<PAGE>
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: May 1, 1999
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.)
1001 Lincoln Avenue, 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 June 7, 1999, there were outstanding 7,652,764 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 $17,243,000.
<PAGE>
GART SPORTS COMPANY
QUARTERLY PERIOD ENDED MAY 1, 1999
INDEX
<TABLE>
<S> <C>
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............... 13
SIGNATURES....................................................... 14
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
May 1, January 30,
1999 1999
--------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,822 $ 10,779
Accounts receivable, net of allowance for doubtful
accounts of $159 and $122, respectively 7,923 8,376
Note receivable 1,258 1,294
Inventories 255,060 223,837
Prepaid expenses and other assets 7,351 8,377
Deferred income taxes 373 373
Assets held for sale 1,716 1,653
-------- --------
Total current assets 281,503 254,689
-------- --------
Property and equipment, net 59,613 59,033
Favorable leases acquired, net 18,618 18,647
Other assets, net of accumulated amortization of $549
and $457, respectively 2,172 2,750
-------- --------
Total assets $361,906 $335,119
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $118,914 $126,478
Current portion of capital lease obligations 386 376
Accrued expenses and other current liabilities 26,033 30,596
-------- --------
Total current liabilities 145,333 157,450
-------- --------
Long-term debt 137,204 100,000
Capital lease obligations, less current portion 2,605 2,693
Deferred rent 4,131 3,768
Deferred income taxes 7,742 7,742
-------- --------
Total liabilities 297,015 271,653
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. 3,000,000 shares authorized
at May 1, 1999 and January 30, 1999; none issued -- --
Common stock, $.01 par value. 22,000,000 shares authorized
at May 1, 1999 and January 30, 1999; 8,030,429 shares
issued and 7,652,764 shares outstanding. 80 80
Additional paid-in capital 55,685 55,685
Unamortized restricted stock compensation (8) (21)
Accumulated other comprehensive loss (247) (1,762)
Retained earnings 11,510 11,620
-------- --------
67,020 65,602
Treasury stock, 377,665 common shares, at cost (2,108) (2,108)
Notes receivable from stockholders (21) (28)
-------- --------
Total stockholders' equity 64,891 63,466
-------- --------
Total liabilities and stockholders' equity $361,906 $335,119
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Thirteen weeks ended
----------------------------------------------
May 1, May 2,
1999 1998
------------------ -------------------
(Unaudited)
<S> <C> <C>
Net sales $ 151,933 $ 155,217
Cost of goods sold, buying, distribution and
occupancy 116,142 121,052
------------------ -------------------
Gross profit 35,791 34,165
Operating expenses 33,935 34,844
Merger integration costs -- 1,961
------------------ -------------------
Operating income (loss) 1,856 (2,640)
Non operating income (expense):
Interest expense, net (2,412) (2,127)
Other income 376 124
------------------ -------------------
Loss before income taxes (180) (4,643)
Income tax benefit 70 1,811
------------------ -------------------
Net loss $ (110) $ (2,832)
================== ===================
Loss per share:
Basic and diluted $ (0.01) $ (0.37)
================== ===================
Weighted average shares of common
stock outstanding 7,652,764 7,679,550
================== ===================
Weighted average shares of common
stock and common stock equivalents outstanding 7,652,764 7,679,550
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
Unaudited Accumulated
Additional paid- restricted stock other Retained
Common stock in capital compensation comprehensive earnings
------------ ---------------- ---------------- ------------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 30, 1999 $ 80 $ 55,685 $ (21) $ (1,762) $ 11,620
------------ ---------------- ---------------- ------------- --------
Net loss -- -- -- -- (110)
Unrealized gain on equity securities,
net of reclassification adjustment -- -- -- 1,515 --
Comprehensive income
Receipts on notes receivable -- -- -- -- --
Amortization of restricted stock -- -- 13 -- --
------------ ---------------- ---------------- ------------- --------
BALANCE AT MAY 1, 1999 $ 80 $ 55,685 $ (8) $ (247) $ 11,510
============ ================ ================ ============= ========
<CAPTION>
Notes receivable Total
Comprehensive from stock- Stockholders'
income Treasury Stock holders equity
------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 30, 1999 $ (2,108) $ (28) $ 63,466
------------- -------------- ---------------- -----------------
Net loss $ (110) -- -- (110)
Unrealized gain on equity securities,
net of reclassification adjustment 1,515 -- -- 1,515
-------------
Comprehensive income $ 1,405
=============
Receipts on notes receivable -- 7 7
Amortization of restricted stock -- -- 13
-------------- ---------------- -----------------
BALANCE AT MAY 1, 1999 $ (2,108) $ (21) $ 64,891
============== ================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
<TABLE>
<CAPTION>
Thirteen weeks ended
-----------------------------
May 1, May 2,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (110) $ (2,832)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 3,298 2,972
Gain on sale of assets (185) (6)
Increase in deferred rent 363 391
Changes in operating assets and liabilities:
Receivables, net 489 484
Inventories (31,223) (11,600)
Prepaid expenses and other assets (215) (2,522)
Income taxes receivable -- (772)
Other assets (20) (51)
Accounts payable (7,664) 24,154
Accrued expenses and other current
liabilities (4,563) (15,792)
---------- -----------
Net cash used in operating activities (39,830) (5,574)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities 2,979 --
Purchases of property and equipment (3,239) (1,814)
Proceeds from sale of property and equipment -- 14
--------- -----------
Net cash used in investing activities (260) (1,800)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term debt 37,204 927
Principal payments on capital lease
obligations (78) (81)
Payment of notes receivable from
stockholders 7 18
Payment of financing fees -- (61)
--------- -----------
Net cash provided by financing activities 37,133 803
--------- -----------
Decrease in cash and cash equivalents (2,957) (6,571)
Cash and cash equivalents at beginning of period 10,779 16,372
--------- -----------
Cash and cash equivalents at end of period $ 7,822 $ 9,801
========= ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net $ 2,904 $ 2,868
========= ===========
Cash paid during the period for income taxes $ -- $ 1,327
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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 1998 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 week period ended May 1, 1999 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.
2. 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"). 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.
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 May 1, 1999
and the thirteen weeks ended May 2, 1998, respectively.
3. PRE-OPENING EXPENSES
Beginning in fiscal 1999, the Company is expensing pre-opening costs in the
period in which they are incurred in conformity with Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities". Prior to fiscal year
1999, the Company capitalized such costs and amortized the balance over the
fiscal year in which it opened the new facility. The implementation of SOP
98-5 slightly affects quarterly results; however on an annual basis, there
will be no financial impact.
4. SALE OF MARKETABLE SECURITIES
During the quarter ended May 1, 1999, the Company sold certain marketable
securities, resulting in a realized gain of approximately $220,000 which
has been recognized as other income. The company utilized the specific
identification method to determine the cost basis of the securities sold.
During the quarter ended May 1, 1999, approximately $1.7 million of
unrealized holding gains arose, before the reclassification adjustment of
the realized gain included in net income.
5
<PAGE>
5. LOSS PER SHARE
The following table sets forth the computations of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Thirteen weeks ended
--------------------------------------------
May 1, May 2,
1999 1998
------------------- ------------------
<S> <C> <C>
Net loss available to common stockholders $ (110,000) $(2,832,000)
Weighted average shares of common stock
outstanding 7,652,764 7,679,550
------------------- ------------------
Basic and diluted loss per share $ (0.01) $ (0.37)
=================== ==================
</TABLE>
6
<PAGE>
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 1998 Annual Report on Form 10-K.
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, ''Disclosure About Segments of an Enterprise and Related
Information'', which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, major customers and the material countries in which the entity holds
assets and reports revenues. The Company is a leading retailer of sporting goods
in the midwest and western United States. Given the economic characteristics of
the store formats, the similar nature of the products sold, the type of customer
and method of distribution, the operations of the Company are aggregated in one
reportable segment.
RESULTS OF OPERATIONS
The following table sets forth the Company's consolidated 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
------------------------------------------------------------
May 1, 1999 May 2, 1998
----------- ------------
Dollars % Dollars %
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $ 151.9 100.0% $ 155.2 100.0%
Cost of goods sold, buying,
distribution and occupancy (116.1) (76.4) (121.0) (78.0)
---------- --------- --------- ----------
Gross profit 35.8 23.6 34.2 22.0
Operating expenses (34.0) (22.4) (34.8) (22.4)
Merger integration costs -- -- (2.0) (1.3)
---------- --------- --------- ----------
Operating income (loss) 1.8 1.2 (2.6) (1.7)
Interest expense, net (2.4) (1.6) (2.1) (1.4)
Other income 0.4 0.2 0.1 0.1
---------- --------- --------- ----------
Loss before
income taxes (0.2) (0.2) (4.6) (3.0)
Income tax benefit 0.1 0.1 1.8 1.2
---------- --------- --------- ----------
Net loss $ (0.1) (0.1)% $ (2.8) (1.8)%
========== ========= ========= ==========
Number of stores at end of period 124 121
========== =========
</TABLE>
THIRTEEN WEEKS ENDED MAY 1, 1999 COMPARED TO THIRTEEN WEEKS ENDED MAY 2, 1998
Net Sales. Net sales for the thirteen weeks ended May 1, 1999 decreased $3.3
million from the year ago quarter, from $155.2 million to $151.9 million.
Comparable store sales decreased 5.0% for the quarter. Comparable store sales
decreased primarily due to lower sales in men's and lifestyle footwear, men's
activewear, outdoor apparel, and golf products. Sales of these products were
impacted by unseasonably cold and wet weather in the month of April throughout
the Company's markets
Gross Profit. Gross profit for the thirteen weeks ended May 1, 1999 was $35.8
million, or 23.6% of net sales, as compared to $34.2 million, or 22.0% of net
sales, for the thirteen weeks ended May 1, 1998. The increase is due primarily
to the benefits derived from the consolidation of vendors associated with the
Sportmart acquisition.
7
<PAGE>
Operating Expenses. Operating expenses for the period ended May 1, 1999 were
$34.0 million, or 22.4% of net sales, compared to $34.8 million, or 22.4% of net
sales, for the period ended May 2, 1998. The decrease is primarily attributable
to the elimination of approximately $1.1 million of internal costs to operate
the Sportmart corporate headquarters in Wheeling, Illinois until substantially
all of the corporate functions were transferred to Colorado.
Merger Integration Costs. The Company did not incur any additional Merger
integration costs during the thirteen week period ended May 1, 1999 and does not
expect to incur any integration costs during the remainder of this fiscal year.
During the thirteen week period ended May 2, 1998, the Company incurred $2.0
million of integration costs.
Operating Income. As a result of the factors described above, the Company
recorded operating income for the thirteen weeks ended May 1, 1999 of $1.8
million compared to an operating loss of $2.6 million for the thirteen week
period ended May 2, 1998.
Interest Expense, Net. Interest expense, net for the thirteen week period
ended May 1, 1999 increased to $2.4 million, or 1.6% of net sales, from $2.1
million, or 1.4% of net sales, in the thirteen week period ended May 2, 1998.
The increase is primarily due to an increase in average interest-bearing debt
for the period, partially due to increasing inventory levels in general and for
the increased number of stores.
Other Income. Other income was $0.4 million for the thirteen weeks ended May
1, 1999 compared to $0.1 million for the thirteen weeks ended May 2, 1998. The
increase is primarily attributable to the sale of marketable securities.
Income Taxes. The Company's income tax benefit for the thirteen week period
ended May 1, 1999 was $0.1 million compared to an income tax benefit of $1.8
million for the thirteen weeks ended May 2, 1998. The Company's tax rate
remained the same at 39.0% for both periods.
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.
Cash Flow Analysis
<TABLE>
<CAPTION>
Thirteen weeks ended
--------------------------------------
May 1, May 2,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash used in operating activities $(39,830) $ (5,574)
Cash used in investing activities (260) (1,800)
Cash provided by financing activities 37,133 803
Capital expenditures $ 3,239 $ 1,814
Long-term debt (at end of period) 137,204 106,527
Working capital (at end of period) 136,170 111,364
Current ratio (at end of period) 1.94 1.80
Debt to equity ratio (at end of period) 2.11 1.62
</TABLE>
Cash used in operating activities in the first quarter of 1999 was primarily
the results of non-cash charges offsetting the net loss for the quarter. These
sources of cash were offset by increases in inventory and decreases in accrued
expenses and accounts payable.
Cash used in investing activities in the first quarter of 1999 was primarily
for capital expenditures. These expenditures were primarily for the opening of
one new superstore, construction of four new stores expected to open during the
second fiscal quarter of 1999, renovations and improvements to existing stores
as well as the purchase of certain information systems. These cash uses were
offset by cash received from the sale of marketable securities.
8
<PAGE>
Cash provided by financing activities in the first quarter of 1999 represents
proceeds from borrowings of long-term debt. At the time of the acquisition, the
Company refinanced Sportmart debt of $86.2 million under the Credit Agreement
referred to below. There was $137.2 million outstanding under the Credit
Agreement at May 1, 1999. The increase in long-term debt since fiscal year end
1998 is primarily attributable to seasonal purchases of inventory, capital
expenditures, and decreases in accounts payable and accrued expenses.
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 its eligible inventories for any
consecutive 90 day period in a fiscal year. Borrowings are limited to the lesser
of $175 million or the amount calculated in accordance with the borrowing base,
and are secured by substantially all inventories, trade receivables and
intangible assets. The lenders may not demand repayment of principal absent an
occurrence of default under the Credit Agreement prior to January 9, 2003. The
Credit Agreement contains certain covenants, including financial covenants that
require the Company to maintain a specified minimum level of net worth at all
times and restrict the Company's ability to pay dividends. Loan interest is
payable monthly at Chase Manhattan Bank's prime rate plus a margin rate that
cannot exceed 0.25% or, at the option of the Company, at Chase Manhattan Bank's
LIBOR rate plus a margin that cannot exceed 1.75%. The margin rate on prime and
LIBOR borrowings can be reduced, if certain earnings levels are achieved, to as
low as 0.0% and 1.50%, respectively. As of May 1, 1999, the Company had not
achieved these specified earnings levels. There was $28.8 million available for
borrowing at May 1, 1999.
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 remodelings, store fixtures, ski rental
equipment and ongoing infrastructure improvements are projected to be
approximately $11.4 million in fiscal 1999. These capital expenditures will be
primarily for five store openings, fixturing, refurbishing Sportmart stores,
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. Based upon
historical data, newly constructed superstores require a cash investment of
approximately $1.8 million for a 45,000 square foot store and $1.5 million for a
33,000 square foot store. Superstores constructed in existing retail space
historically have required capital investments of approximately $700,000 in
leasehold improvements per location. The level of capital improvements is
affected by the mix of new construction versus renovation of existing retail
space. 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 Agreement, will be sufficient to fund projected
capital expenditures and other working capital requirements through fiscal 1999.
The Company intends to utilize the Credit Agreement to meet seasonal
fluctuations in cash flow requirements.
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.
SEASONALITY AND INFLATION
The fourth quarter has historically been the strongest quarter for the
Company. The Company believes that two primary factors contribute to this
seasonality. First, sales of cold weather sporting goods, including sales of ski
and snowboard merchandise during
9
<PAGE>
the quarter, which corresponds with much of the ski and snowboard season.
Second, as is the case with most retailers, holiday sales contribute
significantly to the Company's operating results. 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 customer.
NEW ACCOUNTING PRONOUNCEMENTS
In May 1999, the Financial Accounting Standards Board ("FASB") voted to delay
the effective date of Statement of Financial Accounting Standard No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement No.
133"), issued in June 1998. FASB voted to delay the effective date for one year,
to June 15, 2000, because of concerns over Y2K and education issues. Statement
No.133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. The Company has not yet adopted Statement No. 133,
but will comply with the requirements of this Statement when required. As the
Company's use of derivatives and hedging is not significant, the Company
believes that the adoption of Statement No. 133 will not affect the Company's
consolidated financial position, results of operations, or cash flows.
YEAR 2000 COMPLIANCE
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 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."
State of Year 2000 Readiness. In 1995 the Company began to formulate a plan to
address its Year 2000 issues that now includes 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 the installation of new technology.
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.
10
<PAGE>
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 76% of its Point of Sale systems and 95% of its
Personal Computer and Local/Wide Area Network systems for Year 2000 compliance.
Merchandise, Accounting and Sales systems are in various stages of the
validation and implementation phases. Some systems have completed the
implementation phase and are running in production but will be included in
further testing efforts. The Company currently plans to have completed
remediation of all computer systems which are critical to its operations by
October 1999. Some non-critical systems may not be remediated, 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. Based on the Company's assessment, it believes that its
equipment and systems that contain embedded computer technology present little
Year 2000 exposure or risk. Based on information from its merchandise vendors,
the Company believes that its resale merchandise does not have Year 2000
compliance issues. The Company has assessed its mission critical, non-
information systems service providers and does not believe that these service
providers pose a substantial Year 2000 compliance risk.
Testing and Certification. The Company has not yet begun testing its critical
computer systems in an integrated environment. The Company has begun testing
individual pieces of software related to its Point of Sale software. Certain
risks exist if this testing and certification is delayed beyond the existing
schedule, including but not limited to, the inability to complete any additional
remediation identified in a timely manner.
Vendors. Fortunately, the Year 2000 problem will not completely materialize
until after the Company's peak annual selling period, the December holiday
season. The problems that may 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.
The Costs to Address the Company's Year 2000 Issues. The Company has incurred
costs of approximately $832,000 as of May 1, 1999 with respect to its Year 2000
plan, excluding internal resources which have been recognized separately. 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 the total cost of
completing 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 upon receipt of additional
information from vendors of material goods and services and upon the design and
implementation of the Company's contingency plan.
The Company's Year 2000 Risks. 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 all of its key vendors
of goods and services will be Year 2000 ready in a timely manner or (2) the
computer systems of third parties with which the Company's computer systems
exchange data will be Year 2000 ready in a timely manner and in a manner
compatible with continued data exchange with the Company's computer systems.
The Company believes that its most significant Year 2000 risks are:
. Failure of its mission critical information systems service providers to
timely make their systems Year 2000 compliant;
. Failure of the Company to timely complete implementation of its new payroll
processing system, which it anticipates completing by October 1999; and
11
<PAGE>
. Failure of one or more first tier mission critical merchandise vendors or
service providers to supply merchandise or services for an extended period
of time.
The Company's Contingency Plan. The Company is in the process of developing a
business contingency plan to address Year 2000 risks and expects to have it
completed by July 1999.
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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS.
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 May 1,
1999.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on June 14, 1999 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
14
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<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
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