Indiana |
35-1529720 |
|
|---|
(State or other jurisdiction of |
size=2>(I.R.S. Employer |
|
incorporation or organization) |
Identification
No.) |
|
|
2437
East Main Street |
|---|
Plainfield, Indiana |
46168 |
|
|---|
(Address of principal
executive offices) |
(Zip Code) |
|
(317) 612-2000
(Registrant’s telephone number, including area code)
Indicate by check mark
whether the registrant: (1) 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 for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
Number of
shares of Common Stock outstanding at September 1, 2002: 17,042,508
1
GALYAN’S
TRADING COMPANY, INC.
INDEX TO
FORM 10-Q
Page Numbers
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Operations 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 15
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
GALYAN’S TRADING COMPANY, INC.
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of 1995
We
caution that any forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this Quarterly
Report on Form 10-Q (“Report”) or made by our management involve risks
and uncertainties and are subject to change based on various important factors,
many of which may be beyond our control. Accordingly, our future performance and
financial results may differ materially from those expressed or implied in any
such forward-looking statements. Words such as “estimate,”
“project,” “plan,” “believe,” “expect,”
“anticipate,” “intend,” and similar expressions may identify
forward-looking statements. The following factors, among others, in some cases
have affected and in the future could affect our financial performance and
actual results and could cause actual results for 2002 and beyond to differ
materially from those expressed or implied in any forward-looking statements
included in this Report or otherwise made by our management: risks associated
with our ability to implement our growth strategies or manage our growing
business, including the availability of suitable store locations on appropriate
financing and other terms; the impact of competition and pricing; risks
associated with our limited history of opening and operating new stores; risks
associated with the receipt of product into a central distribution center, as
well as the risks associated with the movement of product from a central
distribution center to the store locations; changes in weather patterns; changes
in consumer demands, preferences and spending patterns and overall economic
conditions; risks associated with the seasonality of the retail industry, the
retail sporting goods industry and our business; the potential impact of natural
disasters or national and international security concerns on the retail
environment; risks relating to the regulation of the products we sell, including
firearms; the ability to retain, hire and train key personnel; risks associated
with the possible inability of our vendors to deliver products in a timely
manner; risks associated with relying on foreign sources of production; risks
relating to changes in our management information systems and risks relating to
operational and financial restrictions imposed by our revolving credit facility.
See our Annual Report on Form 10-K for the year ended February 2, 2002, as filed
with the Securities and Exchange Commission, for a more detailed discussion of
these matters and other risk factors. We do not undertake to publicly update or
revise our forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied therein will not be
realized.
3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Galyan’s Trading Company, Inc.
Consolidated Statements of
Operations
For the Three and Six Month Periods Ended August 3, 2002 and August 4,
2001
(dollars in
thousands, except per share data)
For the three month For the six month
periods ended periods ended
----------------------------- ------------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Net sales $ 142,275 $ 114,993 $ 255,732 $ 202,871
Cost of sales 99,459 81,143 181,410 145,192
----------- ----------- ----------- -----------
Gross profit 42,816 33,850 74,322 57,679
Selling, general and administrative expenses 35,810 28,341 67,621 52,734
----------- ----------- ----------- -----------
Operating income 7,006 5,509 6,701 4,945
Interest expense 465 2,410 971 5,941
Interest income (32) (42) (153) (71)
----------- ----------- ----------- -----------
Income (loss) before extraordinary loss and income
tax provision 6,573 3,141 5,883 (925)
Income tax provision 2,688 1,495 2,412 224
----------- ----------- ----------- -----------
Income (loss) before extraordinary loss 3,885 1,646 3,471 (1,149)
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $2,576 and $3,625) - (5,238) - (6,810)
----------- ----------- ----------- -----------
Net income (loss) $ 3,885 $ (3,592) $ 3,471 $ (7,959)
=========== =========== =========== ===========
Basic earnings (loss) per share:
Earnings (loss) per share before extraordinary loss $ 0.23 $ 0.12 $ 0.20 $ (0.10)
Per share extraordinary loss - (0.39) - (0.57)
----------- ----------- ----------- -----------
Basic earnings (loss) per share $ 0.23 $ (0.27) $ 0.20 $ (0.67)
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Earnings (loss) per share before extraordinary loss $ 0.22 $ 0.12 $ 0.20 $ (0.10)
Per share extraordinary loss - (0.39) - (0.57)
----------- ----------- ----------- -----------
Diluted earnings (loss) per share $ 0.22 $ (0.27) $ 0.20 $ (0.67)
=========== =========== =========== ===========
Weighted average shares used in calculating earnings (loss)
per common share:
Basic 17,040,316 13,230,081 17,037,737 11,861,289
=========== =========== =========== ===========
Diluted 17,421,936 13,544,956 17,354,728 11,861,289
=========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements
4
Galyan’s Trading Company, Inc.
Consolidated Balance Sheets
As of August 3, 2002 and February 2, 2002
(dollars in thousands, except share data)
August 3, 2002 February 2, 2002
-------------- ----------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 9,238 $ 36,770
Receivables, net 7,674 3,219
Merchandise inventories 144,419 111,815
Refundable and deferred income taxes 2,571 2,172
Other current assets 7,900 6,619
------------- --------------
Total current assets 171,802 160,595
Property and equipment, net 115,915 94,572
Deferred income taxes 959 718
Goodwill, net 18,334 18,334
Other assets, net 1,165 1,521
------------- --------------
Total assets $ 308,175 $ 275,740
============= ==============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 64,527 $ 39,248
Accrued expenses 30,701 32,438
Current portion of long-term debt 6,069 5,368
------------- --------------
Total current liabilities 101,297 77,054
Long-term liabilities
Debt, net of current portion 9,282 5,932
Other long-term liabilities 6,174 5,533
------------- --------------
Total long-term liabilities 15,456 11,465
Shareholders' Equity
Common stock and paid-in capital, no par value; 50,000,000 191,425 191,134
shares authorized; 17,042,508 and 17,033,708 shares issued and
outstanding, respectively
Notes receivable from shareholders (1,094) (1,451)
Unearned compensation (198) (280)
Warrants 1,461 1,461
Accumulated deficit (172) (3,643)
------------- --------------
Total shareholders' equity 191,422 187,221
------------- --------------
Total liabilities and shareholders' equity $ 308,175 $ 275,740
============= ==============
See accompanying Notes
to Consolidated Financial Statements
5
Galyan’s Trading Company, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended August 3, 2002 and August 4, 2001
(dollars in thousands)
August 3, 2002 August 4, 2001
-------------- --------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 3,471 $ (7,959)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization 7,924 6,402
Amortization of financing intangibles and discount on subordinated notes 278 903
Loss on early extinguishment of debt - 10,397
Refundable and deferred income taxes (640) (3,852)
Interest converted to subordinated debt - 3,647
Deferred rent and other non-cash expense 925 1,350
Changes in certain assets and liabilities:
Accounts receivable (4,455) (3,160)
Merchandise inventories (32,604) (18,652)
Other assets (1,281) (2,596)
Accounts payable and accrued expenses 30,280 (3,640)
----------- -----------
Net cash provided by (used in) operating activities 3,898 (17,160)
----------- -----------
Cash flows from investing activities:
Capital expenditures (29,189) (12,776)
Increase (decrease) in accounts payable for capital expenditures (6,738) 2,112
----------- -----------
Net cash used in investing activities (35,927) (10,664)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) from revolving line of credit 9,000 (19,950)
Proceeds from long-term debt 365 3,179
Principal payments on long-term debt (5,314) (60,829)
Payments on notes receivable from shareholders 358 200
Proceeds from sale of common stock 88 123,960
Payment of financing costs - (1,379)
Transaction cost for initial public offering - (10,360)
----------- -----------
Net cash provided by financing activities 4,497 34,821
----------- -----------
Net increase (decrease) in cash and cash equivalents (27,532) 6,997
Cash and cash equivalents, beginning of period 36,770 3,756
----------- -----------
Cash and cash equivalents, end of period $ 9,238 $ 10,753
=========== ===========
Supplemental disclosures of cash flow information: Cash paid for:
Interest $ 692 $ 4,040
=========== ===========
Income taxes $ 3,552 $ 6,334
=========== ===========
See accompanying Notes
to Consolidated Financial Statements
6
GALYAN’S
TRADING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Significant Accounting Policies
Basis of Presentation
The
accompanying unaudited consolidated financial statements have been prepared by
us in accordance with accounting principles generally accepted in the United
States of America and should be read in conjunction with our Annual Report on
Form 10-K for the fiscal year ended February 2, 2002. In our opinion, the
unaudited consolidated financial statements for the interim periods presented
reflect all adjustments necessary for fair presentation of the consolidated
financial position and results of operations and cash flows as of and for such
periods indicated. The balance sheet at February 2, 2002, as presented, has been
derived from our audited financial statements for the fiscal year then ended.
Results of operations for the interim periods
presented herein are not necessarily indicative of the results that may be reported
for any other interim period or for the entire fiscal year.
Earnings (Loss) Per Share
Earnings
(loss) per share of common stock is based on the weighted average number of
shares outstanding during the related periods. Diluted earnings per share for
the three and six month periods ended August 3, 2002, included 381,620 and
316,991 incremental shares, respectively, relating to the dilutive effect of
stock options. Basic and diluted loss per share for the three and six month periods ended August 4,
2001, included 720,000 warrants which were exercisable for nominal cash
consideration. Diluted earnings per share for the three month period ended
August 4, 2001, included 314,875 incremental shares relating to the dilutive
effect of stock options. Since we had a loss from operations for the six month period
ended August 4, 2001, 340,738 incremental shares relating to the diluted effect
of stock options were excluded from the calculation of diluted loss per share
due to their anti-dilutive effect.
Note 2: Long-Term Debt
On
July 1, 2002, we paid $5.3 million for all remaining principal and interest
outstanding under the construction loan with a bank, for our store building in
Buffalo, New York, dated October 29, 1999.
Long-term debt consists of the following at August 3, 2002:
Bank and other:
Construction loans $ 6,000
Revolving line of credit 9,000
Other 351
---------
Total bank and other debt 15,351
Less current maturities (6,069)
---------
Total long-term debt, net of current maturities $ 9,282
=========
7
GALYAN’S TRADING COMPANY,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Note 3: Shareholder’s Equity
During
the second quarter of fiscal 2002, we issued options to purchase 336,800 shares
of common stock under our 1999 Stock Option Plan at prices of $20.64 to $21.75
per share to certain employees. These options vest over a three-year period and
expire seven years after the grant date.
Note 4: New Accounting Pronouncements
On
February 3, 2002, we adopted Statement of Financial Accounting Standard
(“SFAS”) No. 142, Goodwill and Other Intangible Assets, which
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Effective with the adoption, we no longer amortize
goodwill, but evaluate it on an annual basis to determine whether there has been
an impairment of goodwill. There was no impairment charge resulting from the
adoption of this standard. Goodwill amortization expense was approximately
$196,000 and $392,000 for the three and six month periods ended August 4, 2001.
No goodwill amortization was expensed for the three and six month periods ended
August 3, 2002.
During
June 2001, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 143, Accounting for Asset Retirement Obligations, which
is effective for the Company beginning February 2, 2003. SFAS No. 143 addresses
financial accounting and reporting of obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement costs. We have
not yet quantified the effect, if any, of this new standard on the consolidated
financial statements.
On
February 3, 2002, we adopted SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The adoption of this statement did not have an
effect on the consolidated financial statements.
In
April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which, among other things,
changes the way gains and losses from the extinguishment of debt are reported.
Previously, all gains and losses from the extinguishment of debt were required
to be reported as an extraordinary item, net of related tax effect. Under SFAS
No.145, gains and losses from the extinguishment of debt should be reported as
part of on-going operations, unless the extinguishment of debt meets the
criteria of both unusual and infrequent as established in APB No.30. SFAS No.
145 is effective for all fiscal years beginning after May 15, 2002, including
all prior period presentations. We will adopt SFAS No. 145 no later than the
first quarter of 2003, at which time the extraordinary loss on early
extinguishment of debt will be reclassified in the comparative financial
statements to be included within earnings (loss) from operations before income
taxes.
During
June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities,
which nullifies Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. SFAS No. 146 is effective
for exit and disposal activities that are initiated after December 31, 2002. We
have not yet quantified the effect, if any, of this new standard on the
consolidated financial statements.
8
Item 2.
GALYAN’S TRADING COMPANY, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Galyan’s
Trading Company, Inc. is a rapidly growing specialty retailer that offers a
broad range of products that appeal to consumers with active lifestyles, from
the casual consumer to the serious sports enthusiast. We sell outdoor and
athletic equipment, apparel, footwear and accessories, as well as casual apparel
and footwear. A typical store ranges from approximately 80,000 to 100,000 square
feet and features a distinctive two story glass facade, a fifty-five foot high
interior atrium, metal appointments and interactive and entertaining elements,
such as our signature rock climbing wall. We operated 29 stores in 14 states as
of August 3, 2002.
Critical Accounting Policies
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the appropriate application of certain accounting policies, many of
which require us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period.
We
believe the application of our accounting policies, and the estimates inherently
required therein, are appropriate. We believe that the following represents the
more critical accounting policies used in the preparation of the consolidated
financial statements:
Revenue
recognition: We recognize retail sales upon the purchase of the merchandise
by our customer, net of returns and allowances, which are based on estimates,
determined using historical customer returns experience. We use gift cards and
store credits, the revenue of which is recognized upon redemption by the
customer. Markdowns associated with our preferred customer programs are
recognized upon redemption in conjunction with a qualifying purchase.
Inventories:
Inventories are stated at the lower of cost or market, on a first-in, first-out
basis, utilizing the retail method. We make certain assumptions to adjust
inventory based on historical experience and current information in order to
assess that inventory is recorded properly at the lower of cost or market.
Property
and Equipment: Our property and equipment is stated at cost. Depreciation
and amortization of property and equipment is computed on a straight-line basis
over the estimated useful lives of the related assets. Leasehold improvements
are amortized over the shorter of the estimated useful life or term of the
lease.
9
GALYAN’S TRADING COMPANY, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
Results of Operations
The
following table sets forth our statement of operations data as a percent of
sales for the periods indicated.
For the three For the six
month periods ended (1) month periods ended (1)
--------------------------------- ----------------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
------------- ------------- ------------- --------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 69.9 70.6 70.9 71.6
------------- ------------- ------------- --------------
Gross profit 30.1 29.4 29.1 28.4
Selling, general and administrative expenses 25.2 24.6 26.4 26.0
------------- ------------- ------------- --------------
Operating income 4.9 4.8 2.6 2.4
Interest expense, net 0.3 2.1 0.3 2.9
------------- ------------- ------------- --------------
Income (loss) before income tax provision
and extraordinary loss 4.6 2.7 2.3 (0.5)
Income tax provision 1.9 1.3 0.9 0.1
------------- ------------- ------------- --------------
Income (loss) before extraordinary loss 2.7 1.4 1.4 (0.6)
Extraordinary loss on early extinguishment
of debt, net of income tax benefit (4.6) (3.4)
------------- ------------- ------------- --------------
Net income (loss) 2.7 % (3.1)% 1.4 % (3.9)%
============= ============= ============= ==============
(1) due to rounding, columns may not add
Net Sales
Net
sales increased by 23.7%, or $27.3 million, to $142.3 million in the second
quarter of fiscal 2002 from $115.0 million in the same quarter last year. When
comparing the second quarter of fiscal 2002 with the same quarter last year, net
sales increased by $2.3 million, or 2.1%, at comparable stores, by $16.1 million
at stores opened during fiscal 2001 but not qualifying as comparable stores and
by $8.9 million at three stores opened during fiscal 2002. The comparable store
sales increase in the second quarter of fiscal 2002 as compared with the same
quarter last year was due primarily to higher sales in the athletic apparel and
athletic footwear categories.
Net
sales in the six month period ended August 3, 2002 increased by 26.1%, or $52.8
million, to $255.7 million from $202.9 million in the same period last year.
When comparing the six month period of fiscal 2002 with the same period last
year, net sales increased by $6.8 million, or 3.4%, at comparable stores, by
$34.7 million at stores opened during fiscal 2001 but not qualifying as
comparable stores and by $11.3 million at three stores opened during fiscal
2002. The comparable store sales increase in the six month period ended August
3, 2002 as compared with the same period last year was due primarily to higher
sales in the athletic apparel and athletic footwear categories.
Gross Profit
Gross
profit increased by 26.5%, or $9.0 million, to $42.8 million in the second
quarter of fiscal 2002 from $33.8 in the same quarter last year. Gross profit as
a percentage of net sales was 30.1% in the quarter as compared to 29.4% in the
same quarter last year due primarily to improved merchandise margins and the
leveraging of occupancy, buying and distribution expenses.
10
GALYAN’S TRADING COMPANY,
INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS - continued
Gross Profit, continued
Gross
profit in the six month period ended August 3, 2002 increased by 28.9%, or $16.6
million, to $74.3 million from $57.7 million in the same period last year. Gross
profit as a percentage of net sales was 29.1% in the six month period as
compared to 28.4% in the same period last year due primarily to the leveraging
of occupancy, buying and distribution expenses.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses increased by 26.4%, or $7.5 million, to
$35.8 million in the second quarter of fiscal 2002 from $28.3 million in the
same quarter last year. Selling, general and administrative expenses, as a
percentage of net sales, increased in the quarter to 25.2% from 24.6% due
primarily to higher health insurance costs and the impact of a bad debt recovery
in the quarter last year.
Selling,
general and administrative expenses in the six month period ended August 3, 2002, increased by 28.2%,
or $14.9 million, to $67.6 million for the six month period ended August 3, 2002 from $52.7
million in the same period last year. Selling, general and
administrative expenses, as a percentage of net sales, increased in the six month
period to 26.4% from 26.0% due primarily to higher
marketing, as well as pre-opening expenses and the impact of a bad debt recovery last year.
Operating Income
Operating
income increased by 27.2%, or $1.5 million, in the second quarter of fiscal
2002, to income of $7.0 million from income of $5.5 million in the same quarter
last year. The increase was due to higher net sales and gross profit, partially
offset by higher selling, general and administrative expenses.
Operating
income in the six month period ended August 3, 2002 increased by 35.5%, or $1.8
million, to $6.7 million from $4.9 million in the same period last year. The
increase was due to higher net sales and gross profit, partially offset by
higher selling, general and administrative expenses.
Interest Expense, Net
Interest
expense, net of interest income, was $433,000 in the second quarter of fiscal
2002 as compared to interest expense, net of interest income, of $2.4 million in
the same period last year. The decrease was due primarily to the extinguishment
of subordinated and junior subordinated notes with the proceeds from our initial
public offering during the second quarter last year, as well as a reduction in
the average outstanding borrowings under our revolving credit facility.
Interest
expense, net of interest income, in the six month period ended August 3, 2002
was $818,000 as compared to interest expense, net of interest income, of $5.9
million in the same period last year. The decrease was due primarily to the
extinguishment of subordinated and junior subordinated notes with the proceeds
from our initial public offering during the second quarter last year, as well as
a reduction in the average outstanding borrowings under our revolving credit
facility.
Income Taxes
Our
effective income tax rate was 41% in the six month period ended August 3, 2002.
This rate reflects the effect of the anticipated federal tax rate and aggregated
state tax rates based on the expected mix of net sales in the various states in
which we currently conduct business.
11
GALYAN’S TRADING COMPANY,
INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS - continued
Extraordinary Loss on Early Extinguishment of Debt
During
the second quarter of fiscal 2001, we paid all of the outstanding amounts due
under our subordinated and junior subordinated notes. We incurred an
extraordinary loss (net of income tax benefit) of $5.2 million, relating to the
write-off of the remaining unamortized discount and deferred financing costs
associated with these notes.
During
the first quarter of fiscal 2001, we refinanced our revolving credit facility
and incurred an extraordinary loss (net of income tax benefit) of $1.6 million,
relating to the write-off of the remaining unamortized deferred financing costs
associated with the prior revolving credit facility.
Net Income (Loss)
As
a result of the foregoing factors, net income increased by $2.3 million, to $3.9
million, or 2.7% of net sales, in the second quarter of fiscal 2002 as compared
to net income before the extraordinary loss on early extinguishment of debt of
$1.6 million, or 1.4% of net sales, for the same period last year.
As
a result of the foregoing factors, net income increased by $4.6 million, to $3.5
million, or 1.4% of net sales, in the six month period ended August 3, 2002 as
compared to a net loss before the extraordinary loss on early extinguishment of
debt of $1.1 million, or 0.6% of net sales in the same period last year.
Liquidity and Capital Resources
Our
principal liquidity and capital requirements have been to fund new store
construction, working capital and general corporate needs. For the six months
ended August 3, 2002, these capital and liquidity requirements were primarily
funded from cash and cash equivalents on hand at the beginning of the period,
net cash provided by operations and borrowings under the revolving credit
facility. Cash flows from operating, investing and financing activities for the
six months ended August 3, 2002 and August 4, 2001 are summarized below.
Net
cash provided by operations was $3.9 million for the six months ended August 3,
2002, compared to cash used in operations of $17.2 million for the same period
last year. The increase in net cash from operations was primarily the
result of an increase in accounts payable and higher net income, partially
offset by an increase in merchandise inventories for new stores.
Net
cash used in investing activities was $36.0 million for the six months ended
August 3, 2002, compared to $10.7 million for the same period last year. The
increase was the result of an increase in capital expenditures and a decrease in
accounts payable for capital expenditures, which related primarily to new store
construction and fixturing. We expect to open nine new stores in fiscal 2002
compared to five stores opened in fiscal 2001.
Net
cash provided by financing activities was $4.5 million for the six month period
ended August 3, 2002, compared to $34.8 million for the same period last year.
The decrease was due primarily to the net proceeds during the second quarter
last year of approximately $112.0 million from the sale of 6.5 million shares of
common stock partially offset by $62.8 million used last year to extinguish
outstanding subordinated and junior subordinated notes. We had $9.0 million in
net borrowings under the revolving credit facility during the six months ended
August 3, 2002, compared to net payments of $20.0 million during the same period
last year.
12
GALYAN’S TRADING COMPANY,
INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS - continued
Liquidity and Capital Resources, continued
On
May 3, 2001, we entered into a revolving credit facility agreement with a
syndicate led by JP Morgan Chase & Co., as administrative agent, which
matures on May 3, 2004. The revolving credit facility allows for borrowings of
up to $160.0 million, a portion of which may be used to issue letters of credit.
The revolving credit facility bears interest, at our election, at either an
adjusted prime rate or an adjusted LIBOR, in each case plus additional interest
which varies depending on the ratio of our average outstanding debt to cash
flow. We pay an annual commitment fee on the unused portions of the revolving
credit facility in an amount equal to 0.50% of the unused amounts. As of August
3, 2002, we had $9.0 million in outstanding borrowings and availability of $67.9
million, net of $5.7 million used in support of letters of credit, under our
revolving credit facility.
The
revolving credit facility contains financial and other covenants, including
covenants that require us to maintain various financial ratios, restrict our
ability to incur indebtedness or to create various liens, and restrict the
amount of capital expenditures that we may incur. The revolving credit facility
also restricts our ability to engage in mergers or acquisitions, sell assets,
enter into certain capital leases or make junior payments, including cash
dividends. As of the date of this Report, we were in compliance with all
required covenants. The revolving credit facility is secured by a first priority
security interest in substantially all of our assets. Our sole subsidiary has
guaranteed, and any future subsidiaries will be required to guarantee, our
obligations under the revolving credit facility.
Also,
on May 25, 2001, we entered into a $6.0 million line of credit agreement to
finance the construction of a new store building in Rochester, New York.
Advances under the line of credit agreement are secured by the building, and the
agreement requires monthly payment of interest under several interest rate
options, with a rate on September 1, 2002 of 3.77%. Outstanding advances as of
September 1, 2002 were $6.0 million. All unpaid principal and interest is due
May 1, 2003. To retire this construction loan and any future construction loans,
we may use our existing credit facility or we may seek alternative financing
transactions, which might include sale-leaseback transactions under which we
sell our ownership interests in the store building and land and enter into a
lease covering both the land and the building or we may seek to do longer term
mortgage financing on the building.
On
July 1, 2002, we paid $5.3 million for all remaining principal and interest
outstanding under the construction loan with a bank, for our store building in
Buffalo, New York, dated October 29, 1999.
Our
net working capital at August 3, 2002 was $67.3 million, compared to $52.1
million at February 2, 2002. Net working capital is calculated as the difference
between current assets (excluding cash) and current liabilities (excluding
current portion of long term debt). The increase in working capital resulted
primarily from an increase in merchandise inventories for new stores opened and
expected to open in fiscal 2002, a seasonal increase in merchandise inventories,
and higher receivables from landlords. These increases were partially offset by
an increase in accounts payable. We had $9.2 million in cash and cash
equivalents as of August 3, 2002.
Our
typical new store, if leased with a landlord construction contribution adequate
to cover the building, requires capital expenditures of between $4.0 to $5.0
million for interior finish and fixtures, and an inventory investment of between
$3.0 to $4.0 million, net of vendor payables. Pre-opening expense, consisting
primarily of store set-up costs, training of new store employees, and travel
expenses, averages approximately $600,000 and is expensed as incurred.
Our
capital requirements depend primarily on the number of new stores that we open,
the timing of those openings within a given year and the amount of landlord construction contribution. For fiscal 2002, we
currently estimate our total capital expenditures to range between $63.0 to
$68.0 million, net of agreed-upon landlord construction contributions. The
capital expenditures
13
GALYAN’S TRADING COMPANY,
INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS - continued
Liquidity and Capital Resources, continued
estimate
contemplates $58.0 to $62.0 million for nine new stores that we intend to open
during fiscal 2002, including the three stores opened during the six month
period ended August 3, 2002, and takes into account estimates of
construction-in-progress disbursements for anticipated fiscal 2003 openings. The
capital expenditures estimate for fiscal 2002 also includes approximately $5.0
to $6.0 million for remodeling and maintenance relating to our existing stores,
technology upgrades and corporate capital expenditures. In addition to this
capital expenditures estimate, we currently anticipate that we will incur
approximately $5.0 to $6.0 million of non-capitalizable pre-opening costs for
the nine new stores we expect to open during fiscal 2002.
We
believe that developer or real estate investment company financing, longer term
mortgage financing, cash flows from operations and borrowings available under
our revolving credit facility will be sufficient to fund our working capital and
finance capital expenditures over the next twelve months.
New Accounting Pronouncements
On
February 3, 2002, we adopted Statement of Financial Accounting Standard
(“SFAS”) No. 142, Goodwill and Other Intangible Assets, which
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Effective with the adoption, we will no longer
amortize goodwill, but will evaluate it on an annual basis to determine whether
there has been an impairment of goodwill. There was no impairment charge
resulting from the adoption of this standard. Goodwill amortization expense was
approximately $196,000 and $392,000 for the three and six month periods ended
August 4, 2001. No goodwill amortization was expensed for the three and six
month periods ended August 3, 2002.
During
June 2001, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 143, Accounting for Asset Retirement Obligations, which
is effective for the Company beginning February 2, 2003. SFAS No. 143 addresses
financial accounting and reporting of obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement costs. We have
not yet quantified the effect, if any, of this new standard on our consolidated
financial statements.
On
February 3, 2002, we adopted SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The adoption of this statement did not have an
effect on our consolidated financial statements.
In
April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which, among other things, changes the way gains and losses
from the extinguishment of debt are reported. Previously, all gains and losses
from the extinguishment of debt were required to be reported as an extraordinary
item, net of related tax effect. Under SFAS No.145, gains and losses from the
extinguishment of debt should be reported as part of on-going operations, unless
the extinguishment of debt meets the criteria of both unusual and infrequent as
established in APB No.30. SFAS No. 145 is effective for all fiscal years
beginning after May 15, 2002, including all prior period presentations. We will
adopt SFAS No. 145 no later than the first quarter of 2003, at which time the
extraordinary loss on early extinguishment of debt will be reclassified in the
comparative financial statements to be included within earnings (loss) from
operations before income taxes.
During
June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which nullifies Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 is effective for exit and disposal
activities that are
14
GALYAN’S TRADING COMPANY,
INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS - continued
New Accounting Pronouncements, continued
initiated after December 31, 2002.
We have not yet quantified the effect, if any, of this new standard on our consolidated financial
statements.
Seasonality and Inflation
Our
annual business cycle is seasonal. In fiscal 2001, our sales trended as follows:
18.2% in the first quarter, 23.8% in the second quarter, 21.8% in the third
quarter and 36.2% in the fourth quarter. We typically have higher profits
occurring in the second and fourth quarters.
We
do not believe inflation had a material effect on the unaudited consolidated
financial statements for the periods presented. There can be no assurance,
however, that our business will not be affected by inflation in the future.
Item 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our
exposure to interest rate risk consists primarily of borrowings under our
revolving credit facility and our construction loans which are benchmarked to
U.S. and European short-term variable rates. The aggregate balance outstanding
under our revolving credit facility and construction loans as of August 3, 2002
and February 2, 2002 totaled $15.0 million and $10.9 million, respectively. The
impact of a one percentage point change on our results of operations for the
period ended August 3, 2002 would not be significant.
15
GALYAN’S TRADING COMPANY,
INC.
Part II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders |
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An annual meeting of our
shareholders was held on May 29, 2002. The matters voted on and the results of the voting were as follows: |
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(a) |
Robert B. Mang, Norman S. Matthews, Byron E. Allumbaugh, Frank J. Belatti, Stuart B. Burgdoerfer, Timothy J. Faber, Todd W.
Halloran, George R. Mrkonic, Jr., John M. Roth, Stephanie M. Shern, Ronald P. Spogli and Peter Starrett were elected to the
Board of Directors for a one-year term. Of the 16,526,151 shares present in person or represented by proxy at the meeting,
the number of shares voted for and the number of shares as to which authority to vote in the election was withheld were as
follows, with respect to each of the nominees: |
Shares Shares as to Which
Voted for Voting Authority
Name Election Withheld
---- --------- ------------------
Robert B. Mang 15,447,430 1,078,721
Norman S. Matthews 16,314,992 211,159
Byron E. Allumbaugh 16,435,577 90,574
Frank J. Belatti 16,328,877 197,274
Stuart B. Burgdoerfer 16,231,377 294,774
Timothy J. Faber 16,181,210 344,941
Todd W. Halloran 16,337,260 188,891
George R. Mrkonic, Jr. 16,226,477 299,674
John M. Roth 16,264,760 261,391
Stephanie M. Shern 16,121,427 404,724
Ronald P. Spogli 16,337,177 188,974
Peter Starrett 16,264,727 261,424
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(b) |
The shareholders were asked to consider and vote upon a proposal to adopt an
employee stock purchase plan which would authorize the issuance and purchase by
employees of up to 1,500,000 shares of Galyan’s Trading Company, Inc.
common stock, no par value. The effective date of the plan is July 1, 2002. Of
the 16,526,151 shares present in person or represented by proxy at the meeting,
15,802,958 shares were voted for the proposal, 361,532 shares were voted against
the proposal and 361,661 abstained from voting with respect to the proposal. |
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(c) |
The shareholders were asked to consider and vote upon a proposal to adopt an
amendment to the Galyan’s Trading Company, Inc. 1999 Stock Option Plan, as
Amended to increase the number of shares available for issuance. Of the
16,526,151 shares present in person or represented by proxy at the meeting,
14,661,389 shares were voted for the proposal, 1,495,401 shares were voted
against the proposal and 369,361 abstained from voting with respect to the
proposal. |
16
GALYAN’S TRADING COMPANY,
INC.
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Item 6. Exhibits and Reports on Form 8-K. |
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(a) |
Exhibits. |
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None |
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(b) |
Reports on Form 8-K. |
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None |
17
GALYAN’S TRADING COMPANY,
INC.
SIGNATURES
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Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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GALYAN’S TRADING COMPANY, INC. |
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Date:
September 17, 2002 |
By:
/s/ Edward S. Wozniak |
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Edward
S. Wozniak |
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Senior
Vice President and |
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Chief
Financial Officer |
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(signing on behalf of the registrant and as principal
financial officer) |
18
GALYAN’S TRADING COMPANY,
INC.
CERTIFICATIONS
I, Robert B. Mang, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Galyan’s Trading Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this quarterly report.
Date:
September 17, 2002 |
/s/ Robert B. Mang |
|
Robert B. Mang |
|
Chief Executive Officer and |
|
Chairman of the Company |
I, Edward S. Wozniak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Galyan’s Trading Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this quarterly report.
Date:
September 17, 2002 |
/s/ Edward S. Wozniak |
|
Edward S. Wozniak |
|
Senior Vice President and |
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Chief Financial Officer |
19
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