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 25, 1998
Commission File No. 1-13426
THE SPORTS AUTHORITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3511120
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3383 N. STATE ROAD 7 - FT. LAUDERDALE, FLORIDA 33319
(Address of principal executive offices) (Zip Code)
(954) 735-1701
(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
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 and nonvoting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing:
$498,609,041 at the close of business on March 30, 1998.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 31,649,576 Shares of
Common Stock outstanding as of March 30, 1998.
Documents Incorporated by Reference: (1) the Company's 1997 Annual Report to
Stockholders incorporated partially in Parts I and II hereof and (2) the
Company's Proxy Statement dated April 27, 1998, incorporated partially in Part
III hereof.
<PAGE>
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 25, 1998, the Company operated 196 sporting goods megastores,
virtually all in excess of 40,000 gross square feet, and three stores under the
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 186 stores in 30 states in the
United States, six stores in Canada and seven stores in Japan operated by a
joint venture 51% owned by the Company. The Company had sales of approximately
$1,464.6 million in 1997, a 15.2% increase over 1996.
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 $41 billion in 1996. 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 1996, the top three
large format sporting goods retailers (including the Company) represented
approximately 6% of the retail sporting goods sales.
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.
2
<PAGE>
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 17 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, Huffy, K2,
Mongoose, Nike, Prince, Pro Player, Rawlings, Reebok, Rollerblade, Russell,
Spalding, Starter, Taylor Made, 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.
3
<PAGE>
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
---- ----- --- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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
1997........................................... 31 7 24 199 8,620,541
</TABLE>
In 1997, the Company opened 31 stores for a total of 199 stores at the end
of the year, including six stores in Canada, seven 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 60 and 70 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 currently operates six stores in Canada and eight stores in Japan.
In addition, the Company periodically evaluates whether it should expand 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.
4
<PAGE>
Further, in 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 1997 and 1998 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 intended 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 $1.0 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 finance substantially all of its new stores with operating leases,
assuming availability and appropriate terms. Due to the additional store growth,
refurbishments of existing stores and the planned opening of a second regional
distribution center (see "Distribution" below), the Company expects that its
capital expenditures will be approximately $95 million in 1998.
5
<PAGE>
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. Beginning with stores opened in the fall of 1997,
the Company introduced its new flexible fixtures, which will facilitate seasonal
changes and reallocation of space in the stores. 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 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.
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, enhanced
merchandise replenishment and allocation systems, 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 0.5% 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.
6
<PAGE>
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:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------
YEAR
-----------------------
MERCHANDISE GROUP 1997 1996 1995
- ----------------- ---- ---- ----
<S> <C> <C> <C>
Hard lines.................................................... 50% 50% 53%
Soft lines:
Apparel................................................... 22 22 20
Footwear.................................................. 28 28 27
--- --- ---
Subtotal soft lines.................................. 50 50 47
--- --- ---
Total......................................................... 100% 100% 100%
=== === ===
</TABLE>
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.
7
<PAGE>
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, paintball 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. Also included in this category is personal
electronics such as the "Talkabout" - a personal communication radio, and hand
held GPS units.
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. The Company has added bike tech shops in 61
existing stores and all new stores to be opened in 1998. The bike tech shop is
designed to increase the overall service offered to customers in the cycling
area.
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,
trading cards and watches and licensed team novelties such as mugs, clocks,
helmets, pennants, bumper stickers and key chains.
8
<PAGE>
WINTER SPORTS. The winter sports department in the Company's North American
stores was previously operated by a group of regional licensees, all operating
under the overview of the principal licensee, Green Mountain Corporation. Under
its license agreement with Green Mountain Corporation, the Company received a
fee of approximately 10% of snow ski merchandise sales. Snow ski merchandise
sales were not included in the Company's sales. In January 1998, the Company
terminated its agreement with Green Mountain Corporation, effective August 1,
1998. As a result, the winter sports department will be operated directly by the
Company and winter sports merchandise sales will be included in the Company's
sales.
PURCHASING
The Company maintains its own central buying staff and a central
replenishment and allocation staff. This staff manages the planning system,
allocates fashion and seasonal merchandise, replenishes basic merchandise and
coordinates the distribution of all merchandise.
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 800 vendors and, in
fiscal 1997, the Company's largest vendor, Nike, Inc., accounted for
approximately 18% 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.
DISTRIBUTION
In November 1997, the Company opened its first regional distribution center
("RDC") outside of Atlanta. The RDC serves as a flow-through facility to receive
and allocate merchandise to the Company's stores. Merchandise is received at the
Atlanta RDC, made "floor ready", and subsequently allocated and distributed to
90 of the Company's stores. The Company believes that the establishment of RDC's
will result in transportation, payroll and merchandise cost savings. The Company
currently plans to open two additional facilities over the next one to two years
(one in the Northeast and one in the West). Additionally, dependinng on future
geographic expansion, the Company may consider opening a fourth facility
thereafter (potentially in the Midwest). Merchandise not
9
<PAGE>
processed by the RDC in Atlanta 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.
The Company also operates an offsite receiving location in Southern California
to service stores in Hawaii and Japan.
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. 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 1997, the Company completed the implementation of hand held, radio
frequency terminals for purposes of streamlining the merchandise receiving and
ticketing processes. The Company also completed the first phase implementation
of a "data warehouse", giving corporate buying staff easy access to sales
information on a class and sub-class level.
YEAR 2000
The Company has conducted a review to identify which computer and other
business systems will be affected by the "Year 2000" problem and has developed a
project plan and schedule designed to solve this issue. The Company is currently
planning to implement substantially all of its Year 2000 conversion project by
the second quarter of 1999, and is using both internal staff and outside
consultants for this effort. Based upon information currently known about its
computer and other business systems, the Company estimates it will expense
approximately $3 million over the next two years in this effort. The Company
believes the cost associated with becoming Year 2000 compliant will not
materially affect its future operating results or financial condition. While the
Company currently believes that it will be able to
10
<PAGE>
implement its Year 2000 conversion project in a timely manner, failure to do so
could have a material impact on the Company's operations. In addition, there can
be no assurance that the systems of other companies with which the Company does
business will also be converted in a timely manner or that failure to convert by
other companies would not have a material impact on the Company's operations.
ADVERTISING AND PROMOTION
The Company seeks to build name recognition and market share through
broadcast media, newspaper advertising, 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. Upon 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. The
"Prepare Yourself" advertising campaign, introduced in August 1997, will be used
throughout the Company's advertising and marketing. The advertising campaign
sends a message that before you participate in any sports activity, you "Prepare
Yourself" first at The Sports Authority.
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
Sporting Goods, Champs, Dunham's, MVP Sports and Hibbett Sporting Goods). These
stores typically carry limited quantities of each item in their assortment and
generally offer a more limited selection at higher prices than large format
stores.
SPECIALTY SPORTING GOODS RETAILERS. Specialty sporting goods retailers
include specialty shops, ranging in size from 1,000 to 10,000 square feet,
frequently located in malls (e.g., Foot Locker, Foot Action, The Finish Line and
The Athlete's Foot), 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., Gart
Sports, Jumbo Sports, Oshman's and Dick's Clothing and Sporting Goods). In
addition, other large format sporting goods retailers compete with certain
product categories sold by the Company (e.g., Just For Feet and Sneaker Stadium
in footwear and Gander Mountain in outdoor sporting products).
11
<PAGE>
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.
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 registered in the U.S. Patent and Trademark
Office include THE SPORTS AUTHORITY(R), THE SPORTS AUTHORITY & Design(R), THE
SKI AUTHORITY(R), AUTHORITY(R), THE BICYCLE AUTHORITY(R), FITNESS AUTHORITY(R),
GOLF AUTHORITY(R), FISHING AUTHORITY(R), MARINE AUTHORITY(R), TENNIS
AUTHORITY(R), RUNNING AUTHORITY(R), TEAM SPORTS AUTHORITY(R) and THE CLUB
AUTHORITY(R). 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 The Sports Authority
Michigan, Inc., a wholly-owned subsidiary of the Company.
ASSOCIATES
As of January 25, 1998, the Company had a total of approximately 6,100
full-time and approximately 5,800 part-time associates. Of these, approximately
11,000 were employed in the Company's stores and approximately 900 were employed
in corporate office positions, regional and district positions, and the
Company's Atlanta regional distribution center. None of the Company's associates
is covered by a collective bargaining agreement. The Company endeavors to
promote new store management from its existing personnel. The Company believes
that its relationships with its associates are good.
SEASONALITY
The Company's business is highly seasonal, with its highest sales occurring
in the fourth quarter, which includes the holiday selling season. In fiscal
1997, 28.7% of the Company's sales occurred in the fourth quarter compared to
29.6% in 1996. 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>
FORWARD LOOKING STATEMENTS
Certain statements contained in or incorporated by reference in this Form
10-K constitute "forward looking statements" made in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. As such,
they involve risks and uncertainties that could cause actual results to differ
materially from those set forth in such forward looking statements. The
Company's forward looking statements are based on assumptions about, or include
statements concerning, many important factors, including without limitation
changes in discretionary consumer spending and consumer preferences,
particularly as they relate to sporting goods, athletic footwear and apparel;
seasonal patterns in consumer spending; the Company's ability to effectively
implement its strategies, including its merchandising, distribution and store
expansion strategies; competitive trends and consolidation within the sporting
goods retailing industry; the effect of economic changes in other countries in
which the Company does business; and other factors described herein. While the
Company believes that its assumptions are reasonable, it cautions that it is
impossible to predict the impact of certain factors which could cause actual
results to differ materially from expected results.
ITEM 2. PROPERTIES
The following table sets forth certain information as of January 25, 1998
regarding the markets in which the Company currently has stores.
<TABLE>
<CAPTION>
UNITED STATES REGIONS/METROPOLITAN AREA NUMBER OF STORES
--------------------------------------- ----------------
<S> <C>
NORTHEAST
Baltimore....................................................................................... 3
Boston ......................................................................................... 6
Hartford/North Haven............................................................................ 3
New York ....................................................................................... 25
Portland, ME ................................................................................... 1
Philadelphia ................................................................................... 8
Providence...................................................................................... 2
Washington, D.C. ............................................................................... 13
-----
SUBTOTAL NORTHEAST......................................................................... 61
SOUTHEAST
Augusta, GA..................................................................................... 1
Atlanta......................................................................................... 13
Charleston...................................................................................... 1
Charlotte....................................................................................... 2
Chattanooga..................................................................................... 1
Ft. Myers....................................................................................... 1
Gainesville, FL................................................................................. 1
Greensboro...................................................................................... 1
Greenville, SC.................................................................................. 1
Jacksonville.................................................................................... 2
Montgomery...................................................................................... 1
Naples.......................................................................................... 1
New Orleans..................................................................................... 3
Norfolk/Hampton................................................................................. 3
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Orlando......................................................................................... 6
Southeast Florida............................................................................... 15
Tampa/St. Petersburg............................................................................ 9
Winston-Salem................................................................................... 1
---
SUBTOTAL SOUTHEAST......................................................................... 63
MIDWEST
Chicago......................................................................................... 15
Detroit......................................................................................... 8
St. Louis....................................................................................... 4
----
SUBTOTAL MIDWEST........................................................................... 27
SOUTHWEST
Dallas.......................................................................................... 1
El Paso......................................................................................... 1
Las Vegas....................................................................................... 3
Little Rock..................................................................................... 1
Phoenix......................................................................................... 7
San Antonio..................................................................................... 2
Tucson.......................................................................................... 1
----
SUBTOTAL SOUTHWEST......................................................................... 16
NORTHWEST
Anchorage....................................................................................... 1
Seattle/Tacoma.................................................................................. 4
----
SUBTOTAL NORTHWEST......................................................................... 5
WEST
Honolulu........................................................................................ 3
Fresno.......................................................................................... 1
Los Angeles..................................................................................... 2
Sacramento...................................................................................... 2
San Diego....................................................................................... 6
----
SUBTOTAL WEST.............................................................................. 14
----
SUBTOTAL UNITED STATES.............................................................................. 186
---
CANADA/METROPOLITAN AREA
------------------------
Toronto......................................................................................... 6
----
SUBTOTAL CANADA..................................................................................... 6
----
JAPAN/METROPOLITAN AREA
-----------------------
Nagoya.......................................................................................... 3
Osaka........................................................................................... 2
Kyushu.......................................................................................... 1
Tokyo........................................................................................... 1
----
SUBTOTAL JAPAN...................................................................................... 7
----
TOTAL ALL COUNTRIES................................................................................. 199
===
</TABLE>
14
<PAGE>
As of January 25, 1998, the Company occupied 174 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 25 of its stores.
In February 1998, the Company closed three stores in Atlanta, Miami and Las
Vegas. See Note 4 to the Financial Statements on page 29 of the Company's 1997
Annual Report to Stockholders, which pages are incorporated herein by reference.
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 10 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.
15
<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.
HIGH LOW
---- ---
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
Fiscal 1997
1st Quarter .................................. 20.25 16.75
2nd Quarter .................................. 21.75 16.63
3rd Quarter .................................. 21.88 17.63
4th Quarter .................................. 20.75 11.06
As of March 30, 1998, the Company had approximately 1,243 shareholders of
record.
DIVIDEND POLICY
The Company did not declare any dividends in 1996 or 1997 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 9 to the Financial Statements on page 30 of the Company's
1997 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.
16
<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 Data" on
page 14 of the Company's 1997 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 15-19 of the Company's 1997 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 22-35 of the Company's 1997 Annual Report to
Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<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 62. 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.
Martin E. Hanaka, age 48. Mr. Hanaka was elected as Vice Chairman and as a
Director of the Company on February 2, 1998. From August 1994 until October
1997, Mr. Hanaka served as President and Chief Operating Officer of Staples,
Inc., an office supply superstore retailer. Mr. Hanaka's extensive retail career
has included serving as Executive Vice President of Marketing and as President
and Chief Operating Officer of Lechmere, Inc. from September 1992 through July
1994, and serving in various capacities for 20 years at Sears Roebuck & Co.,
most recently as Vice President in charge of Sears Brand Central.
Richard J. Lynch, Jr., age 46. 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 50. Mr. Timinski was promoted to Executive Vice
President and Chief Merchandising Officer in January 1998. He previously served
as Senior Vice President and General Merchandise Manager beginning in 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 60. 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 48. 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.
18
<PAGE>
Anthony F. Crudele, age 41. 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.
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 and 14, respectively, of
the Company's Proxy Statement dated April 27, 1998.
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
6-12 of the Company's Proxy Statement dated April 27, 1998.
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 13-14 of the Company's Proxy Statement dated April 27, 1998.
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 15
of the Company's Proxy Statement dated April 27, 1998.
19
<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 21-35 of the Company's 1997 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 Page 23
(b) Reports on Form 8-K.
A Report on Form 8-K, which contained information under Item 5, was
filed on December 29, 1997.
20
<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 24, 1998 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 24, 1998
Jack A. Smith Chief Executive Officer
and Director
(Principal Executive Officer)
/S/ MARTIN E. HANAKA
------------------------- Vice Chairman and APRIL 24, 1998
Martin E. Hanaka Director
/S/ RICHARD J. LYNCH, JR.
------------------------- President, Chief APRIL 24, 1998
Richard J. Lynch, Jr. Operating Officer and
Director
/S/ ANTHONY F. CRUDELE
------------------------- Senior Vice President and APRIL 24, 1998
Anthony F. Crudele Chief Financial Officer
(Principal Financial and
Accounting Officer)
/S/ NICHOLAS A. BUONICONTI Director APRIL 24, 1998
--------------------------
Nicholas A. Buoniconti
/S/ STEVE DOUGHERTY Director APRIL 24, 1998
--------------------------
Steve Dougherty
/S/ JULIUS W. ERVING
-------------------------- Director APRIL 24, 1998
Julius W. Erving
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES
----------
<S> <C> <C>
/S/ CAROL FARMER Director APRIL 24, 1998
------------------
Carol Farmer
/S/ JACK F. KEMP Director APRIL 24, 1998
------------------
Jack F. Kemp
/S/ W. MITT ROMNEY Director APRIL 24, 1998
------------------
W. Mitt Romney
/S/ HAROLD TOPPEL Director APRIL 24, 1998
------------------
Harold Toppel
</TABLE>
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS PAGE NUMBER
- -------- -----------
<S> <C>
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 3.1 to the Form 10-Q for the second quarter of
1997.
4.1 Indenture, dated as of September 20, 1996, between the Company and The
Bank of New York, as Trustee, relating to the Company's $149,500,000
5.25% Convertible Subordinated notes due September 15, 2001 (including
forms of note), incorporated herein by reference to Exhibit 4.1 to
Registration Statement No. 333-16877 on Form S-3.
4.2 Registration Rights Agreement, dated as of September 20, 1996,
between the Company and Goldman, Sachs & Co., relating to the
Company's $149,500,000 5.25% Convertible Subordinated Notes due
September 15, 2001, incorporated herein by reference to Exhibit 4.2
to Registration Statement No. 333-16877 on Form S-3.
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 10.1 to the Form 10-Q for the third quarter of
1997.
10.4 Stock Option Plan, incorporated herein by reference to Exhibit 99.2 to
Registration Statement No. 33-86522 on Form S-8.
</TABLE>
23
<PAGE>
INDEX TO EXHIBITS - CONTINUED
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS PAGE NUMBER
- -------- -----------
<S> <C>
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.
10.6 Annual Incentive Bonus Plan, as amended, incorporated herein by
reference to Exhibit 10.6 to the Form 10-K for 1996.
10.7 Amended and Restated Director Stock Plan, incorporated herein by
reference to Exhibit A of the Company's Proxy Statement dated April 23,
1997.
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 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.
10.11 1996 Stock Option and Restricted Stock Plan, incorporated herein by
reference to Exhibit 10.2 to the Form 10-Q for the second quarter of
1997.
</TABLE>
24
<PAGE>
INDEX TO EXHIBITS - CONTINUED
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS PAGE NUMBER
- -------- -----------
<S> <C>
10.12 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 herein by reference to Exhibit 10.1 to the
Form 10-Q for the third quarter of 1996.
10.13 Employment Agreement, dated as of August 29, 1996, between the Company
and Jack A. Smith, incorporated herein by reference to Exhibit 10.2 to
the Form 10-Q for the third quarter of 1996.
10.14 JUSCO Services Agreement, dated as of August 1, 1995, between JUSCO
Co., Ltd. and Mega Sports Co., Ltd., incorporated herein by reference
to Exhibit 10.17 to the Form 10-K for 1996.
10.15 Supplemental Executive Retirement Plan, as amended, incorporated herein
by reference to Exhibit 10.3 to the Form 10-Q for the second quarter of
1997.
10.16 Supplemental 401(k) Savings and Profit Sharing Plan, incorporated
herein by reference to Exhibit 10.19 to the Form 10-K for 1996.
10.17 Form of Change of Control Agreement between the Company and Anthony F.
Crudele dated May 30, 1997, incorporated herein by reference to Exhibit
10.1 to the Form 10-Q for the second quarter of 1997.
10.18 Amended and Restated Credit Agreement dated as of December 22, 1997
among the Company, the financial institutions named therein, First
Union National bank, as administrative agent for such financial
institutions, and Fleet National Bank, as co-agent, amending and
restating the Credit Agreement referenced above as Exhibit 10.9,
incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed
on December 29, 1997.
10.19* Deferred Compensation Plan. 27
10.20* Employment Agreement, dated as of February 2, 1998, between the Company 31
and Martin E. Hanaka (confidential treatment requested for portions of
this document).
</TABLE>
25
<PAGE>
INDEX TO EXHIBITS - CONTINUED
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS PAGE NUMBER
- -------- -----------
<S> <C>
11.1* Computation of Earnings Per Share. 38
13.1* Financial information from pages 14-35 of the Annual Report to 39
Stockholders for the fiscal year ended January 25, 1998.
21.1* Subsidiaries of the Company. 61
23.1* Consent of Independent Certified Public Accountants 62
27* Financial Data Schedule. 63
</TABLE>
- ----------
* Filed as part of this Annual Report on Form 10-K.
26
EXHIBIT 10.19
THE SPORTS AUTHORITY, INC.
DEFERRED COMPENSATION PLAN
(Adopted November 20, 1997)
This Plan (the "Plan") has been adopted by The Sports Authority, Inc., a
Delaware corporation (the "Company"), to enable certain employees of the Company
and its wholly-owned subsidiaries to defer part of their salaries and bonuses
upon the terms and conditions set forth herein.
1. ADMINISTRATION
The Plan shall be administered by or at the direction of the Vice President -
Human Resources (the "Plan Administrator"). The Plan Administrator shall have
full power and authority to interpret and administer the Plan.
2. AUTHORIZATION OF PLAN YEARS; ELIGIBILITY OF EMPLOYEES
Unless the Compensation Committee of the Board of Directors (the "Committee")
determines otherwise more than thirty (30) days before the beginning of a
calendar year, such calendar year shall be a Plan Year. Each employee who is an
officer or operating director of the Company or a wholly-owned subsidiary at the
beginning of the Plan Year shall be eligible to participate in the Plan during
such Plan Year (the "Participants"). The Plan Administrator shall cause each
Participant to be notified promptly of his or her selection as such, and shall
identify the Company representative to whom he or she may deliver his or her
election form referred to in Section 3.
3. PARTICIPANT DEFERRAL ELECTIONS
Before the first day of a Plan Year, each Participant may irrevocably elect to
defer receipt of all or part of his or her salary payable during the Plan Year
and to defer receipt of all or part of his or her bonus earned under the Annual
Incentive Bonus Plan during the fiscal year commencing in such Plan Year. The
portion of salary or bonus so deferred shall be an integral multiple of 1%
thereof, rounded to the nearest whole dollar. Each Participant's election shall
be effective when actually received by the Plan Administrator.
At the time of making his deferral election, the Participant shall elect to
receive the amount of salary or bonus deferred for the applicable Plan Year
(with interest thereon, as provided in Section 4) either (a)
<PAGE>
in one installment on a date determined by the Company during the first January
after cessation of the Participant's active employment, or (b) in one
installment on a date determined by the Company during the the earlier of (i)
the first January after cessation of the Participant's active employment, or
(ii) January of a year selected by the Participant, which shall not be sooner
than the fourth year after the end of such Plan Year (a "date certain payment").
4. DEFERRED ACCOUNTS
A deferred account shall be set up on the books of the Company for all payments
of salary and bonus deferred under the Plan. Salary and bonus shall be credited
to such account on the date or dates such amounts would otherwise be paid to the
Participant. All amounts deferred under the Plan shall be fully vested at all
times.
As of the end of each calendar quarter after any amount is credited to a
Participant's deferred account, until payment of the balance in such account has
been completed pursuant to Section 5, interest shall be credited to such account
on the then outstanding balance therein (including any interest previously
credited thereto). Such interest for each period from January 1 through June 30
and July 1 through December 31 shall equal two percent (2%) plus the rate shown
for "Corporate 10+ year Medium Quality" bonds, as reported in THE WALL STREET
JOURNAL published on the last business day preceding each such period, or an
equivalent measure as determined by the Plan Administrator if such rates are no
longer reported as stated above.
Each Participant shall receive a statement of his or her deferred account as of
the end of each calendar year.
5. PAYMENTS
The Company shall pay to each Participant, in one installment, an amount in cash
equal to the amount of cash then credited to such Participant's deferred account
(including interest accrued to the date of payment) on a date determined by the
Company during the first January after cessation of the Participant's active
employment. If a Participant has elected a date certain payment for the salary
or bonus deferred from a Plan Year, the Company shall pay such portion
(including interest thereon to the date of payment) in accordance with such
election. If the Participant dies before receiving the payment hereunder, the
amount thereof shall be paid to the beneficiary designated under the Company's
basic group life insurance, or if none is so designated, to the Participant's
estate.
A Participant who attains age 55 and has completed 10 years of active employment
with the Company shall be entitled to receive the amounts in his deferred
accounts in either five or ten approximately equal annual installments payable
during January, by electing such installment payments not later than September
30 of the year before the year in which his active employment terminates;
provided that such election shall not be available with respect to a date
certain payment if the Participant is actively employed by the Company on
January 1 of the year in which such payment is due to be paid. Amounts payable
in annual installments shall be payable as follows: If the amount is payable
over X years, the
<PAGE>
first installment shall be in an amount equal to the deferred account divided by
X, the second annual installment shall be in an amount equal to the remaining
deferred account (including the additional interest accrued as provided in
Section 4) divided by (X-1), and so forth.
If a Participant dies before all such installments are paid, all remaining
amounts shall be paid to the beneficiary designated under the Company's basic
group life insurance, or if none is so designated, to the Participant's estate,
over the same period as previously elected by the Participant.
The Company may pay to a Participant or beneficiary, on such terms and
conditions as the Plan Administrator may establish, such part or all of the
Participant's deferred account as the Plan Administrator may, based upon
substantial evidence submitted by the Participant or beneficiary, determine to
be necessary to alleviate hardship caused by an Unforeseeable Emergency. For
purposes of this Plan, the term "Unforeseeable Emergency" shall mean (a) a
severe financial hardship to a Participant resulting from a sudden and
unexpected illness or accident of the Participant or a dependent (as defined in
Section 152(a) of the Internal Revenue Code of 1986, as amended) of a
Participant; (b) a loss of the Participant's property due to casualty; or (c)
other similar extraordinary and unforeseeable circumstances arising as a result
of events beyond the Participant's control. Such payment will be made only at a
Participant's written request and with the express approval of the Plan
Administrator, and will be made on a date selected by the Plan Administrator in
his sole discretion. An unforeseeable emergency distribution shall be limited to
the amount reasonably needed to meet the emergency. The balance of the
Participant's deferred accounts, if any, will continue to be governed by the
terms of this Plan.
6. AMENDMENTS; TERMINATION
The Board of Directors may at any time or from time to time amend, suspend or
terminate the Plan in whole or in part. The Board of Directors may delegate its
authority to amend the Plan to the Committee. Specifically, the Plan may be
amended at any time to accelerate all remaining payments to all Participants.
However, no such amendment or termination may diminish the Company's obligation
to pay the amounts in each Participant's deferred accounts or to reduce the
accrual of interest thereon. If the Plan is terminated or amended, the Plan
Administrator shall promptly notify all Participants affected thereby.
7. MISCELLANEOUS
(a) The Plan Administrator's interpretations of the Plan and actions
hereunder shall be binding and conclusive on all persons for all purposes. No
officer or employee of the Company shall be liable to any person for any action
taken or omitted in connection with the interpretation and administration of the
Plan unless attributable to his own willful misconduct or lack of good faith.
<PAGE>
(b) The Company shall not be obligated to set aside any funds to pay
amounts deferred hereunder, or interest thereon. The Company's obligation
hereunder shall constitute a general unsecured obligation, payable solely out of
its general assets, and no Participant shall have any right to specific assets.
(c) The right of a Participant or any other person to a payment
hereunder shall not be assigned, transferred, pledged or encumbered.
(d) Nothing herein shall be construed as conferring on any Participant
the right to continue in the employ of the Company in any capacity.
(e) The Plan shall be binding on and inure to the benefit of the
Company, its successors and assigns and each Participant and his or her heirs,
executors, administrators and legal representatives, provided that continuance
of the Plan is not assumed as a contractual obligation of the Company.
(f) The Plan shall be construed in accordance with, and governed by,
the laws of the State of Delaware.
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
February 2, 1998
Mr. Martin E. Hanaka
Vice Chairman
The Sports Authority, Inc.
3383 North State Road 7
Ft. Lauderdale, FL 33319
Dear Mr. Hanaka:
This letter will confirm our understanding concerning your employment
with The Sports Authority, Inc. (the "Company"), and shall be considered an
agreement entered into as of February 2, 1998.
1. Your salary for the Company's 1998 fiscal year will be at an annual
rate of $500,000 per year. You will be eligible for benefits under the Company's
benefit plans to the same extent as other executive officers of the Company.
2. Pursuant to action taken by the Compensation Committee of the Board
of Directors on January 28, 1998 under the Company's 1996 Stock Option and
Restricted Stock Plan (the "Plan"), you have been granted options to purchase
250,000 shares of the Company's Common Stock, effective as of your first day of
employment, February 2, 1998, at an option price of $12.375 per share. The terms
of your option grant are set forth in the Non-Qualified Option Agreement between
the Company and you dated as of February 2, 1998 (the "Option Agreement").
3 Pursuant to action taken by the Compensation Committee of the Board of
Directors on January 28, 1998 under the Plan, you have been granted 50,000
restricted shares of the Company's Common Stock, effective as of your first day
of employment, February 2, 1998. The terms of your grant are set forth in the
Restricted Stock Agreement between the Company and you dated as of February 2,
1998 (the "Restricted Stock Agreement").
<PAGE>
4. The Company will pay for all of your reasonable expenses for
temporary living in Florida and commuting between Florida and your current home
before August 2, 1998. The Company will also pay the reasonable costs of
relocating you and your family from your current home to Florida during your
employment with the Company. All such payments will be grossed up as necessary
to compensate you for taxation of such payments.
5. For purposes of your bonus eligibility for the 1998 fiscal year under
the Company's Annual Incentive Bonus Plan, your job has been classified as Grade
78.
6. You have been elected as a Class I Director of the Company, effective
as of February 2, 1998, and you haven been nominated by the Board of Directors
for election by the stockholders of the Company for a three-year term as a Class
I Director at the 1998 Annual Meeting of Stockholders.
7. Over the next year, certain executive responsibilities and duties
will be transitioned to you. By [confidential portion omitted and filed
separately with the Commission], you will be evaluated by the Chairman and the
Board of Directors for election as the Company's Chief Executive Officer. If you
are employed by the Company on [confidential portion omitted and filed
separately with the Commission], you will be elected by the Board of Directors
as the Company's Chief Executive Officer and will thereupon assume all
responsibilities and duties of that office. It is understood that your
responsibilities will not include those of the Chairman of the Board of
Directors. It is also understood that, if you cease to be employed by the
Company before [confidential portion omitted and filed separately with the
Commission], you will resign at the same time as a Director of the Company.
8. If your employment with the Company is terminated by the Company
other than for Cause, or if your employment is terminated by death, the Company
will pay to you (or, in the case of death, your estate) through June 30, 2000, a
monthly fee equal to (a) one-twelfth of your annualized base salary in effect on
the date your employment is terminated, plus (b) one-twelfth of the "on plan"
bonus amount targeted for you for the fiscal year during which your employment
is terminated (to be paid on or about the 15th day of each month). In addition,
all of your unvested options to purchase Company stock under the Company's stock
option plans will vest upon the termination of your employment.
9. If there is a Change in Control of the Company while you are employed
by the Company and if your employment with the Company is terminated by the
Company other than for Cause or if you terminate your employment with the
Company for Good Reason, or if your employment is terminated by death, in any
case within a two-year period following such a Change in Control, the Company
will pay to you an amount equal to 2.99 times the sum of (i) your annual rate of
base salary at the time of termination or immediately prior to the Change in
Control, whichever base salary amount is greater, and (ii) the "on plan" bonus
amount targeted for you for the fiscal year in which termination
<PAGE>
occurs or the fiscal year immediately prior to the Change in Control, whichever
bonus amount is greater; provided, however, that the amount of such payment may
be reduced as provided in paragraph 12. Such payment shall be made within
fifteen days after your termination, or as promptly thereafter as possible if
the procedures set forth in paragraph 12 cannot be completed within fifteen
days.
10. If there is a Change in Control of the Company while you are
employed by the Company and if you terminate your employment with the Company
(other than under the circumstances described in paragraph 9) at any time after
one year after the Change in Control and before June 30, 2000, the Company will
pay to you through the earlier of one year after the last day of your employment
or June 30, 2000, a monthly fee equal to (a) one-twelfth of your annualized base
salary in effect on the date your employment is terminated, plus (b) one-twelfth
of the "on plan" bonus amount targeted for you for the fiscal year during which
your employment is terminated (to be paid on or about the 15th day of each
month).
11. (a) Termination by the Company for "Cause" means termination
based on (i) conduct which is a material violation of Company policy, as in
effect immediately before any Change in Control, or which is fraudulent or
unlawful or which materially interferes with your ability to perform your
duties, (ii) misconduct which damages or injures the Company or substantially
damages the Company's reputation, or (iii) gross negligence in the performance
of, or willful failure to perform, your duties and responsibilities.
(b) Termination by you for "Good Reason" means termination
based on the occurrence without your express written consent of any of the
following: (i) a significant diminution by the Company of your role with the
Company or a significant detrimental change in the nature and/or scope of your
status with the Company, other than for Cause, (ii) a reduction in your base
salary, other than for Cause and other than as part of an across-the-board
reduction in salaries of management personnel (including all Vice Presidents and
above) of less than 20%, (iii) a material diminution by the Company of benefits
(taken as a whole) provided to you immediately prior to the Change in Control,
or (iv) the relocation of the Company's principal executive offices to a
location outside of Broward County, Palm Beach County or Dade County, Florida or
any requirement that you be based anywhere other than the Company's principal
executive offices.
(c) A "Change in Control" shall be deemed to have occurred if:
(i) the "beneficial ownership" (as defined in Rule
l3d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of securities representing more than 50% 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 the Company or any trustee or other fiduciary
holding securities under an employee benefit plan of the Company), or
<PAGE>
(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
(iii) during any period of three consecutive years,
individuals who at the beginning of such period were members of the Board of
Directors of the Company 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).
12. If it is determined that any payment or distribution by the Company
to you or for your benefit, whether paid or payable or distributed or
distributable pursuant to the terms of this agreement or otherwise (a
"Payment"), would constitute an "excess parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the
aggregate present value of amounts payable or distributable to you or for your
benefit pursuant to this agreement (such payments or distributions pursuant to
this agreement are hereinafter referred to as "Agreement Payments") shall be
reduced (but not below zero) to the Reduced Amount. The "Reduced Amount" shall
be an amount expressed in present value which maximizes the aggregate present
value of Agreement Payments without causing any Payment to be subject to
taxation under Section 4999 of the Code. For this purpose, present value shall
be determined in accordance with Section 280G(d)(4) of the Code.
All determinations to be made under this paragraph 12 shall be made by
the Company's independent public accountant immediately prior to the Change in
Control (the "Accounting Firm")), which firm shall provide its determinations
and any supporting calculations both to the Company and to you within ten days
of your termination. Any such determination by the Accounting Firm shall be
binding on both the Company and you. You shall, in your sole discretion,
determine which and how much of any Payment will be eliminated or reduced
consistent with the requirements of this paragraph 12. Within five days after
your determination, the Company shall pay (or cause to be paid) or distribute
(or cause to be distributed) to or for your benefit such amounts as are then due
to you under this agreement.
As a result of the uncertainty in the application of Section 280G of the
Code at the time of the initial determination by the Accounting Firm hereunder,
it is possible that Agreement Payments will have been made by the Company which
should not have been made ("Overpayment") or that additional Agreement Payments
which have not been made by the Company could have been made ("Underpayment"),
in each case, consistent with the calculations required to be made hereunder.
Within two years after the termination of your employment, the Accounting Firm
shall review the determination made by it pursuant to the preceding paragraph.
If the Accounting Firm determines that an Overpayment has been made, any such
Overpayment shall be treated for all purposes as a loan to you which you shall
repay to the Company together with interest at the applicable Federal rate
<PAGE>
provided for in Section 7872(f)(2) of the Code (the "Federal Rate"); provided,
however, that no amount shall be payable by you to the Company if and to the
extent such payment would not reduce the amount which is subject to taxation
under Section 4999 of the Code. If the Accounting Firm determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Company to you or for your benefit, together with interest at the Federal Rate.
All of the fees and expenses of the Accounting Firm in performing the
determinations referred to above shall be borne solely by the Company. The
Company agrees to indemnify and hold harmless the Accounting Firm against any
and all claims, damages and expenses resulting from or relating to such
determinations, except for claims, damages or expenses resulting from the gross
negligence or willful misconduct of the Accounting Firm.
13. In consideration of the obligations of the Company hereunder, unless
an event occurs entitling you to payments under paragraph 9, you agree that you
shall not (i) directly or indirectly become an employee, director or advisor of,
or otherwise affiliated with, any other entity or enterprise whose business is
in competition with the business of the Company, (ii) directly or indirectly
solicit or hire, or encourage the solicitation or hiring of, any person who was
an employee of the Company at any time on or after the date of this agreement,
unless at the time of such solicitation the person solicited had not been an
employee of the Company for more than twelve months, and (iii) without the
written consent of the Board of Directors or a person authorized thereby,
disclose to any person other than as required by law or court order, any
confidential information obtained by you while in the employ of the Company,
provided, however, that confidential information shall not include any
information known generally to the public (other than as a result of
unauthorized disclosure by you) or any specific information or type of
information generally not considered confidential by persons engaged in the same
business as the Company, or information disclosed by the Company, by any member
of its Board of Directors or by any other officer thereof to a third party
without restrictions on the disclosure of such information. Your obligations
under this paragraph will continue until June 30, 2000.
You acknowledge that these restrictions are reasonable and necessary to
protect the Company's legitimate interests, that the Company would not have
entered into this agreement in the absence of such restrictions, and that any
violation of these restrictions will result in irreparable harm to the Company.
You agree that the Company shall be entitled to preliminary and permanent
injunctive relief, without the necessity of proving actual damages, as well as
an equitable accounting of all earnings, profits and other benefits arising from
any violation hereof, which rights shall be cumulative and in addition to any
other rights or remedies to which the Company may be entitled. You irrevocably
and unconditionally (i) agree that any legal proceeding arising out of this
paragraph may be brought in the United States District Court for the Southern
District of Florida, or if such court does not have jurisdiction or will not
accept jurisdiction, in any court of general jurisdiction in Broward County,
Florida, (ii) consent to the non-exclusive jurisdiction of
<PAGE>
such court in any such proceeding, and (iii) waive any objection to the laying
of venue of any such proceeding in any such court. You also irrevocably and
unconditionally consent to the service of any process, pleadings, notices or
other papers.
14. The payments provided hereunder shall constitute the exclusive
payments due you from, and the exclusive obligation of, the Company in the event
of any termination of your employment, except for any benefits which may be due
you in normal course under any employee or executive benefit plan of the Company
which provides benefits after termination of employment, other than a severance
pay plan. You shall not be required to mitigate the amount of any payment or
benefit provided for in this agreement by seeking other employment or otherwise,
nor shall the amount of any payment or benefit provided for herein be reduced by
any compensation earned by other employment or otherwise. The payments hereunder
may not be transferred, assigned or encumbered in any manner, either voluntarily
or involuntarily. In the event of your death, any payments then or thereafter
due hereunder will be made to your estate.
15. It is the intent of the parties that you not be required to incur
any expenses associated with the enforcement of your right to receive payments
due under paragraph 9 or paragraph 10 of this agreement by arbitration,
litigation or other legal action because the cost and expense thereof would
substantially detract from the benefits intended to be extended to you.
Accordingly, the Company shall pay you on demand the amount necessary to
reimburse you in full for all reasonable expenses (including all attorneys' fees
and legal expenses) incurred by you in enforcing the obligations of the Company
to make the payments due under paragraph 4 of this agreement.
16. The obligation to make the payments hereunder is conditioned upon
your execution and delivery to the Company at the time of the termination of
your employment of a release, in form satisfactory to the Company, of any claims
you may have as a result of your employment or termination of employment under
any federal, state or local law, excluding any claim for benefits which may be
due you in normal course under any employee or executive benefit plan of the
Company which provides benefits after termination of employment, other than a
severance pay plan, and excluding any claims for reimbursement for liabilities,
costs or expenses incurred in any action against you within the scope of your
employment by the Company and for which you would have been indemnified pursuant
to the bylaws of the Company as of the date hereof (in which case you shall
notify the Company in writing within ten days after receiving service of process
as to the commencement of the action and give the Company the right to control
the defense of any such action), unless later limited in accordance with
applicable law.
17. The Company shall require any successor or successors (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to you, to acknowledge expressly that this
agreement is binding upon and enforceable against the Company in accordance with
the terms hereof, and in the same manner and to the same extent that the Company
would be required to perform if no such succession or
<PAGE>
successions had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of this
agreement. As used in this agreement, the Company shall mean the Company as
hereinbefore defined and any such successor or successors to its business and/or
assets, jointly and severally.
18. All payments hereunder shall be subject to applicable tax
withholding and deductions.
19. This agreement, together with the Option Agreement and the
Restricted Stock Agreement, sets forth the entire understanding between you and
the Company concerning your relationship with the Company and supersedes all
prior agreements, written or oral, express or implied, between you and the
Company as to such subject matter. This agreement may not be amended, nor may
any provision hereof be modified or waived, except by an instrument in writing
duly signed by you and the Company.
20. If any provision of this agreement, or any application thereof to
any circumstances, is invalid, in whole or in part, such provision or
application shall to that extent be severable and shall not affect other
provisions or applications of this agreement.
21. This agreement shall be governed by and interpreted under the laws
of the State of Delaware without giving effect to any conflict of laws
provisions.
Please indicate your agreement by signing below and retain one copy for
you records.
Sincerely,
THE SPORTS AUTHORITY, INC.
By: /s/ Jack A. Smith
---------------------------------
Jack A. Smith
Chairman and Chief Executive
Officer
Agreed:
/s/ Martin E. Hanaka
- --------------------
Martin E. Hanaka
Exhibit 11.1
THE SPORTS AUTHORITY, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------
JANUARY 25, JANUARY 26,
1998 1997
------------- ------------
<S> <C> <C>
Financial statement computations:
Income before income taxes $ 34,732 $ 48,032
Income tax expense 14,730 19,597
Minority interest (2,191) (1,570)
----------- ------------
Net income $ 22,193 $ 30,005
=========== ===========
Earnings per common share:
Shares used in earnings per common share
computation:
Weighted average common shares outstanding 31,513 31,392
----------- -----------
Earnings per common share-assuming dilution $ 0.70 $ 0.96
=========== ===========
Shares used in diluted earnings per common share
computation: (1)
Weighted average common shares outstanding 31,513 31,392
Net additional shares assuming options
exercised and proceeds used to purchase
treasury shares at average market price 303 439
----------- -----------
Total potential common shares 31,816 31,831
=========== ===========
Earnings per common share-assuming dilution $ 0.70 $ 0.94
=========== ===========
</TABLE>
(1) 4,580,964 shares issuable pursuant to the conversion rights granted to
holders of the Company's 5.25% Convertible Subordinated Notes are not
included in the computation above because the issuance of the shares
would be antidilutive.
EXHIBIT 13
Selected Consolidated Financial Data The Sports Authority, Inc.
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 25, January 26, January 28, January 22, January 23,
1998 1997 1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
(in thousands, except per share data)
Sales $ 1,464,565 $ 1,271,296 $ 1,046,652 $ 838,539 $ 606,871
Gross profit 419,537 365,373 292,427 229,884 165,946
Licensee fees and rental income 3,345 3,165 2,772 1,978 1,748
Selling, general and administrative expenses 365,363 304,955 245,886 188,875 137,045
Pre-opening expense 10,570 11,408 9,140 10,867 7,658
Goodwill amortization 1,963 1,963 1,963 1,963 2,070
Store closing charges 4,302 -- -- -- --
---------------------------------------------------------------------------
Operating income 40,684 50,212 38,210 30,157 20,921
Interest, net 5,952 2,180 820 318 13
---------------------------------------------------------------------------
Income before income taxes 34,732 48,032 37,390 29,839 20,908
Income tax expense 14,730 19,597 15,305 12,980 8,156
Minority interest (2,191) (1,570) (245) -- --
---------------------------------------------------------------------------
Net income $ 22,193 $ 30,005 $ 22,330 $ 16,859 $ 12,752
===========================================================================
Earnings per common share (2) $ .70 $ .96 $ .72 $ .54 $ .41
===========================================================================
Earnings per common share-assuming dilution (2) $ .70 $ .94 $ .71 $ .54 $ .41
===========================================================================
Percent of Sales Data:
Gross margin 28.6% 28.8% 27.9% 27.4% 27.3%
Selling, general and administrative expenses 24.9 24.0 23.4 22.5 22.6
Operating income 2.8 4.0 3.7 3.6 3.4
Income before income taxes 2.4 3.8 3.6 3.6 3.4
Selected Financial and Operating Data:
End of period stores 199 168 136 107 80
Comparable store sales increase (decrease) (2.2)% 3.3% 1.1% 5.5% 2.6%
Inventory turnover 3.1 3.2 3.2 3.2 3.1
Weighted average sales per square foot $ 193 $ 203 $ 214 $ 220 $ 224
Weighted average sales per store (in thousands) 8,334 8,819 9,231 9,446 9,572
End of period inventory net of accounts
payable per store (in thousands) 900 729 823 861 879
Average sale per transaction 46.54 45.99 44.85 43.23 41.55
Capital expenditures-owned property
(in thousands) 114,271 102,165 55,321 51,449 23,487
Depreciation and amortization (in thousands) 37,314 28,506 20,339 13,956 10,181
Balance Sheet Data--End of Period:(in thousands)
Working capital $ 99,710 $ 175,997 $ 81,878 $ 109,446 $ 37,488
Total assets 812,288 754,270 525,653 463,444 297,765
Long-term debt 157,439 152,021 -- -- --
Stockholders' equity 333,551 310,317 277,528 252,776 147,871
</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 earnings per common share-assuming dilution
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 three-for-two common stock split
effected on July 16, 1996).
14
<PAGE>
Management's Discussion and Analysis The Sports Authority, Inc.
Results of Operations
The following table sets forth the Company's income statement data as a percent
of sales for the periods indicated.
Fiscal Year Ended
--------------------------------------
January 25, January 26, January 28,
1998 1997 1996
--------------------------------------
Sales 100.0% 100.0% 100.0%
Cost of merchandise sold,
includes buying and
occupancy costs 71.4 71.2 72.1
--------------------------------------
Gross margin 28.6 28.8 27.9
Licensee fees and
rental income (0.2) (0.2) (0.3)
Selling, general and
administrative expenses 24.9 24.0 23.4
Pre-opening expense 0.7 0.9 0.9
Goodwill amortization 0.1 0.1 0.2
Store closing charges 0.3 -- --
--------------------------------------
Operating income 2.8 4.0 3.7
Interest, net 0.4 0.2 0.1
--------------------------------------
Income before income taxes 2.4 3.8 3.6
Income taxes 1.0 1.5 1.5
Minority interest (0.1) (0.1) --
--------------------------------------
Net income 1.5% 2.4% 2.1%
======================================
The following table sets forth the Company's store openings for the periods
indicated. No stores were closed during these periods.
Fiscal Year Ended
--------------------------------------
January 25, January 26, January 28,
1998 1997 1996
--------------------------------------
Beginning number of stores 168 136 107
Openings 31 32 29
--------------------------------------
Ending number of stores 199 168 136
======================================
Fiscal Years Ended January 25, 1998 (fiscal 1997) and January 26, 1997 (fiscal
1996)
Sales for the fiscal year ended January 25, 1998 were $1,464.6 million, a $193.3
million, or 15.2% increase over sales of $1,271.3 million for the fiscal year
ended January 26, 1997. Of the 15.2% increase in sales, 10.2%, or $128.9
million, was attributable to the inclusion of a full year of sales for the 32
stores opened in 1996 which had no comparable store sales in the prior year, and
7.2%, or $91.3 million, was attributable to the 31 stores opened in 1997. These
increases were partially offset by a 2.2%, or $26.9 million, decrease in
comparable store sales. The comparable store sales decrease in 1997 was
primarily the result of declining sales in hardlines, specifically the outdoor
categories of fishing and camping, as well as fitness equipment. Athletic wear
decreased due to sales of Olympic merchandise in the prior year and footwear was
negatively impacted by the declining in-line skate business. In the latter part
of 1997, the Company experienced negative sales trends in categories such as
footwear and fitness. Since the end of the year, these trends have continued.
Excluding all or a portion of the 1997 sales from 31 stores considered to
be cannibalized by new store openings, comparable store sales decreased 0.7% in
1997, as compared to an increase of 4.0% in the prior year after excluding all
or a portion of the 1996 sales from 13 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.
Licensee fees and rental income in 1997 were $3.3 million, or 0.2% of
sales, as compared to $3.2 million, or 0.2% of sales, in the prior year. Sales
of snow ski merchandise increased only 5.6% as compared to a 15.2% increase in
the Company's sales. This relatively small increase was primarily due to
unseasonably warm weather in the Northeast. The snow ski merchandise departments
in the Company's North American stores were operated pursuant to a license
agreement with a third party under which the Company received a fee of
approximately 10% of licensee snow ski merchandise sales in the Company's
stores. Snow ski merchandise sales in those stores were not included in the
Company's sales. In January 1998, the Company terminated its license agreement,
effective August 1, 1998. As a result, the snow ski merchandise department will
be operated directly by the Company. Snow ski merchandise sales will be included
in the Company's sales.
Cost of merchandise sold, including buying and occupancy costs, in 1997 was
$1,045.0 million, or 71.4% of sales, as compared to $905.9 million, or 71.2% of
sales, in the prior year. As a percent of sales, gross margin was 28.6% in 1997
and 28.8% in 1996. The major components of cost of goods sold are primarily
merchandise costs (including distribution
15
<PAGE>
Management's Discussion and Analysis
(continued)
costs) and, to a lesser extent, occupancy costs. In 1997, merchandise costs
decreased as a percent of sales primarily due to an increase in the purchase
markon as the Company is selling a larger proportion of higher margin products
such as footwear and apparel. This decrease was partially offset by $2.1 million
in start-up and operating expenses for the Company's first regional distribution
center near Atlanta, which opened in November 1997, as well as $1.2 million in
clearance markdowns in preparation for store closings in 1998 (see discussion
below). Occupancy costs, which are fixed in nature, increased as a percent of
sales due to lower sales volumes per store in 1997 versus 1996.
As the new regional distribution center started receiving merchandise from
all vendors and distributing merchandise to approximately 90 stores in February
1998, the Company began to experience various productivity and allocation
problems, resulting in out-of-stock positions in stores serviced by the
facility. The Company has moved aggressively to resolve these problems as they
have arisen, and continues to believe that its strategy of moving from direct
store distribution to a system of regional distribution centers will result in
substantial operating efficiencies and cost savings in the future.
Selling, general and administrative ("SG&A") expenses in 1997 were $365.4
million, or 24.9% of sales, as compared to $305.0 million, or 24.0% of sales, in
the prior year. The 0.9% of sales increase in SG&A expenses was primarily
attributable to an increase in advertising expenses, and an increase in
corporate G&A expenses as a percent of sales due to lower sales volumes.
Depreciation expense also increased as a result of self developing more stores
and purchasing computer hardware and software for the corporate office.
Pre-opening expense in 1997 was $10.6 million, or 0.7% of sales, as
compared to $11.4 million, or 0.9% of sales, in the prior year. Pre-opening
expense decreased $0.8 million due to the opening of 31 stores in 1997 versus 32
stores in the prior year and to higher pre-opening occupancy expenses in the
prior year 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.
In the fourth quarter of 1997, the Company announced the closing of three
stores and two off-site receiving locations and recorded store closing charges
of $4.3 million. The store closings were the result of lease expirations in 1998
and additional Company store openings in close proximity to the locations. The
two off-site receiving locations were replaced by the Company's new regional
distribution center. The off-site receiving locations were closed in the Fourth
quarter 1997, and the stores were closed in February 1998.
Operating income in 1997 was $40.7 million, or 2.8% of sales, as compared
to $50.2 million, or 4.0% of sales, in 1996. Operating income before pre-opening
expense, goodwill amortization and store closing charges was $57.5 million, or
3.9% of sales, in 1997, as compared to $63.6 million, or 5.0% of sales, in 1996.
Interest, net in 1997 was $6.0 million, or 0.4% of sales, as compared to
$2.2 million, or 0.2% of sales, in 1996. The increase of 0.2% of sales was
primarily attributable to interest incurred under the Company's long-term
convertible debt, which was issued in September 1996.
Income tax expense in 1997 was $14.7 million with an effective tax rate of
42.4% as compared to income tax expense of $19.6 million with an effective tax
rate of 40.8% in 1996. The increase in the effective tax rate was primarily due
to an increase in the valuation allowance of the Company's joint venture in
Japan as a result of an increase in net loss in 1997 versus 1996 and, to a
lesser extent, by the increasing effect of non-deductible goodwill expense due
to the decline of the Company's pre-tax income from 1996 to 1997.
As a result of the foregoing factors, net income in 1997 was $22.2 million,
or 1.5% of sales, as compared to $30.0 million, or 2.4% of sales, in 1996.
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.
16
<PAGE>
The Sports Authority, Inc.
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.
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 was primarily due to strong
ski sales in the Northeast at the beginning of the 1995-1996 ski season, which
are reflected in fiscal 1995.
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 28.8% in 1996
and 27.9% 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.
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.
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 0.1% of sales 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.
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 1997 these
capital requirements have generally been satisfied by cash and cash equivalents
at the beginning of the year, and by short-term borrowings.
17
<PAGE>
Management's Discussion and Analysis
(continued)
Cash flows generated by operating, investing and financing activities as
reported in the Consolidated Statements of Cash Flows for 1997, 1996 and 1995
are summarized below. The net decrease in cash and cash equivalents for 1997 was
$89.3 million as compared to an increase of $97.9 million in 1996 and a decrease
of $25.3 million in 1995.
Net cash used for operations was $0.6 million in 1997, as compared to net
cash provided by operations of $53.7 million in 1996 and $46.0 million in 1995.
Inventory net of accounts payable increased $56.7 million due to the addition of
31 stores in 1997 (versus an increase of $10.5 million due to the addition of 32
stores in 1996). Accounts payable decreased $8.6 million in 1997 despite the
store growth as the Company reduced purchases in reaction to lower than
anticipated sales volume in the fourth quarter. 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. These uses of cash were offset by
income before depreciation and amortization of $59.5 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. 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. The store closing reserve added $4.3 million to net
cash provided by operations.
Net cash used for investing was $112.8 million, $112.5 million and $74.1
million in 1997, 1996 and 1995, respectively. Capital expenditures in 1997
included $81.5 million of expenditures associated with opening stores of which
$73.6 million was used for the development of the 31 stores opened in 1997, and
$7.9 million was used for stores to be opened subsequent to 1997. The remaining
$32.8 million includes $13.2 million for capital expenditures related to the
Company's regional distribution center, $9.1 million for computer software and
hardware enhancements in the corporate office and existing stores, $8.6 million
to refurbish certain existing stores and $1.9 million for corporate office
improvements.
Net cash provided by financing of $24.1 million in 1997 was comprised
principally of short-term borrowings by Mega Sports Co., Ltd., the Company's
joint venture in Japan, and the Company's borrowings under its Revolving Credit
Facility. Net cash provided by financing of $156.7 million in 1996 was comprised
principally of issuance of the Company's $149.5 million long-term convertible
debt issuance in September 1996. 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.
The Company's working capital at January 25, 1998 was $99.7 million
compared with $176.0 million at January 26, 1997, a decrease of $76.3 million.
This decrease was primarily due to a decrease in cash of $89.3 million as the
residual cash from the convertible debt issuance was used in 1997.
Pursuant to the Company's expansion program, the Company opened 31 stores
in 1997, resulting in a year-end total of 199 stores. The Company currently
plans to open approximately 30 stores in 1998. Due to the additional store
growth, refurbishments of existing stores and the planned opening of an
additional regional distribution center in 1999, the Company expects that its
capital expenditures will be approximately $95 million in 1998. The Company
expects to finance substantially all 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 and by Mega Sports, and operating
leases from developers will be sufficient to satisfy its currently anticipated
working capital and capital expenditure requirements through the next 12 months.
In December 1997, the Revolving Credit Facility was amended by increasing the
line of credit from $110 million to $160 million. 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.
18
<PAGE>
The Sports Authority, Inc.
Year 2000
The Company has conducted a review to identify which computer and other business
systems will be affected by the "Year 2000" problem and has developed a project
plan and schedule designed to solve this issue. The Company is currently
planning to implement substantially all of its Year 2000 conversion project by
the second quarter of 1999, and is using both internal staff and outside
consultants for this effort. Based upon information currently known about its
computer and other business systems, the Company estimates it will expense
approximately $3 million over the next two years in this effort. The Company
believes the cost associated with becoming Year 2000 compliant will not
materially affect its future operating results or financial condition.
Seasonality and Inflation
The Company's business is highly seasonal, with its highest sales occurring in
the fourth quarter, which includes the holiday selling season. In fiscal 1997,
28.7% of the Company's sales occurred in the fourth quarter compared to 29.6% in
1996. 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.
1997 Quarter Ended
------------------------------------------------
(in millions) April July October January
------------------------------------------------
Sales $319.8 $383.3 $340.9 $420.6
% of full year 21.8% 26.2% 23.3% 28.7%
Operating income $ 4.9 $ 16.9 $ 4.0$ 14.9(a)
% of full year 12.1% 41.5% 9.9% 36.5%
1996 Quarter Ended
------------------------------------------------
(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(b)
% of full year 7.4% 30.9% 6.3% 55.4%
(a) Fourth quarter adjustments in 1997 had the effect of increasing operating
income and net income by approximately $5.2 million and $3.0 million,
respectively. These adjustments primarily resulted from a reduction in the
Company's bonus accrual, and vendor rebates.
(b) 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.
Management does not believe inflation had a material effect on the
financial statements for the periods presented.
Forward Looking Statements
Certain statements under the heading "Management's Discussion and Analysis" and
elsewhere in this Annual Report constitute "forward looking statements" made in
reliance on the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. As such, they involve risks and uncertainties that could
cause actual results to differ materially from those set forth in such forward
looking statements. The Company's forward looking statements are based on
assumptions about, or include statements concerning, many important factors,
including without limitation changes in discretionary consumer spending and
consumer preferences, particularly as they relate to sporting goods, athletic
footwear and apparel; seasonal patterns in consumer spending; the Company's
ability to effectively implement its strategies, including its merchandising,
distribution and store expansion strategies; competitive trends and
consolidation within the sporting goods retailing industry; the effect of
economic changes in other countries in which the Company does business; and
other factors described in the Company's Form 10-K for 1997. While the Company
believes that its assumptions are reasonable, it cautions that it is impossible
to predict the impact of certain factors which could cause actual results to
differ materially from expected results.
19
<PAGE>
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
20
<PAGE>
Report of Independent Certified Public Accountants The Sports Authority, Inc.
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 25, 1998 and January
26, 1997, and the results of their operations and their cash flows for each of
the three years in the period ended January 25, 1998, 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 5, 1998
21
<PAGE>
Consolidated Statements of Income The Sports Authority, Inc.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
January 25, January 26, January 28,
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Sales $1,464,565 $1,271,296 $1,046,652
Licensee fees and rental income 3,345 3,165 2,772
---------------------------------------------
1,467,910 1,274,461 1,049,424
Cost of merchandise sold, includes buying and occupancy costs 1,045,028 905,923 754,225
Selling, general and administrative expenses 365,363 304,955 245,886
Pre-opening expense 10,570 11,408 9,140
Goodwill amortization 1,963 1,963 1,963
Store closing charges 4,302 -- --
---------------------------------------------
Operating income 40,684 50,212 38,210
Interest:
Interest expense 8,544 4,580 1,327
Interest income (2,592) (2,400) (507)
---------------------------------------------
Interest, net 5,952 2,180 820
---------------------------------------------
Income before income taxes 34,732 48,032 37,390
Income tax expense 14,730 19,597 15,305
Minority interest (2,191) (1,570) (245)
---------------------------------------------
Net income $ 22,193 $ 30,005 $ 22,330
=============================================
Earnings per common share $ .70 $ .96 $ .72
=============================================
Earnings per common share-assuming dilution $ .70 $ .94 $ .71
=============================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
22
<PAGE>
Consolidated Balance Sheets The Sports Authority, Inc.
(In thousands)
<TABLE>
<CAPTION>
January 25, January 26,
1998 1997
----------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 20,359 $109,645
Merchandise inventories 327,662 279,577
Accounts receivable and other current assets 44,405 34,809
Property held for resale -- 21,080
----------------------------
Total current assets 392,426 445,111
Net property owned 313,050 211,651
Other assets and deferred charges 56,029 44,762
Goodwill-net of accumulated amortization of $15,622 and $13,659, respectively 50,783 52,746
----------------------------
Total Assets $812,288 $754,270
============================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable-trade $148,512 $157,156
Accrued payrolls and other liabilities 106,805 89,804
Short-term debt 21,468 5,043
Taxes other than income taxes 10,548 7,407
Income taxes 5,383 9,704
----------------------------
Total current liabilities 292,716 269,114
Long-term debt 157,439 152,021
Other long-term liabilities 30,671 22,715
----------------------------
Total liabilities 480,826 443,850
----------------------------
Commitments and contingencies -- --
Minority interest (2,089) 103
Stockholders' equity:
Common stock, $.01 par value, 100,000 shares authorized, 31,588 issued 316 315
Additional paid-in-capital 247,140 245,621
Deferred compensation and receivables from officers (1,589) (2,177)
Retained earnings 89,226 67,033
Treasury stock, 49 shares (494) (381)
Cumulative translation adjustment (1,048) (94)
----------------------------
Total stockholders' equity 333,551 310,317
----------------------------
Total Liabilities and Stockholders' Equity $812,288 $754,270
============================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
23
<PAGE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity The Sports Authority, Inc.
(In thousands)
<CAPTION>
Common Stock Additional
---------------- Paid-in Deferred Retained Treasury Translation
Shares Amount Capital Compensation Earnings Stock Adjustment Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 22, 1995 20,783 $208 $240,071 $(1,984) $14,698 $(217) $ -- $252,776
Common Stock issued under the
Employee Stock Purchase Plan 72 1 1,274 1,275
Common Stock issued under
the Director Stock Plan 12 -- 210 (188) 22
Payments received under the
Management Stock Purchase Plan 1,035 1,035
Amortization of deferred
compensation 486 486
Treasury shares acquired (11) (30) 98 (164) (96)
Cumulative translation adjustment (300) (300)
Net income for fiscal 1995 22,330 22,330
---------------------------------------------------------------------------------------
Balance, January 28, 1996 20,856 209 241,525 (553) 37,028 (381) (300) 277,528
Three-for-two common stock
split on July 16, 1996 10,480 105 (110) (5)
Common Stock issued under the
Employee Stock Purchase Plan 37 836 836
Common Stock issued under the
Management Stock Purchase Plan 25 583 (110) 473
Common Stock issued under
the Director Stock Plan 8 178 (149) 29
Common Stock issued under the
1996 Stock Option and
Restricted Stock Plan 60 1 1,984 (1,985) --
Amortization of deferred
compensation 620 620
Section 16(b) insider profit recovery 625 625
Cumulative translation adjustment 206 206
Net income for fiscal 1996 30,005 30,005
---------------------------------------------------------------------------------------
Balance, January 26, 1997 31,466 315 245,621 (2,177) 67,033 (381) (94) 310,317
Common Stock issued under the
Employee Stock Purchase Plan 60 1 898 899
Common Stock issued under the
Director Stock Plan 8 156 (124) 32
Common Stock retired under the
Management Stock Purchase Plan (105) (1) (999) (1,000)
Common Stock retired under the
Director Stock Plan (7) (144) 144 --
Amortization of deferred
compensation 672 672
Options issued under the
Director Stock Plan 125 (125) --
Stock Options exercised 127 1 1,504 1,505
Treasury shares acquired (10) (21) 21 (113) (113)
Cumulative translation adjustment (954) (954)
Net income for fiscal 1997 22,193 22,193
---------------------------------------------------------------------------------------
Balance, January 25, 1998 31,539 $316 $247,140 $(1,589) $89,226 $(494) $(1,048) $333,551
=======================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
24
<PAGE>
Consolidated Statements of Cash Flows The Sports Authority, Inc.
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------
January 25, January 26, January 28,
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Cash Provided by (Used for):
Operations
Net income $ 22,193 $ 30,005 $ 22,330
Adjustment to reconcile net income to operating cash flows:
Depreciation and amortization 37,314 28,506 20,339
Cumulative translation adjustment (954) 206 (300)
Minority interest in net loss of Joint Venture (2,191) (1,570) (245)
Loss on sale or disposal of property and equipment 225 272 50
Store closing charges 4,302 -- --
Increase in other assets (13,697) (7,066) (2,367)
Increase in other long-term liabilities 5,094 4,621 3,933
Cash provided by (used for) current assets and liabilities:
Increase in inventories (48,085) (31,270) (30,548)
(Increase) decrease in property held for resale -- (17) 1,488
Increase (decrease) in accounts payable (8,644) 20,812 10,745
Other-net 3,817 9,202 20,575
-------------------------------------------------
Net cash provided by (used for) operations (626) 53,701 46,000
-------------------------------------------------
Investing
Capital expenditures-owned property (114,271) (102,165) (55,321)
Proceeds from sale of property and equipment 1,349 380 --
Other-net 172 (10,741) (18,780)
-------------------------------------------------
Net cash used for investing (112,750) (112,526) (74,101)
-------------------------------------------------
Financing
Short-term borrowings 16,425 5,043 --
Long-term borrowings 5,418 152,021 --
Proceeds from sale of stock 2,403 1,929 2,310
Purchase of treasury stock (113) -- (96)
Minority interest in equity in Joint Venture -- 1,361 557
Debt issuance costs (43) (3,669) --
-------------------------------------------------
Net cash provided by financing 24,090 156,685 2,771
-------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (89,286) 97,860 (25,330)
Cash and cash equivalents at beginning of year 109,645 11,785 37,115
-------------------------------------------------
Cash and cash equivalents at end of year $ 20,359 $ 109,645 $ 11,785
=================================================
Supplemental disclosures of cash flow information
Interest paid, net of amount capitalized $ 7,666 $ 1,505 $ 1,330
Income taxes paid 28,136 27,345 15,211
</TABLE>
Supplemental schedule of noncash investing activities
The Company transferred property held for resale of $21,080
to net property owned in April 1997.
See accompanying Notes to Consolidated Financial Statements
25
<PAGE>
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 25,
1998, the Company operated 196 sporting goods megastores, virtually all in
excess of 40,000 square feet, and three stores under the format "The Sports
Authority, Ltd.". These "Ltd." format stores range from 9,000 - 30,000 square
feet. The Company has an international presence with 186 stores in 30 states
across the United States, six in Canada and seven 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 6,
1995, Kmart sold its remaining 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 1997 fiscal year consisted of 52 weeks and ended on
January 25, 1998. Fiscal years 1996 and 1995 consisted of 52 weeks and 53 weeks,
respectively, and ended on January 26, 1997 and January 28, 1996.
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 Share: In 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (EPS). This statement
supersedes Accounting Principles Board Opinion No. 15 and replaces primary and
fully diluted EPS with a dual presentation of basic and diluted EPS. Basic EPS
equals net income divided by the number of weighted average common shares.
Diluted EPS includes potentially dilutive securities such as stock options and
convertible securities.
A reconciliation of the numerators and denominators of the basic and
diluted EPS computations is illustrated below:
(in thousands, except per share data) 1997 1996 1995
---------------------------------
Basic EPS Computation
Net income $22,193 $30,005 $22,330
---------------------------------
Weighted average common shares 31,513 31,392 31,229
---------------------------------
Earnings per common share $ 0.70 $ 0.96 $ 0.72
=================================
<PAGE>
1997 1996 1995
---------------------------------
Diluted EPS Computation
Net income $22,193 $30,005 $22,330
---------------------------------
Weighted average common shares 31,513 31,392 31,229
Effect of stock options 303 439 140
---------------------------------
Total shares 31,816 31,831 31,369
---------------------------------
Earnings per common
share-assuming dilution $ 0.70 $ 0.94 $ 0.71
=================================
26
<PAGE>
The Sports Authority, Inc.
4,580,964 shares issuable pursuant to the conversion rights granted to
holders of the Company's 5.25% Convertible Subordinated Notes (see Note 10) are
not included in the computation above because the issuance of the shares would
be antidilutive. For the fiscal year ended January 28, 1996, 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.
Cash and Cash Equivalents: The Company considers cash on hand in stores,
deposits in banks, 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:
o The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to their short-term nature.
o The fair value of the Company's notes receivable is based on current
interest rates and repayment terms of the individual notes.
o 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
Note); and,
o Market prices were used to determine the fair value of the 5.25%
Convertible Subordinated Note.
27
<PAGE>
Notes to Consolidated Financial Statements
(continued)
There were no significant differences as of January 25, 1998 and January
26, 1997 in the carrying value and fair value of financial instruments except
for the 5.25% Convertible Subordinated Note which had a carrying value of $149.5
million and a fair value of $127.6 million at January 25, 1998, and the notes
receivable which had a carrying value of $12.4 million and a fair value of $10.9
million at January 25, 1998.
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 165 locations in 1997. Additionally, the Company sells diving
merchandise in one location through a similar license agreement. Effective
August 1, 1998, the ski department will be operated directly by the Company. All
ski merchandise will be owned by the Company. Snow ski merchandise sales will be
included in the Company's sales.
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 assets and other expenses directly related
to store closings. In January 1998, the Company announced the closing of three
stores and two off-site receiving locations. See Note 4 for further discussion
of store closings.
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.
Pursuant to the Joint Venture Agreement between the Company and JUSCO, the
Company entered into a License Agreement and a Services Agreement with Mega
Sports, and JUSCO entered 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 1997 and 1996 fiscal years include fees paid by
Mega Sports to JUSCO totaling $487,000 and $130,000, respectively.
28
<PAGE>
The Sports Authority, Inc.
Note 4: Store Closing Charges
In the fourth quarter of 1997, the company announced the closing of three stores
and two off-site receiving locations and recorded store closing charges of $4.3
million. The store closings were the result of lease expirations in 1998 and
additional Company store openings in close proximity to the locations. The two
off-site receiving locations were replaced by the Company's new regional
distribution center. The off-site receiving locations were closed in the fourth
quarter 1997, and the stores were closed in February 1998. The $4.3 million
store closing charges include $2.1 million for lease obligations and related
costs, net of estimated future sublease revenue, $1.8 million for estimated
disposal of fixed assets, and $350,000 for estimated other costs. In 1997, the
Company paid approximately $50,000 against the liability for lease obligations
and related costs.
Note 5: Accounts Receivable and Other Current Assets
Accounts receivable and other current assets consists of the following:
January 25, January 26,
(in thousands) 1998 1997
----------------------------
Accounts receivable, net of
allowances of $1,481 and
$765, respectively $ 22,608 $15,832
Prepaid expenses 12,662 12,811
Deferred income taxes 9,135 6,166
----------------------------
Total $ 44,405 $34,809
============================
Note 6: Net Property Owned
Net property owned consists of the following:
January 25, January 26,
(in thousands) 1998 1997
----------------------------
Property owned:
Land $ 62,087 $ 30,087
Buildings 84,686 48,894
Leasehold improvements 85,689 70,611
Furniture and fixtures 179,605 130,023
Construction in progress 1,503 1,043
----------------------------
413,570 280,658
Less-accumulated depreciation
and amortization (100,520) (69,007)
----------------------------
Net property owned $ 313,050 $211,651
============================
Note 7: Other Assets and Deferred Charges
Other assets and deferred charges consists of the following:
January 25, January 26,
(in thousands) 1998 1997
----------------------------
Lease acquisition costs,
net of amortization $16,730 $18,358
Deferred income taxes 13,380 5,169
Notes receivable 12,434 12,606
Leasehold deposits 8,938 3,605
Debt issuance costs 2,808 3,438
Other 1,739 1,586
----------------------------
Total $56,029 $44,762
============================
Lease acquisition costs consists primarily of the acquisition of nine
leases of two former sporting goods retailers, Herman's Sporting Goods, Inc. and
Sportstown, Inc. The leases were acquired shortly after the retailers filed for
bankruptcy. The cost of the leases were deferred and are being amortized on a
straight-line basis over the remaining lease lives of the stores.
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. The current
balance of the mortgage note is approximately $5.4 million.
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 $7.0 million.
The debt issuance costs related to the Company's long-term convertible debt
(see Note 10) are being amortized over the five year term of the debt using the
effective interest method.
29
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Note 8: Income Taxes
Income before income taxes is as follows:
(in thousands) 1997 1996 1995
--------------------------------
United States $43,149 $57,724 $41,676
Foreign (8,417) (9,692) (4,286)
--------------------------------
Total $34,732 $48,032 $37,390
================================
The provision for income taxes consists of:
(in thousands) 1997 1996 1995
--------------------------------
Current:
Federal $19,471 $19,637 $15,555
State and local 3,300 2,750 2,675
Deferred:
Federal (4,917) 65 (1,250)
State (1,388) -- --
Foreign (1,736) (2,855) (1,675)
--------------------------------
Total income taxes $14,730 $19,597 $15,305
================================
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
A reconciliation of the federal statutory rate to the Company's effective tax rate follows:
(in thousands) 1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate $12,156 35.0% $16,811 35.0% $13,087 35.0%
State and local taxes, net of federal tax benefit 1,243 3.6 1,788 3.7 1,739 4.6
Foreign tax rate differential 412 1.2 (35) (0.1) (341) (0.9)
Goodwill 687 2.0 687 1.4 687 1.8
Other 232 0.6 346 0.8 133 0.4
------------------------------------------------------------------
Total income taxes $14,730 42.4% $19,597 40.8% $15,305 40.9%
------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the following:
January 25, January 26,
(in thousands) 1998 1997
-------------------------
Deferred tax assets:
Short-term:
Inventory $ 807 $ 659
Accruals and other liabilities 8,167 5,499
Other 161 8
-------------------------
Total short-term 9,135 6,166
-------------------------
Long-term:
Accruals and other liabilities 6,285 548
Property and equipment-foreign 562 297
Canada net operating loss 5,272 4,076
Other 1,261 248
-------------------------
Total long-term 13,380 5,169
-------------------------
Total deferred tax assets 22,515 11,335
-------------------------
Deferred tax liabilities:
Short-term:
Inventory discounts 1,509 2,357
Other 323 102
-------------------------
Total short-term 1,832 2,459
Long-term:
Property and equipment 4,389 4,328
Other (91) (216)
-------------------------
Total long-term 4,298 4,112
-------------------------
Total deferred tax liabilities 6,130 6,571
-------------------------
Net deferred tax assets $16,385 $ 4,764
=========================
The Company has net operating losses for its Canadian subsidiary in fiscal
years 1995 through 1997 in the amount of $14.2 million which expire in fiscal
years 2000 through 2002.
Note 9: Short-term Debt
Short-term debt consists of the following:
January 25, January 26,
(in thousands) 1998 1997
-----------------------
Short-term loans $16,505 $5,043
Revolving Credit Facility 4,963 --
-----------------------
Total $21,468 $5,043
-----------------------
In April 1995, the Company entered into a Revolving Credit Facility with a
group of banks for which First Union National Bank acts as the administrative
agent (the "Revolving Credit Facility") to establish a $110 million revolving
line of credit to fund working capital requirements. In December 1997, the
Revolving Credit Facility was amended by increasing the line of credit to $160
million and extending the term of the prior agreement from April 26, 1998 to
April 26, 1999. 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,
30
<PAGE>
The Sports Authority, Inc.
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, 1999. The weighted
average interest rate on borrowings during 1997 was 7.1%.
Mega Sports has entered into a series of short-term loans with three
Japanese banks at a principal amount of 2.1 billion yen (US $16.5 million). The
loans are at fixed rates ranging from .78% to 1.26% and mature on varying dates
ranging from February 1998 to November 1998. Interest on the loans is due
quarterly and is paid in arrears. The loans are unsecured and contain no
performance covenants.
Note 10: Long-term Debt
Long-term debt consists of the following:
January 25, January 26,
(in thousands) 1998 1997
-----------------------
5.25% Convertible
Subordinated Notes $149,500 $149,500
Term loans 7,939 2,521
-----------------------
Total $157,439 $152,021
=======================
In September 1996, the Company issued 5.25% Convertible Subordinated Notes
("the Notes") in 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.
Mega Sports has entered into a series of unsecured term loans with three
Japanese banks at a principal amount of 1.01 billion yen (US $7.9 million). The
loans are at fixed rates ranging from 1.24% to 1.76% and mature on varying dates
ranging from October 1999 to December 2000. 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 $844,000 in fiscal 1997.
Note 11: Other Long-Term Liabilities
Other long-term liabilities consists of the following:
January 25, January 26,
(in thousands) 1998 1997
-----------------------
Step rent accrual $23,534 $18,603
Deferred income taxes 4,298 4,112
Store closing reserve 1,839 --
Other 1,000 --
-----------------------
Total long-term liabilities $30,671 $22,715
=======================
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.
31
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Note 12: 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 of these matters will not have a material effect on the Company's
liquidity, financial position or results of operations.
Note 13: 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 noncancelable
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 25, 1998 were as
follows:
(in thousands) Operating
-----------
Year:
1998 $ 90,879
1999 89,378
2000 85,302
2001 81,106
2002 80,352
Later years 822,731
----------
Total minimum lease payments 1,249,748
Less: minimum sublease rental income (5,268)
----------
Net minimum lease payments $1,244,480
==========
Rental Expense: A summary of operating lease rental expense and short-term
rentals follows:
(in thousands) 1997 1996 1995
----------------------------
Minimum rentals $86,148 $71,129 $56,728
Percentage rentals 292 589 629
Less: sublease rentals (967) (967) (1,213)
----------------------------
Total $85,473 $70,751 $56,144
============================
32
<PAGE>
The Sports Authority, Inc.
Note 14: Employee Retirement Plans
Employees of the Company who meet certain requirements as to age and service are
eligible to participate in The Sports Authority 401(k) Savings and Profit
Sharing Plan and certain executives are eligible to participate in The Sports
Authority Supplemental 401(k) Savings and Profit Sharing Plan. The Company's
expense related to these plans was $2.3 million, $1.8 million and $1.5 million
for 1997, 1996 and 1995, respectively.
The Company currently has an unfunded supplemental executive retirement plan
for certain executives of the Company. Pension benefits earned under the plan
are primarily based on years of service at the level of Vice President or higher
after June 1990 and average compensation, including salary and bonus. Prior
service costs are 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, 1997 and December 31, 1996:
Pension expense 1997 1996
------------------
(in thousands)
Service cost on benefits
earned during the period $ 282 $ 225
------------------
Interest cost on the projected
benefit obligation 80 48
------------------
Net amortization and deferral 44 42
------------------
Total pension expense $ 406 $ 315
==================
Benefit obligations
Actuarial present value
of benefit obligations:
Vested benefit obligation $ (269) $ (162)
------------------
Accumulated benefit obligation (694) (396)
------------------
Projected benefit obligation (1,699) (1,060)
Unrecognized prior service cost 558 600
Unrecognized net loss 435 145
Additional minimum liability -- (81)
------------------
Accrued pension liability $ (706) $ (396)
==================
The Company assumed a weighted average discount rate of 6.75% and 7.5% for
1997 and 1996 respectively, and an annual increase in the rate of compensation
of 6.0% in determining the pension 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 was $284,000
and $250,000 as of December 31, 1997 and December 31, 1996, respectively.
Interest on the obligation accrues at a rate of 6.75%. Prior service costs are
being amortized over the average remaining service lives of the employees.
Note 15: 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.
33
<PAGE>
Notes to Consolidated Financial Statements
(continued)
The Employee Plan allows the Company's employees to purchase shares of the
Company's Common Stock at a 15% discount from its fair market value. Shares
purchased through the Employee Plan are restricted from sale or transfer for one
year from the date of purchase, except in the event of a change in control of
the Company, as defined in the plan, and certain other events.
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 $510,000, $497,000 and $338,000 in 1997,
1996 and 1995, 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 1997, 1996 and
1995: expected volatility of 37%, risk-free interest rates of 6.4%, 6.0% and
7.0% for 1997, 1996 and 1995, respectively and an expected life of 5 years.
- --------------------------------------------------------------------------------
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,014,136 $13.34 1,435,098 $12.11 1,051,365 $11.91
Granted 627,599 19.21 736,400 15.76 550,500 12.51
Exercised (130,395) 11.91 -- -- -- --
Canceled (187,455) 15.20 (157,362) 13.47 (166,767) 12.11
--------- --------- ---------
Outstanding at end of year 2,323,885 14.86 2,014,136 13.34 1,435,098 12.11
--------- --------- ---------
Exercisable at end of year 726,936 11.91 3,853 12.11 3,853 12.11
--------- --------- ---------
Weighted average fair value of
options granted during year $8.31 $6.71 $5.55
</TABLE>
34
<PAGE>
The Sports Authority, Inc.
A summary of stock options outstanding at January 25, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------- -------------------------------------
Weighted Average Weighted Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices January 25, 1998 Life (in years) Exercise Price January 25, 1998 Exercise Price
- ---------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
$11.91--$14.08 1,136,286 1.9 $12.13 726,936 $11.91
15.75-- 20.63 1,185,799 8.6 17.45 -- --
24.88-- 27.25 1,800 8.7 26.85 -- --
--------- -------
2,323,885 5.4 14.86 726,936 11.91
========= =======
Available for Grant 1,770,311
=========
</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 $3.2 million, $1.9 million and
$862,000 for 1997, 1996 and 1995, respectively. The following illustrate the
Company's Net income and Earnings per common share had FASB Statement No. 123
been utilized:
1997 1996 1995
----------------------------
Net income (in thousands) As reported $22,193 $30,005 $22,330
Pro forma 20,286 28,831 21,730
Earnings per
common share As reported $ 0.70 $ 0.96 $ 0.72
Pro forma 0.64 0.92 0.70
Earnings per common
share-assuming
dilution As reported $ 0.70 $ 0.94 $ 0.71
Pro forma 0.64 0.92 0.70
Note 16: Quarterly Highlights (Unaudited)
1997 Quarter Ended
-------------------------------------------
(In thousands, except per share data) April July October January
-------------------------------------------
Sales $319,802 $383,294 $340,896 $420,573
Operating income 4,914 16,901 4,024 14,845(a)
Net income 2,604 9,555 2,011 8,023(a)
Earnings per common
share-assuming
dilution .08 .30 .06 .25
1996 Quarter Ended
-------------------------------------------
(In thousands, except per share data) April July October January
-------------------------------------------
Sales $270,558 $331,596 $292,920 $376,222
Operating income 3,708 15,528 3,156 27,820(b)
Net income 2,053 9,183 1,976 16,793(b)
Earnings per common
share-assuming
dilution .07 .29 .06 .50
(a) Fourth quarter adjustments in 1997 had the effect of increasing operating
income and net income by approximately $5.2 million and $3.0 million,
respectively. These adjustments primarily resulted from a reduction in the
Company's bonus accrual, and vendor rebates.
(b) 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.
35
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. The Sports Authority Canada, Inc. (an Ontario, Canada Corporation)
4. The Sports Authority Florida, Inc. (a Florida Corporation)
5. The Sports Authority Michigan, Inc. (a Michigan Corporation) (1)
6. Mega Sports Co., Ltd (Joint Venture between The Sports Authority, Inc.-
51% and JUSCO Co., Ltd.- 49%) (Organized under the laws of Japan)
7. The Sports Authority Puerto Rico, Inc. (a Puerto Rico Corporation)
(1) Effective January 26, 1998, Intelligent Sports Inc. merged into The Sports
Authority Michigan, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of these Registration Statements on Form S-3 (No. 333-16877,
and No. 333-47127) and Registration Statements on Form S-8 (No. 333-32955, No.
33-09259, and No. 33-86522) of The Sports Authority, Inc. of our report dated
March 5, 1998, which appears on page 21 of the Annual Report to Shareholders,
which is incorporated by reference in the Annual Report of The Sports Authority,
Inc. on Form 10-K for the fiscal year ended January 25, 1998.
/S/ PRICE WATERHOUSE LLP
- ----------------------------
Price Waterhouse LLP
April 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-25-1998
<PERIOD-START> JAN-27-1997
<PERIOD-END> JAN-25-1998
<CASH> 20,359
<SECURITIES> 0
<RECEIVABLES> 44,405
<ALLOWANCES> (1,481)
<INVENTORY> 327,662
<CURRENT-ASSETS> 392,426
<PP&E> 413,570
<DEPRECIATION> (100,520)
<TOTAL-ASSETS> 812,288
<CURRENT-LIABILITIES> 292,716
<BONDS> 0
0
0
<COMMON> 316
<OTHER-SE> 333,235
<TOTAL-LIABILITY-AND-EQUITY> 812,288
<SALES> 1,464,565
<TOTAL-REVENUES> 1,467,910
<CGS> 1,045,028
<TOTAL-COSTS> 1,045,028
<OTHER-EXPENSES> 382,198
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,952
<INCOME-PRETAX> 34,732
<INCOME-TAX> 14,730
<INCOME-CONTINUING> 22,193
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,193
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70
</TABLE>
