<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
For the Quarterly Period Ended: October 31, 1998
Commission File Number: 000-23515
GART SPORTS COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1242802
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
1000 Broadway, Denver, Colorado 80203
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (303) 861-1122
Indicate by check mark whether the registrant 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 shorter period that the registrant was required to
file such reports).
Yes [X] No [ ]
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of December 7, 1998, there were outstanding 7,681,303 shares of the
registrant's common stock, $.01 par value, and the aggregate market value of the
shares (based upon the closing price on that date of the shares on the NASDAQ
National Market) held by non-affiliates was approximately $ 25,327,829.
<PAGE> 2
GART SPORTS COMPANY
QUARTERLY PERIOD ENDED OCTOBER 31, 1998
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets........................... 1
Consolidated Statements of Operations................. 2
Consolidated Statements of Stockholders' Equity....... 3
Consolidated Statements of Cash Flows................. 4
Notes to Consolidated Financial Statements............ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................... 14
SIGNATURES.............................................................. 15
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
-------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (including restricted
cash of $289 and $5,700, respectively) $ 6,900 16,372
Accounts receivable, net of allowance for
doubtful accounts of $115 and $345, respectively 6,762 4,621
Note receivable 1,338 1,436
Income tax receivable 2,860 --
Inventories 270,948 214,814
Prepaid and other assets 9,597 2,751
Deferred income taxes 390 390
Assets held for sale 1,621 1,708
--------- -------
Total current assets 300,416 242,092
Property and equipment, net 60,448 55,990
Favorable leases acquired, net 17,455 19,111
Other assets, net of accumulated amortization of
$333 and $147, respectively 2,779 2,242
--------- -------
$ 381,098 319,435
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 140,323 79,808
Current portion of capital lease obligations 366 340
Accrued expenses and other current liabilities 27,990 47,734
Income taxes payable -- 2,365
--------- -------
Total current liabilities 168,679 130,247
--------- -------
Long-term debt 134,500 105,600
Capital lease obligations, less current portion 2,791 3,069
Deferred rent 3,614 2,377
Deferred income taxes 9,385 9,385
--------- -------
Total liabilities 318,969 250,678
--------- -------
Stockholders' equity:
Preferred stock, $.01 par value none issued -- --
Common stock, $.01 par value 80 80
Additional paid-in capital 55,671 55,651
Unamortized restricted stock compensation (38) (80)
Accumulated other comprehensive loss (213) --
Retained earnings 8,523 15,038
--------- -------
64,023 70,689
Treasury stock, 346,326 common shares, at cost (1,865) (1,865)
Notes receivable from stockholders (29) (67)
--------- -------
Total stockholders' equity 62,129 68,757
--------- -------
Commitments and contingencies
$ 381,098 319,435
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------------- -------------------------------
OCTOBER 31, OCTOBER 4, OCTOBER 31, OCTOBER 4,
1998 1997 (1) 1998 1997 (1)
------------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $ 142,583 $ 55,765 $ 466,858 $ 151,142
Cost of goods sold, buying,
distribution and occupancy 112,890 42,417 361,125 112,561
---------- ---------- ---------- ----------
Gross profit 29,693 13,348 105,733 38,581
---------- ---------- ---------- ----------
Operating expenses 37,178 13,281 107,491 36,328
Merger integration costs 222 143 2,923 143
---------- ---------- ---------- ----------
Operating income (loss) (7,707) (76) (4,681) 2,110
Other income (expense):
Interest expense, net (2,244) (298) (6,461) (688)
Other income 146 455 462 709
---------- ---------- ---------- ----------
Income (loss) before income
taxes (9,805) 81 (10,680) 2,131
Income tax (benefit) expense (3,823) 33 (4,165) 808
---------- ---------- ---------- ----------
Net income (loss) $ (5,982) $ 48 $ (6,515) $ 1,323
========== ========== ========== ==========
Earnings (loss) per share:
Basic and diluted $ (0.78) $ 0.01 $ (0.85) $ 0.24
========== ========== ========== ==========
Weighted average shares of common
stock outstanding - basic and
diluted 7,681,015 5,498,978 7,680,109 5,502,600
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
(1) Historical Gart only balances - see note 1.
2
<PAGE> 5
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, in Thousands)
<TABLE>
<CAPTION>
UNAMORTIZED NOTES
RESTRICTED ACCUMULATED RECEIVABLE
ADDITIONAL STOCK OTHER FROM TOTAL
COMMON PAID-IN COMPENSATION COMPREHENSIVE RETAINED TREASURY STOCK- STOCKHOLDERS'
STOCK CAPITAL AWARDS LOSS EARNINGS STOCK HOLDERS EQUITY
----- ------- ------ ---- -------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 31, 1998 $ 80 $ 55,651 $ (80) $ -- $ 15,038 $ (1,865) $ (67) $ 68,757
---- -------- ----- ------ -------- -------- ----- --------
Net loss -- -- -- -- (6,515) -- -- (6,515)
Net unrealized loss on
equity securities -- -- -- (213) -- -- -- (213)
Receipts on notes receivable -- -- -- -- -- -- 38 38
Exercise of common stock
options -- 20 -- -- -- -- -- 20
Amortization of restricted
stock -- -- 42 -- -- -- -- 42
---- -------- ----- ------ -------- -------- ----- --------
BALANCES AT OCTOBER 31, 1998 $ 80 $ 55,671 $ (38) $ (213) $ 8,523 $ (1,865) $ (29) $ 62,129
==== ======== ===== ====== ======== ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-------------------------------
OCTOBER 31, OCTOBER 4,
1998 1997 (1)
---------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,515) $ 1,323
Adjustments to reconcile net income (loss)
to net cash and cash equivalents used in
operating activities:
Depreciation and amortization 8,922 2,408
Deferred income taxes -- 518
(Gain) loss on sale of assets (91) 4
Increase in deferred rent 1,237 332
Changes in operating assets and
liabilities:
Receivables, net (2,043) 401
Inventories (56,134) (21,590)
Prepaid expenses (3,530) (252)
Other assets (450) --
Accounts payable 60,515 11,336
Accrued expenses and other
current liabilities (19,744) (4,496)
Income taxes payable (5,225) (1,571)
-------- --------
Net cash and cash equivalents used in
operating activities (23,058) (11,587)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities (3,529) --
Purchases of property and equipment (11,702) (3,529)
Proceeds from sale of property and
equipment 183 109
-------- --------
Net cash and cash equivalents used in
investing activities (15,048) (3,420)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 128,890 38,150
Principal payments of long-term debt (99,990) (29,337)
Principal payments on capital lease
obligations (252) --
Purchase of treasury stock -- (37)
Payment of notes receivable from stockholders 38 35
Proceeds from the sale of common stock under
option plans 20 --
Payment of financing fees (72) (130)
-------- --------
Net cash and cash equivalents
provided by financing activities 28,634 8,681
-------- --------
Decrease in cash and cash equivalents (9,472) (6,326)
Cash and cash equivalents at beginning of
period 16,372 8,800
-------- --------
Cash and cash equivalents at end of period $ 6,900 $ 2,474
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 7,070 $ 434
======== ========
Cash paid during the period for income
taxes $ 2,435 $ 2,007
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
(1) Historical Gart only balances - see note 1.
4
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS COMBINATION AND CHANGE IN FISCAL YEAR
Purchase Business Combination
On January 9, 1998, the Company's wholly owned subsidiary, Gart Bros.
Sporting Goods Company, acquired all of the outstanding common stock of
Sportmart, Inc. ("Sportmart"), a sporting goods retailer operating in the
midwest and western United States.
Change in Fiscal Year
The Company has a 52-53 week fiscal reporting year ending on the Saturday
closest to the end of January. Prior to the Sportmart acquisition on January
9, 1998, the Company ended its 52-53 week fiscal year on the first Saturday
in January. The fiscal quarters referred to in these unaudited consolidated
financial statements are the thirteen weeks ended October 31, 1998 and the
thirteen weeks ended October 4, 1997, respectively.
The Company has not recast its historical financial data to conform to the
current fiscal year because the accounting systems in place at that time
required a certain level of procedural techniques in order for financial
data to be prepared for external reporting purposes. These procedures were
implemented on a quarterly basis only because the Company was not publicly
held during the prior fiscal year. Consequently, to recast the prior fiscal
year would be impracticable and would require significant judgmental
estimates.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements do not include
all information and footnotes necessary for the annual presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles, and should be read in conjunction
with the 1997 Annual Report on Form 10-K. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the statement of financial position and the results of
operations for the interim periods have been included. The results for the
thirteen and thirty-nine week periods ended October 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. ACQUISITION
The Company acquired Sportmart on January 9, 1998. Sportmart operated 59
stores in the midwest and western United States. The Company operates
Sportmart as a wholly owned subsidiary. The acquisition was accounted for as
a purchase and the operations of Sportmart are consolidated after that date.
The financial statements presented for 1997 reflect the Company's historical
results prior to the Sportmart acquisition.
The following unaudited pro forma financial information presents the
combined results of operations of Gart Sports Company and Sportmart as if
the acquisition had occurred as of the beginning of 1997, after giving
effect to certain adjustments, including amortization of favorable leases,
depreciation expense, and related income tax effects. No adjustments have
been made to the pro forma statement of operations to conform accounting
policies and practices or to recognize anticipated cost savings and
synergies.
The pro forma financial information does not necessarily reflect the results
of operations that would have occurred had Gart Sports Company and Sportmart
constituted a single entity during such periods.
5
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. ACQUISITION (continued)
<TABLE>
<CAPTION>
THIRD QUARTER 1997(A) THIRY-NINE WEEKS OF 1997(B)
----------------------- -----------------------------
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net sales $ 144,954 $ 469,550
========= =========
Loss from continuing operations $ (3,445) $ (89)
========= =========
Basic loss per share from continuing operations(C) $ (0.45) $ (0.01)
========= =========
</TABLE>
(A) Includes the 13 weeks ended October 4, 1997 for Gart Sports Company and
the 13 weeks ended November 2, 1997 for Sportmart.
(B) Includes the 39 weeks ended October 4, 1997 for Gart Sports Company and
the 39 weeks ended November 2, 1997 for Sportmart.
(C) Pro forma losses per share have been computed based on the pro forma net
loss and the pro forma weighted average common shares outstanding of
approximately 7,626,119 and 7,626,635 for the periods presented,
respectively. The pro forma weighted average common shares outstanding have
been computed by adjusting the Company's weighted average common shares
outstanding by the shares of the Company's common stock that were issued to
the stockholders of Sportmart. The effect of outstanding options to
purchase shares of common stock of the Company on the calculation of pro
forma loss per share is not material.
6
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto included elsewhere
within this report and the 1997 Annual Report on Form 10-K.
In 1995, the Company adopted an annual fiscal reporting period that ended on
the first Saturday in January. Accordingly, fiscal 1997 began on January 5, 1997
and ended on January 3, 1998. In conjunction with the Sportmart acquisition in
January 1998, the Company adopted an annual fiscal reporting period that ends on
the Saturday closest to the end of January. Accordingly, fiscal 1998 began on
February 1, 1998 and will end on January 30, 1999. The 28 day period following
the end of fiscal 1997 through January 31, 1998 was reported as a transition
period in the Company's 1997 Annual Report on Form 10-K.
The Company has not recast its historical financial data to conform to the
current fiscal year because the accounting systems in place at that time
required a certain level of procedural techniques in order for financial data to
be prepared for external reporting purposes. These procedures were implemented
on a quarterly basis only because the Company was not publicly held during the
prior fiscal year. Consequently, to recast the prior fiscal year would be
impracticable and require significant judgmental estimates. The Company
estimates however, that due to seasonality, on a combined pro forma basis,
utilizing comparable fiscal periods, the year-ago third quarter would have
resulted in a net loss of approximately $0.51 per share. See - - Seasonality and
Inflation. The financial statements presented for 1997 reflect the Company's
historical results prior to the Sportmart acquisition.
RESULTS OF OPERATIONS
The following table sets forth the Company's statement of operations data as a
percentage of net sales and the number of stores open at the end of each period
for the periods indicated (dollars rounded to millions):
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------------------ ----------------------------------------------
OCT 31,1998 OCT 4, 1997 OCT 31, 1998 OCT 4, 1997
DOLLARS % DOLLARS (1) % DOLLARS % DOLLARS (1) %
----------- ------- ----------- ------- ------------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 142.6 100.0% $ 55.8 100.0% $ 466.8 100.0% $ 151.1 100.0%
Cost of goods sold, buying,
distribution and occupancy (112.9) (79.2) (42.4) (76.0) (361.1) (77.4) (112.6) (74.5)
-------- ----- ------- ----- -------- ----- -------- -----
Gross profit 29.7 20.8 13.4 24.0 105.7 22.6 38.5 25.5
Operating expenses (37.2) (26.1) (13.3) (23.8) (107.5) (23.0) (36.3) (24.0)
Merger integration costs (0.2) (0.1) (0.2) (0.4) (2.9) (0.6) (0.1) (0.1)
-------- ----- ------- ----- -------- ----- -------- -----
Operating income (loss) (7.7) (5.4) (0.1) (0.2) (4.7) (1.0) 2.1 1.4
Interest expense, net (2.2) (1.6) (0.3) (0.5) (6.4) (1.4) (0.7) (0.5)
Other income 0.1 0.1 0.5 0.9 0.5 0.1 0.7 0.5
-------- ----- ------- ----- -------- ----- -------- -----
Income (loss) before
income taxes (9.8) (6.9) 0.1 0.2 (10.6) (2.3) 2.1 1.4
Income tax (benefit) expense (3.8) (2.7) -- -- (4.1) (0.9) 0.8 0.5
-------- ----- ------- ----- -------- ----- -------- -----
Net income (loss) $ (6.0) (4.2)% $ 0.1 0.2% $ (6.5) (1.4)% $ 1.3 0.9%
======== ===== ======= ===== ======== ===== ======== =====
Number of stores at end of
period 123 60 123 60
======== ======= ======== ========
</TABLE>
(1) Historical Gart only balances - see note 1.
THIRTEEN WEEKS ENDED OCTOBER 31, 1998 COMPARED TO THIRTEEN WEEKS ENDED
OCTOBER 4, 1997
Net Sales. Net sales increased $86.8 million in the thirteen weeks ended
October 31, 1998, from $55.8 million to $142.6 million. The increase in net
sales is primarily attributable to the acquisition of Sportmart on January 9,
1998. The Sportmart stores increased the Company's sales by $80.0 million. Newly
opened stores increased sales by $6.4 million offset by $2.0 million in lost
sales from closed stores. Comparable store sales decreased 3.7% for the Company.
Comparable store sales consist of a decrease of 2.1% at the Company's Gart
Sports stores and a decline of 4.6% at the Sportmart stores. Comparable store
sales decreases were primarily due to not repeating the Customer Appreciation
Day event in the Sportmart stores, as well as soft sales in outdoor apparel,
fitness and men's footwear. Sales of outerwear apparel were impacted by
unseasonably warm weather in most of the country. During the thirteen weeks
ended October 31, 1998, the Company closed two clearance locations. New stores
enter the comparable store sales base at the beginning of their 14th month of
operation. The Sportmart acquired stores are included in comparable store sales
bases utilizing historical Sportmart comparable store data.
7
<PAGE> 10
Gross Profit. Gross profit for the thirteen weeks ended October 31, 1998 was
$29.7 million, or 20.8% of net sales, as compared to $13.4 million, or 24.0% of
net sales, for the thirteen weeks ended October 4, 1997. The decrease is due
primarily to increased occupancy costs as a percentage of sales. The
amortization of favorable leases for the Sportmart stores established at the
merger date is included in occupancy, and forces the gross profit percentage of
sales to decrease in periods with lower sales volumes.
Merchandise margins for the period were only slightly lower than the prior year.
Operating Expenses. Operating expenses for the period ended October 31, 1998
were $37.2 million, or 26.1% of net sales, compared to $13.3 million, or 23.8%
of net sales, for the period ended October 4, 1997. Integration costs of $1.2
million related to payroll, consulting and supply expense are included in the
third quarter operating expenses. These costs were incurred to re-ticket
merchandise in the Sportmart stores, which eliminated pricing issues between the
Gart and Sportmart stores. Excluding integration costs, operating expenses would
have been $36.0 million, or 25.3% of sales. The increase versus last year is due
to increased store payroll to implement higher service levels in the Sportmart
stores.
Merger Integration Costs. Merger integration expenses were $0.2 million, or
0.1% of net sales for the thirteen week period ended October 31, 1998. These
costs consist primarily of $64,000 of professional fees, $113,000 of human
resource costs and other costs of $45,000. The Company does not expect to incur
any significant integration costs during the remainder of this fiscal year.
During the thirteen week period ended October 4, 1997, the Company incurred
$143,000 of integration costs related primarily to legal expenses.
Operating Loss. As a result of the factors described above, the Company
recorded an operating loss for the thirteen weeks ended October 31, 1998 of $7.7
million compared to an operating loss of $0.1 million for the thirteen week
period ended October 4, 1997.
Interest Expense. Interest expense for the thirteen week period ended
October 31, 1998 increased to $2.2 million, or 1.6% of net sales, from $0.3
million, or 0.5% of net sales, in the thirteen week period ended October 4,
1997. The increase is primarily due to an increase in average interest-bearing
debt for the period due to the refinancing of the Sportmart acquired debt of
$86.2 million on January 9, 1998 and increasing inventory levels approaching the
winter holiday season, partially offset by more favorable interest rates for the
period.
Other Income. Other income was $0.1 million for the thirteen weeks ended
October 31, 1998 compared to $0.5 million for the thirteen weeks ended October
4, 1997. The decrease is primarily attributable to the Company realizing a $0.4
million gain on a lease termination in 1997.
Income Taxes. The Company's income tax benefit for the thirteen week period
ended October 31, 1998 was $3.8 million compared to an income tax expense of
$33,000 for the thirteen weeks ended October 4, 1997. The Company's effective
tax rate decreased to 39.0% for the period ended October 31, 1998 from 40.7% for
the thirteen week period ended October 4, 1997. This decrease is primarily
attributable to a cumulative adjustment in 1997 to bring the effective tax rate
for the thirty-nine week period to 37.9%.
THIRTY NINE WEEKS ENDED OCTOBER 31, 1998 COMPARED TO THIRTY NINE WEEKS ENDED
OCTOBER 4, 1997
Net Sales. Net sales for the thirty-nine weeks ended October 31, 1998
increased $315.7 million from $151.1 million to $466.8 million. The acquisition
of Sportmart and opening of new stores increased year-to-date sales by $298.3
million and $18.1 million, respectively. Comparable store sales decreased 3.6%
for the Company. Comparable store sales consist of an increase of .8% at the
Company's Gart Sports stores and a decline of 5.7% at the Sportmart stores.
Gross Profit. Gross Profit for the thirty nine weeks ended October 31, 1998
was $105.7 million or 22.6% of net sales, as compared to $38.5 million or 25.5%
of net sales for the thirty nine weeks ended October 4, 1997. The decrease as a
percent of net sales relates to higher occupancy costs due to including
Sportmart's favorable lease amortization. Lower merchandise margins also
contribute to the decline.
8
<PAGE> 11
Operating Expenses. Operating expenses for the thirty-nine weeks ended were
$107.5 million or 23.0% of net sales as compared to $36.3 million or 24.0% of
net sales for the thirty-nine weeks ended October 4, 1997. Integration costs of
$2.7 million are included in year-to-date operating expenses. Without these
costs, operating expenses would have been $104.8 million or 22.4% of net sales.
The decrease in the percent of sales is primarily due to expense synergies
achieved as a result of the merger, as corporate expenses are leveraged against
a higher sales base.
Merger Integration Costs. Merger Integration costs were $2.9 million for the
thirty nine week period ended October 31, 1998 as compared to $143,000 for the
thirty nine week period ended October 4, 1997. The $2.9 million incurred year to
date consists of $1.3 million of stay bonuses to employees at the Sportmart
headquarters, $.7 million of professional fees, $.4 million of human resource
costs, $.2 million of travel, and $.3 million of other costs.
Operating Loss. As a result of the factors described above, the operating
loss for the thirty-nine weeks ended October 31, 1998 is $4.7 million compared
to operating income of $2.1 million for the thirteen weeks ended October 4,
1997.
Interest Expense. Year to date as of October 31, 1998, interest expense
increased $5.7 million to $6.4 million or 1.4% of net sales from $.7 million or
.5% of net sales. The increase is primarily due to an increase in average
interest-bearing debt for the period due to the refinancing of the Sportmart
acquired debt of $86.2 million on January 9, 1998 and increasing inventory
levels approaching the winter holiday season, partially offset by more favorable
interest rates for the period.
Other Income. For the thirty-nine week period ended October 31, 1998, other
income decreased $.2 from $.7 million to $.5 million. The decrease is primarily
attributable to the Company realizing a $0.4 million gain on a lease termination
in 1997, partially offset by increased royalties received from the Japan joint
venture compared to 1997.
Income Taxes. The Company's income tax benefit for the thirty nine week
period ended October 31, 1998 was $4.1 million compared to an income tax expense
of $.8 million for the thirty nine week period ended October 4, 1997. The
Company's effective tax rate increased to 39.0% for the thirty nine week period
ended October 31, 1998 from 37.9% for the thirty nine weeks ended October 4,
1997.
In the first nine months of fiscal 1998 the Company had a pretax loss of
$10.6 million compared to pretax income of $2.1 million in fiscal 1997. This
decline in income compared to fiscal 1997 is primarily due to $5.6 million of
integration costs associated with the Sportmart acquisition. The Company
anticipates improved operating income as product mix is adjusted in the
Sportmart locations and additional expense synergies are realized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for inventory, capital
improvements, and pre-opening expenses to support the Company's expansion plans,
as well as for various investments in store remodeling, store fixtures and
ongoing infrastructure improvements.
The Company had working capital of $131.7 million and $111.8 million as of
the periods ended October 31, 1998 and January 31, 1998, respectively.
Cash flows from operating, investing, and financing activities as reported
in the unaudited consolidated Statement of Cash Flows for the thirty-nine weeks
ended October 31, 1998 are summarized below. The net decrease in cash and cash
equivalents for the thirty-nine weeks ended October 31, 1998 was $9.5 million
versus $6.3 million for the thirty-nine weeks ended October 4, 1997. In the
three-quarters of fiscal 1998, operating activities used cash totaling $23.1
million compared to $11.6 million in the prior year. Accounts payable net of
inventory increased $4.4 million due to improved payment terms with vendors.
Accrued expenses decreased by $19.7 million, primarily due to payments being
made during the year for accrued management and stay bonuses, sales taxes and
store closings. Net cash used in investing activities, which primarily represent
purchases of property and equipment was $15.0 million for the thirty-nine week
period ended October 31, 1998 compared to $3.4 million for the thirty-nine weeks
ended October 4, 1997. Net cash provided by financing activities was $28.6
million for the thirty-nine weeks ended October 31, 1998
9
<PAGE> 12
compared to $8.7 million for the thirty-nine weeks ended October 4, 1997.
Financing activities are primarily related to the utilization of the Company's
credit facility to meet day to day operating needs and increase its inventory
levels in anticipation of the winter holiday selling season.
Historically, the Company's liquidity and capital needs have been met by
cash from operations and borrowings under a revolving line of credit with
CIT/Business Credit, Inc. ("CIT"). In connection with the Sportmart acquisition,
this agreement was replaced with a new revolving line of credit facility (the
"Credit Agreement") with a group of lenders including CIT as agent. The
long-term debt currently consists of the Credit Agreement, which allows the
Company to borrow up to 70% of its eligible inventories (as defined in the
credit agreement) during the year and up to 75% of eligible inventories for any
consecutive 90 day period in a fiscal year. The credit agreement also contains
certain restrictive financial covenants such as a minimum net worth requirement.
Borrowings are limited to the lesser of $175 million or the amount calculated in
accordance with the borrowing base (gross $253,608,000 at October 31, 1998), and
are secured by substantially all trade receivables, inventories and intangible
assets. Interest rates are based on the prime rate or the LIBOR rate, at the
option of the Company, plus margins of 25 basis points for prime borrowings and
175 basis points for LIBOR borrowings. The margin rates on prime and LIBOR
borrowings can be reduced beginning in February 1999 to as low as 0.0% and 1.5%,
respectively, based upon certain criteria. There was $134.5 million outstanding
under the Credit Agreement at October 31, 1998, and $40.5 million was available
for borrowing (based upon 70% of eligible inventories and borrowing limit of
$175 million).
The Internal Revenue Service has proposed adjustments to the 1992 and 1993
consolidated federal income tax returns of the Company and its former parent,
now Thrifty PayLess Holdings, Inc., a subsidiary of RiteAid Corporation, due to
the manner in which LIFO inventories were characterized on such returns. These
adjustments could result in up to approximately $9.7 million of a long-term
deferred tax liability being accelerated, which would have a negative impact on
liquidity in the near term.
Capital expenditures to support all of the Company's expansion plans as well
as various investments in store remodeling, store fixtures, ski rentals and
ongoing infrastructure improvements are projected to be $12.9 million for fiscal
1998. These capital expenditures will be for new store openings, fixturing,
refurbishing the Sportmart stores acquired, remodeling of existing stores,
information systems and distribution center facilities. The Company leases all
of its store locations and intends to continue to finance its new stores with
long-term operating leases. Pre-opening costs, which include grand opening
advertising, are expensed on a straight-line basis during the remaining periods
of the fiscal reporting year in which the store opens. The Company expects
similar trends in new store investment for the foreseeable future.
The Company believes that cash generated from operations, combined with
funds available under the credit facility, will be sufficient to fund
transaction fees and costs, projected capital expenditures (estimated at $1.2
million for the remaining portion of the year) and other working capital
requirements during fiscal 1998. The Company intends to utilize its credit
facilities to meet seasonal fluctuations in cash flow requirements. Generally,
the Company reaches its peak borrowing level in November.
FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT
In connection with the Sportmart acquisition, the Company acquired contracts
for certain off-balance sheet derivative financial instruments that Sportmart
had utilized to reduce interest rate risks. The Company does not use derivatives
for speculative trading purposes.
The Company has an interest rate cap agreement for a notional amount
totaling $25.0 million that places an interest rate ceiling on LIBOR at 6.0%.
The agreement covers the revolving line of credit and expires in August 1999.
10
<PAGE> 13
YEAR 2000
Historically, most computer databases, as well as embedded microprocessors
in computer systems and industrial equipment, were designed with date data
fields which used only two digits of the year. Most computer programs,
computers, and embedded microprocessors controlling equipment were programmed to
assume that all two digit dates were preceded by "19", causing "00" to be
interpreted as the year 1900. This formerly common practice now could cause a
computer system ("IT") or embedded microprocessor to fail to properly recognize
a year that begins with "20", rather than "19". This in turn could result in
computer system miscalculations or failures, as well as failures of equipment
controlled by date-sensitive microprocessors ("Non-IT"), and is generally
referred to as the "Year 2000 problem."
The Company's State of Year 2000 Readiness.
- -------------------------------------------
In 1995 the Company began to formulate a plan to address its Year 2000
issues. The Company's Year 2000 plan now contemplates eight phases: Awareness,
Inventory, Assessment, Remediation, Testing, Implementation, Certification and
Maintenance.
Awareness involves ensuring that employees who deal with the Company's
computer assets, and all managers, executives and directors, understand the
nature of the Year 2000 problem and the adverse effects on the business
operations of the Company that would result from the failure to become and
remain Year 2000 ready. Inventory involves the identification of all computer
assets of the Company (both information technology systems and embedded
microprocessors). Assessment involves the determination as to whether such
assets will properly recognize a year that begins with "20", rather than "19".
Computer hardware, software and firmware, and embedded microprocessors, that,
among other things, properly recognize a year beginning with "20" are said to be
"Year 2000 ready". Remediation involves the repair or replacement of computer
assets that are not Year 2000 ready. Testing involves the validation of the
actions taken in the Remediation phase. Implementation is the installation and
integration of remediated and tested computer assets into an overall information
technology and embedded microprocessor system that is Year 2000 ready.
Certification is the final testing phase to ensure full interface between
systems. Maintenance is the process of ensuring that remediated systems are not
corrupted by new technology introduced.
Awareness.
- ----------
The Company completed the Awareness phase of its Year 2000 plan in the
third fiscal quarter of 1998. The Company believes that all employees who deal
with the Company's computer assets, and the Company's management, appreciate the
importance of Year 2000 readiness and understand that achieving such readiness
is primarily a business problem, not merely a technology problem. The Company
has also communicated directly with approximately 27% of its approximately 5,000
vendors of goods and services in an attempt to elicit information from its key
vendors regarding the state of their Year 2000 readiness. The Company believes
that the vendors contacted represent approximately 80% of its key business
partners from both a merchandise and operational perspective.
Internal Computer Systems.
- --------------------------
The Company began its assessment of its internal computer systems in 1995.
All core applications were identified, assessed and ranked for critical
importance to the operations of the Company. Since then, the Company has
replaced or modified 70% of its Point of Sale systems and 90% of its Personal
Computer and Local/Wide Area Network systems for Year 2000 compliance. Host
systems and the remainder of the Point of Sale systems are still in the
remediation phase (scheduled to be completed early in the second fiscal quarter
of 1999) and testing phase (scheduled to be completed by June 1999). The Company
currently plans to have addressed all computer systems which are critical to its
operations by June 1999. Some non-critical systems may not be addressed,
however, until after January 2000.
Embedded Microprocessors.
- -------------------------
The Company has completed its assessment of the potential for Year 2000
problems with respect to embedded microprocessors in its Non-IT equipment,
merchandise inventory, warehouse and distribution facilities, and corporate
offices. As a result of such Assessment, the Company has not identified any
significant Year 2000 issues in these areas.
Vendors.
- --------
Fortunately, the Year 2000 problem will not materialize until after the
Company's peak annual selling period, the December holiday season. The problems
that do in fact occur following the December holiday season will be when
inventory levels are the lowest. As of the date of this report, the Company is
not aware that any of its key vendors will experience a business interruption.
The Company has not, however, obtained responses from all of its vendors who
received a questionnaire from the Company in its effort to identify a key vendor
that may not be Year 2000 ready and, therefore, may adversely affect the
Company's business.
11
<PAGE> 14
The Costs to Address the Company's Year 2000 Issues.
- ----------------------------------------------------
The Company has incurred costs of $26,000 to date with respect to its Year
2000 plan. This amount has come from the general operating budget of the
Company's Management Information Systems department and from funds budgeted for
capital expenditures. No significant Management Information Systems projects
have been deferred due to the Company's Year 2000 plan.
The Company currently estimates that the total cost of completing all eight
phases of its Year 2000 plan will not exceed $2 million. This estimate is based
on currently available information, will be updated as the Company completes its
assessment of third party relationships and proceeds with its testing and
implementation, and may need to be increased further upon receipt of more
information from vendors of material goods and services and upon the design and
implementation of the Company's contingency plan.
The Risks of the Company's Year 2000 Issues.
- --------------------------------------------
If any computer hardware, software applications, or embedded
microprocessors critical to the Company's operations have been overlooked in the
assessment or remediation phases, if any of the Company's remediated or replaced
internal computer systems fail the testing phase, or if some of the Company's
key business partners do not become Year 2000 ready in a timely manner, there
could be a material adverse effect on the Company's results of operations,
liquidity and financial condition of a magnitude which the Company has not yet
fully analyzed. In addition, the Company has not yet been assured that (1) the
computer systems of its all of its key vendors of goods and services will be
Year 2000 ready in a timely manner or that (2) the computer systems of third
parties with which the Company's computer systems exchange data will be Year
2000 ready both in a timely manner and in a manner compatible with continued
data exchange with the Company's computer systems.
The Company's Contingency Plan.
- -------------------------------
The Company is collecting the information necessary to develop a business
contingency plan to address both avoidable and unavoidable Year 2000 risks and
expects to have it completed by April 1999.
SEASONALITY AND INFLATION
The first and fourth quarters have historically been the strongest sales and
profit quarters for the Company. The Company believes that two primary factors
contribute to this seasonality. First, the largest percentage of the Company's
stores has historically been based in the Rocky Mountain region, resulting in a
heavier concentration of winter sporting equipment and apparel. The winter
product lines are characterized by a short selling season, with the month of
January being a significant operating income contribution month. The Company's
customers traditionally make purchases of ski and snowboard merchandise during
these quarters. Management expects the Sportmart acquisition to mitigate the
Company's dependency on cold weather sporting goods. Secondly, as is the case
with most retailers, holiday sales contribute significantly to the Company's
fourth quarter operating results.
Due to the above factors, the change in the Company's fiscal year could have
a material impact on earnings reported in the first and fourth quarters. The
fiscal year change causes the first quarter of each year to encompass the winter
selling season as it is concluding, which generally results in a lower gross
profit, but will result in the fourth quarter having a longer winter product
selling season. The Company does not believe that the fiscal year change will
have an impact on its annual earnings, but could cause material variances for
historical quarterly compared data. As a result of these factors, inventory
levels, which gradually increase beginning in April, generally reach their peak
in November and then decline to their lowest level following the December
holiday season. Any decrease in sales for the fourth quarter, whether due to a
slow holiday selling season, poor snowfall in ski areas near the Company's
markets or otherwise, could have a material adverse effect on the Company's
business, financial condition and operating results for the entire fiscal year.
Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation has a material impact on
the Company's results of operations. The Company believes that it is generally
able to pass along any inflationary increases in costs to its customers.
12
<PAGE> 15
APPOINTMENT OF NEW DIRECTOR
At the Board of Directors meeting held December 2, 1998, the Board accepted
the resignation of Jennifer Holden-Dunbar and elected Jonathan Seiffer to serve
on the Board of Directors. Since December 1997, Mr. Seiffer has been a vice
president at LGP, a merchant banking firm which manages Green Equity Investors,
L.P. ("GEI"), the holder of approximately 61.4% of the outstanding Common Stock
of Gart Sports. From October 1994 until December 1997, Mr. Seiffer was an
associate at LGP. Prior to October 1994, Mr. Seiffer was a member of the
corporate finance department of Donaldson, Lufkin & Jenrette Securities
Corporation.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The information discussed herein includes "forward-looking statements"
within the meaning of the federal securities laws. Although the Company believes
that the expectations reflected in such forward looking statements are
reasonable, the Company's actual results could differ materially as a result of
certain factors, including, but not limited to: the Company's ability to manage
its expansion efforts in existing and new markets, availability of suitable new
store locations at acceptable terms, general economic conditions, and retail and
sporting goods business conditions, specifically, availability of merchandise to
meet fluctuating consumer demands, fluctuating sales margins, increasing
competition in sporting goods and apparel retailing, as well as other factors
described from time to time in the Company's periodic reports filed with the
Securities and Exchange Commission.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1998, the AICPA's Accounting Standards Executive
Committee issued Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. This SOP requires that
entities capitalize certain internal-use software costs once specific criteria
are met. The Company adopted SOP 98-1 at the beginning of the third quarter of
1998 resulting in $0.5 million of capitalized costs that would have otherwise
been expensed. The Company did not adopt SOP 98-1 in either the first or second
quarter of 1998, as the costs required to be capitalized under SOP 98-1 were de
minimus.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, Reporting Comprehensive Income ("SFAS No.
130"). This statement requires that all items recognized under accounting
standards as components of comprehensive income be reported with the same
prominence as other financial statement items. The Company adopted SFAS No. 130
effective February 1, 1998.
In April 1998, the AICPA's Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities, effective for fiscal years beginning after December 15, 1998. This
SOP broadly defines start-up activities as those one-time activities related to,
among other things, opening a new facility. In general, SOP 98-5 requires the
Company to expense as incurred those costs such as pre-opening payroll and
store supplies. Currently, the Company capitalizes such costs and amortizes the
balance over the entire fiscal year in which it opens a new facility. Pursuant
to SOP 98-5, the Company will have to incur expenses prior to having available
the sales to absorb such costs. The Company incurs approximately $125,000 of
pre-opening costs per new store. The Company will adopt SOP 98-5 in fiscal year
1999, which may slightly affect quarterly results. On an annual basis, there
will be no financial impact.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS.
Exhibit 11.1 - Statement Regarding Computation of Per Share Earnings
Exhibit 27.1 - Financial Data Schedule
B. REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended October
31, 1998.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on December 11, 1998 on its
behalf by the undersigned thereunto duly authorized.
GART SPORTS COMPANY
By: /s/ JOHN DOUGLAS MORTON
-----------------------------------------
John Douglas Morton,
Chairman of the Board of Directors,
President and Chief Executive Officer
By: /s/ THOMAS T. HENDRICKSON
-----------------------------------------
Thomas T. Hendrickson,
Executive Vice President, Chief Financial
Officer and Treasurer
15
<PAGE> 18
GART SPORTS COMPANY
AND SUBSIDIARIES
QUARTER ENDED OCTOBER 31, 1998
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
16
<PAGE> 1
EXHIBIT 11.1
GART SPORTS COMPANY
AND SUBSIDIARIES
Statement Regarding Computation of Per Share Earnings
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------------- -------------------------------
OCTOBER 31, OCTOBER 4, OCTOBER 31, OCTOBER 4,
1998 1997 1998 1997
------------- ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Basic and diluted earnings per share:
Income (loss) available to common shareholders $ (5,982) $ 48 $ (6,515) $ 1,323
Weighted average common shares outstanding 7,681,015 5,498,978 7,680,109 5,502,600
----------- ----------- ----------- -----------
Basic and diluted earnings per share $ (0.78) $ 0.01 $ (0.85) $ 0.24
=========== =========== =========== ===========
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 6,900
<SECURITIES> 0
<RECEIVABLES> 8,215
<ALLOWANCES> 115
<INVENTORY> 270,948
<CURRENT-ASSETS> 300,416
<PP&E> 79,262
<DEPRECIATION> 18,814
<TOTAL-ASSETS> 381,098
<CURRENT-LIABILITIES> 168,679
<BONDS> 0
0
0
<COMMON> 80
<OTHER-SE> 62,049
<TOTAL-LIABILITY-AND-EQUITY> 381,098
<SALES> 466,858
<TOTAL-REVENUES> 466,858
<CGS> 361,125
<TOTAL-COSTS> 471,539
<OTHER-EXPENSES> (462)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,461
<INCOME-PRETAX> (10,680)
<INCOME-TAX> (4,165)
<INCOME-CONTINUING> (6,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,515)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
