Edgar Filing: SPORTS AUTHORITY INC /DE/

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GART SPORTS COMPANY QUARTERLY PERIOD ENDED AUGUST 2, 2003 INDEX

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the Quarterly Period Ended: August 2, 2003

Commission File Number: 000-31746

THE SPORTS AUTHORITY, INC.*
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		84-1242802 (I.R.S. Employer Identification No.)
1050 West Hampden Avenue, Englewood, Colorado 80110 (Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (303) 200-5050
* Formerly known as Gart Sports Company

Indicate by check mark whether the registrant 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 shorter period that the registrant was required to file such reports). Yes ý No o

Indicate by check mark whether the registrant has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

As of August 25, 2003, there were outstanding 24,345,357 shares of the registrant's common stock, $.01 par value, and the aggregate market value of the shares (based upon the closing price on that date of the shares on the New York Stock Exchange) held by non-affiliates was approximately $625,942,000.

GART SPORTS COMPANY
QUARTERLY PERIOD ENDED AUGUST 2, 2003
INDEX

PART I—FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Stockholders' Equity
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
PART II—OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

PART I—Financial Information

ITEM 1. Financial Statements

GART SPORTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share and Per Share Amounts)

				August 2, 2003			February 1, 2003
				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	14,850		$	10,156
	Accounts receivable, net of allowance for doubtful accounts of $1,238 and $922				15,057			13,245
	Inventories				355,356			333,538
	Prepaid expenses and other assets				13,165			10,507
	Deferred income taxes				9,557			9,046

			Total current assets		407,985			376,492

	Property and equipment, net				99,996			87,960
	Favorable leases, net of accumulated amortization of $3,894 and $3,015				10,146			11,025
	Deferred income taxes				5,858			9,161
	Goodwill, net of accumulated amortization of $734				44,576			44,576
	Other assets, net of accumulated amortization of $6,948 and $5,993				12,060			11,026

			Total assets	$	580,621		$	540,240

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	140,368		$	142,025
	Current portion of capital lease obligations				470			665
	Accrued expenses and other current liabilities				57,751			62,003

			Total current liabilities		198,589			204,693
Long-term debt					154,921			121,147
Capital lease obligations, less current portion					991			1,139
Deferred rent and other long-term liabilities					16,446			14,681

			Total liabilities		370,947			341,660

Commitments and contingencies
Stockholders' equity:
	Preferred stock, $.01 par value. 3,000,000 shares authorized; none issued				—			—
	Common stock, $.01 par value. 22,000,000 shares authorized; 13,508,622 and 13,440,987 shares issued and 11,935,868 and 11,868,233 shares outstanding				135			134
	Additional paid-in capital				158,070			156,958
	Unamortized restricted stock compensation				(1,602	)		(2,024	)
	Accumulated other comprehensive loss				(824	)		(934	)
	Retained earnings				77,371			67,922

					233,150			222,056
		Treasury stock, 1,572,754, at cost			(23,476	)		(23,476	)

			Total stockholders' equity		209,674			198,580

			Total liabilities and stockholders' equity	$	580,621		$	540,240

See accompanying notes to consolidated financial statements.

GART SPORTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, Dollars in Thousands, Except Share and Per Share Amounts)

				Thirteen weeks ended						Twenty-six weeks ended
				August 2, 2003			August 3, 2002			August 2, 2003			August 3, 2002
Net sales				$	267,514		$	261,705		$	495,946		$	506,682
Cost of goods sold, buying, distribution and occupancy					196,822			193,646			367,673			377,169

			Gross profit		70,692			68,059			128,273			129,513
Operating expenses					58,752			55,510			112,270			110,277
Merger integration costs					1,676			—			1,676			—

			Operating income		10,264			12,549			14,327			19,236
Non operating income (expense):
	Interest expense, net				(2,134	)		(2,432	)		(4,149	)		(5,116	)
	Other income				478			231			2,519			439

		Income before income taxes			8,608			10,348			12,697			14,559
Income tax expense					(3,348	)		(4,014	)		(3,248	)		(5,635	)

		Net income		$	5,260		$	6,334		$	9,449		$	8,924

Earnings per share:
		Basic		$	0.44		$	0.52		$	0.80		$	0.77

		Diluted		$	0.42		$	0.48		$	0.75		$	0.72

Weighted average shares of common stock outstanding:
		Basic			11,900,165			12,282,536			11,885,250			11,562,880

		Diluted			12,621,076			13,128,400			12,538,241			12,459,681

See accompanying notes to consolidated financial statements.

GART SPORTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, Dollars in Thousands)

	Common stock						Unamortized restricted stock compensation			Accumulated other comprehensive loss							Treasury stock
	Common stock			Additional paid-in capital									Retained earnings		Comprehensive income		Treasury stock				Total Stockholders' equity
	Shares	$		Additional paid-in capital									Retained earnings		Comprehensive income		Shares	$			Total Stockholders' equity
BALANCES AT FEBRUARY 1, 2003	11,868,233	$	134	$	156,958		$	(2,024	)	$	(934	)	$	67,922			1,572,754	$	(23,476	)	$	198,580
Net income	—		—		—			—			—			9,449	$	9,449	—		—			9,449
Unrealized gain on securities, net of tax	—		—		—			—			79			—		79	—		—			79
Unrealized gain on interest rate swap, net of tax	—		—		—			—			31			—		31	—		—			31

Comprehensive income															$	9,559

Exercise of stock options	67,635		1		1,090			—			—			—			—		—			1,091
Issuance of restricted stock	—		—		65			(65	)		—			—			—		—			—
Cancellation of restricted stock	—		—		(36	)		36			—			—			—		—			—
Restricted stock vesting and repurchase	—		—		(7	)		28			—			—			—		—			21
Amortization of restricted stock	—		—		—			423			—			—			—		—			423

BALANCES AT AUGUST 2, 2003	11,935,868	$	135	$	158,070		$	(1,602	)	$	(824	)	$	77,371			1,572,754	$	(23,476	)	$	209,674

See accompanying notes to consolidated financial statements.

GART SPORTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Dollars in Thousands)

					Twenty-six weeks ended
					August 2, 2003			August 3, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income				$	9,449		$	8,924
	Adjustments to reconcile net income to net cash used in operating activities:
		Depreciation and amortization				11,624			11,029
		Amortization of loan acquisition costs				427			587
		Deferred income taxes				3,248			5,635
		Loss on disposition of assets				157			125
		Increase in deferred rent				1,546			1,406
		Changes in operating assets and liabilities:
			Accounts receivable, net			(1,812	)		919
			Inventories			(21,818	)		(22,767	)
			Prepaid expenses and other assets			(2,598	)		(2,263	)
			Other assets			(334	)		(60	)
			Accounts payable			(1,669	)		(20,963	)
			Accrued expenses and other current liabilities			(3,035	)		(1,568	)

				Net cash used in operating activities		(4,815	)		(18,996	)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property and equipment					(21,947	)		(11,585	)
	Receipts (payment) of notes receivable					26			24
	Direct costs incurred in connection with the merger with The Sports Authority, Inc.					(2,603	)		—

				Net cash used in investing activities		(24,524	)		(11,561	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from long-term debt					174,785			172,234
	Principal payments on long-term debt					(141,011	)		(184,006	)
	Principal payments on capital lease obligations					(343	)		(315	)
	Proceeds from stock offering, net of offering costs					—			52,145
	Purchase of treasury stock					—			(9,366	)
	Proceeds from the sale of common stock under option plans					602			2,622

				Net cash provided by financing activities		34,033			33,314

	Increase in cash and cash equivalents					4,694			2,757
	Cash and cash equivalents at beginning of period					10,156			11,536

	Cash and cash equivalents at end of period				$	14,850		$	14,293

	Supplemental disclosures of cash flow information:
		Cash paid during the period for interest			$	3,159		$	4,093

		Cash paid during the period for income taxes			$	13		$	18

See accompanying notes to consolidated financial statements.

GART SPORTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Merger

On August 4, 2003, a wholly owned subsidiary of Gart Sports Company completed a merger with The Sports Authority, Inc. In connection with the merger, Gart Sports Company was renamed The Sports Authority, Inc.

This quarterly report on Form 10-Q primarily reflects amounts and events related prior to the consummation of the merger and includes only the historical financial results of Gart Sports Company on a stand alone basis. The references made to the entities herein refer to those entities as they existed prior to the consummation of the merger on August 4, 2003. Gart Sports Company ("the Company") refers to Gart Sports Company, prior to the consummation of the merger and the changing of its name to The Sports Authority, Inc. The Sports Authority, Inc. ("TSA") refers to TSA Stores Inc., (formerly known as The Sports Authority, Inc.), prior to the consummation of the merger.

In separate meetings held in Denver, Colorado and Ft. Lauderdale, Florida on August 4, 2003, shareholders of both companies approved the previously announced transaction. In connection with the merger, Gart Sports Company was renamed The Sports Authority, Inc. In the merger, TSA's shareholders received 0.37 shares of Gart Sports common stock for each share of TSA stock they owned. With the addition of the 205 TSA stores, the Company now operates 381 stores in 45 states and generated combined revenue of approximately $2.5 billion in fiscal 2002.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements do not include all information and footnotes necessary for the annual presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America, and should be read in conjunction with the 2002 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the statement of financial position and the results of operations for the interim periods have been included. The results for the thirteen and twenty-six week periods ended August 2, 2003 are not necessarily indicative of the results to be expected for the full year.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

3. New Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, 64, Amendment of SFAS No. 13, and Technical Corrections." This statement eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment. SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and changes the provisions under SFAS 13 related to original lessees being relieved of primary obligation under an original lease. SFAS No. 145 also makes various technical corrections to existing pronouncements that are not substantive in nature. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective in fiscal years beginning after May 15, 2002 with earlier application encouraged. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May 15, 2002, with earlier application encouraged. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002, with earlier application encouraged. The

adoption of this statement by the Company did not have a material impact on results of operations or financial position.

In May 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for an exit cost or disposal activity be recognized when the liability is incurred, whereas under EITF No. 94-3, a liability was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement has changed the timing of recognition for certain exit costs, so that certain exit costs are recognized over the period in which the exit activities occur.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123 "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for employee stock-based compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in annual and interim financial statements about the method of accounting for stock-based compensation and its effect on reported results. The disclosure provisions of SFAS No. 148 are included in the accompanying Notes to Consolidated Financial Statements. The Company continues to apply the principles of APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation to employees.

In November 2002, the EITF of the FASB issued consensus No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor ("EITF 02-16")." EITF No. 02-16 addresses how a reseller of a vendor's products should account for cash consideration received from the vendor and addressed two Issues. On Issue 1, the Task Force reached a consensus that cash consideration received from a vendor is presumed to be a reduction of cost of sales when recognized in the reseller's income statement. This presumption is overcome when the consideration is a reimbursement for specific, incremental, identifiable costs incurred by the reseller to sell the vendor's products, in which case the cash consideration should be characterized as a reduction of that cost when recognized in the reseller's income statement. Additionally, the Task Force concluded on Issue 2 that a refund or a rebate of a specified amount of cash consideration payable only if the reseller completes a specified level of purchases should be recognized as a reduction of cost of sales based on a systematic and rational allocation of the cash consideration offered to each of the underlying transactions that results in progress by the reseller toward earning the refund or rebate, provided the amounts are probable and reasonably estimable. In its January 2003 meeting, the Task Force amended the transition guidance relative to adoption of EITF 02-16 to require that the consensus on Issue 1 be applied to new arrangements, including modifications of existing arrangements, entered into after December 31, 2002. Issue 2 remains applicable to arrangements entered into after November 21, 2002.

The majority of the Company's existing arrangements were entered into prior to the effective dates of EITF 02-16, outlined above. However, for those arrangements entered into after these effective dates, the impact of EITF 02-16 on Gart's thirteen and twenty-six weeks ended August 2, 2003 was a recharacterization of $0.1 million and $0.2 million, respectively, from reduction of advertising expense to reduction of cost of inventory purchased. The impact on the balance of fiscal 2003 cannot be

determined until advertising expenditures and allowances by vendor are quantified for the full fiscal year.

In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others," ("FIN 45") was issued. This interpretation requires the initial recognition and initial measurement, on a prospective basis only, of guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements are effective for financial statements ending after December 15, 2002. The adoption of this interpretation did not have a material impact on the Company's financial statements.

4. Stock-Based Compensation

At August 2, 2003, the Company has two stock-based employee compensation plans. The Company accounts for stock compensation issued to employees under the plans using the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income for the Company's stock options, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation expense is recorded by the Company for its grants of unvested restricted stock. The compensation expense is amortized on a straight-line basis over the vesting period of the stock and is based on the fair value of the stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands):

	Thirteen weeks ended						Twenty-six weeks ended
	August 2, 2003			August 3, 2002			August 2, 2003			August 3, 2002
Net income, as reported	$	5,260		$	6,334		$	9,449		$	8,924
Add: Stock-based compensation expense included in net income, net of related tax effects		149			130			277			259
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(379	)		(407	)		(737	)		(812	)

Pro forma net income	$	5,030		$	6,057		$	8,989		$	8,371

Earnings per share:
Basic—as reported	$	0.44		$	0.52		$	0.80		$	0.77

Basic—pro forma	$	0.42		$	0.49		$	0.76		$	0.72

Diluted—as reported	$	0.42		$	0.48		$	0.75		$	0.72

Diluted—pro forma	$	0.40		$	0.46		$	0.72		$	0.67

5. Goodwill and Finite Lived Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 142, Accounting for Goodwill and Other Intangible Assets ("SFAS No. 142"), the Company ceased amortization of goodwill derived from purchase business combinations completed prior to or on June 30, 2001, at the beginning of fiscal 2002. Prior to fiscal 2002, goodwill was amortized using the straight-line method over a period of

40 years. In lieu of amortization, SFAS No. 142 requires that goodwill and intangible assets deemed to have indefinite lives be evaluated for impairment on an annual basis. The Company completed both its initial and annual impairment analyses of its existing goodwill during fiscal 2002, and determined that no impairment was indicated. The Company will continue to assess whether goodwill is impaired on an annual basis. Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances, that would indicate that, more likely than not, the book value of goodwill has been impaired. Other intangible assets will continue to be amortized over their useful lives and periodically reviewed for impairment.

The adoption of SFAS No. 142 did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows in regard to the impairment provisions of the statement while the application of the non-amortization provisions of the statement have resulted in the cessation of amortization of approximately $1.1 million per year. The Company has not recognized any amortization expense on goodwill for the thirteen and twenty-six weeks ended August 2, 2003 and August 3, 2002.

Intangible assets are comprised primarily of favorable leases, unamortized loan origination costs and certain capitalizable costs incurred to obtain store locations. Loan origination costs are amortized using the interest method, over the term of the related debt. The favorable lease assets and other costs incurred to obtain store locations are amortized over the related lease term. The carrying amount of intangible assets is as follows (in thousands):

	As of August 2, 2003
	Gross Carrying Amount		Accumulated Amortization
Goodwill	$	45,310	$	(734	)
Favorable leases		14,040		(3,894	)
Loan origination fees		4,193		(2,880	)
Lease acquistion costs		3,691		(799	)

Total	$	67,234	$	(8,307	)

During the twenty-six weeks ended August 2, 2003, amortization of intangible assets expense was $1.8 million. The estimated amortization of intangible assets for the Company for each of the five fiscal years ending in fiscal 2007 is as follows (in thousands):

Fiscal Year	Amortization Expense
2003	$	2,861
2004	$	2,491
2005	$	1,661
2006	$	1,152
2007	$	1,131

6. Earnings Per Share

Basic earnings per share ("EPS") is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in earnings. In loss periods, including common stock equivalents would be anti-dilutive and, accordingly, no impact is provided for common stock equivalents. The computation of diluted EPS also excludes the effect of anti-dilutive stock options

outstanding in each of the respective periods aggregating 27,500 and 20,247 in the thirteen weeks ended August 2, 2003 and August 3, 2002, respectively, and 27,500 and 11,401 in the twenty-six weeks ended August 2, 2003 and August 3, 2002, respectively. The following table sets forth the computations of basic and diluted earnings per share (in thousands, except share and per share amounts):

		Thirteen weeks ended				Twenty-six weeks ended
		August 2, 2003		August 3, 2002		August 2, 2003		August 3, 2002
Net income		$	5,260	$	6,334	$	9,449	$	8,924
Weighted average shares of common stock outstanding—basic			11,900,165		12,282,536		11,885,250		11,562,880

Basic earnings per share		$	0.44	$	0.52	$	0.80	$	0.77

Number of shares used for diluted earnings per share:
	Weighted average shares of common stock outstanding—basic		11,900,165		12,282,536		11,885,250		11,562,880
	Dilutive securities—stock options and unvested restricted stock		720,911		845,864		652,991		896,801

Weighted average shares of common stock outstanding—diluted			12,621,076		13,128,400		12,538,241		12,459,681

Diluted earnings per share		$	0.42	$	0.48	$	0.75	$	0.72

7. Contingencies

Tax Contingency

On July 24, 1997, the IRS proposed adjustments to the Company's and its former parent's (now Thrifty Payless Holdings, Inc., a subsidiary of RiteAid Corporation) 1992 and 1993 federal income tax returns in conjunction with the former parent's Internal Revenue Service examination. The proposed adjustments related to the manner in which LIFO inventories were characterized on such returns. The Company has taken the position that the inventory acquired in connection with the acquisition of the Company's former parent was appropriately allocated to its inventory pools. The Internal Revenue Service asserted the inventory was acquired at a bargain purchase price and should be allocated to a separate pool and liquidated as inventory turns.

Under the terms of the Company's tax sharing agreement with its former parent, the Company is responsible for its share, on a separate return basis, of any tax payments associated with proposed deficiencies or adjustments, and related interest and penalties charged to the controlled group which may arise as a result of an assessment by the Internal Revenue Service ("IRS").

On November 1, 2002, in order to eliminate the accrual of additional interest on taxes owed to the IRS, the Company entered into an agreement with the IRS, based upon the terms of the settlement that was pending between the IRS and the Company's former parent. Pursuant to the agreement, the Company paid the IRS taxes of $1.1 million and interest of $0.5 million. As such, the Company recorded a reversal of its remaining accrued interest payable to the IRS, totaling approximately $0.7 million during the quarter ended November 2, 2002. The tax liability settled under the agreement was recorded as a reduction of the long-term deferred tax liability that had been established previously in relation to this matter. A significant portion of the tax liability agreed to by the Company under the agreement did not require cash payment as those adjustments reduced existing net operating losses

previously generated by the Company. In addition, the Company reached a settlement with its former parent under the tax sharing agreement during the quarter ended May 3, 2003. As a result, the Company will receive, on a net basis, approximately $4.4 million of interest and taxes from its former parent. The interest of $1.9 million is recorded in other income, and the taxes to be received are recorded as an income tax benefit of $1.7 million, and a deferred tax liability of $0.8 million for the 13 weeks ended May 3, 2003. The settlement did not result in the acceleration of the payment of the remaining $3.3 million tax liability associated with this matter and as such, this amount remains recorded as a long term deferred tax liability. The IRS settlement with the Company's former parent has been finalized and was approved by the Joint-Committee of Taxation on August 21, 2003.

Legal Proceedings

The Company is, from time to time, involved in various legal proceedings and claims arising in the ordinary course of business. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity.

In June 2000, a former employee of Sportmart brought two class action complaints in California against the Company, alleging certain wage and hour claims in violation of the California Labor Code, California Business and Professional Code section 17200 and other related matters. One complaint alleges that the Company classified certain managers in its California stores as exempt from overtime pay when they would have been classified as non-exempt and paid overtime. The second complaint alleges that the Company failed to pay hourly employees in its California stores for all hours worked. In March 2001, a third class action complaint was filed in the same court in California alleging the same wage and hour violations regarding classification of certain managers as exempt from overtime pay. In July 2001, a fourth complaint was filed alleging that store managers should also not be classified as employees exempt from overtime pay. All the complaints seek compensatory damages, punitive damages and penalties. The amount of damages sought is unspecified. Although the court denied motions to dismiss the first two complaints, the Company intends to vigorously defend these matters and at this time, the Company has not ascertained the future liability, if any, as a result of these complaints. Recently, however, the Company has entered into settlement negotiations with the class counsel relating to the first two complaints that were filed. As a result, the Company believes it is probable it will reach a settlement related to this matter and recorded an estimated liability totalling $1.5 million, including attorney fees and expenses, in the first fiscal quarter of 2003.

In June 2003, Financo, Inc., a financial advisory firm, filed a complaint against Gart Sports Company in the Delaware Court of Chancery alleging that Gart Sports owes Financo $2,000,000 for services provided to Gart Sports in connection with the merger negotiations with pre-merger TSA. No written contract exists between Gart Sports and Financo. The Company believes that Financo's claim is without merit and intends to vigorously defend the lawsuit and does not believe that the outcome of this matter will have a material adverse effect on the Company's consolidated financial condition, results of operations, or liquidity.

8. Financial Instruments and Risk Management

Interest Rate Instruments

The Company entered into an interest rate swap agreement on June 28, 2001 for a notional amount of $20 million, expiring on June 30, 2004, and entered into a second interest rate swap agreement on December 11, 2002 for a notional amount of $40 million, beginning September 2, 2003, and expiring on May 31, 2005, to minimize the risks and costs associated with its financing activities in

general and to minimize its exposure to variable cash flows in particular. Under the swap agreements, the Company pays fixed rate interest and receives variable LIBOR interest rate payments periodically over the life of the instrument. The total notional interest rate swap amounts are $60 million and are used to measure interest to be paid or received and do not represent the exposure due to credit loss.

The Company's interest rate swaps are each designated as a cash flow hedge, qualifying for the short cut method of assessing effectiveness and are considered highly effective, as defined by FASB Statement No. 133. Under the short cut method there is no need to measure effectiveness of the hedges and there is no charge to earnings for changes in the fair value of the swap agreements. Cash settlements on the swap agreements are recorded as interest expense. At both August 2, 2003 and February 1, 2003, the fair value of the swaps was a loss of approximately $0.9 million, net of the related tax benefit. The unrealized losses from these interest rate swaps are included in other comprehensive income and are shown as a component of stockholders' equity.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere within this report and the 2002 Gart Sports' Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those currently anticipated, including risks and uncertainties discussed in Gart Sports' and The Sports Authority's filings with the Securities and Exchange Commission. Those risks include, among other things, the competitive environment in the sporting goods industry in general and in the specific market area of Gart Sports and The Sports Authority, consumer confidence, changes in discretionary consumer spending, changes in costs of goods and services and economic conditions in general and in the company's specific market areas, unseasonable weather and those risks generally associated with the integration of the two companies. The Company assumes no obligation to update any such factors or to publicly announce results of any revisions to any of the forward-looking statements as a result of new information or future events or developments.

We are one of the nation's largest full-line sporting goods retailers. Given the economic characteristics of the store formats, the similar nature of the products sold, the type of customer and method of distribution, our operations are aggregated in one reportable segment as defined by Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information."

The Results of Operations below reflect amounts and events related prior to the consummation of the merger and include only the historical financial results of the former Gart Sports Company. The references made to the entities herein refer to Gart Sports Company and its subsidiaries as they existed prior to the consummation of the merger on August 4, 2003. Gart Sports Company ("the Company") refers to Gart Sports Company, prior to the consummation of the merger and the changing of its name to The Sports Authority, Inc. The Sports Authority, Inc. ("TSA") refers to TSA Stores Inc. (formerly known as The Sports Authority, Inc.). The combined company now has 381 stores in 45 states. The combined company is headquartered in Englewood, Colorado. The combined company is listed on the New York Stock Exchange under the ticker symbol "TSA."

Results of Operations

The following table sets forth our consolidated statement of operations data as a percentage of net sales and the number of stores open at the end of each period for the periods indicated (dollars rounded to millions, except share and per share amounts):

		Thirteen weeks ended										Twenty-six weeks ended
		August 2, 2003					August 3, 2002					August 2, 2003					August 3, 2002
		Dollars			%		Dollars			%		Dollars			%		Dollars			%
Net sales		$	267.5		100.0	%	$	261.7		100.0	%	$	495.9		100.0	%	$	506.7		100.0	%
Cost of goods sold, buying, distribution and occupancy			(196.8	)	(73.6	)		(193.7	)	(74.0	)		(367.7	)	(74.1	)		(377.2	)	(74.4	)

	Gross profit		70.7		26.4			68.0		26.0			128.2		25.9			129.5		25.6
Operating expenses			(58.7	)	(21.9	)		(55.5	)	(21.2	)		(112.2)	(3)	(22.7	)		(110.3	)	(21.8	)
Merger integration costs			(1.7)	(1)	(0.6	)				0.0			(1.7)	(1)	(0.3	)				0.0

	Operating income		10.3		3.9			12.5		4.8			14.3		2.9			19.2		3.8
Interest expense, net			(2.1	)	(0.8	)		(2.4	)	(0.9	)		(4.1	)	(0.8	)		(5.1	)	(1.0	)
Other income			0.4		0.1			0.2		0.1			2.5	(4)	0.5			0.4		0.1

	Income before income taxes		8.6		3.2			10.3		3.9			12.7		2.6			14.5		2.9
Income tax expense			(3.3	)	(1.2	)		(4.0	)	(1.5	)		(3.2)	(5)	(0.7	)		(5.6	)	(1.1	)

	Net income	$	5.3	(2)	2.0	%	$	6.3		2.4	%	$	9.5	(6)(2)	1.9	%	$	8.9		1.8	%

Number of stores at end of period			184					179					184					179

(1): Represents one-time merger integration costs associated with the merger of Gart Sports Company and The Sports Authority, Inc.
(2): Includes one-time merger integration costs associated with the merger of Gart Sports Company and The Sports Authority, Inc., of $1.0 million on a tax effected basis.
(3): Includes a non-recurring expense of $1.5 million, including attorneys' fees and expenses, related to the proposed settlement of two wage and hour lawsuits in California.
(4): Includes non-recurring interest income of $1.9 million related to the settlement of a tax dispute with our former parent.
(5): Includes a non-recurring tax benefit of $1.7 million related to the settlement of a tax dispute with our former parent.
(6): Includes $1.9 million of non-recurring income, after tax, assoicated with the non-recurring settlements described above and the associated tax benefits.

Newly opened stores enter the comparable store sales base at the beginning of their 14^th full month of operation. The Oshman's stores, that met the criteria above, were included in the comparable store sales base beginning August 4, 2002, the beginning of the 14^th full month of operations since the date of acquisition.

We consider cost of goods sold to include the direct cost of merchandise, plus certain costs associated with procurement, warehousing, handling and distribution. In addition to the full cost of inventory, cost of goods sold includes related occupancy costs and amortization and depreciation of leasehold improvements and rental equipment.

Operating expenses include controllable and non-controllable store expenses (except occupancy), non-store expenses and depreciation and amortization not associated with cost of goods sold.

Critical Accounting Policies

Management's Discussion and Analysis discusses the results of operations and financial condition as reflected in our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to inventory valuation, accounts receivable, the recoverability of long-lived assets including intangible assets, store closing reserves, income taxes, and the estimates used to record purchase accounting related to acquisitions. Management bases its estimates and judgments on its substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Valuation of Inventory

We value our inventory at the lower of last-in, first-out ("LIFO") cost or market. Cost is determined using the average cost of items purchased and applying the dollar value LIFO inventory method. Our dollar value LIFO pools are computed using the Inventory Price Index Computation ("IPIC") method. LIFO cost of our inventories is then compared to estimated market value. This assessment of estimated market value is based on the quality and age of merchandise, the rate of sale of merchandise, the quantities on hand, and our assessment of the market conditions. Estimates and judgments are required in the determination of the market value of our inventory and future events, like changes in customer merchandise preferences or unseasonable weather patterns, could impact the market value of our inventory.

Inventory shrinkage is accrued as a percentage of merchandise sales based on historical inventory shrinkage trends. The Company performs physical inventories at stores and distribution centers throughout the year. The reserve for inventory shrinkage represents an estimate for inventory shrinkage for each location since the last physical inventory date through the reporting date. These estimates are impacted by internal and external factors and may vary from actual results.

Vendor allowances

We receive certain allowances from our vendors, which include rebates and cooperative advertising funds. These amounts are negotiated with vendors typically on an annual basis and are based upon projected purchase volumes and advertising plans for the contract year. By the end of each contract year, actual purchase volumes and advertising plans have been determined. In November 2002, the Emerging Issues Task Force ("EITF") of the FASB issued consensus No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 addresses how a reseller of a vendor's products should account for cash consideration received from the vendor. The majority of the Company's existing arrangements were entered into prior to the effective dates of EITF 02-16. However, for those arrangements entered into after those effective dates, the impact of EITF 02-16 on our thirteen weeks and twenty-six weeks ended August 2, 2003, was a recharacterization of $0.1 million and $0.2 million, respectively, from reduction of advertising expense to reduction of cost of inventory purchased. The impact on the balance of fiscal 2003 cannot be determined until advertising expenditures and allowances by vendor are quantified for the full fiscal year.

Impairment of Assets

We review long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. 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. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Future events could cause management to conclude that impairment indicators exist and that the value of long-lived tangible and intangible assets is impaired.

Store Closing Reserves

Prior to December 31, 2002 and the adoption of SFAS No. 146, "Accounting for Costs associated with Exit or Disposal Activities," we recorded a provision for store closing when the decision was made by management to close a store. In accordance with SFAS No. 146, for store closing activities initiated after December 31, 2002, we record a liability at fair value for costs associated with exit or disposal activities when incurred rather than when the decision to close a store is made. This will change the timing of recognition for certain exit costs, so that certain exit costs will be recognized over the period in which the exit activities occur. The costs incurred in connection with store closings primarily consist of post-closing future net lease obligations, utilities, property taxes, and employee costs directly related to the store closing.

Acquisitions Accounting

Our acquisitions are accounted for under the purchase method of accounting. Accordingly, the total costs of acquisitions are allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values. The determination of fair values involves the use of estimates and assumptions which could require adjustment in the future. While we believe that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, we cannot guarantee that the estimates and assumptions will be accurate, which could require adjustments to these estimates in future periods.

Thirteen Weeks Ended August 2, 2003 Compared to Thirteen Weeks Ended August 3, 2002

Net Sales. Net sales for the thirteen weeks ended August 2, 2003 were $267.5 million compared to $261.7 million for the thirteen weeks ended August 3, 2002. Net sales increased primarily due to new store openings. Comparable store sales during the quarter decreased by 0.6% versus the prior year's comparable quarter. This comparable sales performance was primarily the result of a decrease of athletic footwear and skate sales of approximately $5.9 million, offset by an increase in sales of hunting and camping merchandise totalling approximately $4.1 million.

Gross Profit. Gross profit for the thirteen weeks ended August 2, 2003 was $70.7 million, or 26.4% of net sales, as compared to $68.0 million, or 26.0% of net sales, for the thirteen weeks ended August 3, 2002. The increase as a percent of sales is primarily due to improved merchandise margins in the apparel and outdoor categories.

Operating Expenses. Operating expenses for the thirteen weeks ended August 2, 2003 were $58.7 million, or 21.9% of net sales, compared to $55.5 million, or 21.2% of net sales, for the period ended August 3, 2002. Operating expenses increased primarily due to real estate expenses of approximately $0.8 million for subtenant issues and landlord disputes, and $0.8 million of increased workers compensation insurance costs.

Merger Integration Costs. Merger integration costs associated with the merger with TSA for the twenty-six weeks ended August 2, 2003 were 1.7 million, or 0.6% of net sales. These costs consist primarily of $1.0 million of consulting fees and $0.7 million of costs associated with travel and severance.

Operating Income. As a result of the factors described above, we recorded operating income for the thirteen weeks ended August 2, 2003 of $10.3 million compared to $12.5 million for the thirteen weeks ended August 3, 2002.

Interest Expense. Interest expense for the thirteen weeks ended August 2, 2003 decreased to $2.1 million, or 0.8% of net sales, from $2.4 million, or 0.9% of net sales, in the thirteen weeks ended August 3, 2002. The decrease in interest expense is primarily related to lower effective borrowing rates on amounts borrowed in 2003.

Other Income. Other income was $0.4 million for the thirteen weeks ended August 2, 2003 compared to $0.2 million for the thirteen weeks ended August 3, 2002. The increase is primarily attributable to tickets and license income.

Income Taxes. We recorded an income tax expense for the thirteen weeks ended August 2, 2003 of $3.3 million compared to an income tax expense of $4.0 million for the thirteen weeks ended August 3, 2002. Our estimated effective tax rate was approximately 38.5% for the thirteen weeks ended August 2, 2003 and August 3, 2002.

Twenty-six Weeks Ended August 2, 2003 Compared to Twenty-six Weeks Ended August 3, 2002

Net Sales. Net sales for the twenty-six weeks ended August 2, 2003 were $495.9 million compared to $506.7 million for the twenty-six weeks ended August 3, 2002. Comparable store sales during the twenty-six weeks ended August 2, 2003 decreased by 4.5% versus last year's comparable period. This comparable sales performance was impacted primarily by a less promotional pricing strategy taken during the period on footwear categories resulting in a sales decrease of approximately $6.0 million, increased sales in the first quarter of fiscal 2002 due to the Salt Lake City Winter Olympics totalling approximately $2.7 million, a major snowstorm in the metro Denver area in March, the continued uncertain economy, the war in Iraq, and an overall weak retail environment. Sales of in-line skates decreased from the year ago comparable period by $2.4 million primarily due to a reduced number of promotional events related to skates this year and an overall downward trend in the popularity of the category.

Gross Profit. Gross profit for the twenty-six weeks ended August 2, 2003 was $128.2 million, or 25.9% of net sales, as compared to $129.5 million, or 25.6% of net sales, for the twenty-six weeks ended August 3, 2002. The increase as a percent of sales is primarily due to improved merchandise margins in the apparel and outdoor categories.

Operating Expenses. Operating expenses for the twenty-six weeks ended August 2, 2003 were $112.2 million, or 22.7% of net sales, compared to $110.3 million, or 21.8% of net sales, for the period ended August 3, 2002. Operating expenses increased primarily due to an expected settlement of two wage and hour lawsuits in California totaling $1.5 million, including attorney fees and expenses recorded in the first quarter of 2003; real estate expenses of approximately $0.8 million for subtenant issues and landlord disputes, and $0.8 million of additional workers compensation insurance costs recorded in the second quarter of 2003; offset by a reduction in store payroll expense of $1.3 million, for the year to date period.

Merger Integration Costs. Merger integration costs associated with the merger with TSA for the twenty-six weeks ended August 2, 2003 were 1.7 million, or 0.3% of net sales. These costs consist

primarily of $1.0 million of consulting fees and $0.7 million of costs associated with travel and severance.

Operating Income. As a result of the factors described above, we recorded operating income for the twenty-six weeks ended August 2, 2003 of $14.3 million compared to $19.2 million for the twenty-six weeks ended August 3, 2002.

Interest Expense. Interest expense for the twenty-six weeks ended August 2, 2003 decreased to $4.1 million, or 0.8% of net sales, from $5.1 million, or 1.0% of net sales, in the twenty-six weeks ended August 3, 2002. The decrease in interest expense is primarily related to lower effective borrowing rates on amounts borrowed in 2003.

Other Income. Other income was $2.5 million for the twenty-six weeks ended August 2, 2003 compared to $0.4 million for the twenty-six weeks ended August 3, 2002. The increase is primarily attributable to interest income associated with the settlement of the Rite Aid tax dispute totaling $1.9 million (see Note 7 in the consolidated financial statements).

Income Taxes. We recorded an income tax expense for the twenty-six weeks ended August 2, 2003 of $3.2 million compared to an income tax expense of $5.6 million for the twenty-six weeks ended August 3, 2002. Prior to the effect of the the settlement with our former parent regarding an IRS examination of our 1992 and 1993 consolidated federal income tax returns (see Note 7), our estimated effective tax rate was approximately 38.5% for both the twenty-six weeks ended August 2, 2003 and August 3, 2002. Our tax expense for the twenty-six weeks ended August 2, 2003 was offset by a tax benefit of $1.7 million recorded as a result of the settlement with our former parent described above.

Liquidity and Capital Resources

Our primary capital requirements are for inventory, capital improvements, and pre-opening expenses to support our expansion plans, as well as for various investments in store remodeling, store fixtures, and ongoing infrastructure improvements.

Cash Flow Analysis

	Twenty-six weeks ended
	August 2, 2003			August 3, 2002
Cash used in operating activities	$	(4,815	)	$	(18,996	)
Cash used in investing activities		(24,524	)		(11,561	)
Cash provided by financing activities		34,033			33,314
Capital expenditures		21,947			11,585

	As of
	August 2, 2003		August 3, 2002
Long-term debt	$	154,921	$	146,702
Working capital		209,396		194,428
Current ratio		2.05		1.94
Debt (including capital leases) to equity ratio		0.75		0.77

Cash used in operating activities for the first six months ended August 2, 2003 was primarily for inventory purchases offset by net income, adjusted for depreciation and amortization.

Cash used in investing activities for the first six months ended August 2, 2003 was primarily for capital expenditures.

Cash provided by financing activities in the first six months ended August 2, 2003 primarily represents proceeds from net borrowings on the Company's line of credit.

For the twenty-six weeks ended August 2, 2003, our liquidity and capital needs have principally been met by cash from operations and borrowings under a revolving credit facility with CIT/Business Credit, Inc., as agent. In conjunction with the TSA merger, we entered into a revolving credit facility with CIT, as agent, with a line of credit up to $600 million. Long-term debt at August 2, 2003 consisted of borrowings under the former revolving credit facility, which allowed us to borrow up to 70% of our eligible inventories or the lesser of 75% of eligible inventories or 85% of the net liquidation percentage for one consecutive 90-day period (as defined in the revolving credit facility) during the year. Borrowings under the former revolving credit facility were limited to the lesser of $300 million or the amount calculated in accordance with the borrowing base, and are secured by substantially all inventories, trade receivables, equipment, and intangible assets.

A new credit financing agreement was entered into following consummation of the merger for the combined company that allows the combined company to borrow up to $600 million, limited to an amount equal to 70% of eligible inventory or 85% of the appraised net orderly liquidation value of eligible inventory. The combined company is also entitled to seasonal increases (seasonal advances) in the inventory advance rate for up to 120 days during any calendar year as designated by the combined company for the lesser of 80% eligible inventory or 90% of appraised net orderly liquidation value. Loan interest will be payable monthly at Chase Manhattan Bank's prime rate plus a margin rate ranging from 0% to 0.50% or, at the option of the combined company, at Chase Manhattan Bank's LIBOR rate plus a margin rate ranging from 1.50% to 2.50%. There was $154.9 million outstanding under the credit facility as of August 2, 2003, and $177.8 million was available for borrowing following consummation of the merger.

On May 29, 2002, we completed a common stock offering for 3.5 million shares. This offering resulted in net proceeds of approximately $53 million from our sale of 1.75 million shares. The proceeds were used to pay down debt in fiscal 2002. The balance of the shares were sold by various selling stockholders. We did not receive any portion of the proceeds from the sale of shares by selling stockholders.

In the thirteen and twenty-six weeks ended August 3, 2002, we repurchased 459,999 shares of our common stock totaling approximately $9.4 million under a common share repurchase program approved by the Board of Directors.

We entered into an interest rate swap agreement on June 28, 2001, expiring on June 30, 2004, and entered into a second interest rate swap agreement on December 11, 2002, expiring on May 31, 2005, to minimize the risks and costs associated with our financing activities. Under the swap agreements, we pay fixed rate interest and receive variable interest rate payments periodically over the life of the instrument. The total notional amounts under the interest rate swaps are $60 million which do not represent the exposure due to credit loss. See note 8 to the consolidated financial statements.

Capital expenditures are projected to be approximately $50 to $60 million in fiscal 2003. These capital expenditures will be primarily for new store openings, store remodeling, store fixtures, information systems, and distribution center facilities. We lease the majority of our store locations and intend to continue to finance our new stores with long-term operating leases. Based upon stores opened in fiscal 2002, newly constructed superstores require a cash investment of approximately $1.6 million for a 42,000 square foot store and approximately $1.3 million for a 32,000 square foot store. We intend to open approximately eighteen new stores in fiscal 2003. The level of capital improvements will be affected by the mix of new construction versus renovation of existing retail space.

We believe that cash generated from operations on an annual basis, combined with funds available under the new revolving credit facility, will be sufficient to fund projected capital expenditures, future common share purchases, if any, and other working capital requirements for the foreseeable future. We intend to utilize the revolving credit facility to meet seasonal fluctuations in cash flow requirements.

Seasonality and Inflation

Our fourth quarter has historically been the strongest quarter. We believe that two primary factors contribute to this seasonality. First, increased sales of cold weather sporting goods occurs, including sales of ski and snowboard merchandise during the quarter, which corresponds with much of the ski and snowboard season. Second, holiday sales contribute significantly to our operating results. As a result of these factors, inventory levels, which gradually increase beginning in April, generally reach their peak in November and then decline to their lowest level following the December holiday season. Any decrease in sales for the fourth quarter, whether due to a slow holiday selling season, poor snowfall in ski areas near our markets or otherwise, could have a material adverse effect on our business, financial condition and operating results for the entire fiscal year.

Although our operations are influenced by general economic conditions, we do not believe that inflation has a material impact on our results of operations. We believe that we are generally able to pass along any inflationary increases in costs to our customers.

New Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, 64, Amendment of SFAS No. 13, and Technical Corrections." This statement eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment. SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases", to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and changes the provisions under SFAS 13 related to original lessees being relieved of primary obligation under an original lease. SFAS No. 145 also makes various technical corrections to existing pronouncements that are not substantive in nature. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective in fiscal years beginning after May 15, 2002 with earlier application encouraged. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May 15, 2002, with earlier application encouraged. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002, with earlier application encouraged. Our adoption of this statement did not have a material impact on results of operations or financial position.

In May 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for an exit cost or disposal activity be recognized when the liability is incurred, whereas under EITF No. 94-3, a liability was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement has changed the timing of recognition for certain exit costs, so that certain exit costs are recognized over the period in which the exit activities occur.

employee stock-based compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in annual and interim financial statements about the method of accounting for stock-based compensation and its effect on reported results. The disclosure provisions of SFAS No. 148 are included in the accompanying Notes to Consolidated Financial Statements. We continue to apply the principles of APB Opinion No. 25 and related interpretations in accounting for our stock-based compensation to employees.

The majority of the Company's existing arrangements were entered into prior to the effective date of EITF 02-16, outlined above. However, for those arrangements entered into after those effective dates, the impact of EITF 02-16 on our thirteen and twenty-six weeks ended August 2, 2003 was a recharacterization of $0.1 million and $0.2 million, respectively, from reduction of advertising expense to reduction of cost of inventory purchased. The impact on the balance of fiscal 2003 cannot be determined until advertising expenditures and allowances by vendor are quantified for the full fiscal year.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Our primary interest rate risk exposure results from our long-term debt agreement. Our long-term debt bears interest at variable rates that are tied to either the U.S. prime rate or LIBOR at the time of the borrowing. We maintain portions of our debt in LIBOR traunches that mature in one to nine months. As those traunches mature, the interest rates on our outstanding borrowings are changed to reflect current prime or LIBOR rates. Therefore, our interest expense changes as the prime or

LIBOR market rates change. We have entered into two interest rate swap instruments, designated as cash flow hedges, as shown in the following table:

						Fair Value at
Date Entered Into	Rate Paid		Rate Received	Notional Amount		August 2, 2003
June 28, 2001	5.35	%	3-mo. US Libor	$	20,000,000	$	(810,000	)
December 11, 2002	2.945	%	3-mo. US Libor	$	40,000,000	$	(608,000	)

Based on our overall interest rate exposure at August 2, 2003, a hypothetical instantaneous increase or decrease of one percentage point in interest rates applied to borrowings under our revolving credit facility would change our after-tax earnings by approximately $0.8 million over a 12-month period.

Our exposure to foreign currency exchange rates is limited because we do not operate any stores outside of the United States. We do not consider the market risk exposure relating to foreign currency exchange to be material. Foreign currency fluctuations did not have a material impact on our results during the second quarter of fiscal 2003 or 2002.

The fair value of our investments in marketable equity securities at August 2, 2003 was $176,000. The fair value of these investments will fluctuate as the quoted market prices of such securities fluctuate. As of August 2, 2003, the fair value of our investments in marketable equity securities was $78,000 more than the adjusted basis of those investments. Such unrealized holding loss has not been recognized in our consolidated statement of operations, but rather has been recorded as a component of stockholders' equity in other comprehensive income (loss). The actual gain or loss that we will realize when these investments are sold will depend on the fair value of these securities at the time of sale. Based on our marketable equity securities portfolio and quoted market prices at August 2, 2003, a 50% increase or decrease in the market price of such securities would result in an increase or decrease of approximately $88,000 in the fair value of the marketable equity securities portfolio. Although changes in quoted market prices may affect the fair value of the marketable equities securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments are sold or determined to have a decline in value, which is other than temporary.

ITEM 4. Controls and Procedures

An evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this report. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls since the date the controls were evaluated.

Private Securities Litigation Reform Act of 1995

The information discussed herein includes "forward-looking statements" within the meaning of the federal securities laws. Although we believe that the expectations reflected in such forward looking statements are reasonable, our actual results could differ materially as a result of certain factors, including, but not limited to: our ability to manage our expansion efforts in existing and new markets, risks associated with the acquisition of companies, availability of suitable new store locations at acceptable terms, general economic conditions, and retail and sporting goods business conditions, specifically, availability of merchandise to meet fluctuating consumer demands, fluctuating sales margins, increasing competition in sporting goods and apparel retailing, as well as other factors described from time to time in our periodic reports, including the Annual Report of the Company on Form 10-K for its year ended February 1, 2003, filed with the Securities and Exchange Commission.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

We are, from time to time, involved in various legal proceedings incidental to the conduct of our business. We believe that the outcome of all such pending legal proceedings to which we are a party will not, in the aggregate, have a material adverse effect on our business, financial condition, or operating results.

On July 24, 1997, the IRS proposed adjustments to our and our former parent's (now Thrifty Payless Holdings, Inc., a subsidiary of RiteAid Corporation) 1992 and 1993 federal income tax returns in conjunction with our former parent's IRS examination. The proposed adjustments related to the manner in which LIFO inventories were characterized on these tax returns. On November 1, 2002, in order to eliminate the accrual of additional interest on taxes owed to the IRS, we entered into an agreement with the IRS, based upon the terms of the settlement that was pending between the IRS and our former parent. Pursuant to the agreement, we paid the IRS taxes of $1.1 million and interest of $0.5 million. We believe this to be a full and complete settlement of all our separate return issues under review by the IRS.

The IRS settlement with our former parent has been finalized and was approved by the Joint-Committee of Taxation on August 21, 2003. In addition, we reached a settlement with our former parent under the tax sharing agreement during the quarter ended May 3, 2003. As a result, we will receive, on a net basis, approximately $4.4 million of interest and taxes from our former parent. The settlement did not result in the acceleration of the payment of the remaining $3.3 million tax liability associated with this matter and as such, this amount remains recorded as a long term deferred tax liability.

In June 2000, a former employee of Sportmart brought two class action complaints in California against us, alleging certain wage and hour claims in violation of the California Labor Code, California Business and Professional Code section 17200 and other related matters. One complaint alleges that we classified certain managers in our California stores as exempt from overtime pay when they would have been classified as non-exempt and paid overtime. The second complaint alleges that we failed to pay hourly employees in our California stores for all hours worked. In March 2001, a third class action complaint was filed in the same court in California alleging the same wage and hour violations regarding classification of certain managers as exempt from overtime pay. In July 2001, a fourth complaint was filed alleging that store managers should also not be classified as employees exempt from overtime pay. All the complaints seek compensatory damages, punitive damages and penalties. The amount of damages sought is unspecified. Although the court denied motions to dismiss the first two complaints, we intend to vigorously defend these matters and at this time, we have not ascertained the future liability, if any, as a result of these complaints. Recently, however, we have entered into settlement negotiations with the class counsel relating to the first two complaints that were filed. As a result, we believe it is probable we will reach a settlement related to this matter and recorded an estimated liability totalling $1.5 million, including attorney fees and expenses, in the first fiscal quarter of 2003.

In June 2003, Financo, Inc., a financial advisory firm, filed a complaint against us in the Delaware Court of Chancery alleging that we owe Financo $2,000,000 for services provided to us in connection with the merger negotiations with TSA. No written contract exists between us and Financo. We believe that Financo's claim is without merit and intend to vigorously defend the lawsuit, and do not believe the outcome of this matter will have a material adverse effect on our consolidated financial condition, results of operations, or liquidity.

ITEM 6. Exhibits and Reports on Form 8-K

a. Exhibits.

Exhibit Number		Description
31.1		Certification of Chief Executive officer, pursuant to Rule 13(a)-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

b. Reports on Form 8-K

We filed a Current Report on Form 8-K with the Commission dated May 9, 2003 to report, under Item 7, that we issued a news release to update sales and earnings guidance.

We filed a Current Report on Form 8-K with the Commission dated May 22, 2003 to report, under Item 7, that we issued a news release to report our earnings for the 13 weeks ended May 3, 2003.

We filed a Current Report on Form 8-K with the Commission dated August 13, 2003 to report, under Item 2, that we had completed a merger pursuant to an agreement and Plan of Merger with The Sports Authority, Inc., dated as of February 19, 2003.

We filed a Current Report on Form 8-K with the Commission dated August 25, 2003 to report, under Item 12, that we issued a news release to report our earnings for the 13 weeks and 26 weeks ended August 2, 2003.

We filed a Current Report on Form 8-K with the Commission dated August 25, 2003 to report, under Item 12, that forecasted pro forma, fully diluted earnings per share included in our earnings release dated August 25, 2003 for the third and fourth quarters of fiscal 2003, fiscal year 2003, as well as fiscal year 2004 did not include integration costs forecasted to be between $30 million and $45 million because we are unable to predict, with a high degree of certainty, the timing or magnitude of these integration costs by quarter or fiscal year.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on September 16, 2003 on its behalf by the undersigned thereunto duly authorized.

		GART SPORTS COMPANY
		By:		/s/ JOHN DOUGLAS MORTON John Douglas Morton Vice Chairman of the Board of Directors and Chief Executive Officer
		By:		/s/ THOMAS T. HENDRICKSON Thomas T. Hendrickson Chief Financial Officer, Chief Administrative Officer and Treasurer