Indiana
(State or other jurisdiction of
incorporation or organization) |
35-1529720
(I.R.S. Employer
Identification No.) |
|
2437
East Main Street
Plainfield, Indiana
(Address of principal executive offices) |
46168
(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 December 9, 2002: 17,051,508
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
Item 4. Controls and Procedures 15
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
CERTIFICATIONS 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. For these statements, we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. 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 and the availability of adequate financing sources;
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 Nine Month Periods Ended November 2, 2002 and November 3,
2001
(dollars in
thousands, except per share data)
For the three month For the nine month
periods ended periods ended
---------------------------------- ----------------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
---------------- ---------------- --------------- ----------------
(unaudited) (unaudited)
Net sales $ 129,842 $ 104,898 $ 385,574 $ 307,769
Cost of sales 93,901 75,817 275,311 221,009
---------------- ---------------- --------------- ----------------
Gross profit 35,941 29,081 110,263 86,760
Selling, general and administrative expenses 37,919 28,911 105,540 81,645
---------------- ---------------- --------------- ----------------
Operating income (loss) (1,978) 170 4,723 5,115
Interest expense 541 520 1,512 6,461
Interest income (27) (42) (180) (113)
---------------- ---------------- --------------- ----------------
Income (loss) before extraordinary loss and income
tax provision (benefit) (2,492) (308) 3,391 (1,233)
Income tax provision (benefit) (1,022) (140) 1,390 84
---------------- ---------------- --------------- ----------------
Income (loss) before extraordinary loss (1,470) (168) 2,001 (1,317)
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $3,625) - - - (6,810)
---------------- ---------------- --------------- ----------------
Net income (loss) $ (1,470) $ (168) $ 2,001 $ (8,127)
================ ================ =============== ================
Basic earnings (loss) per share:
Earnings (loss) per share before extraordinary loss $ (0.09) $ (0.01) $ 0.12 $ (0.10)
Per share extraordinary loss - - - (0.50)
---------------- ---------------- --------------- ----------------
Basic earnings (loss) per share $ (0.09) $ (0.01) $ 0.12 $ (0.60)
================ ================ =============== ================
Diluted earnings (loss) per share:
Earnings (loss) per share before extraordinary loss $ (0.09) $ (0.01) $ 0.12 $ (0.10)
Per share extraordinary loss - - - (0.50)
---------------- ---------------- --------------- ----------------
Diluted earnings (loss) per share $ (0.09) $ (0.01) $ 0.12 $ (0.60)
================ ================ =============== ================
Weighted average shares used in calculating earnings
(loss) per common share:
Basic 17,042,508 17,028,927 17,039,297 13,583,835
================ ================ =============== ================
Diluted 17,042,508 17,028,927 17,188,742 13,583,835
================ ================ =============== ================
See accompanying Notes to Consolidated Financial Statements
4
Galyan’s Trading Company, Inc.
Consolidated Balance Sheets
As of November 2, 2002 and February 2, 2002
(dollars in
thousands, except per share data)
November 2, 2002 February 2, 2002
---------------- ----------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 7,904 $ 36,770
Receivables, net 8,953 3,219
Merchandise inventories 196,553 111,815
Refundable and deferred income taxes 2,908 2,172
Other current assets 7,501 6,619
---------------- ----------------
Total current assets 223,819 160,595
Property and equipment, net 130,310 94,572
Deferred income taxes - 718
Goodwill, net 18,334 18,334
Other assets, net 1,027 1,521
---------------- ----------------
Total assets $ 373,490 $ 275,740
================ ================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 100,830 $ 39,248
Accrued expenses 29,689 32,438
Current portion of long-term debt 6,045 5,368
---------------- ----------------
Total current liabilities 136,564 77,054
Long-term liabilities
Debt, net of current portion 40,257 5,932
Other long-term liabilities 6,672 5,533
---------------- ----------------
Total long-term liabilities 46,929 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 (1,091) (1,451)
Unearned compensation (156) (280)
Warrants 1,461 1,461
Accumulated deficit (1,642) (3,643)
---------------- ----------------
Total shareholders' equity 189,997 187,221
---------------- ----------------
Total liabilities and shareholders' equity $ 373,490 $ 275,740
================ ================
See accompanying Notes to Consolidated Financial Statements
5
Galyan’s Trading Company, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended November 2, 2002 and November 3, 2001
(dollars in
thousands)
November 2, 2002 November 3, 2001
---------------- ----------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 2,001 $ (8,127)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization 12,365 9,841
Amortization of financing intangibles and discount on subordinated notes 407 1,039
Loss on early extinguishment of debt - 10,397
Refundable and deferred income taxes 86 (3,993)
Interest converted to subordinated debt - 3,647
Deferred rent and other non-cash expense 1,880 1,928
Changes in certain assets and liabilities:
Accounts receivable (5,734) (5,189)
Merchandise inventories (84,738) (56,073)
Other assets (912) (3,506)
Accounts payable and accrued expenses 63,367 27,616
---------------- ----------------
Net cash used in operating activities (11,278) (22,420)
---------------- ----------------
Cash flows from investing activities:
Capital expenditures (48,141) (30,749)
Increase (decrease) in accounts payable for capital expenditures (4,897) 8,035
---------------- ----------------
Net cash used in investing activities (53,038) (22,714)
---------------- ----------------
Cash flows from financing activities:
Net borrowings (payments) from revolving line of credit 40,000 (5,450)
Proceeds from long-term debt 350 3,258
Principal payments on long-term debt and other obligations (5,348) (60,950)
Payments on notes receivable from shareholders 360 200
Proceeds from sale of common stock 88 124,031
Payment of financing costs - (1,416)
Transaction cost for initial public offering - (11,799)
---------------- ----------------
Net cash provided by financing activities 35,450 47,874
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (28,866) 2,740
Cash and cash equivalents, beginning of period 36,770 3,756
---------------- ----------------
Cash and cash equivalents, end of period $ 7,904 $ 6,496
================ ================
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 1,182 $ 4,391
================ ================
Income taxes $ 3,736 $ 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 nine month period ended November 2, 2002, included 149,445 incremental
shares relating to the dilutive effect of stock options. Since we had a loss
from operations for the three month periods ended November 2, 2002 and November
3, 2001, and for the nine month period ended November 3, 2001, 29,834 and 72,047
incremental shares, respectively, for the three month periods and 261,903
incremental shares for the nine month period, 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 a 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 November 2, 2002 (dollars in
thousands):
Bank and other long-term debt:
Construction loan $ 6,000
Revolving line of credit 40,000
Capital lease obligations 302
---------
Total bank and other debt 46,302
Less current maturities (6,045)
---------
Total long-term debt, net of current maturities $ 40,257
=========
7
GALYAN’S TRADING COMPANY,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Note 3: 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 $587,000 for the three and nine month periods ended November 3,
2001. No goodwill amortization was expensed for the three and nine month periods
ended November 2, 2002.
During
June 2001, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 143, Accounting for Asset Retirement Obligations, which is
effective for us 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. The
adoption of this statement is not expected to have a material effect 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 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 initiated after December 31, 2002.
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 33 stores in 16 states as
of November 2, 2002. On September 20, 2002, we closed our Greenwood location as
a result of a tornado. We expect to open a new Greenwood store in fiscal 2003.
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 sell gift cards and
issue 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 nine
month periods ended (1) month periods ended (1)
--------------------------------- --------------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
---------------- --------------- --------------- ---------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 72.3 72.3 71.4 71.8
---------------- --------------- --------------- ---------------
Gross profit 27.7 27.7 28.6 28.2
Selling, general and administrative expenses 29.2 27.6 27.4 26.5
---------------- --------------- --------------- ---------------
Operating income (loss) (1.5) 0.2 1.2 1.7
Interest expense, net 0.4 0.5 0.4 2.1
---------------- --------------- --------------- ---------------
Income (loss) before income tax provision
(benefit) and extraordinary loss (1.9) (0.3) 0.9 (0.4)
Income tax provision (benefit) (0.8) (0.1) 0.4 0.0
---------------- --------------- --------------- ---------------
Income (loss) before extraordinary loss (1.1) (0.2) 0.5 (0.4)
Extraordinary loss on early extinguishment
of debt, net of income tax benefit (2.2)
---------------- --------------- --------------- ---------------
Net income (loss) (1.1)% (0.2)% 0.5 % (2.6)%
================ =============== =============== ===============
(1) due to rounding, columns may not add
Net Sales
Net
sales increased by 23.7%, or $24.9 million, to $129.8 million in the third
quarter of fiscal 2002 from $104.9 million in the same quarter last year.
When comparing the third quarter of fiscal 2002 with the same quarter last
year, net sales decreased by $2.2 million, or 2.2%, at comparable locations,
increased by $20.4 million at eight stores opened during fiscal 2002 and
increased by $6.7 million at stores opened during fiscal 2001 but not
qualifying as comparable stores. Because our Greenwood location was closed
on September 20, 2002 as a result of a tornado, for purposes of comparisons
to prior fiscal periods, we have treated last year’s net sales
subsequent to the comparable date of the store closing as net sales for
stores not qualifying as comparable stores. This treatment has resulted in a
reduction in net sales at non-comparable stores. The comparable store sales
decrease in the third quarter of fiscal 2002 as compared with the same
quarter last year was due primarily to decreases in the hunting, camping and
outerwear categories against post September 11, 2002 increases in these
categories in the same quarter last year.
Net sales in the nine month period ended November 2, 2002
increased by 25.3%, or $77.8 million, to $385.6 million from $307.8 million
in the same period last year. When comparing the nine month period of fiscal
2002 with the same period last year, net sales increased by $4.6 million, or
1.5%, at comparable stores, increased by $31.9 million at eight stores
opened during fiscal 2002 and increased by $41.3 million at stores opened
during fiscal 2001 but not qualifying as comparable stores. Because our
Greenwood location was closed on September 20, 2002 as a result of a
tornado, for purposes of comparisons to prior fiscal periods, we have
treated last year’s net sales subsequent to the comparable date of the
store closing as net sales for stores not qualifying as comparable stores.
This treatment has resulted in a reduction in net sales at non-comparable
stores. The comparable store sales increased in the nine month period ended
November 2, 2002 as compared with the same period last year was due
primarily to higher sales in the athletic apparel, athletic footwear,
accessories, fitness and baseball categories.
10
GALYAN’S TRADING COMPANY,
INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS - continued
Gross Profit
Gross
profit increased by 23.6%, or $6.8 million, to $35.9 million in the third
quarter of fiscal 2002 from $29.1 million in the same quarter last year.
Gross profit as a percentage of net sales for the third quarter of fiscal
2002 and the third quarter of fiscal 2001 was comparable at 27.7%.
Gross profit in the nine month period ended November 2, 2002 increased by
27.1%, or $23.5 million, to $110.3 million from $86.8 million in the same
period last year. Gross profit increased as a percentage of net sales to
28.6% in the nine month period ended November 2, 2002 as compared to 28.2%
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 31.2%, or $9.0 million, to
$37.9 million in the third quarter of fiscal 2002 from $28.9 million in the
same quarter last year due primarily to expenses associated with stores
opened during and subsequent to the third quarter of fiscal 2001. Selling,
general and administrative expenses, as a percentage of net sales, increased
in the third quarter of fiscal 2002 to 29.2% from 27.6% in the same period
last year due primarily to higher marketing costs associated with our
expansion program and higher pre-opening costs. We opened five stores during
the third quarter of fiscal 2002 as compared to three stores during the
third quarter last year.
Selling,
general and administrative expenses increased by 29.3%, or $23.9 million, to
$105.5 million for the nine month period ended November 2, 2002 from $81.6
million in the same period last year due primarily to expenses associated
with stores opened during and subsequent to fiscal 2001. Selling, general
and administrative expenses, as a percentage of net sales, increased in the
nine month period to 27.4% from 26.5% due largely to higher marketing
expenses, primarily in support of our expansion program, and higher
pre-opening costs due to opening more stores in fiscal 2002 than in the same
period last year.
Operating Income (Loss)
Operating
income decreased by $2.17 million in the third quarter of fiscal 2002 to a
loss of $2.0 million from income of $170,000 in the same quarter last year.
The decrease was due primarily to higher selling, general and administrative
expenses related to higher marketing expenses and pre-opening costs. The
closing of the Greenwood store on September 20, 2002, as a result of the
tornado, did not have a negative impact on operating income as we recognized
income from insurance proceeds, which we received at the end of November, to
cover the lost earnings from the date of the store closing to the end of the
quarter.
Operating
income in the nine month period ended November 2, 2002 decreased by 7.7%, or
$400,000, to $4.7 million from $5.1 million in the same period last year.
The decrease was due to higher selling, general and administrative expenses,
partially offset by higher gross profit.
Interest Expense, Net
Interest
expense, net of interest income, increased 7.5%, or $36,000, to $514,000 in
the third quarter of fiscal 2002 as compared to interest expense, net of
interest income, of $478,000 in the same period last year. The increase was
due primarily to higher average outstanding borrowings under our revolving
credit facility during the third quarter of fiscal 2002 as compared to the
same period last year.
Interest
expense, net of interest income, in the nine month period ended November 2,
2002 was $1.3 million as compared to interest expense, net of interest
income, of $6.3 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 lower average outstanding borrowings under our
revolving credit facility in the nine month period ended November 2, 2002 as
compared to the same period last year.
11
GALYAN’S TRADING COMPANY,
INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS - continued
Income Taxes
Our effective income tax rate was 41.0% in the nine month period ended November 2, 2002. This
rate reflects the effect of the anticipated federal tax rate and aggregated state tax rates in
the various states in which we currently conduct business.
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, the net loss increased by $1.3 million, to $1.5 million,
or 1.1% of net sales, in the third quarter of fiscal 2002 as compared to a net loss of
$168,000, or 0.2% of net sales, for the same period last year.
As a result of the foregoing factors, net income increased by $3.3 million, to $2.0 million, or
0.5% of net sales, in the nine month period ended November 2, 2002 as compared to a net loss
before the extraordinary loss on early extinguishment of debt of $1.3 million, or 0.4% 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 nine months ended November 2, 2002, these
capital and liquidity requirements were primarily funded from cash and cash equivalents on hand
at the beginning of the year and borrowings under the revolving credit facility. Cash flows
from operating, investing and financing activities for the nine months ended November 2, 2002
and November 3, 2001 are summarized below.
Net cash used in operations was $11.3 million for the nine months ended November 2, 2002,
compared to cash used in operations of $22.4 million for the same period last year. The
decrease in net cash used in operations was primarily the result of an increase in accounts
payable for inventories and higher net income, partially offset by an increase in merchandise
inventories for new stores.
Net cash used in investing activities was $53.0 million for the nine months ended November 2,
2002, compared to $22.7 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 have opened
nine new stores in fiscal 2002, including one opened November 15, 2002, compared to five stores
opened in fiscal 2001.
Net cash provided by financing activities was $35.5 million for the nine month period ended
November 2, 2002, compared to $47.9 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
$40.0 million in net borrowings under the revolving credit facility during the nine months
ended November 2, 2002, compared to net payments of $5.5 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 November 2, 2002, we had $40.0 million in outstanding
borrowings and availability of $85.5 million, net of $5.6 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 construction loan to finance the
construction of a new store building in Rochester, New York. Advances under the construction
loan are secured by the building, and the agreement requires monthly payment of interest under
several interest rate options, with a rate on November 2, 2002 of 3.66%. Outstanding advances
as of November 2, 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 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.
Our net working capital at November 2, 2002 was $85.4 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 in fiscal 2002, a seasonal increase in merchandise inventories, and higher
landlord construction receivables. These increases were partially offset by an increase in
accounts payable. We had $7.9 million in cash and cash equivalents as of November 2, 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 and the
timing of those openings within a given year. For fiscal 2002, we currently estimate our total
capital expenditures to range between $65.0 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 $59.0 to $61.0 million for nine new stores that we opened during fiscal
2002, including the eight stores opened during the nine month period ended November 2, 2002 and
one store opened on November 15, 2002, and also contemplates estimates of
construction-in-progress disbursements for anticipated fiscal 2003 openings. The capital
expenditures estimate for fiscal 2002 also includes approximately $6.0 to $7.0 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
approximately $5.0 million of non-capitalizable pre-opening costs for the nine new stores opened
during fiscal 2002.
We currently anticipate opening nine new stores in fiscal 2003. 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 through fiscal 2003. To fund our new
store growth plans and working capital needs in fiscal 2004 and beyond, we currently intend to
consider a variety of potential capital and financing sources, including, among others, the
renewal and possible expansion of our revolving credit facility, which matures on May 3, 2004.
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 $587,000 for the three
and nine month periods ended November 3, 2001. No goodwill amortization was expensed for the
three and nine month periods ended November 2, 2002.
During June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which is effective for us 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. The
adoption of this statement is not expected to have a material effect 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 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).
14
GALYAN’S TRADING COMPANY,
INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS - continued
New Accounting Pronouncements, continued
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.
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 loan which are benchmarked to U.S. and European short-term
variable rates. The aggregate balance outstanding under our revolving credit facility and
construction loan as of November 2, 2002 and February 2, 2002 totaled $46.0 million and $10.9
million, respectively. The impact of a one percentage point change on our results of
operations for the period ended November 2, 2002 would not be significant.
Item 4.
CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation under the
supervision and with the participation of the Chief Executive Officer, the Chief Financial
Officer and other members of senior management, of the effectiveness of our disclosure controls
and procedures. Disclosure controls and procedures are designed to ensure that information
required to be disclosed in our periodic reports filed with or submitted to the Securities and
Exchange Commission is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms. Based on this
evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our
disclosure controls and procedures are effective. There have been no significant changes in
our internal controls or in other factors that could significantly affect these internal
controls subsequent to the date we carried out this evaluation.
15
GALYAN’S TRADING COMPANY, INC.
Part II. OTHER INFORMATION
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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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On September 17, 2002, the Company filed a current report on Form 8-K, dated
the same date, reporting a Regulation FD Disclosure relating to a
certification of the Company’s Principal Executive Officer and Principal
Financial Officer as to the matters required by Section 906 of the
Sarbanes-Oxley Act of 2002. |
16
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:
December 16, 2002 |
by:
/s/ Edward S. Wozniak |
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Edward
S. Wozniak
Senior Vice President and
Chief Financial Officer
(signing on behalf of the registrant and as principal
financial officer) |
17
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;
4. The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
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a) |
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared; |
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b) |
evaluated the effectiveness of the registrant’s disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the “Evaluation Date”); and |
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c) |
presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant’s auditors and to the audit
committee of registrant’s board of directors (or persons performing the
equivalent functions):
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a) |
all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant’s ability to
record, process, summarize and report financial data and have
identified for the registrant’s auditors any material weakness in
internal controls; and |
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b) |
any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s
internal controls; and |
6. The registrant’s other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date:
December 16, 2002 |
/s/ Robert B. Mang |
|
Robert B. Mang
Chief Executive Officer and
Chairman of the Company |
18
GALYAN’S TRADING COMPANY,
INC.
CERTIFICATIONS
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;
4. The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
|
a) |
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared; |
|
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b) |
evaluated the effectiveness of the registrant’s disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the “Evaluation Date”); and |
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c) |
presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant’s auditors and to the audit
committee of registrant’s board of directors (or persons performing the
equivalent functions):
|
a) |
all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant’s ability to
record, process, summarize and report financial data and have
identified for the registrant’s auditors any material weakness in
internal controls; and |
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b) |
any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s
internal controls; and |
6. The registrant’s other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date:
December 16, 2002 |
/s/ Edward S. Wozniak |
|
Edward S. Wozniak
Senior Vice President and
Chief Financial Officer |
19