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