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 October 30, 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 20,420,001 as of December 3,
1998.
<PAGE>
JumboSports Inc.
Index to Form 10-Q
October 30, 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 7-8
Item 2 - Management's Discussion and Analysis 9-16
Part II - Other Information 17
Signatures 18
2
<PAGE>
JUMBOSPORTS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
January 30, October 30
1998 1998
(Unaudited)
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 345 $ 2,968
Accounts receivable, net 4,654 8,396
Inventories 185,047 157,489
Property under contract for sale 78,801 4,774
Prepaid expenses and other assets 3,819 2,927
Income tax receivable 1,556 1,392
-------- --------
Total current assets 274,222 177,946
-------- --------
Property held for sale 28,712 24,370
Property and equipment, net 145,747 144,978
Other assets:
Cost in excess of fair value
of net assets acquired, net 10,803 10,547
Other 7,065 8,718
-------- --------
Total other assets 17,868 19,265
-------- --------
Total assets $466,549 $366,559
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,008 $ 1,560
Accounts payable 26,443 42,873
Accrued expenses 13,717 15,227
Accrued non-recurring and
closed store charges 32,984 8,760
Other 4,101 2,974
-------- --------
Total current liabilities 78,253 71,394
Deferred rent and other long-term liabilities 4,241 3,835
Revolving credit agreement 174,037 106,716
Credit facility term loan 21,987
Long-term debt less current maturities 86,770 71,586
Convertible subordinated notes 74,750 74,750
-------- --------
Total liabilities 418,051 350,268
-------- --------
Stockholders' equity:
Common stock, $.01 par value,
100,000,000 shares authorized,
20,386,155 and 20,420,001 shares
issued and outstanding, respectively 204 204
Additional paid-in capital 149,809 149,760
Accumulated earnings (deficit) (101,515) (133,673)
-------- -------
Total stockholders' equity 48,498 16,291
-------- --------
Total liabilities and stockholders' equity $466,549 $366,559
======== ========
</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 Thirty-Nine Weeks Ended
October 31, October 30, October 31, October 30,
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 129,945 $ 87,075 $ 396,304 $ 260,456
Cost of sales including
buying & occupancy costs 120,643 69,960 322,794 203,157
----------- ----------- ----------- ----------
Gross Profit 9,302 17,115 73,510 57,299
Selling, general and
administrative expenses 27,792 19,643 85,516 58,552
Settlement of legal proceedings (1,000) (1,000)
Loss on disposition of
assets, closed store expenses
and non-recurring charges 20,700 20,700 15,200
----------- ----------- ----------- -----------
Loss from operations (39,190) (1,528) (32,706) (15,453)
Interest expense 6,573 5,345 18,327 16,705
----------- ----------- ----------- -----------
Loss before benefit
for income taxes (45,763) (6,873) (51,033) (32,158)
Benefit for income taxes (1,886)
----------- ----------- ----------- -----------
Net loss $ (45,763) $ (6,873) $ (49,147) $ (32,158)
=========== =========== =========== ===========
Basic and dilutive
earnings per common share $(2.25) $(0.34) $(2.41) $(1.58)
Weighted average shares outstanding 20,368 20,413 20,358 20,401
Stores opened during period 0 2 0 2
Stores closed during period 0 0 0 20
Store open at end of period 85 59 85 59
</TABLE>
See Notes to the Consolidated Financial Statements.
4
<PAGE>
JUMBOSPORTS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 31, 1997 AND OCTOBER 30, 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 32 1 154 155
Net loss (49,147) (49,147)
------ ---- -------- ---------- ---------
Balance October 31, 1997 20,371 $204 $149,793 $ (39,365) $ 110,632
====== ==== ======== ========== =========
Balance, January 30, 1998 20,386 $204 $149,809 $(101,515) $ 48,498
Issuance of common stock 34 29 29
Acquisition and cancellation of
non-registered stock (78) (78)
Net loss (32,158) (32,158)
------ ---- -------- ---------- ---------
Balance October 30, 1998 20,420 204 $149,760 $(133,673) $ 16,291
====== ==== ======== ========== =========
</TABLE>
See Notes to the Consolidated Financial Statements.
5
<PAGE>
JUMBOSPORTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
October 31, 1997 October 30, 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (49,147) $ (32,158)
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation 6,747 5,031
Loss on asset sales 11
Loss on disposition of assets, closed store
expenses and non-recurring charges 20,700 15,200
Goodwill amortization 256 256
Deferred loan cost amortization
& other amortization 1,299 456
Increase in deferred tax asset (1,803)
Increase in accounts receivable (5,221) (3,742)
Decrease in income tax receivable 11,358 164
Decrease (increase) in inventories (53,213) 27,558
Decrease (increase) in prepaid expenses (807) 616
Decrease (increase) in other assets 269 (35)
Increase in accounts payable 12,384 16,430
Increase in accrued expenses 1,399 1,510
Decrease in other current liabilities (2,518) (33,175)
Decrease in deferred rent (190) (508)
Increase (decrease) in income taxes payable (20) 239
--------------- -----------------
Net cash used in
operating activities (58,496) (2,158)
--------------- -----------------
Cash flow from investing activities:
Capital expenditures (9,695) (5,171)
Cash proceeds from sale of property 1,474 73,857
--------------- -----------------
Net cash provided by (used in)
investing activities (8,221) 68,686
--------------- -----------------
Cash flows from financing activities:
Proceeds from sale of common stock-net 154 29
Net collections under stock purchase plan 132 301
Net borrowings under revolving credit agreements 21,470 378
Net repayments under
revolving credit agreements (26,280) (67,699)
Borrowings under term loan 30,683
Repayments under term loan (8,696)
Proceeds from mortgage financing 72,425
Repayments of long term debt (572) (16,847)
Loan costs (4,563) (2,054)
-------------- -----------------
Net cash provided by (used in)
financing activities 62,766 (63,905)
-------------- -----------------
Net increase (decrease) in cash
and cash equivalents (3,951) 2,623
-------------- ----------------
Cash, beginning of period 4,944 345
-------------- ----------------
Cash, end of period $ 993 $ 2,968
============== ================
</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 and 10-K/A dated
November 16, 1998.
(2) Legal Proceedings
On November 9, 1998, the Company settled its lawsuit with AMR Services
Corporation. All claims and counterclaims between the parties have been
dismissed and the Company received payment, net of attorneys fees and costs, in
the amount of $1 million.
On November 13, 1998, the Company filed a lawsuit in the United States
District Court for the Middle District of Florida against Kurt Salmon
Associates, Inc. ("KSA") for Breach of Contract. KSA provides consulting
services in the retail industry. The lawsuit alleges that KSA breached its
contract for services with the Company in connection with the hiring of AMR and
seeks damages in excess of $75,000. Additionally, KSA has filed a motion in
litigation pending in Texas between KSA and AMR for leave to file a third party
claim against the Company.
(3) Subsequent Events
On November 16, 1998, the Company filed Form 10-K/A in response to a review
by the Securities Exchange Commission of the Company's 10K filed on April 28,
1998.
On December 1, 1998, the Company announced that it had hired Jefferies &
Company, Inc., as exclusive advisor for the purpose of assisting the Company in
evaluating various strategic alternatives including the restructuring of its
4 1/4% subordinated convertible notes due November 2000.
On December 1, 1998, management announced that it had initiated discussions
with certain holders of its 4 1/4% subordinated convertible notes. The purpose
of the discussions is to propose a restructuring alternative that could improve
the financial condition of the Company and reduce future cash requirements.
Although a meeting has been held with an informal committee of note holders, it
is premature for management to speculate as to either the timing or the ultimate
outcome of these discussions.
(4) Other Events
In May 1998, the Company closed two under-performing stores located in the
Texas cities of San Antonio and El Paso. The Company also opened two new stores
in the Florida cities of Brandon and Daytona Beach in August 1998.
7
<PAGE>
On July 24, 1998, the Company closed 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 credit agreement financed by NationsBank and
Barnett Bank and to support the currently anticipated working capital needs of
the Company.
In satisfaction of a $186,761 note receivable from the Company's former
president and chief executive officer, the Company received 50,000 shares of
unregistered common stock and cash. The shares were canceled as of September 24,
1998.
On October 19, 1998, the New York Stock Exchange ("NYSE") sent a letter to
the Company which said that it has determined that the Company falls below the
NYSE's continued listing criteria and has concluded that there is not a
sufficient basis for maintaining the listing of JumboSports Inc. The letter
further stated that before moving forward with a delisting recommendation, the
NYSE would give consideration to any definitive action that the Company would
propose to take that would bring it in line with original listing standards
within thirty-six months. Should the NYSE not accept the Company's proposal, and
commences a delisting action against the Company, the letter states that it will
provide the Company with formal notice, and, following suspension in trading,
the Company will be afforded the right to an appeal.
8
<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 third quarter of fiscal 1998 should be read in conjunction
with the discussion and analysis set forth in Form 10-K filed April 24, 1998 and
Form 10-K/A filed November 16, 1998 for the fiscal year ended January 30, 1998.
In May 1998, the Company closed two under-performing stores located in the
Texas cities of San Antonio and El Paso. The Company also opened two new stores
in the Florida cities of Brandon and Daytona Beach in August 1998.
On July 24, 1998, the Company closed 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 credit agreement financed by NationsBank and
Barnett Bank and to support the currently anticipated working capital needs of
the Company.
On November 16, 1998, the Company filed Form 10-K/A in response to a review
by the Securities Exchange Commission of the Company's 10K filed on April 28,
1998
On December 1, 1998, the Company announced that it had hired Jefferies &
Company, Inc., as exclusive advisor for the purpose of assisting the Company in
evaluating various strategic alternatives including the restructuring of its
4 1/4% subordinated convertible notes due November 2000.
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 Thirty-Nine Weeks Ended
October 31, October 30, October 31, October 30,
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 92.8 80.3 81.5 78.0
---------- ----------- ---------- -----------
Gross profit 7.2 19.7 18.5 22.0
Selling, general and
administrative expenses 21.4 22.5 21.6 22.5
Settlement of legal proceedings (1.1) (0.4)
Non-recurring charges,
loss on disposition of assets
and closed store expenses 15.9 5.2 5.8
---------- ----------- --------- -----------
Loss from operations (30.1) (1.7) (8.3) (5.9)
Interest expense-net 5.1 6.2 4.6 6.4
---------- ----------- --------- -----------
Loss before benefit
for income taxes (35.2) (7.9) (12.9) (12.3)
Benefit for income taxes (0.5)
---------- ----------- --------- -----------
Net loss (35.2)% (7.9)% (12.4)% (12.3)%
========== =========== ========== ===========
</TABLE>
9
<PAGE>
In the second fiscal quarter of fiscal 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>
<CAPTION>
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 loss on disposition of real estate represents the loss on
sale of 16 properties comprised 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 closed 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 October 30, 1998.
<TABLE>
<CAPTION>
1/30/98 10/30/98
Ending Reserve Ending
Reserve Description 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 closed stores 10,189.5 1,465.0 11,654.5
Expenses attributable to
closing stores 6,687.7 935.0 7,409.3 213.4
Closing store equipment
reserve 5,011.5 2,886.4 7,882.2 15.7
Closed store leases 4,032.6 850.1 2,367.7 2,515.0
Other charges-severance
and outdated communications
technology 3,781.5 487.3 3,096.7 1,172.1
Disposition and impairment
of under-performing assets 1,452.7 8,576.2 5,185.1 4,843.8
-------- --------- --------- --------- ---------
Reserve totals $32,984.0 $15,200.0 $39,424.0 $8,760.0
</TABLE>
Of the reserve reductions taken in fiscal 1998, $12.9 million resulted in
cash payments, while $26.5 million were non-cash charges.
Management recognizes that operating results have been poor and that
changes must be made to improve sales and profitability. Some of the initiatives
undertaken during the current fiscal year are described below.
10
<PAGE>
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 1998, the Company began forming a centralized
replenishment and allocation department. It is expected that this group will
provide better managed inventories, control inventory investment, minimize
markdowns and reduce store labor expenses. Each store is being re-merchandised
in the apparel areas during 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.
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 was retrained
on proper receiving techniques. Accounting procedures and controls have been
strengthened. A sample of stores from each district conducts periodic physical
inventory counts to monitor progress. Through the end of the third quarter of
fiscal 1998, 29 stores have conducted physical inventory counts. Actual
shrinkage recorded as a result of these counts was 1.4%. All stores are
scheduled for a full physical inventory count as of the end of the fiscal year.
Payroll expense at the store level has been a continued focus of management
as it represents the single largest G&A expense component. Better scheduling,
utilization of technology and the benefits of central replenishment have
combined to reduce this expense.
General and administrative expenses have been reduced directionally with
reduced store count. Future reductions are expected as the Company is able to
take advantage of its technology.
Thirteen Weeks Ended (Third Quarter) October 30, 1998 Compared To Thirteen Weeks
Ended October 31, 1997
The Company opened two (2) stores in August of the current year ending the
quarter with 59 stores this year compared to 85 stores in the prior year. The
Company had previously closed 8 stores in the fourth quarter of the prior year
and 20 stores during the first half of the current year.
Sales for the third quarter decreased 33.0% to $87.1 million compared with
sales of $129.9 million in the third quarter of the prior year. Same store sales
for the third fiscal quarter decreased by 13.9%. Sales have been adversely
affected by the following:
1. Increased promotional markdown activity in the prior year in the footwear
and apparel categories in order to reduce overstocks in the prior year;
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 the golf & tennis
categories;
4. Generally soft sales throughout the sporting goods retail segment.
Gross profit for the third quarter was $17.1 million, or 19.7% of sales, as
compared to $9.3 million, or 7.2% of sales, for the third quarter of the prior
year. The increase as a percentage of sales was attributable to:
1. $17.1 million charge, or 13.2% of sales, in the prior year for the
write-down of excess footwear and apparel inventory and store closings
inventory liquidation;
2. Higher merchandising margins in the current year, 0.8%;
slightly offset by
1. Higher buying and occupancy costs as a percentage of sales, 1.1%; and
2. Lower cash discounts, 0.4%.
Higher merchandise margins 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 third quarter were
$19.6 million, or 22.5% of sales, as compared to $27.8 million, or 21.4% of
sales, for the third quarter of the prior year. The increase as a percentage of
sales was due to the following:
1. Higher corporate general and administrative expenses, 1.0% due to the
implementation of a centralized replenishment and allocation function in
the current year, 0.4% and lower leverage due to sales volume;
2. New stores pre-opening expenses, 0.6%;
offset by:
Lower store payroll expense, 0.5% due to the continued focus on labor
management, the implementation of a centralized replenishment and
allocation function and the closing of under-performing stores.
During the third quarter, the Company recorded income of $1.0 million, or
1.1% of sales, for the settlement of legal proceedings.
In addition to the $17.1 million inventory write-down discussed above, the
Company incurred $20.7 million of non-recurring charges, or 15.9% of sales in
the third quarter of the prior year.
Loss from operations in the third quarter was $1.5 million, or 1.7% of
sales, as compared to loss from operations of $39.2 million, or 30.1% of sales
in the same quarter of the prior year.
Interest expense for the third quarter was $5.3 million, or 6.2% of sales,
as compared to $6.6 million, or 5.1% of sales for the third quarter in the prior
year. The decrease in interest expense was the result of $90.4 million in lower
average debt, slightly offset by higher interest rates.
The Company did not recognize an income tax benefit in the third quarter
but rather recorded an adjustment to the valuation allowance offsetting the
deferred tax assets in excess of the deferred tax liabilities.
For the third quarter, the Company posted a net loss of $6.9 million, or
7.9% of sales, as compared to a net loss of $45.8 million, or 35.2% of sales for
the same quarter of the prior year. The net loss in the third quarter of the
prior year is primarily attributable to the $37.8 million, or 29.1% of sales, in
non-recurring charges and inventory write downs.
Thirty-nine Weeks Ended October 30, 1998 Compared to Thirty-nine Weeks Ended
October 31, 1997
In the three quarters of fiscal 1998, the Company closed twenty(20) stores
and opened two (2) new stores, ending the period with 59 stores compared to 85
stores in the prior year. The Company closed 8 stores in the fourth quarter
of fiscal 1997.
Sales for the first thirty-nine weeks decreased 34.3% to $260.5 million
compared with sales of $396.3 million in the comparable period of the prior
year. Same store sales for this thirty-nine week period declined 13.5%. 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 Credit Agreement;
2. Planned reduction in advertising compared to the prior year's extraordinary
promotional campaign and discounts associated with the JumboSports' name
change and new concept roll-out;
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 the golf & tennis
categories;
5. Generally soft sales throughout the sporting goods retail segment.
12
<PAGE>
Gross profit for the thirty-nine week period of the current year was $57.3
million, or 22.0% of sales, compared to $73.5 million, or 18.5% of sales for the
prior year. In the prior year, the Company incurred a $17.1 million inventory
write-down charge, or 4.3% of sales related to excess footwear and apparel and
store closings. The increase as a percentage of sales was attributable to:
1. Inventory write-down charge in the prior year; 4.3%;
2. Higher merchandising margins, 0.7%;
slightly offset by;
1. Higher shrinkage accrual in the current year, 0.2%;
2. Higher buying and occupancy costs as a percentage of sales, 0.5%; and
3. Lower cash discounts, 0.8%.
Higher merchandise margins are attributable to the closing of
under-performing stores and improvements resulting from better merchandise
replenishment and allocation.
Selling, general and administrative expenses for the thirty-nine weeks of
the current year were $58.6 million, or 22.5% of sales, as compared to $85.5
million, or 21.6% of sales, for the thirty-nine weeks of the prior year. The
increase as a percentage of sales was due to the following:
1. Higher corporate general and administrative expenses, 1.3% due to the
implementation of a centralized replenishment and allocation function in
the current year, 0.3%, relocation expenses for new management, 0.2%, legal
fees associated with the AMR litigation, 0.1%, the settlement of an
information technology outsourcing agreement in the prior year, 0.2% and
lower leverage due to sales volume;
2. Higher store operating expense, 0.4%, due to lower sales volume leverage;
3. New stores pre-opening expenses, 0.2%;
4. A property condemnation settlement in the prior year, 0.2%; and
5. Depreciation was higher 0.2% due to lower sales volume leverage and
depreciation on asset additions in the prior year for projects relating to
information systems upgrades, warehousing and advertising;
These increases were offset due to the following:
1. Store payroll expense was lower 1.2% due to the continued focus on labor
management, the implementation of a centralized replenishment and
allocation function, the closing of under-performing stores and labor
inefficiencies in the prior year caused by the introduction of the new
merchandising system as well as problems experienced in the implementation
of a new distribution center;
2. Advertising expense was down 0.2% due to the planned reductions in
advertising expenditures and discontinuation of electronic media.
In the third quarter of the current year, the Company recorded income of
$1.0 million, or 0.4% of sales, for the settlement of legal proceedings.
In the thirty-nine weeks of the current year, the Company recorded a loss
on the disposition of assets of $15.2 million, or 5.8% of sales. The loss on
real estate disposition, $8.6 million, relates to the sale of 16 properties.
Disposals of closed stores fixtures and equipment was $2.8 million. Charges
related to closed stores, $3.8 million, represent future lease obligations and
future expenses to be incurred at the non-operating locations until disposed.
For the same period of the prior year, the Company incurred $20.7 million of
non-recurring charges, or 5.2% of sales.
Loss from operations in the thirty-nine weeks of the current year was $15.5
million, or 5.9% of sales, as compared to loss from operations of $32.7 million,
or 8.3% of sales, in the thirty-nine weeks of the prior year.
Interest expense for the thirty-nine weeks of the current year was $16.7
million, or 6.4% of sales, as compared to $18.3 million, or 4.6% of sales, for
the comparable period of the prior year. The decrease in interest expense was
the result of $47.5 million in lower average debt slightly offset by an overall
47 basis point increase in average interest rates. The increased 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.
13
<PAGE>
The Company did not recognize an income tax benefit in the first
thirty-nine 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 3.7%.
In the thirty-nine weeks of the current year, the Company posted a net loss
of $32.2 million, or 12.4% of sales, as compared to a net loss of $49.1 million,
or 12.4% 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, while in the prior year the net loss
includes the $37.8 million in inventory and non-recurring charges.
Liquidity and Capital Resources
The Company's primary capital requirements have been to support capital
investment for the opening of two(2) 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 as agent and
Congress Financial Corporation as co-agent. The new credit facility is expected
to provide funds for the currently anticipated working capital needs of the
Company.
Operating activities used cash of $2.2 million for the thirty-nine weeks of
fiscal 1998 as compared to cash used of $58.5 million for the same period of
fiscal 1997. The improvement was attributable to lower inventory levels and
increased vendor support, offset by costs attributable to closed stores.
Inventories were reduced as a result of liquidating the inventory of the 20
stores closed during the year.
Net cash of $68.7 million was provided by investing activities for the
first thirty-nine weeks of fiscal 1998 compared to net cash used in investing
activities of $8.2 million during the first thirty-nine weeks of fiscal 1997. In
the current year, cash was provided through the completion of real estate sales
of 31 properties. In the prior year, the cash usage was related primarily to new
store signage for the name change to JumboSports.
Cash flows used in financing activities were $63.9 million for the first
thirty-nine weeks of fiscal 1998 compared to cash provided of $62.8 million for
the first thirty-nine weeks of fiscal 1997. During fiscal 1998, proceeds from
the real estate sales and operating activities were used to reduce bank and
mortgage debt. Also, financing costs of the new credit facility were incurred in
fiscal 1998. In the prior year, the Company completed $72.4 million of mortgage
financings.
As of October 30, 1998, the Company had $4.8 million of long-term capital
lease obligations, $68.3 million of long-term mortgage obligations, $74.8
million of 4 1/4% Convertible Subordinated Notes, $22.0 million of term loans,
and $106.7 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. In the third quarter of fiscal 1998 the Company financed $2.2 million
of equipment with capital leases.
The new credit facility limits the amount of capital expenditures to $6.5
million for fiscal 1998. The Company has spent $5.2 million through thirty-nine
weeks.
14
<PAGE>
The Company has three(3) properties in the amount of $4.8 million under
contract for sale. The Company anticipates the sale of these properties to be
completed by the fourth quarter of fiscal 1998. The net proceeds will be used to
pay down the term loan. Six(6) properties were sold in the third fiscal quarter,
with net proceeds in the amount of $9.2 million. These proceeds were used to
paydown the term loan. The Company has an additional 10 properties available for
sale, with net anticipated proceeds of $19.6 million. Under the terms of the
credit facility net proceeds from property sales will be used to pay down the
balance of the term loan.
In satisfaction of a $186,761 note receivable from the Company's former
president and chief executive officer, the Company received 50,000 shares of
unregistered common stock and cash. The shares were canceled as of September 24,
1998.
On October 19, 1998 the New York Stock Exchange ("NYSE") sent a letter to
the Company which said that it has determined that the Company falls below the
NYSE's continued listing criteria and has concluded that there is not a
sufficient basis for maintaining the listing of JumboSports Inc. The letter
further stated that before moving forward with a delisting recommendation, the
NYSE would give consideration to any definitive action that the Company would
propose to take that would bring it in line with original listing standards
within thirty-six months. Should the NYSE not accept the Company's plan, and
commences a delisting action against the Company, the letter states that it will
provide the Company with formal notice, and, following suspension in trading,
the Company will be afforded the right to an appeal.
Because of poor operating results over the past several years and the
adverse impact losses have had on the Company's financial condition, many of the
Company's merchandise suppliers have expressed concern about the Company's
future financial viability. Many have indicated to management that the relative
success of the Company's Christmas selling season is material to their credit
decision making process. Adverse credit decisions by the Company's merchandise
suppliers could cause material disruptions in future merchandise flows and
thereby adversely affect the Company's liquidity and its ability to meet its
future cash requirements and consequently force the Company to file for
protection under Chapter 11 of the Bankruptcy Code. As of December 14, 1998,
management is unable to predict how the Christmas selling season will unfold.
On December 1, 1998, management announced that it had initiated discussions
with certain holders of its 4 1/4% subordinated convertible notes. The purpose
of the discussions is to propose a restructuring alternative that could improve
the financial condition of the Company and reduce future cash requirements.
Although a meeting has been held with an informal committee of note holders, it
is premature for management to speculate as to either the timing or the ultimate
outcome of these discussions.
In addition to discussions with holders of the 4 1/4% convertible
subordinated notes, the Company has pursued other strategic alternatives,
including a possible sale of the Company to, or potential business combinations
with, other sporting goods companies. To date, however, discussions with
potential business partners have been preliminary only and management does not
believe that such a sale or business combination is likely in the foreseeable
future.
15
<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 complete its Year 2000 compliance 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 compliance by its vendors. 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 in the event its vendors' systems do not function in
the Year 2000. 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 has not been and 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 thirty-nine 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.
16
<PAGE>
JUMBOSPORTS INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On November 9, 1998, the Company settled its lawsuit with AMR Services
Corporation. All claims and counterclaims between the parties have
been dismissed and the Company received payment, net of attorneys fees
and costs, in the amount of $1 million.
On November 13, 1998, the Company filed a lawsuit in the United States
District Court for the Middle District of Florida against Kurt Salmon
Associates, Inc. ("KSA") for Breach of Contract. KSA provides
consulting services in the retail industry. The lawsuit alleges that
KSA breached its contract for services with the Company in connection
with the hiring of AMR and seeks damages in excess of $75,000.
Additionally, KSA has filed a motion in litigation pending in Texas
between KSA and AMR for leave to file a third party claim against the
Company.
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.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
1) Exhibits.
Exhibit 27 - Financial Data Schedule
2) Reports on Form 8-K.
None
17
<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)
12/14/98 /S/ Jack E. Bush
Date Chairman of the Board, Chief
Executive Officer and President
12/14/98 /S/ Raymond P. Springer
Date Executive Vice President and
Chief Financial Officer
12/14/98 /S/ Jerome A. Kollar
Date Chief Accounting Officer
18
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 NINE MONTHS ENDED OCTOBER 30,
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> Oct-30-1998
<CASH> 2,968
<SECURITIES> 0
<RECEIVABLES> 10,076
<ALLOWANCES> 288
<INVENTORY> 157,489
<CURRENT-ASSETS> 177,946
<PP&E> 203,581
<DEPRECIATION> 34,233
<TOTAL-ASSETS> 366,559
<CURRENT-LIABILITIES> 71,394
<BONDS> 74,750
0
0
<COMMON> 204
<OTHER-SE> 16,087
<TOTAL-LIABILITY-AND-EQUITY> 366,559
<SALES> 260,456
<TOTAL-REVENUES> 260,456
<CGS> 185,186
<TOTAL-COSTS> 203,157
<OTHER-EXPENSES> 72,752
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,705
<INCOME-PRETAX> (32,158)
<INCOME-TAX> 0
<INCOME-CONTINUING> (32,158)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,158)
<EPS-PRIMARY> (1.58)
<EPS-DILUTED> (1.58)
</TABLE>
