<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 29, 2000
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 6, 2000, there were outstanding 7,341,364 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 $18,281,000.
<PAGE>
GART SPORTS COMPANY
QUARTERLY PERIOD ENDED JULY 29, 2000
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.... 7
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders.......................................... 11
Item 6. Exhibits and Reports on Form 8-K................. 11
SIGNATURES.......................................................... 12
<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 29, January 29,
2000 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,522 $ 7,843
Accounts receivable, net of allowance for doubtful accounts of $269 and $266,
respectively 7,887 6,871
Inventories 259,118 240,891
Prepaid expenses and other assets 7,226 6,887
Deferred income taxes 1,533 1,533
--------- ---------
Total current assets 285,286 264,025
Property and equipment, net 61,491 60,441
Favorable leases acquired, net -- 12,536
Asset held for sale 1,692 1,729
Deferred tax asset 12,620 --
Other assets, net of accumulated amortization of $1,074 and $810, respectively 5,306 5,517
--------- ---------
Total assets $ 366,395 $ 344,248
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 117,114 $ 127,410
Current portion of capital lease obligations 439 417
Accrued expenses and other current liabilities 34,173 31,345
--------- ---------
Total current liabilities 151,726 159,172
Long-term debt 130,200 105,900
Capital lease obligations, less current portion 2,051 2,276
Deferred rent and other long-term liabilities 6,170 5,292
Deferred income taxes -- 5,714
--------- ---------
Total liabilities 290,147 278,354
--------- ---------
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;
7,708,775 and 7,694,617 shares issued and 7,343,236 and 7,507,078
shares outstanding at July 29, 2000 and January 29, 2000, respectively. 77 77
Additional paid-in capital 56,885 55,990
Unamortized restricted stock compensation (2,385) (1,770)
Accumulated other comprehensive loss (648) (574)
Retained earnings 24,567 13,393
--------- ---------
78,496 67,116
Treasury stock, 365,539 and 187,539 common shares, respectively, at cost (2,248) (1,222)
--------- ---------
Total stockholders' equity 76,248 65,894
--------- ---------
Total liabilities and stockholders' equity $ 366,395 $ 344,248
========= =========
</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 29, July 31, July 29, July 31,
2000 1999 2000 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 187,600 $ 172,562 $ 353,349 $ 324,495
Cost of goods sold, buying, distribution and
occupancy 140,395 131,951 266,834 248,079
------------ ------------ ------------- -------------
Gross profit 47,205 40,611 86,515 76,416
Operating expenses 40,150 37,013 76,310 70,948
------------ ------------ ------------- -------------
Operating income 7,055 3,598 10,205 5,468
Non operating income (expense):
Interest expense, net (2,922) (2,802) (5,512) (5,214)
Other income 52 47 163 409
------------ ------------ ------------- -------------
Income before income taxes 4,185 843 4,856 663
Income tax benefit (expense) 6,580 (329) 6,318 (259)
------------ ------------ ------------- -------------
Net income $ 10,765 $ 514 $ 11,174 $ 404
============ ============ ============= =============
Earnings per share:
Basic $ 1.46 $ 0.07 $ 1.51 $ 0.05
============ ============ ============= =============
Diluted $ 1.44 $ 0.07 $ 1.49 $ 0.05
============ ============ ============= =============
Weighted average shares of common stock outstanding:
Basic 7,362,358 7,653,196 7,419,744 7,652,980
============ ============ ============= =============
Diluted 7,471,653 7,714,437 7,517,143 7,719,135
============ ============ ============= =============
</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 Total
Common paid-in restricted comprehensive Retained Comprehensive Treasury Stockholders'
stock capital compensation loss earnings income stock equity
------- --------- ------------ ------------ -------- ------------- --------- ------------
BALANCES AT JANUARY 29, 2000 $ 77 $ 55,990 $ (1,770) $ (574) $ 13,393 $ (1,222) $ 65,894
------- --------- ------------ ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income -- -- -- -- 11,174 $ 11,174 -- 11,174
Unrealized loss on equity
securities -- -- -- (74) -- (74) -- (74)
-------------
Comprehensive income $ 11,100
=============
Purchase of treasury stock -- -- -- -- -- (1,026) (1,026)
Issuance of common stock -- 21 -- -- -- -- 21
Issuance of restricted stock -- 921 (921) -- -- --
Exercise of stock options -- 52 -- -- -- -- 52
Cancellation of restricted stock -- (99) 99 -- -- -- --
Amortization of restricted stock -- -- 207 -- -- -- 207
------- --------- ------------ ------------ -------- --------- ------------
BALANCES AT JULY 29, 2000 $ 77 $ 56,885 $ (2,385) $ (648) $ 24,567 $ (2,248) $ 76,248
======= ========= ============ ============ ======== ========= ============
</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 29, July 31,
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,174 $ 404
Adjustments to reconcile net income to net cash
and cash equivalents used in operating activities:
Depreciation and amortization 7,408 6,801
Loss (gain) on sale of assets 83 (179)
Deferred taxes (6,318) --
Increase in deferred rent 736 754
Deferred compensation 21 71
Changes in operating assets and liabilities:
Accounts receivable, net (1,016) (2,900)
Inventories (18,227) (16,290)
Prepaid expenses and other current assets (407) 157
Other assets 55 123
Accounts payable (10,296) (32,261)
Accrued expenses and other current
liabilities 2,828 171
-------------- --------------
Net cash used in operating activities (13,959) (43,149)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities -- 2,979
Purchases of property and equipment (7,567) (7,372)
-------------- --------------
Net cash used in investing activities (7,567) (4,393)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 121,958 135,703
Principal payments on long-term debt (97,658) (89,704)
Principal payments on capital lease
obligations (203) (180)
Purchase of treasury stock (1,026) --
Payment of notes receivable 82 81
Proceeds from the issuance of common stock 52 --
-------------- --------------
Net cash provided by financing activities 23,205 45,900
-------------- --------------
Increase (decrease) in cash and cash equivalents 1,679 (1,642)
Cash and cash equivalents at beginning of period 7,843 10,779
-------------- --------------
Cash and cash equivalents at end of period $ 9,522 $ 9,137
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net $ 5,458 $ 4,653
============== ==============
Cash received during the period for income taxes $ (384) $ (211)
============== ==============
</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 1999 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 29, 2000 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. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty -six weeks ended
------------------------- -------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net income available to common stockholders $ 10,765 $ 514 $ 11,174 $ 404
Weighted average shares of common stock
outstanding - basic 7,362,358 7,653,196 7,419,744 7,652,980
---------- ------------ ---------- ----------
Basic earnings per share $ 1.46 $ 0.07 $ 1.51 $ 0.05
========== ============ ========== ==========
Number of shares used for diluted earnings
per share:
Weighted average shares of common stock
outstanding - basic 7,362,358 7,653,196 7,419,744 7,652,980
Dilutive securities - stock options and restricted stock 109,295 61,241 97,399 66,155
---------- ------------ ---------- ----------
Weighted average shares of common stock
outstanding - diluted 7,471,653 7,714,437 7,517,143 7,719,135
---------- ------------ ---------- ----------
Diluted earnings per share $ 1.44 $ 0.07 $ 1.49 $ 0.05
========== ============ ========== ==========
</TABLE>
3. CONTINGENCIES
Tax Contingency
Under the terms of the Company's tax sharing agreement with its former parent,
the Company is responsible for its share, on a separate return basis, of any
tax payments associated with proposed deficiencies or adjustments, and related
interest and penalties charged to the controlled group which may arise as a
result of an assessment by the IRS.
On July 24, 1997, the IRS proposed adjustments to the Company's former parent's
1992 and 1993 federal income tax returns in conjunction with the former
parent's IRS examination. The proposed adjustments related to the manner in
which LIFO inventories were characterized on such returns. The Company
recorded approximately $9,700,000 as a long-term net deferred tax liability for
the tax effect of the LIFO inventory basis difference. The IRS has asserted
that this basis difference should have been reflected in taxable income in 1992
and 1993. The Company has taken the position that the inventory acquired in
connection with the acquisition of its former parent was appropriately
allocated to its inventory pools. The IRS has asserted the inventory was
acquired at a bargain purchase price and should be allocated to a separate pool
and liquidated as inventory turns.
5
<PAGE>
Based on management's discussions with the Company's former parent, the Company
believes the potential accelerated tax liability, which could have a negative
effect on liquidity in the near term, ranges from approximately $1,000,000 to
$9,700,000. The range of loss from possible assessed interest charges resulting
from the proposed adjustments range from approximately $200,000 to $3,300,00.
The Company has accrued $1,100,000 for estimated interest charges in the
consolidated financial statements. No penalties are expected to be assessed
relating to this matter. At July 29, 2000, the LIFO inventory and other
associated temporary differences continue to be classified as long-term net
deferred tax liabilities since final settlement terms have not been negotiated.
The Company has reviewed the various matters that are under consideration and
believes that it has adequately provided for any liability that may result from
this matter. In the opinion of management, any additional liability beyond the
amounts recorded that may arise as a result of the IRS examination will not
have a material adverse effect on the Company's consolidated financial
condition, results of operations, or liquidity.
In addition, the Company is currently under examination for the fiscal tax
years ended September 1997 and 1998. No adjustments have been proposed at this
time.
Legal Proceedings
The Company is a party to various legal proceedings and claims arising in the
ordinary course of business. Management believes that the ultimate disposition
of these matters will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or liquidity.
In June 2000, a former employee of Sportmart brought two class action
complaints in California, against the Company, alleging certain wage and hour
claims in violation of the California Labor Code, California Business and
Professional Code section 17200 and other related matters. Both complaints seek
compensatory damages, punitive damages and penalties. The amount of damages
sought is unspecified. The Company intends to vigorously defend these matters
and at this time, the Company has not ascertained the future liability, if any,
as a result of these complaints.
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 1999 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 29, 2000 July 31, 1999 July 29, 2000 July 31, 1999
Dollars % Dollars % Dollars % Dollars %
------------- ------- ------------- ------ ------------- ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 187.6 100.0% $ 172.6 100.0% $ 353.3 100.0% $ 324.5 100.0%
Cost of goods sold, buying,
distribution and occupancy (140.4) (74.8) (132.0) (76.5) (266.8) (75.5) (248.1) (76.5)
------------- ------ ------------- ------ ------------ ----- ----------- ------
Gross profit 47.2 25.2 40.6 23.5 86.5 24.5 76.4 23.5
Operating expenses (40.2) (21.4) (37.0) (21.4) (76.3) (21.6) (70.9) (21.8)
------------- ------ ------------- ------ ------------ ----- ----------- ------
Operating income 7.0 3.8 3.6 2.1 10.2 2.9 5.5 1.7
Interest expense, net (2.9) (1.5) (2.8) (1.6) (5.5) (1.6) (5.2) (1.6)
Other income 0.1 (0.0) 0.0 0.0 0.2 0.1 0.4 0.1
------------- ------ ------------- ------ ------------ ----- ----------- ------
Income before income taxes 4.2 2.3 0.8 0.5 4.9 1.4 0.7 0.2
Income tax benefit (expense) 6.6 3.5 (0.3) (0.2) 6.3 1.8 (0.3) (0.1)
------------- ------ ------------- ------ ------------ ----- ----------- ------
Net income $ 10.8 5.8% $ 0.5 0.3% $ 11.2 3.2% $ 0.4 0.1%
============= ====== ============= ====== ============ ===== =========== ======
Number of stores at end of period 123 127 123 127
============= ============= ============ ===========
<CAPTION>
Pro-Forma FY 2000 results excluding the effect of the significant tax benefit
and utilizing statutory tax rates:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes $ 4.2 2.3% $ 0.8 0.5% $ 4.9 1.4% $ 0.7 0.2%
Income tax expense (1.6) (0.9) (0.3) (0.2) (1.9) (0.5) (0.3) (0.1)
------------- ------ ------------- ------ ------------ ----- ----------- ------
Net income $ 2.6 1.4% $ 0.5 0.3% $ 3.0 0.9% $ 0.4 0.1%
============= ====== ============= ====== ============ ===== =========== ======
Earnings per share:
Basic $ 0.35 $ 0.07 $ 0.40 $ 0.05
============= ============= ============ ===========
Diluted $ 0.34 $ 0.07 $ 0.39 $ 0.05
============= ============= ============ ===========
Basic weighted average shares
outstanding 7,362,358 7,653,196 7,419,744 7,652,980
============= ============= ============ ===========
Diluted weighted average shares
outstanding 7,471,653 7,714,437 7,517,143 7,719,135
============= ============= ============ ===========
</TABLE>
THIRTEEN WEEKS ENDED JULY 29, 2000 COMPARED TO THIRTEEN WEEKS ENDED JULY 31,
1999
Net Sales. Net sales for the thirteen weeks ended July 29, 2000 increased
$15.0 million from the year ago quarter, from $172.6 million to $187.6 million.
Comparable store sales increased 4.8% for the quarter, primarily due to
increased sales in hardgoods, including skateboards, bicycles and exercise
fitness, as well as increased athletic apparel sales. Sales of skateboards and
bicycles improved as a result of improved selection and inventory levels
throughout all stores, as well as the introduction of popular new products.
Exercise fitness sales increased primarily as a result of focused marketing
efforts on these products. Athletic apparel sales were favorably impacted by the
store remodeling program and the introduction of new apparel fixtures and
signage.
Gross Profit. Gross profit for the thirteen weeks ended July 29, 2000 was
$47.2 million, or 25.2% of net sales, as compared to $40.6 million, or 23.5% of
net sales, for the thirteen weeks ended July 31, 1999. The increase is due
primarily to improved merchandise margins in most departments, including
footwear, snowboards, hardgoods. The increased margins are a result of improved
inventory management as a result of implementing more products into the auto-
replenishment system and improved buying procedures. These increases were
partially offset by increases in buying costs and occupancy, which includes
scheduled rent increases and increases associated with the opening of five new
superstores since the prior year period.
7
<PAGE>
Operating Expenses. Operating expenses for the thirteen weeks ended July 29,
2000 were $40.2 million, or 21.4% of net sales, compared to $37.0 million, or
21.4% of net sales, for the thirteen weeks ended July 31, 1999. As a percentage
of sales, operating expenses were the same compared to the year ago quarter.
Operating expense dollars increased as a result of increased store payroll and
depreciation due to the increase in the number of superstores over the prior
year.
Operating Income. As a result of the factors described above, the Company
recorded operating income for the thirteen weeks ended July 29, 2000 of $7.0
million compared to operating income of $3.6 million for the thirteen weeks
ended July 31, 1999.
Interest Expense, Net. Interest expense, net for the thirteen weeks ended July
29, 2000 increased to $2.9 million, or 1.5% of net sales, from $2.8 million, or
1.6% of net sales, in the thirteen weeks ended July 31, 1999. The increase is
primarily due to an increase in the effective borrowing rate as a result of
rising interest rates over the past year, partially offset by a decrease in the
average outstanding debt for the period.
Income Taxes. The Company's income tax benefit for the thirteen weeks ended
July 29, 2000 was $6.6 million compared to an income tax expense of $0.3 million
for the thirteen weeks ended July 31, 1999. The income tax benefit reflects the
reversal of valuation allowances, which had offset previously generated net
operating losses, the majority of which were acquired in the purchase of
Sportmart during January 1998. The Company's estimated effective tax rate for
the year is expected to be at or below 0.0% as compared to 39.0% for the prior
year.
TWENTY-SIX WEEKS ENDED JULY 29, 2000 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 31,
1999
Net Sales. Net sales for the twenty-six weeks ended July 29, 2000 increased
$28.8 million from the year ago period, from $324.5 million to $353.3 million.
Comparable store sales increased 4.6% for the same period, primarily due to
increased sales in snowboards and skateboards, ladies activewear, and outdoor
apparel. Snowboards and skateboards improved as a result of improved selection
and inventory levels throughout all stores during the period. The apparel
categories were positively impacted by the store remodeling program and the
introduction of new apparel fixtures and signage.
Gross Profit. Gross profit for the twenty-six weeks ended July 29, 2000 was
$86.5 million, or 24.5% of net sales, as compared to $76.4 million, or 23.5% of
net sales, for the twenty-six weeks ended July 31, 1999. Increases in gross
profit due to improved merchandise margins in many departments including
footwear, snowboards, and hardgoods were only slightly offset by higher
occupancy costs associated with the opening of five new superstores over the
past year and scheduled rent increases in existing stores.
Operating Expenses. Operating expenses for the twenty-six weeks ended July 29,
2000 were $76.3 million, or 21.6% of net sales, compared to $70.9 million, or
21.8% of net sales, for the twenty-six weeks ended July 31, 1999. As a
percentage of sales, operating expenses decreased 0.2% compared to the first six
months of last fiscal year, due to improved sales and continued cost controls.
The dollar increase is due primarily to increased store payroll and depreciation
due to an increase in the number of superstores compared to the prior year.
Operating Income. As a result of the factors described above, the Company
recorded operating income for the twenty-six weeks ended July 29, 2000 of $10.2
million compared to operating income of $5.5 million for the twenty-six weeks
ended July 31, 1999.
Interest Expense, Net. Interest expense, net for the twenty-six weeks ended
July 29, 2000 increased to $5.5 million, or 1.6% of net sales, from $5.2
million, or 1.6% of net sales, in the twenty-six weeks ended July 31, 1999. The
increase is primarily due to an increase in the effective borrowing rate as a
result of rising interest rates over the past year, partially offset by a
decrease in the average outstanding debt for the period.
Income Taxes. The Company's income tax benefit for the twenty-six week period
ended July 29, 2000 was $6.3 million compared to an income tax expense of $0.3
million for the twenty-six weeks ended July 31, 1999. The income tax benefit
reflects the reversal of valuation allowances, which had offset previously
generated net operating losses, the majority of which were acquired in the
purchase of Sportmart during January 1998. The Company's estimated effective tax
rate for the year is expected to be at or below 0.0% as compared to 39.0% for
the prior year.
8
<PAGE>
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
<TABLE>
<CAPTION>
Twenty-six weeks ended
------------------------------
July 29, July 31,
2000 1999
-------------- -------------
<S> <C> <C>
Cash used in operating activities $ (13,959) $ (43,149)
Cash used in investing activities (7,567) (4,393)
Cash provided by financing activities 23,205 45,900
Capital expenditures $ 7,567 $ 7,372
Long-term debt (at end of period) 130,200 145,999
Working capital (at end of period) 133,560 142,417
Current ratio (at end of period) 1.88 2.14
Debt to equity ratio (at end of period) 1.71 2.23
</TABLE>
Cash used in operating activities in the first six months of fiscal 2000 was
primarily the result of purchases of inventory and payments of accounts payable,
offsetting net income adjusted for non-cash items.
Cash used in investing activities in the first six months of fiscal 2000 was
for capital expenditures. These expenditures were primarily for store
remodeling, store fixtures, and the purchase or enhancement of certain
information systems.
Cash provided by financing activities in the first six months of fiscal 2000
represents net proceeds from borrowings on the Company's revolving line of
credit, partially offset by purchases of treasury stock and payments of capital
lease obligations.
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"). 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 limits 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 was reduced to
0.00% and 1.50% during the first quarter of fiscal 2000, as certain earnings
levels were achieved. There was $42.5 million available for borrowing at July
29, 2000.
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, due to the manner in which LIFO inventories were characterized on
such returns. Based on management's discussion with the Company's former parent,
the Company believes the potential accelerated tax liability, which could have a
negative effect on liquidity in the near term, ranges from approximately
$1,000,000 to $9,700,000.
9
<PAGE>
Capital expenditures are projected to be approximately $12.0 million in fiscal
2000 of which, $7.6 million has been spent to date. These capital expenditures
are for store remodeling, store fixtures, information systems, distribution
center facilities, and ski rental equipment. 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 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 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, 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 had a material
impact on the Company's results of operations. The Company believes that it is
generally able to pass along any inflationary increases in costs to its
customers.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement will be effective for the Company beginning February 4, 2001, the
start of fiscal year 2001. The new statement requires that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value and requires that changes in the derivative's fair
value be recognized currently in earnings, unless specific hedge accounting
criteria are met. The Company does not anticipate there will be a material
impact on the results of operations or financial position, due to the adoption
of Statement No. 133.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements". This
Staff Accounting Bulletin summarizes certain of the SEC's views in applying
generally accepted accounting principals to revenue recognition in financial
statements. This statement will be adopted by the Company during this fiscal
year and will not have a material impact on results of operations or financial
position.
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, the 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 including
the 1999 Annual Report of the Company on Form 10-K for its year ended January
29, 2000, filed with the Securities and Exchange Commission.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held June 14, 2000, the stockholders of
the Company elected six directors to serve on the Board of Directors until the
next annual meeting and until their successors are elected. The results of
these votes were as follows:
<TABLE>
<CAPTION>
Number of votes
--------------------------------------------------------------------
Authority Broker
Director Nominees For Withheld Non-Votes
------------------------- -------------- ------------- ---------------
<S> <C> <C> <C>
John Douglas Morton 6,748,663 14,153 0
Jonathon D. Sokoloff 6,541,268 221,548 0
Gordon D. Barker 6,550,564 212,252 0
Peter R. Formanek 6,748,263 14,553 0
Larry J. Hochberg 6,747,663 15,153 0
Jonathon A. Seiffer 6,748,663 14,153 0
</TABLE>
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
May 16, 2000 to report, under Item 4, that the registrant engaged Deloitte &
Touche LLP as its independent auditor for the fiscal year ended February 3, 2001
and concurrently dismissed its former independent auditor, KPMG LLP.
11
<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 11, 2000 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
12
