UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
-
ACT OF 1934
For the quarterly period ended August 4,November 3, 2001
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OR
[_][ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to ____________________
Commission File No. 000-32911
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GALYAN'S TRADING COMPANY, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1529720
-------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2437 East Main Street
Plainfield, Indiana 46168
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(Address of principal executive offices) (Zip Code)
(317) 532-0200
(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 X
------[ ]
Number of shares of Common Stock outstanding at September 14,December 11, 2001:
17,030,041
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1
GALYAN'S TRADING COMPANY, INC.
INDEX TO FORM 10-Q
Page Number
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Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
Page Number
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Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:Statements
Galyan's Trading Company, Inc.
Unaudited Consolidated Statements of Operations................Operations
For the Three Month and Nine Month Periods Ended November 3, Consolidated Balance Sheets.......................... 4
Consolidated Statements of Cash Flows................ 5
Notes to Consolidated Financial Statements........... 6
Item 2. Management's Discussion2001 and
Analysis of
Financial Condition and Results of Operations........ 8
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............ 11
Item 4. Submission of Matters to a Vote of Security Holders.. 11
SIGNATURES.................................................................. 12
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Galyan's Trading Company, Inc.
Unaudited Consolidated Statements of Operations
For the Three Month and Six Month Periods Ended July 29,October 28, 2000 and
August 4, 2001 (in thousands, except per share data)
For the three month For the sixnine month
periods ended periods ended
-------------------------------- ---------------------------------
July 29, August 4, July 29, August 4,----------------------------- ----------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
2001
---------------- --------------- ---------------- --------------------------- ------------ ------------ ------------
Net sales $ 98,952104,898 $ 114,99392,888 $ 174,666307,769 $ 202,871267,554
Cost of sales 70,171 81,143 126,323 145,192
---------------- --------------- ---------------- ---------------75,817 67,777 221,009 194,100
------------ ------------ ------------ ------------
Gross profit 28,781 33,850 48,343 57,67929,081 25,111 86,760 73,454
Selling, general and administrative expenses 23,256 28,341 44,101 52,734
---------------- --------------- ---------------- ---------------28,911 26,115 81,645 70,216
------------ ------------ ------------ ------------
Operating income 5,525 5,509 4,242 4,945(loss) 170 (1,004) 5,115 3,238
Interest expense 3,391 2,410 6,528 5,941520 3,712 6,461 10,240
Interest income (41) (42) (92) (71)
---------------- --------------- ---------------- ---------------
Income (loss)(31) (113) (123)
------------ ------------ ------------ ------------
Loss before extraordinary loss and income tax expense 2,175 3,141 (2,194) (925)(308) (4,685) (1,233) (6,879)
Income tax expense (benefit) 1,072 1,495 (373) 224
---------------- --------------- ---------------- ---------------
Income (loss)(140) (1,652) 84 (2,025)
------------ ------------ ------------ ------------
Loss before extraordinary loss 1,103 1,646 (1,821) (1,149)(168) (3,033) (1,317) (4,854)
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)loss $ 1,103(168) $ (3,592)(3,033) $ (1,821)(8,127) $ (7,959)
================ =============== ================ ===============(4,854)
============ ============ ============ ============
Basic & diluted earnings (loss)loss per share
Earnings (loss)Loss per share before extraordinary loss $ 0.11(0.01) $ 0.12(0.29) $ (0.18)(0.10) $ (0.10)(0.47)
Per share extraordinary loss - (0.39) - (0.57)
---------------- --------------- ---------------- ---------------(0.50) -
------------ ------------ ------------ ------------
Basic & diluted earnings (loss)loss per share $ 0.11(0.01) $ (0.27)(0.29) $ (0.18)(0.60) $ (0.67)
================ =============== ================ ===============(0.47)
============ ============ ============ ============
Weighted average shares used in calculating earnings (loss)loss
per common shares:share:
Basic 10,391,517 13,230,081 10,388,723 11,861,289
================ =============== ================ ===============
Diluted 10,391,517 13,544,956 10,388,723 11,861,289
================ =============== ================ ===============& diluted 17,028,927 10,420,176 13,583,835 10,399,379
============ ============ ============ ============
See accompanying Notes to Consolidated Financial Statements
3
Galyan's Trading Company, Inc.
Unaudited Consolidated Balance Sheets
As of November 3, 2001 and February 3, 2001 and August 4, 2001
(dollars in thousands, except share data)
November 3, February 3,
August 4,
2001 2001
---- ----
(Unaudited)---------- ----------
Assets
Current Assets
Cash $ 3,7566,496 $ 10,7533,756
Receivables, net 9,152 3,963 7,123
Merchandise inventories 147,568 91,495
110,147
DeferredRefundable and deferred income taxes 8,528 1,375 8,300
Other current assets 6,898 3,401
5,990
------------------ --------------------------- ---------
Total current assets 178,642 103,990 142,313
Property and equipment, net 92,046 70,568 77,334
Deferred income taxes 2,773 -
Goodwill, net 18,530 19,117 18,726
Other assets, net 4,641 1,440
------------------ ------------------1,344 7,414
--------- ---------
Total assets $ 290,562 $ 201,089
$ 239,813
================== =========================== =========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 20,85263,502 $ 27,93220,852
Accrued expenses 24,640 31,479 24,412
Current portion of long-term debt 5,357 136
5,384
------------------ --------------------------- ---------
Total current liabilities 93,499 52,467
57,728
Long-term liabilitiesLiabilities
Debt, net of current portion 17,993 25,529 3,508
Subordinated debt - 50,466 -
Other long-term liabilities 4,912 3,588
4,508
------------------ --------------------------- ---------
Total long-term liabilities 22,905 79,583 8,016
Shareholders' Equity
Preferred stock, no par value
2,000,000 shares authorized; no shares issued or outstanding -
5,000,000 shares authorized; no shares issued or outstanding -
Class A voting common stock and paid in capital, no par value,
20,000,000 shares authorized; 9,763,707 shares issued and outstanding 70,596
Class B non-voting common stock, no par value
1,350,000 authorized; no shares issued and outstanding -
Common stock and paid-in capital, no par value
50,000,000 shares authorized; 16,303,70717,030,041 shares issued and outstanding 183,588190,995
Notes receivable from shareholders (1,576) (1,491) (1,576)
Unearned compensation (321) (445)
(363)
Warrants 8,6541,462 8,654
Accumulated deficit (16,402) (8,275)
(16,234)
------------------ --------------------------- ---------
Total shareholders' equity 174,158 69,039
174,069--------- ---------
Total liabilities and shareholders' equity $ 290,562 $ 201,089
$ 239,813
================== =========================== =========
See accompanying Notes to Consolidated Financial Statements
4
Galyan's Trading Company, Inc.
Unaudited Consolidated Statements of Cash Flows
For the Six Month Periods Ended July 29,
Galyan's Trading Company, Inc.
Unaudited Consolidated Statements of Cash Flows
For the Nine Month Periods Ended November 3, 2001 and
October 28, 2000 and August 4, 2001 (dollars in thousands)
For the six month
periods ended
------------------------------
July 29, August 4,November 3, October 28,
2001 2000
2001
--------------- ----------------------- ----------
Cash flows from operating activities:
Net loss $ (1,821)(8,127) $ (7,959)(4,854)
Adjustments to reconcile net loss to net cash from operating activities:activities
Depreciation and& amortization 5,499 6,4029,841 8,485
Amortization of financing intangible and discount on subordinated notes 1,166 903
Write-off1,039 1,862
Loss on early extinguishment of deferred financing costs -- 3,845
Write-off of unamortized debt discount -- 6,55210,397
Deferred income taxes (792) (3,852)(3,993) (1,913)
Interest converted to subordinated debt 3,221 3,647 6,649
Deferred rent and other non-cash expense 1,083 1,350
Changes1,928 1,897
Change in certain assets and liabilities
Accounts receivable (700) (3,160)liabilities:
Receivables (5,189) (1,937)
Merchandise inventories (17,468) (18,652)(56,073) (42,843)
Other assets 53) (2,596)(3,506) (1,293)
Accounts payable and accrued expenses 9,848 (1,528)
--------------- -------------35,651 20,772
--------- ---------
Net cash from operating activities (17) (15,048)(14,385) (13,175)
--------- ---------
Cash flows from investing activities:
Capital expenditures (10,296) (12,776)
--------------- -------------(30,749) (16,386)
--------- ---------
Net cash from investing activities (10,296) (12,776)(30,749) (16,386)
--------- ---------
Cash flows from financing activities:
Net borrowings (payments) fromon revolving line of credit 12,450 (19,950)
Proceeds(5,450) 28,650
Proceed from long-term debt 2,035 3,1793,258 3,186
Principal payments on long-term debt (597) (60,829)(60,950) (610)
Payments on notes receivable from shareholders -- 200
Proceeds from sale of common stock 30 123,960124,031 430
Payment of financing costs -- (1,379)(1,416)
Transaction costs for initial public offering -- (10,360)
Repurchase(11,799)
Acquisition of common stock (31) --
--------------- -------------- (61)
--------- ---------
Net cash from financing activities 13,887 34,821
--------------- -------------47,874 31,595
--------- ---------
Net increase in cash 3,574 6,9972,740 2,034
Cash, beginning of period 3,756 2,662
3,756
--------------- ---------------------- ---------
Cash, end of period $ 6,2366,496 $ 10,753
=============== =============4,696
========= =========
Supplemental disclosures of cash flow information: Cash paid for:
Interest $ 1,5464,391 $ 4,040
=============== =============2,659
========= =========
Income taxes $ --6,334 $ 6,334
=============== =============-
========= =========
See accompanying Notes to Consolidated Financial Statements
5
GALYAN'S TRADING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial information has been prepared
by the Company without audit, in accordance with the instructions to Form 10-Q
and therefore does not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash flows in
accordance with accounting principles generally accepted in the United States of
America.
Unaudited Interim Financial Data
In the opinion of management, the unaudited consolidated financial
statements for the interim periods presented reflect all adjustments, consisting
of only normal recurring accruals, necessary for fair presentation of the
consolidated financial position and results of operations and cash flows as of
and for such periods indicated. These consolidated financial statements and
notes thereto should be read in conjunction with the consolidated financial
statements and notes thereto for the fiscal year ended February 3, 2001. Results
for the interim periods presented herein are not necessarily indicative of
results which may be reported for any other interim period or for the entire
fiscal year.
Earnings (Loss)Loss Per Share
Earnings (loss)Loss per share of common stock is based on the weighted average number
of shares outstanding during the related periods. Basic and diluted loss per
share for the three month and nine month periods ended July 29,October 28, 2000 and August 4, 2001
includeincluded
720,000 warrants which arewere exercisable for nominal cash consideration. Since
the Company had a loss from operations for the sixthree month periodand nine month
periods ended August 4,November 3, 2001 340,738and October 28, 2000, 72,047 and 310,235
incremental shares, respectively, for the third quarter, and 261,903 and 88,736
incremental shares, respectively, for the nine months, relating to the diluted
effect of stock options and warrants were excluded from the calculation of
diluted loss per share due to their anti-dilutive effect. During the three and six month
periods ended July 29, 2000, there were no incremental shares relating to the
dilutive effect of stock options or warrants.
Note 2: Long-Term Debt
On July 2, 2001, the Company extinguished all of its outstanding
subordinated notes and junior subordinated notes with the proceeds from its
initial public offering. In conjunction with the extinguishment of the
subordinated and junior subordinated notes, the Company recorded an
extraordinary loss of $5,238,000 (net of income tax benefit of $2,576,000) to
expense the remaining unamortized discount and deferred financing costs relating
to the subordinated and junior subordinated notes.
On May 25, 2001, the Company entered into a $6.0 million line of credit
agreement with a bank to be used for the construction of a new store building,
which was opened in Rochester, New York. Advances under the line of credit
agreement are secured by the new building, and the agreement requires monthly
payments of interest under several interest rate options. Outstanding advances
as of August 4,November 3, 2001 were $3.1$3.2 million. All unpaid principal and interest is
due May 1, 2002 and canmay be extended to May 1, 2003, at the option of the
Company.
Long-term debt consists of the following at August 4,November 3, 2001:
Bank and other:
Construction loans.............................................loans......................................... $ 8,4298,414
Revolving line of credit....................................... 0
Other.......................................................... 463credit................................... 14,500
Other...................................................... 436
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Total bank and other debt.................................... 8,892debt............................... 23,350
Less current maturities.......................................... (5,384)maturities (5,357)
-------
Total long-term debt, net of current maturities.............. $ 3,508maturities......... $17,993
=======
6
GALYAN'S TRADING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3: Shareholder's Equity
The initial public offering of 6.5 million shares, at $19.00 per share,
of the Company's common stock was consummated on July 2, 2001. Immediately prior
to the initial public offering, the articles of incorporation were amended to
combine all classes of common stock into one single class and to authorize the
issuance of up to 50.0 million shares of common stock.
On September 20, 2001, the Company issued options to purchase 40,000
shares of common stock under its 1999 Stock Option Plan at $8.90 per share to
certain directors. These options vest over a three-year period and expire seven
years after the grant date.
On September 6, 2001, FS Equity Partners IV exercised its rights to
purchase 432,000 shares of common stock pursuant to warrants issued in
connection with the recapitalization of the Company in 1999. The warrants were
exercisable for $0.01 per share.
On August 23, 2001, The Limited, Inc. exercised its rights to purchase
288,000 shares of common stock pursuant to warrants issued in connection with
the recapitalization of the Company in 1999. The warrants were exercisable for
$0.01 per share.
On June 27, 2001, the Company issued options to purchase 150,000 shares
of common stock under its 1999 Stock Option Plan at $19.00 per share to certain
employees. These options vest over a three-year period and expire seven years
after the grant date.
On May 29, 2001, the Company issued options to purchase 110,000 shares
of common stock under its 1999 Stock Option Plan at $19.00 per share to an
employee. These options vest over a three-year period and expire seven years
after the grant date. The Company also issued 30,000 shares of common stock at
$19.00 per share to this employee under the 1999 Stock Plan. In connection with
the purchase of this common stock, the Company received from the employee a note
receivable in the amount of $285,000, which bears interest at 7.5% per year.
On June 27, 2001, the Company issued options to purchase 150,000 shares
of common stock under its 1999 Stock Option Plan at $19.00 per share to certain
employees. These options vest over a three-year period and expire seven years
after the grant date.
Note 4: Subsequent Events
On August 23, 2001, The Limited, Inc. exercised its rights to purchase
288,000 shares of common stock pursuant to warrants issued in connection with
the recapitalization of the Company in 1999. The warrants were exercisable for
$0.01 per share.
On September 6, 2001, FS Equity Partners IV exercised its rights to
purchase 432,000 shares of common stock pursuant to warrants issued in
connection with the recapitalization of the Company in 1999. The warrants were
exercisable for $0.01 per share.
Note 5: New Accounting Pronouncements
Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets," was issued in July 2001. Under SFAS No.
142, goodwill amortization ceases when the new standard is adopted. The new
rules also require an initial goodwill impairment assessment in the year of
adoption and at least annual impairment tests thereafter. SFAS No. 142, is
effective for the Company February 3, 2002. Annual goodwill amortization of
approximately $800,000 will cease upon adoption. Management has not determined
whether any impairment charge will result from the initial adoption of SFAS No.
142.
7
Item 2.
GALYAN'S TRADING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and related notes. This discussion and analysis contains certain
forward-looking statements, which reflect Galyan's Trading Company, Inc.'s
current view of future events and financial performance. 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. Any such
forward-looking statements are subject to risks and uncertainties, which could
cause the Company's future results of operations to differ materially from
historical results or current expectations. The risks and uncertainties which
could cause results to differ materially from those expressed in the forward
looking statements are described in the Company Registration Statement on Form
S-1 (File No. 333-57848), as amended, as filed with the Securities and Exchange
Commission. The Company does not undertake to publicly update or revise its
forward lookingforward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
Overview
Galyan's 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. The Company sells outdoor and
athletic equipment, apparel, footwear and accessories, as well as casual apparel
and footwear. The Company's 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 and timber appointments and interactive
and entertaining elements, such as our signature rock climbing wall. The Company
currently operates 2326 stores in 1214 states, including seveneight mall stores.
Results of Operations
The following table sets forth the Company statement of operations data
as a percent of sales for the periods indicated.
For the three For the sixnine
month periods ended (1) month periods ended (1)
------------------------------ -------------------------------
July 29, August 4, July 29, August 4,------------------------ ------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
2001
------------- -------------- ------------- ------------------------- ---------- ---------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 70.9% 70.6% 72.3% 71.6%
------------- -------------- ------------- ---------------73.0% 71.8% 72.5%
--------- --------- --------- ---------
Gross profit 29.1% 29.4% 27.7% 28.4%27.0% 28.2% 27.5%
Selling, general and administrative expenses 23.5% 24.7% 25.2% 26.0%
------------- -------------- ------------- ---------------27.6% 28.1% 26.5% 26.2%
--------- --------- --------- ---------
Operating income 5.6% 4.8% 2.4% 2.4%(loss) 0.2% (1.1%) 1.7% 1.2%
Interest expense 3.4%0.5% 4.0% 2.1% 3.7% 2.9%3.8%
Interest income 0.0% 0.0% (0.1)% 0.0% ------------- -------------- ------------- ---------------
Income (loss)0.0%
--------- --------- --------- ---------
Loss before extraordinary loss and income tax expense 2.2% 2.7% (1.3)% (0.5)%(0.3%) (5.0%) (0.4%) (2.6%)
Income tax expense (benefit) 1.1% 1.3% (0.2)% 0.1%
------------- -------------- ------------- ---------------
Income (loss)(0.1%) (1.8%) 0.0% (0.8%)
--------- --------- --------- ---------
Loss before extraordinary loss 1.1% 1.4% (1.0)% (0.6)%(0.2%) (3.3%) (0.4%) (1.8%)
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $2,576 and $3,625)benefit) 0.0% (4.6)% 0.0% (3.4)%
------------- -------------- ------------- ---------------
1.1% (3.1)% (1.0)% (3.9)%(2.2%) 0.0%
--------- --------- --------- ---------
Net income (loss) ============= ============== ============= ===============
loss (0.2%) (3.3%) (2.6%) (1.8%)
========= ========= ========= =========
(1) due to rounding, columns may not add
Net Sales
Net sales for the second quarter ended August 4, 2001 grew 16.2% to
$115.0 million from $99.0 million in the same quarter last year. This growth
during the second quarter of fiscal 2001 reflected $9.0 million in
non-comparable store sales, $5.0 million in new
8
GALYAN'S TRADING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
Net Sales
Net sales for the third quarter ended November 3, 2001 grew 12.9% to
$104.9 million from $92.9 million in the same quarter last year. Total sales
during the third quarter of fiscal 2001 reflected $87.5 million in comparable
store sales, $9.7 million in new store sales, and an increase of $2.0$7.7 million in comparablenon-comparable
store sales. Comparable store sales for the quarter increased 2.1%2.2%. The increase
in comparable store sales was primarily driven by increases in footwear, casual, athletichunting,
outerwear and outdoor apparel and athletic sporting goods, which were slightly offset by
declines in big ticket items and licensed apparel.footwear.
Net sales for the sixnine month period ended August 4,November 3, 2001 grew 16.1%15.0%
to $202.9$307.8 million from $174.7$267.6 million in the same period last year. This growthTotal sales
during the sixnine month period of fiscal 2001 reflected $18.6$263.0 million in
comparable store sales, $29.9 million in non-comparable store sales, $5.1and $14.9
million in new store sales, and an increase of
$4.5 million in comparable store sales. Comparable store sales for the sixnine month period
increased 2.6%2.5%. Merchandise category results were consistent with second
quarter results.The increase in comparable store sales was primarily driven by
increases in outerwear and footwear.
Gross Profit
Gross profit for the secondthird quarter increased 17.6%15.8% to $33.9$29.1 million
from $28.8$25.1 million in the same period last year. Gross profit as a percentage of
sales increased to 29.4%27.7% from 29.1%27.0% over the same period last year primarily due
to improved merchandise margins and the merchandise mix of the business.margins.
Gross profit for the sixnine months increased 19.3%18.1% to $57.7$86.8 million from
$48.3$73.5 million in the same period last year. Gross profit as a percentage of
sales increased to 28.4%28.2% from 27.7%27.5% over the same period last year due primarily
to improved merchandise margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the secondthird quarter
increaseddecreased as a percentage of sales to 24.7%27.6% from 23.5%28.1% in the same period last
year. The increaseThis decrease was due primarily to hiring additional senior level managers
in support of our growth plans, increases inpayroll and marketing costs, and
higher costs for the
Company'spartially offset by insurance programs.and new store pre-opening expenses.
Selling, general and administrative expenses for the sixnine months
increased as a percentage of sales to 26.0%26.5% from 25.2%26.2% in the same period last
year. TheThis increase was due primarily to marketing, higher costs for the
same reasons as discussed above.Company's insurance programs and new store pre-opening expenses.
Operating Income
Operating income for the secondthird quarter remained the same at $5.5increased $1.2 million but decreasedto
$170,000 from a loss of $1.0 million, increasing as a percent of sales to 4.8%0.2%
from 5.6%(1.1%) in the same period last year. The decreaseThis increase was due primarily to the
increase in gross profit and the decrease in selling, general and administrative
expenses.expenses as a percentage of sales.
Operating income for the sixnine months increased to $4.9$5.1 million,
compared to $4.2$3.2 million in the same period last year, but remained the sameincreasing as a percent
of sales at 2.4%. Theto 1.7% from 1.2% in the same period last year. This increase was due
primarily to the increase in gross profit.
Interest Expense
Interest for the secondthird quarter was $2.4 million,$520,000, or 2.1%0.5% of sales, compared
to $3.4$3.7 million, or 3.4%4.0% of sales, for the same period last year. The decrease
of $1.0$3.2 million was due primarily to extinguishment of the subordinated and
junior subordinated notes with the proceeds from the initial public offering,
and secondarily to a reduction in borrowings under the Company's revolving
credit facility with the remaining proceeds from the initial public offering.
Interest for the sixnine month period was $5.9$6.5 million, or 2.9%2.1% of sales,
compared to $6.5$10.2 million, or 3.7%3.8% of sales, for the same period last year. The
decrease of $0.6$3.8 million was due primarily to the effectrepayment of debt with the
proceeds from the initial public offering.
9
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 is greater than the statutory rate
because a portion of the interest on the subordinated and junior subordinated
notes and the amortization of goodwill are not deductible for income tax
purposes. The Company extinguished the subordinated and junior subordinated
notes on July 2, 2001, which eliminatedwill eliminate the non-deductible interest expense
relating to these notes.
9
GALYAN'S TRADING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continuednotes for all periods after July 2, 2001.
Extraordinary Loss on Early Extinguishment of Debt
On July 2, 2001, the Company retired all of the outstanding amounts due
under its subordinated and junior subordinated notes. The Company incurred an
extraordinary loss (net of income taxes) of $5.2 million, relating to the
write-off of the remaining unamortized discount and deferred financing costs
associated with these notes.
On May 3, 2001, the Company refinanced its revolving credit facility to
allow borrowings up to $160 million of which $15.0 million is allocated for the
issuance of standby and import letters of credit. The Company incurred an
extraordinary loss (net of income taxes) of $1.6 million, relating to the
write-
offwrite-off of the remaining unamortized deferred financing costs associated with
the prior revolving credit facility.
Net Loss
As a result of the foregoing factors, the net loss for the secondthird
quarter of fiscal 2001 was $3.6 million,$168,000, or 3.1%0.2% of sales, compared to net
income of $1.1$3.0 million,
or 1.1%3.3% of sales, for the same period last year.
Net loss before the extraordinary loss on debt extinguishment for the
sixnine months ended August 4,November 3, 2001, was $1.1$1.3 million, or 0.6%0.4% of sales, compared
to $1.8$4.9 million, or 1.0%1.8% of sales, for the same period last year. Net loss after
the extraordinary loss on debt extinguishment for the sixnine months, ended August 4,
2001, was $8.0$8.1
million.
Liquidity and Capital Resources
The Company's principal liquidity capital requirements are to fund working
capital, needs for capital expenditures onfor new stores and general corporate needs. For
the sixnine months ended August 4,November 3, 2001, these capital requirements were
generally funded by cash from operations, proceeds from the initial public
offering, and by borrowings under the revolving credit facilities. Cash flows
from operating, investing and financing activities for the sixnine months ended
August 4,November 3, 2001 and July 29,October 28, 2000 are summarized below.
Net cash used in operating activitiesfor operations was $15.0$14.4 million for the sixnine month
period ending August 4,November 3, 2001, compared to $17,000$13.2 million for the same period
last year. The increase in net cash used in operating activitiesfor operations was primarily the result
of the net loss from operating activities, an increase in merchandise
inventories for new stores, and the increase in receivables from landlords
associated with new store construction. These cash usesincreases were somewhatpartially offset by
certain non-cash expenses,
including depreciation and amortization and the write-off of the remaining
deferred financing costs and unamortized debt discount costs associated with the
early extinguishment of the subordinated and junior subordinated notes.an increase in accounts payable.
Net cash used for investing activities was $12.8$30.7 million for the sixnine
months ended August 4,November 3, 2001 as compared to $10.3$16.4 million for the same period
last year. Capital expenditures were primarily for new store construction.construction and
fixturing.
Net cash provided by financing activities was $34.8$47.9 million for the
sixnine months ended August 4,November 3, 2001, as compared to $13.9$31.6 million for the same
period last year. The increase was due primarily to the sale of 6.5 million
shares of common stock in an initial public offering for net proceeds of $111.6$111.5
million. The Company used $62.8 million for the early extinguishment of
subordinated notes and junior subordinated notes.notes and related accrued interest.
The Company used $48.0 million to repay outstanding borrowings under the
Company's revolving credit facility. The Company invested the remaining proceeds
in short-term investments.
10
GALYAN'S TRADING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
The Company's working capital at August 4,November 3, 2001 was $84.6$85.1 million,
compared to $51.5 million at February 3, 2001. The increase in working capital
resulted primarily from an increase in merchandise inventories for new stores
and receivables from landlords, deferred income taxes and other current assets.landlords. These increases were partially offset by an
increase in accounts payable. Borrowings under the credit facility were $0.0$14.5
and $20.0 million at August 4,November 3, 2001 and February 3, 2001, respectively.
The Company believes that anticipated cash flows from operations,
combined with borrowings under the revolving credit facility, will be sufficient
to fund working capital and finance capital expenditures over the next twelve
months.
Seasonality and Inflation
The Company's annual business cycle is seasonal. In fiscal 2000, the
Company's sales trended as follows: 18.0% in the first quarter, 23.5% in the
second quarter, 22.0% in the third quarter and 36.5% in the fourth quarter. The
Company typically generateshas higher profits occurring in the second and fourth
quarters.
Management does not believe inflation had a material effect on the
consolidated financial statements for the periods presented.
1011
GALYAN'S TRADING COMPANY, INC.
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
Immediately prior to the closing of our initial public offering on July
2, 2001, our amended and restated Articles of Incorporation became effective and
all outstanding shares of Class A common stock automatically converted into the
same number of shares of common stock. In addition, all securities convertible
or exercisable into shares of Class A common stock or Class B common stock
automatically became convertible or exercisable into the same number of shares
of common stock.Securities.
During the thirteen-week period ended August 4,November 3, 2001, we issued
the following unregistered securities:
(a) 30,000288,000 shares of Class A common stock were issued upon the exercise of
warrants to one employeeThe Limited, Inc. on May
29,August 23, 2001;
and
(b) 110,000 options to purchase432,000 shares of Class A common stock were issued upon the exercise of
warrants to one employeeFS Equity Partners IV on May 29,September 6, 2001; and
(c) 150,00040,000 options to purchase shares of common stock to 46
employees on June 27, 2001.
We made our initial public offering under the Securities Act of 1933,
as amended, on a Registration Statement on Form S-1 (File No. 333-57848) that
was declared effective by the Securities and Exchange Commission on June 26,
2001. On June 27, 2001, our common stock commenced trading on The Nasdaq Stock
Market's National Market. The managing underwriters in the offering were Goldman
Sachs & Co., Salomon Smith Barney Inc., Banc of America Securities LLC and J.P.
Morgan Securities Inc. All 6,500,000 shares of common stock registered under the
Registration Statement were sold at a price of $19.00 per share. The aggregate
price of the shares registered and sold by us was $123.5 million. In connection
with the offering, we paid an aggregate of approximately $8.6 million in
underwriting discounts and commissions to the underwriters and paid other
estimated expenses of approximately $3.3 million. After deducting the
underwriting discounts and commissions and the estimated offering expenses
described above, we received net proceeds from the offering of approximately
$111.6 million. We used approximately $62.8 million to repay all of our
outstanding subordinated notes and junior subordinated notes including interest
at 12.0% and 13.5%, respectively, and having due dates of August 31, 2009. We
used approximately $48.0 million to repay our obligations outstanding under our
revolving credit agreement. We invested the remaining approximately $0.8 million
net proceeds from the offering in short-term, investment-grade, interest-bearing
instruments. The repayments of our outstanding subordinated notes and junior
subordinated notes were made to The Limited, Inc. and FS Equity Partners IV,
L.P., which, together with their respective affiliates, is each a holder of 10%
or more of common stock and has two or more designees on our board of directors
who may be deemed affiliates of The Limited, Inc. and FS Equity Partners IV,
L.P.
Item 4. Submission of Matters To a Vote of Security Holders
An annual meeting of our shareholders was held on May 21, 2001. At
the meeting, shareholders holding 5,213,343 of the 9,773,707 shares
outstanding at the time were in attendance. The holders of all 5,213,343
shares in attendance adopted: (1) a proposal to elect Robert B. Mang, Joel L.
Silverman, Norman S. Matthews, Timothy J. Faber, Todd W. Halloran, John M.
Roth, Ronald P. Spogli, Peter Starrett and Stuart Burgdoerfer as directors,
(2) a proposal to amend and restate our amended and restated articles of
incorporation in connection with the filing of our registration statement on
Form S-1, to be effective immediately prior to the consummation of our initial
public offering, and (3) a proposal to approve our existing 1999
Stock Option Plan, as amended.
11amended, to four directors on September 20,
2001 with an exercise price of $8.90 per share.
Our credit agreement currently prohibits us from declaring or
paying any dividends or other distributions on any shares of our
capital stock other than dividends payable solely in shares of capital
stock or the stock of our subsidiaries. With limited exceptions, the
covenants in our credit agreement limit our aggregate capital
expenditures during each fiscal year. The aggregate amount of capital
expenditures permitted by our credit agreement during the fiscal year
ending February 2, 2002 is $45.0 million.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
---------------
None
(b) Reports on Form 8-K.
--------------------------
On September 21, 2001, the Company filed a report on Form 8-K,
which attached a press release announcing the election of Byron E.
Allumbaugh, Frank J. Bellati, George R. Mrkonic and Stephanie M. Shern
to its Board of Directors.
12
GALYAN'S TRADING COMPANY, INC.
SIGNATURES
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.
GALYAN'S TRADING COMPANY, INC.
Date: September 17,December 12, 2001 By: /s/ EdwardEDWARD S. Wozniak
----------------------------------------WOZNIAK
------------------------------------------
Edward S. Wozniak
Senior Vice President and
Chief Financial Officer
(Signing on behalf of the registrant and
as principal financial officer)
12(Principal Financial Officer)
13