SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number February 1, 1997 000-20969 HIBBETT SPORTING GOODS, INC. (Exact name of registrant as specified in its charter) Delaware 63-1074067 (State of other jurisdiction (I.R.S. Employer of Incorporation or organization) Identification No.) 451 Industrial Lane Birmingham, Alabama 35211 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (205)942-4292 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class CUSIP Number Which Registered Common Stock, $.01 Par Value 428565-10-5 NASDAQ Stock Market 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) 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 ((S)229.405 of this chapter) 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. ___. The aggregate market value of the voting stock held by non-affiliates of the Registrant (assuming for purposes of this calculation that all executive officers and directors are "affiliates") was $82,895,427 at September 15,1997, based on the closing sale price of $29.00 for the Common Stock on such date on the Nasdaq National Market. The number of shares outstanding of the Registrant's Common Stock, as of September 15, 1997 was 6,192,330. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Hibbett Sporting Goods, Inc. Proxy Statement for its 1997 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. The undersigned registrant hereby amends the following items of its Annual Report on Form 10-K for the fiscal year ended February 1, 1997 as set forth in the pages attached hereto: PART I Item 1. Business Item 2. Properties PART III Item 10. Directors and Executive Officers of the Registrant Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART V Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 15th day of September, 1997. HIBBETT SPORTING GOODS, INC. By: /s/ Michael J. Newsome ------------------------ Michael J. Newsome President (Principal Executive Officer) By: /s/ Susan H. Fitzgibbon ------------------------- Susan H. Fitzgibbon Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 1 ITEM 1. BUSINESS General Hibbett Sporting Goods, Inc. ("Hibbett" or the "Company") is a rapidly- growing operator of full-line sporting goods stores in small to mid-sized markets in the southeastern United States. Hibbett's stores offer a broad assortment of quality athletic equipment, footwear and apparel at competitive prices with superior customer service. The Company's merchandise assortment features a core selection of brand name merchandise emphasizing team and individual sports complemented by a selection of localized apparel and accessories designed to appeal to a wide range of customers within each market. The Company believes that its stores are among the primary retail distribution alternatives for brand name vendors that seek to reach Hibbett's target markets. The Company operates 96 Hibbett Sports stores as well as nine smaller-format Sports Addition athletic shoe stores and four larger-format Sports & Co. superstores. Hibbett's primary retail format and growth vehicle is Hibbett Sports, a 5,000 square foot store located predominantly in enclosed malls. Although competitors in some markets may carry product lines and national brands similar to Hibbett, the Company believes that its Hibbett Sports stores are typically the primary, full-line sporting goods retailers in their markets due to the extensive selection of traditional team and individual sports merchandise offered and a high level of customer service. BUSINESS STRATEGY The Company targets markets with county populations that range from 30,000 to 250,000. By targeting these smaller markets, the Company believes that it is able to achieve significant strategic advantages, including numerous expansion opportunities, comparatively low operating costs and a more limited competitive environment than generally faced in larger markets. In addition, the Company establishes greater customer and vendor recognition as the leading full-line sporting goods retailer in these local communities. Management believes that its ability to merchandise to local sporting or community interests differentiates Hibbett from its national competitors. This strong regional focus also enables the Company to achieve significant cost benefits including lower corporate expenses, reduced distribution costs and increased economies of scale from marketing activities. Additionally, Hibbett also utilizes a number of sophisticated information systems to maintain tight controls over operating costs. The Company strives to hire enthusiastic sales personnel with an interest in sports. The Company's extensive training program focuses on product knowledge and selling skills and is conducted through the use of in-store clinics, videos, self study courses, and interactive group discussions. STORE CONCEPTS Hibbett Sports The Company's primary retail format is Hibbett Sports, a 5,000 square foot store located predominantly in enclosed malls. The Company tailors its Hibbett Sports concept to the size, demographics and competitive conditions of each market. Eighty-one Hibbett Sports stores are located in enclosed malls, the majority of which are the only enclosed malls in the county, and the remaining fifteen are located in strip centers. Hibbett Sports stores offer a core selection of quality, brand name merchandise with an emphasis on team and individual sports. This merchandise mix is complemented by a selection of localized apparel and accessories designed to appeal to a wide range of customers within each market. For example, the Company believes that apparel with logos of sports teams of local interest represents a larger percentage of the merchandise mix in Hibbett Sports stores than it does in the stores of national chain competitors. In addition, the Company strives to quickly respond to major sports events of local interest. 2 Sports & Co. The Company opened the first of its four Sports & Co. superstores in the spring of 1995 in Huntsville, Alabama. Sports & Co. superstores average 25,000 square feet and offer a larger assortment of athletic footwear, apparel and equipment than Hibbett Sports stores. Athletic equipment and apparel represent a higher percentage of the overall merchandise mix at Sports & Co. superstores than they do at Hibbett Sports stores. Sports & Co. superstores are designed to project the same exciting and entertaining in-store atmosphere as Hibbett Sports stores but on a larger scale. For example, Sports & Co. superstores offer customer participation areas, such as putting greens and basketball hoop shoots, and feature periodic special events including appearances by well-known athletes. Sports Addition The Company's nine Sports Addition stores are small, mall-based stores, averaging 1,500 square feet with approximately 90% of merchandise consisting of athletic footwear and the remainder consisting of caps and a limited assortment of apparel. Sports Addition stores offer a broader assortment of athletic footwear, with a greater emphasis on fashion than the athletic footwear assortment offered by Hibbett Sports stores. All Sports Addition stores are currently located in the malls in which Hibbett Sports stores are also present. Team Sales Hibbett Team Sales, Inc. ("Team Sales"), a wholly-owned subsidiary of the Company, is a leading supplier of customized athletic apparel, equipment and footwear to school, athletic and youth programs in Alabama. Team Sales sells its merchandise directly to educational institutions and youth associations. The operations of Team Sales are independent of the operations of the Company's stores, and its warehousing and distribution are managed separately out of its own warehouse. EXPANSION STRATEGY Hibbett targets markets ranging in population from 30,000 to 250,000. By targeting smaller markets, the Company believes that it is able to achieve significant strategic advantages, including numerous expansion opportunities, comparatively low operating costs and a more limited competitive environment than generally faced in larger markets. In addition, the Company establishes greater customer and vendor recognition as the leading full-line sporting goods retailer in the local community. The Company has recently accelerated its rate of new store openings to take advantage of the growth opportunities in its target markets. The Company has identified over 500 potential markets for future Hibbett Sports stores within the states in which it operates and in contiguous states. Hibbett's clustered expansion program, which calls for opening new stores within a two-hour driving radius of another Company location, allows it to take advantage of efficiencies in distribution, marketing and regional management. In January 1996 the Company moved its operations to its newly constructed distribution center which has significant expansion potential to support the Company's growth for the foreseeable future. In evaluating potential markets, the Company considers population, economic conditions, local competitive dynamics and availability of suitable real estate. Although approximately 90% of Hibbett Sports stores are located in enclosed malls, the stores also operate profitably in strip center locations. As the Company continues to expand, it will open new stores in mall and strip center locations. 3 MERCHANDISING The Company's merchandising strategy is to provide a broad assortment of quality athletic equipment, footwear and apparel at competitive prices. The Company's stores offer a core selection of brand name merchandise with an emphasis on team and individual sports. This merchandise mix is complemented by a selection of localized apparel and accessories designed to appeal to a wide range of customers within each market. The Company's leading product category is athletic footwear, followed by apparel and sporting equipment, ranked according to sales. The Company emphasizes quality brand name merchandise. The Company believes that the breadth and depth of its brand name merchandise selection generally exceeds the merchandise selection carried by local independent competitors. Many of these branded products are highly technical and require considerable sales assistance. The Company coordinates with its vendors to educate the sales staff at the store level on new products and trends. Although the core merchandise assortment tends to be similar for each Hibbett Sports store, important local or regional differences frequently exist. Accordingly, the Company's stores regularly offer products that reflect preferences for particular sporting activities in each community and local interest in college and professional sports teams. The Company's knowledge of these interests, combined with its access to leading vendors, enables Hibbett Sports stores to react quickly to emerging trends or special events, such as college or professional championships. The Company's merchandise staff analyzes current sporting goods trends by maintaining close relationships with the Company's vendors, monitoring sales at competing stores, communicating with customers, store managers and personnel and reviewing industry trade publications. The merchandise staff works closely with store personnel to meet the requirements of individual stores for appropriate merchandise in sufficient quantities. VENDOR RELATIONSHIPS The sporting goods retail business is very brand name driven. Accordingly, the Company maintains relationships with a number of well-known sporting goods vendors to satisfy customer demand. The Company believes that its stores are among the primary retail distribution alternatives for brand name vendors that seek to reach Hibbett's target markets. As a result, the Company is able to attract considerable vendor interest and establish long-term partnerships with vendors. As its vendors expand their product lines and grow in popularity, the Company expands its sales and promotions of these products within its stores. In addition, as the Company continues to increase its store base and enter new markets, the vendors have increased their brand presence within these regions. The Company also places significant emphasis on and works with its vendors to establish the most favorable pricing and to receive cooperative marketing funds. Management believes the Company maintains excellent working relationships with vendors. During fiscal 1997, the Company's largest vendor, Nike, represented approximately 40% of its total purchases. The loss of key vendor support could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that it has long-standing and strong relationships with its vendors and that it has adequate sources of brand name merchandise on competitive terms; however, there can be no assurance that the Company will be able to acquire such merchandise at competitive prices or on competitive terms in the future. In this regard, certain merchandise that is high profile and in high demand may be allocated by vendors based upon the vendors' internal criteria which are beyond the Company's control. 4 Advertising and Promotion The Company targets special advertising opportunities in its markets to increase the effectiveness of its advertising spending. In particular, the Company prefers advertising in local media as a way to further differentiate itself from national chain competitors. Substantially all of the Company's advertising and promotional spending is centrally directed, with some funds allocated to district managers on an as-requested basis. Advertising in the sports pages of local newspapers serves as the foundation of the Company's promotional program, and in fiscal 1997 it accounted for the majority of the Company's total advertising spending. Other media such as local radio, television and outdoor billboards are used by the Company to reinforce Hibbett name recognition and brand awareness in the community. In addition, direct mail to customers on an in-house mailing list has been used by the Company to reinforce already established buying patterns and to increase customer loyalty. DISTRIBUTION The Company maintains a single 130,000 square foot distribution center in Birmingham, Alabama for all 109 of its existing stores and manages the distribution process centrally from its corporate headquarters which are located in the same building as the distribution center. In January 1996 the Company moved its operations to this newly constructed distribution center which has significant expansion potential to support the Company's growth for the foreseeable future. The Company believes strong distribution support for its stores is a critical element of its expansion strategy and is central to its ability to maintain a low cost operating structure. As the Company continues its expansion, it intends to open new stores in locations that can be supplied from the Company's distribution center. The Company receives substantially all of its merchandise at its distribution center. For key products, the Company maintains backstock at the distribution center that is allocated and distributed to stores through an automatic replenishment program based on items sold during the prior week. Merchandise is typically delivered to stores weekly via Company-operated vehicles. COMPETITION The business in which the Company is engaged is highly competitive and many of the items sold by the Company are sold by local sporting goods stores, department and discount stores, athletic footwear and other specialty athletic stores, traditional shoe stores and national and regional full-line sporting goods stores. The marketplace for sporting goods remains highly fragmented as many different retailers compete for market share by utilizing a variety of store formats and merchandising strategies. In recent years, the growth of large format retailers has resulted in significant consolidation in large metropolitan markets. However, the Company believes that the competitive environment for sporting goods remains different in small to mid-sized markets where retail demand may not support larger format stores. In smaller markets such as those targeted by the Company's Hibbett Sports format, national chains compete by focusing on a specialty category like athletic footwear in the case of Foot Locker and Foot Action. Accordingly, many of the stores with which the Company competes are units of national chains that have substantially greater financial and other resources than the Company. Hibbett Sports format stores compete with national chains that focus on athletic footwear, local sporting goods stores, department and discount stores and traditional shoe stores. Although its Hibbett Sports format may face competition from a variety of competitors, the Company believes that its Hibbett Sports format is able to compete effectively by distinguishing itself as a full-line sporting goods store with an emphasis on team and individual sports merchandise complemented by a selection of localized apparel and accessories. The larger markets targeted by Sports & Co. superstores are also highly competitive. The Company's Sports & Co. superstores compete with sporting goods superstores, athletic footwear superstores and mass merchandisers. Competitors of Sports & Co. superstores may carry similar product lines and national brands and a broader assortment. The Company believes the principal competitive factors in its markets are service, breadth of merchandise offered, availability of brand names, availability of local merchandise and price. The Company believes it competes favorably with respect to these factors in the small to mid-sized markets in the Southeast. However, there can be no assurance that the Company will continue to be able to compete successfully against existing or future competitors. 5 Expansion by the Company into markets served by its competitors, entry of new competitors or expansion of existing competitors into the Company's markets, could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES The Company employed approximately 524 full-time and approximately 852 part- time employees at September 15, 1997, none of whom are represented by a labor union. The number of part-time employees fluctuates depending on seasonal needs. There can be no assurance that the Company's employees will not, in the future, elect to be represented by a union. The Company considers its relationship with its employees to be good and has not experienced significant interruptions of operations due to labor disagreements. Item 2. Properties The Company currently leases all of its existing 109 store locations and expects that its policy of leasing rather than owning will continue as it expands. The Company's leases typically provide for a short initial lease term with options on the part of the Company to extend. Management believes that this lease strategy enhances the Company's flexibility to pursue various expansion opportunities resulting from changing market conditions and to periodically re-evaluate store locations. The Company's ability to open new stores is contingent upon locating satisfactory sites, negotiating favorable leases and recruiting and training additional qualified management personnel. As current leases expire, the Company believes that it will be able either to obtain lease renewals if desired for present store locations or to obtain leases for equivalent or better locations in the same general area. To date, the Company has not experienced difficulty in either renewing leases for existing locations or securing leases for suitable locations for new stores. The Company's leases may contain certain provisions with which the Company may not be in compliance. Based primarily on the Company's belief that it maintains good relations with its landlords, that most of its leases are at market rents and that it has historically been able to secure leases for suitable locations, management believes that these provisions will not have a material adverse effect on the business or financial condition of the Company. The Company moved its operations to the newly-built corporate offices and distribution center in Birmingham, Alabama in January 1996. The offices and the distribution center are leased by the Company under a long term operating lease. Team Sales owns its warehousing and distribution center located in Birmingham, Alabama. 6 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT IDENTIFICATION The directors, nominees for directors and executive officers of the Company and their ages as of February 1, 1997, are as follows: Name Age Position - ------------------------------------------------------- ----------------- ------------------------------------------ Nominees for election to serve until annual meeting in 2000 (Class I) - --------------------------------------------------------------------- F. Barron Fletcher, III 29 Director John F. Megrue, Jr. 38 Chairman of the Board; Director Directors elected or appointed to serve until annual meeting in 1998(Class II) - ------------------------------------------------------------------------------ Carl Kirkland 56 Director Michael J. Newsome 57 President; Director Thomas A. Saunders, III 60 Director Directors elected or appointed to serve until annual meeting in 1999 (Class III) - -------------------------------------------------------------------------------- Clyde B. Anderson 36 Director H. Ray Compton 54 Director Executive Officers Who Are Not Also Directors or Nominees for Director - ---------------------------------------------------------------------- Susan H. Fitzgibbon 33 Vice President and Chief Financial Officer Joy A. McCord 42 Vice President of Merchandising Cathy E. Pryor 33 Vice President of Store Operations Clyde B. Anderson has been a Director of the Company since 1987. Mr. Anderson has served as the Chief Executive Officer of Books-A-Million, Inc., a book retailer, since July 1992 and as director and president of Books-A-Million, Inc. since November 1987. H. Ray Compton has been a director of the Company since January of 1997. Mr. Compton has been a Director, Executive Vice President and Chief Financial Officer of Dollar Tree Stores, Inc. since 1986 when he co-founded that Company. Susan H. Fitzgibbon has been Vice President and Chief Financial Officer of the Company since April 1996. Prior to joining the Company, she held various financial positions at Bruno's Inc., a supermarket store operator, from December 1992 through April 1996, serving most recently as Controller. Prior to Bruno's, Inc., Ms. Fitzgibbon served six years at Arthur Andersen LLP. F. Barron Fletcher, III has been a Director of the Company since 1995. Mr. Fletcher joined Saunders Karp & Megrue, L.P. as an associate in 1992 and is currently a principal. Prior to joining Saunders Karp & Megrue, L.P., from 1991 through 1992, Mr. Fletcher was a financial analyst with Wasserstein Perella & Co. where he served in the merchant banking department and also in mergers and acquisitions. 7 Carl Kirkland has been a director of the Company since January 1997. Mr. Kirkland is a co-founder of Kirkland's, Inc., a leading specialty retailer of decorative home accessories and gift items, and has served as the Chief Executive officer and a director of Kirkland's since 1967. Mr. Kirkland also serves on the board of directors of Union Planters National Bank in Jackson, Tennessee. Joy A. McCord has been with the Company since 1986 and has been the Vice President of Merchandising at the Company since 1995. Prior to 1995, Ms. McCord held positions as sporting goods buyer and general merchandise manager. John F. Megrue, Jr. has been a Director and Chairman of the Board of the Company since 1995. Mr. Megrue has been a partner of SKM Partners, L.P., which serves as the general partner of Saunders Karp & Megrue, L.P., a private equity investment firm, and each of the Funds, since 1992. From 1989 to 1992, Mr. Megrue served as a Vice President and Principal at Patricof & Co., a private equity investment firm, and prior thereto he served as a Vice President at C.M. Diker Associates, a private equity investment firm. Mr. Megrue is also a Vice Chairman and director of Dollar Tree Stores, Inc. Michael J. Newsome has been the President of the Company since 1981. Since joining the Company as an outside salesman over 30 years ago, Mr. Newsome has held numerous positions with the Company, including retail clerk, outside salesman to schools, store manager, district manager, division manager and president. Prior to joining the Company, Mr. Newsome worked in the sporting goods retail business for six years. Cathy E. Pryor has been with the Company since 1988 and has been the Vice President of Store Operations at the Company since 1995. Prior to 1995, Ms. Pryor held positions as a district manager and Director of Store Operations. Thomas A. Saunders, III, has been a Director of the Company since 1995. Mr. Saunders has been a partner of SKM Partners, L.P., which serves as the general partner of Saunders Karp & Megrue, L.P. and each of the Funds, since 1990. Before founding Saunders Karp & Megrue, L.P., Mr. Saunders served as a Managing Director of Morgan Stanley & Co. Incorporated from 1974 to 1989 and as Chairman of The Morgan Stanley Leveraged Equity Fund II, L.P., from 1987 to 1989. Mr. Saunders is a member of the Board of Visitors of the Virginia Military Institute and is the Chairman of the Board of Trustees of the University of Virginia's Darden Graduate School of Business Administration. Mr. Saunders is also a Trustee of The Thomas Jefferson Memorial Foundation, the Cold Spring Harbor Laboratory and a director of Dollar Tree Stores, Inc. 8 SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth certain information concerning the beneficial ownership of the Company's common stock as of September 15, 1997, by (i) each director, (ii) the President, and (iii) each other executive officer whose total annual salary and bonus earned during the fiscal year ended February 1, 1997 exceeded $100,000 (the "Named Executive Officers"), and (iv) all directors and executive officers as a group: AMOUNT AND NATURE Percent of NAME OF DIRECTOR/OFFICER of Beneficial Ownership(1) CLASS(1) - ------------------------ ---------------------------- ------------------- Clyde B. Anderson(2).......................... 322,132 5.2% H. Ray Compton(3)............................. 7,950 * Susan H. Fitzgibbon(4)........................ 5,613 * F. Barron Fletcher, III....................... 800 * Carl Kirkland(5).............................. 5,000 * Joy A. McCord(6).............................. 7,246 * John F. Megrue, Jr.(7)(10).................... 2,892,721 46.7% Michael J. Newsome(8)......................... 135,902 2.2% Cathy E. Pryor(9)............................. 13,726 * Thomas A. Saunders, III(10)................... 2,886,721 46.6% All Directors and Executive Officers as a group........................... 3,391,090 54.8% ________________________________ *Less than one percent (1) As used in this table "beneficial ownership" means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any security. A person is deemed as of any date to have "beneficial ownership" of any security that such person has a right to acquire within 60 days. Any such security is deemed to be outstanding for purposes of calculating the ownership percentage of such person, but is not deemed to be outstanding for purposes of calculating the ownership percentage of any other person. (2) Includes 24,591 shares owned by various trusts in respect of which Mr. Anderson's wife is the trustee and 8,196 shares owned by various trusts in respect of which Mr. Anderson is the trustee. Excludes an aggregate of 2,886,721 shares owned by The SK Equity Fund, L.P. and SK Investment Fund, L.P. and an aggregate of 481,789 shares owned by the Anderson Stockholders (as defined) other than Mr. Anderson, over which Mr. Anderson may be deemed to have beneficial ownership solely by virtue of certain provisions contained in the Stockholders Agreement. The Stockholders Agreement may be deemed to confer on each party thereto the shared power to vote or direct the vote of 3,690,642 shares, the aggregate number of shares owned by all parties to the Stockholders Agreement. See "Certain Relationships and Related Transactions -- Stockholders Agreement." Although all parties to the Stockholders Agreement have jointly filed with the Securities and Exchange Commission a report on Schedule 13G detailing their direct ownership shares of the Company's common stock, each such party disclaims beneficial ownership of any shares owned by the others. 9 (3) Includes 5,000 shares subject to options and 950 shares held in various trusts. (4) Includes 2,459 shares subject to options which became exercisable April 1, 1997, and 3,139 shares subject to options which will become exercisable October 10, 1997. (5) Includes 5,000 shares subject to options. (6) Includes 4,228 shares subject to options which became exercisable August 25, 1996 and 1997, 984 shares subject to options which became exercisable April 1, 1997, and 1,784 shares subject to options which will become exercisable October 10, 1997. (7) Includes 2,000 shares held as custodian for Kyle G. Megrue and 2,000 shares held as custodian for Christopher Megrue. (8) Includes 16,393 shares subject to options which became or will become exercisable November 1, 1996 and 1997, 4,495 shares subject to options which will become exercisable October 10, 1997, and 8,196 shares held in various trusts. (9) Includes 8,456 shares subject to options which became exercisable August 25, 1996 and 1997, 2,131 shares subject to options which became exercisable April 1, 1997, and 3,139 shares subject to options which will become exercisable October 10, 1997. (10) Includes 2,855,484 shares owned by The SK Equity Fund, L.P. and 31,237 shares owned by SK Investment Fund, L.P. SKM Partners, L.P. is the general partner of each of The SK Equity Fund, L.P. and SK Investment Fund, L.P. Messrs. Karp, Megrue and Saunders are general partners of SKM Partners, L.P., and, therefore, may be deemed to have beneficial ownership of the shares shown above as being owned by The SK Equity Fund, L.P. and SK Investment Fund, L.P. Messrs. Karp, Megrue and Saunders disclaim beneficial ownership of such shares, except to the extent that any of them has a limited partnership interest in SK Investment Fund, L.P. Excludes an aggregate of 803,921 shares owned by the Anderson Stockholders over which The SK Equity Fund, L.P. and SK Investment Fund, L.P. may be deemed to have beneficial ownership solely by virtue of certain provisions contained in the Stockholders Agreement. The Stockholders Agreement may be deemed to confer on each party thereto the shared power to vote or direct the vote of 3,690,642 shares, the aggregate number of shares owned by all parties to the Stockholders Agreement. See "Certain Relationships and Related Transactions Stockholders Agreement." Although all parties to the Stockholders Agreement have jointly filed with the Securities and Exchange Commission a report on Schedule 13G detailing their direct ownership shares of the Company's common stock, each such party disclaims beneficial ownership of any shares owned by the others. THE BOARD OF DIRECTORS COMPOSITION OF THE BOARD The Company's Certificate of Incorporation provides that the number of directors constituting the Board of Directors shall be such number, not more than nine or less than six, as is established from time to time by resolution of the Board of Directors pursuant to the Bylaws. The Board of Directors currently consists of seven directors who are divided into three classes of directors, 10 designated Class I, Class II and Class III. Messrs. Fletcher and Megrue are currently serving as Class I directors, Messrs. Newsome, Saunders and Kirkland are currently serving as Class II directors, and Messrs. Anderson and Compton are currently serving as Class III directors. The Class I directors will continue to serve until the annual stockholder meeting in 2000, while the Class II directors will continue to serve until the annual stockholder meeting in 1998, and the Class III directors will continue to serve until the annual stockholder meeting in 1999. Currently, a vacancy exists in Class III which may be filled by a majority of the directors pursuant to the Company's Certificate of Incorporation and Bylaws. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information concerning the beneficial ownership of the Company's common stock as of September 15, 1997 by each person (or group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 (the "Exchange Act")) known by the Company to own beneficially more than five percent of the Company's common stock: Amount and Nature of PERCENT OF NAME AND ADDRESS OF 5% BENEFICIAL OWNERS Beneficial Ownership(1) Class(1) - ------------------------------------------------ ---------------------------- ------------------- The SK Equity Fund, L.P. (2) SK Investment Fund, L.P. (2) Allan W. Karp (2) Thomas A. Saunders, III (2) Two Greenwich Plaza, Suite 100 Greenwich, CT 06830............................. 2,886,721 46.6% John F. Megrue, Jr. (2) (3) Two Greenwich Plaza, Suite 100 Greenwich, CT 06830............................. 2,892,721 46.7% Clyde B. Anderson (4) (5) 402 Industrial Lane Birmingham, Alabama 35211....................... 322,132 5.2% Provident Investment Counsel, Inc. (6) 300 North Lake Avenue Pasadena, CA 91101-4022......................... 632,499 10.2% __________________________ (1) As used in this table "beneficial ownership" means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any security. A person is deemed as of any date to have "beneficial ownership" of any security that such person has a right to acquire within 60 days. Any such security is deemed to be outstanding for purposes of calculating the ownership percentage of such person, but is not deemed to be outstanding for purposes of calculating the ownership percentage of any other person. (2) Includes 2,855,484 shares owned by The SK Equity Fund, L.P. and 31,237 shares owned by SK Investment Fund, L.P. SKM Partners, L.P. is the general partner of each of The SK Equity Fund, L.P. and SK Investment Fund, L.P. Messrs. Karp, Megrue and Saunders are general partners of SKM Partners, L.P., and, therefore, may be deemed to have beneficial ownership of the shares shown above as being owned by The SK Equity Fund, L.P. and SK Investment Fund, L.P. Messrs. Karp, Megrue and Saunders disclaim beneficial ownership of such shares, except to the extent that any of them 11 has a limited partnership interest in SK Investment Fund, L.P. Excludes an aggregate of 803,921 shares owned by the Anderson Stockholders over which The SK Equity Fund, L.P. and SK Investment Fund, L.P. may be deemed to have beneficial ownership sole by virtue of certain provisions contained in the Stockholders Agreement. The Stockholders Agreement may be deemed to confer on each party thereto the shared power to vote or direct the vote of 3,690,642 shares, the aggregate number of shares owned by all parties to the Stockholders Agreement. See "Certain Relationships and Related Transactions Stockholders Agreement." Although all parties to the Stockholders Agreement have jointly filed with the Securities and Exchange Commission a report on Schedule 13G detailing their direct ownership shares of the Company's common stock, each party disclaims beneficial ownership of any shares owned by the others. (3) Includes 2,000 shares held as custodian for Kyle G. Megrue and 2,000 shares held as custodian for Christopher Megrue. (4) Excludes an aggregate of 2,886,721 shares owned by The SK Equity Fund, L.P. and SK Investment Fund, L.P. and 481,789 shares owned by the Anderson Stockholders (other than Mr. Anderson) over which Mr. Anderson may be deemed to have beneficial ownership solely by virtue of certain provisions contained in the Stockholders Agreement. The Stockholders Agreement may be deemed to confer on each party thereto the shared power to vote or direct the vote of 3,690,642 shares, the aggregate number of shares owned by all parties to the Stockholders Agreement. See "Certain Relationships and Related Transactions Stockholders Agreement." Although all parties to the Stockholders Agreement have jointly filed with the Securities and Exchange Commission a report on Schedule 13G detailing their direct ownership shares of the Company's common stock, each such party disclaims beneficial ownership of any shares owned by the others. (5) Includes 24,591 shares owned by various trusts in respect of which Mr. Anderson's wife is the trustee and 8,196 shares owned by various trusts in respect of which Mr. Anderson is the trustee. (6) Includes shares over which Provident Investment Counsel, Inc., a registered investment advisor, has discretionary authority to buy, sell and vote, as reported in a Schedule 13G filed with the Securities and Exchange Commission on August 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company believes that the terms of each transaction described below are comparable to, or more favorable to, the Company than the terms that would have been obtained in an arms' length transaction with an unaffiliated party. ADVISORY AGREEMENTS On November 1, 1995, the Company entered into an advisory agreement with Saunders Karp & Megrue, L.P. ("SKM"), a limited partnership the general partner of which is SKM Partners L.P., which is also the general partner of each of the Funds. Pursuant to the advisory agreement SKM has agreed to provide certain financial advisory services to the Company. In consideration for these services, SKM is entitled to receive an annual fee of $200,000, payable quarterly in advance. The Company also has agreed to indemnify SKM for certain losses arising out of the provision of advisory services and to reimburse certain of SKM's out-of-pocket expenses. The Company and Clyde B. Anderson entered into an agreement effective as of August 1, 1996, pursuant to which Mr. Anderson would provide advisory services to the Company. In consideration of these services, Mr. Anderson received a fee of $25,000 in fiscal 1998. 12 CERTAIN TRANSACTIONS WITH ANDERSON ENTITIES In February 1996, the Company sold its leasehold interest in its former headquarters and distribution facility to Anderson & Anderson, LLC, an entity affiliated with certain Anderson Stockholders (defined below), for $850,000. The Company has entered into a sublease agreement ("Sublease Agreement") with Books-A-Million, Inc. ("Books-A-Million"), a book retailer in the southeastern United States controlled by the Anderson Stockholders, pursuant to which the Company will sublease certain real estate from Books-A-Million in Florence, Alabama for one of its stores. The term of the Sublease Agreement expires in June 2008. Under the Sublease Agreement, the Company will make annual lease payments to Books-A-Million of approximately $190,000. STOCKHOLDERS AGREEMENT Charles C. Anderson, Sr., Joel R. Anderson, Charles C. Anderson, Jr., Terrence C. Anderson, Clyde B. Anderson, Sandra B. Cochran, Harold M. Anderson, First Anderson Grandchildren's Trust f/b/o Charles C. Anderson, III, First Anderson Grandchildren's Trust f/b/o Lauren A. Anderson, First Anderson Grandchildren's Trust f/b/o Hayley E. Anderson, Second Anderson Grandchildren's Trust f/b/o Alexandra R. Anderson, Third Anderson Grandchildren's Trust f/b/o Taylor Claire Anderson, Fourth Anderson Grandchildren's Trust f/b/o Carson Caine Anderson, Fifth Anderson Grandchildren's Trust f/b/o Harold M. Anderson, Jr., Sixth Anderson Grandchildren's Trust f/b/o Bentley Barbour Anderson, Seventh Anderson Grandchildren's Trust f/b/o Olivia Barbour Anderson, The Ashley R. Anderson Trust, Joel R. Anderson, II Trust, Gerald H. Daugherty, Martin R. Abroms, Alexandra Ruth Anderson Irrevocable Trust, Olivia Barbour Anderson 1995 Trust, Clyde Christian Anderson 1996 Trust, Carson Caine Anderson 1995 Trust, Bentley Barbour Anderson 1995 Trust, Keaton Carroll Anderson 1996 Trust, Taylor Claire Anderson 1996 Trust, Harold M. Anderson, Jr. 1996 Trust (collectively, the "Anderson Stockholders"), The SK Equity Fund, L.P. (the "Equity Fund") and SK Investment Fund, L.P. (the "Investment Fund" and, together with the "Equity Fund", the "Funds"), Mr. Newsome and the Company entered into a stockholders agreement dated as of November 1, 1995, as amended (the "Stockholders Agreement"). Except for provisions relating to indemnification and contribution, the Stockholders Agreement will terminate when the number of shares of common stock held by the Anderson Stockholders falls below 323,689. As of September 15, 1997, the Anderson Stockholders held 803,921 shares of common stock. The Stockholders Agreement contains provisions which require all parties thereto to vote their shares in favor of a certain composition of the Board of Directors of the Company. Under Rule 13d promulgated under the Exchange Act, each party to the Stockholders Agreement may be deemed to have shared voting power (and, therefore, beneficial ownership) over all shares owned by the other parties to the Stockholders Agreement by virtue of this provision. The Stockholders Agreement contains certain "tag along" and "drag-along" provisions which permit and, in certain circumstances, require the parties thereto to participate in sales of their shares to third parties. Under Rule 13d promulgated under the Exchange Act, the Funds may be deemed to have shared dispositive power (and, therefore, beneficial ownership) over all shares owned by the Anderson Stockholders and Mr. Newsome by virtue of the "drag-along" provisions. The Stockholders Agreement also contains registration rights pursuant to which the Funds and the Anderson Stockholders, under certain circumstances, may require the Company to register a proposed transaction involving their shares under the Securities Act of 1933, as amended. The Stockholders Agreement also grants the Funds, the Anderson Stockholders and Mr. Newsome "piggy back" 13 registration rights, subject to certain limitations, if the Company proposes to register a transaction involving its common stock. The Company is obligated to pay all reasonable fees, costs and expenses in connection with any demand or "piggy back" registration other than underwriting discounts or commissions. The Stockholders Agreement contains customary indemnity provisions between the Company and the selling stockholders for losses arising out of any demand or "piggy back" registration. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Exhibit # - --------- 23.1 Consent of Arthur Andersen LLP 14