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 May 4, 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 | 35-1529720 | |
---|---|---|
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
2437 East Main Street | ||
Plainfield, Indiana | 46168 | |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Number of shares of Common Stock outstanding at May 23, 2002: 17,039,375
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GALYAN’S TRADING COMPANY, INC.
INDEX TO FORM 10-Q
Page Numbers ------------ Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Consolidated Statements of Operations 4 Consolidated Balance Sheets 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14
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GALYAN’S TRADING COMPANY, INC.
Safe Harbor Statement Under The Private Securities Litigation Act Of 1995
The Company cautions 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 management of the Company involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Accordingly, the Company’s future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify forward-looking statements. The following factors, among others, in some cases have affected and in the future could affect the Company’s 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 management: risks associated with the Company’s ability to implement its growth strategies or manage its growing business, including the availability of suitable store locations on appropriate financing and other terms; the impact of competition and pricing; risks associated with the Company’s limited history of opening and operating new stores; 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 potential impact of natural disasters or national and international security concerns on the retail environment; risks relating to the regulation of products the Company sells, including firearms; the ability to retain, hire and train key personnel; risks associated with the possible inability of the Company’s vendors to deliver products in a timely manner; risks associated with relying on foreign sources of production; risks relating to changes in the Company’s management information systems and risks relating to operating and financial restrictions imposed by the Company’s revolving credit facility. See the Company’s Annual Report on Form 10-K for a more detailed discussion of these matters and other risk factors. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Galyan’s Trading Company, Inc.
Consolidated Statements of Operations
For the Three Months Ended May 4, 2002 and May 5, 2001
(dollars in thousands, except per share data)
May 4, 2002 May 5, 2001 ---------------- --------------- (unaudited) Net sales $ 113,457 $ 87,878 Cost of sales 81,951 64,048 --------------- --------------- Gross profit 31,506 23,830 Selling, general and administrative expenses 31,811 24,393 --------------- --------------- Operating loss (305) (563) Interest expense 506 3,530 Interest income (121) (28) --------------- --------------- Loss before extraordinary loss and income tax benefit (690) (4,065) Income tax benefit (276) (1,270) --------------- --------------- Loss before extraordinary loss (414) (2,795) Extraordinary loss on early extinguishment of debt (net of income tax benefit of $1,048) - (1,572) --------------- --------------- Net loss $ (414) $ (4,367) =============== =============== Basic & diluted loss per share: Loss per share before extraordinary loss $ (0.02) $ (0.27) Per share extraordinary loss - (0.15) --------------- --------------- Basic & diluted loss per share $ (0.02) $ (0.42) =============== =============== Weighted average shares used in calculating loss per common share: Basic & diluted 17,035,159 10,492,498 =============== ===============See accompanying Notes to Consolidated Financial Statements
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Galyan’s Trading Company, Inc.
Consolidated Balance Sheets
As of May 4, 2002 and February 2, 2002
(dollars in thousands)
May 4, 2002 February 2, 2002 ------------------- -------------------- (unaudited) Assets Current assets Cash and cash equivalents $ 11,342 $ 36,770 Receivables, net 4,301 3,219 Merchandise inventories 140,894 111,815 Refundable and deferred income taxes 3,542 2,172 Other current assets 7,538 6,619 --------- --------- Total current assets 167,617 160,595 Property and equipment, net 102,812 94,572 Deferred income taxes 574 718 Goodwill, net 18,334 18,334 Other assets, net 1,333 1,521 --------- --------- Total assets $ 290,670 $ 275,740 ========= ========= Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 58,744 $ 39,248 Accrued expenses 27,902 32,438 Current portion of long-term debt 10,989 5,368 --------- --------- Total current liabilities 97,635 77,054 Long-term liabilities Debt, net of current portion 282 5,932 Other long-term liabilities 5,607 5,533 --------- --------- Total long-term liabilities 5,889 11,465 Shareholders' Equity Common stock and paid-in capital, no par value; 50,000,000 191,383 191,134 shares authorized; 17,038,375 shares issued and outstanding Notes receivable from shareholders (1,402) (1,451) Unearned compensation (239) (280) Warrants 1,461 1,461 Accumulated deficit (4,057) (3,643) --------- --------- Total shareholders' equity 187,146 187,221 --------- --------- Total liabilities and shareholders' equity $ 290,670 $ 275,740 ========= =========See accompanying Notes to Consolidated Financial Statements
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Galyan’s Trading Company, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended May 4, 2002 and May 5, 2001
(dollars in thousands)
May 4, 2002 May 5, 2001 ---------------- ---------------- (unaudited) Cash flows from operating activities: Net loss $ (414) $ (4,367) Adjustments to reconcile net loss to net cash from operating activities Depreciation and amortization 3,772 3,088 Amortization of financing intangibles and discount on subordinated notes 149 646 Loss on early extinguishment of debt - 2,620 Refundable and deferred income taxes (1,226) (2,193) Interest converted to subordinated debt - 3,647 Gain on disposal of property and equipment (3) - Deferred rent and other non-cash expense 639 598 Changes in certain assets and liabilities: Accounts receivable (1,082) (2,886) Merchandise inventories (29,079) (20,936) Other assets (880) (2,810) Accounts payable and accrued expenses 17,760 (7,516) -------- -------- Net cash used in operating activities (10,364) (30,109) -------- -------- Cash flows from investing activities: Capital expenditures (12,009) (8,059) Increase (decrease) in accounts payable for capital expenditures (3,192) 2,077 -------- -------- Net cash used in investing activities (15,201) (5,982) -------- -------- Cash flows from financing activities: Net borrowings from revolving line of credit - 39,050 Proceeds from long-term debt - 44 Payments on notes receivable from shareholders 49 - Proceeds from sale of common stock 88 175 -------- -------- Net cash provided by financing activities 137 39,269 -------- -------- Net increase (decrease) in cash (25,428) 3,178 Cash and cash equivalents, beginning of period 36,770 3,756 -------- -------- Cash and cash equivalents, end of period $ 11,342 $ 6,934 ======== ======== Supplemental disclosures of cash flow information: Cash paid for: Interest $ 380 $ 1,188 ======== ======== Income taxes $ 3,427 $ 6,249 ======== ========See accompanying Notes to Consolidated Financial Statements
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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 the Company in accordance with generally accepted accounting principles for interim financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002. 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. The balance sheet at February 2, 2002, as presented, has been derived from our audited financial statements for the year then ended.
Results of operations for the interim period presented herein is not necessarily indicative of results which may be reported for any other interim period or for the entire fiscal year.
Loss Per Share
Loss per share of common stock is based on the weighted average number of shares outstanding during the related periods. Since the Company had a loss from operations for the three month periods ended May 4, 2002 and May 5, 2001, 248,974 and 391,049 incremental shares, respectively, relating to the dilutive effect of stock options and warrants were excluded from the calculation of diluted loss per share due to their anti-dilutive effect.
Note 2: Long-Term Debt
On April 1, 2002, the Company amended its construction loan with a bank dated October 29, 1999. The amendment extended the due date for all unpaid principal and interest from April 1, 2002 to July 1, 2002. Outstanding advances, which were used for the construction of, and secured by, a new store building, were $5,250,000 as of May 4, 2002. All other provisions of the agreement remained the same. Outstanding advances require monthly payments of interest at LIBOR plus 160 basis points (3.6% as of May 4, 2002).
Long-term debt consists of the following at May 4, 2002:
Bank and other: Construction loans $ 10,900 Revolving line of credit - Other 371 ---------- Total bank and other debt 11,271 Less current maturities (10,989) ---------- Total long-term debt, net of current maturities $ 282 ==========
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GALYAN’S TRADING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Note 3: Shareholder’s Equity
During the first quarter of fiscal 2002, the Company issued options to purchase 56,000 shares of common stock under its 1999 Stock Option Plan at $12.81 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, the Company 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, the Company 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 impact on the Company’s consolidated financial statements upon adoption. Goodwill amortization expense was approximately $196,000 for the three months ended May 5, 2001. No amortization was expensed for the three months ended May 4, 2002.
During June 2001, the Financial Accounting Standards Board issued SFAS No. 143,Accounting for Asset Retirement Obligations, which is effective for the Company beginning February 2, 2003. SFAS No. 143 addresses financial accounting and reporting of obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Management has not yet quantified the effect, if any, of this new standard on the consolidated financial statements.
On February 3, 2002, the Company adopted SFAS No. 144,Accounting forImpairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of this statement did not have an effect on the Company’s consolidated financial statements.
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Item 2.
GALYAN’S TRADING COMPANY, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Galyan’s Trading Company, Inc. is a rapidly growing specialty retailer that offers a broad range of products that appeal to consumers with active lifestyles, from the casual consumer to the serious sports enthusiast. The Company sells 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 the Company’s signature rock climbing wall. The Company operated 28 stores in 14 states as of May 4, 2002.
Results of Operations
The following table sets forth the Company’s statement of operations data as a percent of sales for the periods indicated.
For the three months ended (1) --------------------------------- May 4, May 5, 2002 2001 ------------- ------------- Net sales 100.0 % 100.0 % Cost of sales 72.2 72.9 ------------- ------------- Gross profit 27.8 27.1 Selling, general and administrative expenses 28.0 27.8 ------------- ------------- Operating loss (0.3) (0.6) Interest expense, net 0.3 4.0 ------------- ------------- Loss before income tax benefit and extraordinary loss (0.6) (4.6) Income tax benefit (0.2) (1.4) ------------- ------------- Loss before extraordinary loss (0.4) (3.2) Extraordinary loss on early extinguishment of debt, net of income tax benefit (1.8) ------------- ------------- Net loss (0.4)% (5.0)% ============= =============(1) due to rounding, columns may not add
Net Sales
Net sales increased by 29.1%, or $25.6 million, to $113.5 million for the first quarter ended May 4, 2002 from $87.9 million in the same quarter last year. Comparable store sales increased by 5.1% in the first quarter of fiscal 2002 as compared to 3.3% for the same quarter last year due primarily to higher sales in apparel and footwear, led by women’s, kid’s and junior categories.
Gross Profit
Gross profit increased by 32.2%, or $7.7 million, to $31.5 million in the first quarter of fiscal 2002 from $23.8 in the same quarter last year. Gross profit as a percentage of net sales was 27.8% in the quarter as compared to 27.1% for the same quarter last year due, in large part, to the Company’s leveraging of occupancy, buying and distribution expenses.
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GALYAN’S TRADING COMPANY, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 30.4%, or $7.4 million, to $31.8 million in the first quarter of fiscal 2002 from $24.4 million in the same quarter last year. Selling, general and administrative expenses for the first quarter increased as a percentage of net sales to 28.0% from 27.8% due primarily to higher marketing and pre-opening expenses associated with opening two stores during the first quarter of fiscal 2002 as compared to one store opened during the same quarter last year.
Operating Loss
The operating loss for the first quarter decreased by 45.8%, or $258,000, to a loss of $305,000 for the quarter from a loss of $563,000 for the same quarter last year. The improvement was due to the increase in net sales and gross profit, partially offset by higher selling, general and administrative expenses.
Interest Expense
Interest expense, net of interest income, was $385,000 for the first quarter as compared to interest expense, net of interest income, of $3.5 million for the same period last year. The decrease was due primarily to the extinguishment of the subordinated and junior subordinated notes with the proceeds from the initial public offering during the second quarter of fiscal 2001, as well as a reduction in the outstanding borrowings under the Company’s revolving credit facility.
Income Taxes
The Company’s effective income tax rate was 40% in the first quarter of fiscal 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 the Company conducts business.
Extraordinary Loss on Early Extinguishment of Debt
During the first quarter of fiscal 2001, the Company refinanced its 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 Loss
As a result of the foregoing factors, the net loss for the first quarter of fiscal 2002 decreased by $4.0 million to a net loss of $414,000 from a net loss of $4.4 million for the comparable quarter last year.
Liquidity and Capital Resources
The Company’s principal liquidity and capital requirements have been to fund new store construction, working capital and general corporate needs. For the three months ended May 4, 2002, these capital and liquidity requirements were primarily funded from cash and cash equivalents on hand at the beginning of the period and net cash provided by operations. Cash flows from operating, investing and financing activities for the three months ended May 4, 2002 and May 5, 2001 are summarized below.
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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
Net cash used in operations was $10.4 million for the three-month period ended May 4, 2002, compared to $30.1 million for the same period last year. The decrease in net cash used for operations was primarily the result of an increase in accounts payable and the lower net loss from operating activities. These decreases were partially offset by an increase in merchandise inventories for new stores.
Net cash used in investing activities was $15.2 million for the three months ended May 4, 2002 as compared to $6.0 million for the same period last year. The increase was the result of a decrease in accounts payable for capital expenditures and an increase in capital expenditures, which were primarily for new store construction and fixturing.
Net cash provided by financing activities was $137,000 for the three months ended May 4, 2002, as compared to $39.3 million for the same period last year. The decrease was due primarily to a reduction in net borrowings under the revolving credit facility. The Company had no borrowings under the revolving credit facility during the three months ended May 4, 2002, as compared to net borrowings of $39.1 million during the same period last year.
On April 1, 2002, the Company amended its construction loan with a bank dated October 29, 1999. The amendment extended the due date for all unpaid principal and interest from April 1, 2002 to July 1, 2002. Outstanding advances, which were used for the construction of, and secured by, a new store building, were $5,250,000 as of May 4, 2002. All other provisions of the agreement remained the same.
The Company’s net working capital at May 4, 2002 was $69.6 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 a seasonal increase in merchandise inventories, an increase in merchandise inventories for new stores opened during the first quarter and higher receivables from landlords. These increases were partially offset by an increase in accounts payable. There were no borrowings under the revolving credit facility as of May 4, 2002 or February 2, 2002.
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.
New Accounting Pronouncements
On February 3, 2002, the Company 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, the Company 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 impact on the Company’s consolidated financial statements upon adoption. Goodwill amortization expense was approximately $196,000 for the three months ended May 5, 2001. No amortization was expensed for the three months ended May 4, 2002.
During June 2001, the Financial Accounting Standards Board issued SFAS No. 143,Accounting for Asset Retirement Obligations, which is effective for the Company beginning February 2, 2003. SFAS No. 143 addresses financial accounting and reporting of obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Management has not yet quantified the effect, if any, of this new standard on the consolidated financial statements.
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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
On February 3, 2002, the Company adopted SFAS No. 144,Accounting forImpairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of this statement did not have an effect on the Company’s consolidated financial statements.
Seasonality and Inflation
The Company’s annual business cycle is seasonal. In fiscal 2001, the Company’s 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. The Company typically has higher profits occurring in the second and fourth quarters.
Management does not believe inflation had a material effect on the unaudited consolidated financial statements for the periods presented. There can be no assurance, however, that the Company’s business will not be affected by inflation in the future.
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GALYAN’S TRADING COMPANY, INC.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. | ||
(a) Exhibits. | ||
Designation | Description | |
10.3 | Resignation and General Release Agreement, dated March 6, 2002, between Joel L. Silverman and Galyan’s Trading Company, Inc., incorporated by reference to the Exhibit 10.3 to the Company’s Form 10-K for the period ended February 2, 2002. | |
10.10 | First Modification of Mortgage Note, Assignments of Rents and Security Agreement and Loan Agreement dated April 1, 2002, between Keybank National Association and Galyan’s Trading Company, Inc., incorporated by reference to the Exhibit 10.10 to the Company’s Form 10-K for the period ended February 2, 2002. | |
(b) Reports on Form 8-K. (i) On February 28, 2002, the Company filed a current report on Form 8-K, dated the same date, reporting the resignation of Joel L. Silverman as President, Chief Operating Officer and Director of the Company. |
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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: June 11, 2002 | By: /s/ Edward S. Wozniak | |
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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