<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 9, 1998
---------------
GART SPORTS COMPANY
------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Delaware 000-23515 84-1242802
- --------------------------------------------------------------------------------
(State or other juris- (Commission file (IRS Employer
diction of incorporation) number) Identification No.)
1000 Broadway
Denver, Colorado 80203
- --------------------------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
(303) 861-1122
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On January 9, 1998, the Registrant completed its acquisition of Sportmart,
Inc. ("Sportmart"). Sportmart is a sporting goods superstore retailer with 59
stores located in Illinois, California, Minnesota, Washington, Ohio, Wisconsin,
Iowa, Indiana and Oregon. The acquisition was accomplished pursuant to a merger
of Sportmart with and into GB Acquisition, Inc., a wholly-owned subsidiary of
the Registrant, whereby Sportmart was the surviving corporation in the merger.
Pursuant to the merger, former shareholders of Sportmart received 0.165014
shares of the Registrant's Common Stock for each share of Sportmart common
stock, resulting in the issuance of approximately 2,180,800 shares of the
Registrant's Common Stock. With the acquisition of Sportmart, the Registrant has
become the nation's second largest sporting goods retail chain, based on gross
revenues, with 122 stores operating in 16 states. Audited and interim
consolidated financial statements of Sportmart and pro forma financial
information giving effect to the acquisition of Sportmart have been filed with
this Report on Form 8-K.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
(1) Sportmart, Inc. Interim Consolidated Financial Statements and Annual
Consolidated Financial Statements are filed herewith beginning on page F-2.
(b) PRO FORMA FINANCIAL INFORMATION.
(1) Gart Sports Company Pro Forma Combined Financial Statements are filed
herewith beginning on page F-27.
(c) EXHIBITS
23.1 Consent of Independent Accountants
ITEM 8. CHANGE IN FISCAL YEAR.
On January 14, 1998, the Registrant determined to change its fiscal year
to a 52 or 53 week fiscal year ending on the Saturday closest to the end of
January in each year; with a transition period beginning on January 4, 1998
(following the end of the most recent fiscal year, which ended on January 3,
1998) and ending on January 31, 1998, and the next full fiscal year beginning
on February 1, 1998. The transition period will be reported on the Registrant's
Form 10-K.
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GART SPORTS COMPANY
(Registrant)
/s/ Thomas B. Nelson
-----------------------------------
Date: January 23, 1998 Thomas B. Nelson
Senior Vice President
<PAGE> 4
INDEX TO FINANCIAL STATEMENTS
SPORTMART, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of February 2, 1997 and
November 2, 1997 (Unaudited)........................... F-2
Consolidated Statements of Operations for the 39 weeks
ended October 27, 1996 and November 2, 1997
(Unaudited)............................................ F-3
Consolidated Statements of Stockholders' Equity for the 53
weeks ended February 2, 1997, and 39 weeks ended
November 2, 1997 (Unaudited)........................... F-4
Consolidated Statements of Cash Flows for the 39 weeks
ended October 27, 1996 and November 2, 1997
(Unaudited)............................................ F-5
Notes to Consolidated Financial Statements (Unaudited).... F-6
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants......................... F-8
Consolidated Balance Sheets as of January 28, 1996 and
February 2, 1997....................................... F-9
Consolidated Statements of Operations for the 52 weeks
ended January 29, 1995 and January 28, 1996, and 53
weeks ended February 2, 1997........................... F-10
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-11
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-12
Notes to Consolidated Financial Statements................ F-13
</TABLE>
GART SPORTS COMPANY
<TABLE>
<S> <C>
PRO FORMA COMBINED FINANCIAL STATEMENTS
Pro Forma Combined Financial Information.................. F-27
Pro Forma Combined Balance Sheet as of October 4, 1997
(Unaudited)............................................ F-28
Pro Forma Combined Statements of Operations for the 39
weeks ended October 4, 1997 (Unaudited)................ F-29
Pro Forma Combined Statements of Operations for the 52
weeks ended January 4, 1997 (Unaudited)................ F-30
Notes to Pro Forma Combined Financial Information
(Unaudited)............................................ F-31
</TABLE>
F-1
<PAGE> 5
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-2
<PAGE> 6
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-3
<PAGE> 7
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-4
<PAGE> 8
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-5
<PAGE> 9
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-6
<PAGE> 10
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-7
<PAGE> 11
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-8
<PAGE> 12
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-9
<PAGE> 13
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-10
<PAGE> 14
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-11
<PAGE> 15
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-12
<PAGE> 16
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-13
<PAGE> 17
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-14
<PAGE> 18
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-15
<PAGE> 19
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-16
<PAGE> 20
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-17
<PAGE> 21
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-18
<PAGE> 22
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-19
<PAGE> 23
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-20
<PAGE> 24
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
- --------------- ----------- ---------------- ---------------- ---------------- ----------------
<S> <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-21
<PAGE> 25
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-22
<PAGE> 26
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-23
<PAGE> 27
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-24
<PAGE> 28
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-25
<PAGE> 29
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-26
<PAGE> 30
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-27
<PAGE> 31
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-28
<PAGE> 32
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-29
<PAGE> 33
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-30
<PAGE> 34
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>
<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-31
<PAGE> 35
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-32
<PAGE> 36
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-33
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
23.1 Consent of Coopers & Lybrand L.L.P.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement (No.
333-43997) of Gart Sports Company on Form S-8 of our report dated March 18,
1997, on our audits of the consolidated balance sheets of Sportmart, Inc. as of
February 2, 1997 and January 28, 1996, and on the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended February 2, 1997, which report appears in
the form 8-K of Gart Sports Company dated January 9, 1998.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
January 22, 1998
