<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: October 30, 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 December 6, 1999, there were outstanding 7,603,612 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 $15,522,000.
<PAGE>
GART SPORTS COMPANY
QUARTERLY PERIOD ENDED OCTOBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
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 5. Other Information...................................................... 12
Item 6. Exhibits and Reports on Form 8-K....................................... 12
SIGNATURES............................................................................ 13
</TABLE>
<PAGE>
PART 1 - 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>
October 30, January 30,
1999 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,550 $ 10,779
Accounts receivable, net of allowance for doubtful
accounts of $162 and $122, respectively 9,734 8,376
Inventories 277,119 223,837
Prepaid expenses and other assets 7,120 8,524
Deferred income taxes 373 373
Assets held for sale 1,699 1,653
--------- ---------
Total current assets 302,595 253,542
Property and equipment, net 60,664 59,033
Favorable leases acquired, net 17,319 19,107
Other assets, net of accumulated amortization of $710
and $457, respectively 2,886 3,437
--------- ---------
Total assets $ 383,464 $ 335,119
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 140,407 $ 126,478
Current portion of capital lease obligations 406 376
Accrued expenses and other current liabilities 26,486 30,596
--------- ---------
Total current liabilities 167,299 157,450
Long-term debt 138,600 100,000
Capital lease obligations, less current portion 2,384 2,693
Deferred rent 4,919 3,768
Deferred income taxes 7,742 7,742
--------- ---------
Total liabilities 320,944 271,653
--------- ---------
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;
7,690,651 and 8,030,429 shares issued and 7,609,312 and
7,652,764 shares outstanding at October 30, 1999 and
January 30, 1999, respectively 77 80
Additional paid-in capital 56,123 55,685
Unamortized restricted stock compensation (2,036) (21)
Accumulated other comprehensive loss (602) (1,762)
Retained earnings 9,512 11,620
--------- ---------
63,074 65,602
Treasury stock, 81,339 and 377,665 common shares,
respectively, at cost (554) (2,108)
Notes receivable from stockholders -- (28)
--------- ---------
Total stockholders' equity 62,520 63,466
--------- ---------
Total liabilities and stockholders' equity $ 383,464 $ 335,119
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE>
GART SPORTS COMPANY
AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, Dollars in Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
----------------------------- --------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 155,495 $ 142,583 $ 479,990 $ 466,858
Cost of goods sold, buying, distribution and
occupancy 121,178 112,890 369,287 361,125
------------- ------------- -------------- ----------------
Gross profit 34,317 29,693 110,703 105,733
Operating expenses 35,821 37,178 106,769 107,491
Merger integration costs - 222 - 2,923
------------- ------------- -------------- ----------------
Operating income (loss) (1,504) (7,707) 3,934 (4,681)
Non operating income (expense):
Interest expense, net (2,735) (2,244) (7,949) (6,461)
Other income 121 146 560 462
------------- ------------- -------------- ----------------
Loss before income taxes (4,118) (9,805) (3,455) (10,680)
Income tax benefit 1,606 3,823 1,347 4,165
------------- ------------- -------------- ----------------
Net loss $ (2,512) $ (5,982) $ (2,108) $ (6,515)
============= ============= ============== ================
Loss per share:
Basic and diluted $ (0.33) $ (0.78) $ (0.28) $ (0.85)
============= ============= ============== ================
Weighted average shares of common stock outstanding:
Basic and diluted 7,653,598 7,681,015 7,653,186 7,680,109
============= ============= ============== ================
See accompanying notes to consolidated financial statements
</TABLE>
2
<PAGE>
GART SPORTS COMPANY
AND SUBSIDARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(Unaudited, Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Unamortized other
Common paid-in restricted stock comprehensive Retained Comprehensive
stock capital compensation loss earnings income
-------- --------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 30, 1999 $ 80 $ 55,685 $ (21) $ (1,762) $ 11,620
------- -------- ------------ ------------- ---------
Net loss -- -- -- -- (2,108) $ (2,108)
Unrealized gain on equity securities,
net of reclassification adjustment -- -- -- 1,160 -- 1,160
==========
Comprehensive income $ (948)
==========
Receipts on notes receivable -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Retirement of treasury stock (3) (1,862) -- -- --
Issuance of common stock -- 48 -- -- --
Issuance of restricted stock -- 2,252 (2,252) -- --
Amortization of restricted stock -- -- 237 -- --
======= ========= ============ ============= =========
BALANCES AT OCTOBER 30, 1999 $ 77 $ 56,123 $ (2,036) $ (602) $ 9,512
======= ========= ============ ============= =========
<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 loss -- -- (2,108)
Unrealized gain on equity securities,
net of reclassification adjustments -- -- 1,160
Comprehensive income
Receipts on notes receivable -- 28 28
Purchase of treasury stock (311) -- (311)
Retirement of treasury stock 1,865 -- --
Issuance of common stock -- -- 48
Issuance of restricted stock -- -- --
Amortization of restricted stock -- -- 237
======== ========== ==========
BALANCES AT OCTOBER 30, 1999 $ (554) $ -- $ 62,520
======== ========== ==========
</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>
Thirty-nine weeks ended
---------------------------------
October 30, October 31,
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,108) $ (6,515)
Adjustments to reconcile net loss
to net cash and cash equivalents used in operating activities:
Depreciation and amortization 10,190 8,922
Gain on sale of assets (179) (91)
Increase in deferred expenses 1,436 1,237
Changes in operating assets and liabilities:
Accounts receivable, net (1,358) (2,141)
Inventories (53,282) (56,134)
Prepaid expenses and other assets (195) (3,540)
Other assets 268 (342)
Accounts payable 13,929 60,515
Accrued expenses and other current
liabilities (4,110) (24,969)
------- -------
Net cash used in operating activities (35,409) (23,058)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of marketable securities 2,979 (3,529)
Purchases of property and equipment (9,837) (11,702)
Proceeds from sale of property and equipment -- 183
------- -------
Net cash used in investing activities (6,858) (15,048)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term debt 38,600 28,900
Principal payments on capital lease
obligations (279) (252)
Purchase of treasury stock (311) --
Payment of notes receivable from
stockholders 28 38
Proceeds from the sale of common stock
under option plans -- 20
Payment of financing fees -- (72)
------ -------
Net cash provided by financing activities 38,038 28,634
------ ------
Decrease in cash and cash equivalents (4,229) (9,472)
Cash and cash equivalents at beginning of period 10,779 16,372
======= =======
Cash and cash equivalents at end of period $ 6,550 $ 6,900
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net $ 7,344 $ 7,070
======= =======
Cash paid (received) during the period for income taxes $ (499) $ 2,435
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
GART SPORTS COMPANY AND SUBSIDIARIES
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 thirty-nine week periods ended October 30, 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 thirty-nine weeks ended October 30, 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 thirty-nine weeks ended October 30, 1999,
approximately $1.4 million of unrealized holding gains arose, before the
reclassification adjustment of the realized gain included in the loss before
income taxes.
4. LOSS PER SHARE
The following table sets forth the computations of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
------------------------------ ------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
--------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net loss available to common stockholders $ (2,512,000) $(5,982,000) $ (2,108,000) $(6,515,000)
Weighted average shares of common stock
outstanding - basic and diluted 7,653,598 7,681,015 7,653,186 7,680,109
--------------- ------------ ------------- -----------
Basic and diluted loss per share $ (0.33) $ (0.78) $ (0.28) $ (0.85)
=============== ============ ============= ===========
</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 in 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 Thirty-nine weeks ended
---------------------------------------------- ---------------------------------------------
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
Dollars % Dollars % Dollars % Dollars %
----------- ----- ----------- ------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 155.5 100.0 % $ 142.6 100.0 % $ 480.0 100.0 % $ 466.8 100.0 %
Cost of goods sold, buying,
distribution and occupancy (121.2) (77.9) (112.9) (79.2) (369.3) (76.9) (361.1) (77.4)
----------- ----- ----------- ------ ----------- ----- ----------- -----
Gross profit 34.3 22.1 29.7 20.8 110.7 23.1 105.7 22.6
Operating expenses (35.8) (23.1) (37.2) (26.1) (106.8) (22.3) (107.5) (23.0)
Merger integration costs -- -- (0.2) (0.1) -- -- (2.9) (0.6)
----------- ----- ----------- ------ ----------- ----- ----------- -----
Operating income (loss) (1.5) (1.0) (7.7) (5.4) 3.9 0.8 (4.7) (1.0)
Interest expense, net (2.7) (1.7) (2.2) (1.6) (8.0) (1.6) (6.4) (1.4)
Other income 0.1 0.1 0.1 0.1 0.6 0.1 0.5 0.1
----------- ----- ----------- ------ ----------- ----- ----------- -----
Loss before income taxes (4.1) (2.6) (9.8) (6.9) (3.5) (0.7) (10.6) (2.3)
Income tax benefit 1.6 1.0 3.8 2.7 1.4 0.3 4.1 0.9
----------- ----- ----------- ------ ----------- ----- ----------- -----
Net loss $ (2.5) (1.6)% $ (6.0) (4.2)% $ (2.1) (0.4)% $ (6.5) (1.4)%
=========== ===== =========== ====== =========== ===== =========== =====
Number of stores at end of period 128 123 128 123
=========== =========== =========== ===========
</TABLE>
THIRTEEN WEEKS ENDED OCTOBER 30, 1999 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER
31, 1998
Net Sales. Net sales for the thirteen weeks ended October 30, 1999 increased
$12.9 million from the year ago quarter, from $142.6 million to $155.5 million.
Comparable store sales increased 3.0% for the quarter, primarily due to
increased sales in ski hardgoods and softgoods, snowboards, ladies activewear,
athletic hardgoods, and exercise/fitness products. The increases in ski
hardgoods, snowboards, and ski softgoods resulted from strong sales in the
annual "Sniagrab" sale. Ladies activewear, athletic hardgoods, and
exercise/fitness improved over the prior year primarily due to the complete
integration of these products into the stores resulting in better selection and
quality.
Gross Profit. Gross profit for the thirteen weeks ended October 30, 1999 was
$34.3 million, or 22.1% of net sales, as compared to $29.7 million, or 20.8% of
net sales, for the thirteen weeks ended October 31, 1998. The increase is
primarily due to improved merchandise margins over the prior year as a result of
vendor consolidation and less clearance inventory due to the streamlining of
products subsequent to the Sportmart acquisition, offset slightly by increased
occupancy costs associated with new stores opened during the year.
6
<PAGE>
Operating Expenses. Operating expenses for the thirteen weeks ended October
30, 1999 were $35.8 million, or 23.1% of net sales, compared to $37.2 million,
or 26.1% of net sales, for the thirteen weeks ended October 31, 1998. The
decrease is primarily due to higher costs incurred in the prior year associated
with the integration of Sportmart and a decrease in current year advertising
costs due to a more focused advertising program undertaken by the Company.
Merger Integration Costs. The Company did not incur any merger integration
costs during the thirteen weeks ended October 30, 1999 and does not expect to
incur any during the remainder of this fiscal year. During the thirteen weeks
ended October 31, 1998, the Company incurred $0.2 million of integration costs.
Operating Loss. As a result of the factors described above, the Company
recorded an operating loss for the thirteen weeks ended October 30, 1999 of $1.5
million compared to an operating loss of $7.7 million for the thirteen weeks
ended October 31, 1998.
Interest Expense, Net. Interest expense, net for the thirteen weeks ended
October 30, 1999 increased to $2.7 million, or 1.7% of net sales, from $2.2
million, or 1.6% of net sales, in the thirteen weeks ended October 31, 1998.
The increase is primarily due to an increase in average interest-bearing debt
for the period, primarily due to an increased inventory balance over the prior
year due to new stores opened during the year, and an increase in the effective
borrowing rate as a result of rising interest rates.
Income Taxes. The Company's income tax benefit for the thirteen weeks ended
October 30, 1999 was $1.6 million compared to $3.8 million for the thirteen
weeks ended October 31, 1998. The Company's tax provision rate remained at 39.0%
for both periods.
THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 31, 1998
Net Sales. Net sales for the thirty-nine weeks ended October 30, 1999
increased $13.2 million from the year ago period, from $466.8 million to $480.0
million. Comparable store sales decreased 1.6% for the same period, primarily
due to lower sales in footwear, in-line skates, and licensed apparel. The
footwear segment of the industry continues to be very competitive, however the
Company continues to see improving trends in this category. 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 thirty-nine weeks ended October 30, 1999
was $110.7 million, or 23.1% of net sales, as compared to $105.7 million, or
22.6% of net sales, for the thirty-nine weeks ended October 31, 1998. Increases
in gross profit associated with improved merchandise margins were partially
offset by decreases associated with higher occupancy costs due to new stores
opened during the period.
Operating Expenses. Operating expenses for the thirty-nine weeks ended
October 30, 1999 were $106.8 million, or 22.3% of net sales, compared to $107.5
million, or 23.0% of net sales, for the thirty-nine weeks ended October 31,
1998. Decrease is due to higher costs incurred in the prior year associated with
the integration of Sportmart and a decrease in current year advertising costs
due to a more focused advertising program undertaken by the Company. These items
were partially offset by an increase in expenses associated with 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 thirty-nine weeks ended October 30, 1999 and does not expect
to incur any during the remainder of this fiscal year. During the thirty-nine
weeks ended October 31, 1998, the Company incurred $2.9 million of integration
costs.
Operating Income/Loss. As a result of the factors described above, the
Company recorded operating income for the thirty-nine weeks ended October 30,
1999 of $3.9 million compared to an operating loss of $4.7 million for the
thirty-nine weeks ended October 31, 1998.
7
<PAGE>
Interest Expense, Net. Interest expense, net for the thirty-nine weeks ended
October 30, 1999 increased to $8.0 million, or 1.6% of net sales, from $6.4
million, or 1.4% of net sales, in the thirty-nine weeks ended October 31, 1998.
The increase is primarily due to an increase in average interest-bearing debt
for the period, partially due to a higher inventory balance due to new stores,
and an increase in the effective borrowing rate as a result of rising interest
rates.
Income Taxes. The Company's income tax benefit for the thirty-nine week
period ended October 30, 1999 was $1.4 million compared to $4.1 million for the
thirty-nine weeks ended October 31, 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 and capital
improvements, as well as for investments in store remodeling, store fixtures and
ongoing infrastructure improvements.
Cash Flow Analysis
<TABLE>
<CAPTION>
Thirty-nine weeks ended
------------------------------
October 30, October 31,
1999 1998
------------- ------------
<S> <C> <C>
Cash used in operating activities $ (35,409) $ (23,058)
Cash used in investing activities (6,858) (15,048)
Cash provided by financing activities 38,038 28,634
Capital expenditures $ 9,837 $ 11,702
Long-term debt (at end of period) 138,600 134,500
Working capital (at end of period) 135,296 130,552
Current ratio (at end of period) 1.81 1.77
Debt to equity ratio (at end of period) 2.26 2.21
</TABLE>
Cash used in operating activities in the first nine months of fiscal 1999 was
primarily the result of the net loss adjusted for non-cash expenses, and an
increase in accounts payable, offset by increases in inventory and accounts
receivable, and decreases in accrued expenses.
Cash used in investing activities in the first nine months of fiscal 1999 was
primarily for capital expenditures. These expenditures were primarily for the
opening of five new superstores, 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 nine months of fiscal 1999
represents net proceeds from borrowings on the Company's revolving line of
credit reduced by payments made on capital leases and the purchase of treasury
stock. At the time of the Sportmart 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 and capital expenditures during the period
offset by an increase in accounts payable.
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, July, and August
of the current 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
8
<PAGE>
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
restricts 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 October 30, 1999, the Company had not
achieved these specified earnings levels. There was $36.4 million available for
borrowing at October 30, 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 $12.6 million in
fiscal 1999. These capital expenditures are primarily for seven 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.
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 inflationary increases in costs to its customer.
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.
9
<PAGE>
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 for 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 66% have
responded to our inquiries. We believe that the vendors contacted represent
approximately 80% of our key business partners from both a merchandise and
operational perspective. With the exception of two immaterial vendors, all
vendors who responded to our inquiries acknowledged the Year 2000 issue and were
working to be Year 2000 compliant by December 31, 1999. The Company has not
validated the accuracy of responses from its vendors.
Internal Computer Systems. We began the assessment of our internal computer
systems in 1995. All core applications were identified, assessed and ranked for
critical importance to the operations of the Company. Since then we have
replaced or modified 80% of our Point of Sale systems and 100% of our Personal
Computer and Local/Wide Area Network systems for Year 2000 compliance with the
remaining Point of Sale systems already being Year 2000 ready. We have completed
remediation and testing of all computer systems that are critical to our
operations, including merchandise, accounting and sales systems. We have
completed implementation of our new payroll processing system. Some non-critical
systems will not be remediated until after January 2000.
Embedded Microprocessors. We have completed our assessment of the potential
Year 2000 problems with respect to embedded microprocessors in our Non-IT
equipment, merchandise inventory, warehouse and distribution facilities, and
corporate offices. Based on our assessment, we believe that our equipment and
systems that contain embedded computer technology present little Year 2000
exposure or risk. Based on information from our merchandise vendors, we believe
that, in general, our resale merchandise does not have Year 2000 compliance
issues. We have assessed our mission critical, non-information systems service
providers and do not believe that these service providers pose a substantial
Year 2000 compliance risk.
Testing and Certification. We have completed testing our host systems for
Year 2000 compliance. We have also completed date testing for our in-store and
host Point of Sale software. No problems have been identified.
10
<PAGE>
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 $890,000 as of November 27, 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 be approximately
$1.1 million.
The Company's Year 2000 Risks. Under the most reasonably likely worst case
scenario, we do not anticipate more than isolated, temporary disruptions of our
operations caused by Year 2000 failures affecting either our internal systems or
our 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
of our control and could materially and adversely affect our 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.
We believe that our most significant Year 2000 risks are:
. Failure of our mission critical information systems if the related service
providers have failed to make their systems Year 2000 compliant; 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.
Contingency Plans. We have completed our business continuity plans. Each
department within the Company has developed 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 Sunday, January 2, 2000, continuing after such
date if necessary, (b) having the ability to manually process store
transactions, and (c) planning for December delivery of certain inventory that
would normally be delivered in January. Assuming that the stores have
electricity and other basic infrastructure utilities are operational, we believe
that the stores will be able to open and operate even if our internal
information systems are not properly functioning so that we 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.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On November 4, 1999, the Company reached an agreement to acquire two Denver
store locations from Jumbo Sports, Inc., d.b.a. Sports & Recreation. Under the
agreement Gart took immediate possession of the two sites and the current
inventory. The real estate was then sold to a group led by Richard Sapkin of HC
Properties, Denver, Colorado, and leased by the Company. The locations are in
Littleton and Westminster, suburbs of Denver, Colorado. The two stores opened
under the Gart Sports Company name on November 24, 1999.
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 a Current Report on Form 8-K with the Commission dated
October 6, 1999 to report, under Item 5, that the registrant issued a press
release on October 6, 1999, to announce its Board of Directors had
authorized a discretionary program to purchase up to $3,000,000 of its
common stock, par value, $.01 per share, on the open market or in privately
negotiated transactions using the Company's currently available cash.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on December 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
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 6,550
<SECURITIES> 0
<RECEIVABLES> 9,896
<ALLOWANCES> (162)
<INVENTORY> 277,119
<CURRENT-ASSETS> 302,595
<PP&E> 87,341
<DEPRECIATION> 26,677
<TOTAL-ASSETS> 383,464
<CURRENT-LIABILITIES> 167,299
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 62,443
<TOTAL-LIABILITY-AND-EQUITY> 383,464
<SALES> 479,990
<TOTAL-REVENUES> 479,990
<CGS> 369,287
<TOTAL-COSTS> 476,056
<OTHER-EXPENSES> (560)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,949
<INCOME-PRETAX> (3,455)
<INCOME-TAX> (1,347)
<INCOME-CONTINUING> (2,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,108)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
