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.:
May 31, 1998 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: 5,792,253 shares of Common
Stock, $.01 par value per share, outstanding as of July 10, 1998.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST TEAM SPORTS, INC.
CONSOLIDATED BALANCE SHEETS
May 31, 1998 and February 28, 1998
<TABLE>
<CAPTION>
May 31, February 28,
ASSETS 1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,934,471 $ 1,869,545
Receivables:
Trade, less allowance for
doubtful accounts of $507,000 at
May 31, 1998 and $666,000 at
February 28, 1998 16,738,793 11,417,176
Refundable income taxes 1,358,396 1,678,405
Inventories 19,696,070 22,709,519
Prepaid expenses 822,793 957,903
Deferred income taxes 896,000 896,000
----------- -----------
Total current assets 42,446,523 39,528,548
----------- -----------
PROPERTY AND EQUIPMENT,
Land 600,000 600,000
Building 4,988,680 4,988,680
Production equipment 2,007,406 2,132,156
Office furniture and equipment 1,789,533 1,766,911
Warehouse equipment 916,591 820,626
Vehicles 104,148 102,906
----------- -----------
10,406,358 10,411,279
Less accumulated depreciation 2,297,674 1,993,004
----------- -----------
8,108,684 8,418,275
----------- -----------
OTHER ASSETS
License agreements, less accumulated
amortization of $3,126,000 at May 31,
1998 and $3,039,000 at February 28, 1998 1,942,014 1,766,584
Goodwill, less accumulated amortization
of $102,000 at May 31, 1998 and $64,000
at February 28, 1998 1,391,403 1,462,291
Other 943,300 986,030
----------- -----------
4,276,717 4,214,905
----------- -----------
$54,831,924 $52,161,728
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
FIRST TEAM SPORTS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
May 31, 1998 and February 28, 1998
<TABLE>
<CAPTION>
May 31, February 28,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to bank $ 12,060,000 $ 8,685,000
Current maturities of
long-term debt 1,134,308 978,965
Accounts payable, trade 1,783,417 2,697,675
Accrued expenses 1,944,282 2,115,728
------------ ------------
Total current liabilities 16,922,007 14,477,368
------------ ------------
LONG-TERM DEBT,
less current maturities 6,526,134 6,774,496
------------ ------------
DEFERRED INCOME TAXES 69,000 69,000
------------ ------------
DEFERRED REVENUE 600,000 600,000
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock, par value $.01 per
share; authorized 10,000,000
shares; issued and outstanding
5,792,240 shares at May 31, 1998
and February 28, 1998 57,923 57,923
Additional paid-in capital 9,806,341 9,806,341
Retained earnings 21,056,860 20,492,860
Accumulated other comprehensive income (loss) (206,341) (116,260)
------------ ------------
30,714,783 30,240,864
------------ ------------
$ 54,831,924 $ 52,161,728
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
FIRST TEAM SPORTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
May 31,
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 15,138,589 $ 26,007,262
Cost of goods sold 10,782,924 19,050,049
------------ ------------
Gross profit 4,355,665 6,957,213
------------ ------------
Operating expenses:
Selling 1,400,361 2,041,830
General and
administrative 1,749,570 1,807,155
------------ ------------
3,149,931 3,848,985
------------ ------------
Operating income 1,205,734 3,108,228
Interest expense (359,181) (250,542)
------------ ------------
Income before income
tax expense 846,553 2,857,686
Income tax expense (282,553) (996,000)
------------ ------------
Net income for the
period $ 564,000 $ 1,861,686
============ ============
Net income per share:
Basic $ 0.10 $ 0.32
Diluted $ 0.10 $ 0.32
Shares used in computation of
net income per share:
Basic 5,792,253 5,751,319
Diluted 5,885,956 5,787,328
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
FIRST TEAM SPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Three Months Ended May 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
May 31, May 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 564,000 $ 1,861,686
Adjustments required to reconcile net
income to net cash used in
operating activities:
Depreciation 311,205 448,950
Amortization 164,727 87,300
Change in operating assets and liabilities:
Receivables (5,389,085) (7,600,310)
Inventories 2,983,737 1,336,169
Prepaid expenses 134,798 (46,450)
Accounts payable (899,783) 1,018,405
Accrued expenses (168,259) (119,593)
Income taxes 312,597 760,902
----------- -----------
Net cash used in operating activities (1,986,063) (2,252,941)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment -- (414,114)
Other (261,774) (8,766)
----------- -----------
Net cash used in investing activities (261,774) (422,880)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds on short-term borrowings 3,375,000 1,840,000
Proceeds from long-term borrowings 262,760 1,000,000
Principal payments on long-term
borrowings (356,158) (205,749)
Net proceeds from exercise of stock options -- 56,683
----------- -----------
Net cash provided by financing activities 3,281,602 2,690,934
----------- -----------
Increase in cash and
cash equvalents 1,033,765 15,113
Effect of foreign currency translation 31,161 --
Cash and cash equivalents:
Beginning 1,869,545 381,427
----------- -----------
Ending $ 2,934,471 $ 396,540
=========== ===========
</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 May 31, 1998, and the
consolidated statements of operations for the three-month periods ended May 31,
1998 and 1997 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 May 31, 1998 and 1997 and for all periods presented
have been made. The operating results for the period ended May 31, 1998 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.
REPORT COMPREHENSIVE INCOME
As of March 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130 (Statement 130), Report Comprehensive Income Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption this statement had no impact on the
Company's net income or shareholders' equity. Statement 130 requires the
Company's foreign currency translation, which prior to adoption was reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
During the quarters ended May 31, 1998 and 1997, total comprehensive
income amounted to $357,659 and $1,861,686, respectively.
<PAGE>
EARNINGS PER SHARE
Basic EPS Diluted EPS
1998 1997 1998 1997
------ ------ ------ ------
(in thousands, except per share data)
Net Income $ 564 $1,862 $ 564 $1862
====== ====== ====== ======
Weighted average common
shares outstanding $5,792 $5,751 $5,792 $5,751
Stock Options -- -- 94 36
------ ------ ------ ------
Total common equivalent
shares outstanding $5,792 $5,751 $5,886 $5,787
====== ====== ====== ======
Net Income per share $ .10 $ .32 $ .10 $ .32
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net Sales. Net sales were $ 15.1 million in the first quarter of fiscal
1999, a decrease of 42% over sales of $26.0 million in the comparable quarter of
fiscal 1998. In-line skate sales volume decreases, combined with a decrease in
the average selling price of both the Company's Skate Attack and Ultra Wheels
lines, were the principal factors in the Company's net sales decline in the
first quarter of fiscal 1999. The total number of in-line skate units sold in
the first quarter of fiscal 1999 decreased approximately 42% and the average
selling price in the first quarter of fiscal 1999 decreased approximately 15%
compared to the first quarter of fiscal 1998. These decreases were the result of
the Company experiencing continued pricing pressures from all areas of the
market place due primarily to excess inventory levels and competitive price
cutting in the in-line skate industry.
The Company's product groups consist of in-line skates, in-line
accessories and parts (primarily protective wear and replacement wheels and
bearings), roller hockey products, ice hockey sticks, and ice hockey protective
wear and accessories. Within the product groups, the Company maintains Ultra
Wheels, Skate Attack, Heavy and Third World in-line product lines and a Hespeler
ice hockey line. The Ultra Wheels, Heavy and Third World lines consist of higher
quality and higher priced products that are targeted for the specialty and
sporting goods chain store customers. The Skate Attack line consists of lower
priced products for the mass merchant customers. The Hespeler line consists of
high quality products that are targeted primarily at the specialty and sporting
goods chain stores.
In-line skate and in-line accessory and part sales decreased 46% and
47% respectively, from the first quarter of fiscal 1998 to fiscal 1999. Sales of
in-line skates accounted for approximately 81% of total sales in the first
quarter of fiscal 1999 compared to 87% in the first quarter of fiscal 1998.
Sales of in-line accessories and parts accounted for approximately 12% of total
sales in the first quarter of fiscal 1999 compared to 13% in fiscal 1998. Sales
of ice hockey sticks and ice hockey protective wear and accessories accounted
for approximately 4% and 3%, respectively, of total sales in the first quarter
of fiscal 1999. The Company purchased Hespeler Hockey Company in September 1997,
therefore there were no ice hockey product sales during the first quarter of
fiscal 1998.
The Company currently distributes products to numerous countries
worldwide. Domestic sales were $8.8 million or 59% of total sales in the first
quarter of fiscal 1999 compared to $16.9 million or 65% in the first quarter of
fiscal 1998. Sales in Canada were $4.2 million or 27% of total sales in the
first quarter of fiscal 1999 compared to $4.3 million or 17% in the first
quarter of fiscal 1998. Sales in Europe were $2.1 million or 14% of total sales
in the first quarter of fiscal 1999 compared to $4.2 million or 16% in the first
quarter of fiscal 1998. Other International sales were insignificant in the
first quarter of fiscal 1999 compared to $0.6 million in the first quarter of
fiscal 1998.
<PAGE>
Several factors contributed to the company's sales performance in the
first quarter of fiscal 1999. The decrease in domestic sales was a result of
continued excess inventory levels in the market place and competitive price
cutting which has continued to plague the in-line skate industry. The decrease
in domestic in-line sales were also due to certain customers, primarily large
mass merchant retailers purchasing in-line skate products directly from Pacific
Rim manufacturers. The consistent sales results in Canada were primarily the
result of continued strong acceptance of the Company's USA made products and the
Company's strong sales force in Canada. The decrease in European sales was
primarily the result of excess inventory levels in the European market and an
increase in the number of customers buying direct from Pacific Rim
manufacturers. The decrease in other international sales was primarily the
result of the continued excess inventory levels in both the Pacific Rim and
South American marketplaces.
While the Company believes there are some positive signs that the
market conditions in the in-line industry are improving, the national and
international markets continue to be plagued by excess inventories and extreme
price competition, with no clear signs of when these market conditions will
abate. Furthermore, the increased purchases of product direct from the
manufacturers by large mass merchants will continue to affect the Company's
domestic sales to these customers.
Gross Margin. As a percentage of net sales, the Company's gross margin
was 28.8% in the first quarter of fiscal 1999 compared to 26.8% in the first
quarter of fiscal 1998. The increase in the gross margin in fiscal 1999 was
primarily due to a reduction in product warranty/return claims, Hespeler Hockey
product sales which carry a higher margin, and a reduction in freight costs. In
the first quarter of fiscal 1998 the Company had to airfreight certain products
to meet customer ship dates.
The Company's UltraWheels brand of in-line skates accounted for 65% of
total in-line skate sales in the first quarter of fiscal 1999 compared to 66% in
the first quarter of fiscal 1998, while the Company's Skate Attack brand
accounted for 35% of total in-line skate sales in the first quarter of fiscal
1999 compared to 34% in the first quarter of fiscal 1998.
Operating Expenses. Selling expenses were $1.4 million or 9.3% of total
net sales in the first quarter of fiscal 1999 compared to $2.0 million or 7.9%
in the first quarter of fiscal 1998. The decrease in the absolute dollar amount
of selling expenses in 1999 was primarily the result of a reduction in
commissions, royalties and co-op advertising costs associated with the decreased
sales volume and management's efforts to closely monitor and control its
expenditures. The increase in selling expenses as a percentage of net sales in
1999 was due to continued efforts to advertise and market the Company's two new
subsidiaries Hespeler and Mothership and the Company's new products.
<PAGE>
General and administrative expenses were $1.7 million or 11.6% of total
net sales in the first quarter of fiscal 1999 compared to $1.8 million or 6.9%
in the first quarter of fiscal 1998. The decrease in the absolute dollar amount
of general and administrative expenses in 1999 was primarily the result of a
reduction in insurance costs associated with the decreased sales volume and
reduced operating expenditures resulting from management's continued efforts to
closely monitor and control operating costs. The increase in general and
administrative expenses as a percentage of net sales in 1999 was primarily due
to the effect of fixed costs as related to the reduced sales volume and the
administrative costs associated with the Company's new offices for Hespeler and
Mothership.
In fiscal 1997, the Company purchased a new software system and
appropriate computer hardware. As part of the selection process, the ability to
recognize the year 2000 was a major requirement and thus the company believes it
is prepared for the change. The Company is currently working to resolve the
potential impact of the year 2000 on the processing of date sensitive
information by the Company's computerized information systems, which might occur
due to vendors and/or customers not being ready. Based on preliminary
information, costs of addressing potential problems are currently not expected
to have a material adverse impact on the Company's financial position, results
of operations or cash flows in future periods.
Other Income and Expense. Interest expense was $359,000 in the first
quarter of fiscal 1999 compared to $251,000 in the first quarter of fiscal 1998.
The increase in interest expense for 1999 is primarily due to increased
borrowings under the Company's line of credit facility needed for the operation
of the Company's new subsidiaries, which were not in existence in the first
quarter of fiscal 1998.
Provision for Income Taxes. The Company's effective tax rate was 33.4%
in the first quarter of fiscal 1999 compared to 34.9% in the first quarter of
fiscal 1998. The decrease in 1999 was primarily due to the effect of state and
foreign tax rates and the percentage of state and foreign revenues.
Net Income. The Company had net income of $564,000 or $.10 per share in
the first quarter of fiscal 1999 compared to $1.9 million or $.32 per share in
the first quarter of fiscal 1998. This decrease can be primarily attributed to
the decrease in the sales volume and other issues as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of fiscal 1999 the Company's operations used $2.0
million of cash compared to $2.3 million in the first quarter of fiscal 1998.
The decrease in the net cash used in operations is primarily the result of the
Company reducing its inventory balances. While the Company's inventories have
<PAGE>
been reduced by approximately 13% since February 1998, management believes that
its inventories need to be reduced even further, and is currently in the process
of developing and implementing aggressive and competitive programs for
effectively reducing unneeded inventory.
Net cash used in investing activities was $262,000 in the first quarter of
fiscal 1999 compared to $423,000 in the first quarter of fiscal 1998. The use of
cash for this activity was primarily attributable to expenditures relating to
new licensing arrangements in 1999.
Net cash provided by financing activities was $3.3 million in the first
quarter of fiscal 1999 compared to $2.7 million in the first quarter of fiscal
1998. The cash provided in 1999 was primarily due to proceeds from the Company's
line of credit facility. The proceeds on the line of credit facility were used
primarily for the operations of the Company.
The Company's debt to worth ratio was .8 to 1 as of May 31, 1998
compared to .7 to 1 as of February 28, 1998 and May 31, 1997. The Company's
long-term debt, which consists primarily of a mortgage note on the Company's
facility and obligations under endorsement license agreements, less current
maturities, was $6.5 million as of May 31, 1998 (see Note 6 in Notes to
Financial Statements). The Company has a revolving line of credit with a bank
that provides for borrowings of up to $15 million of which $12.1 million was
outstanding at May 31, 1998 and $8.4 million at July 10, 1998. In addition, the
Company had a line of credit established with the bank providing for borrowings
of up to $1 million for the purchase of equipment and facility improvements. As
of May 31, 1998 there was a $667,000 balance outstanding on this credit
facility.
In connection with these credit facilities, the Company agreed, among
other things, to maintain certain minimum financial ratio and income levels. The
Company's ability to comply with the credit facility covenants may, among other
things, depend on the success of the Company's inventory reduction programs.
Subject to the foregoing the Company believes its current cash
position, funds available under existing bank arrangements and cash generated
from operations will be sufficient to finance the Company's operating
requirements through fiscal 1999.
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information
Shareholder Proposals at 1999 Annual Shareholders' Meeting. Pursuant to
recent amendments to the proxy rules under the Securities Exchange Act of 1934
(17 CFR ss.240.14a), the Company's shareholders are notified that the deadline
for giving the Company timely notice of any shareholder proposal to be submitted
outside of the Rule 14a-8 process for consideration at the Company's 1999 Annual
Meeting of Shareholders is April 20, 1999.
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: July 14, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For Quarter Ended: Commission File No.: 0-16422
May 31, 1998
-------------------------------------------------------------------
FIRST TEAM SPORTS, INC.
-------------------------------------------------------------------
Exhibit
Number Description
3.1 Restated Articles of Incorporation -- incorporated by reference
to Exhibit 3.1 to the Company's Form 10-K for the year ended
February 28, 1998
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 Registrant'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> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,934,471
<SECURITIES> 0
<RECEIVABLES> 17,245,793
<ALLOWANCES> 507,000
<INVENTORY> 19,696,070
<CURRENT-ASSETS> 42,446,523
<PP&E> 10,406,358
<DEPRECIATION> 2,297,674
<TOTAL-ASSETS> 54,831,924
<CURRENT-LIABILITIES> 16,922,007
<BONDS> 6,526,134
0
0
<COMMON> 57,923
<OTHER-SE> 30,656,860
<TOTAL-LIABILITY-AND-EQUITY> 54,831,924
<SALES> 15,138,589
<TOTAL-REVENUES> 15,138,589
<CGS> 10,782,924
<TOTAL-COSTS> 10,782,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 359,181
<INCOME-PRETAX> 846,553
<INCOME-TAX> 282,553
<INCOME-CONTINUING> 564,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 564,000
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
