<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: July 31, 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 September 1, 1999, there were outstanding 7,659,312 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 $15,329,000.
<PAGE>
GART SPORTS COMPANY
QUARTERLY PERIOD ENDED JULY 31, 1999
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets ....................... 1
Consolidated Statements of Operations ............. 2
Consolidated Statement 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 ..... 6
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K .................. 13
SIGNATURES ........................................................... 14
<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>
July 31, January 30,
1999 1999
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,137 $ 10,779
Accounts receivable, net of allowance for doubtful
accounts of $160 and $122, respectively 11,276 8,376
Inventories 240,127 223,837
Prepaid expenses and other assets 7,952 9,671
Deferred income taxes 373 373
Assets held for sale 1,658 1,653
--------- ---------
Total current assets 270,523 254,689
Property and equipment, net 61,034 59,033
Favorable leases acquired, net 17,919 18,647
Other assets, net of accumulated amortization of $630
and $457, respectively 1,999 2,750
--------- ---------
Total assets $ 351,475 $ 335,119
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 94,217 $ 126,478
Current portion of capital lease obligations 396 376
Accrued expenses and other current liabilities 30,767 30,596
--------- ---------
Total current liabilities 125,380 157,450
Long-term debt 145,999 100,000
Capital lease obligations, less current portion 2,493 2,693
Deferred rent 4,522 3,768
Deferred income taxes 7,742 7,742
--------- ---------
Total liabilities 286,136 271,653
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. 3,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value. 22,000,000 shares authorized;
8,036,977 and 8,030,429 shares issued and 7,659,312
and 7,652,764 shares outstanding at July 31, 1999 and
January 30, 1999, respectively 80 80
Additional paid-in capital 57,985 55,685
Unamortized restricted stock compensation (2,130) (21)
Accumulated other comprehensive loss (493) (1,762)
Retained earnings 12,024 11,620
--------- ---------
67,466 65,602
Treasury stock, 377,665 common shares, at cost (2,108) (2,108)
Notes receivable from stockholders (19) (28)
--------- ---------
Total stockholders' equity 65,339 63,466
--------- ---------
Total liabilities and stockholders' equity $ 351,475 $ 335,119
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE>
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, Dollars in Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
-------------------------------- --------------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 172,562 $ 169,057 $ 324,495 $ 324,274
Cost of goods sold, buying, distribution and
occupancy 131,968 127,182 248,110 248,234
----------- ----------- ----------- -----------
Gross profit 40,594 41,875 76,385 76,040
Operating expenses 37,013 35,469 70,947 70,313
Merger integration costs -- 740 -- 2,701
----------- ----------- ----------- -----------
Operating income 3,581 5,666 5,438 3,026
Non operating income (expense):
Interest expense, net (2,802) (2,089) (5,214) (4,216)
Other income 64 192 439 316
----------- ----------- ----------- -----------
Income (loss) before income taxes 843 3,769 663 (874)
Income tax benefit (expense) (329) (1,470) (259) 341
----------- ----------- ----------- -----------
Net income (loss) $ 514 $ 2,299 $ 404 $ (533)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ 0.07 $ 0.30 $ 0.05 $ (0.07)
=========== =========== =========== ===========
Diluted $ 0.07 $ 0.29 $ 0.05 $ (0.07)
=========== =========== =========== ===========
Weighted average shares of common stock outstanding:
Basic 7,653,196 7,679,761 7,652,980 7,679,656
=========== =========== =========== ===========
Diluted 7,714,437 7,859,152 7,719,135 7,679,656
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Unamortized other
Common paid-in restricted stock comprehensive Retained Comprehensive
stock capital compensation loss eamings income
-------- ---------- ----------------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 30, 1999 $ 80 $55,685 $ (21) $ (1,762) $ 11,620
-------- ---------- ----------------- --------------- -----------
Net income -- -- -- -- 404 404
Unrealized gain on equity securities,
net of reclassification adjustment -- -- -- 1,269 -- 1,269
--------------
Comprehensive income $ 1,673
==============
Receipts on notes receivable -- -- -- -- --
Issuance of common stock -- 48 -- -- --
Issuance of restricted stock -- 2,252 (2,252) -- --
Amortization of restricted stock -- -- 143 -- --
-------- ---------- ----------------- --------------- -----------
BALANCES AT JULY 31, 1999 $ 80 $57,985 $ (2,130) $ (493) $ 12,024
======== ========== ================= =============== ===========
<CAPTION>
Notes
receivable Total
Treasury from stock- Stockholders'
stock holders equity
--------- ----------- --------------
<S> <C> <C> <C>
BALANCES AT JANUARY 30, 1999 $ (2,108) $ (28) $ 63,466
--------- ----------- --------------
Net income -- -- 404
Unrealized gain on equity securities,
net of reclassification adjustment -- -- 1,269
Comprehensive income
Receipts on notes receivable -- 9 9
Issuance of common stock -- -- 48
Issuance of restricted stock -- -- --
Amortization of restricted stock -- -- 143
--------- ----------- --------------
BALANCES AT JULY 31, 1999 $ (2,108) $ (19) $ 65,339
========= =========== ==============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
Twenty-six weeks ended
-------------------------------------
July 31, August 1,
1999 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 404 $ (533)
Adjustments to reconcile net income (loss)
to net cash and cash equivalents used in operating activities:
Depreciation and amortization 6,681 6,022
Gain on sale of assets (179) (2)
Increase in deferred expenses 945 828
Changes in operating assets and liabilities:
Accounts receivable, net (2,900) (2,857)
Inventories (16,290) (17,278)
Prepaid expenses and other assets 229 (2,606)
Other assets 123 78
Accounts payable (32,261) 28,545
Accrued expenses and other current liabilities 171 (16,683)
-------- --------
Net cash used in operating activities (43,077) (4,486)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities 2,979 --
Purchases of property and equipment (7,372) (4,471)
Proceeds from sale of property and equipment -- 107
-------- --------
Net cash used in investing activities (4,393) (4,364)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term debt 45,999 1,040
Principal payments on capital lease obligations (180) (165)
Payment of notes receivable from stockholders 9 29
Proceeds from the sale of common stock
under option plans -- 12
Payment of financing fees -- (72)
-------- --------
Net cash provided by financing activities 45,828 844
-------- --------
Decrease in cash and cash equivalents (1,642) (8,006)
Cash and cash equivalents at beginning of period 10,779 16,372
-------- --------
Cash and cash equivalents at end of period $ 9,137 $ 8,366
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net $ 4,653 $ 5,588
======== ========
Cash paid (received) during the period for income taxes $ (211) $ 1,350
======== ========
</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 and twenty-six week periods ended July 31, 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. PRE-OPENING EXPENSES
Beginning fiscal 1999, the Company expenses 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
is no financial impact.
3. SALE OF MARKETABLE SECURITIES
During the twenty-six weeks ended July 31, 1999, the Company sold certain
marketable securities, resulting in a realized gain of approximately
$220,000 before taxes, 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 twenty-six weeks ended July 31,
1999, approximately $1.5 million of unrealized holding gains arose, before
the reclassification adjustment of the realized gain included in net
income.
4. INCOME (LOSS) PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
----------------------------- ------------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net income (loss) available to common stockholders $ 514,000 $ 2,299,000 $ 404,000 $ (533,000)
Weighted average shares of common stock
outstanding - basic 7,653,196 7,679,761 7,652,980 7,679,656
----------- ----------- ----------- -----------
Basic earnings (loss) per share $ 0.07 $ 0.30 0.05 $ (0.07)
=========== =========== =========== ===========
Number of shares used for diluted earnings
per share:
Weighted average shares of common stock
outstanding - basic 7,653,196 7,679,761 7,652,980 7,679,656
Dilutive securities - stock options and restricted stock 61,241 179,391 66,155 --
----------- ----------- ----------- -----------
Weighted average shares of common stock
outstanding - diluted 7,714,437 7,859,152 7,719,135 7,679,656
----------- ----------- ----------- -----------
Diluted earnings (loss) per share $ 0.07 $ 0.29 $ 0.05 $ (0.07)
=========== =========== =========== ===========
</TABLE>
5
<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.
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.
The Company uses a 52-53 week fiscal reporting year ending on the Saturday
closest to the end of January.
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 Twenty-six weeks ended
---------------------------------------------- -----------------------------------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
Dollars % Dollars % Dollars % Dollars %
------------- ------ -------------- ------ ------------- ------ -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 172.6 100.0% $ 169.1 100.0% $ 324.5 100.0% $ 324.3 100.0%
Cost of goods sold, buying,
distribution and occupancy (132.0) (76.5) (127.2) (75.2) (248.1) (76.5) (248.2) (76.5)
-------- ------- -------- ------ -------- ------- -------- -------
Gross profit 40.6 23.5 41.9 24.8 76.4 23.5 76.1 23.5
Operating expenses (37.0) (21.4) (35.5) (21.0) (70.9) (21.8) (70.3) (21.7)
Merger integration costs -- -- (0.7) (0.4) -- -- (2.7) (0.8)
-------- ------- -------- ------ -------- ------- -------- -------
Operating income (loss) 3.6 2.1 5.7 3.4 5.5 1.7 3.1 1.0
Interest expense, net (2.8) (1.6) (2.1) (1.2) (5.2) (1.6) (4.2) (1.3)
Other income 0.0 0.0 0.2 0.1 0.4 0.1 0.3 0.1
-------- ------- -------- ------ -------- ------- -------- -------
Income (loss) before
income taxes 0.8 0.5 3.8 2.3 0.7 0.2 (0.8) (0.2)
Income tax benefit (expense) (0.3) (0.2) (1.5) (0.9) (0.3) (0.1) 0.3 0.1
======== ======= ======== ======= ======== ======= ======== =======
Net income (loss) $ 0.5 0.3% $ 2.3 1.4% $ 0.4 0.1 % $ (0.5) (0.1)%
======== ======= ======== ======= ======== ======= ======== =======
Number of stores at end of period 127 121 127 121
======== ======== ======== ========
</TABLE>
THIRTEEN WEEKS ENDED JULY 31, 1999 COMPARED TO THIRTEEN WEEKS ENDED
AUGUST 1, 1998
Net Sales. Net sales for the thirteen weeks ended July 31, 1999 increased
$3.5 million from the year ago quarter, from $169.1 million to $172.6 million.
Comparable store sales decreased 2.5% for the quarter, primarily due to lower
sales in men's and lifestyle footwear, inline skates, and licensed apparel.
Sales of footwear continue to be very competitive, however the Company did see
an improved trend during the current period. Skate sales were down primarily due
to a decrease in skate promotional events this quarter versus the year ago
quarter. Licensed apparel sales decreased significantly from the year ago
quarter due to the Chicago Bulls not repeating as NBA Champions. The decline in
the sales of these items was partially offset by strong sales of outdoor
products and hard-goods.
Gross Profit. Gross profit for the thirteen weeks ended July 31, 1999 was
$40.6 million, or 23.5% of net sales, as compared to $41.9 million, or 24.8% of
net sales, for the thirteen weeks ended August 1, 1998. The decrease is due
primarily to increased occupancy costs associated with new stores opened during
the year.
6
<PAGE>
Operating Expenses. Operating expenses for the thirteen weeks ended July 31,
1999 were $37.0 million, or 21.4% of net sales, compared to $35.5 million, or
21.0% of net sales, for the thirteen weeks ended August 1, 1998. The increase is
consistent with the increase in the number of stores compared to the year ago
quarter.
Merger Integration Costs. The Company did not incur any merger integration
costs during the thirteen weeks ended July 31, 1999 and does not expect to incur
any during the remainder of this fiscal year. During the thirteen weeks ended
August 1, 1998, the Company incurred $0.7 million of integration costs.
Operating Income. As a result of the factors described above, the Company
recorded operating income for the thirteen weeks ended July 31, 1999 of $3.6
million compared to operating income of $5.7 million for the thirteen weeks
ended August 1, 1998.
Interest Expense, Net. Interest expense, net for the thirteen weeks ended
July 31, 1999 increased to $2.8 million, or 1.6% of net sales, from $2.1
million, or 1.2% of net sales, in the thirteen weeks ended August 1, 1998. The
increase is primarily due to an increase in average interest-bearing debt for
the period, partially due to decreasing accounts payable levels caused by the
timing of inventory receipts in the current year, increased capital expenditures
and inventory purchases for new stores.
Income Taxes. The Company's income tax expense for the thirteen weeks ended
July 31, 1999 was $0.3 million compared to an income tax expense of $1.5 million
for the thirteen weeks ended August 1, 1998. The Company's tax provision rate
remained at 39.0% for both periods.
TWENTY-SIX WEEKS ENDED JULY 31, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
1, 1998
Net Sales. Net sales for the twenty-six weeks ended July 31, 1999 increased
$0.2 million from the year ago period, from $324.3 million to $324.5 million.
Comparable store sales decreased 3.7% for the same period, primarily due to
lower sales in footwear and apparel. Footwear sales continue to be very
competitive, however the Company continues to see improving trends in this
category. Licensed apparel sales decreased significantly from the year ago
period as a result of the Chicago Bulls not repeating as NBA Champions. The
decline in the sales of these items was partially offset by strong sales of
outdoor products and hard-goods.
Gross Profit. Gross profit for the twenty-six weeks ended July 31, 1999 was
$76.4 million, or 23.5% of net sales, as compared to $76.1 million, or 23.5% of
net sales, for the twenty-six weeks ended August 1, 1998. Increases in gross
profit associated with improved merchandise margins were offset by decreases
associated with higher occupancy costs.
Operating Expenses. Operating expenses for the twenty-six weeks ended July
31, 1999 were $70.9 million, or 21.8% of net sales, compared to $70.3 million,
or 21.7% of net sales, for the twenty-six weeks ended August 1, 1998. Increase
is due to the increase in the number of stores compared to the prior year
period.
Merger Integration Costs. The Company did not incur any merger integration
costs during the twenty-six weeks ended July 31, 1999 and does not expect to
incur any during the remainder of this fiscal year. During the twenty-six weeks
ended August 1, 1998, the Company incurred $2.7 million of integration costs.
Operating Income. As a result of the factors described above, the Company
recorded operating income for the twenty-six weeks ended July 31, 1999 of $5.5
million compared to operating income of $3.1 million for the twenty-six weeks
ended August 1, 1998.
Interest Expense, Net. Interest expense, net for the twenty-six weeks ended
July 31, 1999 increased to $5.2 million, or 1.6% of net sales, from $4.2
million, or 1.3% of net sales, in the twenty-six weeks ended August 1, 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, decreased
accounts payable levels due to the timing of inventory receipts in the current
year, and for the increased capital expenditures and inventory purchases for new
stores.
7
<PAGE>
Income Taxes. The Company's income tax expense for the twenty-six week
period ended July 31, 1999 was $0.3 million compared to an income tax benefit of
$0.3 million for the twenty-six weeks ended August 1, 1998. The Company's tax
provision rate remained at 39.0% for both periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for inventory, capital
improvements, and expenditures 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
Twenty-six weeks ended
----------------------------
July 31, August 1,
1999 1998
------------ -------------
Cash used in operating activities $ (43,077) $ (4,486)
Cash used in investing activities (4,393) (4,364)
Cash provided by financing activities 45,828 844
Capital expenditures $ 7,372 $ 4,471
Long-term debt (at end of period) 145,999 106,640
Working capital (at end of period) 145,143 114,614
Current ratio (at end of period) 2.16 1.81
Debt to equity ratio (at end of period) 2.23 1.56
Cash used in operating activities in the first six months of fiscal 1999 was
primarily the result of increases in inventory and accounts receivable, and
decreases in accounts payable due to timing of inventory receipts in the current
year, which was only slightly offset by cash generated by net income and
non-cash charges for the first half of fiscal 1999.
Cash used in investing activities in the first six months of fiscal 1999 was
primarily for capital expenditures. These expenditures were primarily for the
opening of four new superstores, construction of one new store expected to open
during the third fiscal quarter of 1999, renovations and improvements to
existing stores as well as the purchase of information systems. These cash uses
were partially offset by cash received from the sale of marketable securities.
Cash provided by financing activities in the first six months of fiscal 1999
represents net proceeds from borrowings on the company's revolving line of
credit. At the time of the acquisition, the Company refinanced Sportmart debt of
$86.2 million under the Credit Agreement referred to below. The increase in
borrowings since fiscal year end 1998 is primarily attributable to seasonal
purchases of inventory, capital expenditures, increases in accounts receivable,
and decreases in accounts payable due to the timing of inventory receipts in the
current year.
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. The Company calculated its
eligible inventory for borrowing at 75% in June and July during the second
quarter this 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
8
<PAGE>
borrowings can be reduced, if certain earnings levels are achieved, to as low as
0.0% and 1.50%, respectively. As of July 31, 1999, the Company had not achieved
these specified earnings levels. There was $24.7 million available for borrowing
at July 31, 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. (Thrifty), a subsidiary of RiteAid
Corporation, in conjunction with an IRS examination of Thrifty. The proposed
adjustments relate 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 the Company's expansion plans as well as
various investments in store remodelings, store fixtures and ongoing
infrastructure improvements are projected to be approximately $12.0 million in
fiscal 1999. These capital expenditures are primarily for five planned 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 expected to be generated from operations,
combined with funds available under the Credit Agreement, will be sufficient to
fund projected capital expenditures and other working capital requirements for
the foreseeable future. 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, which expired in
August 1999, that Sportmart had utilized to reduce interest rate risks. The
Company does not use derivatives for speculative trading purposes.
The Company had an interest rate cap agreement for a notional amount
totaling $25.0 million that placed an interest rate ceiling on LIBOR at 6.0%.
The agreement covered the revolving line of credit and expired 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 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.
9
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 137 which delays 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 delayed the effective date for one year, to fiscal years
beginning after 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 does not use derivatives, 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. Of the vendors that we have contacted, approximately 65% have
responded to our inquiries. 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 76% of its Point of Sale systems and 95% of its
Personal Computer and Local/Wide Area Network systems for Year 2000 compliance
with the remaining Point of Sale and store personal computers already being Year
2000 ready. Merchandise, Accounting and Sales systems are in various stages of
the implementation and testing 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 and testing of all computer systems that are critical to its
operations by October 1999. Some non-critical systems may not be remediated,
however, until after January 2000.
10
<PAGE>
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, in general, 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. We have begun testing host systems for Year 2000
compliance, but have not yet begun testing the merchandise processing system, as
we are still awaiting certain code changes from our software manufacturer. The
Company has completed date testing for its in-store and host Point of Sale
software. Certain risks exist if this testing and certification is significantly
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 historically 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. See "The Company's Year
2000 Risks" below.
The Costs to Address the Company's Year 2000 Issues. The Company has
incurred costs of approximately $847,000 as of July 31, 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. Under the most reasonably likely worst case
scenario, the Company does not anticipate more than isolated, temporary
disruptions of its operations caused by Year 2000 failures affecting either the
Company or its key merchandise and service vendors. Many of our vendors
manufacture their products overseas and even though their internal computer
systems may be Year 2000 ready, some vendors may experience delays related to
importing goods. Since the majority of products sold by our stores is brand name
merchandise, it will not likely be feasible to replace a vendor who is
experiencing Year 2000 problems with its internal computer systems or who is
unable to deliver its products on a timely basis. If certain of our vendors are
unable to deliver products on a timely basis, we may experience temporary
shortages or outages of those items. Many risks, however, such as the failure to
perform by public utilities, telecommunications providers, and financial
institutions, and the impact of the Year 2000 issue on the national and global
economies, are outside the control of the Company and could materially and
adversely affect the Company's business operations and financial condition.
While we have made significant efforts to address anticipated risks associated
with Year 2000 issues, this is an event without precedent. As a result, there
can be no assurance that the Year 2000 issues will not have a material adverse
impact on the Company's financial condition, operating results and business.
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
. 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.
11
<PAGE>
The Company's Contingency Plans. The Company is in the final stages of
developing its business continuity plans. Each business unit has begun to
develop its own contingency plan to identify actions that need to be taken in
the event of certain critical systems failures. Components of the plans include
(a) establishing a communications center at corporate headquarters in Denver,
Colorado during the rollover weekend from Saturday, January 1, 2000 through
Monday, January 3, 2000, (b) having the ability to manually process store
transactions, and (c) planning for December delivery of certain inventory.
Assuming that the stores have electricity, the Company believes that the stores
will be able to open and operate even if the Company's internal information
systems are not properly functioning so that the Company will not experience any
significant business interruption.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held June 16, 1999, 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:
Number of votes
-----------------------------------------------
Authority Broker
Director Nominees For Withheld Non-votes
-------------------- ----------- --------- ---------
John Douglas Morton 6,338,097 106,637 0
Jonathon D. Sokoloff 6,315,130 129,604 0
Gordon D. Barker 6,338,099 106,635 0
Peter R. Formanek 6,315,146 129,588 0
Larry T. Hochberg 6,313,452 131,282 0
Andrew S. Hochberg 6,338,133 106,601 0
Jonathon A. Seiffer 6,337,786 106,948 0
The stockholders also ratified amendments to the Company's 1994 Management
Equity Plan. The result of this vote was 6,221,825 for, 218,615 against, and
4,294 abstained.
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 July
31, 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 September 10, 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 9,137
<SECURITIES> 0
<RECEIVABLES> 11,436
<ALLOWANCES> (160)
<INVENTORY> 240,127
<CURRENT-ASSETS> 270,523
<PP&E> 84,876
<DEPRECIATION> (23,842)
<TOTAL-ASSETS> 351,475
<CURRENT-LIABILITIES> 125,380
<BONDS> 0
0
0
<COMMON> 80
<OTHER-SE> 65,259
<TOTAL-LIABILITY-AND-EQUITY> 351,475
<SALES> 324,495
<TOTAL-REVENUES> 324,495
<CGS> 248,110
<TOTAL-COSTS> 319,057
<OTHER-EXPENSES> (439)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,214
<INCOME-PRETAX> 663
<INCOME-TAX> 259
<INCOME-CONTINUING> 404
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 404
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
