UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-13322
JumboSports Inc.
(Exact name of registrant as specified in its charter)
Florida 52-1643157
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) identification number)
4701 W. Hillsborough Avenue Tampa, FL 33614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 813/886-9688
Former name, former address and former fiscal year, if changed since last report
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date 20,405,255 as of August 26,
1998.
<PAGE>
JumboSports Inc.
Index to Form 10-Q
July 31, 1998
Page Number
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to the Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis 8-14
Part II - Other Information 15-16
Signatures 17
2
<PAGE>
JUMBOSPORTS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
January 30, July 31,
1998 1998
Unaudited
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 345 $ 2,172
Accounts receivable, net 4,654 4,028
Inventories 185,047 136,330
Property under contract for sale 78,801 22,826
Prepaid expenses and other assets 3,819 5,054
Income tax receivable 1,556 1,421
--------- ---------
Total current assets 274,222 171,831
--------- ---------
Property held for sale 28,712 10,678
Property and equipment, net 145,747 150,913
Other assets:
Cost in excess of fair value
of net assets acquired, net 10,803 10,633
Other 7,065 10,438
--------- ---------
Total other assets 17,868 21,071
--------- ---------
Total assets $466,549 $354,493
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,008 $ 5,973
Accounts payable 26,443 39,807
Accrued expenses 13,717 13,797
Accrued non-recurring
and closed store charges 32,984 15,214
Other 4,101 3,087
--------- ---------
Total current liabilities 78,253 77,878
Deferred rent and other long-term liabilities 4,241 3,740
Revolving credit agreement 174,037 78,885
Credit facility term loan 25,569
Long-term debt less current maturities 86,770 70,437
Convertible subordinated notes 74,750 74,750
--------- ---------
Total liabilities 418,051 331,259
--------- ---------
Stockholders' equity:
Common stock, $.01 par value,
100,000,000 shares authorized,
20,386,155 and 20,405,255 shares issued
and outstanding, respectively 204 204
Additional paid-in capital 149,809 149,830
Accumulated earnings (deficit) (101,515) (126,800)
--------- ---------
Total stockholders' equity 48,498 23,234
--------- ----------
Total liabilities and stockholders' equity $466,549 354,493
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
JUMBOSPORTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
August 1, July 31, August 1, July 31,
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 136,225 $ 86,837 $ 266,359 $ 173,381
Cost of sales including
buying & occupancy costs 102,671 66,913 202,151 133,197
--------- --------- --------- ---------
Gross Profit 33,554 19,924 64,208 40,184
Selling, general and
administrative expenses 30,546 18,931 57,724 38,909
Loss on disposition of assets
and closed store expenses 15,200 15,200
--------- --------- --------- ---------
Income (loss) from operations 3,008 (14,207) 6,484 (13,925)
Interest expense 5,939 5,041 11,754 11,360
--------- --------- --------- ----------
Loss before benefit for income taxes (2,931) (19,248) (5,270) (25,285)
Benefit for income taxes (1,052) (1,886)
--------- --------- --------- ----------
Net loss $ (1,879) $ (19,248) $ (3,384) $ (25,285)
========== ========= ========= ==========
Basic and dilutive earnings per common share $ (0.09) $ (0.94) $ (0.17) $ (1.24)
Weighted average shares outstanding 20,360 20,399 20,353 20,395
Stores closed during period 0 2 0 20
Store open at end of period 85 57 85 57
</TABLE>
See Notes to the Consolidated Financial Statements.
4
<PAGE>
JUMBOSPORTS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWENTY-SIX WEEKS ENDED AUGUST 1, 1997 AND JULY 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Accumulated
Paid in Earnings
Shares Par Value Capital (Deficit) Total
------ --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1997 20,339 $ 203 $149,639 $ 9,782 $159,624
Issuance of common stock 25 1 135 136
Net loss (3,384) (3,384)
------ --------- --------- ----------- --------
Balance August 1, 1997 20,364 $ 204 $149,774 $ 6,398 $156,376
====== ========= ========= =========== ========
Balance, January 30, 1998 20,386 $ 204 $149,809 $(101,515) $ 48,498
Issuance of common stock 19 21 21
Net loss (25,285) (25,285)
------ --------- --------- ----------- --------
Balance July 31, 1998 20,405 $ 204 $149,830 $(126,800) $ 23,234
====== ========= ========= =========== ========
</TABLE>
See Notes to the Consolidated Financial Statements.
5
<PAGE>
JUMBOSPORTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
August 1, 1997 July 31, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,384) $(25,285)
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation 4,460 3,269
Loss (gain) on asset sales and closed
store expenses 11 15,200
Goodwill amortization 171 171
Deferred loan cost amortization
& other amortization 864 249
Increase in deferred tax asset (2,530)
Decrease (increase) in accounts receivable (4,855) 627
Decrease in income tax receivable 11,362 135
Decrease (increase) in inventories (76,520) 48,718
Decrease (increase) in prepaid expenses 1,458 (1,146)
Decrease (increase) in other assets 83 (1,592)
Increase in accounts payable 20,245 13,363
Increase (decrease) in accrued expenses (1,002) 81
Increase (decrease) in other current liabilities (1,562) (29,608)
Decrease in deferred rent (340) (589)
--------- ---------
Net cash provided by (used in)
operating activities (51,539) 23,593
--------- ---------
Cash flow from investing activities:
Capital expenditures (7,782) (3,414)
Net collections under note receivable 132
Cash proceeds from sale of property 1,474 64,589
--------- ---------
Net cash provided by (used in)
investing activities (6,176) 61,175
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock-net 136 21
Net borrowings under term loan and
revolving credit agreements 20,003 378
Net repayments under
revolving credit agreements (444) (64,847)
Proceeds from mortgage financing 37,000
Repayments of long term debt (74) (16,482)
Loan costs (2,730) (2,011)
-------- ---------
Net cash provided by (used in)
financing activities 53,891 (82,941)
-------- ---------
Net increase (decrease) in cash and
cash equivalents (3,824) 1,827
-------- ---------
Cash, beginning of period 4,944 345
-------- ---------
Cash, end of period $ 1,120 $ 2,172
======== =========
</TABLE>
See Notes to the Consolidated Financial Statements
6
<PAGE>
JUMBOSPORTS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all material adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Interim results are not necessarily indicative of results for a full year.
The financial statements should be read in conjunction with the audited
financial statements and notes thereto for the fiscal year ended January 30,
1998 contained in the Company's Form 10-K dated April 24, 1998.
(2) Legal Proceedings
In October 1997, the Company announced that it was terminating its
relationship with AMR Services Corporation ("AMR Services") for the operation of
the Company's warehouse facility in Nashville, Tennessee. On October 10, 1997,
the Company instituted litigation against AMR Services in the United States
District Court, Middle District of Florida, seeking damages, a declaratory
judgment, and injunctive relief for fraud in the inducement and breach of an
agreement to provide third-party logistic services at the warehouse facility. In
its complaint, the Company alleges that AMR Services misrepresented its
experience in the warehouse management industry and mismanaged the Nashville
facility. The Company is preliminarily seeking damages from AMR Services in
excess of $27 million. At the current time, very little discovery has been
completed and an evaluation of the likelihood of success in the litigation
cannot be made. AMR has filed a counterclaim in this action seeking damages in
excess of six million dollars for breach of contract and negligent
misrepresentation.
On October 11, 1997, AMR Services instituted litigation in Tennessee state
court alleging breach of contract arising from the Company's termination of the
third-party logistics agreement. In this action, AMR Services has also sought
possession of certain records and computer data which were generated at the
warehouse facility. This case has been removed to the United States District
Court, Middle District of Tennessee. AMR Services is seeking damages of
approximately $1,686,000. This action has been dismissed by stipulation of the
parties and all claims are now being pursued in the Middle District of Florida
action. All damages previously sought in this action are now included in the six
million dollar claim in the Florida lawsuit.
The parties are currently participating in non-binding arbitration
according to the local rules of The United States District Court for The Middle
District of Florida. The arbitrators have not yet rendered a decision. This case
is currently in its discovery phase.
(3) Subsequent Events
In August 1998, the Company opened two new stores in the Florida cities of
Brandon and Daytona Beach.
(4) Other Events
On May 7, 1998 the Company announced the closing of two under-performing
stores located in the Texas cities of San Antonio and El Paso, and closed the
stores in the second quarter.
On July 24, 1998, the Company completed a $150 million, five-year senior
secured credit facility with Foothill Capital Corporation, as agent, and
Congress Financial Corporation, as co-agent. The new credit facility provided
funds to pay-off the previous facility financed by NationsBank and Barnett Bank
and to support the currently anticipated working capital needs of the Company.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This management's discussion and analysis contains forward-looking
statements. These forward-looking statements are subject to the inherent
uncertainties in predicting future results and conditions. Certain factors could
cause actual results to differ materially from these forward-looking statements.
These factors include, but are not limited to, product demand and market
acceptance risks, the effect of economic conditions generally, the impact of
competition, commercialization and technological difficulties and the condition
of the retail and sporting goods industries.
Management's discussion and analysis of financial condition and results of
operations for the second quarter of fiscal 1998 should be read in conjunction
with the discussion and analysis set forth in Form 10-K filed April 24, 1998 for
the fiscal year ended January 30, 1998.
On February 17, 1998, the Company repriced all options outstanding at
January 30, 1998 for active employees to an exercise price $1.8125, the market
closing price on that date. The number of options impacted was 876,221 with
previously market value grant prices ranging from $3.44 to $26.08.
The Company closed two under-performing stores located in the Texas cities
of San Antonio and El Paso during the second quarter. The Company also announced
the opening of two new stores in the Florida cities of Brandon and Daytona
Beach. The new stores were opened in August 1998.
On July 24, 1998, the Company entered into a new $150 million senior
secured credit facility with Foothill Capital, as agent, and Congress financial,
as co-agent.
Results of Operations
The following table set forth certain operating data as a percentage of
sales for the periods indicated:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
August 1, July 31, August 1, July 31,
1997 1998 1997 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales including buying
and occupancy costs 75.4 77.1 75.9 76.8
-------- -------- --------- ---------
Gross profit 24.6 22.9 24.1 23.2
Selling, general and
administrative expenses 22.4 21.8 21.7 22.4
Loss on disposition of assets
and closed store expenses 17.5 8.8
-------- -------- --------- ---------
Income (loss) from operations 2.2 (16.4) 2.4 (8.0)
Interest expense-net 4.4 5.8 4.4 6.6
-------- -------- --------- ----------
Loss before benefit
for income taxes (2.2) (22.2) (2.0) (14.6)
Benefit for income taxes (0.8) (0.7)
-------- -------- --------- ----------
Net loss (1.4)% (22.2)% (1.3)% (14.6)%
======== ======== ========= ==========
</TABLE>
8
<PAGE>
In the second fiscal quarter of 1998, the Company recorded a $15.2 million
charge for the loss on disposition of assets and closed store expenses. The
components are as follows (in millions):
<TABLE>
Loss on disposition of assets and closed store expenses:
<S> <C>
Loss on disposition of real estate $ 8.6
Loss on disposals of closed store fixtures and equipment 2.9
Closed store expenses 3.7
-----
$15.2
=====
</TABLE>
The $8.6 million charge loss on disposition of real estate represents the
loss on sale of 16 properties composed of closed stores and excess parcels. The
$2.9 million loss on disposal of closed store fixtures relates to the excess
loss on the disposition of the 28 stores closed since 1997. Both the loss on
real estate and loss on closed store fixtures did not result in cash payments.
The $3.7 million charge for closed store expenses relates primarily to the
loss on inventory and expenses for two stores which closed during the second
quarter of 1998, located in the Texas cities of San Antonio and El Paso. The
balance relates to additional charges for prior closed store lease and severance
reserves. These charges may result in future cash payments.
In fiscal 1996 and 1997 the Company recorded one-time and non-recurring
charges in the amount of $55.0 million and $94.3 million respectively. With the
charges taken in 1996, 1997 and 1998, reserve accounts were created and the
following represents balances from January 30, 1998 through July 31, 1998.
<TABLE>
<CAPTION>
1/30/98 7/31/98
Ending Reserve Ending
Reserve Descriptions Balance Additions Reductions Reclasses Balance
- -------------------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Markdown of slow moving and
excess inventory $ 1,828.5 $ $ 1,828.5
Write-down for inventory
liquidation of closing stores 10,189.5 1,465.0 11,654.5
Expenses attributable to
closing stores 6,687.7 935.0 6,263.8 1,358.9
Closing store equipment reserve 5,011.5 2,886.4 7,077.9 820.0
Closed store leases 4,032.6 850.1 1,219.1 3,663.6
Other charges - severance and
outdated communications
technology 3,781.5 487.3 2,808.8 1,460.0
Disposition and impairment of
under-performing assets 1,452.7 8,576.2 2,117.5 7,911.4
--------- --------- --------- ---------
Reserve totals $32,984.0 $15,200.0 $32,970.1 $15,213.9
========= ========= ========= =========
</TABLE>
Of the reserve reductions taken in fiscal 1998, $10.3 million resulted in
cash payments, while $22.7 million were non-cash charges.
Management believes that improved in-stock conditions along with a better
assortment and presentation of softlines merchandise are the key components to
improving sales. In January 1997, the Company began forming a centralized
replenishment and allocation department. It is expected that this group will
provide better managed inventories which will improve sales, control inventory
investment, minimize markdowns and reduce store labor expenses. Each store will
be re-merchandised in the apparel areas by the fourth quarter of fiscal 1998;
this re-merchandising is designed to provide better product identification as
well as make it easier for the customer to shop.
9
<PAGE>
With better sales and inventory management, markdowns are expected to be
lower with improved gross margins. Additionally, the Company has instituted a
program to manage inventory shrinkage to acceptable levels. By the second
quarter of fiscal 1997, 43 stores were fitted with electronic article
surveillance equipment and closed circuit television. Each store will retrain on
proper receiving techniques. Accounting procedures and controls will be
strengthened. A sample of stores from each district will conduct periodic
physical inventory counts to monitor progress. Shrinkage awareness will be
improved throughout the Company.
Management believes that with implementation of a "labor scheduling" model and
enhanced policies and procedures, the Company has begun a change in organization
culture to continue focus on improving operating results.
Thirteen Weeks Ended (Second Quarter) July 31, 1998 Compared To Thirteen Weeks
Ended August 1, 1997
The Company closed two (2) stores in its second quarter of the current year
ending the quarter with 57 stores this year compared to 85 stores in the prior
year.
Sales for the second quarter decreased 36.3% to $86.8 million compared with
sales of $136.2 million in the second quarter of the prior year. Same store
sales for the second fiscal quarter decreased by 14.2%. Sales have been
adversely affected by the following:
1. Planned reduction in advertising compared to the prior year's
extraordinary promotional campaign associated with the
JumboSports' name change and new pricing format;
2. Soft sales trends in the footwear categories due to decreased demand
for athletic footwear and industry over-supply;
3. Poor sales trends in women's and licensed apparel and in the golf and
tennis categories;
4. Generally soft sales throughout the sporting goods retail segment; and
5. Unsatisfactory, but improving in-stock inventory levels.
Gross profit for the second quarter was $19.9 million, or 22.9% of sales,
as compared to $33.6 million, or 24.6% of sales, for the second quarter of the
prior year. The decrease as a percentage of sales was attributable to higher
buying and occupancy costs as a percentage of sales, 0.2%, lower cash discounts,
1.2%, lower capitalized inventory costs, 1.1%, offset by improved merchandise
margins, 0.8%. Merchandise margin improvements are attributable to the closing
of under-performing stores and better merchandise replenishment and allocation.
Selling, general and administrative expenses for the second quarter were
$18.9 million, or 21.8% of sales, as compared to $30.5 million, or 22.4% of
sales, for the second quarter of the prior year. The decrease as a percentage of
sales was due to the following:
1. Advertising expense was down 1.2% due to the planned reductions in
advertising expenditures and discontinuation of electronic media; and
2. Store payroll expense was lower 1.8% due to the continued focus on
labor management, the implementation of a centralized replenishment
and allocation function, .30% of sales. In the second quarter of last
year, the Company encountered excess labor expenses due to
implementation problems with both the new merchandising system and the
new distribution center estimated at 0.4% of sales.
slightly offset by:
1. Higher corporate general and administrative expenses, 0.8% due to the
implementation of a centralized replenishment and allocation function
in the current year, 0.4%, legal fees associated with the AMR
litigation 0.2%, and lower leverage due to sales volume;
2. Higher store operating expense, 0.5%, due to lower sales volume
leverage;
3. A store property condemnation settlement in the prior year, 0.7%; and
4. Higher depreciation, 0.4%, due to lower sales volume leverage and
depreciation on asset additions in the past 12 months for projects
relating to information systems upgrades, warehousing and advertising.
10
<PAGE>
The Company recorded a loss on the disposition of property and closed store
expenses of $15.2 million or 17.5% of sales. The loss on real estate
disposition, $8.6 million, relates to the sale of 16 properties composed of
closed stores and excess parcels. Disposals of closed stores' fixtures and
equipment was $2.9 million. Charges related to closed stores, $3.7 million,
represent future lease obligations and future expenses to be incurred at the
non-operating locations until disposition.
Loss from operations in the second quarter was $14.2 million, or 16.4% of
sales, as compared to income from operations of $3.0 million, or 2.2% of sales
in the same quarter of the prior year.
Interest expense for the second quarter was $5.0 million, or 5.8% of sales,
as compared to $5.9 million, or 4.4% of sales for the second quarter in the
prior year. The decrease in interest expense was the result of an average debt
level lower than the prior year by $52.2 million, slightly offset by higher
interest rates.
The Company did not recognize an income tax benefit in the second quarter
but rather recorded an adjustment to the valuation allowance offsetting the
deferred tax assets in excess of the deferred tax liabilities. In the second
quarter of the prior year, the Company recorded an income tax benefit of $1.1
million with an effective tax rate of approximately 35.9%.
For the second quarter, the Company posted a net loss of $19.2 million, or
22.2% of sales, as compared to a net loss of $1.9 million, or 1.4% of sales for
the same quarter of the prior year. The net loss in the second quarter was
primarily attributable to the $15.2 million loss on the disposition on property
and closed store expenses.
Twenty-six Weeks (First-Half) Ended July 31, 1998 Compared to Twenty-six Weeks
Ended August 1, 1997
In the First-Half of fiscal 1998, the Company closed twenty(20) stores,
ending the period with 57 stores compared to 85 stores in the prior year.
Sales for the first twenty-six weeks decreased 34.9% to $173.4 million
compared with sales of $266.4 million in the comparable period of the prior
year. Same store sales for this twenty-six week period declined 13.2%. Sales
have been adversely impacted by the following:
1. Poor in-stock inventory levels in the early part of the first quarter
attributed to temporary shipment delays that were resolved with the
execution of Amendments to the Company's prior Revolving Credit
Agreement;
2. Planned reduction in advertising compared to the prior year's
extraordinary promotional campaign associated with the JumboSports'
name change and new pricing format;
3. Soft sales trends in the footwear categories due to decreased demand
for athletic footwear and industry over-supply;
4. Poor sales trends in women's and licensed apparel and in the golf and
tennis categories;
5. Generally soft sales throughout the sporting goods retail segment.
Gross profit for the twenty-six week period of the current year was $40.2
million, or 23.2% of sales, compared to $64.2 million, or 24.1% of sales for the
prior year. The decrease as a percentage of sales was attributable to a higher
shrinkage accrual in the current year, 0.4%, higher buying and occupancy costs
as a percentage of sales, 0.3%, lower cash discounts, 0.4%, lower capitalized
inventory costs, 0.6% offset by improved merchandise margins, 0.8%. Merchandise
margin improvements are attributable to the closing of under-performing stores
and improvements resulting from better merchandise replenishment and allocation.
11
<PAGE>
Selling, general and administrative expenses for the twenty-six weeks of
the current year were $38.9 million, or 22.4% of sales, as compared to $57.7
million, or 21.7% of sales, for the twenty-six weeks of the prior year. The
increase as a percentage of sales was due to the following:
1. Inventory service was up 0.1% as a result of increased frequency for
physical inventories;
2. Higher corporate general and administrative expenses, 1.6%, due to the
implementation of a centralized replenishment and allocation function
in the current year, 0.3%, legal fees associated with the AMR
litigation, 0.2%, relocation expenses for new management, 0.2%, the
settlement of an information technology outsourcing agreement in the
prior year, 0.2%, and lower leverage due to reduced sales volume;
3. Higher store operating expense, 0.4%, due to lower sales volume
leverage;
4. A store property condemnation settlement in the prior year, 0.3%; and
5. Depreciation was higher 0.1% due to lower sales volume leverage and
depreciation on asset additions in the past 12 months for projects
relating to information systems upgrades, warehousing and advertising;
slightly offset by:
1. Store payroll expense was lower 1.4% due to the continued focus on
labor management, the implementation of a centralized replenishment
and allocation function and the closing of under-performing stores. In
the second quarter of last year, the Company encountered excess labor
expenses due to implementation problems with both the new
merchandising system and the new distribution center estimated at 0.2%
of sales; and
2. Advertising expense was down 0.4% due to the planned reductions in
advertising expenditures and discontinuation of electronic media.
In the second quarter of the current year, the Company recorded a loss on
the disposition of property and closed store expenses of $15.2 million, or 8.8%
of sales. The loss on real estate disposition, $8.6 million, relates to the sale
of 16 properties. Disposals of closing stores fixtures and equipment was $2.9
million. Charges related to closed stores, $3.7 million, represent future lease
obligations and future expenses to be incurred at the non-operating locations
until disposition.
Loss from operations in the twenty-six weeks of the current year was $13.9
million, or 8.0% of sales, as compared to income from operations of $6.5
million, or 2.4% of sales, in the twenty-six weeks of the prior year.
Interest expense for the first half of the current year was $11.4 million,
or 6.6% of sales, as compared to $11.8 million, or 4.4% of sales, for the
comparable period of the prior year. The decrease in interest expense was the
result of $22.5 million in lower average debt levels slightly offset by an
overall 32 basis point increase in average interest rates. The increase rates
were the result of the prior credit facility which called for borrowings at
LIBOR plus 3.0% versus LIBOR plus 2.0% in the prior year, and by lower
capitalized interest.
The Company did not recognize an income tax benefit in the first twenty-six
weeks but rather recorded an adjustment to the valuation allowance offsetting
the deferred tax assets in excess of the deferred tax liabilities. In the same
period of the prior year, the Company recorded an income tax benefit of $1.9
million with an effective tax rate of approximately 36.5%.
In the twenty-six weeks of the current year, the Company posted a net loss
of $25.3 million, or 14.6% of sales, as compared to a net loss of $3.4 million,
or 1.3% of sales, for the same period of the prior year. The net loss in the
current year includes the aforementioned $15.2 million charge for losses on
property and closed store expenses.
12
<PAGE>
Liquidity and Capital Resources
The Company's primary capital requirements have been to support capital
investment for the opening of new stores, to purchase inventory for new stores,
to meet seasonal working capital needs and to retire indebtedness. The Company's
working capital needs have been funded through the combination of external
financing, internally generated funds and credit terms from vendors. The
Company's working capital needs typically peak in the fourth quarter.
On July 24, 1998, the Company completed a new $150.0 million, five year
senior secured credit facility with Foothill Capital Corporation and Congress
Financial Corporation. The new credit facility is expected to provide funds for
the currently anticipated working capital needs.
Operating activities provided cash of $23.6 million for the twenty-six
weeks of fiscal 1998 as compared to cash used of $51.5 million for the same
period of fiscal 1997. The improvement was attributable to lower inventory
levels and to increased vendor credit support, offset slightly by costs
attributable to the 20 closed stores. Inventories were reduced as a result of
liquidating the inventory of 20 closed stores and to an average reduction of
$990,000 on each open store.
Net cash of $61.2 million was provided by investing activities for the
first twenty-six weeks of fiscal 1998 compared to net cash used in investing
activities of $6.2 million during the first twenty-six weeks of fiscal 1997. In
the current year, cash was provided through the completion of real estate sales
on 25 properties. In the prior year, the cash usage was related to the store
signage for the name change to JumboSports.
Cash flows used in financing activities was $82.9 million for the first
twenty-six weeks of fiscal 1998 compared to cash provided of $53.9 million for
the first twenty-six weeks of fiscal 1997. In fiscal 1998, proceeds from the
real estate sales and operating activities were used to reduce bank and mortgage
debt. Also, financing costs from the new credit facility were incurred.
As of July 31, 1998, the Company had $2.8 million of long-term capital
lease obligations, $68.5 million of long-term mortgage obligations, $74.8
million of 4 1/4% Convertible Subordinated Notes, and $109.6 million of
borrowings under its $150.0 million revolving credit facility. The $150.0
million credit facility matures July 2003 and contains customary events of
default and a number of customary covenants, including restrictions on liens and
sales of assets, prohibitions on dividends and certain changes in control. The
new credit facility has no financial performance covenants.
The new credit facility limits the amount of capital expenditures to $6.5
million for fiscal 1998. The Company has spent $3.4 million through twenty-six
weeks.
The Company has 14 properties under contract for sale in the amount of
$22.8 million. The Company anticipates the sale of these properties to be
completed by early in the fourth quarter of fiscal 1998. The Company has an
additional 6 properties available for sale, with net anticipated proceeds of
$10.7 million.
Management believes its current cash position together with amounts
available under its $150.0 million credit facility, certain leasing commitments,
expected proceeds from the sale of real estate and net cash provided by
operating activities will be sufficient to fund anticipated capital expenditures
and working capital requirements for the upcoming twelve month period.
13
<PAGE>
Year 2000 Compliance
The Company has developed a plan addressing the possible exposures related
to the impact of the Year 2000 on its computer systems and non-information
technology systems. In the spring of 1997, the Company replaced all of its
application software from IBM, Microsoft and JDA Software Group (JDA). With the
implementation of one application programming update from JDA, JumboSports
believes it will be totally Year 2000 compliant in key financial, information
and operating systems. The application of the JDA update will require thorough
testing of every application at JumboSports. The Company is in the process of
reviewing all non-information technology systems for Year 2000 compliance. At
this point the Company does not believe there will be any material impact on
operations. The Company expects to complete the Year 2000 compliance testing in
the second half of fiscal 1998. Risks for the Company regarding the Year 2000
issue, relate to its vendor compliance. Should a majority of the Company's major
vendors have difficulties associated with the Year 2000 issue, the Company could
experience a material adverse financial impact. The Company currently does not
have a contingency plan for the most likely worst case scenario. The Company is
considering the creation of a plan, which if necessary, would be in place by the
second half of 1999. The financial impact of making required information systems
changes is not expected to be material to the Company's consolidated financial
position, results of operations or cash flows.
Seasonality and Inflation
The Company's business is seasonal in nature, with its highest sales and
operating profitability historically occurring during the fourth fiscal quarter,
which includes the Christmas selling season. During the fourth quarter of the
prior year, the Company recorded 26.7% of its sales and 31.7% of its income from
operations for the Company's 59 operating stores, prior to the non-recurring
charges taken in the third and fourth quarters of fiscal 1997. In the future,
the number and timing of the opening of new stores may impact this historical
trend.
The Company does not believe that inflation had a material effect on its
results from operations for the first twenty-six weeks of fiscal 1998 or fiscal
1997. There can be no assurance, however, that the Company's business will not
be affected by inflation in the future.
14
<PAGE>
JUMBOSPORTS INC.
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 1. Legal Proceedings.
In October 1997, the Company announced that it was terminating its
relationship with AMR Services Corporation ("AMR Services") for the
operation of the Company's warehouse facility in Nashville, Tennessee. On
October 10, 1997, the Company instituted litigation against AMR Services in
the United States District Court, Middle District of Florida, seeking
damages, a declaratory judgment, and injunctive relief for fraud in the
inducement and breach of an agreement to provide third-party logistic
services at the warehouse facility. In its complaint, the Company alleges
that AMR Services misrepresented its experience in the warehouse management
industry and mismanaged the Nashville facility. The Company is
preliminarily seeking damages from AMR Services in excess of $27 million.
At the current time, very little discovery has been completed and an
evaluation of the likelihood of success in the litigation cannot be made.
AMR has filed a counterclaim in this action seeking damages in excess of
six million dollars for breach of contract and negligent misrepresentation.
On October 11, 1997, AMR Services instituted litigation in Tennessee
state court alleging breach of contract arising from the Company's
termination of the third-party logistics agreement. In this action, AMR
Services has also sought possession of certain records and computer data
which were generated at the warehouse facility. This case has been removed
to the United States District Court, Middle District of Tennessee. AMR
Services is seeking damages of approximately $1,686,000. This action has
been dismissed by stipulation of the parties and all claims are now being
pursued in the Middle District of Florida action. All damages previously
sought in this action are now included in the six million dollar claim in
the Florida lawsuit.
The parties are currently participating in non-binding arbitration
according to the local rules of The United States District Court for The
Middle District of Florida. The arbitrators have not yet rendered a
decision. This case is currently in its discovery phase.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of the Security-Holders.
a. Annual Meeting of Shareholders held June 18, 1998.
b. The following directors were elected to office at that meeting:
For Withheld
Jack E. Bush 16,959,044 1,385,654
Ronald L. Vaughn 16,959,719 1,384,304
c. There were no other matters voted on at the Annual Meeting.
15
<PAGE>
Item 5. Other Information.
On February 17, 1998, the Company repriced all options outstanding at
January 30, 1998 for active employees to an exercise price $1.8125,
the market closing price on that date. The number of options this
impacted was 876,221 with previously market value grant prices ranging
from $3.44 to $26.08.
Item 6. Exhibits and Reports on Form 8-K.
1) Exhibits.
Exhibit 27 - Financial Data Schedule
2) Reports on Form 8-K.
On or about August 27, 1998, the Company filed with the
Commission a current report on Form 8-K (including the exhibit
thereto) dated July 31, 1998 relating to the Company entering
into a Loan and Security Agreement with Foothill Capital
Corporation and Congress Financial Corporation.
16
<PAGE>
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.
JumboSports Inc.
(Registrant)
09/xx/98 /S/ Jack E. Bush
Date Chairman of the Board, Chief
Executive Officer and President
09/xx/98 /S/ Raymond P. Springer
Date Executive Vice President and
Chief Financial Officer
09/xx/98 /S/ Jerome A. Kollar
Date Chief Accounting Officer
17
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF JUMBOSPORTS INC. FOR THE SIX MONTHS ENDED JULY 31, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jan-29-1999
<PERIOD-START> Jan-31-1998
<PERIOD-END> Jul-31-1998
<CASH> 2,172
<SECURITIES> 0
<RECEIVABLES> 5,743
<ALLOWANCES> 294
<INVENTORY> 136,330
<CURRENT-ASSETS> 171,831
<PP&E> 194,353
<DEPRECIATION> 32,762
<TOTAL-ASSETS> 354,493
<CURRENT-LIABILITIES> 77,878
<BONDS> 74,750
0
0
<COMMON> 204
<OTHER-SE> 23,234
<TOTAL-LIABILITY-AND-EQUITY> 354,493
<SALES> 173,381
<TOTAL-REVENUES> 173,381
<CGS> 121,706
<TOTAL-COSTS> 133,197
<OTHER-EXPENSES> 54,109
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,360
<INCOME-PRETAX> (25,285)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,285)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,285)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
