SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: Commission File No.:
August 31, 1996 0-16442
FIRST TEAM SPORTS, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1545748
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1201 Lund Boulevard
Anoka, Minnesota 55303
(Address of principal executive offices)
Registrant's telephone number, including area code:
(612) 576-3500
--------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No
---------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,742,967 shares of Common
Stock, $.01 par value per share, outstanding as of October 8, 1996.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST TEAM SPORTS, INC.
CONSOLIDATED BALANCE SHEETS
August 31, 1996 and February 29, 1996
<TABLE>
<CAPTION>
August 31, February 29,
ASSETS 1996 1996
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $616,399 $2,166,863
Receivables:
Trade, less allowance for
doubtful accounts of $748,000 at
August 31, 1996 and $489,000 at
February 29, 1996 18,562,800 16,228,666
Refundable income taxes 155,146
Inventory 24,027,859 22,813,850
Prepaid expenses 686,963 960,079
Deferred income taxes 827,000 827,000
------------ ------------
Total current assets $44,721,021 $43,151,604
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Land $600,000 $600,000
Building 5,024,767 4,825,740
Production equipment 4,637,768 4,069,078
Office furniture and equipment 1,760,781 1,509,120
Warehouse equipment 331,850 315,509
Vehicles 46,925 46,925
------------ ------------
$12,402,091 $11,366,372
Less accumulated depreciation 2,169,689 1,511,689
------------ ------------
$10,232,402 $9,854,683
------------ ------------
OTHER ASSETS
License agreements, less accumulated
amortization of $2,749,000 at August
31, 1996 and $2,459,000 at February
29, 1996 $2,355,289 $2,645,268
Other 307,046 306,247
------------ ------------
$2,662,335 $2,951,515
------------ ------------
$57,615,758 $55,957,802
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
FIRST TEAM SPORTS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
August 31, 1996 and February 29, 1996
<TABLE>
<CAPTION>
August 31, February 29,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1996
------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to bank $12,354,250 $5,268,000
Current maturities of
long-term debt 856,913 943,060
Accounts payable, trade 3,027,003 9,462,883
Accrued expenses 846,441 2,532,676
Income taxes 154,156 -
------------ -------------
Total current liabilities $17,238,763 $18,206,619
------------ -------------
LONG-TERM DEBT,
less current maturities $6,345,345 $6,880,360
------------ -------------
DEFERRED INCOME TAXES $440,000 $440,000
------------ -------------
DEFERRED REVENUE $600,000 $600,000
------------ -------------
SHAREHOLDERS' EQUITY
Common Stock, par value $.01 per
share; authorized 10,000,000
shares; issued and outstanding
5,738,793 shares at August 31, 1996,
5,721,000 shares at February 29, 1996 $57,388 $57,210
Additional paid-in capital 9,491,281 9,396,802
Retained earnings 23,442,981 20,376,811
------------ ------------
$32,991,650 $29,830,823
------------ ------------
$57,615,758 $55,957,802
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
FIRST TEAM SPORTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
August 31, August 31,
1996 1995 1996 1995
--------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Net sales $15,634,944 $23,229,805 $46,221,743 $54,006,268
Cost of goods sold 11,474,675 15,979,035 32,978,677 37,238,922
--------------------- -------------------- --------------------- --------------------
Gross profit $4,160,269 $7,250,770 $13,243,066 $16,767,346
--------------------- -------------------- ----------------------- --------------------
Operating expenses:
Selling $1,954,914 $2,183,890 $4,345,468 $4,777,096
General and
administrative 1,484,564 1,879,409 3,421,357 3,921,614
--------------------- -------------------- --------------------- --------------------
$3,439,478 $4,063,299 $7,766,825 $8,698,710
--------------------- -------------------- --------------------- --------------------
Operating income $720,791 $3,187,471 $5,476,241 $8,068,636
Other income
(expense):
Interest expense (399,812) (195,370) (723,071) (459,329)
Other 0 0 0 0
--------------------- -------------------- --------------------- --------------------
Income before income
taxes $320,979 $2,992,101 $4,753,170 $7,609,307
Income taxes 110,000 1,040,000 1,687,000 2,775,000
--------------------- -------------------- --------------------- --------------------
Net income for the
period $210,979 $1,952,101 $3,066,170 $4,834,307
===================== ==================== ===================== ====================
Net income per
common share: $0.04 $0.32 $0.52 $0.80
===================== ==================== ===================== ====================
Weighted average
number of common
shares outstanding
including Common
Share equivalents 5,983,901 6,089,271 5,931,080 6,062,450
===================== ==================== ===================== ====================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
FIRST TEAM SPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Six Months Ended August 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
August 31, August 31,
1996 1995
-------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $3,066,170 $4,834,307
Adjustments required to reconcile net
income to net cash provided by (used in)
operating activities:
Depreciation 658,000 315,000
Amortization 316,979 351,358
Deferred income taxes - (150,000)
Change in assets and liabilities:
Receivables (2,178,988) (1,424,418)
Inventories (1,214,009) (615,278)
Prepaid expenses 273,116 279,045
Accounts payable (6,435,880) (448,144)
Accrued expenses (1,686,235) (313,605)
Income taxes 154,156 1,000
------------ ----------
Net cash provided by
(used in) operating activities ($7,046,691) $2,829,265
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ($1,035,719) ($1,180,552)
Other (27,799) (78,815)
------------ ----------
Net cash used in investing activities ($1,063,518) ($1,259,367)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (payments) on short-term borrowings $7,086,250 ($582,000)
Principal payments on long-term
borrowings (621,162) (626,891)
Net proceeds from
issuances of common stock 1996;
17,750 shares, 1995; 90,338 shares 94,657 467,472
----------- -----------
Net cash provided by (used in) financing activities $6,559,745 ($741,419)
----------- -----------
Increase (decrease) in cash and
cash equvalents ($1,550,464) $828,479
Cash and cash equivalents:
Beginning $2,166,863 $601,394
----------- -----------
Ending $616,399 $1,429,873
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
FIRST TEAM SPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1.
The consolidated condensed balance sheet as of August 31, 1996, and the
consolidated statements of operations for the three-month and six-month periods
ended August 31, 1996 and August 31, 1995 and the consolidated statements of
cash flows for the six-month periods then ended have been prepared by the
Company without audit. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the consolidated
financial position, results of operations and cash flows at August 31, 1996 and
August 31, 1995 and for all periods presented have been made. The operating
results for the period ended August 31, 1996 are not necessarily indicative of
the operating results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in
consolidated financial statements in accordance with generally accepted
accounting principles have been condensed or omitted.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net Sales. Net sales were $15.6 million in the second quarter of fiscal
1997, a decrease of 33% over the comparable quarter of fiscal 1996 when sales
were $23.2 million. Net sales for the first six-months of fiscal 1997 were $46.2
million, compared to $54 million for the first six-months of fiscal 1996, a
decrease of 14%. In-line roller skates, ice skates and roller hockey product
sales decreased 35%, 98% and 66%, respectively, and accessory and part sales
increased 8% from the second quarter of fiscal 1996 to fiscal 1997. Sales of
in-line roller skates accounted for approximately 80% of total sales in the
second quarter of fiscal 1997 compared to 82% in the second quarter of fiscal
1996. Sales of accessories and parts accounted for approximately 18% of total
sales in the second quarter of fiscal 1997 compared to 11% in the second quarter
of fiscal 1996. Street hockey equipment accounted for approximately 2% of total
sales in the second quarter of fiscal 1997 compared to 4% in the second quarter
of fiscal 1996. Ice skate sales were insignificant in the second quarter of
fiscal 1997 compared to 3% of total sales in the second quarter of fiscal 1996.
Sales to the Company's ten largest customers accounted for 60% of the Company's
total sales in the second quarter of fiscal 1997 compared to 55% of the
Company's sales in the second quarter of fiscal 1996.
The worldwide markets for the Company's products continue to grow and
expand. As a result the Company was able to continue to increase its foreign
sales outside of North America in the second quarter of fiscal 1997. Domestic
sales were 63% of total net sales in the second quarter of fiscal 1997 compared
to 68% in the second quarter of fiscal 1996, while export sales were 37% in the
second quarter of fiscal 1997 compared to 32% in the second quarter of fiscal
1996. Export sales consisted of sales in Canada and outside North America of 1%
and 36% of total net sales in the second quarter of fiscal 1997, respectively,
compared to 12% and 20% in the second quarter of fiscal 1996, respectively.
Several factors contributed to the Company's sales performance in the
second quarter of fiscal 1997. The lower percentage of domestic and Canadian
sales is a result of an overall retail slowdown in sporting goods purchases,
continued excess inventories in the marketplace and continued strong competition
with our mass merchant accounts. With the soft retail environment in the United
States and Canada the level of customer reorders were well below Company
expectations. The increase in the sales outside of North America is a result of
the Company's ability to capitalize on continued industry growth in the foreign
market.
<PAGE>
Gross Margin. The Company's gross margin decreased $3,090,501 (or 43%)
between the second quarter of fiscal 1997 and the second quarter of fiscal 1996.
Gross margin as a percentage of sales was 27% in the second quarter of fiscal
1997 compared to 31% in the second quarter of fiscal 1996. The decrease in the
gross margin percentage is primarily due to the overall retail slowdown and
continued excess retail inventories. This has resulted in increased competition
and gross margin pressure at all levels, from the mass merchants to the
specialty shops. The Company's UltraWheels in-line skate sales and
non-UltraWheels in-line skate sales accounted for approximately 60% and 40% of
total in-line skate sales in the second quarter of fiscal 1997, respectively,
compared to 47% and 53% of total in-line skate sales in the second quarter of
fiscal 1996.
Operating Expenses. The Company's operating expenses, (consisting of
Selling expenses and General and Administrative expenses) were $3,439,478, or
22% of net sales in the second quarter of fiscal 1997, compared to $4,063,299,
or 17% of net sales in the second quarter of fiscal 1996.
Selling expenses decreased $228,976 (or 11%), between the second quarters of
fiscal 1997 and 1996, and were approximately 13% and 9% in the second quarter of
fiscal 1997 and 1996, respectively. The decrease in Selling expenses can be
attributed to reduced commissions and endorsement royalties associated with the
decreased sales volume.
General and Administrative expenses decreased $394,845 (or 21%) between the
second quarter of fiscal 1997 and 1996, and were approximately 9% and 8% of net
sales in the second quarters of fiscal 1997 and 1996, respectively. The decrease
in General and Administrative expenses in the second quarter of fiscal 1997 was
primarily due to savings associated with the Company's new office and warehouse
facility, the ability of management to respond quickly to the reduced sales
activity and the continued efforts by management to control spending and
expenses.
Other Income and Expense. Interest expense in the second quarter of fiscal
1997 was $399,812, or 3% of net sales, compared to $195,370 or 1% of net sales,
in the second quarter of fiscal 1996. The increase in Interest expense is
primarily due to an increase in the use of the Company's bank line of credit and
the addition of the mortgage note associated with the Company's new office and
warehouse facility.
Net Income. Net income decreased $1,741,122 (or 89%) between the second
quarter of fiscal 1997 and 1996, and earnings per share was $ .04 in the second
quarter of fiscal 1997 compared to $ .32 in the second quarter of fiscal 1996.
The decrease in net income can be attributed primarily to the decrease in sales
and gross margins as discussed above.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $616,399 as of August 31,
1996, compared to $2,166,863 as of February 29, 1996. The decrease in cash and
cash equivalents is a result of $7,046,691 of cash used in operating activities
and $1,063,518 of cash used in investing activities being partially offset by
$6,559,745 of cash provided by financing activities. The net cash used in
operating activities was primarily from the decrease in accounts payable, an
increase in receivables and inventory and net income for the quarter. The net
cash used in investing activities was primarily for the purchase of capital
assets. The net cash provided by financing activities was primarily proceeds
received on the Company's line of credit.
The Company had net working capital of $27,482,258 as of August 31, 1996,
compared to $24,944,985 as of February 29, 1996. The improvement in the
Company's net working capital was primarily attributable to an increase in the
Company's receivables and inventory.
The Company's debt-to-worth ratio was .7 to 1 as of August 31, 1996,
compared to .9 to 1 as of February 29, 1996. The Company's long-term debt, which
consists primarily of the mortgage note on the Company's office and warehouse
facility and obligations under endorsement license agreements, less current
maturities, was $6,345,345 as of August 31, 1996. As of August 31, 1996, the
Company had revolving line of credit established with a bank that provides for
borrowings of up to $15,000,000, of which $12,354,250 was outstanding. In
addition, the Company has a line of credit established with the bank providing
for borrowings of up to $1,000,000 for the purchase of equipment and
improvements. As of August 31, 1996, approximately $30,000 was outstanding on
this credit facility.
The Company believes that its current cash position, funds available under
existing bank arrangements and cash generated from profitable operations will be
sufficient to finance the cash flows for operating activities at projected
levels of sales through fiscal 1997.
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its Annual Meeting on June 28, 1996.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There
was no solicitation in opposition to management's nominees as
listed in the proxy statement, and all of such nominees were
elected.
The shareholders set the number of directors at five (5) by a
vote of 5,307,609 shares in favor, with 26,735 share voted
against and 30,604 shares abstaining. The following persons were
elected to serve as directors of the Company until the next
annual meeting of shareholders with the following votes:
<TABLE>
<CAPTION>
Number of Number of
Nominee Votes For Votes Withheld
<S> <C> <C>
John J. Egart 5,287,305 77,643
David G. Soderquist 5,286,342 78,606
Joe Mendelsohn 5,286,492 78,456
Timothy G. Rath 5,285,517 79,431
Stanley E. Hubbard 5,272,855 92,093
</TABLE>
The shareholders ratified the appointment of McGladrey & Pullen,
LLP as the Company's independent auditors for the fiscal year
ending February 28, 1997 by a vote of 5,313,183 shares in favor,
with 25,910 shares voted against and 25,855 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Exhibit Index immediately following the signature
page of this Form 10-Q.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Registrant during the quarter to which this Form 10-Q relates.
<PAGE>
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
its behalf by the undersigned thereunto duly authorized.
FIRST TEAM SPORTS, INC.
By: /s/ John J. Egart
John J. Egart
President and CEO
and By: /s/ Robert L. Lenius, Jr.
Robert L. Lenius, Jr.
Vice President and CFO
Dated: October 8, 1996
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For Quarter Ended: Commission File No.: 0-16422
August 31, 1996
-------------------------------------------------------------------
FIRST TEAM SPORTS, INC.
-------------------------------------------------------------------
Exhibit Number Description
3.1 Restated Articles of Incorporation - incorporated by reference
to Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 29, 1996
3.2 Bylaws - incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-18 Reg. No.
33-16345C
4.1 Specimen of Common Stock Certificate-incorporated by reference
to 4.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1991
4.2 Certificate of Designations of Series A Preferred Stock
(included in Restated Articles of Incorporation - see Exhibit
3.1)
4.3 Rights Agreement dated as of March 15, 1996 between the Company
and Norwest Bank Minnesota, N.A. as Rights Agent - incorporated
by reference to Exhibit 2.1 to the Company's Registration
Statement on Form 8-A, Reg. No. 0-16422
4.4 Form of Right Certificate - incorporated by reference to
Exhibit 2.2 to the Company's Registration Statement on
Form 8-A, Reg. No. 0-16422
4.5 Summary of Rights to Purchase Share of Series A Preferred Stock
- incorporated by reference to Exhibit 2.3 to the Company's
Registration Statement of Form 8-A, Reg. No. 0-16422
27 Financial Data Schedule (included in electronic version only)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 616,399
<SECURITIES> 0
<RECEIVABLES> 18,562,800
<ALLOWANCES> 748,000
<INVENTORY> 24,027,859
<CURRENT-ASSETS> 44,721,021
<PP&E> 12,402,091
<DEPRECIATION> 2,169,689
<TOTAL-ASSETS> 57,615,758
<CURRENT-LIABILITIES> 17,238,763
<BONDS> 6,345,345
0
0
<COMMON> 57,388
<OTHER-SE> 32,934,262
<TOTAL-LIABILITY-AND-EQUITY> 57,615,758
<SALES> 46,221,743
<TOTAL-REVENUES> 46,221,743
<CGS> 32,978,677
<TOTAL-COSTS> 32,978,677
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 723,071
<INCOME-PRETAX> 4,753,170
<INCOME-TAX> 1,687,000
<INCOME-CONTINUING> 3,066,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,066,170
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
