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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 November 2, 2002
----------------
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File No. 1-13426
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THE SPORTS AUTHORITY, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3511120
-------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3383 N. State Road 7, Ft. Lauderdale, Florida 33319
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(954) 735-1701
--------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-----
Number of shares of Common Stock outstanding at December 11, 2002: 32,964,243
----------
THE SPORTS AUTHORITY, INC.
INDEX TO FORM 10-Q
Page Number
-----------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
CERTIFICATIONS 18
INDEX TO EXHIBITS 20
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE SPORTS AUTHORITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
13 Weeks Ended 39 Weeks Ended
--------------------------- ---------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Sales $ 309,257 $ 304,825 $ 1,038,516 $ 1,014,975
License fee income 1,241 775 3,332 2,345
----------- ----------- ----------- -----------
310,498 305,600 1,041,848 1,017,320
----------- ----------- ----------- -----------
Cost of merchandise sold, including
buying and occupancy costs 226,160 221,517 754,289 739,328
Selling, general and administrative expenses 86,865 85,625 275,601 267,424
Pre-opening expense 702 - 1,689 -
----------- ----------- ----------- -----------
313,727 307,142 1,031,579 1,006,752
----------- ----------- ----------- -----------
Store exit costs - 272 - 1,855
Corporate restructuring - - - 800
----------- ----------- ----------- -----------
Operating income (loss) (3,229) (1,814) 10,269 7,913
Interest expense, net (1,018) (2,710) (3,524) (11,227)
----------- ----------- ----------- -----------
Income (loss) before extraordinary gain and
cumulative effect of accounting change (4,247) (4,524) 6,745 (3,314)
Extraordinary gain, net of tax - - - 548
Cumulative effect of accounting change - - - (503)
----------- ----------- ----------- -----------
Net income (loss) $ (4,247) $ (4,524) $ 6,745 $ (3,269)
=========== =========== =========== ===========
Earnings (loss) per common share-basic:
Income (loss) before extraordinary gain and
cumulative effect of accounting change $ (0.13) $ (0.14) $ 0.21 $ (0.10)
Extraordinary gain, net of tax - - - 0.02
Cumulative effect of accounting change - - - (0.02)
----------- ----------- ----------- -----------
Net income (loss) $ (0.13) $ (0.14) $ 0.21 $ (0.10)
=========== =========== =========== ===========
Earnings (loss) per common share-diluted:
Income (loss) before extraordinary gain and
cumulative effect of accounting change $ (0.13) $ (0.14) $ 0.20 $ (0.10)
Extraordinary gain, net of tax - - - 0.02
Cumulative effect of accounting change - - - (0.02)
----------- ----------- ----------- -----------
Net income (loss) $ (0.13) $ (0.14) $ 0.20 $ (0.10)
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 32,824 32,634 32,774 32,599
=========== =========== =========== ===========
Diluted 32,824 32,634 34,024 32,599
=========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
3
THE SPORTS AUTHORITY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
November 2, February 2,
2002 2002
------------ ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 8,539 $ 8,028
Merchandise inventories 396,344 358,119
Receivables and other current assets 37,429 45,522
----------- ------------
Total current assets 442,312 411,669
Net property and equipment 143,608 150,451
Other assets and deferred charges 29,234 39,037
----------- ------------
Total assets $ 615,154 $ 601,157
=========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - trade $ 137,127 $ 105,906
Accrued payroll and other liabilities 95,964 100,686
Current debt 414 999
Taxes other than income taxes 14,012 10,372
Income taxes 2,905 4,968
----------- ------------
Total current liabilities 250,422 222,931
Long-term debt 159,221 179,333
Other long-term liabilities 42,708 43,770
----------- ------------
Total liabilities 452,351 446,034
Stockholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized, 32,893 and 32,707 shares issued, respectively 329 327
Additional paid-in capital 253,875 253,044
Deferred compensation (266) (395)
Accumulated deficit (90,588) (97,333)
Treasury stock, 59 and 56 shares at cost, respectively (547) (520)
----------- ------------
Total stockholders' equity 162,803 155,123
----------- ------------
Total liabilities and stockholders' equity $ 615,154 $ 601,157
=========== ============
See accompanying Notes to Consolidated Financial Statements.
4
THE SPORTS AUTHORITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
39 Weeks Ended
--------------------------------
November 2, November 3,
2002 2001
-------------- -------------
(Unaudited)
Cash provided by (used for):
Operations
Net income (loss) $ 6,745 $ (3,269)
Adjustments to reconcile net income (loss) to operating cash flows:
Depreciation and amortization 29,333 31,585
Extraordinary gain - (548)
Cumulative effect of accounting change - 503
Store closing charges - 1,855
Corporate restructuring - 800
Cash provided by (used for) current assets and liabilities:
Change in receivables and other current assets 5,889 1,993
Change in merchandise inventories (38,225) (17,689)
Change in accounts payable - trade 31,220 31,077
Change in accrued payroll and other liabilities (4,773) (26,040)
Change in other long-term liabilities (1,062) (6,237)
Other - net 757 1,462
----------- -----------
Net cash provided by operations 29,884 15,492
----------- -----------
Investing
Capital expenditures (27,075) (12,371)
Proceeds from sale of property and equipment 5,980 43,931
Payments under mortgage notes receivable 9,718 -
Proceed from sale of securities 1,997 -
----------- -----------
Net cash (used for) provided by investing activities (9,380) 31,560
----------- -----------
Financing
Payments under credit facility, net (19,950) (3,298)
Purchase of convertible notes - (44,219)
Proceeds from sale of stock and treasury stock 805 166
Debt issuance costs (100) (145)
Payments under capital lease obligations (748) (757)
----------- -----------
Net cash used for financing activities (19,993) (48,253)
----------- -----------
Net increase (decrease) in cash and cash equivalents 511 (1,201)
Cash and cash equivalents at beginning of year 8,028 7,535
----------- -----------
Cash and cash equivalents at end of period $ 8,539 $ 6,334
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
5
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The unaudited interim financial statements have been prepared 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. The unaudited financial statements
include all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation. Results of
operations for the period are not necessarily indicative of the results to be
expected for the full year.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation.
Note 2: Recent Accounting Pronouncements
In the first quarter of 2002, the Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets, " which supersedes SFAS 121. SFAS
144 retains many of the provisions of SFAS 121 with respect to assets held for
use, but significantly changes the criteria for classifying assets as held for
sale. Additionally, SFAS 144 expands the scope of discontinued operations to
include more disposal transactions. The adoption of the statement did not affect
the Company's financial position or results of operations as of November 2, 2002
or for the 13 and 39 weeks then ended, respectively.
In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," which requires capitalization of any retirement costs as part of
the total cost of the related long-lived asset. Adoption of SFAS 143 is required
for years beginning after June 15, 2002. The Company does not expect that the
implementation of SFAS 143 will have a material impact on its financial position
or results of operations.
In June 2002, the FASB issued SFAS 146, "Obligations Associated with Exit
or Disposal Activities." SFAS 146 requires companies to record a liability for
costs associated with an exit activity when that liability is incurred and can
be measured at fair value. SFAS 146 is required for exit activities initiated
after December 31, 2002. The Company does not expect that the implementation of
SFAS 146 will have a material impact on its financial position or results of
operations.
Note 3: Restructuring Reserves
Store Exit Costs:
The Company regularly evaluates the adequacy of its store exit reserves
based on recent broker analyses, general economic conditions, current trends in
the real estate market, and historical experience with respect to marketing its
closed store sites. No adjustments to existing store exit reserves have been
recorded in 2002 based on a determination that, currently, such reserves are
adequate and appropriate. No plans for store closures have been approved in
2002.
In 2001, the Company recorded store exit costs of $5.6 million related to
the adjustment of reserves for previously closed stores. The charge related to:
(i) revised estimates of the time to market remaining idle properties and
anticipated sublease rates, (ii) payment of lease termination fees for two
previously closed store sites which exceeded the recorded obligations for these
stores, partially offset by (iii) a reversal of reserves for one store which the
Company reopened in May 2002.
6
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded store exit costs of $2.8 million, $8.9 million and
$39.4 million in 2000, 1999 and 1998, respectively. The 2000 charge related
principally to a $4.0 million increase in reserves established under prior store
exit plans based on changes in the estimated time and rate to sublease or assign
certain locations. The charge was partially offset by a net $1.2 million gain on
the lease termination of one store approved for closure in 2000 pursuant to a
favorable lease buy-out agreement. This store closed in the fourth quarter of
2000.
The 1999 charge related primarily to closure of five Canadian and two U.S.
stores. The Canadian stores were closed in the first quarter of 2000, and the
two U.S. stores by the end of the third quarter of 2000. The 1998 charge related
to the announced closure of 18 underperforming stores, including two in Canada.
As a result of favorable market and lease factors, the Company decided not to
close three stores and reversed its exit reserves for these stores in 1999. The
remaining 15 stores were closed in the first quarter of 1999. As a result of its
store closures, the Company ceased its Canadian operations in 2000.
To date, the Company has assigned or terminated its lease obligations at 13
stores, and entered into long-term subleases at three others. The Company is
actively marketing its remaining closed store sites, which include five leased
and two owned properties. Following is a summary of activity in the store exit
reserves for the 39 weeks ended November 2, 2002.
Lease and
Related
(in thousands) Obligations Other Total
----------------------------------------
Balance at February 2, 2002 $ 12,922 $ 480 $ 13,402
Payments (4,242) (183) (4,425)
Sublease income 1,440 60 1,500
----------- --------- ----------
Balance at November 2, 2002 $ 10,120 $ 357 $ 10,477
=========== ========= ==========
Note 4: Change in Accounting Estimate
During the third quarter of 2002, the Company changed the estimated useful
life of its leasehold improvements from ten years to the remaining term of the
underlying property lease, plus committed lease renewal periods. The Company
believes that this change results in a better matching of depreciation expense
over the period in which such assets will be utilized. Accordingly, the
remaining lives of leasehold improvements as of the end of the second quarter of
2002 were revised to reflect the remaining lease term, and depreciation expense
was adjusted beginning in the third quarter to reflect the more appropriate
useful life. The effect of this change was a reduction in the loss before
extraordinary gain and cumulative effect of accounting change of $0.3 million,
or $0.01 per basic and diluted share, for the 13 weeks ended November 2, 2002,
and a comparable increase in income and earnings per share of the same amount
for the 39 weeks then ended.
Note 5: Proceeds Under Mortgage Notes Receivable
During the third quarter of 2002, the Company received $9.5 million in net
principal and interest on the early retirement of certain mortgage notes
receivable related to two of its stores. These notes, along with mortgage notes
secured by three other Sports Authority stores, were "put" to the Company in
January 2002 as a result of Kmart Corporation's ("Kmart") bankruptcy filing.
This transaction is more fully described in the Company's Annual Report on Form
10-K for the fiscal year ended February 2, 2002. The Company assisted the
landlord of two stores in refinancing this obligation, thereby permitting payoff
of the mortgage notes. The Company continues to hold $15.0 million in mortgage
notes and receives semi-annual interest and annual principal payments on these
receivables.
7
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Income Taxes
No tax provision or benefit was recorded for the 13 and 39 weeks ended
November 2, 2002 since the Company expects that it will have a nominal effective
tax rate in 2002 due to the availability of federal and state net operating loss
carryforwards, as well as the reversal of other tax deductible temporary
differences. In 1999, the Company recorded a valuation allowance on 100% of its
net deferred tax assets based on a presumption that such tax assets might not be
realized due to recurring losses experienced at that time. As of February 2,
2002, the remaining valuation allowance was $49.6 million, which will be reduced
as the deferred tax assets are realized or when the Company has generated
sufficient income to overcome the presumption that such assets will not be
realized.
Note 7: Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share", which requires a dual presentation of basic and diluted EPS. A
reconciliation of the numerators and denominators of the basic and diluted EPS
computations is presented below:
13 Weeks Ended 39 Weeks Ended
----------------------------- -----------------------------
(in thousands, except per share data) November 2, November 3, November 2, November 3,
2002 2001 2002 2001
-------------- ------------ ------------ ------------
Basic EPS Computation
Income (loss) before extraordinary gain and cumulative
effect of accounting change $ (4,247) $ (4,524) $ 6,745 $ (3,314)
----------- ---------- ------------ -----------
Weighted average common shares 32,824 32,634 32,774 32,599
------------ ---------- ------------ -----------
Basic earnings (loss) before extraordinary gain and
cumulative effect of accounting change
per common share $ (.13) $ (.14) $ .21 $ (.10)
=========== ========== ============ ===========
Diluted EPS Computation
Income (loss) before extraordinary gain and cumulative
effect of accounting change $ (4,247) $ (4,524) $ 6,745 $ (3,314)
----------- ---------- ------------ -----------
Weighted average common shares 32,824 32,634 32,774 32,599
Effect of stock options - - 1,250 -
----------- ---------- ------------ -----------
Total shares 32,824 32,634 34,024 32,599
----------- ---------- ------------ -----------
Diluted earnings (loss) before extraordinary gain and
cumulative effect of accounting change
per common share $ (.13) $ (.14) $ .20 $ (.10)
=========== ========== ============ ===========
8
THE SPORTS AUTHORITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8: Comprehensive Income
Comprehensive income represents the change in equity arising from non-owner
sources, including net income and other comprehensive income items such as
foreign currency translation adjustments and unrealized gains and losses on
available-for-sale securities. For the 13 and 39 weeks ended November 2, 2002
and November 3, 2001, respectively, the Company had no other comprehensive
income items.
Note 9: Amendment of Credit Facility
Subsequent to November 2, 2002, the Company completed an amendment of its
$335 million revolving credit facility ("Credit Facility"), which included an
extension of the term of the Credit Facility from September 2003 to September
2006. Additionally, the interest rate margin that the Company pays on borrowings
was changed to a range of 1.50% to 2.25%, based on Collateral Availability and
attainment of certain earnings before interest, taxes, depreciation and
amortization ("EBITDA") thresholds. Previously, the margin rate ranged from
1.75% to 2.25%, based on Collateral Availability. The amendment also increased
the inventory advance rate used to determine the Company's borrowing base, and
includes a provision which permits limited repurchases of the Company's common
stock. The Company remains subject to a limitation on stock repurchases under
the Lease Guaranty, Indemnification and Reimbursement Agreement between the
Company and Kmart.
9
Item 2.
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the Company's statement of operations data as a
percent of sales for the periods indicated.
13 Weeks Ended 39 Weeks Ended
------------------------------ -----------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
------------- ------------ ------------ ------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold, including
buying and occupancy costs 73.1 72.7 72.6 72.8
------------- ------------ ------------ -----------
Gross margin 26.9 27.3 27.4 27.2
License fee income 0.3 0.3 0.2 0.2
Selling, general and administrative expenses 28.1 28.1 26.5 26.3
Pre-opening expense 0.2 - 0.2 -
Store exit costs - 0.1 - 0.2
Corporate restructuring - - - 0.1
------------- ------------ ------------ ------------
Operating income (loss) (1.1) (0.6) 0.9 0.8
Interest expense, net (0.3) (0.9) (0.3) (1.1)
------------- ------------ ------------ ------------
Income (loss) before extraordinary gain and
cumulative effect of accounting change (1.4) (1.5) 0.6 (0.3)
Extraordinary gain, net of tax - - - 0.1
Cumulative effect of accounting change - - - (0.1)
------------- ------------ ------------ ------------
Net income (loss) (1.4)% (1.5)% 0.6% (0.3)%
============= ============ ============ ============
The following table sets forth the Company's store openings and closings for the
periods indicated.
13 Weeks Ended 39 Weeks Ended
--------------------------- ----------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
----------- ------------ ------------ -------------
Beginning number of stores 201 198 198 198
Openings 3 - 6 -
Closings - - - -
----------- ------------ ------------ -------------
Ending number of stores 204 198 204 198
=========== ============ ============ =============
10
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
13 Weeks Ended November 2, 2002 and November 3, 2001
Sales for the 13 weeks ended November 2, 2002 were $309.3 million, a $4.5
million or 1.5% increase from sales of $304.8 million for the same period in the
prior year. Of the $4.5 million increase, $3.3 million was attributable to six
new stores, three of which opened late in the third quarter, and the remaining
increase was due to an increase in comparable store sales of $1.1 million or
0.4%. Comparable store sales fell short of Company plans, which forecasted
stronger sales given the comparison to a prior year quarter that included the
September 11th terrorist attack. The relatively flat performance reflected
continued economic uncertainty in 2002, which produced a soft Back-to-School
season and only modest increases later in the quarter. From a merchandise
perspective, men's branded, ladies activewear, team sports footwear, and
licensed apparel categories all produced solid comparable sales increases,
reflecting ongoing improvements in product assortments and in-stock positions.
These gains were offset by continued declines in the outdoor categories,
including hunting and marine. Sales in the hunting category were soft compared
to a prior year quarter which showed a surge in sales after September 11. The
decline in the marine category was driven by a deterioration of average unit
retail prices on electronic products.
License fee income was $1.2 million or 0.3% of sales for the 13 weeks ended
November 2, 2002, compared to $0.8 million or 0.3% of sales for the same period
in the prior year. License fee income consists principally of royalties earned
under a license agreement between the Company and Mega Sports Co., Ltd. ("Mega
Sports"), the Company's Japanese joint venture. Royalties earned under this
agreement totaled $0.9 million and $0.7 million for the 13 weeks ended November
2, 2002 and November 3, 2001, respectively. The Company also has a License and
E-commerce Agreement with GSI Commerce Solutions, Inc., a subsidiary of GSI
Commerce, Inc. ("GSI Commerce"), which operates the e-commerce business of the
Company. Royalties under this agreement were $0.3 million during the third
quarter of 2002 and $0.1 million for the same period of the prior year.
Cost of merchandise sold, which includes certain buying and occupancy
costs, was 73.1% of sales for the 13 weeks ended November 2, 2002, compared to
72.7% of sales for the same period in the prior year, resulting in a decline in
gross margin of 40 basis points. While initial merchandise margins increased as
a result of buying initiatives such as private label and vendor bidding
programs, these gains were more than offset by, primarily, an increase in
inventory shrink, as well as allocated occupancy costs. The Company has
experienced an increase in its shrink rate in 2002, which it attributes to: (i)
the more precise measurement of shrink (and all other components of margin),
under the cost method of accounting versus the retail inventory method
previously used, and; (ii) an improved merchandise assortment, including a
broader selection of higher-ticket merchandise. The Company has implemented a
number of initiatives to reduce shrink, including ongoing rollout of
full-service footwear departments that limit access to inventories, and improved
physical security of other shrink sensitive items. The increase in allocated
occupancy costs referred to above was approximately 60 basis points and was
attributable to the sale-leaseback of 10 stores during 2001 and, to a lesser
extent, one sale-leaseback and six store openings in 2002. The sale-leaseback
transactions impact the Company's Statement of Operations by converting
depreciation and interest expense into allocated occupancy costs, thereby
reducing gross margin.
Selling, general and administrative ("SG&A") expenses for the 13 weeks
ended November 2, 2002 were $86.9 million, an increase of $1.3 million over the
same period of the prior year and flat as a percentage of sales at 28.1%. The
increase in expense was due primarily to increased advertising costs, in line
with plan, and higher payroll and benefit costs due to new store openings and
higher sales volumes. These increases were partially offset by a reduction in
depreciation expense due to the sale-leaseback of 11 stores, as well as the
effect of a change in the estimated useful life of leasehold improvements.
Beginning in the third quarter of 2002, the Company changed the estimated useful
life of such assets from ten years to the remaining term of the underlying
property lease, plus committed lease renewal periods. The change resulted in a
reduction in depreciation expense in the third quarter of 2002 of $0.3 million.
Pre-opening expense for the 13 weeks ended November 2, 2002 was $0.7
million and related to three store openings. The Company opened no stores during
the prior year period. Pre-opening expense consists principally of store payroll
expense for associate training and store preparation, occupancy costs and
grand-opening advertising expenditures.
11
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
Net interest expense for the 13 weeks ended November 2, 2002 was $1.0
million or 0.3% of sales, compared to $2.7 million or 0.9% of sales for the same
period in the prior year. The decrease of $1.7 million reflected a decline in
interest rates combined with a reduction in overall debt levels year over year.
Additionally, interest expense in 2002 was offset by net interest income on
mortgage notes receivable acquired by the Company in January 2002.
No tax provision or benefit was recorded for the 13 weeks ended November 2,
2002 and November 3, 2001. Exclusive of the anticipated one-time benefit
described below, the Company expects its effective tax rate to be nominal in
2002 due to the availability of federal and state net operating loss
carryforwards and the reversal of other tax deductible temporary differences
which will offset any current year tax provision. In 1999, the Company recorded
a valuation allowance on 100% of its net deferred tax assets based on a
presumption that such tax assets would not be realized due to recurring losses
experienced at that time. As of February 2, 2002, the remaining valuation
allowance was $49.6 million, which will be reduced as the deferred tax assets
are realized or when the Company has generated sufficient income to overcome the
presumption that such assets will not be realized. Based on its current earnings
projections, the Company expects to overcome this presumption in the fourth
quarter of 2002. As a result, it expects to reverse substantially all of the
valuation allowance on its deferred tax assets (other than the portion related
to certain state net operating loss carryforwards), resulting in a one-time,
non-cash tax benefit of approximately $35.0 million.
The net loss for the 13 weeks ended November 2, 2002 was $4.2 million,
compared to $4.5 million for the same period of the prior year.
39 Weeks Ended November 2, 2002 and November 3, 2001
Sales for the 39 weeks ended November 2, 2002 were $1,038.5 million, a
$23.5 million or 2.3% increase from sales of $1,015.0 million for the same
period in the prior year. The increase was attributable to an increase in
comparable store sales of $15.1 million or 1.5%, combined with non-comparable
sales from six new stores and the catalog and commercial sales programs of $8.4
million. The increase in comparable store sales resulted from strong
performances in a number of categories, including ladies activewear, licensed
product, team sports footwear, and fitness. These categories benefited from
improvements in merchandise assortments, in-stock positions and aged
merchandise, as well as the popularity of fitness items such as yoga products
and hand-held weights earlier in the year. Partly offsetting these increases
were significant declines in outdoor categories such as hunting, fishing and
marine.
License fees and rental income were $3.3 million or 0.2% of sales for the
39 weeks ended November 2, 2002, compared to $2.3 million or 0.2% of sales for
the same period in the prior year, and consisted primarily of royalties earned
under the Mega Sports license agreement of $2.8 million and $2.1 million,
respectively. Royalties under the GSI Commerce agreement were $0.5 million and
$0.2 million, respectively.
Cost of merchandise sold, including certain buying and occupancy costs, was
72.6% of sales for the 39 weeks ended November 2, 2002, compared to 72.8% of
sales, for the same period in the prior year, resulting in an increase in gross
margin of 20 basis points. The net increase reflects improvements in initial
merchandise margins in 2002 due to the following factors: the continued impact
of buying and merchandising initiatives, including vendor bidding, private label
and import buying programs; lower logistics costs due to improved operating
efficiencies and improved execution of vendor compliance programs; and the
effect of the Company's conversion from the retail inventory method of
accounting to the cost method in the first quarter of 2001. This conversion has
improved the Company's ability to more precisely measure the distinct
components of merchandise costs and to use such measurements to make better
buying and pricing decisions. Gains in initial merchandise margins were largely
offset by increases in inventory shrink and allocated occupancy costs, as
previously discussed.
12
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
SG&A expenses for the 39 weeks ended November 3, 2002 were $275.6 million
or 26.5% of sales, as compared to $267.4 million or 26.3% of sales for the same
period in the prior year. The $8.2 million increase was largely due to an
increase in payroll and benefits of $8.6 million from new store openings and
higher sales volumes. Additionally, net advertising expense increased $1.1
million, commensurate with the Company's advertising plan. These increases were
partially offset by a decline in depreciation expense of $2.3 million, primarily
due to the sale-leaseback transactions and, to a lesser extent, the change in
depreciable lives previously discussed.
Store exit costs were $1.9 million or 0.2% of sales for the 39 weeks ended
November 3, 2001, and related primarily to lease termination fees paid for two
previously closed store sites which exceeded the recorded obligations for these
stores.
Corporate restructuring costs were $0.8 million or 0.1% of sales for the 39
weeks ended November 3, 2001. During the first quarter of 2001, the Company
approved a corporate restructuring plan to consolidate certain departmental
functions in response to the Company's plans for limited growth at that time,
resulting in the elimination of 44 positions. The Company has satisfied its
obligations under the restructuring plan.
Interest, net for the 39 weeks ended November 2, 2002 was $3.5 million or
0.3% of sales, compared to $11.2 million or 1.1% of sales for the same period in
the prior year. The decrease in expense was due to a market decline in interest
rates as well as a reduction in the Company's overall debt levels.
No tax provision or benefit was recorded for the 39 weeks ended November 2,
2002 and November 3, 2001. Exclusive of the anticipated one-time benefit
described previously, the Company expects its effective tax rate will be nominal
in 2002 due to the availability of federal and state net operating loss
carryforwards and the reversal of other tax-deductible temporary differences
which will offset any current year tax provision.
During the 39 weeks ended November 3, 2001, the Company purchased $31.9
million principal amount of the Notes for $31.4 million, and recorded an
extraordinary gain of approximately $0.5 million. The Company repaid its
remaining obligation under its convertible subordinated notes ("Notes") on the
September 17, 2001 maturity date.
In the first quarter of 2001, the Company changed its method of accounting
for inventories from the retail inventory method to the lower of weighted
average cost or market method. The Company believes the cost method is
preferable because it results in greater precision in the costing of sales and
inventories and a better matching of revenues and cost of goods sold. The effect
of the change as of the beginning of 2001 was a charge of $0.5 million, or $0.02
per share, which has been reflected as a cumulative effect of a change in
accounting principle in the first quarter of 2001.
Net income for the 39 weeks ended November 2, 2002 was $6.7 million, as
compared to a net loss of $3.3 million for the same period in the prior year.
Liquidity and Capital Resources
Subsequent to November 2, 2002, the Company completed an amendment of its
$335 million Credit Facility which, among other things, extended the term of the
Credit Facility from September 2003 to September 2006. Additionally, the
interest rate margin that the Company pays on borrowings was changed to a range
of 1.50% to 2.25%, based on Collateral Availability and attainment of certain
earnings before interest, taxes, depreciation and amortization ("EBITDA")
thresholds. Previously, the margin rate ranged from 1.75% to 2.25%, based on
Collateral Availability. The amendment also increased the inventory advance rate
used to determine the Company's borrowing base, and includes a provision which
permits limited repurchases of the Company's common stock. The Company remains
subject to a limitation on stock repurchases under the Lease Guaranty,
Indemnification and Reimbursement Agreement between the Company and Kmart.
13
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
The Company's principal capital requirements are to fund working capital
needs and capital expenditures. For the 39 weeks ended November 2, 2002, these
capital requirements were generally funded by operations. Cash flows generated
by (used for) operating, investing and financing activities for the 39 weeks
ended November 2, 2002 and November 3, 2001 are summarized below.
Net cash provided by operations was $29.9 million for the 39 weeks ended
November 2, 2002, compared to $15.5 million for the same period in the prior
year. The increase resulted primarily from an increase in income before
extraordinary gains and non-cash items of $7.8 million, from $28.3 million in
the 2001 period to $36.1 million in 2002. Reductions in accounts receivable and
other current assets year over year, primarily due to timing differences in the
collection of vendor entitlements, produced an additional $4.0 million in cash
flow in the 2002 period compared to the 2001 period.
Net cash used by investing activities was $9.4 million for the 39 weeks
ended November 2, 2002, compared to net cash provided by investing activities of
$31.6 million for the same period in the prior year resulting from the
sale-leaseback of ten stores. The 2002 period reflects capital expenditures of
$27.1 million, including $14.3 million for store refurbishment, $5.1 million for
new store openings, $4.5 million for information systems and $3.2 million for
improvements at the corporate headquarters and distribution centers. Capital
expenditures were partially offset by the receipt of $9.4 million in principal
in satisfaction of mortgage notes held by the Company and secured by two of its
store sites, and by principal payments aggregating $0.3 million under remaining
mortgage notes secured by three other store sites. The Company acquired the
mortgage notes in January 2002, as described more fully in the Company's Annual
Report on Form 10-K for the fiscal year ended February 2, 2002. The Company also
received proceeds of $5.9 million on the sale-leaseback of one store location
completed in the second quarter of 2002, and $2.0 million on the sale of shares
of GSI Commerce common stock. The Company exercised warrants to acquire the
stock, which it had received as a result of its e-commerce relationship with GSI
Commerce, in the fourth quarter of 2001. The shares were sold for net proceeds
of $2.5 million, of which $0.5 million was received in cash in 2001, and the
remaining $2.0 million in the first quarter of 2002. As a result of these
transactions, the Company has no further stock or warrant interest in GSI
Commerce.
Net cash used for financing activities was $20.0 million for the 39 weeks
ended November 2, 2002, compared to $48.3 million for the same period of the
prior year. Debt reductions were financed in both periods by operating and
investing cash flows, but to a lesser extent in 2002 since such cash flows were
also required to fund the higher level of capital spending. The 2001 period
reflected the payoff of the remaining Notes obligation, which was financed
largely with proceeds from the 2001 sale-leaseback. At November 2, 2002,
borrowings under the Credit Facility were $159.2 million, and unused
availability was $112.0 million.
The Company's working capital at November 2, 2002 was $191.9 million,
compared to $209.0 million at November 3, 2001, a decrease of $17.1 million. The
decrease reflects a decline in inventories of $13.9 million, combined with an
increase in accounts payable of $9.0 million as a result of improved accounts
payable financing.
During 2002, the Company has opened six new stores, completed the remodel
of 30 existing stores and commenced remodels on several others, and commenced
the design phase of a new 416,000 square foot distribution center in New Jersey.
Full year capital expenditures in 2002 are expected to range from $38 - $43
million.
The Company believes that anticipated cash flows from operations, combined
with borrowings under the Credit Facility, will be sufficient to fund working
capital and finance capital expenditures during the next 12 months.
14
THE SPORTS AUTHORITY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
Seasonality and Inflation
The Company's annual business is seasonal, with higher sales and correlated
profits occurring in the second and fourth quarters. In fiscal 2001, the
Company's sales trended as follows: 24.0% in the first quarter, 26.2% in the
second quarter, 21.5% in the third quarter and 28.3% in the fourth quarter.
Management does not believe inflation had a material effect on the
financial statements for the periods presented.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations,"
which requires capitalization of any retirement costs as part of the total cost
of the related long-lived asset. Adoption of SFAS 143 is required for years
beginning after June 15, 2002. The Company does not expect that the
implementation of SFAS 143 will have a material impact on its financial position
or results of operations
In June 2002, the FASB issued SFAS 146, "Obligations Associated with Exit or
Disposal Activities." SFAS 146 requires companies to record a liability for
costs associated with an exit activity when that liability is incurred and can
be measured at fair value. SFAS 146 is required for exit activities initiated
after December 31, 2002. The Company does not expect that the implementation of
SFAS 146 will have a material impact on its financial position or results of
operations.
Critical Accounting Policies
The Company's financial statements are based on the application of critical
accounting policies which may require the use of significant estimates and
judgments. A discussion of critical policies requiring the use of significant
estimates or judgments is included in the Company's Annual Report on Form 10-K
for the year ended February 2, 2002.
Forward-Looking Statements
Certain statements under the heading "Management's Discussion and Analysis"
and elsewhere in this Quarterly Report constitute "forward-looking statements"
made in reliance on the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. As such, they involve risks and uncertainties
that could cause actual results to differ materially from those set forth in
such forward-looking statements. The Company's forward looking statements are
based on assumptions about, or include statements concerning, many important
factors, including without limitation, consumer confidence, changes
in discretionary consumer spending and consumer preferences, particularly as
they relate to sporting goods, athletic footwear and apparel and the Company's
particular merchandise mix and retail locations; the Company's ability to
effectively implement its merchandising, vendor relationship, inventory control,
marketing, store remodeling, electronic commerce, supply chain, logistics and
other strategies; increasing competition from other retailers; unseasonable
weather; fluctuating gross profit margins; product availability; capital
spending levels; and the effects of possible terrorist attacks. The Company
undertakes no obligation to release publicly the results of any revisions to
these forward looking statements to reflect events or circumstances after the
date such statements were made.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At November 2, 2002, there had not been a material change in the market
risk information disclosed in the Company's Annual Report on Form 10-K for the
year ended February 2, 2002 under the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Item 4. Controls and Procedures
An evaluation was performed of the effectiveness of the design and
operation of the Company's disclosure controls and procedures, within 90 days of
the filing date of this report. This evaluation was conducted under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer and its Chief Financial Officer. Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls since the date the
controls were evaluated.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is one of thirty-three named defendants, including firearms
manufacturers and retailers, in City of Chicago and County of Cook v. Beretta
U.S.A. Corp. et al., Circuit Court of Cook County, Illinois. This suit was
served on the Company in November 1998. The complaint was based on legal
theories of public nuisance and negligent entrustment of firearms and alleged
that the defendants distributed, marketed and sold firearms in the portion of
Cook County outside Chicago that were found illegally in Chicago. The complaint
sought damages allocated among the defendants exceeding $433 million to
compensate the City of Chicago and Cook County for their alleged costs resulting
from the alleged public nuisance. The complaint also sought punitive damages and
injunctive relief imposing additional regulations on the methods the defendants
use to distribute, market and sell firearms in Cook County. In February 2000,
the Court dismissed the complaint's negligent entrustment count. The plaintiffs
filed an amended complaint with the Court's permission in March 2000, which
contained both the public nuisance and negligent entrustment counts. In
September 2000, the Court granted the motions of the defendants to dismiss the
amended complaint, in its entirety, with prejudice. In October 2000, the
plaintiffs appealed to the Appellate Court of Illinois, First Judicial District,
but did not pursue the negligent entrustment issue before the Appellate Court.
On November 4, 2002, the Appellate Court reversed the dismissal of the amended
complaint and remanded the case to the trial court for further proceedings on
the public nuisance issue. On November 25, 2002 the Company filed a petition for
rehearing with the Appellate Court. The Company is currently unable to predict
the outcome of this case.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See Index to Exhibits on Page 20
(b) Reports on Form 8-K:
Report on Form 8-K, dated August 20, 2002, with respect to
the resignation of James R. Tener as Chief Operating
Officer.
Report on Form 8-K, dated September 5, 2002, with respect
to the hiring of Louis-Philippe Vanier as Executive
Vice President of Store Operations.
16
THE SPORTS AUTHORITY, 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.
THE SPORTS AUTHORITY, INC.
Date: December 17, 2002 By: /S/ MARTIN E. HANAKA
----------------
Martin E. Hanaka
Chairman and
Chief Executive Officer
Date: December 17, 2002 By: /S/ GEORGE R. MIHALKO
-----------------
George R. Mihalko
Vice Chairman, Chief
Administrative Officer and
Chief Financial Officer
(Principal Financial Officer)
Date: December 17, 2002 By: /S/ TODD WEYHRICH
-------------
Todd Weyhrich
Senior Vice President and
Controller
(Principal Accounting Officer)
17
CERTIFICATION UNDER SECTION 302
OF THE SARBANES-OXLEY ACT
I, Martin E. Hanaka, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of The Sports Authority,
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 in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosures controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
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 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 weaknesses 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 or not 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.
/S/ MARTIN E. HANAKA
----------------
Martin E. Hanaka
Chairman and
Chief Executive Officer
18
CERTIFICATION UNDER SECTION 302
OF THE SARBANES-OXLEY ACT
I, George R. Mihalko, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of The Sports Authority,
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 in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosures controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
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 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 weaknesses 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 or not 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.
/S/ GEORGE R. MIHALKO
-----------------
George R. Mihalko
Vice Chairman, Chief Administrative
Officer and Chief Financial Officer
(Principal Financial Officer)
19
INDEX TO EXHIBITS
Exhibits
- --------
3.1 Amended and Restated Bylaws of the Company, as amended November 20,
2002.
10.1 Second Amendment to Amended and Restated Loan and Security Agreement,
dated November 12, 2002, between Fleet Retail Finance, Inc., as Agent
for the Lenders referenced therein, the Lenders referenced therein,
and the Company and its wholly-owned United States subsidiaries.
10.2 Form of Severance Agreement dated as of September 16, 2002 between the
Company and Louis-Philippe Vanier, incorporated by reference to
Exhibit 10.2 to the Form 10-Q for the second quarter of 2001.
99.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
20