<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: August 1, 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 September 4, 1998, there were outstanding 7,680,114 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 $21,502,000.
<PAGE> 2
GART SPORTS COMPANY
QUARTERLY PERIOD ENDED AUGUST 1, 1998
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.................... 1
Condensed Consolidated Statements of Operations.......... 2
Consolidated Statements of Stockholders' Equity.......... 3
Condensed Consolidated Statements of Cash Flows.......... 4
Notes to Condensed Consolidated Financial Statements..... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 7
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of the
Security Holders......................................... 11
Item 6. Exhibits and Reports on Form 8-K......................... 11
SIGNATURES................................................................. 12
<PAGE> 3
GART SPORTS COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
AUGUST 1, JANUARY 31,
1998 1998
----------------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents (including restricted cash of
$287 and $5,700, respectively) $ 8,366 16,372
Accounts receivable, net of allowance for doubtful
accounts of $214 and $345, respectively 7,478 4,621
Note receivable 1,372 1,436
Inventories 232,092 214,814
Prepaid expenses 5,421 2,751
Deferred income taxes 390 390
Assets held for sale 1,653 1,708
---------------- ----------
Total current assets 256,772 242,092
Property and equipment, net 55,645 55,990
Favorable leases acquired, net 18,007 19,111
Other assets, net of accumulated amortization of $304
and $147, respectively 2,113 2,242
---------------- ----------
$ 332,537 319,435
================ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 108,353 79,808
Current portion of capital lease obligations 389 340
Accrued expenses and other current liabilities 32,383 47,734
Income taxes payable 1,033 2,365
---------------- ----------
Total current liabilities 142,158 130,247
---------------- ----------
Long-term debt 106,640 105,600
Capital lease obligations, less current portion 2,855 3,069
Deferred rent 3,205 2,377
Deferred income taxes 9,385 9,385
---------------- ----------
Total liabilities 264,243 250,678
---------------- ----------
Stockholders' equity:
Preferred stock, $.01 par value
none issued -- --
Common stock, $.01 par value 80 80
Additional paid-in capital 55,663 55,651
Unamortized restricted stock compensation (51) (80)
Retained earnings 14,505 15,038
---------------- ---------
70,197 70,689
Treasury stock, 346,326 common shares, at cost (1,865) (1,865)
Notes receivable from stockholders (38) (67)
---------------- ----------
Total stockholders' equity 68,294 68,757
---------------- ----------
Commitments and contingencies
$ 332,537 319,435
================ ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-1-
<PAGE> 4
GART SPORTS COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------- --------------------------
AUGUST 1, JULY 5, AUGUST 1, JULY 5,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $ 169,057 $ 48,020 $ 324,274 $ 95,377
Cost of goods sold, buying, distribution and
occupancy 127,182 36,233 248,234 70,144
---------- ---------- ---------- ----------
Gross profit 41,875 11,787 76,040 25,233
---------- ---------- ---------- ----------
Operating expenses 35,469 11,442 70,313 23,047
Merger integration costs 740 -- 2,701 --
---------- ---------- ---------- ----------
Operating income 5,666 345 3,026 2,186
Other income (expense):
Interest expense,net (2,089) (253) (4,216) (390)
Other income 192 118 316 254
---------- ---------- ---------- ----------
Income (loss) before income taxes 3,769 210 (874) 2,050
Income tax (benefit) expense 1,470 85 (341) 775
---------- ---------- ---------- ----------
Net income (loss) $ 2,299 $ 125 $ (533) $ 1,275
========== ========== ========== ==========
Earnings (loss) per share:
Basic $ 0.30 $ 0.02 $ (0.07) $ 0.23
========== ========== ========== ==========
Diluted $ 0.29 $ 0.02 $ (0.07) $ 0.23
========== ========== ========== ==========
Weighted average shares of common
stock outstanding 7,679,761 5,503,144 7,679,656 5,504,411
========== ========== ========== ==========
Weighted average shares of common
stock and common stock equivalents
outstanding 7,859,152 5,503,144 7,679,656 5,504,411
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE> 5
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
UNAMORTIZED NOTES
RESTRICTED RECEIVABLE
ADDITIONAL STOCK FROM TOTAL
COMMON PAID-IN COMPENSATION RETAINED TREASURY STOCK- STOCKHOLDERS'
STOCK CAPITAL AWARDS EARNINGS STOCK HOLDERS EQUITY
------ ---------- ------------ -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 3, 1998 $ 57 $ 21,378 $ -- $ 23,043 $ (1,865) $ -- $ 42,613
----- -------- ---- -------- -------- ---- --------
Net loss -- -- -- (8,005) -- -- (8,005)
Issuance of 2,180,656 shares in
exchange for Sportmart shares 22 32,290 (80) -- -- -- 32,232
Redeemable common stock 147,600
shares reclassified to equity 1 1,983 -- -- -- (80) 1,904
Receipts on notes receivable -- -- -- -- -- 13 13
----- -------- ---- -------- -------- ---- --------
BALANCES AT JANUARY 31, 1998 80 55,651 (80) 15,038 (1,865) (67) 68,757
----- -------- ---- -------- -------- ---- --------
Net loss -- -- -- (2,832) -- -- (2,832)
Receipts on notes receivable -- -- -- -- -- 18 18
Amortization of restricted stock -- -- 15 -- -- -- 15
----- -------- ---- -------- -------- ---- --------
BALANCES AT MAY 2, 1998 80 55,651 (65) 12,206 (1,865) (49) 65,958
----- -------- ---- -------- -------- ---- --------
Net income -- -- -- 2,299 -- -- 2,299
Receipts on notes receivable -- -- -- -- -- 11 11
Exercise of 800 common stock
options -- 12 -- -- -- -- 12
Amortization of restricted stock -- -- 14 -- -- -- 14
----- -------- ---- -------- -------- ---- --------
BALANCES AT AUGUST 1, 1998 $ 80 $ 55,663 $(51) $ 14,505 $ (1,865) $(38) $ 68,294
===== ======== ==== ======== ======== ==== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE> 6
GART SPORTS COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
-------------------------
AUGUST 1, JULY 5,
1998 1997
-------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (533) $ 1,275
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 6,022 1,579
Deferred income taxes -- 856
(Gain) loss on sale of assets (2) 5
Increase in deferred rent 828 121
Changes in operating assets and liabilities:
Receivables, net (2,793) 542
Inventories (17,278) (7,963)
Prepaid expenses (2,670) (201)
Other assets 78 --
Accounts payable 28,545 (4,753)
Accrued expenses and other current
liabilities (15,351) (5,679)
Income taxes payable (1,332) (1,088)
-------- ---------
Net cash used in operating
activities (4,486) (15,306)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,471) (1,735)
Proceeds from sale of property and equipment 107 95
-------- ---------
Net cash used in investing
activities (4,364) (1,640)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 80,558 23,100
Principal payments of long-term debt (79,518) (11,500)
Principal payments on capital lease
obligations (165) --
Purchase of treasury stock -- (35)
Payment of notes receivable from
stockholders 29 32
Proceeds from the sale of common stock
under option plans 12 --
Payment of financing fees (72) (50)
-------- ---------
Net cash provided by financing
activities 844 11,547
-------- --------
Decrease in cash and cash
equivalents (8,006) (5,399)
Cash and cash equivalents at beginning of
period 16,372 8,800
-------- --------
Cash and cash equivalents at end of period $ 8,366 $ 3,401
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 5,588 $ 414
======== ========
Cash paid during the period for income taxes $ 1,350 $ 1,007
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE> 7
NOTES TO CONDENSED 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 condensed
consolidated financial statements are the thirteen weeks ended August 1,
1998 and the thirteen weeks ended July 5, 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 condensed 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 weeks ended August 1, 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 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.
-5-
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
<TABLE>
<CAPTION>
SECOND QUARTER 1997(A) TWENTY-SIX WEEKS OF 1997(B)
---------------------- ---------------------------
<S> <C> <C>
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net sales $ 173,307 $ 324,596
========= =========
Income from continuing operations $ 2,884 $ 3,356
========= =========
Basic earnings per share from continuing
operations (C) $ 0.38 $ 0.44
========= =========
</TABLE>
(A) Includes the 13 weeks ended July 5, 1997 for Gart Sports Company and the 13
weeks ended August 2, 1997 for Sportmart.
(B) Includes the 26 weeks ended July 5, 1997 for Gart Sports Company and the 26
weeks ended August 2, 1997 for Sportmart.
(C) Pro forma basic earnings per share have been computed based on the pro forma
net income and the pro forma weighted average common shares outstanding of
approximately 7,627,965 and 7,626,894 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
earnings per share is not material.
-6-
<PAGE> 9
GART SPORTS COMPANY AND SUBSIDIARIES
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 condensed 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 period would have resulted in
net income of approximately $0.43 per share. See - - Seasonality and Inflation.
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:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------------------------- -----------------------------------------------
AUG 1, JULY 5, 1997 AUG 1, 1998 JULY 5, 1997
1998 % DOLLARS % DOLLARS % DOLLARS %
DOLLARS ------ ------- ------ ------- ------ ------- ------
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $169.1 100.0% $48.0 100.0% $324.3 100.0% $95.4 100.0%
Cost of goods sold, buying,
distribution and occupancy (127.2) (75.2) (36.2) (75.4) (248.2) (76.5) (70.1) (73.5)
------ ----- ----- ----- ------ ----- ----- -----
Gross profit 41.9 24.8 11.8 24.6 76.1 23.5 25.3 26.5
Operating expenses (35.5) (21.0) (11.5) (24.0) (70.3) (21.7) (23.0) (24.1)
Merger integration costs (0.7) (0.4) -- -- (2.7) (0.8) -- --
------ ----- ----- ----- ------ ----- ----- -----
Operating income 5.7 3.4 0.3 0.6 3.1 1.0 2.3 2.4
Interest expense, net (2.1) (1.2) (0.2) (0.4) (4.2) (1.3) (0.4) (0.4)
Other income 0.2 0.1 0.1 0.2 0.3 0.1 0.2 0.2
------ ----- ----- ----- ------ ----- ----- -----
Income (loss) before
income taxes 3.8 2.3 0.2 0.4 (0.8) (0.2) 2.1 2.2
Income tax (benefit) expense 1.5 0.9 0.1 0.2 (0.3) (0.1) 0.8 0.8
------ ----- ----- ----- ------ ----- ----- -----
Net income (loss) $ 2.3 1.4% $ 0.1 0.2% $ (0.5) (0.1)% $ 1.3 1.4%
====== ===== ===== ===== ====== ===== ===== =====
Number of stores at end of period 121 61 121 61
====== ===== ====== =====
</TABLE>
THIRTEEN WEEKS ENDED AUGUST 1, 1998 COMPARED TO THIRTEEN WEEKS ENDED JULY 5,
1997
Net Sales. Net sales increased $121.1 million in the thirteen weeks ended
August 1, 1998, from $48.0 million to $169.1 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 $114.2 million. Newly
opened stores increased sales by $6.6 million offset by $3.4 million in lost
sales from closed stores. Comparable store sales decreased 6.5% for the Company.
Comparable store sales consist of a decrease of 2.0% at the Company's Gart
Sports stores and a decline of 8.3% at the Sportmart stores. Comparable store
sales decreases were primarily due to information system issues with
replenishment of inventory in the Sportmart stores during the Father's Day
holiday period coupled with not repeating a hunting sales event and strong sales
in licensed sales in both hockey and basketball in the prior year in the
historical Gart stores as well as continued softness in golf sales. During the
thirteen weeks ended August 1, 1998, the Company closed two stores. 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 August 1, 1998 was
$41.9 million, or 24.8% of net sales, as compared to $11.8 million, or 24.6% of
net sales, for the thirteen weeks ended July 5, 1997. Management attributes the
slight increase as a percentage of net sales to various factors including: the
impact of replacing Sportmart's private label with prestigious name brands such
as North Face and Callaway.
Operating Expenses. Operating expenses for the period ended August 1, 1998
were $35.5 million, or 21.0% of net sales, compared to $11.5 million, or 24.0%
of net sales, for the period ended July 5, 1997. The period ended August 1, 1998
includes approximately $0.5 million of internal costs to operate the Sportmart
corporate headquarters in Wheeling, Illinois until substantially all of the
corporate functions were transferred to Colorado. The Company closed the
Wheeling facility May 29, 1998, and all corporate functions have been
consolidated to the Company's Denver, Colorado location. The decrease as a
percentage of net sales is due primarily to declines in corporate overhead
expenses and regional expenses as synergies from the merger have been achieved.
Merger Integration Costs. Merger integration expenses were $0.7 million, or
0.4% of net sales for the thirteen week period ended August 1, 1998. These costs
consist primarily of $113,000 of professional fees, $200,000 of stay bonuses to
employees at the Sportmart corporate headquarters, $110,000 of human resource
costs and other costs of $317,000. The Company expects to incur approximately an
additional $0.7 million for consulting fees related to the integration of
systems and merchandise re-ticketing in Sportmart stores to conform SKU's during
the remainder of this fiscal year.
Operating Income. As a result of the factors described above, the Company
recorded operating income for the thirteen weeks ended August 1, 1998 of $5.7
million compared to operating income of $0.3 million for the thirteen week
period ended July 5, 1997.
Interest Expense. Interest expense for the period ended August 1, 1998
increased to $2.1 million, or 1.2% of net sales, from $0.2 million, or 0.4% of
net sales, in the period ended July 5, 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 the
beginning of increasing inventory levels approaching the winter holiday season,
partially offset by more favorable interest rates for the period.
Other Income. Other income was $0.2 million for the period ended August 1,
1998 compared to $0.1 million for the period ended July 5, 1997. Other income
consists primarily of sales tax handling fees. The increase is primarily
attributable to receipt of approximately $76,000 in royalty income from a
Japanese licensing agreement acquired in the Sportmart merger. This income is
not expected to continue as the Company anticipates dissolving the relationship.
Income Taxes. The Company's income tax expense for the period ended August
1, 1998 was $1.5 million compared to an income tax expense of $0.1 million for
the period ended July 5, 1997. The Company's effective tax rate decreased to
39.0% for the period ended August 1, 1998 from 40.5% for the thirteen week
period ended July 5, 1997. This decrease is primarily attributable to a
cumulative adjustment in 1997 to bring the effective tax rate for the twenty-six
week period to 37.8%.
In the first six months of fiscal 1998 the Company had a pretax loss of
approximately $0.8 million compared to pretax income of $2.1 million in fiscal
1997. This decline in income compared to fiscal 1997 is primarily due to $4.3
million of internal and external integration costs associated with the Sportmart
acquisition. The Company anticipates improved operating income as product mix is
adjusted in the Sportmart locations and regional and store 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 $114.6 million and $111.8 million as of
the periods ended August 1, 1998 and January 31, 1998, respectively.
Cash flows from operating, investing, and financing activities as reported
in the unaudited condensed consolidated Statement of Cash Flows for the
twenty-six weeks ended August 1, 1998 are summarized below. The net decrease in
cash and cash equivalents for
-8-
<PAGE> 11
the twenty-six weeks ended August 1, 1998 was $8.0 million versus $5.4 million
for the twenty-six weeks ended July 5, 1997. In the first half of fiscal 1998,
operating activities used cash totaling $4.5 million compared to $15.3 million
in the prior year. Accounts payable net of inventory increased $11.3 million due
to improved payment terms with vendors. Accrued expenses decreased by $15.4
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 $4.4 million for the twenty-six week period ended August 1, 1998
compared to $1.6 million for the twenty-six weeks ended July 5, 1997. Net cash
provided by financing activities was $0.8 million for the twenty-six weeks ended
August 1, 1998 compared to $11.5 million for the twenty-six weeks ended July 5,
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 $214,029,000 at August 1, 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 $118.6 million outstanding
under the Credit Agreement at September 4, 1998, and $31.2 million was available
for borrowing (based upon 70% of eligible inventories).
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, integration costs (estimated at $0.7 million for the
remaining portion of the year), projected capital expenditures (estimated at
$6.3 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.
-9-
<PAGE> 12
YEAR 2000
The Company is currently addressing a universal situation commonly referred
to as the "Year 2000 Problem." The Year 2000 Problem relates to the inability of
certain computer software programs and imbedded chips in operating equipment to
properly recognize and process date-sensitive information relative to the Year
2000 and beyond. During fiscal 1994, the Company began evaluating the potential
impact to core host systems and began remediation in 1995. As of August 1, 1998
the Company has completed 67% of that task and anticipates complete compliance
in early 1999. Senior management is committed to a plan and has formed a
committee to devote the necessary resources to identify and modify all systems
impacted by the Year 2000 Problem, or implement new systems to become Year 2000
compliant in a timely manner. The total cost of executing this plan is estimated
at $1 million and, as of August 1, 1998, the Company was approximately 75%
complete with the execution of this plan. In addition, the Company is in the
process of contacting its major suppliers and vendors seeking information about
their internal compliance efforts. The Company's risks involved with not solving
the Year 2000 issue include, but are not limited to, the following; loss of
local or regional electric power, loss of telecommunication services, delays or
cancellations of shipping or transportation manufacturing shut-downs, bank
errors and computer errors by vendors. The Company is in the process of
developing contingency plans for those areas critical to core functionalities
which might be affected by the Year 2000 Problem. If the Company, its suppliers
or vendors are unable to resolve issues related to the Year 2000 on a timely
basis, it could result in a material financial risk.
SEASONALITY AND INFLATION
The first and fourth quarters have historically been the strongest quarters
for the Company. The Company believes that two primary factors contribute to
this seasonality. First, the largest percentages of the Company's stores have
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 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.
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.
-10-
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held June 17, 1998, the
stockholders of the Company elected seven Directors to serve on the
Board of Directors until the next annual meeting and until their
successors are elected. The results of these votes were as follows:
<TABLE>
<CAPTION>
Number of Votes
--------------------------------------------
Authority Broker
Director Nominees For Withheld Non-Votes
-----------------------------------------------------------------------
<S> <C> <C> <C>
John Douglas Morton 6,903,634 6,798 0
Jonathan D. Sokoloff 6,900,937 9,495 0
Jennifer Holden Dunbar 6,903,634 6,798 0
Gordon D. Barker 6,881,514 28,918 0
Peter R. Formanek 6,903,603 6,829 0
Larry J. Hochberg 6,788,554 121,878 0
Andrew S. Hochberg 6,788,389 122,043 0
</TABLE>
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 following reports on Form 8-K on July 6, 1998 and July 16, 1998:
Item 5 - Other Events -Announcing it is seeking a stratigic business
combination with The Sports Authority.
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on September 10, 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
<PAGE> 15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
11.1 Statement Regarding Computation of Per Share
Earnings
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
GART SPORTS COMPANY
Statement re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
1-Aug-98 5-Jul-97 1-Aug-98 5-Jul-97
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Earnings (loss) per share:
Net income (loss) attributable to common stock $ 2,299 $ 125 $ (533) $ 1,275
Common and common equivalent shares outstanding:
Historical common shares outstanding at beginning of period 7,679,550 5,505,677 7,679,550 5,505,944
Effect of common stock and common stock equivalents
issued within one year prior to initial public offering. 211 ---- 106 ----
Weighted average common equivalent shares issued 179,391 ---- ---- ----
Weighted average treasury stock purchased (2,533) (1,533)
Weighted average shares of common stock ---- ---- ---- ----
Weighted average shares of common and common equivalent
shares outstanding 7,859,152 5,503,144 7,679,656 5,504,411
Earnings (loss) per share $ 0.29 $ 0.02 $ (0.07) $ 0.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-02-1998
<PERIOD-END> AUG-01-1998
<CASH> 8,366
<SECURITIES> 0
<RECEIVABLES> 7,692
<ALLOWANCES> 214
<INVENTORY> 232,092
<CURRENT-ASSETS> 256,772
<PP&E> 72,328
<DEPRECIATION> 16,683
<TOTAL-ASSETS> 332,537
<CURRENT-LIABILITIES> 142,158
<BONDS> 0
0
0
<COMMON> 80
<OTHER-SE> 68,214
<TOTAL-LIABILITY-AND-EQUITY> 332,537
<SALES> 324,274
<TOTAL-REVENUES> 324,590
<CGS> 248,234
<TOTAL-COSTS> 248,234
<OTHER-EXPENSES> 73,014
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,216
<INCOME-PRETAX> (874)
<INCOME-TAX> (341)
<INCOME-CONTINUING> (533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (533)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
