SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
For the Quarterly Period Ended: May 5, 2001
Commission File Number: 000-23515
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GART SPORTS COMPANY
-------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1242802
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
1000 Broadway, Denver, Colorado 80203
-------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (303) 861-1122
Indicate by check mark whether the registrant has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or shorter period that the registrant was required to
file such reports).
Yes [X] No [_]
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of June 2, 2001, there were outstanding 7,411,582 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 $39,200,000.
GART SPORTS COMPANY
QUARTERLY PERIOD ENDED MAY 5, 2001
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets........................... 1
Consolidated Statements of Operations................. 2
Consolidated Statements of Stockholders' Equity....... 3
Consolidated Statements of Cash Flows................. 4
Notes to Consolidated Financial Statements............ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 8
Item 3. Quantitative and Qualitative Disclosures
about Market Risk..................................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................... 12
Item 6. Exhibits and Reports on Form 8-K...................... 12
SIGNATURES................................................................ 13
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)
May 5, February 3,
2001 2001
---------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,334 $ 8,107
Accounts receivable, net of allowance for doubtful accounts of $845 and $606,
respectively 6,327 6,273
Note Receivable 185 181
Inventories 238,407 230,800
Prepaid expenses and other assets 7,603 7,474
Deferred income taxes 2,033 2,033
--------- ---------
Total current assets 261,889 254,868
--------- ---------
Property and equipment, net 61,361 59,298
Asset held for sale 1,628 1,671
Deferred income taxes 12,821 13,208
Other assets, net of accumulated amortization of $3,134 and $2,912, respectively 6,919 6,083
--------- ---------
Total assets $ 344,618 $ 335,128
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 99,081 $ 105,395
Current portion of capital lease obligations 488 470
Accrued expenses and other current liabilities 27,313 35,679
--------- ---------
Total current liabilities 126,882 141,544
Long-term debt 118,400 95,900
Capital lease obligations, less current portion 1,677 1,805
Deferred rent and other long-term assets 7,960 6,993
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Total liabilities 254,919 246,242
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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;
7,762,289 and 7,739,203 shares issued and 7,380,150 and 7,357,064
shares outstanding at May 5, 2001 and February 3, 2001, respectively 78 77
Additional paid-in capital 57,154 57,014
Unamortized restricted stock compensation (1,908) (2,055)
Accumulated other comprehensive loss (306) (226)
Retained earnings 37,094 36,489
--------- ---------
92,112 91,299
Treasury stock, 382,139 common shares, at cost (2,413) (2,413)
--------- ---------
Total stockholders' equity 89,699 88,886
--------- ---------
Total liabilities and stockholders' equity $ 344,618 $ 335,128
========= =========
See accompanying notes to consolidated financial statements.
1
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, Dollars in Thousands, Except Share and Per Share Amounts)
Thirteen weeks ended
-----------------------------
May 5, April 29,
2001 2000
------------- -------------
Net sales $ 162,642 $ 165,749
Cost of goods sold, buying,
distribution and occupancy 123,316 126,439
----------- -----------
Gross profit 39,326 39,310
Operating expenses 36,183 36,159
----------- -----------
Operating income 3,143 3,151
Non operating income (expense):
Interest expense, net (2,210) (2,590)
Other income 59 111
----------- -----------
Income before income taxes 992 672
Income tax expense (387) (262)
----------- -----------
Net income $ 605 $ 410
=========== ===========
Earnings per share:
Basic $ 0.08 $ 0.05
=========== ===========
Diluted $ 0.08 $ 0.05
=========== ===========
Weighted average shares of common
stock outstanding:
Basic 7,365,790 7,477,130
=========== ===========
Diluted 7,902,298 7,547,103
=========== ===========
See accompanying notes to consolidated financial statements.
2
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, Dollars in Thousands)
Accumulated
Additional Unamortized other
Common paid-in restricted stock comprehensive Retained
stock capital compensation loss earnings
---------- ----------- ---------------- ---------------- -----------
BALANCES AT FEBRUARY 3, 2001 $ 77 $ 57,014 $ (2,055) $ (226) $ 36,489
Net income -- -- -- -- 605
Unrealized loss on equity securities -- -- -- (80) --
Comprehensive income
Issuance of common stock -- 12 -- -- --
Exercise of stock options 1 128 -- -- --
Amortization of restricted stock -- -- 147 -- --
---------- ----------- ---------------- ---------------- -----------
BALANCES AT MAY 5, 2001 $ 78 $ 57,154 $ (1,908) $ (306) $ 37,094
========== =========== ================ ================ ===========
Total
Comprehensive Treasury Stockholders'
income stock equity
--------------- ---------- --------------
BALANCES AT FEBRUARY 3, 2001 $ (2,413) $ 88,886
Net income $ 605 -- 605
Unrealized loss on equity securities (80) -- (80)
---------------
Comprehensive income $ 525
===============
Issuance of common stock -- 12
Exercise of stock options -- 129
Amortization of restricted stock -- 147
---------- --------------
BALANCES AT MAY 5, 2001 $ (2,413) $ 89,699
========== ==============
See accompanying notes to consolidated financial statements.
3
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Dollars in Thousands)
Thirteen weeks ended
-----------------------------
May 5, April 29,
2001 2000
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 605 $ 410
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 3,714 3,826
Deferred income taxes 387 -
Loss on disposition of assets 45 -
Increase in deferred rent 389 362
Deferred compensation 12 -
Changes in operating assets and liabilities:
Accounts receivable, net (83) (373)
Inventories (7,607) (16,572)
Prepaid expenses and other assets (209) (88)
Other assets (480) (72)
Accounts payable (6,314) (9,716)
Accrued expenses and other current
liabilities (8,368) (1,374)
-------------- ------------
Net cash used in operating activities (17,909) (23,597)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,427) (2,574)
Receipts on notes receivable 44 38
-------------- ------------
Net cash used in investing activities (5,383) (2,536)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 66,686 69,903
Principal payments on long-term debt (44,186) (43,003)
Principal payments on capital lease
obligations (110) (100)
Purchase of treasury stock - (243)
Proceeds from the sale of common stock
under option plans 129 52
-------------- ------------
Net cash provided by financing activities 22,519 26,609
-------------- ------------
Increase (decrease) in cash and cash equivalents (773) 476
Cash and cash equivalents at beginning of period 8,107 7,843
-------------- ------------
Cash and cash equivalents at end of period $ 7,334 $ 8,319
============== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net $ 2,121 $ 2,603
============== ============
Cash received during the period for income taxes $ -- $ (400)
============== ============
See accompanying notes to consolidated financial statements.
4
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
accounting principles generally accepted in the United States of America,
and should be read in conjunction with the 2000 Annual Report on Form 10-K.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the statement of
financial position and the results of operations for the interim periods
have been included. The results for the thirteen week period May 5, 2001 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):
Thirteen weeks ended
---------------------------------
May 5, April 29,
2001 2000
--------------- --------------
Net income $ 605 $ 410
Weighted average shares of common stock
outstanding - basic 7,365,790 7,477,130
--------------- --------------
Basic earnings per share $ 0.08 $ $ 0.05
=============== ==============
Number of shares used for diluted earnings
per share:
Weighted average shares of common stock
outstanding - basic 7,365,790 7,477,130
Dilutive securities - stock options and restricted stock 536,508 69,973
--------------- --------------
Weighted average shares of common stock
outstanding - diluted 7,902,298 7,547,103
--------------- --------------
Diluted earnings per share $ 0.08 $ 0.05
=============== ==============
3. 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, as amended, became effective in the first
quarter 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 adopted this statement on
February 4, 2001 and there was not a material impact on results of
operations or financial position.
5
4. 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 and 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 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. 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 $2,500,000 to
$9,700,000. 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 range of loss from possible assessed interest charges
resulting from the proposed adjustments range from approximately $200,000 to
$3,300,000. The Company has accrued approximately $1.2 million for estimated
interest charges in the consolidated financial statements. No penalties are
expected to be assessed relating to this matter. At May 5, 2001, 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
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. One complaint
alleges that the Company classified certain managers in its California
stores as exempt from overtime pay when they would have been classified as
non-exempt and paid overtime. The second complaint alleges that the Company
failed to pay hourly employees in its California stores for all hours
worked. In March 2001, a third class action complaint was filed in the same
court in California alleging the same wage and hour violations regarding
classification of certain managers as exempt from overtime pay. All the
complaints seek compensatory damages, punitive damages and penalties. The
amount of damages sought is unspecified. Although the court recently denied
motions to dismiss the first two complaints, 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.
The Company is a party to various other 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.
5. SUBSEQUENT EVENTS
On June 7, 2001, the Company completed its acquisition of Houston-based
Oshman's Sporting Goods, Inc. ("Oshman's"). In separate meetings held in
Denver and Houston on June 7, 2001, shareholders of both companies approved
the transaction valued at approximately $99 million based on the closing
price of Gart Sports common stock on that day. Oshman's shareholders
received $7.00 in cash and 0.55 shares of Gart Sports common stock for each
share of Oshman's common stock held. Oshman's operated 58 sporting goods
specialty stores, including 43 SuperSports USA stores and 15 traditional
stores. Oshman's SuperSports USA
6
stores are located primarily in medium to large metropolitan areas across
the United States, offering high quality name brand and private label
equipment and sportswear. Oshman's SuperSports USA stores utilize
interactional merchandising by offering sports test-play areas, including
basketball courts, batting cages, golf simulators and tennis courts. With
the addition of the 58 Oshman's stores, Gart Sports now operates 178 stores
in 25 states.
7
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 2000 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):
Thirteen weeks ended
----------------------------------------------------------------------
May 5, 2001 April 29, 2000
Dollars % Dollars %
---------------- -------- ---------------- --------
Net sales $ 162.6 100.0 % $ 165.7 100.0 %
Cost of goods sold, buying,
distribution and occupancy (123.3) (75.8) (126.4) (76.3)
---------------- -------- ---------------- --------
Gross profit 39.3 24.2 39.3 23.7
Operating expenses (36.2) (22.3) (36.1) (21.8)
---------------- -------- ---------------- --------
Operating income 3.1 1.9 3.2 1.9
Interest expense, net (2.2) (1.4) (2.6) (1.6)
Other income 0.1 0.1 0.1 0.1
---------------- -------- ---------------- --------
Income before income taxes 1.0 0.6 0.7 0.4
Income tax expense (0.4) (0.2) (0.3) (0.2)
---------------- -------- ---------------- --------
Net income $ 0.6 0.4 % $ 0.4 0.2 %
================ ======== ================ ========
Number of stores at end of period 119 126
================ ================
THIRTEEN WEEKS ENDED MAY 5, 2001 COMPARED TO THIRTEEN WEEKS ENDED APRIL 29, 2000
Net Sales. Net sales for the thirteen weeks ended May 5, 2001 were $162.6
million compared to $165.7 million for the thirteen weeks ended April 29, 2000.
Comparable store sales during the quarter were slightly positive versus the
prior year's comparable quarter. This comparable sales performance was primarily
due to soft sales of in-line skates, bikes and golf as a result of unseasonably
cold and wet weather in the months of February and March. These soft sales were
offset by strong sales in these same categories once the weather began to
normalize in the month of April.
Gross Profit. Gross profit for the thirteen weeks ended May 5, 2001 was
$39.3 million, or 24.2% of net sales, as compared to $39.3 million, or 23.7% of
net sales, for the thirteen weeks ended April 29, 2000. The increase as a
percent of sales is due primarily to improved buying disciplines and continued
progress in enhancing the replenishment and allocation of merchandise to the
stores.
Operating Expenses. Operating expenses for the thirteen weeks ended May 5,
2001 were $36.2 million, or 22.3% of net sales, compared to $36.1 million, or
21.8% of net sales, for the period ended April 29, 2000. Operating expense
dollars remained relatively flat versus the year ago quarter. As a percentage of
sales, operating expenses increased slightly due to increased utility and
insurance costs.
Operating Income. As a result of the factors described above, the Company
recorded operating income for the thirteen weeks ended May 5, 2001 of $3.1
million compared to operating income of $3.2 million for the thirteen weeks
ended April 29, 2000.
8
Interest Expense, Net. Interest expense, net for the thirteen weeks ended
May 5, 2001 decreased to $2.2 million, or 1.4% of net sales, from $2.6 million,
or 1.6% of net sales, in the thirteen weeks ended April 29, 2000. The decrease
is primarily due to a decrease in average interest bearing debt for the period
and a decrease in the effective borrowing rate as a result of lower interest
rates over the prior year.
Other Income. Other income was $0.1 million for the thirteen weeks ended May
5, 2001 compared to $0.1 million for the thirteen weeks ended April 29, 2000.
Income Taxes. The Company's income tax expense for the thirteen weeks ended
May 5, 2001 was $0.4 million compared to income tax expense of $0.3 million for
the thirteen weeks ended April 29, 2000. The Company's estimated effective tax
rate remained the same at 39.0% for both periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for inventory, capital
improvements, and pre-opening expenses to support the Company's expansion plans,
as well as for various investments in store remodeling, store fixtures and
ongoing infrastructure improvements.
Cash Flow Analysis
Thirteen weeks ended
-------------------------
May 5, April 29,
2001 2000
---------- ----------
Cash used in operating activities $ (17,909) $ (23,597)
Cash used in investing activities (5,383) (2,536)
Cash provided by financing activities 22,519 26,609
Capital expenditures $ 5,427 $ 2,574
Long-term debt (at end of period) 118,400 132,800
Working capital (at end of period) 135,007 133,466
Current ratio (at end of period) 2.06 1.90
Debt to equity ratio (at end of period) 1.32 2.01
Cash used in operating activities in the first quarter of fiscal 2000 was
primarily the result of inventory purchases and payments of accounts payable and
accrued expenses. These cash uses were partially offset by cash generated by net
income adjusted for non-cash charges in the first quarter of fiscal 2001.
Cash used in investing activities in the first quarter of fiscal 2001 was
primarily 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 quarter of fiscal 2001
primarily represents net proceeds from borrowings on the Company's revolving
line of credit and proceeds from the sale of common stock under option plans,
slightly offset by 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., as agent, ("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 restrict the Company's
ability to pay dividends. At May 5, 2001, the Company was in compliance with all
covenants of the Credit Agreement.
9
Under the terms of the revolving credit facility, 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 rates on prime and LIBOR
borrowings were reduced to 0.0% and 1.50% during the first quarter of fiscal
2000, as a result of achieving certain earnings levels. There was $39.5 million
available for borrowing at May 5, 2001.
The Internal Revenue Service has proposed adjustments to the 1992 and 1993
consolidated federal income tax returns of the Company and its former parent,
now Thrifty PayLess Holdings, Inc., a subsidiary of RiteAid Corporation, due to
the manner in which LIFO inventories were characterized on such returns. 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 $2,500,000 to
$9,700,000. See note 4 to the Consolidated Financial Statements.
Capital expenditures, on a stand-alone basis, are projected to be
approximately $15 to $17 million in fiscal 2001. These capital expenditures will
be for new store openings, store remodeling, store fixtures, 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 40,000 square foot
store and $1.5 million for a 33,000 square foot store. Superstores constructed
in existing retail space historically have required additional capital
investments of approximately $700,000 in leasehold improvements per location.
The level of capital improvements will be affected by the mix of new
construction versus renovation of existing retail space.
The Company believes that on a stand alone basis cash generated from
operations, combined with funds available under the Credit Agreement, would be
sufficient to fund projected capital expenditures and other working capital
requirements through fiscal 2001. The Company intends to utilize the Credit
Agreement to meet seasonal fluctuations in cash flow requirements.
In conjunction with the acquisition of Oshman's, the Company increased its
revolving line of credit from $175 million to $300 million. The CIT
Group/Business Credit Inc. is the agent for the four year facility. The Company
believes that the available resources under the revised line of credit, combined
with cash generated from operations, will be sufficient to fund the combined
entity, the costs incurred to integrate Oshman's with the Company as well as
non-recurring costs incurred as a result of this transaction.
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, increased 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 a material impact on
the Company's results of operations. The Company believes that it is generally
able to pass along any inflationary increases in costs to its customer.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Statement became effective in the first quarter 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
adopted this statement on February 4, 2001 and there was not a material impact
on results of operations or financial position.
10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary interest rate risk exposure results from the Company's
long-term debt agreement. The Company's long-term debt bears interest at
variable rates that are tied to either the U.S. prime rate or LIBOR at the time
of the borrowing. At the end of each 90-day period, the interest rates on the
Company's outstanding borrowings are changed to reflect current prime or LIBOR
rates. Therefore, the Company's interest expense changes as prime or LIBOR
change. Historically, the Company has not relied upon derivative financial
instruments to mitigate the risk associated with changes in interest rates.
Based on the Company's overall interest rate exposure at May 5, 2001, a
hypothetical instantaneous increase or decrease of one percentage point in
interest rates applied to all financial instruments would change the Company's
after-tax earnings by approximately $722,000 over a 12-month period.
The Company's exposure to foreign currency exchange rates is limited because
the Company does not operate any stores outside of the United States. In
connection with the acquisition of Sportmart, the Company acquired one store in
Canada, which Sportmart had closed prior to the acquisition. The Company is
currently attempting to sell this store. The Company does not consider the
market risk exposure relating to foreign currency exchange to be material.
Foreign currency fluctuations did not have a material impact on the Company
during the first quarter of fiscal 2001 or 2000.
The fair value of the Company's investments in marketable equity securities
at May 5, 2001 was $194,000. The fair value of these investments will fluctuate
as the quoted market prices of such securities fluctuate. Based on the Company's
marketable equity securities portfolio and quoted market prices at May 5, 2001,
a 50% increase or decrease in the market price of such securities would result
in an increase or decrease of approximately $97,000 in the fair value of the
marketable equity securities portfolio. Although changes in quoted market prices
may affect the fair value of the marketable equities securities portfolio and
cause unrealized gains or losses, such gains or losses would not be realized
unless the investments are sold or determined to have a decline in value which
is other than temporary.
As of May 5, 2001, the fair value of the Company's investments in marketable
equity securities was $306,000 less than the adjusted basis of those
investments. Such unrealized holding loss has not been recognized in the
Company's consolidated statement of operations, but rather has been recorded as
a component of stockholders' equity in other comprehensive loss. The actual gain
or loss that the Company will realize when such investments are sold will depend
on the fair value of such securities at the time of sale.
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, including the
Annual Report of the Company on Form 10-K for its year ended February 3, 2001,
filed with the Securities and Exchange Commission.
11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, involved in various legal proceedings
incidental to the conduct of its business. The Company believes that the
outcome of all such pending legal proceedings to which it is a party will
not, in the aggregate, have a material adverse effect on the Company's
business, financial condition, or operating results.
As previously disclosed, 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. In
March 2001, a third class action complaint was filed in the same court in
California alleging the same wage and hour violations regarding
classification of certain managers as exempt from overtime pay. All the
complaints seek compensatory damages, punitive damages and penalties. The
amount of damages sought is unspecified. Although the court recently denied
motions to dismiss the first two complaints, 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS.
B. REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the Commission dated
February 22, 2001 to report, under Item 5, that the registrant and Oshman's
Sporting Goods, Inc. ("Oshman's") had entered into an Agreement and Plan of
Merger dated as of February 21, 2001, by and among Oshman's, Gart Sports
and GSC Acquisition Corp., a wholly owned subsidiary of Gart Sports.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on June 19, 2001 on its
behalf by the undersigned thereunto duly authorized.
GART SPORTS COMPANY
By: /s/ JOHN DOUGLAS MORTON
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John Douglas Morton,
Chairman of the Board of Directors,
President and Chief Executive Officer
By: /s/ THOMAS T. HENDRICKSON
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Thomas T. Hendrickson,
Executive Vice President, Chief Financial
Officer and Treasurer
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