DICK'S SPROTING GOODS, INC. Form 10-Q/A
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 2004
Commission File No. 001-31463
DICKS SPORTING GOODS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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16-1241537
(I.R.S. Employer
Identification No.) |
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300 Industry Drive, RIDC Park West, Pittsburgh, Pennsylvania
(Address of principal executive offices)
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15275
(Zip Code) |
(724) 273-3400
(Registrants 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act).
Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act).
Yes o No þ
The number of shares of common stock and Class B common stock outstanding at November 26, 2004 was
34,446,919 and 14,039,529, respectively.
Explanatory Note for Amendment No. 2
The purpose of this second amendment on Form 10-Q/A to the Quarterly Report on Form 10-Q of
Dicks Sporting Goods, Inc. for the quarterly period ended October 30, 2004 is to correct
mathematical errors that appeared in Amendment No. 1 on Form 10-Q/A filed on May 20, 2005. Part I,
Item 1 is being revised as follows:
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39 Weeks Ended October 30, 2004 |
|
Consolidated Statements |
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As Previously |
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As |
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of Operations |
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Reported |
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Corrected |
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(in thousands, except per share data) |
|
Income before income taxes |
|
$ |
42,265 |
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$ |
44,265 |
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Net income |
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$ |
24,560 |
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$ |
26,560 |
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Basic EPS |
|
$ |
0.51 |
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$ |
0.56 |
|
Diluted EPS |
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$ |
0.47 |
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$ |
0.50 |
|
No other changes to our second amendment on Form 10-Q/A are being made to the first amendment
on Form 10-Q/A filed on May 20, 2005.
Explanatory Note for Amendment No. 1
The purpose of this amendment on Form 10-Q/A to the Quarterly Report on Form 10-Q of Dicks
Sporting Goods, Inc. for the quarterly period ended October 30, 2004 is to restate our condensed
consolidated financial statements for the 13 and 39 Weeks Ended October 30, 2004 and November 1,
2003 and the Condensed Consolidated Balance Sheets as of October 30, 2004 and January 31, 2004 and
related disclosures, as described in Note 3 of the Notes to the Condensed Consolidated Financial
Statements. Additional information about the decision to restate these financial statements can be
found in our Current Report on Form 8-K, filed with the SEC on March 31, 2005.
Except for the foregoing amended information required to reflect the effects of the
restatement, this Form 10-Q/A continues to describe conditions as presented in the original report
on Form 10-Q, except as required to reflect the effects of the restatement. The Form 10-Q/A
generally does not reflect events occurring after the filing of the Form 10-Q, or modify or update
those disclosures, including the exhibits to the Form 10-Q affected by subsequent events.
Information not affected by the restatement is unchanged and reflects the disclosures made at the
time of the original filing of the Form 10-Q on December 3, 2004. Accordingly, this Form 10-Q/A
should be read in conjunction with our filings made with the Securities and Exchange Commission
subsequent to the filing of the original Form 10-Q, including any amendments to those filings. The
following items have been amended (and conforming changes have been made where indicated as
restated) as a result of the restatement:
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Part I Item 1 Financial Statements |
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Part I Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Part I Item 4 Controls and Procedures |
In March 2005, the Company concluded that its lease accounting policy and accounting treatment
of construction allowances were not consistent with generally accepted accounting standards. The
Company corrected its lease accounting policy such that the commencement date of the lease term
will be the earlier of the date rent payments begin, the date the Company takes possession of the
property for the initial setup of fixtures and merchandise or, in certain circumstances, the date
the Company takes possession of the leased space for construction purposes. In those circumstances
where the commencement date of the lease term begins when the Company takes possession of the
leased space for construction purposes, the rent expense from that commencement date through the
earlier of the date rent payments begin or the date the Company takes possession of the property
for the initial setup of fixtures and merchandise is capitalized with a corresponding increase in
long-term deferred liabilities.
In addition, the Company had historically accounted for construction allowances as reductions
of the related leasehold improvement asset on the Condensed Consolidated Balance Sheets and capital
expenditures in investing activities on the Condensed Consolidated Statements of Cash Flows. The
Company determined that the appropriate interpretation of Financial Accounting Standards Board
(FASB) Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases, required these
allowances to be recorded as deferred liabilities on the Condensed Consolidated Balance Sheets and
as a component of operating activities on the Condensed Consolidated Statements of Cash Flows.
2
The effect of the restatement on the Companys previously released Condensed Consolidated
Statements of Income is a reduction of net income of $0.2 million for the 13 weeks ended October
30, 2004 and November 1, 2003, respectively, and a reduction of net income of $0.4 million for the
39 weeks ended October 30, 2004 and November 1, 2003, respectively. We have corrected these errors
through our restatement. There was no change to the previously released loss per share and
earnings per share for the 13 weeks ended October 30, 2004 and November 1, 2003 of $(0.04) and
$0.09. The effect of the restatement on previously released earnings per share is a reduction in
earnings per share of $0.01 for the 39 weeks ended October 30, 2004 and November 1, 2003,
respectively.
The effect of the restatement on the Companys Condensed Consolidated Balance Sheets is an
increase in property and equipment of $66.4 million as of October 30, 2004 and an increase in
long-term deferred liabilities of $70.7 million as of October 30, 2004. In addition, there is an
increase in the deferred tax asset of $1.7 million as of October 30, 2004 and a decrease in
retained earnings of $2.5 million as of October 30, 2004.
This restatement of previously issued condensed consolidated financial statements does not
have an effect on total net cash flows during any of the periods restated. Certain
reclassifications result including the classification of construction allowances and capitalized
rent within operating activities with a corresponding increase in capital expenditures.
See Note 3 of the Notes to Condensed Consolidated Financial Statements for additional information.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DICKS SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (as restated, see Note 3)
(Dollars in thousands, except per share data)
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13 Weeks Ended |
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39 Weeks Ended |
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October 30, |
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November 1, |
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October 30, |
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November 1, |
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2004 |
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2003 |
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2004 |
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2003 |
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Net sales |
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$ |
541,009 |
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|
$ |
338,164 |
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|
$ |
1,321,351 |
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|
$ |
996,413 |
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|
|
|
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Cost of goods sold, including occupancy
and distribution costs |
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402,758 |
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249,251 |
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961,178 |
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727,970 |
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GROSS PROFIT |
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138,251 |
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88,913 |
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360,173 |
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268,443 |
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Selling, general and administrative expenses |
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124,832 |
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80,210 |
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292,863 |
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219,295 |
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Pre-opening expenses |
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5,483 |
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|
3,036 |
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|
11,195 |
|
|
|
7,112 |
|
Merger integration and store closing costs |
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7,742 |
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7,793 |
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INCOME FROM OPERATIONS |
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194 |
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5,667 |
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48,322 |
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42,036 |
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Gain on sale of investment |
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2,324 |
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3,536 |
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Interest expense, net |
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3,455 |
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504 |
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5,057 |
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|
1,545 |
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Other income |
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(1,000 |
) |
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(LOSS) INCOME BEFORE INCOME TAXES |
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(3,261 |
) |
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7,487 |
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44,265 |
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44,027 |
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(Benefit) Provision for income taxes |
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(1,305 |
) |
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2,995 |
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17,705 |
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17,611 |
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NET (LOSS) INCOME |
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$ |
(1,956 |
) |
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$ |
4,492 |
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$ |
26,560 |
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$ |
26,416 |
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(LOSS) EARNINGS PER COMMON SHARE: |
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Basic |
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$ |
(0.04 |
) |
|
$ |
0.10 |
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|
$ |
0.56 |
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$ |
0.60 |
|
Diluted |
|
$ |
(0.04 |
) |
|
$ |
0.09 |
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$ |
0.50 |
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$ |
0.53 |
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WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING: |
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Basic |
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48,251 |
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46,430 |
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47,755 |
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|
44,062 |
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Diluted |
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|
48,251 |
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|
51,168 |
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|
52,731 |
|
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|
49,854 |
|
See accompanying notes to unaudited consolidated financial statements.
5
DICKS SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS UNAUDITED (as restated, see Note 3)
(Dollars in thousands)
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October 30, |
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January 31, |
|
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2004 |
|
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2004 |
|
ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
|
$ |
28,810 |
|
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$ |
93,674 |
|
Accounts receivable, net |
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|
47,940 |
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|
|
10,185 |
|
Income tax receivable |
|
|
16,606 |
|
|
|
232 |
|
Inventories, net |
|
|
625,043 |
|
|
|
254,360 |
|
Prepaid expenses and other current assets |
|
|
15,085 |
|
|
|
5,222 |
|
Deferred income taxes |
|
|
95 |
|
|
|
1,021 |
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|
|
|
|
|
|
Total current assets |
|
|
733,579 |
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|
364,694 |
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Property and equipment, net |
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|
333,229 |
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|
144,402 |
|
Construction in progress leased facilities |
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|
12,113 |
|
|
|
10,927 |
|
Goodwill |
|
|
181,314 |
|
|
|
|
|
Other assets |
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|
36,074 |
|
|
|
23,337 |
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|
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|
TOTAL ASSETS |
|
$ |
1,296,309 |
|
|
$ |
543,360 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
319,623 |
|
|
$ |
118,383 |
|
Accrued expenses |
|
|
137,977 |
|
|
|
72,090 |
|
Deferred revenue and other liabilities |
|
|
32,257 |
|
|
|
37,037 |
|
Current portion of other long-term debt and capital leases |
|
|
1,824 |
|
|
|
505 |
|
|
|
|
|
|
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|
Total current liabilities |
|
|
491,681 |
|
|
|
228,015 |
|
|
|
|
|
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|
LONG-TERM LIABILITIES: |
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|
|
|
|
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|
Senior convertible notes |
|
|
172,500 |
|
|
|
|
|
Revolving credit borrowings |
|
|
260,216 |
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|
|
|
|
Other long-term debt and capital leases |
|
|
8,125 |
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|
|
3,411 |
|
Non-cash obligations for construction in progress -
leased facilities |
|
|
12,113 |
|
|
|
10,927 |
|
Deferred revenue and other liabilities |
|
|
85,102 |
|
|
|
60,113 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
538,056 |
|
|
|
74,451 |
|
|
|
|
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY: |
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|
|
|
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|
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|
Preferred stock |
|
|
|
|
|
|
|
|
Common stock |
|
|
344 |
|
|
|
331 |
|
Class B common stock |
|
|
140 |
|
|
|
141 |
|
Additional paid-in capital |
|
|
174,042 |
|
|
|
175,748 |
|
Retained earnings |
|
|
87,517 |
|
|
|
60,957 |
|
Accumulated other comprehensive income |
|
|
4,529 |
|
|
|
3,717 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
266,572 |
|
|
|
240,894 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
1,296,309 |
|
|
$ |
543,360 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
6
DICKS SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME UNAUDITED (as restated, see Note 3)
(Dollars in thousands)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
|
|
October 30, |
|
|
November 1, |
|
|
October 30, |
|
|
November 1, |
|
|
|
2004 |
|
|
2003 |
|
|
2004 |
|
|
2003 |
|
NET (LOSS) INCOME |
|
$ |
(1,956 |
) |
|
$ |
4,492 |
|
|
$ |
26,560 |
|
|
$ |
26,416 |
|
OTHER COMPREHENSIVE (LOSS) INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities, net
of tax |
|
|
1,368 |
|
|
|
1,198 |
|
|
|
812 |
|
|
|
5,606 |
|
Reclassification adjustment for gains realized in net
income due to the sale of available-for-sale securities,
net of tax |
|
|
|
|
|
|
(1,511 |
) |
|
|
|
|
|
|
(2,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE (LOSS) INCOME |
|
$ |
(588 |
) |
|
$ |
4,179 |
|
|
$ |
27,372 |
|
|
$ |
29,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
7
DICKS SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY UNAUDITED
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common Stock |
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Dollars |
|
|
Shares |
|
|
Dollars |
|
|
Capital |
|
|
Earnings |
|
|
Income |
|
|
Total |
|
BALANCE,
January 31, 2004 (as previously reported) |
|
|
33,052,882 |
|
|
$ |
331 |
|
|
|
14,107,644 |
|
|
$ |
141 |
|
|
$ |
175,748 |
|
|
$ |
63,044 |
|
|
$ |
3,717 |
|
|
$ |
242,981 |
|
Prior period adjustments (Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,087 |
) |
|
|
|
|
|
|
(2,087 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
January 31, 2004 (as restated, see Note 3) |
|
|
33,052,882 |
|
|
|
331 |
|
|
|
14,107,644 |
|
|
|
141 |
|
|
|
175,748 |
|
|
|
60,957 |
|
|
|
3,717 |
|
|
|
240,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of Class B common
stock for common stock |
|
|
68,115 |
|
|
|
1 |
|
|
|
(68,115 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefit of
$12,098 |
|
|
1,226,253 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
15,632 |
|
|
|
|
|
|
|
|
|
|
|
15,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock under
employee stock purchase plan |
|
|
84,659 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1,762 |
|
|
|
|
|
|
|
|
|
|
|
1,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of bond hedge,
net of sale of warrant,
including tax benefit of $1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,100 |
) |
|
|
|
|
|
|
|
|
|
|
(19,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (as restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,560 |
|
|
|
|
|
|
|
26,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
securities available-for-sale,
net of taxes of $437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
812 |
|
|
|
812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
October 30, 2004 (as restated, see Note 3) |
|
|
34,431,909 |
|
|
$ |
344 |
|
|
|
14,039,529 |
|
|
$ |
140 |
|
|
$ |
174,042 |
|
|
$ |
87,517 |
|
|
$ |
4,529 |
|
|
$ |
266,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
8
DICKS SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (as restated, see Note 3)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
|
|
October 30, |
|
|
|
|
|
|
November 1, |
|
|
|
2004 |
|
|
|
|
|
|
2003 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,560 |
|
|
|
|
|
|
$ |
26,416 |
|
Adjustments to reconcile net income
to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
24,280 |
|
|
|
|
|
|
|
12,993 |
|
Deferred income taxes |
|
|
(337 |
) |
|
|
|
|
|
|
(4,330 |
) |
Tax benefit from exercise of stock options |
|
|
12,098 |
|
|
|
|
|
|
|
23,594 |
|
Gain on sale of investment |
|
|
|
|
|
|
|
|
|
|
(3,536 |
) |
Other non-cash items |
|
|
|
|
|
|
|
|
|
|
2,067 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(28,381 |
) |
|
|
|
|
|
|
(7,472 |
) |
Inventories |
|
|
(214,339 |
) |
|
|
|
|
|
|
(136,859 |
) |
Prepaid expenses and other assets |
|
|
(11,830 |
) |
|
|
|
|
|
|
538 |
|
Accounts payable |
|
|
94,268 |
|
|
|
|
|
|
|
43,530 |
|
Accrued expenses |
|
|
(2,338 |
) |
|
|
|
|
|
|
2,961 |
|
Income taxes payable |
|
|
2,014 |
|
|
|
|
|
|
|
(12,763 |
) |
Deferred construction allowances |
|
|
25,407 |
|
|
|
|
|
|
|
10,575 |
|
Deferred revenue and other liabilities |
|
|
(12,187 |
) |
|
|
|
|
|
|
4,779 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(84,785 |
) |
|
|
|
|
|
|
(37,507 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(75,515 |
) |
|
|
|
|
|
|
(44,543 |
) |
Proceeds from sale-leaseback transactions |
|
|
30,031 |
|
|
|
|
|
|
|
12,100 |
|
Payment for the purchase of Galyans, net of $17,931 cash acquired |
|
|
(351,382 |
) |
|
|
|
|
|
|
|
|
Purchase of held-to-maturity securities |
|
|
(57,942 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of held-to-maturity securities |
|
|
57,942 |
|
|
|
|
|
|
|
|
|
Proceeds from sale of available-for-sale investment |
|
|
|
|
|
|
|
|
|
|
4,150 |
|
Increase in recoverable costs from developed properties |
|
|
(7,102 |
) |
|
|
|
|
|
|
(1,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(403,968 |
) |
|
|
|
|
|
|
(30,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes |
|
|
172,500 |
|
|
|
|
|
|
|
|
|
Revolving credit borrowings, net |
|
|
260,216 |
|
|
|
|
|
|
|
50,141 |
|
(Payments) borrowings on other long-term debt and capital leases |
|
|
(396 |
) |
|
|
|
|
|
|
463 |
|
Payment for purchase of bond hedge |
|
|
(33,120 |
) |
|
|
|
|
|
|
|
|
Proceeds from issuance of warrant |
|
|
12,420 |
|
|
|
|
|
|
|
|
|
Transaction costs for convertible notes |
|
|
(5,786 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of common stock under employee stock purchase plan |
|
|
1,763 |
|
|
|
|
|
|
|
1,342 |
|
Proceeds from exercise of stock options |
|
|
3,545 |
|
|
|
|
|
|
|
12,385 |
|
Increase in bank overdraft |
|
|
12,747 |
|
|
|
|
|
|
|
6,823 |
|
Transaction costs related to initial public offering |
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
423,889 |
|
|
|
|
|
|
|
71,337 |
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
(64,864 |
) |
|
|
|
|
|
|
3,574 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
93,674 |
|
|
|
|
|
|
|
11,120 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
28,810 |
|
|
|
|
|
|
$ |
14,694 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress leased facilities |
|
$ |
1,186 |
|
|
|
|
|
|
$ |
9,434 |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
9
DICKS SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Company
On July 29, 2004, a wholly owned subsidiary of Dicks Sporting Goods, Inc. completed the
acquisition of Galyans Trading Company, Inc. (Galyans). The Consolidated Statements of
Operations for the 13 weeks ended October 30, 2004 reflect the results of the combined company for
the entire 13 weeks whereas the results for the 39 weeks ended October 30, 2004 reflect the results
of Dicks Sporting Goods on a stand-alone basis from February 1, 2004 to July 28, 2004 and the
combined company from the acquisition date of July 29, 2004 to October 30, 2004. Prior year
results include Dicks Sporting Goods, Inc. on a stand-alone basis. Unless otherwise specified,
any reference to year is to our fiscal year and when used in this Form 10-Q/A and unless the
context otherwise requires, the terms Dicks, we, us, the Company and our refer to Dicks
Sporting Goods, Inc. and its wholly owned subsidiaries.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by
us, in accordance with the requirements for Form 10-Q and do not include all the disclosures
normally required in annual consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America. The interim financial
information as of October 30, 2004 and for the 13 and 39 weeks ended October 30, 2004 and November
1, 2003 is unaudited and has been prepared on the same basis as the audited financial statements.
In the opinion of management, such unaudited information includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the interim financial
information. This financial information should be read in conjunction with the audited
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K/A
for the fiscal year ended January 31, 2004 dated March 31, 2005, as filed with the Securities and
Exchange Commission. Operating results for the 13 and 39 weeks ended October 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending January 29, 2005 or
any other period.
3. Restatement of Previously Issued Financial Statements
This second amendment on Form 10-Q/A to the Quarterly Report on Form 10-Q of Dicks Sporting
Goods, Inc. for the quarterly period ended October 30, 2004 is to correct mathematical errors that
appeared in Amendment No. 1 on Form 10-Q/A filed on May 20, 2005. Part I, Item 1 is being revised
as follows:
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended October 30, 2004 |
Consolidated Statements |
|
As Previously |
|
As |
of Operations |
|
Reported |
|
Corrected |
|
|
(in thousands, except per share data) |
|
|
|
Income before income taxes |
|
$ |
42,265 |
|
|
$ |
44,265 |
|
Net income |
|
$ |
24,560 |
|
|
$ |
26,560 |
|
Basic EPS |
|
$ |
0.51 |
|
|
$ |
0.56 |
|
Diluted EPS |
|
$ |
0.47 |
|
|
$ |
0.50 |
|
No other changes to our second amendment on Form 10-Q/A are being made to the first amendment
on Form 10-Q/A filed on May 20, 2005.
In March 2005, the Company concluded that its lease accounting policy and accounting treatment
of construction allowances were not consistent with generally accepted accounting standards. The
Company corrected its lease accounting policy such that the commencement date of the lease term
will be the earlier of the date rent payments begin, the date the Company takes possession of the
property for the initial setup of fixtures and merchandise or, in certain circumstances, the date
the Company takes possession of the leased space for construction purposes. In those circumstances
where the commencement date of the lease term begins when the Company takes possession of the
leased space for construction purposes, the rent expense from that commencement date through the
earlier of the date rent payments begin or the date the Company takes possession of the property
for the initial setup of fixtures and merchandise is capitalized with a corresponding increase in
long-term deferred liabilities.
In addition, the Company had historically accounted for construction allowances as reductions
of the related leasehold improvement asset on the Condensed Consolidated Balance Sheets and capital
expenditures in investing activities on the Condensed Consolidated Statements of Cash Flows. The
Company determined that the appropriate interpretation of
10
Financial Accounting Standards Board
(FASB) Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases,
required these allowances to be recorded as deferred liabilities on the Condensed Consolidated
Balance Sheets and as a component of operating activities on the Condensed Consolidated Statements
of Cash Flows.
The effect of the restatement on the Companys previously released Condensed Consolidated
Statements of Income is a reduction of net income of $0.2 million for the 13 weeks ended October
30, 2004 and November 1, 2003, respectively, and a reduction of net income of $0.4 million for the
39 weeks ended October 30, 2004 and November 1, 2003, respectively. We have corrected these errors
through our restatement. There was no change to the previously released loss per share and
earnings per share for the 13 weeks ended October 30, 2004 and November 1, 2003 of $(0.04) and
$0.09. The effect of the restatement on previously released earnings per share is a reduction in
earnings per share of $0.01 for the 39 weeks ended October 30, 2004 and November 1, 2003,
respectively.
The effect of the restatement on the Companys Condensed Consolidated Balance Sheets is an
increase in property and equipment of $66.4 million as of October 30, 2004 and an increase in
long-term deferred liabilities of $70.7 as of October 30, 2004. In addition, there is an increase
in the deferred tax asset of $1.7 million as of October 30, 2004 and a decrease in retained
earnings of $2.5 million as of October 30, 2004.
This restatement of previously issued condensed consolidated financial statements does not
have an effect on total net cash flows during any of the periods restated. Certain
reclassifications result including the classification of construction allowances and capitalized
rent within operating activities with a corresponding increase in capital expenditures.
The impacts of these restatements on the condensed consolidated financial statements are
summarized below (in thousands, except per share data):
11
|
|
|
|
|
|
|
|
|
|
|
October 30, 2004 |
|
|
As |
|
|
|
|
Previously |
|
As |
|
|
Reported |
|
Restated |
|
|
|
Consolidated Balance Sheets: |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
266,795 |
|
|
$ |
333,229 |
|
Other assets |
|
|
34,386 |
|
|
|
36,074 |
|
Total assets |
|
|
1,228,187 |
|
|
|
1,296,309 |
|
Long-term deferred revenue and other liabilities |
|
|
14,449 |
|
|
|
85,102 |
|
Total long-term liabilities |
|
|
467,403 |
|
|
|
538,056 |
|
Retained earnings |
|
|
90,048 |
|
|
|
87,517 |
|
Total stockholders equity |
|
|
269,103 |
|
|
|
266,572 |
|
Total liabilities and stockholders equity |
|
|
1,228,187 |
|
|
|
1,296,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended October 30, 2004 |
|
13
Weeks Ended November 1, 2003 |
|
|
As |
|
|
|
|
|
As |
|
|
|
|
Previously |
|
As |
|
Previously |
|
As |
|
|
Reported |
|
Restated |
|
Reported |
|
Restated |
|
|
|
|
|
Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, including occupancy
and distribution costs |
|
$ |
402,848 |
|
|
$ |
402,758 |
|
|
$ |
249,325 |
|
|
$ |
249,251 |
|
Gross profit |
|
|
138,161 |
|
|
|
138,251 |
|
|
|
88,839 |
|
|
|
88,913 |
|
Pre-opening expenses |
|
|
5,101 |
|
|
|
5,483 |
|
|
|
2,594 |
|
|
|
3,036 |
|
Income from operations |
|
|
486 |
|
|
|
194 |
|
|
|
6,035 |
|
|
|
5,667 |
|
Income before income taxes |
|
|
(2,969 |
) |
|
|
(3,261 |
) |
|
|
7,855 |
|
|
|
7,487 |
|
Provision for income taxes |
|
|
(1,188 |
) |
|
|
(1,305 |
) |
|
|
3,142 |
|
|
|
2,995 |
|
Net income |
|
|
(1,781 |
) |
|
|
(1,956 |
) |
|
|
4,713 |
|
|
|
4,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended October 30, 2004 |
|
|
39
Weeks Ended November 1, 2003 |
|
|
|
As |
|
|
|
|
|
|
As |
|
|
|
|
|
|
Previously |
|
|
As |
|
|
Previously |
|
|
As |
|
|
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
|
|
|
|
|
Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, including occupancy
and distribution costs |
|
$ |
961,431 |
|
|
$ |
961,178 |
|
|
$ |
728,179 |
|
|
$ |
727,970 |
|
Gross profit |
|
|
359,920 |
|
|
|
360,173 |
|
|
|
268,234 |
|
|
|
268,443 |
|
Pre-opening expenses |
|
|
10,200 |
|
|
|
11,195 |
|
|
|
6,212 |
|
|
|
7,112 |
|
Income from operations |
|
|
49,064 |
|
|
|
48,322 |
|
|
|
42,727 |
|
|
|
42,036 |
|
Income before taxes |
|
|
45,007 |
|
|
|
44,265 |
|
|
|
44,718 |
|
|
|
44,027 |
|
Provision for income taxes |
|
|
18,003 |
|
|
|
17,705 |
|
|
|
17,887 |
|
|
|
17,611 |
|
Net income |
|
|
27,004 |
|
|
|
26,560 |
|
|
|
26,831 |
|
|
|
26,416 |
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.57 |
|
|
|
0.56 |
|
|
|
0.61 |
|
|
|
0.60 |
|
Diluted |
|
|
0.51 |
|
|
|
0.50 |
|
|
|
0.54 |
|
|
|
0.53 |
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended October 30, 2004 |
|
39
Weeks Ended November 1, 2003 |
|
|
As |
|
|
|
|
|
As |
|
|
|
|
Previously |
|
As |
|
Previously |
|
As |
|
|
Reported |
|
Restated |
|
Reported |
|
Restated |
|
|
|
|
|
Consolidated Statements of Cash Flows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
27,004 |
|
|
$ |
26,560 |
|
|
$ |
26,831 |
|
|
$ |
26,416 |
|
Deferred income taxes |
|
|
(40 |
) |
|
|
(337 |
) |
|
|
(4,053 |
) |
|
|
(4,330 |
) |
Deferred construction allowances |
|
|
|
|
|
|
25,407 |
|
|
|
|
|
|
|
10,575 |
|
Deferred revenue and other liabilities |
|
|
(14,075 |
) |
|
|
(12,187 |
) |
|
|
2,681 |
|
|
|
4,779 |
|
Net cash used in operating activities |
|
|
(111,339 |
) |
|
|
(84,785 |
) |
|
|
(49,488 |
) |
|
|
(37,507 |
) |
Capital expenditures |
|
|
(48,961 |
) |
|
|
(75,515 |
) |
|
|
(32,562 |
) |
|
|
(44,543 |
) |
Net cash used in investing activities |
|
|
(377,414 |
) |
|
|
(403,968 |
) |
|
|
(18,275 |
) |
|
|
(30,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended October 30, 2004 |
|
13
Weeks Ended November 1, 2003 |
|
|
As |
|
|
|
|
|
As |
|
|
|
|
Previously |
|
As |
|
Previously |
|
As |
|
|
Reported |
|
Restated |
|
Reported |
|
Restated |
|
|
|
|
|
Consolidated Statements of Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(413 |
) |
|
$ |
(588 |
) |
|
$ |
4,400 |
|
|
$ |
4,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended October 30, 2004 |
|
39
Weeks Ended November 1, 2003 |
|
|
As |
|
|
|
|
|
As |
|
|
|
|
Previously |
|
As |
|
Previously |
|
As |
|
|
Reported |
|
Restated |
|
Reported |
|
Restated |
|
|
|
|
|
Consolidated Statements of Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
27,816 |
|
|
$ |
27,372 |
|
|
$ |
30,138 |
|
|
$ |
29,723 |
|
4. Business Combination
On July 29, 2004, Dicks Sporting Goods, Inc. acquired all of the common stock of Galyans for
$16.75 per share in cash, and Galyans became a wholly owned subsidiary of Dicks. Dicks paid
$351.4 million, net of cash acquired of $17.9 million, to fund and consummate the Galyans
acquisition, including the repayment of $57.2 million of Galyans indebtedness. The Company
obtained approximately $193 million of these funds from cash and cash equivalents, investments and
the balance from borrowings under its revolving line of credit.
The primary reasons for the acquisition of Galyans, and the primary factors that contributed
to a purchase price that resulted in recognition of goodwill are:
|
|
|
The acquisition provides broader real estate coverage in our existing geographic
footprint creating new in-fill opportunities as well as a quicker entry into key
markets such as Chicago, Atlanta, Minneapolis, Dallas and Denver, capitalizing on
Galyans premium quality real estate; |
|
|
|
|
The acquisition improves our logistics capabilities, with the addition of a
second full-service distribution center in Plainfield, IN to serve the western
portion of the chain; and |
|
|
|
|
The acquisition could create meaningful margin improvement opportunities due to
lower merchandise costs as we will order in larger volumes, intend to have fewer
markdowns due to improved inventory control and create leverage of advertising and
general and administrative expenditures |
The transaction is being accounted for using the purchase method of accounting as required by
Statement of Financial Accounting Standards (SFAS) Statement No. 141, Business Combinations,
with Dicks as the accounting acquirer. Accordingly, the purchase price has been allocated to
tangible and identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values at the date of the acquisition. The excess of the purchase price over the
fair value of net assets acquired was recorded as goodwill. The Consolidated Statements of
Operations for the 13 and 39 weeks ended October 30, 2004 reflect the results of the combined
company from the acquisition date. Prior year results
13
include Dicks Sporting Goods, Inc. on a
stand-alone basis. Goodwill and identifiable intangible assets recorded in the acquisition will be
tested periodically for impairment as required by SFAS Statement No. 142, Goodwill and Other
Intangible Assets. The allocation of the purchase price to specific assets and liabilities is
based, in part, upon internal estimates of assets and liabilities. The Company has received an
independent appraisal (in draft form) for certain assets and is in the process of refining its
internal fair value estimates; therefore, the allocation of the purchase price is preliminary and
the final allocation may differ. Based on the preliminary purchase price allocation, the following
table summarizes estimated fair values of the assets acquired and liabilities assumed (in
thousands):
|
|
|
|
|
Inventory |
|
$ |
156,471 |
|
Other current assets |
|
|
37,642 |
|
Property and equipment, net |
|
|
170,968 |
|
Other long term assets, excluding goodwill |
|
|
1,936 |
|
Goodwill |
|
|
181,314 |
|
Favorable leases |
|
|
5,310 |
|
Accounts payable |
|
|
(94,225 |
) |
Accrued expenses |
|
|
(68,191 |
) |
Other current liabilities |
|
|
(10,989 |
) |
Long-term debt |
|
|
(6,331 |
) |
Other long-term liabilities |
|
|
(4,592 |
) |
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired, including intangibles |
|
$ |
369,313 |
|
|
|
|
|
As of October 30, 2004, the Company had accrued expenses of $6.4 million related to Galyans
associate severance, retention bonuses and relocation and $15.5 million related to the proposed
closing of Galyans stores, the Galyans clearance center and its corporate headquarters which
consists primarily of rent, common area maintenance and real estate taxes. These costs were
accounted for under Emerging Issues Task Force No. 95-3 (Issue 95-3), Recognition of Liabilities
in Connection with a Purchase Business Combination and were recognized as a liability assumed in
the acquisition. In addition, the Company had $20.7 million of inventory reserves as of October
30, 2004 established to recognize the impact of liquidating items that will not be carried in the
assortment after the conversion to Dicks stores is completed. The Company is continuing to assess
and complete the integration plans which may result in changes to those accruals and reserves
recorded.
The following table summarizes the activity in 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
|
|
|
|
|
|
|
|
|
Liabilities established |
|
|
reserve |
|
|
|
|
|
|
Associate severance, |
|
|
for the closing |
|
|
for discontinued |
|
|
|
|
|
|
retention and |
|
|
of Galyans stores and |
|
|
Galyans |
|
|
|
|
|
|
relocation |
|
|
corporate headquarters |
|
|
merchandise |
|
|
Total |
|
Liabilities and reserves established
in conjuction with the Galyans
acquisition at July 31, 2004 |
|
$ |
15,600 |
|
|
$ |
15,838 |
|
|
$ |
22,686 |
|
|
$ |
54,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid |
|
|
(8,282 |
) |
|
|
|
|
|
|
|
|
|
|
(8,282 |
) |
Adjustments to the estimate |
|
|
(940 |
) |
|
|
(315 |
) |
|
|
|
|
|
|
(1,255 |
) |
Clearance of discontinued Galyans
merchandise |
|
|
|
|
|
|
|
|
|
|
(1,989 |
) |
|
|
(1,989 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 30, 2004 |
|
$ |
6,378 |
|
|
$ |
15,523 |
|
|
$ |
20,697 |
|
|
$ |
42,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No activity related to these accruals was charged to net income for the 13 or 39 weeks ended
October 30, 2004. The $2.0 million of inventory reserve utilized for the clearance of discontinued
Galyans merchandise was recorded as a reduction of cost of sales for the 13 weeks ended October
30, 2004. The Company believes that the remaining reserves are adequate to complete its
integration plan and expects payments to be substantially completed by the end of fiscal 2005 with
the balance in fiscal 2006 and beyond which relates primarily to future lease payments on closed
stores.
14
The following unaudited pro-forma summary presents information as if Galyans had been
acquired at the beginning of each period presented. The pro-forma amounts include certain
reclassifications to Galyans amounts to conform them to the Companys presentation, and an
increase in interest expense of $1,876, $3,868 and $5,869 for the 13 weeks ended November 1, 2003,
the 39 weeks ended October 30, 2004 and the 39 weeks ended November 1, 2003, respectively, to
reflect the increase in borrowings under the amended credit facility to finance the acquisition as
if it had occurred at the beginning of each period presented. The pro-forma amounts do not reflect
any benefits from economies which might be achieved from combining the operations.
The pro-forma information does not necessarily reflect the actual results that would have
occurred had the companies been combined during the periods presented, nor is it necessarily
indicative of the future results of operations of the combined companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
|
October 30, |
|
November 1, |
|
October 30, |
|
November 1, |
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
(Unaudited, in thousands, except per share amounts) |
Net sales |
|
$ |
541,009 |
|
|
$ |
485,432 |
|
|
$ |
1,660,595 |
|
|
$ |
1,435,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,956 |
) |
|
$ |
(271 |
) |
|
$ |
14,107 |
|
|
$ |
16,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
(0.04 |
) |
|
$ |
|
|
|
$ |
0.30 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
(0.04 |
) |
|
$ |
|
|
|
$ |
0.27 |
|
|
$ |
0.33 |
|
5. Goodwill and Other Intangible Assets
In connection with the acquisition of Galyans on July 29, 2004, the Company recorded goodwill
and other intangible assets in accordance with SFAS No. 141, Business Combinations. As of
October 30, 2004 the $181.3 million of goodwill was recorded as the excess of the purchase price of
$369.3 million over the fair value of the net amounts assigned to assets acquired and liabilities
assumed. In accordance with SFAS No. 142, Accounting for Goodwill and Other Intangible Assets,
the Company will continue to assess on an annual basis whether goodwill and other intangible assets
acquired in the acquisition of Galyans are impaired. Additional impairment assessments may be
performed on an interim basis if the Company deems it necessary. Finite-lived intangible assets
will be amortized over their estimated useful economic lives and periodically reviewed for
impairment.
The change in the carrying amount of goodwill for the thirteen weeks ended October 30, 2004 is
as follows (in thousands):
|
|
|
|
|
Goodwill balance at July 30, 2004 |
|
$ |
159,398 |
|
|
|
|
|
|
Change in deferred taxes related to purchase price adjustments |
|
|
21,869 |
|
Elimination of deferred rent acquired |
|
|
(9,918 |
) |
Decrease in property and equipment, net for revised store closing estimate |
|
|
8,413 |
|
Record favorable leases based on appraisal |
|
|
(5,310 |
) |
Galyans transaction fees |
|
|
7,803 |
|
Other |
|
|
(941 |
) |
|
|
|
|
|
|
|
|
|
Goodwill balance at October 30, 2004 |
|
$ |
181,314 |
|
|
|
|
|
Acquired intangible assets subject to amortization at October 30, 2004 were as follows (in
thousands):
15
|
|
|
|
|
|
|
|
|
|
|
October 30, 2004 |
|
Intangible
assets subject to amortization: |
|
Gross Amount |
|
|
Accumulated Amortization |
|
Favorable leases |
|
$ |
5,310 |
|
|
$ |
(164 |
) |
Amortization expense for intangible assets subject to amortization was $0.2 million for both
the 13 and 39 weeks ended October 30, 2004. The estimated economic useful life is 11 years. The
annual amortization expense of the favorable leases recorded as of October 30, 2004 is expected to
be as follows (in thousands):
|
|
|
|
|
|
|
Estimated |
|
Fiscal |
|
Amortization |
|
Years |
|
Expense |
|
2004 (remaining three months) |
|
$ |
267 |
|
2005 |
|
|
840 |
|
2006 |
|
|
799 |
|
2007 |
|
|
724 |
|
2008 |
|
|
682 |
|
2009 and thereafter |
|
|
1,834 |
|
|
|
|
|
Total |
|
$ |
5,146 |
|
|
|
|
|
6. Store and Corporate Office Closings
As a result of the Galyans acquisition, the Company has decided to close six Dicks Sporting
Goods stores and three Galyans stores, two of which have lease terms expiring in fiscal 2004, the
Galyans clearance center and the Galyans corporate headquarters. As of October 30, 2004, the
Company had recorded $34.6 million of reserves and write-offs related to the closings of the
Galyans locations. The Company decided to close certain stores that were in overlapping trade
areas.
The following table provides a summary of the activity of the Galyans store closing reserves
and write-offs established in conjunction with the purchase price allocation (in thousands):
|
|
|
|
|
Store and corporate office closing reserves and write-offs in conjuction with
the Galyans acquisition at July 31, 2004 (including $15,838 previously
described in Note 3) |
|
$ |
22,791 |
|
|
|
|
|
|
Additional write-offs of property and equipment, net |
|
|
6,767 |
|
Elimination of capital lease related to a Galyans store closing |
|
|
5,393 |
|
Other changes recorded as a component of purchase accounting |
|
|
(315 |
) |
|
|
|
|
|
|
|
|
|
Balance at October 30, 2004 |
|
$ |
34,636 |
|
|
|
|
|
During the 13 weeks ended October 30, 2004, the Company recorded $2.6 million of additional
depreciation associated with the closure of the Dicks stores due to overlapping trade areas to
merger integration and store closing costs.
7. Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees
and related Interpretations.
Accordingly, no compensation expense has been recognized where the exercise price of the
option was equal to or greater
16
than the market value of the underlying common stock on the date of
grant. The pro-forma net income and earnings per share in the following table illustrates the
effect on net income and earnings per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
|
|
October 30, |
|
|
November 1, |
|
|
October 30, |
|
|
November 1, |
|
|
|
2004 |
|
|
2003 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands, except per share data) |
|
Net (loss) income, as reported |
|
$ |
(1,956 |
) |
|
$ |
4,492 |
|
|
$ |
26,560 |
|
|
$ |
26,416 |
|
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of related tax effects |
|
|
(2,607 |
) |
|
|
(814 |
) |
|
|
(7,821 |
) |
|
|
(2,049 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma net (loss) income |
|
$ |
(4,563 |
) |
|
$ |
3,678 |
|
|
$ |
18,739 |
|
|
$ |
24,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(0.04 |
) |
|
$ |
0.10 |
|
|
$ |
0.56 |
|
|
$ |
0.60 |
|
Basic pro-forma |
|
$ |
(0.09 |
) |
|
$ |
0.08 |
|
|
$ |
0.39 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
(0.04 |
) |
|
$ |
0.09 |
|
|
$ |
0.50 |
|
|
$ |
0.53 |
|
Diluted pro-forma |
|
$ |
(0.09 |
) |
|
$ |
0.07 |
|
|
$ |
0.36 |
|
|
$ |
0.49 |
|
8. Earnings Per Share
Basic earnings per share are based upon the weighted average number of shares outstanding.
Diluted earnings per share are based upon the weighted average number of shares outstanding plus
the incremental shares that would be outstanding assuming exercise of dilutive stock options. The
number of incremental shares from the assumed exercise of stock options is calculated by applying
the treasury stock method. The aggregate number of shares, totaling 4,388,024, that the Company
could be obligated to issue upon conversion of our $172.5 million issue price of senior convertible
notes was excluded from the 13 and 39 weeks ended October 30, 2004 calculation as they were
anti-dilutive. In addition, 4,924,734 shares were not included in the 13 weeks ended October 30,
2004 calculation as these stock options were anti-dilutive.
The computations for basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
October 30, |
|
|
November 1, |
|
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands, except per share data) |
|
Earnings per common share Basic: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,956 |
) |
|
$ |
4,492 |
|
Weighted average common shares outstanding |
|
|
48,251 |
|
|
|
46,430 |
|
(Loss) earnings per common share |
|
$ |
(0.04 |
) |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share Diluted: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,956 |
) |
|
$ |
4,492 |
|
Weighted average common shares outstanding basic |
|
|
48,251 |
|
|
|
46,430 |
|
Stock options |
|
|
|
|
|
|
4,738 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
48,251 |
|
|
|
51,168 |
|
(Loss) earnings per common share |
|
$ |
(0.04 |
) |
|
$ |
0.09 |
|
17
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
|
|
October 30, |
|
|
November 1, |
|
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands, except per share data) |
|
Earnings per common share Basic: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,560 |
|
|
$ |
26,416 |
|
Weighted average common shares outstanding |
|
|
47,755 |
|
|
|
44,062 |
|
Earnings per common share |
|
$ |
0.56 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share Diluted: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,560 |
|
|
$ |
26,416 |
|
Weighted average common shares outstanding basic |
|
|
47,755 |
|
|
|
44,062 |
|
Stock options |
|
|
4,976 |
|
|
|
5,792 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
52,731 |
|
|
|
49,854 |
|
Earnings per common share |
|
$ |
0.50 |
|
|
$ |
0.53 |
|
9. Senior Convertible Notes
On February 18, 2004, the Company completed a private offering of $172.5 million issue price
of senior unsecured convertible notes due 2024 (senior convertible notes) in transactions
pursuant to Rule 144A under the Securities Act of 1933, as amended. Net proceeds of $146.0 million
to the Company are net of estimated transaction costs associated with the offering of $5.8 million,
and the net cost of a convertible bond hedge and a separate warrant transaction. The hedge and
warrant transactions effectively increase the conversion price associated with the senior
convertible notes during the term of these transactions from 40% to 100%, or from $39.31 to $56.16
per share, thereby reducing the potential dilutive effect to shareholders upon conversion.
The senior convertible notes bear interest at an annual rate of 2.375% of the issue price
payable semi-annually on August 18th and February 18th of each year until
February 18, 2009, with the first interest payment made on August 18, 2004. After February 18,
2009, the senior convertible notes will not pay cash interest but the initial principal amount of
the notes will accrete daily at an original issue discount rate of 2.625%, until maturity on
February 18, 2024, when a holder will receive $1,000 per note. The senior convertible notes are
convertible into the Companys common stock (the common stock) at an initial conversion price in
each of the first 20 fiscal quarters following issuance of the notes of $39.31 per share, upon the
occurrence of certain events. Thereafter, the conversion price per share of common stock increases
each fiscal quarter by the accreted original issue discount for the quarter. Upon conversion of a
note, unless the Company is in default, the Company is obligated to pay cash in lieu of issuing
some or all of the shares of common stock, in an amount up to the accreted principal amount of the
note, and whether any shares of common stock are issuable in addition to this cash payment would
depend upon the then market price of the Companys common stock. The senior convertible notes will
mature on February 18, 2024, unless earlier converted or repurchased. The Company may redeem the
notes at any time on or after February 18, 2009, at its option, at a redemption price equal to the
sum of the issue price, accreted original discount and any accrued cash interest, if any. The
total face amount of the senior convertible notes was $255.1 million prior to the original discount
of $82.6 million.
Concurrently with the sale of the senior convertible notes, the Company purchased a bond hedge
designed to mitigate the potential dilution to shareholders from the conversion of the senior
convertible notes. Under the five year terms of the bond hedge, one of the initial purchasers
(the counterparty) will deliver to the Company upon a conversion of the bonds a number of shares
of common stock based on the extent to which the then market price exceeds $39.31 per share. The
aggregate number of shares that the Company could be obligated to issue upon conversion of the
senior convertible notes is 4,388,024 shares.
The cost of the purchased bond hedge was partially offset by the sale of warrants (the
warrants) to acquire up to
8,775,948 shares of the common stock to the counterparty with whom the Company entered into
the bond hedge. The warrants are exercisable in year five at a price of $56.16 per share. The
warrants may be settled at the Companys option through a net share settlement or a net cash
settlement, either of which would be based on the extent to which the then market price exceeds
$56.16 per share.
The net effect of the purchased bond hedge and the warrants is to either reduce the potential
dilution from the conversion of the senior convertible notes if the Company elects a net share
settlement or to increase the net cash proceeds of
18
the offering if a net cash settlement is elected
if the senior convertible notes are converted at a time when the market price of the common stock
exceeds $39.31 per share. There would be dilution from the conversion of the senior convertible
notes to the extent that the then-market price per share of the common stock exceeds $56.16 at the
time of conversion.
10. Revolving Credit Agreement
On July 28, 2004, the Company executed its Second Amended and Restated Credit Agreement (the
Credit Agreement), between Dicks and lenders named therein. The Credit Agreement became
effective on July 29, 2004 and provides for a revolving credit facility in an aggregate outstanding
principal amount of up to $350 million, including up to $75 million in the form of letters of
credit.
Borrowing availability under the Companys Credit Agreement is generally limited to the lesser
of 70% of the Companys eligible inventory or 85% of the Companys inventorys liquidation value,
in each case net of specified reserves and less any letters of credit outstanding. Interest on
outstanding indebtedness under the Credit Agreement currently accrues, at the Companys option, at
a rate based on either (i) the prime corporate lending rate or (ii) at the LIBOR rate plus 1.25% to
1.75% based on the level of excess borrowing availability.
The obligations of the Company under the Credit Agreement are secured by interests in
substantially all of the Companys personal property excluding store and distribution center
equipment and fixtures. The Credit Agreements term expires May 30, 2008.
11. Stock Split
On February 10, 2004, the Companys Board of Directors declared a two-for-one stock split, in
the form of a stock dividend, of the Companys common shares for stockholders of record on March
19, 2004. The split became effective on April 5, 2004 by issuing our stockholders of record one
additional share of common stock for every share of common stock held, and one additional share of
Class B common stock for every share of Class B common stock held. The applicable share and
per-share data for all periods included herein have been restated to give effect to this stock
split.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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/A 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. Accordingly, investors should not place undue reliance on
forward-looking statements as a prediction of actual results. You can identify these statements as
those that may predict, forecast, indicate or imply future results, performance or advancements and
by forward-looking words such as believe, anticipate, expect, estimate, predict,
intend, plan, project, will, will be, will continue, will result, could, may,
might or any variations of such words or other words with similar meanings. Forward-looking
statements address, among other things, our expectations, our growth strategies, including our
plans to open new stores, our efforts to increase profit margins and return on invested capital,
plans to grow our private label business, projections of our future profitability, results of
operations, capital expenditures or our financial condition or other forward-looking information
and includes statements about revenues, earnings, spending, margins, liquidity, store openings and
operations, inventory, private label products, our actions, plans or strategies.
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 2004 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: the intense competition in the
sporting goods industry and actions by our competitors; our inability to manage our growth, open
new stores on a timely basis and expand successfully in new and existing markets; the availability
of retail store sites on terms
acceptable to us; the cost of real estate and other items related to our stores; our ability
to access adequate capital; changes in consumer demand; risks relating to product liability claims
and the availability of sufficient insurance coverage relating to those claims; our relationships
with our suppliers, distributors or manufacturers and their ability to provide us with sufficient
quantities of products; any serious disruption at our distribution or return facilities; the
seasonality of our business; the potential impact of natural disasters or national and
international security concerns on us or the retail environment; risks related to the economic
impact or the effect on the U.S. retail environment relating to instability and conflict in the
Middle East or elsewhere; risks relating to the regulation of the products we sell, such as hunting
rifles and handguns; risks
19
associated with relying on foreign sources of production; risks relating
to implementation of new management information systems; risks relating to operational and
financial restrictions imposed by our Credit Agreement; factors associated with our pursuit of
strategic acquisitions; risks and uncertainties associated with assimilating acquired companies;
the loss of our key executives, especially Edward W. Stack, our Chairman and Chief Executive
Officer; our ability to meet our labor needs; changes in general economic and business conditions
and in the specialty retail or sporting goods industry in particular; our ability to repay or make
the cash payments under our senior convertible notes; our expansion plans at our distribution
facility; changes in our business strategies and other factors discussed in other reports or
filings filed by us with the Securities and Exchange Commission.
In addition, we operate in a highly competitive and rapidly changing environment; therefore,
new risk factors can arise, and it is not possible for management to predict all such risk factors,
nor to assess the impact of all such risk factors on our business or the extent to which any
individual risk factor, or combination of factors, may cause results to differ materially from
those contained in any forward-looking statement. We do not assume any obligation and do not
intend to update any forward-looking statements.
On July 29, 2004, Dicks Sporting Goods, Inc. acquired all of the common stock of Galyans
which became a wholly owned subsidiary of Dicks. Due to this acquisition, additional risks and
uncertainties arise that could affect our financial performance and actual results and could cause
actual results for 2004 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 combining businesses and achieving expected savings and synergies (including
annualized cost savings and merchandise buying improvements) and/or with assimilating acquired
companies and the fact that merger integration and store closing costs related to the Galyans
acquisition are difficult to predict with a level of certainty and may be greater than expected.
OVERVIEW (restated)
Dicks is an authentic full-line sporting goods retailer offering a broad assortment of
brand-name sporting goods equipment, apparel and footwear in a specialty store environment. On
July 29, 2004, a wholly owned subsidiary of Dicks Sporting Goods, Inc. completed the acquisition
of Galyans Trading Company, Inc. The Condensed Consolidated Statements of Operations for the 13
weeks ended October 30, 2004 reflect the results of the combined company for the entire 13 weeks
whereas the results for the 39 weeks ended October 30, 2004 reflect the results of Dicks Sporting
Goods on a stand-alone basis from February 1, 2004 to July 28, 2004 and the combined company from
the acquisition date of July 29, 2004 to October 30, 2004. Prior year results include Dicks
Sporting Goods, Inc. on a stand-alone basis. Unless otherwise specified, any reference to year is
to our fiscal year and when used in this Form 10-Q and unless the context otherwise requires, the
terms Dicks, we, us, the Company and our refer to Dicks Sporting Goods, Inc. and its
wholly owned subsidiaries. As of October 30, 2004, the Company operated 233 stores in 32 states
primarily throughout the Eastern half of the United States under the Dicks Sporting Goods and
Galyans names.
In March 2005, the Company concluded that its lease accounting policy and accounting treatment
of construction allowances were not consistent with generally accepted accounting standards. The
Company corrected its lease accounting policy such that the commencement date of the lease term
will be the earlier of the date rent payments begin, the date the Company takes possession of the
property for the initial setup of fixtures and merchandise or, in certain circumstances, the date
the Company takes possession of the leased space for construction purposes. In those circumstances
where the commencement date of the lease term begins when the Company takes possession of the
leased space for construction purposes, the rent expense from that commencement date through the
earlier of the date rent payments begin or the date the Company takes possession of the property
for the initial setup of fixtures and merchandise is capitalized with a corresponding increase in
long-term deferred liabilities.
In addition, the Company had historically accounted for construction allowances as reductions
of the related leasehold improvement asset on the Condensed Consolidated Balance Sheets and capital
expenditures in investing activities on the Condensed Consolidated Statements of Cash Flows. The
Company determined that the appropriate interpretation of Financial Accounting Standards Board
(FASB) Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases,
required these allowances to be recorded as deferred liabilities on the Condensed Consolidated
Balance Sheets and as a component of operating activities on the Condensed Consolidated Statements
of Cash Flows.
The effect of the restatement on the Companys previously released Condensed Consolidated
Statements of Income is a reduction of net income of $0.2 million for the 13 weeks ended October
30, 2004 and November 1, 2003, respectively, and a reduction of net income of $0.4 million for the
39 weeks ended October 30, 2004 and November 1, 2003, respectively. We have corrected these errors
through our restatement. There was no change to the previously released loss per share and
earnings per share for the 13 weeks ended October 30, 2004 and November 1, 2003 of $(0.04) and
$0.09. The effect of the
20
restatement on previously released earnings per share is a reduction in
earnings per share of $0.01 for the 39 Weeks Ended October 30, 2004 and November 1, 2003,
respectively.
The effect of the restatement on the Companys Condensed Consolidated Balance Sheets is an
increase in property and equipment of $66.4 million as of October 30, 2004 and an increase in
long-term deferred liabilities of $70.7 million as of October 30, 2004. In addition, there is an
increase in the deferred tax asset of $1.7 million as of October 30, 2004 and a decrease in
retained earnings of $2.5 million as of October 30, 2004.
This restatement of previously issued condensed consolidated financial statements does not
have an effect on total net cash flows during any of the periods restated. Certain
reclassifications result including the classification of construction allowances and capitalized
rent within operating activities with a corresponding increase in capital expenditures.
See Note 3 of the Notes to Condensed Consolidated Financial Statements for additional
information. The accompanying Managements Discussion and Analysis of Financial Condition and
Results of Operations gives effect to such restatement.
Due to the seasonal nature of our business, interim results are not necessarily indicative of
results for the entire fiscal year. Our revenue and earnings are typically greater during our
fiscal fourth quarter, which includes the majority of the holiday selling season.
Executive Summary
The Company reported a net loss for the 13 weeks ended October 30, 2004 of $2.0 million, or
$(0.04) per diluted share, as compared to net income of $4.5 million and earnings per share of
$0.09 per diluted share for the 13 weeks ended November 1, 2003. The decrease in earnings was
attributable to a loss from operations of the Galyans stores acquired in July 2004, which were not
in last years results, merger integration and store closing costs associated with the Galyans
business of $7.7 million, and higher interest expense also associated with the Galyans
acquisition.
Net sales increased 60%, or $202.8 million to $541.0 million for the 13 weeks ended October
30, 2004 from $338.2 million for the 13 weeks ended November 1, 2003. This increase resulted
primarily from a comparable store sales increase of 1.5%, or $4.6 million and $198.2 million from
the net addition of 37 new stores and 49 Galyans stores in the last five quarters, which are not
included in the comparable store base.
Income from operations decreased 96%, or $5.5 million, to $0.2 million for the 13 weeks ended
October 30, 2004, from $5.7 million for the 13 weeks ended November 1, 2003 due primarily to
increased sales and gross profit offset by $7.7 million of merger integration and store closing
costs.
As a percentage of net sales, gross profit decreased to 25.6% for the 13 weeks ended October
30, 2004, from 26.3% for the 13 weeks ended November 1, 2003. The decrease in gross profit
percentage was primarily due to improved selling margins in the majority of the Companys product
categories as a result of improved purchasing efficiencies and inventory management, offset by
higher Galyans occupancy costs as a percentage of sales. The current quarters occupancy costs
includes a lease termination charge related to the closure of one Dicks store.
During the third quarter we leveraged selling, general and administrative expenses by 65 basis
points. The decrease as a percentage of sales was due primarily to decreased advertising,
relocation and professional fee expense partially offset by higher information systems costs due
mainly to the implementation of the new merchandising system.
The operations of Galyans are included from the July 29, 2004 acquisition date. A detailed
conversion plan is being developed for the Galyans stores with our primary objectives being the
synchronizing of the merchandise assortment and the reopening of the Galyans stores as Dicks
Sporting Goods stores by the end of the first half of 2005. See Outlook below.
We ended the third quarter with $260.2 million of outstanding borrowings on our line of credit
as compared to $0 at January 31, 2004. The increase was primarily due to using the line to fund a
portion of the acquisition of Galyans as well as meeting our seasonal borrowing requirements.
Excess borrowing availability totaled $73.6 million at quarter-end.
RESULTS OF OPERATIONS AND OTHER SELECTED DATA
The following table presents for the periods indicated selected items in the Consolidated
Statements of Operations as a percentage of the Companys net sales, as well as other selected data
which provides a further understanding of our business:
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended (1) |
|
|
39 Weeks Ended (1) |
|
|
|
October 30, |
|
|
November 1, |
|
|
October 30, |
|
|
November 1, |
|
|
|
2004 |
|
|
2003 |
|
|
2004 |
|
|
2003 |
|
Net sales (2) |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold, including occupancy and distribution costs (3) |
|
|
74.4 |
|
|
|
73.7 |
|
|
|
72.7 |
|
|
|
73.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
25.6 |
|
|
|
26.3 |
|
|
|
27.3 |
|
|
|
26.9 |
|
Selling, general and administrative expenses (4) |
|
|
23.1 |
|
|
|
23.7 |
|
|
|
22.2 |
|
|
|
22.0 |
|
Pre-opening expenses (5) |
|
|
1.0 |
|
|
|
0.9 |
|
|
|
0.8 |
|
|
|
0.7 |
|
Merger integration and store closing costs (6) |
|
|
1.4 |
|
|
|
0.0 |
|
|
|
0.6 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
0.0 |
|
|
|
1.7 |
|
|
|
3.7 |
|
|
|
4.2 |
|
Gain on sale of investment |
|
|
0.0 |
|
|
|
0.7 |
|
|
|
0.0 |
|
|
|
0.4 |
|
Interest expense, net (7) |
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
0.2 |
|
Other income |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(0.6 |
) |
|
|
2.2 |
|
|
|
3.3 |
|
|
|
4.4 |
|
(Benefit) provision for income taxes |
|
|
(0.2 |
) |
|
|
0.9 |
|
|
|
1.3 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(0.4 |
)% |
|
|
1.3 |
% |
|
|
2.0 |
% |
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store net sales increase (8) |
|
|
1.5 |
% |
|
|
2.5 |
% |
|
|
3.0 |
% |
|
|
1.0 |
% |
Number of stores at end of period (9) |
|
|
233 |
|
|
|
162 |
|
|
|
233 |
|
|
|
162 |
|
Total square feet at end of period (9) |
|
|
13,474,358 |
|
|
|
7,869,138 |
|
|
|
13,474,358 |
|
|
|
7,869,138 |
|
(1) Columns may not add due to rounding.
(2) Revenue from retail sales is recognized at the point of sale. Revenue from cash received
for gift cards is deferred, and the revenue is recognized upon the redemption of the gift card.
Sales are recorded net of estimated returns. Revenue from layaway sales is recognized upon receipt
of final payment from the customer.
(3) Cost of goods sold includes the cost of merchandise, inventory shrinkage, freight,
distribution and store occupancy costs. Store occupancy costs include rent, common area maintenance
charges, real estate and other asset based taxes, store maintenance, utilities, depreciation,
fixture lease expenses and certain insurance expenses.
(4) Selling, general and administrative expenses include store and field support payroll and
fringe benefits, advertising, bank card charges, information systems, marketing, legal, accounting,
other store expenses and all expenses associated with operating the Companys corporate
headquarters.
(5) Pre-opening expenses consist primarily of rent, marketing, payroll and recruiting costs
incurred prior to a new store opening.
(6) Merger integration and store closing costs include the expense of closing Dicks stores
in connection with the Galyans acquisition, advertising the rebranding of Galyans stores,
duplicative administrative costs, recruiting and system conversion costs.
(7) Interest expense, net, results primarily from interest on our senior convertible notes
and Credit Agreement partially offset by interest income from the Companys investments in
marketable securities and held-to-maturity investments.
(8) Comparable store sales begin in a stores 14th full month of operations after
its grand opening. Comparable store
sales are for stores that opened at least 13 months prior to the beginning of the period
noted. Stores that were relocated during the applicable period have been excluded from comparable
store sales. Each relocated store is returned to the comparable store base after its
14th full month of operations at that new location. Galyans stores will be included in
the comparable store base in the 14th full month after the completion of the re-branding
and re-merchandising effort expected to occur by the end of the first half of 2005.
(9) Number of stores at end of period and total square feet at end of period represents the
combined companies as of October 30, 2004 and Dicks Sporting Goods, Inc. stand-alone as of
November 1, 2003.
22
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that the Company believes are both most important to
the portrayal of the Companys financial condition and results of operations, and require the
Companys most difficult, subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties
affecting the application of those policies may result in materially different amounts being
reported under different conditions or using different assumptions.
The Company considers the following policies to be the most critical in understanding the
judgments that are involved in preparing its consolidated financial statements.
Inventory Valuation
The Company values inventory using the lower of weighted average cost or market method.
Market value is generally based on the current selling price of the merchandise. The Company
regularly reviews inventories to determine if the carrying value of the inventory exceeds market
value and the Company records a reserve to reduce the carrying value to its market price, as
necessary. Historically, the Company has rarely experienced significant occurrences of
obsolescence or slow moving inventory. However, future changes such as customer merchandise
preference, unseasonable weather patterns, or business trends could cause the Companys inventory
to be exposed to obsolescence or slow moving merchandise.
Shrink expense is accrued as a percentage of merchandise sales based on historical shrink
trends. The Company performs physical inventories at the stores and distribution center throughout
the year. The reserve for shrink represents an estimate for shrink for each of the Companys
locations since the last physical inventory date through the reporting date. Estimates by location
and in the aggregate are impacted by internal and external factors and may vary significantly from
actual results.
Vendor Allowances
Vendor allowances include allowances, rebates and cooperative advertising funds received from
vendors. These funds are determined for each fiscal year and the majority are based on various
quantitative contract terms. Amounts expected to be received from vendors relating to the purchase
of merchandise inventories are recognized as a reduction of cost of goods sold as the merchandise
is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are
recorded as a reduction to the related expense in the period that the related expense is incurred.
The Company records an estimate of earned allowances based on the latest projected purchase volumes
and advertising forecasts. On an annual basis, the Company confirms earned allowances with vendors
to ensure the amounts are recorded in accordance with the terms of the contract.
In November 2002, the FASB issued Emerging Issues Task Force Issue No. 02-16 (Issue 02-16),
Accounting by a Reseller for Cash Consideration Received from a Vendor. Issue 02-16 addresses
the issue of how a reseller of a vendors product should account for cash consideration received
from a vendor. The adoption of Issue 02-16, effective with agreements entered into after November
21, 2002, did not have a material impact on the Companys consolidated financial position or
results of operations.
Goodwill, Intangible Assets and Impairment of Assets
Goodwill and other intangible assets must be tested for impairment on an annual basis. Our
evaluation of goodwill and intangible assets with indefinite useful lives for impairment requires
accounting judgments and financial estimates in determining the fair value of such assets. If
these judgments or estimates change in the future, we may be required to record impairment charges
for these assets.
The Company reviews long-lived assets for impairment whenever events and circumstances
indicate that the carrying value of these assets may not be recoverable based on estimated
undiscounted future cash flows. Assets are reviewed at the lowest level for which cash flows can
be identified, which is the store level. In estimating future cash flows, significant estimates
are made by the Company with respect to future operating results of each store over its remaining
lease term. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value of the
assets.
23
Business Combinations
Our acquisition of Galyans is accounted for under the purchase method of accounting. The
assets and liabilities of Galyans are adjusted to their fair values and the excess of the purchase
price over the net assets acquired is recorded as goodwill. The purchase price allocation as of
October 30, 2004 is preliminary. The determination of fair values involves the use of estimates
and assumptions which will require adjustments in the future. While we believe the factors
considered and the independent appraisal performed will provide a reasonable basis for determining
fair value, we cannot guarantee that the estimates and assumptions used will prevent adjustments to
those estimates in future periods.
Self-Insurance
The Company is self-insured for certain losses related to health, workers compensation and
general liability insurance, although we maintain stop-loss coverage with third-party insurers to
limit our liability exposure. Liabilities associated with these losses are estimated in part by
considering historical claims experience, industry factors, severity factors and other actuarial
assumptions.
13 Weeks Ended October 30, 2004 Compared to the 13 Weeks Ended November 1, 2003
Net Loss
The Company reported a net loss for the 13 weeks ended October 30, 2004 of $2.0 million, or
$(0.04) per diluted share, as compared to net income of $4.5 million and earnings per share of
$0.09 per diluted share for the 13 weeks ended November 1, 2003. The decrease was due to merger
integration and store closing costs of $7.7 million and higher interest expense associated with the
acquisition of Galyans.
Net Sales
Net sales increased by $202.8 million, or 60%, to $541.0 million for the 13 weeks ended
October 30, 2004, from $338.2 million for the 13 weeks ended November 1, 2003. This increase
resulted primarily from a comparable store sales increase of 1.5%, or $4.6 million and $198.2
million from the net addition in the last five quarters of 37 new stores and 49 Galyans stores
which are not included in the comparable store base.
The increase in comparable store sales is mostly attributable to sales increases throughout
much of our business, including womens and kids footwear and apparel, team sports, cleats,
accessories and sport games and bikes. We also saw favorable results in licensed product,
primarily due to sales of Boston Red Sox championship merchandise. Those favorable results were
somewhat offset by a few categories, including cold-weather product, boots and inline skates.
For the 13 weeks ended October 30, 2004, private label product sales in Dicks stores
represented 9.6% of sales, an increase from last years 9.2%.
These private label sales
are for the merchandise developed by Dicks, and do not include any remaining private label
products developed by Galyans. As we progress through the re-assortment of the Galyans stores,
we will be rolling out our private label program and we will begin to report private label sales on
the full chain. We expect that this will be complete by the end of the first half of 2005.
During the quarter we opened 13 Dicks stores and one Galyans store in Chicago compared to
the opening of 11 Dicks stores for the 13 weeks ended November 1, 2003. The store in Chicago was
opened as a Galyans store to leverage advertising expense, as Dicks does not yet have a presence
in the market. The store will be converted along with the entire Chicago market in the first half
of 2005. We closed two Dicks stores during the quarter that were not related to the Galyans
acquisition, one closed as its replacement was opened last year, and the second was closed due to
performance.
Income from Operations
Income from operations decreased 96%, or $5.5 million to $0.2 million for the 13 weeks ended
October 30, 2004, from $5.7 million for the 13 weeks ended November 1, 2003 due primarily to
increased sales and gross profit offset by $7.7 million of merger integration and store closing
costs and an increase in selling, general and administrative expenses.
Gross profit increased by $49.4 million, or 56%, to $138.3 million for the 13 weeks ended
October 30, 2004, from $88.9 million for the 13 weeks ended November 1, 2003. As a percentage of
net sales, gross profit decreased to 25.6% for the 13 weeks ended October 30, 2004, from 26.3% for
the 13 weeks ended November 1, 2003. The decrease in gross profit percentage was primarily due to
improved selling margins in the majority of the Companys product categories as a result of
improved purchasing efficiencies and inventory management, offset by higher Galyans occupancy
costs (94 basis points). The prior year quarter gross profit percentage was also favorably
impacted 16 basis points by the classification of a larger
24
portion of cooperative advertising funds as a reduction of cost of goods sold, as fewer of
these funds were directly tied to advertising expenditures in the prior year quarter as compared to
the current year quarter.
Selling, general and administrative expenses increased by $44.6 million to $124.8 million for
the 13 weeks ended October 30, 2004, from $80.2 million for the 13 weeks ended November 1, 2003 due
primarily to an increase in store count and continued investment in corporate and store
infrastructure. As a percentage of net sales, selling, general and administrative expenses
decreased from 23.7% for the 13 weeks ended November 1, 2003 to 23.1% for the 13 weeks ended
October 30, 2004. The percentage decrease was due primarily to the classification of a larger
portion of cooperative advertising funds as a reduction of cost of goods sold in the prior year
third quarter (16 basis points), lower advertising (16 basis points) due primarily to reductions of
Galyans advertising, and decreases in relocation expense (16 basis points) and professional fees
(14 basis points), partially offset by higher information systems costs due mainly to the
implementation of the new merchandising system (15 basis points).
Merger integration and store closing costs associated with the purchase of Galyans were $7.7
million or 1.4% of sales for the 13 weeks ended October 30, 2004. These costs consisted primarily
of $3.2 million of duplicative administrative costs, $2.6 million of additional depreciation
related to a change in the estimated useful lives of the depreciable assets for the Dicks Sporting
Goods stores that are closing, $0.7 million of recruiting and relocation costs and $1.2 million of
other costs comprised primarily of travel, advertising and system conversion costs.
Pre-opening expenses increased by $2.5 million to $5.5 million for the 13 weeks ended October
30, 2004, from $3.0 million for the 13 weeks ended November 1, 2003. Pre-opening expenses
increased primarily due to the opening of 14 new stores during the 13 weeks ended October 30, 2004
and five stores that opened early in November 2004 compared to the opening of 11 new stores for the
13 weeks ended November 1, 2003.
Gain on Sale of Investment
Gain on sale of investment of $2.3 million for the 13 weeks ended November 1, 2003 resulted
from the sale of a portion of the Companys non-cash investment in its third-party internet
commerce provider. No portion of this investment was sold during the 13 weeks ended October 30,
2004.
Interest Expense, Net
Interest expense, net, increased by $3.0 million to $3.5 million for the 13 weeks ended
October 30, 2004, from $0.5 million for the 13 weeks ended November 1, 2003 due primarily to
interest expense on our amended credit facility related to the acquisition of Galyans and senior
convertible notes.
39 Weeks Ended October 30, 2004 Compared to the 39 Weeks Ended November 1, 2003
Net Income
Our net income increased by $0.2 million to $26.6 million for the 39 weeks ended October 30,
2004, from $26.4 million for the 39 weeks ended November 1, 2003. This represented a decrease in
diluted earnings per share of $0.03 to $0.50 from $0.53. The increase was due primarily to higher
sales and gross profit partly offset by merger integration and store closing costs associated with
the acquisition of Galyans and an increase in selling, general and administrative expenses.
Net Sales
Net sales increased by $325.0 million, or 33%, to $1,321.4 million for the 39 weeks ended
October 30, 2004, from $996.4 million for the 39 weeks ended November 1, 2003. This increase
resulted from a comparable store sales increase of 3.0%, or $26.5 million, and $298.5 million in
new store sales.
The increase in comparable store sales is mostly attributable to sales increases in mens,
womens and kids apparel, mens, womens and kids footwear, golf, licensed product, exercise and
bikes, partly offset by lower sales of boots, in-line skates and hunting clothing.
For the 39 weeks ended October 30, 2004, private label product sales in Dicks stores
represented 10.5% of sales, an increase from last years 9.0%.
25
During the 39 weeks ended October 30, 2004 we opened 23 Dicks stores, one Galyans store,
relocated three Dicks stores and closed two Dicks stores. This compares to opening 21 stores and
the relocation of one store for the 39 weeks ended November 1, 2003.
Income from Operations
Income from operations increased by $6.3 million, or 15%, to $48.3 million for the 39 weeks
ended October 30, 2004, from $42.0 million for the 39 weeks ended November 1, 2003. The increase
in income from operations is primarily a result of increased sales and gross profit partly offset
by $7.8 million of merger integration and store closing costs and an increase in selling, general
and administrative expenses.
Gross profit increased by $91.8 million, or 34%, to $360.2 million for the 39 weeks ended
October 30, 2004, from $268.4 million for the 39 weeks ended November 1, 2003. As a percentage of
net sales, gross profit increased to 27.3% for the 39 weeks ended October 30, 2004, from 26.9% for
the 39 weeks ended November 1, 2003. The increase in gross profit percentage was primarily due to
improved selling margins in the majority of the Companys product categories as a result of
improved purchasing efficiencies partly offset by higher Galyans occupancy costs (49 basis
points).
Selling, general and administrative expenses increased by $73.6 million to $292.9 million for
the 39 weeks ended October 30, 2004, from $219.3 million for the 39 weeks ended November 1, 2003
due primarily to an increase in store count and continued investment in corporate and store
infrastructure. As a percentage of net sales, selling, general and administrative expenses
increased from 22.0% for the 39 weeks ended November 1, 2003 to 22.2% for the 39 weeks ended
October 30, 2004. The percentage increase was due primarily to the classification of a larger
portion of cooperative advertising funds as a reduction of cost of goods sold as discussed above
(12 basis points), increases in advertising expenditures (16 basis points) and an increase in
payroll and fringe expenses (15 basis points), which was offset by lower relocation expenses (11
basis points), lower professional fee expenses (7 basis points) and last years first quarter
containing higher information systems costs (9 basis points).
Merger integration and store closing costs associated with the purchase of Galyans were $7.8
million or 0.6% of sales for the 39 weeks ended October 30, 2004. These costs consisted primarily
of $3.2 million of duplicative administrative costs, $2.6 million of accelerated depreciation
related to a change in the estimated useful lives of the depreciable assets for the Dicks Sporting
Goods stores that are closing, $0.7 million of recruiting and relocation costs and $1.3 million of
other costs comprised primarily of travel, advertising and system conversion costs.
Pre-opening expenses increased by $4.1 million to $11.2 million for the 39 weeks ended October
30, 2004, from $7.1 million for the 39 weeks ended November 1, 2003. Pre-opening expenses were for
the opening of 23 Dicks stores, one Galyans store and the relocation of three Dicks stores for
the 39 weeks ended October 30, 2004 and five stores that opened early in November 2004 compared to
the opening of 21 new stores and the relocation of one store for the 39 weeks ended November 1,
2003.
Gain on Sale of Investment
Gain on sale of investment of $3.5 million for the 39 weeks ended November 1, 2003 resulted
from the sale of a portion of the Companys non-cash investment in its third-party internet
commerce provider. No portion of this investment was sold during the 39 weeks ended October 30,
2004.
Interest Expense, Net
Interest expense, net, increased by $3.6 million to $5.1 million for the 39 weeks ended
October 30, 2004, from $1.5 million for the 39 weeks ended November 1, 2003 due primarily to
interest expense on our amended credit facility associated with the Galyans acquisition and senior
convertible notes offset by interest income of $1.1 million from our investments in marketable
securities and held-to-maturity investments.
Other Income
Other income included a $1.0 million break-up fee related to our unsuccessful effort to
acquire the assets of a bankrupt retailer.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for inventory, capital improvements, and pre-opening
expenses to support expansion plans, as well as for various investments in store remodeling, store
fixtures and ongoing infrastructure
26
improvements. The Companys main sources of liquidity for the 39 weeks ended October 30, 2004
have been borrowings pursuant to the Credit Agreement, the net proceeds from the issuance of the
senior convertible notes and proceeds from sale-leaseback transactions.
The change in cash and cash equivalents is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
|
|
October 30, |
|
|
November 1, |
|
|
|
2004 |
|
|
2003 |
|
Net cash used in operating activities |
|
$ |
(84,785 |
) |
|
$ |
(37,507 |
) |
Net cash used in investing activities |
|
|
(403,968 |
) |
|
|
(30,256 |
) |
Net cash provided by financing activities |
|
|
423,889 |
|
|
|
71,337 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(64,864 |
) |
|
$ |
3,574 |
|
|
|
|
|
|
|
|
Operating Activities
Cash used in operating activities for the 39 weeks ended October 30, 2004 increased by $47.3
million to $84.8 million reflecting primarily changes in non-cash items and working capital. The
increase in the use of working capital is primarily due to an increase in the change in inventory
and accounts receivable partially offset by an increase in the change in accounts payable. The
increase in the change in inventory and the increase in the change in accounts payable were
primarily due to the increase in purchases for the Galyans stores for the third quarter 2004 and
the increase in fall and winter receipts in fiscal 2004 compared to fiscal 2003 as well as an
increase in in-transit inventory. The increase in the change in accounts receivable is primarily
related to an increase in the number of stores that have landlord contributions and an increase in
the income tax receivable. The cash flow from operating the Companys stores is a significant
source of liquidity on an annual basis and will continue to be used in 2004 primarily to purchase
inventory, make capital improvements and open new stores. All of the Companys revenues are
realized at the point-of-sale in the stores. Thus, net sales are essentially on a cash basis.
Investing Activities
Cash used in investing activities for the 39 weeks ended October 30, 2004 increased by $373.7
million to $404.0 million primarily reflecting the payment for the purchase of Galyans of $351.4
million, net of $17.9 million cash acquired. Net capital expenditures increased $13.1 million as
proceeds from sale-leaseback transactions increased $17.9 million while capital expenditures
increased $31.0 million. We use cash in investing activities to build new stores and remodel or
relocate existing stores. Furthermore, net cash used in investing activities includes purchases of
information technology assets and expenditures for distribution facilities and corporate
headquarters. The following table presents the major categories of capital expenditure activities:
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
|
|
October 30, |
|
|
November 1, |
|
|
|
2004 |
|
|
2003 |
|
New, relocated and remodeled stores |
|
$ |
57,109 |
|
|
$ |
29,185 |
|
Future stores |
|
|
746 |
|
|
|
3,871 |
|
Existing stores |
|
|
5,042 |
|
|
|
5,728 |
|
Information systems |
|
|
9,091 |
|
|
|
5,252 |
|
Administration and distribution |
|
|
3,527 |
|
|
|
507 |
|
|
|
|
|
|
|
|
|
|
$ |
75,515 |
|
|
$ |
44,543 |
|
|
|
|
|
|
|
|
We opened 23 stores, including one Galyans store, relocated three Dicks stores and closed
two Dicks stores during the 39 weeks ended October 30, 2004 compared to opening 21 stores and
relocating one store during the 39 weeks ended November 1, 2003. Sale-leaseback transactions
covering store fixtures, buildings and information technology assets also have the effect of
returning to the Company cash previously invested in these assets. During the 39 weeks ended
October 30, 2004 we completed four building sale-leaseback transactions that generated proceeds of
$21.7 million, of which
27
$15.2 million of the capital expenditures were incurred in fiscal 2003.
The increase in information systems capital
expenditures is primarily related to the implementation of the new merchandising system. The
increase in administration and distribution capital expenditures is primarily related to the new
corporate headquarters that opened during June of 2004.
Cash requirements in 2004, other than normal operating expenses, are expected to consist
primarily of capital expenditures related to the addition of new stores and conversion of Galyans
stores and distribution center. The Company now expects to open 29 stores this year. The Company
also anticipates incurring additional expenditures to enhance its information technology assets as
well as other infrastructure improvements. While there can be no assurance that current
expectations will be realized, the Company expects net capital expenditures in 2004 to be
approximately $30 million, which excludes the costs to retrofit the existing Galyans stores and
distribution center, as this cost has not been determined.
In accordance with Emerging Issues Task Force No. 97-10 (Issue 97-10), The Effect of Lessee
Involvement in Asset Construction, the Company is considered to be the owner of certain buildings
during the construction period, for accounting purposes only. Accordingly, the Company has
recognized a non-cash asset and related non-cash obligation of $12.1 million as of October 30,
2004. At the conclusion of the construction period, the asset and related liability will be
removed from the balance sheet in a manner similar to a sale-leaseback transaction if certain
conditions are met. The application of Issue 97-10 has no impact to cash balances, net cash flow,
and the statement of operations or cash obligations.
Financing Activities
Cash provided by financing activities for the 39 weeks ended October 30, 2004 increased by
$352.6 million to $423.9 million primarily reflecting the net proceeds from the senior convertible
notes and the increase in the change in the balance under the Revolving Credit Agreement.
Financing activities consisted primarily of the borrowings to finance the purchase of Galyans, the
issuance of the senior convertible notes, borrowings and repayments under the Credit Agreement and
proceeds from transactions in the Companys common stock. The Company received proceeds of $5.3
million and $13.7 million from the exercise of employee stock options and purchases of common stock
under the employee stock purchase plan during the 39 weeks ended October 30, 2004 and the 39 weeks
ended November 1, 2003, respectively.
On February 18, 2004, the Company completed a private offering of $172.5 million issue price
of convertible notes in transactions pursuant to Rule 144A under the Securities Act of 1933, as
amended. Net proceeds to the Company of $146.0 million are after the net cost of a convertible
bond hedge and a separate warrant transaction as well as estimated transaction costs associated
with the offering of $5.8 million. The hedge and warrant transactions effectively increase the
conversion price associated with the senior convertible notes during the term of these transactions
from 40% to 100%, or from $39.31 to $56.16 per share, thereby reducing the potential dilutive
effect to shareholders upon conversion.
On July 29, 2004, Dicks Sporting Goods, Inc. acquired all of the issued and outstanding
shares of common stock of Galyans for $16.75 per share in cash, and Galyans became a wholly owned
subsidiary of Dicks. Dicks paid $351.4 million, net of cash acquired of $17.9 million, to fund
and consummate the Galyans tender offer and the acquisition, including the repayment of $57.2
million of Galyans indebtedness. The Company obtained approximately $193 million of these funds
from cash and cash equivalents and investments and the balance from the borrowings under its Credit
Agreement.
The Companys liquidity and capital needs have generally been met by cash from operating
activities, the proceeds from the convertible notes and borrowings under the Credit Agreement. On
July 28, 2004, the Company amended its Revolving Credit Agreement, among other matters, increasing
it from $180 million to $350 million, including up to $75 million in the form of letters of credit.
Borrowing availability under the Credit Agreement is generally limited to the lesser of 70% of the
Companys eligible inventory or 85% of the Companys inventorys liquidation value, in each case
net of specified reserves and less any letters of credit outstanding. Interest on outstanding
indebtedness under the Credit Agreement currently accrues, at the Companys option, at a rate based
on either (i) the prime corporate lending rate or (ii) at the LIBOR rate plus 1.25% to 1.75% based
on the level of total borrowings during the prior three months. The Credit Agreements term was
extended to May 30, 2008.
Borrowings under the Credit Agreement were $260.2 million as of October 30, 2004. There were
no outstanding borrowings on the Credit Agreement as of January 31, 2004. Total remaining
borrowing capacity, after subtracting letters of credit as of October 30, 2004 and January 31, 2004
was $73.6 million and $154.3 million, respectively.
The Credit Agreement contains restrictions regarding the Companys and related subsidiarys
ability, among other things, to merge, consolidate or acquire non-subsidiary entities, to incur
certain specified types of indebtedness or liens in excess of certain specified amounts, to pay
dividends or make distributions on the Companys stock, to make certain investments or loans to
other parties, or to engage in lending, borrowing or other commercial transactions with
subsidiaries, affiliates or employees. The Company may be obligated to maintain a fixed charge
coverage ratio of not less than 1.0 to 1.0
28
in certain circumstances. The obligations of the
Company under the Credit Agreement are secured by interests in
substantially all of the Companys personal property excluding store and distribution center
equipment and fixtures. As of October 30, 2004, the Company was in compliance with the terms of
the Credit Agreement.
The Company believes that cash flows generated from operations, funds available under our
Credit Agreement and proceeds from our convertible notes will be sufficient to satisfy our capital
requirements through 2005. Other new business opportunities or store expansion rates substantially
in excess of those presently planned may require additional funding.
Contractual Obligations and Other Commercial Commitments
The only off-balance sheet contractual obligations and commercial commitments as of October
30, 2004 relate to operating lease obligations and letters of credit. The Company has excluded
these items from the balance sheet in accordance with generally accepted accounting principles.
OUTLOOK
On July 29, 2004, Dicks Sporting Goods, Inc. acquired all of the common stock of Galyans
which became a wholly owned subsidiary of Dicks. Due to this acquisition, additional risk and
uncertainties arise that could affect our financial performance and actual results and could cause
actual results for the third and fourth quarters of 2004, the full year of 2004 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. These risks include those associated with
combining businesses and achieving expected savings and synergies (including annualized cost
savings and merchandise buying improvements) and/or with assimilating acquired companies and the
fact that merger integration and store closing costs related to the Galyans acquisition are
difficult to predict with a level of certainty and may be greater than expected. Additionally,
there are various risks and uncertainties attributable to Galyans, many of which cannot be
predicted, which could have a material affect on our business or operations.
In the 3 months since we have owned Galyans, we have re-signed 16 of the 47 Galyans stores
as Dicks stores in order to begin to leverage the advertising spend in the markets where both
Dicks and Galyans operate stores, and we have also begun the efforts to synchronize the
assortments in the stores. In the first half of 2005, we plan to convert the Galyans distribution
center over to our warehouse management system and begin to optimize the stores that each
distribution center serves based on geographic location. Our plan is to complete the conversion by
the end of the second quarter of fiscal 2005. At that time, well be operating these stores under
the Dicks name with the same merchandise assortments and customer service expectations as we have
for the rest of our stores.
The Company intends to close nine stores in conjunction with the conversion, six Dicks stores
and three Galyans stores, the Galyans clearance center and the Galyans corporate headquarters.
The Company also expects merger integration and store closing costs of approximately $70 million
pre-tax, of which $7.7 million was incurred in the 13 weeks ended October 30, 2004. The Company
estimates future merger costs of $35 million in the fourth quarter of 2004, $17 million in fiscal
2005, with the balance in fiscal 2006 and beyond which relates to future lease payments on closed
stores. These costs include the expense of closing stores, advertising the re-branding of Galyans
stores, duplicative costs, recruiting and system conversion costs. In addition, Galyans store and
corporate office estimated closing costs totaling $35 million as of October 30, 2004 are included
in the purchase price allocation, which results in an increase in goodwill.
As discussed in the notes to the unaudited condensed consolidated financial statements, we do
not recognize expense for stock option grants or our employee stock purchase plan. The Financial
Accounting Standards Board (FASB) has proposed a new standard, which would require expense
recognition in our Consolidated Statements of Income for stock option grants and certain employee
stock purchase plans. As currently proposed by the FASB, the new standard would be effective
beginning in our third fiscal quarter of 2005. We will adopt any new standard when the FASB
completes its standard-setting process and the new standard is effective.
At its meeting on July 1, 2004 the Emerging Issues Task Force (EITF) reached a tentative
consensus that the dilutive effect of contingent convertible debt instruments must be included in
dilutive EPS regardless of whether the triggering contingency has been satisfied. This tentative
consensus, EITF Issue 04-8 (Issue 04-8), The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share, would be applied on a retroactive basis and would require restatement of prior
period diluted EPS by those affected companies. At its September 2004 meeting, the EITF affirmed
its tentative consensus as it relates to market price contingencies. The consensus is expected to
be effective for fiscal 2004. We will adopt Issue 04-8 when it becomes effective. The Company
does not believe there will be an effect on diluted weighted average common shares outstanding due
to the adoption of Issue 04-8 as the Company must pay the accreted principal amount of the
convertible notes in cash and would be treated as an Instrument C as prescribed in EITF Issue
90-19, Convertible Bonds with Issuer Option to Settle for Cash Upon Conversion.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Companys net exposure to interest rate risk will consist primarily of borrowings under
the Credit Agreement. The Companys Credit Agreement bears interest at rates that are benchmarked
either to U.S. short-term floating rate interest rates or one-month LIBOR rates, at the Companys
election. Outstanding borrowings under the Credit Agreement were $260.2 million as of October 30,
2004. There were no borrowings outstanding under the Credit Agreement as of January 31, 2004. The
impact on the Companys annual net income of a hypothetical one percentage point interest rate
change on the October 2004 borrowings under the Credit Agreement would be approximately $1.6
million.
Credit Risk
In February 2004, the Company sold $172.5 million issue price of senior unsecured convertible
notes due 2024. In conjunction with the issuance of these senior convertible notes, we also
entered into a five year convertible bond hedge and a separate five year warrant transaction with
one of the initial purchasers (the counterparty) and/or certain of its affiliates. Subject to
the movement in our common stock price, we could be exposed to credit risk arising out of net
settlement of the convertible bond hedge and separate warrant transaction. Based on our review of
the possible net settlements and the credit strength of the counterparty and its affiliates, we
believe that we do not have a material exposure to credit risk as a result of these share option
transactions.
Tax Matters
Presently, the Company does not believe that there are any tax matters that could materially
affect the consolidated financial statements.
Seasonality and Quarterly Results
The Companys business is subject to seasonal fluctuations. Significant portions of the
Companys net sales and profits are realized during the fourth quarter of the Companys fiscal
year, which is due, in part, to the holiday selling season and, in part, to our sales of cold
weather sporting goods and apparel. Any decrease in fiscal fourth quarter sales, whether because
of a slow holiday selling season, unseasonable weather conditions, or otherwise, could have a
material adverse effect on our business, financial condition and operating results for the entire
fiscal year.
ITEM 4. CONTROLS AND PROCEDURES
As required by SEC Rule 13a-15(b), an evaluation was performed of the effectiveness of the
design and operation of the Companys disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by the report. This evaluation was conducted under the supervision and with the
participation of the Companys management, including its Chief Executive Officer and its Chief
Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including cost limitations, judgments used in decision making, assumptions
regarding the likelihood of future events, soundness of internal controls, fraud, the possibility
of human error and the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can provide only reasonable, and not absolute,
assurance of achieving their control objectives. Based on the evaluation, the Companys Chief
Executive Officer and its Chief Financial Officer concluded that the Companys disclosure controls
and procedures are effective in all material respects at a reasonable assurance level with respect
to the recordings, processing, summarizing and reporting, within the time periods specified in the
SECs rules and forms, of information required to be disclosed by us in the reports that we file or
submit under the Exchange Act.
In connection with the restatement and the filing of this Form 10-Q/A, the Companys
management, with the participation of the Companys Chief Executive Officer and Chief Financial
Officer, re-evaluated the effectiveness of the Companys disclosure controls and procedures as of
the end of the period covered by this report. We believe that the
mathematical error leading to this amendment was the result of
inadvertent human error and does not reflect any weakness in our
disclosure controls and procedures. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the
end of the period covered by this report were effective as of the end of the period covered by this
report.
There have been no changes in the Companys internal controls over financial reporting that
occurred during our most recent quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
30
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit Number |
|
Description of Exhibit |
|
Method of Filing |
31.1
|
|
Certification of Edward W. Stack,
Chairman and Chief Executive Officer,
dated as of November 14, 2005 and
made pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
|
|
|
|
|
31.2
|
|
Certification of Michael F. Hines,
Executive Vice President and Chief
Financial Officer, dated as of
November 14, 2005 and made pursuant
to Rule 13a-14 of the Securities
Exchange Act of 1934, as adopted
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
|
|
|
|
|
32.1
|
|
Certification of Edward W. Stack,
Chairman and Chief Executive Officer,
dated as of November 14, 2005 and
made pursuant to Section 1350,
Chapter 63 of Title 18, United States
Code, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
32.2
|
|
Certification of Michael F. Hines,
Executive Vice President and Chief
Financial Officer, dated as of
November 14, 2005 and made pursuant
to Section 1350, Chapter 63 of Title
18, United States Code, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on November 14, 2005 on its behalf by the
undersigned, thereunto duly authorized.
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DICKS SPORTING GOODS, INC. |
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By:
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/s/ EDWARD W. STACK |
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Edward W. Stack
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Chairman of the Board, Chief Executive Officer and Director |
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By:
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/s/ MICHAEL F. HINES
Michael F. Hines
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EVP Chief Financial Officer (principal financial and accounting officer) |
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EXHIBIT INDEX
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Exhibit Number |
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Description of Exhibit |
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Method of Filing |
31.1
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Certification of Edward W. Stack,
Chairman and Chief Executive Officer,
dated as of November 14, 2005 and
made pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
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Filed herewith |
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31.2
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Certification of Michael F. Hines,
Executive Vice President and Chief
Financial Officer, dated as of
November 14, 2005 and made pursuant
to Rule 13a-14 of the Securities
Exchange Act of 1934, as adopted
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Filed herewith |
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32.1
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Certification of Edward W. Stack,
Chairman and Chief Executive Officer,
dated as of November 14, 2005 and
made pursuant to Section 1350,
Chapter 63 of Title 18, United States
Code, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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Filed herewith |
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32.2
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Certification of Michael F. Hines,
Executive Vice President and Chief
Financial Officer, dated as of
November 14, 2005 and made pursuant
to Section 1350, Chapter 63 of Title
18, United States Code, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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Filed herewith |
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