Transaction is consummated within nine months
after the termination of the Merger Agreement, then within two business days
after entering into such definitive agreement or after such consummation,
Sportmart shall pay Gart Sports a fee in cash equal to $2.5 million. This fee
shall also be payable within two business days of Gart Sports' termination of
the Merger Agreement due to the taking of certain actions proscribed under "The
Merger Agreement -- No Solicitation" by Sportmart's directors, officers,
employees, agents or representatives. See "The Merger Agreement -- Termination
Fee."
EXCHANGE OF STOCK CERTIFICATES
Upon consummation of the Merger, each holder of a certificate or
certificates representing shares of Sportmart Common Stock outstanding
immediately prior to the Merger, upon the surrender thereof (duly endorsed, if
required) to American Securities Transfer, Incorporated (the "Exchange Agent"),
will be entitled to receive a certificate or certificates representing the
number of shares of Gart Common Stock into which such shares of Sportmart Common
Stock will have been automatically converted as a result of the Merger. The
Exchange Agent will mail a letter of transmittal with instructions to all
holders of record of Sportmart Common Stock as of the Effective Time for use in
surrendering their stock certificates in exchange
4
<PAGE> 14
for certificates representing shares of Gart Common Stock. CERTIFICATES SHOULD
NOT BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL AND INSTRUCTIONS ARE
RECEIVED. See "The Merger Agreement -- Conversion of Securities."
NO DISSENTERS' RIGHTS
Under the Delaware General Corporation Law, the holders of Sportmart Common
Stock are not entitled to any dissenters' rights of appraisal with respect to
the Merger.
FEDERAL INCOME TAX CONSEQUENCES
Sportmart's legal counsel, Katten Muchin & Zavis, has rendered a legal
opinion to Sportmart that, subject to the limitations and qualifications
referred to in such opinion, the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and that no gain or loss will be recognized by Sportmart and no
gain or loss will be recognized by Sportmart stockholders upon the receipt of
shares of Gart Common Stock in exchange for shares of Sportmart Common Stock
pursuant to the Merger Agreement (except with respect to any cash received by
holders of Sportmart Common Stock in respect of fractional shares). For a
further discussion of certain federal income tax consequences of the Merger, see
"The Merger -- Certain Federal Income Tax Matters."
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase of Sportmart by Gart Sports
as that term is used pursuant to generally accepted accounting principles and
for accounting and financial reporting purposes. Under the purchase method of
accounting, the assets and liabilities of Sportmart as of the Effective Time
will be recorded at their fair values, based on the fair value of the Gart
Common Stock to be issued and the fair value of the Sportmart Stock Options
converted into options to purchase Gart Common Stock.
COMPARISON OF STOCKHOLDERS RIGHTS
Upon consummation of the Merger, the stockholders of Sportmart will become
stockholders of Gart Sports. For a discussion of certain differences between the
Sportmart Restated Certificate of Incorporation and Bylaws, and the Gart Sports
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws to be in effect at the Effective Time, see "The Merger -- Comparison of
Rights of Stockholders."
5
<PAGE> 15
SUMMARY FINANCIAL AND OTHER OPERATING DATA OF SPORTMART
The following table sets forth summary financial data and other operating
data of Sportmart and should be read in conjunction with the Consolidated
Financial Statements the Notes thereto and other financial information included
elsewhere in this Proxy Statement/Prospectus. The results of operations of
Sportmart for the 39 weeks ended October 27, 1996 and November 2, 1997 are
presented on an unaudited basis but have been prepared on the same basis as the
annual results of operations and, in the opinion of Sportmart management,
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the periods presented.
<TABLE>
<CAPTION>
39 WEEKS ENDED
FISCAL YEARS ---------------------------
------------------------------------------ OCTOBER 27, NOVEMBER 2,
1994(1) 1995(5) 1996(5) 1996 1997
------------ ------------ ------------ ------------ ------------
(52 WEEKS) (52 WEEKS) (53 WEEKS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $ 413,337 $ 492,179 $ 514,611 $ 373,948 $ 318,498
Costs of sales, including buying, distribution and
occupancy....................................... 311,948 381,146 400,637 286,581 247,557
------------ ------------ ------------ ------------ ------------
Gross profit...................................... 101,389 111,033 113,974 87,367 70,941
Operating expenses................................ 81,791 114,430 147,840 79,050 69,008
------------ ------------ ------------ ------------ ------------
Operating income (loss)........................... 19,598 (3,397) (33,866) 8,317 1,933
Other income (expense)............................ (3,877) (3,728) (8,910) (5,778) (5,322)
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations before
income taxes.................................... 15,721 (7,125) (42,776) 2,539 (3,389)
Income tax expense (benefit)...................... 6,211 (3,004) (16,269) 1,062 (1,356)
------------ ------------ ------------ ------------ ------------
Income(loss) from continuing operations........... 9,510 (4,121) (26,507) 1,477 (2,033)
Loss from discontinued operations, net(6)......... (575) (2,324) (90) -- --
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item........... 8,935 (6,445) (26,597) 1,477 (2,033)
Extraordinary item, net of income tax benefit of
$335,000........................................ -- -- (462) (462) --
------------ ------------ ------------ ------------ ------------
Net income (loss)................................. $ 8,935 $ (6,445) $ (27,059) $ 1,015 $ (2,033)
============ ============ ============ ============ ============
Income (loss) per share from continuing
operations...................................... $ 0.87 $ (0.32) $ (2.06) $ 0.12 $ (0.16)
Loss per share from discontinued operations....... (0.05) (0.18) (0.01) -- --
------------ ------------ ------------ ------------ ------------
Income (loss) per share before extraordinary
item............................................ 0.82 (0.50) (2.07) 0.12 (0.16)
Loss per share from extraordinary item............ -- -- (0.04) (0.04) --
------------ ------------ ------------ ------------ ------------
Net income (loss) per share....................... $ 0.82 $ (0.50) $ (2.11) $ 0.08 $ (0.16)
============ ============ ============ ============ ============
Weighted average number of common and common
equivalent shares outstanding................... 10,910,797 12,771,911 12,826,360 12,823,434 12,883,320
============ ============ ============ ============ ============
OTHER DATA:
Number of stores at beginning of period........... 42 53 67 67 59
Number of stores opened........................... 12 16 4 4 --
Number of stores closed........................... 1 2 12 1 --
------------ ------------ ------------ ------------ ------------
Number of stores at end of period................. 53 67 59 70 59
============ ============ ============ ============ ============
Comparable store sales increase (decrease)(2)..... 1.6% (4.3%) (4.6%) (3.7%) (5.7%)
EBITDA(3)......................................... $ 26,408 $ 12,515 $ 11,107 $ 16,921 $ 10,260
Net cash provided by (used in):
Operating activities............................ (25,147) 4,539 (5,249) (22,050) (9,489)
Investing activities............................ (13,682) (28,143) (13,893) (13,149) (2,792)
Financing activities............................ 41,994 24,456 17,941 31,182 9,465
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(4)................................ $ 88,778 $ 80,323 $ 9,200 $ 12,187
Total assets...................................... 226,812 287,499 266,597 248,954
Total debt and capitalized lease obligations...... 55,156 78,242 96,891 104,005
Total stockholders' equity........................ 107,048 100,796 73,919 72,170
</TABLE>
- ---------------
(1) Restated to exclude the results of operations of Sportmart's No Contest
division which was discontinued in 1995.
(2) Stores enter the comparable store sales base at the beginning of their 13th
month of operations.
(3) EBITDA is earnings (loss) from continuing operations before income taxes
plus interest expense, depreciation and amortization and non-recurring
charges. Sportmart believes that, in addition to cash flow from operations
and net earnings (loss), EBITDA is a useful financial performance
measurement for assessing operating performance as it provides an additional
basis to evaluate the ability of Sportmart to incur and service debt and to
fund capital expenditures. In evaluating EBITDA, Sportmart believes that
consideration should be given, among other things, to the amount by which
EBITDA exceeds interest costs for the period, how EBITDA compares to
principal repayments on debt for the period and how EBITDA compares to
capital expenditures for the period. To evaluate EBITDA, the components of
EBITDA such as revenue and operating expenses and the variability of such
components over time, should also be considered. EBITDA should not be
construed, however, as an alternative to operating income (loss) (as
determined in accordance with generally accepted accounting principles
(GAAP) as an indicator of Sportmart's operating performance or to cash
6
<PAGE> 16
flows from operating activities (as determined in accordance with GAAP) as a
measure of liquidity. See Sportmart's consolidated financial statements
included herein. Sportmart's method of calculating EBITDA may differ from
methods used by other companies, and as a result, EBITDA measures disclosed
herein may not be comparable to other similarly titled measures used by
other companies.
(4) The primary reason for the decrease in working capital for the fiscal year
ended February 2, 1997 is the reclassification of Sportmart's credit
agreement from long-term debt to current liabilities in compliance with
Emerging Issues Task Force Issue No. 95-22. Gart Sports intends to refinance
Sportmart's credit agreement upon consummation of the Merger.
(5) Loss from continuing operations includes the loss from Canadian operations
of $2,508,000 and $5,902,000 for fiscal 1995 and 1996, respectively. In
addition, loss from continuing operations includes non-recurring charges of
$5,711,000 and $33,224,000 for fiscal 1995 and 1996, respectively. The
non-recurring charge for fiscal 1995 is primarily the result of the decision
to close 2 stores in the Chicago metropolitan area. The non-recurring charge
for fiscal 1996 is the result of the decision to exit the Canadian market,
including the cost of closing 11 stores.
(6) Loss from discontinued operations is presented net of income tax benefits of
$375,000, $1,549,000, and $60,000 for the fiscal years 1994, 1995, and 1996,
respectively.
7
<PAGE> 17
SUMMARY FINANCIAL AND OTHER OPERATING DATA OF GART SPORTS
The following table sets forth summary financial data and other operating
data of Gart Sports and should be read in conjunction with the Consolidated
Financial Statements the Notes thereto and other financial information included
elsewhere in this Proxy Statement/Prospectus. The results of operations of Gart
Sports for the 39 weeks ended October 5, 1996 and October 4, 1997 are presented
on an unaudited basis but have been prepared on the same basis as the annual
results of operations and, in the opinion of Gart Sports management, reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the periods presented.
<TABLE>
<CAPTION>
39 WEEKS ENDED
FISCAL YEARS(1) -----------------------
------------------------------------ OCTOBER 5, OCTOBER 4,
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................. $ 171,866 $ 176,829 $ 204,126 $ 137,485 $ 151,052
Cost of goods sold, buying, distribution and
occupancy........................................... 124,892 131,455 148,420 103,097 112,471
---------- ---------- ---------- ---------- ----------
Gross profit.......................................... 46,974 45,374 55,706 34,388 38,581
Operating expenses.................................... 39,949 42,876 47,604 32,772 36,373
---------- ---------- ---------- ---------- ----------
Operating income...................................... 7,025 2,498 8,102 1,616 2,208
Interest expense...................................... 1,746 2,281 1,601 1,218 680
Other income.......................................... 490 576 637 298 598
---------- ---------- ---------- ---------- ----------
Income before income taxes............................ 5,769 793 7,138 696 2,126
Income tax expense.................................... 2,209 285 2,681 261 803
---------- ---------- ---------- ---------- ----------
Net income............................................ $ 3,560 $ 508 $ 4,457 $ 435 $ 1,323
========== ========== ========== ========== ==========
Earnings per share.................................... $ 0.62 $ 0.09 $ 0.81 $ 0.08 $ 0.24
========== ========== ========== ========== ==========
Weighted average shares of common stock outstanding... 5,784,918 5,681,811 5,512,886 5,515,088 5,502,600
========== ========== ========== ========== ==========
OTHER DATA:
Number of stores at beginning of period............... 58 61 60 60 60
Number of stores opened............................... 5 5 5 4 1
Number of stores closed............................... 2 6 5 4 2
---------- ---------- ---------- ---------- ----------
Number of stores at end of period..................... 61 60 60 60 59
========== ========== ========== ========== ==========
Total gross square feet at end of period.............. 1,210,003 1,326,158 1,453,520 1,427,932 1,446,405
Comparable store sales increase (decrease)(2)......... (2.8%) (4.1%) 4.4% 2.8% 4.2%
EBITDA(3)............................................. $ 10,115 $ 6,568 $ 12,396 $ 4,680 $ 5,216
Net cash provided by (used in):
Operating activities................................ (3,108) 11,541 22,076 (6,247) (11,587)
Investing activities................................ (5,349) (3,615) (3,377) (2,268) (3,420)
Financing activities................................ 8,061 (3,289) (16,820) 3,535 8,681
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital..................................... $ 49,415 $ 44,806 $ 34,133 $ 43,699
Total assets........................................ 95,666 93,658 96,435 112,688
Total debt.......................................... 19,672 17,000 -- 8,813
Redeemable common stock, net........................ -- 554 860 2,144
Stockholders' equity................................ 32,761 32,502 36,883 36,920
</TABLE>
- ---------------
(1) During 1995, Gart Sports adopted an annual fiscal reporting period that ends
on the first Saturday in January. Accordingly, fiscal 1994 began on January
1, 1994 and ended on December 31, 1994; fiscal 1995 began on January 1, 1995
and ended on January 6, 1996 and included 53 weeks of operations; and fiscal
1996 began on January 7, 1996 and ended on January 4, 1997 and included 52
weeks of operations.
(2) Stores enter the comparable store sales base at the beginning of their 14th
month of operations.
(3) EBITDA is earnings (loss) before income taxes plus interest expense and
other financing costs and depreciation and amortization. Gart Sports
believes that, in addition to cash flow from operations and net earnings
(loss), EBITDA is a useful financial performance measurement for assessing
operating performance as it provides an additional basis to evaluate the
ability of Gart Sports to incur and service debt and to fund capital
expenditures. In evaluating EBITDA, Gart Sports believes that consideration
should be given, among other things, to the amount by which EBITDA exceeds
interest costs for the period, how EBITDA compares to principal repayments
on debt for the period and how EBITDA compares to capital expenditures for
the period. To evaluate EBITDA, the components of EBITDA such as revenue and
operating expenses and the variability of such components over time should
also be considered. EBITDA should not be construed, however, as an
alternative to operating income (loss) (as determined in accordance with
generally accepted accounting principles (GAAP) as an indicator of Gart
Sports' operating performance or to cash flows from operating activities (as
determined in accordance with GAAP) as a measure of liquidity. Gart Sports'
method of calculating EBITDA may differ from methods used by other
companies, and as a result, EBITDA measures disclosed herein may not be
comparable to other similarly titled measures used by other companies.
8
<PAGE> 18
UNAUDITED PRO FORMA SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth summary pro forma combined financial and
other operating data of Gart Sports, giving effect to the Merger accounted for
under the purchase method of accounting. The summary pro forma combined
financial data presented below should be read in conjunction with the pro forma
combined financial statements included elsewhere herein. The pro forma combined
financial data do not reflect any cost savings or other synergies that may
result from the Merger.
<TABLE>
<CAPTION>
FISCAL YEAR 39 WEEKS ENDED
1996 OCTOBER 4, 1997
----------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA:
Net sales................................................. $718,737 $469,550
Operating income (loss)................................... (23,452) 5,481
Income (loss) from continuing operations(1)............... (20,617) 94
Earnings (loss) per share from continuing operations(1)... $ (2.70) $ 0.01
PRO FORMA COMBINED OTHER DATA:
Number of stores at beginning of period................... 127 119
Number of stores opened................................... 9 1
Number of stores closed................................... 17 2
-------- --------
Number of stores at end of period......................... 119 118
======== ========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 4, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Total assets.............................................. $337,235
Working capital........................................... 131,975
Total debt(2)............................................. 112,818
Stockholders' equity...................................... 71,412
</TABLE>
- ---------------
(1) The pro forma combined statements of operations includes exit costs incurred
by Sportmart during fiscal year 1996 totaling approximately $33,200,000,
primarily associated with exiting the Canadian market and closing its stores
in Canada. Costs associated with closing the stores include severance costs,
lease buy-out costs, inventory write-downs, write-offs of unamortized
leasehold improvements, as well as other miscellaneous exit costs. The
effect of such exit costs was to increase the pro forma combined loss from
continuing operations by $20,584,000 and pro forma combined loss per share
from continuing operations by $2.70 in fiscal year 1996.
(2) Total debt includes amounts outstanding under Sportmart's credit agreement,
mortgage payable and capitalized lease obligations and Gart Sports' credit
agreement.
9
<PAGE> 19
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates," "expects"
and words of similar import, constitute "forward-looking statements." Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Gart Sports, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. These factors include, but are not limited to, the
effect of economic conditions generally, and retail and sporting goods business
conditions specifically, the impact of competition in existing and future
markets, the exercise of control over Gart Sports by certain stockholders and
the conflicts of interest that might arise among Gart Sports, such stockholders
and their affiliates, the inherent uncertainties relating to the integration of
Sportmart following the Merger, certain potential liabilities relating to the
manner in which LIFO inventories were characterized on Gart Sports' 1992 and
1993 consolidated federal income tax returns, the consequences of the
substantial leverage that will result from the Merger and Gart Sports ability to
refinance Sportmart's bank indebtedness on acceptable terms, Gart Sports'
ability to successfully anticipate merchandising and market trends and
customers' purchasing preferences, Gart Sports' ability to maintain its
relationships with certain vendors and the allocation of merchandise by certain
vendors, the impact of seasonality and weather conditions, potential
fluctuations in comparable store sales, the absence of a prior public market for
the Gart Common Stock, the effect of accounting policies, and other risks
detailed in this Proxy Statement/Prospectus. These factors are discussed in more
detail elsewhere in this Prospectus, including, without limitation, under the
captions "Summary," "Risk Factors," "Sportmart Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Gart Sports
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Information Regarding Sportmart" and "Information Regarding Gart
Sports." Given these uncertainties, prospective investors are cautioned not to
place undue reliance on such forward-looking statements. Gart Sports disclaims
any obligation to update any such factors or to publicly announce the result of
any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
---------------------
Gart Sports(R), Gart Sports Superstores(R), Gart Bros. Sporting Goods
Company(R), Sniagrab(R), Sportscastle(R) and Gart Sports Company(R) are
federally registered trademarks of Gart Sports. Sportmart(R) is a federally
registered trademark of Sportmart. In addition, Gart Sports and Sportmart claim
common law rights to their respective trademarks listed above and various other
trademarks and service marks. All other trademarks or registered trademarks
appearing in this Prospectus are trademarks or registered trademarks of the
respective companies that utilize them.
10
<PAGE> 20
RISK FACTORS
Holders of Sportmart Common Stock should be aware that ownership of the
shares of Gart Common Stock to be exchanged for shares of Sportmart Common Stock
in the Merger involves a high degree of risk. In addition to the other
information in this Proxy Statement/Prospectus, the following risk factors
should be considered carefully by such stockholders in evaluating the Merger.
The risk factors apply equally to Gart Sports and Sportmart on a combined basis
unless the context would clearly suggest otherwise.
COMPETITION
The market for sporting goods retailers is highly fragmented and intensely
competitive. Gart Sports and Sportmart currently compete with a number of
established companies including large format sporting goods stores (such as The
Sports Authority, Oshman's and Jumbo Sports), traditional sporting goods stores
and chains (such as Big 5), specialty sporting goods shops and pro shops (such
as Pro Golf Discount, Foot Locker and REI), and mass merchandisers (discount
stores, department stores and warehouse clubs such as Kmart, Wal-Mart and
Price/Costco). Several of these companies have substantially greater resources
and better name recognition than Gart Sports. Increased competition in markets
in which Gart Sports has stores, the adoption by competitors of innovative store
formats and retail sales methods or the entry of new competitors or the
expansion of operations by existing competitors in Gart Sports' markets could
have a material adverse effect on Gart Sports' business, financial condition and
operating results. See "Information Regarding Sportmart -- Competition," and
"Information Regarding Gart Sports -- Competition."
CONTROL BY SIGNIFICANT STOCKHOLDER
GEI currently holds approximately 85.7% of the outstanding Gart Common
Stock. Following the consummation of the Merger, GEI will own approximately 61%
of the issued and outstanding shares of Gart Common Stock, assuming no exercise
of any options to purchase Gart Common Stock. Accordingly, GEI will have the
power to elect Gart Sports' Board of Directors and to approve most actions
requiring stockholder approval, including adopting amendments to Gart Sports'
Certificate of Incorporation and approving or disapproving additional sales of
Common Stock by Gart Sports, mergers or sales of all or substantially all of the
assets of Gart Sports. As a result, GEI will be able to control all of Gart
Sports' major policy decisions. See "Certain Transactions of Gart
Sports -- Relationship With GEI -- Control by GEI," "Principal and Selling
Stockholders" and "Description of Gart Sports Capital Stock."
INHERENT UNCERTAINTIES RELATING TO CERTAIN EFFECTS OF THE MERGER
The success of the Merger in enhancing long-term stockholder value will
depend, in part, on achieving cost savings and other benefits that could be
expected to be realized as a result of the Merger. Cost savings and other
benefits are expected to be approximately $6.7 million annually beginning in
fiscal 1999 and consist of enhanced purchasing power and lower administrative
costs. The anticipated benefits of the Merger may not be achieved unless
Sportmart's business operations are successfully integrated in a timely manner.
Gart Sports expects to incur approximately $4.6 million of integration costs in
fiscal 1998, which will consist primarily of systems reengineering and certain
incentives to retain employees during the integration period. The difficulties
of such integration may initially be increased by the necessity of coordinating
geographically separated organizations and integrating personnel with disparate
corporate cultures. As in every business integration, achieving the benefits
will require the dedication of management resources that will temporarily
detract from attention to the daily business of Gart Sports. This integration
process may cause an interruption of, or a loss of, momentum in the activities
of Gart Sports, which could have a material adverse effect on the revenues and
operating results, at least in the near term. There can be no assurance that
Gart Sports will not incur additional charges to reflect costs associated with
the Merger, nor can there be any assurance that Gart Sports will be able to
realize the anticipated benefits of the Merger, or to do so within any
particular period.
11
<PAGE> 21
POTENTIAL IMPACT ON LIQUIDITY OF INCOME TAX CONTINGENCY
On July 24, 1997, the Internal Revenue Service ("IRS") proposed adjustments
to the 1992 and 1993 consolidated federal income tax returns of Gart Sports and
its former parent, TCH Corporation, now Thrifty PayLess Holdings, Inc.
("Thrifty") in conjunction with Thrifty's IRS examination. The proposed
adjustments relate to the manner in which LIFO inventories were characterized on
such returns. Gart Sports was a wholly-owned indirect subsidiary of Thrifty
until April 20, 1994 and responsible for its share of taxes on a separate return
basis under a tax sharing agreement with Thrifty. See "Certain Transactions of
Gart Sports -- Relationship With GEI -- Tax Sharing and Indemnification
Agreements." Gart Sports recorded approximately $9.7 million as a long-term net
deferred tax liability for the tax effect of the LIFO inventory basis
difference. The IRS has asserted that this basis difference should be reflected
in taxable income in 1992 and 1993. Gart Sports has taken the position that the
inventory acquired in connection with the acquisition of Thrifty was
appropriately allocated to its inventory pools. The IRS has asserted the
inventory was acquired at a bargain purchase price and should be allocated to a
separate inventory pool and liquidated as inventory turns.
Based on Gart Sports' discussions with Thrifty, Gart Sports believes the
potential accelerated tax liability, which could have a negative effect on
liquidity in the near term, ranges from approximately $2.5 million to $9.7
million. The range of loss from possible assessed interest charges resulting
from the proposed adjustments range from approximately $460,000 to $3.0 million.
As Gart Sports believes that no amount is more probable than another within the
range, the minimum interest exposure of $460,000 has been accrued in Gart Sports
consolidated financial statements. No penalties are expected to be assessed
relating to this matter. At October 4, 1997, the LIFO inventory and other
associated temporary differences continue to be classified as long-term net
deferred tax liabilities as Gart Sports does not believe the matter will be
resolved within a year.
While Gart Sports believes that it has adequately provided for any
liability that may arise from this matter, there can be no assurance that any
additional liability beyond the amounts recorded will not arise as a result of
the IRS examination. The actual liability that may arise from the matter could
have a material adverse effect on Gart Sports' liquidity, which could have a
material adverse effect on Gart Sports' business, financial condition and
operating results. See Note 13 to the Consolidated Financial Statements.
SUBSTANTIAL LEVERAGE
After giving effect to the Merger, Gart Sports will have consolidated
indebtedness that is substantial in relation to its stockholders' equity and
significantly greater than its existing indebtedness. As of October 4, 1997,
Gart Sports had $8.8 million of total debt and $36.9 million of stockholders'
equity. After giving effect to the Merger, on a pro forma basis, as of October
4, 1997 Gart Sports would have had $112.8 million of total debt and $71.4
million of stockholders' equity. Gart Sports is in the process of negotiating a
refinancing of Sportmart's current credit agreement and will seek to increase
the amount available under the replacement credit facility. Gart Sports' level
of indebtedness after the Merger will have several important consequences,
including: (i) a substantial portion of Gart Sports' cash flow from operations
must be dedicated to debt service requirements, will not be available for other
purposes and will decrease its profitability; (ii) Gart Sports' ability to
obtain additional financing for working capital, capital expenditures or
acquisitions may be impaired; (iii) Gart Sports' leverage may increase its
vulnerability to economic downturns and limit its ability to withstand
competitive pressures; and (iv) Gart Sports' ability to capitalize on
significant business opportunities may be limited.
REFINANCING OF SPORTMART BANK INDEBTEDNESS
Upon consummation of the Merger, Gart Sports intends to refinance the
combined indebtedness of Gart Sports and Sportmart with an asset-based credit
facility of $175 million, for which it has received a commitment letter.
However, there can be no assurance that such financing will be consummated. In
the event that Gart Sports does not refinance the indebtedness under Sportmart's
revolving credit agreement on or before the Effective Time, upon the
consummation of the Merger, the lenders could declare a default under
Sportmart's revolving credit agreement and accelerate the amounts outstanding
thereunder. As of November 2, 1997, approximately $99.7 million was outstanding
under Sportmart's revolving credit agreement.
12
<PAGE> 22
POTENTIAL ADVERSE EFFECTS OF FAILURE TO RESPOND TO MERCHANDISING TRENDS
Gart Sports' success depends to a large degree on its ability to provide a
merchandise selection that appeals to its customers' changing desires and that
appropriately reflects geographical differences in merchandise preferences. The
Merger will provide the added challenge of the combined organization learning to
buy for different geographic markets. Gart Sports often makes commitments to its
vendors to purchase merchandise several months in advance of the proposed
delivery date and therefore must anticipate and respond to changing merchandise
trends and consumer demand in a timely manner. Accordingly, any failure by Gart
Sports to identify and respond to emerging trends, or to obtain high-demand
sporting goods products, could adversely affect consumer acceptance of the
merchandise in Gart Sports' stores, which, in turn, could have a material
adverse effect on Gart Sports' business, financial condition and operating
results. If Gart Sports miscalculates either the market for the merchandise in
its stores or its customers' purchasing preferences and market trends, Gart
Sports may be faced with a significant amount of unsold inventory, which could
have an adverse effect on Gart Sports' business, financial condition and
operating results. See "-- Vendor Relationships" and "Information Regarding Gart
Sports -- Merchandising."
POTENTIAL ADVERSE EFFECT OF CHANGES IN VENDOR RELATIONSHIPS
Gart Sports and Sportmart each purchase merchandise from over 1,000
vendors. In fiscal 1996, Nike, the largest vendor for both Gart Sports and
Sportmart, represented approximately 8.6% and 20%, respectively, of total
purchases. No other vendor represented more than 5% of total purchases by Gart
Sports or Sportmart. Although Gart Sports believes that current relationships
with its vendors are generally good, there can be no assurance that these
relationships will not change following consummation of the Merger. Gart Sports
does not have long-term contracts with any vendor. Moreover, certain merchandise
for which there is significant demand may be allocated by vendors based upon the
vendors' internal criteria which is beyond Gart Sports' control. Any disruption
in Gart Sports' relationship with its vendors, particularly those whose sporting
goods products are in high demand, or any inability to obtain merchandise from
existing or new vendors in the future, could have a material adverse effect on
Gart Sports' business, financial condition and operating results. See
"Information Regarding Gart Sports -- General" and "-- Business Strategy."
SEASONALITY; DEPENDENCE ON WINTER SELLING SEASON
Gart Sports' business is seasonal in nature, with its highest sales levels
and operating profitability historically occurring during the fourth fiscal
quarter, which includes the holiday selling season. This seasonality is also
due, in part, to Gart Sports' strong sales of cold weather sporting goods and
apparel. For fiscal years 1995 and 1996, the fourth quarter contributed 33.7%
and 32.7%, respectively, of net sales, and 204.0% and 80.2%, respectively, of
operating income. In fiscal 1995 and 1996, sales and rentals of winter sports
equipment and apparel accounted for 22.6% and 23.2%, respectively, of Gart
Sports' net sales for these fiscal years. Any decrease in sales for such period,
whether due to a slow holiday selling season, poor snowfall in ski areas near
Gart Sports' markets or otherwise, could have a material adverse effect on Gart
Sports' business, financial condition and operating results for the entire
fiscal year. Further, as a result of the seasonality of Gart Sports' revenue,
Gart Sports may experience net losses in the second and third fiscal quarters of
each year for the foreseeable future. Inventory levels, which gradually increase
beginning in April, generally reach their peak in November and then fall to
their lowest level following the December holiday season. See "Gart Sports
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The second and fourth fiscal quarters, which respectively include Father's
Day and Christmas, have historically contributed the greatest volume of net
sales and income before taxes to Sportmart. For fiscal years 1996 and 1995, the
second and fourth fiscal quarters combined accounted for approximately 56% and
58%, respectively, of Sportmart's fiscal year net sales. In both fiscal 1996 and
1995, the fourth fiscal quarter was significantly impacted by nonrecurring
charges and, in addition, the fourth quarter of fiscal 1995 was impacted by
discontinued operations; however, typically, the second and fourth quarters have
accounted for substantially all of Sportmart's income before taxes. In contrast,
Sportmart has consistently experienced net losses in the third quarter and it
anticipates that such trend may continue through fiscal 1997. Inventory levels,
which gradually increase beginning in February, generally reach their peak in
November and then fall to their lowest
13
<PAGE> 23
level following the December holiday season. See "Sportmart Management's
Discussion and Analysis of Financial Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN COMPARABLE STORE SALES
A variety of factors could affect Gart Sports' comparable store sales,
including actions of competitors (such as the opening of additional stores in
Gart Sports' markets), the retail sales environment, general economic
conditions, weather conditions and Gart Sports' ability to execute its business
strategy effectively. Also, opening additional stores in market areas where Gart
Sports has already opened stores may reduce sales at existing Gart Sports stores
in that area. Factors such as increased competition and economic trends in Gart
Sports' markets may result in future comparable store sales increases lower than
those experienced in fiscal 1996. Moreover, there can be no assurance that
comparable store sales for any particular period will not decrease in the
future. As is the case with many retailers, Gart Sports' comparable store sales
results could cause the price of Gart Common Stock to fluctuate substantially.
POTENTIAL CONFLICTS OF INTEREST
Certain of Sportmart's directors, officers and principal stockholders own
interests in various entities from which Sportmart leases certain properties and
Sportmart has made certain advances of funds to these entities. From and after
the Effective Time, Gart Bros. will guarantee Sportmart's obligations under
those leases. See "Certain Transactions of Sportmart -- Property Leases" and "--
Sportmart Guarantees and Interim Financing of Partnerships." Such ownership
could result in conflicts of interest for such directors, officers and
stockholders in situations where Sportmart's and Gart Bros.' interests and those
of such other entities are not identical.
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS
In 1995, Gart Sports installed new management information systems,
including sales reporting, financial reporting and inventory management systems.
Sportmart currently uses many of the same management information systems and
vendors. However, although major platforms and significant vendors are the same,
there remain significant risks to the integration of Sportmart's management
information systems into those of Gart Sports. Gart Sports will need to
continually evaluate the adequacy of its management information systems and in
the future may need to upgrade such systems to support the integration of
Sportmart stores into Gart Sports' operating systems and to be prepared for
necessary systems conversion for year 2000 compliance. All management
information systems are currently being reviewed for year 2000 compliance. The
costs of such compliance could be significant. No assurance can be given that
the steps necessary for such compliance will not be disruptive to Gart Sports'
operations or that they will not have a material adverse effect on Gart Sports'
business, financial condition or operating results. In addition, Gart Sports
currently relies on a small number of outside vendors for the software and
support of its management information systems. While Gart Sports has taken a
number of precautions against certain events that could disrupt the operation of
its management information systems, there can be no assurance that Gart Sports
will not experience systems failures or interruptions, any of which could have a
material adverse effect on Gart Sports' business, financial condition and
operating results. See "Information Regarding Gart Sports -- Management
Information Systems."
DEPENDENCE ON KEY PERSONNEL
Gart Sports believes that the loss of the services of John Douglas Morton,
its Chairman of the Board, President and Chief Executive Officer, or any of Gart
Sports' other executive officers, could have a material adverse effect on Gart
Sports' business, financial condition and operating results. Gart Sports does
not have employment agreements with Mr. Morton or any other senior executive,
nor does Gart Sports maintain "key man" life insurance on any of its officers.
14
<PAGE> 24
POTENTIAL IMPACT OF PRODUCT LIABILITY
Gart Sports may be exposed to potential losses arising from product
liability claims with respect to the sporting goods equipment and other products
that Gart Sports sells. Although Gart Sports currently believes its insurance
coverage is adequate, there can be no assurance that Gart Sports will not be
forced to bear substantial losses from such claims in excess of its liability
coverage. Gart Sports has entered into indemnity agreements with many of its
vendors with respect to certain product liability claims; however, there can be
no assurance that Gart Sports will be able to collect sufficient payments under
these indemnity agreements to offset losses suffered as a result of product
liability claims. Substantial claims resulting from product liability suits
could have a material adverse effect on the Gart Sports' business, financial
condition and operating results.
POTENTIAL DILUTIVE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Immediately following the consummation of the Merger, Gart Sports will have
outstanding approximately 7,683,392 shares of Gart Common Stock (assuming no
exercise prior to the Effective Time of outstanding options to acquire 586,812
shares of Gart Common Stock and options to acquire 1,165,295 shares of Sportmart
Common Stock and assuming a Conversion Ratio of .164860). A significant number
of such shares, including shares held by certain holders of Gart Common Stock
prior to the Merger, will be eligible for sale without restriction under the
Securities Act in the public market after the consummation of the Merger by
persons other than affiliates of Gart Sports. Sales of shares by affiliates of
Sportmart will be subject to Rule 145 of the Securities Act (or Rule 144 in the
case of such persons who become affiliates of Gart Sports) or as otherwise
permitted under the Securities Act. In addition, certain stockholders of Gart
Sports will have rights to require Gart Sports to register the sale of such
holders' shares of Gart Common Stock under the Securities Act or, in some cases,
to register the sale of shares in other registration statements filed by Gart
Sports in respect of sales of shares by it or by others. See "Shares Eligible
for Future Sale" and "The Merger Agreement -- Registration Rights."
Gart Sports intends to file a registration statement on Form S-8 on or
about the Effective Time of the Merger to register the shares of restricted
common stock of Gart Sports and the shares of Gart Common Stock reserved for
issuance upon the exercise of outstanding options, all of which shares were
issued or options granted pursuant to the Gart Sports' Management Equity Plan,
or from the conversion of Sportmart Common Stock options to Gart Sports Common
Stock options. After giving effect to the Merger, 41,215 shares of restricted
common stock of Gart Sports will be outstanding and options to purchase 778,922
shares (assuming no exercise prior to the Effective Time of outstanding options
to acquire Gart Common Stock and Sportmart Common Stock and assuming a
Conversion Ratio of .164860) will be outstanding, all of which shares will be
eligible, subject to vesting, for sale pursuant to such registration statement.
CHANGES IN STOCKHOLDER RIGHTS
Upon consummation of the Merger, the stockholders of Sportmart will become
stockholders of Gart Sports. Differences between the Sportmart Restated
Certificate of Incorporation (the "Sportmart Certificate") and Sportmart Bylaws
(the "Sportmart Bylaws") and the Gart Sports Certificate and Gart Sports Amended
and Restated Bylaws ("Gart Sports Bylaws") will result in changes to the rights
of stockholders of Sportmart when they become stockholders of Gart Sports. See
"The Merger Agreement -- Comparison of Rights of Stockholders of Sportmart and
Gart Sports."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the consummation of the Merger, there has been no public market
for the Gart Common Stock. From time to time following the consummation of the
Merger, there may be significant volatility in the market price for the Gart
Common Stock, and there can be no assurance that following the consummation of
the Merger an active public market for the Gart Common Stock will develop or be
sustained. Gart Sports believes that future announcements concerning Gart
Sports, its competitors or the sporting good industry generally, seasonal or
quarterly variations in operating results or same store sales, changes in
product mix or prices by
15
<PAGE> 25
Gart Sports or its competitors, weather patterns or economic trends that may be
perceived to affect the demand for the Gart Sports' products, changes, or
anticipated changes, in earnings estimates by analysts or changes in accounting
policies, general economic conditions and conditions on national stock
exchanges, among other factors, could cause the market price of the Gart Common
Stock to fluctuate substantially.
POSSIBLE ANTI-TAKEOVER EFFECT OF CHARTER, BYLAWS AND DELAWARE LAW PROVISIONS
Certain provisions of the Gart Sports Certificate and Gart Sports Bylaws
may have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire, control of Gart
Sports. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Gart Common Stock. Certain of
these provisions allow Gart Sports to issue authorized but unissued shares of
Gart Sports' preferred stock (the "Gart Preferred Stock") without any vote or
further action by the stockholders. These provisions could have the effect of
diluting current stockholders' ownership interests in Gart Sports, may make it
more difficult for stockholders to take certain corporate actions, including
replacing incumbent management, and could have the effect of delaying or
preventing a change in control of Gart Sports. Moreover, certain provisions of
Delaware law applicable to Gart Sports could also delay or make more difficult a
merger, tender offer or proxy contest involving Gart Sports. Such provisions
include Section 203 of the Delaware General Corporation Law, which prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless certain conditions are
met. See "Description of Gart Sports Capital Stock." In addition, so long as GEI
is the majority stockholder of Gart Sports, third parties will not be able to
obtain control of Gart Sports through purchases of Gart Common Stock not owned
by GEI. See "Certain Transactions of Gart Sports -- Relationship With GEI."
DIVIDEND POLICY
Gart Sports has never declared or paid any dividends on its Common Stock.
Gart Sports plans to retain earnings to finance future growth and has no current
plans to pay cash dividends to stockholders following the consummation of the
Merger. The payment of any future cash dividends will be at the sole discretion
of the Gart Sports' Board of Directors and will depend upon, among other things,
future earnings, capital requirements, the general financial condition of Gart
Sports and general business conditions. In addition, Gart Sports' revolving line
of credit limits the payment of dividends. See "Gart Sports Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
16
<PAGE> 26
SELECTED HISTORICAL FINANCIAL DATA OF SPORTMART
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for and as of the end of each of the
fiscal years in the five-year period ended February 2, 1997, are derived from
the audited consolidated financial statements of Sportmart included elsewhere in
this Prospectus and should be read in conjunction therewith. The data that is
presented for and as of the end of each of the 39 weeks ended October 27, 1996
and November 2, 1997 is derived from Sportmart's unaudited consolidated
financial statements included elsewhere in this Proxy Statement/Prospectus and
should be read in conjunction therewith. The interim consolidated financial
statements as of November 2, 1997 and for the 39 weeks ended October 27, 1996
and November 2, 1997 include all adjustments which Sportmart considers necessary
for a fair presentation of the results of operations and financial position for
such periods. The results of operations for the 39 weeks ended November 2, 1997
are not necessarily indicative of results of operations to be expected for the
entire fiscal year due in part, to the seasonality of Sportmart's business. The
consolidated financial statements of Sportmart for fiscal 1992, 1993, 1994, 1995
and 1996 were audited by Coopers & Lybrand L.L.P., independent accountants. This
data should be read in conjunction with the consolidated financial statements of
Sportmart, the notes thereto and other financial information of Sportmart
included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
39 WEEKS ENDED
FISCAL YEARS -------------------------
----------------------------------------------------------------- OCTOBER 27, NOVEMBER 2,
1992(1) 1993(1) 1994(1) 1995(5) 1996(5) 1996 1997
---------- ---------- ----------- ----------- ----------- ----------- -----------
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $ 244,475 $ 328,119 $ 413,337 $ 492,179 $ 514,611 $ 373,948 $ 318,498
Costs of sales, including buying,
distribution and occupancy...... 180,273 245,451 311,948 381,146 400,637 286,581 247,557
---------- ---------- ----------- ----------- ----------- ----------- -----------
Gross profit...................... 64,202 82,668 101,389 111,033 113,974 87,367 70,941
Operating expenses................ 52,762 67,022 81,791 114,430 147,840 79,050 69,008
---------- ---------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)........... 11,440 15,646 19,598 (3,397) (33,866) 8,317 1,933
Other income (expense)............ (1,359) (2,105) (3,877) (3,728) (8,910) (5,778) (5,322)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income
taxes........................... 10,081 13,541 15,721 (7,125) (42,776) 2,539 (3,389)
Income tax expense (benefit)...... 3,971 5,126 6,211 (3,004) (16,269) 1,062 (1,356)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations...................... 6,110 8,415 9,510 (4,121) (26,507) 1,477 (2,033)
Loss from discontinued operations,
net(6).......................... (748) (536) (575) (2,324) (90) -- --
---------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary
item............................ 5,362 7,879 8,935 (6,445) (26,597) 1,477 (2,033)
Extraordinary item, net of income
tax benefit of $335,000......... -- -- -- -- (462) (462) --
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................. $ 5,362 $ 7,879 $ 8,935 $ (6,445) $ (27,059) $ 1,015 $ (2,033)
========== ========== =========== =========== =========== =========== ===========
Income (loss) per share from
continuing operations........... $ 0.68 $ 0.82 $ 0.87 $ (0.32) $ (2.06) $ 0.12 $ (0.16)
Loss per share from discontinued
operations...................... (0.08) (0.05) (0.05) (0.18) (0.01) -- --
---------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) per share before
extraordinary item.............. 0.60 0.77 0.82 (0.50) (2.07) 0.12 (0.16)
Loss per share from extraordinary
item............................ -- -- -- -- (0.04) (0.04) --
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per share....... $ 0.60 $ 0.77 $ 0.82 $ (0.50) $ (2.11) $ 0.08 $ (0.16)
========== ========== =========== =========== =========== =========== ===========
Weighted average number of common
and common equivalent shares
outstanding..................... 8,906,889 10,242,539 10,910,797 12,771,911 12,826,360 12,823,434 12,883,320
========== ========== =========== =========== =========== =========== ===========
OTHER DATA:
Number of stores at beginning of
period.......................... 25 31 42 53 67 67 59
Number of stores opened........... 6 11 12 16 4 4 --
Number of stores closed........... -- -- 1 2 12 1 --
---------- ---------- ----------- ----------- ----------- ----------- -----------
Number of stores at end of
period.......................... 31 42 53 67 59 70 59
========== ========== =========== =========== =========== =========== ===========
Comparable store sales increase
(decrease)(2)................... 7.9% 3.2% 1.6% (4.3%) (4.6%) (3.7%) (5.7%)
EBITDA(3)......................... $ 14,149 $ 20,808 $ 26,408 $ 12,515 $ 11,107 $ 16,921 $ 10,260
Net cash provided by (used in):
Operating activities............ $ (4,851) $ (3,682) $ (25,147) $ 4,539 $ (5,249) $ (22,050) $ (9,489)
Investing activities............ (14,228) (27,125) (13,682) (28,143) (13,893) (13,149) (2,792)
Financing activities............ 19,591 29,988 41,994 24,456 17,941 31,182 9,465
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital(4)................ $ 46,109 $ 62,122 $ 88,778 $ 80,323 $ 9,200 $ 12,187
Total assets...................... 110,570 170,907 226,812 287,499 266,597 248,954
Total debt and capitalized lease
obligations..................... 17,228 46,910 55,156 78,242 96,891 104,005
Stockholders' equity.............. 57,718 65,597 107,048 100,796 73,919 72,170
</TABLE>
17
<PAGE> 27
- ---------------
(1) Restated to exclude the results of operations of Sportmart's No Contest
division which was discontinued in 1995. Prior to Sportmart's initial public
offering in October 1992, Sportmart was an S Corporation and not subject to
Federal (and some state) corporate income taxes. Fiscal 1992 has been
adjusted to reflect a pro forma tax provision as if Sportmart were subject
to corporate income taxes for such period.
(2) Stores enter the comparable store sales base at the beginning of their 13th
month of operations.
(3) EBITDA is earnings (loss) from continuing operations before income taxes
plus interest expense, depreciation and amortization, and non-recurring
charges. Sportmart believes that, in addition to cash flow from operations
and net earnings (loss), EBITDA is a useful financial performance
measurement for assessing operating performance as it provides an additional
basis to evaluate the ability of Sportmart to incur and service debt and to
fund capital expenditures. In evaluating EBITDA, Sportmart believes that
consideration should be given, among other things, to the amount by which
EBITDA exceeds interest costs for the period, how EBITDA compares to
principal repayments on debt for the period and how EBITDA compares to
capital expenditures for the period. To evaluate EBITDA, the components of
EBITDA such as revenue and operating expenses and the variability of such
components over time, should also be considered. EBITDA should not be
construed, however, as an alternative to operating income (loss) (as
determined in accordance with generally accepted accounting principles
(GAAP) as an indicator of Sportmart's operating performance or to cash flows
from operating activities (as determined in accordance with GAAP) as a
measure of liquidity. See Sportmart's consolidated financial statements
included herein. Sportmart's method of calculating EBITDA may differ from
methods used by other companies, and as a result, EBITDA measures disclosed
herein may not be comparable to other similarly titled measures used by
other companies.
(4) The primary reason for the decrease in working capital for the fiscal year
ended February 2, 1997 is the reclassification of Sportmart's credit
agreement from long-term debt to current liabilities in compliance with
Emerging Issues Task Force Issue No. 95-22. Gart Sports intends to refinance
Sportmart's credit agreement upon consummation of the Merger.
(5) Loss from continuing operations includes the loss from Canadian operations
of $2,508,000 and $5,902,000 for fiscal 1995 and 1996, respectively. In
addition, loss from continuing operations includes non-recurring charges of
$5,711,000 and $33,224,000 for fiscal 1995 and 1996, respectively. The
non-recurring charge for fiscal 1995 is primarily the result of the decision
to close 2 stores in the Chicago metropolitan area. The non-recurring charge
for fiscal 1996 is the result of the decision to exit the Canadian market,
including the cost of closing 11 stores.
(6) Loss from discontinued operations is presented net of income tax benefits of
$478,000, $342,000, $375,000, $1,549,000, and $60,000 for the fiscal years
1992, 1993, 1994, 1995, and 1996, respectively.
18
<PAGE> 28
SELECTED HISTORICAL FINANCIAL DATA OF GART SPORTS
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for and as of the end of each of the
fiscal years in the three-year period ended January 4, 1997, are derived from
the audited consolidated financial statements of Gart Sports included elsewhere
in this Prospectus and should be read in conjunction therewith. The "Statement
of Operations Data" for the period from January 1, 1992 to September 25, 1992,
and for the period from September 26, 1992 to December 31, 1992 and for the year
ended December 31, 1993 and the Balance Sheet Data at December 31, 1992, 1993
and 1994 are derived from audited consolidated financial statements not included
in this Proxy Statement/Prospectus. The data that is presented for and as of the
end of each of the 39 weeks ended October 5, 1996 and October 4, 1997 is derived
from Gart Sports' unaudited consolidated financial statements included elsewhere
in this Proxy Statement/Prospectus and should be read in conjunction therewith.
The interim consolidated financial statements as of October 4, 1997 and for the
39 weeks ended October 5, 1996 and October 4, 1997 include all adjustments which
Gart Sports considers necessary for a fair presentation and the results of
operations and financial position for such periods. The results of operations
for the 39 weeks ended October 4, 1997 are not necessarily indicative of results
of operations to be expected for the entire fiscal year due in part, to the
seasonality of Gart Sports' business. This data should be read in conjunction
with the consolidated financial statements of Gart Sports, the notes thereto and
other financial information of Gart Sports included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 26,
1992 THROUGH THROUGH
SEPTEMBER 25, DECEMBER 31, FISCAL YEARS(2)
1992(1) 1992(1) -------------------------------------------------
(PREDECESSOR) (SUCCESSOR) 1993 1994 1995 1996
------------- ------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $ 85,447 $ 43,209 $ 141,744 $ 171,866 $ 176,829 $ 204,126
Cost of goods sold, buying,
distribution and occupancy...... 65,786 31,170 104,236 124,892 131,455 148,420
---------- ---------- ---------- ---------- ---------- ----------
Gross profit...................... 19,661 12,039 37,508 46,974 45,374 55,706
Operating expenses................ 18,286 6,821 30,684 39,949 42,876 47,604
---------- ---------- ---------- ---------- ---------- ----------
Operating income.................. 1,375 5,218 6,824 7,025 2,498 8,102
Interest expense.................. 1,967 91 187 1,746 2,281 1,601
Other income...................... 60 83 1,002 490 576 637
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes........................... (532) 5,210 7,639 5,769 793 7,138
Income tax expense................ -- 1,945 3,070 2,209 285 2,681
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................. $ (532) $ 3,265 $ 4,569 $ 3,560 $ 508 $ 4,457
========== ========== ========== ========== ========== ==========
Earnings per share................ $ (0.09) $ 0.56 $ 0.78 $ 0.62 $ 0.09 $ 0.81
========== ========== ========== ========== ========== ==========
Weighted average shares of common
stock outstanding............... 5,845,220 5,845,220 5,845,220 5,784,918 5,681,811 5,512,886
========== ========== ========== ========== ========== ==========
OTHER DATA:
Number of stores at beginning of
period.......................... 48 58 61 60
Number of stores opened........... 11 5 5 5
Number of stores closed........... 1 2 6 5
---------- ---------- ---------- ----------
Number of stores at end of
period.......................... 58 61 60 60
========== ========== ========== ==========
Total gross square feet at end of
period.......................... 1,046,760 1,210,003 1,326,158 1,453,520
Comparable store sales increase
(decrease)(3)................... 4.6% (2.8%) (4.1%) 4.4%
EBITDA(4)......................... $ 2,503 $ 5,324 $ 8,478 $ 10,115 $ 6,568 $ 12,396
Net cash provided by (used in):
Operating activities............ 6,912 5,942 (3,431) (3,108) 11,541 22,076
Investing activities............ (1,639) (839) (9,693) (5,349) (3,615) (3,377)
Financing activities............ (5,099) (4,597) 13,636 8,061 (3,289) (16,820)
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital................. $ 26,593 $ 21,059 $ 49,415 $ 44,806 $ 34,133
Total assets.................... 56,662 77,573 95,666 93,658 96,435
Total debt...................... -- 9,039 19,672 17,000 --
Redeemable common stock, net.... -- -- -- 554 860
Stockholders' equity............ 28,265 31,253 32,761 32,502 36,883
<CAPTION>
39 WEEKS ENDED
-----------------------
OCTOBER 5, OCTOBER 4,
1996 1997
---------- ----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $ 137,485 $ 151,052
Cost of goods sold, buying,
distribution and occupancy...... 103,097 112,471
---------- ----------
Gross profit...................... 34,388 38,581
Operating expenses................ 32,772 36,373
---------- ----------
Operating income.................. 1,616 2,208
Interest expense.................. 1,218 680
Other income...................... 298 598
---------- ----------
Income (loss) before income
taxes........................... 696 2,126
Income tax expense................ 261 803
---------- ----------
Net income (loss)................. $ 435 $ 1,323
========== ==========
Earnings per share................ $ 0.08 $ 0.24
========== ==========
Weighted average shares of common
stock outstanding............... 5,515,088 5,502,600
========== ==========
OTHER DATA:
Number of stores at beginning of
period.......................... 60 60
Number of stores opened........... 4 1
Number of stores closed........... 4 2
---------- ----------
Number of stores at end of
period.......................... 60 59
========== ==========
Total gross square feet at end of
period.......................... 1,427,932 1,446,405
Comparable store sales increase
(decrease)(3)................... 2.8% 4.2%
EBITDA(4)......................... $ 4,680 $ 5,216
Net cash provided by (used in):
Operating activities............ (6,247) (11,587)
Investing activities............ (2,268) (3,420)
Financing activities............ 3,535 8,681
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital................. $ 43,699
Total assets.................... 112,688
Total debt...................... 8,813
Redeemable common stock, net.... 2,144
Stockholders' equity............ 36,920
</TABLE>
19
<PAGE> 29
- ---------------
(1) Gart Sports was a wholly-owned subsidiary of Thrifty Corporation until its
acquisition by TCH Corporation on September 25, 1992. Accordingly, the
financial information for the periods subsequent to this date is presented
on a different cost basis than for the periods before the acquisition and,
therefore, is not comparable.
(2) During 1995, Gart Sports adopted an annual fiscal reporting period that ends
on the first Saturday in January. Accordingly, fiscal 1993 began on January
1, 1993 and ended on December 31, 1993; fiscal 1994 began on January 1, 1994
and ended on December 31, 1994; fiscal 1995 began on January 1, 1995 and
ended on January 6, 1996 and included 53 weeks of operations; and fiscal
1996 began on January 7, 1996 and ended on January 4, 1997 and included 52
weeks of operations.
(3) Stores enter the comparable store sales base at the beginning of their 14th
month of operations.
(4) EBITDA is earnings (loss) before income taxes plus interest expense and
other financing costs and depreciation and amortization. Gart Sports
believes that, in addition to cash flow from operations and net earnings
(loss), EBITDA is a useful financial performance measurement for assessing
operating performance as it provides an additional basis to evaluate the
ability of Gart Sports to incur and service debt and to fund capital
expenditures. In evaluating EBITDA, Gart Sports believes that consideration
should be given, among other things, to the amount by which EBITDA exceeds
interest costs for the period, how EBITDA compares to principal repayments
on debt for the period and how EBITDA compares to capital expenditures for
the period. To evaluate EBITDA, the components of EBITDA such as revenue and
operating expenses and the variability of such components over time should
also be considered. EBITDA should not be construed, however, as an
alternative to operating income (loss) (as determined in accordance with
generally accepted accounting principles (GAAP) as an indicator of Gart
Sports' operating performance or to cash flows from operating activities (as
determined in accordance with GAAP) as a measure of liquidity. Gart Sports'
method of calculating EBITDA may differ from methods used by other
companies, and as a result, EBITDA measures disclosed herein may not be
comparable to other similarly titled measures used by other companies.
20
<PAGE> 30
UNAUDITED PRO FORMA SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected pro forma combined financial and
other operating data of Gart Sports, giving effect to the Merger accounted for
under the purchase method of accounting. The selected pro forma combined
financial data presented below should be read in conjunction with the pro forma
combined financial statements included elsewhere herein. The pro forma combined
financial data does not reflect any cost savings or other synergies that may
result from the Merger.
<TABLE>
<CAPTION>
FISCAL YEAR 39 WEEKS ENDED
1996 OCTOBER 4, 1997
------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA:
Net sales................................................... $718,737 $469,550
Cost of goods sold, including buying, distribution and
occupancy................................................. 547,581 359,170
-------- --------
Gross profit.............................................. 171,156 110,380
Operating expenses.......................................... 194,608 104,899
-------- --------
Operating income (loss)................................... (23,452) 5,481
Nonoperating income (expense):
Interest expense.......................................... (10,490) (6,056)
Other income.............................................. 616 652
-------- --------
Income (loss) before income taxes......................... (33,326) 77
Income tax benefit.......................................... (12,709) (17)
-------- --------
Income (loss) from continuing operations(1)............... $(20,617) $ 94
======== ========
Earnings (loss) per share from continuing operations(1)... $ (2.70) $ 0.01
======== ========
PRO FORMA COMBINED OTHER DATA:
Number of stores at beginning of period................... 127 119
Number of stores opened................................... 9 1
Number of stores closed................................... 17 2
-------- --------
Number of stores at end of period......................... 119 118
======== ========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 4, 1997
---------------
(DOLLARS IN THOUSANDS)
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Total assets.............................................. $337,235
Working capital........................................... 131,975
Total debt(2)............................................. 112,818
Stockholders' equity...................................... 71,412
</TABLE>
- ---------------
(1) The pro forma combined statements of operations includes exit costs incurred
by Sportmart during fiscal year 1996 totaling approximately $33,200,000,
primarily associated with exiting the Canadian market and closing its stores
in Canada. Costs associated with closing the stores include severance costs,
lease buy-out costs, inventory write-downs, write-offs of unamortized
leasehold improvements, as well as other miscellaneous exit costs. The
effect of such exit costs was to increase the pro forma combined loss from
continuing operations by $20,584,000 and pro forma combined loss per share
from continuing operations by $2.70 in fiscal year 1996.
(2) Total debt includes amounts outstanding under Sportmart's credit agreement,
mortgage payable, and capitalized lease obligations and Gart Sports' credit
agreement.
21
<PAGE> 31
COMPARATIVE PER SHARE DATA OF GART SPORTS AND SPORTMART
Set forth below are the income (loss) from continuing operations and book
value per common share data on a historical and pro forma basis for Gart Sports,
on an historical basis for Sportmart, and on an equivalent pro forma per share
basis for Sportmart. The Gart Sports pro forma combined data was derived by
combining the historical financial information of Gart Sports and Sportmart,
after giving pro forma effect to the Merger under the purchase method of
accounting for business combinations. The per share equivalent pro forma data
for Sportmart was calculated by multiplying the Gart Sports pro forma combined
per common share data by an assumed Conversion Ratio of .164860. See "The Merger
Agreement -- Conversion of Shares."
The information set forth below should be read in conjunction with the
respective interim and annual consolidated financial statements and related
notes of Gart Sports and Sportmart included elsewhere herein.
<TABLE>
<CAPTION>
52 WEEKS 39 WEEKS
ENDED ENDED
JANUARY 4, OCTOBER 4,
1997 1997
---------- ----------
<S> <C> <C>
GART SPORTS HISTORICAL PER COMMON SHARE DATA:
Income from continuing operations......................... $ 0.81 $ 0.24
Book value (end of period)................................ 6.89 6.90
GART SPORTS PRO FORMA PER COMMON SHARE DATA:
Income (loss) from continuing operations.................. $ (2.70) $ 0.01
Book value (end of period)................................ 9.35
</TABLE>
<TABLE>
<CAPTION>
53 WEEKS 39 WEEKS
ENDED ENDED
FEBRUARY 2, NOVEMBER 2,
1997 1997
----------- -----------
<S> <C> <C>
SPORTMART HISTORICAL PER COMMON SHARE DATA:
Loss from continuing operations........................... $ (2.06) $(0.16)
Book value (end of period)................................ 5.76 5.58
SPORTMART EQUIVALENT PRO FORMA PER COMMON SHARE DATA:
Income (loss) from continuing operations.................. $ (0.45) $ 0.00
Book value (end of period)................................ 1.55
</TABLE>
22
<PAGE> 32
THE SPORTMART MEETING
DATE, TIME AND PLACE OF MEETING
The Sportmart Meeting will be held on Friday, January 9, 1998, at 9:00
a.m., Central Time, at the Northbrook Hilton, located at 2855 N. Milwaukee
Avenue, Northbrook, Illinois.
RECORD DATE AND OUTSTANDING SHARES
The Board of Directors of Sportmart has fixed November 14, 1997 as the
record date (the "Record Date") for the determination of stockholders entitled
to notice of and to vote at the Sportmart Meeting. As of the Record Date, there
were 5,148,833.5 shares of Sportmart Voting Common Stock outstanding and
7,736,680.5 shares of Sportmart Class A Common Stock outstanding. The
outstanding shares of Sportmart Voting Common Stock constitute the only
outstanding voting securities of Sportmart entitled to be voted at the Sportmart
Meeting. Each holder of record of shares of Sportmart Voting Common Stock on the
Record Date is entitled to cast one vote per share, in person or by proxy.
VOTING OF PROXIES
A form of proxy for voting your shares of Sportmart Voting Common Stock at
the Sportmart Meeting is enclosed. All shares of Sportmart Voting Common Stock
which are entitled to vote and are represented at the Sportmart Meeting by
properly executed proxies received prior to or at the Sportmart Meeting, and not
duly and timely revoked, will be voted at the Sportmart Meeting in accordance
with the instructions indicated on such proxies. IF NO INSTRUCTIONS ARE
INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE MERGER. The Board of Directors of Sportmart knows of no other
matters to be presented at the Sportmart Meeting other than those described in
this Proxy Statement/Prospectus. If any other matters are properly presented at
the Sportmart Meeting for consideration, including, among other things,
consideration of a motion to adjourn or postpone the Sportmart Meeting to
another time and/or place (including, without limitation, for the purpose of
soliciting additional proxies), the persons named in the enclosed form of proxy
will have discretion to vote on such matters in accordance with their best
judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked or superseded
by: (i) filing with the Secretary of Sportmart at or before the taking of the
vote at the Sportmart Meeting, a written notice of revocation bearing a later
date than the proxy; (ii) duly executing a later dated proxy relating to the
same shares and delivering it to the Secretary of Sportmart before the taking of
the vote at the Sportmart Meeting; or (iii) attending the Sportmart Meeting and
voting in person (although attendance at the Sportmart Meeting will not in and
of itself constitute a revocation of a proxy). Any written notice of revocation
or subsequent proxy should be sent so as to be delivered to Sportmart, Inc.,
1400 South Wolf Road, Suite 200, Wheeling, Illinois 60090, Attention: Secretary,
transmitted by facsimile to 847-520-1380, Attention: Secretary, or hand
delivered to the Secretary of Sportmart, at or before the taking of the vote at
the Sportmart Meeting.
VOTE REQUIRED
The approval and adoption of the Merger Agreement and the Merger requires
the affirmative vote of the holders of at least a majority of the outstanding
shares of Sportmart Voting Common Stock.
The Sportmart Principals have entered into the Stockholder Agreement
pursuant to which they have agreed upon the terms set forth therein to vote
shares of Sportmart Voting Common Stock representing approximately 65% of the
total voting power of the outstanding Sportmart Voting Common Stock in favor of
the Merger Agreement and the Merger. See "Stockholder Agreement." Accordingly,
approval and adoption of the Merger Agreement and the Merger at the Sportmart
Meeting are assured.
23
<PAGE> 33
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The presence at the Sportmart Meeting in person or by Proxy of the holders
of a majority of the outstanding shares of Sportmart Voting Common Stock is
necessary to constitute a quorum. Abstentions and broker non-votes will be
included in determining the presence of a quorum. In determining whether the
proposal relating to the approval and adoption of the Merger Agreement and the
Merger has been approved, abstention and broker non-votes will have the same
effect as votes against the proposal.
SOLICITATION OF PROXIES AND EXPENSES
The cost of soliciting Proxies in the accompanying form has been, or will
be, paid by Sportmart. In addition to the solicitation of Proxies by the use of
the mails, certain officers and associates (who will receive no compensation
therefor in addition to their regular salaries) may be used to solicit Proxies
personally and by telephone, telegraph, facsimile transmission or other means of
communication. In addition, banks, brokers and other custodians, nominees and
fiduciaries will be requested to forward copies of the Proxy material to their
principals and to request authority for the execution of Proxies. Sportmart will
reimburse such persons for their expenses in so doing. Sportmart may employ a
proxy solicitation firm in connection with the Sportmart Meeting.
THE SPORTMART BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
IS FAIR TO AND IN THE BEST INTERESTS OF SPORTMART AND ITS STOCKHOLDERS,
UNANIMOUSLY HAS APPROVED THE MERGER AGREEMENT (AND THE TRANSACTIONS CONTEMPLATED
THEREBY) AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF SPORTMART VOTING COMMON
STOCK VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
THE MATTERS TO BE CONSIDERED AT THE SPORTMART MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF SPORTMART. ACCORDINGLY, STOCKHOLDERS ARE URGED
TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
24
<PAGE> 34
THE MERGER
The following is a summary of the material features of the proposed Merger.
To the extent that it relates to the Merger Agreement, the following description
does not purport to be complete and is qualified in its entirety by reference to
the Merger Agreement, which is attached as Appendix A to this Proxy Statement/
Prospectus. All stockholders are urged to read the Merger Agreement in its
entirety.
GENERAL
The Merger Agreement provides that the Merger will be consummated if the
approval of Sportmart's stockholders required therefor is obtained and all other
conditions to the Merger are satisfied or waived. Upon consummation of the
Merger, Merger Sub will be merged with and into Sportmart and Sportmart will
become a wholly-owned subsidiary of Gart Sports.
Upon consummation of the Merger, each outstanding share of Sportmart Common
Stock issued and outstanding immediately prior to the Effective Time shall be
converted into, the right to receive a fractional share (the "Conversion Ratio")
of Gart Common Stock as determined by the conversion formula (the "Conversion
Formula") set forth in the Merger Agreement.
The Conversion Formula is designed so that upon consummation of the Merger,
current Sportmart stockholders will own approximately 27 1/2%, and current Gart
Sports stockholders will own approximately 72 1/2%, of the outstanding shares of
Gart Common Stock on a fully diluted basis. The Conversion Ratio is expected to
be approximately .164860, but can fluctuate due to changes in the market prices
of Sportmart Class A Common Stock and Sportmart Voting Common Stock that will
affect the number and value of "in-the-money" stock options used in the
Conversion Formula. The exact Conversion Ratio will be determined based on the
weighted average closing price of Sportmart Class A Common Stock and Sportmart
Voting Common Stock (the "Weighted Average Price of Sportmart Common Stock") on
the last full day of trading prior to the closing, which is expected to occur on
the same day as the Sportmart Meeting. If the closing occurs after such date,
the actual number of shares of Gart Common Stock to be issued to holders of
Sportmart Common Stock will not be determined until after the Sportmart Meeting.
The Conversion Ratio will fluctuate less than .001 for each $0.50 change in the
Weighted Average Price of Sportmart Common Stock. See "The Merger
Agreement -- Conversion of Shares."
BACKGROUND OF THE MERGER
In connection with addressing Sportmart's long term capital needs and
strategic planning, Sportmart's management and Board of Directors have been
examining strategic alternatives for Sportmart, including capital markets and
bank financing transactions and strategic business combinations, for a number of
years. During 1996, Sportmart's financial advisor at the time made a number of
inquiries to parties who could make strategic combinations with Sportmart. These
inquires led to discussions between Sportmart's financial advisor and the
financial advisor to another party ("Party A") in early 1996, which Party A
abruptly terminated after detailed discussions and initially expressing a high
degree of interest.
In January, 1997, Sportmart engaged Peter J. Solomon Company Limited
("PJSC") to provide financial advisory services to Sportmart in connection with
possible business combinations. During approximately the first six months of
1997, Sportmart's management and representatives of PJSC had conversations with,
received preliminary proposals from and in some cases had meetings with a number
of potential strategic partners. The most in-depth of these included extensive
due diligence and business negotiations with Party A, which had expressed
renewed interest since the termination of discussions in 1996. These renewed
discussions terminated after Party A sought to renegotiate matters which had
been settled as a condition to commencing due diligence. During the several
months following termination of those negotiations, a representative of Party
A's management had a number of additional conversations with a representative of
Sportmart and in late June of 1997, contrary to prior discussions, indicated
Party A would not then resume serious discussions regarding a combination with
Sportmart.
25
<PAGE> 35
On July 15, 1997, Sportmart's Board met and reviewed the status of on-going
discussions with the various parties which were interested in potential
strategic combinations with Sportmart. Sportmart's Board instructed PJSC and
management to notify all parties with whom they wished to pursue discussions of
a deadline for submitting proposals for a transaction.
On July 16, 1997, PJSC notified three of the parties ("Party B, Party C,
and Party D") with whom on-going discussions had occurred (which did not include
Gart Sports or Party A) that Sportmart had elected to establish a formal process
for each of their review of a potential business combination and set August 20,
1997 as a deadline for responses from each party.
On July 17, 1997, Party B withdrew its outstanding proposal.
On July 17, 1997, PJSC notified Gart Sports about Sportmart's decision to
establish a formal process for its review of a potential business combination
and informed it of the August 20, 1997 deadline.
On July 27, 1997, representatives of Sportmart's senior management and PJSC
met with the management of Party C and its financial advisor to discuss a
potential combination of the two companies.
On July 28, 1997, representatives of PJSC and Sportmart's management met
with representatives of GEI, Gart Sports' controlling stockholder, to discuss
combining Sportmart and Gart Sports.
On or about August 12, 1997, Party D indicated to PJSC that it no longer
had an interest in pursuing a business combination with Sportmart.
On August 14, 1997, representatives of Sportmart's management and PJSC met
with representatives of Party C's management and its financial advisor to
further discuss a potential business combination.
On August 21, 1997, at a special meeting of the Sportmart Board,
Sportmart's management updated Sportmart's Board on the status of discussions
with the various parties. At that time, only Gart Sports and one other party,
Party C, remained in discussions and Party C had not yet produced adequate
information for Sportmart to proceed further with a financial analysis of a
proposed combination.
On September 3, 1997, representatives of PJSC met with representatives of
GEI to discuss the terms of a potential transaction between Gart Sports and
Sportmart.
On September 9, 1997, at a special meeting of the Sportmart Board, a
representative of PJSC outlined the preliminary terms of a potential transaction
with Gart Sports. At that time, the representative of PJSC also informed the
Board of Party C's continuing failure to produce the financial data requested
and that the information was not expected for several more weeks.
On September 10, 1997, legal counsel for Sportmart distributed a first
draft of the Merger Agreement to Gart Sports and its counsel and representatives
and on or about September 11, 1997 legal counsel for Gart Sports submitted to
legal counsel for Sportmart a draft exclusivity agreement for Sportmart to
negotiate exclusively with Gart Sports for a period of time regarding a business
combination.
On September 13, 1997, legal counsel for Gart Sports provided a first draft
of the Stockholder Agreement, which included provisions for the Sportmart
Principals to vote in favor of the proposed merger.
On September 16, 1997, Sportmart's Board met to discuss Gart Sports'
request for an exclusive period in which to negotiate a definitive Agreement. At
that meeting the Board was advised that a representative of Party A had called
an outside director of Sportmart to discuss reinitiating discussions. The Board
authorized Sportmart management to contact Party A's representative and at
management's discretion to execute an agreement which would provide for
exclusive negotiations with Gart Sports for 15 days.
On September 16, 1997, a representative of each of Sportmart's and Party
A's management and on September 18, 1997, a representative of each of PJSC's and
Party A's financial advisor had separate conversations regarding Party A's level
of interest in combining with Sportmart. In those conversations no definitive
proposal from Party A was made, but the representative of Party A's management
indicated that Party A could be interested in exploring a cash only transaction
at a price at levels no higher than prior
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discussions between the parties, and the representative of the financial advisor
also indicated that Party A would be interested in exploring a potential
transaction.
On September 18, 1997, Sportmart's Board met to reconsider the
authorization to execute an exclusivity agreement with Gart Sports in light of
the discussions with Party A's management and financial advisors and the Board
again authorized execution of the exclusivity agreement.
On September 19, 1997, Sportmart signed an exclusivity agreement with Gart
Sports for a 15 day exclusive period in which to negotiate with Gart Sports
regarding a potential definitive merger agreement.
During the following week, members of senior management of Sportmart and
Gart Sports, the Sportmart Principals and their respective financial advisors
and legal counsel continued negotiations and discussions regarding the proposed
Merger Agreement and the Stockholder Agreement. The issues negotiated included
the nature of the representations and warranties to be made by each party, the
consideration for the Merger (including the methodology for adjusting the Merger
consideration to account for the value implicit in Sportmart's and Gart Sports'
respective option programs on a treasury stock basis), the covenants by each
party regarding the conduct of its business prior to the Merger, the ability of
the Company to negotiate or discuss transactions other than the Merger, the
conditions to the parties' obligations to consummate the Merger, and the rights
of the parties to terminate the Merger Agreement. Gart Sports engaged LGA as its
principal financial advisor. LGA and PJSC were actively involved in the
negotiation of the Merger Agreement and the development of the Conversion
Formula. Gart Sports also engaged Dain Bosworth Incorporated ("Dain") and
William Blair & Company ("Blair") as financial advisors. Dain and Blair provided
valuation assistance to Gart Sports, but were not actively involved in the
negotiation of the Merger Agreement.
On September 25, 1997, at a special meeting of Sportmart's Board,
Sportmart's Board considered the proposed Merger on the terms set forth in the
Merger Agreement. At this time, representatives of PJSC, Sportmart's legal
counsel, including special Delaware counsel, and the Sportmart Principals' legal
counsel made presentations concerning the proposed Merger Agreement and the
terms of the revised Stockholder Agreement. Sportmart's various legal counsel
described to the Board the terms of the Merger Agreement and described the legal
standards which governed the Board's consideration of the Merger Agreement. The
Sportmart Principals' legal counsel described to the Board the terms of the
Stockholder Agreement. PJSC presented to the Board a review of various matters
including (a) a review of the discussions, inquiries and negotiations with
various parties other than Gart Sports; (b) a review of Sportmart's historical
financial performance and management's updated financial outlook for Sportmart;
(c) a review and analysis of the historical and current market prices and
trading patterns of the Sportmart Common Stock and the market prices and
financial data relating to other companies deemed by PJSC to be comparable to
Sportmart; (d) a review and analysis of the prices and premiums paid in, and
other terms of, acquisition transactions deemed to be relevant for purposes of
PJSC's analysis; (e) an analysis of certain other publicly traded companies; and
(f) an analysis of a Gart Sports and Sportmart combination. Houlihan Lokey
summarized for the Board the analyses which it made to render its fairness
opinion. See "-- Opinion of Financial Advisor to Sportmart." Houlihan Lokey
confirmed that it was prepared to render its oral opinion, to be confirmed by a
written opinion, to the effect that, as of such date, based upon and subject to
certain matters stated therein, the Merger was fair to Sportmart's stockholders
from a financial point of view. During the course of the Board meeting a
representative of PJSC received a phone call from a representative of Party A's
financial advisor and Party A's financial advisor stated that Party A would be
willing to enter negotiations for a transaction involving an all cash purchase
price of $4.00 per share of Sportmart, subject to full due diligence by Party A
and negotiation of definitive agreements. The Board was advised of and
considered this phone call, including the fact that it was presented as only the
possibility of an offer and not a firm or definitive offer, that it was subject
to due diligence and negotiation and the Company's experiences in prior
discussions and negotiations with Party A.
On September 28, 1997, Sportmart's Board, together with the representatives
of the advisors who were present at the preceding meeting, met to consider and
act upon the proposed Merger, Houlihan Lokey rendered its oral opinion herein
discussed, and the Sportmart Board unanimously (including the approval later
that day of a director who was present at substantially all of the meeting but
was unable to be present at the
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meeting at the time of formal vote of the Board) approved the Merger and the
Stockholder Agreement and authorized the officers of Sportmart to execute and
deliver the Merger Agreement.
On September 29, 1997, Sportmart and Gart Sports issued a press release
announcing the execution and delivery of the Merger Agreement by Sportmart, Gart
Sports and Gart Bros.
REASONS FOR THE MERGER
Sportmart Reasons. In its evaluation of the Merger, Sportmart's Board of
Directors considered the following material factors prior to approving the
Merger and the Stockholder Agreement:
1. The opinion of Houlihan Lokey, Sportmart's financial advisor, that,
as of such date, based upon and subject to certain matters stated therein,
the Merger was fair, from a financial point of view, to the Stockholders.
See "-- Opinion of Financial Advisor to Sportmart."
2. The presentation and views expressed by the senior management of
Sportmart regarding (a) the financial condition, result of operations,
business and prospects of Sportmart generally, (b) the financial condition,
result of operations, and business of Sportmart during fiscal 1997 and (c)
the increasingly competitive environment in which Sportmart operates.
3. The presentations of, and views expressed by, PJSC as to the
various financial considerations and background for the Sportmart Board's
evaluation of the Merger pursuant to the Merger Agreement.
4. The Sportmart Board's familiarity with Sportmart's business,
financial condition, results of operations, business strategy and
prospects, current industry, economic and market conditions, and the
Sportmart Board's assessment of the consequences of remaining independent,
including the impact of increasing competition, Sportmart's ability to
continue to meet its bank covenants, its access to capital on acceptable
terms and Sportmart's ability to be an acquiror in a consolidating market.
5. The Sportmart Principals' expressed support of the Merger Agreement
and the Merger and their willingness to enter into the Stockholder
Agreement, their unwillingness to jeopardize the Merger to pursue a
transaction with Party A or any other party at that time, and the fact that
the Sportmart Principals would receive the same consideration for their
Sportmart Common Stock as the other holders of the Sportmart Common Stock.
6. The terms and conditions of the Merger Agreement, including the
likelihood that the Merger would be consummated, and the terms and
conditions of the Stockholder Agreement.
7. The fact that the Merger would provide Sportmart's stockholders
with Gart Sports' shares in a tax-free exchange.
8. The possible impact of the Merger and the alternative of remaining
independent on Sportmart's business, prospects, customers and employees.
9. Historical discussions and negotiations with other parties as to
possible combinations with Sportmart and the likelihood of concluding a
transaction with Party A or any other party that had expressed interest in
combining with Sportmart on terms that were more favorable to the Sportmart
stockholders than the Merger.
The foregoing discussion of the information and factors considered by the
Sportmart Board of Directors is not intended to be exhaustive but is believed to
include all material factors considered by the Sportmart Board. In view of the
wide variety of factors, both positive and negative, considered by the Sportmart
Board of Directors, the Board did not find it practical to, and did not,
quantify or otherwise assign relative weights to the specific factors considered
and individual directors may have given differing weights to different factors.
After taking into consideration all of the factors set forth above, the
Board of Directors of Sportmart unanimously determined that the Merger was fair
to and in the best interests of Sportmart and its stockholders and that
Sportmart should proceed with the Merger at this time.
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Joint Reasons. Sportmart and Gart Sports (together, the "Companies") have
identified several potential mutual benefits of the Merger that they believe
will contribute to the success of the combined company. These potential benefits
include:
- The Merger will create the second largest sporting goods retailer, based
on gross revenues, in the United States with combined fiscal 1996 revenue
of over $718 million; and a significant presence in many of the top
United States metropolitan areas. The Companies believe that the retail
sporting goods business will experience consolidation and continuing
increased competition, and operational scale will be fundamental to long
term success. Additionally, the combined company will have the benefits
of increased geographic diversity without the costs and risks involved in
internal expansion into increasingly saturated major markets. Similarly,
the Companies believe that the combined company should have access to
greater financial resources, which in the long term will be a strategic
competitive advantage.
- The Merger will provide the combined company with the ability to increase
its profitability through significant cost savings, operating
efficiencies, economies of scale and other synergies. Areas with
potential cost savings include elimination of duplicative accounting,
administrative and merchandise buying staff, expanded preferred
relationships with key vendors, and lower cost of capital.
- The Merger will provide the combined company with the opportunity to
leverage Gart Sports' programs for providing superior customer service.
- The Companies have nearly identical inventory tracking and management
information systems and complementary distribution centers. The Merger
will provide the combined company with the opportunity to leverage these
complementary infrastructures to support future growth.
INTEGRATION OF THE COMPANIES
The Merger will result in the creation of the nation's second largest
sporting goods retail chain, based on gross revenues, serving major markets such
as Chicago, Los Angeles, Denver, San Francisco, San Diego, Portland, Oregon,
Salt Lake City, Seattle, and Minneapolis. Upon consummation of the Merger, Gart
Sports will operate 122 stores in sixteen states with combined pro forma fiscal
1996 revenue of over $718 million. During the 24 months following consummation
of the Merger, Gart Sports expects to incur significant integration costs of
approximately $15.4 million, including incremental capital expenditures of
approximately $10.8 million to refurbish existing Sportmart stores, systems
integration costs, severance costs, training costs and costs associated with
redundant operations.
Gart Sports and Sportmart believe the Merger will be an opportunity to
achieve certain cost savings and synergies, including the elimination of
duplicative overhead and administrative expenses; the integration of management
information systems; and the enhanced purchasing power resulting from Gart
Sports' increased size. Gart Sports believes these costs savings of
approximately $6.7 million annually are achievable by the end of fiscal 1998.
Upon consummation of the Merger, Gart Sports intends to review its own and
Sportmart's respective assets, businesses, operations, properties, policies,
corporate structures, capitalization and management in order to identify any
additional cost savings and synergies.
REFINANCING OF SPORTMART INDEBTEDNESS
As of November 2, 1997, Sportmart had approximately $99.7 million
outstanding under its current credit agreement and Gart Sports had approximately
$12.7 million outstanding under its current credit agreement. Gart Sports
intends to refinance these credit agreements upon consummation of the Merger and
has received a commitment letter for a multi-year replacement asset-based credit
facility of $175 million with an advance rate against eligible inventories of
70%.
OPINION OF FINANCIAL ADVISOR TO SPORTMART
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the valuation
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methodologies followed by Houlihan Lokey. The summary does not purport to be a
complete statement of the analyses and procedures applied, the judgments made or
the conclusion reached by Houlihan Lokey or a complete description of its
presentation. Houlihan Lokey believes, and so advised the Sportmart Board, that
its analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all factors
and analyses, could create an incomplete view of the process underlying its
analyses and opinions.
Sportmart retained Houlihan Lokey to render an opinion as to the fairness,
from a financial point of view, of the Merger to the holders of Sportmart Class
A Common Stock and Sportmart Voting Common Stock. At the September 25, 1997
meeting of the Sportmart Board, Houlihan Lokey presented its analysis as
hereinafter described and delivered its oral opinion that as of such date and
based on the matters described therein, the Merger is fair to the Sportmart
Class A Common Stockholders and the Sportmart Voting Common Stockholders from a
financial point of view. At the September 28, 1997 meeting of the Sportmart
Board, Houlihan Lokey confirmed its oral opinion, and following the meeting
delivered its written opinion, that as of such date and based on the matters
described therein, the Merger is fair to the Sportmart Class A Common
Stockholders and the Sportmart Voting Common Stockholders from a financial point
of view.
THE COMPLETE TEXT OF HOULIHAN LOKEY'S OPINION IS ATTACHED HERETO AS
APPENDIX C. THE SUMMARY OF THE OPINION SET FORTH BELOW IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH OPINION. THE CLASS A COMMON STOCKHOLDERS AND
VOTING COMMON STOCKHOLDERS ARE URGED TO READ SUCH OPINION CAREFULLY IN ITS
ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED
AND THE ASSUMPTIONS MADE BY HOULIHAN LOKEY.
Houlihan Lokey's opinion to the Sportmart Board addresses only the fairness
from a financial point of view of the Merger, and does not constitute a
recommendation to the stockholders as to how such stockholders should vote at
the Sportmart Meeting. Houlihan Lokey's opinion does not address Sportmart's
underlying business decision to effect the Merger. Furthermore, at the Sportmart
Board's request, Houlihan Lokey has not advised the Sportmart Board with respect
to its alternatives to the Merger.
In connection with the preparation of its opinion, Houlihan Lokey made such
reviews, analyses and inquiries as it deemed necessary and appropriate under the
circumstances. Houlihan Lokey: (i) reviewed Sportmart's annual reports to
stockholders and on Form 10-K for the five fiscal years ended February 2, 1997
and quarterly report on Form 10-Q for the quarter ended August 3, 1997, which
Sportmart's management has identified as being the most current financial
statements available; (ii) reviewed Gart Sports' audited financial statements
for the two fiscal years ended January 4, 1997 and the unaudited financial
statement for the quarter ended July 5, 1997, which Gart Sports' management has
identified as being the most current financial statements available; (iii)
reviewed the Merger Agreement; (iv) reviewed the Stockholder Agreement; (v) met
with certain members of the senior management of Sportmart and Gart Sports to
discuss the operations, financial condition, future prospects and projected
operations and performance of Sportmart and Gart Sports; (vi) reviewed a
forecast prepared by Sportmart's management with respect to Sportmart for the
years ending approximately January 31, 1998 through 2002; (vii) reviewed a
forecast prepared by Gart Sports' management with respect to Gart Sports for the
years ending approximately January 1, 1998 through 2002; (viii) reviewed a
forecast prepared by Sportmart's and Gart Sports' managements with respect to
Sportmart and Gart Sports combined (the "Combined Company") for the years ending
approximately January 31, 1999 through 2002; (ix) reviewed the historical market
prices and trading volume for Sportmart's publicly traded securities; (x)
reviewed the draft Form S-1 for Gart Sports; and (xi) reviewed publicly
available financial data for certain companies that it deemed comparable to
Sportmart and Gart Sports, and publicly available prices and premiums paid in
other transactions that it considered similar to the Merger.
In assessing the financial fairness of the Merger to Sportmart's
stockholders, Houlihan Lokey: (i) analyzed the reasonableness of the trading
value of Sportmart's publicly traded equity securities; (ii) valued the common
equity of Sportmart using widely accepted valuation methodologies; (iii) valued
the common equity of Gart Sports using the same valuation methodologies; (iv)
analyzed the reasonableness of the consideration being offered in the Merger;
and (v) reviewed the valuation implications to Sportmart's
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stockholders of various alternatives to the Merger. See "-- Assessment of
Sportmart's Strategic Alternatives to the Merger."
Houlihan Lokey's fairness analysis involved: (i) determining an appropriate
range of equity value for Sportmart and Gart Sports on a stand-alone basis; (ii)
determining the value of Sportmart and Gart Sports on a combined basis excluding
the potential value of cost savings and margin enhancements ("synergies"); (iii)
estimating the potential value of synergies; (iv) determining the value of
Sportmart's interest in the Combined Company including and excluding the
potential value of synergies; and (v) comparing the value of Sportmart's
interest in the Combined Company to the value of Sportmart on a stand-alone
basis. To address these issues, Houlihan Lokey applied the following valuation
methodologies in assessing the fairness of the consideration to be received by
the stockholders of Sportmart in the Merger:
Valuation of Sportmart
Historical Stock Trading Analysis. As part of its analysis, Houlihan Lokey
analyzed the trading value of Sportmart's equity securities. Houlihan Lokey
calculated the implied price/earnings multiples ("P/E"), total invested capital
("TIC") to earnings before interest and taxes multiples ("TIC/EBIT") and total
invested capital to earnings before interest, taxes, depreciation and
amortization multiples ("TIC/EBITDA") for Sportmart based on its projected
fiscal year ending 1997 and 1998 earnings per share, earnings before interest
and taxes ("EBIT"), and earnings before interest, taxes, depreciation and
amortization ("EBITDA") and compared those ratios to comparable publicly traded
companies. Houlihan Lokey also analyzed daily closing stock prices and volumes
from September 26, 1996 to September 26, 1997. As part of this analysis,
Houlihan Lokey calculated the ratios of each class of stock's average daily
volume (over the most recent 365 days) to each class' float and total shares
outstanding on a separate and combined basis, and compared them to similar
ratios of other comparable publicly traded companies (as listed below in the
following paragraph). Houlihan Lokey also analyzed the amount and nature of
equity analyst coverage of Sportmart and the comparable public companies.
Houlihan Lokey noted that (i) Sportmart's equity securities do not trade as
actively as the median of the comparable publicly traded companies and (ii)
Sportmart has less analyst coverage than most of the comparable publicly traded
companies.
Independent Valuation Analysis of Sportmart. In addition to analyzing
recent trading activity, Houlihan Lokey applied two valuation approaches to
arrive at an independent valuation of Sportmart. The first approach, the market
multiple approach, involved the multiplication of various earnings and cash flow
measures by appropriate risk-adjusted multiples. Multiples were determined
through an analysis of certain publicly traded companies, selected on the basis
of operational and economic similarity with the principal business operations of
Sportmart. Earnings and cash flow multiples were calculated for the comparative
companies based upon daily trading prices. A comparative risk analysis between
Sportmart and the public companies formed the basis for the selection of
appropriate risk adjusted multiples for Sportmart. The risk analysis
incorporates both quantitative and qualitative risk factors which relate to,
among other things, the nature of the industry in which Sportmart and other
comparative companies are engaged. For purposes of this analysis, Houlihan Lokey
selected the following publicly-traded operators of retail sporting goods
stores: JumboSports, Sports Chalet, Oshman's Sporting Goods, Hibbet Sporting
Goods and The Sports Authority. In its independent valuation analysis, Houlihan
Lokey utilized Sportmart's projected 1997 and 1998 (i) earnings; (ii) EBIT and
(iii) EBITDA.
Houlihan Lokey's market multiple approach yielded a valuation of
Sportmart's common stock in the range of $1.85 to $2.63 per share on a combined
basis for the Sportmart Class A Common Stock and Sportmart Voting Common Stock.
In the discounted cash flow approach, pro forma projections for Sportmart
prepared by Sportmart's management were utilized. The projected cash flows were
analyzed on a "debt-free" basis (before cash payments to equity and
interest-bearing debt investors) in order to develop a value indication for
Sportmart. A provision for the value of Sportmart at the end of the forecast
period, or terminal value, was also made based on projected 2001 EBITDA
multiplied by a TIC/EBITDA multiple in the range of 5.0 to 7.0. The present
value of the interim cash flows and the terminal value was determined using a
risk-adjusted rate of return or
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"discount rate" in the range of 12% to 16%. The discount rate, in turn, was
developed through an analysis of rates of return on alternative investment
opportunities on investments in companies with similar risk characteristics to
Sportmart.
Houlihan Lokey's discounted cash flow approach yielded a valuation of
Sportmart's common stock in the range of $1.47 to $3.41 per share on a combined
basis for the Sportmart Class A Common Stock and Sportmart Voting Common Stock.
Based on the market multiple approach and the discounted cash flow
approach, Houlihan Lokey concluded that the value of Sportmart's common stock
was reasonably stated in the range of $1.47 to $3.02 per share on a combined
basis for the Sportmart Class A Common Stock and Sportmart Voting Common Stock.
Valuation of Gart Sports
For purposes of determining the value of Gart Sports, Houlihan Lokey
considered the implied valuation of Gart Sports based on indications from
underwriters regarding Gart Sports' pending initial public offering. In
addition, Houlihan Lokey employed a market multiple approach and a discounted
cash flow approach to arrive at an independent valuation of Gart Sports.
Implied Initial Public Offering Valuation Analysis. Gart Sports was in the
process of registering an initial public offering of Gart Sports' common stock
at the time it began its negotiations with Sportmart. To determine the implied
value of Gart Sports on a pre-public offering basis, Houlihan Lokey subtracted
the proceeds that Gart Sports would have received in the offering of $15.0
million from the underwriters' projected range of trading value of $105.0
million to $120.0 million. This analysis yielded a range of aggregate equity
value for Gart Sports of $90.0 million to $105.0 million.
Independent Valuation Analysis of Gart Sports. In performing the market
multiple approach for Gart Sports, Houlihan Lokey utilized the same comparable
company analysis it used for Sportmart. Houlihan Lokey's market multiple
approach yielded an equity valuation of Gart Sports in the range of
approximately $92.0 million to $107.0 million. Houlihan Lokey's discounted cash
flow approach (using discount rates in the range of 12.0% to 16.0% and terminal
TIC/EBITDA multiples in the range of 5.0 to 7.0) yielded an equity valuation of
Gart Sports in the range of $102.0 million to $117.0 million.
Based on the market multiple approach, the discounted cash flow approach
and the implied initial public offering approach, Houlihan Lokey concluded that
the aggregate value of Gart Sports common stock was in the range of
approximately $92.0 million to $112.0 million.
Valuation of Sportmart's Interest in the Combined Company
Upon completion of the Merger, Sportmart's stockholders will hold an
approximately 27.5% interest in the Combined Company. Houlihan Lokey considered
the implied value of 100 percent of the Combined Company based on: (i) the range
of pre-offering proceeds IPO valuations of Gart Sports' equity of $90.0 million
to $105.0 million divided by Gart Sports ownership in the Combined Company of
72.5%; and (ii) Sportmart's aggregate publicly traded equity value of
approximately $34.0 million divided by Sportmart's ownership in the Combined
Company of 27.5%. These analyses yielded indications of the implied aggregate
equity value of 100% of the Combined Company, before the consideration of
certain cost savings and margin enhancements, of $121.0 million to $141.0
million. Multiplying the aggregate equity value by Sportmart's 27.5% ownership
interest in the Combined Company yielded indications of value of approximately
$33.0 million to $39.0 million (or $2.53 to $2.95 per share). For purposes of
calculating this per share value, Houlihan Lokey included all of the outstanding
shares of Sportmart's Class A Common Stock and Voting Common Stock and 250,000
shares of restricted stock that may become fully vested following the Merger and
considered in-the-money stock options.
Determination of the Value of Synergies. Houlihan Lokey analyzed the
potential value of the synergies by utilizing a capitalization approach and a
discounted cash flow approach. Under the capitalization approach, Houlihan Lokey
considered a range of synergies projected by Sportmart's and Gart Sports'
managements of approximately $10.0 million to $18.5 million annually.
Capitalizing the synergies by a risk adjusted EBITDA
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multiple of 6.0 times yielded an indication of the aggregate value of the
synergies of $60.0 million to $111.0 million. In the discounted cash flow
approach Houlihan Lokey relied upon managements' projections for the Combined
Company through year 2001, adjusted the synergies for required capital
expenditures and taxes, made a provision at the end of the projection period for
the terminal value of the synergies based on projected 2001 synergies multiplied
by a TIC/EBITDA multiple in the range of 5.0 to 7.0, and discounted the
after-tax synergies and terminal value at risk adjusted costs of capital that
ranged from 12% to 16%. The discounted cash flow approach yielded an indication
of the aggregate value of the synergies of $60.0 million to $100.0 million.
Based on these analyses, Houlihan Lokey concluded that the potential value
of the synergies that could be achieved in the transaction was in the range of
$60.0 million to $100.0 million. Adding the concluded value of the synergies to
the concluded value of the Combined Company pre-synergies yielded an aggregate
value of 100% of the Combined Company including synergies of $181.0 million to
$241.0 million. Multiplying the aggregate equity value by Sportmart's 27.5%
ownership interest in the Combined Company yielded indications of value of
approximately $50.0 million to $66.0 million (or $3.79 to $5.05 per share). For
purposes of calculating this per share value, Houlihan Lokey included all of the
outstanding shares of Sportmart's Class A Common Stock and Voting Common Stock
and 250,000 shares of restricted stock that may become fully vested following
the Merger and considered in-the-money stock options.
Fairness of Consideration
Acquisition Premium Analysis. Houlihan Lokey analyzed the acquisition
premiums (the difference between the acquisition price and unaffected trading
price) paid in ten stock-for-stock acquisitions of a 100% interest of retail
companies that occurred between January 1, 1995 and September 26, 1997. Houlihan
Lokey noted that in these transactions the acquisition premiums ranged from a
low of 12.8% to a high of 64.5% with a median of 40.8%. Houlihan Lokey advised
the Sportmart Board that none of the transactions reviewed were directly
comparable to the Merger. For purposes of its analysis, Houlihan Lokey analyzed
the implied acquisition premium on a pre-synergy and post-synergy basis relative
to both Sportmart's 20-day weighted average stock price as of September 19, 1997
and Houlihan Lokey's concluded per share equity value. Houlihan Lokey noted that
the calculation of Sportmart's implied acquisition premium in the Merger is not
directly comparable because Gart Sports is not a publicly traded entity and,
therefore, the calculation of the acquisition premium is based on Gart Sports'
implied initial public offering value. Houlihan Lokey noted that, relative to
Sportmart's 20-day weighted average stock price as of September 19, 1997, the
implied acquisition premium was approximately 2.6% and 65.5% on a pre-synergy
and post-synergy basis, respectively. In addition, Houlihan Lokey noted that,
relative to Houlihan Lokey's concluded equity value, the implied acquisition
premium was approximately 34.9% and 112.5% on a pre-synergy and post-synergy
basis, respectively.
Comparable Transaction Multiples. Houlihan Lokey analyzed the acquisition
multiples paid in publicly disclosed, completed, majority acquisitions of retail
companies. This approach involves multiples of earnings and cash flow. Multiples
utilized in this approach were determined through an analysis of transactions
involving controlling interests in companies with operations similar to
Sportmart's principal business operations. Houlihan Lokey's study analyzed 28
transactions for public and private companies that were announced and completed
between January 1, 1995 and September 26, 1997.
Houlihan Lokey advised the Sportmart Board that none of the transactions
reviewed were directly comparable to the Merger. As part of this analysis,
Houlihan Lokey calculated the multiples of TIC/Revenues, TIC/EBIT, and
TIC/EBITDA. Houlihan Lokey's analysis indicated that for the acquisitions of
companies with available financial information: (i) the TIC/Revenues multiples
had a median of 0.51; (ii) the TIC/EBIT multiples had a median of 14.0; (iii)
the TIC/EBITDA multiples had a median multiple of 9.1. The implied TIC/revenue,
TIC/EBIT and TIC/EBITDA multiples for Sportmart based on the value of the
consideration offered in the Merger for the Sportmart Common Stock are 0.26,
15.2 and 6.3, respectively. For purposes of this analysis, Houlihan Lokey
utilized the implied value of Sportmart's TIC and equity on a pre-synergy basis
of approximately $117.1 million and $36.0 million, respectively. Based on these
analyses, Houlihan Lokey noted that the multiples of TIC/Revenues, TIC/EBIT and
TIC/EBITDA implied
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for Sportmart in the Merger were reasonably consistent with the multiples paid
in the publicly disclosed transactions described above, which provided an
indication that the value of the consideration offered by Gart Sports in the
Merger is reasonable.
Assessment of Sportmart's Strategic Alternatives to the Merger
In evaluating the fairness of the Merger, from a financial point of view,
Houlihan Lokey considered the expected value to Sportmart's stockholders of
completing the Merger and certain alternatives to the Merger. With regard to
each alternative, Houlihan Lokey's analysis qualitatively considered the
valuation implications to Sportmart's common stockholders, the probability of
successfully completing the alternative, and the cost and time to implement. For
purposes of this analysis Houlihan Lokey considered the following strategic
alternatives: (i) status quo; (ii) sale or merger with a strategic buyer; (iii)
sale to a financial buyer; and (iv) the Merger with Gart Sports. Houlihan Lokey
noted that of the strategic alternatives considered, the Merger appears to
provide the greatest value to Sportmart's common stockholders on a risk-adjusted
basis.
Houlihan Lokey has not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of Sportmart. Furthermore,
at Sportmart's Board's request, Houlihan Lokey did not negotiate the Merger or
advise Sportmart's Board with respect to its alternatives to the Merger.
Houlihan Lokey has relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to it have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of Sportmart and Gart Sports, and
that there has been no material change in the assets, financial condition,
business or prospects of Sportmart and Gart Sports since the date of the most
recent financial statements made available to Houlihan Lokey.
Houlihan Lokey did not independently verify the accuracy and completeness
of the information supplied to it with respect to Sportmart and Gart Sports and
does not assume any responsibility with respect to it. Houlihan Lokey has not
made any physical inspection or independent appraisal of any of the properties
or assets of Sportmart or Gart Sports. Houlihan Lokey's opinion is necessarily
based on business, economic, market and other conditions as they exist and can
be evaluated by Houlihan Lokey at the date of the opinion.
Houlihan Lokey is a nationally recognized investment banking firm with
special expertise in, among other things, valuing businesses and securities and
rendering fairness opinions. Houlihan Lokey is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, private placements of debt and equity,
corporate reorganizations, employee stock ownership plans, corporate and other
purposes. Sportmart selected Houlihan Lokey because of its experience and
expertise in performing valuation and fairness analysis. Houlihan Lokey does not
beneficially own nor has it ever beneficially owned any interest in Sportmart.
Fees and Expenses
Pursuant to an agreement entered into on September 15, 1997, Houlihan Lokey
was retained by Sportmart to analyze the fairness of the Merger to holders of
the Sportmart Class A Common Stock and Sportmart Voting Common Stock, from a
financial point of view. Sportmart has agreed to pay Houlihan Lokey a fee of
$125,000 plus its reasonable out-of-pocket expenses incurred in connection with
the rendering of a fairness opinion. Sportmart has further agreed to indemnify
Houlihan Lokey against certain liabilities and expenses in connection with the
rendering of its services.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF SPORTMART UNANIMOUSLY HAS DETERMINED THAT THE
MERGER IS FAIR TO AND IN THE BEST INTERESTS OF SPORTMART AND ITS STOCKHOLDERS,
UNANIMOUSLY HAS APPROVED THE MERGER AGREEMENT (AND THE TRANSACTION CONTEMPLATED
THEREBY) AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF SPORTMART VOTING COMMON
STOCK VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
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<PAGE> 44
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Sportmart Board of Directors,
holders of Sportmart Common Stock should consider that certain of Sportmart's
executive officers and directors have certain interests in the Merger that are
in addition to the interests of holders of Sportmart Common Stock generally. The
Sportmart Board of Directors was aware of these interests when it approved the
Merger Agreement.
Stock Options and Restricted Shares. At November 28, 1997, the executive
officers and directors of Sportmart owned 250,000 restricted shares of Sportmart
Common Stock and outstanding options to purchase up to an aggregate of 831,393
shares of Sportmart Common Stock, including options to purchase up to 54,000
shares of Sportmart Common Stock issued pursuant to the Sportmart Director's
Plan. These options will convert into options to purchase shares of Gart Common
Stock at the Effective Time. The Merger Agreement permits the Board of Directors
of Sportmart (or the Compensation Committee thereof), at any time prior to the
Effective Time, to provide for the acceleration of the vesting of Sportmart
Stock Options (and restricted shares of Sportmart Common Stock under the
Sportmart, Inc. Restricted Stock Plan) in connection with the Merger, provided
that such accelerated vesting shall only be applicable to persons (i) whose
employment with Sportmart or Gart Sports is terminated by Gart Sports or
Sportmart at (or in anticipation of) the Effective Time or thereafter by Gart
Sports within six months following the Effective Time or thereafter by such
persons within six months following the Effective Time under circumstances that
constitute "Good Reason" as defined under the Sportmart Severance Plan or (ii)
who do not at the Effective Time have at least a comparable position with Gart
Sports to the position that they had with Sportmart and its subsidiaries.
Nominations of Directors. The Merger Agreement provides that two additional
directors are to be designated from the Sportmart Board of Directors within 30
days after the Effective Time by a majority of the persons who constitute the
Sportmart Board of Directors immediately prior to the Effective Date. The Merger
Agreement also contains provisions relating to the nominations of Larry Hochberg
and Andrew Hochberg to the Gart Sports Board of Directors under certain
circumstances. See "The Merger -- Directors and Executive Officers of Gart
Sports after the Merger."
Severance Agreements. Each of C. Mark Scott and Thomas T. Hendrickson, the
President and Chief Financial Officer, respectively, of Sportmart is a party to
an Employment Agreement with Sportmart, pursuant to which he is entitled to a
severance benefit of 18 months' base salary in effect on the date of termination
if he is terminated without cause or for Good Reason (based on the same
definition given in the Sportmart Severance Plan).
Consulting Agreements. At the Effective Time, Gart Bros. and Sportmart will
enter into a consulting agreement (the "Consulting Agreements") with each of
Larry J. Hochberg, Sportmart's Chairman of the Board, Andrew S. Hochberg,
Sportmart's Chief Executive Officer, and John A. Lowenstein, Sportmart's Chief
Operating Officer (each, a "Consultant"), whereby for a period of one year
following the Effective Time, the Consultants will be available to Gart Bros.
for advice with respect to strategic and operational issues. Each Consultant
will be compensated for such services in an amount equal to 50% of such
Consultant's annual base salary from Sportmart as in effect on September 26,
1997. Andrew Hochberg and Mr. Lowenstein will also receive paid family medical
insurance coverage during the one year term of the Consulting Agreements and the
six months following such term. Larry Hochberg will receive lifetime medical
benefits for himself and his spouse pursuant to the terms of his existing
agreement with Sportmart.
The Consulting Agreements also provide that each Consultant will receive a
severance benefit of 18 months' salary at such Consultant's annual base salary
as in effect on September 26, 1997, to be paid in equal monthly installments
over 18 months. This severance benefit is in lieu of the severance benefits each
Consultant is entitled to under the Sportmart Severance Plan, which generally
would have provided for a lump sum payment at the Effective Time equal to 18
months' salary at such Consultant's annual base salary as in effect at the
Effective Time.
Leases. Certain of Sportmart's directors, officers and principal
stockholders own interests in various entities from which Sportmart leases
certain properties and Sportmart has made certain advances of funds to these
entities. See "Certain Transactions of Sportmart -- Property Leases" and "--
Sportmart Interim
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<PAGE> 45
Financing of Partnerships." Pursuant to the Stockholders Agreement, these leases
will be guaranteed by Gart Bros. upon consummation of the Merger. Such ownership
could result in conflicts of interest for such directors, officers and
stockholders in situations where Sportmart's interests and those of such other
entities are not identical.
Indemnification. The Merger Agreement preserves certain indemnification
rights of the executive officers and directors of Sportmart which currently are
in effect. See "The Merger Agreement -- Indemnification and Insurance."
See "Certain Transactions of Sportmart."
DIRECTORS AND EXECUTIVE OFFICERS OF GART SPORTS AFTER THE MERGER
The Board of Directors of Gart Sports after the Merger will consist of
seven Directors. Three of these Directors shall be the current members of the
Gart Sports Board of Directors, John Douglas Morton, Jonathan A. Sokoloff and
Jennifer Holden Dunbar, and two additional Directors shall be nominated by Gart
Sports. The Merger Agreement permits Gart Sports to supplement or amend this
list prior to the Effective Time (with the consent of Sportmart which shall not
be unreasonably withheld). The remaining two Directors (the "Sportmart
Nominees") shall be two members of the Sportmart Board of Directors to be
designated within 30 days after the Effective Time by a majority of the persons
who constitute the Sportmart Board of Directors immediately prior to the
Effective Time. Gart Sports has agreed in the Merger Agreement that Larry
Hochberg and Andrew Hochberg will be nominated to serve as directors for a one
year term commencing at Gart Sports' 1998 annual meeting of stockholders to fill
the Sportmart Nominee positions and Gart Sports will use its best efforts to
cause the election thereof provided that the Sportmart Principals own at least
75% of the Gart Common Stock that they receive in the Merger on the date of
mailing of Gart Sports' proxy materials with respect to such meeting (provided
that if the Sportmart Principals own more than 50% but less than 75% of the Gart
Common Stock that they receive in the Merger on the date of mailing of such
proxy materials, Gart Sports agrees that one of Larry Hochberg or Andrew
Hochberg (in Gart Sports' discretion) will be nominated to serve as director and
Gart Sports will use its best efforts to cause the election thereof) and that
one of them (in Gart Sports' discretion) will be nominated for election as a
director at Gart Sports' 1999 annual meeting of stockholders provided that the
Sportmart Principals own at least 50% of the Gart Common Stock that they receive
in the Merger on the date of mailing of Gart Sports' proxy materials with
respect to such meeting. In the event that either or both of Larry Hochberg and
Andrew Hochberg are unwilling or unable to serve as a director of Gart Sports as
provided above, replacement nominee(s) shall be chosen by a majority in interest
of the Sportmart Principals and Gart Sports will use its best efforts to cause
the election thereof. GEI, which will hold approximately 61% of the outstanding
Gart Common Stock following the Effective Time, has agreed to vote in favor of
the Sportmart Nominees and not to vote for or otherwise cause or cooperate in
their removal as Directors, other than for cause, during the periods referred to
above.
The Executive Officers of Gart Sports prior to the Merger will be the
Executive Officers of Gart Sports following the Merger.
CERTAIN FEDERAL INCOME TAX MATTERS
Set forth below is a description of the opinion of Katten Muchin & Zavis as
to the material federal income tax consequences of the Merger to stockholders of
Sportmart who hold shares as a capital asset. The full text of the opinion of
Katten Muchin & Zavis is attached as Appendix F to this Proxy Statement/
Prospectus, and should be read carefully and in its entirety. The discussion
does not address the tax consequences that may be relevant to a particular
stockholder subject to special treatment under certain federal income tax laws,
such as dealers in securities, banks, insurance companies, tax-exempt
organizations, non-United States persons, stockholders who acquired their shares
of Sportmart Common Stock pursuant to the exercise of options or otherwise as
compensation, and persons holding (directly or indirectly) five percent or more
of the outstanding shares of Gart Sports following the Merger. In addition, the
following discussion does not address the tax consequences of the Merger arising
under the laws of any state, local or foreign
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<PAGE> 46
jurisdiction or the tax consequences of transactions effectuated prior or
subsequent to or concurrently with the Merger (whether or not such transactions
are in connection with the Merger), including, without limitation, transactions
in which Sportmart Common Stock is acquired or Gart Common Stock is disposed of.
Moreover, the tax consequences to holders of options or warrants are not
discussed. The discussion is based upon the Code, treasury regulations
thereunder and administrative rulings and court decisions as of the date hereof.
All of the foregoing are subject to change, possibly with retroactive effect,
and any such change could affect the continuing validity of this discussion.
Sportmart does not intend to request a ruling from the Internal Revenue Service
("IRS") with respect to the Merger, and opinions of counsel are not binding on
the IRS or the courts.
SPORTMART'S STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER
TO THEM IN THEIR PARTICULAR CIRCUMSTANCES.
This discussion is based upon the opinion of Katten Muchin & Zavis,
delivered to Sportmart, that, subject to the limitations and qualifications
referred to therein, the Merger will constitute a reorganization within the
meaning of Section 368 of the Code (a "Reorganization"). See Appendix F -- Tax
Opinion of Katten Muchin & Zavis. Qualification of the Merger as a
Reorganization will result in the following federal income tax consequences:
(a) No gain or loss will be recognized by Sportmart, Gart Sports or
Merger Sub solely as a result of the consummation of the Merger;
(b) No gain, loss or income will be recognized by holders of Sportmart
Common Stock upon the receipt of Gart Common Stock in exchange therefor
(except with respect to any cash received by holders of Sportmart Common
Stock in respect of fractional shares);
(c) The aggregate tax basis of the Gart Common Stock received by a
holder of Sportmart Common Stock in the Merger will be the same as the
aggregate tax basis of Sportmart Common Stock surrendered in exchange
therefor by such stockholder, reduced by amounts allocable to fractional
shares for which cash is to be received;
(d) The holding period of the Gart Common Stock received in the Merger
by the holders of Sportmart Common Stock will include the period during
which the shares of Sportmart Common Stock surrendered in exchange therefor
were held, provided that the Sportmart Common Stock is held as a capital
asset in the hands of the holders of Sportmart Common Stock on the date of
the exchange; and
(e) Cash payments received by holders of Sportmart Common Stock in
lieu of a fractional share will be treated as if such fractional share of
Gart Common Stock had been issued in the Merger and then redeemed by Gart
Sports. A holder of Sportmart Common Stock receiving such cash will
generally recognize gain or loss, upon such payment, measured by the
difference (if any) between the amount of cash received and the basis in
such fractional share.
In rendering its opinion, Katten Muchin & Zavis has relied upon information
contained in this Proxy Statement/Prospectus, representations and warranties of
Sportmart and certificates of officers of Sportmart and Gart Sports with regard
to the particular facts and circumstances applicable to the transactions
contemplated, without independent verification. In particular, the opinion has
been issued in reliance on certain representations from Sportmart and Gart
Sports (including that (i) Sportmart will continue to hold substantially all of
its assets after the Merger, (ii) Gart Sports has no plan or intention to cause
Sportmart to issue shares so that Gart Sports loses control of Sportmart after
the Merger, and (iii) there is no debt outstanding between Sportmart and Gart
Sports) and certain principal stockholders of Sportmart and Gart Sports with
respect to the satisfaction of the continuity of interest requirement of the
regulations interpreting Section 368 of the Code, and certain other matters.
A successful IRS challenge to the reorganization status of the Merger would
result in a holder of Sportmart Common Stock recognizing gain or loss with
respect to each share of Sportmart Common Stock surrendered equal to the
difference between the stockholder's basis in such share and the fair market
value, as of the date of the Merger, of the Gart Common Stock received in
exchange therefor. In such event, a
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<PAGE> 47
stockholder's aggregate basis in the Gart Common Stock so received would equal
its fair market value, and the stockholder's holding period for such stock would
begin the day after the Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase of Sportmart by Gart Sports
as that term is used pursuant to generally accepted accounting principles and
for accounting and financial reporting purposes. Under the purchase method of
accounting, the assets and liabilities of Sportmart as of the Effective Time
will be recorded at their fair values, based on the fair value of the Gart
Common Stock to be issued and the fair value of the Sportmart Stock Options
converted into options to purchase Gart Common Stock.
REGULATORY MATTERS
In accordance with the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), and the rules promulgated thereunder, Gart
Sports and Sportmart have filed premerger notifications and reports under the
HSR Act with the United States Department of Justice or the Federal Trade
Commission in connection with the Merger. At any time before or after the
Effective Time, such governmental agencies or others could take action under the
antitrust laws with respect to the Merger, including seeking action under the
antitrust laws with respect to the Merger, including seeking to enjoin the
consummation of the Merger, to rescind the Merger or to require divestiture of
substantial assets of Gart Sports or Sportmart. There can be no assurance that a
challenge to the Merger on antitrust grounds will not be made or that if such a
challenge were made that it would not be successful.
Consummation of the Merger is conditioned upon the receipt of all material
governmental authorizations, consents, orders and approvals, subject to waiver
of such conditions in accordance with the terms of the Merger Agreement. See
"The Merger Agreement -- Conditions." Except for approvals otherwise described
in this Proxy Statement/Prospectus, neither Gart Sports nor Sportmart is aware
of any other significant government or regulatory approvals required for the
consummation of the transactions contemplated by the Merger Agreement.
AFFILIATES' RESTRICTIONS ON SALE OF SPORTMART COMMON STOCK
All Gart Common Stock issued in the Merger will be freely transferable,
except that any Gart Common Stock received by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of Sportmart or
Gart Sports prior to the Merger may be sold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act with
respect to affiliates of Sportmart, or Rule 144 under the Securities Act with
respect to persons who are or become affiliates of Gart Sports, or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of Sportmart or Gart Sports generally include individuals or entities that
control, are controlled by, or are under common control with, such party and may
include certain officers and directors of such party as well as principal
stockholders of such party. Gart Sports has agreed to keep the Registration
Statement effective for two years following the Effective Date to cover the
resale of shares of Gart Common Stock owned by the Sportmart Principals. See
"Registration Rights."
Affiliates may not sell their Gart Common Stock acquired in the Merger,
except pursuant to an effective registration statement under the Securities Act
covering such shares or in compliance with Rule 145 (or Rule 144 under the
Securities Act in the case of persons who are or become affiliates of Gart
Sports) or another applicable exemption from the registration requirements of
the Securities Act. In general, under Rule 145, for one year following the
Effective Time an affiliate of Sportmart prior to the Merger (together with
certain related persons) will be entitled to sell Gart Common Stock acquired in
the Merger only through unsolicited "broker transactions" or in transactions
directly with a "market maker," as such terms are defined in Rule 144.
Additionally, the number of shares to be sold by such an affiliate (together
with certain related persons and certain persons acting in concert) within any
three-month period for purposes of Rule 145 may not exceed the greater of 1% of
the outstanding Gart Common Stock or the average weekly trading volume of the
Gart Common Stock during the four calendar weeks preceding such sale. Rule 145
will only remain available, however, to persons who were affiliates of Sportmart
prior to the Merger if Gart Sports remains current with its informational
filings with the Commission under the Exchange Act. One year after the
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<PAGE> 48
Effective Time, a person who was an affiliate of Sportmart prior to the Merger
will be able to sell Gart Common Stock without regard to such manner of sale or
volume limitations, provided that Gart Sports is current with its Exchange Act
informational filings and such person is not then an affiliate of Gart Sports.
Two years after the Effective Time, a person who was an affiliate of Sportmart
prior to the Merger will be able to sell such Gart Common Stock without any
restrictions so long as such person had not been an affiliate of Gart Sports for
at least three months prior to the sale. The Sportmart Principals will be able
to sell shares of Gart Common Stock owned by them during the first two years
following the Effective Time, subject to certain volume restrictions, pursuant
to the Registration Statement which Gart Sports has agreed to maintain effective
during that period.
REGISTRATION RIGHTS
Gart Sports has agreed to enter into Registration Rights Agreements with
each of GEI and the Sportmart Principals upon consummation of the Merger. The
Registration Rights Agreements provide for certain rights to require Gart Sports
to register the resale of Gart Common Stock under the Securities Act and,
subject to certain limitations, provide for certain incidental rights to include
shares of Gart Common Stock in other registrations statements filed by Gart
Sports under the Securities Act. In addition, Gart Sports has agreed to maintain
the effectiveness of the Registration Statement for a period of two years
following the Effective Time covering the resale of Gart Common Stock owned by
the Sportmart Principals.
NO DISSENTERS' RIGHTS
Under the Delaware General Corporation Law, the holders of Sportmart Common
Stock are not entitled to any dissenters' rights of appraisal with respect to
the Merger.
CONSULTING AGREEMENTS
At the Effective Time, Gart Bros. and Sportmart will enter into the
Consulting Agreements with each of Larry J. Hochberg, Sportmart's Chairman of
the Board, Andrew S. Hochberg, Sportmart's Chief Executive Officer, and John A.
Lowenstein, Sportmart's Chief Operating Officer, whereby for a period of one
year following the Effective Time, the Consultants will be available to Gart
Bros. and Sportmart for advice with respect to strategic and operational issues.
Each Consultant will be compensated for such services in an amount equal to 50%
of such Consultant's annual base salary from Sportmart as in effect on September
26, 1997. Andrew Hochberg and Mr. Lowenstein will also receive paid family
medical insurance coverage during the one year term of the Consulting Agreements
and the six months following such term. Larry Hochberg will receive lifetime
medical benefits for himself and his spouse pursuant to the terms of his
existing agreement with Sportmart.
The Consulting Agreements also provide that each Consultant will receive a
severance benefit of 18 months' salary at such Consultant's annual base salary
as in effect on September 26, 1997, to be paid in equal monthly installments
over 18 months. This severance benefit is in lieu of the severance benefits each
Consultant is entitled to under the Sportmart Severance Plan, which generally
would have provided for a lump sum payment at the Effective Time equal to 18
months' salary at such Consultant's annual base salary as in effect at the
Effective Time.
MERGER EXPENSES AND FEES
The Merger Agreement provides, in general, that each of the parties will
bear and pay all direct costs and expenses incurred by it or on its behalf in
connection with the transactions contemplated by the Merger Agreement, including
fees and expenses of its own financial or other consultants, investment bankers,
accountants, and counsel, and that Gart Sports and Sportmart will each bear and
pay one-half of the filing fees payable in connection with the Proxy
Statement/Prospectus and printing costs incurred in connection with the printing
of the Proxy Statement/Prospectus.
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<PAGE> 49
The Merger Agreement provides that if the Merger Agreement is terminated
under certain circumstances, Sportmart will pay a fee of $2.5 million to Gart
Sports. See "The Merger Agreement -- Termination Fee."
OTHER FEES AND EXPENSES
Sportmart has engaged PJSC as its financial advisor in connection with the
Merger Agreement, for which PJSC will receive a fee equal to the excess of (x)
1.5% of Aggregate Consideration (as defined below) paid or payable in connection
with the Merger over (y) $300,000. Such fee is contingent upon the consummation
of the Merger. The term "Aggregate Consideration" means the total amount of all
cash, securities, contractual agreements (including any lease arrangements or
put or call agreements) and other properties paid or payable, directly or
indirectly, in connection with the Merger (including, without limitation,
amounts paid to holders of any warrants, stock purchase rights or convertible
securities of Sportmart and to holders of any options or stock appreciation
rights issued by Sportmart, whether or not vested). Aggregate Consideration also
includes the amount of any short-term debt and long-term liabilities of
Sportmart (including the principal amount of any indebtedness for borrowed money
and capitalized leases and the full amount of any off-balance sheet financings)
(x) repaid or retired in connection with or in anticipation of the Merger or (y)
existing on Sportmart's balance sheet at the time of the Merger. PJSC will also
be reimbursed for its expenses. PJSC's fees and expenses are expected to be
approximately $1.875 million. Sportmart has also engaged Houlihan Lokey to issue
a fairness opinion to the Sportmart Board of Directors, for which the firm will
receive a fee of $125,000 plus its reasonable out-of-pocket expenses.
Gart Sports has engaged LGA as its financial advisor, for which LGA will
receive a fee of $3.0 million upon consummation of the Merger. Gart Sports has
also engaged as its financial advisors Dain and Blair, which firms will receive
fees of $250,000 and $200,000, respectively, upon consummation of the Merger.
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<PAGE> 50
THE MERGER AGREEMENT
Following is a summary of the material terms of the Merger Agreement, a
copy of which is attached as Appendix A to this Proxy Statement/Prospectus and
is incorporated herein by reference. Such summary is qualified in its entirety
by reference to the Proxy Statement/Prospectus. Stockholders of Sportmart are
urged to read the Proxy Statement/Prospectus in its entirety for a more complete
description of the Merger.
THE MERGER
The Merger Agreement provides that, following the approval and adoption of
the Merger Agreement and the transactions contemplated thereby by the
stockholders of Sportmart, and the satisfaction or waiver of the other
conditions to the Merger, Merger Sub will be merged with and into Sportmart, and
Sportmart shall continue as the surviving corporation of the Merger and become a
wholly-owned subsidiary of Gart Sports.
The Closing will occur on the second business day after which all of the
conditions to the Merger are first satisfied or waived. The Merger will become
effective on the date and at the time specified in the Certificate of Merger to
be filed with the Secretary of State of the State of Delaware, both of which
filings shall occur on the Closing date.
At the Effective Time, the Certificate of Incorporation and By-Laws of Gart
Sports attached hereto as Appendixes D and E, respectively, will become
effective.
CONVERSION OF SHARES
As of the Effective Time, each share of Sportmart Class A Common Stock and
each share of Sportmart Voting Common Stock issued and outstanding immediately
prior to the Effective Time shall be converted into the right to receive a
fractional share (the "Conversion Ratio") of Gart Common Stock as determined by
the conversion formula (the "Conversion Formula") set forth in the Merger
Agreement. The Conversion Formula is designed so that upon consummation of the
Merger, current Sportmart stockholders will own approximately 27 1/2%, and
current Gart Sports stockholders will own approximately 72 1/2%, of the
outstanding shares of Gart Common Stock on a fully diluted basis. The Conversion
Ratio is expected to be approximately .164860 (based upon closing prices of
$2.50 and $2.44 for Sportmart Class A Common Stock and Sportmart Voting Common
Stock, respectively, on December 16, 1997), but can fluctuate due to changes in
the market prices of Sportmart Class A Common Stock and Sportmart Voting Common
Stock. The exact Conversion Ratio will be determined based on the weighted
average closing price of Sportmart Class A Common Stock and Sportmart Voting
Common Stock (the "Weighted Average Price of Sportmart Common Stock") on the
last full day of trading prior to the closing, which is expected to occur on the
same day as the Sportmart Meeting. If the closing occurs after such date, the
actual number of shares of Gart Common Stock to be issued to holders of
Sportmart Common Stock will not be determined until after the Sportmart Meeting.
The Conversion Ratio will fluctuate less than .001 for each $0.50 change in the
Weighted Average Price of Sportmart Common Stock.
The Conversion Formula converts the total number of shares of Sportmart
Common Stock issued and outstanding immediately prior to the Closing into
approximately 27 1/2% of the total number of outstanding shares of Gart Common
Stock, on a fully diluted basis, after consummation of the Merger. Holders of
Gart Common Stock prior to consummation of the Merger will hold approximately
72 1/2% of the total number of shares of Gart Common Stock issued and
outstanding after consummation of the Merger. The Conversion Formula is more
complicated than a simple ratio of total outstanding shares because the total
number of outstanding shares of Sportmart Common Stock and Gart Common Stock
must be adjusted to reflect the number of equivalent shares represented by
outstanding options to purchase both Sportmart Common Stock and Gart Common
Stock ("Sportmart Equivalent Option Shares" and "Gart Sports Equivalent Option
Shares," respectively). The number of equivalent shares these options represent
is calculated using the treasury stock method for valuing options which takes
the value of all options in the money less the cost of acquiring such options
and divides the net proceeds by the then current market price of the underlying
stock. This number is then added to the number of issued and outstanding shares
of capital stock of each of Sportmart and Gart Sports to determine the total
number of equivalent shares outstanding used to calculate
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<PAGE> 51
the Conversion Ratio. Using the Weighted Average Price of Sportmart Common Stock
as of December 16, 1997 ($2.46180), there would be 7,503 Sportmart Equivalent
Option Shares and 263,444 Gart Equivalent Option Shares.
Set forth below is the equation by which the Conversion Ratio and the
resulting implied market price of Gart Common Stock are calculated:
<TABLE>
<S> <C> <C>
(Outstanding Sportmart Common Stock(1) + Sportmart
27.5% Equivalent Option Shares) X Conversion Ratio
- ----- = ------------------------------------------------------
72.5% Outstanding Gart Common Stock + Gart Equivalent Option
Shares
</TABLE>
- ---------------
(1) Includes 250,000 shares of restricted stock that vest upon consummation of
the Merger.
The Sportmart and Gart Equivalent Option Shares are calculated as follows:
<TABLE>
<S> <C> <C>
Sportmart Equivalent Option Shares = (A X B) - C
-----------
A
</TABLE>
A = Weighted Average Price of Sportmart Common Stock.
B = Number of shares of Sportmart Common Stock underlying options
that are "in-the-money" at the Weighted Average Price of
Sportmart Common Stock (40,000 in the example below).
C = The aggregate exercise price of the options noted in B ($80,000
in the example below).
<TABLE>
<S> <C> <C>
Gart Equivalent Option Shares = (D X E) - F
-----------
D
</TABLE>
D = Implied market price of Gart Common Stock.
E = Number of shares of Gart Common Stock underlying options that are
"in-the-money" at the implied market price of Gart Common Stock
(401,312 in the example below).
F = The aggregate exercise price of the options noted in E
($2,058,729 in the example below).
Applying the foregoing equation to the Weighted Average Price of Sportmart
Common Stock as of December 16, 1997 ($2.46180), the Conversion Ratio and the
resulting implied market price of Gart Common Stock would be determined as
follows:
<TABLE>
<C> <C> <C>
($2.46180 X 40,000) - $80,000
13,250,540 + ----------------------------- X Conversion Ratio
27.5% $2.46180
----- = ---------------------------------------------------------------
72.5% (Implied Market Price X 401,312) - $2,058,729
5,498,908 + ---------------------------------------------
Implied Market Price
</TABLE>
which results in a Conversion Ratio of .164860 and an implied market price of
Gart Common Stock of approximately $14.93. Since there will be no readily
ascertainable market price for Gart Common Stock prior to the Merger, the
parties have agreed upon a so-called "implied market price" for use in the
foregoing equation. This implied market price of Gart Common Stock is calculated
for purposes of determining the Conversion Ratio and may not be indicative of
the price at which Gart Common Stock will trade following the Merger.
42
<PAGE> 52
The following table illustrates the fluctuation in the Conversion Ratio and
the corresponding effect on the implied market price of Gart Common Stock based
upon different potential Weighted Average Prices of Sportmart Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES
SPORTMART
SHAREHOLDERS WILL GART COMMON
AVERAGE WEIGHTED SPORTMART GART SPORTS OWN IN THE STOCK IMPLIED
CLOSING PRICE FOR EQUIVALENT OPTION EQUIVALENT OPTIONS AGGREGATE (POST- MARKET PRICE PER
SPORTMART STOCK SHARES SHARES CONVERSION RATIO MERGER)(1) SHARE
- --------------------- ----------------- ------------------ ---------------- ----------------- ----------------
<C> <C> <C> <C> <C> <C>
$2.00 -- 232,429 .164065 2,173,949 $12.19
$2.46180 7,503 263,444 .164860 2,184,484 $14.93
$2.50 8,000 267,357 .164966 2,185,888 $15.16
$3.00 26,973 318,617 .166194 2,202,160 $18.05
$3.50 86,576 356,469 .166528 2,206,585 $21.02
$4.00 151,889 385,258 .166531 2,206,625 $24.02
</TABLE>
- ---------------
(1) Assuming no exercise of options after the date hereof.
For information with respect to historical high and low closing sales prices for
Sportmart Common Stock, see "Sportmart Market Price Data and Dividend
Information."
As soon as practicable after the Effective Time, the Exchange Agent will
mail to each holder of record of Sportmart Common Stock a letter of transmittal
and instructions to be used to surrender and exchange certificates representing
shares of Sportmart Common Stock for certificates representing shares of Gart
Common Stock to which such holder has become entitled. Upon surrender of a
certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, the holder of such certificate shall be entitled to
receive in exchange therefor (a) certificates representing that number of whole
shares of Gart Common Stock into which the shares of Sportmart Common Stock
represented by the surrendered certificate have been converted at the Effective
Time, (b) any dividends or other distributions to which such holder is entitled
and (c) cash in lieu of any fractional shares of Gart Common Stock to which such
holder is entitled, and the certificate so surrendered shall forthwith be
canceled. Until so surrendered each certificate representing Sportmart Common
Stock shall be deemed from and after the Effective Time to represent only the
right to receive upon such surrender the shares of Gart Common Stock, cash in
lieu of any fractional shares of Gart Common Stock to which such holder is
entitled and any dividends or distributions on Gart Common Stock. The holder of
such unexchanged certificate will not be entitled to receive any dividends or
other distributions payable by Gart Sports until the certificate has been
exchanged. In no event shall the holder of any such surrendered certificates be
entitled to receive interest on any cash for fractional shares to be received in
the Merger. Gart Sports or the Exchange Agent shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to the Merger
Agreement to any holder of Sportmart Common Stock such amounts as Gart Sports or
the Exchange Agent are required to deduct and withhold under the Code, or any
provision of state, local or foreign tax law, with respect to the making of such
payment. To the extent that amounts are so withheld by Gart Sports or the
Exchange Agent, such withheld amounts shall be treated as having been paid to
the holder of Sportmart Common Stock in respect of whom such deduction and
withholding was made by Gart Sports or the Exchange Agent.
SPORTMART STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS.
CONVERSION OF SPORTMART OPTIONS
Each Sportmart Stock Option which is outstanding immediately prior to the
Effective Time shall become and represent an option to purchase the number of
shares of Gart Common Stock, increased to the nearest whole share, determined by
multiplying (i) the number of shares of Sportmart Common Stock subject to such
Sportmart Stock Option immediately prior to the Effective Time by (ii) the
Conversion Ratio, at an exercise price per share of Gart Common Stock (increased
to the nearest whole cent) equal to the exercise price per share of Sportmart
Common Stock immediately prior to the Effective Time divided by the Conversion
Ratio. The Merger Agreement permits the Board of Directors of Sportmart (or the
Compensation Committee thereof), at any time prior to the Effective Time, to
provide for the acceleration of the vesting of Sportmart
43
<PAGE> 53
Stock Options (and restricted shares of Sportmart Common Stock under the
Sportmart, Inc. Restricted Stock Plan) in connection with the Merger, provided
that such accelerated vesting shall only be applicable to persons (i) whose
employment with Sportmart or Gart Sports is terminated by Gart Sports or
Sportmart at (or in anticipation of) the Effective Time or thereafter by Gart
Sports within six months following the Effective Time or thereafter by such
persons within six months following the Effective Time under circumstances that
constitute "Good Reason" as defined under The Sportmart Severance Plan or (ii)
who do not at the Effective Time have at least a comparable position with Gart
Sports or its subsidiaries to the position that they had with Sportmart and its
subsidiaries.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of Sportmart, Gart Sports, Gart Bros. and Merger Sub (which will
terminate upon consummation of the Merger) relating to, among other things, (a)
the corporate organization and qualification of each of Sportmart, Gart Sports,
Gart Bros. and Merger Sub, their respective subsidiaries and certain similar
corporate matters; (b) the capital structure of each of Sportmart, Gart Sports,
Gart Bros. and Merger Sub and each of their respective subsidiaries; (c) the
authorization, execution, delivery and enforceability of the Merger Agreement
and the consummation of the transactions contemplated thereby and related
matters; (d) required governmental filings and absence of violations under
charters, bylaws and certain instruments and laws; (e) financial statements and
other reports and documents of each of Sportmart, Gart Sports, Gart Bros. and
Merger Sub; (f) the absence of certain material adverse changes or events; (g)
litigation; (h) taxes, tax returns and audits; (i) title and leasehold interests
in real property; (j) intellectual property; (k) the accuracy of information
supplied by each of Sportmart, Gart Sports, Gart Bros. and Merger Sub in
connection with this Proxy Statement/Prospectus and the Registration Statement;
(l) employee benefits; (m) environmental matters; (n) certain "related party"
transactions; (o) properties; (p) brokers and finders; (q) contracts; (r) labor
matters and (s) solvency issues.
NO SOLICITATION
Prior to the Effective Time, Sportmart has agreed that neither it, any of
its respective subsidiaries or affiliates, nor any of the respective directors,
executive officers, agents or representatives of the foregoing, will, directly
or indirectly, (i) solicit, initiate or encourage (including by way of
furnishing information) any inquiries or the making of any proposal with respect
to any Acquisition Transaction or (ii) negotiate or otherwise engage in
discussions with any person (other than Gart Sports and its representatives)
with respect to any Acquisition Transaction, or which may reasonably be expected
to lead to a proposal for an Acquisition Transaction, or enter into any
agreement, arrangement or understanding (including any letter of intent,
agreement in principle or similar agreement) with respect to any such
Acquisition Transaction; provided, however, that, Sportmart may, in response to
a proposal or inquiry unsolicited after the date of the Merger Agreement,
furnish information to, negotiate or otherwise engage in discussions with any
person (pursuant to a customary confidentiality agreement) which makes or
indicates in writing an intention or desire to make, and with respect to whom
the Board of Directors of Sportmart has concluded in good faith after
consultation with its financial advisor is reasonably capable of making, a
Superior Proposal (as defined below), if the Board of Directors of Sportmart
determines in good faith, after consultation with its outside counsel, that the
failure to take such action would be inconsistent with the fiduciary duties of
the Board of Directors of Sportmart under applicable law and such proposed
Acquisition Transaction was not solicited by it in, or did not otherwise result
from, a breach of the above and subject to compliance with the other provisions
of these no solicitation provisions; and provided further that, notwithstanding
anything to the contrary herein contained, the Board of Directors of Sportmart
may take and disclose to Sportmart's stockholders a position contemplated by
Rule 14e-2 promulgated under the Exchange Act, comply with Rule 14d-9 thereunder
and make all other disclosures required by applicable law. Any of the foregoing
to the contrary notwithstanding, Sportmart may engage in discussions with or
provide information to any person or group that has made a proposal unsolicited
after the date of the Merger Agreement with respect to an Acquisition
Transaction for the limited purpose of determining whether such proposal is, or
could lead to, a Superior Proposal. As used herein, "Superior Proposal" means a
bona fide, written proposal or offer made by any person (or group) (other than
Gart Sports
44
<PAGE> 54
or any of its subsidiaries) with respect to an Acquisition Transaction on terms
which the Board of Directors of Sportmart determines in good faith, based on the
advice of independent financial advisors and legal counsel, to be more favorable
to Sportmart and its stockholders than the transactions contemplated by the
Merger Agreement (including taking into account the financing thereof).
ADDITIONAL AGREEMENTS
The Merger Agreement contains various additional agreements relating to,
among other things, (a) the conduct of the respective businesses of Sportmart
and Gart Sports prior to the Effective Time, (b) the reasonable access, by Gart
Sports and Sportmart, to books and records and information related to the normal
business activities of the other and reasonable cooperation with respect to
transition activities prior to the Effective Date; (c) the preparation and
filing with the Commission of the Proxy Statement/Prospectus and the
Registration Statement; (d) obtaining Sportmart stockholder approval of the
Merger Agreement; (e) compliance with the Securities Act by Sportmart; (f) the
obtaining of governmental and material third party consents required or
desirable to consummate the Merger; (g) execution of the Registration Rights
Agreement and the Consulting Agreements; (h) employee benefits; (i) public
announcements; (j) the listing of Gart Common Stock on Nasdaq at the time of
issuance and the registration of Gart Common Stock under the Exchange Act; (k)
notification by each of Gart Sports and Sportmart of (i) the occurrence or non-
occurrence of any event which would be likely to cause (x) any representation or
warranty contained in the Merger Agreement to be untrue or inaccurate in any
material respect or (y) any covenant, condition or agreement contained in the
Merger Agreement not to be complied with or satisfied in any material respect
and (ii) any failure of Sportmart or Gart Sports, as the case may be, to comply
with in any material respect any covenant or agreement to be complied with by
it; (l) the affirmation by Gart Sports of certain matters regarding maintaining
the names of Sportmart's present stores after the Effective Time; (m) tax
returns and accounting methods; (n) implementation of a stay bonus program; and
(o) acknowledgment by all parties to the Merger Agreement that time is of the
essence.
INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that all rights to indemnification,
exculpation, advancement of expenses and the like now existing in favor of any
director or officer of Sportmart and its subsidiaries ("Indemnified Parties")
are contract rights and shall survive the Merger. In addition, Sportmart, Gart
Sports and Gart Bros. shall indemnify, defend and hold harmless all Indemnified
Parties to the fullest extent permitted by applicable law with respect to all
acts and omissions arising out of such individuals' services as officers,
directors, employees or agents of Sportmart or any of its subsidiaries or as
trustees or fiduciaries of any plan for the benefit of employees, or otherwise
on behalf of, Sportmart or any of its subsidiaries, occurring at or prior to the
Effective Time, including the transactions contemplated by the Merger Agreement.
The Merger Agreement provides that, subject to the certain limitations,
Gart Sports and Gart Bros. will maintain in effect for a specified period
policies of directors' and officers' liability insurance coverage, provided that
Gart Sports and Gart Bros. may substitute therefor policies of at least the same
coverage containing terms and conditions which are no less advantageous to the
Indemnified Parties and provided that such substitutions shall not result in any
gaps or lapses in coverage with respect to matters occurring prior to the
Effective Time.
CONDITIONS
The respective obligations of Sportmart and Gart Sports to effect the
Merger are subject to the following conditions, among others: (a) the approval
and adoption of the Merger Agreement and the transactions contemplated thereby
by the stockholders of Sportmart; (b) the expiration or termination of any
waiting period applicable to the consummation of the Merger under the HSR Act
(early termination was granted on November 4, 1997 by the Federal Trade
Commission); (c) the receipt of all material governmental authorizations,
consents, orders or approvals; (d) the effectiveness of the Registration
Statement, which shall not be the subject of a stop order or proceedings seeking
a stop order; (e) the absence of any temporary restraining order, preliminary or
permanent injunction or other order to be in effect that prevents, or seeks to
prevent, the consummation of the Merger; and (f) no suit, action or proceeding
shall have been instituted or
45
<PAGE> 55
be pending by any governmental entity which questions the validity or legality
of the transactions contemplated by the Merger Agreement.
The obligations of Gart Sports, Gart Bros. and Merger Sub to effect the
Merger shall be subject to the following additional conditions, unless waived in
writing by Gart Sports: (a) the representations and warranties of Sportmart in
the Merger Agreement which are qualified by reference to Sportmart Material
Adverse Effect shall be true and correct and the representations and warranties
of Sportmart that are not so qualified shall be true and correct except where
the failure to be true and correct would not have a Sportmart Material Adverse
Effect; (b) performance by Sportmart, in all material respects, of all
obligations required to be performed by it under the Merger Agreement; (c) no
event or occurrence which has had or would reasonably be expected to have, a
Sportmart Material Adverse Effect (as defined below); (d) receipt of an opinion
of counsel from outside counsel to Sportmart; and (e) all amounts due and
payable by any Sportmart Principal to Sportmart or any of its Subsidiaries shall
have been paid to Sportmart and certain transactions with Sportmart affiliates
shall have been terminated.
The obligation of Sportmart to effect the Merger shall be subject to the
following additional conditions: (a) the representations and warranties of Gart
Sports, Gart Bros. and Merger Sub in the Merger Agreement which are qualified by
reference to Gart Material Adverse Effect shall be true and correct and the
representations and warranties of Gart Sports, Gart Bros. and Merger Sub that
are not so qualified shall be true and correct except where the failure to be
true and correct would not have a Gart Material Adverse Effect; (b) performance
by Gart Sports, Gart Bros. and Merger Sub in all material respects, of all
obligations required to be performed by each under the Merger Agreement; (c)
there shall have been no event or occurrence which has had a Gart Material
Adverse Effect (as defined below); (d) the Gart Sports Certificate shall have
been filed with the Secretary of State of the State of Delaware; (e) receipt of
an opinion of counsel; (f) receipt of an opinion of counsel with respect to
certain tax matters; and (g) execution of the Registration Rights Agreement and
the Consulting Agreements.
The Merger Agreement defines a "Sportmart Material Adverse Effect" as an
event or occurrence which would have a material adverse effect, individually or
in the aggregate, on the business, financial condition, or results of operations
of Sportmart and its subsidiaries taken as a whole, or, if applicable, the
ability of Sportmart to consummate the Merger and the other transactions
contemplated by the Merger Agreement. A Sportmart Material Adverse Effect shall
not be deemed to have occurred as a result of: (i) a decline in the actual or
potential future financial performance or operations of Sportmart provided that
Sportmart has operated its business in accordance with the provisions of the
Merger Agreement and otherwise consistent with its past practices, (ii) losses
of employees or other matters related to the transactions contemplated by the
Merger Agreement (including, without limitation, the public announcement
thereof), (iii) opening of stores, or the announcement of planned store
openings, by competitors, (iv) any effect or consequence of, or related to, any
of the Pack Boot Inventory (as defined in the Agreement made and entered into as
of November 3, 1997, between Sportmart and Gart Bros. (the "Pack Boot
Agreement")), the Additional Ski Inventory (as defined in the Pack Boot
Agreement) or any transaction pursuant to either the Pack Boot Agreement or the
Consignment Agreement, made and entered as of November 3, 1997, between
Sportmart and Gart Bros. (the "Consignment Agreement") or (v) facts and
circumstances unless such facts and circumstances are of such a fundamental and
extraordinary nature that no reasonable person could dispute that such a
"material adverse change" has occurred.
The Merger Agreement defines a "Gart Material Adverse Effect" as an event
or occurrence which would have a material adverse effect, individually or in the
aggregate, on the business, financial condition, or results of operations of
Gart Sports and its subsidiaries taken as a whole, or, if applicable, the
ability of Gart Sports to consummate the Merger and the other transactions
contemplated by the Merger Agreement. A Gart Material Adverse Effect shall not
be deemed to have occurred as a result of: (i) opening of stores, or the
announcement of planned store openings, by competitors or (ii) facts and
circumstances unless such facts and circumstances are of such a fundamental and
extraordinary nature that no reasonable person could dispute that such a
"material adverse change" has occurred.
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<PAGE> 56
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time:
(a) by mutual written consent of Gart Sports and Sportmart;
(b) by either Gart Sports or Sportmart, if the Merger shall not have
been consummated on or before May 31, 1998 (unless, in the case of any such
termination pursuant to this paragraph, the failure of such event to occur
shall have been caused by the action or failure to act of the party seeking
to terminate the Merger Agreement, which action or failure to act
constitutes a breach of such party's obligations under the Merger
Agreement);
(c) by either Gart Sports or Sportmart, if any permanent injunction,
order, decree or ruling by any governmental entity of competent
jurisdiction preventing the consummation of the Merger shall have become
final and nonappealable; provided, however, that the party seeking to
terminate the Merger Agreement pursuant to this paragraph shall have used
its reasonable best efforts to remove such injunction or overturn such
action;
(d) by Gart Sports, if (i) Sportmart has breached any representation
or warranty contained in the Merger Agreement, and such breach shall not
have been cured within 30 days after notice of such breach is given by Gart
Sports to Sportmart (except where such breach would not have a Sportmart
Material Adverse Effect), (ii) there has been a material breach of a
material covenant or agreement set forth in the Merger Agreement on the
part of Sportmart, which shall not have been cured within 30 days after
notice of such breach is given by Gart Sports to Sportmart, (iii) the
Sportmart Board of Directors fails to recommend the approval and adoption
of the Merger Agreement and the transactions contemplated hereby to the
Sportmart stockholders or withdraws or amends or modifies in a manner
adverse to Gart Sports such recommendation or approval, or (iv) the taking
of certain actions proscribed under "-- No Solicitation" by Sportmart's
directors, officers, employees, agents or representatives.
(e) by Sportmart if the Board of Directors of Sportmart shall
determine, in good faith and after consultation with its financial advisor
and outside counsel, that a proposal for an Acquisition Transaction
constitutes a Superior Proposal;
(f) by Sportmart, if (i) Gart Sports, Gart Bros. or Merger Sub has
breached any representation or warranty contained in the Merger Agreement,
and such breach shall not have been cured within 30 days after notice of
such breach is given by Sportmart to Gart Sports (except where such breach
would not have a Gart Material Adverse Effect), (ii) there has been a
material breach of a material covenant or agreement set forth in the Merger
Agreement on the part of Gart Sports, which shall not have been cured
within 30 days after notice of such breach is given by Sportmart to Gart
Sports; and
(g) by Gart Sports if (i) any event has occurred that has had, or
would reasonably be expected to have, a Sportmart Material Adverse Effect,
(ii) prior to the Conditional Date and (a) prior to February 1, 1998,
Sportmart's Net Worth (as defined below) falls below $70 million, or (b)
after February 1, 1998, Sportmart's Net Worth falls below $67.5 million, or
(iii) prior to February 2, 1998, the sum of Sportmart's long term debt
(including current and long-term capital lease obligations), short term
debt, Accounts Payable (as defined in the Merger Agreement) and Accrued
Liabilities (as defined in the Merger Agreement) shall exceed the following
amounts as of any of the following dates occurring prior to the Conditional
Date: $163,328,000 at October 5, 1997; $178,008,000 at November 2, 1997;
$194,212,000 at November 30, 1997; $155,880,000 at January 4, 1998; or
$154,265,000 at February 1, 1998 (provided, however, that any amounts paid
or accrued in the fiscal year ending February 1, 1998 and specified in
clauses (r), (s), (t), (u) or (v) below shall not be taken into account in
determining Accounts Payable, short term debt or Accrued Liabilities, as
the case may be, for purposes of this clause (iii)). The Merger Agreement
defines "Net Worth" as "Net Worth" is calculated under Sportmart's current
credit agreement except that such Net Worth calculation shall be made
without taking into account amounts increasing or decreasing Net Worth in
the fiscal year ended February 1, 1998 pertaining, or with respect, to (r)
any of the Pack Boot Inventory, the Additional Ski Inventory or any
transaction pursuant to the Pack Boot Agreement or the Consignment
Agreement, (s) any charge to establish a LIFO reserve,
47
<PAGE> 57
(t) any severance, bonus or other change-in-control related items paid or
incurred in connection with the Merger, (u) costs and expenses in
connection with Sportmart's efforts to engage in any extraordinary
transaction, including, without limitation, the Merger (capped in the event
of any such transactions other than the Merger at $200,000), (v) any
expenses associated with the termination of any contract, or the obtaining
of any consent, in connection with the Merger Agreement or the transactions
contemplated thereby, (w) any reversal into income of Sportmart's inventory
reserve for obsolescence, (x) any reversal into income for any unused or
unallocated portion of the reserve established in the 1996 fiscal year
pertaining to the decision to exit the Canadian market, (y) any increase to
the reserve previously established for Sportmart's River North property, or
(z) any after tax impact of any change in Sportmart's valuation reserve for
its deferred tax assets and the loss of any deferred tax benefit resulting
from the failure to tax-effect any operational loss; and, provided,
further, that in making such Net Worth calculation, Net Worth shall be
increased by the amount of expenses incurred, in the fiscal year ending
February 1, 1998 (up to $739,000 pre-tax) that would not have been incurred
if Sportmart's forecasted plan to reduce operational expenses in such
fiscal year had been adhered to.
In the event of termination of the Merger Agreement pursuant to the above,
the Merger shall be deemed abandoned and the Merger Agreement shall forthwith
become void, with the exception of certain provisions, provided, however, that
nothing in the Merger Agreement shall relieve any party from liability for any
material breach of the Merger Agreement.
Whether or not the Merger is consummated, all fees, costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses.
TERMINATION FEE
If: (i) an Acquisition Transaction shall have been made known to Sportmart
or has been proposed directly to its stockholders generally or any person shall
have publicly announced an intention (whether or not conditional) to enter into
an Acquisition Transaction and thereafter the approval of the Merger by
Sportmart's stockholders is not obtained; or (ii) Sportmart terminates the
Merger Agreement pursuant to clause (e) under "-- Termination" above and
Sportmart enters into a definitive agreement with any person or entity with
respect to such Acquisition Transaction or the Acquisition Transaction which
gave rise to such termination (or any revision of such Acquisition Transaction),
as the case maybe, within nine months after the termination of the Merger
Agreement or such Acquisition Transaction is consummated within nine months
after the termination of the Merger Agreement, then within two business days
after entering into such definitive agreement or after such consummation,
Sportmart shall pay Gart Sports a fee in cash equal to $2.5 million. This fee
shall also be payable within two business days of Gart Sports' termination of
this Agreement pursuant to clause (d)(iv) above.
AMENDMENT AND WAIVER
The Merger Agreement may be amended at any time prior to the Effective
Time, only by written agreement of Gart Sports and Sportmart; provided, however,
that no such amendment shall be made which under applicable law require the
approval of stockholders of Sportmart or Gart Sports, without the further
approval of such stockholders. At any time prior to the Effective Time, Gart
Sports and Sportmart may extend the time for performance of the obligations or
other acts of the other parties to the Merger Agreement, may waive inaccuracies
in the representations or warranties contained in the Merger Agreement or
related documents and may waive compliance with any agreements or conditions
contained in the Merger Agreement which may legally be waived.
48
<PAGE> 58
STOCKHOLDER AGREEMENT
Pursuant to the Stockholder Agreement, the Sportmart Principals have agreed
that until the first to occur of (a) the Effective Time, (b) 30 days after
termination of the Merger Agreement (i) by Gart Sports other than in connection
with a breach of the non-solicitation provisions of the Merger Agreement
(provided that such termination is not as a result of Sportmart's intentionally
acting, or failing to act, in bad faith with respect to its obligations under
the Merger Agreement) or (ii) rightfully by Sportmart in good faith pursuant to
the Merger Agreement's termination provision with respect to breaches by Gart
Sports, Gart Bros. or Merger Sub of representations, warranties or covenants, or
(c) June 30, 1998 (the first to occur of clauses (a), (b) and (c), the
"Termination Date"), at any meeting (whether annual or special and whether or
not an adjourned or postponed meeting) of the holders of Sportmart Common Stock,
however called, or in connection with any written consent of the holders of
Sportmart Common Stock, the Sportmart Principals will appear at the meeting or
otherwise cause the Sportmart Common Stock beneficially owned by them to be
counted as present thereat for purposes of establishing a quorum and vote or
consent (or cause to be voted or consented) such shares (A) in favor of the
adoption of the Merger Agreement and the approval of other actions contemplated
by the Merger Agreement and the Stockholder Agreement and any actions required
in furtherance thereof; (B) against any action or agreement that would result in
a breach in any respect of any material covenant, representation or warranty or
any other obligation or agreement of Sportmart under the Merger Agreement or the
Stockholder Agreement; and (C) except as otherwise agreed to in writing in
advance by Gart Sports in its sole discretion, against the following actions
(other than the Merger and the transactions contemplated by the Stockholder
Agreement and the Merger Agreement): (1) any Acquisition Transaction or Superior
Proposal, (2) (u) any change in a majority of the persons who constitute
Sportmart's Board of Directors (other than with the approval of a majority of
Sportmart's directors then in office); (v) any material change in the present
capitalization of Sportmart, including without limitation any proposal to sell a
substantial equity interest in Sportmart or its subsidiaries; (w) any amendment
of Sportmart's Restated Certificate of Incorporation or Bylaws; (x) any other
material change in Sportmart's corporate structure or business; or (y) any other
action which, in the case of each of the matters referred to in clauses (2) (u),
(v), (w) or (x), is intended, or could reasonably be expected, to impede,
interfere with, delay, postpone or materially adversely affect the Merger and
the transactions contemplated by the Stockholder Agreement and the Merger
Agreement.
The Stockholder Agreement also provides that if Gart Sports becomes
entitled to the $2.5 million fee described under "-- Termination; Expenses" with
respect to securities for which any Sportmart Principal receives cash
consideration pursuant to the Acquisition Transaction, such Sportmart Principal
will immediately upon the receipt thereof pay to Gart Sports an amount in cash
(if positive) (the "Differential Amount") equal to (i) the net pre-tax cash
proceeds received by such Sportmart Principal with respect to the shares of
Sportmart Common Stock or other securities of such Sportmart Principal (such
shares, the "Subject Shares") in such Acquisition Transaction within nine months
after the date that the Merger Agreement is terminated, minus (ii) the product
of (A) the per share value attributed to the outstanding Sportmart Common Stock
in the proposed Merger based on a $105 million equity value for Gart Sports
times (B) the number of Subject Shares. If such Sportmart Principal receives any
non-cash consideration in an Acquisition Transaction otherwise of a type
described above as part of the net proceeds ("Other Consideration") that
consists of securities listed on a national securities exchange or Nasdaq
("Marketable Securities"), such Sportmart Principal shall deliver immediately to
Gart Sports an amount of Marketable Securities whose aggregate value, calculated
on the basis of the closing price for such Marketable Securities on the exchange
where such Marketable Securities are listed, equals the Differential Amount. To
the extent the Other Consideration consists of non-Marketable Securities or
other assets, such Other Consideration will be held by such Sportmart Principal
until such Sportmart Principal shall have sold or otherwise disposed of such
Other Consideration for cash or Marketable Securities, or has otherwise actually
realized value, directly or indirectly, from such sale or disposition, at which
time the Differential Amount, to the extent not previously paid, will be
immediately paid to Gart Sports in cash or such Marketable Securities.
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Pursuant to the Stockholders Agreement, Gart Bros. will guarantee certain
leases for property leased by Sportmart from entities in which certain of
Sportmart's directors, officers and principal stockholders own interests. See
"The Merger -- Interests of Certain Persons In The Merger -- Leases."
Each Sportmart Principal has agreed in the Stockholder Agreement not,
directly or indirectly, prior to the Termination Date, to (i) offer for sale,
sell, transfer, tender, pledge, encumber, assign or otherwise dispose of, or
enter into any contract, option or other arrangement or understanding with
respect to or consent to the offer for sale, sale, transfer, tender, pledge,
encumbrance, assignment or other disposition of, any or all shares of Sportmart
Common Stock beneficially owned by such Sportmart Principal or any interest
therein, not including any sale, transfer, pledge, assignment or otherwise to
other Sportmart Principals, or for tax, securities or estate planning purposes
or for charitable donation purposes as long as the recipient of the voting and
dispositive power with respect to such Sportmart Common Stock agrees to abide by
the provisions of and becomes a party to the Stockholder Agreement and not
including any pledge of Sportmart Common Stock as security for obligations in
connection with a bona fide transaction as long as the pledgee or mortgagee
agrees, in the event it obtains the right to vote the Sportmart Common Stock, to
abide by and become a party to the Stockholder Agreement; (ii) grant any proxies
or powers of attorney, deposit the Sportmart Common Stock beneficially owned by
such Sportmart Principal into a voting trust or enter into a voting agreement
with respect to such shares; or (iii) take any action that would make any
representation or warranty of such stockholder contained in the Stockholder
Agreement untrue or incorrect or would result in a breach by such stockholder of
its obligations under the Stockholder Agreement.
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INFORMATION REGARDING SPORTMART
GENERAL
Sportmart is a leading sporting goods superstore retailer, which pioneered
the superstore concept in 1971. As of November 2, 1997, Sportmart operated 59
stores, with 16 stores in the Chicago metropolitan area, 13 stores in the Los
Angeles metropolitan area, 11 stores in the San Francisco/Sacramento area, five
stores in the Minneapolis metropolitan area, three stores in each of the Seattle
and Columbus, Ohio metropolitan areas, two stores in each of the San Diego,
Milwaukee and Portland areas and one store in each of the Cleveland and Des
Moines areas.
BUSINESS STRATEGY
Key factors of Sportmart's ability to successfully compete in the retail
sporting goods industry include:
Merchandising. Sportmart is committed to providing both quality
name-brand and private-brand merchandise at everyday low prices, in a
specialty store, rather than a "warehouse" store, environment. Sportmart
believes that the breadth and depth of its in-stock merchandise selection
exceeds that which is generally available in specialty stores, discount and
department stores and other traditional sporting goods chains and that it
is able to offer customers convenient, one-stop shopping for their complete
sporting goods needs.
Customer Service. Fundamental to Sportmart's philosophy is a
company-wide culture of customer service and customer satisfaction.
Consequently, Sportmart has implemented procedures and training programs to
increase its sales staff's responsiveness and knowledge aimed at exceeding
the customer's expectations.
Leading Position in Major Markets. Sportmart's aim is to be a leading
sporting goods superstore retailer in each of its developed markets.
Management believes that the superstore concept for sporting goods can be
most effectively carried out in major metropolitan areas which offer an
adequate population base and favorable demographic characteristics
supplemented by additional stores in smaller markets that can be serviced
by the same distribution centers.
Economies of Scale. Sportmart has established itself in existing
developed markets by opening clusters of stores which can be serviced by a
central distribution center and which also provide economies of scale in
advertising, promotions and other overhead expenses. Additionally, stores
in smaller markets are also serviced by the same distribution centers.
MERCHANDISING
Sportmart's merchandising strategy focuses on offering in one superstore a
broad and deep selection of in-stock, quality, name-brand and private-brand
merchandise. Sportmart's comprehensive product assortment is presented in the
integrated "Four Worlds" format that combines equipment and apparel by sport.
The "Worlds" consist of team sports, footwear, outdoors and fitness. Each store
offers a wide variety of sports equipment, apparel, footwear and accessories
designed to meet the total sporting goods needs of its customers, from casual
sports participants to serious athletes. In addition, the in-store merchandise
assortment is tailored to reflect the specific regional and seasonal needs of
each store.
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The table below provides the percentage of Sportmart's sales represented by
each of the listed categories for the last three fiscal years and the
thirty-nine weeks ended October 27, 1996 and November 2, 1997:
<TABLE>
<CAPTION>
SALES BY CATEGORY(1)
-------------------------------------------------------------------
FISCAL YEARS ENDED THIRTY-NINE WEEKS ENDED
--------------------------------------- -------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2, OCTOBER 27, NOVEMBER 2,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Soft Goods:
Sportswear and Athletic
Apparel.................. 26.3% 26.0% 28.7% 25.9% 26.6%
Athletic Footwear........... 21.2 21.3 23.4 25.0 25.9
----- ----- ----- ----- -----
Total Soft Goods.... 47.5 47.3 52.1 50.9 52.5
Hard Goods(2)................. 52.5 52.7 47.9 49.1 47.5
----- ----- ----- ----- -----
Total Sales......... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Sales are restated to reflect U.S. sales only.
(2) Hard goods generally consist of participation (club) equipment, in-line
skates, fitness equipment, field and stream and outdoor equipment.
Sportmart purchased merchandise from approximately 1000 vendors in fiscal
1996 and in the first thirty-nine weeks of fiscal 1997. Sportmart's largest
vendor, Nike, Inc., accounted for approximately 20% of its total merchandise
purchases.
CUSTOMER SERVICE AND TRAINING
Customer service at Sportmart includes knowledgeable sales associates, a
liberal return policy, new product demonstrations and "Tech Centers" for on-site
customer services. Sportmart also places great emphasis on the training of store
level management and associates. Each store is staffed with one manager, up to
two assistant managers and three to six department managers. Management
associates are trained in a number of areas, including sales techniques,
management techniques and product knowledge. Sportmart seeks to encourage
responsiveness and entrepreneurship at the store level by tying store manager
bonuses to store performance. Associates are also encouraged to participate in
company sponsored clinics and product demonstrations to gain first-hand product
knowledge. Large vendors such as Nike, Wilson, Adidas and Rollerblade conduct
quarterly meetings to discuss new products and product technologies with
Sportmart associates.
The prototypical store has a visible "Tech Center" which offers a wide
range of on-site services by trained technicians. Customers can purchase and
watch racket stringing, golf club regripping, bowling ball drilling, ski binding
installation and bike assembly. Management believes such services instill
customer confidence that Sportmart's merchandise will be "competition-ready"
when it leaves the store.
MARKETING
Sportmart's comprehensive marketing program includes an integrated program
of advertising, event marketing and public relations. Sportmart's marketing
program is administered by Sportmart's marketing staff with support from an
outside advertising agency.
The advertising program is concentrated in extensive newspaper advertising
that provides a broad-based method of reaching existing customers and
prospecting new customers. This is supplemented by television, radio and
targeted direct mail advertising. Sportmart advertises in major metropolitan
newspapers as well as regional newspapers circulated in areas surrounding
Sportmart locations to achieve maximum market coverage. Advertisements typically
consist of full-color Sunday newspaper inserts and weekly single-page
advertising. Television is generally concentrated in the two to three weeks of
peak selling periods such as Father's Day and Christmas. Sportmart receives
substantial vendor cooperative advertising reimbursements.
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Targeted direct mail advertising is implemented according to specific
customer information provided by Sportmart's Frequent Buyer database, which
rewards customers for loyalty and tracks customer shopping patterns. Direct mail
consists of sport-specific mailers targeted during key "windows of opportunity"
to customers who have demonstrated the greatest propensity to purchase such
goods. Direct mail also supplements heightened newspaper and broadcast
advertising during peak selling periods such as Father's Day and Christmas. A
portion of the direct mail program is targeted to prospective Sportmart
customers matching specified demographics.
Sportmart also sponsors tournaments and amateur competitive events in an
effort to align itself with both the serious sports enthusiast and the
recreational athlete. Sportmart is also recognized as a major sponsor of
professional sport teams in its markets, including, from time to time, the
Bulls, White Sox, Cubs and Bears in Chicago, the Dodgers in Los Angeles, the
Supersonics in Seattle, the Twins and Vikings in Minneapolis, and the Giants in
San Francisco.
Events marketing includes a targeted women's sports program entitled "The
Woman Athlete, Breaking the Myth." Sportmart has identified this as a major
company objective as participation in women's sports continues to escalate and
the loyalty of the female customer is an important element in Sportmart's long
term success. A key component of this program is the Sportmart Women's Advisory
Team, or "SWAT." SWAT is composed of five Olympic champions including Janet
Evans (four-time Olympic Gold Medalist in swimming), Mia Hamm (Olympic Gold
Medalist in soccer), Katrina McClain (two-time Olympic Gold Medalist in
basketball), Dot Richardson (Olympic Gold Medalist in softball), and Willye
White (two-time Silver Medalist in track and field, and the first American to
compete in five consecutive Olympics). This stellar team of athletes, along with
the prestigious Women's Sports Foundation, guides Sportmart in the
administration of a scholarship program that awards eight scholarships to young
women athletes entering college. Applications are received from all Sportmart
markets. SWAT also appears in key Sportmart advertising to communicate the
importance and benefits of sports participation for all women. SWAT will
continue to guide Sportmart in its merchandising and marketing to women.
EXPANSION
Sportmart's growth strategy has been based primarily upon opening clusters
of stores in major metropolitan areas that are serviced by central distribution
centers and opening additional stores in smaller markets that can be serviced by
the same distribution centers. In 1992, Sportmart adopted an aggressive
expansion program and, from Sportmart's initial public offering in October 1992
through the end of fiscal 1996, Sportmart grew from 26 stores to 71 stores and
entered the following 12 new geographical markets: San Francisco/Sacramento,
Minneapolis, Seattle, Portland, Columbus, Cleveland, Des Moines, Milwaukee and
Calgary, Edmonton, Vancouver and Toronto, Canada. On January 16, 1997, Sportmart
announced the closing of the eleven stores in Canada. The liquidation of the
Canadian stores' inventory was completed in April, 1997. As of November 2, 1997,
Sportmart operated 59 stores.
In January 1995, Sportmart entered into a joint venture agreement with
Dovrat, Shrem & Co. Trading Ltd. ("Dovrat") under which "Sportmart Israel Ltd."
(the "Joint Venture") was formed as a corporation under the laws of the State of
Israel. Pursuant to this agreement, Sportmart licensed the "Sportmart" name and
certain commercial and technical information to the Joint Venture. In fiscal
1996, the Joint Venture was restructured, so that Dovrat exited the Joint
Venture and Fishman Reshatot Ltd. took a controlling interest in the Joint
Venture (the "Restructured Venture"). Sportmart owns approximately 15% of the
Restructured Venture and has approximately $100,000 remaining as its investment.
STORE OPERATIONS
Stores. Sportmart believes that store design contributes significantly to
its overall merchandising strategy. The average store is approximately 42,000
square feet. Each store is designed to provide ample space for Sportmart's
customers to shop Sportmart's extensive product offerings. Generally, 85% of
store space is dedicated to selling while 15% is reserved for warehousing.
Sportmart's prototype store design has wide aisles, central checkouts and high
ceilings, but does not project a "warehouse" image. Because Sportmart does not
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warehouse goods on its selling floor, its stores have greater flexibility in
utilizing and formatting their selling floor and providing customers with
effective sight lines to products on display. Sportmart's merchandise assortment
is presented in an integrated "Four Worlds" format. The merchandise "Worlds" are
team sports, footwear, outdoors and fitness. In this format, the display of
equipment and apparel are integrated by sport and merchandised within
Sportmart's typical "racetrack" floor layout. In fiscal 1996, Sportmart also
rolled out its "Four Worlds" concept in a new prototype design in Sportmart's
Lombard location and is currently completing renovations implementing the new
prototype in two other locations in Southern California. In this new prototype
design rather than displaying merchandise in Sportmart's typical "racetrack"
layout, the new prototype integrates hard lines and soft lines merchandise in
four distinct areas of a store.
Sportmart operates stores in a variety of shopping environments. Sportmart
considers each of its stores to be a destination for its customers, conveniently
located in an identified trade area within one of its markets.
Distribution. Sportmart utilizes a "hub and spoke" distribution system in
which a central distribution center serves surrounding regional stores.
Management believes that its distribution system has the following advantages as
compared to a direct delivery (i.e., drop shipping) system utilized by other
superstore and warehouse store sporting goods chains: reduced individual store
inventory investment; more timely matching of store inventory needs; better use
of relatively higher cost store floor space; and easier returns to vendors. This
"hub and spoke" distribution system is utilized by many major volume retailers
such as Wal-Mart, Toys "R" Us and Circuit City.
Sportmart distributes substantially all of its products to its stores in
California and the Pacific Northwest through a 202,500 square foot distribution
center located in Fontana, California. Substantially all of the merchandise flow
for the stores in the Midwest is being distributed through a 142,000 square foot
distribution center located in Woodridge, Illinois.
Information Services. In fiscal 1996, Sportmart focused its information
systems resources on automated replenishment, electronic commerce, merchandise
planning and inventory management. A centralized help desk function was
initiated to provide support for the stores, distribution centers and home
office users. The initial steps in upgrading the communications network
infrastructure began in the fall and will continue throughout 1997. All systems
are currently being reviewed for year 2000 compliance.
COMPETITION
The market for retail sporting goods is highly competitive, fragmented and
segmented. Sportmart competes with many different types of retail stores,
including full-line sporting goods chains, warehouses, specialty stores,
discount and department stores and other superstores. Many of Sportmart's
competitors are affiliated with large national or regional chains that have
substantially greater resources than Sportmart. With respect to sportswear,
athletic apparel and athletic footwear, Sportmart competes with a number of
specialty footwear stores. While stores face competition in individual markets
from a variety of retailers, management believes that Sportmart's greatest
competition in the long-term is likely to come from other superstores and from
warehouse operations. Management believes that the primary competitive factors
in the retail sporting goods industry include quality and assortment of
merchandise, pricing, image, specialized customer service and costs of
operations. Several of Sportmart's stores currently face direct competition from
The Sports Authority stores, and Sportmart expects to face increased direct
competition from other superstores and warehouse operations in the future.
ASSOCIATES
Sportmart refers to all of its non-management employees as "associates." As
of November 30, 1997, Sportmart had approximately 1,463 full-time associates and
2,416 part-time associates (defined as associates who work less than 32 hours
per week). None of the associates are unionized. Sportmart considers its
relationship with its associates to be good.
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TRADENAMES
"Sportmart" and Sportmart's corporate logo are federally registered
servicemarks of Sportmart. Additionally, Sportmart has registered other
trademarks and service marks used in connection with its operations and has
trademark and service mark registration applications pending in the U.S. and
other nations. Management believes the strength of each of its service marks and
trademarks is of considerable value to its business and will seek to promote and
protect its service marks and trademarks as it deems appropriate.
CANADIAN SUBSIDIARY
On January 16, 1997, Sportmart announced its decision to close its eleven
Canadian based stores. The closing of the Canadian stores allows Sportmart to
focus resources on its core U.S. markets. Sportmart completed the liquidation of
its inventory in Canada in early April 1997. As of November 30, 1997, Sportmart
has terminated leases for seven locations and assigned leases for two additional
locations in Canada. Sportmart is actively marketing the two remaining
locations.
PROPERTY
Of Sportmart's 59 stores, 16 stores are located in the Chicago metropolitan
area, 13 stores are located in the Los Angeles metropolitan area, 11 stores are
located in the San Francisco/Sacramento area, five stores are located in the
Minneapolis metropolitan area, three stores are located in each of the Seattle
and Columbus, Ohio metropolitan areas, two stores are located in each of the San
Diego, Milwaukee and Portland areas and one store is located in each of the
Cleveland and Des Moines areas.
Sportmart leases all of its stores in the United States. As of the date
hereof, seven of the leases were with partnerships, the partners of which are
certain officers of Sportmart and their family members. There are an additional
four leases with respect to vacant stores leased from partnerships, the parties
of which include certain officers of Sportmart and their family members. See
"Certain Transactions of Sportmart -- Property Leases." Typically, Sportmart
occupies its stores under long-term leases which generally provide for an
initial term of at least 15 years with multiple five-year renewal options.
Sportmart's leases typically provide for the payment of minimum annual rent with
periodic adjustments, plus other charges, including a proportionate share of
taxes, insurance and common area maintenance. In addition, Sportmart remains
secondarily liable for the two leases it has assigned in Canada and has a
contingent liability behind two other parties with respect to a portion of a
third location in Canada. Sportmart owns its location in Edmonton, Canada and
leases the one other remaining Canadian location. Sportmart is currently
marketing these locations as a result of the closing of its Canadian subsidiary.
Sportmart also owns approximately 6 acres of land in Orland Park, Illinois, on
which Sportmart anticipates it may relocate its current Orland Park location. In
addition, Sportmart has signed a lease for a new store in San Mateo, California,
which it anticipates opening in the first half of fiscal 1998.
Sportmart leases a distribution center located in a 202,500 square foot
facility in Fontana, California. The term of that lease expires September 30,
2008, assuming all options are exercised. Sportmart also leases a distribution
center in Woodridge, Illinois in a 142,000 square foot facility. The term of
this lease expires April 27, 2007, assuming all options are exercised.
LEGAL PROCEEDINGS
Sportmart is involved in various routine legal proceedings incidental to
the conduct of its business. Management believes that none of these legal
proceedings will have a material adverse impact on the financial condition or
results of operations of Sportmart.
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SPORTMART MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical Financial Data of Sportmart" and the notes thereto and
Sportmart's consolidated financial statements and notes thereto included
elsewhere in this Proxy Statement/Prospectus.
The following table sets forth, for the fiscal periods indicated, certain
income and expense items expressed as a percentage of net sales and the number
of stores open at the end of each period:
<TABLE>
<CAPTION>
THIRTY-NINE
WEEKS
FISCAL YEAR ENDED ENDED
------------------------------ ------------------
JAN. 29, JAN. 28, FEB. 2, OCT. 27, NOV. 2,
1995 1996 1997 1996 1997
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales, including buying, distribution and
occupancy.......................................... 75.5 77.4 77.9 76.6 77.7
----- ----- ----- ----- -----
Gross profit......................................... 24.5 22.6 22.1 23.4 22.3
OPERATING EXPENSES:
Store expenses....................................... 16.4 18.1 18.0 17.1 17.3
General and administrative expenses.................. 2.8 3.2 3.9 3.8 4.4
Non-recurring charges................................ -- 1.2 6.5 -- --
Store pre-opening expenses........................... 0.6 0.8 0.3 0.2 --
----- ----- ----- ----- -----
Operating (loss) income.............................. 4.7 (0.7) (6.6) 2.3 0.6
Interest expense, net................................ (1.0) (1.0) (1.7) (1.6) (1.7)
Other income (expense)............................... 0.1 0.3 -- -- --
----- ----- ----- ----- -----
(Loss) income before income taxes, discontinued
operations and extraordinary item.................. 3.8 (1.4) (8.3) 0.7 (1.1)
Income tax expense (benefit)......................... 1.5 (0.6) (3.1) 0.3 (0.4)
----- ----- ----- ----- -----
Net (loss) income from continuing operations......... 2.3% (0.8)% (5.2)% 0.4% (0.7)%
===== ===== ===== ===== =====
Number of stores at end of period.................... 53 67 59 70 59
===== ===== ===== ===== =====
</TABLE>
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1997 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 29, 1996
Net sales decreased from $373.9 million in the thirty-nine weeks ended
October 27, 1996 to $318.5 million in the thirty-nine weeks ended November 2,
1997. The net sales decrease was primarily attributable to Sportmart's decision
to exit the Canadian market at the end of fiscal 1996 coupled with the overall
comparable store sales decreases.
Net sales in comparable stores decreased 5.7% during the thirty-nine weeks
ended November 2, 1997 as compared to the thirty-nine week period ended October
27, 1996. Management believes that comparable stores sales have been negatively
effected by the continued impact of competition and the re-positioning of
Sportmart into businesses that historically have generated higher gross margins.
Sportmart realized sales increases during the thirty-nine weeks ended November
2, 1997 in cleated footwear, athletic socks and accessories, womens fitness,
men's and women's sportswear, men's active sportswear and golf. The apparel
categories previously noted represent areas where Sportmart has expanded its
offerings of higher margin private branded merchandise as part of its strategic
re-positioning. Nevertheless, the comparable store sales performance was
negatively impacted by soft sales of abdominal exercisers, in-line skates and
outdoor categories during the thirty-nine week period.
Gross profit after buying, distribution, and occupancy costs decreased
$16.4 million during the thirty-nine week period ended October 27, 1996, to
$70.9 million, an 18.8% decrease, primarily due to lower sales volume. Gross
profit, as a percentage of net sales, decreased 1.1% due primarily to accruing a
higher shrinkage reserve
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based on last year's full year results. In addition, distribution and occupancy
costs caused the gross profit percentage to decrease due to the lower sales
volume.
Store expenses decreased from $63.9 million in the thirty-nine week period
ended October 27, 1996, to $55.1 million in the thirty-nine week period ended
November 2, 1997, a 13.8% decrease. This decrease was primarily due to the
closure of the eleven Canadian locations. As a percentage of net sales, store
expenses increased slightly from 17.1% in the thirty-nine week period ended
October 27, 1996, to 17.3% in the thirty-nine week period ended November 2,
1997.
General and administrative expenses decreased slightly from $14.2 million
in the thirty-nine week period ended October 27, 1996, to $13.9 million in the
thirty-nine week period ended November 2, 1997, a 2.1% decrease. As a percentage
of net sales, general and administrative expenses increased from 3.8% in the
thirty-nine week period ended October 27, 1996, to 4.4% in the thirty-nine week
period ended November 2, 1997, primarily due to the lower sales volume.
Net interest expense decreased from $6.0 million in the thirty-nine week
period ended October 27, 1996, to $5.4 million in the thirty-nine week period
ended November 2, 1997. The decrease in net interest expense is due to the lower
average debt levels during fiscal 1997. Net interest expense, as a percentage of
net sales, increased slightly from 1.6% in the thirty-nine week period ended
October 27, 1996, to 1.7% in the thirty-nine week period ended November 2, 1997.
For the thirty-nine week periods ended November 2, 1997 and October 27,
1996, the statements of operations reflect a provision for federal, state, and
provincial income taxes based on Sportmart's expected annual tax rates.
FISCAL YEAR ENDED FEBRUARY 2, 1997 COMPARED TO FISCAL YEAR ENDED JANUARY 28,
1996
During fiscal 1996, Sportmart opened four new Sportmart superstores and
closed the Wheeling, Illinois location. Sportmart also decided to close its 11
Canadian-based stores at the end of fiscal 1996. Sportmart engaged an
independent company to liquidate the Canadian inventories beginning in
mid-January 1997 which was completed in mid-April 1997. These stores are still
classified as open at the end of fiscal 1996 in the table above, as the stores
were still operating during the liquidation process. During fiscal 1995,
Sportmart opened 16 new stores and closed two stores, one in West Covina,
California, and one in Chicago, Illinois (River North). As of February 2, 1997,
Sportmart operated 70 stores (11 in the process of liquidation) as compared to
67 stores as of January 28, 1996.
Net sales from continuing operations in fiscal 1996 (a 53 week period)
increased 4.6% to $514.6 million from $492.2 million in fiscal 1995 (a 52 week
period). The increase in net sales is due to sales contributions from the new
stores opened during fiscal 1996 and 1995. The sales volumes in the eleven
Canadian locations opened during fiscal 1996 and 1995 were less than those
typically realized for new stores opened in the United States and less than
Sportmart's expectations. Sportmart believes that the lower volumes in Canada
resulted from significantly increased competition and declining demand in the
Canadian sporting goods market during fiscal 1996.
Comparable store sales decreased 6.8% for a comparable 52 week period
versus the prior year. A store is included in comparable stores sales in its
thirteenth month of operation. Management believes that comparable store sales
in fiscal 1996 were impacted by increased competition, cooler weather in the
Midwest for the spring season along with the re-positioning of Sportmart into
businesses that historically have generated higher gross margins. Sportmart's
strategy is to evolve from a sports generalist toward four strong specialty
businesses, or "Four Worlds"; team sports, footwear, fitness and outdoor
lifestyle. Within each world, floor space and inventory dollars are being
allocated to better reflect the consumer's interest and maximize profitability
per square foot. The results of Sportmart's apparel and footwear businesses have
improved, particularly sales of private brand merchandise; however, these
results were not enough to offset declines in hardlines merchandise. In an
effort to improve its sales performance during fiscal 1997, Sportmart has
increased advertising spending, added direct mail pieces and enhanced its
frequent buyer program through promotional offers and a preferred pricing
program.
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Gross profit from continuing operations, after buying, distribution, and
occupancy costs, increased 2.7% from $111.0 million in fiscal 1995 to $114.0
million in fiscal 1996, due primarily to a higher level of sales. Gross profit
as a percentage of net sales decreased from 22.6% to 22.1% primarily due to
higher occupancy costs as a result of the significant number of new store
openings during the past few years coupled with a significant increase in the
merchandise cost of goods sold for the Canadian locations. In the U.S., however,
overall gross profit increased 0.2% from the prior year. Sportmart's U.S.
results reflect an improvement in the cost of merchandise sold net of the impact
of the higher than expected shrinkage recorded in the fourth quarter. In
response, Sportmart plans to install electronic article surveillance equipment
in the stores which currently do not have it (approximately 24 stores) and to
intensify its store audit programs. Finally, Sportmart is continuing to expand
its private brand business in fiscal 1997 which historically has generated
higher gross margins.
Store expenses increased 4.5% from $89.0 million in fiscal 1995 to $93.0
million in fiscal 1996. As a percentage of net sales, store expenses decreased
slightly from 18.1% to 18.0%. Store expenses for the U.S. locations decreased in
both dollars and as a percentage of net sales. The decrease was due mainly to
decreases in net advertising expenses as well as improved efficiencies in
overall regional expense categories.
General and administrative expenses increased to $19.9 million in fiscal
1996 from $15.9 million in fiscal 1995, a 25.2% increase. This increase was due
primarily to replacing and hiring additional personnel and information system
related costs (computer equipment depreciation and lease costs) to support
Sportmart's strategic goals. As a percentage of net sales, general and
administrative expenses increased to 3.9% of net sales for fiscal 1996 versus
3.2% for fiscal 1995.
Store pre-opening expenses decreased from $3.8 million in fiscal 1995 to
$1.7 million in fiscal 1996, a 55.3% decrease. Store pre-opening expenses in
fiscal 1996 reflect the opening of four new locations along with the remodeling
of the Lombard, Illinois location at an average cost per store of approximately
$340,000. Store pre-opening expenses in fiscal 1995 reflect the opening of
sixteen new stores at an average cost per store of $237,000. The average cost
per store increased over the prior year mainly due to the occupancy costs paid
at the Canadian locations before the stores opened for business. The average
cost per store in the U.S. for the two new locations and the one remodel was
approximately $226,000.
A pre-tax charge of $33.2 million for non-recurring items was recorded
during the fourth quarter of fiscal 1996 primarily in conjunction with closing
the eleven Canadian locations. Included in the charge for store closings were
charges for the unamortized portions of nonrecoverable capital improvements
($12.5 million), lease buy-out costs ($11.9 million), inventory write-down costs
($5.7 million), severance ($850,000), as well as other miscellaneous costs ($2.2
million). Sportmart engaged an outside service to liquidate the inventory
beginning in mid-January 1997 and the liquidation was completed by mid-April,
1997. The closing of the eleven Canadian locations will have resulted in
aggregate personnel reductions of approximately 600 people.
Operating loss in fiscal 1996 was $33.9 million as compared to $3.4 million
in fiscal 1995 due to a combination of the factors described above including the
non-recurring charge, comparable store sales declines and the poor results in
Canada.
Interest expense as a percentage of net sales increased from 1.0% for
fiscal 1995 to 1.7% for fiscal 1996. The increase over the prior year was due to
increased borrowings related to funding Canada and partially to increased
interest rates. Other income/expense decreased from income of $1.4 million for
fiscal 1996 to expense of $21,000 for fiscal 1996. The decrease in other income
is due to the addition of bank commitment fees, the recognition of Sportmart's
portion of the loss in its joint venture in Israel during the year coupled with
a decrease in the revenue received from landlords for late opening penalties.
Income tax benefit as a percentage of loss from continuing operations was
38.0% for fiscal 1996, as compared to an income tax expense of 42.2% in fiscal
1995. This decrease in the effective income tax rate is primarily due to the
elimination of the higher federal and provincial statutory rates in Canada.
Included in the February 2, 1997 Consolidated Balance Sheet, Sportmart had an
income tax refund receivable of $11.0 million, primarily as a result of the
income tax benefit recorded for fiscal 1996. As of April 25, 1997, $10.7 million
of the currently refundable income taxes had been received. As of February 2,
1997, Sportmart has available
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federal and state net operating loss carry forwards of approximately $19.0
million for offset against taxable income. Based on Sportmart's business plan
and the timing of the reversals of temporary differences, management believes
Sportmart will be able to realize the benefit of the net deferred tax asset on
the Consolidated Balance Sheet as of February 2, 1997.
The net loss from continuing operations for fiscal 1996 and 1995 was $26.5
million and $4.1 million, respectively, as a result of the items discussed above
including the non-recurring charge, comparable store sales declines and the poor
results in Canada. The net income for the U.S. operations, excluding
non-recurring charges and results from foreign operations, was $413,000 for the
fiscal year ended February 2, 1997.
During fiscal 1995, Sportmart closed its No Contest division and
established an after-tax reserve of $1.7 million for discontinued operations.
During fiscal 1996, an additional after-tax charge of $90,000 was recorded as
discontinued operations as a result of increased costs associated with the No
Contest closing.
During the third quarter of fiscal 1996, Sportmart incurred an
extraordinary charge of approximately $460,000, net of income taxes of $335,000,
as a result of the termination of the previous revolving credit facility with a
syndicate of banks and the Senior Notes from Allstate Insurance Co.
FISCAL YEAR ENDED JANUARY 28, 1996 COMPARED TO FISCAL YEAR ENDED JANUARY 29,
1995
During fiscal 1995, Sportmart opened 16 new Sportmart superstores and
closed two stores, one in West Covina, California, and one in Chicago, Illinois
(River North). Sportmart also announced plans to close another store in Chicago
(Wheeling, Illinois) in early 1996. During fiscal 1994, Sportmart opened 12 new
stores, relocated one store and closed one store located in Glendale,
California. As of January 28, 1996, Sportmart operated 67 stores as compared to
53 stores as of January 29, 1995.
Net sales from continuing operations for fiscal 1995 increased 19.1% to
$492.2 million from $413.3 million in fiscal 1994. The increase in sales was due
to sales contributions from the new stores opened during fiscal 1995 and 1994.
The sales volumes in the nine Canadian locations opened during fiscal 1995 were
less than those typically realized for new stores opened in the United States
and less than Sportmart's expectations. Sportmart believes that the lower
volumes in Canada resulted from significantly increased competition from
additional sporting goods superstores opened in the Toronto metro market during
the second half of fiscal 1995.
Comparable store sales decreased 4.3% during fiscal 1995 versus fiscal
1994. Management believes that comparable store sales in fiscal 1995 were
modestly impacted by cannibalization from new stores which overlapped the
customer base of existing stores as a result of Sportmart's strategy to dominate
certain markets. Additionally, comparable store sales were adversely affected by
increased competition and a weak Southern California retail environment.
Finally, comparable store sales were negatively impacted by lower than
anticipated sales of ski related merchandise during the fourth quarter,
particularly on the West Coast. Several personnel and organizational changes
were made during fiscal 1995 to address Sportmart's comparable store sales.
These include new senior executives in merchandising, store operations and
inventory management and a new organization of the buying staff.
Gross profit from continuing operations, after buying, distribution, and
occupancy costs increased 9.5% from $101.4 million in fiscal 1994 to $111.0
million in fiscal 1995, due primarily to a higher level of sales. Gross profit
as a percentage of net sales decreased from 24.5% to 22.6% primarily due to
higher occupancy costs as a result of the significant number of new store
openings during the past few years and markdowns necessary to achieve targeted
levels of inventories. The personnel and organizational changes discussed above
were also made to address Sportmart's goal of improving gross margins.
Store expenses increased 31.9% from $67.5 million in fiscal 1994 to $89.0
million in fiscal 1995. As a percentage of net sales, store expenses increased
from 16.3% to 18.1% primarily due to higher advertising expenditures and
increased store salaries as a percentage of sales. The higher advertising
expenditures resulted from the increased promotional nature of retailing during
the holiday season while the higher store salaries rate was related to the lower
sales achieved in both the new stores recently opened and the comparable store
sales decline.
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General and administrative expenses increased to $15.9 million in fiscal
1995 from $11.7 million in fiscal 1994, a 35.9% increase. This increase was due
primarily to expenditures related to replacing and hiring additional personnel
to support Sportmart's strategic goals. As a percentage of net sales, general
and administrative expenses increased to 3.2% of net sales for fiscal 1995
versus 2.8% for fiscal 1994.
Store pre-opening expenses increased to $3.8 million in fiscal 1995 from
$2.6 million in fiscal 1994, a 46.2% increase. Store pre-opening expenses in
fiscal 1995 reflected the opening of sixteen new stores at an average cost per
store of approximately $237,000. Store pre-opening expenses in fiscal 1994
reflect the opening of twelve new stores and the relocation of one store at an
average cost per store of approximately $197,000. The average costs per store
increased over the prior year due to additional start-up costs associated with
entering the Canadian market.
A pre-tax reserve of $5.7 million for non-recurring charges was established
during the fourth quarter of fiscal 1995 to provide for the costs associated
with closing the River North store (located near downtown Chicago) and a
clearance center store (located in Wheeling, Illinois) along with a reserve
primarily for severance pay. The River North location was closed as of the end
of fiscal 1995 and the Wheeling store was closed during the second quarter of
fiscal 1996.
Operating loss in fiscal 1995 was $3.4 million as compared to operating
income in fiscal 1994 of $19.6 million due to a combination of the factors
described above including the non-recurring charge, comparable store sales
declines and the lower than expected sales for the new Canadian stores.
Net interest expense as a percentage of net sales remained unchanged at
1.0% for both fiscal 1995 and fiscal 1994. Other income increased to $1.4
million in fiscal 1995 from $.4 million in fiscal 1994. The increase in other
income is primarily due to the introduction of a new branded credit card program
and an increase in the revenue received from landlords for late opening
penalties.
Income tax benefit as a percentage of loss from continuing operations was
42.2% for fiscal 1995, as compared to an income tax expense of 39.5% in fiscal
1994. This increase in the effective income tax rate is primarily due to the
higher federal and provincial statutory rates in Canada.
As a result of Sportmart's strategy to concentrate on its Sportmart
superstore operations, Sportmart decided to close its No Contest division at the
end of fiscal 1995. Accordingly, an after-tax reserve of $1.7 million was
established in fiscal 1995 for costs associated with the closing of the
division. Net loss from discontinued operations remained constant at
approximately $.6 million for both fiscal 1995 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of November 2, 1997, Sportmart had working capital of $12.2 million
compared to $9.2 million at February 2, 1997.
Net cash used in operating activities was $9.5 million for the thirty-nine
weeks ended November 2, 1997, versus $22.1 million for the thirty-nine weeks
ended October 27, 1996. The $12.6 million decrease in cash used in operating
activities is primarily due to the decrease in inventory as a result of exiting
the Canadian market. Also, Sportmart collected an income tax refund during the
first thirty-nine weeks of fiscal 1997. Partially offsetting these items were
payments of accrued expenses related to the closure of the Canada stores during
the first thirty-nine weeks of fiscal 1997.
Net cash used in investing activities decreased from $13.1 million for the
thirty-nine weeks ended October 27, 1996, to $2.8 million for the thirty-nine
weeks ended November 2, 1997. The $10.3 million decrease in cash used in
investing activities is primarily due to lower capital expenditures.
Net cash provided by financing activities was $9.5 million for the
thirty-nine weeks ended November 2, 1997, versus $31.2 million for the
thirty-nine weeks ended October 27, 1996. The $31.2 million net cash provided by
financing activities for the thirty-nine week period ended October 27, 1996 was
primarily due to $56.5 million net advances on the line of credit net of $20.2
million payment on the early extinguishment of debt and $5.6 million principal
payments under capital lease obligations and long-term debt. The $9.5 million
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net cash provided by financing activities for the thirty-nine weeks ended
November 2, 1997 was primarily due to $6.6 million net advances on the line of
credit.
Sportmart has available a $135.0 million revolving credit agreement with a
syndicate of banks. This revolving line of credit funds both seasonal and
general capital requirements. In order to comply with Emerging Issues Task Force
Issue No. 95-22 regarding classification of certain debt instruments, the
borrowings under this revolving line of credit have been classified as current
liabilities. However, based on the terms of the agreement and Sportmart's
business plan, Sportmart believes the amount outstanding under the revolving
line of credit will be due and payable in September 2001 subject to any prior
refinancing by Gart Sports following the Merger. This revolving line of credit
requires the maintenance of minimum net worth and a maximum debt to inventory
ratio. As of November 2, 1997, Sportmart was in compliance with all covenants of
this agreement. In June and September of fiscal 1997, Sportmart amended this
credit agreement to lower the minimum net worth requirement and increase
borrowing availability in order to provide Sportmart with greater operating
flexibility. As of December 3, 1997, approximately $101.9 million in cash
borrowings and $4.9 million in letters of credit (to support imported
merchandise and certain real estate transactions) were outstanding under this
line of credit.
Sportmart's primary on-going cash requirements for fiscal 1997 relate to
capital expenditures relating to the improvement of existing operations.
Sportmart does not plan to open any new stores during fiscal 1997. As of
November 2, 1997, Sportmart has invested approximately $3.6 million in capital
expenditures of which $2.7 million related to the renovation of existing stores
and distribution centers and $.9 million related to upgrades in Sportmart's
management information systems. In addition, Sportmart plans to invest, during
the remainder of fiscal 1997, $2.5 million to renovate existing stores and
distribution centers and to upgrade Sportmart's management information systems.
Sportmart expects to be able to fund its working capital requirements with a
combination of anticipated cash flows from operations, bank borrowings and
normal trade credit agreements.
FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT
Derivative financial instruments are utilized by Sportmart to reduce
interest rate and foreign currency exchange risks. Sportmart does not use
derivatives for speculative trading purposes.
In March 1995, Sportmart entered into an interest rate swap agreement, a
form of derivative, with a major financial institution. This agreement became
effective in August 1995 and expires in August 1998. This agreement effectively
converts $10.0 million of its floating rate bank debt (based on LIBOR plus a fee
determined by financial performance) to a fixed rate of 7.54% (plus the same
fee) and requires settlement on a quarterly basis. The difference in interest
between the fixed rate and effective LIBOR interest rate is recognized as an
adjustment to interest expense in the period incurred.
In order to reduce its exposure to fluctuations in interest rates,
Sportmart entered into interest rate cap agreements for a notional amount
totaling $50.0 million during fiscal 1997. In April 1997, Sportmart entered into
an interest rate cap on $25.0 million of its revolving line of credit which
expires in one year and places a ceiling on LIBOR at 6.0%. In July 1997,
Sportmart entered into a second interest rate cap for $25.0 million of its
revolving line of credit which expires in two years and places a ceiling on
LIBOR at 6.0%.
During the course of operating in Canada, Sportmart entered into foreign
currency contracts to hedge intercompany loans and other commitments in
currencies other than its Canadian subsidiary's functional currency. During the
course of closing down operations in Canada, Sportmart has continued to enter
into such contracts. Realized and unrealized gains and losses arising from these
foreign currency contracts are recognized in income as offsets to gains and
losses resulting from the underlying hedged transaction. As of November 2, 1997,
Sportmart had approximately $1.4 million of open foreign currency contracts with
various settlement dates prior to January 1998.
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SEASONALITY AND INFLATION
The second and fourth fiscal quarters, which respectively include Father's
Day and Christmas, have historically contributed the greatest volume of net
sales and income before taxes to Sportmart. For fiscal years 1996 and 1995, the
second and fourth fiscal quarters combined accounted for approximately 56% and
58%, respectively, of Sportmart's fiscal year net sales. In both fiscal 1996 and
1995, the fourth fiscal quarter was significantly impacted by non-recurring
charges and, in addition, the fourth quarter of fiscal 1995 was impacted by
discontinued operations; however, typically, the second and fourth quarters
account for substantially all of Sportmart's income before taxes. In contrast,
Sportmart has consistently experienced net losses in the third quarter.
Inventory levels, which gradually increase beginning in February, generally
reach their peak in November and then fall to their lowest level following the
December holiday season. Although the operations of Sportmart are influenced by
general economic conditions, Sportmart does not believe that inflation has had a
material effect on the results of operations during the thirty-nine weeks ended
November 2, 1997.
GEOGRAPHIC SEGMENT INFORMATION
Sportmart's major operations are in the United States, however, as of
February 2, 1997, Sportmart operated eleven locations in Canada which were
liquidated in the first quarter of fiscal 1997. The revenues, operating loss
after nonrecurring expenses and identifiable assets relating to the Canadian
operations for fiscal 1996 were $49.9 million, $39.0 million and $24.0 million,
respectively.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (FAS
128). FAS 128 is designed to improve the EPS information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements, and increasing the comparability of EPS data on an
international basis. FAS 128 is effective for financial statements issued for
periods ending after December 15, 1997. Sportmart has not yet determined the
impact that adoption of FAS 128 will have on the financial statements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, Disclosure of Information about Capital Structure (FAS 129).
FAS 129 establishes standards for disclosing information about an entity's
capital structure. This Statement is effective for financial statements for
periods ending after December 15, 1997. It contains no change in disclosure
requirements for entities that were previously subject to the requirements of
Opinions No. 10 (Omnibus Opinion--1966) and No. 15 (Earnings per Share) and
Statement No. 47 (Disclosure of Long-Term Obligations). Thus Sportmart does not
anticipate any impact from this pronouncement as it is complying with the
disclosure requirements for Opinion No. 15 (Earnings per Share).
In June 1997, the FASB issued SFAS Statement No. 130, "Reporting
Comprehensive Income." This statement, effective for fiscal years beginning
after December 15, 1997, would require Sportmart to report components of
comprehensive income in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income is defined by
Concepts Statement No. 6, "Elements of Financial Statements" as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Sportmart does not believe that SFAS Statement No. 130
will have a material impact on its financial statements.
In June 1997, the FASB issued SFAS Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement, effective
for financial statements for periods beginning after December 15, 1997, requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments. Generally, financial information is
required to be reported on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to segments.
Sportmart does not believe that SFAS Statement No. 131 will have a material
impact on its financial statements.
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COMPARISON OF RIGHTS OF STOCKHOLDERS OF SPORTMART AND GART SPORTS
The following comparison of stockholders' rights is a summary thereof and
is subject in all respects, and is qualified by reference, to Delaware law and
to the provisions of the Amended and Restated Certificate of Incorporation of
Gart Sports (the "Gart Certificate"), the Amended and Restated Bylaws of Gart
Sports (the "Gart Bylaws"), the Restated Certificate of Incorporation of
Sportmart, Inc. (the "Sportmart Certificate") and the Bylaws of Sportmart (the
"Sportmart Bylaws").
The rights of Sportmart's stockholders are governed by the Sportmart
Certificate, Sportmart's Bylaws and the Delaware General Corporation Law
("DGCL"). After the Effective Time, the rights of Sportmart's stockholders who
become Gart Sports stockholders will be governed by the Gart Certificate, the
Gart Bylaws and the DGCL. The companies' Certificates and Bylaws are similar in
many respects. For example, both Gart Sports and Sportmart have the same quorum
requirements, notice requirements for meetings, and do not provide for
preemptive rights. The following is a summary comparison of certain differences
between the rights of Sportmart's stockholders under the Sportmart Certificate
and Sportmart Bylaws and the rights of Gart Sports stockholders under the Gart
Certificate and Gart Bylaws.
All references herein to the Gart Certificate and Gart Bylaws are to such
Amended and Restated Certificate of Incorporation and Bylaws as will be in
effect at the completion of the merger. The Gart Certificate and Bylaws to be in
effect at that time are attached to this Proxy Statement/Prospectus as
Appendices D and E, respectively.
Number of Directors. The Gart Certificate provides that except as otherwise
fixed pursuant to the provisions of Article IV, which relates to the rights of
the holders of any class or series of Preferred Stock to elect additional
directors under specified circumstances, the number of directors of Gart Sports
shall be fixed from time to time exclusively by resolutions adopted by the Board
of Directors. However, no decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. Currently,
the Gart Sports Board of Directors consists of three directors. After the
Effective Date, the Gart Sports' Board of Directors will consist of seven
directors. The Sportmart Certificate provides that the Board of Directors should
consist of not less than six nor more than eleven directors. The exact number of
Directors of Gart Sports shall be determined from time to time by a resolution
adopted by the affirmative vote of a majority of the directors in office at the
time of adoption of such resolution. The Sportmart Board now consists of nine
members.
Classified Board of Directors. The Sportmart Board is divided into three
classes which serve for staggered terms of three years. The Gart Certificate
does not provide for classification of directors.
Removal of Directors. The Gart Certificate provides that any director,
other than those who may be elected by the holders of any class or series of
Preferred Stock, or the entire Board of Directors, may be removed from office
only for cause by the affirmative vote of the holders of at least a majority of
the voting power of all the then outstanding shares of capital stock of Gart
Sports entitled to vote generally in the election of directors (the "Voting
Stock"), voting together as a single class. The Sportmart Certificate and
Sportmart Bylaws provide that, except as required by law, a director may be
removed only for cause.
Vacancies on the Board of Directors. The Gart Certificate provides that
vacancies shall be filled solely by the affirmative vote of a majority of the
directors then in office, even though less than a quorum of the Board of
Directors, or by a sole remaining director. The elected director shall hold
office until such director's successor shall have been elected and qualified, or
until such director's earlier resignation or removal. The Sportmart Certificate
provides that all vacancies on the Board of Directors and newly-created
directorships shall be filled by the Board of Directors.
Amendments of Certificate of Incorporation. The DGCL provides that, unless
a higher percentage is specified in a corporation's certificate of
incorporation, such certificate may be amended by the affirmative vote of the
holder of a majority of the outstanding shares of the corporation entitled to
vote thereon. The Gart Certificate does not specify a higher percentage except
to amend or repeal the provisions relating to Article VI (Business Combinations)
of the Gart Certificate, which requires the affirmative vote of the holders of
at least 66 2/3% of the Voting Stock. The Sportmart Certificate requires the
affirmative vote of at least 75% of the voting power of the shares entitled to
vote generally in the election of directors to amend or repeal any provision in
the Sportmart Certificate.
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Amendments of Bylaws. The Gart Certificate provides that the Board of
Directors shall have the power to make, alter, amend and repeal the Gart Bylaws.
Bylaws adopted by the Board of Directors under the powers conferred in the Gart
Certificate may be altered, amended or repealed by the Board of Directors or by
the stockholders of Gart Sports. Notwithstanding the foregoing, Section 7 of
Article II (Notice of Business) and Section 3 of Article III (Election of
Directors) of the Gart Bylaws cannot be altered, amended or repealed and no
provision inconsistent therewith can be adopted without the affirmative vote of
the holders of at least a majority of Gart Common Stock, voting together as a
single class. The Sportmart Certificate provides that the Board of Directors is
expressly authorized to make, alter or repeal the Sportmart Bylaws. The
Sportmart Bylaws may be altered, amended or repealed by the Board of Directors
in accordance with the preceding sentence or by the vote of the holders of at
least 75% of the voting power of the shares entitled to vote generally in the
election of directors.
Notice of Business. The Gart Bylaws provide that at any meeting of the
stockholders of Gart Sports, only such proper business shall be conducted as
shall have been brought before the meeting (i) by or at the direction of the
Board of Directors of Gart Sports or (ii) by any stockholder of Gart Sports who
is a stockholder of record at the time of giving the notice required as set
forth hereinafter. For business to be brought before a meeting of stockholders
by a stockholder, the stockholder shall have given timely notice thereof in
writing to the Secretary of Gart Sports. To be timely, a stockholder's notice
shall be delivered to or mailed and received at the principal executive office
of Gart Sports no less than 50 days nor more than 75 days prior to the meeting;
provided, however, that in the event that less than 60 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made, whichever
first occurs. Such notice shall include (i) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting; (ii) the name and address, as they appear on Gart
Sports' books, of the stockholder proposing such business; (iii) the class and
number of shares of capital stock of Gart Sports which are beneficially owned by
such stockholder; and (iv) any material interest of such stockholder in such
business.
The Sportmart Bylaws provide that at an annual meeting of the stockholders,
only such business shall be conducted as shall have been brought before the
meeting by or at the direction of the Board of Directors or by any stockholder
of Sportmart who complies with the notice procedures as set forth hereinafter.
For business to be properly brought before an annual meeting by a stockholder,
the stockholder must deliver written notice to, or mail such written notice so
that it is received by, the Secretary of Sportmart not less than 120 or more
than 150 days prior to the first anniversary of the date of Sportmart's consent
solicitation or proxy statement released to stockholders in connection with the
previous year's election of directors or meeting of stockholders, except that if
no annual meeting of stockholders or election by consent was held in the
previous year or if the date of the annual meeting has been changed from the
previous year's meeting, a proposal shall be received by Sportmart within 10
days after Sportmart has "publicly disclosed" the date of the meeting. The
notice that is required to be submitted to the Secretary of Sportmart in the
Sportmart Bylaws is substantially the same as the notice requirement in the Gart
Bylaws.
Nominations of Directors. The Gart Bylaws provide that nominations for
election as directors of Gart may be made at a meeting of stockholders (a) by or
at the direction of the Board of Directors of Gart Sports, (b) by any nominating
committee or persons appointed by the Board of Directors of Gart, or (c) by any
stockholders of Voting Stock who comply with the notice procedure. To be timely,
a stockholder's notice shall be delivered to or mailed and received at the
principal executive office of Gart Sports not less than 30 days nor more than 75
days prior to the meeting; provided, however, that in the event that less than
40 days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the tenth day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs.
The Sportmart Bylaws have similar nominating provisions, however, a
nominating committee may not nominate directors as it can under the Gart
Certificate. In addition, for notice to be timely it must be received by
Sportmart not less than 60 or more than 90 days prior to the meeting; provided,
however, that if Sportmart
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has not "publicly disclosed" the date of the meeting at least 70 days prior to
the meeting date, notice may be timely made by a stockholder if received by the
Secretary of Sportmart not later than the close of business on the tenth day
following the day on which Sportmart publicly disclosed the meeting date.
Calling of Special Meeting of Stockholders; Stockholder Action by Written
Consent. The Gart Certificate provides that except as otherwise prescribed by
law and subject to the rights of holders of any class or series of Preferred
Stock, a special meeting of stockholders of Gart Sports, for any purpose or
purposes, may be called by the Chairman of the Board of Directors of Gart
Sports, if there be one, the President, or the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors of Gart
Sports and shall be called by the Secretary or any Assistant Secretary, if there
be one, at the request in writing of a majority of the entire Board of Directors
of Gart Sports or by holders of outstanding stock of Gart Sports having not less
than a majority of the votes that would be necessary to authorize such action.
The Gart Bylaws provide that, upon receipt of such written request, the
President shall fix a date and time for such meeting which date shall be within
ten business days of the proposed date specified in the written request.
The Sportmart Certificate provides that a special meeting of stockholders
of Sportmart may be called upon not less than ten or more than 60 days' prior
written notice only by (a) the Board of Directors of Sportmart pursuant to a
resolution approved by a majority of the Board of Directors of Sportmart, or (b)
by holders of shares of Sportmart Voting Common Stock representing at least 75%
of the votes entitled to be cast generally in the election of directors.
The Gart Certificate provides that any stockholder action may be taken by
written consent in lieu of meeting if signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted, and the Board of Directors has received 24 hours
prior notice of the intent to take such action, which notice may be waived in
writing by each director entitled to receive such notice. The Sportmart
Certificate does not permit stockholder action to be taken by written consent in
lieu of meeting.
DESCRIPTION OF SPORTMART CAPITAL STOCK
The authorized capital stock of Sportmart consists of 50 million shares of
Sportmart Voting Common Stock, $.01 par value per share, 50 million shares of
Sportmart Class A Common Stock, $.01 par value per share, and 5 million shares
of Preferred Stock, $.01 par value per share ("Sportmart Preferred Stock").
COMMON STOCK
As of November 14, 1997, 5,148,833.5 shares of Sportmart Voting Common
Stock and 8,067,394.5 shares of Sportmart Class A Common Stock were outstanding.
All of the shares of Sportmart Common Stock are fully paid and nonassessable,
not subject to redemption and without preemptive or other rights to subscribe
for or purchase any proportionate part of any new or additional issues of any
class or of securities convertible into stock of any class. Except as otherwise
required by Delaware law or as otherwise provided in the Restated Certificate of
Incorporation and summarized below, each share of Sportmart Voting Common Stock
and each share of Sportmart Class A Common Stock has identical rights,
preferences and privileges. In the event of a liquidation, dissolution or
winding up of Sportmart, holders of Sportmart Common Stock are entitled to share
with each other on a ratable basis as a single class in the net assets of
Sportmart available for distribution after payment of liabilities and
satisfaction of any preferential rights of holders of Sportmart Preferred Stock.
The rights, preferences and privileges of holders of Sportmart Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Sportmart Preferred Stock which Sportmart may designate
and issue in the future.
Voting. Except as described under "Class A Protection" below, each share of
Sportmart Voting Common Stock entitles the holder thereof to one vote per share
on all matters on which stockholders are entitled to vote, including the
election of directors. Under the Sportmart Certificate, cumulative voting is not
permitted. Holders of the Sportmart Class A Common Stock are not entitled to
vote on any matters except in the limited circumstances provided in the
Sportmart Certificate and as required by Delaware law, as described below.
Actions submitted to a vote of stockholders are generally voted on only by
holders of Sportmart Voting
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<PAGE> 75
Common Stock, and only the affirmative vote of the holders of a majority of the
votes which may be cast by holders of the outstanding shares of Sportmart Voting
Common Stock is required, among other things, to amend the Sportmart
Certificate, to authorize additional shares of Sportmart Common Stock, to
approve the dissolution of Sportmart or, subject to the limitations discussed
below, to approve any merger or consolidation of Sportmart with or into any
other corporation. The holders of Sportmart Voting Common Stock are entitled to
elect the entire Board of Directors. In addition, as permitted under the DGCL,
the Sportmart Certificate provides that the number of authorized shares of
Sportmart Class A Common Stock may be increased or decreased (but not below the
number of shares then outstanding) without any vote of the holders thereof.
Under the Sportmart Certificate and the DGCL, so long as the holders of shares
of Sportmart Class A Common Stock receive at least the same amount and the same
form of consideration as the holders of shares of Sportmart Voting Common Stock
(other than differences identical in all material respects to the differences
between the Sportmart Voting Common Stock and the Sportmart Class A Common
Stock), the holders of Sportmart Class A Common Stock are not entitled to vote
on any merger or consolidation that affects their interests as stockholders. See
"-- Mergers and Consolidations."
Under the Sportmart Certificate and the DGCL, holders of Sportmart Class A
Common Stock are entitled to vote only on proposed amendments to the Sportmart
Certificate that would change the par value of the Sportmart Class A Common
Stock, that would adversely affect the powers, preferences or special rights of
the shares of Sportmart Class A Common Stock, including the dividend and Class A
Protection feature described below, or in mergers or consolidations that do not
meet the standards noted above.
Dividends and Other Distributions. The Sportmart Certificate provides that,
in the event that a cash dividend is declared and paid on either Sportmart
Voting Common Stock or Sportmart Class A Common Stock, the Board of Directors
must declare a dividend on the other class and may in its discretion declare a
dividend with respect to the Sportmart Class A Common Stock which is up to 20%
higher (but under no circumstances lower) than the dividend declared with
respect to the Sportmart Voting Common Stock. The Board of Directors is not
required to declare a higher dividend on the Sportmart Class A Common Stock and
the amount of future dividends, if any, on each of the Sportmart Voting Common
Stock and Sportmart Class A Common Stock will depend on circumstances existing
at the time, including the sufficiency of funds legally available for the
payment of dividends. The payment of dividends with respect to shares of
Sportmart Common Stock would be subject to preferential rights of holders of any
outstanding shares of Preferred Stock.
In all other respects, each share of Sportmart Voting Common Stock and
Sportmart Class A Common Stock is equal with respect to dividends and other
distributions in cash, stock or property (including distributions upon
liquidation, dissolution or winding up of Sportmart), except that dividends or
other distributions payable on the Sportmart Voting Common Stock or the
Sportmart Class A Common Stock in shares of Sportmart Voting Common Stock or
Sportmart Class A Common Stock may be made only as follows: (i) in shares of
Sportmart Class A Common Stock to the holders of both Sportmart Voting Common
Stock and Sportmart Class A Common Stock, (ii) in shares of Sportmart Voting
Common Stock to the holders of Sportmart Voting Common Stock and in shares of
Sportmart Class A Common Stock to the holders of Sportmart Class A Common Stock,
or (iii) in any other authorized class or series of capital stock to the holders
of both Sportmart Voting Common Stock and Sportmart Class A Common Stock.
Neither the Sportmart Voting Common Stock nor the Sportmart Class A Common Stock
may be split, subdivided or combined unless the other is proportionately split,
subdivided or combined.
Mergers and Consolidations. Any merger or consolidation of Sportmart
(whether or not Sportmart is the surviving corporation) in which the holders of
Sportmart Class A Common Stock are not entitled to receive at least the same
amount and the same form of consideration per share as the per share
consideration, if any, received by the holders of the Sportmart Voting Common
Stock shall be subject to the approval of the holders of a majority of the
outstanding shares of Sportmart Class A Common Stock. The holders of shares of
Sportmart Class A Common Stock shall be deemed to receive the same form of
consideration per share as the consideration per share received by the holders
of Sportmart Voting Common Stock if the terms of the securities to be received
by the holders of shares of Sportmart Class A Common Stock are identical in all
material respects to the terms of the Sportmart Class A Common Stock and the
terms of the securities to be
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received by the holders of shares of Sportmart Voting Common Stock are identical
in all material respects to the terms of the Sportmart Voting Common Stock.
Class A Protection. If any person or group acquires (other than as a result
of a "Permitted Transfer," defined below) beneficial ownership of a number of
shares of Sportmart Voting Common Stock after a "Trigger Date" (defined below)
that are equal to at least 10% or more of the then issued and outstanding shares
of Sportmart Voting Common Stock (any person or group making such acquisition
being defined as a "Significant Stockholder"), and such person or group does not
then beneficially own shares of Sportmart Class A Common Stock acquired after
September 27, 1994 (the "Initial Issuance"), constituting a percentage of the
issued and outstanding shares of Sportmart Class A Common Stock equal to or
greater than the percentage of issued and outstanding shares of Sportmart Voting
Common Stock represented by the number of shares of Sportmart Voting Common
Stock acquired by such Significant Stockholder (other than as a result of a
Permitted Transfer) after the Initial Issuance, such Significant Stockholder
must, within a 90-day period beginning the day after becoming a Significant
Stockholder, commence a public tender offer to acquire a number of additional
shares of Sportmart Class A Common Stock, as described below (a "Class A
Protection Transaction"). For purposes of this provision, the term "Trigger
Date" means the later of: (i) the Initial Issuance, or (ii) the then most recent
acquisition of beneficial ownership of shares of Sportmart Voting Common Stock
by such person or group that triggered the requirement of a tender offer by such
person or group under the Class A Protection feature.
For purposes of this provision, the terms "beneficial ownership" and
"group" have the same meanings as used in Regulation 13D promulgated under the
Exchange Act, and the term "Permitted Transfer" means an issuance or sale of
shares of either Sportmart Voting Common Stock or Sportmart Class A Common Stock
by Sportmart or a transfer of shares of either Sportmart Voting Common Stock or
Sportmart Class A Common Stock by an affiliate of Sportmart to another affiliate
of Sportmart, by operation of law, by will or the laws of descent and
distribution, by gift or by foreclosure of a bona fide loan.
In a Class A Protection Transaction, the Significant Stockholder must offer
to acquire from the holders of the Sportmart Class A Common Stock that number of
shares of additional Sportmart Class A Common Stock (the "Additional Shares")
determined by (i) dividing the number of issued and outstanding shares of
Sportmart Voting Common Stock beneficially owned by such Significant Stockholder
on the date such person or group became a Significant Stockholder, which were
acquired after the date of the Initial Issuance (other than through a Permitted
Transfer), by the total number of shares of Sportmart Voting Common Stock
outstanding on the date such person or group became a Significant Stockholder,
(ii) multiplying that percentage by the total number of shares of Sportmart
Class A Common Stock outstanding on such date, and (iii) subtracting therefrom
the total number of shares of Sportmart Class A Common Stock beneficially owned
by such Significant Stockholder on such date which were acquired after the date
of the Initial Issuance (including shares acquired on the date such person or
group became a Significant Stockholder). The Significant Stockholder must
acquire all shares validly tendered or, if the number of shares tendered exceeds
the number determined pursuant to such formula, a pro rata amount from each
tendering holder.
The offer price for any shares of Sportmart Class A Common Stock required
to be purchased by the Significant Stockholder pursuant to a Class A Protection
Transaction is the greater of (i) the highest price per share paid by the
Significant Stockholder for any share of Sportmart Voting Common Stock in the
six-month period ending on the date such person or group became a Significant
Stockholder or (ii) the highest price of a share of Sportmart Voting Common
Stock or Sportmart Class A Common Stock (whichever is higher) on Nasdaq (or such
other quotation system or securities exchange constituting the principal trading
market for either the Sportmart Voting Common Stock or the Sportmart Class A
Common Stock) on the date such person or group became a Significant Stockholder.
A Class A Protection Transaction is also required each time a Significant
Stockholder has cumulatively acquired in one or more transactions an additional
10% of the then issued and outstanding Sportmart Voting Common Stock (other than
as a result of a Permitted Transfer) after the last acquisition by such person
or group which triggered the requirement for a Class A Protection Transaction,
if such Significant Stockholder does not then beneficially own a number of
shares of Sportmart Class A Common Stock acquired after the
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<PAGE> 77
date of the Initial Issuance constituting a percentage of all of the then issued
and outstanding shares of Sportmart Class A Common Stock equal to or greater
than the percentage of issued and outstanding shares of Sportmart Voting Common
Stock represented by the number of shares of Sportmart Voting Common Stock
acquired by such Significant Stockholder (other than as a result of a Permitted
Transfer) after the Initial Issuance. Such Significant Stockholder would be
required to offer to buy that number of Additional Shares prescribed by the
formula set forth above, even if a previous Class A Protection Transaction
resulted in fewer shares of Sportmart Class A Common Stock being tendered than
such previous offer included.
Once a person becomes a Significant Stockholder, the voting rights of such
person with respect to the shares of Sportmart Voting Common Stock beneficially
owned by such person and acquired after the date of the Initial Issuance are
automatically suspended until consummation of a Class A Protection Transaction
as required by the terms of Section 4.A.6. of the Sportmart Certificate or until
divestiture of the shares of Sportmart Voting Common Stock that triggered the
offer requirement. The requirement to engage in a Class A Protection Transaction
is satisfied by making the requisite offer and purchasing validly tendered
shares, even if the number of shares tendered is less than the number of shares
included in the required offer. To the extent that the voting power of a
Significant Stockholder with respect to any shares of Sportmart Voting Common
Stock is so suspended, such shares will not be included in the determination of
aggregate voting shares for any purpose under the Sportmart Certificate or the
DGCL. Neither the Class A Protection Transaction requirement nor the related
loss of voting rights applies to any increase in percentage ownership of
Sportmart Voting Common Stock resulting solely from a change in the total amount
of Sportmart Voting Common Stock outstanding.
Convertibility. Except as described below, neither the Sportmart Voting
Common Stock nor the Sportmart Class A Common Stock is convertible into another
class of securities of Sportmart.
The Sportmart Class A Common Stock may be converted into Sportmart Voting
Common Stock on a share-for-share basis by resolution of the Board of Directors
if, as a result of the existence of the Sportmart Class A Common Stock, the
Sportmart Voting Common Stock or the Sportmart Class A Common Stock or both
become excluded from quotation on Nasdaq, or, if such shares are then listed on
a national securities exchange, from trading on the principal national
securities exchange on which the shares are then traded.
In addition, if at any time, as a result of additional issuances by
Sportmart of Sportmart Class A Common Stock, repurchases by Sportmart of
Sportmart Voting Common Stock or a combination of such issuances and
repurchases, the number of outstanding shares of Sportmart Voting Common Stock
as reflected on the stock transfer books of Sportmart falls below 10% of the
aggregate number of outstanding shares of Sportmart Voting Common Stock and
Sportmart Class A Common Stock, then, immediately upon the occurrence of such
event, all the outstanding shares of Sportmart Class A Common Stock will be
automatically converted into shares of Sportmart Voting Common Stock, on a
share-for-share basis. For purposes of the immediately preceding sentence, any
shares of Sportmart Voting Common Stock or Sportmart Class A Common Stock
repurchased by Sportmart will no longer be deemed "outstanding" from and after
the date of repurchase. Sportmart has no present intention to repurchase any
shares of its Sportmart Voting Common Stock and Sportmart Class A Common Stock.
In the event of any such conversion of the Sportmart Class A Common Stock,
certificates which formerly represented outstanding shares of Sportmart Class A
Common Stock will thereafter be deemed to represent a like number of shares of
Sportmart Voting Common Stock.
PREFERRED STOCK
Sportmart has an authorized class of five million shares of undesignated
Sportmart Preferred Stock. Sportmart's Board of Directors has authority, without
any further vote or action by the stockholders, to provide for the issuance of
the shares of Sportmart Preferred Stock in series, to establish from time to
time the number of shares to be included in each such series and to fix the
designations, preferences and relative, participating, optional or other special
rights, qualifications or restrictions of the shares of each such series and to
determine the voting powers, if any, of such shares. The issuance of Sportmart
Preferred Stock could adversely affect, among other things, the rights of
current stockholders. The issuance of Sportmart Preferred
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Stock could decrease the amount of earnings and assets available for
distribution to holders of Sportmart Common Stock. In addition, any such
issuance could have the effect of delaying, deferring or preventing a change in
control of Sportmart and could make the removal of the present management of
Sportmart more difficult. Sportmart has no present plans to issue any of the
Sportmart Preferred Stock.
DELAWARE LAW AND CERTAIN CORPORATION PROVISIONS
Sportmart is subject to the provisions of Section 203 of the DGCL. In
general, this statute prohibits a publicly held Delaware corporation from
engaging, under certain circumstances, in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless either
(i) prior to the date at which the stockholder became an interested stockholder,
the Board of Directors approved either the business combination or the
transaction in which the person becomes an interested stockholder, (ii) the
stockholder acquires more than 85% of the outstanding voting stock of the
corporation (excluding shares held by directors who are officers or held in
certain employee stock plans) upon consummation of the transaction in which the
stockholder becomes an interested stockholder or (iii) the business combination
is approved by the Board of Directors and by two-thirds of the outstanding
voting stock of the corporation (excluding shares held by the interested
stockholder) at a meeting of stockholders (and not by written consent) held on
or subsequent to the date of the business combination. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
at any time within the prior three years did own) 15% or more of the
corporation's voting stock. Section 203 defines a "business combination" to
include, without limitation, mergers, consolidations, stock sales and asset
based transactions and other transactions resulting in a financial benefit to
the interested stockholder.
The Sportmart Certificate and Bylaws contain a number of provisions
relating to corporate governance and to the rights of stockholders. Certain of
these provisions may be deemed to have a potential "anti-takeover" effect in
that such provisions may delay, defer or prevent a change of control of
Sportmart. These provisions include, in addition to the Class A Protection
feature described above, (a) the classification of the Board of Directors into
three classes, each class serving for staggered three year terms; (b) a
requirement that special meetings of stockholders may be called only by the
Board of Directors or by holders of Sportmart Voting Common Stock representing
at least 75% of the votes entitled to be cast by the outstanding Sportmart
Voting Common Stock; (c) a requirement that stockholder action may be taken only
at stockholder meetings; (d) the authority of the Board to issue series of
Preferred Stock with such voting rights and other powers as the Board of
Directors may determine; (e) the requirement that the Bylaws may only be amended
(other than by the Board of Directors) by the vote of greater than 75% of the
votes entitled to be cast by the outstanding Sportmart Voting Common Stock; (f)
notice requirements in the Bylaws relating to nominations to the Board of
Directors and to the raising of business matters at stockholder meetings; and
(g) the requirement that certain transactions such as mergers or sales of
substantially all Sportmart's assets will require a supermajority vote of the
outstanding Sportmart Voting Common Stock.
TRANSFER AGENT AND REGISTRAR FOR SPORTMART COMMON STOCK
The transfer agent and registrar for the Sportmart Voting Common Stock and
Sportmart Class A Common Stock is LaSalle National Trust, N.A., Chicago,
Illinois.
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SPORTMART MARKET PRICE DATA AND DIVIDEND INFORMATION
Sportmart's common shares are traded on Nasdaq under the symbol "SPMT" for
the Sportmart Voting Common Stock and "SPMTA" for the Sportmart Class A Common
Stock. As of the Record Date, there were approximately 188 holders of record of
Sportmart Voting Common Stock and approximately 196 holders of record of
Sportmart Class A Common Stock. The number of holders of record for both the
Sportmart Voting Common Stock and the Sportmart Class A Common Stock does not
include the beneficial owners of common shares whose shares are held in the name
of banks, brokers, nominees or other fiduciaries. The last reported sale prices
of Sportmart Voting Common Stock and Sportmart Class A Common Stock at December
16, 1997 were $2.50 per share and $2.44 per share, respectively.
The following table lists, for the periods indicated, the reported high and
low closing sales prices as quoted on Nasdaq of Sportmart Voting Common Stock
and Sportmart Class A Common Stock.
<TABLE>
<CAPTION>
SPORTMART
SPORTMART VOTING CLASS A
COMMON STOCK COMMON STOCK
---------------- -------------
PRICE RANGE PRICE RANGE
---------------- -------------
HIGH LOW HIGH LOW
------- ------ ----- -----
<S> <C> <C> <C> <C>
Fiscal 1995
First Quarter....................................... $10.75 $8.13 $9.38 $6.00
Second Quarter...................................... 10.88 8.38 7.75 5.50
Third Quarter....................................... 11.00 7.63 7.75 4.88
Fourth Quarter...................................... 8.50 4.75 5.38 3.02
Fiscal 1996
First Quarter....................................... $ 6.25 $4.00 $4.00 $2.88
Second Quarter...................................... 5.75 3.50 4.13 2.44
Third Quarter....................................... 4.75 3.25 3.75 2.63
Fourth Quarter...................................... 4.50 3.13 3.63 2.38
Fiscal 1997
First Quarter....................................... $ 4.00 $2.38 $3.00 $1.75
Second Quarter...................................... 4.00 2.25 3.13 2.00
Third Quarter....................................... 4.75 2.50 3.47 2.13
Fourth Quarter (through December 16, 1997).......... 3.25 2.50 3.13 2.31
</TABLE>
Sportmart did not pay cash dividends or distributions on its capital stock
during the first twenty-six weeks of fiscal 1997 and fiscal 1996, 1995 or 1994.
Sportmart currently intends to retain its cash flow from operations to improve
its existing operations and to finance future growth and; therefore, does not
anticipate paying any cash dividends in the foreseeable future. The payment of
any future dividends will be determined by the Board of Directors in light of
conditions then existing, including, Sportmart's earnings, financial condition
and requirements, restrictions of financing agreements, business conditions and
other factors. At present, Sportmart's revolving credit facility with its banks
does not allow for the payment of cash dividends.
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CERTAIN TRANSACTIONS OF SPORTMART
From time to time Sportmart has transacted business with entities in which
its principal stockholders or management or other affiliates of Sportmart have
an interest.
PROPERTY LEASES
As of February 2, 1997, eight of Sportmart's stores (Niles, Lombard,
Calumet City, Schaumburg, Vernon Hills, Chicago (Lakeview), Merrillville, and
North Riverside) and Sportmart's No Contest stores in Ferguson, Missouri and
Crestwood, Missouri as well as a vacant store in Wheeling, Illinois were leased
from partnerships or land trusts in which the following members of management
and their families own, in the aggregate, all of the beneficial interests
through various partnerships: Larry Hochberg, Barbara Hochberg, Andrew Hochberg,
John Lowenstein, Amy Lowenstein, and Mitchell Kahn. A partnership in which
members of management and their families indirectly own the general partner and
hold up to a one-third interest as limited partners owns the property on which
the Chicago (River North), Illinois mart is located.
In fiscal 1995, Sportmart determined to discontinue the operation of its No
Contest division and to close its River North and Wheeling, Illinois locations.
Notwithstanding the discontinuance of No Contest operations and the closing of
the two Sportmart locations, Sportmart is still obligated on the leases for
these locations. In April, 1997 one of the above-described partnerships sold the
Vernon Hills, Illinois location to an unrelated third party. Thus, Sportmart
currently has eleven leases with the partnerships as described above. From and
after the Effective Time, Gart Bros. has agreed to guarantee Sportmart's
obligations under these leases. Sportmart has subleased the No Contest locations
and is actively marketing the remaining locations to potential substitute
tenants.
Sportmart believes that the occupancy costs to Sportmart under each lease
are no higher than those which would be charged by an unrelated third party
under similar circumstances. Each of the lease agreements provides for
Sportmart, as tenant, to pay monthly fixed rent, percentage rent based upon
sales in excess of stipulated amounts and its pro rata share of all utilities,
insurance, taxes and other common area costs associated with the property (other
than free standing stores which pay all of the costs associated with the
property). The aggregate lease payments (net of utilities, insurance, taxes and
other common area costs) for the above locations in fiscal years 1996, 1995, and
1994 were approximately $3.7, $3.9, and $3.6 million, respectively.
Additionally, various lease amendments and leases have been entered into
between Sportmart and certain of the above described partnerships, all with the
approval of the outside members of the Board of Directors. Generally, these
lease amendments and leases are for the purpose of adding space to existing
locations, extending lease terms or adding option terms.
SPORTMART INTERIM FINANCING OF PARTNERSHIPS
Sportmart has provided interim financing to certain management-owned
partnerships to cover expenses incurred by the partnerships in connection with
the purchase and management of properties. Each partnership reimburses Sportmart
for such advances, including accrued interest, as and when the partnership is
billed by Sportmart. As of November 30, 1997, the total amount owed by such
partnerships was approximately $133,000. These amounts will be repaid prior to
consummation of the Merger. There are no Sportmart guarantees of partnership
obligations.
MISCELLANEOUS
Each of the management-owned partnerships which lease property to Sportmart
pays a management fee to Sportmart equal to 2.5% of the gross rent for the
particular property as reimbursement for property management services provided
by Sportmart. For fiscal 1996, total management fees were $123,065. Following
the Merger, these management arrangements will be terminated.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF SPORTMART
The following table sets forth, as of November 28, 1997, certain
information with respect to the beneficial ownership of the Sportmart Class A
Common Stock and the Sportmart Voting Common Stock by (i) each person known by
Sportmart to own beneficially more than 5% of the outstanding shares of either
class of Sportmart Common Stock, (ii) each director of Sportmart, (iii) the four
other most highly compensated (combined salary and bonus) executive officers of
Sportmart and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
SPORTMART CLASS A
SPORTMART VOTING COMMON STOCK COMMON STOCK
------------------------------- -------------------------------
NO. OF SHARES PERCENTAGE NO. OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF TOTAL BENEFICIALLY OWNED OF TOTAL
--------------------------- ------------------ ---------- ------------------ ----------
<S> <C> <C> <C> <C>
Larry J. Hochberg(2)(8).................. 2,711,349 52.5% 530,344 6.6%
Barbara P. Hochberg(3)................... 102,000 2.0 1,527,500 18.9
Andrew S. Hochberg (4)(9)................ 426,136 8.3 750,269 9.3
John A. Lowenstein(5)(10)................ 144,807 2.8 323,788 4.0
C. Mark Scott(11)........................ 650 * 32,000 *
Thomas Hendrickson(12)................... 19,964 * 33,481 *
Charles G. Cooper(6)..................... 15,000 * 1,000 *
Jerome S. Gore(6)........................ 15,000 * 3,000 *
Stuart C. Nathan(6)...................... 15,000 * -- *
Lawrence J. Ring(7)...................... 9,000 * 500 *
Matthew A. Howard(15).................... 3,000 * -- *
Joseph L. Harrosh(13).................... -- * 467,300 5.8
Directors & Executive Officers as a
Group(14) (13 persons)................. 3,462,791 65.9 3,272,638 39.9
</TABLE>
- ---------------
* Less than 1%
(1) The address of each stockholder listed, with the exception of Joseph L.
Harrosh, is c/o Sportmart, Inc., 1400 South Wolf Road, Suite 200, Wheeling,
Illinois 60090. Joseph L. Harrosh's address is 40900 Grimmer Boulevard,
Fremont, California 94538.
(2) Excludes 93,000 shares of Sportmart Class A Common Stock and 102,000 shares
of Sportmart Voting Common Stock beneficially owned by Larry J. Hochberg's
wife, Barbara P. Hochberg, of which shares Larry J. Hochberg disclaims
beneficial ownership. Excludes 126,732 shares of Sportmart Class A Common
Stock which are held by Barbara P. Hochberg and John A. Lowenstein as
Trustees of the AHL Investment Trust U/A/D 12/7/90, of which shares Larry
J. Hochberg disclaims beneficial ownership. Excludes 555,424 shares of
Sportmart Class A Common Stock and 275,329 shares of Sportmart Voting
Common Stock held by Barbara P. Hochberg and Andrew Hochberg, as Trustees
of AH Investment Trust U/A/D 6/3/87, of which shares Larry J. Hochberg
disclaims beneficial ownership. Excludes 1,434,500 shares of Sportmart
Class A Common Stock, which shares are held in a Delaware limited
partnership of which a revocable trust, of which Larry J. Hochberg is
grantor and trustee, is general partner and Barbara P. Hochberg has voting
power. Includes 18,100 shares of Sportmart Class A Common Stock and 792
shares of Sportmart Voting Common Stock held in a irrevocable trust of
which Larry J. Hochberg is co-trustee. Includes 312,500 shares Sportmart
Voting Common Stock beneficially owned by Sanford Cantor, which shares are
subject to a voting agreement pursuant to which Larry J. Hochberg may vote
such shares; Larry J. Hochberg disclaims beneficial ownership of such
shares. Includes 15,000 shares of Sportmart Voting Common Stock and 4,500
shares of Sportmart Class A Common Stock which are held by Larry J.
Hochberg as Trustee of the Andrew S. Hochberg Sub-Trust U/A/D 1/3/90.
Includes 12,500 shares of Sportmart Voting Common Stock and 4,500 shares of
Sportmart Class A Common Stock which are held by Larry J. Hochberg as
Trustee of the Amy H. Lowenstein Sub-Trust U/A/D 1/3/90.
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(3) Excludes 478,921 shares of Sportmart Class A Common Stock and 2,358,557
shares of Sportmart Voting Common Stock beneficially owned by Barbara P.
Hochberg's husband, Larry J. Hochberg. Excludes 126,732 shares of Sportmart
Class A Common Stock held by Barbara P. Hochberg and John A. Lowenstein, as
Trustees of the AHL Investment Trust U/A/D 12/7/90. Excludes 555,424 shares
of Sportmart Class A Common Stock and 275,329 shares of Sportmart Voting
Common Stock held by Barbara P. Hochberg and Andrew S. Hochberg, as
Trustees of the AH Investment Trust U/A/D 6/3/87, with respect to which
shares Barbara P. Hochberg and Andrew S. Hochberg share voting power.
Excludes 18,100 shares of Sportmart Class A Common Stock and 792 shares of
Sportmart Voting Common Stock held in an irrevocable trust of which Larry
J. Hochberg is co-trustee. Includes 1,434,500 shares of Sportmart Class A
Common Stock, which shares are held in a Delaware limited partnership of
which a revocable trust, of which Larry J. Hochberg is a grantor and
trustee, is general partner and Barbara P. Hochberg has voting power.
(4) Excludes 18,100 shares of Sportmart Class A Common Stock and 792 shares of
Sportmart Voting Common Stock held in an irrevocable trust of which Mr.
Hochberg's wife is co-trustee; Andrew S. Hochberg disclaims beneficial
ownership of these shares. Includes 555,424 shares of Sportmart Class A
Common Stock and 275,329 shares of Sportmart Voting Common Stock held by
Andrew S. Hochberg and Barbara P. Hochberg, as Trustees of the AH
Investment Trust U/A/D 6/3/87, with respect to which shares Andrew S.
Hochberg and Barbara P. Hochberg share voting power. Includes 64,500 shares
of Sportmart Class A Common Stock held in a limited partnership in which a
trust, of which Andrew S. Hochberg is trustee, is the general partner.
Includes 5,000 and 11,989 shares of Class A Common Stock respectively held
by the spouse and children of Andrew S. Hochberg.
(5) Includes 126,732 shares of Sportmart Class A Common Stock held by Barbara
P. Hochberg and John A. Lowenstein, as Trustees of the AHL Investment Trust
U/A/D 12/7/90. Includes 120,227 shares of Sportmart Class A Common Stock
and 138,807 shares of Sportmart Voting Common Stock held by the spouse of
John A. Lowenstein. Includes 40,943 shares of Sportmart Class A Common
Stock held by the children of John A. Lowenstein.
(6) Includes 15,000 shares of Sportmart Voting Common Stock which are currently
issuable on or before January 27, 1998 upon exercise of options pursuant to
the Sportmart, Inc. Directors' Stock Option Plan (the "Directors' Plan").
(7) Includes 9,000 shares of Sportmart Voting Common Stock currently issuable
on or before January 27, 1998 upon exercise of options pursuant to the
Directors' Plan.
(8) Includes 12,000 shares of Sportmart Voting Common Stock and 12,000 shares
of Sportmart Class A Common Stock which are currently issuable on or before
January 27, 1998 upon exercise of options pursuant to the Stock Option
Plan.
(9) Includes 12,000 shares of Sportmart Voting Common Stock and 12,000 shares
of Sportmart Class A Common Stock which are currently issuable on or before
January 27, 1998 upon exercise of options pursuant to the Stock Option
Plan.
(10) Includes 6,000 shares of Sportmart Voting Common Stock and 8,000 shares of
Sportmart Class A Common Stock which may be acquired on or before January
27, 1998 upon exercise of options pursuant to the Stock Option Plan.
(11) Includes 32,000 shares of Sportmart Class A Common Stock which may be
acquired on or before January 27, 1998 upon exercise of options pursuant to
the Stock Option Plan.
(12) Includes 19,281 shares of Voting Common Stock and 33,481 shares of
Sportmart Class A Common Stock which may be acquired on or before January
27, 1998, upon exercise of options pursuant to the Stock Option Plan.
(13) As reported on a Schedule 13D filed by Joseph L. Harrosh on August 14,
1997. According to such Schedule 13D, Joseph L. Harrosh has sole voting
power and sole dispositive power with respect to all of these shares.
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(14) Includes 106,281 shares of Sportmart Voting Common Stock and 142,024 shares
of Sportmart Class A Common Stock which may be acquired on or before
January 27, 1998, upon exercise of options pursuant to the Stock Option
Plan and the Director's Plan.
(15) Includes 3,000 shares of Sportmart Voting Common Stock which may be
acquired on or before January 27, 1998 upon exercise of options pursuant to
the Directors' Plan.
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INFORMATION REGARDING GART SPORTS
GENERAL
Gart Sports is one of the leading sporting goods retailers in the western
United States and the leading full-line sporting goods retailer in the Rocky
Mountain region in terms of sales and number of stores. Founded in 1928, Gart
Sports operates 63 stores in Colorado, Utah, Idaho, Wyoming, Nevada, New Mexico,
Montana and Washington. Gart Sports stores are designed to create a dynamic
shopping atmosphere that appeals to both the casual sporting goods customer and
the sports enthusiast by combining the selection and competitive prices
associated with warehouse format sporting goods retailers with the upscale
shopping environment, customer service and brand names typically available only
in specialty stores and pro shops.
Gart Sports has developed a well-established reputation as a premier
provider of a broad selection of high quality sporting goods, featuring popular
brands such as Burton, Coleman, Columbia, K2, Nike, Rawlings, Reebok,
Rollerblade, Rossignol, Spalding, Speedo and Wilson. Gart Sports was a pioneer
of the concept of the sporting goods "superstore" with the opening of its Denver
Sportscastle store in 1971 and was one of the first retailers to feature
specialized brand shops for vendors such as Nike, Columbia and The North Face,
which offer a broad array of vendor-specific products in specialized,
image-enhancing fixtures. Gart Sports differentiates itself from its warehouse
format competitors by providing full service in each of its departments, all of
which are staffed by highly trained and knowledgeable sales personnel. Gart
Sports' high level of customer service, expert technicians and specialty store
presentation enable it to purchase directly from manufacturers full product
lines that are typically only made available to specialty stores and pro shops,
such as Callaway, Cobra, Taylor Made and Tommy Armour golf clubs, The North Face
apparel and equipment, Sierra Designs apparel, G. Loomis fishing equipment,
Glock and Weatherby firearms, Volkl and Volant ski equipment, and Burton
snowboard equipment.
Capitalizing on its 70 years of experience operating various store formats,
Gart Sports determined that its superstore format provides the best opportunity
for future growth. Since November 1993, Gart Sports has opened 20 stores, 18 of
which are superstores. Seven of the superstores were opened in new markets with
the remainder expanding Gart Sports' presence in its existing markets. Nine of
Gart Sports' newly opened superstores replaced existing non-superstore format
stores, increasing gross square footage by 267,171 square feet in those markets.
Since November 1993, while Gart Sports has increased its net store base from 58
to 63 stores, it has increased total square footage by 61.9% from 991,760 square
feet to 1,605,963 square feet.
Gart Sports has refined its superstore prototypes to two models: (i) a
33,000 square foot superstore typically used in smaller markets and (ii) a
45,000 square foot superstore typically used in major markets. In addition to
Gart Sports' 20 superstores, Gart Sports operates stores in three other formats:
(i) 22 freestanding stores (including stores in strip shopping centers) ranging
in size from 8,000 to 27,000 square feet; (ii) 16 stores in enclosed shopping
malls averaging 11,500 square feet; and (iii) five resort stores ranging in size
from 10,000 to 27,000 square feet. Gart Sports' superstores typically range from
33,000 to 55,000 square feet, with the Sportscastles stores in Denver and Salt
Lake City being substantially larger (76,000 and 65,000 square feet,
respectively). Gart Sports periodically reviews opportunities to open other
non-superstore format stores, particularly in resort markets, as they arise.
INDUSTRY OVERVIEW
According to the National Sporting Goods Association (the "NSGA"), total
U.S. retail sales of sporting goods (including sporting equipment, athletic
footwear and apparel, but excluding recreational transportation products) were
approximately $41.6 billion in 1996, an increase from $39.2 billion in 1995. The
NSGA reported that in 1997, sales of athletic footwear are projected to grow 4%,
sales of athletic apparel are projected to grow 2%, and sales of athletic
equipment are projected to grow 3%.
The retail sporting goods industry is comprised of four principal
categories of retailers: (i) large format sporting goods stores, which typically
range from 30,000 to 80,000 square feet in size and emphasize high sales volumes
and a large number of SKUs in a warehouse-style store, (ii) traditional sporting
goods stores, which typically range in size from 5,000 to 20,000 square feet and
carry a more limited assortment of merchandise
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and are often viewed by their customers as convenient neighborhood stores, (iii)
specialty sporting goods stores, consisting of specialty stores and pro shops,
generally specializing in one product category of sporting goods, and (iv) mass
merchandisers, including discount retailers, warehouse clubs and department
stores, which although generally price competitive, have limited customer
service and a more limited selection.
The sporting goods industry in the United States is characterized by
fragmented competition, limited assortments from traditional sporting goods
retailers, customer preference for one-stop shopping convenience and the growing
importance of delivering value to the customer through selection, service and
price. Gart Sports believes that these characteristics of the sporting goods
industry make Gart Sports' superstore format particularly well suited to grow
and increase Gart Sports' market share relative to the traditional sporting
goods stores, specialty sporting goods retailers, mass merchandisers and other
large format sporting goods retailers.
BUSINESS STRATEGY
Gart Sports' business strategy is to provide its customers with an
extensive selection of high quality, brand name merchandise at competitive
prices with exceptional customer service. The key elements of Gart Sports'
business strategy are the following:
Broad Assortment of Quality, Brand Name Products. Gart Sports offers a
wide selection of quality, brand name apparel and equipment at competitive
prices designed to appeal to both the casual sporting goods customer and
the sports enthusiast. Gart Sports carries over 40,000 active SKUs,
including popular brands such as Burton, Coleman, Columbia, K2, Nike,
Rawlings, Reebok, Rollerblade, Rossignol, Spalding, Speedo and Wilson. Gart
Sports' customer service, expert technicians and specialty store
presentation enable it to purchase directly from manufacturers full product
lines that are typically only available in specialty stores and pro shops,
such as Callaway, Cobra, Taylor Made and Tommy Armour golf clubs, The North
Face apparel and equipment, Sierra Designs apparel, G. Loomis fishing
equipment, Glock and Weatherby firearms, Volkl and Volant ski equipment and
Burton snowboard equipment.
Exceptional Customer Service. Gart Sports differentiates its stores by
providing the high level of service generally associated with specialty
sporting goods stores and pro shops. Gart Sports' strategy is to hire sales
associates and sports technicians who are knowledgeable and enthusiastic
about the products they sell or service. Gart Sports supports its sales
associates by providing ongoing training with respect to the performance
attributes and technical aspects of its merchandise, including conducting
regular manufacturers' clinics. Gart Sports provides full service in all
departments, including shoe and winter sports departments, and strives to
maintain high in-stock levels to ensure customer satisfaction. Gart Sports
also employs a "no-hassle" merchandise return policy. Finally, Gart Sports
offers special customer services such as special order capability,
equipment rental, on-site repair centers, instructional courses, discounted
ski lift tickets and hunting and fishing licenses.
Attractive Shopping Environment. Gart Sports seeks to offer a uniquely
attractive shopping environment that showcases the breadth of Gart Sports'
product offerings and reinforces Gart Sports' distinctive brand image. Gart
Sports' brightly lit stores are designed to project a clean, upscale
atmosphere, with a user-friendly layout featuring wide aisles,
well-organized merchandise displays and clearly defined departments
arranged in a logical and convenient floorplan. Gart Sports believes that
this customer-oriented shopping environment helps distinguish its stores
from the warehouse format offered by many of its competitors.
Customized Merchandise Mix. Gart Sports tailors its product mix to
local demographics and lifestyles based on Gart Sports' experience and
market research. Purchasing decisions are made on a store by store basis,
and store operations work directly with Gart Sports' buyers to revise the
product mix in each store. Various factors typically influence the product
mix in a particular market, such as disposable income, professional and
amateur sports activities, number of skier days and recreational licenses.
Promotional Advertising and Marketing. Gart Sports uses a promotional
pricing and advertising strategy focused on the creation of "events" to
drive traffic and sales in its stores. Each event is based
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upon either a key shopping period such as the winter holidays, Father's
Day, and Back-to-School or a specific sales or promotional event, including
the annual Sniagrab ("bargains" spelled backwards) sale, which Gart Sports
believes is the largest pre-season ski and snowboard sale in the United
States. Gart Sports' strategy of clustering stores in major markets enables
it to employ an aggressive advertising strategy on a cost-effective basis,
utilizing newspaper, radio and television.
MERCHANDISING
Gart Sports offers its customers over 40,000 active SKUs of high quality
brand name merchandise in over 65 categories of sporting goods and apparel. Gart
Sports provides an assortment of products typically found only in a warehouse
format sporting goods store with the presentation and service typical of
specialty stores and pro shops. As a result of its exceptional customer service,
expert technicians and specialty store presentation, Gart Sports has direct
vendor access to full lines of brands not typically found in its warehouse
format sporting goods competitors.
Because of the large percentage of Gart Sports stores based in the Rocky
Mountain region, Gart Sports' merchandise has a heavier concentration of winter
sporting equipment and apparel than a typical warehouse format sporting goods
store. Gart Sports believes that the quality and breadth of its winter sports
merchandise has contributed to its strong reputation in the Rocky Mountain
region compared to other large format competitors with less experience marketing
winter sporting goods. In addition, Gart Sports believes that its ability to
manage the complex inventory requirements of the winter product line, which is
characterized by a short selling season and peak selling periods at the
beginning and end of the selling season, gives it an important competitive
advantage.
The following table sets forth the percentage of total net sales for each
major product category for each of the last three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------------------------
1994 1995 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Hardlines.................................... 51.6% 50.7% 48.7%
----- ----- -----
Softlines:
Apparel.................................... 28.4% 28.0% 30.9%
Footwear................................... 20.0% 21.3% 20.4%
----- ----- -----
Subtotal........................... 48.4% 49.3% 51.3%
----- ----- -----
Total.............................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The hardlines and softlines sold by Gart Sports include the following
merchandise categories:
Winter Equipment and Apparel
Gart Sports believes it offers the widest selection of ski and snowboard
merchandise in the Rocky Mountain region. This extensive selection consists of
winter sports apparel, accessories and equipment, including a broad selection of
apparel and equipment for nordic (cross country) skiing. Gart Sports has become
a leader in the snowboard industry, which began in the early 1990's, with its
wide range of snowboard-related products, including snowboards, boots, bindings
and apparel. Gart Sports offers products from a wide variety of well-known
winter sports equipment and apparel suppliers, including the following:
Airwalk Elan Kombi RD Spider
Atomic Fisher Lange Roffe Tecnica
Bogner Gordini Leki Rossignol The North Face
Burton Grandoe Marker Salomon Thule
Columbia Head Morrow Santa Cruz Tyrolia
Descente Helly Hansen Nils Scott Vans
Duofold K2 Nordica Skea Volant
Dynastar Karhu Obermeyer Skyr Volkl
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In addition to offering the most widely known and available popular brands,
Gart Sports carries full lines of winter equipment and apparel from
manufacturers that are typically only available in specialty stores, such as
Volkl, Volant, The North Face and Bogner.
Many Gart Sports stores also rent winter sports equipment, including skis,
snowboards, boots and poles. The rental equipment ranges from entry-level
products designed for beginners to advanced products for more accomplished
skiers and snowboarders. Other services offered in these stores include advanced
demo ski programs, custom boot fitting, complete ski and snowboard repair
facilities, each with specialized equipment, and the convenience of in-store
discounted lift ticket sales to area resorts.
Footwear, In-line Skates and General Apparel
Gart Sports stores carry a complete line of athletic footwear, sportswear
and apparel designed for a wide variety of activities and performance levels.
Footwear is available for such diverse activities as basketball, baseball,
football, soccer, tennis, golf, aerobics, running, walking, cycling, hiking,
cross-training, wrestling and snowshoeing. Gart Sports is also a major retailer
of in-line skates and ice skates. Gart Sports' wide variety of sportswear and
apparel include a broad selection of licensed apparel for professional and
college teams. Special services in this area include in-line skate repair,
bearing and wheel changes, and training and safety programs designed to help new
skate owners safely develop their in-line skating skills. Gart Sports' extensive
variety of well-known apparel and footwear vendors includes the following:
Adidas Converse Merrell Puma Saucony
Asics Danner Mitre Reebok Sorel
Avia Danskin Mizuno Rollerblade Speedo
Bauer Fila Mossimo Rollerderby Tecnica
Birkenstock Head New Balance Ruff Hewn Teva
Browning Hi-Tech Nike Russell Thorlo
Columbia K-Swiss No Fear Salomon Vans
General Athletics, Exercise and Outdoor Recreation
General Athletics and Exercise. Gart Sports offers a broad range of brand
name equipment for traditional team sports, including football, baseball,
basketball, hockey, volleyball and soccer, as well as equipment for activities
which have recently become more popular such as street hockey. Gart Sports also
carries a variety of fitness equipment, including treadmills, stationary
bicycles, rowing machines, stair climbers, weight machines and free weights, and
equipment for recreational activities including ping pong, darts, badminton,
croquet and horseshoes. In addition, Gart Sports offers home delivery and
in-home set up on exercise equipment and outdoor equipment (such as basketball
hoops and trampolines).
Gart Sports' stores carry brands such as:
Adams Franklin Mizuno Spalding
Bike Athletic Harvard Sport Nike Starter
Bio Dyne Hillerich & Bradsby Pro Form Timex
Champion Hutch Pro Player Tunturi
Easton Sports Life Fitness Rawlings Umbro
Everlast Lifetime Products Reebok Upper Deck
Fitness Quest Logo Athletic Riddell Weider
Forster Louisville Russell Wilson
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Golf and Tennis. Gart Sports maintains a wide assortment of golf and tennis
apparel and equipment to cater to every type of sporting goods customer, ranging
from the recreational athlete to the most avid sports enthusiast. Gart Sports
offers products from a wide variety of well-known golf and racquet sports
equipment and apparel suppliers, including the following:
Callaway Lynx Ping Sun Mountain
Cleveland Maxfli Pinnacle Taylor Made
Cobra McGregor Precept Titleist
Ektelon Nike Prince Tommy Armour
Footjoy Odyssey Reebok Wilson
Head Penn Spalding Yonex
In addition to offering the most widely known and available popular brands,
Gart Sports has direct vendor access to full lines of prestigious brands such as
Callaway, Cobra, Taylor Made and Tommy Armour that are generally not found in
large format stores. Most Gart Sport stores have their own golf club repair
center and tennis stringing and re-gripping center and several stores rent
rackets. Most of Gart Sports' stores feature indoor putting greens, all of the
Gart Sports Superstores feature indoor driving ranges and one store features a
rooftop tennis court, enabling customers to try out equipment prior to purchase.
Cycling. In most of its stores, Gart Sports offers a selection of KHS and
Nishiki bicycles, including mountain bikes, cross country bikes and racing bikes
and bicycle accessories. The stores carry cycling apparel, accessories and
components from suppliers such as Bell, Descente, Nike, Shimano and Specialized.
Gart Sports also offers all of the attachments necessary for carrying bicycles
on a Thule car roof rack. Most Gart Sports stores have their own bicycle repair
facility where work can be performed on all makes and models of bikes, including
those purchased from other retailers.
Water Sports. Gart Sports carries a broad array of products designed for a
variety of water sports, including recreational and competitive swimming, water
skiing, canoeing, knee boarding and surfing. Suppliers of these products include
HO, O'Brien and O'Neill. Swimsuits and accessories are available from Jansen,
Mossimo, Quiksilver, Sideout, Speedo and Tyr. In addition, Gart Sports carries
snorkeling equipment and wet suits.
Hunting, Fishing and Camping Apparel and Equipment
Hunting. Gart Sports carries a broad selection of hunting equipment and
accessories. Gart Sports stores provide a complete selection of sporting arms,
scopes, reloading supplies, clothing and hunting licenses. Gart Sports also
offers the expertise of its own in-house gunsmith. Gart Sports carries such top
brand names as:
Beretta Colt Nikon Smith & Wesson
Browning Federal Pentax Walls
Bushnell Glock Redfield Weatherby
Carhartt Leupold Remington Winchester
Fishing. Gart Sports stores offer a broad range of freshwater and fly
fishing equipment, accessories and fishing licenses. To complement this
department, several stores offer instructional fly fishing courses on topics
such as fly tying, line winding and casting. Gart Sports sells equipment and
accessories from widely known fishing equipment and accessory manufacturers
including the following:
Berkley Daiwa Hodgman Scientific Angler
Browning Eagle Claw Penn Shimano
Cortland G. Loomis Ross Stillwater
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Camping. Gart Sports stores carry a wide selection of outdoor products for
most types of camping and outdoor activity. Gart Sports offers products from a
broad range of companies including the following:
American Camper Garmin Jansport Sierra Design
Camp Chef Gregory Kavu Slumberjack
Coleman/Peak1 Igloo Kelty Swiss Army Knife
Columbia Inside Edge Magellan The North Face
Eureka Jack Wolfskin Pur Woolrich
GART STORES
Store Design
Gart Sports creates a dynamic shopping atmosphere that appeals broadly to
both the casual sporting goods customer and the sports enthusiast. Based on
almost 70 years of experience in the sporting goods retail industry, Gart Sports
has developed two superstore prototypes designed to feature the quality and
variety of brand name merchandise, the breadth of product selection and the high
levels of customer service that are the foundation of Gart Sports' strong
reputation. Gart Sports typically penetrates larger, multiple store markets
primarily with its 45,000 square foot prototype superstore and smaller
single-store markets with its 33,000 square foot prototype superstore. Gart
Sports has determined that these superstore formats provide the best opportunity
for growth.
The prototype superstore layout features a racetrack configuration with
apparel and specialty brand shops in the middle of the store and the specialty
hardgoods departments along the outside of the racetrack. The lighting, flooring
and color scheme is designed to enhance the presentation of the merchandise and
avoid a warehouse-type atmosphere. The apparel is displayed prominently to
showcase the quality brand names. In addition, many Gart Sports stores feature
specialized brand shops for vendors such as Nike, Columbia and The North Face,
which offer a broad array of vendor-specific products in specialized,
image-enhancing fixtures. The visibility of the branded apparel and the feature
shops emphasize the quality image and brand assortment of Gart Sports' stores.
Specialty departments are located adjacent to other related departments and
apparel assortments to increase customer convenience and to stimulate
cross-purchasing. The specialty departments display merchandise on low racking
to allow customers easy access to products and to promote store-wide visibility
and easy department identification. The specialty departments use the walls
effectively to display merchandise in order to convey the depth and breadth of
product selection. Department layouts are adjusted periodically to make room for
seasonal products.
Gart Sports' 22 freestanding and strip center stores more closely resemble
traditional sporting goods stores and range in size from 8,000 to 27,000 square
feet. Gart Sports' 16 stores in enclosed shopping malls average 11,500 square
feet and carry a selection of merchandise that appeals to the mall-oriented
shopper, focusing on apparel and footwear. Gart Sports' five resort stores range
in size from 10,000 to 27,000 square feet and provide a broader merchandise
selection and lower prices than typically available in resort areas, while
offering a high level of customer service.
Customer Service
Gart Sports differentiates its stores by providing the exceptional level of
service generally associated with specialty sporting goods stores and pro shops.
Gart Sports' strategy is to hire sales associates and sports technicians who are
knowledgeable and enthusiastic about the products they sell or service. Sales
associates are required to attend product training clinics sponsored by
individual vendors as well as Gart Sports sponsored seminars on topics such as
customer service and selling skills. Gart Sports provides full service in all
departments, including shoe and winter sport departments, and strives to
maintain high in-stock levels to ensure customer satisfaction. Gart Sports also
employs a "no-hassle" merchandise return policy. In addition, Gart Sports offers
services typically associated with smaller, specialty sporting goods shops,
including special
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order capability, equipment rental, on-site repair centers, instructional
courses, discounted ski lift tickets and hunting and fishing licenses.
Operations and Training
Typically, Gart Sports' superstores have 70 to 80 sales associates and
technicians, while its non-superstore stores employ a staff of approximately 20
to 25. Additional part-time sales associates are hired during the holiday season
and for the Sniagrab pre-season ski sale. Sales associates receive a commission
for each item they sell.
Gart Sports employs a manager, at least two assistant managers and several
department managers in each store. Store managers report to a district manager
having responsibility for all stores in a limited geographic region. There are
currently nine district managers and two regional managers. Gart Sports
anticipates that additional district managers and regional managers will be
needed as Gart Sports' operations expand.
Gart Sports' new store managers are either promoted internally or hired as
trainees. Gart Sports places a significant emphasis on the training of
store-level management. The training of new store managers is a two-step process
which involves participation in a formalized training program covering, among
other things, time management, staff selection, scheduling, employee training,
customer service and retail selling skills. The management trainee then becomes
a manager in training at one of Gart Sports' stores for a period of six months
to one year. Upon completion of this program, management trainees are eligible
to be promoted to the position of assistant manager of operations or
merchandising and later to store manager.
Gart Sports' stores are open seven days a week, generally from 9:00 a.m. to
9:00 p.m., Monday through Saturday; and 10:00 a.m. to 6:00 p.m. on Sunday. Store
hours are adjusted for individual markets as necessary.
Site Selection and Location
In choosing appropriate markets, Gart Sports considers the market's
demographic and lifestyle characteristics, including, among other factors, the
following factors: levels of disposable income; local population and buying
patterns; enthusiasm for outdoor recreation; popularity of collegiate and
professional sports teams; and level of affinity for winter sports activities.
The following table sets forth the location by state of Gart Sports'
stores:
<TABLE>
<CAPTION>
STATE SUPERSTORES RESORT STORES OTHER STORES TOTAL NUMBER OF STORES
----- ----------- ------------- ------------ ----------------------
<S> <C> <C> <C> <C>
Colorado................... 8 2 20 30
Utah....................... 4 2 9 15
Idaho...................... 1 0 6 7
Wyoming.................... 0 1 3 4
Montana.................... 2 0 0 2
New Mexico................. 1 0 0 1
Nevada..................... 1 0 0 1
Washington................. 3 0 0 3
-- - -- --
Total............ 20 5 38 63
== = == ==
</TABLE>
MANAGEMENT INFORMATION SYSTEMS
Over the last five years Gart Sports has installed sophisticated management
information systems which use JDA retail software operating on an IBM AS/400
platform. Gart Sports utilizes an IBM 4680 point-of-sale system which
incorporates scanning, price look-up, zone pricing support and store level
access to Gart Sports' merchandise information system. Gart Sports is currently
evaluating each of its systems to ensure compliance with year 2000 requirements.
Gart Sports believes that year 2000 compliance will be achieved by mid-1998 for
its primary management information systems from JDA and that other operating
systems will be updated for year 2000 compliance or replaced by year 2000
compliant systems within the next 12 months. Gart Sports' management information
systems fully integrate purchasing and sales reporting and inventory
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information down to the SKU level and have allowed Gart Sports to improve
overall inventory management by identifying individual SKU movement and
projecting trends and replenishment needs on a timely basis. These systems have
enabled Gart Sports to increase margins and profitability by reducing inventory
investment, strengthening in-stock positions, reducing Gart Sports' historical
shrinkage levels, and creating store level perpetual inventories and automatic
replenishment. Gart Sports is continuing to invest in hardware and software, and
has hired additional systems staff to assist in the development of enhancements
such as data warehousing and electronic data interchange to improve Gart Sports'
ability to systematically manage its inventory. In addition, Gart Sports intends
to install a frame relay data and voice communications system to enhance the
overall efficiency of the management information systems.
ADVERTISING AND PROMOTION
Gart Sports' comprehensive marketing program is designed to promote Gart
Sports' quality image and extensive selection of brand name products at
competitive prices. The program is centered on extensive newspaper advertising
supplemented by television, radio and billboard ads. Advertising is focused on
key shopping periods, such as the winter holidays, Father's Day and
Back-to-School, and on specific sales and promotional events, including the
annual Sniagrab sale, which Gart Sports believes is the largest pre-season ski
and snowboard sales event in the United States.
Gart Sports' advertising is designed to create an "event" in the stores and
to drive customer traffic with advertisements promoting a wide variety of sale
priced merchandise appropriate for the current holiday or event. In addition to
holidays, Gart Sports events include the Sniagrab sale, celebrity autograph
sessions, events related to local sports teams, race sponsorships and
registrations, vendor demonstrations and other activities that attract customers
to Gart Sports stores. The marketing program is administered by Gart Sports'
in-house staff, and Gart Sports has recently retained an outside advertising
agency to help develop new advertising programs.
Gart Sports' strategy of clustering stores in major markets enables it to
employ an aggressive advertising strategy on a cost effective basis through the
use of newspaper, radio and television advertising. Gart Sports' goal is to be
one of the dominant sporting goods advertisers in its markets. Gart Sports
advertises in major metropolitan newspapers as well as regional newspapers
circulated in areas surrounding its store locations. Newspaper advertising
typically consists of weekly promotional ads with three-color inserts on a
semi-monthly basis. Television advertising is generally concentrated three to
four days prior to a promotional event or key shopping period. Radio advertising
is used primarily to publicize specific promotions in conjunction with newspaper
advertising or to announce a public relations promotion or grand opening.
Billboards emphasizing Gart Sports' image and high quality brand name
merchandise are strategically located on high traffic thoroughfares near store
locations. In addition, vendor payments under cooperative advertising
arrangements with Gart Sports as well as vendor buy-ins to sponsor sporting
events and programs have significantly improved Gart Sports' advertising
leverage.
PURCHASING AND DISTRIBUTION
Gart Sports' purchasing department is composed of two Vice Presidents of
Merchandising and ten buyers. Gart Sports' Vice Presidents of Merchandising and
buyers have an average of approximately 22 and 14 years of retail experience,
respectively. In addition to merchandise procurement, the buying staff is also
responsible for determining pricing, stock levels and product mix for each of
Gart Sports' stores, and regularly communicate with store operations to monitor
shifts in consumer tastes and market trends.
Gart Sports' merchandise allocation and control department (the "MAC
Group") is responsible for merchandise distribution, inventory control and
replenishment, and acts as the central processing intermediary between the
buying staff and Gart Sports' stores. The MAC Group also coordinates the
inventory necessary for each advertising promotion with the buying staff and the
advertising department. The MAC Group tracks the ad results for analysis of
effectiveness to allow the buying staff and the advertising department to refine
each promotional program. In addition, the MAC Group implements price changes
and monitors and reorders basic merchandise, determining minimum/maximum levels
for individual stores on particular items.
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Gart Sports purchases merchandise from over 1,100 vendors and has no
long-term purchase commitments. During fiscal 1996, the largest vendor, Nike,
represented approximately 8.6% of Gart Sports' purchases and no other vendor
represented more than 4.0%.
Vendors ship directly to Gart Sports' 240,000 square foot central
distribution center located in Denver. Inventory is allocated directly to the
stores or to the distribution center or to both. Seasonal and limited purchase
inventory is fully distributed to all stores. Inventory that is purchased more
frequently and is planned as part of a basic program is allocated to the stores
largely on a percentage basis with the balance remaining in the warehouse for
future replenishment. An automated reorder system regularly replenishes the
stores by allocating merchandise from the distribution center based on each
store's sales. This system has significantly reduced the need for back-stock in
the stores. Gart Sports plans to continue adding SKUs to this automated re-order
system.
Gart Sports operates tractor trailers for delivering the merchandise from
its distribution center to Colorado stores and contracts with common carriers to
deliver merchandise to its stores outside a 400 mile radius from Denver. Gart
Sports leases six tractors, 18 trailers, two delivery trucks and one
sports-service van. Gart Sports believes this system is more efficient and
cost-effective than drop-shipping goods sent by vendors directly to the stores.
By utilizing a central distribution system, Gart Sports believes it is better
able to manage the inventory kept in stock at each store and to reduce inventory
shrinkage.
Gart Sports completed a reconfiguration of the distribution center and
upgrade of the equipment in the processing and receiving areas in the first half
of 1997 at a total cost of approximately $500,000, increasing capacity for
future expansion. Gart Sports believes that its distribution center is adequate
to service Gart Sports' current and expansion needs for the foreseeable future.
COMPETITION
The retail sporting goods industry is highly fragmented and intensely
competitive. While Gart Sports' competition differs by market, there are four
general categories of sporting goods retailers with which Gart Sports competes:
large format sporting goods stores, traditional sporting goods stores, specialty
sporting goods stores and mass merchandisers.
Large Format and Warehouse Sporting Goods Stores. Stores in this category,
including warehouse stores such as Jumbo Sports and The Sports Authority, and
large format stores such as Sport Chalet and Oshman's, typically range from
30,000 to 80,000 square feet in size and tend to be destination (freestanding or
strip shopping center anchor) locations. Most large format and warehouse
sporting goods stores emphasize high sales volumes and a large number of SKUs.
Traditional Sporting Goods Stores. This category consists of traditional
sporting goods chains, such as Big 5, Hibbetts and Koenigs, as well as local
independent sporting goods retailers. These stores typically range in size from
5,000 to 20,000 square feet and are frequently located in regional malls and
strip shopping centers. Traditional chains and local sporting goods stores often
carry a more limited assortment of merchandise and are commonly viewed by their
customers as convenient neighborhood stores.
Specialty Sporting Goods Stores. This category consists of specialty stores
and pro shops specializing in certain categories of sporting goods. Examples
include such national retail chains as The Athlete's Foot, Champs, Finish Line,
Foot Locker, Just for Feet, REI, Pro Discount Golf and Nevada Bob's. These
retailers are highly focused, selling generally only one product category such
as athletic footwear, ski or snowboard equipment, backpacking and
mountaineering, or golf and tennis equipment and apparel.
Mass Merchandisers. Stores in this category include discount retailers such
as Kmart and Wal-Mart, warehouse clubs such as Price/Costco, and department
stores such as JC Penney and Sears. These stores range in size from
approximately 50,000 to 200,000 square feet and are primarily located in
regional malls and strip shopping centers. Sporting goods merchandise and
apparel represent a small portion of the total merchandise in these stores and
the selection is often more limited than in other sporting goods retailers.
Although generally price competitive, Gart Sports believes that discount and
department stores have limited customer service because the store personnel
often lack product expertise in the selling of sporting goods.
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Gart Sports believes that although it will continue to face competition
from retailers in each of these categories, the most significant competition
will be from the large format sporting goods stores. Of Gart Sports' 63 stores,
nine currently face direct competition from warehouse format sporting goods
stores, including Jumbo Sports in Denver and Colorado Springs, Colorado and
Oshman's in Ogden, Utah. The principal competitive factors include store
location and image, product selection, quality and price, and customer service.
Increased competition in markets in which Gart Sports has stores, the adoption
by competitors of innovative store formats and retail sales methods or the entry
of new competitors or the expansion of operations by existing competitors in
Gart Sports' markets could have a material adverse effect on Gart Sports'
business, financial condition and operating results. In addition, certain of
Gart Sports' competitors have substantially greater resources than Gart Sports.
Gart Sports believes that the principal strengths with which it competes are its
broad selection and competitive prices combined with superior customer service
and brand names typically available only in specialty stores and pro shops.
PROPERTIES
Gart Sports currently leases all of its store locations. Most leases
provide for the payment of minimum annual rent subject to periodic adjustments,
plus other charges, including a proportionate share of taxes, insurance and
common area maintenance. Gart Sports has identified certain markets for
strategic repositioning and plans to address the positioning of each store as
leases expire and as opportunities arise. Leases for eight of Gart Sports'
non-superstore format stores have expired or are expiring by the end of 1998 and
Gart Sports believes that it can continue to occupy such stores on a
month-to-month basis. As part of its repositioning strategy, Gart Sports
regularly evaluates whether to renew store leases in existing locations or to
strategically relocate some of the stores to better locations and replace them
with larger stores. Gart Sports believes that at store locations where it
chooses to remain and renew expired leases, Gart Sports can do so on favorable
terms. Leases for the 20 Gart Sports Superstores expire between 2002 and 2016.
Gart Sports anticipates that all of its new stores will have long-term leases,
typically 15 years, with multiple five-year renewal options.
Gart Sports also leases its 240,000 square foot central distribution center
in Denver, Colorado, which expires in 2004 with a ten year renewal option. Gart
Sports believes that its distribution center is adequate to service Gart Sports'
current and expansion needs for the foreseeable future. Gart Sports' corporate
offices are located in its Denver Sportscastle store and are included under that
store's lease, which expires in 2002. In connection with the Merger, Gart Sports
intends to relocate its corporate offices to a larger facility in the Denver
metropolitan area.
EMPLOYEES
At December 6, 1997, Gart Sports employed 2,391 employees, 1,442 of whom
were employed on a full-time basis and 949 of whom were employed on a part-time
(less than 32 hours per week) basis. Of these, 289 were employed at the
executive and administrative level and 2,102 were employed at the store level.
Due to the seasonal nature of Gart Sports business, total employment fluctuates
during the year. Gart Sports considers its employee relations to be good. None
of Gart Sports' employees are covered by a collective bargaining agreement.
TRADEMARKS AND TRADE NAMES
Gart Sports uses the Gart Sports(R), Gart Bros. Sporting Goods Company(R),
Gart Sports Superstore(R), Sniagrab(R), Sportscastle(R) and Gart Sports
Company(R) trademarks and trade names, which have been registered with the
United States Patent and Trademark Office. Gart Sports also owns numerous other
trademarks and service marks which involve the manufacturing of soft goods,
advertising slogans, promotional event names and store names used in its
business.
LEGAL PROCEEDINGS
Gart Sports is from time to time involved in various legal proceedings
incidental to the conduct of its business. Gart Sports believes that the outcome
of all such pending legal proceedings to which it is a party will
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not in the aggregate have a material adverse effect on Gart Sports' business,
financial condition, or operating results.
On July 24, 1997, the IRS proposed adjustments to the 1992 and 1993
consolidated federal income tax returns of Gart Sports and its former parent
company, Thrifty. See "Risk Factors -- Potential Impact on Liquidity of Income
Tax Contingency."
GART SPORTS MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Immediately following the Merger, the executive officers and directors of
Gart Sports are expected to be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John Douglas Morton.................... 47 President, Chief Executive Officer and
Chairman of the Board (Director)
David J. Nace(1)....................... 51 Executive Vice President, Chief
Financial Officer and Treasurer
Robert M. Chessen...................... 46 Senior Vice President -- Human
Resources and Distribution
Arthur S. Hagan........................ 58 Senior Vice President -- Store
Operations
Jonathan D. Sokoloff(2)................ 40 Director
Jennifer Holden Dunbar(2).............. 34 Director
</TABLE>
- ---------------
(1) It is anticipated that shortly following the closing of the Merger, Thomas
Hendrickson, currently Sportmart's Executive Vice President and Chief
Financial Officer, will become Gart Sport's Executive Vice President, Chief
Financial Officer and Treasurer.
(2) Member of the Compensation Committee.
The Merger Agreement provides that two additional directors (the
"Additional Directors") are to be designated by Gart Sports prior to the
Effective Time and two additional directors are to be designated from the
Sportmart Board of Directors within 30 days after the Effective Time by a
majority of the persons who constitute the Sportmart Board of Directors
immediately prior to the Effective Date. The Merger Agreement also contains
provisions relating to the nominations of Messrs. Larry Hochberg and Andrew
Hochberg to the Gart Sports Board of Directors under certain circumstances. See
"The Merger -- Directors and Executive Officers of Gart Sports after the
Merger."
John Douglas Morton became President, Chief Executive Officer and Chairman
of the Board in May 1995. Mr. Morton joined Gart Sports in 1986 as Division
Manager of Gart Sports' Utah region. In 1988 he was promoted to Division Vice
President of that region and in 1990 to Vice President of Operations for Gart
Sports. In 1994 Mr. Morton was promoted to Executive Vice President of Gart
Sports with responsibility for Stores, Distribution and Marketing. Prior to
joining Gart Sports he served in various positions in Wolfe's Sporting Goods (a
seven-store sporting goods retailer) from 1972 to 1980 including Merchandise
Manager -- Ski, Camping, Golf, Tennis, Store Manager and Operations Manager for
that company. From 1980 until joining Gart Sports he served as a District
Manager for Malone and Hyde's sporting goods division (a 40-store retail
sporting goods retailer). Mr. Morton has worked for over 30 years in the
sporting goods retail industry.
David J. Nace became Executive Vice President, Chief Financial Officer and
Treasurer in May 1997. He joined Gart Sports in October 1993 as Senior Vice
President, Chief Financial Officer and Treasurer. Prior to that time, he was
employed at Child World, Inc. (a national toy retailer), where he served as Vice
President/ Controller from 1981 to 1993.
Robert M. Chessen became Senior Vice President -- Human Resources and
Distribution in May 1997. He joined Gart Sports in July 1993 as Vice President
of Human Resources. Prior to that time, Mr. Chessen was Senior Vice President of
Meier & Frank (a division of The May Department Stores Co.) from 1992 to June
1993, and Director of Executive Development at The May Department Stores Co.
from 1987 to 1992.
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Arthur S. Hagan became Senior Vice President -- Store Operations in May
1997. Mr. Hagan joined Gart Sports in 1988 as Gart Sports' Division Merchandise
Manager for Golf, Tennis, Ski Clothing/Equipment and Garden Furniture and was
promoted to Vice President -- Store Operations in 1995. He was President and
owner of Hagan Sports Ltd. (a six-store sporting goods retailer acquired by Gart
Sports in 1987) and President and Chief Executive Officer of Aspen Leaf of
Colorado, Inc. (a 12-store ski equipment and apparel retailer). Mr. Hagan has
over 30 years retailing experience.
Thomas Hendrickson is expected to become Executive Vice President, Chief
Financial Officer and Treasurer shortly following the closing of the Merger. Mr.
Hendrickson is currently the Executive Vice President and Chief Financial
Officer of Sportmart, which position he has held since September 1996. He joined
Sportmart in January 1993 as Vice President -- Financial Operations. In March
1993 he was named Chief Financial Officer of Sportmart and in March 1995 he was
named Senior Vice President and Chief Financial Officer of Sportmart. From 1987
until joining Sportmart, Mr. Hendrickson was employed as the Vice President and
Controller of Millers Outpost Stores.
Jonathan D. Sokoloff became a Director of Gart Sports in April 1993. Mr.
Sokoloff has been a partner of Leonard Green & Partners, L.P. ("LGP") since
1990, and was employed at Drexel Burnham Lambert Incorporated, from 1985-1990,
most recently as a managing director. He has been an executive officer and
equity owner of LGA since its formation in 1994, and is also a director of
Carr-Gottstein Foods Co. (an Alaskan based chain of grocery stores) and Twinlab
Corporation (a manufacturer and marketer of nutritional supplements).
Jennifer Holden Dunbar became a Director of Gart Sports in April 1993. Ms.
Holden Dunbar joined LGA in 1989 and became a partner in 1994. During the five
years preceding 1991, she was an associate of LGA, an associate of Gibbons,
Green, van Amerongen (a merchant banking firm), and a financial analyst for
Morgan Stanley & Co., Incorporated in its mergers and acquisitions department.
Ms. Holden Dunbar is also a director of Twinlab Corporation.
All officers of Gart Sports serve at the discretion of the Board of
Directors. There are no family relationships between any director, officer or
person nominated or chosen to become a director or officer and any other such
persons.
Gart Sports' Board of Directors serve for one year terms and are elected
annually at Gart Sports' annual meeting of its shareholders.
The Board of Directors intends to establish an Audit Committee within 90
days of the date of this Prospectus. The functions of the Audit Committee will
be to recommend annually to the Board of Directors the appointment of
independent public accountants of Gart Sports, discuss and review the scope and
the fees of the prospective annual audit and review the results thereof with the
independent public accountants, review and approve non-audit services of the
independent public accountants, review compliance with existing major accounting
and financial policies of Gart Sports, review the adequacy of the financial
organization of Gart Sports and review management's procedures and policies
relative to the adequacy of Gart Sports' internal accounting controls.
The Board of Directors has appointed Mr. Sokoloff (Chairman) and Ms. Holden
Dunbar as members of the Compensation Committee and intends to appoint one of
the Additional Directors to the Compensation Committee upon his or her
appointment. The functions of the Compensation Committee will be to, among other
things, review and approve annual salaries and bonuses for all executive
officers and review, approve and recommend to the Board of Directors the terms
and conditions of all employee benefit plans or changes thereto and administer
Gart Sports' Management Equity Plan.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Directors who are employees of Gart Sports receive no separate compensation
for serving as directors. It is anticipated that any outside directors elected
or appointed to the Board of Directors following the Effective Time will be paid
customary directors' fees in an amount which has not yet been determined.
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The following table sets forth the annual compensation for services
rendered to Gart Sports during the 1996 fiscal year for all of Gart Sports'
executive officers (the "Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 LONG-TERM COMPENSATION
1996 ANNUAL COMPENSATION -----------------------------------
------------------------ RESTRICTED STOCK ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) AWARDS($) COMPENSATION($)
--------------------------- ---------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C>
John Douglas Morton................. 250,000 306,250 -- --
Chief Executive Officer and
President
David J. Nace....................... 157,000 137,375 -- --
Executive Vice President, Chief
Financial Officer and Treasurer
Arthur S. Hagan..................... 130,000 79,625 -- --
Senior Vice President -- Store
Operations
Robert M. Chessen................... 120,000 73,500 -- --
Senior Vice President -- Human
Resources and Distribution
</TABLE>
The following table summarizes the options granted during the 1996 fiscal
year to the Executive Officers. All of these options were granted under Gart
Sports' Management Equity Plan described below.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1996
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE
NUMBER VALUE AT ASSUMED ANNUAL
OF PERCENT OF RATE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED 1996 ($/SHARE)(1) DATE 5% 10%
---- ---------- ------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John Douglas Morton.............. 40,000 18.70% $5.13 8/1/2006 $129,049 $327,036
David J. Nace.................... 15,000 7.01% $5.13 8/1/2006 $ 48,393 $122,638
Arthur S. Hagan.................. 17,000 7.95% $5.13 8/1/2006 $ 54,846 $138,990
Robert M. Chessen................ 12,000 5.61% $5.13 8/1/2006 $ 38,715 $ 98,111
</TABLE>
- ---------------
(1) The exercise price of each option was the estimated fair value of the Gart
Common Stock on the date of grant.
(2) Based upon the estimated fair value of the Gart Common Stock on the date of
grant and assumed appreciation over the term of the options at the
respective annual rates of stock appreciation shown. Potential gains are net
of the exercise price but before taxes associated with the exercise. The 5%
and 10% assumed annual rates of compounded stock appreciation are mandated
by the rules of the Securities and Exchange Commission and do not represent
Gart Sports' estimate or projection of the future price of the Gart Common
Stock. Actual gains, if any, on stock option exercises are dependent on the
future financial performance of Gart Sports and overall market conditions.
The actual value realized may be greater or less than the potential
realizable value set forth in the table.
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<PAGE> 97
The following table sets forth certain information regarding the number and
value of unexercised options held by the Executive Officers at January 4, 1997.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John Douglas Morton............................ 25,600 110,400 -- --
David J. Nace.................................. 12,800 34,200 -- --
Arthur S. Hagan................................ 6,000 26,000 -- --
Robert M. Chessen.............................. 1,600 14,400 -- --
</TABLE>
- ---------------
(1) Represents the value of the shares of Gart Common Stock subject to
outstanding options, based on an assumed value of $5.13 per share at January
4, 1997, less the aggregate option exercise price.
SEVERANCE AGREEMENTS
Severance Agreements. Gart Sports is party to severance agreements with
each of Messrs. Morton and Nace, which provide that upon termination without
cause, the executive officer is entitled to continue to receive his base salary
for a period of one year following the termination.
COMPENSATION PLANS AND ARRANGEMENTS
Management Equity Plan. Gart Sports has a Management Equity Plan (the
"Management Equity Plan") that commenced on September 30, 1994, and shall expire
September 30, 2004, unless earlier terminated by Gart Sports. The purpose of the
Management Equity Plan is to provide long-term incentives to the key employees
responsible for the continued growth and success of Gart Sports. Gart Sports has
reserved 1,500,000 shares of Gart Common Stock for issuance pursuant to stock
options awards that may be granted under the Management Equity Plan. Awards
covering 586,812 of the shares are outstanding.
The Management Equity Plan is administered by the Board of Directors of
Gart Sports or, in the discretion of the Board of Directors, a Committee
consisting of two or more disinterested directors (as defined in the Management
Equity Plan) of Gart Sports (in either case, the "Committee"). Pursuant to the
Management Equity Plan, the Committee has sole and final authority to construe
and interpret the Management Equity Plan, to determine when and to whom to grant
awards under, the number of shares to be covered by the grants, the types of
awards to be granted and the terms (including the consideration to be paid) of
such awards, to prescribe, amend and rescind rules and regulations relating to
the Management Equity Plan, and to make all other determinations necessary or
advisable for the administration of the Management Equity Plan. Under the terms
of the Management Equity Plan, the Committee may award key employees (including
officers and directors who are employees) of Gart Sports (i) grants of Gart
Common Stock ("Grant Shares"), (ii) permitted purchases of Gart Common Stock
("Purchased Shares"), or (iii) options to purchase Gart Common Stock ("Stock
Options"), or any combination of the foregoing as determined by the Committee.
In the case of Gart Stock Options, the Committee has the authority to
determine whether such Gart Stock Options shall be intended as "incentive stock
options" ("ISOs") or "non-incentive" or "nonqualified" Gart Stock Options under
Section 422 of the Code. No more than 600,000 of the 1,500,000 aggregate shares
allocated to awards under the Management Equity Plan shall be subject to the
ISOs outstanding at any time. Where the aggregate fair market value of Gart
Common Stock or other capital stock exceeds $100,000 with respect to which ISOs
are exercisable for the first time during any calendar year, such Gart Stock
Options shall be treated by the Committee as Gart Stock Options which are not
ISOs.
The exercise price of Gart Stock Options granted under the Management
Equity Plan will be established by the Committee, but the exercise price for
Gart Stock Options intended as ISOs may not be less than the
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fair market value (110% of fair market value in the case of holders of 10% or
more of the Gart Common Stock ("10% Stockholders")) of the Gart Common Stock on
the date the option is granted. Each option granted will be exercisable over a
period as determined by the Committee, provided that no Gart Stock Option may
have a term exceeding 10 years from the date such Gart Stock Option is granted
or five years in the case of 10% Stockholders.
No Gart Stock Option may be transferred by an optionee during his or her
lifetime. Gart Stock Options may not be exercised more than three months after
an employee's termination of employment with Gart Sports unless such termination
was a result of death, disability or retirement, in which case the exercise
period is extended to one year. During such period after death, any vested
unexercised portion of the Gart Stock Option may be exercised by the person to
whom the option holder's rights under the Gart Stock Option shall pass by will
or the laws of descent and distribution.
The Management Equity Plan provides that if the outstanding shares of the
Gart Common Stock of Gart Sports are increased, decreased, changed into or
exchanged for a different number or kind of shares or securities of Gart Sports
through reorganization, recapitalization, reclassification, stock split, reverse
stock split, stock dividend or similar capital adjustment, the Committee may
affect a proportionate adjustment in the maximum number and kind of shares which
may be awarded under the Management Equity Plan without receipt of consideration
by Gart Sports.
Bonus Plan. Gart Sports has established a Bonus Plan (the "Bonus Plan") for
certain officers and other members of Gart Sports' target bonus management team.
Under the Bonus Plan, eligible employees will be awarded cash bonuses based upon
Gart Sports' achievement of a target level of pre-tax income ("Target Income").
Assuming that Gart Sports achieves 100% of Target Income for 1997, participants
in the Bonus Plan will receive 100% of their respective target bonuses, for an
aggregate bonus payout by Gart Sports of approximately $1.0 million. Target
Income is subject to adjustment at the discretion of Gart Sports' Board of
Directors, in certain circumstances. Gart Sports may choose to continue, amend
or terminate the Bonus Plan in future years after 1997.
Employee Benefit Plan. Gart Sports maintains a defined contribution profit
sharing plan (the "Employee Plan") that includes a 401(k) plan feature for all
eligible employees. The Employee Plan permits eligible employees to make tax
deferred contributions and provides for discretionary matching contributions by
Gart Sports as determined by the Board of Directors. In 1996, Gart Sports'
discretionary matching contributions were $126,000. Gart Sports also provided an
additional discretionary contribution of $174,000 to the Employee Plan during
1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During fiscal 1996 the Compensation Committee consisted of Mr. Sokoloff and
Ms. Holden Dunbar.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Gart Sports Certificate provides that no director shall be liable
personally to Gart Sports or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that, the Gart Sports Certificate does
not eliminate the liability of a director for (i) any breach of the director's
duty of loyalty to Gart Sports or its stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) acts or omissions in respect to certain unlawful dividend payments or
stock redemptions or repurchases; or (iv) any transaction from which such
director derives improper personal benefit. The effect of this provision is to
eliminate the rights of Gart Sports and its stockholders (through stockholders'
derivative suits on behalf of Gart Sports) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent to grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. The limitations
summarized above, however, do not affect the ability of Gart Sports or its
stockholders to seek non-monetary based remedies, such as an injunction or
rescission, against a director for breach of his fiduciary duty. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling Gart Sports pursuant to
the foregoing provisions, Gart Sports has been informed that in the
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opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Gart Sports Certificate and Gart Sports Bylaws provide that Gart Sports
shall indemnify and advance expenses to the currently acting and former
directors, officers, employees and agents of Gart Sports or another corporation,
partnership, joint venture, trust, association or other enterprise if serving at
the request of Gart Sports arising in connection with their acting in such
capacities. In addition, Section 145 of the DGCL General Corporation Law permits
Gart Sports to indemnify an officer or director who was or is a party or is
threatened to be made a party to any proceeding because of his or her position,
if the officer or director acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interest of Gart Sports
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful.
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GART SPORTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Gart Sports Selected Historical Financial Data" and the notes thereto and Gart
Sports' consolidated financial statements and notes thereto included elsewhere
in this Proxy Statement/Prospectus.
RESULTS OF OPERATIONS
During 1994, Gart Sports, under previous management, shifted its pricing
strategy from a promotional advertising and pricing strategy to an everyday low
price strategy. Under this strategy, Gart Sports attempted to maintain the
lowest price on many of its products within Gart Sports' entire operating
region. This strategy resulted in a steady decline in gross margins from a
five-year high of 26.5% in 1993 to a five year low of 25.7% in 1995. In May
1995, in addition to the management change that resulted in John Douglas Morton
becoming President and Chief Executive Officer, Gart Sports began to make the
necessary changes in advertising and purchasing to reinstate its promotional
advertising and pricing strategy. Gross margins for each quarter of 1996 were
higher than the comparable quarter of 1995, resulting in an increase in gross
margins of 1.6 percentage points for the entire year of 1996 to 27.3%.
Stores enter the comparable store sales base at the beginning of their 14th
month of operations. Inventories are stated at the lower of last-in, first-out
(LIFO) cost or market. Gart Sports considers cost of goods sold to include the
direct cost of merchandise, plus certain internal costs associated with
merchandise procurement, warehousing, handling and distribution. In addition to
the full cost of inventory, cost of goods sold includes certain other occupancy
costs and amortization and depreciation of leasehold improvement and rental
equipment. Operating expenses include both controllable and non-controllable
store expenses (except occupancy), non-store expenses and depreciation and
amortization not included in cost of goods sold.
During 1995, Gart Sports adopted an annual fiscal reporting period that
ends on the first Saturday in January. Accordingly, fiscal 1996 began on January
7, 1996 and ended on January 4, 1997 and included 52 weeks of operations. Fiscal
1995 began on January 1, 1995 and ended on January 6, 1996 and included 53 weeks
of operations. Fiscal 1994 began on January 1, 1994 and ended on December 31,
1994.
The following table sets forth for the periods indicated unaudited
consolidated statements of income items and those items as a percentage of net
sales:
<TABLE>
<CAPTION>
FISCAL YEARS 39 WEEKS ENDED
--------------------------------------------------- ---------------------------------
1994 1995 1996 OCTOBER 5, 1996 OCTOBER 4, 1997
--------------- --------------- --------------- --------------- ---------------
DOLLARS % DOLLARS % DOLLARS % DOLLARS % DOLLARS %
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $171.9 100.0% $176.8 100.0% $204.1 100.0% $137.5 100.0% $151.1 100.0%
Cost of goods sold, buying,
distribution and
occupancy................. 124.9 72.7 131.4 74.3 148.4 72.7 103.1 75.0 112.5 74.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit................ 47.0 27.3 45.4 25.7 55.7 27.3 34.4 25.0 38.6 25.5
Operating expenses.......... 40.0 23.2 42.9 24.3 47.6 23.4 32.8 23.8 36.4 24.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income............ 7.0 4.1 2.5 1.4 8.1 3.9 1.6 1.2 2.2 1.4
Interest expense............ 1.7 1.0 2.3 1.3 1.6 0.8 1.2 0.9 0.7 0.4
Other income................ 0.5 0.3 0.6 0.4 0.6 0.4 0.3 0.2 0.6 0.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income before income
taxes..................... 5.8 3.4 0.8 0.5 7.1 3.5 0.7 0.5 2.1 1.4
Income tax expense.......... 2.2 1.3 0.3 0.2 2.7 1.3 0.3 0.2 0.8 0.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Net income.................. $ 3.6 2.1% $ 0.5 0.3% $ 4.4 2.2% $ 0.4 0.3% $ 1.3 0.9%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
39 WEEKS ENDED OCTOBER 4, 1997 AS COMPARED TO 39 WEEKS ENDED OCTOBER 5, 1996
Net Sales. Net sales increased 9.9% to $151.1 million in the 39 weeks ended
October 4, 1997 as compared to $137.5 million in the 39 weeks ended October 5,
1996. This growth is attributable to a
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<PAGE> 101
comparable store sales increase of 4.2% and an increase of $12.4 million from
new stores opened in fiscal 1996 and 1997 offset by $3.9 million in lost sales
from closed stores. Comparable store sales increases were partly attributable to
strong sales in golf equipment, footwear, athletic hardlines and activewear.
During the 39 weeks ended October 4, 1997, Gart Sports opened one superstore and
closed two freestanding stores as compared to opening four superstores and
closing three freestanding and one mall store in the 39 weeks ended October 5,
1996. At October 4, 1997, Gart Sports operated 59 stores as compared to 60
stores as of October 5, 1996.
Gross Profit. Gross profit in the 39 weeks ended October 4, 1997 was $38.6
million, or 25.5% of net sales as compared to $34.4 million, or 25.0% of net
sales, in the 39 weeks ended October 5, 1996. This increase as a percentage of
net sales was primarily the result of improved margins in hardlines and apparel
and lower depreciation expense classified as cost of goods sold, buying,
distribution and occupancy.
Operating Expenses. Operating expenses in the 39 weeks ended October 4,
1997 were $36.4 million, or 24.1% of net sales, as compared to $32.8 million, or
23.8% of net sales, in the 39 weeks ended October 5, 1996. This increase as a
percentage of net sales was primarily due to an increase in store payroll and
advertising costs partially offset by a decline in corporate overhead expenses.
Operating Income. As a result of the factors described above, operating
income in the 39 weeks ended October 4, 1997 increased 36.6% to $2.2 million, or
1.4% of net sales, from $1.6 million, or 1.2% of net sales, in the 39 weeks
ended October 5, 1996.
Interest Expense. Interest expense in the 39 weeks ended October 4, 1997
decreased 44.2% to $0.7 million, or 0.4% of net sales, from $1.2 million, or
0.9% of net sales, in the 39 weeks ended October 5, 1996. This decrease was
primarily due to a decrease in borrowings under Gart Sports' revolving credit
line.
Other Income. Other income in the 39 weeks ended October 4, 1997 increased
100.7% to $.6 million, or 0.4% of net sales, from $0.3 million, or 0.2% of net
sales, in the 39 weeks ended October 5, 1996. This increase was due to proceeds
received from a lessor's buyout of a store lease, offset in part by the
write-off of deferred offering costs as a result of the cancellation of a
proposed initial public offering in light of the pendency of the Merger.
Income Taxes. Gart Sports' income tax expense in the 39 weeks ended October
4, 1997 was $0.8 million as compared to $0.3 million in the 39 weeks ended
October 5, 1996. Gart Sports' effective tax rate increased to 37.8% as compared
to 37.5% in the comparable period last year.
FISCAL 1996 AS COMPARED TO FISCAL 1995
Net Sales. Net sales increased 15.4% to $204.1 million in fiscal 1996 as
compared to $176.8 million in fiscal 1995. This growth is attributable to a
comparable store increase of 4.4% and an increase of $35.6 million in sales from
new stores offset by $12.8 million in lost sales from closed stores. Comparable
store sales increases were partly attributable to strong sales in the apparel
categories. As a result of new store openings net of store closings, total
square footage increased 9.6% in fiscal 1996 to 1,453,520 from 1,326,158 in
fiscal 1995. During fiscal 1996, Gart Sports opened five superstores and closed
four freestanding stores and one mall store as compared to opening four
superstores and one freestanding store and closing four freestanding stores and
two mall stores in fiscal 1995. Gart Sports operated 60 stores at the end of
both fiscal 1996 and fiscal 1995.
Gross Profit. Gross profit in fiscal 1996 was $55.7 million, or 27.3% of
net sales as compared to $45.4 million, or 25.7% of net sales in fiscal 1995.
This increase as a percentage of net sales was primarily attributable to reduced
inventory shrinkage and higher gross profit margins overall due to a change in
pricing from an everyday low price strategy to a promotional price strategy. The
promotional pricing strategy was reinstated in late fiscal 1995.
Operating Expenses. Operating expenses in fiscal 1996 were $47.6 million,
or 23.4% of net sales as compared to $42.9 million, or 24.3% of net sales in
fiscal 1995. This decrease as a percentage of net sales was the result of lower
store payroll expenses and lower corporate overhead expenses due in part to the
absence of a non-recurring severance charge of $0.8 million for termination
costs of several executives in fiscal 1995 and to various cost containment
programs initiated in fiscal 1996.
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Operating Income. As a result of the factors described above, operating
income in fiscal 1996 increased 224.3% to $8.1 million, or 3.9% of net sales,
from $2.5 million, or 1.4% of net sales in fiscal 1995.
Interest Expense. Interest expense in fiscal 1996 decreased 29.8% to $1.6
million, or 0.8% of net sales, from $2.3 million, or 1.3% of net sales, in
fiscal 1995. This decrease is primarily due to a decrease in borrowings under
Gart Sports' credit agreement.
Income Taxes. Gart Sports' income tax expense in fiscal 1996 was $2.7
million as compared to $0.3 million in fiscal 1995. Gart Sports' effective tax
rate in fiscal 1996 increased to 37.6% as compared to 35.9% in fiscal 1995.
FISCAL 1995 AS COMPARED TO FISCAL 1994
Net Sales. Net sales increased 2.9% to $176.8 million in fiscal 1995 as
compared to $171.9 million in fiscal 1994. This growth is due to the net impact
of six additional days of sales attributable to Gart Sports' fiscal reporting
period and by the net increase in sales generated in new stores opened net of
stores closed in fiscal 1995. This growth was offset by a decrease in comparable
store sales of 4.1%. Total square footage increased 9.6% in fiscal 1995 to
1,326,158 from 1,210,003 in fiscal 1994. During fiscal 1995, Gart Sports opened
four superstores and one freestanding store and closed four freestanding stores
and two mall stores, as compared to opening three superstores, one freestanding
store and one resort store and closing two freestanding stores in fiscal 1994.
At the end of fiscal 1995, Gart Sports operated 60 stores as compared with 61 at
the end of fiscal 1994.
Gross Profit. Gross profit in fiscal 1995 was $45.4 million, or 25.7% of
net sales as compared to $47.0 million, or 27.3% of net sales, in fiscal 1994.
This decrease as a percentage of net sales was primarily the result of lower
gross profit margins pursuant to the adoption in 1994 by Gart Sports of an
everyday low price strategy. The everyday low price strategy was phased out in
late fiscal 1995.
Operating Expenses. Operating expenses in fiscal 1995 were $42.9 million,
or 24.3% of net sales as compared to $40.0 million, or 23.2% of net sales in
fiscal 1994. This increase as a percentage of net sales was primarily due to
higher depreciation resulting from capital expenditures for new superstore
openings and a non-recurring severance charge in fiscal 1995.
Operating Income. As a result of the factors described above, operating
income in fiscal 1995 decreased 64.4% to $2.5 million, or 1.4% of net sales from
$7.0 million, or 4.1% of net sales in fiscal 1994.
Interest Expense. Interest expense in fiscal 1995 increased 30.6% to $2.3
million, or 1.3% of net sales, from $1.7 million, or 1.0% of net sales, in
fiscal 1994. This increase was due primarily to an increase in borrowings under
the Gart Sports' revolving credit line.
Income Taxes. Gart Sports' income tax expense in fiscal 1995 was $0.3
million as compared to $2.2 million in fiscal 1994. Gart Sports' effective tax
rate in fiscal 1995 decreased to 35.9% as compared to 38.3% in fiscal 1994. This
decrease is primarily due to the impact of non-recurring state income tax
credits received in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Gart Sports' primary capital requirements are for inventory, capital
improvements and pre-opening expenses to support the Gart Sports' expansion
plans, as well as for various investments in store remodeling, store fixtures
and ongoing infrastructure improvements. Historically, Gart Sports' liquidity
and capital needs have been met by cash from operations and borrowings under a
revolving line of credit (the "Credit Agreement") with CIT/Business Credit, Inc.
("CIT").
Net cash used in operating activities increased to $11.6 million in the 39
weeks ended October 4, 1997 from $6.2 million in the 39 weeks ended October 5,
1996 primarily due to an increase in inventories offset by an increase in
accounts payable. Net cash used in investing activities, which primarily
represented purchases of property and equipment for new store openings in both
periods, increased to $3.4 million in the 39 weeks ended October 4, 1997 from
$2.3 million in the 39 weeks ended October 5, 1996. Net cash provided by
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financing activities increased to $8.7 million in the 39 weeks ended October 4,
1997 from $3.5 million in the 39 weeks ended October 5 1996, which primarily
represented borrowings under Gart Sports' revolving credit facility.
Net cash derived from operating activities was $22.1 million in fiscal 1996
versus $11.5 million in fiscal 1995. The increase in cash provided in fiscal
1996 compared to fiscal 1995 primarily resulted from an increase in net income,
higher levels of accounts payable and accrued expenses, and the receipt of
income tax refunds. Net cash used in investing activities was $3.4 million in
fiscal 1996 compared to $3.6 million in fiscal 1995 and consisted primarily of
capital expenditures. Fiscal 1996 capital expenditures were predominantly used
for the opening of five new stores. In addition, capital expenditures were also
made for information systems, distribution center facilities, store fixturing
and remodeling.
Net cash used in financing activities was $16.8 million in fiscal 1996 and
$3.3 million in fiscal 1995. In fiscal 1996 and fiscal 1995, repayment of long
term debt was $17.0 million and $2.7 million, respectively. The long term debt
consists of the Credit Agreement, which allows Gart Sports' to borrow up to 60%
of its eligible inventories (as defined in the Credit Agreement) for the period
January through August of each year and up to 65% of its eligible inventories
for the period September through December of each year. Borrowings are limited
to the lesser of $50 million or the amount calculated in accordance with the
borrowing base, and are secured by substantially all trade receivables,
inventories and intangible assets. CIT may not demand repayment of principal
absent an occurrence of default under the Credit Agreement prior to April 20,
2001. Loan interest is payable monthly at Chase Manhattan Bank's prime rate plus
a margin rate that cannot exceed 0.75% or, at the option of Gart Sports, at
Chase Manhattan Bank's LIBOR rate plus a margin that cannot exceed 2%. The
margin rate on both prime and LIBOR borrowings can be reduced to as low as 0.0%
and 1.25%, respectively, depending on certain criteria. There was $8.8 million
outstanding under the Credit Agreement at October 4, 1997, and $41.2 million was
available for borrowing.
The IRS has proposed adjustments to the 1992 and 1993 consolidated federal
income tax returns of Gart Sports and its former parent, Thrifty, and the manner
in which LIFO inventories were characterized on such returns. These adjustments
could result in up to approximately $9.7 million of a long-term deferred tax
liability being accelerated, which would have a negative impact on liquidity in
the near term. See "Risk Factors -- Potential Impact on Liquidity of Income Tax
Contingency" and Note 13 to the Gart Sports Consolidated Financial Statements.
Gart Sports has opened 20 stores since November 1993, including five stores
in 1994, five stores in 1995, five stores in 1996 and five stores in 1997.
Capital expenditures to support all of Gart Sports' expansion plans as well as
various investments in store remodeling, store fixtures, ski rentals and ongoing
infrastructure improvements are projected to be $5.3 million in fiscal 1997.
These capital expenditures will be for new store openings, fixturing and
remodeling of existing stores, information systems and distribution center
facilities. Gart Sports currently leases all of its store locations and intends
to continue to finance its new stores with long-term operating leases. Based on
Gart Sports' prior experience, newly constructed superstores require a cash
investment of approximately $1.8 million for a 45,000 square foot store,
consisting of $1.4 million for inventory net of vendor payables, $300,000 for
capital improvements (including leasehold improvements, fixtures and equipment)
and $100,000 for pre-opening expenses. The cash investment for a newly
constructed 33,000 square foot store is approximately $1.5 million, consisting
of $1.1 million for inventory net of vendor payables, $250,000 for capital
improvements and $100,000 for pre-opening expenses. Historically, superstores
constructed in existing retail space have required additional capital investment
of approximately $700,000 in leasehold improvements per location. The level of
capital improvements will be impacted by the mix of new construction versus
renovation of existing retail space for the Gart Sports' new stores. Of the 16
superstores opened since November, 1993, three have been renovations of existing
retail space. Pre-opening costs, which include grand opening advertising, are
expensed on a straight-line basis during the remaining periods of the fiscal
reporting year in which the store opens. Gart Sports expects similar trends in
new store investment for the foreseeable future.
Gart Sports has received a commitment letter for a multi-year asset-based
credit facility of $175 million to refinance the combined indebtedness of Gart
Sports and Sportmart. The new credit facility will include a
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$10 million letter of credit feature, an advance rate against eligible
inventories of 70%, and certain financial covenants. Interest rates will be
based on the prime rate or the LIBOR rate, at the option of Gart Sports, plus
margins of 25 basis points for prime borrowings and 175 basis points for LIBOR
borrowings.
Gart Sports believes that cash generated from operations, together with
funds available under the proposed credit facility, will be sufficient to fund
transaction fees and costs, severance and relocation costs, integration costs
(estimated to be approximately $21 million in the aggregate), projected capital
expenditures (estimated at $11 million) and other working capital requirements
through fiscal 1998. Gart Sports also intends to utilize its credit facilities
to meet seasonal fluctuations in cash flow requirements. Gart Sports generally
reaches its peak borrowing level in November.
SEASONALITY AND INFLATION
The following table sets forth Gart Sports' unaudited consolidated
quarterly results of operations for each of the quarters in fiscal 1995 and 1996
and for the first three quarters of fiscal 1997. This quarterly information is
unaudited, but has been prepared on the same basis as the annual financial
information and, in the opinion of management, reflects all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the periods presented. The results of
operations for any quarter are not necessarily indicative of the results for the
respective fiscal year. The results of operations for any quarter are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
FISCAL 1995
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales................................................ $38.9 $36.3 $42.0 $59.6
% of full year........................................... 22.0% 20.5% 23.8% 33.7%
Operating income (loss).................................. $(0.2) $(1.9) $(0.5) $ 5.1
% of full year........................................... (8.0)% (76.0)% (20.0)% 204.0%
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales................................................ $44.3 $42.9 $50.3 $66.6
% of full year........................................... 21.7% 21.0% 24.6% 32.7%
Operating income......................................... $ 1.4 $ 0.2 $ 0.0 $ 6.5
% of full year........................................... 17.3% 2.5% 0.0% 80.2%
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997
----------------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
------- ------- -------
<S> <C> <C> <C> <C>
Net sales................................................ $47.4 $48.0 $55.7
Operating income......................................... $ 1.8 $ 0.4 $ 0.0
</TABLE>
The fourth quarter has historically been the strongest quarter for Gart
Sports. For fiscal 1995 and 1996, the fourth quarter contributed 33.7% and
32.7%, respectively, of net sales and 207.3% and 80.2%, respectively, of
operating income. Gart Sports believes that two primary factors contribute to
this seasonality. First, Gart Sports' business is characterized by strong sales
of cold weather sporting goods, and its customers traditionally make purchases
of ski and snowboard merchandise during these quarters in anticipation of the
ski and snowboard season. In fiscal 1995 and 1996, sales and rentals of winter
sports equipment and apparel accounted for 22.6% and 23.2%, respectively, of
Gart Sports' net sales for these fiscal years. Second, as is the case with most
retailers, holiday sales contribute significantly to Gart Sports' operating
results. As a result of these factors, inventory levels, which gradually
increase beginning in April, generally reach their peak in November and then
fall to their lowest level following the December holiday season. Any decrease
in sales for the fourth quarter, whether due to a slow holiday selling season,
poor snowfall in ski areas near Gart Sports'
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markets or otherwise, could have a material adverse effect on Gart Sports'
business, financial condition and operating results for the entire fiscal year.
Further, as a result of the seasonality of Gart Sports' revenue, Gart Sports may
experience net losses in the second and third fiscal quarters of each year for
the foreseeable future. Following the proposed merger, it is expected the
seasonality of Gart Sports will be less dependent on the fourth quarter for both
sales and operating income generation as a percentage of full year. See "Risk
Factors -- Seasonality; Dependence on Winter Selling Season" and "Sportmart
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
Although the operations of Gart Sports are influenced by general economic
conditions, Gart Sports does not believe that inflation has a material impact on
Gart Sports' results of operations. Gart Sports believes that it is generally
able to pass along any inflationary increases in costs to its customers.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In February of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
128), which is effective for periods ending after December 15, 1997 (including
interim periods). SFAS 128 requires public companies to present basic earnings
per share and diluted earnings per share instead of primary and fully diluted
earnings per share as required under current accounting standards. SFAS 128
cannot be adopted early. At October 4, 1997, the pro forma basic and diluted
earnings per share presentations for the 39 weeks ended October 5, 1996 and
October 4, 1997, are the same as earnings per share as currently disclosed. Pro
forma diluted earnings per share is equal to pro forma basic earnings per share,
as Gart Sports' dilutive common stock equivalents, as calculated using the
treasury stock method, are not significant. Potentially dilutive common stock
equivalents include stock options outstanding under Gart Sports' Management
Equity Plan.
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CERTAIN TRANSACTIONS OF GART SPORTS
RELATIONSHIP WITH GEI
Control by GEI. GEI currently owns 85.7% of the outstanding Common Stock,
and upon consummation of the Merger, GEI will own approximately 61% of the
outstanding Gart Common Stock. GEI, whose general partner is LGA, led the
acquisition of Thrifty Corporation in 1992, at which time Gart Sports was a
subsidiary of Thrifty Drug Stores. In 1994, Thrifty distributed all of the
capital stock of Gart Sports to Thrifty's shareholders. LGA is a private
investment firm which initiates, structures and invests in acquisitions and
recapitalizations of established public and private middle-market companies. See
"Risk Factors -- Potential Conflicts of Interest."
Due to GEI's stock ownership in Gart Sports, GEI will continue to be able
to control Gart Sports, to elect its Board of Directors and to approve any
action requiring stockholder approval, including adopting amendments to the Gart
Sports Certificate and approving or disapproving mergers or sales of all or
substantially all of the assets of Gart Sports. As a result of such control, GEI
will be able to effectively control all of Gart Sports' policy decisions. As
long as GEI is a majority stockholder of Gart Sports, third parties will not be
able to obtain control of Gart Sports through purchases of Gart Common Stock not
owned by GEI. See "Risk Factors -- Control by Significant Stockholder."
Tax Sharing and Indemnification Agreements. Gart Sports was a subsidiary of
Thrifty Corporation, which was wholly-owned by TCH Corporation ("TCH"), until
1994 and was included in TCH's consolidated federal income tax returns during
that period. Under federal tax law, if Gart Sports is included in a consolidated
federal income tax return, it is severally liable for all the federal income tax
liabilities with respect to such return, including tax liabilities not
attributable to income of Gart Sports ("Non-Company Taxes"). In order to
allocate the tax liabilities among them, TCH and its subsidiaries, including
Gart Bros. and MC, entered into a Tax Sharing Agreement as of September 25,
1992. In general, the Tax Sharing Agreement provides that, so long as TCH is
required to file consolidated federal income tax returns which include Gart
Bros., Gart Bros. will be responsible for paying to TCH its Separate Tax
Liability (as defined in the Tax Sharing Agreement) computed as a flat tax on
its income at the highest marginal rate applicable to corporations under the
various income tax systems provided under the Internal Revenue Code. Similarly,
TCH will be required to reimburse Gart Bros. for the use of its tax attributes
(i.e., net operating losses, capital losses or credits) to reduce federal income
tax liability on a TCH consolidated federal income tax return. Similar
provisions apply with respect to the filing of combined or consolidated state
income or franchise tax returns and the payment of tax. Under the Tax Sharing
Agreement, TCH will determine the reporting of all items on the TCH consolidated
federal income tax returns and will be responsible for all audits and
controversies. Separate Tax Liabilities of each member will be adjusted to
reflect adjustments resulting from resolved audits or other controversies and
appropriate payments or reimbursements will be made. On July 24, 1997, the IRS
proposed adjustments to the 1992 and 1993 consolidated federal income tax
returns of Gart Bros. and its former parent company, Thrifty. See "Risk
Factors -- Potential Impact on Liquidity of Income Tax Contingency."
Pacific Enterprises ("PE"), the former parent company of Thrifty , TCH,
Thrifty Corporation and Big 5 Corporation entered into a Tax Indemnity Agreement
dated as of September 25, 1992 which sets forth the parties' agreements with
respect to various tax matters and provides that PE will indemnify each member
of the affiliated group of which TCH is the common parent (collectively, the
"Thrifty Group") from specified liabilities and expenses imposed on or incurred
by any member of the Thrifty Group in respect of federal income tax for all tax
periods ending on or before September 25, 1992 and in respect of certain ERISA
liabilities. Gart Bros. was a member of the Thrifty Group at the time the Tax
Indemnity Agreement was entered into and continues to be subject to such
agreement. Pursuant to the Tax Indemnity Agreement, each member of the Thrifty
Group jointly and severally indemnified PE and each member of the Parent Group
(as defined in the Tax Indemnity Agreement) against liabilities incurred as a
result of a breach of the Tax Indemnity Agreement by TCH or any member of the
Thrifty Group.
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In connection with the distribution of the Gart Common Stock to the
shareholders of Thrifty (the "Distribution") and Thrifty's simultaneous
acquisition of Pay Less Drugstores Northwest, Inc. ("Pay Less"), Gart Sports and
several other former subsidiaries of Thrifty (the "Former Subsidiaries") entered
into an Indemnification and Reimbursement Agreement (the "Reimbursement
Agreement") with Thrifty whereby the Former Subsidiaries have agreed to
indemnify Thrifty for any tax-related expenses arising from the Distribution (in
excess of $15 million) or the operation of the Former Subsidiaries businesses.
The Reimbursement Agreement also provides that Thrifty will indemnify the Former
Subsidiaries for any expenses arising from the operation of Thrifty's business
on or before date of the Distribution. Gart Sports has not received any notices
of claims under the Reimbursement Agreement, and is unaware of any pending claim
thereunder.
Also in connection with the Distribution, Gart Sports entered into an
Indemnification Allocation Agreement (the "Allocation Agreement") with Thrifty
and MC whereby the parties agree to separate and allocate the economic benefits
of certain indemnification rights under the agreement whereby Thrifty purchased
Thrifty Corporation from PE among themselves. Gart Sports has not received any
notices of claims under the Reimbursement Agreement, and is unaware of any
pending claim thereunder.
Management Services Agreement. Gart Sports has entered into a Management
Services Agreement with LGA, pursuant to which LGA receives an annual retainer
fee of $500,000 plus reasonable expenses for providing certain management,
consulting and financial planning services (the "LGA Management Fee"). Gart
Sports believes that the contacts and expertise provided by LGA in these areas
enhance Gart Sports' opportunities and management's expertise in these matters
and that the fees to be paid to LGA fairly reflect the value of the services to
be provided by LGA. In addition to the LGA Management Fee, the Management
Services Agreement provides that LGA may receive reasonable and customary fees
and reasonable expenses from time to time for providing financial advisory and
investment banking services in connection with major financial transactions that
may be undertaken in the future. The Management Services Agreement terminates on
April 20, 2004.
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<PAGE> 108
PRINCIPAL STOCKHOLDERS OF GART SPORTS
The table below sets forth certain information regarding beneficial
ownership of Gart Common Stock as of November 28, 1997, assuming the exercise of
options exercisable within 60 days of the date hereof, and the issuance of Gart
Common Stock pursuant to the Merger with respect to: (i) each person or entity
who owns of record or beneficially five percent or more of the Gart Common Stock
(including GEI)), (ii) each executive officer and each director of Gart Sports,
and (iii) all executive officers and directors of Gart Sports as a group. To the
knowledge of Gart Sports, each of such stockholders has sole voting and
investment power as to the shares shown unless otherwise noted. The table sets
forth the number and percentage of the outstanding shares projected to be
beneficially owned by each of such shareholders after consummation of the
Merger.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO THE MERGER AFTER THE MERGER
-------------------- --------------------
NUMBER PERCENT NUMBER PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Green Equity Investors, L.P.(1).................... 4,713,206 85.7% 4,713,206 61.4%
Larry J. Hochberg(2)............................... -- -- 568,933 7.4
John Douglas Morton................................ 84,800 1.5 84,800 1.1
David J. Nace...................................... 54,200 1.0 54,200 .7
Arthur S. Hagan.................................... 19,067 0.5 19,067 .2
Robert M. Chessen.................................. 8,800 .2 8,800 .1
Jonathan D. Sokoloff(1)............................ -- -- -- --
Jennifer Holden Dunbar(1).......................... -- -- -- --
All directors and executive officers as a group (6
persons)......................................... 166,417 4.0 166,417 2.9
</TABLE>
- ---------------
(1) GEI is a Delaware limited partnership, the general partner of which is LGA.
The general partners of LGA are (i) Tardy-Green, Inc., a Delaware
corporation the capital stock of which is wholly-owned by a trust of which
Leonard I. Green is the co-trustee, (ii) Mr. Sokoloff, (iii) Willow III,
Inc., a California corporation the capital stock of which is beneficially
owned by Ms. Holden Dunbar, and (iv) GANMAX, a California corporation the
capital stock of which is beneficially owned by Gregory J. Annick. Mr.
Sokoloff, Ms. Holden Dunbar and Mr. Annick may be deemed to be beneficial
owners of the shares of Gart Common Stock held by GEI since they (or
entities controlled by them) are general partners of LGA and also because
they (whether through ownership interest or position) may be deemed to
control LGA.
(2) Includes 32,147 shares of Gart Common Stock beneficially owned by Larry J.
Hochberg's wife, Barbara P. Hochberg. Includes 3,114 shares of Gart Common
Stock which are held by Larry J. Hochberg as Co-Trustee of the Hochberg
Annual Gift Trust U/A/D 4/27/94. Includes 3,214 shares of Gart Common Stock
which are held by Larry J. Hochberg as Trustee of the Andrew S. Hochberg
Sub-Trust U/A/D 1/3/90. Includes 2,802 shares of Gart Common Stock which are
held by Larry J. Hochberg as Trustee of the Amy H. Lowenstein Sub-Trust
U/A/D 1/3/90. Includes 51,518 shares of Gart Common Stock beneficially owned
by Sanford Cantor, which shares are subject to a voting agreement pursuant
to which Larry J. Hochberg may vote such shares. Excludes 234,126 shares of
Gart Common Stock issuable with respect to shares of Sportmart Common Stock
currently held by LJH L.P., a limited partnership with respect to which a
trust for which Mr. Hochberg acts as trustee serves as general partner. It
is anticipated that prior to the Effective Time, LJH L.P. will be liquidated
and the shares of Sportmart Common Stock owned thereby will be distributed
to the partners of such partnership on a pro rata basis. Because Mr.
Hochberg will not be the beneficial owner of any shares of Gart Common Stock
held by such partners, Mr. Hochberg disclaims beneficial ownership thereof.
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<PAGE> 109
DESCRIPTION OF GART SPORTS CAPITAL STOCK
Upon consummation of the Merger, Gart Sports will have authorized capital
of 22,000,000 shares of Gart Common Stock, par value $.01 per share, and
3,000,000 shares of Gart Preferred Stock, par value $.01 per share. Of the
22,000,000 shares of Gart Common Stock authorized, 5,498,894 shares will be
outstanding immediately prior to the consummation of the Merger and
approximately 7,683,392 shares will be outstanding upon consummation of the
Merger (assuming no exercise prior to the Effective Time of outstanding options
to acquire Gart Common Stock and Sportmart Common Stock and assuming a
Conversion Ratio of .164860). No shares of Gart Preferred Stock have been
issued.
COMMON STOCK
All shares of Gart Common Stock currently outstanding are, and all shares
of Gart Common Stock to be issued in connection with the Merger, when duly
issued and paid for, will be fully paid and nonassessable, not subject to
redemption and without preemptive, conversion or subscription rights. Holders of
Gart Common Stock are entitled to one vote per share on all actions submitted to
a vote of stockholders. Cumulative voting is not permitted. Holders of Gart
Common Stock are entitled to receive cash dividends equally on a per share basis
as and when such dividends are declared by the Board of Directors from funds
legally available therefor, subject to preferential rights with respect to any
outstanding Gart Preferred Stock. See "Dividend Policy."
In the event of a liquidation, dissolution or winding up of Gart Sports,
holders of Gart Common Stock are entitled to share with each other on a ratable
basis as a single class in the remaining assets of Gart Sports available for
distribution after payment of liabilities and satisfaction of any preferential
rights of holders of Gart Preferred Stock. The rights, preferences and
privileges of holders of Gart Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Gart Preferred
Stock which Gart Sports may designate and issue in the future.
PREFERRED STOCK
Gart Sports has an authorized class of undesignated Gart Preferred Stock
consisting of 3,000,000 shares. The Board of Directors has authority, without
any further vote or action by the stockholders, to provide for the issuance of
the shares of Gart Preferred Stock in series, to establish from time to time the
relative, participating, optional or other special rights, qualifications or
restrictions of the shares of each such series and to determine the voting
powers, if any, of such shares. The issuance of Gart Preferred Stock could
adversely affect, among other things, the rights of current stockholders. The
issuance of Gart Preferred Stock could decrease the amount of earnings and
assets available for distribution to holders of Gart Common Stock. In addition,
any such issuance could have the effect of delaying, deferring or preventing a
change in control of Gart Sports and could make the removal of the present
management of Gart Sports more difficult. Gart Sports has no present plans to
issue any Gart Preferred Stock. See "Risk Factors -- Possible Anti-Takeover
Effect of Charter, Bylaws and Delaware Law Provisions."
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Gart Sports Certificate and Gart Sports Bylaws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of Gart Sports. These provisions include the following:
Special Meetings of Stockholders; Stockholder Action by Written
Consent. The Gart Sports Certificate and Gart Sports Bylaws require that
any action required or permitted to be taken by Gart Sports' stockholders
must be effected at a duly called annual or special meeting of
stockholders; provided, however, that any action required or permitted to
be taken at any annual or special meeting of Gart Sports' stockholders may
be taken without a meeting, without prior notice, and without a vote, if a
consent in writing, setting forth the action taken, is signed by the
holders of outstanding stock of Gart Sports having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were
present and voted, and the Secretary of Gart Sports has received at least
24 hours prior written notice of the intent to take such action which
notice the Secretary has conveyed to each director at least 24 hours prior
to the taking of
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<PAGE> 110
such action; provided that such notice may be waived in writing by each
director entitled to receive such notice. Additionally, the Gart Sports
Certificate requires that special meetings of the stockholders of Gart
Sports be called only by the Chairman of the Board, the President, or the
Board of Directors pursuant to a resolution approved by a majority of the
entire Board of Directors, and shall be called by the Secretary or any
Assistant Secretary, if there be one, at the request in writing of holders
of outstanding stock of Gart Sports having not less than a majority of the
votes that would be necessary to authorize such action.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Gart Sports Bylaws provide that stockholders seeking to
bring business before or to nominate directors at any meeting of
stockholders must provide timely notice thereof in writing. To be timely, a
stockholder's notice must be delivered to, or mailed and received at, the
principal executive offices of Gart Sports not less than 30 days nor more
than 75 days prior to such meeting, or, if less than 40 days' notice was
given for the meeting, within 10 days following the date on which such
notice was given. The Gart Sports Bylaws specify certain requirements for a
stockholder's notice to be in proper written form. These provisions may
preclude some stockholders from bringing matters before the stockholders or
from making nominations for directors.
Supermajority Vote for Business Combinations. The Gart Sports
Certificate includes a "fair price provision" which requires the
affirmative vote of two-thirds of the outstanding shares of capital stock
entitled to vote generally in the election of directors held by persons who
are not interested stockholders (as defined below) and present in person or
by proxy to approve certain business combinations (including certain
mergers, security issuances, recapitalizations, liquidations and the sale,
lease or transfer of a substantial part of Gart Sports' assets) involving
Gart Sports or a subsidiary and an owner of 10% or more of the outstanding
Gart Common Stock ("interested stockholder"), unless either (i) such
business combination is approved by a majority of the directors
unaffiliated with the interested stockholder or (ii) the stockholders
receive a "fair price" for their holdings and other procedural requirements
are met. A "fair price" for the holders of outstanding stock entitled to
vote generally in the election, including Common Stock but excluding any
class of Preferred Stock excluded by the Board of Directors, in a business
combination shall be at least equal to the higher of the following: (i) the
highest price per share paid by the interested stockholder (a) within the
two-year period immediately prior to the first public announcement of the
proposed business combination, or (b) in the transaction in which the
interested stockholder became an interested stockholder, whichever is
higher; (ii) if applicable, the highest preferential amount per share to
which the holders of shares of such class of stock are entitled in the
event of any voluntary or involuntary liquidation, dissolution, or winding
up of Gart Sports; or (iii) the Fair Market Value (as defined in the Gart
Sports Certificate) per share of such class of stock (a) on the date of the
first public announcement of the proposed business combination, or (b) on
the date on which the interested stockholder became an interested
stockholder, whichever is higher. The fair price provision of the Gart
Sports Certificate can only be amended by the affirmative vote of the
holders of two-thirds of the outstanding shares of Gart Common Stock
entitled to vote thereon.
Upon the consummation of the Merger, Gart Sports will be subject to Section
203 of the DGCL which imposes restrictions on business combinations (as defined
therein) with interested stockholders (being any person who acquired 15% or more
of Gart Sports' outstanding voting stock). In general, Gart Sports is prohibited
from engaging in business combinations with an interested stockholder, unless
(i) before such person became an interested stockholder, the Board of Directors
of Gart Sports approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of Gart Sports outstanding at the time the transaction commenced
(excluding for purposes of determining the number of shares outstanding stock
held by directors who are also officers of Gart Sports and by employee stock
plans that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) on or subsequent to the date on which such person became an
interested stockholder, the business combination is approved by the Board of
Directors of Gart Sports and authorized at a meeting of stockholders by the
affirmative vote of the holders of two-thirds of the outstanding
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<PAGE> 111
voting stock of Gart Sports not owned by the interested stockholder. Under
Section 203 of the DGCL, the restrictions described above also do not apply to
certain business combinations proposed by an interested stockholder following
the earlier of the announcement or notification of one of certain extraordinary
transactions involving Gart Sports and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of Gart Sports' Board of Directors, if such
extraordinary transaction is approved or not opposed by a majority of the
directors who are directors prior to any person becoming an interested
stockholder during the previous three years or who were recommended for election
or elected to succeed such directors by a majority of such directors. By
restricting the ability of Gart Sports to engage in business combinations with
an interested person, the application of Section 203 of the DGCL to Gart Sports
may provide a barrier to hostile or unwanted takeovers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Gart Common Stock will be American
Securities Transfer, Incorporated.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Merger, Gart Sports will have outstanding
approximately 7,683,392 shares of Common Stock (assuming no exercise prior to
the Effective Time of outstanding options to acquire Gart Common Stock and
Sportmart Common Stock and assuming a Conversion Ratio of .164860). A
significant number of such shares, including shares held by certain holders of
Gart Common Stock prior to the Merger, will be eligible for sale without
restriction under the Securities Act in the public market after the consummation
of the Merger by persons other than affiliates of Gart Sports. Sales of shares
by affiliates of Sportmart will be subject to Rule 145 of the Securities Act (or
Rule 144 in the case of such persons who become affiliates of Gart Sports) or as
otherwise permitted under the Securities Act. In addition, certain stockholders
of Gart Sports will have rights to require Gart Sports to register the sale of
such holders' shares of Gart Common Stock under the Securities Act or, in some
cases, to register the sale of shares in other registration statements filed by
Gart Sports in respect of sales of shares by it or by others. See "The Merger --
Registration Rights."
In general, under Rule 144 as currently in effect, an affiliate of Gart
Sports, subject to any applicable holding period, would be entitled to sell
within any three-month period a number of Restricted Shares that does not exceed
the greater of 1% of the then outstanding shares of Gart Common Stock or the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. In addition, sales
under Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current information about Gart Sports.
Gart Sports intends to file a registration statement on Form S-8 on or
about the Effective Time of the Merger to register the shares of restricted
common stock of Gart Sports and the shares of Gart Common Stock reserved for
issuance upon the exercise of outstanding options, all of which shares were
granted pursuant to the Gart Sports' Management Equity Plan or from the
conversion of Sportmart Common Stock options to Gart Common Stock options. After
giving effect to the Merger, 41,215 shares of restricted common stock of Gart
will be outstanding and options to purchase 778,922 shares (assuming no changes
in the capitalization of either Sportmart or Gart Sports, no exercise prior to
the Effective Time of outstanding options to acquire Gart Common Stock and
Sportmart Common Stock and a Conversion Ratio of .164860), all of which shares
will be eligible, subject to vesting, for sale pursuant to such registration
statement. See "Gart Sports Management -- Compensation Plans and
Arrangements -- Management Equity Plan."
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<PAGE> 112
SELLING SHAREHOLDERS OF SPORTMART
The table below sets forth certain information regarding ownership of Gart
Common Stock by the Sportmart Principals after giving effect to the Merger
(assuming no changes in the capitalization of either Sportmart or Gart Sports),
and the number of Resale Shares to be sold by them under this Proxy Statement/
Prospectus:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERING(1)(2) NUMBER AFTER OFFERING
----------------------- OF SHARES -----------------------
NAME OF SELLING SHAREHOLDER NO. OF SHARES PERCENT OFFERED(1) NO. OF SHARES PERCENT
--------------------------- ------------- ------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C>
AH Investment Trust U/A/D 6/3/87(5)........... 179,814 2.3% 179,814 -- --
Barbara P. Hochberg Trust U/A/D 12/17/88...... 32,147 * 32,147 -- --
Amy H. Lowenstein Sub-Trust U/A/D 1/3/90...... 2,802 * 2,802 -- --
Andrew S. Hochberg Sub-Trust U/A/D 1/3/90..... 3,214 * 3,214 -- --
Hochberg Annual Gift Trust U/A/D 4/27/94...... 3,114 * 3,114 -- --
Daniel Hochberg under the IL UGMA............. 1,261 * 1,261 -- --
Larry J. Hochberg(3).......................... 5,988 * 2,031 3,957 *
Andrew S. Hochberg(3)......................... 11,400 * 7,443 3,957 *
Laurie Hochberg............................... 824 * 824 -- --
Larry J. Hochberg Trust U/A/D 6/12/81(5)...... 470,151 6.1% 470,151 -- --
Jacob Lowenstein under the IL UGMA............ 1,121 * 1,121 -- --
Ariel Lowenstein under the IL UGMA............ 1,459 * 1,459 -- --
Amy Lowenstein................................ 487 * 487 -- --
Raphael Lowenstein under the IL UGMA.......... 1,121 * 1,121 -- --
Joshua Lowenstein under the IL UGMA........... 1,121 * 1,121 -- --
John A. Lowenstein(4)......................... 6,906 * 4,597 2,309 *
AHL Investment Trust U/A/D 12/7/90(5)......... 57,128 * 57,128 -- --
Jessica Hochberg under the IL UGMA............ 715 * 715 -- --
Abigail Lowenstein under the IL UGMA.......... 1,014 * 1,014 -- --
Amy H. Lowenstein Revocable Trust U/A/D
8/29/91..................................... 42,216 * 42,216 -- --
Andrew S. Hochberg Revocable Trust U/A/D
7/9/87(5)................................... 32,125 * 32,125 -- --
Abigail Lowenstein under the IL UGMA.......... 912 * 912 -- --
The Lowenstein Annual Gift Trusts U/A/D
12/1/96(5).................................. 741 * 741
AH Investment Trust II U/A/D 1/5/96(5)........ 18,141 * 18,141
AHL Investment Trust II U/A/D 1/5/96(5)....... 90,706 1.2% 90,706
AHL Investment Trust III U/A/D 9/19/97(5)..... 44,703 * 44,703
Andrew S. Hochberg 1995 Gift Trust U/A/D
1/3/95(5)................................... 11,268 * 11,268
</TABLE>
- ---------------
* Less than 1%.
(1) Represents the number of Gart Common Stock that may be issued to each of the
Selling Shareholders in the Merger calculated by assuming a Conversion Ratio
of .164860. For an illustration of how the number of shares of Gart Common
Stock to be issued to each of the Selling Shareholders in the Merger may
change based on different Conversion Ratios, see "The Merger
Agreement -- Conversion of Shares."
(2) For each Selling Shareholder, the number of shares listed excludes any
shares of Gart Common Stock held by any other Selling Shareholder which such
Selling Shareholder may be deemed to beneficially own. See "Security
Ownership of Certain Persons and Management of Sportmart."
(3) Includes 3,957 shares of Gart Common Stock which will be issuable within 60
days of the Effective Time upon exercise of options pursuant to the
Sportmart Stock Option Plan (which will be assumed by Gart Sports pursuant
to the Merger).
(4) Includes 2,309 shares of Gart Common Stock which will be issuable within 60
days of the Effective Time upon exercise of options pursuant to the
Sportmart Stock Option Plan (which will be assumed by Gart Sports pursuant
to the Merger).
(5) Includes shares of Gart Common Stock that are issuable with respect to
shares of Sportmart Common Stock currently held by a partnership of which
the Selling Shareholder is a partner; such partnership will be liquidated
prior to the Effective Time.
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<PAGE> 113
PLAN OF DISTRIBUTION
The Registration Statement of which this Proxy Statement/Prospectus is a
part relates to and covers the reoffering and resale by the Sportmart Principals
or their pledgees, donees, transferees or distributees, or their respective
successors-in-interest (collectively, the "Selling Shareholders") of the Resale
Shares issued or issuable to them by Gart Sports. Any Resale Shares owned by the
Selling Shareholders may be offered by them from time to time in transactions
(which may involve crosses and block transactions) on Nasdaq, in negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to the prevailing market prices or at negotiated prices. Selling
Shareholders may sell some or all of the shares in transactions involving
broker-dealers, including (i) block trades in which the brokers or dealers will
attempt to sell the Resale Shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (ii) purchases by
brokers or dealers as principal and resale by such brokers or dealers for their
account pursuant to this Proxy Statement/Prospectus; (iii) ordinary brokerage
transactions and transactions in which the brokers solicit purchases; or (iv)
one or more underwritten offerings on a firm commitment or best efforts basis.
Broker-dealers, agents or underwriters participating in such transactions as
agent may receive commissions from the Selling Shareholders and, if they act as
agent for the purchaser of the shares, from the purchaser. Participating
broker-dealers may agree with the Selling Shareholders to sell a specified
number of shares at a stipulated price per share, and to the extent such
broker-dealer is unable to do so as agent for the Selling Shareholders, the
broker-dealer may purchase as principal any unsold shares at the price required
to fulfill the broker-dealer's commitment to the Selling Shareholders. In
addition, shares may be sold by Selling Shareholders by or through
broker-dealers in special offerings, exchange distributions or secondary
distributions, and in connection therewith commissions in excess of the
customary commissions prescribed by applicable rules may be paid to
participating broker-dealers or, in the case of certain secondary distributions,
a discount or concession from the offering price may be allowed to participating
broker-dealers in excess of such customary commissions. Broker-dealers who
acquire shares as principal may thereafter resell such shares from time to time
in transactions on Nasdaq, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale, at prices related to the prevailing
market prices or at negotiated prices, and in connection with such resale may
pay to or receive commissions from the purchaser of such shares. A Selling
Shareholder may, from time to time, sell short the Gart Common Stock, and in
such instances, this Proxy Statement/Prospectus may be delivered in connection
with such short sales and the Resale Shares offered hereby may be used to cover
such short sales. Sales of the Resale Shares may also be made pursuant to Rule
144 under the Securities Act, as applicable. There is no assurance that the
Selling Shareholders will sell any or all of the shares offered hereby.
The Selling Shareholders and any underwriters, broker-dealers or agents
that participate in a distribution of such shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
commissions or concessions received by any such underwriters, dealers or agents
might be deemed to be underwriting discounts and commissions under the
Securities Act. Under applicable rules and regulations under the Exchange Act,
any person engaged in the distribution of the Resale Shares may not bid for or
purchase Resale Shares during a period which commences one business day (5
business days, if Gart Sports' public float is less than $25 million or its
average daily trading volume is less than $100,000) prior to such person's
participation in the distribution, subject to exceptions for certain passive
market making activities. In addition, and without limiting the foregoing, the
Selling Shareholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including, without limitation,
Regulation M which provisions may limit the timing of purchases and sales of
Resale Shares by the Selling Shareholders.
Gart Sports will pay substantially all expenses incident to the reoffering
of the Resale Shares by the Selling Shareholders to the public, other than
commissions and discounts of underwriters, dealers or agents. Gart Sports will
receive no proceeds from any sales of such shares under this Proxy
Statement/Prospectus by any Selling Shareholders.
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<PAGE> 114
LEGAL MATTERS
The validity of the shares of Gart Common Stock being offered hereby will
be passed upon for Gart Sports by Brownstein Hyatt Farber & Strickland, P.C.,
Denver, Colorado.
Certain federal income tax matters in connection with the Merger Agreement
will be passed upon for Sportmart by Katten Muchin & Zavis, Chicago, Illinois.
EXPERTS
The consolidated financial statements of Gart Sports as of January 6, 1996
and January 4, 1997, and for the year ended December 31, 1994, the fifty-three
weeks ended January 6, 1996, and the fifty-two weeks ended January 4, 1997, have
been included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, included herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated balance sheets of Sportmart as of January 28, 1996 and
February 2, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended February 2, 1997, have been included herein in reliance upon the
report of Coopers & Lybrand L.L.P., independent certified public accountants,
given on the authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
Sportmart is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Sportmart with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices at 7 World Trade Center, Suite 1300,
New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained at prescribed rates
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. Such reports, proxy
and information statements and other information may be found on the
Commission's Web site address, http://www.sec.gov. The periodic reports, proxy
statements and other information filed by Sportmart with the Commission may also
be inspected at the offices of the Nasdaq National Market, 1735 K Street, N.W.,
Washington, D.C. 20006-1500.
This Proxy Statement/Prospectus is part of a Registration Statement on Form
S-4 (together with all amendments and exhibits thereto, the "Registration
Statement") that has been filed by Gart Sports under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the securities to be issued
pursuant to the Merger Agreement. As permitted by the rules and regulations of
the Commission, this Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement. Such additional information
may be obtained from the Commission's principal office in Washington, D.C.
Statements contained in this Proxy Statement/Prospectus as to the contents of
any contract or other document referred to herein or therein are, where the
context indicates, intended to include descriptions of the material terms
thereof, but are not necessarily complete. In each instance, reference is hereby
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement and each such statement is qualified in all respects by
such reference.
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<PAGE> 115
INDEX TO FINANCIAL STATEMENTS
GART SPORTS COMPANY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA COMBINED FINANCIAL STATEMENTS
Pro Forma Combined Financial Information.................. F-2
Pro Forma Combined Balance Sheet as of October 4, 1997
(Unaudited)............................................ F-3
Pro Forma Combined Statements of Operations for the 39
weeks ended October 4, 1997 (Unaudited)................ F-4
Pro Forma Combined Statements of Operations for the 52
weeks ended January 4, 1997 (Unaudited)................ F-5
Notes to Pro Forma Combined Financial Information
(Unaudited)............................................ F-6
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of January 4, 1997 and
October 4, 1997 (Unaudited)............................ F-9
Consolidated Statements of Income for the 39 weeks ended
October 5, 1996 and October 4, 1997 (Unaudited)........ F-10
Consolidated Statements of Stockholders' Equity for the 52
weeks ended January 4, 1997 and 39 weeks ended October
4, 1997 (Unaudited).................................... F-11
Consolidated Statements of Cash Flows for the 39 weeks
ended October 5, 1996 and October 4, 1997
(Unaudited)............................................ F-12
Notes to Interim Consolidated Financial Statements
(Unaudited)............................................ F-13
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................. F-15
Consolidated Balance Sheets as of January 6, 1996 and
January 4, 1997........................................ F-16
Consolidated Statements of Income for the year ended
December 31, 1994, 53 weeks ended January 6, 1996 and
52 weeks ended January 4, 1997......................... F-17
Consolidated Statements of Stockholders' Equity for the
year ended December 31, 1994, 53 weeks ended January 6,
1996 and 52 weeks ended January 4, 1997................ F-18
Consolidated Statements of Cash Flows for the year ended
December 31, 1994, 53 weeks ended January 6, 1996 and
52 weeks ended January 4, 1997......................... F-19
Notes to Consolidated Financial Statements................ F-20
SPORTMART, INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of February 2, 1997 and
November 2, 1997 (Unaudited)........................... F-30
Consolidated Statements of Income for the 39 weeks ended
October 27, 1996 and November 2, 1997 (Unaudited)...... F-31
Consolidated Statements of Stockholders' Equity for the 53
weeks ended February 2, 1997, and 39 weeks ended
November 2, 1997 (Unaudited)........................... F-32
Consolidated Statements of Cash Flows for the 39 weeks
ended October 27, 1996 and November 2, 1997
(Unaudited)............................................ F-33
Notes to Consolidated Financial Statements (Unaudited).... F-34
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants......................... F-36
Consolidated Balance Sheets as of January 28, 1996 and
February 2, 1997....................................... F-37
Consolidated Statements of Operations for the 52 weeks
ended January 29, 1995 and January 28, 1996, and 53
weeks ended February 2, 1997........................... F-38
Consolidated Statements of Stockholders' Equity for the 52
weeks ended January 29, 1995 and January 28, 1996, and
53 weeks ended February 2, 1997........................ F-39
Consolidated Statements of Cash Flows for the 52 weeks
ended January 29, 1995 and January 28, 1996, and 53
weeks ended February 2, 1997........................... F-40
Notes to Consolidated Financial Statements................ F-41
</TABLE>
F-1
<PAGE> 116
GART SPORTS COMPANY
PRO FORMA COMBINED FINANCIAL INFORMATION
Gart Sports, Gart Bros., Merger Sub and Sportmart have entered into an
agreement and plan of merger dated September 28, 1997 and amended and restated
as of December 2, 1997 (the "Merger Agreement") that provides for the merger
(the "Merger") of Merger Sub with and into Sportmart, whereupon Sportmart will
become a subsidiary of Gart Sports. Under the terms of the Merger Agreement each
share of Sportmart Voting Common Stock and each share of Sportmart Class A
Common Stock will be exchanged for a fractional share of Gart Common Stock. Upon
consummation of the Merger, current Gart Sports stockholders will own
approximately 72 1/2% of the combined entity, and current Sportmart stockholders
will own approximately 27 1/2% of the combined entity. The transaction will be
accounted for as a purchase of Sportmart by Gart Sports. Gart Sports' fiscal
year ends on the first Saturday of January and Sportmart's fiscal year ends on
the Sunday closest to the end of January. The year end of the combined entity
will be the Saturday closest to the end of January.
The following pro forma combined balance sheet as of October 4, 1997
assumes that the Merger occurred as of that date and reflects the combination of
the historical balance sheet of Gart Sports as of October 4, 1997 with the
historical balance sheet of Sportmart as of November 2, 1997, with pro forma
adjustments to give effect to (1) purchase accounting adjustments to the
historical cost basis of certain assets and liabilities of Sportmart, (2)
estimated transaction fees and costs to be incurred related to the Merger, and
(3) estimated severance and relocation costs relating to Sportmart to be
incurred in connection with combining the operations of the Companies.
The following pro forma combined statements of operations for the 39 weeks
ended October 4, 1997 and the 52 weeks ended January 4, 1997 assume that the
Merger occurred as of January 7, 1996, and combines the historical results of
operations of Gart Sports for the 39 weeks ended October 4, 1997 and the 52
weeks ended January 4, 1997 with the historical results of operations of
Sportmart for the 39 weeks ended November 2, 1997 and the 53 weeks ended
February 2, 1997, respectively, with pro forma adjustments to depreciation and
amortization expense and related income tax expense as a result of the purchase
accounting adjustments to property and equipment and favorable leases acquired.
No adjustments have been made in the statements of operations to conform
accounting policies and practices of the companies or for anticipated cost
savings and synergies. The pro forma results of operations are not necessarily
indicative of the results that would have been obtained if the Merger had
occurred as of the beginning of the periods presented nor are they indicative of
future operating results of the combined companies.
The pro forma combined financial information with respect to the Merger is
based on preliminary estimates of fair values of the shares issued and net
assets acquired and estimated transaction costs to be incurred in connection
with the Merger. The purchase accounting entries for the Merger will be based on
final appraisals, fair values and actual transaction costs. Accordingly, the
actual financial statements which give effect to the Merger can be expected to
differ from these pro forma combined financial statements. However, management
of Gart Sports believes the final valuations and allocations utilized to record
the Merger will not be materially different from the pro forma information
presented herein. These pro forma combined financial statements should be read
in conjunction with the historical consolidated financial statements and related
notes of Gart Sports and Sportmart.
F-2
<PAGE> 117
GART SPORTS COMPANY
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
GART PRO
SPORTS SPORTMART PRO FORMA FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
OCTOBER 4, NOVEMBER 2, -------------------- GART
1997 1997 DEBIT CREDIT SPORTS
---------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 2,474 $ -- $ 2,474
Due from related parties.............................. -- 419 419
Inventories........................................... 92,289 156,018 248,307
Prepaid expenses and other assets..................... 2,666 8,199 $ 581(a) 10,284
Income taxes receivable............................... -- 302 302
Advertising co-op receivables, net.................... 648 5,683 6,331
Assets held for sale.................................. -- 2,521 2,521
Deferred income taxes................................. -- 7,656 7,656(b) --
-------- -------- -------- -------- --------
Total current assets............................ 98,077 180,798 8,237 270,638
-------- -------- -------- -------- --------
Property and equipment:
Land.................................................. 118 1,341 9(c) 1,450
Rental equipment...................................... 3,449.... -- 3,449
Buildings and leasehold improvements.................. 6,737 38,066 24,850(c) 19,953
Furniture, fixtures and equipment..................... 14,955 62,804 41,257(c) 36,502
-------- -------- -------- -------- --------
25,259 102,211 66,116 61,354
Less accumulated depreciation and amortization........ (11,100) (45,063) $ 45,063(c) (11,100)
-------- -------- -------- -------- --------
Net property and equipment...................... 14,159 57,148 45,063 66,116 50,254
Favorable leases acquired............................... -- -- 14,669(c) 14,669
Deferred income taxes................................... -- 7,278 7,278(b) --
Other assets, net of accumulated amortization........... 452 3,730 2,508(d) 1,674
-------- -------- -------- -------- --------
$112,688 $248,954 $ 59,732 $ 84,139 $337,235
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Outstanding checks, net............................... $ -- $ 2,101 $ 2,101
Revolving line of credit.............................. -- 99,741 $ 99,741(k) --
Mortgage payable...................................... -- 775 775
Current portion of capitalized lease obligations...... -- 331 331
Accounts payable...................................... 42,262 44,961 87,223
Accrued compensation and benefits..................... 2,998 2,631 5,629
Accrued sales and property taxes...................... 2,482 4,696 7,178
Accrued reserve for store closings.................... -- 6,196 6,196
Accrued severance and relocation costs................ -- -- $ 8,565(e) 8,565
Other accrued expenses and current liabilities........ 5,582 7,179 4,575(f) 19,611
2,275(g)
Income taxes payable.................................. 257 -- 257
Deferred income taxes................................. 797 -- 797
-------- -------- -------- -------- --------
Total current liabilities....................... 54,378 168,611 99,741 15,415 138,663
Long-term debt.......................................... 8,813 -- 99,741(k) 108,554
Long-term portion of capitalized lease obligations...... -- 3,158 3,158
Other long-term liabilities............................. 2,169 5,015 7,184
Deferred income taxes................................... 8,264 -- 8,264
-------- -------- -------- -------- --------
Total liabilities............................... 73,624 176,784 99,741 115,156 265,823
-------- -------- -------- -------- --------
Redeemable common stock, net of notes receivable from
stockholders.......................................... 2,144 -- $ 2,144(j) --
Stockholders' equity:
Common stock.......................................... 57 129 264(h) 450
Additional paid-in capital............................ 21,046 80,090 48,964(h) 830(i) 55,317
2,315(j)
Retained earnings..................................... 17,682 (8,049) 8,049(h) 17,682
-------- -------- -------- -------- --------
38,785 72,170 48,964 11,458 73,449
Treasury stock........................................ (1,865) -- (1,865)
Notes receivable from stockholders.................... -- -- 172(j) (172)
-------- -------- -------- -------- --------
Total stockholders' equity...................... 36,920 72,170 49,136 11,458 71,412
-------- -------- -------- -------- --------
$112,688 $248,954 $151,021 $126,614 $337,235
======== ======== ======== ======== ========
</TABLE>
F-3
<PAGE> 118
GART SPORTS COMPANY
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
39 WEEKS ENDED OCTOBER 4, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GART
SPORTS
HISTORICAL SPORTMART PRO FORMA PRO FORMA
39 WEEKS HISTORICAL ADJUSTMENTS COMBINED
ENDED 39 WEEKS ENDED --------------- GART
OCTOBER 4, 1997 NOVEMBER 2, 1997 DEBIT CREDIT SPORTS
--------------- ---------------- ----- ------ ----------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 151,052 $318,498 $ 469,550
Cost of goods sold, including
buying, distribution and
occupancy........................ 112,471 247,557 $ 858(l) 359,170
---------- -------- ----- ------ ----------
Gross profit....................... 38,581 70,941 858 110,380
Operating expenses................. 36,373 69,008 482(l) 104,899
---------- -------- ----- ------ ----------
Operating income................... 2,208 1,933 1,340 5,481
---------- -------- ----- ------ ----------
Nonoperating income (expense):
Interest expense................. (680) (5,376) (6,056)
Other income..................... 598 54 652
---------- -------- ----- ------ ----------
(82) (5,322) (5,404)
---------- -------- ----- ------ ----------
Income (loss) from continuing
operations before income taxes... 2,126 (3,389) 1,340 77
Income tax expense (benefit)....... 803 (1,356) $ 536(m) (17)
---------- -------- ----- ------ ----------
Income (loss) from
continuing
operations............. $ 1,323 $ (2,033) $ 536 $1,340 $ 94
========== ======== ===== ====== ==========
Earnings per share from continuing
operations....................... $ 0.24 $ 0.01
========== ==========
Weighted average shares of common
stock outstanding................ 5,502,600 7,626,544
========== ==========
</TABLE>
F-4
<PAGE> 119
GART SPORTS COMPANY
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
52 WEEKS ENDED JANUARY 4, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GART
SPORTS SPORTMART PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
52 WEEKS ENDED 53 WEEKS ENDED --------------- GART
JANUARY 4, 1997 FEBRUARY 2, 1997 DEBIT CREDIT SPORTS
--------------- ---------------- ----- ------ ----------
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 204,126 $514,611 $ 718,737
Cost of goods sold, including
buying, distribution and
occupancy......................... 148,420 400,637 $1,476(l) 547,581
---------- -------- ---- ------ ----------
Gross profit........................ 55,706 113,974 1,476 171,156
Operating expenses (note 3)......... 47,604 147,840 836(l) 194,608
---------- -------- ---- ------ ----------
Operating income (loss)............. 8,102 (33,866) 2,312 (23,452)
---------- -------- ---- ------ ----------
Nonoperating income (expense):
Interest expense.................. (1,601) (8,889) (10,490)
Other income (expense)............ 637 (21) 616
---------- -------- ---- ------ ----------
(964) (8,910) (9,874)
---------- -------- ---- ------ ----------
Income (loss) from continuing
operations before income taxes.... 7,138 (42,776) 2,312 (33,326)
Income tax expense (benefit)........ 2,681 (16,269) $879(m) (12,709)
---------- -------- ---- ------ ----------
Income (loss) from
continuing operations... $ 4,457 $(26,507) $879 $2,312 $ (20,617)
========== ======== ==== ====== ==========
Earnings (loss) per share from
continuing operations (note 3).... $ 0.81 $ (2.70)
========== ==========
Weighted average shares of common
stock outstanding................. 5,512,886 7,627,440
========== ==========
</TABLE>
F-5
<PAGE> 120
GART SPORTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) BASIS OF PRESENTATION
The Merger Agreement provides that, at the Effective Time, Merger Sub will
merge with and into Sportmart, whereupon Sportmart will become a Subsidiary of
Gart Sports. Under the terms of the Merger Agreement each share of Sportmart
Voting Common Stock and each share of Sportmart Class A Common Stock will be
converted into the right to receive the Conversion Ratio, as defined, of shares
of Gart Common Stock. The Conversion Ratio will be determined at the Effective
Date of the Merger based on the number of Gart's Equivalent Shares Outstanding,
as defined, the number of Sportmart's Equivalent Shares Outstanding, and the
market price of the Sportmart Common Stock immediately prior to the Effective
Date. Assuming no changes in the capitalization of either Sportmart or Gart
Sports and assuming that the closing prices of the Sportmart Voting Common Stock
and the Sportmart Class A Common Stock are $2.50 and $2.44 per share,
respectively (the closing prices as of December 16, 1997), the Conversion Ratio
will be .164860. See "The Merger Agreement -- Conversion of Shares." Any
resulting fractional shares will be settled in cash.
Outstanding options to purchase shares of Sportmart Common Stock will be
converted into options to purchase an equivalent number of shares of Gart Common
Stock, with the option price adjusted accordingly.
Based on a Conversion Number of .164860, approximately 2,200,000 shares of
Gart Common Stock will be issued to the Sportmart stockholders. The estimated
fair value of the shares issued to the Sportmart stockholders is $31,919,000,
based on an independent valuation. The estimated fair value of the Sportmart
stock options converted into Gart Sports stock options is $830,000. Estimated
fees and costs of the Merger payable by Garts Sports are $4,575,000. The
aggregate consideration for the Merger, including estimated fees and costs, is
$37,324,000.
The following summary of the preliminary allocation of the purchase price
to assets acquired, liabilities assumed and purchase-related intangibles, is
based on the assets and liabilities of Sportmart as of November 2, 1997. The
final allocation of the purchase price will be based upon the assets and
liabilities of Sportmart at the date of closing, final appraisals, actual
transaction costs, and the final Conversion Ratio. Accordingly, the preliminary
allocation of the purchase price presented below could vary from the final
allocation of the purchase price. The preliminary allocation of the purchase
price also gives effect to an estimated $2,275,000 of transaction fees and costs
to be incurred by Sportmart in conjunction with the Merger.
PRELIMINARY ALLOCATION OF PURCHASE PRICE:
<TABLE>
<CAPTION>
<S> <C>
Current assets.............................................. $172,561,000
Net property and equipment.................................. 36,095,000
Favorable leases acquired................................... 14,669,000
Other assets................................................ 1,222,000
------------
224,547,000
------------
Current liabilities......................................... 79,309,000
Long-term debt.............................................. 102,899,000
Other long-term liabilities................................. 5,015,000
------------
187,223,000
------------
Net assets acquired............................... $ 37,324,000
============
</TABLE>
The accompanying pro forma combined financial statements include pro forma
adjustments to give effect to the acquisition of Sportmart as of October 4,
1997. The pro forma combined statements of operations combine the historical
results of operations of Gart Sports and Sportmart for the respective periods
presented and adjustments for the pro forma effects of the Merger.
F-6
<PAGE> 121
GART SPORTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED) -- (CONTINUED)
(2) PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the historical
balance sheets of Sportmart and Gart Sports to give effect to the acquisition of
Sportmart by Gart Sports, including (1) the issuance of shares of Gart Common
Stock in exchange for all of the outstanding shares of Sportmart Common Stock,
(2) the conversion of options to purchase shares of Sportmart Common Stock into
options to purchase Gart Common Stock, (3) estimated transaction fees and costs
payable by Gart Sports and Sportmart, and (4) estimated severance and relocation
costs relating to Sportmart to be incurred in combining the operations of the
Companies. The pro forma adjustments also include adjustments to the historical
cost basis of certain assets and liabilities of Sportmart to reflect the fair
value of the net assets acquired.
(a) To reduce prepaid expenses of Sportmart for unamortized pre-opening
costs, site investigation costs, trademark and licensing costs and
other deferred and prepaid expenses, to reflect their fair value
consistent with Gart Sports' accounting practices.
(b) To reverse the net deferred tax assets recorded in the historical
financial statements of Sportmart and to record the pro forma net
deferred tax liabilities of the combined companies. A valuation
allowance of approximately $21 million has been provided for net
deferred tax assets of the combined companies which management of Gart
Sports considers more likely than not will not be realized, as a
result of limitations imposed on their use or otherwise.
(c) To adjust property and equipment of Sportmart to its estimated fair
value and to record the present value, discounted at 10 1/2%, of
favorable operating leases for store locations.
(d) To eliminate deferred loan costs and other intangible assets recorded
in the historical financial statements of Sportmart.
(e) To record a liability for the estimated severance and relocation costs
relating to Sportmart to be incurred in connection with combining the
operations of the Companies.
(f) To record a liability for the estimated transaction fees and costs
payable by Gart Sports, including $3,000,000 payable to LGA.
(g) To record a liability for transaction fees and costs payable by
Sportmart.
(h) To record the estimated fair value of the shares of Common Stock of
Gart Sports of $31,919,000 to be issued in the Merger, based upon an
appraisal of the fair value of Gart Sports by an independent
investment banking firm and to eliminate the historical equity of
Sportmart.
(i) To record the estimated fair value of the Sportmart stock options
converted into options to purchase shares of Gart Common Stock of
$830,000.
(j) To record the reclassification of redeemable common stock, net of
notes receivable from stockholders, to stockholders' equity upon
expiration of the put options covering the shares issued effective
with the Company's initial public offering.
(k) To reclassify Sportmart's revolving line of credit to long-term, as
Gart Sports has received a commitment letter for a multi-year
asset-based credit facility of $175 million to refinance the combined
indebtedness of Gart Sports and Sportmart. The new credit facility
will include a $10 million letter of credit feature and an advance
rate against eligible inventory of 70%.
The following pro forma adjustments have been made to the historical
statements of operations of Sportmart and Gart Sports to reflect
depreciation and amortization based on Gart Sports' basis in the assets
acquired, including the related effect on income tax expense. No
adjustments have been made in
F-7
<PAGE> 122
GART SPORTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED) -- (CONTINUED)
the statement of operations to conform accounting policies and practices of
the companies or anticipated cost savings and synergies.
(l) To adjust depreciation and amortization expense to reflect reductions
in expense for depreciation of the estimated fair value of the
property and equipment of Sportmart acquired and amortization of the
estimated fair value of favorable operating leases for store
locations.
(m) To record the tax effect of the pro forma adjustments to depreciation
and amortization expense.
(3) EXIT COSTS OF SPORTMART
The historical statement of operations of Sportmart for the 53 weeks ended
February 2, 1997 includes a non-recurring pre-tax charge for exit costs of
approximately $33,200,000, primarily associated with exiting the Canadian market
and closing the stores in Canada. Costs associated with closing the stores
include severance costs, lease buy-out costs, inventory write-downs, write-offs
of unamortized leasehold improvements, as well as other miscellaneous exit
costs. The effect of such exit costs was to increase the pro forma combined loss
from continuing operations by $20,584,000 and the pro forma loss per share from
continuing operations by $2.70.
(4) PRO FORMA EARNINGS (LOSS) PER SHARE
Pro forma earnings per share have been computed based on the pro forma net
earnings (loss) and the pro forma weighted average common shares outstanding for
the periods presented. The pro forma weighted average common shares outstanding
have been computed by adjusting Gart's weighted average common shares
outstanding by the shares of Gart Common Stock to be issued to the stockholders
of Sportmart. The dilutive effect of outstanding options to purchase shares of
common stock of Gart Sports, outstanding stock options of Sportmart to be
converted into options to purchase Gart Common Stock, on the calculation of pro
forma earnings per share is not material.
F-8
<PAGE> 123
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JANUARY 4, OCTOBER 4,
1997 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 8,800 $ 2,474
Trade receivables, net of allowance for doubtful accounts
of $180 and $198....................................... 2,027 1,626
Inventories............................................... 70,699 92,289
Prepaid expenses.......................................... 1,436 1,688
------- --------
Total current assets.............................. 82,962 98,077
------- --------
Property and equipment:
Land...................................................... 118 118
Rental equipment.......................................... 3,235 3,449
Leasehold improvements.................................... 6,361 6,737
Furniture, fixtures and equipment......................... 12,353 14,955
------- --------
22,067 25,259
Less accumulated depreciation and amortization............ (9,132) (11,100)
------- --------
Net property and equipment........................ 12,935 14,159
------- --------
Other assets, net of accumulated amortization of $778 and
$994...................................................... 538 452
------- --------
$96,435 $112,688
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $30,926 $ 42,262
Accrued compensation and benefits......................... 4,185 2,998
Accrued sales and property taxes.......................... 3,323 2,482
Other accrued expenses and current liabilities............ 8,050 5,582
Income tax payable........................................ 1,828 257
Deferred income taxes..................................... 517 797
------- --------
Total current liabilities......................... 48,829 54,378
Long-term debt (note 2)..................................... -- 8,813
Deferred rent............................................... 1,837 2,169
Deferred income taxes....................................... 8,026 8,264
------- --------
Total liabilities................................. 58,692 73,624
------- --------
Redeemable common stock, 154,650 and 147,600 shares issued,
net of notes receivable from stockholders................. 860 2,144
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 1,000,000
shares; none issued.................................... -- --
Common stock, $.01 par value. Authorized 8,000,000 shares;
5,690,570 and 5,697,620 shares issued.................. 57 57
Additional paid-in capital................................ 22,295 21,046
Retained earnings......................................... 16,359 17,682
------- --------
38,711 38,785
Treasury stock, 339,276 and 346,326 common shares, at
cost................................................... (1,828) (1,865)
------- --------
Total stockholders' equity........................ 36,883 36,920
Commitments and contingencies (notes 3, 4 and 6)............
------- --------
$96,435 $112,688
======= ========
</TABLE>
See accompanying notes to interim unaudited consolidated financial statements.
F-9
<PAGE> 124
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
39 WEEKS ENDED
----------------------------------
OCTOBER 5, OCTOBER 4,
1996 1997
--------------- ---------------
<S> <C> <C>
Net sales................................................... $ 137,485 $ 151,052
Cost of goods sold, buying, distribution and occupancy...... 103,097 112,471
--------- ---------
Gross profit.............................................. 34,388 38,581
Operating expenses.......................................... 32,772 36,373
--------- ---------
Operating income.......................................... 1,616 2,208
--------- ---------
Nonoperating income (expense):
Interest expense.......................................... (1,218) (680)
Other income.............................................. 298 598
--------- ---------
(920) (82)
--------- ---------
Income before income taxes................................ 696 2,126
Income tax expense.......................................... 261 803
--------- ---------
Net income........................................ $ 435 1,323
========= =========
Earnings per share (note 5)................................. $ 0.08 $ 0.24
========= =========
Weighted average shares of common stock outstanding......... 5,515,088 5,502,600
========= =========
</TABLE>
See accompanying notes to interim unaudited consolidated financial statements.
F-10
<PAGE> 125
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCK-
COMMON PAID-IN RETAINED TREASURY HOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 6, 1996.................... $57 $22,259 $11,902 $(1,716) $32,502
Net income..................................... -- -- 4,457 -- 4,457
Purchase of 21,500 shares of treasury
stock........................................ -- -- -- (112) (112)
Adjustment for redeemable common stock
purchased as treasury shares................. -- 112 -- -- 112
Increase in redemption amount of redeemable
common stock during the year................. -- (76) -- -- (76)
--- ------- ------- ------- -------
BALANCES AT JANUARY 4, 1997.................... 57 22,295 16,359 (1,828) 36,883
--- ------- ------- ------- -------
Net income..................................... -- -- 1,323 -- 1,323
Purchase of 7,050 shares of treasury stock..... -- -- -- (37) (37)
Adjustment for redeemable common stock
purchased as treasury shares................. -- 37 -- -- 37
Increase in redemption amount of redeemable
common stock during the period............... -- (1,286) -- -- (1,286)
--- ------- ------- ------- -------
BALANCES AT OCTOBER 4, 1997.................... $57 $21,046 $17,682 $(1,865) $36,920
=== ======= ======= ======= =======
</TABLE>
See accompanying notes consolidated financial statements.
F-11
<PAGE> 126
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
39 WEEKS ENDED
------------------------
OCTOBER 5, OCTOBER 4,
1996 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 435 $ 1,323
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 2,766 2,408
Provision for deferred income taxes.................... 1,080 518
Loss on disposition of assets.......................... 39 4
Increase in deferred rent.............................. 424 332
Changes in operating assets and liabilities:
Trade receivables.................................... 342 401
Inventories.......................................... (16,343) (21,590)
Prepaid expenses..................................... (485) (252)
Income tax receivable................................ (90) --
Accounts payable..................................... 8,940 11,336
Accrued expenses and other current liabilities....... (3,355) (4,496)
Income tax payable................................... -- (1,571)
-------- --------
Net cash used in operating activities............. (6,247) (11,587)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (2,420) (3,529)
Proceeds from sale of property and equipment.............. 152 109
-------- --------
Net cash used in investing activities............. (2,268) (3,420)
-------- --------
Cash flows from financing activities:
Net borrowings of long-term debt.......................... 3,600 8,813
Purchase of treasury stock................................ (86) (37)
Payment of notes receivable from stockholders............. 71 35
Payment of financing fees................................. (50) (130)
-------- --------
Net cash provided by financing activities......... 3,535 8,681
-------- --------
Decrease in cash and cash equivalents............. (4,980) (6,326)
Cash and cash equivalents at beginning of period............ 6,921 8,800
-------- --------
Cash and cash equivalents at end of period.................. $ 1,941 $ 2,474
======== ========
</TABLE>
See accompanying notes to interim unaudited consolidated financial statements.
F-12
<PAGE> 127
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying interim unaudited consolidated financial statements have
been prepared by Gart Sports Company and subsidiaries (the Company) in
accordance with generally accepted accounting principles for interim financial
reporting and the regulations of the Securities and Exchange Commission for
quarterly reporting. Accordingly, the consolidated financial statements do not
include all the information and the notes required by generally accepted
accounting principles for complete financial statements. As a result, these
interim unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
related notes thereto included elsewhere herein. In the opinion of management,
all adjustments, consisting only of normal recurring accruals, have been made
which are necessary for a fair presentation of the consolidated financial
position of the Company as of October 4, 1997 and the consolidated results of
its operations and cash flows for the 39 weeks ended October 5, 1996 and October
4, 1997. Operating results for interim periods are not necessarily indicative of
the results that may be expected for the complete fiscal year.
(2) LONG-TERM DEBT
On July 1, 1997, the Company and its commercial lender amended the terms of
the financing agreement discussed in note 4 to the audited consolidated
financial statements. The amended agreement increased the borrowing base feature
to allow the Company to borrow up to 60% of its eligible inventories (as defined
in the agreement) for the period January through August and up to 65% of its
eligible inventories for the period September through December. Borrowings are
limited to the lessor of $50,000,000 or the borrowing base amount calculated in
accordance with the agreement. Borrowings continue to be secured by
substantially all trade receivables, inventories and intangible assets. The
amended agreement extended the maturity date, stipulating that the lender may
not demand repayment of principal, absent an occurrence of a default under the
agreement, prior to April 20, 2001. Interest is payable monthly at rates ranging
from the prime rate to prime plus 0.75% or, at the option of the Company, at the
LIBOR rate plus amounts ranging from 1.25% to 2% (effective interest rate at
October 4, 1997 was a blended rate of 7.48%). Further, the agreement originally
provided for a line of credit fee, payable monthly, based on .375% per annum of
the total line of credit less the sum of the average daily revolving loans
outstanding and the average daily undrawn face amount of all outstanding letters
of credit. Under the amended agreement, on the first day of any month following
the commercial lender's timely receipt of financial statements, which indicate a
leverage ratio for the Company of less than 2.75 to 1.0, the line of credit fee
rate shall be reduced to .25% per annum. At October 4, 1997, $8,813,000 was
outstanding and an additional $41,187,000 was available for borrowing under the
amended financing agreement. The amended agreement also eliminated certain
financial covenant requirements other than the requirement to maintain a minimum
level of net worth.
(3) CONTINGENCY
Under the terms of the Company's tax sharing agreement with its former
parent, the Company is responsible for its share, on a separate return basis, of
any tax payments associated with proposed deficiencies or adjustments, related
interest and penalties charged to the controlled group which may arise as a
result of an assessment by the Internal Revenue Service (IRS).
On July 24, 1997, the IRS proposed adjustments to the Company's and former
parent's 1992 and 1993 federal income tax returns in conjunction with the former
parent's IRS examination. The proposed adjustments related to the manner in
which LIFO inventories were characterized on such returns. The Company recorded
approximately $9,700,000 as a long-term net deferred tax liability for the tax
effect of the LIFO inventory basis difference. The IRS has asserted that this
basis difference should be reflected in taxable
F-13
<PAGE> 128
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
income in 1992 and 1993. The Company has taken the position that the inventory
acquired in connection with the acquisition of its former parent was
appropriately allocated to its inventory pools. The IRS has asserted the
inventory was acquired at a bargain purchase price and should be allocated to a
separate pool and liquidated as inventory turns.
Based on management's discussions with the Company's former parent, the
Company believes the potential accelerated tax liability, which could have a
negative effect on liquidity in the near term, ranges from approximately
$2,500,000 to $9,700,000. The range of loss from possible assessed interest
charges resulting from the proposed adjustments range from approximately
$460,000 to $3,000,000. As the Company believes that no amount is more probable
than another within the range, the minimum interest exposure of $460,000 has
been accrued in the consolidated financial statements. No penalties are expected
to be assessed relating to this matter. At October 4, 1997, the LIFO inventory
and other associated temporary differences continue to be classified as
long-term net deferred tax liabilities as the Company does not believe the
matter will be resolved within a year.
The Company has reviewed the various matters that are under consideration
and believes that it has adequately provided for any liability that may result
from this matter. In the opinion of management, any additional liability beyond
the amounts recorded that may arise as a result of the IRS examination will not
have a material adverse effect on the Company's financial condition or results
of operations.
(4) OPERATING LEASE COMMITMENTS
At October 4, 1997, the Company had entered into five operating lease
agreements for stores to be opened in the future, and one operating lease for
computer hardware and software commencing September 1, 1997. The store lease
agreements are for periods of approximately fifteen years. The computer hardware
and software lease is for a period of three years. The aggregate future minimum
lease payments for such leases is approximately $32,634,000.
(5) EARNINGS PER SHARE
In February of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
128), which is effective for periods ending after December 15, 1997 (including
interim periods). SFAS 128 requires public companies to present basic earnings
per share and diluted earnings per share; instead of primary and fully diluted
earnings per share as required under current accounting standards. SFAS 128
cannot be adopted early. The pro forma basic and diluted earnings per share for
the 39 weeks ended October 4, 1997, are the same as earnings per share as
currently disclosed. Pro forma diluted earnings per share is equal to pro forma
basic earnings per share, as the Company's dilutive common stock equivalents, as
calculated using the treasury stock method, are not significant. Potentially
dilutive common stock equivalents include stock options outstanding under the
Company's management equity plan.
(6) SUBSEQUENT EVENTS
Gart Sports, Gart Bros., Merger Sub and Sportmart have entered into an
Agreement and Plan of Merger dated as of September 28, 1997 and amended and
restated as of December 2, 1997 (the "Merger Agreement") that provides for the
merger of Merger Sub with and into Sportmart. Under the terms of the Merger
Agreement each share of Voting Common Stock and each share of Class A Common
Stock of Sportmart will be exchanged for a fractional share of Gart Common
Stock. Upon consummation of the Merger, current Gart Sports stockholders will
own approximately 72 1/2% of the combined entity, and current Sportmart
stockholders will own approximately 27 1/2% of the combined entity. The
transaction will be accounted for as a purchase of Sportmart by Gart Sports.
F-14
<PAGE> 129
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gart Sports Company:
We have audited the accompanying consolidated balance sheets of Gart Sports
Company and subsidiaries (the Company) as of January 6, 1996 and January 4,
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for the year ended December 31, 1994, fifty-three weeks ended
January 6, 1996 and fifty-two weeks ended January 4, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gart Sports
Company and subsidiaries as of January 6, 1996 and January 4, 1997, and the
results of their operations and their cash flows for the year ended December 31,
1994, fifty-three weeks ended January 6, 1996 and fifty-two weeks ended January
4, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 5, 1997, except as to
Note 12, which is as of December 1, 1997
F-15
<PAGE> 130
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
JANUARY 6, JANUARY 4,
1996 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,921 $ 8,800
Trade receivables, net of allowance for doubtful accounts
of $269 and $180 (notes 3 and 4)....................... 2,019 2,027
Inventories (note 4)...................................... 68,648 70,699
Prepaid expenses.......................................... 1,131 1,436
Income tax receivable..................................... 1,189 --
------- -------
Total current assets.............................. 79,908 82,962
------- -------
Property and equipment:
Land...................................................... 118 118
Rental equipment.......................................... 2,930 3,235
Leasehold improvements.................................... 5,837 6,361
Furniture, fixtures and equipment......................... 10,058 12,353
------- -------
18,943 22,067
Less accumulated depreciation and amortization............ (5,970) (9,132)
------- -------
Net property and equipment........................ 12,973 12,935
------- -------
Other assets, net of accumulated amortization of $489 and
$778 (note 10)............................................ 777 538
------- -------
$93,658 $96,435
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $22,392 $30,926
Accrued compensation and benefits......................... 2,116 4,185
Accrued sales and property taxes.......................... 2,893 3,323
Other accrued expenses and current liabilities............ 7,275 8,050
Income tax payable........................................ -- 1,828
Deferred income taxes (note 6)............................ 426 517
------- -------
Total current liabilities......................... 35,102 48,829
Long-term debt (note 4)..................................... 17,000 --
Deferred rent............................................... 1,166 1,837
Deferred income taxes (note 6).............................. 7,334 8,026
------- -------
Total liabilities................................. 60,602 58,692
------- -------
Redeemable common stock, 176,150 and 154,650 shares issued,
net of notes receivable from stockholders (note 9) of
$549,000 and $207,000..................................... 554 860
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 1,000,000
shares; none issued.................................... -- --
Common stock, $.01 par value. Authorized 8,000,000 shares;
5,669,070 and 5,690,570 shares issued (note 12)........ 57 57
Additional paid-in capital................................ 22,259 22,295
Retained earnings......................................... 11,902 16,359
------- -------
34,218 38,711
Treasury stock, 317,776 and 339,276 common shares, at
cost................................................... (1,716) (1,828)
------- -------
Total stockholders' equity........................ 32,502 36,883
Commitments and contingencies (notes 6, 7, 10 and 11).......
------- -------
$93,658 $96,435
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 131
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
DECEMBER 31, JANUARY 6, JANUARY 4,
1994 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Net sales.................................................. $ 171,866 $ 176,829 $ 204,126
Cost of goods sold, buying, distribution and occupancy
(note 7)................................................. 124,892 131,455 148,420
---------- ---------- ----------
Gross profit............................................. 46,974 45,374 55,706
Operating expenses (note 5)................................ 39,949 42,876 47,604
---------- ---------- ----------
Operating income......................................... 7,025 2,498 8,102
---------- ---------- ----------
Nonoperating income (expense):
Interest expense......................................... (1,746) (2,281) (1,601)
Other income............................................. 490 576 637
---------- ---------- ----------
(1,256) (1,705) (964)
---------- ---------- ----------
Income before income taxes............................... 5,769 793 7,138
Income tax expense (note 6)................................ 2,209 285 2,681
---------- ---------- ----------
Net income....................................... $ 3,560 $ 508 $ 4,457
========== ========== ==========
Earnings per share......................................... $ 0.62 $ 0.09 $ 0.81
========== ========== ==========
Weighted average shares of common stock outstanding........ 5,784,918 5,681,811 5,512,886
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 132
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCK-
COMMON PAID-IN RETAINED TREASURY HOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993............... $58 $23,361 $ 7,834 $ -- $31,253
Net income.................................. -- -- 3,560 -- 3,560
Purchase of 400,000 shares of treasury
stock..................................... -- -- -- (2,052) (2,052)
Issuance of 292,124 shares of common stock
pursuant to management equity plan........ -- -- -- 1,498 1,498
Adjustment for redeemable common stock
issued from treasury shares............... (1) (1,497) -- -- (1,498)
--- ------- ------- ------- -------
BALANCES AT DECEMBER 31, 1994............... 57 21,864 11,394 (554) 32,761
Net income.................................. -- -- 508 -- 508
Purchase of 209,900 shares of treasury
stock..................................... -- -- -- (1,162) (1,162)
Adjustment for redeemable common stock
purchased as treasury shares.............. -- 594 -- -- 594
Increase in redemption amount of redeemable
common stock during the year.............. -- (199) -- -- (199)
--- ------- ------- ------- -------
BALANCES AT JANUARY 6, 1996................. 57 22,259 11,902 (1,716) 32,502
Net income.................................. -- -- 4,457 -- 4,457
Purchase of 21,500 shares of treasury
stock..................................... -- -- -- (112) (112)
Adjustment for redeemable common stock
purchased as treasury shares.............. -- 112 -- -- 112
Increase in redemption amount of redeemable
common stock during the year.............. -- (76) -- -- (76)
--- ------- ------- ------- -------
BALANCES AT JANUARY 4, 1997................. $57 $22,295 $16,359 $(1,828) $36,883
=== ======= ======= ======= =======
</TABLE>
See accompanying notes consolidated financial statements.
F-18
<PAGE> 133
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
DECEMBER 31, JANUARY 6, JANUARY 4,
1994 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,560 $ 508 $ 4,457
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 2,600 3,494 3,657
Provision for deferred income taxes.................... (707) 2,877 783
Loss on disposition of assets.......................... 186 45 47
Increase in deferred rent.............................. 331 246 671
Changes in operating assets and liabilities:
Trade receivables.................................... (84) 845 (8)
Inventories.......................................... (11,235) 3,586 (2,051)
Prepaid expenses..................................... 119 (920) (305)
Income tax receivable................................ -- (1,189) 1,189
Other assets......................................... (342) -- --
Accounts payable..................................... (2,028) 3,359 8,534
Accrued expenses and other current liabilities....... 636 2,031 3,274
Income tax payable................................... 3,856 (3,341) 1,828
-------- ------- --------
Net cash provided by (used in) operating
activities...................................... (3,108) 11,541 22,076
-------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (5,605) (3,670) (3,634)
Proceeds from sale of property and equipment.............. 256 55 257
-------- ------- --------
Net cash used in investing activities............. (5,349) (3,615) (3,377)
-------- ------- --------
Cash flows from financing activities:
Net payments of long-term debt............................ 19,672 (2,672) (17,000)
Decrease in receivable from affiliate..................... (9,545) 506 --
Purchase of treasury stock................................ (2,052) (1,162) (112)
Payment of notes receivable from stockholders............. 860 89 342
Payment of financing fees................................. (874) (50) (50)
-------- ------- --------
Net cash provided by (used in) financing
activities...................................... 8,061 (3,289) (16,820)
-------- ------- --------
Increase (decrease) in cash and cash
equivalents..................................... (396) 4,637 1,879
Cash and cash equivalents at beginning of period............ 2,680 2,284 6,921
-------- ------- --------
Cash and cash equivalents at end of period.................. $ 2,284 $ 6,921 $ 8,800
======== ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. $ 1,546 $ 2,356 $ 1,668
======== ======= ========
Cash paid during the period for income taxes.............. $ 7,704 $ 1,667 $ 1,212
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 134
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION, ORGANIZATION, AND DESCRIPTION OF BUSINESS
(A) BASIS OF PRESENTATION AND ORGANIZATION
The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Gart Sports Company, a
Delaware corporation, and its wholly owned subsidiary, Gart Bros. Sporting Goods
Company, a Colorado corporation, and its subsidiaries (the Company). All
significant intercompany balances and transactions have been eliminated in
consolidation.
Green Equity Investors, L.P. (GEI) is the majority stockholder of the
Company's outstanding common stock. Leonard Green and Associates, L.P. (LGA) is
the general partner of GEI.
The Company has a 52-53 week fiscal reporting year ending on the first
Saturday in January. Prior to January 1, 1995, the Company reported on a
calendar year basis that ended each fiscal year on December 31. The fiscal years
referred to in these consolidated financial statements are the calendar year
ended December 31, 1994 (1994), the 53 weeks ended January 6, 1996 (1995), and
the 52 weeks ended January 4, 1997 (1996).
(B) DESCRIPTION OF BUSINESS
The Company primarily operates as a sporting goods retailer with stores in
Colorado, Utah, Wyoming, Montana, Idaho, and New Mexico. The Colorado and Utah
store locations in the aggregate accounted for approximately 86%, 84% and 82% of
the Company's sales in 1994, 1995 and 1996, respectively.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
Cash equivalents include bank card sales remittances in process.
(B) INVENTORIES
The Company accounts for inventories at the lower of cost or market. Cost
is determined using the last-in, first-out (LIFO) method. At January 6, 1996 and
January 4, 1997, the replacement cost of inventory approximated its carrying
value, which is recorded at market.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets, which
range from 3 to 9 years for furniture, fixtures and equipment, and 3 years for
rental equipment. Amortization of rental equipment totaling $723,000, $977,000
and $836,000 in 1994, 1995 and 1996, respectively, is included in cost of goods
sold, buying, distribution and occupancy. Leasehold improvements are amortized
on the straight-line method over the shorter of the respective lease term or
estimated useful lives of the assets. Maintenance and repairs which are
recurring or do not extend the useful life of the respective assets are charged
to expense as incurred.
The Company capitalizes the costs of major purchased software systems and
the external costs associated with customizing those systems; related training
costs and internal costs are expensed as incurred. Depreciation of purchased
software systems is calculated using the straight-line method over an estimated
useful life of 5 years. Depreciation expense for purchased software systems
aggregated $163,000, $352,000 and $408,000 in 1994, 1995 and 1996, respectively.
The net book value of computer software which is included in furniture, fixtures
and equipment was $1,280,000 and $872,000 at January 6, 1996 and January 4,
1997, respectively.
F-20
<PAGE> 135
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(D) ACCOUNTING FOR LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS 121), on January 7, 1996. SFAS 121
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of SFAS 121 by the Company
for the fifty-two weeks ended January 4, 1997 did not have an impact on the
Company's financial position, results of operations, or liquidity.
(E) PRE-OPENING EXPENSES
New store pre-opening expenses are amortized on a straight-line basis
against operations over the period from store opening to the end of the fiscal
reporting year during which the store opened.
(F) ADVERTISING COSTS
The Company participates in various advertising and marketing programs with
its vendors. Certain of the Company's costs incurred in connection with these
programs are reimbursed. All costs related to advertising the Company's products
are expensed in the fiscal reporting year incurred. Advertising costs, which are
included in operating expenses, totaled $5,241,000, $5,941,000 and $5,877,000
during 1994, 1995 and 1996, respectively.
(G) INCOME TAXES
The Company files a consolidated U.S. federal income tax return using a tax
year ending on the Saturday closest to the end of September. Income taxes are
accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(H) EARNINGS PER SHARE
Earnings per share is computed based on net income for the period, divided
by the weighted average number of shares of common stock outstanding during the
period of 5,784,918, 5,681,811 and 5,512,886 during 1994, 1995, and 1996,
respectively. Common stock equivalents in the form of stock options, as
calculated using the treasury stock method, are not significant.
(I) MANAGEMENT EQUITY PLAN
Prior to January 7, 1996, the Company accounted for its management equity
plan in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 7, 1996, the Company
F-21
<PAGE> 136
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adopted Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS 123 (see note 9).
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of current assets and
current liabilities. Current assets and liabilities are stated at fair market
value.
(K) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates.
(L) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
(3) ACCOUNTS RECEIVABLE
The provision for doubtful accounts was $200,000, $50,000 and $42,000 and
uncollectible account write-offs charged to the allowance were $198,000, $71,000
and $131,000 for 1994, 1995 and 1996, respectively. The allowance for doubtful
accounts was $269,000 and $180,000 as of January 6, 1996 and January 4, 1997,
respectively.
(4) LONG-TERM DEBT
The Company has a financing agreement with a commercial finance company.
The agreement includes a borrowing base feature that allows the Company to
borrow up to 55% of its eligible inventories (as defined in the agreement) for
the period January through August and up to 60% of its eligible inventories for
the period September through December. Borrowings are limited to the lesser of
$50,000,000 or the amount calculated in accordance with the borrowing base, and
are secured by substantially all trade receivables, inventories, and intangible
assets. The commercial finance company may not demand repayment of principal,
absent an occurrence of a default under the agreement, prior to April 20, 1998.
Loan interest is payable monthly at the prime rate plus 0.75% or, at the option
of the Company, at the LIBOR rate plus 2%. Further, the terms of the agreement
provide for a line of credit fee, payable monthly, based on .375% per annum of
the total line of credit less the sum of the average daily revolving loans
outstanding and the average daily undrawn face amount of all outstanding letters
of credit. No amounts were outstanding under the financing agreement at January
4, 1997, and $39,983,000 was available for borrowing. The agreement contains
certain covenants, including financial covenants requiring the Company to
maintain certain leverage ratios, fixed charge coverage ratios, and amounts of
working capital and net worth.
F-22
<PAGE> 137
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) NONRECURRING SEVERANCE CHARGE
The Company recorded a nonrecurring severance charge of $750,000 in 1995
for termination costs of two officers and several other executives, which is
included in operating expenses.
(6) INCOME TAXES
Prior to April 21, 1994, the Company's financial results were included in
the consolidated U.S. federal income tax returns of its former parent. Pursuant
to the tax sharing agreement between the Company and its former parent, which
was effective from September 25, 1992 up to and including April 20, 1994, the
Company recorded income taxes computed assuming the Company filed a separate
income tax return. The tax sharing agreement also provided for the treatment of
tax loss carrybacks, indemnifications, resolution of disputes, and other matters
that may arise as a result of its former parent's pending Internal Revenue
Service (IRS) examination. See note 13.
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................................ $(2,458,000) $ 2,192,000 $(1,535,000)
State.................................. (458,000) 400,000 (363,000)
----------- ----------- -----------
(2,916,000) 2,592,000 (1,898,000)
----------- ----------- -----------
Deferred:
Federal................................ 606,000 (2,474,000) (785,000)
State.................................. 101,000 (403,000) 2,000
----------- ----------- -----------
707,000 (2,877,000) (783,000)
----------- ----------- -----------
$(2,209,000) $ (285,000) $(2,681,000)
=========== =========== ===========
</TABLE>
The effective income tax rate on income before income taxes differs from
the U.S. federal statutory rate for the following reasons:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate................................. 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State and local taxes, net of federal benefit............. 3.3 0.2 3.3
Other, net................................................ 1.0 1.7 0.3
---- ---- ----
38.3% 35.9% 37.6%
==== ==== ====
</TABLE>
F-23
<PAGE> 138
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
JANUARY 6, JANUARY 4,
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Trade receivables, principally due to allowance for
doubtful accounts.................................... $ 100,000 $ 68,000
Property and equipment.................................. 309,000 420,000
Accrual of compensated absences and other expenses...... 918,000 1,211,000
Alternative minimum tax credit carryforwards............ 2,811,000 2,008,000
------------ ------------
Total deferred tax assets....................... 4,138,000 3,707,000
------------ ------------
Deferred tax liabilities:
Inventories, primarily due to differences in basis...... (11,898,000) (11,721,000)
Prepaid expenses........................................ -- (529,000)
------------ ------------
Total deferred tax liabilities.................. (11,898,000) (12,250,000)
------------ ------------
Net deferred tax liability...................... $ (7,760,000) $ (8,543,000)
============ ============
</TABLE>
The net deferred tax liability consists of a current deferred tax liability
of $426,000, and a noncurrent deferred tax liability of $7,334,000 as of January
6, 1996, and a current deferred tax liability of $517,000 and a noncurrent
deferred tax liability of $8,026,000 as of January 4, 1997. The noncurrent
deferred tax liability consists of basis differences in property and equipment;
and differences between the tax and book basis of LIFO inventories acquired in a
business combination, net of applicable alternative minimum tax credit
carryforwards. The LIFO basis difference is classified as noncurrent as this
inventory is not expected to be liquidated or replaced within one year. See note
13.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Accordingly, management
believes it is more likely than not that the Company will realize the benefits
of these deductible differences.
(7) LEASES
The Company has noncancelable operating leases primarily for stores,
distribution facilities and equipment, expiring at various dates from 1997 to
2015. Certain leases include contingent rentals based upon a percentage of sales
over a specified amount. Minimum rentals include noncash rent expense related to
the amortization of deferred rent totaling $321,000, $398,000 and $671,000 for
1994, 1995 and 1996, respectively.
Total rent expense was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Minimum rentals.............................. $7,293,000 $7,965,000 $10,474,000
Contingent rentals........................... 268,000 112,000 142,000
Sublease rental income....................... (141,000) (118,000) (118,000)
---------- ---------- -----------
$7,420,000 $7,959,000 $10,498,000
========== ========== ===========
</TABLE>
F-24
<PAGE> 139
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At January 4, 1997, future minimum lease payments under noncancelable
operating leases, with initial or remaining lease terms in excess of one year,
were as follows:
<TABLE>
<CAPTION>
Fiscal year:
<S> <C>
1997...................................................... $ 10,788,000
1998...................................................... 10,455,000
1999...................................................... 9,733,000
2000...................................................... 9,117,000
2001...................................................... 8,479,000
Thereafter................................................ 72,784,000
------------
Total minimum lease payments...................... $121,356,000
============
</TABLE>
In connection with the transfer of certain leased stores to a former
affiliate in 1991, the Company remains liable as assignor on eight leases. The
former affiliate has agreed to indemnify the Company for any losses it may incur
as assignor, however, such indemnification is unsecured. The remaining future
minimum lease payments on these leases of the former affiliate, exclusive of any
variable rent or cost reimbursement that might be required, were as follows at
January 4, 1997:
<TABLE>
<CAPTION>
Fiscal year:
<S> <C>
1997...................................................... $1,126,000
1998...................................................... 1,126,000
1999...................................................... 741,000
2000...................................................... 463,000
2001...................................................... 388,000
Thereafter................................................ 991,000
----------
Total minimum lease payments...................... $4,835,000
==========
</TABLE>
In the event the former affiliate defaults on the above lease obligations,
and is not able to indemnify the Company, the Company would incur a loss up to
the extent of any remaining obligations, less any obligation mitigated by the
lessor re-leasing the property.
During 1996, the Company closed five stores, one of which had a remaining
lease term of approximately 5 years. As a result, the remaining undiscounted
noncancelable operating lease commitment attributable to this store was accrued
for in full at January 4, 1997, along with related estimates of utilities and
property taxes, in the amount of $490,000, and was included in the cost of goods
sold, buying, distribution and occupancy. Operating lease commitments and other
closure costs attributable to the four other closed stores were not material as
the store leases either expired in conjunction with the store closing or the
Company was released from the remaining lease obligation by the lessor.
(8) EMPLOYEE BENEFIT PLAN
During 1995, the Company amended its qualified defined contribution profit
sharing plan to include a 401(k) plan feature for all eligible employees. The
amended plan provides for tax deferred contributions by eligible employees and
for discretionary matching contributions by the Company. Participants vest in
the Company's contributions at a rate of 20% per year after the first year of
service. The Company contributed $94,000 and $126,000 to the profit sharing plan
in the form of matching contributions for 1995 and 1996, respectively. The
Company provided an additional discretionary contribution of $250,000 and
$174,000 to the
F-25
<PAGE> 140
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
profit sharing plan during 1994 and 1996, respectively. The plan provides for
contributions by the Company in amounts determined annually by the Board of
Directors.
(9) MANAGEMENT EQUITY PLAN
As of October 17, 1994, the Company sold shares of common stock and granted
options to purchase common stock to management of the Company under a management
equity plan (the Management Equity Plan). The Company issued 292,124 shares of
common stock for $1,498,000 and granted options to purchase 292,050 shares of
common stock at a $5.13 per share exercise price. The aggregate purchase price
for the issued shares consisted of $781,000 in cash received by the Company and
the balance was paid in the form of notes, which bear interest at 8% per annum,
are secured by the common stock purchased with the notes and have full recourse
to the makers. The notes are due October 17, 1999; however, 25% of any pre-tax
bonus earned as an employee of the Company may be used to reduce the employee's
note at the discretion of the Board of Directors of the Company.
The Management Equity Plan authorizes the issuance of common stock plus
grants of options to purchase shares of authorized but unissued common stock up
to 1,000,000 combined shares and options. As of January 4, 1997, 154,650 shares
of common stock and 432,550 options remain outstanding under the Management
Equity Plan. Stock options are granted with an exercise price equal to the fair
market value of the underlying stock, as determined by the Board of Directors,
at the date of grant. All stock options have a ten-year term and vest 20% per
year over five years from the date of grant. The holders of the Common Stock may
"put" the common stock to the Company upon death, disability, retirement, or
involuntary termination at a price equal to the greater of adjusted book value,
as defined, or fair value for vested shares, and adjusted book value for
unvested shares. For purposes of the put provisions, the common shares vest
ratably over a five year period. The Company may "call" such common stock upon
an employee's voluntary or involuntary termination, just-cause dismissal, death
or disability. The "call" price shall be the lower of adjusted book value or
fair value in the event of an employee's voluntary termination or just-cause
dismissal and in the event of involuntary termination, death or disability, the
greater of the two for vested shares and adjusted book value for unvested
shares. The put and call features shall lapse and terminate upon the earliest to
occur of (1) an initial public offering, (2) the sale of all or substantially
all of the assets or capital stock of the Company, or (3) five years from the
date of the management equity plan agreement (October 17, 1994). If the Company
completes an initial public offering prior to the events noted in (2) or (3)
above, the call option shall remain in effect for unvested shares until the
earlier of events (2) or (3) above.
The shares of common stock issued under the Management Equity Plan that
subject to the put provisions are reflected as redeemable common stock in the
accompanying consolidated balance sheets. Vested shares are recorded at the
greater of the adjusted book value or fair value. Unvested shares are recorded
at the adjusted book value or, if greater, the amount determined by increasing
the adjusted book value to the fair value ratably over the vesting period. At
January 6, 1996 and January 4, 1997, related notes receivable from stockholders
totaling $549,000 and $207,000, respectively, are reflected as a reduction of
redeemable common stock.
F-26
<PAGE> 141
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in redeemable common stock and related notes receivable from
stockholders for the periods indicated was as follows:
<TABLE>
<CAPTION>
REDEEMABLE NOTES TOTAL
COMMON STOCK RECEIVABLE REDEEMABLE
----------------- FROM COMMON
SHARES AMOUNT STOCKHOLDERS STOCK, NET
-------- ------ ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Balance at December 31, 1993................ -- -- -- --
Issuance of shares pursuant to management
equity plan............................... 292,124 $1,498 $ (638) $ 860
-------- ------ ------ ------
Balance at December 31, 1994................ 292,124 1,498 (638) 860
Purchase of shares of redeemable common
stock as treasury stock................ (115,974) (594) -- (594)
Payment of notes receivable from
stockholders........................... -- -- 89 89
Increase in redemption amount during the
year................................... -- 199 -- 199
-------- ------ ------ ------
Balance at January 6, 1996.................. 176,150 1,103 (549) 554
Purchase of shares of redeemable common
stock as treasury stock................ (21,500) (112) -- (112)
Payment of notes receivable from
stockholders........................... -- -- 342 342
Increase in redemption amount during the
year................................... -- 76 -- 76
-------- ------ ------ ------
Balance at January 4, 1997.................. 154,650 $1,067 $ (207) $ 860
======== ====== ====== ======
</TABLE>
Stock option activity during the periods indicated was as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Balance at December 31, 1993................................ -- $ --
Granted................................................... 292,050 5.13
--------
Balance at December 31, 1994................................ 292,050 5.13
Granted................................................... 64,000 5.13
Canceled.................................................. (126,200) 5.13
--------
Balance at January 6, 1996.................................. 229,850 5.13
Granted................................................... 213,900 5.13
Canceled.................................................. (11,200) 5.13
--------
Balance at January 4, 1997.................................. 432,550 5.13
========
</TABLE>
Canceled options are a result of employee terminations. As a result of
these employee terminations, the Company also repurchased 115,974 and 21,500
shares of common stock during 1995 and 1996, respectively.
At January 4, 1997, the exercise price and weighted-average remaining
contractual life of outstanding options were $5.13 and 8.86 years, respectively.
At January 6, 1996 and January 4, 1997, the number of options exercisable
was 33,170 and 43,730, respectively. No options have been exercised under the
Management Equity Plan as of January 4, 1997.
The per share weighted-average fair value of stock options granted during
1995 and 1996 was $3.04 and $3.28 on the date of grant using the Black Scholes
option-pricing model (which incorporates a present value calculation) with the
following weighted-average assumptions: 1995 -- no expected dividend yield,
risk-free
F-27
<PAGE> 142
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest rate of 6.66%, and an expected life of 8 years; 1996 -- no expected
dividend yield, risk-free interest rate of 6.48%, and an expected life of 7
years.
The Company applies APB Opinion No. 25 in accounting for the Management
Equity Plan and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS 123, the Company's consolidated net income would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Net income, as reported..................................... $508,000 $4,457,000
======== ==========
Net income, pro forma....................................... $494,000 $4,401,000
======== ==========
</TABLE>
Pro forma net income reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting period of
five years and compensation cost for options granted prior to January 1, 1995 is
not considered.
(10) RELATED PARTY TRANSACTIONS
In conjunction with negotiating its financing agreement in 1994 (see note
4), the Company paid $500,000 to LGA, which has been capitalized as a deferred
financing cost in other assets and is being amortized over four years.
The Company has a management services agreement with LGA whereby LGA
receives an annual retainer fee plus reasonable expenses for providing certain
management, consulting and financial planning services. The management services
agreement also provides that LGA may receive reasonable and customary fees and
reasonable expenses from time to time for providing financial advisory and
investment banking services in connection with major financial transactions that
may be undertaken in the future. The management services agreement will
terminate on April 20, 2004. The Company paid a management fee to LGA of
approximately $80,000 during 1994 and $120,000 during both 1995 and 1996. The
minimum management fee is $500,000 per year for the remaining term of the
agreement.
Certain facilities are leased from related parties. Rent expense on these
facilities totaled $711,000, $721,000 and $651,000 for 1994, 1995 and 1996,
respectively.
(11) CONTINGENCIES
The Company is a party to various legal proceedings and claims arising in
the ordinary course of business. Management believes that the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
(12) AUTHORIZATION OF STOCK AND COMMON STOCK SPLIT
On October 16, 1997, the stockholders approved an increase in the
authorized number of shares of common stock to 8,000,000. The Board of Directors
of the Company effected common stock splits on October 16, 1997 and December 1,
1997 resulting in a cumulative stock split of 2.0 to 1, to be effected in the
form of a stock dividend. In the accompanying consolidated financial statements,
all numbers of common shares and per share amounts have been restated to reflect
the common stock splits retroactively.
F-28
<PAGE> 143
GART SPORTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) EVENTS SUBSEQUENT TO THE DATE OF INDEPENDENT AUDITORS' REPORT (UNAUDITED)
Under the terms of the Company's tax sharing agreement with its former
parent, the Company is responsible for its share, on a separate return basis, of
any tax payments associated with proposed deficiencies or adjustments, related
interest and penalties charged to the controlled group which may arise as a
result of an assessment by the IRS.
On July 24, 1997, the IRS proposed adjustments to the Company's and former
parent's 1992 and 1993 federal income tax returns in conjunction with the former
parent's IRS examination. The proposed adjustments related to the manner in
which LIFO inventories were characterized on such returns. The Company recorded
approximately $9,700,000 as a long-term net deferred tax liability for the tax
effect of the LIFO inventory basis difference. The IRS has asserted that this
basis difference should be reflected in taxable income in 1992 and 1993. The
Company has taken the position that the inventory acquired in connection with
the acquisition of its former parent was appropriately allocated to its
inventory pools. The IRS has asserted the inventory was acquired at a bargain
purchase price and should be allocated to a separate pool and liquidated as
inventory turns.
Based on management's discussions with the Company's former parent, the
Company believes the potential accelerated tax liability, which could have a
negative effect on liquidity in the near term, ranges from approximately
$2,500,000 to $9,700,000. The range of loss from possible assessed interest
charges resulting from the proposed adjustments range from approximately
$460,000 to $3,000,000. As the Company believes that no amount is more probable
than another within the range, the minimum interest exposure of $460,000 has
been accrued in the consolidated financial statements. No penalties are expected
to be assessed relating to this matter. At October 4, 1997, the LIFO inventory
and other associated temporary differences continue to be classified as
long-term net deferred tax liabilities as the Company does not believe the
matter will be resolved within a year.
The Company has reviewed the various matters that are under consideration
and believes that it has adequately provided for any liability that may result
from this matter. In the opinion of management, any additional liability beyond
the amounts recorded that may arise as a result of the IRS examination will not
have a material adverse effect on the Company's financial condition or results
of operations.
F-29
<PAGE> 144
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 2, NOVEMBER 2,
1997 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,816 $ --
Due from related parties.................................. 624 419
Merchandise inventories, net.............................. 162,913 156,018
Prepaid expenses and other assets......................... 5,035 8,199
Income taxes receivable................................... 11,044 302
Advertising co-op receivable, net......................... 2,338 5,683
Assets held for sale...................................... 2,631 2,521
Deferred income taxes..................................... 6,300 7,656
-------- --------
Total current assets............................... 193,701 180,798
Property and equipment, net................................. 61,750 57,148
Other assets................................................ 3,868 3,730
Deferred income taxes....................................... 7,278 7,278
-------- --------
$266,597 $248,954
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Outstanding checks, net................................... $ -- $ 2,101
Revolving line of credit due 2001......................... 93,175 99,741
Mortgage payable.......................................... -- 775
Current portion of capitalized lease obligations.......... 307 331
Accounts payable.......................................... 44,922 44,961
Accrued expenses:
Salaries and wages...................................... 3,338 2,631
Taxes other than income................................. 8,049 4,696
Advertising............................................. 5,014 482
Reserve for store closings.............................. 16,319 6,196
Other................................................... 13,377 6,697
-------- --------
Total current liabilities.......................... 184,501 168,611
Capitalized lease obligations, net of current portion....... 3,409 3,158
Other long-term liabilities................................. 4,768 5,015
-------- --------
192,678 176,784
-------- --------
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock; $.01 par value; 5,000,000 shares
authorized; none issued................................. -- --
Voting common stock; $.01 par value; 50,000,000 shares
authorized; 5,148,833 shares issued and outstanding on
February 2, 1997 and November 2, 1997................... 52 52
Class A common stock, non-voting; $.01 par value,
50,000,000 shares authorized; 7,694,734 and 7,783,083
shares issued and outstanding on February 2, 1997 and
November 2, 1997, respectively.......................... 77 77
Additional paid-in capital................................ 79,842 80,090
Cumulative translation adjustment......................... (36) --
Retained deficit.......................................... (6,016) (8,049)
-------- --------
Total stockholders' equity......................... 73,919 72,170
-------- --------
$266,597 $248,954
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-30
<PAGE> 145
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-------------------------
OCTOBER 27, NOVEMBER 2,
1996 1997
----------- -----------
<S> <C> <C>
Net sales................................................... $ 373,948 $ 318,498
Cost of sales, including buying, distribution and
occupancy................................................. 286,581 247,557
----------- -----------
Gross profit................................................ 87,367 70,941
Operating expenses:
Store..................................................... 63,913 55,097
General and administrative................................ 14,230 13,911
Store pre-opening......................................... 907 --
----------- -----------
Operating income............................................ 8,317 1,933
----------- -----------
Other expense:
Interest expense, net..................................... (6,019) (5,376)
Other income.............................................. 241 54
----------- -----------
(5,778) (5,322)
----------- -----------
Income (loss) from operations before income taxes........... 2,539 (3,389)
Income tax expense (benefit)................................ 1,062 (1,356)
----------- -----------
Income (loss) before extraordinary item..................... $ 1,477 $ (2,033)
Extraordinary item, net of income tax benefit of $335....... (462) --
----------- -----------
Net income (loss)........................................... $ 1,015 $ (2,033)
=========== ===========
Income (loss) per share before extraordinary item........... $ 0.12 $ (0.16)
Loss per share from extraordinary item...................... (0.04) --
----------- -----------
Net income (loss) per share................................. $ 0.08 $ (0.16)
=========== ===========
Weighted average number of common shares outstanding........ 12,823,434 12,883,320
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-31
<PAGE> 146
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
VOTING CLASS A
COMMON STOCK COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------ ------------------ PAID-IN TRANSLATION RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
--------- ------ --------- ------ ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 28, 1996..... 5,148,833 $52 7,625,538 $76 $79,637 $(12) $ 21,043 $100,796
Issuance of 60,766 of Class A
common shares under stock
purchase plan................ -- -- 60,766 1 173 -- -- 174
Exercise of stock options...... -- -- 8,430 -- 32 -- -- 32
Cumulative translation
adjustment................... -- -- -- -- -- (24) -- (24)
Net loss....................... -- -- -- -- -- -- (27,059) (27,059)
--------- --- --------- --- ------- ---- -------- --------
Balances, February 2, 1997..... 5,148,833 52 7,694,734 77 79,842 (36) (6,016) 73,919
Issuance of 41,946 of Class A
common shares under stock
purchase plan................ -- -- 41,946 -- 97 -- -- 97
Exercise of stock options...... -- -- 46,403 -- 151 -- -- 151
Cumulative translation
adjustment................... -- -- -- -- -- 36 -- 36
Net loss....................... -- -- -- -- -- -- (2,033) (2,033)
--------- --- --------- --- ------- ---- -------- --------
Balances November 2, 1997...... 5,148,833 $52 7,783,083 $77 $80,090 $ -- $ (8,049) $ 72,170
========= === ========= === ======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-32
<PAGE> 147
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------
OCTOBER 27, NOVEMBER 2,
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations.............. $ 1,477 $ (2,033)
Extraordinary item, net of tax............................ (462) --
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 8,363 8,273
Other adjustment....................................... (20) 36
Deferred income tax provision.......................... (42) (1,356)
Net decrease (increase) in assets:
Merchandise inventories, net......................... (15,601) 6,895
Prepaid expenses and other assets.................... 5,974 (3,164)
Income taxes receivable.............................. -- 10,742
Advertising co-op receivable, net.................... (712) (3,345)
Other assets......................................... (1,076) (428)
Net increase (decrease) in liabilities:
Accounts payable..................................... (6,574) 39
Accrued expenses..................................... (14,285) (25,395)
Other long-term liabilities.......................... 908 247
--------- ---------
Net cash used in operating activities............. (22,050) (9,489)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................ (11,693) (3,565)
Proceeds from sale of property and equipment.............. -- 458
Sale (purchase) of assets held pending sale............... (1,401) 110
Advances to related parties............................... (373) (103)
Repayment of advances to related parties.................. 318 308
--------- ---------
Net cash used in investing activities............. (13,149) (2,792)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Class A common stock............ 205 250
Principal payments under capital lease obligations........ (5,605) (227)
Early extinguishment of debt.............................. (20,200) --
Outstanding checks, net................................... 289 2,101
Proceeds from mortgage payable............................ -- 775
Advances on line of credit................................ 218,573 124,732
Repayment on line of credit............................... (162,080) (118,166)
--------- ---------
Net cash provided by financing activities......... 31,182 9,465
--------- ---------
Net decrease in cash and cash equivalents................... (4,017) (2,816)
Cash and cash equivalents at beginning of period............ 4,017 2,816
--------- ---------
Cash and cash equivalents at end of period.................. $ -- $ --
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-33
<PAGE> 148
SPORTMART, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Sportmart, Inc. and Subsidiary (the "Company") operates in one business
segment which is the retail sporting goods business. As of December 3, 1997, the
Company operated 59 superstores located in the United States. The eleven
Canadian locations in the process of liquidation as of February 2, 1997 have all
been closed as of December 3, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Sportmart,
Inc. and Sportdepot Stores Inc., its wholly-owned subsidiary. Sportmart Canada,
Inc. was incorporated in April 1994 and the first store in Canada opened in
March 1995. In addition, Sportdepot Stores Inc. was incorporated in January 1995
as a wholly-owned subsidiary of Sportmart Canada, Inc. In October 1995,
Sportmart Canada, Inc. was amalgamated into Sportdepot Stores Inc. All
significant intercompany transactions and balances have been eliminated.
Principles of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting solely of
normal recurring accruals) necessary to present fairly the consolidated
financial position of Sportmart, Inc. and Subsidiary as of November 2, 1997 and
the consolidated results of its operations and its cash flows for the
thirty-nine week periods ended October 27, 1996 and November 2, 1997. Due to the
seasonal nature of the business, results for interim periods are not indicative
of a full year's operations.
These consolidated financial statements should be read in conjunction with
the Company's audited financial statements for the fiscal year ended February 2,
1997 included in the Company's Form 10-K.
Net Loss Per Share
Net loss per share is based on 12,823,434 and 12,883,320 weighted average
common shares outstanding for the thirty-nine weeks ended October 27, 1996 and
November 2, 1997.
3. NON-RECURRING ITEMS
During the fourth quarter of fiscal 1996, the Company recorded a
non-recurring pre-tax charge of $33.2 million. The majority of the charge was
related to costs associated with exiting the Canadian market including
unamortized portions of nonrecoverable capital improvements ($12.5 million),
lease buy-out costs ($11.9 million), inventory write-down costs ($5.7 million),
severance ($850,000) and miscellaneous costs ($2.2 million). Additionally, the
Company has reserves for store closings relating to previous store closings
including Wheeling and River North. As of November 2, 1997, the total reserve is
approximately $6.2 million consisting primarily of the remaining lease buy-out
and miscellaneous costs. In total, the Company believes the remaining reserves
for these non-recurring charges continue to be appropriate.
F-34
<PAGE> 149
SPORTMART, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
4. EXTRAORDINARY ITEM
During the third quarter of fiscal 1996, the Company incurred an
extraordinary charge of approximately $462,000, net of income taxes, as a result
of the termination of a previous revolving credit facility and the loans from
Allstate.
5. PENDING PLAN OF MERGER
The Company entered into an Agreement and Plan of Merger, dated as of
September 28, 1997 and amended and restated as of December 2, 1997, (The Merger
Agreement) with Gart Sports Company. Privately held Gart Sports (Gart) is the
holding company for Gart Bros. Sporting Goods Co., a 63-store, Denver-based
sporting goods retailer. Under the agreement, Sportmart will be merged into
Gart. Based on the agreement's conversion ratio, stockholders of Gart
(pre-merger) will hold approximately 72.5% of the combined company, while
Sportmart stockholders will hold approximately 27.5% of the outstanding shares
of the combined company. Leonard Green & Partners, an affiliate of the majority
stockholder of Gart, will control approximately 60% of the outstanding shares of
the combined company. The Merger Agreement requires the Company to maintain
minimum net worth and total liabilities prior to closing. The Merger Agreement
is subject to Sportmart stockholder approval and a majority of Sportmart
stockholders have agreed to vote in favor of the Merger Agreement. A special
meeting of stockholders to approve the merger is expected to occur in January
1998.
F-35
<PAGE> 150
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Sportmart, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Sportmart,
Inc. and Subsidiary as of January 28, 1996 and February 2, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three fiscal years in the period ended February 2, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sportmart, Inc.
and Subsidiary as of January 28, 1996 and February 2, 1997 and the results of
its operations and its cash flows for each of the three fiscal years in the
period ended February 2, 1997 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 28, 1997
F-36
<PAGE> 151
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 2,
1996 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 4,017 $ 2,816
Due from related parties.................................. 1,348 624
Merchandise inventories, net.............................. 174,952 162,913
Prepaid expenses and other assets......................... 12,200 5,035
Income taxes receivable................................... 4,242 11,044
Advertising co-op receivable, net......................... 5,547 2,338
Assets held for sale...................................... 2,883 2,631
Deferred income taxes..................................... 4,347 6,300
-------- --------
Total current assets.............................. 209,536 193,701
Property and equipment, net................................. 72,040 61,750
Other assets................................................ 3,745 3,868
Deferred income taxes....................................... 2,178 7,278
-------- --------
$287,499 $266,597
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit due 2001 (See Note 5)............ $ -- $ 93,175
Bank notes payable........................................ 18,213 --
Current portion of capitalized lease obligations and
long-term debt......................................... 7,221 307
Accounts payable.......................................... 67,297 44,922
Accrued expenses.......................................... 36,482 46,097
-------- --------
Total current liabilities......................... 129,213 184,501
Long-term bank notes payable................................ 30,000 --
Long-term debt, net of current portion...................... 18,800 --
Capitalized lease obligations, net of current portion....... 4,008 3,409
Other long-term liabilities................................. 4,682 4,768
-------- --------
186,703 192,678
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value; 5,000,000 shares
authorized; none issued................................ -- --
Voting common stock; $.01 par value; 50,000,000 shares
authorized; 5,148,833 shares issued and outstanding.... 52 52
Class A common stock, non-voting; $.01 par value;
50,000,000 shares authorized; 7,625,538 and 7,694,734
shares issued and outstanding on January 28, 1996 and
February 2, 1997, respectively......................... 76 77
Additional paid-in capital................................ 79,637 79,842
Cumulative translation adjustment......................... (12) (36)
Retained earnings (deficit)................................. 21,043 (6,016)
-------- --------
Total stockholders' equity........................ 100,796 73,919
-------- --------
$287,499 $266,597
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-37
<PAGE> 152
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, FEBRUARY 2,
1995 1996 1997
----------- ----------- -----------
(52 WEEKS) (52 WEEKS) (53 WEEKS)
<S> <C> <C> <C>
Net sales................................................ $ 413,337 $ 492,179 $ 514,611
Cost of sales, including buying, distribution and
occupancy.............................................. 311,948 381,146 400,637
---------- ---------- ----------
Gross profit............................................. 101,389 111,033 113,974
Operating expenses:
Store expenses......................................... 67,523 89,007 92,979
General and administrative expenses.................... 11,713 15,921 19,938
Non-recurring charges.................................. -- 5,711 33,224
Store pre-opening expenses............................. 2,555 3,791 1,699
---------- ---------- ----------
Operating (loss) income.................................. 19,598 (3,397) (33,866)
Other (expense) income:
Other (expense) income................................. 440 1,440 (21)
Interest expense....................................... (4,317) (5,168) (8,889)
---------- ---------- ----------
(3,877) (3,728) (8,910)
---------- ---------- ----------
(Loss) income from continuing operations before income
taxes.................................................. 15,721 (7,125) (42,776)
Income tax expense (benefit)............................. 6,211 (3,004) (16,269)
---------- ---------- ----------
(Loss) income from continuing operations................. 9,510 (4,121) (26,507)
Discontinued operations:
Loss from discontinued operations, (net of income tax
benefit of $375 in 1994 and $385 in 1995)........... (575) (578) --
Loss from disposal of discontinued operations (net of
income tax benefit of $1,164 in 1995 and $60 in
1996)............................................... -- (1,746) (90)
---------- ---------- ----------
Loss from discontinued operations...................... (575) (2,324) (90)
---------- ---------- ----------
(Loss) income before extraordinary item.................. 8,935 (6,445) (26,597)
Extraordinary item (net of income tax benefit of $335)... -- -- (462)
---------- ---------- ----------
Net (loss) income........................................ $ 8,935 $ (6,445) $ (27,059)
========== ========== ==========
(Loss) income per share from continuing operations....... $ 0.87 $ (0.32) $ (2.06)
Loss per share from discontinued operations.............. (0.05) (0.18) (.01)
---------- ---------- ----------
(Loss) income per share before extraordinary item........ 0.82 (0.50) (2.07)
Loss per share from extraordinary item................... -- -- (.04)
---------- ---------- ----------
Net (loss) income per share.............................. $ 0.82 $ (0.50) $ (2.11)
========== ========== ==========
Weighted average number of common and common equivalent
shares outstanding..................................... 10,910,797 12,771,911 12,826,360
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-38
<PAGE> 153
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
VOTING CLASS A
COMMON STOCK COMMON STOCK RETAINED
------------------- ------------------ ADDITIONAL CUMULATIVE EARNINGS TOTAL
PAID-IN TRANSLATION (DEFICIT) STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT --------- EQUITY
---------- ------ --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 30, 1994..... 10,235,000 $102 -- -- $46,942 -- $18,553 $ 65,597
Issuance of 16,075 common
shares under stock purchase
plan......................... 16,075 1 -- -- 217 -- -- 218
Reclassification of Voting
common stock into Class A
common stock................. (5,125,538) (51) 5,125,538 $51 -- -- -- --
Issuance of 2,500,000 Class A
common shares, net of stock
offering costs............... -- -- 2,500,000 25 32,273 -- -- 32,298
Net income, fiscal 1994........ -- -- -- -- -- -- 8,935 8,935
---------- ---- --------- --- ------- ---- -------- --------
Balances, January 29, 1995..... 5,125,537 52 7,625,538 76 79,432 -- 27,488 107,048
Issuance of 23,296 Voting
common shares under stock
purchase plan................ 23,296 -- -- -- 205 -- -- 205
Cumulative translation
adjustment................... -- -- -- -- -- $(12) -- (12)
Net loss, fiscal 1995.......... -- -- -- -- -- -- (6,445) (6,445)
---------- ---- --------- --- ------- ---- -------- --------
Balances, January 28, 1996..... 5,148,833 52 7,625,538 76 79,637 (12) 21,043 100,796
Issuance of 60,766 Class A
common shares under stock
purchase plan................ -- -- 60,766 1 173 -- -- 174
Exercise of stock options...... -- -- 8,430 -- 32 -- -- 32
Cumulative translation
adjustment................... -- -- -- -- -- (24) -- (24)
Net loss, fiscal 1996.......... -- -- -- -- -- -- (27,059) (27,059)
---------- ---- --------- --- ------- ---- -------- --------
Balances, February 2, 1997..... 5,148,833 $ 52 7,694,734 $77 $79,842 $(36) $(6,016) $ 73,919
========== ==== ========= === ======= ==== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-39
<PAGE> 154
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, FEBRUARY 2,
1995 1996 1997
----------- ----------- -----------
(52 WEEKS) (52 WEEKS) (53 WEEKS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income from continuing operations......... $ 9,510 $ (4,121) $ (26,507)
Loss from discontinued operations, net of tax........ (575) (578) --
Loss on disposal of discontinued operations, net of
tax............................................... -- (1,746) (90)
Loss from extraordinary item, net of tax............. -- -- (462)
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation and amortization..................... 6,370 8,761 11,770
(Gain) loss on disposition of property and
equipment and capital lease..................... (200) 59 --
Deferred tax provision............................ (1,370) (4,225) (7,053)
Net decrease (increase) in assets:
Merchandise inventories......................... (36,995) (33,095) 12,039
Prepaid expenses and other assets............... (2,613) (2,343) 7,165
Income taxes receivable......................... 35 (4,242) (6,802)
Advertising co-op receivable.................... (4,950) 4,215 3,209
Other assets -- noncurrent...................... (386) (2,723) 543
Net (decrease) increase in liabilities:
Accounts payable................................ (1,554) 31,639 (22,375)
Accrued expenses................................ 6,437 11,943 23,228
Other long-term liabilities..................... 1,144 995 86
--------- --------- ---------
Net cash (used in) provided by operating
activities...................................... (25,147) 4,539 (5,249)
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment................... (20,357) (29,268) (14,570)
Purchase of assets held pending sale and leaseback... (13,479) (3,499) (46)
Proceeds from sale and leaseback of assets........... 19,135 5,468 --
Advances to related parties.......................... (327) (1,062) (288)
Repayment of advances to related parties............. 1,346 218 1,011
--------- --------- ---------
Net cash used in investing activities............. (13,682) (28,143) (13,893)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock............... 217 205 206
Proceeds from sale of common stock, net.............. 32,298 -- --
Principal payments under capital lease obligations... (608) (405) (277)
Principal payments under long-term debt.............. -- (1,400) (5,400)
Early extinguishment of debt......................... -- -- (20,200)
Debt issuance costs.................................. -- -- (1,350)
Proceeds from construction loans..................... 10,758 -- --
Payments on construction loans....................... (10,566) (3,357) --
Advances on lines of credit.......................... 137,200 212,751 264,665
Repayments on lines of credit........................ (127,000) (183,338) (219,703)
Bank overdraft, net.................................. (305) -- --
--------- --------- ---------
Net cash provided by financing activities......... 41,994 24,456 17,941
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents
..................................................... 3,165 852 (1,201)
Cash and cash equivalents at beginning of period....... -- 3,165 4,017
--------- --------- ---------
Cash and cash equivalents at end of period............. $ 3,165 $ 4,017 $ 2,816
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid........................................ $ 4,284 $ 5,382 $ 8,364
Income taxes (refunded) paid......................... 6,640 4,842 (2,850)
</TABLE>
See Notes to Consolidated Financial Statements
F-40
<PAGE> 155
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Sportmart, Inc. and Subsidiary (the "Company") operates in one business
segment which is the retail sporting goods business. As of February 2, 1997, the
Company operated 59 superstores located in the United States plus eleven
locations in the process of liquidation in Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Sportmart,
Inc. and Sportdepot Stores, Inc., it's wholly-owned subsidiary. Sportmart
Canada, Inc. was incorporated in April 1994 and the first store opened in March
1995. In addition, Sportdepot Stores, Inc. was incorporated in January 1995 as a
wholly-owned subsidiary of Sportmart Canada, Inc. In October 1995, Sportmart
Canada, Inc. was amalgamated into Sportdepot Stores, Inc. All significant
intercompany transactions and balances have been eliminated.
Fiscal Year
The Company maintains a 52-53 week fiscal year, with the fiscal year ending
on the Sunday closest to the end of January. The fiscal years ended January 29,
1995 (fiscal 1994) and January 28, 1996 (fiscal 1995) included 52 weeks. The
fiscal year ended February 2, 1997 (fiscal 1996) included 53 weeks.
Merchandise Inventories
The Company's inventories are valued at the lower of cost or market with
cost being determined on a first-in, firstout (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
of property and equipment are computed principally by the straight-line method
over the estimated useful lives of the related assets, ranging from three to
fifteen years, or the terms of the related leases for leasehold improvements, if
shorter. Upon retirement or other disposal of property and equipment, the asset
costs and the related accumulated depreciation are eliminated from the accounts.
The difference, if any, between the net asset value and the proceeds is adjusted
to income.
Maintenance and repairs, which neither materially add to the value of the
property nor appreciably prolong its life, are charged to expense as incurred.
Long-Lived Assets
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" in fiscal 1995. The adoption had no impact
on the financial results. When facts and circumstances indicate potential
impairment, the Company evaluates the recoverability of long-lived asset
carrying values using estimates of undiscounted future cash flows over remaining
asset lives. When impairment is indicated, any impairment loss is measured by
the excess of carrying values over fair values.
Sale/leasebacks
Any loss on a sale/leaseback transaction is recognized immediately and any
gains are deferred and recognized over the term of the future lease.
F-41
<PAGE> 156
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advertising
Advertising costs are expensed in the period in which the advertising
occurs. A receivable is recorded at that time for the estimated amount of
cooperative advertising reimbursements to be received from vendors. Gross
advertising spent in fiscal 1994, 1995 and 1996 was $21,425,000, $25,363,000 and
$21,577,000, respectively.
Store Pre-Opening Costs
Non-capital expenditures incurred prior to the opening of a new store are
charged to expense ratably from the date the store is opened through the end of
the fiscal year in which the store is opened.
Capitalized Interest
Interest costs incurred during the construction period of significant
capital projects are capitalized. The total interest capitalized by the Company
was $555,000 in fiscal year 1994, $152,000 in fiscal year 1995, and $20,230 in
fiscal year 1996.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. Substantially all cash and cash equivalents are
concentrated with two banks located in Chicago, Illinois and in Toronto, Canada.
Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Net (Loss) Income Per Share
Income per share from continuing operations, loss per share from
discontinued operations, income per share before extraordinary item and net
income per share for the fiscal year ended January 29, 1995 are based on
10,910,797 weighted average shares outstanding.
Loss per share from continuing operations, loss per share from discontinued
operations, loss per share before extraordinary item and net loss per share for
the fiscal year ended January 28, 1996 are based on 12,771,911 weighted average
shares outstanding.
Loss per share from continuing operations, loss per share from discontinued
operations, loss per share before extraordinary item, loss per share from
extraordinary item and net loss per share for the fiscal year ended February 2,
1997 are based on 12,826,360 weighted average shares outstanding.
F-42
<PAGE> 157
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation
The consolidated financial statements and transactions of the Company's
Canadian subsidiary are maintained in its functional currency (Canadian dollars)
and translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. Foreign currency balance sheet accounts are
translated into United States dollars at the rate of exchange in effect at
fiscal year end. Income and expenses are translated at the average rates of
exchange in effect during the year. Translation adjustments have been
accumulated in a separate component of stockholders' equity. Such adjustments do
not affect cash flow and are unrealized. During the course of operating in
Canada, the Company enters into transactions in currencies other than its
Canadian subsidiary's functional currency. Realized and unrealized gains and
losses relating to these transactions which arise as a result of changes in
currency exchange rates are recognized in income as incurred.
Derivative Financial Instruments
Derivative financial instruments are utilized by the Company to reduce
interest rate and foreign exchange risks. The Company does not use derivatives
for speculative trading purposes.
Interest Rate Contracts -- The differential to be received or paid under
contracts designated as hedges is recognized as an adjustment to interest
expense in the period incurred.
Foreign Currency Contracts -- Realized and unrealized gains and losses
arising from foreign currency contracts are recognized in income as offsets to
gains and losses resulting from the underlying hedged transaction.
Reclassifications
The Company has reclassified certain amounts reported in prior years to
conform with the fiscal 1996 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 2,
DESCRIPTION 1996 1997
----------- ----------- -----------
<S> <C> <C>
Capitalized lease property -- land and buildings.......... $ 7,711,000 $ 6,321,000
Land...................................................... -- 1,341,000
Store and warehouse equipment............................. 41,640,000 38,661,000
Buildings and leasehold improvements...................... 40,376,000 37,368,000
Data processing equipment and software.................... 7,801,000 10,271,000
Other..................................................... 5,718,000 5,142,000
----------- -----------
103,246,000 99,104,000
----------- -----------
Less accumulated depreciation and amortization:
Capitalized lease property.............................. 4,932,000 4,064,000
All other............................................... 26,274,000 33,290,000
----------- -----------
31,206,000 37,354,000
----------- -----------
Property and equipment, net............................. $72,040,000 $61,750,000
=========== ===========
</TABLE>
Depreciation expense for fiscal years 1994, 1995 and 1996 was $6,193,710,
$8,501,209 and $11,084,968, respectively.
F-43
<PAGE> 158
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had assets held pending sale or sale and leaseback of
$2,883,000 and $2,631,000, respectively, as of January 28, 1996 and February 2,
1997. These assets consist of land and buildings and improvements for store
locations that the Company intends to sell and, for certain properties, lease
back from unaffiliated third parties.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 2,
DESCRIPTION 1996 1997
----------- ----------- -----------
<S> <C> <C>
Accrued salaries and wages................................ $ 3,297,000 $ 3,338,000
Taxes other than income................................... 6,912,000 8,049,000
Advertising............................................... 7,959,000 5,014,000
Reserve for store closings................................ 7,177,000 16,319,000
Other..................................................... 11,137,000 13,377,000
----------- -----------
Accrued expenses..................................... $36,482,000 $46,097,000
=========== ===========
</TABLE>
5. FINANCING ARRANGEMENTS
On September 6, 1996, the Company entered into, and subsequently amended
certain provisions of, a $135.0 million revolving credit agreement with a
syndicate of banks. The new credit facility is due in September, 2001 and the
inventory and personal property of the Company have been pledged as collateral.
Interest is due monthly on outstanding cash borrowings based on LIBOR (London
Interbank Offered Rate) plus a fee ranging up to 2.50% depending on the
maintenance of certain financial ratios or, at the Company's option, at the
prime rate (8.25% at February 2, 1997) plus 1.00%. In addition, the facility
also provides for the issuance of letters of credit, not to exceed $25.0
million, for a fee equal to 1.50% per annum. The Company also pays a commitment
fee of .375% on the unused portion of the line of credit. This new revolving
line of credit requires the maintenance of minimum net worth and maximum debt to
inventory ratios and prohibits the payment of cash dividends. The proceeds from
this new credit facility were used to repay all borrowings outstanding under the
previous revolving credit facilities and the Senior Notes (as discussed below).
As of February 2, 1997, approximately $93.2 million in cash borrowings and $4.5
million in letters of credit (to support imported merchandise and certain real
estate transactions) were outstanding under this line of credit.
In order to comply with Emerging Issues Task Force Issue (EITF) No. 95-22
regarding classification of certain debt instruments, the borrowings under this
new revolving line of credit have been classified as current liabilities in the
February 2, 1997 balance sheet. However, based on the terms of the agreement and
the Company's current business plan, the Company believes the amounts
outstanding under the revolving line of credit will be due and payable on its
stated maturity in September, 2001.
The Company previously had two agreements with a syndicate of banks in the
United States and Canada providing for unsecured revolving lines of credit up to
$125.0 million (U.S. dollars). Interest on these agreements was based on LIBOR
in the U.S. or Bankers Acceptances in Canada, plus a fee ranging from .50% to
2.60% depending on the maintenance of certain financial ratios. The Company also
had the option to borrow at the prime rate in the U.S. and, in Canada, at the
prime rate plus a fee ranging up to 2.00% depending on the maintenance of
certain financial ratios. Commitment fees paid to the banks on the unused
portion of these lines of credit ranged from .15% to .70%. As of January 28,
1996 these revolving lines of credit had outstanding balances of a U.S. dollar
equivalent of $48.2 million. These agreements were terminated upon execution of
the $135.0 million facility discussed above.
The weighted average interest rate on short-term cash borrowings
outstanding was 6.9% and 8.1% as of January 28, 1996 and February 2, 1997,
respectively.
F-44
<PAGE> 159
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of January 28, 1996, the Company also had $25.6 million in borrowings
outstanding in the form of unsecured Senior Notes due January 30, 1999 and May
15, 2000. Interest on the Senior Note due January 30, 1999 was payable monthly
at a rate ranging from 8.9% to 11.15% per annum depending on the maintenance of
certain financial ratios. Principal payments of $1.4 million were required on
January 30th of each year. Interest on the Senior Note due May 15, 2000 was
payable at a rate ranging from 6.6% to 8.85% per annum depending on the
maintenance of certain financial ratios. Annual principal payments of $4.0
million were required commencing on May 15, 1996. Principal payments totaling
$5.4 million on these Senior Notes were made in fiscal 1996 prior to the
termination of these agreements in conjunction with the execution of the $135.0
million facility discussed above.
6. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Derivative financial instruments are utilized by the Company to reduce
interest rate and foreign exchange risks.
The notional amount of foreign currency contracts is the amount of foreign
currency bought or sold at maturity. The notional amount of interest rate swaps
is the underlying principal amount used in determining the interest payments
exchanged over the term of the swap agreement. The notional amounts are not a
measure of the Company's exposure through its use of derivatives.
Interest Rate Contracts -- In March 1995, the Company entered into an
interest rate swap agreement with a major financial institution. This agreement
became effective in August 1995 and expires in August 1998. This agreement
effectively converts $10.0 million of its floating rate bank debt (based on
LIBOR plus a fee determined by financial performance) to a fixed rate of 7.54%
(plus the same fee) and requires settlement on a quarterly basis. The difference
in interest between the fixed rate and the effective LIBOR rate was recognized
in interest expense for the years ended January 28, 1996 and February 2, 1997.
Foreign Exchange Contracts -- As of February 2, 1997, the Company held
foreign currency contracts with settlement dates prior to March 1997 with
several major financial institutions to exchange Canadian dollars for
approximately $38.0 million U.S. dollars. The total net realized and unrealized
gains and losses on foreign currency contracts was immaterial.
Fair Value of Financial Instruments -- The carrying amounts reported in the
balance sheet for cash and cash equivalents, accounts payable and accrued
expenses approximate fair value due to the short maturity of these instruments.
The amounts recorded for the line of credit also approximates fair market value
based on the borrowing rates currently available to the Company for debt with
similar terms and average maturities. The fair value at January 28, 1996 and
February 2, 1997 of the foreign currency contracts and the interest rate swap
agreement as presented below is the amount at which these contracts could be
settled or terminated based on bank or market quotes.
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 2,
1996 1997
----------- -----------
<S> <C> <C>
Interest rate swap agreement
Notional Principal...................................... $10,000,000 $10,000,000
Fair Value.............................................. (600,000) (227,000)
Foreign currency contracts
Notional Principal...................................... $ 5,700,000 $38,000,000
Fair Value.............................................. 40,000 164,000
</TABLE>
Credit risk -- The Company is exposed to credit risk to the extent of
nonperformance by the counterparties to the foreign currency contracts and
interest rate swap discussed above. However, the
F-45
<PAGE> 160
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company considers the risk of default to be remote because the counterparties
are major financial institutions whose credit ratings are regularly monitored.
7. INCOME TAXES
The income tax (benefit) provision consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2,
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Historical income tax (benefit) provision:
Current:
Federal............................... $ 5,513,000 $ 750,000 $ (9,267,000)
State................................. 1,435,000 (19,000) (451,000)
----------- ----------- ------------
6,948,000 731,000 (9,718,000)
Deferred (benefit):
Federal............................... (901,000) (3,110,000) (6,949,000)
State................................. (211,000) (307,000) (1,945,000)
Foreign............................... -- (1,867,000) 1,948,000
----------- ----------- ------------
(1,112,000) (5,284,000) (6,946,000)
----------- ----------- ------------
Total income tax (benefit) provision....... $ 5,836,000 $(4,553,000) $(16,664,000)
=========== =========== ============
</TABLE>
Differences between the U.S. federal statutory income tax rate and the
Company's effective rate for the historical income tax provision are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory rate.................................... 34.3% 35.0% 34.0%
State/provincial income taxes, net of federal
income tax benefit.............................. 5.5 9.0 5.5
Foreign rate difference........................... -- 1.2 (1.0)
Alternative minimum tax and tax credits........... (1.4) (3.2) --
Other............................................. 1.1 (0.5) (.4)
---- ---- ----
Effective tax rate................................ 39.5% 41.5% 38.1%
==== ==== ====
</TABLE>
The effective tax rate as presented above represents the Company's total
effective rate including the discontinued operations and extraordinary item.
F-46
<PAGE> 161
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the deferred tax assets and liabilities, and
their related tax effects are as follows:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 2,
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Capitalized inventory cost.............................. $ 2,177,000 $ 2,311,000
Capital leases.......................................... 1,016,000 969,000
Vacation accrual........................................ 504,000 546,000
Deferred rent........................................... 501,000 649,000
Reserve for store closings and severance pay............ 2,422,000 2,751,000
Credit carry forwards................................... 964,000 880,000
NOL carry forward....................................... 1,867,000 7,637,000
Other................................................... 607,000 1,030,000
----------- -----------
10,058,000 16,773,000
Deferred tax liabilities:
LIFO reversal........................................... (616,000) --
Depreciation............................................ (2,539,000) (2,811,000)
Capital lease termination............................... (358,000) (349,000)
Other................................................... (20,000) (35,000)
----------- -----------
(3,533,000) (3,195,000)
----------- -----------
Net deferred tax asset.................................. $ 6,525,000 $13,578,000
=========== ===========
</TABLE>
As of February 2, 1997, the Company has available federal and state net
operating loss carry forwards of approximately $19.0 million for offset against
taxable income. The federal NOL carry forwards expire at the end of the fiscal
year ending January 2012. In addition, the Company also has available tax credit
carry forwards for tax purposes of $880,000 primarily consisting of alternative
minimum tax credits which do not have an expiration date. Based on the Company's
business plan and the timing of the reversals of temporary differences,
management believes the Company will be able to realize the benefit of the net
deferred tax asset.
8. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Company has a noncontributory profit sharing plan for eligible
employees. The plan provides for contributions by the Company in such amounts as
the Board of Directors may annually determine, not to exceed 15% of the
compensation paid annually to the participants. There were no contributions to
the plan for fiscal years 1995 and 1996. Contributions to this plan were
$100,000 in fiscal 1994.
Incentive Savings Plan
The Company has an incentive savings plan covering eligible employees which
allows for employee contributions under Section 401(k) of the Internal Revenue
Code. The Company is obligated to match one-third of the first 3% of each
employee's salary which is contributed to the plan. Company contributions to
this plan were approximately $153,000, $175,000 and $193,000 for fiscal 1994,
1995, and 1996, respectively.
Stock Purchase Plan
Effective September 1992, the Board of Directors and stockholders adopted a
stock purchase plan for its employees under which a maximum of 200,000 shares of
common stock have been reserved for issuance. Under this plan, a Sportmart
employee may purchase stock through payroll deductions for 85% of the lesser of
F-47
<PAGE> 162
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the closing market price of the common stock on the grant date or the exercise
date. The grant date, the exercise date and the class of stock are designated by
the purchase committee. On February 28, 1994, the first exercise date, 16,075
shares were purchased of Voting Common Stock. On March 10, 1995, the second
exercise date, 23,296 shares of Voting Common Stock were purchased. On March 22,
1996, the third exercise date, 60,766 shares of Class A Common Stock were
purchased.
Restricted Stock Plan
Effective July 1, 1996, the Board of Directors and stockholders adopted the
Sportmart, Inc., 1996 Restricted Stock Plan. The purpose of this Plan is to
promote the overall financial objectives of the Company and its stockholders by
motivating those persons selected to participate in this Plan to achieve
long-term growth in stockholder equity in the Company and by retaining the
association of those individuals who are instrumental in achieving long-term
growth in shareholder equity. Under this Plan, shares awarded may be granted as
Voting Common Stock or Class A Common Stock. A total of 400,000 shares of common
stock were authorized and reserved for issuance under the plan. A Committee
appointed by the Board of Directors may condition the grant of Restricted Stock
upon the participant's completing a period of service or attainment of specified
performance goals by the participant or Company. During fiscal 1996, 300,000
shares of Class A Common Stock were granted to participants under the plan.
During the period commencing on the Grant Date, November 19, 1996, and
continuing until August 1, 1999, these shares are restricted and can not be sold
or transferred. After such period, the participants vest immediately.
Stock Option Plans
1992 Plan
The Board of Directors and stockholders adopted the Sportmart, Inc. Stock
Option Plan (the "1992 Plan"), effective as of September 1992. A total of
625,000 shares of common stock were authorized and reserved for issuance under
the 1992 Plan as of January 30, 1994, and during fiscal 1994, an additional
500,000 shares of common stock were authorized and reserved under the 1992 Plan.
Options granted under this plan may be granted to purchase either Voting Common
Stock or Class A Common Stock. The 1992 Plan provides for the grant of incentive
stock options ("ISOs") as defined in Section 422A of the Internal Revenue Code
of 1986, as amended (the "Code"), to employees of the Company. The 1992 Plan
also provides for non-qualified stock options ("NQSOs") which may be granted to
the Company's officers, employees or independent contractors or any affiliate
thereof. The exercise price of the ISOs granted under the 1992 Plan may not be
less than 100% of the fair market value of the Company's common stock on the
date of grant or 110% of such fair market value in the case of holders of more
than 10% of the Company's common stock. Shares subject to an option granted
under the 1992 Plan may be purchased (i) for cash; (ii) in exchange for shares
of common stock owned by the optionee; (iii) for a combination of cash and
common stock; or (iv) by reducing the number of shares of common stock to be
issued and delivered to the optionee upon such exercise. The plan includes
vesting requirements from immediately up to five years and option lives of ten
years.
Directors' Plan
The Board of Directors and stockholders adopted the Sportmart, Inc.
Directors' Stock Option Plan (the "Directors' Plan"), effective as of September
1992. A total of 75,000 shares of common stock have been authorized and reserved
for issuance under the Directors' Plan. All options granted under the Directors'
Plan are exercisable immediately upon grant and, for options other than those
granted as of the Initial Grant Date, at a price per share equal to the closing
price of the common stock as reported on the Nasdaq National Market on the date
of grant or, if the market is closed on such date, the next business day. Once
granted, options may not be canceled, but expire on the earlier of seven years
after the grant date or two years after the Outside Director is no longer
serving as a Director.
F-48
<PAGE> 163
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity for the fiscal years ended January 29, 1995, January 28,
1996 and February 2, 1997 for the 1992 Plan and the Director's Plan was as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE OPTIONS
SHARES EXERCISE PRICE EXERCISABLE
--------- ---------------- -----------
<S> <C> <C> <C>
Balances at January 30, 1994................. 101,081 $14.67 74,031
Options granted............................ 179,200 13.15
Options exercised.......................... -- --
Options cancelled.......................... 146,200 13.02
---------
Balances at January 28, 1995................. 134,081 14.45 93,231
Options granted............................ 788,190 5.70
Options exercised.......................... -- --
Options cancelled.......................... 268,649 5.57
---------
Balances at January 28, 1996................. 653,622 7.55 226,959
Options granted............................ 846,229 3.17
Options exercised.......................... 8,430 3.27
Options cancelled.......................... 110,148 3.19 --
---------
Balances at February 2, 1997................. 1,381,273 $ 5.24 525,410
=========
</TABLE>
The following table summarizes the status of outstanding stock options as
of February 2, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE -----------------------------------
NUMBER OF REMAINING NUMBER
RANGE OF OPTIONS CONTRACTUAL LIFE WEIGHTED-AVERAGE OF OPTIONS WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ---------------- ----------------
<C> <C> <C> <C> <C> <C>
$ 2.69 - $ 7.25 1,235,192 9.5 $ 4.21 420,179 $ 4.00
$ 8.25 - $12.75 52,081 6.6 11.48 40,231 11.26
$14.00 - $18.40 94,000 6.9 15.37 65,000 15.43
- --------------- --------- --- ------- ------- -------
$ 2.69 - $18.40 1,381,273 9.2 $ 5.24 525,410 $ 5.97
=============== ========= === ======= ======= =======
</TABLE>
Had the Company elected to apply the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123) regarding recognition of compensation expense to the extent of the
calculated fair value of stock options granted in fiscal 1996 and 1995, reported
loss from continuing operations and loss per share from continuing operations
would have been increased as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Loss from continuing operations, as reported............ $ (4,121,000) $(26,507,000)
Pro forma loss from continuing operations............... (5,111,000) (27,379,000)
Loss per share from continuing operations, as
reported.............................................. $ (0.32) $ (2.06)
Pro forma loss per share from continuing operations..... (0.40) (2.14)
</TABLE>
The effects of applying SFAS 123 in the above pro forma disclosure are not
likely to be representative of the effects disclosed in future years because the
proforma calculations exclude stock options granted before fiscal 1995.
F-49
<PAGE> 164
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of the SFAS 123, pro forma net loss and loss per share
calculation, the fair value of each option grant is estimated as of the date of
grant using the Black-Scholes option-pricing model. The weighted-average
assumptions used in determining fair value as disclosed for SFAS 123 are shown
in the following table:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Risk-free interest rate..................................... 6.15% 6.3%
Dividend yield.............................................. 0.0% 0.0%
Option life (years)......................................... 4.0 4.0
Stock price volatility...................................... 45.0% 45.0%
</TABLE>
During fiscal 1994, 1995 and 1996, the Company did not pay any
post-retirement benefits to retired employees.
9. LEASING ARRANGEMENTS
The Company is obligated under several noncancellable operating leases for
its stores, distribution centers and certain computer and warehouse equipment,
which expire through the year 2018 exclusive of renewal option periods. The
leases provide for, among other things, minimum annual rentals and contingent
rentals based upon a percentage of sales in excess of stipulated amounts,
payments of real estate taxes and maintenance and insurance costs. Eight of the
leases are with partnerships, the partners of which are officers of the Company
and their family members.
The Company has also entered into agreements for the lease of certain other
properties which are classified as capital leases for financial reporting
purposes. All of these capital leases are with partnerships substantially owned
by certain officers of the Company and their family members. The lease terms
range from 15 to 21 years and provide for minimum annual rental payments plus
contingent rentals based upon a percentage of sales in excess of stipulated
amounts.
The following table presents the future minimum lease commitments,
including the present value of the net minimum lease payments for capital leases
and the minimum future rental commitments for all operating leases that have
initial or remaining noncancelable terms in excess of one year.
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
---------- ------------ ------------
<S> <C> <C> <C>
1997....................................... $ 665,000 $ 28,832,000 $ 29,497,000
1998....................................... 665,000 28,269,000 28,934,000
1999....................................... 665,000 27,447,000 28,112,000
2000....................................... 665,000 27,353,000 28,018,000
2001....................................... 674,000 26,071,000 26,745,000
Thereafter................................. 2,176,000 195,270,000 197,446,000
---------- ------------ ------------
Total minimum lease payments............... 5,510,000 $333,242,000 $338,752,000
============ ============
Less imputed interest...................... 1,794,000
----------
Present value of future minimum rentals, of
which $307,000 is included in current
liabilities, at February 2, 1997......... $3,716,000
==========
</TABLE>
The total future minimum operating lease commitments also include
$4,414,000 of noncancellable sublease payments.
F-50
<PAGE> 165
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense was $18,058,000, $27,110,000 and $31,644,000 for fiscal 1994,
1995, and 1996, respectively. Included in these amounts are $333,000, $210,000
and $119,000, respectively, representing contingent rentals.
As of February 2, 1997, the Company has issued letters of credit of
approximately $3.8 million related to the leasing for various locations.
10. RELATED PARTIES
The Company leases certain properties from partnerships that are
substantially owned by certain officers of the Company and their family members.
Expenses recognized for leases with these related partnerships are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating leases:
Base rentals................................. $2,170,000 $2,767,000 $2,970,000
Percentage rentals........................... 96,000 208,000 80,000
---------- ---------- ----------
2,266,000 2,975,000 3,050,000
---------- ---------- ----------
Capitalized leases:
Interest..................................... 767,000 499,000 388,000
Reduction of lease obligations............... 390,000 380,000 277,000
Percentage rentals........................... 226,000 22,000 11,000
---------- ---------- ----------
1,383,000 901,000 676,000
---------- ---------- ----------
Totals....................................... $3,649,000 $3,876,000 $3,726,000
========== ========== ==========
</TABLE>
F-51
<PAGE> 166
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In both fiscal 1995 and 1996, one of the related party capital leases was
reclassified into an operating lease due to substantial changes in the lease
thus causing the increase in operating leases expenses and the reduction in
capital lease above. The affiliated real estate partnerships pay a management
fee to the Company as reimbursement for administrative services provided. Total
management fees for fiscal 1994, 1995 and 1996 were $100,000, $115,000 and
$123,000, respectively. In addition, the Company has advanced amounts to certain
affiliated real estate partnerships for working capital purposes. These advances
are due on demand and bear interest at 6-9% per year. As of January 28, 1996 and
February 2, 1997, $696,000 and $217,000, respectively, was owed to the Company
by affiliated partnerships. The Company earned interest on affiliated
partnership advances of $18,000, $35,000 and $37,000 in fiscal 1994, 1995 and
1996, respectively. The Company has not experienced problems in collecting
advances to affiliated real estate partnerships in the past and does not
anticipate problems in collecting amounts currently advanced.
11. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of the
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
12. NON-RECURRING ITEMS
During the fourth quarter of fiscal 1996, the Company recorded a
non-recurring pre-tax charge of $33.2 million. The majority of the charge was
related to costs associated with exiting the Canadian market including
unamortized portions of nonrecoverable capital improvements ($12.5 million),
lease buy-out costs ($11.9 million), inventory write-down costs ($5.7 million),
severance ($850,000) and miscellaneous costs ($2.2 million). The closing of the
eleven Canadian locations will result in personnel reductions of approximately
600 people. As of February 2, 1997, no severance had been paid out. In addition
to severance, cash outflows will be required for lease buy-out and certain
miscellaneous costs which the Company expects to fund from normal operations.
The liquidation of the inventory, by an independent company, began in mid-
January 1997 and was completed by mid-April 1997. Upon completion of the
closings, the Company expects to realize approximately $3.5 to $4.5 million (net
of tax) annual cost savings.
During the fourth quarter of fiscal 1995, the Company recorded a
non-recurring pre-tax charge of $5.7 million. Approximately 79% of the charge
was related to costs associated with the closing of a store in Chicago, Illinois
(River North) and a clearance store in Wheeling, Illinois. The River North
location was closed as of the end of fiscal 1995 and the Wheeling store was
closed in May, 1996. Included in the original charge of store closings were
charges for lease buy-out costs ($2.8 million), inventory write-down costs ($1.0
million), unamortized portions of nonrecoverable capital improvements
($558,000), severance ($39,000), as well as other miscellaneous exit costs
($123,000). The remainder of the non-recurring charge was primarily due to
severance for certain corporate and store personnel ($791,000) and other
miscellaneous costs (400,000). The Company increased this reserve during the
fourth quarter of fiscal 1997 resulting in an additional non-recurring charge of
approximately $300,000. As of February 2, 1997, the reserve is approximately
$2.7 million primarily consisting of the remaining lease buy-out costs.
13. DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 1995, the Company announced its
strategic decision to discontinue the operations of its No Contest Division. The
No Contest division has been accounted for as discontinued operations, and
accordingly, its operations are segregated in the accompanying income
statements. Net sales, operation costs and expenses, other income and expense,
and income taxes for fiscal years 1995 and 1994 have been reclassified for
amounts associated with the discontinued division. A reserve was also
established for the estimated costs of disposal of the business segment of $2.9
million pre-tax ($1.7 million after tax). The reserve
F-52
<PAGE> 167
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
included estimated lease buy-out costs (approximately one year of occupancy
costs per location), severance payments, inventory write-down costs, unamortized
portions of nonrecoverable capital improvements (any recoverable capital
improvements were transferred to another operating location) as well as other
miscellaneous exit costs. The Company updated this reserve at year-end resulting
in an additional charge of $90,000 (net of tax). As of February 2, 1997, the
reserve is approximately $150,000 due to the payout of the lease costs.
Sales, gross profit, related losses and income tax benefits associated with
the No Contest division for the fiscal years ended January 29, 1995 and January
28, 1996 were as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Sales..................................................... $10,852,000 $10,527,000
Gross profit.............................................. 1,833,000 1,917,000
Loss before income taxes.................................. (950,000) (963,000)
Income tax benefit........................................ 375,000 385,000
Net loss from discontinued operations..................... (575,000) (578,000)
</TABLE>
14. EXTRAORDINARY ITEM
As a result of the termination of the previous revolving credit facility
and the Senior Notes from Allstate Life Insurance Co. in September, 1996, the
Company incurred an extraordinary charge of $462,000, net of income taxes of
$335,000, for the write-off of the unamortized loan origination fees.
15. GEOGRAPHIC SEGMENT INFORMATION
In addition to the Company's operations in the U.S., the Company also
operated nine and eleven locations in Canada as of January 29, 1996 and February
2, 1997, respectively. All eleven of these locations were in the process of
liquidation as of February 2, 1997 due to the Company's decision to exit the
Canadian market. Revenue, operating loss and identifiable assets pertaining to
the Canadian locations are presented below for the last two fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 28, FEBRUARY 2,
1996 1997
------------ ------------
<S> <C> <C>
Revenue................................................. $ 29,642,000 $ 49,869,000
Operating loss including exit charges................... $ (3,885,000) $(39,026,000)
Identifiable assets..................................... $ 41,641,000 $ 24,037,000
</TABLE>
F-53
<PAGE> 168
SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
FISCAL 1995
Net sales.................................. $103,193 $133,945 $105,020 $150,021
Gross profit............................... 22,027 34,651 23,428 30,927
Store pre-opening expenses................. 84 379 674 2,654
Net (loss) income from continuing
operations............................... (984) 5,343 (1,678) (6,802)
Loss from discontinued operations.......... (159) (153) (12) (2,000)
Net (loss) income.......................... (1,143) 5,190 (1,690) (8,802)
Net (loss) income per share from continuing
operations............................... (0.08) 0.42 (0.13) (0.53)
Loss per share from discontinued
operations............................... (0.01) (0.01) (0.00) (0.16)
Net (loss) income per share................ (0.09) 0.41 (0.13) (0.69)
FISCAL 1996
Net sales.................................. $116,209 $146,079 $111,659 $140,664
Gross profit............................... 25,619 37,093 24,654 26,608
Store pre-opening expenses................. 117 384 406 792
Net (loss) income from continuing
operations............................... (877) 4,435 (2,080) (27,985)
Loss from discontinued operations.......... -- -- -- (90)
Loss from extraordinary item............... -- -- (462) --
Net (loss) income.......................... (877) 4,435 (2,542) (28,075)
Net (loss) income per share from continuing
operations............................... (.07) .35 (.16) (2.18)
Loss per share from discontinued
operations............................... -- -- -- (.01)
Loss per share from extraordinary item..... -- -- (.04) --
Net (loss) income per share................ (.07) .35 (.20) (2.19)
</TABLE>
Fourth quarter adjustments for fiscal 1995, primarily related to the
following entries (net of tax): $3.3 million non-recurring charge incurred for
the closing of two locations and severance pay; $1.7 million for loss on
discontinued operations; and $680,000 for reductions of incentives and other
compensation. Fourth quarter adjustments for fiscal 1996, primarily related to
the following entries (net of tax): $2.7 million related to adjusting shrink at
year-end and $19.7 million non-recurring charge incurred for the exiting of the
Canadian operations.
F-54
<PAGE> 169
APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMONG
GART SPORTS COMPANY
GART BROS. SPORTING GOODS COMPANY
AND
SPORTMART, INC.
DATED AS OF DECEMBER 2, 1997
<PAGE> 170
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of December 2,
1997 (this "Agreement"), by and among Gart Sports Company, a Delaware
corporation ("Holdings"), Gart Bros. Sporting Goods Company, a Colorado
corporation and wholly-owned subsidiary of Holdings ("Sporting"), GB
Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of
Holdings ("Acquisition") and Sportmart, Inc., a Delaware corporation (the
"Company").
WHEREAS, Holdings, Sporting and the Company are parties to an Agreement and
Plan of Merger (the "Original Agreement"), dated as of September 28, 1997 (the
"Original Execution Date"), and such parties desire to amend and restate the
Original Agreement in its entirety as set forth herein:
WHEREAS, the Boards of Directors of Holdings, Sporting Acquisition and the
Company have each approved and deem it advisable and in the best interests of
their respective stockholders to consummate the combination of the Company and
Acquisition upon the terms and subject to the conditions of this Agreement;
WHEREAS, it is intended that the combination be accomplished by a merger of
Acquisition with and into the Company (the "Merger");
WHEREAS, each of Holdings, Sporting Acquisition and the Company intend that
the Merger will be treated as a tax free reorganization which meets the
requirements of Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as
amended (the "Code");
WHEREAS, the Board of Directors of the Company has approved the
transactions contemplated by this Agreement in accordance with the provisions of
Sections 203 and 251 of the Delaware General Corporation Law (the "DGCL"), and
has resolved, subject to the terms of this Agreement, to recommend the approval
and adoption of the Merger by its stockholders;
WHEREAS, the holders (the "Company Principals") of more than 60% of the
outstanding Company Voting Stock (as herein defined) have, pursuant to a
Stockholder Agreement dated as of September 28, 1997, as amended and restated as
of the date hereof (the "Stockholder Agreement"), agreed to vote in favor of the
Merger;
WHEREAS, the Boards of Directors of Holdings, Sporting and Acquisition each
has approved the transactions contemplated by this Agreement and Green Equity
Investors, L.P. (the "Fund"), the holder of approximately 85% of the outstanding
Holdings Common Stock (as herein defined), and Holdings, as the sole stockholder
of each of Sporting and Acquisition, has each approved and adopted this
Agreement and the transactions contemplated hereby in accordance with Sections
228 and 251 of the DGCL and Sections 7-108-202 and 7-107-104 of the Colorado
Business Corporation Act (the "CBCA"); and
WHEREAS, this Agreement and the transactions contemplated hereby shall be
submitted to the stockholders of the Company for their adoption and approval.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
contained in this Agreement, and in accordance with the DGCL, at the Effective
Time (as herein defined), Acquisition shall be merged with and into the Company,
the separate corporate existence of Acquisition shall thereupon cease, and the
Company shall continue as the surviving corporation (sometimes hereinafter
referred to as the "Surviving Corporation") and shall continue its corporate
existence under the laws of the State of Delaware. In accordance with the DGCL,
all of the rights, privileges, powers, immunities, purposes and franchises of
Acquisition and the Company shall vest in the Surviving Corporation and all of
the debts, liabilities,
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obligations and duties of Acquisition and the Company shall become the debts,
liabilities, obligations and duties of the Surviving Corporation.
Section 1.2 Closing. Subject to the terms and conditions of this
Agreement, the closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Altheimer & Gray, 10 S. Wacker
Drive, Suite 4000, Chicago, Illinois 60606, at 10:00 a.m., local time, on the
second business day after which all of the conditions set forth in Article VII
are first satisfied or waived ((the date of such first satisfaction or waiver
being the "Conditional Date") (provided that all such conditions continue to be
so satisfied or waived on such second business day, and if not so satisfied or
waived, the Closing shall be automatically extended from time to time until the
first subsequent business day on which all such conditions are again so
satisfied or waived, subject, however, to Section 8.1(b)), or on such other date
and at such other time and place as Holdings and the Company shall agree (the
date on which the Closing actually occurs being referred to herein as the
"Closing Date").
Section 1.3 Filing; Effective Time. On the date of the Closing, Holdings
and the Company will cause a Certificate of Merger to be properly executed and
filed pursuant to Section 251 of the DGCL. The Merger shall become effective at
such time as agreed in writing by Holdings and the Company and specified in the
Certificate of Merger (or if the parties cannot agree on a time, the Certificate
of Merger shall specify 9:15 a.m., eastern time, on the next business day
following the day of the filing of the Certificate of Merger). Such filing shall
be made contemporaneously with the Closing. When used in this Agreement, the
term "Effective Time" shall mean the date and time at which the Merger shall
become effective.
Section 1.4 Certificate of Incorporation and By-Laws of Surviving
Corporation. At the Effective Time, the Certificate of Incorporation of the
Company, as in effect immediately prior to the Effective Time, shall be amended
and restated as set forth in Exhibit A-1 hereto (the "Surviving Corporation
Charter"). The By-Laws of the Company as in effect immediately prior to the
Effective Time shall be amended and restated as of the Effective Time as set
forth in Exhibit B-1 hereto.
Section 1.5 Directors and Officers. The officers and directors of the
Surviving Corporation shall be the officers and directors of Acquisition at the
Effective Time, and shall hold office from the Effective Time until their
respective successors are duly elected or appointed and qualified in the manner
provided in the Certificate of Incorporation or By-Laws of the Surviving
Corporation or as otherwise provided by law.
Section 1.6 Certificate of Incorporation and By-Laws of Holdings. At the
Effective Time, the Certificate of Incorporation of Holdings, as in effect
immediately prior to the Effective Time, shall be amended and restated as set
forth in Exhibit A hereto (the "Holdings Charter"). The By-Laws of Holdings as
currently in effect shall be amended and restated as of the Effective Time as
set forth in Exhibit B-2 hereto.
Section 1.7 Directors of Holdings; Certain Share Treatment.
(a) The Board of Directors of Holdings at the Effective Time and for a
period of three years thereafter shall consist of seven directorships.
Initially, five of such directorships shall be the following individuals: John
Douglas Morton, Jonathan A. Sokoloff, Jennifer Holden Dunbar, Daniel A. Siegel
and one individual nominated by Holdings, it being understood that this list of
individuals may be supplemented or amended from time to time by Holdings prior
to the Effective Time (with the consent of the Company which shall not be
unreasonably withheld) and two of such directorships shall be filled by the two
members of the Board of Directors of the Company designated within 30 days after
the Effective Time by a majority of the persons who so constitute such Board of
Directors of the Company immediately prior to the Effective Time, each of which
seven directors shall serve until Holdings' 1998 annual meeting of stockholders.
Holdings agrees that Messrs. Larry Hochberg and Andrew Hochberg will be
nominated to serve as directors for a one year term commencing at Holdings' 1998
annual meeting of stockholders, and Holdings will use its best efforts to cause
the election thereof provided that the Company Principals own at least 75% of
the Holdings Common Stock that they receive in the Merger on the date of mailing
of Holdings' proxy materials with respect to such meeting (provided that if the
Company principals own more than 50% but less than 75% of the Holdings Common
Stock that they receive in the Merger on the date of mailing of Holdings' proxy
materials with respect to such meeting, Holdings agrees that one of Messrs.
Larry Hochberg or Andrew Hochberg (in
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Holdings' discretion) will be nominated to serve as director and Holdings will
use its best efforts to cause the election thereof) and that one of them (in
Holdings' discretion) will be nominated for election as a director at Holdings'
1999 annual meeting of stockholders provided that the Company Principals own at
least 50% of the Holdings Common Stock that they receive in the Merger on the
date of mailing of Holdings' proxy materials with respect to such meeting. In
the event that either or both of Messrs. Larry Hochberg and Andrew Hochberg are
unwilling or unable to serve as a director of Holdings as provided above,
replacement nominee(s) shall be chosen by a majority in interest of the Company
Principals and Holdings will use its best efforts to cause the election thereof.
(b) For a period of 18 months from and after the Effective Time, Holdings
covenants and agrees that no merger, consolidation or other extraordinary
transaction involving holders of Holdings Common Stock, shall be entered into by
Holdings or any of its Subsidiaries unless all such holders are treated equally
with respect to their Holdings Common Stock in such transaction or unless
otherwise approved by the independent directors of Holdings.
ARTICLE II
CONVERSION OF SHARES
Section 2.1 Conversion of Shares. As of the Effective Time, by virtue of
the Merger and without any action on the part of any holder of any shares of
capital stock of the Company, Holdings, Sporting or Acquisition:
(a) Each share of Common Stock, par value $.01 per share, of the Company
("Company Voting Stock") and each share of Class A Common Stock, par value $.01
per share, of the Company ("Company Non-Voting Stock" and together with the
Company Voting Stock, the "Company Common Stock") issued and outstanding
immediately prior to the Effective Time shall be converted into, and shall
thereafter represent only, the right to receive the Conversion Number (as herein
defined) of duly issued, validly authorized, fully paid and nonassessable shares
of Common Stock, par value $.01 per share, of Holdings ("Holdings Common
Stock"). For purposes hereof, the "Conversion Number" shall mean Holdings' Share
Consideration (as defined below) divided by the Company's "Equivalent Shares
Outstanding." "Equivalent Shares Outstanding" shall mean the number of shares of
common stock (of any class) of Holdings or the Company, as the case may be,
outstanding, including the number of shares of common stock (of any class)
outstanding pursuant to any restricted stock plan, plus the number of Equivalent
Option Shares of Holdings or the Company, as applicable. "Equivalent Option
Shares" shall be the quotient of (a) the result of (i) the product of (x) the
number of shares of common stock purchasable upon exercise of outstanding
options (whether or not vested) with exercise prices less than the applicable
Closing Price of Holdings or the Company, as the case may be, multiplied by (y)
the applicable Closing Price minus (ii) the sum of the exercise prices of all
such options included in clause (i) divided by (b) the Closing Price of Holdings
or the Company, as applicable. The "Closing Price" of the Company shall be the
weighted average of the closing prices of the Company Voting Stock and the
Company Non-Voting Stock each as reported on the Nasdaq National Market. The
"Closing Price" of Holdings shall be the quotient of (a) the product of 2.636364
multiplied by the Closing Price of the Company multiplied by the Company's
Equivalent Shares Outstanding divided by (b) Holdings' Equivalent Shares
Outstanding. The Closing Price of Holdings shall be determined by a trial and
error method using multiple iterations and the same methodology used to
determine the Company's Equivalent Shares Outstanding. "Holdings Share
Consideration" shall be the product of Holdings' Equivalent Shares Outstanding
multiplied by 0.37931. All determinations with respect to the foregoing shall be
made as of the Effective Time (using the last full trading day prior thereto
with respect to the Closing Price of the Company).
(b) All shares of Company Common Stock that are owned by the Company as
treasury stock shall automatically be canceled and retired and shall cease to
exist and no cash, Holdings Common Stock, or other consideration shall be
delivered or deliverable in exchange therefor.
(c) All shares of Company Common Stock to be converted pursuant to Section
2.1(a), issued and outstanding immediately prior to the Effective Time, shall no
longer be outstanding and shall automatically be
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canceled and retired and shall cease to exist and each holder of a certificate
which immediately prior to the Effective Time represented outstanding shares of
Company Common Stock (the "Certificates") shall cease to have any rights as
stockholders of the Company, except the right to receive the consideration set
forth in Section 2.1(a) for each share of Company Common Stock held by them.
(d) Each share of Common Stock, par value $.01 per share, of Acquisition
issued and outstanding immediately prior to the Effective Time shall be
converted into one share of Common Stock, par value $.01 per share, of the
Surviving Corporation.
Section 2.2 Exchange Procedures.
(a) Holdings shall designate a bank or trust company reasonably acceptable
to the Company to act as Exchange Agent hereunder (the "Exchange Agent").
Immediately following the Effective Time, Holdings shall deliver, in trust, to
the Exchange Agent, for the benefit of the holders of shares of Company Common
Stock, for exchange in accordance with this Article II, through the Exchange
Agent, certificates evidencing the shares of Holdings Common Stock issuable
pursuant to Section 2.1 in exchange for shares of Company Common Stock (the
"Exchange Fund").
(b) As soon as practicable after the Effective Time, Holdings and the
Surviving Corporation shall cause the Exchange Agent to mail to each holder of
record of a Certificate or Certificates (i) a form of letter of transmittal
specifying that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Exchange Agent and (ii) instructions for use in surrendering such Certificates
in exchange for certificates representing shares of Holdings Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent, together with
such letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor (A) certificates representing that
number of whole shares of Holdings Common Stock into which the shares of Company
Common Stock represented by the surrendered Certificate have been converted at
the Effective Time pursuant to Section 2.1 hereof, (B) any dividends or other
distributions to which such holder is entitled pursuant to Section 2.3 hereof
and (C) cash in lieu of any fractional shares of Holdings Common Stock to which
such holder is entitled pursuant to Section 2.4 hereof, and the Certificate so
surrendered shall forthwith be canceled. Until surrendered as contemplated by
this Section 2.2(b), each Certificate shall be deemed from and after the
Effective Time to represent only the right to receive upon such surrender the
shares of Holdings Common Stock, cash in lieu of any fractional shares of
Holdings Common Stock in accordance with Section 2.4 hereof and any dividends or
distributions on Holdings Common Stock in accordance with Section 2.3 hereof. In
no event shall the holder of any such surrendered Certificates be entitled to
receive interest on any cash for fractional shares to be received in the Merger.
Neither the Exchange Agent nor any party hereto shall be liable to a holder of
shares of Company Common Stock for any amount paid to a public official pursuant
to any applicable abandoned property, escheat or similar law. Shares of Holdings
Common Stock to be issued in the Merger shall be issued as of, and be deemed to
be outstanding as of, the Effective Time. Holdings shall cause all such shares
of Holdings Common Stock to be duly authorized, validly issued, fully paid and
non-assessable and not subject to preemptive rights.
(c) If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed and, if required by Holdings and the Surviving
Corporation, the giving by such person of an indemnity against any claim that
may be made against it with respect to such Certificate, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed Certificate the applicable
certificate representing shares of Holdings Common Stock in accordance with
Section 2.1 hereof, any cash in lieu of fractional shares of Holdings Common
Stock to which the holders thereof are entitled pursuant to Section 2.4 hereof
and any dividends or other distributions to which the holders thereof are
entitled pursuant to Section 2.3 hereof.
Section 2.3 Dividends; Transfer Taxes; Withholding. No dividends or other
distributions that are declared on or after the Effective Time on Holdings
Common Stock, or are payable to the holders of record thereof who became such on
or after the Effective Time, shall be paid to any person entitled by reason of
the Merger to receive certificates representing shares of Holdings Common Stock,
and no distribution of cash consideration and no cash payment in lieu of any
fractional share of Holdings Common Stock shall be paid to
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any person pursuant to Section 2.4 hereof, until such person shall have
surrendered its Certificate(s) as provided in Section 2.2 hereof (or such person
shall have complied with Section 2.2(c) hereof). Subject to applicable law,
Holdings shall cause to be paid to each person receiving a certificate
representing such shares of Holdings Common Stock, (i) at the time of such
receipt the amount of any dividends or other distributions theretofore paid with
respect to the shares of Holdings Common Stock represented by such certificate
and having a record date on or after the Effective Time, and (ii) at the
appropriate payment date the amount of any dividends or other distributions
payable with respect to the shares of Holdings Common Stock represented by such
certificate which dividends or other distributions have a record date on or
after the Effective Time and a payment date on or subsequent to such receipt. In
no event shall the person entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or other
distributions. If any cash or certificate representing shares of Holdings Common
Stock is to be paid to or issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Certificate so surrendered shall be properly
endorsed and otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the Exchange Agent any transfer or other
taxes required by reason of the issuance of such certificate representing shares
of Holdings Common Stock and the distribution of such cash payment in a name
other than that of the registered holder of the Certificate so surrendered, or
shall establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not applicable. Holdings, the Surviving Corporation or the Exchange
Agent shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of Company Common Stock such
amounts as Holdings, the Surviving Corporation or the Exchange Agent are
required to deduct and withhold under the Code, or any provision of state, local
or foreign tax law, with respect to the making of such payment. To the extent
that amounts are so withheld by Holdings, the Surviving Corporation or the
Exchange Agent, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the Company Common Stock in
respect of whom such deduction and withholding was made by Holdings, the
Surviving Corporation or the Exchange Agent.
Section 2.4 Fractional Shares. No certificates or scrip representing
fractional shares of Holdings Common Stock shall be issued upon the surrender
for exchange of Certificates, no dividend or distribution with respect to shares
shall be payable on or with respect to any fractional share and such fractional
share interests shall not entitle the owner thereof to vote or to any other
rights of a stockholder of Holdings. In lieu of any such fractional share of
Holdings Common Stock, Holdings shall pay to each former stockholder of the
Company who otherwise would be entitled to receive a fractional share of
Holdings Common Stock an amount in cash (without interest) rounded to the
nearest whole cent, determined by multiplying (i) the closing sales price of the
Holdings Common Stock on the Nasdaq National Market (or other principal exchange
or market in which such stock is traded) on the first day of trading thereof
following the Effective Time (the "Fractional Share Price") by (ii) the
fractional interest in a share of Holdings Common Stock to which such holder
would otherwise be entitled. Holding shall make available to the Exchange Agent,
and cause to be paid by the Exchange Agent, cash for this purpose.
Section 2.5 Return of Exchange Fund. Any portion of the certificates
representing shares of Holdings Common Stock together with any cash in lieu of
fractional shares payable pursuant to Section 2.4 hereof and any dividends or
distributions payable pursuant to Section 2.3 hereof, which remains
undistributed to the former holders of Company Common Stock for one year after
the Effective Time shall be delivered to Holdings, upon its request, and any
such former holders who have not theretofore surrendered to the Exchange Agent
their Certificate(s) in compliance with this Article II shall thereafter look
only to Holdings for payment of their claim for shares of Holdings Company
Stock, any cash in lieu of fractional shares of Holdings Common Stock and any
dividends or distributions with respect to such shares of Holdings Common Stock
(in each case, without interest thereon). The Exchange Agent shall invest any
cash included in the Exchange Fund, as directed by Holdings, on a daily basis.
Any interest and other income resulting from such investments shall be paid to
Holdings.
Section 2.6 Options.
(a) Following the Effective Time, each outstanding option to purchase
shares of Holdings Common Stock shall remain outstanding and unchanged.
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(b) Effective at the Effective Time, Holdings hereby assumes the Company's
obligations with respect to its stock options, as follows. Not later than the
Effective Time, each option to purchase shares of Company Common Stock (each a
"Company Stock Option") which is outstanding immediately prior to the Effective
Time pursuant to any stock option plan or stock incentive plan of the Company in
effect on the Original Execution Date and which plan is identified on the
Company Disclosure Schedule (the "Company Stock Plans") shall become and
represent an option to purchase the number of shares of Holdings Common Stock (a
"Substitute Company Option"), increased to the nearest whole share, determined
by multiplying (i) the number of shares of Company Common Stock subject to such
Company Stock Option immediately prior to the Effective Time by (ii) the
Conversion Number, at an exercise price per share of Holdings Common Stock
(increased to the nearest whole cent) equal to the exercise price per share of
Company Common Stock immediately prior to the Effective Time divided by the
Conversion Number. After the Effective Time, except as provided above in this
Section 2.6, each Substitute Company Stock Option shall be exercisable upon the
same terms and conditions as were applicable to the related Company Stock Option
immediately prior to the Effective Time, and each Substitute Company Option
shall, subject to the accelerated vesting contemplated by this paragraph, be
vested to the extent provided in the related Company Stock Plan or the option
agreement with respect to the related Company Stock Option, as the case may be.
This Section 2.6 shall be subject to any contrary provision contained in the
applicable Company Stock Plan or in the option agreement with respect to any
Company Stock Option outstanding thereunder, but, subject to the other
provisions of this Agreement, prior to the Effective Time, the Company, and
after the Effective Time, Holdings shall each use its reasonable best efforts to
obtain any necessary consents of the holders of such Company Stock Options to
effect this Section 2.6. Notwithstanding anything to the contrary contained in
this Agreement, the Board of Directors of the Company (or the Compensation
Committee thereof) may, at any time prior to the Effective Time, provide for the
acceleration of the vesting of Company Stock Options and restricted shares of
Company Common Stock under the Sportmart, Inc. Restricted Stock Plan in
connection with the Merger, provided that such accelerated vesting shall only be
applicable to persons (i) whose employment with the Company (or the Surviving
Corporation) is terminated by Holdings, the Company or the Surviving Corporation
at (or in anticipation of) the Effective Time or thereafter by Holdings or the
Surviving Corporation within six months following the Effective Time or
thereafter by such persons within six months following the Effective Time under
circumstances that constitute "Good Reason" as defined under the Company
Severance Plan in effect on the Original Execution Date or (ii) who do not at
the Effective Time have at least a comparable position with Holdings and the
Surviving Corporation to the position that they had with the Company and its
Subsidiaries. Notwithstanding anything to the contrary in this Section, the
conversion of Company Stock Options pursuant to any "stock purchase plan" within
the meaning of Code section 423 to Substitute Company Options shall be made in
accordance with Code section 424(a).
(c) There shall be no restrictions on selling shares of Holdings Common
Stock acquired pursuant to Substitute Company Options, except as required by law
or pursuant to the Registration Rights Agreement referenced in Section 7.3(h)
hereof (the "Registration Rights Agreement"). If such sales are restricted by
law, the Substitute Company Options (other than any options pursuant to any
"stock purchase plan" within the meaning of Code section 423) shall remain
exercisable for a period of at least 90 days (or, if shorter, the remainder of
the term of the Substitute Company Option, without regard to early termination
provisions) after the lapsing of such restriction if such Substitute Company
Options were outstanding when the restrictions became applicable to the selling
of shares of Holdings Common Stock acquired pursuant to Substitute Company
Options.
(d) At the Effective Time, Holdings shall register under the Securities Act
on Form S-8 or another appropriate form all Substitute Company Options and all
shares of Holdings Common Stock issuable pursuant to all such Options.
Section 2.7 Closing of Transfer Books. At the Effective Time, no transfer
of shares of Company Common Stock shall thereafter be made, and the stock
transfer books of the Company shall be closed. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be canceled
and exchanged as provided in this Article II.
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Section 2.8 Further Assurances. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of Acquisition and the Company acquired or to be acquired
by the Surviving Corporation as a result of, or in connection with, the Merger
or otherwise to carry out the purposes of this Agreement, the officers of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of each of Acquisition and the Company or otherwise, all such
deeds, bills of sale, assignments and assurances and to take and do, in such
names and on such behalves or otherwise, all such other actions and things as
may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the
Surviving Corporation or otherwise to carry out the purposes of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Company Disclosure Schedule delivered by the
Company to Holdings in connection with the execution of the Original Agreement
(the "Company Disclosure Schedule") (each section of which qualifies the
correspondingly numbered representation and warranty and any other
representation and warranty to which the disclosure on its face relates), the
Company represents and warrants, as of the Original Execution Date and only with
respect to facts and circumstances then in existence (except with respect to
Sections 3.5, 3.7 and 3.8, which are expressly remade as of the date hereof), to
Holdings as follows:
Section 3.1 Organization and Good Standing. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power and authority to carry on its
business as it is now being conducted. The Company is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary, except where
the failure to be so qualified or in good standing would not have a material
adverse effect, individually or in the aggregate, on the business, financial
condition, or results of operations of the Company and its Subsidiaries taken as
a whole, or, if applicable, the ability of the Company to consummate the Merger
and the other transactions contemplated by this Agreement (a "Company Material
Adverse Effect"). For purposes of this Agreement, a "Company Material Adverse
Effect" shall not be deemed to have occurred as a result of: (i) a decline in
the actual or potential future financial performance or operations of the
Company provided that the Company has operated its business in accordance with
Section 5.1 and otherwise consistent with its past practices, (ii) losses of
employees or other matters related to the transactions contemplated hereby
(including, without limitation, the public announcement thereof), (iii) opening
of stores, or the announcement of planned store openings, by competitors or (iv)
facts and circumstances unless such facts and circumstances are of such a
fundamental and extraordinary nature that no reasonable person could dispute
that such a "material adverse change" has occurred, or (v) any effect or
consequence of, or related to, any of the Pack Boot Inventory (as defined in the
Agreement made and entered into as of November 3, 1997, by and between the
Company and Sporting (the "Pack Boot Agreement")), the Additional Ski Inventory
(as defined in the Pack Boot Agreement), or any transaction pursuant to either
the Pack Boot Agreement or the Consignment Agreement, made and entered as of
November 3, 1997, by and between the Company and Sporting (the "Consignment
Agreement"). As used in this Agreement, a "Subsidiary" of any person means
another person, an amount of the voting securities, other voting ownership or
voting partnership interests of which is sufficient to elect at least a majority
of its Board of Directors or other governing body (or, if there are no such
voting interests, 50% or more of the equity interests of which) is owned
directly or indirectly by such first person.
Section 3.2 Certificate of Incorporation and By-Laws. Complete and correct
copies of the Certificates of Incorporation and By-laws or equivalent
organizational documents, each as amended as of the Original Execution Date, of
the Company and each of its Subsidiaries have been made available to Holdings.
The Certificates of Incorporation, By-laws and equivalent organizational
documents of the Company and each of
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its Subsidiaries are in full force and effect. Neither the Company nor any of
its Subsidiaries is in violation of any provision of its Certificate of
Incorporation, By-laws or equivalent organizational documents.
Section 3.3 Capitalization.
(a) As of the Original Execution Date, the authorized capital stock of the
Company consists of 5,000,000 shares of Preferred Stock, par value $.01 per
share ("Company Preferred Stock"), 50,000,000 shares of Company Voting Stock and
50,000,000 shares of Company Non-Voting Stock. At the close of business on
September 25, 1997: (i) no shares of Company Preferred Stock were outstanding;
(ii) 5,148,833 shares of Company Voting Stock were outstanding; (iii) 7,736,680
shares of Company Non-Voting Stock were outstanding; (iv) 250,000 shares of
restricted Company Non-Voting Stock were outstanding pursuant to the Sportmart,
Inc. Restricted Stock Plan and (v) 154,581 shares of unissued Company Voting
Stock and 1,176,739 shares of unissued Company Non-Voting Stock were subject to
issuance upon the exercise of outstanding stock options listed in the Company
Disclosure Schedule. All outstanding shares of Company Common Stock are validly
issued, fully paid and nonassessable and not subject to preemptive rights. No
shares of Company Common Stock are owned by any direct or indirect Subsidiary of
the Company.
(b) Except as described in this Section 3.3 and as contemplated by this
Agreement (i) no shares of capital stock or other equity securities of the
Company are authorized, issued or outstanding, or reserved for issuance, and
there are no options, warrants or other rights (including registration rights),
agreements, arrangements or commitments of any character to which the Company or
any of its Subsidiaries is a party relating to the issued or unissued capital
stock or other equity interests of the Company or any of its Subsidiaries,
requiring the Company or any of its Subsidiaries to grant, issue or sell any
shares of the capital stock or other equity interests of the Company or any of
its Subsidiaries by sale, lease, license or otherwise; (ii) neither the Company
nor any of its Subsidiaries have any obligation, contingent or otherwise, to
repurchase, redeem or otherwise acquire any shares of the capital stock or other
equity interests of the Company or any of its Subsidiaries; (iii) neither the
Company nor any of its Subsidiaries, directly or indirectly, owns, or has agreed
to purchase or otherwise acquire, the capital stock or other equity interests
of, or any interest convertible into or exchangeable or exercisable for such
capital stock or such equity interests of, any corporation, partnership, joint
venture or other entity which would be material in value to the Company; and
(iv) there are no voting trusts, proxies or other agreements or understandings
to which the Company or any of its Subsidiaries is a party with respect to the
voting of any shares of capital stock or other equity interests of the Company
or any of its Subsidiaries.
Section 3.4 Company Subsidiaries. The Company Disclosure Schedule sets
forth a list of each Subsidiary of the Company; its authorized, issued and
outstanding capital stock or other equity interests; the percentage of such
capital stock or other equity interests owned by the Company or any Subsidiary
of the Company, and the identity of such owner; the capital stock reserved for
future issuance pursuant to outstanding options or other agreements; and the
identity of all parties to any such option or other agreement. Each Subsidiary
of the Company is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization.
Each Subsidiary of the Company has all requisite corporate power and authority
to carry on its business as it is now being conducted. Each Subsidiary of the
Company is duly qualified as a foreign corporation or organization authorized to
do business, and is in good standing, in each jurisdiction where the character
of its properties owned or held under lease or the nature of its activities
makes such qualification necessary, except where the failure to be so qualified
or in good standing would not have a Company Material Adverse Effect. All of the
outstanding shares of capital stock or other ownership interests in each of the
Company's Subsidiaries have been validly issued, and are fully paid,
nonassessable and are owned by the Company or another Subsidiary of the Company
free and clear of all pledges, claims, options, liens, charges, encumbrances and
security interests of any kind or nature whatsoever (collectively, "Liens"), and
are not subject to preemptive rights created by statute, such Subsidiary's
respective Certificate of Incorporation or By-laws or equivalent organizational
documents or any agreement to which such Subsidiary is a party.
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Section 3.5 Corporate Authority.
(a) The Company has the requisite corporate power and authority to execute
and deliver this Agreement and, subject to the approval and adoption of the
Company's stockholders with respect to this Agreement and the transactions
contemplated, to consummate the transactions contemplated hereby. The execution
and delivery by the Company of this Agreement and the consummation by the
Company of the transactions contemplated hereby have been duly authorized by its
Board of Directors and, except for the approval and adoption of the Company's
stockholders with respect to this Agreement and the transaction contemplated, no
other corporate action on the part of the Company is necessary to authorize the
execution and delivery by the Company of this Agreement and the consummation by
it of the transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Company and constitutes a valid and binding
agreement of the Company and is enforceable against the Company in accordance
with its terms, except to the extent that (i) such enforcement may be subject to
any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or
other laws, now or hereafter in effect, relating to or limiting creditors'
rights generally and (ii) the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defense, and to the
discretion of the court before which any proceeding therefor may be brought. The
preparation of the Proxy Statement (as herein defined) filed with the SEC was
duly authorized by the Board of Directors of the Company.
(b) Prior to execution and delivery of this Agreement, the Board of
Directors of the Company (at a meeting duly called and held) has (i) approved
this Agreement, the Merger and the other transactions contemplated hereby and
thereby (including, without limitation, the entry by the Company Principals into
the Stockholder Agreement), and such approval is sufficient to render
inapplicable to the Merger and all of such other transactions the provisions of
Section 203 of the DGCL, (ii) determined that the transactions contemplated
hereby are fair to and in the best interests of the holders of the Company
Common Stock and (iii) determined to recommend this Agreement, the Merger and
the other transactions contemplated hereby to the Company's stockholders for
approval and adoption at the stockholders meeting contemplated by Section 6.4(a)
hereof (it being understood that such determination is subject to any future
determination by the Board of Directors of the Company, in good faith and as
advised by outside counsel, that such recommendation would be inconsistent with
the fiduciary obligations of the Board of Directors of the Company under
applicable law). The affirmative vote of the holders of a majority of the
outstanding shares of Company Voting Stock is the only vote of the holders of
any class or series of the Company's capital stock necessary to approve and
adopt this Agreement.
Section 3.6 Compliance with Applicable Law. Except as set forth in the
Company Disclosure Schedule, (i) the Company and each of its Subsidiaries holds,
and is in compliance with the terms of, all permits, licenses, exemptions,
orders and approvals of all Governmental Entities (as hereinafter defined)
necessary for the conduct of their respective businesses ("Company Permits"),
except for failures to hold or to comply with such permits, licenses,
exemptions, orders and approvals which would not have a Company Material Adverse
Effect, (ii) with respect to the Company Permits, to the knowledge of the
Company no action or proceeding is pending or threatened that would reasonably
be expected to have a Company Material Adverse Effect, (iii) the business of the
Company and its Subsidiaries is being conducted in compliance with all
applicable laws, ordinances, regulations, judgments, decrees or orders
("Applicable Law") of any federal, state, local, foreign or multinational court,
arbitral tribunal, administrative agency or commission or other governmental or
regulatory authority or administrative agency or commission (a "Governmental
Entity"), except for violations or failures to so comply that would not have a
Company Material Adverse Effect, and (iv) to the knowledge of the Company, no
investigation or review by any Governmental Entity with respect to the Company
or its Subsidiaries is pending or threatened, other than, in each case, those
which would not reasonably be likely to have a Company Material Adverse Effect.
Section 3.7 Non-Contravention. Except as set forth on the Company
Disclosure Schedule, the execution and delivery of this Agreement do not, and
the consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, (i) result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to the loss of a
material benefit under any loan, guarantee of indebtedness or credit agreement,
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note, bond, mortgage, indenture, lease, agreement, contract, instrument, permit,
concession, franchise, right or license (any of the foregoing, a "Contract")
applicable to the Company or any of its Subsidiaries, or result in the creation
of any Lien upon any of the properties or assets of the Company or any of its
Subsidiaries, (ii) conflict or result in any violation of any provision of the
Certificate of Incorporation or By-Laws or other equivalent organizational
document, in each case as amended, of the Company or any of its Subsidiaries, or
(iii) subject to the governmental filings referenced in clause (i) of Section
3.8, conflict with or violate any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or any of its
Subsidiaries or any of their respective properties or assets, other than, in the
case of clauses (i) and (iii), any such violations, conflicts, defaults, rights,
losses or Liens that, individually or in the aggregate, would not have a Company
Material Adverse Effect.
Section 3.8 Government Approvals; Required Consents. No filing or
registration with, or authorization, consent or approval of, any Governmental
Entity is required by or with respect to the Company or any of its Subsidiaries
in connection with the execution and delivery of this Agreement by the Company
or is necessary for the consummation of the transactions contemplated hereby
(including, without limitation, the Merger) except: (i) in connection, or in
compliance, with the provisions of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), the Securities Act of 1933, as amended
(the "Securities Act"), the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), any state securities or "Blue Sky" law, (ii) for the filing of
a Certificate of Merger with the Secretary of State of the State of Delaware,
(iii) such consents, approvals, authorizations, permits, filings and
notifications listed in the Company Disclosure Schedule and (iv) such other
consents, orders, authorizations, registrations, declarations and filings the
failure of which to obtain or make would not, individually or in the aggregate,
have a Company Material Adverse Effect.
Section 3.9 SEC Documents and Other Reports. The Company has filed on a
timely basis all documents required to be filed prior to the Original Execution
Date by it with the Securities and Exchange Commission (the "SEC") since January
30, 1994 (the "Company SEC Documents"). Complete and correct copies of the
Company SEC Documents have been made available to Holdings. As of their
respective dates, or if amended as of the date of the last such amendment, the
Company SEC Documents complied in all material respects with the requirements of
the Securities Act or the Exchange Act, as the case may be, and the applicable
rules and regulations promulgated thereunder and none of the Company SEC
Documents as of the date thereof contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Complete and accurate copies of the
unaudited consolidated balance sheet, consolidated statements of income,
retained earnings and cash flows (together with any supplementary information
thereto) of the Company, all as of and for the four week period ended August 31,
1997 (the "Interim Financial Information") have been provided to Holdings. The
consolidated financial statements of the Company included in the Company SEC
Documents and the Interim Financial Information fairly present, in all material
respects, the consolidated financial position of the Company and its
consolidated Subsidiaries, as of and for the respective dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the respective periods then ended (subject, in the case of the unaudited
statements, to normal year-end audit adjustments and to any other adjustments
described therein) in conformity with United States generally accepted
accounting principles ("GAAP") (except, in the case of the unaudited statements,
as permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated therein or in the notes thereto).
Since February 2, 1997, the Company has not made any change in the accounting
practices or policies applied in the preparation of its financial statements,
except as may be required by GAAP.
Section 3.10 Absence of Certain Changes or Events. Except to the extent
disclosed in the Company Disclosure Schedule, since February 2, 1997 the Company
and their Subsidiaries have conducted their businesses and operations in the
ordinary and usual course consistent with past practice and there has not
occurred (i) any event, condition or occurrence having or that would reasonably
be expected to have, individually or in the aggregate, a Company Material
Adverse Effect; (ii) any damage, destruction or loss (whether or not covered by
insurance) having or which would reasonably be expected to have, individually or
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in the aggregate, a Company Material Adverse Effect; or (iii) any declaration,
setting aside or payment of any dividend or distribution of any kind by the
Company on any class of its capital stock.
Section 3.11 Actions and Proceedings. Except as set forth in the Company
Disclosure Schedule, there are no outstanding orders, judgments, injunctions,
awards or decrees of any Governmental Entity against the Company or any of its
Subsidiaries, any of their properties, assets or business, or, to the knowledge
of the Company, any of the Company's or its Subsidiaries' current or former
directors or officers or any other person whom the Company or any of its
Subsidiaries has agreed to indemnify that would reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect. Except as
set forth in the Company Disclosure Schedule, to the knowledge of the Company,
there are no actions, suits or legal, administrative, regulatory or arbitration
proceedings pending or threatened against the Company or any of its
Subsidiaries, any of their properties, assets or business, or, to the knowledge
of the Company, any of the Company's or its Subsidiaries' current or former
directors or officers or any other person whom the Company or any of its
Subsidiaries has agreed to indemnify, that would reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect. To the
Company's knowledge, there are no facts or circumstances specific to the Company
which, if known to a third party, would reasonably be expected to result in such
a suit or proceeding which could be expected to have a Company Material Adverse
Effect.
Section 3.12 Contracts. Each Contract entered into by the Company or any
of its Subsidiaries is valid, binding and enforceable and in full force and
effect, except where failure to be valid, binding and enforceable and in full
force and effect would not reasonably be expected to have a Company Material
Adverse Effect and there are no defaults by the Company or any of its
Subsidiaries or, to the knowledge of the Company, another party thereto,
thereunder, except those defaults that would not reasonably be expected to have
a Company Material Adverse Effect. Except as set forth in the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is a party to or bound
by any non-competition agreement or any other agreement or obligation which
purports to limit in any material respect the manner in which, or the localities
in which, the Company or any such Subsidiary is entitled to conduct all or any
material portion of the business of the Company and its Subsidiaries taken as a
whole. All Contracts which are material to the business, financial condition,
results of operations or prospects of the Company and its Subsidiaries taken as
a whole, are listed in the Company Disclosure Schedule.
Section 3.13 Taxes.
(a) As used in this Agreement, the following terms shall have the following
meanings: the term "Taxes" means all federal, state, local, foreign and other
net income, gross income, gross receipts, sales use, ad valorem, transfer,
franchise, profits, license, lease, service, service use, withholding, payroll,
estimated, employment, excise, severance, stamp, occupation, premium, property,
windfall profits, customs, duties or other taxes, fees, assessments or charges
of any kind whatsoever, together with any interest any penalties, additions to
tax or additional amounts with respect thereto; and the term "Returns" means all
returns, declarations, reports, statements and other documents required to be
filed in respect of Taxes. All citations to the Code, or to the Treasury
Regulations promulgated thereunder, shall include any amendments or any
substitute or successor provisions thereto.
(b) There have been properly completed and filed on a timely basis and in
correct form all Returns required to be filed by the Company and any of its
Subsidiaries. As of the time of filing, the Returns correctly reflected the
facts regarding the income, business, assets, operations, activities, status or
other matters of the Company or such Subsidiary or any other information
required to be shown thereon. An extension of time within which to file any
Return which has not been filed has not been requested or granted.
(c) With respect to all amounts in respect of Taxes imposed upon the
Company and any of its Subsidiaries, or for which the Company or any of its
Subsidiaries is or could be liable, whether to taxing authorities (as, for
example, under law) or to other persons or entities (as, for example, under tax
allocation agreements), with respect to all taxable periods or portions of
periods ending on or before the Closing Date, all applicable tax laws and
agreements have been fully complied with, and all amounts required to be paid by
the Company or any of its Subsidiaries, to taxing authorities or others, on or
before the Original Execution Date have been paid.
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(d) No issues have been raised (and are currently pending) by any taxing
authority in connection with any of the Returns filed by the Company or any of
its Subsidiaries. No waivers of statutes of limitation with respect to such
Returns have been given by or requested from the Company or any of its
Subsidiaries. The Company Disclosure Schedule sets forth (i) the taxable years
of each of the Company and its Subsidiaries as to which the respective statutes
of limitations with respect to Taxes have not expired, and (ii) with respect to
such taxable years sets forth those years for which examinations have been
completed, those years for which examinations are presently being conducted,
those years for which examinations have not been initiated, and those years for
which required Returns have not yet been filed. All deficiencies asserted or
assessments made as a result of any examinations have been fully paid, or are
fully reflected as a liability in the financial statements contained in the
Company SEC Documents or are being contested in good faith and an adequate
reserve therefor has been established and is fully reflected in the financial
statements.
(e) Neither the Company nor any of its Subsidiaries is a party to or bound
by any tax indemnity, tax sharing or tax allocation agreement.
(f) Neither the Company nor any of its Subsidiaries has agreed to make, and
is not required to make, any adjustment under section 481(a) of the Code by
reason of a change in accounting method or otherwise.
(g) Neither the Company nor any of its Subsidiaries is a party to any
agreement, contract, arrangement or plan that has resulted or would result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code.
(h) The unpaid Taxes of the Company and its Subsidiaries do not exceed (and
at the Effective Time will not exceed) the reserve for tax liability with
respect to the Company and its Subsidiaries (excluding any reserve for deferred
Taxes to the extent such reserve reflects timing differences between book and
tax income) set forth or included in the latest consolidated financial
statements included in the Company SEC Documents as adjusted in accordance with
the past practices of the Company and its Subsidiaries for items of income,
gain, loss, and expense arising and accruals and transactions occurring after
the latest balance sheet date in such Company SEC Documents.
(i) The transactions contemplated herein will not result in restorations
into income of amounts deferred under the consolidated return regulations, such
as those relating to intercompany transactions, excess loss accounts, and the
like.
(j) The transactions contemplated herein are not subject to any tax
withholding provisions of law or regulations other than with respect to foreign
shareholders.
(k) No breach of any of the foregoing representations and warranties in
this Section 3.13 shall be deemed to exist unless such breach would have a
Company Material Adverse Effect.
(l) To the knowledge of the Company there is no plan or intention on the
part of the Company's stockholders to sell, exchange or otherwise dispose of a
number of shares of Holdings Common Stock received by them for shares of Company
Common Stock pursuant to the Merger, nor to enter into any puts, calls,
straddles, spreads or similar transactions, that would reduce the Company's
stockholders' ownership for U.S. federal income tax purposes of Holdings Common
Stock to a number of shares having a value, as of the Effective Time, of less
than 50 percent of the value of all of the formerly outstanding stock of the
Company as of the same date. For purposes of this representation, shares of
Company Common Stock surrendered by dissenters or exchange for case in lieu of
fractional shares of Holdings Common Stock are treated as outstanding shares of
Company Common Stock at the Effective Time. Moreover, shares of Company Common
Stock and shares of Holdings Common Stock held by the Company's stockholders and
otherwise sold, redeemed or disposed of prior to or subsequent to the Merger
will be considered in making this representation.
(m) At the Effective Time, the fair market value of the assets of the
Company will exceed the sum of its liabilities, plus the amount of liabilities,
if any, to which such assets are subject.
Section 3.14 Title to Properties; Encumbrances. Except as described in the
following sentence, each of the Company and its Subsidiaries has good, valid
and, in the case of real property, marketable title to, or a
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valid leasehold interest in, all of its material properties and assets (real,
personal, tangible and intangible), including, without limitation, all such
properties and assets reflected in the consolidated balance sheet of the Company
and its Subsidiaries as of February 2, 1997 included in the Company SEC
Documents (except for properties and assets disposed of in the ordinary course
of business and consistent with past practices since such date), except for such
title or interest the failure of which to have would not have, individually or
in the aggregate, a Company Material Adverse Effect. None of such properties or
assets are subject to any Liens (whether absolute, accrued, contingent or
otherwise), except (i) as set forth in the Company Disclosure Schedule or (ii)
imperfections of title and Liens, if any, which do not detract from the value of
the property or assets subject thereto in a manner material to the Company and
do not materially impair the business or operations of the Company and its
Subsidiaries taken as a whole.
Section 3.15 Intellectual Property. The Company and its Subsidiaries own
or have a valid license to use all inventions, patents, trademarks, service
marks, trade names, copyrights, trade secrets, technology and know-how, software
and other intellectual property rights (collectively, the "Company Intellectual
Property") necessary to carry on their respective businesses as currently
conducted except where the failure to own or have a valid license to use such
would not have a Company Material Adverse Effect; and neither the Company nor
any such Subsidiary has received any notice of infringement of or conflict with,
and, to the Company's knowledge, there are no infringements of or conflicts
with, the rights of others with respect to the use of any of the Company
Intellectual Property that, in either such case, has had or would reasonably be
expected to have a Company Material Adverse Effect.
Section 3.16 Information in Disclosure Documents and Registration
Statement. None of the information supplied or to be supplied by the Company for
inclusion in (i) the Registration Statement to be filed with the SEC on Form S-4
under the Securities Act (the "Registration Statement") for the purpose of
registering the shares of Holdings Common Stock to be issued in connection with
the Merger (the "Share Issuance") or (ii) the proxy statement/prospectus to be
distributed in connection with the Company's meeting of stockholders to vote
upon this Agreement and the transactions contemplated hereby (the "Proxy
Statement") will, at the time the Registration Statement becomes effective, at
the time of the initial mailing of the Proxy Statement and any amendments or
supplements thereto or at the time of the meeting of stockholders of the Company
to be held in connection with the Merger, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Proxy Statement and
any amendments or supplements thereto will, at their respective times of
mailing, comply as to form in all material respects with the applicable
requirements of the Exchange Act, and the rules and regulations promulgated
thereunder. Notwithstanding the foregoing, the Company makes no representations
with respect to any statement in the foregoing documents based upon and
conforming to information supplied by Holdings for inclusion therein.
Section 3.17 Employee Benefit Plans; ERISA.
(a) None of the Company, any of its Subsidiaries or any affiliate of the
Company or any of its Subsidiaries as determined under Code section 414(b), (c),
(m) or (o) ("Company ERISA Affiliate") maintains, administers or contributes to,
or has any liability with respect to, nor do the employees of the Company, its
Subsidiaries or any Company ERISA Affiliate receive or expect to receive as a
condition of employment, benefits pursuant to:
(A) any employee benefit plan (as defined in section 3(3) of ERISA) (each
such plan, a "Company Plan"), including, without limitation, any multiemployer
plan (as defined in section 3(37) of ERISA) ("Multiemployer Plan"); or
(B) any bonus, deferred compensation, performance compensation, stock
purchase, stock option, stock appreciation, severance, salary continuation,
vacation, sick leave, holiday pay, fringe benefit, personnel policy,
reimbursement program, incentive, insurance, welfare or similar plan, program,
policy or arrangement (each such plan, a "Company Benefit Plan"); other than
those Company Plans and Company Benefit Plans listed in the Company Disclosure
Schedule. Except as required by section 4980B of the Code, none of the Company,
any of its Subsidiaries or any Company ERISA Affiliate has promised any former
employee or other
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individual not employed by the Company, any of its Subsidiaries or any Company
ERISA Affiliate medical or other benefit coverage and none of the Company, any
of its Subsidiaries or any Company ERISA Affiliate maintains or contributes to
any plan, program, policy or arrangement providing medical or life insurance
benefits to former employees, their spouses or dependents or any other
individual not employed by the Company, any of its Subsidiaries or any Company
ERISA Affiliate. No Company Plan or Company Benefit Plan has any provision which
could increase or accelerate benefits or increase the liability of the Company
or any of its Subsidiaries as a result of any transaction contemplated by this
Agreement.
(b) All Company Plans and Company Benefit Plans which are not Multiemployer
Plans and any related trust agreements or annuity contracts (or any related
trust instruments) comply with and are and have been operated in accordance with
each applicable provision of ERISA and the Code in all material respects. Each
Company Plan, as amended to date, which is not a Multiemployer Plan, that is
intended to be qualified under sections 401(a) and 501(a) of the Code has been
determined to be so qualified by the IRS, has been submitted to the IRS for a
determination with respect to such qualified status, or the remedial amendment
period with respect to such Company Plan will not have expired prior to the
Effective Time, and no event has occurred, either by reason of any action or
failure to act, which would cause the loss of any such qualification.
(c) Neither any Company Plan fiduciary nor any Company Plan (excluding each
Multiemployer Plan and its fiduciaries) has engaged in any transaction in
violation of section 406 of ERISA or any "prohibited transaction" (as defined in
section 4975(c)(1) of the Code) unless exempt under section 408 of ERISA or
section 4975 of the Code and there has been no "reportable event" (as defined in
section 4043 of ERISA), with respect to any Company Plan which is not a
Multiemployer Plan, for which the 30-day notice requirement has not been waived.
None of the Company, any of its Subsidiaries or any Company ERISA Affiliate has
incurred or suffered to exist any "accumulated funding deficiency" (as defined
in section 302 of ERISA) whether or not waived by the IRS, involving any Company
Plan subject to section 412 of the Code or Part 3 of Subtitle B of Title I of
ERISA. No withdrawals have occurred so as to cause any Company Plan to become
subject to the provisions of section 4063 of ERISA, and none of the Company, any
of its Subsidiaries or any Company ERISA Affiliate has ceased making
contributions to any employee benefit plan subject to section 4064(a) of ERISA
to which the Company, any of its Subsidiaries or any Company ERISA Affiliate
made contributions during the six (6) years prior to the Original Execution Date
or ceased operations at a facility so as to become subject to section 4062(e) of
ERISA. Full payment has been made of all amounts which the Company, any of its
Subsidiaries or any Company ERISA Affiliate is required or committed to pay to
each of the Company Plans and Company Benefit Plans prior to or as of the
Effective Time.
(d) True and complete copies of each Company Plan, Company Benefit Plan,
related trust agreements, annuity contracts, determination letters, the most
recent determination letter request, summary plan descriptions, annual reports
on Form 5500, Form 990, actuarial reports and PBGC Forms 1 for the most recent
three (3) plan years, and each plan, agreement, instrument and commitment
referred to herein has been previously furnished to Holdings. The annual reports
on Form 5500 and Form 990 and actuarial statements furnished to the Company
fully and accurately set forth the financial and actuarial condition of the
respective Company Plan or Company Benefit Plan, as may be applicable.
(e) The aggregate present value of all accrued benefits, including the
maximum value of all subsidized benefits, pursuant to each Company Plan subject
to Title IV of ERISA, determined on the basis of current participation and
projected compensation for active participants, and earnings, mortality and
other actuarial assumptions set forth in the most recent actuarial report for
Company Plan does not exceed the current fair market value of Company Plan's
assets.
(f) None of the Company, any of its Subsidiaries or any Company ERISA
Affiliate has incurred any liability to the PBGC, including as a result of the
voluntary or involuntary termination of any Company Plan which is subject to
Title IV of ERISA. There is currently no active filing by the Company, its
Subsidiaries or any Company ERISA Affiliate with the PBGC (and no proceeding has
been commenced by the PBGC and no condition exists, and no event has occurred,
that could constitute grounds for the termination of any Company Plan by the
PBGC) to terminate any Company Plan which is subject to Title IV of ERISA and
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which has been maintained or funded, in whole or in part, by the Company, its
Subsidiaries or any Company ERISA Affiliate.
(g) To the knowledge of the Company or its Subsidiaries, there are no
pending or threatened claims by or on behalf of any of Company Plans or Company
Benefit Plans by any employee or beneficiary covered under any Company Plans or
Company Benefit Plans or otherwise involving any Company Plan or Company Benefit
Plan (other than routine claims for benefits).
(h) With respect to each Company Plan which is a Multiemployer Plan
covering employees of the Company, any of its Subsidiaries or any Company ERISA
Affiliate: (i) none of the Company, such Subsidiary or such Company ERISA
Affiliate would incur any withdrawal liability on a complete withdrawal from
each such Company Plan as of the Effective Date, under applicable laws and
conditions of each such Company Plan and the applicable provisions of law; (ii)
none of the Company, its Subsidiaries or any Company ERISA Affiliate has made or
suffered a "complete withdrawal" or a "partial withdrawal", as such terms are
respectively defined in sections 4203 and 4205 of ERISA; (iii) none of the
Company, its Subsidiaries or any Company ERISA Affiliate has any contingent
liability under section 4204 of ERISA; and (iv) no such Company Plan is in
reorganization as defined in section 4241 of ERISA and no circumstances exist
which present a material risk of any such Company Plan going into
reorganization.
(i) With respect to employees of the Company and its Subsidiaries, the
Company and its Subsidiaries are and have been in compliance with all applicable
laws respecting employment and employment practices, terms and conditions of
employment and wages and hours, including, without limitation, any such laws
respecting employment discrimination, occupational safety and health, and unfair
labor practices.
(j) No breach of any of the foregoing representations and warranties in
this Section 3.17 shall be deemed to exist unless such breach would have a
Company Material Adverse Effect.
Section 3.18 Environmental Matters. Except as set forth in the Company
Disclosure Schedule, the Company and its Subsidiaries are and at all times have
been, and all real property currently or, to the Company's knowledge,
previously, owned, leased, occupied, used by or under the control of the Company
or any of its Subsidiaries and all operations or activities of the Company and
its Subsidiaries (including, without limitation, those conducted on or taking
place at any of such real property) are and, to the knowledge of the Company, at
all times have been, in compliance with and not subject to any liability or
obligation under any Environmental Law or Environmental Permit except where any
of the foregoing would not have a Company Material Adverse Effect. As used in
this Agreement: "Environmental Laws" means all applicable federal, state or
local laws, rules, regulations or principles of common law relating to
protection of health and safety, pollution, and environmental matters of any
kind whatsoever, including with respect to the storage, treatment, generation,
transportation, spillage, discharge, leakage or other release or threatened
release of any material, substance or waste of any kind whatsoever; and
"Environmental Permits" means any permits, licenses, notifications, consents or
approvals required under any Environmental Law. There is no condition or
circumstance regarding the Company or any of its Subsidiaries or their business
or any such real property or the operations or activities conducted thereon,
which may give rise to a violation of, or liability or obligation under, any
Environmental Law or Environmental Permit which would have a Company Material
Adverse Effect. Neither the Company, any of its Subsidiaries nor, to the
knowledge of the Company, any Person, the acts or omissions of which may be
attributable to, the responsibility of, or be the basis of a liability to, the
Company, has, or has arranged to have, any material, substance or waste
generated, released, treated, stored or disposed of at, or transported to, any
facility or property the remediation or cleanup of which, or the response costs
related thereto, could become or result in a Company Material Adverse Effect.
There are no allegations, claims, demands, citations, notices of violation, or
orders of noncompliance made against, issued to or received by the Company
relating or pursuant to any Environmental Law or Environmental Permit except
those which have been corrected or complied with or which are not material to
the Company, and to the knowledge of the Company no such allegation, claim,
demand, citation, notice of violation or order of noncompliance is threatened,
imminent or likely. No breach of any of the foregoing representations and
warranties in this Section 3.18 shall be deemed to exist unless such breach
would have a Company Material Adverse Effect.
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Section 3.19 Labor Matters. With respect to employees of the Company and
its Subsidiaries: (i) to the knowledge of the Company there is no pending or
threatened unfair labor practice charges or employee grievance charges; (ii)
there is no request for union representation, labor strike, dispute, slowdown or
stoppage actually pending or, to the knowledge of the Company, threatened
against the Company, and there has been no such event during the 18 months
preceding the Original Execution Date; (iii) the Company is not a party to any
collective bargaining agreements; and (iv) except as set out in the Company
Disclosure Schedule, the employment of each of the Company's employees is
terminable at will without cost to the Company except for payments required
under the Company Plans and Company Benefit Plans and payment of accrued
salaries or wages and vacation pay. No employee or former employee has any right
to be rehired by the Company prior to the Company's hiring a person not
previously employed by the Company. The Company is and, since February 2, 1997
has been, in compliance in all material respects with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, including, without limitation, any such laws
respecting employment discrimination, occupational safety and health, and unfair
labor practices, except where such failure to comply would not have a Company
Material Adverse Effect. The Company is not delinquent in payments to any of its
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed by them or any amounts required to be
reimbursed to such employees.
Section 3.20 Affiliate Transactions. Except as set forth in the Company
Disclosure Schedule or as contemplated by the transactions contemplated hereby,
since January 1, 1996, there are no material undischarged Contracts or other
material transactions between the Company or any of its Subsidiaries, on the one
hand, and any (i) officer or director of the Company or any of its Subsidiaries,
(ii) record or beneficial owner of five percent or more of the voting securities
of the Company or (iii) affiliate (as such term is defined in Regulation 12b-2
promulgated under the Exchange Act) of any such officer, director or beneficial
owner, on the other hand (each person described in clauses (i), (ii) and (iii),
a "Related Party").
Section 3.21 Real Estate.
(a) Owned Real Estate. All material real estate owned by the Company (the
"Company Real Estate") is owned in fee simple title, subject only to real estate
taxes not delinquent and to covenants, conditions, restrictions and easements
which are of record and minor irregularities or imperfections of title which do
not in the aggregate materially detract from the value of the Company Real
Estate or interfere with the Company's use or occupancy thereof. Except as set
forth in the Company Disclosure Schedule, none of the Company Real Estate is
subject to any leases or tenancies.
(b) Leased Premises. All real estate leased by the Company (the "Company
Leased Premises") is leased pursuant to written leases, and the Company has
provided to Holdings the original lease and any material amendments thereto and
has otherwise made available to Holdings its records regarding the Company
Leased Premises. To the Company's knowledge, the Company is not in default under
any material term of any agreement relating to the Company Leased Premises nor,
to the Company's knowledge, is any other party thereto in default thereunder,
which in any case would have a Company Material Adverse Effect.
(c) Condemnation. There are no condemnation proceedings pending or, to the
Company's knowledge, threatened with respect to any portion of the Company Real
Estate or the Company Leased Premises.
(d) Condition of Buildings. To the knowledge of the Company, the buildings
and other facilities located on the Company Real Estate and the Company Leased
Premises are free of any patent structural or engineering defects and, to the
Company's knowledge, are free of any latent structural or engineering defects.
Section 3.22 Brokers. Except for fees, commissions and expenses payable to
its financial advisors, Peter J. Solomon Company Limited and to Houlihan, Lokey,
Howard & Zukin with respect to its work in connection with rendering a fairness
opinion with respect to the transactions contemplated by this Agreement, no
broker, finder or financial advisor retained by the Company is entitled to any
brokerage, finder's or other fee or commission from the Company in connection
with the transactions contemplated by this Agreement.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HOLDINGS, SPORTING AND ACQUISITION
Except as set forth in the Holdings Disclosure Schedule delivered by
Holdings to the Company in connection with the execution of the Original
Agreement (the "Holdings Disclosure Schedule") (each section of which qualifies
the correspondingly numbered representation and warranty and any other
representations and warranties to which the disclosure on its face relates),
Holdings, Sporting and Acquisition each represents and warrants, as of the
Original Execution Date and only with respect to facts and circumstances then in
existence (except with respect to Acquisition, including as a Subsidiary of
Holdings, as to which all such representations and warranties are expressly made
as the date hereof and except with respect to Sections 4.5, 4.7, 4.8, 4.13(k)
and 4.23, which are expressly remade as of the date hereof), to the Company as
follows:
Section 4.1 Organization and Good Standing. Each of Holdings and
Acquisition is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power and
authority to carry on its business as it is now being conducted. Holdings is
duly qualified as a foreign corporation to do business, and is in good standing,
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified or in good standing would not have a
material adverse effect, individually or in the aggregate, on the business,
financial condition or results of operations of Holdings and its Subsidiaries
taken as a whole, or, if applicable, the ability of Holdings or Acquisition to
consummate the Merger and the other transactions contemplated by this Agreement
(a "Holdings Material Adverse Effect"). For purposes of this Agreement, a
"Holdings Material Adverse Effect" shall not be deemed to have occurred as a
result of (i) opening of stores, or the announcement of planned store openings,
by competitors or (ii) facts and circumstances unless such facts and
circumstances are of such a fundamental and extraordinary nature that no
reasonable person could dispute that such a "material adverse change" has
occurred. Holdings sole assets are the capital stock of Sporting and
Acquisition. Sporting and Acquisition are Holdings' sole direct Subsidiaries and
Holdings owns 100% of the capital stock of each of Sporting and Acquisition.
Section 4.2 Certificate of Incorporation and By-Laws. Complete and correct
copies of the Certificates of Incorporation and By-laws or equivalent
organizational documents, each as amended to date, of Holdings and each of its
Subsidiaries have been made available to the Company. The Certificates of
Incorporation, By-laws and equivalent organizational documents of Holdings and
each of its Subsidiaries are in full force and effect. Neither Holdings nor any
of its Subsidiaries is in violation of any provision of its Certificate of
Incorporation, By-laws or equivalent organizational documents.
Section 4.3 Capitalization.
(a) As of the Original Execution Date, the authorized capital stock of
Holdings consisted of 1,000,000 shares of Preferred Stock, par value $.01 per
share ("Holdings Preferred Stock"), and 5,000,000 shares of Common Stock, par
value $.01 per share ("Holdings Common Stock"). As of the date hereof, the
authorized capital stock of Holdings consists of 1,000,000 shares of Holdings
Preferred Stock and 8,000,000 shares of Holdings Common Stock. At the close of
business on September 25, 1997, (i) no shares of Holdings Preferred Stock were
outstanding, (ii) 2,749,447 shares of Holdings Common Stock were outstanding and
(iii) 200,650 shares of unissued Holdings Common Stock were subject to issuance
upon the exercise of outstanding stock options listed in the Holdings Disclosure
Schedule. All outstanding shares of Holdings Common Stock are validly issued,
fully paid and nonassessable and not subject to preemptive rights.
(b) As of the Original Execution Date, the authorized capital stock of
Sporting consisted of 1,000 shares of Common Stock, no par value ("Sporting
Common Stock"). At the close of business on September 25, 1997, all 1,000 shares
of Sporting Common Stock were outstanding and held by Holdings. All outstanding
shares of Sporting Common Stock are validly issued, fully paid and nonassessable
and not subject to preemptive rights.
(c) As of the date hereof, the authorized capital stock of Acquisition
consists of 1,000 shares of Common Stock, $.01 par value ("Acquisition Common
Stock"). At the close of business on the date hereof,
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all 1,000 shares of Acquisition Common Stock were outstanding and held by
Holdings. All outstanding shares of Acquisition Common Stock are validly issued,
fully paid and nonassessable and not subject to preemptive rights. Acquisition
is newly-formed and has conducted no business except in connection with the
Merger.
(d) Except as described in this Section 4.3 and as contemplated by this
Agreement: (i) no shares of capital stock or other equity securities of
Holdings, Sporting or Acquisition are authorized, issued or outstanding, or
reserved for issuance and there are no options, warrants or other rights
(including registration rights), agreements, arrangements or commitments of any
character to which Holdings or any of its Subsidiaries is a party relating to
the issued or unissued capital stock or other equity interests of Holdings or
any of its Subsidiaries, requiring Holdings or any of its Subsidiaries to grant,
issue or sell any shares of the capital stock or other equity interests of
Holdings or any of its Subsidiaries by sale, lease, license or otherwise; (ii)
neither Holdings nor any of its Subsidiaries have any obligation, contingent or
otherwise, to repurchase, redeem or otherwise acquire any shares of the capital
stock or other equity interests of Holdings or any of its Subsidiaries; (iii)
neither Holdings nor any of its Subsidiaries, directly or indirectly, owns, or
has agreed to purchase or otherwise acquire, the capital stock or other equity
interests of, or any interest convertible into or exchangeable or exercisable
for such capital stock or such equity interests of, any corporation,
partnership, joint venture or other entity which would be material in value to
Holdings; and (iv) there are no voting trusts, proxies or other agreements or
understandings to which Holdings or any of its Subsidiaries is a party with
respect to the voting of any shares of capital stock or other equity interests
of Holdings or any of its Subsidiaries.
Section 4.4 Holdings Subsidiaries. The Holdings Disclosure Schedule sets
forth a list of each Subsidiary of Holdings; its authorized, issued and
outstanding capital stock or other equity interests; the percentage of such
capital stock or other equity interests owned by Holdings or any Subsidiary of
Holdings, and the identity of such owner; the capital stock reserved for future
issuance pursuant to outstanding options or other agreements; and the identity
of all parties to any such option or other agreement. Each Subsidiary of
Holdings is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation or organization. Each
Subsidiary of Holdings has all requisite corporate power and authority to carry
on its business as it is now being conducted. Each Subsidiary of Holdings is
duly qualified as a foreign corporation or organization authorized to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary, except where the failure to be so qualified or in
good standing would not have a Holdings Material Adverse Effect. All of the
outstanding shares of capital stock or other ownership interests in each of
Holdings' Subsidiaries have been validly issued, and are fully paid,
nonassessable and are owned by Holdings or another Subsidiary of Holdings free
and clear of all Liens, and are not subject to preemptive rights created by
statute, such Subsidiary's respective Certificate of Incorporation or By-laws or
any agreement to which such Subsidiary is a party.
Section 4.5 Corporate Authority.
(a) Each of Holdings, Sporting and Acquisition has the requisite corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Holdings, Sporting and Acquisition and the consummation by Holdings, Sporting
and Acquisition of the transactions contemplated hereby have been duly
authorized by their respective Board of Directors and stockholders and no other
corporate action on the part of Holdings, Sporting or Acquisition is necessary
to authorize the execution and delivery by Holdings, Sporting and Acquisition of
this Agreement and the consummation by them of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by Holdings,
Sporting and Acquisition and constitutes a valid and binding agreement of
Holdings, Sporting and Acquisition and is enforceable against Holdings, Sporting
and Acquisition in accordance with its terms, except to the extent that (i) such
enforcement may be subject to any bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other laws, now or hereafter in effect,
relating to or limiting creditors' rights generally and (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defense, and to the discretion of the court before which
any proceeding therefor may be brought. The preparation of the Registration
Statement to be filed with the SEC has been duly authorized by the Board of
Directors of Holdings.
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(b) Prior to the execution and delivery of this Agreement, the Boards of
Directors of Holdings, Sporting and Acquisition have (i) approved this Agreement
and the Merger and the other transactions contemplated hereby, (ii) determined
that the transactions contemplated hereby are fair to and in the best interests
of the Holdings and the holders of Holdings Common Stock and (iii) determined to
recommend this Agreement, the Merger and the other transactions contemplated
hereby to their respective stockholders for approval and adoption. This
Agreement and the transactions contemplated hereby have been duly approved and
adopted by the affirmative vote of the holders of a majority of the outstanding
shares of Holdings Common Stock and by the sole stockholder of each of Sporting
and Acquisition in accordance with Sections 228 and 251 of the DGCL and Sections
7-108-202 and 7-107-104 of the CBCA, as applicable, and no further vote of the
holders of any class or series of Holdings', Sporting's or Acquisition's capital
stock is necessary to approve, adopt and consummate this Agreement or the
transactions contemplated hereby. Holdings, Sporting and Acquisition covenant
and agree to timely provide any and all notices and other information and to
take any other action pursuant to the DGCL and the CBCA, as applicable, that may
be required as a result of such approvals.
Section 4.6 Compliance with Applicable Law. Except as disclosed in the
Holdings Disclosure Schedule, (i) each of Holdings and its Subsidiaries holds,
and is in compliance with the terms of, all permits, licenses, exemptions,
orders and approvals of all Governmental Entities necessary for the conduct of
their respective businesses ("Holdings Permits"), except for failures to hold or
to comply with such permits, licenses, exemptions, orders and approvals which
would not have a Holdings Material Adverse Effect, (ii) with respect to the
Holdings Permits, to the knowledge of Holdings no action or proceeding is
pending that would reasonably be expected to have a Holdings Material Adverse
Effect, (iii) the business of Holdings and its Subsidiaries is being conducted
in compliance with all Applicable Laws, except for violations or failures to so
comply that would not have a Holdings Material Adverse Effect, and (iv) to the
knowledge of Holdings, no investigation or review by any Governmental Entity
with respect to Holdings or its Subsidiaries is pending or threatened, other
than, in each case, those which would not reasonably be likely to have a
Holdings Material Adverse Effect.
Section 4.7 Non-contravention. Except as set forth on the Holdings
Disclosure Schedule, the execution and delivery of this Agreement do not, and
the consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, (i) result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to the loss of a
material benefit under any Contract applicable to Holdings or any of its
Subsidiaries, or result in the creation of any Lien upon any of the properties
or assets of Holdings or any of its Subsidiaries, (ii) conflict or result in any
violation of any provision of the Certificate of Incorporation or By-Laws or
other equivalent organizational document, in each case as amended, of Holdings
or any of its Subsidiaries, (iii) subject to the governmental filings referenced
in clause (i) of Section 4.8, conflict with or violate any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Holdings or
any of its Subsidiaries or any of their respective properties or assets, other
than, in the case of clauses (i) and (iii), any such violations, conflicts,
defaults, rights, losses or Liens that, individually or in the aggregate, would
not have a Holdings Material Adverse Effect.
Section 4.8 Government Approvals; Required Consents. No filing or
registration with, or authorization, consent or approval of, any Governmental
Entity is required by or with respect to Holdings or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by Holdings,
Sporting or Acquisition or is necessary for the consummation of the transactions
contemplated hereby (including, without limitation, the Merger) except: (i) in
connection, or in compliance, with the provisions of the HSR Act, the Securities
Act, the Exchange Act, any state securities or "Blue Sky" law, (ii) for the
filing of a Certificate of Merger with the Secretary of State of the State of
Delaware, (iii) for the filing of the Holdings Charter and the Surviving
Corporation Charter with the Secretary of State of the State of Delaware, (iv)
such consents, approvals, authorizations, permits, filings and notifications
listed in the Holdings Disclosure Schedule and (v) such other consents, orders,
authorizations, registrations, declarations and filings the failure of which to
obtain or make would not, individually or in the aggregate, have a Holdings
Material Adverse Effect.
Section 4.9 Financial Statements and Other Documents. The Holdings
Disclosure Schedule contains complete and accurate copies of the audited
consolidated balance sheets, consolidated statements of income,
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retained earnings and cash flows and notes to consolidated financial statements
(together with any supplementary information thereto) of Holdings, all as of and
for the fiscal years ended December 31, 1994, January 6, 1996 and January 4,
1997. The Holdings Disclosure Schedule also contains complete and accurate
copies of the unaudited consolidated balance sheets, consolidated statements of
income, retained earnings and cash flows (together with any supplementary
information thereto) for the quarterly periods with respect to the fiscal years
ended January 6, 1996 and January 4, 1997. The Holdings Disclosure Schedule also
contains complete and accurate copies of the unaudited consolidated balance
sheet, consolidated statements of income, retained earnings and cash flows
(together with any supplementary information thereto) of Holdings, all as of and
for the first and second fiscal quarters of 1997 and the four week period ended
August 2, 1997 (all of the foregoing financial statements, collectively, the
"Holdings Financial Statements"). The Holdings Financial Statements fairly
present, in all material respects, the consolidated financial position of
Holdings and its consolidated Subsidiaries, as of and for the respective dates
thereof and the consolidated results of their operations and their consolidated
cash flows for the respective periods then ended (subject, in the case of the
unaudited statements, to normal year-end audit adjustments and to any other
adjustments described therein) in conformity with GAAP (except, in the case of
the unaudited statements, for the omission of normal and customary footnote
disclosures required by GAAP, none of which would materially affect such
Financial Statements) applied on a consistent basis during the periods involved
(except as may be indicated therein or in the notes thereto). Since January 4,
1997, Holdings has not made any change in the accounting practices or policies
applied in the preparation of its financial statements, except as may be
required by GAAP. Holdings' draft registration statement on Form S-1 dated
September 5, 1997 does not contain any material misstatement or omission which
would make the statements made therein, in light of the circumstances under
which they were made, materially misleading with respect to the historical
description of Holdings' business and operations described therein.
Section 4.10 Absence of Certain Changes or Events. Except to the extent
disclosed in the Holdings Disclosure Schedule, since January 4, 1997 Holdings
and its Subsidiaries have conducted their businesses and operations in the
ordinary and usual course consistent with past practice and there has not
occurred (i) any event, condition or occurrence having or that would reasonably
be expected to have, individually or in the aggregate, a Holdings Material
Adverse Effect; (ii) any damage, destruction or loss (whether or not covered by
insurance) having or which would reasonably be expected to have, individually or
in the aggregate, a Holdings Material Adverse Effect; or (iii) any declaration,
setting aside or payment of any dividend or distribution of any kind by Holdings
on any class of its capital stock.
Section 4.11 Actions and Proceedings. Except as set forth in the Holdings
Disclosure Schedule, there are no outstanding orders, judgments, injunctions,
awards or decrees of any Governmental Entity against Holdings or any of its
Subsidiaries, any of their properties, assets or business, or, to the knowledge
of Holdings, any of Holdings' or its Subsidiaries' current or former directors
or officers or any other person whom Holdings or any of its Subsidiaries has
agreed to indemnify, that would reasonably be expected to have, individually or
in the aggregate, a Holdings Material Adverse Effect. Except as set forth in the
Holdings Disclosure Schedule, to the knowledge of Holdings, there are no
actions, suits or legal, administrative, regulatory or arbitration proceedings
pending or, threatened against Holdings or any of its Subsidiaries, any of their
properties, assets or business, or, to the knowledge of Holdings, any of
Holdings' or its Subsidiaries' current or former directors or officers or any
other person whom Holdings or any of its Subsidiaries has agreed to indemnify,
that would reasonably be expected to have, individually or in the aggregate, a
Holdings Material Adverse Effect. To the knowledge of Holdings, there are no
facts or circumstances specific to Holdings which if known to a third party
would reasonably be expected to result in such a suit or proceeding which could
be expected to have a Holdings Material Adverse Effect.
Section 4.12 Contracts. Each Contract entered into by Holdings or any of
its Subsidiaries is valid, binding and enforceable and in full force and effect,
except where failure to be valid, binding and enforceable and in full force and
effect would not reasonably be expected to have a Holdings Material Adverse
Effect and there are no defaults by Holdings or any of its Subsidiaries or, to
the knowledge of Holdings, another party thereto, thereunder, except those
defaults that would not reasonably be expected to have a Holdings Material
Adverse Effect. Except as set forth in the Holdings Disclosure Schedule, neither
Holdings nor any of its
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Subsidiaries is a party to or bound by any non-competition agreement or any
other agreement or obligation which purports to limit in any material respect
the manner in which, or the localities in which, Holdings or any such Subsidiary
is entitled to conduct all or any material portion of the business of Holdings
and its Subsidiaries taken as a whole. All Contracts which are material to the
business, financial condition, results of operations or prospects of Holdings
and its Subsidiaries taken as a whole, are listed in the Holdings Disclosure
Schedule.
Section 4.13 Taxes.
(a) There have been properly completed and filed on a timely basis and in
correct form all Returns required to be filed by Holdings and any of its
Subsidiaries. As of the time of filing, the Returns correctly reflected the
facts regarding the income, business, assets, operations, activities, status or
other matters of Holdings or its Subsidiary or any other information required to
be shown thereon. An extension of time within which to file any Return which has
not been filed has not been requested or granted.
(b) With respect to all amounts in respect of Taxes imposed upon Holdings
and any of its Subsidiaries, or for which Holdings or any of its Subsidiaries is
or could be liable, whether to taxing authorities (as, for example, under law)
or to other persons or entities (as, for example, under tax allocation
agreements), with respect to all taxable periods or portions of periods ending
on or before the Closing Date, all applicable tax laws and agreements have been
fully complied with, and all amounts required to be paid by Holdings or any of
its Subsidiaries, to taxing authorities or others, on or before the Original
Execution Date have been paid.
(c) Except as set forth in the Holdings Disclosure Schedule, no issues have
been raised (and are currently pending) by any taxing authority in connection
with any of the Returns filed by Holdings or any of its Subsidiaries. No waivers
of statutes of limitation with respect to such Returns have been given by or
requested from Holdings or any of its Subsidiaries. The Holdings Disclosure
Schedule sets forth (i) the taxable years of Holdings and its Subsidiaries as to
which the respective statutes of limitations with respect to Taxes have not
expired, and (ii) with respect to such taxable years sets forth those years for
which examinations have been completed, those years for which examinations are
presently being conducted, those years for which examinations have not been
initiated, and those years for which required Returns have not yet been filed.
All deficiencies asserted or assessments made as a result of any examinations
have been fully paid, or are fully reflected as a liability in the Holdings
Financial Statements or are being contested in good faith and an adequate
reserve therefor has been established and is fully reflected in the Holdings
Financial Statements.
(d) Except as set forth in the Holdings Disclosure Schedule, neither
Holdings nor any of its Subsidiaries is a party to or bound by any tax
indemnity, tax sharing or tax allocation agreement.
(e) Neither Holdings nor any of its Subsidiaries has agreed to make, and is
not required to make, any adjustment under section 481(a) of the Code by reason
of a change in accounting method or otherwise.
(f) Neither Holdings nor any of its Subsidiaries is a party to any
agreement, contract, arrangement or plan that has resulted or would result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of section 280G of the Code.
(g) The unpaid Taxes of Holdings and its Subsidiaries do not exceed (and at
the Effective Time will not exceed) the reserve for tax liability with respect
to Holdings and its Subsidiaries (excluding any reserve for deferred Taxes to
the extent such reserve reflects timing differences between book and tax income)
set forth or included in the latest Holdings Financial Statements as adjusted in
accordance with the past practices of Holdings and its Subsidiaries for items of
income, gain, loss and expense arising and accruals and transactions occurring
after the latest balance sheet date in such Holdings Financial Statements.
(h) The transactions contemplated herein will not result in restorations
into income of amounts deferred under the consolidated return regulations, such
as those relating to intercompany transactions, excess loss accounts, and the
like.
(i) The transactions contemplated herein are not subject to any tax
withholding provisions of law or regulations other than with respect to foreign
shareholders.
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(j) No breach of any of the representations and warranties contained in
paragraphs (a) through (i) of this Section 4.13 shall be deemed to exist unless
such breach would have a Holdings Material Adverse Effect.
(k) Until April 20, 1994, Holdings was a wholly-owned, indirect subsidiary
of TCH Corporation, a Delaware corporation, which became Thrifty Payless
Holdings, Inc., a Delaware corporation ("Thrifty"). Effective December 12, 1996,
Thrifty was merged with and into Rite Aid Corporation, a Delaware corporation,
pursuant to Section 251 of the DGCL. Each of Holdings, Sporting and Acquisition
represents, warrants and agrees that Holdings is in control of each of Sporting
and Acquisition within the meaning of Section 368(c) of the Code and that each
of Holdings, Sporting and Acquisition has not and will not, and that the
Surviving Corporation will not (and the Surviving Corporation hereby agrees that
it will not), take, or permit any of their Subsidiaries to take, any action that
would cause the Merger not to be a tax-free reorganization under Section
368(a)(2)(E) of the Code, including, without limitation, by reason of any
violation of the continuity-of-proprietary-interest doctrine or the
continuity-of-business-enterprise doctrine, or a merger of the Company with and
into another corporation or entity with such other corporation or entity
surviving the merger, if such merger would cause the Merger not to be a tax-free
reorganization under Section 368(a)(2)(E) of the Code. Each of Holdings,
Sporting and Acquisition represent and warrant that they have no plan or
intention to effect a merger of the Company with an into another corporation or
entity with such other corporation or entity surviving such merger.
Notwithstanding anything in this Agreement to the contrary, this Section 4.13(k)
shall survive the Closing and shall apply without regard to any disclosure on
the Holdings Disclosure Schedule or otherwise made on behalf of Holdings.
Stockholders of the Company are each third party beneficiaries of this Section
4.13(k) and may seek relief for breach hereof in their own names.
(l) Holdings will not make any extraordinary dividend payments to its
stockholders prior to the Effective Time, or in contemplation of the Merger.
(m) At the Effective Time, the fair market value of the assets of each of
Holdings, Sporting and Acquisition will exceed the sum of its liabilities, plus
the amount of liabilities of others, if any, to which such assets are subject.
Section 4.14 Title to Properties; Encumbrances. Except as described in the
following sentence, each of Holdings and its Subsidiaries has good, valid and,
in the case of real property, marketable title to, or a valid leasehold interest
in, all of its material properties and assets (real, personal, tangible and
intangible), including, without limitation, all such properties and assets
reflected in the consolidated balance sheet of Holdings and its Subsidiaries as
of January 4, 1997 included in the Holdings Financial Statements (except for
properties and assets disposed of in the ordinary course of business and
consistent with past practices since that date), except for such title or
interest the failure of which to have would not have, individually or in the
aggregate, a Holdings Material Adverse Effect. None of such properties or assets
are subject to any Liens (whether absolute, accrued, contingent or otherwise),
except (i) as set forth in the Holdings Disclosure Schedule or (ii)
imperfections of title and Liens, if any, which do not detract from the value of
the property or assets subject thereto in a manner material to Holdings and do
not materially impair the business or operations of Holdings and its
Subsidiaries taken as a whole.
Section 4.15 Intellectual Property. Holdings and its Subsidiaries own or
have a valid license to use all inventions, patents, trademarks, service marks,
trade names, copyrights, trade secrets, technology and know-how, software and
other intellectual property rights (collectively, the "Holdings Intellectual
Property") necessary to carry on their respective businesses as currently
conducted except where the failure to own or have a valid license to use such
would not have a Holdings Material Adverse Effect; and neither Holdings nor any
such Subsidiary has received any notice of infringement of or conflict with,
and, to Holdings' knowledge, there are no infringements of or conflicts with,
the rights of others with respect to the use of any of the Holdings Intellectual
Property that, in either such case, has had or would reasonably be expected to
have, individually or in the aggregate, a Holdings Material Adverse Effect.
Section 4.16 Information in Registration Statement. None of the
information supplied or to be supplied by Holdings for inclusion in the
Registration Statement will at the time it becomes effective, at the time of the
initial mailing of the Proxy Statement and any amendments or supplements thereto
or at the time of the meeting of the Company's stockholders contemplated by this
Agreement contain any untrue statement of a
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material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Registration
Statement, as of its effective date, will comply as to form in all material
respects with the requirements of the Securities Act, and the rules and
regulations promulgated thereunder. Notwithstanding the foregoing, Holdings
makes no representations with respect to any statement in the foregoing
documents based upon and conforming to information supplied by the Company for
inclusion therein.
Section 4.17 Employee Benefit Plans; ERISA.
(a) None of Holdings, any of its Subsidiaries or any affiliate of Holdings
or any of its Subsidiaries as determined under Code section 414(b), (c), (m) or
(o) ("Holdings ERISA Affiliate") maintains, administers or contributes to, or
has any liability with respect to, nor do the employees of Holdings, its
Subsidiaries or any Holdings ERISA Affiliate receive or expect to receive as a
condition of employment, benefits pursuant to:
(A) any employee benefit plan (as defined in section 3(3) of ERISA) (each
such plan, a "Holdings Plan"), including, without limitation, any Multiemployer
Plan; or
(B) any bonus, deferred compensation, performance compensation, stock
purchase, stock option, stock appreciation, severance, salary continuation,
vacation, sick leave, holiday pay, fringe benefit, personnel policy,
reimbursement program, incentive, insurance, welfare or similar plan, program,
policy or arrangement (each such plan, a "Holdings Benefit Plan");
other than those Holdings Plans and Holdings Benefit Plans listed in the
Holdings Disclosure Schedule. Except as required by section 4980B of the Code,
none of Holdings, any of its Subsidiaries or any Holdings ERISA Affiliate has
promised any former employee or other individual not employed by Holdings, any
of its Subsidiaries or any Holdings ERISA Affiliate medical or other benefit
coverage and none of Holdings, any of its Subsidiaries or any Holdings ERISA
Affiliate maintains or contributes to any plan, program, policy or arrangement
providing medical or life insurance benefits to former employees, their spouses
or dependents or any other individual not employed by Holdings, any of its
Subsidiaries or any Holdings ERISA Affiliate. No Holdings Plan or Holdings
Benefit Plan has any provision which could increase or accelerate benefits or
increase the liability of Holdings or any of its Subsidiaries as a result of any
transaction contemplated by this Agreement.
(b) All Holdings Plans and Holdings Benefit Plans which are not
Multiemployer Plans and any related trust agreements or annuity contracts (or
any related trust instruments) comply with and are and have been operated in
accordance with each applicable provision of ERISA and the Code in all material
respects. Each Holdings Plan, as amended to date, which is not a Multiemployer
Plan, that is intended to be qualified under sections 401(a) and 501(a) of the
Code has been determined to be so qualified by the IRS, has been submitted to
the IRS for a determination with respect to such qualified status, or the
remedial amendment period with respect to such Holdings Plan will not have
expired prior to the Effective Time, and no event has occurred, either by reason
of any action or failure to act, which would cause the loss of any such
qualification.
(c) Neither any Holdings Plan fiduciary nor any Holdings Plan (excluding
each Multiemployer Plan and its fiduciaries) has engaged in any transaction in
violation of section 406 of ERISA or any "prohibited transaction" (as defined in
section 4975(c)(1) of the Code) unless exempt under section 408 of ERISA or
section 4975 of the Code and there has been no "reportable event" (as defined in
section 4043 of ERISA),with respect to any Holdings Plan which is not a
Multiemployer Plan, for which the 30-day notice requirement has not been waived.
None of Holdings, any of its Subsidiaries or any Holdings ERISA Affiliate has
incurred or suffered to exist any "accumulated funding deficiency" (as defined
in section 302 of ERISA) whether or not waived by the IRS, involving any
Holdings Plan subject to section 412 of the Code or Part 3 of Subtitle B of
Title I of ERISA. No withdrawals have occurred so as to cause any Holdings Plan
to become subject to the provisions of section 4063 of ERISA, and none of
Holdings, any of its Subsidiaries or any Holdings ERISA Affiliate has ceased
making contributions to any employee benefit plan subject to section 4064(a) of
ERISA to which Holdings, any of its Subsidiaries or any Holdings ERISA Affiliate
made contributions during the six (6) years prior to the Original Execution Date
or ceased operations at a facility so as to become subject to
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section 4062(e) of ERISA. Full payment has been made of all amounts which
Holdings, any of its Subsidiaries or any Holdings ERISA Affiliate is required or
committed to pay to each of the Holdings Plans and Holdings Benefit Plans prior
to or as of the Effective Time.
(d) True and complete copies of each Holdings Plan, Holdings Benefit Plan,
related trust agreements, annuity contracts, determination letters, the most
recent determination letter request, summary plan descriptions, annual reports
on Form 5500, Form 990, actuarial reports and PBGC Forms 1 for the most recent
three (3) plan years, and each plan, agreement, instrument and commitment
referred to herein has been previously furnished to the Company. The annual
reports on Form 5500 and Form 990 and actuarial statements furnished to the
Company fully and accurately set forth the financial and actuarial condition of
the respective Holdings Plan or Holdings Benefit Plan, as may be applicable.
(e) The aggregate present value of all accrued benefits, including the
maximum value of all subsidized benefits, pursuant to each Holdings Plan subject
to Title IV of ERISA, determined on the basis of current participation and
projected compensation for active participants, and earnings, mortality and
other actuarial assumptions set forth in the most recent actuarial report for
Holdings Plan does not exceed the current fair market value of Holdings Plan's
assets.
(f) None of Holdings, any of its Subsidiaries or any Holdings ERISA
Affiliate has incurred any liability to the PBGC, including as a result of the
voluntary or involuntary termination of any Holdings Plan which is subject to
Title IV of ERISA. There is currently no active filing by Holdings, its
Subsidiaries or any Holdings ERISA Affiliate with the PBGC (and no proceeding
has been commenced by the PBGC and no condition exists, and no event has
occurred, that could constitute grounds for the termination of any Holdings Plan
by the PBGC) to terminate any Holdings Plan which is subject to Title IV of
ERISA and which has been maintained or funded, in whole or in part, by Holdings,
its Subsidiaries or any Holdings ERISA Affiliate.
(g) To the knowledge of Holdings or its Subsidiaries, there are no pending
or threatened claims by or on behalf of any of Holdings Plans or Holdings
Benefit Plans by any employee or beneficiary covered under any Holdings Plans or
Holdings Benefit Plans or otherwise involving any Holdings Plan or Holdings
Benefit Plan (other than routine claims for benefits).
(h) With respect to each Holdings Plan which is a Multiemployer Plan
covering employees of Holdings, any of its Subsidiaries or any Holdings ERISA
Affiliate: (i) none of Holdings, such Subsidiary or such Holdings ERISA
Affiliate would incur any withdrawal liability on a complete withdrawal from
each such Holdings Plan as of the Effective Date, under applicable laws and
conditions of each such Holdings Plan and the applicable provisions of law; (ii)
none of Holdings, its Subsidiaries or any Holdings ERISA Affiliate has made or
suffered a "complete withdrawal" or a "partial withdrawal", as such terms are
respectively defined in sections 4203 and 4205 of ERISA; (iii) none of Holdings,
its Subsidiaries or any Holdings ERISA Affiliate has any contingent liability
under section 4204 of ERISA; and (iv) no such Holdings Plan is in reorganization
as defined in section 4241 of ERISA and no circumstances exist which present a
material risk of any such Holdings Plan going into reorganization.
(i) With respect to employees of Holdings and its Subsidiaries, Holdings
and its Subsidiaries are and have been in compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, including, without limitation, any such laws
respecting employment discrimination, occupational safety and health, and unfair
labor practices.
(j) No breach of any of the foregoing representations and warranties in
this Section 4.17 shall be deemed to exist unless such breach would have a
Holdings Material Adverse Effect.
4.18 Environmental Matters. Except as set forth on the Holdings Disclosure
Schedule, Holdings and its Subsidiaries are and at all times have been, and all
real property currently or, to Holdings knowledge, previously, owned, leased,
occupied, used by or under the control of Holdings or any of its Subsidiaries
and all operations or activities of Holdings and its Subsidiaries (including,
without limitation, those conducted on or taking place at any of such real
property) are and, to the knowledge of Holdings, at all times have been, in
compliance with and not subject to any liability or obligation under any
Environmental Law or Environmental Permit except where any of the foregoing
would not have a Holdings Material Adverse Effect. There is no
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condition or circumstance regarding Holdings or any of its Subsidiaries or its
business or any such real property or the operations or activities conducted
thereon, which may give rise to a violation of, or liability or obligation
under, any Environmental Law or Environmental Permit which would have a Holdings
Material Adverse Effect. Neither Holdings, any of its Subsidiaries nor, to the
knowledge of Holdings, any Person, the acts or omissions of which may be
attributable to, the responsibility of, or be the basis of a liability to,
Holdings, has, or has arranged to have, any material, substance or waste
generated, released, treated, stored or disposed of at, or transported to, any
facility or property the remediation or cleanup of which, or the response costs
related thereto, could become or result in a Holdings Material Adverse Effect.
There are no allegations, claims, demands, citations, notices of violation, or
orders of noncompliance made against, issued to or received by Holdings relating
or pursuant to any Environmental Law or Environmental Permit except those which
have been corrected or complied with or are not material to Holdings, and to the
knowledge of Holdings no such allegation, claim, demand, citation, notice of
violation or order of noncompliance is threatened, imminent or likely. No breach
of any of the foregoing representations and warranties contained in this Section
4.18 shall be deemed to exist unless such breach would have a Holdings Material
Adverse Effect.
Section 4.19 Labor Matters. With respect to employees of Holdings and its
Subsidiaries: (and the following references to Holdings are deemed to include
the Subsidiaries): (i) to the knowledge of Holdings, there is no pending or
threatened unfair labor practice charges or employee grievance charges; (ii)
there is no request for union representation, labor strike, dispute, slowdown or
stoppage actually pending or, to the knowledge of Holdings, threatened against
Holdings, and there has been no such event during the 18 months preceding the
Original Execution Date; (iii) Holdings is not a party to any collective
bargaining agreements; and (iv) except as set out in the Holdings Disclosure
Schedule, the employment of each of Holdings' employees is terminable at will
without cost to Holdings except for payments required under the Holdings Plans
and Holdings Benefit Plans and payment of accrued salaries or wages and vacation
pay. No employee or former employee has any right to be rehired by Holdings
prior to Holdings' hiring a person not previously employed by Holdings. Holdings
is and, since January 4, 1997 has been, in compliance in all material respects
with all applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, including, without limitation,
any such laws respecting employment discrimination, occupational safety and
health, and unfair labor practices, except where such failure to comply would
not have a Holdings Material Adverse Effect. Holdings is not delinquent in
payments to any of its employees for any wages, salaries, commissions, bonuses
or other direct compensation for any services performed by them or any amounts
required to be reimbursed to such employees.
Section 4.20 Affiliate Transactions. Except as set forth in the Holdings
Disclosure Schedule or as contemplated by the transactions contemplated hereby,
since January 1, 1996, there are no material undischarged Contracts or other
material transactions between Holdings or any of its Subsidiaries, on the one
hand, and any (i) officer or director of Holdings or any of its Subsidiaries,
(ii) record or beneficial owner of five percent or more of the voting securities
of Holdings or (iii) affiliate (as such term is defined in Regulation 12b-2
promulgated under the Exchange Act) of any such officer, director or beneficial
owner, on the other hand.
Section 4.21 Real Estate.
(a) Owned Real Estate. All material real estate owned by Holdings and its
Subsidiaries (the "Holdings Real Estate") is owned in fee simple title, subject
only to real estate taxes not delinquent and to covenants, conditions,
restrictions and easements which are of record and minor irregularities or
imperfections of title which do not in the aggregate materially detract from the
value of the Holdings Real Estate or interfere with Holdings' use or occupancy
thereof. Except as set forth in the Holdings Disclosure Schedule, none of the
Holdings' Real Estate is subject to any leases or tenancies.
(b) Leased Premises. Except as set forth in the Holdings Disclosure
Schedule, all real estate leased by Holdings and its Subsidiaries (the "Holdings
Leased Premises") is leased pursuant to written leases, and Holdings has
provided to the Company the original lease and any material amendments thereto
and has otherwise made available to the Company its records regarding the
Holdings Leased Premises. To Holdings' knowledge, Holdings is not in default
under any material term of any agreement relating to the Holdings
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Leased Premises nor, to Holdings' knowledge, is any other party thereto in
default thereunder which in any case would have a Holdings Material Adverse
Effect.
(c) Condemnation. There are no condemnation proceedings pending or, to
Holdings' knowledge, threatened with respect to any portion of the Holdings Real
Estate or the Holdings Leased Premises.
(d) Condition of Buildings. To the knowledge of Holdings, the buildings and
other facilities located on the Holdings Real Estate and the Holdings Leased
Premises are free of any patent structural or engineering defects and, to
Holdings' knowledge, are free of any latent structural or engineering defects.
Section 4.22 Brokers. Except for fees, commissions and expenses payable to
its financial advisors, Leonard Green & Associates, L.P., Dain Bosworth
Incorporated and William Blair & Co., no broker, finder or financial adviser is
entitled to any brokerage, finder's or other fee or commission from the Company
or Holdings in connection with the transactions contemplated by this Agreement.
Section 4.23 Solvency. At the Effective Time and after giving effect to
any changes in the Surviving Corporation's assets and liabilities as a result of
the Merger and any financing (or re-financing) incurred in connection therewith
or related thereto and the use of proceeds therefrom, the Surviving Corporation
will not: (i) be insolvent either because its financial condition is such that
the sum of its debts is greater than the fair value of its assets or because the
present fair salable value of its assets will be less than the amount required
to pay its probable liability on its debts (including any legal liability
whether matured or unmatured, liquidated, absolute, fixed, or contingent with
any contingent liability evaluated in light of all the facts and circumstances
existing at the time of such valuation as the amount that can reasonably be
expected to become an actual or matured liability) as they become absolute and
matured: (ii) have unreasonably small capital with which to continue as a going
concern and will not lack sufficient capital for its needs and anticipated
needs; or (iii) have incurred or plan to incur debts beyond its ability to pay
as such debts become absolute and matured. For the purpose of the representation
and warranty contained in this Section 4.23, Holdings, Sporting and Acquisition
shall be entitled to assume that the representations and warranties of the
Company regarding its liabilities and the liabilities of its Subsidiaries are
true and correct in all material respects and that there has been and will be no
material change in the aggregate of the assets or liabilities of the Company
after the date hereof except to the extent Holdings, Sporting and Acquisition
have knowledge to the contrary.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
Section 5.1 Conduct of Business by the Company Pending the Merger. Prior
to the Effective Time, unless Holdings shall otherwise agree in writing (which
agreement shall not be unreasonably withheld) or as otherwise expressly
contemplated by this Agreement, including, without limitation, Article III
hereof, or as set forth in Section 5.1 of the Company Disclosure Schedule, the
Company shall conduct, and cause each of its Subsidiaries to conduct, its
business only in the ordinary and usual course consistent in all material
respects with past practice, and, subject to the remainder of this Section 5.1,
the Company shall use, and cause each of its Subsidiaries to use, its reasonable
efforts to preserve intact the present business organization, keep available the
services of its present officers and key employees, and preserve their existing
business relationships. The Company shall promptly give Holdings written notice
of the existence or occurrence of any condition which might reasonably be
expected to prevent the consummation of the transactions contemplated hereby.
Without limiting the generality of the foregoing, unless Holdings shall
otherwise agree in writing (which agreement shall not be unreasonably withheld),
or as otherwise expressly contemplated by this Agreement or as set forth in
Section 5.1 of the Company Disclosure Schedule, prior to the Effective Time the
Company shall not, nor shall it permit any of its Subsidiaries to:
(a)(i) amend its Certificate of Incorporation, as amended, By-Laws or other
organizational documents, (ii) split, combine or reclassify any shares of its
outstanding capital stock, (iii) declare, set aside or pay any dividend or other
distribution payable in cash, stock or property, or (iv) directly or indirectly
redeem or otherwise acquire any shares of its capital stock or shares of the
capital stock of any of its Subsidiaries;
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(b) authorize for issuance, issue (except upon the exercise of outstanding
stock options) or sell or agree to issue or sell any shares of, or rights to
acquire or convertible into any shares of, its capital stock or shares of the
capital stock of any of its Subsidiaries (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase or
otherwise), including the granting of options pursuant to the Company's Stock
Plans other than grants of options to newly appointed store-level managers in
the ordinary course of business and consistent with past practice;
(c)(i) merge, combine or consolidate with another entity, (ii) acquire or
purchase an equity interest in or a substantial portion of the assets of another
corporation, partnership or other business organization or otherwise acquire any
assets outside the ordinary course of business and consistent with past practice
and not to exceed $25,000 or otherwise enter into any material contract,
commitment or transaction either outside the ordinary course of business and
consistent with past practice or exceeding $25,000 individually and $250,000 in
the aggregate (provided that such dollar limitations do not apply to a contract
that allows the Company to terminate within 30 days or less at no cost) or (iii)
sell, lease, license, waive, release, transfer, encumber or otherwise dispose of
any of its material assets (x) to a Related Party, (y) other than in the
ordinary course of business and consistent with past practices and not to exceed
$350,000 in the aggregate other than as described on Schedule 5.1(c), or (z)
sales of inventory in the ordinary course of business consistent with past
practice;
(d) (i) incur, assume or prepay any material indebtedness or any other
material liabilities other than accounts payable, payments under bank credit
facilities existing on the Original Execution Date and obligations relating to
the acquisition of inventory, in each case in the ordinary course of business
and consistent with past practice, (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise) for
the obligations of any other person other than a Subsidiary of the Company or
(iii) make any loans, advances or capital contributions to, or investments in,
(x) any other person except to satisfy legal or contractual obligations
(existing on the Original Execution Date) of any Subsidiary of the Company, (y)
a Related Party except in a manner consistent with past practice with respect to
the "due to/due from related party" account contained in the Company's financial
statements described in Section 3.9 or (z) any other person other than in the
ordinary course of business and consistent with past practices and not to exceed
$25,000 individually other than as described on Schedule 5.1(d);
(e) pay, satisfy, discharge or settle any material claim, liabilities or
obligations (absolute, accrued, contingent or otherwise), other than those (i)
reflected or reserved against in the Company's August 31, 1997 financial
statements (and the notes thereto) described in Section 3.9 but in no event in
an amount greater than $250,000 individually or $350,000 in the aggregate, (ii)
incurred in the ordinary course of business consistent with past practice, or
(iii) which are legally or contractually required to be paid, discharged or
satisfied;
(f) modify or amend, or waive any benefit of, any non-competition agreement
to which the Company or any of its Subsidiaries is a party;
(g) enter into any new transaction of the type described in Section 3.20 or
modify or amend, extend the due date of any payment with respect to, or waive
any benefit of, any existing transaction described in Section 3.20 except with
respect to transactions with officers and directors as set forth in Section 3.20
of the Company Disclosure Schedule, pursuant to Company Plans or Company Benefit
Plans and rights of officers and directors pursuant to the Company's certificate
of incorporation and by-laws and insurance policies of the Company or any of its
Subsidiaries;
(h) authorize or make capital expenditures, other than (x) for repair and
maintenance, (y) as set forth on Schedule 5.1, or (z) or otherwise not to exceed
$100,000 in the aggregate;
(i) enter into any new lease or purchase of real estate or any material
computer system (or any material components thereof) except for (i) renewal of
existing real estate leases (except for the leases described in Section 3.20)
and (ii) purchases of computer equipment as set forth on Schedule 5.1 or
otherwise not to exceed $100,000 in the aggregate;
(j) permit any insurance policy naming the Company or any Subsidiary of the
Company as a beneficiary or a loss payee to be canceled or terminated other than
in the ordinary course of business and provided that
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replacement policies which the Company deems to be commercially appropriate
under all relevant circumstances are obtainable for such canceled or terminated
policies, provided the Company may renew any existing insurance policy in the
ordinary course of business and consistent with past practices for the
applicable renewal period;
(k)(i) adopt, enter into, terminate or amend in any material respect
(except as may be required by applicable law) any plan for the current or future
benefit or welfare of any director or officer, (ii) increase in any manner the
compensation or fringe benefits of, or pay any bonus to, any director, officer
or employee or (iii) except as contemplated by this Agreement, take any action
to or in any other way secure, or to accelerate or otherwise remove restrictions
with respect to, the payment of compensation or benefits under any employee
plan, agreement, contract, arrangement or other Company Plan other than in the
ordinary course of business, or (iv) hire any new employee at the Company's
corporate office with annual compensation in excess of $40,000;
(l) make any significant change in its accounting or tax policies or
procedures and shall not reverse the amount of any existing reserves unless
necessary to prevent a covenant default under the Credit Agreement, dated as of
September 6, 1996, as subsequently amended, among the Company, BT Commercial
Corporation, as agent, and the lenders identified therein (the "Credit
Agreement"), except in each case as required by law or to comply with GAAP; or
(m) enter into any contract, agreement, commitment or arrangement with
respect to any of the foregoing; provided however, that this Section 5.1 shall
not prohibit the Company nor any of its Subsidiaries from entering into and
performing the Pack Boot Agreement or the Consignment Agreement.
Any action permitted under any exception to a prohibition in this Section 5.1
shall not be prohibited by any other general prohibition in this Section 5.1.
Section 5.2 Conduct of Business by Holdings Pending the Merger. Prior to
the Effective Time, unless the Company shall otherwise agree in writing (which
agreement shall not be unreasonably withheld), or as otherwise expressly
contemplated by this Agreement, including, without limitation, Article IV
hereof, or as set forth in Section 5.2 of the Holdings Disclosure Schedule,
Holdings shall conduct, and cause each of its Subsidiaries to conduct, its
business only in the ordinary and usual course consistent in all material
respects with past practice, and Holdings shall use, and cause each of its
Subsidiaries to use, its reasonable efforts to preserve intact the present
business organization, keep available the services of its present officers and
key employees, and preserve their existing business relationships. Holdings
shall promptly give the Company written notice of the existence or occurrence of
any condition which might reasonably be expected to prevent the consummation of
the transactions contemplated hereby. Without limiting the generality of the
foregoing, unless the Company shall otherwise agree in writing (which agreement
shall not be unreasonably withheld), or as otherwise expressly contemplated by
this Agreement or as set forth in Section 5.2 of the Holdings Disclosure
Schedule, prior to the Effective Time Holdings shall not, nor shall it permit
any of its Subsidiaries to:
(a)(i) except for the filing of the Holdings Charter and the Acquisition
Charter, amend its Certificate of Incorporation, as amended, By-Laws or other
organizational documents, (ii) split, combine or reclassify any shares of its
outstanding capital stock unless all share numbers contained in or contemplated
by this Agreement shall be correspondingly adjusted, (iii) declare, set aside or
pay any dividend or other distribution payable in cash, stock or property, or
(iv) directly or indirectly redeem or otherwise acquire any shares of its
capital stock or shares of the capital stock of any of its Subsidiaries;
(b) authorize for issuance, issue (except upon the exercise of outstanding
stock options) or sell or agree to issue or sell any shares of, or rights to
acquire or convertible into any shares of, its capital stock or shares of the
capital stock of any of its Subsidiaries (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase or
otherwise), except for the granting of options to purchase up to a number of
shares of Holdings Common Stock pursuant to any stock option plan equal to the
number of outstanding Substitute Company Options with an exercise price above
the Closing Price of the Company
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outstanding on the Effective Date divided by 0.275 and such options shall not
exceed 150,000 without the consent of the Company, which consent shall not be
unreasonably withheld;
(c)(i) merge, combine or consolidate with another entity, (ii) acquire or
purchase an equity interest in or a substantial portion of the assets of another
corporation, partnership or other business organization or otherwise acquire any
assets outside the ordinary course of business and consistent with past practice
or otherwise enter into any material contract, commitment or transaction outside
the ordinary course of business and consistent with past practice or (iii) sell,
lease, license, waive, release, transfer, encumber or otherwise dispose of any
of its material assets outside the ordinary course of business and consistent
with past practice;
(d)(i) incur, assume or prepay any material indebtedness or any other
material liabilities other than in each case in the ordinary course of business
and consistent with past practice, (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise) for
the obligations of any other person other than a Subsidiary of Holdings, in each
case other than in the ordinary course of business and consistent with past
practice or (iii) make any loans, advances or capital contributions to, or
investments in, any other person, other than to any Subsidiary of Holdings;
(e) pay, satisfy, discharge or settle any material claim, liabilities or
obligations (absolute, accrued, contingent or otherwise), other than either in
the ordinary course of business and consistent with past practice or pursuant to
mandatory terms of any Holdings Contract in effect on the Original Execution
Date;
(f) modify or amend, or waive any benefit of, any non-competition agreement
to which Holdings or any of its Subsidiaries is a party;
(g) permit any insurance policy naming Holdings or any Subsidiary of
Holdings as a beneficiary or a loss payee to be canceled or terminated other
than in the ordinary course of business and provided that replacement policies
which the Company deems to be commercially appropriate under all relevant
circumstances are obtainable for such canceled or terminated policies;
(h) make any significant change in its accounting or tax policies or
procedures and shall not reverse the amount of any existing reserves, except as
required by law or to comply with GAAP;
(i) acquire any shares of capital stock of the Company; or
(j) enter into any contract, agreement, commitment or arrangement with
respect to any of the foregoing; provided however, that this Section 5.2 shall
not prohibit Holdings nor any of its Subsidiaries from entering into and
performing the Pack Boot Agreement or the Consignment Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 Access and Information.
(a) Each party hereto shall (and shall cause its Subsidiaries and its and
their respective officers, directors, employees, auditors and agents to) afford
to the other party and to such other party's officers, employees, financial
advisors, legal counsel, accountants, consultants and other representatives
(except to the extent not permitted under applicable law as advised by counsel
and except as may be limited by any confidentiality obligation contained in any
contract with a third party) reasonable access during normal business hours
throughout the period prior to the Effective Time to all of its books and
records and its properties, plants and personnel and, during such period, shall
furnish promptly to the other party a copy of each report, schedule and other
document filed or received by it pursuant to the requirements of federal
securities laws. The Company agrees to cooperate reasonably with Holdings with
respect to transition activities prior to the Effective Date, provided that such
activities do not cause any unreasonable interference with the operation of the
Company's business. The Company agrees to provide to Holdings promptly following
the date hereof a true and complete list, as of a current date, of all employees
who are employed by the Company at the Company's headquarters and all other
employees above the store manager level, such list to
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include such employees' salaries, wages, other significant compensation (other
than benefits under the Plans and Employee Benefit Plans), dates of employment
and positions.
(b) Unless otherwise required by law, each party hereto agrees that it
shall hold in confidence all non-public information so acquired in accordance
with the terms of the confidentiality agreements between the Company and
Holdings, dated July 31, 1997.
Section 6.2 No Solicitation.
(a) Prior to the Effective Time, the Company agrees that neither it, any of
its respective Subsidiaries or affiliates, nor any of the respective directors,
executive officers, agents or representatives of the foregoing, will, directly
or indirectly, (i) solicit, initiate or encourage (including by way of
furnishing information) any inquiries or the making of any proposal with respect
to any merger, consolidation or other business combination involving the Company
or any Subsidiary of the Company or the acquisition of all or any significant
part of the assets or capital stock (including but not limited to a majority
voting interest) of the Company or any Subsidiary of the Company (an
"Acquisition Transaction") or (ii) negotiate or otherwise engage in discussions
with any person (other than Holdings and its representatives) with respect to
any Acquisition Transaction, or which may reasonably be expected to lead to a
proposal for an Acquisition Transaction, or enter into any agreement,
arrangement or understanding (including any letter of intent, agreement in
principle or similar agreement) with respect to any such Acquisition
Transaction; provided, however, that, the Company may, in response to a proposal
or inquiry unsolicited after the Original Execution Date, furnish information
to, negotiate or otherwise engage in discussions with any person (pursuant to a
customary confidentiality agreement) which makes or indicates in writing an
intention or desire to make, and with respect to whom the Board of Directors of
the Company has concluded in good faith after consultation with its financial
advisor is reasonably capable of making, a Superior Proposal (as herein
defined), if the Board of Directors of the Company determines in good faith,
after consultation with its outside counsel, that the failure to take such
action would be inconsistent with the fiduciary duties of the Board of Directors
of the Company under applicable law and such proposed Acquisition Transaction
was not solicited by it in, or did not otherwise result from a, breach of this
Section 6.2 and subject to compliance with the other provisions of this Section
6.2; and provided further that notwithstanding anything to the contrary herein
contained, the Board of Directors of the Company may take and disclose to the
Company's stockholders a position contemplated by Rule 14e-2 promulgated under
the Exchange Act, comply with Rule 14d-9 thereunder and make all other
disclosures required by applicable law. Any of the foregoing to the contrary
notwithstanding, the Company may engage in discussions with or provide
information to any person or group that has made a proposal unsolicited after
the Original Execution Date with respect to an Acquisition Transaction for the
limited purpose of determining whether such proposal is, or could lead to, a
Superior Proposal.
(b) Except as would be inconsistent with the fiduciary duties of the
Company's Board of Directors under applicable law, the Company agrees that, as
of the Original Execution Date, it, its Subsidiaries and affiliates, and the
respective directors, executive officers, agents and representatives of the
foregoing, shall immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any person (other than Holdings and
its representatives) conducted heretofore with respect to any Acquisition
Transaction. The Company agrees to promptly advise Holdings, its Subsidiaries or
affiliates, of any inquiries or proposals received by, any such information
requested from, or any negotiations or discussions sought to be initiated or
continued with, the Company, its Subsidiaries or affiliates, or any of the
respective directors, executive officers, agents or representatives of the
foregoing, in each case from a person (other than Holdings and its
representatives) with respect to an Acquisition Transaction, and a reasonable
summary of the terms thereof, including the identity of such third party (unless
disclosing the identity of such third party would violate the terms of any
confidentiality or similar agreement binding on the Company and entered into on
or prior to September 19, 1997), including any financing arrangement or
commitment in connection therewith, and, except as otherwise would be
inconsistent with the fiduciary duties of the Company's Board of Directors under
applicable law, to update on an ongoing basis or upon Holdings' reasonable
request, the status thereof, as well as any actions taken or other developments
pursuant to this Section 6.2. As used herein, "Superior Proposal" means a bona
fide, written proposal or offer made by any person (or group) (other than
Holdings or any of its Subsidiaries) with respect to an Acquisition Transaction
on terms which the Board of Directors of the
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Company determines in good faith, based on the advice of independent financial
advisors and legal counsel, to be more favorable to the Company and its
stockholders than the transactions contemplated hereby (including taking into
account the financing thereof).
Section 6.3 Registration Statement. As soon as practicable, Holdings and
the Company shall in consultation with each other prepare and file with the SEC
the Proxy Statement in preliminary form and the Registration Statement. The
Company and Holdings shall each use its reasonable best efforts to have the
Proxy Statement cleared by the SEC and the Registration Statement declared
effective as soon as practicable. The Company shall furnish Holdings with all
information concerning the Company and the holders of its capital stock and
shall take such other action as Holdings may reasonably request in connection
with the Registration Statement and the Share Issuance. If at any time prior to
the Effective Time any event or circumstance relating to the Company, any
Subsidiary of the Company, Holdings, any Subsidiary of Holdings, or any of their
respective officers or directors, should be discovered by such party which
should be set forth in an amendment or a supplement to the Registration
Statement or Proxy Statement, such party shall promptly inform the other thereof
and take appropriate action in respect thereof.
Section 6.4 Proxy Statement; Stockholder Approval.
(a) The Company, acting through its Board of Directors, shall, subject to
and in accordance with applicable law and its Certificate of Incorporation, as
amended, and its By-Laws, promptly and duly call, give notice of, convene and
hold as soon as practicable following the date upon which the Registration
Statement becomes effective a meeting of the holders of Company Common Stock for
the purpose of voting to approve and adopt this Agreement and the transactions
contemplated hereby, and, (i) except as the Board of Directors of the Company
determines, in good faith and as advised by outside counsel, would be
inconsistent with the fiduciary duties of the Board of Directors of the Company
under applicable law, and subject to the second proviso of Section 6.2(a),
recommend approval and adoption of this Agreement and the transactions
contemplated hereby, by the stockholders of the Company and include in the Proxy
Statement such recommendation and (ii) except as the Board of Directors of the
Company determines, in good faith and as advised by outside counsel, would be
inconsistent with the fiduciary duties of the Board of Directors of the Company
under applicable law and subject to the second proviso of Section 6.2(a), take
all reasonable action to solicit and obtain such approval; provided, however
that neither the Company's Board of Directors nor any committee thereof may
either (i) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to Holdings, the approval or recommendation of the Merger or this
Agreement, or (ii) approve or recommend, or propose publicly to approve or
recommend, any Acquisition Transaction (other than the Merger), in the case of
clauses (i) and (ii) next above until the sixth business day following Holdings'
receipt of written notice advising Holdings that the Company's Board of
Directors has received a Superior Proposal, specifying the material terms and
conditions thereof and identifying the person making such Superior Proposal.
(b) The Company shall, as promptly as practicable (or at such other time as
may be mutually agreed by the Company and Holdings), cause the definitive Proxy
Statement/Prospectus to be mailed to the stockholders of the Company and
Holdings.
Section 6.5 Compliance with the Securities Act.
(a) At least 30 days prior to the Effective Time, the Company shall cause
to be delivered to Holdings a list identifying all persons who are Affiliates of
the Company.
(b) The Company shall use its reasonable best efforts to cause each person
who is identified as one of its Affiliates in its list referred to in Section
6.5(a) above to deliver to Holdings, at least 10 days prior to the Effective
Time, a written agreement, in the form attached hereto as Exhibit 6.5(b).
Section 6.6 Reasonable Best Efforts.
(a) Subject to the terms and conditions herein provided and applicable
legal requirements, each of the parties hereto agrees to use its reasonable best
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, and to assist and cooperate with the other parties hereto in doing, as
promptly as practicable,
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all things (not, in the case of the Company, inconsistent with the fiduciary
duties of its Board of Directors) necessary, proper or advisable (i) under
applicable laws and regulations and otherwise to ensure that the conditions set
forth in Article VII are satisfied and to consummate and make effective the
transactions contemplated by this Agreement, and to obtain as promptly as
practicable all consents, waivers, approvals, authorizations or permits of, or
registration or filing with or notification to (any of the foregoing being a
"Consent"), of any Governmental Entity, including, without limitation, under the
HSR Act (it being agreed that Holdings shall cause to be taken all necessary
action by the Fund, its control persons and Holdings' "ultimate parent entity"
with respect to such Consents and the Company shall cause to be taken all
necessary action by the Company Principals with respect to such Consents), (ii)
to obtain the consent of its independent auditors to the use of its historical
opinion covering the financial statements to be included in the Registration
Statement and (iii) to attempt to obtain third party consents mutually agreed to
be desirable in connection with the Merger.
(b) In furtherance of the foregoing, at the Closing, Holdings shall enter
into the Registration Rights Agreement (and cause the Fund to enter into the
Registration Rights Agreement) and Sporting and the Surviving Corporation shall
enter into the consulting agreements referenced in Section 7.3(i). In addition,
in connection therewith, it is agreed that Holdings may enter into a
registration rights agreement with the Fund provided such agreement with the
Fund shall not cause Holdings to be in breach of the Registration Rights
Agreement or materially adversely effect the benefits to the Shareholders (as
defined in the Registration Rights Agreement), thereunder.
(c) Each party hereto shall promptly inform the other of any material
communication from the United States Federal Trade Commission, the Department of
Justice, or any other Governmental Entity regarding any of the transactions
contemplated by this Agreement. After consultation with the other party, such
party will make an appropriate response in compliance with such request.
Section 6.7 Employee Benefits. During the one-year period immediately
following the Effective Time, Holdings and the Surviving Corporation shall cause
to be provided each of the employees who was employed by the Company or any of
its Subsidiaries at the Effective Time and continue employment with the
Surviving Corporation or any affiliate of the Surviving Corporation ("Employee")
benefits (including, without limitations, benefits under each Company Plan and
Company Benefit Plan (including benefits related to termination of employment))
which, taken as a whole, are no less favorable to the Employee than the benefits
provided the Employee by the Company and its Subsidiaries immediately prior to
the Effective Time unless any of the benefits provided to comparable employees
by Sporting would be significantly more favorable to the Employee in which event
such more favorable benefits will be provided to the Employee as soon as
reasonably practicable. Each of Sporting and the Surviving Corporation and its
affiliates shall credit Employees with any amounts paid for the calendar year
under the Company's medical and dental plans prior to the transition to a new
medical or dental program toward satisfaction of the applicable deductible
amounts and copayment and deductible maximums under any new medical or dental
program. With respect to each Employee, each of Sporting and the Surviving
Corporation and its affiliates shall treat service treated by the Company or its
Subsidiaries as service with the Company or its Subsidiaries as service with
each of Sporting and the Surviving Corporation or its affiliates for purposes of
employee benefits and fringe benefits, including, without limitation, vacation
benefits, waiting periods, vesting requirements and pre-existing conditions
limitations. The Company, prior to the Effective Time, and Holdings and the
Surviving Corporation, from and after the Effective Time, shall make the
severance payments set forth on Schedule 6.7 to the extent that such payments
have been accurately calculated pursuant to the terms of the Company's Severance
Plan, including consistent with any discretion of the committee administering
such plan, all of which have been approved by such committee as of the Original
Execution Date.
Section 6.8 Public Announcements. Each of Holdings and the Company agrees
that, except as may be required by applicable law as advised by counsel, it will
not issue any press release or otherwise make any public statement with respect
to this Agreement (including the Exhibits hereto) or the transactions
contemplated hereby (or thereby) without having consulted with the other party.
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Section 6.9 Directors' and Officers' Indemnification and Insurance.
(a) Holdings, Sporting and the Company agree that all rights to
indemnification, exculpation, advancement of expenses and the like now existing
in favor of any director or officer of the Company and its Subsidiaries (the
"Indemnified Parties") as provided in their respective charters or by-laws, or
in an agreement between an Indemnified Party and the Company or one of its
Subsidiaries set forth in Section 6.9 of the Company Disclosure Schedule, are
contract rights and shall survive the Merger. In addition, and without limiting
the foregoing, Holdings, Sporting and the Surviving Corporation shall indemnify
all Indemnified Parties to the fullest extent permitted by applicable law with
respect to all acts and omissions arising out of such individuals' services as
officers, directors, employees or agents of the Company or any of its
Subsidiaries or as trustees or fiduciaries of any plan for the benefit of
employees, or otherwise on behalf of, the Company or any of its Subsidiaries,
occurring at or prior to the Effective Time including, without limitation, the
transactions contemplated by this Agreement. Without limitation of the
foregoing, in the event any such Indemnified Party is or becomes involved in any
capacity in any action, proceeding or investigation in connection with any
matter, including, without limitation, the transactions contemplated by this
Agreement, occurring at or prior to, and including, the Effective Time,
Holdings, Sporting and the Surviving Corporation will pay as incurred such
Indemnified Party's legal and other expenses (including the cost of any
investigation and preparation) incurred in connection therewith so long as such
party shall enter into an undertaking with Holdings, Sporting and the Surviving
Corporation to reimburse Holdings, Sporting and the Surviving Corporation, to
the extent required by applicable law, for all amounts advanced if a court of
competent jurisdiction shall ultimately determine, in a judgment which is not
subject to appeal or review, that indemnification of such Indemnified Party is
prohibited by applicable law. Holdings, Sporting and the Surviving Corporation
shall pay all expenses, including reasonable attorneys' fees, that may be
incurred by any Indemnified Party in enforcing the indemnity and other
obligations provided for in this Section 6.9.
(b) Holdings, Sporting and the Surviving Corporation shall cause to be
maintained in effect for six years from the Effective Time the current policies
of the directors' and officers' liability insurance maintained by the Company;
provided that Holdings, Sporting and the Surviving Corporation may substitute
therefor policies of at least the same coverage containing terms and conditions
which are no less advantageous to the Indemnified Parties and provided that such
substitution shall not result in any gaps or lapses in coverage with respect to
matters occurring prior to the Effective Time; and provided, further, that
Holdings, Sporting and the Surviving Corporation shall not be required to pay an
annual premium in excess of 200% of the last annual premium paid by the Company
prior to the Original Execution Date (which premium is disclosed in Section 6.9
of the Company Disclosure Schedule) and if Holdings, Sporting and the Surviving
Corporation are unable to obtain the insurance required by this Section 6.9(b)
they shall obtain as much comparable insurance as possible for an annual premium
equal to such maximum amount.
Section 6.10 Expenses. Each party hereto shall bear its own costs and
expenses in connection with this Agreement and the transactions contemplated
hereby; in particular Holdings and the Company will share equally the expenses
incurred in connection with (i) filings under HSR and any other antitrust laws
and (ii) preparing, printing and distributing the Proxy Statement and the
Registration Statement (but, not including any such expenses incurred prior to
the Original Execution Date).
Section 6.11 Listing Application; 1934 Act Registration. The Company and
Holdings shall each use its reasonable best efforts to cause the shares of
Holdings Common Stock to be issued pursuant to this Agreement in the Merger to
be listed for trading on the Nasdaq National Market at the time of such issuance
and the Holdings Common Stock to be designated as a national market system
security by the Nasdaq National Market at the effective date of the Merger.
Holdings shall not file or permit to become effective any registration under
Section 12 of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
prior to the deemed registration of the Holdings Common Stock under the 1934 Act
(the "1934 Act Registration") pursuant to Rule 12g-3(a) as a result of the
consummation of the Merger.
Section 6.12 Supplemental Disclosure. The Company shall give prompt notice
to Holdings, and Holdings shall give prompt notice to the Company, of (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which would be likely to cause (x) any representation or warranty contained
in this Agreement to be untrue or inaccurate in any material respect or (y) any
covenant, condition or
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agreement contained in this Agreement not to be complied with or satisfied in
any material respect and (ii) any failure of the Company or Holdings, as the
case may be, to comply with in any material respect any covenant or agreement to
be complied with by it hereunder. Each of the parties hereto shall deliver an
updated Company Disclosure Schedule or updated Holdings Disclosure Schedule, as
the case may be, on the 15th day of each fiscal month until the Effective Time,
providing updated disclosure through the end of the preceding fiscal month. The
updated Company Disclosure Schedules and updated Holdings Disclosure Schedules
shall not be deemed to amend the Company Disclosure Schedule or the Holdings
Disclosure Schedule, as the case may be, and the delivery of any notice and
updated Company Disclosure Schedules and Holdings Disclosure Schedules pursuant
to this Section 6.12 shall not have any effect for the purpose of determining
the satisfaction of the conditions set forth in Article VII of this Agreement or
the right to terminate this Agreement pursuant to Article VIII of this Agreement
or otherwise limit or affect the remedies available hereunder to any party. In
addition, the Company shall deliver to Holdings a certificate signed on behalf
of the Company by the chief executive officer and the chief financial officer of
the Company on or prior to the 15th day of each fiscal month until the Effective
Time certifying as to the Company's compliance with the requirements of Section
8.1(g) for the relevant preceding date specified in clause (iii) of Section
8.1(g) and attaching calculations in reasonable detail demonstrating such
compliance in the case of clauses (ii) or (iii), as applicable, of Section
8.1(g).
Section 6.13 Store Names. Holdings affirms as of (i) the Original
Execution Date, that it had no, (ii) the date hereof, that it has no, and (iii)
the Closing, it will not have any, present intention to change the names of any
of the Company's present stores other than in the Seattle, Washington and
Portland, Oregon metropolitan areas, and agrees that for a period of two years
from the Effective Time, Holdings will not, and will not permit its Subsidiaries
to, change the names of the Company's present stores in the Chicago, Illinois
metropolitan area; provided, that Holdings' obligations under this Section 6.13
shall cease upon a significant change in the ownership of Holdings and are
generally subject to Holdings' Board of Directors' fiduciary duties.
Section 6.14 Tax Returns. After the Effective Time, the Company authorizes
Holdings and the Surviving Corporation to prepare and file all tax returns on
behalf of the Company covering any period prior to the Effective time, subject,
however, to Section 4.13(k) hereof.
Section 6.15 Purchase Accounting. Each of the parties hereto acknowledges
that the Merger will be accounted for under the purchase method of accounting.
Section 6.16 Stock Legending. The Company agrees to cooperate fully in the
legending of certain certificates representing shares of Company Common Stock as
contemplated by the Stockholder Agreement of even date herewith by and among
Holdings and the stockholders of the Company signatory thereto.
Section 6.17 Stay Bonus Program. Notwithstanding anything to the contrary
in this Agreement, the Company shall implement a "stay bonus" program consistent
with the recommendations of William M. Mercer, Incorporated, such program to be
implemented as soon as practicable.
Section 6.18 Time of the Essence. All parties hereto acknowledge that time
is of the essence to the performance of this Agreement.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction or waiver at or prior to the Closing Date of the
following conditions:
(a) Stockholder Approval. This Agreement and the transactions contemplated
hereby shall have been approved and adopted by the requisite vote (as described
in Section 3.5) of the stockholders of the Company in accordance with applicable
law.
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(b) HSR and Other Regulatory Approvals. All applicable waiting periods (and
any extension thereof) applicable to the consummation of the Merger and the
transactions contemplated hereby under the HSR Act shall have expired or been
terminated. All other authorizations, consents, orders, declarations or
approvals of, or filings with, or terminations or expirations of waiting periods
imposed by, any Governmental Entity, which the failure to obtain, make or occur
would have a Holdings Material Adverse Effect, assuming the Merger had taken
place, shall have been obtained, shall have been made or shall have occurred.
(c) Registration Statement. The Registration Statement shall have become
effective in accordance with the provisions of the Securities Act. No stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC and no proceedings for that purpose shall have been initiated
by the SEC. The Holdings Common Stock shall be designated a Nasdaq National
Market System security and the shares of Holdings Common Stock issuable in
accordance with the Merger and upon exercise of Substitute Company Options shall
be listed for trading on the Nasdaq National Market and no action other than the
1934 Act Registration shall be required with respect to such designation and
listing.
(d) No Injunction. No Governmental Entity having jurisdiction over the
Company or Holdings, or any of their respective Subsidiaries, shall have
enacted, issued, promulgated, enforced or entered any law, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is then in effect and has the effect of making
the Merger illegal or otherwise prohibiting consummation of the Merger.
(e) Litigation. There shall not have been instituted or be pending any
suit, action or proceeding by any Governmental Entity as a result of this
Agreement or any of the transactions contemplated hereby which questions the
validity or legality of the transactions contemplated by this Agreement and
which, if such Governmental Entity were to prevail, would reasonably be expected
to have a Holdings Material Adverse Effect, assuming the Merger had taken place.
Section 7.2 Conditions to Obligations of Holdings and Acquisition to
Effect the Merger. The obligations of Holdings and Acquisition to effect the
Merger shall be subject to the satisfaction at or prior to the Effective Time of
the following additional conditions, unless waived in writing by Holdings:
(a) Representations and Warranties. The representations and warranties of
the Company contained in this Agreement which are qualified by reference to
Company Material Adverse Effect shall be true and correct and the
representations and warranties of the Company that are not so qualified shall be
true and correct except where the failure to be true and correct would not have
a Company Material Adverse Effect, in each case as of the Effective Time as
though made at and as of the Effective Time, and Holdings shall have received a
certificate signed on behalf of the Company by the chief executive officer and
the chief financial officer of the Company to such effect (provided that no
authorization, consent or approval of any person (other than as contemplated by
Section 7.1 hereof) in connection with the transactions contemplated hereby, nor
the failure to obtain any of the foregoing or satisfy any conditions imposed
incident to the giving of any consent, nor any violation, default, right of
termination, cancellation or acceleration, or loss of benefit or creation of any
Lien arising in connection with, or as a result of, any of the foregoing, shall,
or shall be deemed to, give rise to a failure of the foregoing condition).
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all material obligations required to be
performed by it under this Agreement at or prior to the Effective Time, and
Holdings shall have received a certificate signed on behalf of the Company by
the chief executive officer and the chief financial officer of the Company to
such effect (provided that no authorization, consent or approval of any person
(other than as contemplated by Section 7.1 hereof) in connection with the
transactions contemplated hereby, nor the failure to obtain any of the foregoing
or satisfy any conditions imposed incident to the giving of any consent, nor any
violation, default, right of termination, cancellation or acceleration, or loss
of benefit or creation of any Lien arising in connection with, or as a result
of, any of the foregoing, shall, or shall be deemed to, give rise to a failure
of the foregoing condition).
(c) Material Adverse Change. Since the date of this Agreement, there shall
have been no event or occurrence which has had, or would reasonably be expected
to have, a Company Material Adverse Effect, and
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Holdings shall have received a certificate signed on behalf of the Company by
the chief executive officer and the chief financial officer of the Company to
such effect (provided that no authorization, consent or approval of any person
(other than as contemplated by Section 7.1 hereof) in connection with the
transactions contemplated hereby, nor the failure to obtain any of the foregoing
or satisfy any conditions imposed incident to the giving of any consent, nor any
violation, default, right of termination, cancellation or acceleration, or loss
of benefit or creation of any Lien arising in connection with, or as a result
of, any of the foregoing, shall, or shall be deemed to, give rise to a failure
of the foregoing condition).
(d) [intentionally deleted]
(e) Legal Opinion. Holdings shall have received an opinion of counsel from
outside counsel to the Company reasonably acceptable to Holdings in form and
substance reasonably satisfactory to Holdings.
(f) Related Party Transactions. All amounts due and payable by any Company
Principal to the Company or any of its Subsidiaries pursuant to or in connection
with any transactions described in Section 3.20, or otherwise due and payable by
any Company Principal, shall have been paid to the Company, and Item 7 on
Section 3.20 of the Company Disclosure Schedule shall have been terminated in
writing by the partnerships referenced therein, and any other similar items
involving any of the Company Principals which were required to be set forth on
Section 3.20 of the Company Disclosure Schedule on the Original Execution Date
but were not so disclosed (including by cross-reference) (but not including any
matters pursuant to Company Plans, Company Benefit Plans and rights of officers
and directors pursuant to the Company's certificate of incorporation and by-laws
and insurance policies of the Company or any of its Subsidiaries) shall have
been terminated in writing. Without implication that the contrary would
otherwise be true, any items cross-referenced on Section 3.20 of the Company
Disclosure Schedule and any items deemed disclosed on such Section 3.20 pursuant
to the lead-in to Article III shall be deemed disclosed on such Section 3.20 for
purposes of this Section 7.2(f).
Section 7.3 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following additional
conditions, unless waived in writing by the Company:
(a) Representations and Warranties. The representations and warranties of
Holdings, Sporting and Acquisition contained in this Agreement which are
qualified by reference to Holdings Material Adverse Effect shall be true and
correct, the representations and warranties of Holdings, Sporting and
Acquisition that are not so qualified shall be true and correct except where the
failure to be true and correct would not in the aggregate have a Holdings
Material Adverse Effect, and the representations and warranties contained in
Sections 4.13, 4.23 and 6.13 shall be true and correct, in each case as of the
Effective Time as though made on and as of the Effective Time, and the Company
shall have received a certificate signed on behalf of Holdings, Sporting and
Acquisition by their respective chief executive officers and chief financial
officers to such effect.
(b) Performance of Obligations of Holdings, Sporting and
Acquisition. Holdings, Sporting and Acquisition shall each have performed in all
material respects all material obligations required to be performed by it under
this Agreement at or prior to the Effective Time, and the Company shall have
received a certificate signed on behalf of Holdings, Sporting and Acquisition by
their respective chief executive officers and chief financial officers to such
effect.
(c) Material Adverse Change. Since the date of this Agreement, there shall
have been no event or circumstance which has had, or would reasonably be
expected to have, a Holdings Material Adverse Effect; and the Company shall have
received a certificate on behalf of Holdings, Sporting and Acquisition by their
respective chief executive officers and chief financial officers to such effect.
(d) Holdings Charter, and Surviving Corporation Charter. The Holdings
Charter and the Surviving Corporation Charter shall each have been filed with
the Secretary of State of the State of Delaware.
(e) Material Consents. [intentionally deleted]
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(f) Legal Opinion. The Company shall have received an opinion of counsel
from Brownstein Hyatt Farber & Strickland, P.C. in form and substance reasonably
satisfactory to the Company.
(g) Tax Opinion of Counsel. The Company shall have received an opinion of
its outside counsel in form and substance reasonably acceptable to the Company,
to the effect that the transactions contemplated by this Agreement will be tax
free. Holdings, Sporting and Acquisition shall cooperate with the Company's
counsel and other advisors in the investigation of factual and other matters
necessary or appropriate in granting or withholding such opinion.
(h) Registration Rights Agreement. Holdings and the Fund shall enter into
the Registration Rights Agreement with each of the persons to be parties thereto
in the form attached hereto as Exhibit C.
(i) Consulting Agreements. Sporting and the Surviving Corporation shall
have entered into consulting agreements with each of Messrs. Hochberg, Hochberg
and Lowenstein in the form attached hereto as Exhibit D.
ARTICLE VIII
TERMINATION
Section 8.1 Termination. This Agreement may be terminated, and the Merger
and the other transactions contemplated hereby may be abandoned, at any time
prior to the Effective Time, whether before or after approval by the
stockholders of the Company or Holdings:
(a) by mutual written consent of Holdings and the Company;
(b) by either Holdings or the Company, if the Merger shall not have been
consummated on or before May 31, 1998 (unless, in the case of any such
termination pursuant to this Section 8.1(b), the failure of such event to occur
shall have been caused by the action or failure to act of the party seeking to
terminate this Agreement, which action or failure to act constitutes a breach of
such party's obligations under this Agreement);
(c) by either Holdings or the Company, if any permanent injunction, order,
decree or ruling by any Governmental Entity of competent jurisdiction preventing
the consummation of the Merger shall have become final and nonappealable;
provided, however, that the party seeking to terminate this Agreement pursuant
to this Section 8.1(c) shall have used its reasonable best efforts to remove
such injunction or overturn such action;
(d) by Holdings, if (i) there has been a breach by the Company of any of
its representations or warranties set forth in this Agreement the effect of
which is a Company Material Adverse Effect or a breach by the Company in any
material respect of any of its material covenants and agreements set forth in
this Agreement, in either case which breach is not curable or, if curable, is
not cured within 30 days after written notice of such breach is given by
Holdings to the Company, (provided that no authorization, consent or approval of
any person (other than as contemplated by Section 7.1 hereof) in connection with
the transactions contemplated hereby, nor the failure to obtain any of the
foregoing or satisfy any conditions imposed incident to the giving of any
consent, nor any violation, default, right of termination, cancellation or
acceleration, or loss of benefit or creation of any Lien arising in connection
with, or as a result of, any of the foregoing, shall, or shall be deemed to,
give rise to such a right of termination), (ii) the Board of Directors of the
Company (x) fails to recommend the approval and adoption of this Agreement and
the transactions contemplated hereby to the Company's stockholders in accordance
with Section 6.4 hereof, or (y) withdraws or amends or modifies in a manner
adverse to Holdings its recommendation or approval in respect of this Agreement
or the transactions contemplated hereby, or (iii) (a) the Company through any of
its directors or executive officers so expressly authorized to act by the Board
of Directors shall willfully take any of the actions proscribed by Sections 6.2
or 6.4, or (b) any of the Company's directors, officers, employees, agents or
representatives of the foregoing shall take any of the actions proscribed by
Sections 6.2 or 6.4 and the Company shall not, within 24 hours of the giving of
written notice to the Company to do so by Holdings, disavow such action and use
all reasonable efforts to cause such action to be terminated, unwound, abandoned
or otherwise negated;
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(e) by the Company if the Board of Directors of the Company shall
determine, in good faith and after consultation with its financial advisor and
outside counsel, that a proposal for an Acquisition Transaction constitutes a
Superior Proposal;
(f) by the Company, if there has been a breach by Holdings, Sporting or
Acquisition of any of its representations or warranties set forth in this
Agreement the effect of which is a Holdings Material Adverse Effect or a breach
by Holdings, Sporting or Acquisition in any material respect of any of its
material covenants and agreements set forth in this Agreement, in either case,
which breach is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by the Company to Holdings; and
(g) by Holdings if (i) any event has occurred that has had, or would
reasonably be expected to have, a Company Material Adverse Effect, (ii) prior to
the Conditional Date and (a) prior to February 1, 1998, the Company's Net Worth
falls below $70 million, or (b) after February 1, 1998, the Company's Net Worth
falls below $67.5 million, as, in each case, the term "Net Worth" is calculated
under the Credit Agreement as in effect on the Original Execution Date,
provided, however, that such Net Worth calculation shall be made without taking
into account amounts increasing or decreasing Net Worth pertaining, or with
respect, to (r) any of the Pack Boot Inventory (as defined in the Pack Boot
Agreement), the Additional Ski Inventory (as defined in the Pack Boot Agreement)
or any transaction pursuant to the Pack Boot Agreement or the Consignment
Agreement, (s) any charge to establish a LIFO reserve, (t) any severance, bonus
or other change-in-control related items paid or incurred in connection with the
Merger, (u) costs and expenses in connection with the Company's efforts to
engage in any extraordinary transaction, including, without limitation, the
Merger (capped in the event of any such transactions other than the Merger at
$200,000), (v) any expenses associated with the termination of any contract, or
the obtaining of any consent, in connection with the Merger or the transactions
contemplated thereby, (w) any reversal into income of the Company's inventory
reserve for obsolescence, (x) any reversal into income for any unused or
unallocated portion of the reserve established in the 1996 fiscal year
pertaining to the decision to exit the Canadian market, (y) any increase to the
reserve previously established for the River North property, or (z) any after
tax impact of any change in the Company's valuation reserve for its deferred tax
assets and the loss of any deferred tax benefit resulting from the failure to
tax-effect any operational loss; and, provided, further, that in making such Net
Worth calculation, Net Worth shall be increased by the amount of expenses
incurred, in the fiscal year ended February 1, 1998 (up to $739,000 pre-tax),
that would not have been incurred if the Company's forecasted plan to reduce
operational expenses in such fiscal year had been adhered to, (iii) prior to
February 2, 1998, the sum of the Company's long term debt (including current and
long-term capital lease obligations), short term debt, Accounts Payable (meaning
as of each determination date, all amounts due for trade merchandise and such
other liabilities consistently classified as "Accounts Payable" in the current
liabilities of the SEC Financial Statements as defined below) and Accrued
Liabilities (meaning as of each determination date, all amounts accrued for
taxes, salaries and wages, interest, rent, utilities, advertising, insurance and
such other current liabilities consistently classified as "Accrued Expenses" in
the current liabilities of the SEC Financial Statements, but excluding all
amounts recorded and classified as "Reserve for Store Closings") calculated in
accordance with GAAP applied on a basis consistent with past practice and the
audited financial statements for the year ended February 2, 1997 included in the
Company's Form 10-K and the interim financial statements for the quarterly
periods ending May 4, 1997 and August 3, 1997, included in the Company's Form
10-Q) (the "SEC Financial Statements") shall exceed the following amounts as of
any of the following dates occurring prior to the Conditional Date: $163,328,000
at October 5, 1997; $178,008,000 at November 2, 1997; $194,212,000 at November
30, 1997; $155,880,000 at January 4, 1998; or $154,265,000 at February 1, 1998;
provided, however, that any amounts paid or accrued in such fiscal year ended
February 1, 1998 and specified in subclauses (r), (s), (t), (u) or (v) above
shall not be taken into account in determining Accounts Payable, short term debt
or Accrued Liabilities, as the case may be, for purposes of this clause (iii).
Section 8.2 Effect of Termination.
(a) If: (i) an Acquisition Transaction (a "Competing Acquisition
Transaction") shall have been made known to the Company or any of its
Subsidiaries or has been proposed directly to its stockholders generally or any
person shall have publicly announced an intention (whether or not conditional)
to enter into an
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Acquisition Transaction and thereafter the approval of the Merger by the
Company's stockholders is not obtained; or (ii) the Company terminates this
Agreement pursuant to Section 8.1(e); and the Company enters into a definitive
agreement with any person or entity with respect to such Competing Acquisition
Transaction or the Acquisition Transaction which gave rise to such termination
pursuant to Section 8.1(e) (or any revision of such Acquisition Transaction), as
the case may be, within nine months after the termination of this Agreement or
such Competing Acquisition Transaction or the Acquisition Transaction which gave
rise to such termination pursuant to Section 8.1(e) is consummated within nine
months after the termination of this Agreement, then within two business days
after entering into such definitive agreement or after such consummation, the
Company shall pay Holdings a fee (the "Alternative Proposal Fee") in cash equal
to $2.5 million. The Alternative Proposal Fee shall also be payable within two
business days of Holdings' termination of this Agreement pursuant to Section 8.1
(d)(iii). In no event shall more than one Alternative Proposal Fee be payable to
Holdings.
(b) In the event of termination of this Agreement pursuant to this Article
VIII, the Merger shall be deemed abandoned and this Agreement shall forthwith
become void, except that the provisions of Section 6.1(b), Section 6.10 and this
Section 8.2 shall survive any termination of this Agreement; provided, however,
that nothing in this Agreement shall relieve any party from liability for any
material breach of this Agreement.
Section 8.3 Authority for Termination. Any termination of this Agreement
pursuant to Section 8.1 may only be made pursuant to the approval of the board
of directors of the applicable party.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Amendment and Modification. At any time prior to the Effective
Time, this Agreement may be amended, modified or supplemented only by written
agreement (referring specifically to this Agreement) of Holdings and the Company
with respect to any of the terms contained herein; provided, however, that no
such amendment, modification or supplementation shall be made which under
applicable law requires the approval of stockholders of the Company or Holdings,
without the further approval of such stockholders.
Section 9.2 Waiver. At any time prior to the Effective Time, Holdings, on
the one hand, and the Company, on the other hand, may (i) extend the time for
the performance of any of the obligations or other acts of the other, (ii) waive
any inaccuracies in the representations and warranties of the other contained
herein or in any documents delivered pursuant hereto and (iii) waive compliance
by the other with any of the agreements or conditions contained herein which may
legally be waived. Any such extension or waiver shall be valid only if set forth
in an instrument in writing specifically referring to this Agreement and signed
on behalf of such party.
Section 9.3 Survivability. Except as provided in this Agreement with
respect to Holdings, Sporting and Acquisition, the respective representations
and warranties of Holdings, Sporting and Acquisition, on the one hand, and the
Company, on the other hand, and the covenants and agreements of the Company
contained herein or in any certificates or other documents delivered prior to or
as of the Effective Time shall not survive beyond the Effective Time. The
covenants and agreements contained herein or in any certificate or other
documents delivered prior to or as of the Effective Time of Holdings, Sporting
and Acquisition (or the Surviving Corporation as the case may be) shall survive
the Effective Time (including, without limitation, any such covenants and
agreements contained in Section 4.13(k) hereof).
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Section 9.4 Notices. All notices and other communications hereunder shall
be in writing and shall be delivered personally or by next-day courier or
telecopied with confirmation of receipt, to the parties at the addresses
specified below (or at such other address for a party as shall be specified by
like notice; provided that notices of a change of address shall be effective
only upon receipt thereof). Any such notice shall be effective upon receipt, if
personally delivered or telecopied, or one day after delivery to a courier for
next-day delivery.
If to Holdings, Sporting or Acquisition to:
Gart Sports Company
1000 Broadway
Denver, CO 80203
Attention: John Douglas Morton
Telecopier: (303) 830-9282
with copies to:
Leonard Green & Partners, L.P.
11111 Santa Monica Boulevard
Suite 2000
Los Angeles, California 90025
Attention: Jennifer Holden Dunbar
Telecopier: (310) 954-0404
and
Brownstein Hyatt Farber & Strickland, P.C.
410 17th Street
Denver, CO 80202
Attention: Jeffrey M. Knetsch
Telecopier: (303) 623-1956
If to the Company, to:
Sportmart, Inc.
1400 South Wolf Road
Wheeling, IL 60090
Attention: Andrew S. Hochberg
Telecopier: (847) 520-1884
with copies to:
Altheimer & Gray
10 S. Wacker Drive
Suite 4000
Chicago, IL 60606
Attention: Myron Lieberman, Esq.
Peter Lieberman, Esq.
Telecopier: (312) 715-4800
and:
Katten Muchin & Zavis
525 W. Monroe Street
Suite 1600
Chicago, IL 60661
Attention: Matthew S. Brown, Esq.
Telecopier: (312) 902-1061
Section 9.5 Descriptive Headings; Interpretation. The headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. References in this
Agreement to Sections, Exhibits or Articles mean a Section, Exhibit or Article
of this Agreement unless otherwise indicated. References to this Agreement shall
be deemed to include the Exhibits
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hereto, unless the context otherwise requires. The term "Person" shall mean and
include an individual, a partnership, a joint venture, a corporation, a trust, a
Governmental Entity, an unincorporated organization and any other entity of or
any fund.
Section 9.6 Entire Agreement; Assignment. This Agreement (including the
Exhibits and other documents and instruments referred to herein), together with
the Confidentiality Agreement, constitute the entire agreement and supersede all
other prior agreements and understandings, both written and oral, among the
parties or any of them, with respect to the subject matter hereof. Except for
the provisions of Sections 1.7, 4.13(k) and 6.13 (each of which shall be
expressly for the benefit of the stockholders of the Company immediately prior
to the Effective Time) and Sections 6.7 (which shall expressly be for the
benefit of the Employees) and 6.9 (which shall be expressly for the benefit of
the Indemnified Parties), all of which provisions shall survive the Closing,
this Agreement is not intended to confer upon any person not a party hereto any
rights or remedies hereunder. This Agreement shall not be assigned by operation
of law or otherwise. Any damages payable to stockholders of the Company for
breach of this Agreement shall be payable in voting common stock of Holdings
(valued at the price determined under Section 2.4(i)) to the extent necessary to
assure qualification of the Merger as a tax-free reorganization under section
368(a)(2)(E) of the Code.
Section 9.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without giving
effect to the provisions thereof relating to conflicts of law.
Section 9.8 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated by this Agreement, (b) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court and (c) agrees that it will not bring any
action relating to this Agreement or any of the transactions contemplated by
this Agreement in any court other than a federal or state court sitting in the
State of Delaware.
Section 9.9 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall only
apply as to such party in the specific jurisdiction where such judgment shall be
made.
Section 9.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
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IN WITNESS WHEREFORE, each of Holdings, Sporting, Acquisition and the
Company has caused this Agreement to be executed on its behalf by its officers
thereunto duly authorized, all as of the date first above written.
GART SPORTS COMPANY
By: JOHN DOUGLAS MORTON
----------------------------------
Name: John Douglas Morton
Title: President and Chief
Executive Officer
GART BROS. SPORTING GOODS COMPANY
By: JOHN DOUGLAS MORTON
----------------------------------
Name: John Douglas Morton
Title: President and Chief
Executive Officer
GB ACQUISITION, INC.
By: JOHN DOUGLAS MORTON
----------------------------------
Name: John Douglas Morton
Title: President and Chief
Executive Officer
SPORTMART, INC.
By: ANDREW HOCHBERG
----------------------------------
Name: Andrew Hochberg
Title: CEO
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APPENDIX B
AMENDED AND RESTATED STOCKHOLDER AGREEMENT
AMENDED AND RESTATED AGREEMENT, dated as of December 2, 1997, by and
between Gart Sports Company, a Delaware corporation ("Holdings"), Gart Bros.
Sporting Goods Company, a Colorado corporation and wholly-owned subsidiary of
Holdings ("Sporting") and the stockholders of Sportmart, Inc., a Delaware
corporation (the "Company") signatory hereto (the "Stockholders").
RECITALS
A. Holdings and Stockholders are parties to a Stockholder Agreement (the
"Original Stockholder Agreement") dated September 28, 1997 (the "Original
Execution Date") and concurrently with the execution of the Original Stockholder
Agreement, Holdings, Sporting and the Company entered into an Agreement and Plan
of Merger (the "Original Merger Agreement"), pursuant to which the Company would
have been merged with and into Sporting (the "Merger");
B. As an inducement and a condition to entering into the Original Merger
Agreement, Holdings required that Stockholders agree, and Stockholders did
agree, to enter into the Original Stockholder Agreement;
C. Concurrently with the execution of this Amended and Restated Agreement
Holdings, Sporting and the Company have amended and restated the Original Merger
Agreement in its entirety whereby GB Acquisition, Inc., a Delaware corporation
("Acquisition") and wholly owned subsidiary of Holdings, will merge with and
into the Company (as such amended and restated agreement may hereafter be
amended form time to time, the "Merger Agreement"); and
D. As an inducement and a condition to voting in favor of the Merger
Agreement and the Merger, as restructured, the Stockholders have required that
the Original Stockholder Agreement be amended and restated in its entirety as
set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
representations, warranties, covenants and agreements contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. CERTAIN DEFINITIONS. In addition to the terms defined elsewhere herein,
capitalized terms used and not defined herein have the respective meanings
ascribed to them in the Merger Agreement. For purposes of this Agreement:
(a) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having "beneficial ownership" of such securities as determined
pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
(b) "Existing Shares" means shares of Company Common Stock Beneficially
Owned by any of the Stockholders as of the date hereof.
(c) "Securities" means the Existing Shares together with any shares of
Company Common Stock or other securities of the Company that become Beneficially
Owned by any Stockholder in any capacity after the date hereof and prior to the
termination of this Agreement whether upon the exercise of options, warrants or
rights, the conversion or exchange of convertible or exchangeable securities, or
by means of purchase, dividend, distribution, split-up, recapitalization,
combination, exchange of shares or the like, gift, bequest, inheritance or as a
successor in interest in any capacity or otherwise.
2. DISCLOSURE. The Stockholders hereby agree to permit the Company and
Holdings to publish and disclose in the Registration Statement and the Proxy
Statement (including all documents and schedules filed with the SEC), and any
press release or other disclosure document which Holdings, in its sole
discretion,
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determines to be necessary or desirable in connection with the Merger and any
transactions related thereto, the Stockholders' identities and ownership of
Company Common Stock and the nature of the Stockholders' commitments,
arrangements and understandings under this Agreement. Holdings will provide a
representative of the Stockholders designated by them (the "Spokesperson") with
a copy of any proposed disclosure and will provide the Spokesperson with a
reasonable opportunity to comment thereon and will not make any disclosure to
which the Spokesperson reasonably objects.
3. VOTING OF COMPANY COMMON STOCK. The Stockholders hereby agree that,
during the period commencing on the date hereof and continuing until the first
to occur of (a) the Effective Time, (b) 30 days after termination of the Merger
Agreement (i) by Holdings other than pursuant to Sections 8.1(d)(ii) or
8.1(d)(iii) of the Merger Agreement provided that such termination is not as a
result of the Company's intentionally acting, or failing to act, in bad faith
with respect to its obligations under the Merger Agreement or (ii) rightfully by
the Company in good faith pursuant to Section 8.1(f) of the Merger Agreement, or
(c) June 30, 1998 (the first to occur of clauses (a), (b) and (c), the
"Termination Date"), at any meeting (whether annual or special and whether or
not an adjourned or postponed meeting) of the holders of Company Common Stock,
however called, or in connection with any written consent of the holders of
Company Common Stock, the Stockholders will appear at the meeting or otherwise
cause the Securities to be counted as present thereat for purposes of
establishing a quorum and vote or consent (or cause to be voted or consented)
the Securities (A) in favor of the adoption of the Merger Agreement and the
approval of other actions contemplated by the Merger Agreement and this
Agreement and any actions required in furtherance thereof and hereof; (B)
against any action or agreement that would result in a breach in any respect of
any material covenant, representation or warranty or any other obligation or
agreement of the Company under the Merger Agreement or this Agreement; and (C)
except as otherwise agreed to in writing in advance by Holdings in its sole
discretion, against the following actions (other than the Merger and the
transactions contemplated by this Agreement and the Merger Agreement): (1) any
Acquisition Transaction or Superior Proposal, (2) (u) any change in a majority
of the persons who constitute the Company's Board of Directors (other than with
the approval of a majority of the Company's directors then in office); (v) any
material change in the present capitalization of the Company, including without
limitation any proposal to sell a substantial equity interest in the Company or
its Subsidiaries; (w) any amendment of the Company's Certificate of
Incorporation or By-laws; (x) any other material change in the Company's
corporate structure or business; or (y) any other action which, in the case of
each of the matters referred to in clauses (2) (u), (v), (w) or (x), is
intended, or could reasonably be expected, to impede, interfere with, delay,
postpone or materially adversely affect the Merger and the transactions
contemplated by this Agreement and the Merger Agreement. The Stockholders may
not enter into any agreement or understanding with any person the intended or
reasonably anticipated effect of which would be inconsistent with or violative
of any provision contained in this Section 3.
4. SUBSEQUENT STOCKHOLDER ACTIONS.
(a) If Holdings becomes entitled to a fee pursuant to Section 8.2 of the
Merger Agreement, subject to the last sentence of this subsection (a) to this
Section 4, with respect to Securities for which any Stockholder receives cash
consideration pursuant to the Acquisition Transaction, such Stockholder will
immediately upon the receipt thereof pay to Holdings an amount in cash (if
positive) (the "Differential Amount") equal to (i) the net pre-tax cash proceeds
received by such Stockholder with respect to the shares of Company Common Stock
or other Securities, including any shares of Company Common Stock into or for
which any Securities are convertible, exchangeable or exercisable, of such
Stockholder (such shares, the "Subject Shares") in such Acquisition Transaction
within nine months after the date that the Merger Agreement is terminated, minus
(ii) the product of (A) the per share value attributed to the outstanding
Company Common Stock in the proposed Merger based on a $105 million equity value
for Holdings times (B) the number of Subject Shares. If such Stockholder
receives any non-cash consideration in an Acquisition Transaction otherwise of a
type described above as part of the net proceeds ("Other Consideration") that
consists of securities listed on a national securities exchange or the Nasdaq
National Market ("Marketable Securities"), such Stockholder shall deliver
immediately to Holdings an amount of Marketable Securities whose aggregate
value, calculated on the basis of the closing price for such Marketable
Securities on the
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exchange where such Marketable Securities are listed, equals the Differential
Amount. To the extent the Other Consideration consists of non-Marketable
Securities or other assets, such Other Consideration will be held by such
Stockholder until such Stockholder shall have sold or otherwise disposed of such
Other Consideration for cash or Marketable Securities, or has otherwise actually
realized value, directly or indirectly, from such sale or disposition, at which
time the Differential Amount, to the extent not previously paid, will be
immediately paid to Holdings in cash or such Marketable Securities.
(b) From and after the date hereof and until June 30, 1998, each
Stockholder agrees to use commercially reasonable efforts (but without the
obligation to expend any funds) to facilitate the renegotiation by Holdings,
Sporting or the Company of any leases or other material contracts between the
Company (prior to the Effective Time) or Sporting (as the survivor by merger to
the Company), and any entities in which such Stockholder owns a substantial
economic interest or over which such Stockholder exercises any control
(including the obtaining of any required landlord consents to the Merger);
provided, however, that no such renegotiation shall change the underlying
economics of any such leases or material contracts.
5. COVENANTS, REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS. Each
Stockholder hereby represents and warrants to, and agrees with, Holdings as
follows:
(a) Ownership of Shares. Such Stockholder is the sole record and Beneficial
Owner of the number of Existing Shares opposite such Stockholder's name on the
signature pages hereof, and on the date hereof, such Existing Shares constitute
all of the shares of Company Common Stock owned of record or Beneficially Owned
by such Stockholder. Such Stockholder has sole voting power and sole power to
issue instructions with respect to the matters set forth in Sections 3 and 4
hereof, sole power of disposition, sole power of conversion, sole power to
demand appraisal rights and sole power to agree to all of the matters set forth
in this Agreement, in each case with respect to all of such Stockholder's
Existing Shares with no limitations, qualifications or restrictions on such
rights, subject to applicable securities laws, and the terms of this Agreement.
(b) Corporate Authorization. This Agreement has been duly and validly
executed and delivered by such Stockholder and constitutes a valid and binding
agreement enforceable against such Stockholder in accordance with its terms
except (i) as may be limited by applicable bankruptcy, insolvency or similar
laws affecting creditors rights and (ii) that the remedy of specific performance
and injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
(c) No Conflicts. Except for filings, authorizations, consents and
approvals as may be required under the HSR Act, the Exchange Act and the
Securities Act, (i) no filing with, and no permit, authorization, consent or
approval of, any state or federal Governmental Authority is necessary for the
execution of this Agreement by such Stockholder and the consummation by such
Stockholder of the transactions contemplated hereby and (ii) none of the
execution and delivery of this Agreement by such Stockholder, the consummation
by such Stockholder of the transaction contemplated hereby or compliance by such
Stockholder with any of the provisions hereof will (A) conflict with or result
in any breach of the organizational documents of such Stockholder (if
applicable), (B) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any third
party right of termination, cancellation, material modification or acceleration)
under any of the terms, conditions or provisions of any note, loan agreement,
bond, mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of any kind to which
such Stockholder is a party or by which such Stockholder or any of its
properties or assets may be bound, or (C) violate any order, writ, injunction,
decree, judgment, statute, rule or regulation applicable to such Stockholder or
any of its properties or assets.
(d) No Encumbrances. Except as applicable in connection with the
transactions contemplated by Sections 3 and 4 hereof, such Stockholder's
Existing Shares at all times during the term hereof, will be Beneficially Owned
by such Stockholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever, except for Existing Shares pledged to other
Stockholders.
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(e) No Finder's Fees. No broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial adviser's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of such Stockholder,
other than as contemplated by the Merger Agreement.
(f) No Solicitation. Such Stockholder will not, and will cause its
Affiliates (other than the Company) and officers, directors, employees,
partners, investment bankers, attorneys, accountants and other agents and
representatives of such Stockholder and such affiliates (such Affiliates,
officers, directors, employees, partners, investment bankers, attorneys,
accountants and other agents and representatives of any person are hereinafter
collectively referred to as the "Representatives" of such person) not to,
directly or indirectly (other than with Holdings and its representatives in
connection with the Merger), (i) solicit, initiate or encourage (including by
way of furnishing information) any inquiries or the making of any proposal with
respect to any Acquisition Transaction or (ii) negotiate or otherwise engage in
discussions with any person with respect to any Acquisition Transaction, or
which may reasonably be expected to lead to a proposal for an Acquisition
Transaction, or enter into any agreement, arrangement or understanding
(including any letter of intent, agreement in principle or similar agreement)
with respect to any such Acquisition Transaction. Such Stockholder will promptly
advise Holdings of any inquiries or proposals received by, and any information
requested from, or any negotiations or discussions sought to be initiated or
continued with agents or representatives of the foregoing, in each case from a
person (other than Holdings and its representatives) with respect to an
Acquisition Transaction, and a reasonable summary of the terms thereof,
including the identity of such third party (unless disclosing the identity of
such third party would violate the terms of any confidentiality or similar
agreement binding on the Company and entered into on or prior to September 19,
1997), including any financing arrangement or commitment in connection
therewith. Such Stockholder will, and will cause its Representatives to,
immediately cease and cause to be terminated any and all existing activities,
discussions or negotiations, if any, with any parties conducted heretofore with
respect to any Acquisition Transaction or Superior Proposal relating to the
Company, other than discussions or negotiations with Holdings and its
affiliates.
(g) Restriction on Transfer, Proxies and Non-Interference. From the date
hereof, such Stockholder will not, directly or indirectly, prior to the
Termination Date, (i) offer for sale, sell, transfer, tender, pledge, encumber,
assign or otherwise dispose of, or enter into any contract, option or other
arrangement or understanding with respect to or consent to the offer for sale,
sale, transfer, tender, pledge, encumbrance, assignment or other disposition of,
any or all of the Securities or any interest therein, not including any sale,
transfer, pledge, assignment or otherwise to other Stockholders and except as
provided in Section 4(a); (ii) grant any proxies or powers of attorney, deposit
the Securities into a voting trust or enter into a voting agreement with respect
to the Securities; or (iii) take any action that would make any representation
or warranty of such Stockholder contained herein untrue or incorrect or would
result in a breach by such Stockholder of its obligations under this Agreement.
(h) Reliance by Holdings. Such Stockholder understands and acknowledges
that Holdings is entering into the Merger Agreement in reliance upon such
Stockholder's execution and delivery of this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND SPORTING. Each of
Holdings and Sporting hereby represents and warrants to the Stockholders as
follows:
(a) Organization. Holdings is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, Sporting
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Colorado. Holdings and Sporting have all requisite
corporate power or other power and authority to execute and deliver this
Agreement and perform their obligations hereunder. The execution and delivery by
Holdings and Sporting of this Agreement and the performance by Holdings and
Sporting of their obligations hereunder have been duly and validly authorized by
the Board of Directors of Holdings and Sporting and no other corporate
proceedings on the part of Holdings or Sporting are necessary to authorize the
execution, delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby by Holdings and Sporting.
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(b) Corporate Authorization. This Agreement has been duly and validly
executed and delivered by Holdings and Sporting and constitutes a valid and
binding agreement of Holdings and Sporting enforceable against Holdings and
Sporting in accordance with its terms, except (i) as may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditors rights and
(ii) that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
(c) No Conflicts. Except for filings, authorizations, consents and
approvals as may be required under the HSR Act, the Exchange Act and the
Securities Act, (i) no filing with, and no permit, authorization, consent or
approval of, any state or federal Governmental Authority is necessary for the
execution of this Agreement by Holdings and Sporting and the consummation by
Holdings and Sporting of the transactions contemplated hereby and (ii) none of
the execution and delivery of this Agreement by Holdings and Sporting, the
consummation by Holdings and Sporting of the transactions contemplated hereby or
compliance by Holdings and Sporting with any of the provisions hereof will (A)
conflict with or result in any breach of the certificate of incorporation or
by-laws of Holdings or Sporting, (B) result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default (or give
rise to any third party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or provisions
of any note, loan agreement, bond, mortgage, indenture, license, contract,
commitment, arrangement, understanding, agreement or other instrument or
obligation of any kind to which Holdings or Sporting is a party or by which
Holdings or Sporting or any of their properties or assets may be bound, or (C)
violate any order, writ, injunction, decree, judgment, statute, rule or
regulation applicable to Holdings or Sporting or any of their properties or
assets.
(d) No Finder's Fee. No broker, investment banker, financial adviser or
other person is entitled to any broker's, finder's, financial adviser's or other
similar fee or commission in connection with the transactions contemplated
hereby based upon arrangements made by or on behalf of Holdings or Sporting
other than as contemplated by the Merger Agreement.
(e) Merger Agreement. Holdings and Sporting acknowledge that the
Stockholders are third-party beneficiaries of Section 6.13 of the Merger
Agreement.
7. STOP TRANSFER; LEGEND.
(a) Each Stockholder agrees with, and covenants to Holdings that such
Stockholder will not request that the Company register the transfer (book-entry
or otherwise) of any certificate or uncertificated interest representing any of
the Securities, unless such transfer is made in compliance with this Agreement.
(b) In the event of a stock dividend or distribution, or any change in the
Company Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like other than
pursuant to the Merger, the terms "Shares" and "Securities" will be deemed to
refer to and include the shares of Company Common Stock as well as all such
stock dividends and distributions and any shares into which or for which any or
all of the Securities may be changed or exchanged and appropriate adjustments
shall be made to the terms and provisions of this Agreement.
(c) Such Stockholder will duly execute and deliver to Holdings an
Affiliate's Letter in the form attached to the Merger Agreement prior to
Closing.
8. LEASE GUARANTEES. In order to preserve the economics originally
negotiated under the Original Merger Agreement and the Original Stockholder
Agreement, Sporting hereby irrevocably, unconditionally and absolutely
guarantees, effective from and after the Effective Time, as primary obligor and
not merely as surety, the full and prompt performance and payment when due of
all liabilities and obligations, whether now existing or hereafter arising, of
the Company under those leases at the locations set forth in Exhibit A attached
to this Agreement and made a part hereof (the "Leases"). It is understood and
agreed that this guaranty is a guaranty of performance and payment when due and
not of collection and this guaranty may be enforced directly against Sporting
without proceeding against the Company and that Sporting hereby waives notice of
acceptance of this guaranty and notice of any liability or obligations to which
it may apply and waives presentment, demand of payment, protest, notice of
dishonor or non-payment or non-performance of any such
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liability or obligation, suit or the taking of any other action thereof by, and
any other notice to, any party liable thereon or therefor. This guaranty is
expressly for the benefit of, and enforceable by, each and every person or
entity to whom the Company has obligations or liabilities under and pursuant to
the Leases, whether now existing or hereafter arising.
9. TERMINATION. This Agreement will terminate upon the Termination Date,
except that the covenants and agreements set forth in Section 4(a) hereof will
survive any termination of this Agreement for the term specified therein.
10. MISCELLANEOUS.
(a) Further Assurances. From time to time, at the other party's request and
without further consideration, each party hereto will execute and deliver such
additional documents and take all such further lawful action as may be necessary
or reasonably desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this Agreement.
(b) Entire Agreement. This Agreement constitutes the entire agreement among
the parties with respect to the subject matter hereof and supersedes all other
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter hereof.
(c) Capacity, Binding Effect and Certain Permitted Activities. Stockholders
agree that this Agreement and the obligations hereunder will attach to the
Securities and will be binding upon any person or entity to which legal or
Beneficial Ownership of such Securities shall pass, whether by operation of law
or otherwise, including without limitation, any Stockholder's legal
representatives or successors or other transferees (for value or otherwise) and
any other successors in interest. Notwithstanding anything to the contrary in
this Agreement, each Stockholder is signing this Agreement solely in its
capacity as a stockholder of the Company and no Stockholder shall be limited or
otherwise affected by this Agreement with respect to any action or inaction of
such Stockholder taken (i) in its capacity as a director, officer or employee of
the Company, (ii) in its capacity as a director, officer or employee of, or
consultant to, Holdings and/or its subsidiaries or (iii) in conjunction with,
vis-a-vis or in relation to any other Stockholder or family member or any entity
(other than, for purposes of this clause (iii), the Company and Holdings or any
of their respective subsidiaries) as to which such a Stockholder or family
member serves as a director, officer, trustee, member, partner, or fiduciary or
other similar position, or as to which such Stockholder exercises any
dispositive or voting control of any Securities held by such entity.
(d) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder will be assigned or delegated (whether by operation of law
or otherwise) without the prior written consent of the other parties, provided
that Holdings may assign, in its sole discretion, its rights, interests and
obligations hereunder to any direct or indirect wholly owned Subsidiary of
Holdings, but no such assignment will relieve Holdings from any of its
obligations hereunder if such assignee does not perform such obligations.
Subject to the preceding sentence, this Agreement will be binding upon, inure to
the benefit of and be enforceable by the parties and their respective successors
and assigns.
(e) Amendment and Modification. This Agreement may not be amended, changed,
supplemented, waived or otherwise modified, except upon the execution and
delivery of a written agreement executed by the parties hereto.
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(f) Notices. All notices and other communications hereunder will be in
writing and will be deemed given if delivered personally, telecopied (which is
confirmed) or on the next business day after being sent by an overnight courier
service, such as FedEx, to the parties at the following addresses (or at such
other address for a party as will be specified by like notice):
If to the Stockholders:
c/o Mr. Andrew S. Hochberg
77 South Deere Park Drive
Highland Park, IL 60035
Telecopy: (847) 266-1004
copy to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive, Suite 2700
Chicago, Illinois 60606
Attention: Peter J. Barack and David R. Selmer
Telecopy: (312) 984-3150
if to Holdings or Sporting:
Gart Sports Company
1000 Broadway
Denver, CO 80203
Attention: John Douglas Morton
Telecopier: (303) 830-9282
with copies to:
Leonard Green & Partners, L.P.
11111 Santa Monica Boulevard
Suite 2000
Los Angeles, California 90025
Attention: Jennifer Holden Dunbar
Telecopier: (310) 954-0404
and
Brownstein Hyatt Farber & Strickland, P.C.
410 17th Street
Denver, CO 80202
Attention: Jeffrey M. Knetsch
Telecopier: (303) 623-1956
(g) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void, unenforceable or against its regulatory policy, the remainder of
the terms, provisions, covenants and restrictions of this Agreement will remain
in full force and effect and will in no way be affected, impaired or
invalidated.
(h) Specific Performance. The parties hereto agree that irreparable damage
would occur in the event any provision of this Agreement was not performed in
accordance with the terms hereof and that the parties will be entitled to the
remedy of specific performance of the terms hereof, in addition to any other
remedy at law or equity.
(i) No Waiver. The failure of any party hereto to exercise any right, power
or remedy provided under this Agreement or otherwise available in respect hereof
at law or in equity, or to insist upon compliance by any other party hereto with
its obligations hereunder, and any custom or practice of the parties at variance
with the
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<PAGE> 219
terms hereof, will not constitute a waiver by such party of its right to
exercise any such or other right, power or remedy or to demand such compliance.
(j) No Third Party Beneficiaries. Except as contemplated by and set forth
in Section 8, this Agreement is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder.
(k) Governing Law. This Agreement will be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflict of laws thereof.
(l) Jurisdiction. Each party hereby irrevocably submits to the exclusive
jurisdiction of the Court of Chancery in the State of Delaware in any action,
suit or proceeding arising in connection with this Agreement, and agrees that
any such action, suit or proceeding will be brought only in such court (and
waives any objection based on forum non conveniens or any other objection to
venue therein); provided, however, that no such consent to jurisdiction of said
Court or in the State of Delaware shall be valid other than for such purposes.
Each party hereby waives any right to a trial by jury in connection with any
such action, suit or proceeding.
(m) Description Headings. The description headings used herein are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
(n) Counterparts. This Agreement may be executed in counterparts, each of
which will be considered one and the same agreement and will become effective
when such counterparts have been signed by each of the parties and delivered to
the other parties, it being understood that all parties need not sign the same
counterpart.
(o) Certain Sales and Transfers. Anything to the contrary in this Agreement
notwithstanding, a Stockholder may (i) sell, transfer or otherwise dispose of
all or any portion of the Holdings Common Stock which it may acquire in the
Merger or which it may otherwise own and (ii) reorganize its internal structure
and composition and/or transfer all or any portion of the Securities which it
owns for tax, securities or estate planning purposes, for charitable donation
purposes or to another Stockholder, as long as the recipient of the voting and
dispositive power with respect to such Securities under this subsection (ii)
agrees to abide by the provisions of and become a party to this Agreement. In
addition, a Stockholder may pledge all or any portion of the Securities which it
owns as security for the Stockholder's obligations in connection with a bona
fide transaction as long as the pledgee or mortgagee of such Securities agrees,
in the event it obtains the right to vote such Securities, whether by reason of
a default, foreclosure or otherwise, to abide by and become a party to this
Agreement.
IN WITNESS WHEREOF, Holdings, Sporting and the Stockholders have caused
this Agreement to be duly executed as of the day and year first above written.
GART SPORTS COMPANY
By:
----------------------------------
Name:
Title:
GART BROS. SPORTING GOODS COMPANY
By:
----------------------------------
Name:
Title:
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STOCKHOLDERS:
<TABLE>
<S> <C> <C>
AH INVESTMENT TRUST U/A/D 6/3/87 NV-555,424
C-275,329
By:
- -----------------------------------------------------
Barbara P. Hochberg, Trustee
By:
- -----------------------------------------------------
Andrew S. Hochberg, Trustee
BARBARA P. HOCHBERG TRUST
U/A/D 12/17/88
By: NV-93,000
C-102,000
- -----------------------------------------------------
Barbara P. Hochberg, Trustee
AMY H. LOWENSTEIN SUB-TRUST
U/A/D 1/3/90
By: NV-4,500
C-12,500
- -----------------------------------------------------
Larry J. Hochberg, Trustee
ANDREW S. HOCHBERG SUB-TRUST
U/A/D 1/3/90
By: NV-4,500
C-15,000
- -----------------------------------------------------
Larry J. Hochberg, Trustee
HOCHBERG ANNUAL GIFT TRUST
U/A/D 4/27/94
By: NV-18,100
C-2,376
- -----------------------------------------------------
Laurie Hochberg, Trustee
By:
- -----------------------------------------------------
Larry J. Hochberg, Trustee
</TABLE>
B-9
<PAGE> 221
DANIEL HOCHBERG UNDER THE ILUGMA
By: NV-7,651
- -------------------------------------------------
Andrew S. Hochberg, as Custodian for Daniel Hochberg
under the ILUGMA
NV-22,483
- -----------------------------------------------------
Andrew Hochberg
NV-5,000
- -----------------------------------------------------
Laurie Hochberg
LARRY J. HOCHBERG TRUST U/A/D NV-478,921
6/12/81 C-2,358,557
By:
- -----------------------------------------------------
Larry J. Hochberg
JACOB LOWENSTEIN UNDER THE ILUGMA
By: NV-6,800
- -----------------------------------------------------
Amy Lowenstein, as Custodian for Jacob Lowenstein
under the ILUGMA
ARIEL LOWENSTEIN UNDER THE ILUGMA
By: NV-8,851
- -----------------------------------------------------
Amy Lowenstein, as Custodian for Ariel Lowenstein
under the ILUGMA
NV-2,957
- -----------------------------------------------------
Amy Lowenstein
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<PAGE> 222
RAPHAEL LOWENSTEIN UNDER THE IL UGMA NV-6,800
By:
- -------------------------------------------------
Amy Lowenstein, as Custodian for Raphael Lowenstein
under the IL UGMA
JOSHUA LOWENSTEIN UNDER THE IL UGMA NV-6,800
By:
- -----------------------------------------------------
Amy Lowenstein, as Custodian for Joshua Lowenstein
under the IL UGMA
NV-21,220
- -------------------------------------------------
John A. Lowenstein
AHL INVESTMENT TRUST U/A/D 12/7/90 NV-126,732
By:
- -----------------------------------------------------
Barbara P. Hochberg, Trustee
By:
- -----------------------------------------------------
John A. Lowenstein, Trustee
JESSICA HOCHBERG UNDER THE IL UGMA NV-4,338
By:
- -----------------------------------------------------
Andrew Hochberg, as Custodian for Jessica Hochberg
under the IL UGMA
ABIGAIL LOWENSTEIN UNDER THE IL UGMA NV-6,154
By:
- -----------------------------------------------------
John A. Lowenstein, as Custodian for Abigail
Lowensteine
under the IL UGMA
B-11
<PAGE> 223
AMY H. LOWENSTEIN REVOCABLE NV-117,270
TRUST U/A/D 8/29/91 C-138,807
By:
- -----------------------------------------------------
Amy H. Lowenstein, Trustee
ANDREW S. HOCHBERG REVOCABLE NV-56,207
TRUST U/A/D 7/9/87 C-138,015
By:
- -----------------------------------------------------
Andrew S. Hochberg, Trustee
ABIGAIL LOWENSTEIN UNDER THE IL UGMA NV-5,538
By:
- -----------------------------------------------------
Amy Lowenstein, as Custodian for Abigail Lowenstein
under the IL UGMA
LJH L.P. NV-1,434,500
By: Larry J. Hochberg Trust U/A/D 6/12/81,
General Partner
By:
- -----------------------------------------------------
Larry Hochberg, Trustee
AH L.P. NV-64,500
By: Andrew S. Hochberg Revocable Trust,
General Partner
By:
- -----------------------------------------------------
Andrew S. Hochberg, Trustee
NV-10,657
- ------------------------------------------------------
LARRY J. HOCHBERG
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<PAGE> 224
EXHIBIT A
Niles
Lombard
Calumet City, IN
Schaumburg
Chicago (Lakeview)
Merrillville, IN
North Riverside
Ferguson, MO
Crestwood, MO
Wheeling
Chicago (River North)
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<PAGE> 225
APPENDIX C
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
September 28, 1997
To The Board of Directors
Sportmart, Inc.
Ladies and Gentlemen:
We understand that Sportmart, Inc. (the "Company") is contemplating entering
into an agreement and plan of merger (the "Agreement") with Gart Sports Company
("Holdings") and its wholly-owned subsidiary Gart Bros. Sporting Goods Company
("Merger Sub") after giving effect to which the shareholders of Holdings will
own 72.5 percent of the surviving company and the shareholders of the Company
will own 27.5 percent of the surviving company. It is our understanding that (i)
the outstanding shares of the Company's Class A common stock and common stock
will be converted into shares of Holdings' common stock based upon the
Conversion Number (as defined in the Agreement), (ii) the outstanding restricted
shares of the Company's Class A common stock will be converted into shares of
Holdings' common stock based upon the Conversion Number (as defined in the
Agreement), and (iii) the outstanding options to purchase Company Class A common
stock or common stock will be converted into an option to purchase the number of
shares of Holdings' common stock increased to the nearest whole share determined
by multiplying (i) the number of shares of the Company's common stock prior to
the Effective Time (as defined in the Agreement) by (ii) the Conversion Number
(as defined in the Agreement), at an exercise price equal to the exercise price
immediately prior to the Effective Time divided by the Conversion Number. The
merger and all related transactions are referred to collectively herein as the
"Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to stockholders and on Form 10-K
for the five fiscal years ended February 2, 1997 and quarterly report
on Form 10-Q for the quarter ended August 3, 1997, which the Company's
management has identified as being the most current financial
statements available;
2. reviewed Holdings audited financial statements for the two fiscal years
ended January 4, 1997 and the unaudited financial statement for the
quarter ended July 5, 1997;
3. reviewed the Agreement and Plan of Merger of Merger between Holdings,
Merger Sub and the Company dated September 28, 1997;
4. reviewed an execution copy of the Stockholder Agreement dated as of
September 28, 1997 by and between Holdings and certain stockholders of
the Company;
5. met with certain members of the senior management of the Company and
Holdings to discuss the operations, financial condition, future
prospects and projected operations and performance of the Company and
Holdings;
6. reviewed a forecast prepared by the Company's management with respect
to the Company for the years ending approximately January 31, 1998
through 2002;
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7. reviewed a forecast prepared by Holdings' management with respect to
Holdings for the years ending approximately January 1, 1998 through
2002;
8. reviewed a forecast prepared by the Company's and Holdings' managements
with respect to Newco for the years ending approximately January 31,
1999 through 2002;
9. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
10. reviewed the draft Form S-1 for Gart Sports Company;
11. reviewed publicly available financial data for certain companies that
we deem comparable to the Company and Holdings, and publicly available
prices and premiums paid in other transactions that we considered
similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company and Holdings, and that there has been no
material change in the assets, financial condition, business or prospects of the
Company and Holdings since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and Holdings and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Company or Holdings. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this presentation.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
Transaction is fair to the Company's Class A common stockholders and common
stockholders from a financial point of view.
This Opinion is directed to the Board of Directors of the Company and does not
constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote at the stockholders' meeting to be held in connection
with the Transaction. This Opinion is delivered to each recipient subject to the
conditions, scope of engagement, limitations and understandings set forth in
this Opinion and our engagement letter, and subject to the understanding that
the obligations of Houlihan Lokey in the Transaction are solely corporate
obligations, and without limiting Houlihan Lokey's obligations, to the extent
permitted by applicable law, no officer, director, employee, agent, shareholder
or controlling person of Houlihan Lokey shall be subjected to any personal
liability whatsoever to any person, nor will any such claim be asserted by or on
behalf of you or your affiliates.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
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<PAGE> 227
APPENDIX D
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
GART SPORTS COMPANY
Gart Sports Company, a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is Gart Sports Company. The original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of Delaware on September 16, 1993. A Restated Certificate of Incorporation
was filed with the Secretary of State of Delaware on April 6, 1994.
2. This Amended and Restated Certificate of Incorporation was duly adopted
by the Board of Directors and stockholders of the Corporation in accordance with
the provisions of Sections 228, 242 and 245 of the General Corporation Law of
the State of Delaware and it amends and restates the provisions of the Restated
Certificate of Incorporation, as amended, of this corporation.
3. The text of the Restated Certificate of Incorporation is hereby amended
and restated to read in its entirety as follows:
ARTICLE I
The name of the corporation is Gart Sports Company (hereinafter referred to
as the "Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 32 Loockerman Square, Suite L-100, City of Dover, County of Kent,
19901. The name of the registered agent of the Corporation in the State of
Delaware at such address is The Prentice-Hall Corporation System, Inc.
ARTICLE III
The nature of the business of the Corporation and the purposes for which it
is organized are to engage in any business and lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware and to possess and employ all powers and privileges now or hereafter
granted or available under the laws of the State of Delaware to such
corporations.
ARTICLE IV
Section 1. Authorized Shares. The number of shares of capital stock of all
classes which the Corporation shall have authority to issue is 25,000,000
shares, consisting of 22,000,000 shares of Common Stock, par value $.01 per
share (the "Common Stock"), and 3,000,000 shares of Preferred Stock, par value
$.01 per share (the "Preferred Stock").
Section 2. Designations, Powers, and Preferences. The designations and the
powers, preferences and rights, and the qualifications, limitations or
restrictions of the shares of each class of stock are as follows:
A. Preferred Stock. Shares of Preferred Stock may be issued in one or more
series at such time or times as the Board of Directors may determine. All shares
of any one series of Preferred Stock shall be of equal rank and identical in all
respects except as to the dates from and after which dividends thereon shall
cumulate, if cumulative. The number of authorized shares of Preferred Stock may
be increased or decreased by the affirmative vote of a majority of the capital
stock of the Corporation entitled to vote without the separate vote of holders
of Preferred Stock as a class. Subject to the limitations hereof and the
limitations prescribed by law,
D-1
<PAGE> 228
the Board of Directors of the Corporation (the "Board of Directors") is
expressly authorized to fix from time to time, by resolution or resolutions
adopted prior to the issuance of and providing for the establishment or issuance
of any series of Preferred Stock, the designation of such series and the powers,
preferences and rights of such series, and the qualifications, limitations or
restrictions thereof. The authority of the Board of Directors with respect to
each such series shall include, but shall not be limited to, determination of
the following:
(i) The distinctive serial designation and number of shares comprising each
such series (provided that the aggregate number of shares constituting all
series of Preferred Stock shall not exceed the total number of authorized shares
of Preferred Stock pursuant to Section 1 of this Article IV, which number may
(except where otherwise provided by the Board of Directors in creating such
series) be increased or decreased (but not below the number of shares of such
series then outstanding) from time to time by action of the Board of Directors;
(ii) The rate of dividends, if any, on the shares of that series, whether
dividends shall be noncumulative, cumulative to the extent earned or cumulative
(and, if cumulative, from which date or dates), whether dividends shall be
payable in cash, property, or rights, or in shares of the Corporation's capital
stock, and the relative priority, if any, of payment of dividends on shares of
that series over shares of any other series;
(iii) Whether the shares of that series shall be redeemable and, if so, the
terms and conditions of such redemption, including the date or dates upon or
after which they shall be redeemable, the event or events upon or after which
they shall be redeemable or at whose option they shall be redeemable, and the
amount per share payable upon redemption (which amount may vary under different
conditions and at different redemption dates) or the property or rights,
including securities of any other corporation, payable upon redemption;
(iv) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series and, if so, the terms and amounts payable into
such sinking fund;
(v) The rights to which the holders of the shares of that series shall be
entitled in the event of voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, and the relative rights of priority, if any, of
payment of shares of that series in any such event;
(vi) Whether the shares of that series shall be convertible into or
exchangeable for any other securities and, if so, the terms and conditions of
such conversion or exchange, including the rate or rates of conversion or
exchange, the date or dates upon or after which they shall be convertible or
exchangeable or at whose option they shall be convertible or exchangeable, and
the method, if any, of adjusting the rates of conversion or exchange in the
event of a stock split, stock dividend, combination or reclassification of
shares or similar event;
(vii) Whether the issuance of any additional shares of such series shall be
subject to restrictions, or whether any shares of any other series shall be
subject to restrictions as to issuance, or as to the powers, preferences or
rights of any such other series;
(viii) Whether the shares of that series shall have voting rights in
addition to the voting rights provided by law, and, if so, the terms of such
voting rights, including, without limitation, the authority to confer multiple
votes per share, voting rights as to specified matters or issues or, subject to
the provisions of this Amended and Restated Certificate of Incorporation, voting
rights to be exercised either together with holders of Common Stock as a single
class, or independently as a separate class;
(ix) The rights of the holders of the shares of that series to elect
additional directors of the Corporation under specified circumstances and the
provisions under which such additional directors so elected shall serve; and
(x) Any other preferences, privileges and powers and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions of such series, as the Board of Directors may deem advisable and
as shall not be inconsistent with the provisions of this Amended and Restated
Certificate of Incorporation and to the full extent now or hereafter permitted
by the laws of the State of Delaware.
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B. Common Stock.
Subject to all of the rights of the Preferred Stock, and except as may be
provided with respect to the Preferred Stock herein, by law or by the Board of
Directors pursuant to this Article IV:
(i) Dividends may be declared and paid or set apart for payment upon the
Common Stock out of any assets or funds of the Corporation legally available for
the payment of dividends;
(ii) The holders of Common Stock shall have the right to vote for the
election of directors and on all other matters requiring stockholder action,
each share being entitled to one vote; and
(iii) Upon the voluntary or involuntary liquidation, dissolution or winding
up of the Corporation, the net assets of the Corporation shall be distributed
pro rata to the holders of the Common Stock in accordance with their respective
rights and interests.
C. Preemptive Rights. No holder of any stock of the Corporation of any
class shall have the preemptive right to subscribe for or purchase any part of
any new or additional issue of stock of any class whatsoever of the Corporation,
or of securities convertible into or exchangeable for stock of any class
whatsoever, whether now or hereafter authorized, or whether issued for cash or
other consideration or by way of dividend.
ARTICLE V
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. For the management of the business and
for the conduct of the affairs of the Corporation, and in further creation,
definition, limitation and regulation of the powers of the Corporation and of
its directors and of its stockholders, it is further provided:
Section 1. Elections of Directors. Elections of directors need not be by
written ballot unless the Bylaws of the Corporation shall so provide.
Section 2. Number, Election, and Terms of Directors. Except as otherwise
fixed pursuant to the provisions of Article IV hereof relating to the rights of
the holders of any class or series of Preferred Stock to elect additional
directors under specified circumstances, the number of directors of the
Corporation shall be fixed from time to time exclusively by resolutions adopted
by the Board of Directors; provided, however, that no decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Section 3. Stockholder Nomination of Director Candidates. Advance notice of
nominations for the election of directors, other than by the Board of Directors
or a committee thereof, shall be given in the manner provided in the Bylaws.
Section 4. Newly Created Directorships and Vacancies. Except as otherwise
fixed pursuant to the provisions of Article IV hereof relating to the rights of
the holders of any class or series of Preferred Stock to elect directors under
specified circumstances, newly created directorships resulting from any increase
in the number of directors and any vacancies on the Board of Directors resulting
from death, resignation, disqualification, removal or other cause shall be
filled solely by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors, or by
a sole remaining director. Any director elected in accordance with the preceding
sentence shall hold office until such director's successor shall have been
elected and qualified, or until such director's earlier resignation or removal.
Section 5. Stockholder Action. Any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly called annual
or special meeting of such stockholders; provided however, that any action
required or permitted to be taken at any annual or special meeting of
stockholders of the Corporation may be taken without a meeting, without prior
notice (except as set forth below), and without a vote, if a consent or consents
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted, and the
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Secretary of the Corporation shall have received at least 24 hours prior written
notice of the intent to take such action, which notice shall be conveyed by the
Secretary of the Corporation to each director at least 24 hours prior to the
taking of such action; provided that such notice may be waived in writing by
each director entitled to receive such notice. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing. Any such
consent may be in counterparts and shall bear the date of signature of each
stockholder who signs the consent. No such consent shall be effective to take
any action unless, within sixty days following the date of the earliest
signature thereon, the consent or counterparts thereof, bearing the signatures
of holders of outstanding stock of the Corporation having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
to take such action, are delivered to the Corporation by delivery to its
principal place of business or to the secretary of the Corporation. Any action
taken pursuant to such consent shall be effective, as of the date of the last
signature thereon needed to make it effective, unless otherwise provided in the
consent. All counterparts of such consent necessary to make it effective shall
be filed with the minutes of proceedings of the stockholders.
Except as otherwise prescribed by law and subject to the rights of holders
or any class or series of Preferred Stock, special meetings of stockholders of
the Corporation, for any purpose or purposes, may be called only by the Chairman
of the Board, if there be one, the President, or the Board of Directors pursuant
to a resolution approved by a majority of the entire Board of Directors and
shall be called by the Secretary or any Assistant Secretary, if there be one, at
the request in writing of a majority of the entire Board of Directors or by
holders of outstanding stock of the Corporation having not less than a majority
of the votes that would be necessary to authorize such action.
Section 6. Bylaw Amendments. The Board of Directors shall have power to
make, alter, amend and repeal the Bylaws (except so far as the Bylaws adopted by
the stockholders shall otherwise provide). Any Bylaws made by the Board of
Directors under the powers conferred hereby may be altered, amended or repealed
by the Board of Directors or by the stockholders of the Corporation.
Notwithstanding the foregoing and anything contained in this Amended and
Restated Certificate of Incorporation to the contrary, Section 7 of Article II
and Section 3 of Article III of the Bylaws shall not be altered, amended or
repealed and no provision inconsistent therewith shall be adopted without the
affirmative vote of the holders of at least a majority of the voting power of
all the shares of capital stock of the Corporation entitled to vote generally in
the election of directors (the "Voting Stock"), voting together as a single
class.
Section 7. Removal of Directors. Any director (or the entire Board of
Directors), other than those who may be elected by the holders of any class or
series of Preferred Stock, may be removed from office by the affirmative vote of
the holders of at least a majority of the voting power of all of the then
outstanding shares of Voting Stock, voting together as a single class.
Section 8. Amendment, Repeal, Etc. Notwithstanding any other provision of
this Restated Certificate of Incorporation or the Bylaws (and notwithstanding
the fact that a lesser percentage may be specified by law), the affirmative vote
of the holders of at least a majority of the voting power of all the then
outstanding shares of Voting Stock, voting together as a single class, shall be
required to alter, amend, adopt any provision inconsistent with, or repeal, this
Article V or any provision hereof.
ARTICLE VI
Section 1. Vote Required for Certain Business Combinations.
A. Higher Vote for Certain Business Combinations. In addition to any
affirmative vote required by law or this Amended and Restated Certificate of
Incorporation, and except as otherwise expressly provided in Section 2 of this
Article VI:
(i) any merger or consolidation of the Corporation or any Subsidiary (as
hereinafter defined) with (a) any Interested Stockholder (as hereinafter
defined) or (b) any other corporation (whether or not itself an Interested
Stockholder) which immediately prior to such merger or consolidation is an
Affiliate of an Interested Stockholder; and
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(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate of any Interested Stockholder of any
assets of the Corporation or any Subsidiary having an aggregate Fair Market
Value (as hereinafter defined) equal to or greater than 20% of the Corporation's
assets, as set forth on the Corporation's most recent audited consolidated
financial statements; or
(iii) the issuance or transfer by the Corporation or any Subsidiary (in one
transaction or a series of transactions) of any securities of the Corporation or
any Subsidiary to any Interested Stockholder or any Affiliate of any Interested
Stockholder in exchange for cash, securities or other property (or a combination
thereof), which cash, securities or other property has an aggregate Fair Market
Value equal to or greater than 20% of the Corporation's assets, as set forth on
the Corporation's most recent audited consolidated financial statements, unless
such issuance or transfer is made pro rata to all stockholders of the
Corporation; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Interested
Stockholder or any Affiliate of any Interested Stockholder; or
(v) any reclassification of securities (including any reverse stock split),
recapitalization, reorganization, merger or consolidation of the Corporation, or
any other transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class of
Equity Security (as hereinafter defined) of the Corporation or any Subsidiary
which is Beneficially Owned (as hereinafter defined) by an Interested
Stockholder or any Affiliate of any Interested Stockholder,
shall require the affirmative vote of the holders of at least 66 2/3% of the
voting power of the then outstanding Voting Stock not Beneficially Owned by the
applicable Interested Stockholder or an Affiliate of such Interested Stockholder
and present in person or by proxy at the meeting of stockholders at which the
Business Combination (as hereinafter defined) is being considered, voting
together as a single class (it being understood that for the purposes of this
Article VI, each share of Voting Stock shall have the number of votes granted to
it pursuant to or in accordance with the provisions of Article IV of this
Amended and Restated Certificate of Incorporation). Such affirmative vote shall
be required notwithstanding the fact that no vote may be required, or that a
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
B. Definition of "Business Combination." The term "Business Combination"
used in this Article shall mean any transaction which is referred to in any one
or more of clauses (i) through (v) of paragraph A of this Section 1.
Section 2. When Higher Vote is Not Required.
The provisions of Section 1 of this Article shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by law and any other provision of this
Amended and Restated Certificate of Incorporation, if all of the conditions
specified in either of the following paragraphs A or B are met:
A. Approval by Disinterested Directors. The Business Combination shall have
been approved by a majority of the Disinterested Directors (as hereinafter
defined).
B. Price and Procedure Requirements. All of the following conditions shall
have been met:
(i) The aggregate amount of the cash and the Fair Market Value as of the
date of the consummation of the Business Combination of the consideration other
than cash to be received per share by holders of Common Stock in such Business
Combination shall be at least equal to the higher of the following:
(a) if applicable, the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by the Interested
Stockholder or any of its Affiliates for any shares of Common Stock acquired by
them (1) within the two-year period immediately prior to the first public
announcement of the terms of the proposed Business Combination (the
"Announcement Date") or (2) in the transaction in which the Interested
Stockholder became an Interested Stockholder, whichever is higher; or
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(b) the Fair Market Value per share of Common Stock on the Announcement
Date or on the date on which the Interested Stockholder became an Interested
Stockholder (such latter date is referred to in this Article as the
"Determination Date"), whichever is higher.
(ii) The aggregate amount of the cash and the Fair Market Value as of the
date of the consummation of the Business Combination of consideration other than
cash to be received per share by holders of shares of any other class of
outstanding Voting Stock (other than Excluded Preferred Stock as hereinafter
defined) shall be at least equal to the highest of the following, it being
intended that the requirements of this paragraph B(ii) shall be required to be
met with respect to every class or series of outstanding Voting Stock (other
than Excluded Preferred Stock), whether or not the Interested Stockholder or any
of its Affiliates has previously acquired any shares of a particular class or
series of Voting Stock:
(a) if applicable, the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by the Interested
Stockholder or any of its Affiliates for any shares of such class of Voting
Stock acquired by them (1) within the two-year period immediately prior to the
Announcement Date or (2) in the transaction in which the Interested Stockholder
became an Interested Stockholder, whichever is higher; or
(b) if applicable, the highest preferential amount per share to which the
holders of shares of such class of Voting Stock are entitled in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; or
(c) the Fair Market Value per share of such class of Voting Stock on the
Announcement Date or on the Determination Date, whichever is higher.
(iii) The consideration to be received by holders of a particular class of
outstanding Voting Stock (including Common Stock, but excluding Excluded
Preferred Stock) shall be in cash or in the same form as the Interested
Stockholder has previously paid for shares of such class of Voting Stock. If the
Interested Stockholder has paid for shares of any class of Voting Stock with
varying forms of consideration, the form of consideration for such class of
Voting Stock shall be either cash or the form used to acquire the largest number
of shares of such class of Voting Stock previously acquired by it. The price
determined in accordance with paragraph B(i) and B(ii) of this Section 2 shall
be subject to appropriate adjustment in the event of any stock dividend, stock
split, combination of shares or similar event.
(iv) After such Interested Stockholder or any of its Affiliates has become
an Interested Stockholder and prior to the consummation of such Business
Combination: (a) except as approved by a majority of the Disinterested
Directors, there shall have been no failure to declare and pay at the regular
date therefor any full quarterly dividends (whether or not cumulative) on any
outstanding stock having preference over the Common Stock as to dividends or
upon liquidation; (b) there shall have been (1) no reduction in the annual rate
of dividends paid on the Common Stock (except as necessary to reflect any
subdivision of the Common Stock), except as approved by a majority of the
Disinterested Directors, and (2) an increase in such annual rate of dividends as
necessary to reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which has the effect
of reducing the number of outstanding shares of the Common Stock, unless the
failure so to increase such annual rate is approved by a majority of the
Disinterested Directors; and (c) neither such Interested Stockholder nor any of
its Affiliates shall have become the beneficial owner of any additional shares
of Voting Stock except as part of the transaction which results in such
Interested Stockholder becoming an Interested Stockholder.
(v) After such Interested Stockholder has become an Interested Stockholder,
such Interested Stockholder shall not have received the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits or other
tax advantages provided by the Corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
(vi) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules or regulations) shall have been mailed to
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public stockholders of the Corporation at least 30 days prior to the
consummation of such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to such Act or
subsequent provisions).
(vii) Such Interested Stockholder shall have supplied the Corporation with
such information as shall have been requested pursuant to Section 4.B. of this
Article VI within the time period set forth therein.
Section 3. Certain Definitions.
For the purposes of this Article:
A. "Affiliate" or "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the rules and regulations under the Securities
Exchange Act of 1934, as in effect on the date on which this Amended and
Restated Certificate of Incorporation is filed.
B. A person shall be a "Beneficial Owner" of, or shall "Beneficially Own,"
any Voting Stock:
(i) which such person or any of its Affiliates or Associates beneficially
owns, directly or indirectly, within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as in effect on the date on which this Amended
and Restated Certificate of Incorporation is filed; or
(ii) which such person or any of its Affiliates or Associates has (a) the
right to acquire (whether such right is exercisable immediately or only after
the passage of time), pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (b) the right to vote pursuant to any agreement, arrangement or
understanding (but shall not be deemed to be the Beneficial Owner of any shares
of Voting Stock solely by reason of a revocable proxy granted for a particular
meeting of stockholders, pursuant to a public solicitation of proxies for such
meeting, and with respect to which shares neither such person nor any such
Affiliate or Associate is otherwise deemed the Beneficial Owner); or
(iii) which are Beneficially Owned, directly or indirectly, by any other
person with which such person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting (other than solely by reason of a revocable proxy as described in
subparagraph (ii) of this paragraph (B)) or disposing of any shares of Voting
Stock; provided, however, that in case of any employee stock ownership or
similar plan of the Corporation or of any Subsidiary in which the beneficiaries
thereof possess the right to vote any shares of Voting Stock held by such plan,
no such plan nor any trustee with respect thereto (nor any Affiliate of such
trustee), solely by reason of such capacity of such trustee, shall be deemed,
for any purposes hereof, to beneficially own any shares of Voting Stock held
under any such plan.
C. "Disinterested Director" means (i) any member of the Board of Directors
(a) who is not an Affiliate of the Interested Stockholder and (b) was a member
of the Board of Directors prior to the time that a Business Combination with
such Interested Stockholder or an Affiliate thereof was proposed, and (ii) any
successor of a Disinterested Director who is not an Affiliate of the Interested
Stockholder and is recommended to succeed a Disinterested Director by a majority
of Disinterested Directors then on the Board of Directors.
D. "Equity Security" shall have the meaning ascribed to such term in
section 3(a)(11) of the Securities Exchange Act of 1934, as in effect on the
date on which this Amended and Restated Certificate of Incorporation is filed.
E. "Excluded Preferred Stock" means any series of Preferred Stock with
respect to which the Certificate of Designation creating such series expressly
provides that the provisions of this Article VI shall not apply.
F. "Fair Market Value" means: (i) in the case of stock, the highest closing
sale price during the 30-day period immediately preceding the date in question
of a share of such stock on the Composite Tape for the New York Stock
Exchange -- Listed Stocks, or, if such stock is not quoted on the Composite
Tape, on the New York Stock Exchange, on the principal United States securities
exchange registered under the Securities Exchange Act of 1934 on which such
stock is listed, or, if such stock is not listed on any such exchange, on the
National Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") National
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Market, or, if such stock is not traded on the NASDAQ National Market, the
highest closing bid quotation with respect to a share of such stock during the
30-day period preceding the date in question on the NASDAQ or any system then in
use, or if no such quotations are available, the fair market value on the date
in question of a share of such stock as determined by the Board of Directors in
good faith; and (ii) in the case of property other than cash or stock, the fair
market value of such property on the date in question as determined by the Board
of Directors in good faith.
G. "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(i) is the Beneficial Owner, directly or indirectly, of 10% or more of the
voting power of the outstanding Voting Stock; or
(ii) is an Affiliate of the Corporation and at any time within the two-year
period immediately prior to the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of the then
outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of Voting
Stock which were at any time within the two-year period immediately prior to the
date in question beneficially owned by any Interested Stockholder, if such
assignment or succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering within the meaning of the
Securities Act of 1933, as amended.
H. For the purpose of determining whether a person is an Interested
Stockholder pursuant to paragraph G of this Section 3, the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned by the
Interested Stockholder through application of paragraph G of this Section 3 but
shall not include any other shares of Voting Stock which may be issuable
pursuant to any agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
I. A "person" shall mean any individual, firm, corporation, limited
liability company, partnership or other entity.
J. "Subsidiary" means any corporation of which a majority of any class of
Equity Security is owned, directly or indirectly, by the Corporation; provided,
however, that for purposes of the definition of Interested Stockholder set forth
in paragraph G of this Section 3, the term "Subsidiary" shall mean only a
corporation of which a majority of each class of Equity Security is owned,
directly or indirectly, by the Corporation.
K. "Whole Board" means the total number of directors which this Corporation
would have if there were no vacancies.
L. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used in
paragraph B(i) and (ii) of Section 2 of this Article shall include the shares of
Common Stock or the shares of any other class of outstanding Voting Stock
retained by the holders of such shares.
Section 4. Powers of the Board of Directors.
A. A majority of the Whole Board but only if a majority of the Whole Board
shall then consist of Disinterested Directors or, if a majority of the Whole
Board shall not then consist of Disinterested Directors, a majority of the then
Disinterested Directors, shall have the power and duty to determine, on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine compliance with this Article VI, including, without limitation, (i)
whether a person is an Interested Stockholder, (ii) the number of shares of
Voting Stock beneficially owned by any person, (iii) whether a person is an
Affiliate or Associate of another, (iv) whether the applicable conditions set
forth in paragraph (B) of Section 2 have been met with respect to any Business
Combination, (v) the Fair Market Value of stock or other property in accordance
with paragraph (H) of Section 3 of this Article VI, and (vi) whether the assets
which are the subject of any Business Combination referred to in paragraph A(ii)
of Section 1 have or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination referred to in paragraph A(iii) of Section 1 has, an aggregate Fair
Market Value equal to or greater than 20%
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of the Corporation's assets as set forth on the corporation's most recent
audited consolidated financial statements.
B. A majority of the Whole Board shall have the right to demand, but only
if a majority of the Whole Board shall then consist of Disinterested Directors,
or, if a majority of the Whole Board shall not then consist of Disinterested
Directors, a majority of the then Disinterested Directors shall have the right
to demand, that any person who it is reasonably believed is an Interested
Stockholder (or holder of record shares of Voting Stock Beneficially Owned by
any Interested Stockholder) supply this Corporation with complete information as
to (i) the record owner(s) of all shares Beneficially Owned by such person who
it is reasonably believed is an Interested Stockholder, (ii) the number of, and
class or series of, shares Beneficially Owned by such person who it is
reasonably believed is an Interested Stockholder and held of record by each such
record owner and the number(s) of the stock certificate(s)) evidencing such
shares, and (iii) any other factual matter relating to the applicability or
effect of this Article VI, as may be reasonably requested of such person, and
such person shall furnish such information within 10 days after receipt of such
demand.
Section 5. No Effect on Fiduciary Obligations of Interested Stockholders.
Nothing contained in this Article shall be construed to relieve any
Interested Stockholder from any fiduciary obligation imposed by law.
Section 6. Amendment, Repeal, Etc.
Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or the Bylaws (and notwithstanding the fact that a
lesser percentage may be specified by law) the affirmative vote of the holders
of at least 66 2/3% of the voting power of all the then outstanding Voting
Stock, voting together as a single class, shall be required to alter, amend, or
adopt any provision inconsistent with, or repeal, this Article VI or any
provision hereof.
ARTICLE VII
No director shall be personally liable to the Corporation or any
stockholder for monetary damages for breach of fiduciary duty as a director,
except (i) for any breach of such director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, (iii) for violations
of Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
Delaware General Corporation Law hereafter is amended to eliminate or limit
further the liability of a director, then, in addition to the elimination and
limitation of liability provided by the preceding sentence, the liability of
each director of the Corporation shall be eliminated or limited to the fullest
extent provided or permitted by the Delaware General Corporation Law, as so
amended. Any repeal or modification of this Article VII shall not adversely
affect any right or protection of a director under this Article VII, as in
effect immediately prior to such repeal or modification, with respect to any
liability that would have accrued, but for this Article VII, prior to such
repeal or modification.
ARTICLE VIII
The Corporation shall indemnify to the full extent permitted by the laws of
the State of Delaware as from time to time in effect any person against all
liability and expense (including attorneys' fees) incurred by reason of the fact
that he is or was a director or officer of the Corporation, or, while serving as
a director or officer of the Corporation, he is or was serving at the request of
the Corporation as a director, officer, partner or trustee of, or in any similar
managerial or fiduciary position of, or as an employee or agent of another
corporation, partnership, joint venture, trust, association or other enterprise,
or by reason of any action alleged to have been taken or omitted in such
capacity. Expenses (including attorneys' fees) incurred in defending an action,
suit, or proceeding may be paid by the Corporation in advance of the final
disposition of such action, suit, or proceeding to the full extent and under the
circumstances permitted by Delaware law. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, fiduciary,
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or agent of the Corporation against any liability asserted against and incurred
by such person in any such capacity or arising out of such person's position,
whether or not the Corporation would have the power to indemnify against such
liability under the provisions of this Article VIII. The indemnification
provided by this Article VIII shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under this Amended and Restated
Certificate of Incorporation, any bylaw, agreement, vote of stockholders or
disinterested directors, statute, or otherwise, and shall inure to the benefit
of their heirs, executors, and administrators. The provisions of this Article
VIII shall not be deemed to preclude the Corporation from indemnifying other
persons from similar or other expenses and liabilities as the Board of Directors
or the stockholders may determine in a specific instance or by resolution of
general application. Neither the amendment nor repeal of this Article, nor the
adoption of any provision of this Amended and Restated Certificate of
Incorporation or Bylaws or of any statute inconsistent with this Article, shall
eliminate or reduce the effect of this Article, in respect of any acts or
omissions occurring prior to such amendment, repeal or adoption of an
inconsistent provision.
In accordance with the provisions of Section 103(d) of the General
Corporation Law of the State of Delaware, this Amended and Restated Certificate
of Incorporation shall become effective upon its filing date.
IN WITNESS WHEREOF, Gart Sports Company has caused this Amended and
Restated Certificate of Incorporation to be signed and acknowledged by its
President and attested by its Secretary and its corporate seal to be affixed
hereto this day of January, 1998.
GART SPORTS COMPANY
By:
----------------------------------
John Douglas Morton, President
ATTEST:
- ------------------------------------
Thomas B. Nelson, Secretary
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APPENDIX E
AMENDED AND RESTATED BYLAWS
OF
GART SPORTS COMPANY
(hereinafter called the "Corporation")
ARTICLE I
OFFICES AND AGENT
1. Principal Office. The principal office of the Corporation may be located
within or without the State of Delaware, as designated by the Board of
Directors. The Corporation may have other offices and places of business at such
places within or without the State of Delaware as shall be determined by the
directors.
2. Registered Office and Agent. The Corporation shall have and maintain at
all times (a) a registered office in the State of Delaware, which office shall
be located at 32 Loockerman Square, Suite L-100, Dover, Delaware 19901, and (b)
a registered agent located at such address whose name is The Prentice-Hall
Corporation System, Inc., until changed from time to time as provided by the
General Corporation Law of the State of Delaware.
ARTICLE II
MEETINGS OF STOCKHOLDERS
1. Place of Meetings. All meetings of stockholders of the Corporation shall
be held within or without the State of Delaware as may be designated by the
Board of Directors, the Chairman of the Board, if there be one, or the
President, or, if not designated, at the registered office of the Corporation.
2. Annual Meetings. The annual meeting of stockholders for the election of
directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on such date and at such time as
determined by resolution of the Board of Directors. If, at the place of the
meeting, this date shall fall upon a legal holiday, then such meeting shall be
held on the next succeeding business day at the same hour. If no annual meeting
is held in accordance with the foregoing provisions, the Board of Directors
shall cause the meeting to be held as soon thereafter as convenient. If no
annual meeting is held in accordance with the foregoing provisions, a special
meeting may be held in lieu of the annual meeting, and any action taken at that
special meeting shall have the same effect as if it had been taken at the annual
meeting, and in such case all references in these Bylaws to the annual meeting
of stockholders shall be deemed to refer to such special meeting.
3. Special Meetings. Unless otherwise prescribed by law or by the
Certificate of Incorporation, special meetings of stockholders, for any purpose
or purposes, may be called only by the Chairman of the Board, if there be one,
the President, or the Board of Directors pursuant to a resolution approved by a
majority of the entire Board of Directors, and shall be called by the Secretary
or any Assistant Secretary, if there be one, at the request in writing of a
majority of the entire Board of Directors or by holders of outstanding stock of
the Corporation having at least a majority of the voting power of all shares of
capital stock of the Corporation entitled to vote generally in the election of
directors. Such request shall state the purpose or purposes of the proposed
meeting. Upon receipt of such written request, the President shall fix a date
and time for such meeting which such date shall be within ten (10) business days
of the proposed date specified in the written request.
4. Notice of Meeting. Except as otherwise provided in these Bylaws or the
General Corporation Law of the State of Delaware, written notice of any meeting
of stockholders stating the place, date and hour of the meeting, and in the case
of a special meeting, the purpose for which the meeting is called, shall be
delivered either personally or by mail to each stockholder of record entitled
either personally or by mail to vote at such
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meeting not less than ten (10) nor more than sixty (60) days before the date of
the meeting. If mailed, such notice shall be deemed to be delivered as to any
stockholder of record when deposited in the United States mail addressed to the
stockholder at his address as it appears on the stock transfer books of the
Corporation, with postage prepaid. When a meeting is adjourned to another time
or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty (30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
5. Waiver of Notice. Any stockholder, either before or after any
stockholders' meeting, may waive in writing notice of the meeting, and his
waiver shall be deemed the equivalent or giving notice. Attendance at a meeting
by a stockholder shall constitute a waiver of notice, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
6. Fixing of Record Date. For the purpose of determining the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors of the Corporation may fix, in
advance, a record date which shall be not more than sixty (60) days nor less
than ten (10) days prior to the date of such meeting, nor more than sixty (60)
days prior to any other action. If no record date is fixed, the record date for
determining the stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. The record date for
determining the stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is expressed. The
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
7. Notice of Business. At any meeting of the stockholders of the
Corporation, only such proper business shall be conducted as shall have been
brought before the meeting (i) by or at the direction of the Board of Directors
or (ii) by any stockholder of the Corporation who is a stockholder of record at
the time of giving of the notice provided for in this Section 7, who shall be
entitled to vote at such meeting and who complies with the notice procedures set
forth in this Section 7. For business to be brought before a meeting of
stockholders by a stockholder, the stockholder shall give timely notice thereof
in writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
office of the Corporation not less than fifty (50) days nor more than
seventy-five (75) days prior to the meeting; provided, however, that in the
event that less than sixty (60) days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made, whichever first occurs. Such
stockholder's notice to the Secretary of the Corporation shall set forth as to
each matter the stockholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting, and in the event that such
business includes a proposal to amend any document, including these Bylaws, the
language of the proposed amendment, (ii) the name and address, as they appear on
the Corporation's books, of the stockholder proposing such business, (iii) the
class and number of shares of capital stock of the Corporation which are
beneficially owned by such stockholder and (iv) any material interest of such
stockholder in such business. Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted at a meeting of the stockholders except
in
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accordance with the procedures set forth in this Section 7. The chairman of the
meeting of the stockholders shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting in
accordance with the provisions of these Bylaws, and if he should so determine,
he shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing
provisions of this Section 7, a stockholder shall also comply with all
applicable requirements of the Securities and Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder with respect to matters set
forth in this Section 7.
8. Quorum. Except as otherwise provided by law or by the Certificate of
Incorporation, the holders of a majority of the capital stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, quorum at all meetings of the stockholders for the transaction of
business. If, however, such quorum shall not be present or represented at any
meeting of the stockholders, the stockholders entitled to vote thereat, present
in person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally noticed. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder entitled to vote at the meeting.
9. Voting. Unless otherwise required by law, the Certificate of
Incorporation or these Bylaws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. The Board of Directors, in its
discretion, or the officer of the Corporation presiding at a meeting of
stockholders, in his discretion, may require that any votes cast at such meeting
shall be cast by written ballot.
Persons holding stock in a fiduciary capacity shall be entitled to vote the
shares so held. Persons whose stock is pledged shall be entitled to vote, unless
in the transfer by the pledgor on the books of the Corporation he has expressly
empowered the pledgee to vote thereon, in which case only the pledgees, or his
proxy, may represent such stock and vote thereon.
If shares having voting power stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, tenants by the entirety, or otherwise, or if two or more persons have
the same fiduciary relationship respecting the same shares, unless the Secretary
of the Corporation is given written notice to the contrary and is furnished with
a copy of the instrument or order appointing them or creating the relationship
wherein it is so provided, their acts with respect to voting shall have the
following effect: (i) if only one votes, his act binds all; (ii) if more than
one vote, the act of a majority so voting binds all; and (iii) if more than one
vote, but the vote is evenly split on any particular matter, each fraction may
vote the securities in question proportionately, or any person voting the shares
or a beneficiary, if any, may apply to the Court of Chancery or any court of
competent jurisdiction in the State of Delaware to appoint an additional person
to act with the persons so voting the shares. The shares shall then be voted as
determined by a majority of such persons and the person appointed by the Court.
If a tenancy is held in unequal interests, a majority or even-split for the
purpose of this subsection shall be a majority or even-split in interest.
10. Proxies. A stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for him by proxy. No proxy shall
be voted or acted upon after three (3) years from its date, unless the proxy
provides for a longer period.
11. List of Stockholders Entitled to Vote. The officer of the Corporation
who has charge of the stock ledger of the Corporation shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list
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shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten (10)
days prior to the meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder of the Corporation
who is present.
11. Stock Ledger. The stock ledger of the Corporation shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list required by Section 11 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
ARTICLE III
DIRECTORS
1. Duties and Powers. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
2. Number of Directors. Except as otherwise fixed pursuant to the
provisions of Article IV of the Certificate of Incorporation of the Corporation
relating to the rights of the holders of any class or series of Preferred Stock
to elect additional directors under specified circumstances, the number of
directors of the Corporation shall be fixed from time to time exclusively by
resolutions adopted by the Board of Directors; provided, however, that no
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
3. Elections of Directors. Except as provided in Section 4 of this Article
and subject to the rights of the holders of any class or series of Preferred
Stock to elect additional directors under specified circumstances pursuant to
the provisions of Article IV of the Certificate of Incorporation of the
Corporation, directors shall be elected by a plurality of the votes cast at
annual meetings of stockholders, and each director so elected shall hold office
until his successor is duly elected and qualified, or until his earlier
resignation or removal. Directors need not be stockholders. Only persons who are
nominated in accordance with the following procedures shall be eligible for
election by the stockholders as directors of the Corporation. Nominations of
persons for election as directors of the Corporation may be made at a meeting of
stockholders (a) by or at the direction of the Board of Directors, (b) by any
nominating committee or persons appointed by the Board of Directors or (c) by
any stockholders of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 3. Such nominations, other than those made by or at the direction
of the Board of Directors or a committee thereof, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be made pursuant to timely notice in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice shall be
delivered to or mailed and received at the principal executive office of the
Corporation not less than thirty (30) days nor more than seventy-five (75) days
prior to the meeting; provided, however, that in the event that less than forty
(40) days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the tenth day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs. Such stockholder's notice to the
Secretary of the Corporation shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director, (i)
the name, age, business address and residence address of the person, (ii) the
principal occupation or employment of the person, (iii) the class and number of
shares of capital stock of the Corporation which are beneficially owned by the
person and (iv) any other information relating to the person that is required to
be disclosed in solicitations for proxies for election of directors pursuant to
Rule 14a under the Securities Exchange Act of 1934, as now or hereafter amended;
and (b) as to the stockholder giving the notice (i) the name and record address
of such stockholder and (ii) the class and number of shares of capital stock of
the Corporation which are beneficially owned by such stockholder. The
Corporation may require any
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proposed nominee to furnish such other information as may reasonably be required
by the Corporation to determine the eligibility of such proposed nominee to
serve as a director of the Corporation. No person shall be eligible for election
by the stockholders as a director of the Corporation unless nominated in
accordance with the procedures set forth herein. The chairman of the meeting of
the stockholders shall, if the facts warrant, determine and declare to the
meeting that nomination was not made in accordance with the foregoing procedure,
and if he should so determine, he shall so declare to the meeting and the
defective nomination shall be disregarded.
4. Newly Created Directorships and Vacancies. Except as otherwise fixed
pursuant to the provisions of Article IV of the Certificate of Incorporation or
the Corporation relating to the rights of the holders of any class or series of
Preferred Stock to elect directors under specified circumstances, newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled solely by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board of Directors, or by a sole remaining
director. Any director elected in accordance with the preceding sentence shall
hold office until the next annual election of directors and until such
director's successor shall have been elected and qualified, or until such
director's earlier resignation or removal.
5. Resignation. Any director may resign by delivering his written
resignation to the Corporation at its principal office addressed to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
6. Removal. Any director, other than those who may be elected by the
holders of any class or series of Preferred Stock, or the entire Board of
Directors, may be removed from office only for cause by the affirmative vote of
the holders of at least a majority of the voting power of all of the then
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (the "Voting Stock"), voting together as
a single class.
7. Interested Directors. No contract or transaction between the Corporation
and one or more of its directors or officers, or between the Corporation and any
other corporation, partnership, association, or other organization in which one
or more of its directors of officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose
if (i) the material facts as to his or their relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or (ii) the material facts as to his or their relationship or
interest and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board of Directors, a committee thereof
or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
8. Committees. The Board of Directors may, by a resolution passed by a
majority of the whole Board of Directors, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members of the committee present at any meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of the absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors and subject to the
provisions of the General Corporation Law of the State of Delaware, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs
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of the Corporation, and may authorize the seal of the Corporation to be affixed
to all such papers which may require it. Each such committee shall keep minutes
and make such reports as the Board of Directors may from time to time request.
Except as the Board of Directors may otherwise determine, any committee may make
rules for the conduct of its business, but, unless otherwise provided by the
directors or in such rules, its business shall be conducted as nearly as
possible in the same manner as is provided in these Bylaws for the Board of
Directors.
9. Compensation. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE IV
MEETINGS OF THE BOARD
1. Place of Meetings. The regular or special meetings of the Board of
Directors or any committee designated by the Board shall be held at the
principal office of the Corporation or at any other place within or without the
State of Delaware that a majority of the Board of Directors or any such
committee, as the case may be, may designate from time to time by resolution.
2. Regular Meetings. The Board of Directors shall meet each year
immediately after and at the same place as the annual meeting of the
stockholders for the purpose of electing officers and transacting such other
business as may come before the meeting. The Board of Directors or any committee
designated by the Board may provide, by resolution, for the holding of
additional regular meetings within or without the State of Delaware without
notice of the time and place of such meeting other than such resolution;
provided that director who is absent when such resolution is made shall be given
notice of said resolution.
3. Special Meetings. Special meetings of the Board of Directors or any
committee designated by the Board may be held at any time and place, within or
without the State of Delaware, designated in a call by the Chairman of the
Board, if there be one, by the President or by a majority of the members of the
Board of Directors or any such committee, as the case may be.
4. Notice of Special Meetings. Except as otherwise provided by these Bylaws
or the laws of the State of Delaware, written notice of each special meeting of
the Board of Directors or any committee thereof setting forth the time and place
of the meeting shall be given to each director by the Secretary or by the
officer or director calling the meeting not less than twenty-four hours prior to
the time fixed for the meeting or, in the case of notice by mail, not less than
forty-eight hours before the date of the meeting. Notice of special meetings may
be either given personally, personally by telephone, or by sending a copy of the
notice through the United States mail or by telecopy to the address of each
director appearing on the books of the Corporation. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail so addressed,
with postage prepaid thereon. If notice be given by telecopy, such notice shall
be deemed to be delivered when the receipt of the telecopy is electronically
confirmed. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
5. Waiver of Notice. A director may waive, in writing, notice of any
special meeting of the Board of Directors or any committee thereof, either
before, at, or after the meeting; and his waiver shall be deemed the equivalent
of giving notice. By attending or participating in a regular or special meeting,
a director waives any required notice of such meeting unless the director, at
the beginning of the meeting, objects to the holding of the meeting or the
transacting of business at the meeting.
6. Quorum and Action at Meeting. At meetings of the Board of Directors or
any committee designated by the Board, a majority of the total number of
directors, or a majority of the members of any such committee, as the case may
be, shall constitute a quorum for the transaction of business. In the event one
or more of the
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directors shall be disqualified to vote at any meeting, then the required quorum
shall be reduced by one for each such director so disqualified; provided,
however, that in no case shall less than one-third ( 1/3) of the number so fixed
constitute a quorum. If a quorum is present, the act of the majority of
directors in attendance shall be the act of the Board of Directors or any
committee thereof, as the case may be, unless the act of a greater number is
required by these Bylaws, the Certificate of Incorporation or the General
Corporation Law of the State of Delaware. If a quorum shall not be present at
any meeting of the Board of Directors, the directors present thereat may adjourn
that meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
7. Presumption of Assent. A director who is present at a meeting of the
Board of a committee thereof when action is taken is deemed to have assented to
the action unless: (i) he objects at the beginning of such meeting to the
holding of the meeting or the transacting of business at the meeting; (ii) he
contemporaneously requests that his dissent from the action taken be entered in
the minutes of such meeting; or (iii) he gives written notice of his dissent to
the presiding officer of such meeting before its adjournment or to the Secretary
of the Corporation immediately after adjournment of such meeting. The right of
dissent as to a specific action taken at a meeting of a Board or a committee
thereof is not available to a director who votes in favor of such action.
8. Actions of Board. Unless otherwise provided by the Certificate of
Incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all the members of the Board of Directors or committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or committee.
9. Meetings by Means of Conference Telephone. Unless otherwise provided by
the Certificate of Incorporation or these Bylaws, members of the Board of
Directors of the Corporation, or any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 9 shall constitute
presence in person at such meeting.
ARTICLE V
OFFICERS AND AGENTS
1. Enumeration, Election and Term. The officers of the Corporation shall
consist of a President, a Secretary, a Treasurer and such other officers with
such other titles as may be deemed necessary or desirable by the Board of
Directors, including one or more Vice Presidents, Assistant Treasurers and
Assistant Secretaries and a Chairman of the Board (who must be a director). Any
number of offices may be held by the same person, unless otherwise prohibited by
law, and no officer need be a stockholder, director, except in the case of the
Chairman of the Board of Directors, or a resident of the State of Delaware.
Except as otherwise provided by law, the Certificate of Incorporation or these
Bylaws, each officer shall hold office until his successor is elected and
qualified or until his earlier death, resignation or removal. The officers of
the Corporation shall be elected annually by the Board of Directors at the first
meeting of the Board held after each annual meeting of the stockholders.
2. General Duties. All officers and agents of the Corporation, as between
themselves and the Corporation, shall have such authority and shall perform such
duties in the management of the Corporation as may be provided in these Bylaws
or as may be determined by resolution of the Board of Directors not inconsistent
with these Bylaws. In all cases where the duties of any officer, agent or
employee are not prescribed by the Bylaws or by the Board of Directors, such
officer, agent or employee shall follow the orders and instructions of the
President.
3. Voting Securities Owned by the Corporation. Powers of attorney, proxies,
waivers of notice of meeting, consents and other instruments relating to
securities owned by the Corporation may be executed in the name of and on behalf
of the Corporation by the President or any Vice President and any such officer
may, in the
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name of and on behalf of the Corporation, take all such action as any such
officer may deem advisable to vote in person or by proxy at any meeting of
security holders of any corporation in which the Corporation may own securities
and at any such meeting shall possess and may exercise any and all rights and
power incident to the ownership of such securities and which, as the owner
thereof, the Corporation might have exercised and possessed if present. The
Board of Directors may, by resolution, from time to time confer like powers upon
any other person or persons.
4. Vacancies. The Board of Directors may fill any vacancy occurring in any
office for any reason and may, in its discretion, leave any vacancy unfilled for
such period as it may determine other than a vacancy in the office of President
or Secretary. The officer so selected shall hold office until his successor is
elected and qualified or until his earlier death, resignation or removal.
5. Compensation. The Board of Directors from time to time shall fix the
compensation of the officers of the Corporation. The compensation of other
agents and employees of the Corporation may be fixed by the Board of Directors,
or by any committee designated by the Board or by an officer to whom that
function has been delegated by the Board.
6. Resignation and Removal. Any officer may resign by delivering his
written resignation to the Corporation at its principal office addressed to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event. Any officer or agent of the Corporation may be removed, with or
without cause, by a vote of the majority of the members of the Board of
Directors whenever in its judgment the best interests of the Corporation may be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or an agent shall not of itself create contract rights.
7. Chairman of the Board. The Chairman of the Board, if there be one, shall
preside as chairman at meetings of the stockholders and the Board of Directors.
He shall, in addition, have such other duties as the Board may prescribe that he
perform. At the request of the Chief Executive Officer, the Chairman of the
Board may, in the case of the Chief Executive Officer's absence or inability to
act, temporarily act in his place. In the case of death of the Chief Executive
Officer or in the case of his absence or inability to act without having
designated the Chairman of the Board to act temporarily in his place, the
Chairman of the Board shall perform the duties of the Chief Executive Officer,
unless the Board of Directors, by resolution, provides otherwise. If the
Chairman of the Board shall be unable to act in place of the Chief Executive
Officer, the President may exercise such powers and perform such duties as
provided in Section 8 below.
8. Chief Executive Officer. The Chief Executive Officer shall be the
Corporation's Chief Executive Officer and have general supervision of the
business of the Corporation. At each annual meeting of the stockholders, the
Chief Executive Officer shall give a report of the business of the Corporation
for the preceding fiscal year and shall perform whatever other duties the Board
of Directors may from time to time prescribe.
9. President. In the event the position of Chief Executive Officer shall
not be occupied or the Chief Executive Officer shall be absent or otherwise
unable to act, the President shall preside at meetings of the stockholders and
directors and shall discharge the duties of the presiding officer. The President
shall perform whatever other duties the Board of Directors may from time to time
prescribe.
10. Vice Presidents. Each Vice President shall have such powers and perform
such duties as the Board of Directors may from time to time prescribe or as the
President may from time to time delegate to him. At the request of the
President, in the case of the President's absence or inability to act, any Vice
President may temporarily act in his place. In the case of the death of the
President, or in the case of his absence or inability to act without having
designated a Vice President or Vice Presidents to act temporarily in his place,
the Board of Directors, by resolution, may designate a Vice President or Vice
Presidents to perform the duties of the President. If no such designation shall
be made, all of the Vice Presidents may exercise such powers and perform such
duties.
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11. Secretary. The Secretary shall keep or cause to be kept in books
provided for that purpose, the minutes of the meetings of the stockholders,
executive committee, if any, and any other committees, and of the Board of
Directors; shall see that all notices are duly given in accordance with the
provisions of these Bylaws and as required by law; shall be custodian of the
records and of the seal of the Corporation and see that the seal is affixed to
all documents, the execution of which on behalf of the Corporation under its
seal is duly authorized and in accordance with the provisions of these Bylaws;
and, in general, shall perform all duties incident to the office of Secretary
and such other duties as may, from time to time, be assigned to him by the Board
of Directors or by the President. In the absence of the Secretary or his
inability to act, the Assistant Secretaries, if any, shall act with the same
powers and shall be subject to the same restrictions as are applicable to the
Secretary.
12. Treasurer. The Treasurer shall have custody of corporate funds and
securities. He shall keep full and accurate accounts of receipts and
disbursements and shall deposit all corporate monies and other valuable effects
in the name and to the credit of the Corporation in the depository or
depositories of the Corporation, and shall render an account of his transactions
as Treasurer and of the financial condition of the Corporation to the President
or the Board of Directors upon request. Such power given to the Treasurer to
deposit and disburse funds shall not, however, preclude any other officer or
employee of the Corporation from also depositing and disbursing funds when
authorized to do so by the Board of Directors. The Treasurer shall, if required
by the Board of Directors, give the Corporation a bond in such amount and with
such surety or sureties as may be ordered by the Board of Directors for the
faithful performance of the duties of his office. The Treasurer shall have such
other powers and perform such other duties as may be from time to time
prescribed by the Board of Directors or the President. In the absence of the
Treasurer or his inability to act, the Assistant Treasurers, if any, shall act
with the same authority and shall be subject to the same restrictions as are
applicable to the Treasurer.
13. Delegation of Duties. Whenever an officer is absent, or whenever, for
any reason, the Board of Directors may deem it desirable, the Board may delegate
the powers and duties of an officer to any other officer or officers or to any
director or directors.
ARTICLE VI
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
The Corporation shall indemnify any and all of its directors, officers,
employees or agents to the fullest extent provided by the laws of the State of
Delaware. Without limiting the generality of the foregoing, the Corporation
shall indemnify any and all of its directors, officers, employees or agents in
accordance with the following provisions.
1. Indemnification: Third Party Actions. The Corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner or trustee of, or in
any similar managerial or fiduciary position of, or as an employee or agent of
another corporation, partnership, joint venture, trust, association or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
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2. Indemnification: Derivative Actions. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, partner or
trustee of, or in any similar managerial or fiduciary position of, or as an
employee or agent of another corporation, partnership, joint venture, trust,
association or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
3. Mandatory Indemnification. To the extent that a director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Sections 1
and 2 of this Article VI, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith without the necessity of
authorization in the specific case.
4. Authorization for Indemnification. Any indemnification under Sections 1
and 2 of this Article VI (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 1 and 2 of this Article VI. Such determination shall be made (1) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
5. Advance Payment of Expenses. Expenses (including attorneys' fees)
incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article VI.
Such expenses (including attorneys' fees) incurred by other employees and agents
may be so paid upon such terms and conditions, if any, as the Board of Directors
deems appropriate.
6. Non-exclusivity. The indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections of this Article VI
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors, statute or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue, unless otherwise
provided when authorized or ratified, as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
7. Insurance. The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
fiduciary or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, partner or trustee of, or in any similar
managerial or fiduciary position of, or as an employee or agent of another
corporation, partnership, joint venture, trust, association or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article VI.
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8. Definitions. For purposes of this Article VI, the following terms shall
have the following meanings:
(a) references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Article VI with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued;
(b) references to "other enterprises" shall include employee benefit plans;
(c) references to "fines" shall include any excise taxes assessed on a
person with respect to any employee benefit plan;
(d) references to "serving at the request of the Corporation" shall include
any service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to any employee benefit plan, its participants or
beneficiaries;
(e) a person who acted in good faith and in a manner he reasonably believed
to be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in this Article VI; and
(f) all references to the masculine gender include the feminine.
ARTICLE VII
CAPITAL STOCK
1. Certificates of Stock. The shares of the Corporation shall be
represented by certificates, provided that the Board of Directors of the
Corporation may, by resolution, provide that some or all of any or all classes
or series of its stock shall be uncertificated shares. Any such resolution shall
not apply to shares represented by a certificate until such certificate is
surrendered to the Corporation. Notwithstanding the adoption of such a
resolution by the Board of Directors, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the Corporation by
the Chairman or Vice Chairman of the Board of Directors, or the President or
Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Corporation representing the number of shares
registered in certificate form. Any or all the signatures on the certificate may
be a facsimile. In case any officer, transfer agent, or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
2. Issuance of Stock. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the Corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the Corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by resolution of the Board of Directors in such manner,
for such consideration and on such terms as the Board of Directors may
determine. Consideration for such shares of capital stock shall be expressed in
dollars, and shall not be less than the par value or stated value therefor, as
the case may be. The par value for shares, if any, shall be stated in the
Certificate of Incorporation, and the stated value for shares, if any, shall be
fixed from time to time by the Board of Directors.
3. Lost Certificates. The Board of Directors may direct a new certificate
to be issued in place of any previously issued certificate alleged to have been
destroyed or lost if the owner makes an affidavit or affirmation of that fact
and produces such evidence of loss or destruction as the Board may require. The
Board,
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in its discretion, may as a condition precedent to the issuance of a new
certificate require the owner to give the Corporation a bond as indemnity
against any claim that may be made against the Corporation relating to the
allegedly destroyed or lost certificate.
4. Transfer of Shares. Subject to applicable law, shares of stock of the
Corporation may be transferred on its books upon the surrender to the
Corporation or its transfer agent of the certificates representing such shares,
if any, duly endorsed or accompanied by a written assignment or power of
attorney duly executed and with such proof of authority or authenticity of
signature as the Corporation or its transfer agent may reasonably require. In
that event, the surrendered certificates shall be cancelled, new certificates
issued to the persons entitled to them, if any, and the transaction recorded on
the books of the Corporation.
5. Registered Stockholders. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and to hold liable for calls
and assessments a person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of the other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of the State of Delaware.
6. Stock Ledger. An appropriate stock journal and ledger shall be kept by
the Secretary or such registrars or transfer agents as the directors by
resolution may appoint in which all transactions in the shares of stock of the
Corporation shall be recorded.
7. Restriction on Transfer of Shares. Notice of any restriction on the
transfer of the stock of the Corporation shall be placed on each certificate of
stock issued or in the case of uncertificated shares contained in the notice
sent to the registered owner of such shares in accordance with the provisions of
the General Corporation Law of the State of Delaware.
ARTICLE VIII
DISBURSEMENTS
All checks or demands for money and notes of the Corporation shall be
signed by such officer or officers or such other person or persons as the Board
of Directors may from time to time designate.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall be determined by the Board of
Directors and set forth in the minutes of the directors. Said fiscal year may be
changed from time to time by the Board of Directors in its discretion.
ARTICLE X
DIVIDENDS
Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation, if any, may be declared by the
Board of Directors at any regular or special meeting, pursuant to law. Dividends
may be paid in cash, in property, or in shares of the capital stock, subject to
the provisions of the Certificate of Incorporation. Before payment of any
dividend, there may be set aside out of any funds of the Corporation available
for dividends such sum or sums as the directors from time to time, in their
absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the directors shall
think in the best interests of the Corporation, and the directors may modify or
abolish any such reserve in the manner in which it was created.
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ARTICLE XI
AMENDMENTS
Subject to repeal or change by action of the stockholders, the Board of
Directors may amend, supplement or repeal these Bylaws or adopt new Bylaws, and
all such changes shall affect and be binding upon the holders of all shares
heretofore as well as hereafter authorized, subscribed for or offered.
Notwithstanding the foregoing and anything contained in the Certificate of
Incorporation to the contrary, Section 7 of Article II and Section 3 of Article
III of the Bylaws shall not be altered, amended or repealed and no provision
inconsistent therewith shall be adopted without the affirmative vote of the
holders of at least a majority of the voting power of all the then outstanding
shares of Voting Stock, voting together as a single class.
ARTICLE XII
MISCELLANEOUS
1. Gender. Whenever required by the context, the singular shall include the
plural, the plural the singular, and one gender shall include all genders.
2. Invalid Provision. The invalidity or unenforceability of any particular
provision of these Bylaws shall not affect the other provisions herein, and
these Bylaws shall be construed in all respects as if such invalid or
unenforceable provision was omitted.
3. Governing Law. These Bylaws shall be governed by and construed in
accordance with the laws of the State of Delaware.
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APPENDIX F
OPINION OF KATTEN MUCHIN & ZAVIS
December 16, 1997
Sportmart, Inc.
1400 S. Wolf Road
Wheeling, Illinois 60090
Attention: Board of Directors
Gentlemen:
We have been requested to render this opinion concerning certain matters of
federal income tax law in connection with the proposed merger of GB Acquisition,
Inc., a corporation which is organized and existing under the laws of the State
of Delaware ("Merger Sub") and which is a wholly owned subsidiary of Gart Sports
Company, a corporation which is organized and existing under the laws of the
State of Delaware ("Holdings"), with and into Sportmart, Inc., a corporation
which is organized and existing under the laws of the State of Delaware (the
"Company") with the Company surviving the merger and becoming a wholly owned
subsidiary of Holdings, pursuant to the applicable corporate laws of the State
of Delaware (the "Merger"), and in accordance with that certain Amended and
Restated Agreement and Plan of Merger dated as of December 2, 1997 between and
among the Company, Holdings and Merger Sub and Gart Bros. Sporting Goods Company
(the "Agreement").
Except as otherwise provided, capitalized terms referred to herein have the
meanings set forth in the Agreement. All section references, unless otherwise
indicated, are to the Internal Revenue Code of 1986, as amended (the "Code").
We have acted as special tax legal counsel to the Company in connection
with the Merger. For the purpose of rendering this opinion, we have examined (or
will examine on or prior to the Effective Time of the Merger) and are relying
(or will rely) upon (without any independent investigation or review thereof)
the truth and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in the following documents (including
all schedules and exhibits thereto):
1. The Agreement;
2. The Representation Letter dated December 16, 1997 issued to us by
Holdings and Merger Sub;
3. The Representation Letter dated December 16, 1997 issued to us by
the Company;
4. The Representation Certificates signed by Company officers,
directors and shareholders owning at least 5% of Company Common Stock, as
well as Representation Certificates from the partners of the following
partnerships: (1) LJH LP, and (2) AH LP; and
5. The Registration Statement on Form S-4 dated December 16, 1997 (the
"Registration Statement").
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. There has been (or will be by the Effective Time of the Merger) due
execution and delivery of all documents where due execution and delivery
are prerequisites to the effectiveness thereof;
2. Any representation or statement referred to above made "to the
knowledge of" or otherwise similarly qualified is correct without such
qualification;
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3. The Merger will be consummated pursuant to the Agreement and will
be effective under the applicable state law;
4. There is no plan or intention by the Company stockholders who own
5% or more of the outstanding shares of Company Common Stock to sell,
exchange or otherwise dispose of their shares of Holdings Common Stock to
be issued in the Merger;
5. Following the Merger, the Company will continue its historic
business or use a significant portion of its historic business assets in a
business;
6. No outstanding indebtedness of the Company, Holdings or Merger Sub
has or will represent equity for tax purposes (including, without
limitation, any loans from Holdings to the Company); no outstanding equity
of the Company, Holdings or Merger Sub has represented or will represent
indebtedness for tax purposes; no outstanding security (other than the
existing options to acquire Company Stock), instrument, agreement or
arrangement that provides for, contains, or represents either a right to
acquire shares of the Company Common Stock or to share in the appreciation
thereof constitutes or will constitute "stock" for purposes of Section
368(c) of the Code;
7. To the extent any expenses relating to the Merger (or the "plan of
reorganization" within the meaning of Treas. Reg. sec.1.368-1(c) with
respect to the Merger) are funded directly or indirectly by a party other
than the party incurring such expenses, such expenses will be within the
guidelines established in Revenue Ruling 73-54, 1973-1 C.B. 187; and
8. Neither Holdings, the Company or Merger Sub is, or will be at the
time of the Merger: (a) an "investment company" within the meaning of
Section 368(a)(2)(F) of the Code; or (b) under the jurisdiction of a court
in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of
the Code.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion, for federal income tax purposes, that (1) no gain or loss will
be recognized by the Company, Holdings or Merger Sub solely as a result of the
consummation of the Merger; (2) no gain, loss or income will be recognized by
holders of Company Common Stock upon the receipt of Holdings Common Stock in
exchange therefor (except with respect to any cash received by holders of
Company Common Stock in respect of fractional shares); (3) the aggregate tax
basis of Holdings Common Stock received by a holder of Company Common Stock in
the Merger will be the same as the aggregate tax basis of Company Common Stock
surrendered in exchange therefor by such stockholder, reduced by amounts
allocable to fractional shares for which cash is to be received; (4) the holding
period of Holdings Common Stock received in the Merger by the holders of Company
Common Stock will include the period during which the shares of Company Common
Stock surrendered in exchange therefor were held, provided that the Company
Common Stock is held as a capital asset in the hands of the holders of Company
Common Stock on the date of the exchange; and (5) cash payments received by
holders of Company Common Stock in lieu of a fractional share will be treated as
if such fractional share of Holdings Common Stock has been issued in the Merger
and then redeemed by Holdings. A holder of Holdings Common Stock receiving such
cash will generally recognize gain or loss, upon such payment, measured by the
difference (if any) between the amount of cash received and the basis in such
fractional share.
In addition to the assumptions set forth above, this opinion is subject to
the exceptions, limitations and qualifications set forth below:
1. This opinion represents and is based upon our best judgment
regarding the application of existing federal income tax laws arising under
the Code, judicial decisions, administrative regulations and published
rulings and procedures. Our opinion is not binding upon the Internal
Revenue Service or the courts, and the Internal Revenue Service is not
precluded from successfully asserting a contrary position. No ruling has
been or will be requested from the Internal Revenue Service concerning the
federal income tax consequences of the Merger. Furthermore, no assurance
can be given that future legislative, judicial or administrative changes,
on either a prospective or retroactive basis, would not adversely affect
the
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accuracy of the opinion expressed herein. Nevertheless, we undertake no
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws after the date of this
opinion.
2. Our opinion concerning certain of the federal income tax
consequences of the Merger is limited to the specific federal income tax
consequences presented above. No opinion is expressed as to any transaction
other than the Merger, including any transaction undertaken in connection
with the Merger. In addition, this opinion does not address any other
federal, estate, gift, state, local or foreign tax consequences that may
result from the Merger. In particular, we express no opinion regarding:
(a) whether and the extent to which any Company stockholder who has
provided or will provide services to the Company, Holdings or Merger Sub
will have compensation income under any provision of the Code;
(b) the effects of such compensation income, including, but not
limited to, the effect upon the basis and holding period of the Holdings
Common Stock received by any such stockholder in the Merger;
(c) the effects of the Merger and Holdings' assumption of
outstanding options to acquire the Company Common Stock on the holders
of such options;
(d) the effects of the Merger on any pension or other employee
benefit plan maintained by Holdings or the Company;
(e) the potential application of the "golden parachute" provisions
of Sections 280G, 3121(v)(2) and 4999 of the Code, the alternative
minimum tax provisions of Sections 55, 56 and 57 of the Code or the
regulations promulgated thereunder;
(f) the survival and/or availability, after the Merger, of any of
the federal income tax attributes or elections of the Company or
Holdings (including, without limitation, foreign tax credits or net
operating loss carryforwards, if any, of the Company or Holdings), after
application of any provision of the Code, as well as the regulations
promulgated thereunder and judicial interpretations thereof;
(g) the basis of any equity interest in the Company acquired by
Holdings in the Merger; and
(h) the tax consequences of the Merger (including the opinion set
forth above) as applied to specific stockholders of the Company and/or
holders of options or warrants for shares of the Company Common Stock or
that may be relevant to particular classes of the Company stockholders
and/or holders of options or warrants to purchase shares of the Company
Common Stock, including, without limitation, dealers in securities,
corporate shareholders subject to the alternative minimum tax, foreign
persons, and holders of shares of Company Common Stock acquired upon
exercise of stock options or in other compensatory transactions.
3. No opinion is expressed if all the transactions described in the
Agreement are not consummated in accordance with the terms of such
Agreement and without waiver or breach of any material provision thereof or
if all of the representations, warranties, statements and assumptions upon
which we relied are not true and accurate at all relevant times. In the
event any one of the statements, representations, warranties or assumptions
upon which we have relied to issue this opinion is incorrect, our opinion
might be adversely affected and may not be relied upon.
4. If the facts vary from those relied upon (including if any
representation, covenant, warranty or assumption upon which we have relied
is inaccurate, incomplete, breached or ineffective), our opinion contained
herein could be inapplicable.
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5. This opinion is being delivered solely for the purpose of
satisfying the condition set forth in Section 7.3(g) of the Agreement. This
opinion may not be made available to any other person or entity, without
our prior written consent. We do, however, consent to the filing of this
opinion as an exhibit to the Registration Statement and the inclusion of
this opinion as an Appendix to the Proxy Statement/Prospectus contained
therein. We further consent to the use of our name in the Registration
Statement wherever it appears.
Very truly yours,
KATTEN MUCHIN & ZAVIS
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PROXY PROXY
SPORTMART, INC.
1400 South Wolf Road, Suite 200, Wheeling, Illinois 60090
PROXY FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 9, 1998
TO VOTE AT THE SPECIAL MEETING IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE
BOARD OF DIRECTORS OF SPORTMART, INC., SIGN AND DATE THE REVERSE SIDE OF THIS
CARD WITHOUT CHECKING ANY BOX.
The undersigned holder of Voting Common Stock of Sportmart, Inc. (the "Company")
hereby appoints Larry J. Hochberg and Andrew S. Hochberg, or either of them,
with full power of substitution, as proxies to cast all votes which the
undersigned stockholder is entitled to cast at the Special Meeting of
Stockholders (the "Special Meeting") to be held on January 9, 1998, at 9:00
a.m., local time, at the Northbrook Hilton, 2855 N. Milwaukee Avenue,
Northbrook, Illinois, and at any adjournments thereof, upon the following
matters. The undersigned stockholder hereby revokes any proxy or proxies
heretofore given.
This proxy, when properly executed, will be voted and will be voted in the
manner as directed herein by the undersigned stockholder. UNLESS CONTRARY
DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AND IN ACCORDANCE
WITH THE DETERMINATION OF THE BOARD OF DIRECTORS AS TO OTHER MATTERS. The
undersigned stockholder may revoke this proxy at any time before it is voted by
delivering to the Corporate Secretary of the Company either a written revocation
of the proxy or a duly executed proxy bearing a later date, or by appearing at
the Special Meeting and voting in person. The undersigned stockholder hereby
acknowledges receipt of the Notice of Special Meeting of Stockholders and Proxy
Statement/Prospectus.
(Comments/Change of Address)
----------------------------------------------------------
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(If you have written in the above space, please mark the
corresponding box on the reverse side)
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
SPORTMART, INC.
1400 South Wolf Road, Suite 200
Wheeling, Illinois 60090
YOUR VOTE IS IMPORTANT
TO THE COMPANY
PLEASE SIGN AND RETURN YOUR PROXY/INSTRUCTION
CARD BY TEARING OFF THE TOP PORTION OF THIS SHEET
AND RETURNING IT IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
<PAGE> 255
SPORTMART, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]
[ ]
FOR WITHHOLD FOR ALL
ALL ALL EXCEPT
1. Adoption of the Merger Agreement (as defined in [ ] [ ] [ ]
the Proxy Statement/Prospectus that accompanies
this Proxy) and the transactions contemplated
thereby.
2. In their discretion the proxies are authorized
to vote upon such other business as may properly
come before the Special Meeting, or any adjourn-
ments hereof.
I am planning to attend the Special Meeting of [ ]
Stockholders.
Comments/ Date: , 19__
Change [ ] --------------------------
of Address
-------------------------------------
Signature(s)
-------------------------------------
Signature(s)
PLEASE MARK, SIGN, DATE AND RETURN THIS
CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
If you receive more than one proxy card,
please sign and return ALL cards in the
enclosed envelope.
Please date and sign exactly as the name
appears hereon. When signing as executor,
administrator, trustee, guardian, attorney-
in-fact or other fiduciary, please give
title as such. When signing as a corporation,
please sign in full corporate name by
President or other authorized officer. If
you sign for a partnership, please sign in
partnership name by an authorized person.
- --------------------------------------------------------------------------------
* FOLD AND DETACH HERE *
PLEASE VOTE, SIGN EXACTLY AS NAME APPEARS ABOVE,
DATE, AND RETURN
THIS PROXY FORM PROMPTLY USING THE ENCLOSED POSTPAID ENVELOPE.
