UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 3,November 2, 2002
OR
o 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
GALYAN’S TRADING COMPANY, INC.
(Exact name of registrant as specified in its charter)
| 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) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d)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,December 9, 2002: 17,042,50817,051,508
1
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'sManagement’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 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
SIGNATURESCERTIFICATIONS 18
2
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;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 SixNine Month Periods Ended August 3,November 2, 2002 and August 4,November 3, 2001
(dollars in thousands, except per share data)
For the three month For the sixnine month
periods ended periods ended
----------------------------- ---------------------------------------------------------------- ----------------------------------
AugustNovember 2, November 3, August 4, AugustNovember 2, November 3, August 4,
2002 2001 2002 2001
----------- ----------- ----------- --------------------------- ---------------- --------------- ----------------
(unaudited) (unaudited)
Net sales $ 142,275129,842 $ 114,993104,898 $ 255,732385,574 $ 202,871307,769
Cost of sales 99,459 81,143 181,410 145,192
----------- ----------- ----------- -----------93,901 75,817 275,311 221,009
---------------- ---------------- --------------- ----------------
Gross profit 42,816 33,850 74,322 57,67935,941 29,081 110,263 86,760
Selling, general and administrative expenses 35,810 28,341 67,621 52,734
----------- ----------- ----------- -----------37,919 28,911 105,540 81,645
---------------- ---------------- --------------- ----------------
Operating income 7,006 5,509 6,701 4,945(loss) (1,978) 170 4,723 5,115
Interest expense 465 2,410 971 5,941541 520 1,512 6,461
Interest income (32)(27) (42) (153) (71)
----------- ----------- ----------- -----------(180) (113)
---------------- ---------------- --------------- ----------------
Income (loss) before extraordinary loss and income
tax provision 6,573 3,141 5,883 (925)(benefit) (2,492) (308) 3,391 (1,233)
Income tax provision 2,688 1,495 2,412 224
----------- ----------- ----------- -----------(benefit) (1,022) (140) 1,390 84
---------------- ---------------- --------------- ----------------
Income (loss) before extraordinary loss 3,885 1,646 3,471 (1,149)(1,470) (168) 2,001 (1,317)
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(1,470) $ (3,592)(168) $ 3,4712,001 $ (7,959)
=========== =========== =========== ===========(8,127)
================ ================ =============== ================
Basic earnings (loss) per share:
Earnings (loss) per share before extraordinary loss $ 0.23(0.09) $ 0.12(0.01) $ 0.200.12 $ (0.10)
Per share extraordinary loss - (0.39) - (0.57)
----------- ----------- ----------- ------------ (0.50)
---------------- ---------------- --------------- ----------------
Basic earnings (loss) per share $ 0.23(0.09) $ (0.27)(0.01) $ 0.200.12 $ (0.67)
=========== =========== =========== ===========(0.60)
================ ================ =============== ================
Diluted earnings (loss) per share:
Earnings (loss) per share before extraordinary loss $ 0.22(0.09) $ 0.12(0.01) $ 0.200.12 $ (0.10)
Per share extraordinary loss - (0.39) - (0.57)
----------- ----------- ----------- ------------ (0.50)
---------------- ---------------- --------------- ----------------
Diluted earnings (loss) per share $ 0.22(0.09) $ (0.27)(0.01) $ 0.200.12 $ (0.67)
=========== =========== =========== ===========(0.60)
================ ================ =============== ================
Weighted average shares used in calculating earnings
(loss) per common share:
Basic 17,040,316 13,230,081 17,037,737 11,861,289
=========== =========== =========== ===========17,042,508 17,028,927 17,039,297 13,583,835
================ ================ =============== ================
Diluted 17,421,936 13,544,956 17,354,728 11,861,289
=========== =========== =========== ===========17,042,508 17,028,927 17,188,742 13,583,835
================ ================ =============== ================
See accompanying Notes to Consolidated Financial Statements4
Galyan’s Trading Company, Inc.
Consolidated Balance Sheets
As of August 3,November 2, 2002 and February 2, 2002
(dollars in thousands, except per share data)
August 3,November 2, 2002 February 2, 2002
------------------------------ ----------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 9,2387,904 $ 36,770
Receivables, net 7,6748,953 3,219
Merchandise inventories 144,419196,553 111,815
Refundable and deferred income taxes 2,5712,908 2,172
Other current assets 7,9007,501 6,619
------------- ------------------------------ ----------------
Total current assets 171,802223,819 160,595
Property and equipment, net 115,915130,310 94,572
Deferred income taxes 959- 718
Goodwill, net 18,334 18,334
Other assets, net 1,1651,027 1,521
------------- ------------------------------ ----------------
Total assets $ 308,175373,490 $ 275,740
============= ============================== ================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 64,527100,830 $ 39,248
Accrued expenses 30,70129,689 32,438
Current portion of long-term debt 6,0696,045 5,368
------------- ------------------------------ ----------------
Total current liabilities 101,297136,564 77,054
Long-term liabilities
Debt, net of current portion 9,28240,257 5,932
Other long-term liabilities 6,1746,672 5,533
------------- ------------------------------ ----------------
Total long-term liabilities 15,45646,929 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 (1,094)(1,091) (1,451)
Unearned compensation (198)(156) (280)
Warrants 1,461 1,461
Accumulated deficit (172)(1,642) (3,643)
------------- ------------------------------ ----------------
Total shareholders' equity 191,422189,997 187,221
------------- ------------------------------ ----------------
Total liabilities and shareholders' equity $ 308,175373,490 $ 275,740
============= ============================== ================
See accompanying Notes to Consolidated Financial Statements5
Galyan’s Trading Company, Inc.
Consolidated Statements of Cash Flows
For the SixNine Months Ended August 3,November 2, 2002 and August 4,November 3, 2001
(dollars in thousands)
AugustNovember 2, 2002 November 3, 2002 August 4, 2001
-------------- ------------------------------ ----------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 3,4712,001 $ (7,959)(8,127)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization 7,924 6,40212,365 9,841
Amortization of financing intangibles and discount on subordinated notes 278 903407 1,039
Loss on early extinguishment of debt - 10,397
Refundable and deferred income taxes (640) (3,852)86 (3,993)
Interest converted to subordinated debt - 3,647
Deferred rent and other non-cash expense 925 1,3501,880 1,928
Changes in certain assets and liabilities:
Accounts receivable (4,455) (3,160)(5,734) (5,189)
Merchandise inventories (32,604) (18,652)(84,738) (56,073)
Other assets (1,281) (2,596)(912) (3,506)
Accounts payable and accrued expenses 30,280 (3,640)
----------- -----------63,367 27,616
---------------- ----------------
Net cash provided by (used in)used in operating activities 3,898 (17,160)
----------- -----------(11,278) (22,420)
---------------- ----------------
Cash flows from investing activities:
Capital expenditures (29,189) (12,776)(48,141) (30,749)
Increase (decrease) in accounts payable for capital expenditures (6,738) 2,112
----------- -----------(4,897) 8,035
---------------- ----------------
Net cash used in investing activities (35,927) (10,664)
----------- -----------(53,038) (22,714)
---------------- ----------------
Cash flows from financing activities:
Net borrowings (payments) from revolving line of credit 9,000 (19,950)40,000 (5,450)
Proceeds from long-term debt 365 3,179350 3,258
Principal payments on long-term debt (5,314) (60,829)and other obligations (5,348) (60,950)
Payments on notes receivable from shareholders 358360 200
Proceeds from sale of common stock 88 123,960124,031
Payment of financing costs - (1,379)(1,416)
Transaction cost for initial public offering - (10,360)
----------- -----------(11,799)
---------------- ----------------
Net cash provided by financing activities 4,497 34,821
----------- -----------35,450 47,874
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (27,532) 6,997(28,866) 2,740
Cash and cash equivalents, beginning of period 36,770 3,756
----------- --------------------------- ----------------
Cash and cash equivalents, end of period $ 9,2387,904 $ 10,753
=========== ===========6,496
================ ================
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 6921,182 $ 4,040
=========== ===========4,391
================ ================
Income taxes $ 3,5523,736 $ 6,334
=========== =========================== ================
See accompanying Notes to Consolidated Financial Statements6
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 threenine month period ended August 4, 2001,November 2, 2002, included 314,875149,445 incremental shares relating to the dilutive effect of stock options. Since we had a loss from operations for the sixthree month periods ended November 2, 2002 and November 3, 2001, and for the nine month period ended August 4,November 3, 2001, 340,73829,834 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 thea 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:November 2, 2002 (dollars in thousands):
Bank andother:other long-term debt: Constructionloansloan $ 6,000 Revolving line of credit9,000 Other 35140,000 Capital lease obligations 302 --------- Total bank and other debt15,35146,302 Less current maturities(6,069)(6,045) --------- Total long-term debt, net of current maturities $9,28240,257 =========
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$587,000 for the three and sixnine month periods ended August 4,November 3, 2001. No goodwill amortization was expensed for the three and sixnine month periods ended August 3,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 the Companyus 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,The adoption of this new standardstatement 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 ofLong-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 BoardFASB 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,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.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 BoardFASB 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
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 2933 stores in 1416 states as of August 3,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 usesell 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
For the three For the sixnine
month periods ended (1) month periods ended (1)
--------------------------------- ----------------------------------
August--------------------------------
November 2, November 3, August 4, AugustNovember 2, November 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
------------- ------------- ------------- --------------72.3 72.3 71.4 71.8
---------------- --------------- --------------- ---------------
Gross profit 30.1 29.4 29.1 28.427.7 27.7 28.6 28.2
Selling, general and administrative expenses 25.2 24.6 26.4 26.0
------------- ------------- ------------- --------------29.2 27.6 27.4 26.5
---------------- --------------- --------------- ---------------
Operating income 4.9 4.8 2.6 2.4(loss) (1.5) 0.2 1.2 1.7
Interest expense, net 0.30.4 0.5 0.4 2.1
0.3 2.9
------------- ------------- ------------- ------------------------------ --------------- --------------- ---------------
Income (loss) before income tax provision
(benefit) and extraordinary loss 4.6 2.7 2.3 (0.5)(1.9) (0.3) 0.9 (0.4)
Income tax provision 1.9 1.3 0.9 0.1
------------- ------------- ------------- --------------(benefit) (0.8) (0.1) 0.4 0.0
---------------- --------------- --------------- ---------------
Income (loss) before extraordinary loss 2.7 1.4 1.4 (0.6)(1.1) (0.2) 0.5 (0.4)
Extraordinary loss on early extinguishment
of debt, net of income tax benefit (4.6) (3.4)
------------- ------------- ------------- --------------(2.2)
---------------- --------------- --------------- ---------------
Net income (loss) 2.7 (1.1)% (3.1)(0.2)% 1.40.5 % (3.9)(2.6)%
============= ============= ============= ============================== =============== =============== ===============
(1) due to rounding, columns may not addNet Sales
Net sales increased by 23.7%, or $27.3$24.9 million, to $142.3$129.8 million in the secondthird quarter of fiscal 2002 from $115.0$104.9 million in the same quarter last year. When comparing the secondthird quarter of fiscal 2002 with the same quarter last year, net sales increaseddecreased by $2.3$2.2 million, or 2.1%2.2%, at comparable locations, increased by $20.4 million at eight stores opened during fiscal 2002 and increased by $16.1$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 and by $8.9 millionnot qualifying as comparable stores. This treatment has resulted in a reduction in net sales at three stores opened during fiscal 2002.non-comparable stores. The comparable store sales increasedecrease in the secondthird quarter of fiscal 2002 as compared with the same quarter last year was due primarily to higher salesdecreases in the athletic apparelhunting, camping and athletic footwear categories.outerwear categories against post September 11, 2002 increases in these categories in the same quarter last year.
Net sales in the sixnine month period ended August 3,November 2, 2002 increased by 26.1%25.3%, or $52.8$77.8 million, to $255.7$385.6 million from $202.9$307.8 million in the same period last year. When comparing the sixnine month period of fiscal 2002 with the same period last year, net sales increased by $6.8$4.6 million, or 3.4%1.5%, at comparable stores, increased by $34.7$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 and by $11.3 millionnot qualifying as comparable stores. This treatment has resulted in a reduction in net sales at three stores opened during fiscal 2002.non-comparable stores. The comparable store sales increaseincreased in the sixnine month period ended August 3,November 2, 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 marginsaccessories, fitness and the leveraging of occupancy, buying and distribution expenses.baseball categories.
10
GALYAN’S TRADING COMPANY, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
Gross Profit continued
Gross profit increased by 23.6%, or $6.8 million, to $35.9 million in the six month period ended August 3,third quarter of fiscal 2002 increased by 28.9%, or $16.6 million, to $74.3 million from $57.7$29.1 million in the same periodquarter 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 29.1%comparable at 27.7%.
Gross profit in the sixnine 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 28.4%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 26.4%31.2%, or $7.5$9.0 million, to $35.8$37.9 million in the secondthird quarter of fiscal 2002 from $28.3$28.9 million in the same quarter last year.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 25.2%29.2% from 24.6%27.6% in the same period last year due primarily to higher health insurancemarketing costs associated with our expansion program and higher pre-opening costs. We opened five stores during the impactthird quarter of a bad debt recovery infiscal 2002 as compared to three stores during the third quarter last year.
Selling, general and administrative expenses inincreased by 29.3%, or $23.9 million, to $105.5 million for the sixnine 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,November 2, 2002 from $52.7$81.6 million in the same period last year.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 sixnine month period to 26.4%27.4% from 26.0%26.5% due primarilylargely to higher marketing as well asexpenses, primarily in support of our expansion program, and higher pre-opening expenses andcosts due to opening more stores in fiscal 2002 than in the impact of a bad debt recoverysame period last year.
Operating Income (Loss)
Operating income increaseddecreased by 27.2%, or $1.5$2.17 million in the secondthird quarter of fiscal 2002 to incomea loss of $7.0$2.0 million from income of $5.5 million$170,000 in the same quarter last year. The increasedecrease was due primarily to higher net sales and gross profit, partially offset by higher selling, general and administrative expenses.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 sixnine month period ended August 3,November 2, 2002 increaseddecreased by 35.5%7.7%, or $1.8 million,$400,000, to $6.7$4.7 million from $4.9$5.1 million in the same period last year. The increasedecrease was due to higher net sales and gross profit, partially offset by higher selling, general and administrative expenses.expenses, partially offset by higher gross profit.
Interest Expense, Net
Interest expense, net of interest income, was $433,000increased 7.5%, or $36,000, to $514,000 in the secondthird quarter of fiscal 2002 as compared to interest expense, net of interest income, of $2.4$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 a reduction in thelower average outstanding borrowings under our revolving credit facility. Interest expense, net of interest income,facility in the sixnine month period ended August 3,November 2, 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.
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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 $2.3$3.3 million, to $3.9$2.0 million, or 2.7%0.5% 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 sixnine month period ended August 3,November 2, 2002 as compared to a net loss before the extraordinary loss on early extinguishment of debt of $1.1$1.3 million, or 0.6%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 sixnine months ended August 3,November 2, 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 operationsyear and borrowings under the revolving credit facility. Cash flows from operating, investing and financing activities for the sixnine months ended August 3,November 2, 2002 and August 4,November 3, 2001 are summarized below.
Net cash provided byused in operations was $3.9$11.3 million for the sixnine months ended August 3,November 2, 2002, compared to cash used in operations of $17.2$22.4 million for the same period last year. The increasedecrease in net cash fromused in operations wasprimarilywas 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 $36.0$53.0 million for the sixnine months ended August 3,November 2, 2002, compared to $10.7$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 expect to openhave 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 $4.5$35.5 million for the sixnine month period ended August 3,November 2, 2002, compared to $34.8$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 $9.0$40.0 million in net borrowings under the revolving credit facility during the sixnine months ended August 3,November 2, 2002, compared to net payments of $20.0$5.5 million during the same period last year.
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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,November 2, 2002, we had $9.0$40.0 million in outstanding borrowings and availability of $67.9$85.5 million, net of $5.7$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 line of credit agreementconstruction loan to finance the construction of a new store building in Rochester, New York. Advances under the line of credit agreementconstruction loan are secured by the building, and the agreement requires monthly payment of interest under several interest rate options, with a rate on September 1,November 2, 2002 of 3.77%3.66%. Outstanding advances as of September 1,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 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.
York.
Our net working capital at August 3,November 2, 2002 was $67.3$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 and expected to open in fiscal 2002, a seasonal increase in merchandise inventories, and higher receivables from landlords.landlord construction receivables. These increases were partially offset by an increase in accounts payable. We had $9.2$7.9 million in cash and cash equivalents as of August 3,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 and the amount of landlord construction contribution.year. For fiscal 2002, we currently estimate our total capital expenditures to range between $63.0$65.0 to $68.0 million, net of agreed-upon landlord construction contributions. The capital expenditures
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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$59.0 to $62.0$61.0 million for nine new stores that we intend to openopened during fiscal 2002, including the threeeight stores opened during the sixnine month period ended August 3,November 2, 2002 and takes into accountone 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 $5.0$6.0 to $6.0$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 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 openopened 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 overthrough 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 next twelve months.
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 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$587,000 for the three and sixnine month periods ended August 4,November 3, 2001. No goodwill amortization was expensed for the three and sixnine month periods ended August 3,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 the Companyus 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,The adoption of this new standardstatement is not expected to have a material effect on ourthe 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,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.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 anActivity (including Certain Costs Incurred in a Restructuring).
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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
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GALYAN’S TRADING COMPANY, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS 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 loansloan which are benchmarked to U.S. and European short-term variable rates. The aggregate balance outstanding under our revolving credit facility and construction loansloan as of August 3,November 2, 2002 and February 2, 2002 totaled $15.0$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 August 3,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.
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GALYAN’S TRADING COMPANY, INC.
Part II. OTHER INFORMATION
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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GALYAN’S TRADING COMPANY, INC.
| Item 6. Exhibits and Reports on Form 8-K. | ||
| (a) | Exhibits. | |
| None | ||
| (b) | Reports on Form 8-K. | |
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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: | ||
| Edward S. Wozniak | ||
Senior Vice President and | ||
Chief Financial Officer | ||
(signing on behalf of the registrant and as principal financial officer) |
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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.
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; | |
| 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 | |
| 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 | |
| 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: | /s/ Robert B. Mang |
| Robert B. Mang | |
Chief Executive Officer and | |
Chairman of the Company |
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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.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; | |
| 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 | |
| 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 | |
| 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: | /s/ Edward S. Wozniak |
| Edward S. Wozniak | |
Senior Vice President and | |
Chief Financial Officer |
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