UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 26, 1997
Commission File No. 1-13426
THE SPORTS AUTHORITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3511120
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3383 N. State Road 7 - Ft. Lauderdale, Florida 33319
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(Address of principal executive offices) (Zip Code)
(954) 735-1701
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on which Registered
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Common Stock, $.01 par value The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing:
$576,344,255 at the close of business on March 31, 1997.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 31,466,567 Shares of
Common Stock outstanding as of March 31, 1997.
Documents Incorporated by Reference: (1) the Company's 1996 Annual Report to
Stockholders incorporated partially in Parts I and II hereof and (2) the
Company's Proxy Statement dated April 23, 1997, incorporated partially in Part
III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is the largest operator of large format sporting goods stores
in the United States in terms of both sales and number of stores and is also the
largest full-line sporting goods retailer in the United States in terms of
sales. At January 26, 1997, the Company operated 165 sporting goods megastores,
virtually all in excess of 40,000 gross square feet, and three stores under its
new format "The Sports Authority, Ltd." These "Ltd." format stores range from
9,000 - 30,000 square feet. The Company's business strategy is to offer
customers extensive selections of quality, brand name sporting equipment and
athletic and active footwear and apparel, everyday fair prices and premium
customer service. The Company has an international presence, with 159 stores in
27 states in the United States, six stores in Canada and three stores in Japan
operated by a joint venture 51% owned by the Company. The Company had sales of
approximately $1,271.3 million in 1996, a 21.5% increase over 1995. The Company
is the first full-line sporting goods retailer to have achieved annual revenues
in excess of $1 billion.
The Company was founded by Jack A. Smith, its current Chairman and Chief
Executive Officer, who opened the first store in Fort Lauderdale, Florida in
1987. During the following two years, the Company added nine more stores. In
1990, the Company was acquired by Kmart Corporation ("Kmart"), which provided
additional capital to fund the Company's expansion program as well as its
continual investment in infrastructure and technology. Following public
offerings in November 1994 and October 1995, Kmart no longer owns any interest
in the Company.
INDUSTRY OVERVIEW
According to the National Sporting Goods Association ("NSGA"), total U.S.
retail sales of sporting goods (including sporting equipment, athletic footwear
and apparel) exceeded $36 billion in 1995. The retail sporting goods industry is
comprised of four principal categories of retailers: (i) traditional sporting
goods retailers, (ii) specialty sporting goods retailers, (iii) large format
sporting goods retailers and (iv) mass merchandisers.
Large format sporting goods retailers represent an increasing percentage of
the retail sporting goods market in the United States. In 1995, the top three
large format sporting goods retailers (including the Company) represented
approximately 6% of the retail sporting goods sales, with the Company's sales
being greater than the sales of the other two combined.
The sporting goods industry in the United States is characterized by
fragmented competition, limited assortments from traditional sporting goods
retailers, customer preference for one-stop shopping convenience, reduced mall
shopping and a growing importance of delivering value to the customer through
selection, service and price. Management believes that these characteristics of
the sporting goods industry make the large format operators particularly well
suited to grow and increase their market share relative to the traditional
sporting goods retailers, specialty sporting goods retailers and mass
merchandisers.
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BUSINESS STRATEGY
The Company's business strategy is to consistently offer the extensive
selection and competitive pricing associated with category dominant retailers
while, at the same time, offering the brand names and professional service
associated with smaller specialty shops and pro shops. The key elements of this
strategy are as follows:
MEGASTORE FORMAT. The Company operates large format stores, virtually all
of which are in excess of 40,000 gross square feet. This megastore format
enables the Company to provide under one roof an extensive selection of
merchandise for sports and leisure activities that ordinarily are associated
with specialty shops and pro shops, such as golf, tennis, snow skiing, cycling,
hunting, fishing, bowling, archery, boating and water sports, as well as for
activities ordinarily associated with traditional sporting goods retailers, such
as team sports, physical fitness, and men's, women's and children's athletic and
active apparel and footwear. Each megastore offers approximately 45,000 active
SKUs (excluding discontinued items) across 16 major departments. The Company's
megastores provide ease of shopping through pleasant and well-designed store
layouts, informative and easily identifiable signage, individual price ticketing
of each product, speedy and courteous check-out, easy store access and
convenient customer parking.
QUALITY BRAND NAME SPORTING GOODS. The Company's merchandising strategy is
to offer the largest breadth and depth of selection in quality brand name
sporting goods in each of its over 1,200 merchandise classifications. The
Company's comprehensive merchandise assortment includes over 900 brand names,
including Adidas, Asics, Champion, Coleman, Columbia, Ektelon, Fila, Huffy, K2,
Nike, Prince, Pro Player, Rawlings, Reebok, Rollerblade, Rossignol, Russell,
Spalding, Starter, Teva, Timberland and Wilson. The Company utilizes a
sophisticated inventory management system in conjunction with strong store
operating controls to achieve optimal in-stock levels of brand name merchandise.
PREMIUM CUSTOMER SERVICE. The Company seeks to distinguish itself from
other large format sporting goods retailers, traditional sporting goods
retailers and mass merchandisers by emphasizing the higher levels of customer
service generally associated with smaller specialty stores and pro shops. In
addition to hiring many sales associates who are sports enthusiasts skilled in
various disciplines, the Company provides extensive training for its sales
associates and offers incentives that reward achievement of customer service
goals.
EVERYDAY FAIR PRICES. The Company maintains a policy of consistent everyday
fair pricing that focuses on depth and breadth of merchandise and customer
service relative to price and is designed to assure customers that they will
receive good value at the Company's stores. The Company's everyday fair pricing
policy is to maintain prices that are generally below prices at specialty
sporting goods retailers and comparable with prices at traditional sporting
goods retailers and other sporting goods superstores. Unlike many of its large
format competitors, the Company generally does not take temporary price
reductions to promote product sales. The Company also seeks to be a price leader
on certain highly identifiable items.
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FOCUS ON MULTI-STORE MARKETS. The Company seeks to establish a significant
presence in each of its markets and pursues a store expansion strategy that
primarily focuses on opening multiple stores in its markets. This focus enables
the Company to obtain significant market penetration and to leverage management
and advertising expenses, thereby achieving greater economies of scale. In
addition, the Company believes its multi-store expansion strategy results in
greater name recognition and enhanced customer convenience in each market. The
Company believes that achieving greater market penetration will enable it to
compete more effectively and increase profitability and return on capital over
the long term. While the Company's expansion strategy is primarily focused on
multi-store markets, it will enter smaller markets where the anticipated returns
justify opening a single store.
EXPANSION
The Company has engaged in a rapid expansion program. The following table
sets forth certain information regarding the Company's expansion program during
the fiscal years indicated:
<TABLE>
<CAPTION>
NEW STORES
----------------------------
MARKET
------------------- NO. OF STORES GROSS SQUARE
AT PERIOD FEET
YEAR TOTAL NEW EXISTING END AT PERIOD END
---- ------ ----- -------- ------------- -------------
<C> <C> <C> <C> <C> <C>
1992................... 20 9 11 56 2,391,739
1993................... 24 8 16 80 3,415,200
1994................... 27 5 22 107 4,618,400
1995................... 29 15 14 136 5,899,117
1996................... 32 7 25 168 7,290,549
</TABLE>
In 1996, the Company opened 32 stores for a total of 168 stores at the end
of the year, including six stores in Canada, three stores in Japan operated by a
joint venture 51% owned by the Company and three smaller format stores in New
York City under the name "The Sports Authority, Ltd." The markets in which these
stores are located are listed in Item 2. The Company currently plans to open
between 70 and 80 new stores during the next two years. The rate of the
Company's expansion will depend, among other things, on general economic and
business conditions affecting consumer confidence and spending, the availability
of qualified management personnel, the availability of desirable locations, the
negotiation of acceptable lease or purchase terms, the availability of adequate
capital and its ability to manage the operational aspects of its growth. The
Company's ability to maintain an aggressive growth rate will be dependent upon
its ability to open new stores. There can be no assurance that the Company will
sustain the growth in the number of stores and the revenue growth achieved
historically or that it will maintain consistent levels of profitability,
particularly as it expands into markets now served by other large format
sporting goods retailers and mass merchandisers.
The Company's expansion program includes opening stores internationally.
The Company operates six stores in Canada and three stores in Japan. In
addition, the Company is considering expansion into other countries. There can
be no assurance that the retail formula for the Company's stores that has worked
successfully to date in the United States will work successfully in foreign
markets. Further, in
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addition to the risks associated with its expansion program generally, the
success of the Company's stores in foreign markets will depend on the Company's
ability to source and ship merchandise and to address particular challenges in
each country it enters, such as the availability of a suitable workforce, the
condition of the local real estate market, applicable regulatory requirements,
the stability of such country's currency and the overall economic and political
climate.
The Company's expansion strategy focuses primarily on multi-store markets
where it can achieve significant market penetration and can leverage management
personnel and advertising expenses. For example, more than two-thirds of those
stores that were opened or are planned to be opened in 1996 and 1997 are in the
Company's existing markets. This strategy has resulted in some cannibalization
of sales at existing stores. While management believes that achieving greater
market penetration will enable the Company to compete more effectively and
increase profitability and return on capital in the long term, there can be no
assurance that the level of cannibalization that results in the future will not
adversely affect the Company's sales and profitability.
In analyzing a new market, the Company evaluates that market's potential in
terms of total number of store locations. Sites are selected based on regional
access, co-tenancy, available lease or purchase terms, visibility, parking,
demographics (such as income levels and distribution, age and family size),
population and proximity to competition. In general, the Company's site
selection strategy is designed to maximize profitability and market share.
The Company traditionally has obtained new store locations through
long-term operating leases. On an operating lease basis, the cost of opening a
new store consists primarily of the investment in inventory, the cost of
furniture, fixtures and equipment and pre-opening expenses, such as the costs
associated with training employees and stocking the store. Inventory for a new
store is estimated to cost approximately $1.6 million, with average vendor
payables equal to approximately 50% of the initial inventory, for a net initial
investment of approximately $0.8 million. The cost of furniture, fixtures and
equipment for a new store is approximately $0.7 million. Pre-opening expenses,
which are expensed in the month in which the store opens, typically average
approximately $0.3 million and include grand opening advertising expenses
averaging approximately $0.1 million per store. If the Company purchases the
land and building, there would be an additional capital expenditure of
approximately $4 million to $8 million to open each such store. If the site
requires a retrofit of an existing building, costs (excluding furniture,
fixtures and equipment) approximate $1.4 million. However, for projected higher
volume stores in densely populated urban areas (New York City and Chicago, for
example) retrofit costs tend to be significantly higher. The Company currently
plans to continue to finance a majority of its new stores with operating leases,
assuming availability and appropriate terms, and currently plans to acquire,
develop and own a number of its new stores. Due to the Company's increasing
focus on self-development and its decision to begin implementation of a
logistics program in 1997 involving creating a network of regional distribution
centers (see "Purchasing and Distribution" below), the Company expects that its
capital expenditures will be approximately $130 million in 1997.
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STORES AND CUSTOMER SERVICE
The Company's megastores average in excess of 40,000 gross square feet. The
stores are located primarily in regional strip or power centers that generally
have tenants that are value-oriented large format retailers, and a small
percentage are located in malls and stand alone locations. Unlike warehouse
stores, the interior of each store creates a pleasant shopping environment, with
carpet and resilient tile floor coverings, high ceilings, bright lighting, wide
aisles, extensive category signage, high perimeter "H" frame type racks, "ladder
style" apparel fixtures and product statement shops, which promote technical
products of leading vendors. Each store displays merchandise in accordance with
centrally developed presentation standards. These standards are designed to
provide logical department adjacencies to promote convenience and multiple
purchases of related items. The layouts for each department are also centrally
developed to ensure that each store utilizes display techniques to highlight
merchandise and present a consistent and attractive shopping environment. The
Company believes that its sales per gross square foot and inventory turnover are
enhanced due to the manner in which it uses its square footage for sales
purposes.
The Company believes customers want an easy shopping environment and
therefore seeks to make shopping at its stores as convenient as possible through
its extensive in-store signage and department placement. For example, the
athletic and active footwear department is located at the front of the store.
The Company continues to refine its store layout and signage, and in particular
is increasing point-of-purchase product information. Furthermore, as part of its
commitment to a high level of customer service, the Company is now utilizing bar
code scanners in all of its stores.
The Company divides selling and non-selling functions in order to allow its
sales associates to devote their full attention to assisting customers.
Non-selling duties, such as receiving and stocking, are performed immediately
prior to opening or shortly after closing.
The Company believes that its premium customer service, training of
store-level management, continual investment in technology and infrastructure
and attentiveness to loss prevention practices have contributed to a relatively
low rate of inventory shrinkage at the Company. On average, for the last three
years, the Company's shrinkage, expressed as a percentage of sales, has been
approximately 0.7% at retail, or 0.4% at cost.
MERCHANDISING
The Company's merchandising strategy focuses on offering a broader and
deeper selection of quality, brand name merchandise than is generally available
in traditional sporting goods retailers. The Company's comprehensive merchandise
assortment consists of a wide variety of sports equipment, apparel, footwear and
accessories and is designed to meet all of the sporting goods needs of its
customers, from the serious sports enthusiast to the weekend athlete. Each
megastore offers approximately 45,000 active SKUs (excluding discontinued items)
across more than 1,200 merchandise classifications.
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The Company also tailors merchandise assortment and store space allocation
to reflect customer preferences at each store location. This is accomplished by
recognizing differences related to the region or market in which such store is
located, as well as by recognizing subtle differences related to the
demographics of the surrounding communities. This store-by-store merchandising
involves differences in brands, sizes, colors, fabrication and timing of the
assortment and the space allocated to present such merchandise.
The Company's stores offer an extensive selection of both hard lines, which
consist of equipment for team sports, fitness, hunting, fishing, camping, golf,
racquet sports, cycling, water sports, marine, snow sports and general
merchandise, and soft lines, which consist of athletic and active footwear and
apparel. The following table sets forth the approximate percentage of sales
attributable to hard lines and soft lines for the periods presented:
PERCENTAGE OF NET SALES
-----------------------
YEAR
-----------------------
MERCHANDISE GROUP 1996 1995 1994
- ----------------- ---- ---- ----
Hard lines.................................... 50% 53% 56%
Soft lines:
Apparel................................... 22 20 19
Footwear.................................. 28 27 25
--- --- ---
Subtotal soft lines.................. 50 47 44
--- --- ---
Total......................................... 100% 100% 100%
=== === ===
The hard lines and soft lines sold by the Company include the following
merchandise categories:
ATHLETIC AND ACTIVE FOOTWEAR. Each of the Company's stores carries a
complete line of athletic footwear for a wide variety of activities and for a
broad range of experience levels. A typical store carries more than 500 styles
of footwear. This footwear selection includes athletic shoes for running,
football, basketball, baseball, tennis, wrestling, aerobics, walking, soccer,
cross-training, hiking, hunting, bowling, golf and lifestyle. An important
product category within the Company's footwear department is recreational,
street hockey and aggressive in-line skates as well as socks and accessories.
MEN'S AND LADIES' ATHLETIC AND ACTIVE APPAREL. Each of the Company's stores
carries both general active and leisure apparel and apparel designed and
fabricated for specific sports. General active and leisure apparel includes
t-shirts, fleece, warm-ups, shorts and polo shirts from vendors such as Nike,
Reebok, Adidas, Russell, Starter and Champion. Apparel for specific sports
ranges from entry level to highly technical for golf, tennis, running, aerobics,
biking, swimming, weight lifting, baseball, football, soccer, lacrosse,
volleyball, hockey and skiing.
LICENSED APPAREL. This category includes hats, t-shirts, shorts, pants,
sweatshirts and outerwear from prominent colleges and the professional sports of
baseball, basketball, football and hockey. Additionally, both replica and
authentic jerseys are available for professional and college sports teams. This
category also includes children's athletic and active licensed apparel.
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HUNTING, FISHING AND CAMPING. A vast assortment of merchandise is carried
in the Company's stores to satisfy the needs of outdoor sports enthusiasts of
all levels of experience. Camping and backpacking merchandise includes tents,
sleeping bags, lanterns, flashlights, grills, coolers and accessories. For
fishing and hunting, each of the Company's stores sells rods, reels, fishing
line, terminal tackle, tackle boxes, fishing nets, firearms, ammunition, scopes,
binoculars, archery equipment and accessories.
TEAM SPORTS. Each of the Company's stores carries a full range of
merchandise for basketball, football, soccer, baseball, ice and off-ice hockey,
volleyball, table tennis, billiards, bowling, darts and lawn games.
GOLF AND RACQUET SPORTS. The Company carries a broad selection of
merchandise for golf and racquet sport enthusiasts. For the golfer, each of the
Company's stores stocks golf clubs, golf bags, golf balls, golf accessories,
putting machines, teaching aids and instructional videos. Each store also
carries a variety of tennis, racquetball, squash and badminton rackets, as well
as tennis balls, racquet balls, squash balls, shuttlecocks, tennis nets,
badminton nets and replacement grips. The Company offers customers the option of
having their tennis racquets strung by stringers certified by the United States
Racket Stringers Association.
FITNESS. A wide range of fitness equipment is offered at each of the
Company's stores, including fitness riders, steppers, treadmills, rowing
machines, stationary bicycles, home gyms, weight benches, free weights,
dumbbells, boxing and martial arts equipment, and a broad selection of handheld
exercise equipment. Also carried in this category are food supplements.
WATER SPORTS AND MARINE. Water sports and marine merchandise includes an
array of merchandise for boating and for water sports such as swimming, water
skiing, jet skiing, SCUBA diving and snorkeling. This merchandise includes water
skis, boogie boards, wetsuits, SCUBA gear, fins, masks, snorkels, towable
inflatables and life vests.
CYCLING. Each of the Company's stores sells a wide variety of bicycles for
various types of cycling, including mountain bikes, hybrid bikes (for on and off
road) as well as extreme sports bikes (BMX and Trick) and a large variety of
skateboards. In addition, the Company carries accessories such as cycling
gloves, helmets and water bottles.
GENERAL MERCHANDISE. Each of the Company's stores carries a wide variety of
general merchandise to complement its comprehensive selection of sport specific
merchandise. This merchandise includes videos, magazines, books, sunglasses and
watches and licensed team novelties such as mugs, clocks, helmets, pennants,
bumper stickers and key chains.
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SNOW SKI DEPARTMENT. The snow ski department in the Company's North
American stores is operated by a group of regional licensees, all operating
under the overview of the principal licensee, Green Mountain Corporation. All
licensees also operate their own specialty snow ski shops. These licensees are
responsible for assorting, pricing and merchandising the snow ski department in
each store as well as staffing and maintenance and tuning of ski equipment.
Determination of assortment, pricing, inventory levels and merchandise
presentation is done in conjunction with the Company's merchandising management.
The Company believes that, as a result of the practice of using licensees to
operate the snow ski department, its stores have a better geographical
merchandising assortment and additional brand name snow ski products in both
apparel and hardgoods categories than traditional sporting goods retailers. The
snow ski department in the Company's stores in Japan is operated directly by the
Company.
PURCHASING AND DISTRIBUTION
The Company maintains its own central buying staff and a central
replenishment and allocation staff. This staff manages the planning system,
allocates fashion and seasonal merchandise, replenishes basic merchandise and
coordinates the distribution of all merchandise.
Using a detailed merchandise planning system, the merchandise mix for each
store is selected by the central buying staff in consultation with district and
store managers. The system allows the Company to manage its sales and inventory
levels by store at the subclass level. The Company also uses an automated
allocation system to allocate non-reorderable merchandise to stores based on
planned sales and inventory at the SKU level, as well as recent sales trends and
inventory position. The Company also utilizes an automated replenishment system
for approximately 40% of its active assortment based upon specific in-stock
requirements utilizing statistically based sales forecasting. This automatic
replenishment system balances the need to provide high in-stock positions to
satisfy customer demand with the costs associated with carrying such inventory.
The Company currently purchases merchandise from over 1,000 vendors and, in
fiscal 1996, the Company's largest vendor, Nike, Inc., accounted for
approximately 13% of its total merchandise purchased. The Company does not
maintain any long-term or exclusive commitments or arrangements to purchase from
any vendor. The Company is either the largest or one of the largest customers
for many of its vendors. For most vendors, the Company is the largest per store
seller of that vendor's merchandise. As the number of stores increases pursuant
to its store expansion plan, the Company believes it will continue to obtain
sufficient merchandise for all of its stores on a timely basis.
More than 85% of the dollar value of the Company's merchandise is shipped
directly to each store by vendors. In addition, the Company uses a small
contract break bulk operation located in New Jersey to distribute certain
orders, primarily for athletic and active footwear. In addition, the Company
operates offsite receiving operations in New Jersey, Southeast Florida and
Southern California to service certain stores in the New York metropolitan area,
Southeast Florida and Alaska, Hawaii and Japan respectively.
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In 1996, the Company began the planning phase of a logistics initiative
designed to enhance the ordering, transporting and receiving of merchandise.
Under the initiative, the Company will be establishing Regional Distribution
Centers ("RDC's") to receive and allocate merchandise to the Company's stores.
The RDC's will serve as flow-through facilities, not storage warehouses. Large
quantities of merchandise will be received at the facility, made "floor ready",
and subsequently allocated and distributed to the stores. The Company believes
that the establishment of the RDC's will result in transportation, payroll and
merchandise cost savings. The Company is currently considering four distribution
centers over the next 2 to 3 years, with the initial distribution center
expected to be operational by the Spring of 1998.
MANAGEMENT INFORMATION SYSTEMS
Since its inception, the Company has implemented sophisticated management
information systems that integrate purchasing, receiving, sales and perpetual
inventory data on a daily basis. These systems have enabled the Company to
maintain strong financial controls and to manage its inventory. The inventory
management systems manage all aspects of inventory control from order placement
through elimination of aged inventory. These systems include the functions of
automated replenishment, automated merchandising planning and allocation,
electronic data interchange and daily tracking of in-stock levels by item and
location. Management believes that these systems also have sufficient capacity
and flexibility to enable the Company to systematically manage the
implementation of its expansion strategy.
The Company currently employs point-of-sale ("POS") terminals in all of its
stores, which provide price look-up capabilities and SKU-level sales data,
capture customer zip code data and initiate requests for authorization of the
different credit and check tenders accepted by the Company. In 1995, the Company
installed bar code scanners in all of its stores. The Company also utilizes
small IBM AS/400 computers at store level as in-store processors to record
merchandise receipts, produce price tickets, maintain SKU-level perpetual
inventories, provide time keeping information and for general data inquiry.
These in-store processors communicate interactively with central AS/400
computers to exchange data created at store level and the Company's corporate
offices. These processors are intended to provide local management with the
ability to more closely manage inventory productivity and merchandise space
planning, as well as reduce the amount of employee time spent on non-selling
functions.
In 1996, the Company switched to frame relay technology in all stores to
exchange data between the POS system and processors at store level with central
AS/400 computers utilized by corporate staff to support store operations. This
change produced a more reliable, lower cost technology to provide the greater
transmission capacity that is required to support the Company's expanding
communication needs.
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ADVERTISING AND PROMOTION
The Company seeks to maintain name recognition and market penetration
through broadcast media, newspaper ads and inserts, billboards and sports
sponsorships. Because of the heavy brand name orientation of the Company's
merchandise assortment, the Company's advertising impact is supplemented by
advertising of manufacturers and distributors of brand name products, including
products promoted on infomercials. In connection with entering a new market, the
Company uses extensive billboard, radio, and newspaper advertising to establish
name recognition in that market. The focus on multi-store markets enables the
Company to leverage a substantial portion of advertising costs.
COMPETITION
The retail sporting goods industry is highly competitive and is comprised
of the following four principal categories of retailers:
TRADITIONAL SPORTING GOODS RETAILERS. Traditional sporting goods retailers
tend to have relatively small stores, generally ranging in size from 5,000 to
20,000 square feet, frequently located in malls or strip centers (e.g.,
Modell's, Champs). These stores typically carry limited quantities of each item
in their assortment and generally offer a more limited selection at higher
prices than large format stores.
SPECIALTY SPORTING GOODS RETAILERS. Specialty sporting goods retailers
include specialty shops, ranging in size from 1,000 to 10,000 square feet,
frequently located in malls (e.g., Foot Locker, Foot Action), and also include
pro shops that often are single store operations. These stores typically carry a
wide assortment of one specific product category, such as athletic shoes or golf
or tennis equipment, and generally have higher prices than large format stores.
LARGE FORMAT SPORTING GOODS RETAILERS. Large format stores such as the
Company's stores generally range in size from 30,000 to 70,000 square feet,
offer a broad selection of brand name sporting goods merchandise and tend to be
either anchor stores in strip malls or free-standing locations (e.g., Sportmart,
Jumbo Sports and Dick's Clothing and Sporting Goods). In addition, other large
format sporting goods retailers compete with certain product categories sold by
the Company (e.g., Just For Feet in footwear and Gander Mountain in outdoor
sporting products).
MASS MERCHANDISERS. Mass merchandisers are large stores, generally ranging
in size from 50,000 to 200,000 square feet, that feature sporting equipment as
only a small portion of all merchandise carried, and are located primarily in
strip centers or free-standing locations (e.g., Wal*Mart and Kmart). These
stores have limited selection and fewer brand names and also typically do not
offer the customer service offered by sporting goods retailers.
The Company believes that the principal strengths with which it competes
are premium customer service, a broad assortment of brand name merchandise, ease
of shopping and everyday fair pricing.
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TRADEMARKS AND SERVICE MARKS
The Company uses "The Sports Authority" as its trade name and applies to
qualify to do business as such in each jurisdiction where it operates stores.
The trademarks and service marks THE SPORTS AUTHORITY/registered trademark/,
AUTHORITY/registered trademark/, THE SPORTS AUTHORITY & Design/registered
trademark/, THE SKI AUTHORITY/registered trademark/, THE KNIFE
AUTHORITY/registered trademark/, THE LOW PRICE AUTHORITY/registered trademark/,
THE CLUB AUTHORITY/registered trademark/ and THE BAG AUTHORITY/registered
trademark/ are registered in the U.S. Patent and Trademark Office. The Company
uses a family of marks which feature the word AUTHORITY. Many of these marks are
the subject of pending applications for registration in the U.S., Canada, Japan
and elsewhere. The Company has continued the process of registering its
principal trademarks and service marks throughout the world on a strategic
basis. The Company vigorously protects its trademarks, service marks and trade
name from infringement throughout the world. Use of these marks in the U.S. and
Canada is under license from Intelligent Sports, Inc., a wholly-owned subsidiary
of the Company.
ASSOCIATES
As of January 26, 1997, the Company had a total of approximately 5,500
full-time and approximately 5,200 part-time associates. Of these, approximately
10,100 were employed in the Company's stores and approximately 600 were employed
in corporate office positions. None of the Company's associates is covered by
collective bargaining agreements. The Company endeavors to promote new store
management from its existing personnel. The Company believes that its
relationships with its associates are good.
SEASONALITY
The Company's business is highly seasonal, with its highest sales and
operating profitability occurring in the fourth quarter, which includes the
holiday selling season. In fiscal 1996, 29.6% of the Company's sales and 55.4%
of its operating income occurred in the fourth quarter compared to 30.8% and
57.0%, respectively in 1995. The Company's expansion program generally is
weighted toward store openings in the second half of the fiscal year. In the
future, changes in the number and timing of store openings and consumer buying
habits, particularly in the holiday selling season, may change seasonality
trends.
12
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth certain information as of January 26, 1997
regarding the markets in which the Company currently has stores.
UNITED STATES REGIONS/METROPOLITAN AREA NUMBER OF STORES
--------------------------------------- ----------------
NORTHEAST
Baltimore.................................................. 3
Boston .................................................... 5
Hartford/North Haven....................................... 3
New York .................................................. 22
Philadelphia .............................................. 7
Providence................................................. 2
Washington, D.C. .......................................... 11
-----
SUBTOTAL NORTHEAST.................................... 53
SOUTHEAST
Atlanta.................................................... 11
Charleston................................................. 1
Charlotte.................................................. 2
Chattanooga................................................ 1
Ft. Myers.................................................. 1
Gainesville, FL............................................ 1
Greensboro................................................. 1
Greenville, SC............................................. 1
Jacksonville............................................... 2
Naples..................................................... 1
New Orleans................................................ 2
Norfolk/Hampton............................................ 3
Orlando.................................................... 6
Southeast Florida.......................................... 13
Tampa Bay.................................................. 7
Winston-Salem.............................................. 1
---
SUBTOTAL SOUTHEAST.................................... 54
MIDWEST
Chicago.................................................... 13
Detroit.................................................... 8
St. Louis.................................................. 4
----
SUBTOTAL MIDWEST...................................... 25
SOUTHWEST
Las Vegas.................................................. 3
Phoenix.................................................... 6
San Antonio................................................ 2
Tucson..................................................... 1
----
SUBTOTAL SOUTHWEST.................................... 12
13
<PAGE>
NORTHWEST
Anchorage.................................................. 1
Seattle/Tacoma............................................. 4
----
SUBTOTAL NORTHWEST.................................... 5
WEST
Honolulu................................................... 2
Los Angeles................................................ 2
Sacramento................................................. 2
San Diego.................................................. 4
----
SUBTOTAL WEST......................................... 10
----
SUBTOTAL UNITED STATES......................................... 159
---
CANADA/METROPOLITAN AREA
Toronto.................................................... 6
----
SUBTOTAL CANADA................................................ 6
----
JAPAN/METROPOLITAN AREA
Nagoya..................................................... 3
----
SUBTOTAL JAPAN................................................. 3
----
TOTAL ALL COUNTRIES............................................ 168
===
The Company occupies 151 stores pursuant to long-term leases. The leases
typically provide for an initial 15 to 25 year term with multiple five-year
renewal options. In most cases, the Company's leases provide for minimum annual
rent subject to periodic adjustments, plus other charges, including a
proportionate share of taxes, insurance and common area maintenance. Seventy of
the Company's store leases are guaranteed by Kmart. In addition, the Company
owns 17 of its stores.
The Company leases a building at 3383 N. State Road 7, Fort Lauderdale,
Florida, containing approximately 98,000 square feet, that houses its corporate
offices, with a remaining primary term of 11 years with two 10-year renewal
options.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is traded on the New York Stock Exchange
(the "NYSE") under the symbol "TSA". The following table sets forth, for the
fiscal quarters indicated, the high and low market prices for the Common Stock
as reported on the NYSE, as adjusted to reflect a three-for-two stock split
effected on July 16, 1996, for the past two fiscal years of the Company.
HIGH LOW
----- -----
Fiscal 1995
1st Quarter ............................... 14.25 11.25
2nd Quarter ............................... 16.33 11.42
3rd Quarter ............................... 20.17 16.00
4th Quarter ............................... 16.67 11.25
Fiscal 1996
1st Quarter ............................... 20.25 12.50
2nd Quarter ............................... 24.17 19.17
3rd Quarter ............................... 29.00 18.50
4th Quarter ............................... 26.38 16.50
As of March 31, 1997, the Company had approximately 850 shareholders of
record.
DIVIDEND POLICY
The Company did not declare any dividends in 1995 or 1996 and intends to
retain its earnings to finance future growth. Therefore, the Company does not
anticipate paying any cash dividends in the foreseeable future. The declaration
and payment of dividends, if any, is subject to the discretion of the Board of
Directors and to certain limitations under the General Corporation Law of the
State of Delaware. In addition, the Company's Revolving Credit Facility and
Lease Guaranty Agreement contain restrictions on the Company's ability to pay
dividends. See Note 8 to the Financial Statements on page 26 of the Company's
1996 Annual Report to Stockholders, which pages are incorporated herein by
reference. The timing, amount and form of dividends, if any, will depend, among
other things, on the Company's results of operations, financial condition, cash
requirements and other factors deemed relevant by the Board of Directors.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated herein by reference
to the information under the caption "Selected Consolidated Financial
Information" on page 10 of the Company's 1996 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item 7 is incorporated herein by reference
to the information under the caption "Management's Discussion and Analysis" on
pages 11-15 of the Company's 1996 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated herein by reference
to the information on pages 18-31 of the Company's 1996 Annual Report to
Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Jack A. Smith, age 61. Mr. Smith founded the Company and has served as
Chairman of the Board since the Initial Public Offering on November 23, 1994,
and as Chief Executive Officer and a Director since its inception in 1987. He
also served as President of the Company from its inception to February 1996.
Previously Mr. Smith served in various senior management positions, including
Chief Operations Officer, with Herman's Sporting Goods, Inc., a retail sporting
goods chain, from 1981 to 1987.
Richard J. Lynch, Jr., age 45. Mr. Lynch has served as President and Chief
Operating Officer of the Company since February 1996 and as a Director since
June 1990. He previously served as Senior Vice President and Chief Financial
Officer of the Company from January 1991 to February 1996. Mr. Lynch joined the
Company as Vice President and Chief Financial Officer in June 1988 after serving
as Chief Financial Officer for The Sports Club, Inc., a retail sporting goods
chain, from 1986 to 1987, and as Chief Financial Officer at various retail
divisions of W. R. Grace and Co. from 1978 to 1986.
Robert J. Timinski, age 49. Mr. Timinski has served as Senior Vice
President and General Merchandise Manager since January 1993. Prior to joining
the Company, he served as Executive Vice President of Odyssey USA, Inc., a
manufacturer of outerwear and outdoor products, from 1990 to 1992 and in various
senior level positions at Herman's Sporting Goods, Inc. from 1978 to 1990,
including Executive Vice President and Chief Merchandise Officer from 1987 to
1990 and Senior Vice President and General Merchandise Manager from 1986 to
1987.
Arnold D. Sedel, age 59. Mr. Sedel has served as Senior Vice President,
Stores since January 1991. He joined the Company as Vice President of Operations
in August 1988 after having served as Senior Vice President, Operations for
Herman's Sporting Goods, Inc. from 1982 to 1987 and as President of The Sporting
Goods Warehouse, a retail sporting goods chain, from 1975 to 1981.
Samuel G. Allen, age 47. Mr. Allen joined the Company in April 1995 as
International President. Prior thereto, Mr. Allen served as President and Chief
Executive Officer of Sport Chalet, Inc., a retail sporting goods chain, since
1984.
Anthony F. Crudele, age 40. Mr. Crudele has served as Senior Vice President
and Chief Financial Officer since February 1996. He previously served as Vice
President and Controller of the Company from January 1991 to February 1996. Mr.
Crudele joined the Company as Controller in April 1989 after serving in various
positions at Price Waterhouse from 1981 to 1989.
17
<PAGE>
There is no family relationship between any of these executive officers or
between any such officer and any Director of the Company. The remaining
information required by this Item 10 is incorporated herein by reference to the
information under the captions "Election of Directors" and "Section 16(a) -
Beneficial Ownership Reporting Compliance" on pages 2-5 and 15-16, respectively,
of the Company's Proxy Statement dated April 23, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the information under the caption "Executive Compensation" on pages
5-13 of the Company's Proxy Statement dated April 23, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by
reference to the information under the caption "Ownership of Common Stock" on
pages 14-15 of the Company's Proxy Statement dated April 23, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the information under the caption "Certain Transactions" on page 16
of the Company's Proxy Statement dated April 23, 1997.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed with, and as a part of, this Annual
Report on Form 10-K.
1. FINANCIAL STATEMENTS.
The financial statements incorporated herein by reference to the
information found on pages 17-31 of the Company's 1996 Annual Report to
Stockholders to be furnished to the Securities and Exchange Commission
are as follows:
Report of Independent Certified Public Accountants
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. EXHIBITS.
See Exhibit Index on Pages 22-24
(b) Reports on Form 8-K.
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE SPORTS AUTHORITY, INC.
Date: APRIL 18, 1997 By: /s/ JACK A. SMITH
-----------------
Jack A. Smith, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ JACK A. SMITH Chairman of the Board, APRIL 18, 1997
--------------------------- Chief Executive Officer
Jack A. Smith and Director
(Principal Executive Officer)
/S/ RICHARD J. LYNCH, JR. President, Chief APRIL 18, 1997
--------------------------- Operating Officer and
Richard J. Lynch, Jr. Director
/S/ ANTHONY F. CRUDELE Senior Vice President and APRIL 18, 1997
--------------------------- Chief Financial Officer
Anthony F. Crudele (Principan Financial and
Accounting Officer)
/S/ NICHOLAS A. BUONICONTI Director APRIL 18, 1997
---------------------------
Nicholas A. Buoniconti
/S/ STEVE DOUGHERTY Director APRIL 18, 1997
---------------------------
Steve Dougherty
/S/ CAROL FARMER Director APRIL 18, 1997
---------------------------
Carol Farmer
/S/ JACK F. KEMP Director APRIL 18, 1997
---------------------------
Jack F. Kemp
20
<PAGE>
/S/ W. MITT ROMNEY Director APRIL 18, 1997
---------------------------
W. Mitt Romney
/S/ HAROLD TOPPEL Director APRIL 18, 1997
---------------------------
Harold Toppel
</TABLE>
21
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBERS DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company,
incorporated herein by reference to Exhibit 3.1 to the Form
10-K for 1994.
3.2 Amended and Restated Bylaws of the Company, incorporated
herein by reference to Exhibit 3.2 to the Form 10-K for 1994.
4.1 Indenture, dated as of September 20, 1996, between the Company
and The Bank of New York, as Trustee, relating to the
Company's $149,500,000 5.25% Convertible Subordinated notes
due September 15, 2001 (including forms of note), incorporated
by reference to Exhibit 4.1 to Registration Statement No.
333-16877 on Form S-3.
4.2 Registration Rights Agreement, dated as of September 20, 1996,
between the Company and Goldman, Sachs & Co., relating to the
Company's $149,500,000 5.25% Convertible Subordinated Notes
due September 15, 2001, incorporated by reference to Exhibit
4.2 to Registration Statement No. 333-16877 on Form S-3.
10.1 Lease Guaranty, Indemnification and Reimbursement Agreement,
dated November 23, 1994, as amended, between the Company and
Kmart Corporation, incorporated herein by reference to Exhibit
10.3 to the Form 10-K for 1994.
10.2 Form of Severance and Change in Control Agreement applicable
to Richard J. Lynch, Jr., Robert J. Timinski and Arnold D.
Sedel, incorporated herein by reference to Exhibit 10.6 to
Registration Statement No. 33-83554 on Form S-1.
10.3 Management Stock Purchase Plan, as amended, incorporated
herein by reference to Exhibit 10.3 to the Form 10-Q for the
second quarter of 1996.
10.4 Stock Option Plan, incorporated herein by reference to Exhibit
99.2 to Registration Statement No. 33-86522 on Form S-8.
10.5 Employee Stock Purchase Plan, as amended, incorporated herein
by reference to Exhibit 10.9 to the Form 10-Q for the second
quarter of 1995.
22
<PAGE>
INDEX TO EXHIBITS - CONTINUED
10.6* Annual Incentive Bonus Plan, as amended. 25
10.7 Director Stock Plan, incorporated herein by reference to
Exhibit 99.4 to Registration Statement No. 33-86522 on Form
S-8.
10.8 Joint Venture Agreement, dated as of January 19, 1995, between
the Company and JUSCO Co., Ltd., incorporated herein by
reference to Exhibit 10.14 to the Form 10-K for 1994.
10.9 Credit Agreement, dated as of April 26, 1995, among the
Company, the financial institutions named therein, First Union
National Bank of Florida, as Administrative Agent, Pearl
Street, L.P., as Syndication Agent, and Bank of Montreal, as
Co-Agent, incorporated herein by reference to Exhibit 10.15 to
the Form 10-Q for the second quarter of 1995.
10.10 Participation Agreement, dated as of July 11, 1995, among the
Company, Harris Trust and Savings Bank, FBTC Leasing Corp.,
BNY Leasing Corporation, Bank of Montreal, First Union
National Bank of Florida, Pearl Street, L.P. and certain other
financial institutions named therein, incorporated herein by
reference to Exhibit 10.16 to the Form 10-Q for the second
quarter of 1995.
10.11 Amended and Restated Leasehold Purchase Agreement, dated as of
July 28, 1995, between Sportstown, Inc. and The Sports
Authority, Inc., incorporated herein by reference to Exhibit
10.17 to the Form 10-Q for the second quarter of 1995.
10.12 Severance and Change in Control Agreement, dated as of April
17, 1995, between the Company and Samuel G. Allen,
incorporated herein by reference to Exhibit 10.18 to
Registration Statement No. 33-96166, on Form S-1.
10.13 1996 Stock Option and Restricted Stock Plan, incorporated
herein by reference to Exhibit A to the Company's Proxy
Statement dated April 25, 1996.
23
<PAGE>
10.14 First Amendment to Joint Venture Agreement, entered into on
September 6, 1996 effective as of January 19, 1995, between
the Company and JUSCO Co., Ltd., amending the Joint Venture
Agreement referenced above as Exhibit 10.8, incorporated by
reference to Exhibit 10.1 to the Form 10-Q for the third
quarter of 1996.
10.15 Employment Agreement, dated as of August 29, 1996, between the
Company and Jack A. Smith, incorporated by reference to
Exhibit 10.2 to the Form 10-Q for the third quarter of 1996.
10.16 Lessor's Statement of Termination, dated October __, 1996,
made (pursuant to a notice from the Company) by Harris Trust
and Savings Bank in favor of the Company, The Sports Authority
Florida, Inc. and The Sports Authority Michigan, Inc.,
terminating the Participation Agreement, dated as of July 11,
1995, among the Company, Harris Trust and Savings Bank, FBTC
Leasing Corp., BNY Leasing Corporation, Bank of Montreal,
First Union National Bank of Florida, Pearl Street, L.P. and
certain other financial institutions named therein, (which
Participation Agreement is referenced above as Exhibit 10.10),
incorporated by reference to Exhibit 10.3 to the Form 10-Q for
the third quarter of 1996.
10.17* JUSCO Services Agreement, dated as of August 1, 1995, between
34 JUSCO Co., Ltd. and Mega Sports Co., Ltd.
10.18* Supplemental Executive Retirement Plan.
10.19* Supplemental 401(k) Savings and Profit Sharing Plan.
11.1* Computation of Earnings Per Share.
13.1* Financial information from pages 10-31 of the Annual Report to
Stockholders for the fiscal year ended January 26, 1997.
21.1* Subsidiaries of the Company.
27* Financial Data Statement.
- ----------
* Filed as part of this Annual Report on Form 10-K.
24
EXHIBIT 10.6
THE SPORTS AUTHORITY, INC.
ANNUAL INCENTIVE BONUS PLAN
(AMENDED EFFECTIVE NOVEMBER 4, 1996)
1. PURPOSES.
The purposes of The Sports Authority, Inc. Annual Incentive Bonus Plan
(the "Plan") are to attract and retain highly-qualified executives by providing
appropriate performance-based short-term incentive awards, to align executive
and shareholder long-term interests by creating a direct link between executive
compensation and shareholder return, and to enable executives, through the
mandatory and optional share purchase features of the Management Stock Purchase
Plan, to develop and maintain a substantial stock ownership position in the
Company's Shares. An additional purpose of the Plan is to serve as a qualified
performance-based compensation program under Section 162(m) of the Internal
Revenue Code of 1986, as amended, in order to preserve the Company's tax
deduction for compensation paid under the Plan to Covered Employees.
2. DEFINITIONS.
The following terms, as used herein, shall have the following meanings:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Bonus" shall mean any annual incentive bonus award granted pursuant to
the Plan; the payment of any such award shall be contingent upon the
attainment of Performance Goals with respect to a Plan Year.
(c) "Change in Control" shall mean the occurrence of an event described
in Section 6(e) hereof.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(e) "Committee" shall mean the Compensation Committee of the Board.
<PAGE>
(f) "Company" shall mean The Sports Authority, Inc., a corporation
organized under the laws of the State of Delaware, or any successor
corporation.
(g) "Covered Employee" shall have the meaning set forth in Section 162(m)
(3) of the Code (or any successor provision).
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(i) "Management Stock Purchase Plan" shall mean The Sports Authority, Inc.
Management Stock Purchase Plan, as amended from time to time.
(j) "Participant" shall mean an officer or other employee of the Company or
one of its Subsidiaries who is eligible to participate herein pursuant
to Section 3 of the Plan and for whom a target Bonus is established
with respect to the relevant Plan Year.
(k) "Performance Goal(s)" shall mean the criteria and objectives which must
be met during the Plan Year as a condition of the Participant's receipt
of payment with respect to a Bonus, as described in Section 5 hereof.
(l) "Plan" shall mean The Sports Authority, Inc. Annual Incentive Bonus
Plan, as amended from time to time.
(m) "Plan Year" shall mean the Company's fiscal year.
(n) "Restricted Shares" shall mean the Shares in which a Bonus is partially
or wholly payable pursuant to Section 6(d) hereof; such Restricted
Shares are issuable pursuant to the Management Stock Purchase Plan.
(o) "Shares" shall mean common shares, $.01 par value, of the Company.
(p) "Subsidiary" shall mean any subsidiary of the Company which is
designated by the Board or the Committee to have any one or more of its
employees participate in the Plan.
2
<PAGE>
(q) "1996 Option Plan" shall mean The Sports Authority, Inc. 1996 Stock
Option and Restricted Stock Plan.
(r) "Bonus Reduction Options" shall mean options to purchase Shares which
are granted pursuant to Section 4(c) of the 1996 Option Plan wholly or
partially in lieu of Bonuses foregone pursuant to Section 6(d) hereof.
3. ELIGIBILITY.
All Company officers and such key employees of the Company and its
Subsidiaries as are designated by the Committee shall participate in the Plan.
In determining the persons to whom Bonuses shall be granted, the Committee shall
take into account such factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the Plan.
4. NO SHARES SUBJECT TO THE PLAN.
No Shares of the Company shall be reserved for, or issued under, the
Plan. To the extent that annual bonuses are paid in Restricted Shares, such
Restricted Shares shall be issued under, and subject to the terms and conditions
of, the Management Stock Purchase Plan. To the extent that Bonuses are foregone
and Bonus Reduction Options are granted in lieu thereof, such Bonus Reduction
Options shall be granted under, and the Shares issuable upon exercise of such
Bonus Reduction Options shall be issued under, and subject to the terms and
conditions of, the 1996 Option Plan.
5. PERFORMANCE GOALS.
Performance Goals may be expressed in terms of (i) the Company's return
on equity, assets, capital or investment, (ii) pre-tax or after-tax profit
levels of the Company or the Subsidiaries or any combination thereof, (iii)
expense reduction levels, (iv) implementation of critical projects or processes,
(v) level of sales and/or (vi) changes in market price of the Shares. To the
extent applicable, any such Performance Goal shall be determined in accordance
with generally accepted accounting principles and reported upon by the Company's
independent accountants. Performance Goals shall include a threshold level of
performance below which no Bonus payment shall be made, levels of performance
3
<PAGE>
at which specified percentages of the target Bonus shall be paid, and a maximum
level of performance above which no additional Bonus shall be paid. The
Performance Goals established by the Committee may be (but need not be)
different each Plan Year and different goals may be applicable to different
Participants.
6. BONUSES.
(a) IN GENERAL. For each Plan Year, the Committee shall specify the
Performance Goals applicable to such Plan Year and the amount of the target
Bonus for each Participant with respect to such Plan Year. A Participant's
target Bonus for each Plan Year shall be expressed as either a dollar amount or
as a percentage of the salary midpoint for the Participant's salary grade.
Unless otherwise provided by the Committee in its discretion in connection with
terminations of employment, or except as set forth in Section 6(e) hereof,
payment of a Bonus for a particular Plan Year shall be made only if and to the
extent the Performance Goals with respect to such Plan Year are attained and
only if the Participant is employed by the Company or one of its Subsidiaries on
the date of payment of the Bonus. The actual amount of a Bonus payable under the
Plan shall be determined as a percentage of the Participant's target Bonus,
which percentage shall vary depending upon the extent to which the Performance
Goals have been attained and may be lesser than, greater than, or equal to 100%.
The Committee may, in its discretion, reduce or eliminate the amount payable to
any Participant (including a Covered Employee), in each case based upon such
factors as the Committee may deem relevant, but shall not increase the amount
payable to any Covered Employee. With respect to the 1994 Plan Year, those
employees of the Company and its subsidiaries who are participants in the Kmart
Corporation Annual Incentive Bonus Plan for Kmart Corporation's 1994 fiscal year
shall be participants in this Plan for the Company's 1994 fiscal year, the same
performance goals and target bonus adopted by Kmart Corporation's Compensation
and Incentives Committee with respect to each such participant shall be the
performance goals and target bonus for the 1994 Plan Year hereunder with respect
to such participant, and the calculation of bonus amounts shall take into
account the Company's entire 1994 fiscal year.
(b) SPECIAL LIMITATION ON CERTAIN BONUSES. Notwithstanding anything to
the contrary contained in this Section 6, the actual Bonus paid to the Company's
Chief Executive Officer under the Plan for any Plan Year may not exceed three
times the salary midpoint for the salary grade of the Chief Executive Officer,
as determined by the Committee prior to the beginning of such Plan Year based on
competitive data, including a survey of
4
<PAGE>
comparable companies; and the Bonus for each other Covered Employee under the
Plan may not exceed two times the salary midpoint (as of the beginning of such
Plan Year) for such Covered Employee's salary grade, as so determined by the
Committee prior to the beginning of such Plan Year.
(c) TIME OF PAYMENT. Unless otherwise determined by the Committee, or
except as provided in Section 6(e) hereof, all payments in respect of Bonuses
granted under this Section 6 shall be made within a reasonable period after the
end of the Plan Year. In the case of Participants who are Covered Employees,
unless otherwise determined by the Committee in connection with terminations of
employment and except as provided in Section 6(e) hereof, such payments shall be
made only after achievement of the Performance Goals has been certified by the
Committee.
(d) FORM OF PAYMENT. Except as provided in Section 6(e) hereof, payment
of at least 20 percent of each Participant's Bonus for any Plan Year before 1996
(less applicable payroll deductions, which shall not include Federal income tax
withholding) shall be made in Restricted Shares pursuant to, and subject to the
terms and conditions of, the Management Stock Purchase Plan. At the election of
each Participant (made in accordance with the terms and conditions of the
Management Stock Purchase Plan), up to 100 percent of the Participant's Bonus
for any Plan Year before 1996 (less applicable payroll deductions, which shall
not include Federal income tax withholding) shall be paid in Restricted Shares
pursuant to, and subject to the terms and conditions of, the Management Stock
Purchase Plan. The amount of the Bonus being paid in Restricted Shares shall be
calculated as follows: (i) multiply the gross Bonus by the aggregate percentage
of the Bonus being paid in Restricted Shares, and (ii) subtract applicable
payroll deductions from the result. The number of Restricted Shares to be paid
shall be calculated in accordance with the Management Stock Purchase Plan.
Payment of the balance of the Participant's Bonus for any Plan Year shall be
made in cash. Payments of portions of any Bonuses made in Restricted Shares
pursuant to the Management Stock Purchase Plan may be referred to therein as
"purchases" of such Shares. Except as provided in Section 6(e) hereof, for any
one or more Plan Years after 1995, the Committee may in its discretion allow
certain Participants to elect to forego all or a portion of their respective
Bonuses and to receive Bonus Reduction Options in lieu thereof. The Committee
shall have sole discretion to determine which Participants will be allowed to
forego Bonuses as provided above and to set limits on the amount of each Bonus
which may be foregone. The Committee shall not be required to treat Participants
uniformly or to act on a consistent basis from one Plan Year to the next.
5
<PAGE>
(e) CHANGE IN CONTROL. Notwithstanding any other provision of the Plan
to the contrary, (i) if a "Change in Control" of the Company (as defined in this
Section 6(e)) shall occur following a Plan Year as to which the Committee has
determined the actual Bonuses to be paid (but such Bonuses have not yet been
paid), such Bonuses shall be paid immediately in cash, (ii) if a Change in
Control shall occur following a Plan Year as to which the Committee has not yet
determined the actual Bonuses to be paid, such Bonuses shall be immediately
determined and paid in cash, and (iii) if a Change in Control shall occur during
a Plan Year as to which target Bonuses have been established (but the actual
Bonuses to be paid have not yet been determined), such Plan Year shall be deemed
to have been completed, the target levels of performance set forth under the
respective Performance Goals shall be deemed to have been attained, and a pro
rata portion of the Bonus so determined for each Participant for such partial
Plan Year (based on the number of full and partial months which have elapsed
with respect to such Plan Year) shall be paid immediately in cash to each
Participant for whom a target Bonus for such Plan Year was established.
Notwithstanding any other provision of the Plan to the contrary, in no event
shall the initial public offering of the Shares be treated as a Change in
Control of the Company for purposes of this Plan.
For purposes of this Section 6, a Change in Control of the Company
shall occur upon the first to occur of the following:
(i) the "beneficial ownership" (as defined in Rule 13d-3 under the
Exchange Act) of securities representing more than 20% of the combined
voting power of the Company is acquired by any "person," as defined in
sections 13(d) and 14(d) of the Exchange Act (other than Kmart Corporation,
the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, or any corporation owned, directly or
indirectly, by the shareholders of the Company in substantially the same
proportions as their ownership of Shares of the Company, or any "person"
acquiring such securities in a sale or transfer by Kmart Corporation in a
transaction not involving a public offering), or
(ii) the shareholders of the Company approve a definitive
agreement to merge or consolidate the Company with or into another
corporation or to sell or otherwise dispose of all or substantially all of
its assets, or adopt a plan of liquidation, or
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(iii) during any period of three consecutive years beginning after
the completion of the initial public offering of the Shares, individuals
who at the beginning of such period were members of the Board cease for any
reason to constitute at least a majority thereof (unless the election, or
the nomination for election by the Company's shareholders, of each new
director was approved by a vote of at least a majority of the directors
then still in office who were directors at the beginning of such period or
whose election or nomination was previously so approved).
7. ADMINISTRATION.
Prior to the completion of the initial public offering of the Shares,
the Plan shall be administered by the Board (which, during such period, shall
have all the powers given herein to the Committee). From and after the
completion of such offering, the Plan shall be administered by the Committee.
The Committee shall have the authority in its sole discretion, subject to and
not inconsistent with the express provisions of the Plan, to administer the Plan
and to exercise all the powers and authorities either specifically granted to it
under the Plan or necessary or advisable in the administration of the Plan,
including, without limitation, the authority to grant Bonuses; to determine the
persons to whom and the time or times at which Bonuses shall be granted; to
determine the terms, conditions, restrictions and performance criteria relating
to any Bonus; to make adjustments in the Performance Goals in response to
changes in applicable laws, regulations, or accounting principles; except as
otherwise provided in Section 6(a) hereof, to adjust compensation payable upon
attainment of Performance Goals; to construe and interpret the Plan and any
Bonus; to prescribe, amend and rescind rules and regulations relating to the
Plan; and to make all other determinations deemed necessary or advisable for the
administration of the Plan.
The Committee shall consist of two or more persons each of whom is an
"outside director" within the meaning of Section 162(m) of the Code. The
Committee may appoint a chairperson and a secretary and may make such rules and
regulations for the conduct of its business as it shall deem advisable, and
shall keep minutes of its meetings. All determinations of the Committee shall be
made by a majority of its members either present in person or participating by
conference telephone at a meeting or by unanimous written consent. The Committee
may delegate to one or more of its members or to one or more agents such
administrative duties as it may deem advisable, and the Committee or any person
to whom it has delegated duties as aforesaid may employ one or more persons to
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render advice with respect to any responsibility the Committee or such person
may have under the Plan. All decisions, determinations and interpretations of
the Committee shall be final and binding on all persons, including the Company,
the Participant (or any person claiming any rights under the Plan from or
through any Participant) and any shareholder.
No member of the Board or the Committee shall be liable for any action
taken or determination made in good faith with respect to the Plan or any Bonus
granted hereunder.
8. GENERAL PROVISIONS.
(a) COMPLIANCE WITH LEGAL REQUIREMENTS. The Plan and the granting of
Bonuses, and the other obligations of the Company under the Plan shall be
subject to all applicable federal and state laws, rules and regulations, and to
such approvals by any regulatory or governmental agency as may be required.
(b) NO RIGHT TO CONTINUED EMPLOYMENT. Nothing in the Plan or in any Bonus
granted shall confer upon any Participant the right to continue in the employ of
the Company or any of its Subsidiaries or to be entitled to any remuneration or
benefits not set forth in the Plan or to interfere with or limit in any way the
right of the Company to terminate such Participant's employment.
(c) WITHHOLDING TAXES. The Company or Subsidiary employing any Participant
shall deduct from all payments and distributions under the Plan any taxes
required to be withheld by federal, state or local governments.
(d) AMENDMENT AND TERMINATION OF THE PLAN. The Board may at any time and
from time to time alter, amend, suspend, or terminate the Plan in whole or in
part; provided, however, that no amendment which requires stockholder approval
in order for the Plan to continue to comply with Code Section 162(m) shall be
effective unless the same shall be approved by the requisite vote of the
shareholders of the Company. Additionally, the Committee may make such
amendments as it deems necessary to comply with other applicable laws, rules and
regulations. Notwithstanding the foregoing, no amendment shall affect adversely
any of the rights of any Participant, without such Participant's consent, under
any Bonus theretofore granted under the Plan.
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(e) PARTICIPANT RIGHTS. No Participant shall have any claim to be granted
any Bonus under the Plan, and there is no obligation for uniformity of treatment
for Participants.
(f) UNFUNDED STATUS OF BONUSES. The Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any payments which
at any time are not yet made to a Participant pursuant to a Bonus, nothing
contained in the Plan or any Bonus shall give any such Participant any rights
that are greater than those of a general creditor of the Company.
(g) GOVERNING LAW. The Plan and the rights of all persons claiming hereunder
shall be construed and determined in accordance with the laws of the State of
Delaware without giving effect to the choice of law principles thereof, except
to the extent that such law is preempted by federal law.
(h) EFFECTIVE DATE. The Plan shall take effect upon its adoption by the
Board, but the Plan (and any grants of Bonuses made prior to the shareholder
approval mentioned herein) shall be subject to the requisite approval of the
shareholders of the Company. In the absence of such approval, such Bonuses shall
be null and void.
(i) INTERPRETATION. The Plan is designed and intended to comply with Section
162(m) of the Code, to the extent applicable, and all provisions hereof shall be
construed in a manner to so comply.
(j) TERM. No Bonus may be granted under the Plan with respect to any Plan
Year after fiscal 1998. Bonuses made with respect to fiscal 1998 or prior years,
however, may extend beyond fiscal 1998 and the provisions of the Plan shall
continue to apply thereto.
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EXHIBIT 10.17
JUSCO SERVICES AGREEMENT
THIS JUSCO SERVICES AGREEMENT ("Agreement") is made and entered into as of
the 1st day of August, 1995 (the "Effective Date") by and between JUSCO CO.,
LTD. ("JUSCO"), a corporation organized and existing under the laws of Japan,
with its principal office AT 1-5-1, NAKASE, MIHAMA-KU, CHIBA-SHI, CHIBA KEN,
261, JAPAN, AND MEGA SPORTS CO., LTD. (the "Company"), a company organized and
existing under the laws of Japan, having its principal office AT 1-5-1 NAKASE,
MIHAMA-KU, CHIBA-SHI, CHIBA, 261 JAPAN.
WHEREAS, JUSCO is a leading retailer and possesses know-how concerning the
management of retailing in Japan;
WHEREAS, JUSCO and The Sports Authority, Inc. ("TSA"), a well-known U.S.
retailer, have agreed under a certain Joint Venture Agreement dated January 19,
1995, as amended, to form the Company to develop and operate the TSA Stores (as
defined herein) in Japan (the "JVA");
WHEREAS, the Company wishes to operate the TSA Stores in Japan and has
requested that TSA provide certain services to the Company pursuant to a License
Agreement (the "License Agreement") and a TSA Services Agreement (the "TSA
Services Agreement") between TSA and the Company dated as of the date hereof;
and
WHEREAS, the Company has also requested that JUSCO provide to the Company
certain Company Employee Services and Requested Assistance relating to the
assignment or selection of full-time employees for the Company and the location,
administration, management and operation of the TSA Stores;
NOW, THEREFORE, in consideration of the mutual promises, undertakings and
covenants herein, and for other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree:
ARTICLE I
DEFINITIONS
1.1 "Business Day(s)" shall mean a day, excluding Saturday, in which the
banks in both New York and Tokyo are open for business.
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1.2 "Business Travel Expenses" shall mean business or executive class
airfare for officers and MANAGERS of JUSCO, and COACH CLASS FOR ALL OTHERS BELOW
MANAGER LEVEL (with all airfares within a class of travel to be at the lowest
fare for the route with the least number of stops), reasonable business hotel
accommodations, meals and transportation within the U.S. or Japan, and other
reasonable out-of-pocket expenses, in accordance with JUSCO's policies.
1.3 "Company Employee Services" shall mean JUSCO's assignment to the
Company of JUSCO employees or assistance to the Company in hiring individuals,
as full-time employees of the Company, as such services are described in further
detail in Article 2.1.
1.4 "Expenses" shall mean the expenses incurred by JUSCO:
(I) with respect to each JUSCO employee assigned to the Company to perform
Company Employee Services on a full-time basis, to the extent the JUSCO employee
is not paid directly by the Company (and apart from any full-time employees
which JUSCO assisted the Company in hiring who are paid directly by the
Company), for salary (including paid vacation), bonus and all other benefits in
accordance with JUSCO's policies, including such benefits as medical benefits,
and for all Business Travel Expenses for JUSCO employees (to the extent not paid
directly by the Company) and JUSCO's reasonable out-of-pocket expenses in
connection with such JUSCO employees; and
(ii) with respect to Requested Assistance provided by JUSCO to the Company,
for all Business Travel Expenses for JUSCO employees and other reasonable
out-of-pocket expenses incurred by JUSCO in providing Requested Assistance and,
in addition, for assistance that requires JUSCO third party contractors or
consultants to perform services on behalf of the Company (whether or not
resident in Japan) for any period of time, for all expenses incurred by JUSCO
for such third party contractors or consultants in performing such services,
including contractor and consultant fees, travel and out-of-pocket expenses
(prorated, in the case of contractor and consultant fees, based upon the
relative amounts of time expended by such contractor or consultant during the
applicable Fiscal Year in rendering services to the Company and JUSCO,
respectively); provided, however, that Expenses shall not include any amounts
attributable to contractor or consulting fees unless the services to be provided
by such
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contractors or consultants are approved in writing by the Company.
"Expenses" shall not include expenses other than those enumerated in (i) and
(ii) above.
1.5 "Fees" shall mean an amount equal to one (1) percent of Gross Sales of
the TSA Stores in the Territory, which shall be in lieu of payment for salary
and other compensation paid by JUSCO with respect to JUSCO employees providing
Requested Assistance to the Company under this Agreement. The Fees may be
reviewed from time to time to insure that they are commensurate with the
Requested Assistance provided by JUSCO to the Company, and may be amended only
by mutual written agreement of the parties.
1.6 "Fiscal Year" shall mean the Company's fiscal year. The Company shall
give prompt notice to JUSCO of any change in designation of the Company's fiscal
year.
1.7 "Gross Sales" shall mean the total sales revenues received for
merchandise and services furnished at the TSA Stores in the Territory (AS
DEFINED HEREIN), whether by the Company, its Related Company or Affiliate
Company (as those terms are defined in the JVA), tenants or licensees, whether
for cash or on credit, except that the following shall be excluded in
calculating Gross Sales: (i) sales of merchandise subsequently returned for
refund or credit; and (ii) value added taxes, consumption taxes and any other
applied taxes imposed by governments, excluding withholding taxes, if any. Gross
Sales shall be calculated net of any allowances given with respect to defective
merchandise.
1.8 "Party(ies)" shall mean JUSCO or the Company or both.
1.9 "Requested Assistance" shall mean services requested by the Company
from JUSCO in Japan, as such services are described in further detail in Article
2.2.
1.10 "Term" shall mean the period from the Effective Date to and including
the expiration or termination date hereof.
1.11 "Territory" shall mean Japan.
1.12 "TSA Store" shall mean a sporting goods retail outlet consisting of
more than 20,000 square feet (or approximately 1,800 square meters) of gross
indoor floor space primarily devoted to the sale of a broad
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assortment of sporting goods and equipment, footwear and apparel.
ARTICLE II
SERVICES
JUSCO agrees to render the following services to the Company, in accordance
with the mutual agreement of the Parties, during the Term:
2.1 COMPANY EMPLOYEE SERVICES (FULL-TIME COMPANY EMPLOYEES). At the request
of the Company, assignment to the Company of JUSCO employees (in which case
JUSCO's Expenses are set forth in Article 1.4(i)) or, at JUSCO's option,
assistance to the Company in hiring individuals (in which case the Company shall
directly pay salaries and all other expenses) to fill positions of the Company
on a full-time basis. The Parties acknowledge that the term of any JUSCO
employee transferred to the Company may be terminated at any time by JUSCO, the
Company or the employee, at which time JUSCO has the option of accepting the
return of such employee to JUSCO. Without limiting any other employee
termination rights of the Company, if either JUSCO or the Company intends to
terminate the term of any JUSCO employee transferred to the Company by
initiating a return of such employee to JUSCO, such Party shall give to the
other written notice at least ninety (90) days prior to the expected date of any
such transfer.
2.2 REQUESTED ASSISTANCE (PART OR FULL-TIME ON A TEMPORARY BASIS). Subject
to certain restrictions as set forth below, at the request of the Company, JUSCO
through its employees or through third party contractors or consultants, shall
assist the Company on a temporary, part-time or consulting basis. Such Requested
Assistance shall consist of JUSCO's support and cooperation to assist the
Company in meeting the following objectives:
(a) REAL ESTATE. Enabling the Company to analyze, select and obtain the
most appropriate real estate sites in the most favorable locations in the
TERRITORY on terms which will most enhance the value of the Company.
(b) CONSTRUCTION. Enabling the Company to carry out planning, renovation
and building construction for TSA Stores in the TERRITORY, including, at the
Company's request, oversight of design and construction management on terms
which will most enhance the value of the Company, and supervision of the
construction agreement negotiation process and review of such agreements to help
ensure the best possible terms and conditions for the Company.
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(c) STORE OPENINGS. Enabling the Company to apply for and otherwise arrange
government approvals required for the opening of TSA Stores as large scale
stores in the TERRITORY on terms which will most enhance the value of the
Company, including advice on compliance with Japanese regulations and customs.
(d) PERSONNEL. Taking into account Article 4.4 and other relevant sections
of the JVA, support and cooperation in identifying and hiring the most
appropriate personnel for the Company, including assistance with establishing
and maintaining human resource policies.
(e) ADMINISTRATIVE SYSTEMS. Performing payroll, accounts payable and other
administrative functions, on an interim basis, and to allow the Company to
establish its own capabilities for such functions.
(f) DISTRIBUTION. Enabling the Company to set up and maintain an effective
and economical distribution system for the TSA Stores in the TERRITORY.
(g) COMPLIANCE WITH LAWS AND REGULATIONS. Support in securing any and all
approvals, licenses, registrations and/or permits required under the laws or
regulations of any governmental or similar entity in the TERRITORY having
jurisdiction over the Company or the TSA Stores, complying with all such laws
and regulations, including those concerning the use, shipment, export, import,
sale or other distribution of products or provision of services provided under
the TSA Services Agreement and the License Agreement, whether regarding
compliance with export and import control regulations, relevant consumer product
and health and safety laws (such as those concerning product labeling,
instructions, testing and certification), or otherwise. Nothing in this
Agreement shall be construed to require JUSCO or the Company to perform any act
in violation of such laws AND REGULATIONS.
(h) MERCHANDISING, STORE DECOR, CUSTOMER SERVICE, ADVERTISING AND PUBLICITY
AND INFORMATION SYSTEMS Supplementing the support and cooperation provided by
TSA to the Company to merchandise the TSA Stores, establish facades, lay-out,
decor and furnishings for the TSA Stores, to train the Company's sales personnel
in customer service, to develop the public image of the TSA Stores and to allow
the Company to establish information systems that will correspond, with
appropriate modifications, to the systems in effect for TSA's stores in the
U.S.A.
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A request for Requested Assistance made by the Company in accordance with
this Article 2.2 shall specify the type of assistance sought and the time frame
within which the assistance is needed. JUSCO shall furnish such Requested
Assistance in such manner and in such detail as in the reasonable judgment of
the Company is necessary to meet its objectives, as described in this Article
2.2. The Parties acknowledge that such Requested Assistance is subject to
availability of the subject JUSCO employees or third party contractors or
consultants, and that third party contractors or consultants shall not be used
without the prior written consent of the Company. In the event that JUSCO is
unable to provide the Requested Assistance requested by the Company, JUSCO shall
advise the Company in writing, stating the reasons for such inability. Any
supplies, equipment or materials required by the Company which JUSCO may assist
the Company in obtaining shall be purchased and contracted for either directly
by the Company or, as agreed to between JUSCO and the Company, by JUSCO pursuant
to Article 7.1. In addition to the requirement in Section 4.5 of the JVA
regarding arms'-length dealings between the Company and JUSCO or TSA or any of
their Related Companies (as defined in the JVA), JUSCO shall provide the Company
with prior written notice in the event that any Requested Assistance, or any
purchases under Article 7.1, involve the purchase of supplies, equipment,
materials or services from JUSCO OR ONE OF ITS Related or Affiliate Companies
(as defined in the JVA), or result in any compensation received by JUSCO or its
Related or Affiliate Company in connection with such a purchase.
ARTICLE III
PAYMENTS
The Company shall pay to JUSCO the Fees and Expenses as follows:
3.1 PAYMENTS OF FEES FOR REQUESTED ASSISTANCE. During the Term of this
Agreement, the Company shall pay the Fees to JUSCO in the manner and at the time
specified in Article 4.
3.2 PAYMENTS OF EXPENSES FOR COMPANY EMPLOYEE SERVICES AND REQUESTED
ASSISTANCE. During the Term of this Agreement, the Company shall pay the
Expenses to JUSCO in the manner and at the time specified in Article 5.
ARTICLE IV
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REPORTS -- FEES
4.1 DELIVERY BY THE COMPANY AND PAYMENT. Within forty-five (45) days after
the end of each fiscal quarter of the Company, the Company shall:
(a) Deliver to JUSCO a report, certified by one of its corporate
officers, giving the following particulars concerning Gross Sales during the
preceding fiscal quarter, together with documentary proof of payment of any
withholding tax (including, without limitation, original receipts or
certificates evidencing payment of such taxes):
(i) Identification and location of TSA Stores which were open for
business during the fiscal quarter;
(ii) Gross Sales of each such Store;
(iii) Amount of Fees due JUSCO with respect to each Store and in the
aggregate; and
(iv) Amount of withholding tax withheld and paid to tax authorities.
(b) Pay to JUSCO the Fees due for the quarter covered by such report,
in Japanese Yen, in immediately available funds, by international bank draft or
as otherwise directed by JUSCO. Receipt or acceptance of any report or payment
shall not preclude JUSCO from questioning the correctness thereof at any time.
In the event that any inconsistency or mistake is discovered by either JUSCO or
the Company in such reports or payments, it shall be immediately rectified and,
within fifteen (15) Business Days, the appropriate report and payment shall be
made.
4.2 PAYMENT OBLIGATIONS ABSOLUTE. Time is of the essence with respect
to the Company's duty to make all payments when due and the Company's
obligations to make such payments are absolute, unconditional and not subject to
any right of reduction or set-off, except for withholding taxes imposed on the
Fees which the Company is required by law to withhold. The Company shall
withhold and timely pay such taxes to the proper tax authority at the rate
required by statute but reduced to the fullest extent as permitted by tax
treaty. Written notice by JUSCO to the Company as to any amount of the Fees
shall be PRIMA FACIE evidence that said amount is unpaid as of the date of such
notice.
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4.3 COMPANY RESPONSE TO INQUIRY; DISCREPANCY; CERTIFICATE OF ACCURACY.
(a) The Company shall respond in writing to any written inquiry from
JUSCO with respect to any report or payment within fifteen (15) Business Days OF
receipt thereof.
(b) If, in the course of an audit or inspection by JUSCO or its
representative(s), any discrepancy shall appear with respect to any amount due
and payable by the Company and the amount paid, the amount owed shall be paid
within fifteen (15) Business Days after the Company's receipt of notice of any
such discrepancy.
(c) Within ninety (90) days after the end of each Fiscal Year of the
Company, the Company shall furnish JUSCO a certificate from an independent
certified public accountant as to the accuracy of the Company's Fee payments and
reports for each such Fiscal Year.
ARTICLE V
REPORTS -- EXPENSES
5.1 DELIVERY BY JUSCO. Within forty-five (45) days after the end of each
month (or, in the discretion of JUSCO, within forty-five (45) days after the end
of a number of months not in excess of four (4)) JUSCO shall deliver to the
Company a report, certified by a corporate officer of JUSCO, giving the details
of the amount of Expenses due JUSCO with appropriate itemization of such
expenses.
5.2 TERMS OF PAYMENT FOR EXPENSES. Within thirty (30) days from the receipt
of such report, the Company shall pay to JUSCO the Expenses due for the period
covered by such report, in Japanese Yen, in immediately available funds, by
international bank draft or as otherwise directed by JUSCO. Receipt or
acceptance of any report or payment of any sum shall not preclude the Company
from questioning the correctness thereof at any time or with holding payment of
the amount to which the Company objects. In the event that any inconsistency or
mistake is discovered by either JUSCO or the Company in such reports or
payments, or if the Company has withheld some portion of the payment, the
disagreement shall be immediately rectified and, within fifteen (15) Business
Days, the appropriate payment shall be made.
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5.3 RELATED PAYMENT OBLIGATIONS. Time is of the essence with respect to
the Company's duty to make all payments when due and the Company's obligations
to make such payments are absolute, unconditional and not subject to any right
of set-off, except for withholding taxes imposed on the Fees which the Company
is required by law to withhold. The Company shall withhold and timely pay such
taxes to the proper tax authority at the rate required by statute but reduced to
the fullest extent as permitted by tax treaty.
ARTICLE VI
BOOKS AND AUDITS
6.1 JUSCO'S BOOKS OF ACCOUNT. JUSCO shall keep full, true and accurate
books of account containing all particulars which may be necessary for the
purpose of showing the Expenses, due and payable to JUSCO. Said books of account
shall be kept at JUSCO's principal place of business and maintained by JUSCO for
a period of at least three (3) years following the end of each subject year
during the Term and thereafter and shall be available for inspection by the
Company.
6.2 AUDITS OF JUSCO. During the Term and for a period of three (3)
years after expiration or termination of this Agreement, the Company or an
independent certified public accountant retained by the Company may audit all
statements of account, records and reports provided for in this Agreement, at
least once per Fiscal Year. JUSCO shall make available to the Company or said
certified public accountant for the purposes of this paragraph any and all
records reasonably necessary to the verification of such reports. Any error(s)
discovered by such audit shall be corrected by JUSCO within fifteen (15)
Business Days after having been notified of such error. The expense of any and
all such audits and verifications shall be borne by the Company. However, if the
error discovered represents an overcharge by JUSCO of more than 3% of the total
charges for the year in question, JUSCO will also promptly reimburse the Company
the reasonable costs of such audit.
6.3 THE COMPANY'S BOOKS OF ACCOUNT. The Company shall keep full, true
and accurate books of account containing all particulars which may be necessary
for the purpose of reviewing the Gross Sales and computing the Fees due and
payable to JUSCO. Said books of account shall be kept at the Company's principal
place of business and maintained by the Company for a period of at least three
(3) years following the end of the subject year during the
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Term and three (3) years following the expiration or termination of this
Agreement and shall be available for inspection by JUSCO.
6.4 AUDITS OF THE COMPANY. During the Term and for a period of three
(3) years after expiration or termination of this Agreement, JUSCO or an
independent certified public accountant retained by JUSCO may audit all
statements of account, records and reports provided for in this Agreement, at
least once per Fiscal Year. The Company shall make available to JUSCO or said
certified public accountant for the purposes of this paragraph any and all
records reasonably necessary to the verification of such reports. Any error(s)
discovered by such audit shall be corrected by the Company within fifteen (15)
Business Days after having been notified of such error. The expense of any and
all such audits and verifications shall be borne by JUSCO. However, if the error
discovered represents an under payment by the Company of more than 3% of the
total charges for the year in question, the Company will also promptly reimburse
JUSCO for the reasonable costs of such audit.
ARTICLE VII
ADDITIONAL SERVICES AND INDEMNIFICATION
7.1 PURCHASES OF PRODUCTS AND SERVICES. JUSCO may from time to time
purchase or contract for on behalf of the Company certain products (such as
software, equipment or merchandise) or services (such as legal, engineering,
systems development or accounting services) for such price and upon such terms
as shall be agreed upon by JUSCO and the Company, whether by Company
representatives or as determined by the Company's Board of Directors. Any
purchases made or contracts entered into by JUSCO on behalf of the Company may,
at JUSCO's option, either (i) be paid for by JUSCO and billed to the Company on
such basis as the Company and JUSCO may mutually agree in writing, or (ii) be
billed by the supplier directly to the Company and paid by the Company directly
to the supplier pursuant to the terms of the applicable purchase order or
service contract. Amounts payable under this Article 7 shall be in addition to
the Fees payable under Article 4 and the Expenses payable under Article 5.
7.2 INDEMNIFICATION. The Company shall defend, indemnify and hold
harmless JUSCO or any subsidiary or affiliate of JUSCO, and any of their
officers, directors, employees, representatives and agents, at the Company's
expense, from and against any claim, damage,
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loss, cost, expense (including reasonable attorneys' fees) or penalty, or any
action therefor, arising out of or in connection with the Company's use of the
Company Employee Services and Requested Assistance, any conduct performed or
failed to be performed by any employee or third party contractor or consultant
performing services on behalf of the Company or any products or services
provided to the Company pursuant to Article 7.1, including but not limited to
any claims for damaged or defective products, product or premises liability,
failure to comply with product labeling, instructions, testing or certification
requirements, trademark or other proprietary right or intellectual property
infringement, negligence, defamation, misappropriation, unfair competition and
failure to pay withholding tax. As a condition to the exercise of its
indemnification rights under this Agreement, JUSCO or any subsidiary or
affiliate of JUSCO must assign to the Company any rights that it may have
against its supplier and/or any other third party relating to the occurrence
that gave rise to the indemnification obligation of the Company.
ARTICLE VIII
REPRESENTATIONS, WARRANTIES AND DUTIES OF COMPANY
The Company represents and warrants to JUSCO and agrees that:
8.1 EMPLOYMENT RELATIONSHIPS. The Company shall be completely
responsible for the payment of all moneys which may be due at any time to its
own employees, agents, contractors or representatives, and for all other claims
made by such employees, agents, vendors, contractors or representatives. JUSCO
shall not for any reason be liable in any way for the Company's termination of
employment or other relationships with such parties or other legal entities.
8.2 APPROVALS, PERMITS, ETC. The Company shall, at its own expense,
secure any and all approvals, licenses, registrations and/or permits required
under the laws or regulations of any governmental or similar entity having
jurisdiction over the Company or the TSA Stores, or over the shipment, export,
import, sale or other distribution of products or provision of services within
the TERRITORY as these relate to operation of the TSA Stores, including, without
limitation, compliance with all export and import control regulations and
relevant consumer product and health and safety laws (such as those concerning
product labeling, instructions, testing and certification). Nothing in this
Agreement shall be
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construed to require JUSCO or the Company to perform any act in violation of
such laws.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND DUTIES OF JUSCO
JUSCO represents and warrants to the Company and agrees that:
9.1 PERFORMANCE. In rendering services under this Agreement, JUSCO will
use reasonable care to perform its obligations in a manner consistent with its
practices in operating stores in the TERRITORY, using personnel with the
necessary professional aptitude and competence to discharge such obligations.
9.2 OTHER AGREEMENTS. It is not a party to any agreement inconsistent
with this Agreement.
ARTICLE X
GENERAL PROVISIONS
10.1 TERM AND TERMINATION.
(a) This Agreement shall remain in effect for an initial Term of
approximately five years from the Effective Date through January 31, 2000, and
shall be renewed automatically for subsequent five-year periods unless
terminated by written notice by either Party not later than sixty (60) days
prior to January 31, 2000 or the subsequent five-year period then in effect.
Notwithstanding the foregoing, either Party may terminate this Agreement for any
of the reasons set forth in (i) or (ii) below by written notice to the other
Party in accordance with (b) or (c) below, as the case may be:
(i) If the other Party shall fail to perform its obligations as
required hereunder or otherwise materially breaches in any manner
the terms of this Agreement; or
(ii) If the other Party shall be unable to pay its obligations when
due, or shall make any assignment for the benefit of creditors, or
shall file or have filed against it, any petition for relief from
creditors or any
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petition in bankruptcy, or be adjudicated bankrupt or insolvent, or
if any receiver or judicial manager is appointed for its business
or property, or if any trustee in bankruptcy or insolvency shall be
appointed for such Party.
(b) In the event of breach by one Party of any provision of this
Agreement as provided in (a)(i) above, the other Party shall give it notice in
writing to cure the breach within sixty (60) days (the "Notice Period") or such
longer period as may be agreed upon by the Parties and if the breach is not
cured to the satisfaction of the non-breaching Party within such period, such
Party shall be entitled to exercise any remedies it may have hereunder,
including, without limitation, its right to terminate this Agreement effective
upon expiration of the Notice Period, provided that if such breach is capable of
being cured but incapable, by reason of its nature, of being cured within the
Notice Period, such Party may, in its discretion, delay taking action so long as
the other Party shall have begun in good faith to cure such breach within the
Notice Period and thereafter proceeds diligently to complete the cure of the
breach and such breach is cured within a reasonable period thereafter.
(c) In the event of the occurrence of any event described in (a)(ii)
above with respect to one Party, the other Party may terminate this Agreement
effective upon expiration of the Notice Period; provided, however, that the
Party affected may avoid such termination if any adverse filing described in
(a)(ii) above is stayed, dismissed or reversed within the Notice Period and it
provides satisfactory evidence of same to the other Party within such period.
(d) This Agreement shall automatically terminate on the date that JUSCO
ceases to have a direct or indirect ownership interest in the Company or on the
date that the JVA is terminated, whichever is earlier.
(e) This Agreement may be terminated at any time by mutual written
agreement of the Parties.
(f) Termination of this Agreement for any reason shall not affect
obligations which (i) have accrued as of the date of termination, (ii) or arise
out of Company Employee Services, Requested Assistance or additional services,
transactions or occurrences prior to such date, including but not limited to,
(A) the payment of any Fees, Expenses or other amounts which have accrued as of
the
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termination date, (B) the representations, warranties and obligations of the
Company set forth in Article 8, (C) the Company's right to audit as set forth in
Article 6.2, (D) JUSCO's right to audit as set forth in Article 6.4 and (E) the
Company's indemnification obligations set forth in Article 7.2.
10.2 GOVERNING LAW, ARBITRATION AND LANGUAGE.
(a) This Agreement shall be governed by, and construed and interpreted
in accordance with, the laws of Japan. Any controversy or claim arising out of
or relating to this Agreement, or the breach thereof or relationship created
thereby, shall be settled exclusively by arbitration in ,THE STATE OF HAWAII,
U.S.A. in accordance with the Rules of Conciliation and Arbitration of the
International Chamber of Commerce then in effect. The arbitration shall be heard
before three arbitrators, one to be chosen by JUSCO, one to be chosen by the
Company and the third to be chosen by those two arbitrators. The arbitration
shall be final, binding on the Parties, not subject to any appeal, and shall
deal with the question of costs of the arbitration. Judgment on the award of the
arbitrators may be entered by any court having jurisdiction to do so.
Notwithstanding any other provision of this Agreement, either Party shall be
entitled to seek injunctive or other provisional relief from any court of
competent jurisdiction pending the final decision or award of the arbitrators.
(b) The English language version of this Agreement shall control the
rights, obligations and relationships of the Parties and the construction and
interpretation of this Agreement, and shall also be the controlling language for
all future communications between the Parties concerning this Agreement.
10.3 NOTICES.
(a) Any notice or request with respect to this Agreement shall be in
writing and shall be delivered personally, by registered mail, by airborne
express courier, in each such case directed by each Party to the other, with
evidence of transmission, to its respective addresses as follows:
IF TO THE COMPANY: Mega Sports Co., Ltd.
1-5-1, Nakase, Mihama-ku
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Chiba-shi, Chiba-Ken 261,
Japan
Tel: (043) 212-6068
Fax: (043) 212-6448
Attn: PRESIDENT AND
REPRESENTATIVE
DIRECTOR
with a copy to: The Sports Authority, Inc.
3383 North State Road 7
Fort Lauderdale, Florida
33319
U.S.A.
Tel: (305) 735-1701
Fax: (305) 484-0837
Attn: PRESIDENT
IF TO JUSCO: JUSCO Co., Ltd.
1-5-1, Nakase, Mihama-ku
Chiba-shi, Chiba-ken 261,
Japan
Tel: (043) 212-6098
Fax: (043) 212-6813
Attn: GENERAL MANAGER
INTERNATIONAL BUSINESS
DEPARTMENT
(b) Any notice or request shall be deemed to be given when actually
received. Either Party, by written notice to the other Party, may change the
address to which notices or requests shall be directed.
10.4 NO IMPLIED WARRANTIES; LIMITATION ON LIABILITY. Neither JUSCO nor
its officers, directors, employees, representatives or agents shall be liable to
the Company or to any other party for direct, indirect, special, incidental or
consequential damages, losses or injuries, including foreseeable and
unforeseeable damages such as lost profits, resulting from or arising out of the
use or non-use by the Company of the Company Employee Services or Requested
Assistance described in Article 2 or any additional products or services
rendered pursuant to or
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transactions described in Article 7. Neither Party makes any representation or
warranty to the other except as specifically set forth herein. ANY PRODUCTS
PURCHASED BY JUSCO OR ITS SUBSIDIARIES OR AFFILIATES FOR OR ON BEHALF OF THE
COMPANY ARE PURCHASED BY THE COMPANY "AS IS." JUSCO, ITS SUBSIDIARIES AND ITS
AFFILIATES MAKE NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING
WITHOUT LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. Any claims relative to any products referred to in the
foregoing shall be made by the Company solely against the vendor or other
warrantor, and nothing herein contained shall be construed as depriving the
Company of whatever rights, if any, the Company may have against such party.
10.5 FURTHER DOCUMENTS. Each Party shall, upon request, make, execute
and deliver such documents as shall be reasonably necessary to take such action
as may be reasonably requested to fully implement and carry out the purposes of
this Agreement. This Agreement may be executed in counterparts and all such
counterparts taken together shall be deemed to constitute one and the same
instrument.
10.6 BINDING EFFECT. All covenants, agreements, representations,
warranties and indemnifications in this Agreement by and behalf of either of the
Parties shall bind and inure to the benefit of its respective successors and
permitted assigns (if any). Upon termination of this Agreement, all obligations
and covenants of the Company under this Agreement shall survive and be
enforceable.
10.7 PROHIBITION ON ASSIGNMENT. Neither this Agreement nor any rights
granted hereunder may be assigned or pledged by the Company without the prior
written consent of an authorized officer of JUSCO, which consent may be withheld
at JUSCO's sole discretion.
10.8 WAIVER. Silence, acquiescence or inaction shall not be deemed a
waiver of any right. A waiver shall only be effective if it is in writing,
signed by the Party to be charged. Any such waiver shall not be construed to as
a continuing waiver or as a waiver of any other breach of a same or similar
nature.
10.9 SEVERABILITY. In the event that any part or portion of this
Agreement shall be deemed to be invalid or illegal, then such invalid or illegal
portion shall, so far as possible, not affect the validity or legality of the
remainder of this Agreement. Further, the Parties agree that they shall attempt
to arrive at a modification of any illegal or invalid part so as to render the
same legal and
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valid and within the keeping of the original tenor and spirit of the Agreement .
10.10 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the Parties with respect to the Company Employee Services, Requested
Assistance or any additional services rendered pursuant to or transactions
described in Article 7, and supersedes all prior negotiations, understandings
and agreements, if any, between the Parties, whether oral or written. This
Agreement may only be amended or modified by written instrument signed by
authorized officers of both Parties. Because both parties are sophisticated and
knowledgeable business enterprises with ready access to legal counsel, the
principle of construing an ambiguous provision or provisions against the drafter
shall be disregarded when construing this Agreement.
10.11 TITLES AND HEADINGS. Titles and headings herein are for
convenient reference only and are not part of this Agreement.
10.12 CONFIDENTIAL AGREEMENT. The terms of this Agreement are
confidential and shall not be disclosed except for the purpose of enforcement or
as may be required by law.
IN WITNESS WHEREOF, the Parties have caused this Agreement to
be executed by their duly authorized representatives as of the Effective Date.
EGA SPORTS CO., LTD.
By:_________________
Name:_______________
Title:______________
JUSCO CO., LTD.
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By:_________________
Name: ______________
Title:______________
18
EXHIBIT 10.18
THE SPORTS AUTHORITY, INC.
TARGET SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, it is in the best interest of The Sports Authority, Inc. and its
Affiliates (the "Corporation") to retain a select group of competent and loyal
management personnel; and
WHEREAS, Congress has from time to time limited the amounts of retirement
benefits available to the more highly compensated employees in relationship to
their pay; and
WHEREAS, the Corporation finds that it is in its best interest to supplement the
retirement pay of a select group of management personnel who might otherwise
receive less retirement pay than their counterparts, and to retain equity among
the Corporation's management personnel;
NOW THEREFORE, the Corporation hereby establishes the following Target
Supplemental Executive Retirement Plan effective January 1, 1996 ("Effective
Date"):
<PAGE>
ARTICLE I
DEFINITIONS
1.1 AFFILIATE. "Affiliate" means an entity that is a wholly-owned subsidiary
of The Sports Authority, Inc.
1.2 AVERAGE COMPENSATION. "Average Compensation" means the result obtained by
dividing the total Compensation of a Participant during the considered
period by three (3). The considered period shall be the three (3) complete
calendar years out of the last five (5) complete calendar years of the
Participant's Service in which the Participant received the highest amount
of Compensation from the Corporation.
1.3 BENEFICIARY. "Beneficiary" means a person or entity designated by the
Participant under the terms of the Plan to receive any amounts
distributable under the Plan upon the death of the Participant.
1.4 BOARD OF DIRECTORS. "Board of Directors" means the Board of Directors of
The Sports Authority, Inc.
1.5 CHANGE IN CONTROL. "Change in Control" means the first to occur of any of
the following events:
(a) the "beneficial ownership" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) of securities representing more
than 20% of the combined voting power of the Corporation is acquired
by any "person," as defined in sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (other than the Corporation, any
trustee or other fiduciary holding securities under an employee
benefit plan of the Corporation), or
(b) the shareholders of the Corporation approve a definitive agreement
to merge or consolidate the Corporation with or into another
corporation or to sell or otherwise dispose of all or substantially
all of its assets, or adopt a plan of liquidation, or
(c) during any period of three consecutive years, individuals who at the
beginning of such period were members of the Board of Directors
cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the
Corporation's shareholders, of each new director was approved by a
vote of at least a majority of the directors then still in office
who were directors at the beginning of such period).
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1.6 CODE. "Code" means the Internal Revenue Code of 1986, as amended.
1.7 COMPENSATION. "Compensation" means the Participant's gross base salary and
bonuses received from the Corporation during a complete calendar year.
1.8 COMPENSATION COMMITTEE. "Compensation Committee" means the persons who are
from time to time serving as members of the Compensation Committee of the
Corporation's Board of Directors.
1.9 CORPORATION. "Corporation" means The Sports Authority, Inc. and any of its
Affiliates (a) whose participation in the Plan has been approved by the
Board of Directors, and (b) which by action of its own board of
directors shall have adopted the Plan.
1.10 DISABILITY. "Disability" means a physical or mental impairment which
prevents the Participant from continuing to perform the functions of an
Officer for the Corporation.
1.11 EARLY RETIREMENT. "Early Retirement" means the Participant's termination
of any employment relationship with the Corporation or any legal successor
before age sixty-five (65), but after completing seven (7) or more Years
of Vesting Service.
1.12 EARLY RETIREMENT DATE. "Early Retirement Date" means the first day of the
calendar month coincident with or following the Early Retirement of
the Participant.
1.13 EFFECTIVE DATE. "Effective Date" means the date as of which the Plan is
effective, which is January 1, 1996.
1.14 ELIGIBLE SPOUSE. "Eligible Spouse" means the person to whom the
Participant is legally married at the time of the Participant's death.
1.15 LATE RETIREMENT. "Late Retirement" means the Participant's termination of
any employment relationship with the Corporation or any legal successor
after Normal Retirement.
1.16 LATE RETIREMENT DATE. "Late Retirement Date" means the first day of the
calendar month coincident with or following the Participant's Late
Retirement.
1.17 NORMAL RETIREMENT. "Normal Retirement" means the Participant's termination
of any employment relationship with the Corporation or any legal successor
at age sixty-five (65).
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1.18 NORMAL RETIREMENT DATE. "Normal Retirement Date" means the first day of
the calendar month coincident with or immediately following the Normal
Retirement of the Participant.
1.19 OFFICER. "Officer" means an officer of the Corporation at the level of
Vice President or above.
1.20 PARTICIPANT. "Participant" means any Officer of The Sports Authority, Inc.
Participant shall also include any Officer of an Affiliate designated by
the Compensation Committee of the Board of Directors to participate in the
Plan. Jack A. Smith and Arnold Sedel will be excluded from active
participation in the Plan.and will only be entitled to benefits payable
under Section 4.9.
1.21 PLAN. "Plan" means The Sports Authority, Inc. Target Supplemental
Executive Retirement Plan set forth in this document, as amended from
time to time.
1.22 PLAN YEAR. "Plan Year" means calendar year.
1.23 PRESENT VALUE EQUIVALENCY. "Present Value Equivalency" means the
conversion of the benefit to a certain annuity, where the certain period
equals twenty (20) years plus the period of time the benefit starts before
Normal Retirement Date. The basis for discounting future payments and
converting the payment duration will be the average interest rate on
20-year Treasury Constant Maturities for the three (3) calendar months
prior to the month of benefit commencement.
1.24 PRESENT VALUE EQUIVALENT. "Present Value Equivalent" means a lump sum
amount equal to the present value of a certain annuity.. The basis for
discounting future payments will be the average interest on a 20-year
Treasury Constant Maturities for the three (3) calendar months prior to
the month of benefit payment
1.25 SERVICE. "Service" means employment with the Corporation while an employee
is an Officer.
1.26 TRUST. "Trust" means the "rabbi trust," which may be entered into in
conjunction with the Plan.
1.27 YEAR OF BENEFIT SERVICE. "Year of Benefit Service" means any calendar year
in which an Officer earns one thousand (1,000) or more hours of Service;
provided, however, that Years of Benefit Service shall not include any
period of Service prior to June 1, 1990, and will be limited to a maximum
of twenty (20) years.
3
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1.28 YEAR OF VESTING SERVICE. "Year of Vesting Service" means any calendar year
in which an Officer earns one thousand (1,000) or more hours of Service.
4
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ARTICLE II
ELIGIBILITY
Officers of The Sports Authority, Inc. who are among a select group of
management and highly compensated employees shall, unless otherwise
provided herein participate in the Plan. Officers of any Affiliate who are
among a select group of management and highly compensated employees, and
who are selected at the discretion of the Board of Directors, may
participate in the Plan. An Officer who becomes a Participant shall remain
a Participant unless and until the Board of Directors or the Compensation
Committee determines that the Officer is no longer designated to
participate in the Plan. Such action shall be effective as of the later
of: (i) the date such action is taken; or (ii) its effective date. An
Officer whose status as a Participant is revoked shall be entitled only to
any benefits to which he or she is entitled under Article IV.
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ARTICLE III
VESTING
A Participant shall vest in his or her benefit on the earlier of the
Participant's:
(a) attainment of age sixty-five (65);
(b) completion of seven (7) Years of Vesting Service; or
(c) death or Disability.
In the case of a Change in Control, each Participant shall become immediately
fully vested in his or her benefit under the Plan.
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ARTICLE IV
RETIREMENT BENEFIT
4.1 CALCULATION OF RETIREMENT BENEFIT. Upon Normal Retirement or Late
Retirement from the Corporation, a Participant shall be entitled to
receive an annual benefit under the Plan beginning on the Participant's
Normal Retirement Date, or Late Retirement Date if applicable, and ending
after two hundred and forty (240) monthly payments. The amount of the
benefit under this Section 4.1 shall be equal to one and three-quarters
percent (1-3/4%) of a Participant's Average CompensatioN, multiplied by
Years of Benefit Service up to twenty (20) years.
4.2 EARLY RETIREMENT. Upon Early Retirement from the Corporation, a
Participant shall be entitled to receive the same benefit calculated under
Section 4.1 payable at the Participant's Normal Retirement Date (or at an
earlier date at the request of the Participant and granted solely in the
discretion of the Compensation Committee) in a reduced amount using the
Present Value Equivalency, payable until the Participant attains age
eighty-five (85)).
4.3 DISABILITY BENEFIT. Upon the Disability of the Participant, the
Participant shall be entitled to a benefit calculated in accordance with
Section 4.1 payable at the Participant's Normal Retirement Date (or at an
earlier date at the request of the Participant made at any time before
Normal Retirement Date in a reduced amount using the Present Value
Equivalency). If a Participant does not receive his or her benefit
commencing immediately under this Section 4.3, continued Years of Benefit
Service will continue to be recognized, up to the earlier of the
Participant's Normal Retirement Date, or the date the Participant's
benefit commences in determining the Participant's benefit under Section
4.1.
4.4 DEATH BENEFIT.
(a) If death occurs prior to the Participant's benefit commencement
date, the Corporation shall pay to the Participant's designated
Beneficiary a benefit calculated in accordance with Section 4.1
payable commencing on the Participant's Normal Retirement Date (or
at an earlier date at the request of the designated Beneficiary made
at any time before Normal Retirement Date in a reduced amount using
the Present Value Equivalency).
(b) If death occurs while the Participant is receiving his benefit under
the Plan, his Beneficiary shall continue to receive his monthly
benefits for the period of time that the Participant would have
received his or her benefit if he or she were still alive.
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4.5 TIMING AND FORM OF PAYMENT.
(a) A Participant shall receive his or her benefit under the Plan in
monthly payments.
(b) A Beneficiary receiving a death benefit under Section 4.4 may
request a Present Value Equivalent in lieu of monthly payments.
(c) At any time and without consent of the Participant or Beneficiary,
the Participant's benefit may be paid in the form of a Present Value
Equivalent in lieu of monthly payments at the discretion of the
Board of Directors; provided, however, no Board member may vote on
his or her own payout form.
4.6 UNUSUAL PAYOUTS. In the event any circumstance should occur which results
in taxation to a Participant on his or her benefit prior to commencement
of benefit payments, a distribution of part of the benefit will be allowed
that is sufficient to provide for the required taxes.
4.7 DESIGNATION OF BENEFICIARY.
(a) The Participant shall file with the Compensation Committee a
designation of one or more Beneficiaries to whom the benefit under
the Plan will be payable in the event of the Participant's death
prior to receipt of his or her entire benefit. The designation will
be effective upon receipt by the Compensation Committee of a
properly executed form which the Compensation Committee has approved
for that purpose.
(b) From time to time, a Participant may change his or her Beneficiary
by written notice to the Compensation Committee, and upon such
change, the rights of all previously designated Beneficiaries to
receive any benefits under the Plan shall cease.
(c) If there is no valid designation of a Beneficiary on file with the
Compensation Committee at the time of the Participant's death, or if
all of the Beneficiaries designated in the Beneficiary designation
have predeceased the Participant, the Beneficiary will be the
Participant's Eligible Spouse if the Eligible Spouse survives the
Participant, or otherwise the Participant's estate.
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<PAGE>
4.8 Benefit due to Service with Prior Parent Company. Certain Officers earned
supplemental retirement benefits while the Corporation was a wholly owned
subsidiary of Kmart Corporation. The liability for these benefits has
become an obligation of the Corporation.
In addition to any amount payable under the preceding provisions of this
Plan, any Officer listed on Exhibit A of this Plan shall be entitled to
the benefit so listed.
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ARTICLE V
EVENTS CAUSING FORFEITURE
5.1 TERMINATION OF EMPLOYMENT. Termination of employment for any reason prior
to the Participant's vesting under Article III will cause the Participant
and all Beneficiaries under the Plan to forfeit any unvested interest in
the Plan.
5.2 FORFEITURE FOR CAUSE. If the Compensation Committee finds, after full
consideration of the facts presented on behalf of both the Corporation and
a former Participant, that the Participant was discharged by the
Corporation for fraud, embezzlement, theft, commission of a felony, or for
proven dishonesty in the course of his or her employment by the
Corporation which damaged the Corporation, the entire benefit under the
Plan will be forfeited. The decision of the Compensation Committee as to
the cause of a former Participant's discharge and the damage done to the
Corporation will be final. No decision of the Compensation Committee will
affect the finality of the discharge of the Participant by the Corporation
in any manner.
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ARTICLE VI
ADMINISTRATION
6.1 POWERS OF THE COMPENSATION COMMITTEE. The Compensation Committee will have
the responsibility for the general administration of the Plan according to
the terms and provisions of the Plan and will have all powers necessary to
accomplish those purposes, including, but not by way of limitation, the
right, power and authority:
(a) to make rules and regulations for the administration of the Plan
which are not inconsistent with its terms and provisions;
(b) to construe all terms, provisions, conditions and limitations of the
Plan, and its construction of the Plan will be final as to all
parties;
(c) to correct any defect, supply any omission or reconcile any
inconsistency that may appear in the Plan in the manner and to the
extent it deems expedient to carry the Plan into effect and its
judgment in those matters will be final as to all parties;
(d) to delegate by written notice those clerical and recordation duties
of the Compensation Committee, as it deems necessary or advisable
for the proper and efficient administration of the Plan.
No member of the Board of Directors or the Compensation Committee
shall be liable for any action taken or determination made in good faith
with respect to the Plan.
6.2 CONFLICT OF INTEREST. A member of the Compensation Committee who is also a
Participant shall not vote or act on any matter relating solely to himself
or herself.
6.3 CLAIMS PROCEDURE. The Compensation Committee shall make all determinations
as to the right of any person to a benefit. If any application for payment
of a benefit under the Plan shall be denied, the Compensation Committee
shall notify the claimant within ninety (90) days of such denial setting
forth the specific reason therefor and afford such claimant a reasonable
opportunity for a full and fair review of the decision denying his or her
claim. Notice of such denial shall set forth, in addition to the specific
reasons for the denial, reference to pertinent provisions of the Plan,
such additional information as may be relevant to denial of the claim, an
explanation of the claims review procedure and
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advice that such claimant may request the opportunity to review pertinent
Plan documents and submit a statement of issues and comments. Within sixty
(60) days following advice of denial of his or her claim, upon request
made by any claimant for a review of such denial, the Compensation
Committee shall take appropriate steps to review its decision in light of
any further information or comments submitted by such claimant. The
Compensation Committee may, in its discretion, hold a hearing at which
such claimant shall be entitled to present the basis of his or her claim
for review and at which he may be represented by counsel. The Compensation
Committee shall render a decision within sixty (60) days after claimant's
request for review (which may be extended to 120 days if circumstances so
require) and shall advise claimant in writing of its decision on such
review, specifying its reasons and identifying appropriate provisions of
the Plan.
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ARTICLE VII
AMENDMENT AND/OR TERMINATION
7.1 AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors may amend or
terminate the Plan at any time by an instrument in writing.
7.2 NO RETROACTIVE EFFECT ON ACCRUED BENEFITS. No amendment or termination of
the Plan shall adversely affect the rights of any Participant or
Beneficiary to the benefit provided under the Plan previously accrued by
the Participant without his or her consent. However, the Board of
Directors shall retain the right at any time to change in any manner the
benefit provided in Article IV, but only as to accruals after the date of
the amendment.
7.3 EFFECT OF TERMINATION. If the Plan is terminated, no further benefit under
the Plan will accrue. The Plan benefit accrued to the date of termination
will be payable under the conditions, at the time and in the form then
provided in the Plan.
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ARTICLE VIII
CORPORATE OBLIGATION
The Corporation shall pay the benefits due the Participants under the
Plan. It is specifically recognized by both the Corporation and the Participants
that the Plan is only an unsecured corporate commitment and that each
Participant must rely upon the general credit of the Corporation for the
fulfillment of its obligations hereunder. Under all circumstances, the rights of
Participants to any asset held by the Corporation will be no greater than the
rights expressed in the Plan. Nothing contained in the Plan will constitute a
guarantee by the Corporation that the assets of the Corporation will be
sufficient to pay any benefits under the Plan or would place the Participant in
a secured position ahead of general creditors of the Corporation. Though the
Corporation may establish a Trust to accumulate assets to fulfill its
obligations, the Plan and any such trust will not create any lien, claim,
encumbrance, right, title or other interest of any kind whatsoever of any
Participant in any asset held by the Corporation, contributed to any such trust
or otherwise designated to be used for payment of any of its obligations created
in the Plan. No policy or other specific asset of the Corporation has been or
will be set aside, or will in any way be transferred to any trust or will be
pledged in any way for the performance of the Corporation's obligations under
the Plan which would remove the policy or asset from being subject to the
general creditors of the Corporation.
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ARTICLE IX
MISCELLANEOUS
9.1 LIMITATION OF RIGHTS. Nothing in the Plan will be construed:
(a) to give a Participant any right with respect to any benefit except
in accordance with the terms of the Plan;
(b) to limit in any way the right of the Corporation to terminate a
Participant's employment with the Corporation at any time;
(c) to evidence any agreement or understanding, expressed or implied,
that the Corporation will employ a Participant in any particular
position or for any particular remuneration; or
(d) to give a Participant or any other person claiming through him any
interest or right under the Plan other than that of any unsecured
general creditor of the Corporation.
9.2 DISTRIBUTIONS TO INCOMPETENTS OR MINORS. Should a Participant become
incompetent or should a Participant designate a Beneficiary who is a minor
or incompetent, the Corporation is authorized to pay the funds due to the
parent of the minor or to the guardian of the minor or incompetent or
directly to the minor or to apply those funds for the benefit of the minor
or incompetent in any manner the Compensation Committee determines in its
sole discretion.
9.3 NONALIENATION OF BENEFITS. No right or benefit provided in the Plan will
be transferable by the Participant except, upon his or her death, to a
named Beneficiary as provided in the Plan. No right or benefit under the
Plan will be subject to anticipation, alienation, sale, assignment,
pledge, encumbrance or charge (except as provided in Section 206(d)(3) of
the Employee Retirement Income Security Act of 1974 relating to domestic
relations orders), and any attempt to anticipate, alienate, sell, assign,
pledge, encumber, or charge the same will be void. No right or benefit
under the Plan will in any manner be liable for or subject to any debts,
contracts, liabilities or torts of the person entitled to such benefits.
9.4 RESPONSIBILITY FOR DISTRIBUTIONS AND WITHHOLDING OF TAXES. The
Compensation Committee will furnish information to the Corporation,
concerning the amount and form of distribution to any Participant entitled
to a distribution so that the Corporation may make or cause the Trust to
make the distribution required. It will also calculate the deductions from
the amount of the benefit paid under the Plan for any taxes required to
15
<PAGE>
be withheld by federal, state or local government based on the
Participant's instructions, and will cause them to be withheld.
9.5 RELIANCE UPON INFORMATION. No member of the Board of Directors or the
Compensation Committee shall be liable for any decision or action taken in
good faith in connection with the administration of the Plan. Without
limiting the generality of the foregoing, any decision or action taken by
the Board of Directors or the Compensation Committee when it relies upon
information supplied it by any officer of the Corporation, the
Corporation's legal counsel, the Corporation's actuary, the Corporation's
independent accountants or other advisors in connection with the
administration of the Plan will be deemed to have been taken in good
faith.
9.6 SEVERABILITY. If any term, provision, covenant or condition of the Plan is
held to be invalid, void or otherwise unenforceable, the rest of the Plan
will remain in full force and effect and will in no way be affected,
impaired or invalidated.
9.7 NOTICE. Any notice or filing required or permitted to be given to the
Compensation Committee or a Participant will be sufficient if in writing
and hand delivered or sent by U. S. mail to the principal office of the
Corporation or to the residential mailing address of the Participant.
Notice will be deemed to be given as of the date of hand delivery or if
delivery is by mail, as of the date shown on the postmark.
9.8 GENDER. Whenever any words are used in the Plan in the masculine,
feminine, or neuter gender, they are to be construed as though they were
also used in another gender in all cases where they would so apply.
9.9 GOVERNING LAW. The Plan will be construed, administered and governed in
all respects by the laws of the State of Delaware to the extent they are
not preempted by Federal law.
9.10 EFFECTIVE DATE. The Plan will be operative and effective on January 1,
1996.
16
<PAGE>
================================================================================
EXHIBIT A
================================================================================
NAME MONTHLY BENEFIT PAYABLE AT AGE 65
- --------------------------------------------------------------------------------
Jack A. Smith $2,220.15
- --------------------------------------------------------------------------------
Richard Lynch $371.54
- --------------------------------------------------------------------------------
Arnold Sedel $127.92
- --------------------------------------------------------------------------------
Roy Cohen $15.49
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
17
EXHIBIT 10.19
THE SPORTS AUTHORITY, INC.
SUPPLEMENTAL 401(K) SAVINGS AND
PROFIT SHARING PLAN
WHEREAS, it is in the best interest of The Sports Authority, Inc. and its
Affiliates (the "Corporation") to retain a select group of competent and loyal
management personnel; and
WHEREAS, Congress has from time to time limited the amounts of retirement
benefits available to the more highly compensated employees in relationship to
their pay; and
WHEREAS, the Corporation finds that it is in its best interest to supplement the
retirement pay of a select group of management personnel who might otherwise
receive less retirement pay than their counterparts, and to retain equity among
the Corporation's management personnel;
NOW THEREFORE, the Corporation hereby establishes the following Supplemental
401(k) Savings and Profit Sharing Plan effective January 1, 1996 ("Effective
Date"):
<PAGE>
ARTICLE I
DEFINITIONS
1.1 AFFILIATE. "Affiliate" means an entity that is a member of the same
controlled group (as defined in Code Sections 414(b), (c) or (m)) as The
Sports Authority, Inc.
1.2 BENEFICIARY. "Beneficiary" means a person or entity designated by the
Participant as his or her beneficiary under the terms of the Profit
Sharing Plan.
1.3 BOARD OF DIRECTORS. "Board of Directors" means the Board of Directors of
The Sports Authority, Inc.
1.4 CHANGE IN CONTROL. "Change in Control" means the first to occur of any of
the following events:
(a) the "beneficial ownership" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) of securities representing more
than 20% of the combined voting power of the Corporation is
acquired by any "person," as defined in sections 13(d) and 14(d) of
the Securities Exchange Act of 1934 (other than the Corporation,
any trustee or other fiduciary holding securities under an employee
benefit plan of the Corporation, or any corporation owned, directly
or indirectly, by the shareholders of the Corporation in
substantially the same proportions as their ownership of shares of
the Corporation, or any "person" acquiring such securities in a
sale or transfer by the Corporation in a transaction not involving
a public offering), or
(b) the shareholders of the Corporation approve a definitive agreement
to merge or consolidate the Corporation with or into another
corporation or to sell or otherwise dispose of all or substantially
all of its assets, or adopt a plan of liquidation, or
(c) during any period of three consecutive years , individuals who at
the beginning of such period were members of the Board of Directors
cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the
Corporation's shareholders, of each new director was approved by a
vote of at least a majority of the directors then still in office
who were directors at the beginning of such period).
1.5 CODE. "Code" means the Internal Revenue Code of 1986, as amended.
1
<PAGE>
1.6 COMPENSATION COMMITTEE. "Compensation Committee" means the persons who
are from time to time serving as members of the Compensation Committee of
the Corporation's Board of Directors.
1.7 CORPORATION. "Corporation" means The Sports Authority, Inc. and any of
its Affiliates (a) whose participation in the Plan has been approved by
the Board of Directors, and (b) which by action of its own board of
directors shall have adopted the Plan.
1.8 ELIGIBLE SPOUSE. "Eligible Spouse" means the person to whom the
Participant is legally married at the time of the Participant's death.
1.9 MATCHING CONTRIBUTION. "Matching Contribution" means the matching
contribution made by the Corporation for the benefit of a Participant
under and in accordance with the terms of the Profit Sharing Plan for a
Plan Year.
1.10 MATCHING CONTRIBUTION ACCOUNT. "Matching Contribution Account" means the
account established for a Participant under the Profit Sharing Plan to
which Matching Contributions are allocated, as adjusted by earnings or
losses thereon.
1.11 OFFICER. "Officer" means an officer of the Corporation at the level of
Vice President or above.
1.12 PARTICIPANT. "Participant" means any Officer of The Sports Authority,
Inc. who participates in the Plan in accordance with Article II of the
Plan. Participant shall also include any Officer of an Affiliate
designated by the Compensation Committee of the Board of Directors to
participate in the Plan.
1.13 PLAN. "Plan" means The Sports Authority, Inc. Supplemental 401(k) Savings
and Profit Sharing Plan set forth in this document, as amended from time
to time.
1.14 PLAN YEAR. "Plan Year" means calendar year.
1.15 PROFIT SHARING ACCOUNT. "Profit Sharing Account" means the account
established for a Participant under the Profit Sharing Plan to which
Profit Sharing Contributions are allocated, as adjusted by earnings or
losses thereon.
1.16 PROFIT SHARING CONTRIBUTION. "Profit Sharing Contribution" means the
profit sharing contribution made by the Corporation for the benefit of a
Participant under and in accordance with the terms of the Profit Sharing
Plan for a Plan Year.
2
<PAGE>
1.17 PROFIT SHARING PLAN. "Profit Sharing Plan" means The Sports Authority
401(k) Savings and Profit Sharing Plan.
1.18 SUPPLEMENTAL MATCHING CONTRIBUTION. "Supplemental Matching Contribution"
means the matching contribution credited to the Supplemental Matching
Contribution Account by the Corporation on behalf of a Participant under
the Plan for a Plan Year.
1.19 SUPPLEMENTAL MATCHING CONTRIBUTION ACCOUNT. "Supplemental Matching
Contribution Account" means the account maintained by the Corporation
under the Plan for a Participant that is credited with amounts described
in Section 4.2.
1.20 SUPPLEMENTAL PROFIT SHARING ACCOUNT. "Supplemental Profit Sharing
Account" means the account maintained by the Corporation under the Plan
for a Participant that is credited with amounts described in Section 4.1.
1.21 SUPPLEMENTAL PROFIT SHARING CONTRIBUTION. "Supplemental Profit Sharing
Contribution" means the profit sharing contribution credited to the
Supplemental Profit Sharing Account by the Corporation on behalf of a
Participant under the Plan for a Plan Year.
1.22 TRUST. "Trust" means the "rabbi trust," which may be entered into in
conjunction with the Plan.
1.23 YEAR OF VESTING SERVICE. "Year of Vesting Service" means a year of
"Service" as defined in the Profit Sharing Plan.
3
<PAGE>
ARTICLE II
ELIGIBILITY
Officers of The Sports Authority, Inc. who are among a select group of
management and highly compensated employees and who are Participants in the
Profit Sharing Plan and who have Profit Sharing Contributions or Matching
Contributions under the Profit Sharing Plan that have been limited in any way by
the requirements of the Code and applicable regulations, including, but not
limited to, Section 401(a)(17) of the Code (relating to the $150,000 (indexed)
limit on compensation), Section 401(k)(3) of the Code (relating to
discrimination standards) and Section 402(g) of the Code (relating to the limit
on elective deferrals), shall participate in the Plan.
Officers of any Affiliate who are among a select group of management and highly
compensated employees, and who are selected at the discretion of the Board of
Directors, may participate in the Plan. Such action shall be effective as of the
later of: (i) the date such action is taken; or (ii) its effective date. An
Officer whose status as a Participant is revoked shall be entitled only to any
benefits to which he or she is entitled under Article IV.
4
<PAGE>
ARTICLE III
VESTING
3.1 SUPPLEMENTAL PROFIT SHARING CONTRIBUTIONS. The amounts credited to the
Participant's Supplemental Profit Sharing Account shall become one
hundred percent (100%) vested only after the Participant earns five (5)
Years of Vesting Service, attains age 65, dies or becomes disabled as
defined in the Profit Sharing Plan.
3.2 SUPPLEMENTAL MATCHING CONTRIBUTIONS. The amounts credited to the
Participant's Supplemental Matching Contribution Account shall be and
remain one hundred percent (100%) vested at all times.
3.3 CHANGE IN CONTROL. In the case of a Change in Control, each Participant
shall become immediately fully vested in the amount credited to his or
her Supplemental Profit Sharing Account under the Plan.
5
<PAGE>
ARTICLE IV
SUPPLEMENTAL CONTRIBUTIONS
4.1 SUPPLEMENTAL PROFIT SHARING CONTRIBUTION. A Supplemental Profit Sharing
Contribution shall be credited to each Participant's Supplemental Profit
Sharing Account by the Corporation for the benefit of that Participant
for each Plan Year. The amount credited shall be equal to the difference
between (a) and (b) below:
(a) The Profit Sharing Contribution that would have been allocated to
the Participant's Profit Sharing Account under the Profit Sharing
Plan on behalf of the Participant for the Plan Year if such
contribution had not been limited by the Code;
(b) The amount of the Profit Sharing Contribution actually allocated to
the Participant's Profit Sharing Account under the Profit Sharing
Plan on behalf of the Participant for the Plan Year.
Such Supplemental Profit Sharing Contributions shall be credited at the
time the Profit Sharing Contribution under the Profit Sharing Plan is credited
to the Participant's Profit Sharing Account.
4.2 SUPPLEMENTAL MATCHING CONTRIBUTION. A Supplemental Matching Contribution
shall be credited to each Participant's Supplemental Matching
Contribution Account by the Corporation for the benefit of that
Participant for each Plan Year. The amount credited shall be equal to the
difference between (a) and (b) below:
(a) The Matching Contribution that would have been allocated to the
Participant's Matching Contribution Account under the Profit Sharing
Plan on behalf of the Participant for the Plan Year if such
contribution had not been limited by the Code;
(b) The amount of the Matching Contribution actually allocated to the
Participant's Matching Contribution Account under the Profit Sharing
Plan on behalf of the Participant for the Plan Year.
Such Supplemental Matching Contribution shall be credited at the time the
Matching Contribution under the Profit Sharing Plan is credited to the
Participant's Matching Contribution Account.
6
<PAGE>
ARTICLE V
VALUATION OF SUPPLEMENTAL CONTRIBUTIONS
On each date amounts are credited hereunder, such amounts shall be deemed
invested in shares of Common Stock of the Corporation (icluding fractional
shares), based on the closing price of such shares on the date credited, as
reported in The Wall Street Journal, New York Stock Exchange Transactions -
Composite Transactions. On any date thereafter, the value of a Participant's
Supplemental Matching Contribution Account and Supplemenatl Profit Sharing
Contribution Account shall equal the number of shares in which amounts credited
are deemed invested (as adjusted to reflect stock splits, stock dividends,
recapitalizations, combinations or exhanges of shares or similar coprorate
transactions, and as adjusted to reflect the reinvestment of cash dividends on
such shares), mulitiplied by the price of such shares on such date, calculated
in the manner set forth in the preceding sentence.
7
<PAGE>
ARTICLE VI
DISTRIBUTIONS
6.1 TIMING AND FORM OF PAYMENT. The benefits payable under the Plan shall be
paid in cash at the later of termination of employment or age sixty-five
(65), or earlier in the discretion of the Compensation Committee, in one
lump sum payment. Such payment shall be made within thirty (30) days
after such event or determination, and the amount thereof shall be based
on the total value of the Participant's Profit Sharing Contribution
Account and his Matching Contribution Account as of the date of such
event or termination.
6.2 DEATH BENEFIT. If a Participant dies prior to receiving all amounts
distributable under the Plan, the Participant's Beneficiary shall receive
in cash the benefits payable under the Plan, at the same time as such
Beneficiary receives benefits payable under the Profit Sharing Plan. The
amount paid shall be based on the total value of the Participant's Profit
Sharing Contribution Account and his Matching Contribution Account as of
the same date assets held in the Participants accounts in the Profit
Sharing Plan are valued for purposes of distribution to the Beneficiary.
6.3 BENEFIT DUE TO SERVICE WITH PRIOR PARENT COMPANY. Certain Officers earned
supplemental retirement benefits while the Corporation was a wholly owned
subsidiary of Kmart Corporation. The liability for these benefits has
become an obligation of the Corporation.
In addition to any amounts payable under the preceding provisions of
this Plan, any Officer listed on Exhibit A of this Plan shall be entitled
to the benefit so listed.
8
<PAGE>
ARTICLE VII
EVENTS CAUSING FORFEITURE
7.1 TERMINATION OF EMPLOYMENT. Termination of employment for any reason prior
to the Participant's vesting under Article III will cause the Participant
to forfeit any unvested interest in the Plan.
7.2 FORFEITURE FOR CAUSE. If the Compensation Committee finds, after full
consideration of the facts presented on behalf of both the Corporation
and a former Participant, that the Participant was discharged by the
Corporation for fraud, embezzlement, theft, commission of a felony, or
for proven dishonesty in the course of his or her employment by the
Corporation which damaged the Corporation, the amounts credited to the
Participant's accounts under the Plan will be forfeited. The decision of
the Compensation Committee as to the cause of a former Participant's
discharge and the damage done to the Corporation will be final. No
decision of the Compensation Committee will affect the finality of the
discharge of the Participant by the Corporation in any manner.
9
<PAGE>
ARTICLE VIII
COMPENSATION COMMITTEE
8.1 POWERS OF THE COMPENSATION COMMITTEE. The Compensation Committee will
have the responsibility for the general administration of the Plan
according to the terms and provisions of the Plan and will have all
powers necessary to accomplish those purposes, including, but not by way
of limitation, the right, power and authority:
(a) to make rules and regulations for the administration of the Plan
which are not inconsistent with its terms and provisions;
(b) to construe all terms, provisions, conditions and limitations of the
Plan, and its construction of the Plan will be final as to all
parties;
(c) to correct any defect, supply any omission or reconcile any
inconsistency that may appear in the Plan in the manner and to the
extent it deems expedient to carry the Plan into effect and its
judgment in those matters will be final as to all parties;
(d) to delegate by written notice those clerical and recordation duties
of the Compensation Committee, as it deems necessary or advisable
for the proper and efficient administration of the Plan.
No member of the Board of Directors or the Compensation
Committee shall be liable for any action taken or determination made in
good faith with respect to the Plan.
8.2 CONFLICT OF INTEREST. A member of the Compensation Committee who is also
a Participant shall not vote or act on any matter relating solely to
himself or herself.
8.3 CLAIMS PROCEDURE. The Compensation Committee shall make all
determinations as to the right of any person to a benefit. If any
application for payment of a benefit under the Plan shall be denied, the
Compensation Committee shall notify the claimant within ninety (90) days
of such denial setting forth the specific reason therefor and afford such
claimant a reasonable opportunity for a full and fair review of the
decision denying his or her claim. Notice of such denial shall set forth,
in addition to the specific reasons for the denial, reference to
pertinent provisions of the Plan, such additional information as may be
relevant to denial of the claim, an explanation of the claims review
procedure and advice that such claimant may request the opportunity to
review pertinent Plan documents
10
<PAGE>
and submit a statement of issues and comments. Within sixty (60) days
following advice of denial of his or her claim, upon request made by any
claimant for a review of such denial, the Compensation Committee shall
take appropriate steps to review its decision in light of any further
information or comments submitted by such claimant. The Compensation
Committee may, in its discretion, hold a hearing at which such claimant
shall be entitled to present the basis of his or her claim for review and
at which he may be represented by counsel. The Compensation Committee
shall render a decision within sixty (60) days after claimant's request
for review (which may be extended to 120 days if circumstances so
require) and shall advise claimant in writing of its decision on such
review, specifying its reasons and identifying appropriate provisions of
the Plan.
11
<PAGE>
ARTICLE IX
AMENDMENT AND/OR TERMINATION
9.1 AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors may amend or
terminate the Plan at any time by an instrument in writing.
9.2 NO RETROACTIVE EFFECT ON CREDITED BENEFITS. No amendment or termination
of the Plan shall adversely affect the rights of any Participant to the
benefit credited under the Plan for the Participant without his or her
consent. However, the Board of Directors shall retain the right at any
time to change in any manner the contributions provided in Article IV,
but only as to contributions after the date of the amendment.
9.3 EFFECT OF TERMINATION. If the Plan is terminated, no further
contributions under the Plan will be credited. The contributions credited
under the Plan prior to the date of termination will be payable under the
conditions, at the time and in the form then provided in the Plan.
12
<PAGE>
ARTICLE X
CORPORATE OBLIGATION
The Corporation shall pay the benefits due the Participants under the
Plan. It is specifically recognized by both the Corporation and the Participants
that the Plan is only an unsecured corporate commitment and that each
Participant must rely upon the general credit of the Corporation for the
fulfillment of its obligations hereunder. Under all circumstances, the rights of
Participants to any asset held by the Corporation will be no greater than the
rights expressed in the Plan. Nothing contained in the Plan will constitute a
guarantee by the Corporation that the assets of the Corporation will be
sufficient to pay any benefits under the Plan or would place the Participant in
a secured position ahead of general creditors of the Corporation. Though the
Corporation may establish a Trust to accumulate assets to fulfill its
obligations, the Plan and any such trust will not create any lien, claim,
encumbrance, right, title or other interest of any kind whatsoever of any
Participant in any asset held by the Corporation, contributed to any such trust
or otherwise designated to be used for payment of any of its obligations created
in the Plan. No policy or other specific asset of the Corporation has been or
will be set aside, or will in any way be transferred to any trust or will be
pledged in any way for the performance of the Corporation's obligations under
the Plan which would remove the policy or asset from being subject to the
general creditors of the Corporation.
13
<PAGE>
ARTICLE XI
MISCELLANEOUS
11.1 LIMITATION OF RIGHTS. Nothing in the Plan will be construed:
(a) to give a Participant any right with respect to any benefit except
in accordance with the terms of the Plan;
(b) to limit in any way the right of the Corporation to terminate a
Participant's employment with the Corporation at any time;
(c) to evidence any agreement or understanding, expressed or implied,
that the Corporation will employ a Participant in any particular
position or for any particular remuneration; or
(d) to give a Participant or any other person claiming through him any
interest or right under the Plan other than that of any unsecured
general creditor of the Corporation.
11.2 DISTRIBUTIONS TO INCOMPETENTS OR MINORS. Should a Participant become
incompetent or should a Participant designate a Beneficiary who is a
minor or incompetent, the Corporation is authorized to pay the funds due
to the parent of the minor or to the guardian of the minor or incompetent
or directly to the minor or to apply those funds for the benefit of the
minor or incompetent in any manner the Compensation Committee determines
in its sole discretion.
11.3 NONALIENATION OF BENEFITS. No right or benefit provided in the Plan will
be transferable by the Participant except, upon his or her death, to a
named Beneficiary as provided in the Plan. No right or benefit under the
Plan will be subject to anticipation, alienation, sale, assignment,
pledge, encumbrance or charge (except as provided in Section 206(d)(3) of
the Employee Retirement Income Security Act of 1974 relating to domestic
relations orders), and any attempt to anticipate, alienate, sell, assign,
pledge, encumber, or charge the same will be void. No right or benefit
under the Plan will in any manner be liable for or subject to any debts,
contracts, liabilities or torts of the person entitled to such benefits.
11.4 RESPONSIBILITY FOR DISTRIBUTIONS AND WITHHOLDING OF TAXES. The
Compensation Committee will furnish information to the Corporation,
concerning the amount and form of distribution to any Participant
entitled to a distribution so that the Corporation may make or cause the
Trust, if applicable, to make the distribution required. It will also
calculate the deductions from the amount of the benefit paid under the
Plan for any taxes
14
<PAGE>
required to be withheld by federal, state or local government based on
the Participant's instructions, and will cause them to be withheld.
11.5 RELIANCE UPON INFORMATION. No member of the Board of Directors or the
Compensation Committee shall be liable for any decision or action taken
in good faith in connection with the administration of the Plan. Without
limiting the generality of the foregoing, any decision or action taken by
the Board of Directors or the Compensation Committee when it relies upon
information supplied it by any officer of the Corporation, the
Corporation's legal counsel, the Corporation's actuary, the Corporation's
independent accountants or other advisors in connection with the
administration of the Plan will be deemed to have been taken in good
faith.
11.6 SEVERABILITY. If any term, provision, covenant or condition of the Plan
is held to be invalid, void or otherwise unenforceable, the rest of the
Plan will remain in full force and effect and will in no way be affected,
impaired or invalidated.
11.7 NOTICE. Any notice or filing required or permitted to be given to the
Compensation Committee or a Participant will be sufficient if in writing
and hand delivered or sent by U.S. mail to the principal office of the
Corporation or to the residential mailing address of the Participant.
Notice will be deemed to be given as of the date of hand delivery or if
delivery is by mail, as of the date shown on the postmark.
11. GENDER. Whenever any words are used in the Plan in the masculine,
feminine, or neuter gender, they are to be construed as though they were
also used in another gender in all cases where they would so apply.
11.9 GOVERNING LAW. The Plan will be construed, administered and governed in
all respects by the laws of the State of Delaware to the extent they are
not preempted by Federal law.
11.10 EFFECTIVE DATE. The Plan will be operative and effective on January 1,
1996.
15
<PAGE>
===============================================================================
EXHIBIT A
===============================================================================
EQUIVALENT SHARES OF
SHARES OF KMART VALUE OF KMART THE SPORTS AUTHORITY
NAME STOCK AS OF STOCK AS OF STOCK AS
11/17/94 11/17/94 IPO 11/17/94
===============================================================================
Jack A. Smith 3,261.058 $48,508.238 2,716.027
- -------------------------------------------------------------------------------
Richard Lynch 1,163.667 $17,309.547 969.18
- -------------------------------------------------------------------------------
Arnie Sedel 584.694 $ 8,697.323 486.972
- -------------------------------------------------------------------------------
Robert Timinski 546.142 $ 8,123.862 454.864
===============================================================================
16
EXHIBIT 11.1
THE SPORTS AUTHORITY, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 26, JANUARY 28,
1997 1996
------------- --------------
Financial statement computations:
Income before income taxes $ 48,032 $ 37,390
Income tax expense 19,597 5,305
Minority interest (1,570) (245)
-------- --------
Net income $ 30,005 $ 22,330
======== ========
Earnings per share:
Shares used in primary earnings
per share computation:
Weighted average common shares
outstanding 31,392 31,229
Net additional shares assuming
options exercised and proceeds
used to purchase treasury
shares at average market price 439 140
-------- --------
Common and common share
equivalents 31,831 31,369
======== ========
Earnings per share assuming
primary dilution $ 0.94 $ 0.71
======== ========
Shares used in fully diluted
earnings per share computation: (1)
Weighted average common shares
outstanding 31,392 31,229
Net additional shares assuming
options exercised and proceeds
used to purchase treasury
shares at higher of average
market price and period-end
market price 443 137
Common and common share
equivalents 31,835 31,366
======== ========
Earnings per share assuming full
dilution $ 0.94 $ 0.71
======== ========
(1) The calculation of fully diluted earnings per share excludes shares
issuable pursuant to the conversion rights granted to holders under the
Company's 5.25% Convertible Subordinated Notes because they have an
antidilutive effect.
THE SPORTS AUTHORITY, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial data set forth below reflect the
historical results of operations, financial condition and operating data of the
Company for the periods indicated and should be read in conjunction with the
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1)
-------------------------------------------------------------------------
JANUARY 26, JANUARY 28, JANUARY 22, JANUARY 23, JANUARY 24,
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
(in thousands except per share data)
Sales $1,271,296 $1,046,652 $838,539 $606,871 $411,519
Gross profit 368,538 295,199 231,862 167,694 114,814
Selling, general and administrative expenses 304,955 245,886 188,875 137,045 95,590
Pre-opening expense 11,408 9,140 10,867 7,658 6,982
Goodwill amortization 1,963 1,963 1,963 2,070 2,070
---------- ---------- -------- -------- --------
Operating income 50,212 38,210 30,157 20,921 10,172
Interest, net 2,180 820 318 13 141
---------- ---------- -------- -------- --------
Income before income taxes 48,032 37,390 29,839 20,908 10,031
Income tax expense 19,597 15,305 12,980 8,156 4,299
Minority interest (1,570) (245) - - -
---------- ---------- -------- -------- --------
Net income $ 30,005 $ 22,330 $ 16,859 $ 12,752 $ 5,732
========== ========== ======== ======== ========
Earnings per common share and common
share equivalents(2) $ .94 $ .71 $ .54 $ .41
========== ========== ======== ========
Weighted average common shares and
common share equivalents(2) 31,831 31,369 31,175 31,175
========== ========== ======== ========
PERCENT OF SALES DATA:
Gross margin 29.0% 28.2% 27.6% 27.6% 27.9%
Selling, general and administrative expenses 24.0 23.4 22.5 22.6 23.2
Operating income 4.0 3.7 3.6 3.4 2.5
Income before income taxes 3.8 3.6 3.6 3.4 2.4
SELECTED FINANCIAL AND OPERATING DATA:
End of period stores 168 136 107 80 56
Comparable store sales increase 3.3% 1.1% 5.5% 2.6% 8.3%
Inventory turnover 3.2 3.2 3.2 3.1 2.9
Weighted average sales per square foot $ 203 $ 214 $ 220 $ 224 $ 228
Weighted average sales per store (in thousands) 8,819 9,231 9,446 9,572 9,689
End of period inventory net of accounts payable
per store (in thousands) 729 823 861 879 1,046
Average sale per transaction 45.99 44.85 43.23 41.55 39.86
Capital expenditures-owned property (in thousands) 102,165 55,321 51,449 23,487 25,911
Depreciation and amortization (in thousands) 28,506 19,975 13,956 10,181 7,214
BALANCE SHEET DATA-END OF PERIOD:
(in thousands)
Working capital $ 175,997 $ 81,878 $109,446 $ 37,488 $ 34,535
Total assets 754,270 525,653 463,444 297,765 236,432
Long-term debt 152,021 - - - -
Stockholders' equity 310,317 277,528 252,776 147,871 139,200
</TABLE>
- ------------------------
(1) The fiscal year ended January 28, 1996 consisted of 53 weeks. All other
fiscal years shown each consisted of 52 weeks.
(2) Earnings per common share and common share equivalents and weighted average
common shares and common share equivalents for the fiscal years ended
January 22, 1995 and January 23, 1994 are pro forma and are based on the
actual number of common shares outstanding at January 22, 1995 (adjusted for
the stock split).
<PAGE>
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth the Company's income statement data as a
percent of sales for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
JANUARY 26, JANUARY 28, JANUARY 22,
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Licensee fees and rental income 0.2 0.3 0.2
------- ------- -------
100.2 100.3 100.2
Cost of merchandise sold, includes buying and occupancy costs 71.2 72.1 72.6
------- ------- -------
Gross margin 29.0 28.2 27.6
Selling, general and administrative expenses 24.0 23.4 22.5
Pre-opening expense 0.9 0.9 1.3
Goodwill amortization 0.1 0.2 0.2
------- ------- -------
Operating income 4.0 3.7 3.6
Interest, net 0.2 0.1 -
------- ------- -------
Income before income taxes 3.8 3.6 3.6
Income taxes 1.5 1.5 1.6
Minority interest (0.1) - -
------- ------- -------
Net income 2.4% 2.1% 2.0%
======= ======= =======
</TABLE>
The following table sets forth the Company's store openings for the
periods indicated. No stores were closed during these periods.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
JANUARY 26, JANUARY 28, JANUARY 22,
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Beginning number of stores 136 107 80
Openings 32 29 27
----- ----- ----
Ending number of stores 168 136 107
===== ===== ====
</TABLE>
FISCAL YEARS ENDED JANUARY 26, 1997 (FISCAL 1996) AND JANUARY 28, 1996 (FISCAL
1995)
Sales for the 52 weeks ended January 26, 1997 were $1,271.3 million, a
$224.6 million, or 21.5% increase over sales of $1,046.7 million for the 53
weeks ended January 28, 1996. Of the 21.5% increase in sales, 10.6%, or $111.3
million, was attributable to the inclusion of a full year of sales for the 29
stores opened in 1995 which had no comparable store sales in the prior year;
9.3%, or $97.0 million, was attributable to the 32 stores opened in 1996; and
3.3%, or $34.2 million, was attributable to comparable store sales growth. These
increases were partially offset by an additional week's sales of $17.9 million,
or 1.7% of sales, in the prior year as fiscal 1995 was a 53 week year.
Comparable store sales increased 3.3% and 1.1%, in 1996 and 1995, respectively.
The comparable store sales increase in 1996 was primarily the result of an
increase in apparel, due in large part to strong sales of licensed products, as
well as fitness equipment and footwear. Comparable sales were positively
impacted by the closing of Herman's Sporting Goods in July 1996 and the Summer
Olympic Games. Excluding all or a portion of the 1996 sales from 13 stores
considered to be cannibalized by new store openings, comparable store sales
increased 4.0% in 1996, as compared to 2.5% in the prior year after excluding
all or a portion of the 1995 sales from 15 stores considered to be cannibalized.
The Company considers an existing store to be cannibalized for a period of one
year from the date on which a new store overlaps its primary trade area. In
calculating comparable store sales excluding cannibalized stores, sales from a
cannibalized store are excluded from the calculation of total comparable sales
for such months.
2
<PAGE>
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
Licensee fees and rental income in 1996 were $3.2 million, or 0.2% of
sales, as compared to $2.8 million, or 0.3% of sales, in the prior year. Sales
of snow ski merchandise increased only 13.8% as compared to a 21.5% increase in
the Company's sales. This relatively small increase is primarily due to strong
ski sales in the Northeast at the beginning of the 1995-1996 ski season, which
are reflected in fiscal 1995. The snow ski merchandise departments in the
Company's North American stores are operated pursuant to a licensee agreement
with a third-party under which the Company receives a fee of approximately 10%
of licensee snow ski merchandise sales in the Company's stores. Snow ski
merchandise sales in those stores are not included in the Company's sales.
Cost of merchandise sold, including buying and occupancy costs, in 1996
was $905.9 million, or 71.2% of sales, as compared to $754.2 million, or 72.1%
of sales, in the prior year. As a percent of sales, gross margin was 29.0% in
1996 and 28.2% in 1995. The major components of cost of goods sold are primarily
merchandise costs and, to a lesser extent, occupancy costs. In 1996, merchandise
costs decreased as a percent of sales primarily because the Company is selling a
larger proportion of higher margin products such as footwear and apparel.
Occupancy costs increased slightly as a percent of sales due to lower initial
sales volumes for non-comparable stores opened in the second half of 1995.
Selling, general and administrative ("SG&A") expenses in 1996 were
$305.0 million, or 24.0% of sales, as compared to $245.9 million, or 23.4% of
sales, in the prior year. The 0.6% of sales increase in SG&A expenses was
primarily attributable to an increase in store payroll expenses due to lower
initial sales volumes for non-
comparable stores opened in the second half of 1995. Depreciation expense also
increased as a result of the installation of the new ladder style apparel
fixtures in the stores in the second half of 1995. These increases were
partially offset by a decrease in advertising due to leveraging of advertising
expenses as the Company continues to backfill in existing multiple store
markets.
Pre-opening expense in 1996 was $11.4 million, or 0.9% of sales, as
compared to $9.1 million, or 0.9% of sales, in the prior year. Pre-opening
expense increased $2.3 million primarily due to the opening of 32 stores in 1996
versus 29 stores in the prior year and, to a lesser extent, to higher
pre-opening occupancy expenses in three stores as a result of assuming existing
lease obligations and higher grand opening advertising expenses. Pre-opening
expense consists principally of store payroll expense for associate training and
store preparation prior to a store opening, as well as grand-opening advertising
expenditures.
Operating income in 1996 was $50.2 million, or 4.0% of sales, as compared
to $38.2 million, or 3.7% of sales, in 1995. Operating income before pre-opening
expense and goodwill amortization was $63.6 million, or 5.0% of sales, in 1996,
as compared to $49.3 million, or 4.7% of sales, in 1995.
Interest, net in 1996 was $2.2 million, or 0.2% of sales, as compared to
$0.8 million, or 0.1% of sales, in 1995. The increase of $1.4 million was
primarily attributable to interest incurred under the Company's long-term
convertible debt issuance and, to a lesser extent, from higher average
borrowings under the Revolving Credit Facility. The interest expense is
partially offset by interest income from short-term investments, a note
receivable from a developer, and a participation in a privately placed mortgage
note secured by a store lease.
Income tax expense in 1996 was $19.6 million with an effective tax rate of
40.8% as compared to income tax expense of $15.3 million with an effective tax
rate of 40.9% in 1995. The decrease in the effective tax rate resulted primarily
due to a decrease in state taxes and the declining effect of non-deductible
goodwill expense due to the growth of the Company's pre-tax income from 1995 to
1996. This was partially offset by the effect of a valuation allowance
offsetting the income tax benefit related to the Company's joint venture in
Japan.
As a result of the foregoing factors, net income in 1996 was $30.0
million, or 2.4% of sales, as compared to $22.3 million, or 2.1% of sales, in
1995.
FISCAL YEARS ENDED JANUARY 28, 1996 (FISCAL 1995) AND JANUARY 22, 1995 (FISCAL
1994)
Sales for the 53 weeks ended January 28, 1996 were $1,046.7 million, a
$208.2 million, or 24.8% increase over sales of $838.5 million for the 52 weeks
ended January 22, 1995. Of the 24.8% increase in sales, 15.7%, or $132.2
million, was attributable to the inclusion of a full year of sales for the 27
stores opened in 1994 which had no comparable store sales in the prior year;
8.0%, or $66.8 million, was attributable to the 29 stores opened in 1995; and
1.1%, or $9.2 million, was attributable to comparable store sales growth.
Comparable store sales increased 1.1% and 5.5%, in 1995 and 1994, respectively.
Comparable store sales increases primarily resulted from footwear, due in large
3
<PAGE>
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
part to the increased popularity of in-line skates (including an increase in
average retail price point), and apparel, due to strong sales of licensed
products. These increases were also due to the addition of products from Nike, a
brand not carried until October 1994. However, comparable store sales increased
at a lower rate in 1995 versus 1994 primarily due to sluggish sales in
hardlines, particularly in outdoor sports products. Excluding all or a portion
of the 1995 sales from 15 stores considered to be cannibalized by new store
openings, comparable store sales increased 2.5% in 1995, as compared to 8.2% in
the prior year after excluding all or a portion of the 1994 sales from 24 stores
considered to be cannibalized.
Licensee fees and rental income in 1995 were $2.8 million as compared to
$2.0 million in the prior year. Licensee fees increased 40.1% in 1995 primarily
due to the greater number of stores and strong comparable ski sales,
particularly in the Northeast.
Cost of merchandise sold, including buying and occupancy costs, in 1995
was $754.2 million, or 72.1% of sales, as compared to $608.7 million, or 72.6%
of sales, in the prior year. As a percent of sales, gross margin was 28.2% in
1995 and 27.6% in 1994. The major components of cost of goods sold are primarily
merchandise costs and, to a lesser extent, occupancy costs. In 1995, merchandise
costs decreased primarily due to an increase in the purchase markon and a
decrease in retail markdowns (at cost). This was partially offset by a decrease
in cash discounts from vendors as a result of negotiating more favorable
purchase terms in lieu of taking cash discounts. The decrease in merchandise
costs was partially offset by higher occupancy costs. This was due primarily to
higher minimum rentals and real estate taxes resulting from continued expansion
in the Northeast (including the New York metropolitan area), Chicago and Hawaii
in the second half of 1994 and a 2.6% reduction in average store sales volume
per store in 1995 versus 1994.
SG&A expenses in 1995 were $245.9 million, or 23.4% of sales, as compared
to $188.9 million, or 22.5% of sales, in the prior year. The 0.9% of sales
increase in SG&A expenses was primarily attributable to an increase in store
payroll expenses partly due to increased payroll related to the Company's TSA
2000 project. Depreciation expense also increased as a result of additional
computer hardware and software in the stores and the installation of the new
ladder style apparel fixtures in the stores. In addition, the Company's
corporate overhead increased due to the additional costs required in being a
publicly traded company. This was partially offset by a decrease in advertising
due to leveraging of advertising expenses as the Company continues to backfill
in existing multiple store markets.
Pre-opening expense in 1995 was $9.1 million, or 0.9% of sales, as
compared to $10.9 million, or 1.3% of sales, in the prior year. The decrease in
pre-opening expenses is attributable to reduced pre-opening payroll and more
efficient grand opening advertising, partially offset by a greater number of
stores opened in 1995 versus 1994.
Operating income in 1995 was $38.2 million, or 3.7% of sales, as compared
to $30.2 million, or 3.6% of sales, in 1994. Operating income before pre-opening
expense and goodwill amortization was $49.3 million, or 4.7% of sales, in 1995,
as compared to $43.0 million, or 5.1% of sales, in 1994.
Income tax expense in 1995 was $15.3 million with an effective tax rate of
40.9% as compared to $13.0 million with an effective tax rate of 43.5% in 1994.
The 2.6 percentage point decrease in the effective tax rate resulted from
several factors including a tax rate differential related to the Company's
Canadian subsidiary and non-deductible goodwill expense, which represented a
smaller proportion of income before income taxes in 1995 than in 1994.
As a result of the foregoing factors, net income in 1995 was $22.3
million, or 2.1% of sales, as compared to $16.9 million, or 2.0% of sales, in
1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
needs and to open new stores in connection with its expansion strategy. For 1996
these capital requirements have generally been satisfied by issuance of $149.5
million of long-term convertible debt, cash provided by operations, cash and
cash equivalents at the beginning of the year and by borrowings under the $110
million Revolving Credit Facility.
Cash flows generated by operating, investing and financing activities as
reported in the Consolidated Statements of Cash Flows for 1996, 1995 and 1994
are summarized below. The net increase in cash and cash equivalents for 1996 was
$97.9 million as compared to a decrease of $25.3 million in 1995 and an increase
of $28.9 million in 1994.
4
<PAGE>
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
Net cash provided by operations was $53.7 million in 1996, as compared to
net cash provided by operations of $46.0 million in 1995 and net cash used for
operations of $5.6 million in 1994. Income before depreciation and amortization
contributed $58.5 million. Depreciation and amortization expense resulted
primarily from leasehold improvements, store fixtures and goodwill. Depreciation
expense is expected to continue to increase in the future due to continued
expansion and new store openings such as those discussed below. In the other-net
category, accrued payroll and other liabilities increased due to the greater
number of stores in operation in 1996 than in 1995. Other long-term liabilities
increased due to increased step rent accruals as a result of the relative
immaturity of the existing stores and the increased store base. These provisions
of cash were offset by an increase in inventory net of accounts payable of $10.5
million due to the addition of 32 stores in 1996 (versus an increase of $19.8
million in 1995 due to the addition of 29 stores). Other assets increased due to
long-term store lease deposits expended by the Company's joint venture in Japan
and an increase in deferred income taxes as a result of the Company's net
operating loss related to its Canadian subsidiary. In the other-net category,
accounts receivable and other current assets increased due to an increase in
co-op receivables, the recording of an income tax receivable due to a change in
accounting method for tax purposes, and an increase in prepaid expenses.
Net cash used for investing was $112.5 million, $74.1 million and $53.4
million in 1996, 1995 and 1994 respectively. Capital expenditures in 1996
included $74.8 million of expenditures associated with opening stores, of which
$70.9 million was used for the development of 32 stores opened in 1996, and $3.9
million was used for stores to be opened subsequent to 1996. In addition,
capital expenditures of $12.7 million were recorded for three locations
purchased by the Company from the trustee under the $50 million Operating Lease
Facility (see discussion below). The remaining $14.7 million was used to
refurbish certain existing stores and purchase computer hardware and software
for the corporate office. Other-net increased by $10.7 million due to the
purchase of a participation in a privately placed mortgage note secured by one
of the Company's stores and the acquisition of leases of two store locations.
Net cash provided by financing of $156.7 million in 1996 was comprised
principally of issuance of $149.5 million long-term convertible debt in
September 1996. A portion of the proceeds from the convertible debt issuance
were used to repay existing indebtedness under the Revolving Credit Facility,
finance the acquisition and development of new stores and to purchase three
locations from the trustee under the Operating Lease Facility. In October 1996,
the Company terminated its $50 million Operating Lease Facility, which had
provided financing for certain new store development. Net cash provided by
financing of $2.8 million in 1995 was comprised principally of proceeds from the
sale of stock to employees through the Management Stock Purchase Plan and the
Employee Stock Purchase Plan. Net cash provided by financing of $87.9 million in
1994 was comprised almost entirely of equity contributions by Kmart.
The Company's working capital at January 26, 1997 was $176.0 million
compared with $81.9 million at January 28, 1996, an increase of $94.1 million.
This increase was primarily due to an increase in cash of $97.9 million as a
result of the convertible debt issuance.
Pursuant to the Company's rapid expansion program, the Company opened 32
stores in 1996, resulting in a year-end total of 168 stores. The Company
currently plans to open 40 stores in 1997. Since the Company has decided to
acquire, develop and own a number of its new stores, and to begin implementation
of a logistics program involving creation of a network of regional distribution
centers, the Company expects that its capital expenditures will be approximately
$130 million in 1997. The Company will continue to finance a certain number of
its new stores with operating leases, assuming availability and appropriate
terms. To the extent stores are not financed with operating leases, capital
expenditures will be higher by approximately $4 million to $8 million per
location.
The Company believes that anticipated cash flows from operations,
borrowings under the Revolving Credit Facility, operating leases from developers
and the remaining proceeds from the convertible debt issuance will be sufficient
to satisfy its currently anticipated working capital and capital expenditure
requirements through the end of 1997. The Company continues to evaluate various
sources of financing for its expansion, and may seek to raise additional funds
through debt or equity-related offerings, or through an additional commercial
bank debt arrangement. The Company's Revolving Credit Facility currently
provides for borrowings in a principal amount of $110 million at any one time.
As of April 8, 1997, the Company had no borrowings under the Revolving Credit
Facility.
5
<PAGE>
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION - (CONTINUED)
SEASONALITY AND INFLATION
The Company's business is highly seasonal, with its highest sales and
operating profitability occurring in the fourth quarter, which includes the
holiday selling season. In fiscal 1996, 29.6% of the Company's sales and 55.4%
of its operating income occurred in the fourth quarter compared to 30.8% and
57.0%, respectively in 1995. The Company's expansion program generally is
weighted toward store openings in the second half of the fiscal year. In the
future, changes in the number and timing of store openings and consumer buying
habits, particularly in the holiday selling season, may change seasonality
trends.
<TABLE>
<CAPTION>
1996 QUARTER ENDED
-------------------------------------------------
<S> <C> <C> <C> <C>
(in millions) APRIL JULY OCTOBER JANUARY
- ------------------- ------ ----- -------- ---------
Sales $270.6 $331.6 $ 292.9 $ 376.2
% of full year 21.3% 26.1% 23.0% 29.6%
Operating income $ 3.7 $15.5 $ 3.2 $ 27.8(a)
% of full year 7.4% 30.9% 6.3% 55.4%
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTER ENDED
-------------------------------------------------
<S> <C> <C> <C> <C>
(in millions) APRIL JULY OCTOBER JANUARY
- ------------------- ------ ----- -------- ---------
Sales $221.6 $268.4 $ 234.2 $ 322.5
% of full year 21.2% 25.6% 22.4% 30.8%
Operating income $ 3.2 $12.1 $ 1.1 $ 21.8(b)
% of full year 8.4% 31.7% 2.9% 57.0%
</TABLE>
(a) Fourth quarter adjustments in 1996 had the effect of increasing operating
income and net income by approximately $6.0 million and $3.5 million,
respectively. These adjustments primarily related to worker's compensation
and general liability insurance reserves, and vendor rebates.
(b) Fourth quarter adjustments in 1995 had the effect of increasing operating
income and net income by approximately $5.1 million and $3.0 million,
respectively. These adjustments primarily related to health insurance
accruals and an adjustment related to the Company's allowance for defective
merchandise.
Management does not believe inflation had a material effect on the
financial statements for the periods presented.
6
<PAGE>
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the integrity and consistency of all
financial information presented in this Annual Report. The financial statements
have been prepared in accordance with generally accepted accounting principles
and include certain amounts based on Management's best estimates and judgments
as required.
Management has developed and maintains a system of accounting and controls
designed to provide reasonable assurance that the Company's assets are
protected from improper use and that accounting records provide a reliable basis
for the preparation of financial statements. This system includes policies which
require adherence to ethical business standards and compliance with all laws to
which the Company is subject. This system is continually reviewed, improved and
modified in response to changing business conditions and operations. The
Company's comprehensive internal audit program provides for constant evaluation
of the adequacy of and adherence to Management's established policies and
procedures; the extent of the Company's system of internal accounting controls
recognizes that the cost should not exceed the benefits derived. Management
believes that assets are safeguarded and financial information is reliable.
The financial statements of the Company have been audited by Price Waterhouse
LLP, independent certified public accountants. Their report, which appears
herein, is based upon their audit conducted in accordance with generally
accepted auditing standards. These standards include a review of the systems of
internal controls and tests of transactions to the extent considered necessary
by them for purposes of supporting their opinion.
The Audit Committee of the Board of Directors is comprised solely of
directors who are not officers or employees of the Company. The Committee is
responsible for recommending to the Board of Directors the selection of
independent certified public accountants. It meets periodically and monitors the
financial, accounting and auditing procedures of the Company in addition to
reviewing the Company's financial reports. Price Waterhouse LLP and the
internal auditors have full and free access to the Audit Committee.
/s/ JACK A. SMITH /s/ RICHARD J. LYNCH, JR.
- ---------------------------- ----------------------------
Jack A. Smith Richard J. Lynch, Jr.
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
7
<PAGE>
THE SPORTS AUTHORITY, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF THE SPORTS AUTHORITY, INC.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of The Sports Authority, Inc. and its subsidiaries at
January 26, 1997 and January 28, 1996, and the results of their operations
and their cash flows for each of the three years in the period ended
January 26, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
------------------------------
Price Waterhouse LLP
Ft. Lauderdale, Florida
March 3, 1997
8
<PAGE>
THE SPORTS AUTHORITY, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
JANUARY 26, JANUARY 28, JANUARY 22,
(In thousands, except per share data) 1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Sales $1,271,296 $1,046,652 $838,539
Licensee fees and rental income 3,165 2,772 1,978
---------- ---------- --------
1,274,461 1,049,424 840,517
Cost of merchandise sold, includes buying and
occupancy costs 905,923 754,225 608,655
Selling, general and administrative expenses 304,955 245,886 188,875
Pre-opening expense 11,408 9,140 10,867
Goodwill amortization 1,963 1,963 1,963
---------- ---------- --------
Operating income 50,212 38,210 30,157
---------- ---------- --------
Interest:
Interest expense 4,580 1,327 609
Interest income (2,400) (507) (291)
---------- ---------- --------
Interest, net 2,180 820 318
---------- ---------- --------
Income before income taxes 48,032 37,390 29,839
Income tax expense 19,597 15,305 12,980
Minority interest (1,570) (245) -
---------- ---------- --------
Net income $ 30,005 $ 22,330 $ 16,859
========== ========== ========
Earnings per common share and
common share equivalents $ .94 $ .71 $ .54
========== ========== ========
Weighted average common shares and
common share equivalents 31,831 31,369 31,175
========== ========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
9
<PAGE>
THE SPORTS AUTHORITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 28,
(in thousands) 1997 1996
------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $109,645 $11,785
Merchandise inventories 279,577 248,307
Accounts receivable and other current assets 34,809 30,442
Property held for resale 21,080 21,063
-------- -------
Total current assets 445,111 311,597
Net property owned 211,651 134,706
Other assets and deferred charges 44,762 24,642
Goodwill-net of accumulated amortization of
$13,659 and $11,697 respectively 52,746 54,708
-------- -------
Total Assets $754,270 $525,653
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $157,156 $136,344
Accrued payrolls and other liabilities 89,804 73,770
Short-term debt 5,043 -
Taxes other than income taxes 7,407 7,438
Income taxes 9,704 12,167
-------- -------
Total current liabilities 269,114 229,719
Long-term debt 152,021 -
Other long-term liabilities 22,715 18,094
-------- -------
Total liabilities 443,850 247,813
-------- -------
Commitments and contingencies - -
Minority interest 103 312
Stockholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized, 31,505 issued 315 209
Additional paid-in-capital 245,621 241,525
Deferred compensation and receivables from officers (2,177) (553)
Retained earnings 67,033 37,028
Treasury stock, 39 shares (381) (381)
Cumulative translation adjustment (94) (300)
-------- -------
Total stockholders' equity 310,317 277,528
-------- -------
Total Liabilities and Stockholders' Equity $754,270 $525,653
======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
10
<PAGE>
THE SPORTS AUTHORITY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN DEFERRED
(In thousands) SHARES AMOUNT CAPITAL COMPENSATION
------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Balance, January 23, 1994 10 $ 10 $ 133,223 $ -
Net equity transactions with Kmart 80,759
Stock split on November 16, 1994 and
restatement of par value to $0.01 9,990 90 (90)
Sale of Common Stock in Initial Public
Offering on November 23, 1994 10,200 102 183,383
Dividend to Kmart (166,686)
Common Stock issued under the
Management Stock Purchase Plan 278 3 4,300 (1,900)
Common Stock issued under the Employee
Stock Purchase Plan 316 3 5,098
Common Stock issued under the Director
Stock Plan 4 - 84 (84)
Treasury shares acquired (15)
Net income for fiscal 1994
Balance, January 22, 1995 20,783 208 240,071 (1,984)
Common Stock issued under the Employee
Stock Purchase Plan 72 1 1,274
Common Stock issued under the Director
Stock Plan 12 - 210 (188)
Payments received under the Management
Stock Purchase Plan 1,035
Amortization of deferred compensation 486
Treasury shares acquired (11) (30) 98
Cumulative translation adjustment
Net income for fiscal 1995
Balance, January 28, 1996 20,856 209 241,525 (553)
Three-for-two stock split on July 16, 1996 10,480 105 (110)
Common Stock issued under the
Management Stock Purchase Plan 25 583 (110)
Common Stock issued under the Employee
Stock Purchase Plan 37 836
Common Stock issued under the Director
Stock Plan 8 178 (149)
Common Stock issued under the 1996
Stock Option and Restricted Stock Plan 60 1 1,984 (1,985)
Amortization of deferred compensation 620
Section 16(b) insider profit recovery 625
Cumulative translation adjustment
Net income for fiscal 1996
BALANCE, JANUARY 26, 1997 31,466 $ 315 $ 245,621 $(2,177)
======= ======== ========= =======
(RESTUB TABLE FROM ABOVE)
RETAINED TREASURY TRANSLATION
(In thousands) EARNINGS STOCK ADJUSTMENT TOTAL
----------- ----------- ------------- ------------
Balance, January 23, 1994 $ 14,638 $ - $ - $ 147,871
Net equity transactions with Kmart 80,759
Stock split on November 16, 1994 and
restatement of par value to $0.01 -
Sale of Common Stock in Initial Public
Offering on November 23, 1994 183,485
Dividend to Kmart (16,799) (183,485)
Common Stock issued under the
Management Stock Purchase Plan 2,403
Common Stock issued under the Employee
Stock Purchase Plan 5,101
Common Stock issued under the Director
Stock Plan -
Treasury shares acquired (217) (217)
Net income for fiscal 1994 16,859 16,859
-------- ---------
Balance, January 22, 1995 14,698 (217) - 252,776
Common Stock issued under the Employee
Stock Purchase Plan 1,275
Common Stock issued under the Director
Stock Plan 22
Payments received under the Management
Stock Purchase Plan 1,035
Amortization of deferred compensation 486
Treasury shares acquired (164) (96)
Cumulative translation adjustment (300) (300)
Net income for fiscal 1995 22,330 22,330
-------- ---------
Balance, January 28, 1996 37,028 (381) (300) 277,528
Three-for-two stock split on July 16, 1996 (5)
Common Stock issued under the
Management Stock Purchase Plan 473
Common Stock issued under the Employee
Stock Purchase Plan 836
Common Stock issued under the Director
Stock Plan 29
Common Stock issued under the 1996
Stock Option and Restricted Stock Plan -
Amortization of deferred compensation 620
Section 16(b) insider profit recovery 625
Cumulative translation adjustment 206 206
Net income for fiscal 1996 30,005 30,005
-------- ---------
BALANCE, JANUARY 26, 1997 $ 67,033 $(381) $ (94) $ 310,317
======== ===== ===== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
11
<PAGE>
THE SPORTS AUTHORITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
JANUARY 26, JANUARY 28, JANUARY 22,
(In thousands) 1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income $ 30,005 $ 22,330 $ 16,859
Adjustment to reconcile net income to operating cash flows:
Depreciation and amortization 28,506 20,339 13,956
Cumulative translation adjustment 206 (300) -
Minority interest in net loss of Joint Venture (1,570) (245) -
Loss on sale or disposal of property and equipment 272 50 -
Increase in other assets (7,066) (2,367) (405)
Increase in other long-term liabilities 4,621 3,933 7,034
Cash provided by (used for) current assets and liabilities:
Increase in inventories (31,270) (30,548) (60,440)
(Increase) decrease in property held for resale (17) 1,488 (22,551)
Increase in accounts payable 20,812 10,745 38,590
Other-net 9,202 20,575 1,397
--------- -------- ---------
Net cash provided by (used for) operations 53,701 46,000 (5,560)
--------- -------- ---------
INVESTING
Capital expenditures-owned property (102,165) (55,321) (51,449)
Proceeds from sale of property and equipment 380 - -
Other-net (10,741) (18,780) (1,988)
--------- -------- ---------
Net cash used for investing (112,526) (74,101) (53,437)
--------- -------- ---------
FINANCING
Short-term borrowings 5,043 - -
Long-term borrowings 152,021 - -
Net equity transactions with Kmart Corporation - - 80,759
Dividends paid to Kmart Corporation - - (183,485)
Proceeds from sale of stock 1,929 2,310 190,901
Purchase of treasury stock - (96) (217)
Minority interest in equity in Joint Venture 1,361 557 -
Debt issuance costs (3,669) - -
Reduction in capital lease obligations - - (64)
--------- -------- ---------
Net cash provided by financing 156,685 2,771 87,894
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 97,860 (25,330) 28,897
Cash and cash equivalents at beginning of year 11,785 37,115 8,218
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 109,645 $ 11,785 $ 37,115
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid, net of amount capitalized $ 1,505 $ 1,330 $ 606
Income taxes paid 27,345 15,211 6,299
</TABLE>
See accompanying Notes to Consolidated Financial Statements
12
<PAGE>
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: THE COMPANY
The Sports Authority, Inc. ("The Sports Authority" or "Company") operates
retail sporting goods megastores in the United States, Canada and Japan. At
January 26, 1997, the Company operated 165 sporting goods megastores, virtually
all in excess of 40,000 square feet, and three stores under its new format "The
Sports Authority, Ltd." These "Ltd." format stores range from 9,000-30,000
square feet. The Company has an international presence with 159 stores in 27
states across the United States, six in Canada and three stores in Japan.
The Company was a wholly owned subsidiary of Kmart Corporation ("Kmart")
until November 23, 1994, when the Company completed an Initial Public Offering
("Initial Public Offering") of its Common Stock. Subsequent to the offering,
Kmart owned approximately 29.1% of the outstanding Common Stock. On October 21,
1994, the Company declared a dividend of $96,000,000 paid in the form of a
promissory note to Kmart and on November 17, 1994, the Company declared an
additional dividend of $87,485,000 paid in the form of a promissory note to
Kmart ("Dividend Notes"). The Company used the net proceeds of the Initial
Public Offering to repay the Dividend Notes on November 23, 1994.
In conjunction with the Initial Public Offering, on November 16, 1994, the
Company declared a 1,000-for-1 split of the Company's Common Stock and a change
in the par value of the Common Stock to $0.01. Subsequent to the Initial Public
Offering, 100,000,000 shares of Common Stock were authorized at $0.01 par and
5,000,000 shares of Preferred stock were authorized at $0.01 par, none of which
were issued.
On October 6, 1995, Kmart sold its remaining 29.1% ownership through a
secondary public offering of the Company's Common Stock. The transaction did
not affect the Company's stockholders' equity as all proceeds were received by
Kmart. As a result of the offering, Kmart no longer owns an interest in the
Company.
In January 1995, the Company entered into a Joint Venture Agreement with
JUSCO Co., Ltd. ("JUSCO") a major Japanese retailer, which owns 9.6% of
the Company's outstanding Common Stock. In the Joint Venture Agreement, as
amended in 1996, the Company and JUSCO agreed to develop and operate The Sports
Authority stores in Japan through a jointly owned Japanese corporation, Mega
Sports Co., Ltd. ("Mega Sports"), of which 51% is owned by the Company and
49% by JUSCO. The Company effectively retains operating control of Mega Sports.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies, which conform to generally
accepted accounting principles, are described below.
BASIS OF FINANCIAL STATEMENT PRESENTATION: The Company prepares its
financial statements in conformity with generally accepted accounting
principles. These principles require management to (1) make estimates and
assumptions that affect the reported amounts of assets and liabilities, (2)
disclose contingent assets and liabilities at the date of the financial
statements and (3) report amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
FISCAL YEAR: The Company's fiscal year ends on the Sunday prior to the
last Wednesday in January. The 1996 fiscal year consisted of 52 weeks and ended
on January 26, 1997. Fiscal years 1995 and 1994 consisted of 53 weeks and 52
weeks, respectively, and ended on January 28, 1996 and January 22, 1995.
BASIS OF CONSOLIDATION: The Company includes its wholly owned and
majority owned subsidiaries in the consolidated financial statements. All
intercompany transactions and amounts have been eliminated in consolidation.
EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS: Earnings per
common share and common share equivalents equals net income divided by the
number of weighted average common shares outstanding plus common share
equivalents. Common share equivalents includes incremental shares relating to
stock options granted to employees by the Company. The incremental shares are
calculated using the "treasury stock" method. Shares issuable pursuant to
the conversion rights granted to holders of the Company's 5.25% Convertible
Subordinated Notes (see Note 9) are not considered common share equivalents for
purposes of calculating primary earnings per share. For the fiscal years ended
January 28, 1996 and January 22, 1995, the earnings per share and weighted
average common shares have been adjusted to reflect a three-for-two common stock
split distributed on July 16, 1996 to shareholders of record as of July 1, 1996.
For the fiscal year ended January 22, 1995 the pro forma earnings per share is
computed based on the actual shares outstanding at January 22, 1995 (adjusted
for the stock split).
CASH AND CASH EQUIVALENTS: The Company considers cash on hand in stores,
deposits in banks,
13
<PAGE>
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
certificates of deposit, short-term marketable securities with maturities of 90
days or less as cash and cash equivalents for the purposes of the statement of
cash flows.
INVENTORIES: Merchandise inventories are valued on a first-in, first-out
(FIFO) basis at the lower of cost or market using the retail inventory method.
PROPERTY OWNED AND DEPRECIATION: Land, buildings, leasehold improvements
and furniture, fixtures and equipment are recorded at cost, including a
provision for capitalized interest. Depreciation is provided over the estimated
useful lives of related assets on the straight-line method for financial
statement purposes and on accelerated methods for income tax purposes. Most
store properties are leased and improvements are amortized over the term of the
lease but not more than 10 years. Other annual rates used in computing
depreciation for financial statement purposes are 2% for buildings, 14% for
store fixtures and 20% for other furniture, fixtures and equipment.
Expenditures for owned properties, primarily self-developed locations
which the Company intends to sell and lease-back within one year of acquisition,
are included in property held for resale.
IMPAIRMENT OF ASSETS: In 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets. There
was no material effect on the financial statements from the adoption. Under
provisions of the Statement, impairment losses are recognized when expected
future cash flows are less than the assets' carrying value. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying value
of net property owned, property held for resale and intangibles in relation to
the operating performance and future undiscounted cash flows of the underlying
business. The Company adjusts the net book value of the underlying assets if the
sum of expected future cash flows is less than book value.
GOODWILL: The excess of Kmart's acquisition cost over the fair value of
the net assets of the Company as of March 2, 1990, the date of acquisition of
the Company by Kmart, was capitalized and is being amortized over 40 years using
the straight-line method. The Company evaluates the recoverability of goodwill
and reviews the amortization period on an annual basis. Several factors are used
to evaluate goodwill, including but not limited to: management's plans for
future operations, recent operating results and projected, undiscounted cash
flows. The primary method is projected, undiscounted cash flows.
FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of the fair value of financial instruments held by the Company. SFAS
107 defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The following methods and assumptions were used to estimate fair value:
/bullet/ The carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to
their short-term nature.
/bullet/ The fair value of the Company's notes receivable is based on
current interest rates and repayment terms of the individual
notes.
/bullet/ Discounted cash flows using current interest rates for debt with
similar characteristics and maturity were used to estimate the
fair value of short-term and long-term debt (excluding the 5.25%
Convertible Subordinated Notes); and,
/bullet/ Market prices were used to determine the fair value of the 5.25%
Convertible Subordinated Notes.
There were no significant differences as of January 26, 1997 and January
28, 1996 in the carrying value and fair value of financial instruments except
for the 5.25% Convertible Subordinated Notes which had a carrying value of
$149.5 million and a fair value of $131.4 million at January 26, 1997, and the
notes receivable which had a carrying value of $12.6 million and a fair value of
$11.0 million at January 26, 1997.
LICENSEE SALES: Snow ski merchandise in the North American stores is
sold through a license agreement whereby the Company receives a percentage of
snow ski sales for rent and services. Snow ski sales in those stores are
excluded from total sales. The Company sold snow ski merchandise through license
agreements in 146 locations in 1996. Additionally, the Company sells diving
merchandise in one location through a similar license agreement.
PRE-OPENING AND CLOSING COSTS: Costs associated with the opening of a
new store are expensed in the first month of operation. When the decision to
close a retail unit is made, the Company provides for the future net lease
obligation, non-recoverable investment in fixed
14
<PAGE>
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
assets and other expenses directly related to discontinuance of operations. As
of January 26, 1997, the Company had not closed a retail unit.
INCOME TAXES: The Company provides for Federal and State income taxes
currently payable as well as deferred income taxes resulting from temporary
differences between the basis of assets and liabilities for tax purposes and for
financial statement purposes.
FOREIGN CURRENCY TRANSLATION: The financial statements of the Company's
foreign subsidiaries are maintained in their functional currencies and
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. Assets and liabilities are translated at current
exchange rates existing at the balance sheet date and stockholders' equity is
translated at historical exchange rates. Revenues and expenses are translated at
the average exchange rate for the period. Translation adjustments are
accumulated in a separate component of stockholders' equity in accordance with
Financial Accounting Standard No. 52. Transaction gains and losses included in
the Consolidated Statements of Income are not material.
RECLASSIFICATION: Certain amounts in the prior year's financial
statements have been reclassified to conform to the current year's
presentation.
NOTE 3: RELATED PARTY TRANSACTIONS
Kmart provided financing and cash management for the Company, prior to the
Initial Public Offering, through a system of intercompany accounts and continued
to provide these arrangements, subsequent to the Initial Public Offering,
pursuant to a Cash Management Agreement which was terminated on April 26, 1995.
In accordance with the Cash Management Agreement, all receipts of the Company
were transferred to Kmart and Kmart funded all of the Company's disbursement
requirements. Interest was payable by the Company on funds advanced by Kmart,
and by Kmart on funds received by it from the Company, at a rate equal to
Kmart's weighted average short term borrowing rate for each accounting period
plus .25%, compounded monthly. All such interest became payable on termination
of the Cash Management Agreement. At January 22, 1995, the Company had included
in cash and cash equivalents $28.1 million held by Kmart pursuant to the Cash
Management Agreement and had recognized interest income from Kmart amounting to
$250,533. In the historical financial statements of the Company for periods
prior to the Initial Public Offering, net cash used by or provided to the
Company was characterized as an adjustment of Kmart's investment in the
Company. Net repayments to Kmart were treated as dividends. Accordingly, no
interest expense to or interest income from Kmart is reflected in the financial
statements of the Company for any period prior to the Initial Public Offering
date except for interest of $552,479 on the Dividend Note of $96 million.
During periods prior to the Initial Public Offering certain corporate,
general and administrative costs (including certain corporate borrowing, legal,
tax and employee benefit costs) were charged to the Company based upon
utilization and at negotiated rates.
The Company's financial statements for the fiscal year ended January 22,
1995 include an allocation, which management believes to be reasonable, of
corporate, general and administrative costs related specifically to the
management of Kmart's specialty retail operations and allocated equally among
the entities comprising such operations; such charges totaled $108,000 in 1994.
The Joint Venture Agreement between the Company and JUSCO required that
the Company enter into a License Agreement and a Services Agreement with Mega
Sports, and JUSCO enter into a Services Agreement with Mega Sports. JUSCO's
Services Agreement with Mega Sports requires JUSCO to provide certain management
and other services to Mega Sports in exchange for a fee equal to 1% of Mega
Sports' gross sales and reimbursement of reasonable expenses. This Agreement
expires on January 31, 2000 and is automatically renewed for successive five
year periods unless terminated by either party, and terminates automatically if
JUSCO ceases to have an ownership interest in Mega Sports. The Company's
financial statements for the 1996 fiscal year include fees paid by Mega Sports
to JUSCO totalling $130,000.
NOTE 4: ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS
Accounts receivable and other current assets consists of the following:
JANUARY 26, JANUARY 28,
(in thousands) 1997 1996
-------------- -------------
Accounts receivable, net of
allowances of $765 and
$576, respectively $15,832 $14,444
Prepaid expenses 12,811 10,713
Deferred income taxes 6,166 5,285
-------- --------
Total $34,809 $30,442
======== ========
15
<PAGE>
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5: NET PROPERTY OWNED
Net property owned consists of the following:
JANUARY 26, JANUARY 28,
(in thousands) 1997 1996
-------------- ------------
Property owned:
Land $ 30,087 $ 7,797
Buildings 48,894 19,304
Leasehold improvements 70,611 54,775
Furniture and fixtures 130,023 96,852
Construction in progress 1,043 838
-------- --------
280,658 179,566
Less-accumulated
depreciation and
amortization (69,007) (44,860)
-------- --------
Net property owned $211,651 $134,706
======== ========
NOTE 6: OTHER ASSETS AND DEFERRED CHARGES
Other assets and deferred charges consists of the following:
JANUARY 26, JANUARY 28,
(in thousands) 1997 1996
-------------- ------------
Lease acquisition costs, net
of amortization $18,358 $14,937
Notes receivable 12,606 6,411
Deferred income taxes 5,169 2,114
Debt issuance costs 3,438 -
Other 5,191 1,180
-------- --------
Total $44,762 $24,642
======== ========
Herman's Sporting Goods, Inc. ("Herman's"), a full-line sporting goods
retailer, filed a Chapter 11 bankruptcy petition in April 1996. In July 1996,
the Company assumed Herman's leases for two locations in New York City at a cost
of approximately $3.8 million. The Company opened the two smaller format stores
in November 1996 under the name "The Sports Authority, Ltd." The acquisition
costs of $3.8 million were deferred and will be amortized on a straight-line
basis over the remaining lease lives of the stores.
Sportstown, Inc. ("Sportstown"), a large format full-line sporting goods
retailer, filed a Chapter 11 bankruptcy petition in February 1995. In July 1995,
the Company assumed seven of Sportstown's store leases for four locations in
Georgia, two locations in South Carolina and one location in North Carolina at a
cost of approximately $9.3 million. The Company opened six of the locations in
1995 but did not open the seventh location. As a result, a reserve of
approximately $900,000 was created to cover future occupancy expenses of the
seventh location. The acquisition cost of $9.3 million and the reserve cost of
$900,000 were deferred and will be amortized on a straight-line basis over the
remaining lease lives of the six opened locations.
In June 1996, the Company paid Kmart $5.5 million in principal and accrued
interest in exchange for a participation in a privately placed mortgage note.
Under the terms of the mortgage note, principal is payable annually and interest
semi-annually over the remaining period of 18 years at an interest rate of 8.4%.
One of the Company's store leases serves as collateral for the note.
In July 1995, the Company entered into an agreement with a developer in
which the Company financed the development of a store location in exchange for a
promissory note which totals $7.2 million (the "Promissory Note"). The
Promissory Note is payable in equal monthly installments over a period of 20
years, at an interest rate of 8.2%. The developer retains ownership rights to
the store location and the Company pays a monthly rent to the developer. The
property is pledged as collateral for the loan. The current balance of the
Promissory Note is approximately $7.1 million.
The debt issuance costs related to the Company's long-term convertible
debt (see Note 9) are being amortized over the five year term of the debt using
the effective interest method.
NOTE 7: INCOME TAXES
Income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
United States $ 57,724 $ 41,676 $29,839
Foreign (9,692) (4,286) -
-------- --------- --------
Total $ 48,032 $ 37,390 $29,839
======== ======== ========
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal $19,637 $15,555 $9,061
State and local 2,750 2,675 2,225
Deferred:
Federal 65 (1,250) 1,694
Foreign (2,855) (1,675) -
------- ------- -------
Total income taxes $19,597 $15,305 $12,980
======= ======= =======
</TABLE>
16
<PAGE>
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation of the federal statutory rate to the Company's effective
tax rate follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
--------------------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate $16,811 35.0% $13,087 35.0% $10,444 35.0%
State and local taxes, net of federal
tax benefit 1,788 3.7 1,739 4.6 1,446 4.8
Foreign tax rate differential (35) (0.1) (341) (0.9) - -
Goodwill 687 1.4 687 1.8 687 2.3
Other 346 0.8 133 0.4 403 1.4
------- ------ ------- ------ -------- ------
Total income taxes $19,597 40.8% $15,305 40.9% $12,980 43.5%
======= ====== ======= ====== ======== ======
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 28,
(in thousands) 1997 1996
-------------- -----------
<S> <C> <C>
Deferred tax assets:
Short term:
Inventory $ 659 $ 602
Accruals and other
liabilities 5,499 4,672
Other 8 11
------ -----
Total short-term 6,166 5,285
------ -----
Long term:
Accruals and other
liabilities 548 258
Property and equipment-
foreign 297 32
Canada net operating loss 4,076 1,660
Other 248 164
------ -----
Total long-term 5,169 2,114
------ -----
Total deferred tax assets 11,335 7,399
------ -----
Deferred tax liabilities:
Short-term:
Inventory discounts 2,357 1,888
Other 102 (129)
------ -----
Total short-term 2,459 1,759
------ -----
Long-term:
Property and equipment 4,328 4,336
Other (216) -
------ -----
Total long-term 4,112 4,336
------ -----
Total deferred
tax liabilities 6,571 6,095
------ -----
Net deferred tax assets $4,764 $1,304
====== =====
</TABLE>
The Company has net operating losses for its Canadian subsidiary in fiscal
years 1995 and 1996 in the amount of $10.3 million which expire in fiscal years
2000 and 2001.
NOTE 8: SHORT-TERM DEBT
In April 1995, the Company entered into a Revolving Credit Facility with a
group of banks for which First Union National Bank of Florida acts as the
administrative agent (the "Revolving Credit Facility") to establish a $110
million revolving line of credit to fund working capital requirements. The line
of credit is unsecured and contains certain financial covenants relating to the
maintenance of a minimum fixed charge coverage ratio, a maximum leverage ratio
and a minimum tangible net worth, and restrictive covenants pertaining to
limitations on indebtedness, liens, contingent obligations, loans and
investments, dividends and distributions, liquidations, mergers, consolidations,
disposition of assets or subsidiaries, transactions with affiliates and
fundamental corporate changes.
Borrowings under the Revolving Credit Facility bear interest at the
election of the Company at either the Alternate Base Rate or LIBO Rate, both as
defined in the Revolving Credit Facility. Subject to the provisions of the
Revolving Credit Facility, the Company may, from time to time, borrow, repay and
reborrow under such facility. The entire unpaid balance may be prepaid at any
time without penalty, and is payable in full on April 26, 1998. The weighted
average interest rate on borrowings during the year was 6.6%. There were no
borrowings under the Revolving Credit Facility at January 26, 1997.
In 1996, Mega Sports entered into a series of short-term loans with two
Japanese banks at a principal amount of 600 million yen (US $5,043,000). The
loans had a weighted average interest rate of .89% at January 26, 1997 and
mature on varying dates ranging from November 1997 to January 1998. Interest on
the loans is due quarterly and is paid in arrears. The loans are unsecured and
contain no performance covenants.
17
<PAGE>
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 28,
(in thousands) 1997 1996
-------------- ------------
<S> <C> <C>
5.25% Convertible
Subordinated Notes $149,500 $ -
1.76% Term Loans 2,521 -
--------- ----
Total $152,021 $ -
========= ====
</TABLE>
In September 1996, the Company issued 5.25% Convertible Subordinated Notes
("the Notes") at a principal amount of $149.5 million. The Notes will mature on
September 15, 2001, and are convertible at the option of the holder into an
aggregate of 4,580,964 shares of the Company's Common Stock at any time on or
after the 90th day following the issue date until the maturity date, at a
conversion price of $32.635 per share, subject to adjustment in certain events.
Interest is payable semi-annually, on March 15 and September 15 of each year.
The Notes are redeemable at the option of the Company at any time on or after
September 15, 1999 at declining redemption prices beginning with 102.1% of par
at September 15, 1999. The Notes are unsecured obligations of the Company
subordinated in right of payment to all existing and future Senior Indebtedness,
as defined in the Indenture pursuant to which the Notes were issued.
In 1996, Mega Sports entered into four unsecured term loans with two
Japanese banks at a principal amount of 300 million yen (US $2,521,000). The
loans bear interest at 1.76% per year and mature in their entirety on October
18, 1999. Interest is due quarterly and is paid in advance. The loans may not be
prepaid without consent of the banks. The loans contain no financial performance
covenants.
Interest expense in the accompanying Consolidated Statements of Income is
net of capitalized interest of $354,000 in fiscal 1996.
NOTE 10: OTHER LONG-TERM LIABILITIES
Other long-term liabilities consists of the following:
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 28,
(in thousands) 1997 1996
-------------- -----------
<S> <C> <C>
Step rent accrual $18,603 $13,758
Deferred income taxes 4,112 4,336
-------- --------
Total long-term liabilities $22,715 $18,094
======== ========
</TABLE>
Other long-term liabilities consist primarily of the step rent accrual
related to the Company's store leases. In accordance with Financial Accounting
Standard No. 13, rental expense for the Company's store leases is recognized on
a straight-line basis even though a majority of the store leases contain
escalation clauses. The step rent accrual is expected to increase due to the
relative immaturity of the existing stores and the anticipated new store growth
in the future.
NOTE 11: COMMITMENTS AND CONTINGENCIES
Leases with respect to five of the Company's stores serve as collateral
for certain mortgage pass-through certificates (the "Certificates") and
one lease serves as collateral for a privately placed mortgage note (the
"Note") which is also secured by leases of adjacent tenants.
The Certificates include a provision which would permit the holders of the
mortgage pass-through certificates to require the Company or, upon the
Company's failure, Kmart to repurchase the underlying mortgage notes in certain
events, including the failure by the Company to make payments of rent under the
related lease, the failure by Kmart to maintain required debt ratings or the
termination of the guarantee by Kmart of the Company's obligations under the
related lease. In the event the Company is required to repurchase all of the
underlying mortgage notes, the Company would be obligated to either refinance or
pay approximately $27 million.
The Note, of which the principal amount is $3.5 million, may be put back
to Kmart in certain events, including a decline in Kmart's debt rating. Under
the Lease Guaranty, Indemnity and Reimbursement Agreement (the "Lease
Guaranty Agreement") between the Company and Kmart, the Company must
reimburse Kmart for "losses" in connection with the Company's allocable
share of Kmart's payments on the put of the Note. The Company has agreed that,
if before October 31, 1998 Kmart is able to cause the Note to be separated into
multiple notes, one of which is secured solely by, and is the only note secured
by, property leased to the Company, the Company will purchase the note
applicable to such property for principal plus accrued interest.
There are various claims, lawsuits and pending actions against the Company
incident to its operations. It is the opinion of management that the ultimate
resolution
18
<PAGE>
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of these matters will not have a material effect on the Company's liquidity,
financial position or results of operations.
NOTE 12: LEASES
DESCRIPTION OF LEASING ARRANGEMENTS: The Company conducts operations
primarily in leased facilities. Store leases are generally for terms of 15 to 25
years with multiple five-year renewal options which allow the Company the option
to extend the life of the lease up to 25 years beyond the initial noncancellable
term.
Certain leases provide for additional rental payments based on a percent
of sales in excess of a specified base. Also, certain leases provide for the
payment by the lessee of executory costs (taxes, maintenance and insurance).
Some selling space has been sublet to other retailers in certain of the leased
facilities.
LEASE COMMITMENTS: Future minimum lease payments at January 26, 1997
were as follows:
(in thousands) OPERATING
-----------
Year:
1997 $ 76,292
1998 73,891
1999 71,817
2000 70,394
2001 69,359
Later years 866,215
---------
Total minimum lease payments 1,227,968
Less: minimum sublease rental income (6,241)
---------
Net minimum lease payments $1,221,727
=========
Rental Expense: A summary of operating lease rental expense and
short-term rentals follows:
(in thousands) 1996 1995 1994
---------- ---------- ---------
Minimum rentals $71,129 $56,728 $43,571
Percentage rentals 589 629 622
Less: sublease rentals (967) (1,213) (1,531)
------- ------- -------
Total $70,751 $56,144 $42,662
======= ======= =======
NOTE 13: EMPLOYEE RETIREMENT PLANS
Employees of the Company who meet certain requirements as to age and
service are eligible to participate in an employee savings plan. Prior to the
Initial Public Offering, employees participated in the Kmart Employee Savings
Plan. Beginning December 1, 1994, employees were able to participate in The
Sports Authority 401(k) Savings and Profit Sharing Plan and certain executives
were able to participate in The Sports Authority Supplemental 401(k) Savings and
Profit Sharing Plan. The Company's expense related to these plans was
$1,816,000, $1,520,000 and $686,000 for 1996, 1995 and 1994 respectively. There
was no expense related to the profit sharing portion of The Sports Authority
plan in 1994.
In March 1996, the Company adopted an unfunded supplemental executive
retirement plan for certain executives of the Company. Pension benefits earned
under the plan are primarily based on years of service at the level of Vice
President or higher after June 1990 and average compensation, including salary
and bonus. Prior service costs are being amortized over the average remaining
service lives of the employees. The following summarizes the pension expense and
benefit obligations for the plan as of December 31, 1996:
Pension expense
(in thousands)
Service cost on benefits earned during the period $225
Interest cost on the projected benefit obligation 48
Net amortization and deferral 42
-----
Total pension expense $315
=====
Benefit obligations
(in thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation $ (162)
=======
Accumulated benefit obligation $ (396)
=======
Projected benefit obligation $(1,060)
Unrecognized prior service cost 600
Unrecognized net loss 145
Additional minimum liability (81)
-------
Accrued pension liability $ (396)
=======
The Company assumed a weighted average discount rate of 7.5% and an annual
increase in the rate of compensation of 6.0% in determining pension expense and
the related benefit obligation.
The Company has assumed all obligations for senior executives which were
previously covered under the Kmart supplemental executive retirement plan. The
vested benefit obligation for pension benefits under the Kmart plan is $250,000
as of December 31, 1996. Interest on the obligation accrues at a rate of 7.5%.
Prior
19
<PAGE>
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
service costs are being amortized over the average remaining service lives of
the employees.
NOTE 14: STOCK PURCHASE, STOCK OPTION AND RESTRICTED STOCK PLANS
In connection with the Initial Public Offering, the Company adopted the
Management Stock Purchase Plan (the "Management Plan") and the Employee
Stock Purchase Plan (the "Employee Plan"). Under the Management Plan, the
Company's senior management personnel were required, prior to May 1996, to
receive a minimum of 20%, and were permitted to elect to receive up to 100% of
their annual incentive bonuses in the form of restricted Common Stock of the
Company at a 20% discount from fair value. In addition, certain senior
management personnel were given a one-time opportunity to invest up to $1.0
million each to purchase restricted Common Stock at the time of the Initial
Public Offering, at a 20% discount from the initial public offering price, net
of the underwriting discount. For each restricted share of Common Stock so
purchased, the Company granted the employee an option to purchase one additional
restricted share of Common Stock at the initial public offering price, less the
underwriting discount. Restricted shares of Common Stock purchased or acquired
through exercise of options granted under the Management Plan are restricted
from sale or transfer for three years from the date of purchase, except in the
event of a change in control of the Company, as defined in the plan, and certain
other events.
The Employee Plan allows the Company's employees to purchase the
Company's Common Stock at a 15% discount from its fair market value. Shares
purchased through the Employee Plan are restricted from sale or transfer for one
year from the date of purchase, except in the event of a change in control of
the Company, as defined in the plan, and certain other events.
In connection with the Initial Public Offering, the Company also adopted a
Stock Option Plan pursuant to which options to purchase up to 2,274,591 shares
of the Company's Common Stock may be granted. The exercise price of options to
be granted under this plan may not be less than the fair market value per share
of Common Stock at grant date; options become exercisable two and one-half to
three years after the grant date and expire over a period of not more than ten
years. Exercisability is accelerated on a change in control of the Company, as
defined in the plan, and in certain other events.
In May 1996, the Company adopted the 1996 Stock Option and Restricted
Stock Plan (the "1996 Plan"). The number of shares reserved for grants
under the plan is 2,250,000, of which 1,950,000 are reserved for grants of
options and 300,000 are reserved for the grant of restricted shares. The
exercise price of options to be granted under the plan may not be less than the
fair market value per share of Common Stock at grant date, except that options
granted in lieu of a bonus may be granted at a price not less than 80% of the
fair market value. The Compensation Committee of the Board (the
"Committee") has sole discretion to determine the vesting and
exercisability provisions of each option granted, except that no option may
become exercisable and no option which is not granted in lieu of a bonus may
vest until the optionee has completed at least one year of employment after the
date of grant. Exercisability is accelerated on a change in control of the
Company, as defined in the plan, and in certain other events. The term of each
option may not exceed ten years from the date of grant. The Committee has sole
discretion to determine the restricted period for each grant of restricted
shares, but in no event may the restricted period be less than six months after
the date of grant. The restricted period is accelerated on a change in control
of the Company, as defined in the plan, and in certain other events.
The Company recognizes compensation expense for the discount on restricted
Common Stock purchased under the Management Plan. Such discounts are recognized
as expense on a straight-line basis over the three-year period during which the
shares are restricted from sale or transfer. The Company is not required to
record compensation expense with respect to shares purchased under the Employee
Plan. The company recognizes compensation expense over the restricted period for
restricted shares granted under the 1996 Plan. The Company's expense related to
the Management Plan and 1996 Plan was $497,000, $338,000 and $48,000 in 1996,
1995 and 1994, respectively.
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 123-Accounting for Stock Based Compensation, to establish a fair value based
method of accounting for stock compensation plans for awards granted in fiscal
years that begin after December 15, 1994. The Company used the Black-Scholes
option pricing model with the following weighted average assumptions in
determining the fair value of options granted in 1996 and 1995: expected
volatility of 37%, risk-free interest rates of 6.0% and 7.0% for 1996 and 1995,
respectively and an expected life of 5 years.
20
<PAGE>
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- --------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ----------- ------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,435,098 12.11 1,051,365 11.91 - -
Granted 736,400 15.76 550,500 12.51 1,090,728 11.91
Cancelled (157,362) 13.47 (166,767) 12.11 (39,363) 11.91
---------- ---------- ---------
Outstanding at end of year 2,014,136 13.34 1,435,098 12.11 1,051,365 11.91
========== ========== =========
Exercisable at end of year 3,853 12.11 3,853 12.11 - 11.91
========== ========== =========
Weighted average fair value of options
granted during year $ 6.71 $ 5.55 $ 5.45
</TABLE>
A summary of stock options outstanding at January 26, 1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- ----------------------------------------
WEIGHTED AVERAGE
RANGE OF OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICES JANUARY 26, 1997 LIFE (IN YEARS) EXERCISE PRICE JANUARY 26, 1997 EXERCISE PRICE
- ----------------- ------------------- ------------------ ------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
$11.91 - $14.08 1,342,086 2.9 $12.12 3,853 $12.11
15.75 - 20.63 670,250 9.2 15.75 - -
24.88 - 27.25 1,800 9.7 26.85 - -
----------- -------
2,014,136 5.0 13.34 3,853 12.11
=========== =======
Available for
Grant 2,210,455
===========
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for the stock option plans and Employee Plan. Had FASB Statement No. 123 been
applied, the compensation cost would have been $1,888,552 and $862,259 for 1996
and 1995, respectively. The following illustrate the Company's Net income and
Earnings per share had FASB Statement No. 123 been utilized:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C> <C>
Net income (in thousands) As reported $30,005 $22,330
Pro forma 28,831 21,730
Earnings per share As reported $ 0.94 $ 0.71
Pro forma 0.92 0.70
</TABLE>
21
<PAGE>
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 15: QUARTERLY HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
1996 QUARTER ENDED
----------------------------------------------------------
(in thousands, except per share data) APRIL JULY OCTOBER JANUARY
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Sales $270,558 $331,596 $292,920 $ 376,222
Operating income 3,708 15,528 3,156 27,820(a)
Net income 2,053 9,183 1,976 16,793(a)
Earnings per common share and common share equivalents .06 .29 .06 .53
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTER ENDED
----------------------------------------------------------
(in thousands, except per share data) APRIL JULY OCTOBER JANUARY
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Sales $221,595 $268,348 $234,200 $ 322,509
Operating income 3,146 12,105 1,143 21,816(b)
Net income 1,677 6,904 631 13,118(b)
Earnings per common share and common share equivalents .05 .22 .02 .42
</TABLE>
(a) Fourth quarter adjustments in 1996 had the effect of increasing operating
income and net income by approximately $6.0 million and $3.5 million,
respectively. These adjustments primarily related to worker's compensation
and general liability insurance reserves, and vendor rebates.
(b) Fourth quarter adjustments in 1995 had the effect of increasing operating
income and net income by approximately $5.1 million and $3.0 million,
respectively. These adjustments primarily related to health insurance
accruals and the Company's allowance for defective merchandise.
22
Exhibit 21.1
SUBSIDIARIES OF THE SPORTS AUTHORITY, INC.
The following subsidiaries are 100% owned by The Sports Authority, Inc. unless
otherwise indicated:
1. OSR, Inc. (a Delaware Corporation)
2. Authority International, Inc. (a Delaware Corporation)
3. Intelligent Sports, Inc. (a Michigan Corporation)
4. The Sports Authority Canada, Inc. (an Ontario, Canada Corporation)
5. The Sports Authority Florida, Inc. (a Florida Corporation)
6. The Sports Authority Michigan, Inc. (a Michigan Corporation)
7. Mega Sports Co., Ltd (Joint Venture between The Sports Authority, Inc.-
51% and JUSCO Co., Ltd.-49%) (Organized under the laws of Japan)
8. The Sports Authority Puerto Rico, Inc. (a Puerto Rico Corporation)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-26-1997
<PERIOD-START> JAN-29-1996
<PERIOD-END> JAN-26-1997
<CASH> 109,645
<SECURITIES> 0
<RECEIVABLES> 35,574
<ALLOWANCES> (765)
<INVENTORY> 279,577
<CURRENT-ASSETS> 445,111
<PP&E> 280,658
<DEPRECIATION> (69,007)
<TOTAL-ASSETS> 754,270
<CURRENT-LIABILITIES> 269,114
<BONDS> 0
0
0
<COMMON> 315
<OTHER-SE> 310,002
<TOTAL-LIABILITY-AND-EQUITY> 754,270
<SALES> 1,271,296
<TOTAL-REVENUES> 1,274,461
<CGS> 905,923
<TOTAL-COSTS> 905,923
<OTHER-EXPENSES> 318,326
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,180
<INCOME-PRETAX> 48,032
<INCOME-TAX> 19,597
<INCOME-CONTINUING> 50,212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,005
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.94
</TABLE>
