<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-26798
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EASTBAY, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Wisconsin 39-1422174
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
427 Third Street, Wausau, Wisconsin 54403
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: 715-845-5538
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by sections 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
___ ___
On November 12, 1996, there were outstanding 6,071,028 shares of the
Registrant's $.01 par value common stock.
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EASTBAY, INC.
FORM 10-Q
SEPTEMBER 30, 1996
INDEX
PART I - FINANCIAL INFORMATION
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Page
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Item 1 Condensed Balance Sheets as of September 30, 1996 (unaudited) 3
and June 30, 1996 (derived from audited financial statements)
Statements of Income for the Three Months Ended
September 30, 1996 (unaudited) and September 30, 1995
(unaudited) 4
Condensed Statements of Cash Flows for the Three Months Ended
September 30, 1996 (unaudited) and September 30, 1995
(unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II - OTHER INFORMATION
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
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2
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Item 1. Financial Statements.
EASTBAY, INC.
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Sept. 30, 1996* June 30, 1996*
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ASSETS
Current assets:
Cash and cash equivalents....................... $ 4,087 $ 7,509
Accounts receivable - net....................... 1,372 875
Refundable income taxes......................... - 62
Inventories..................................... 39,863 34,109
Catalog costs................................... 3,051 1,716
Other........................................... 1,404 1,420
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Total current assets.......................... 49,777 45,691
Property and equipment.......................... 2,760 2,632
Other assets.................................... 406 406
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Total Assets.................................... $ 52,943 $ 48,729
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 10,049 $ 8,415
Accrued and other liabilities................... 1,872 2,461
Accrued income taxes............................ 1,069 -
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Total current liabilities..................... 12,990 10,876
Shareholders' equity.............................. 39,953 37,853
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Total Liabilities and Shareholders' Equity...... $ 52,943 $ 48,729
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</TABLE>
* The balance sheet as of September 30, 1996 is unaudited. The June 30, 1996
balance sheet is derived from audited financial statements.
The accompanying notes are an integral part of the financial statements.
3
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EASTBAY, INC.
STATEMENTS OF INCOME
(In thousands, except shares and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
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1996 1995
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<S> <C> <C>
Net sales......................................... $ 30,816 $ 28,539
Cost of sales..................................... 15,105 15,762
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Gross profit.................................... 15,711 12,777
Selling, general and administrative expenses...... 12,328 10,132
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Income from operations.......................... 3,383 2,645
Interest income................................... 90 -
Interest expense.................................. (3) (316)
Other income (expense)............................ 2 -
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Income before income taxes...................... 3,472 2,329
Provision for income taxes or
pro forma adjustment for income taxes............ 1,372 920
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Pro forma net income............................ $ 2,100 $ 1,409
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Pro forma net income per share.................. $ 0.35 $ 0.31
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Pro forma weighted average shares outstanding... 6,070,778 4,537,444
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Supplemental pro forma net income per share....... $ 0.35 $ 0.26
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Supplemental pro forma weighted average shares
outstanding...................................... 6,070,778 6,070,778
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</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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EASTBAY, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
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1996 1995
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Cash flows from operating activities:
Pro forma net income................................. $ 2,100 $ 1,409
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization........ 277 225
Pro forma adjustment for income taxes.............. -- 920
Changes in operating assets and liabilities:
Accounts receivable.............................. (497) (316)
Inventories...................................... (5,754) 233
Other assets..................................... (1,319) (506)
Accounts payable................................. 1,634 (3,240)
Accrued and other liabilities.................... (589) (326)
Accrued income taxes............................. 1,131 --
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Net cash used in operating activities.................. (3,017) (1,601)
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Cash flows from investing activities:
Purchase of property and equipment................... (405) (158)
Repayment of shareholder advances.................... -- 214
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Net cash provided by (used in) investing activities.... (405) 56
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Cash flows from financing activities:
Net borrowings under demand line of credit........... -- 4,929
Principal payments on long-term debt................. -- (50)
Dividends paid....................................... -- (3,350)
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Net cash provided by financing activities.............. -- 1,529
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Net decrease in cash................................... (3,422) (16)
Cash at beginning of period............................ 7,509 17
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Cash at end of period.................................. $ 4,087 $ 1
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Supplemental cash flow information:
Interest paid........................................ $ 3 $ 355
Income taxes paid.................................... $ 241 $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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EASTBAY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES
The accompanying unaudited interim financial statements have been prepared
by the Company in accordance with generally accepted accounting principles
for interim financial reporting and the regulations of the Securities and
Exchange Commission for quarterly reporting. Accordingly, they do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
the Company the condensed financial statements include all adjustments,
which are all normal and recurring in nature, and present fairly the
financial position, results of operations and cash flows for the interim
periods presented. Changing economic conditions and seasonality of the
business may have a significant impact on the operating results. As a
consequence, operating results for any interim period are not necessarily
indicative of the results that may be expected for the entire year. For
further information, refer to the financial statements and footnotes
thereto for the year ended June 30, 1996 included in the Company's Annual
Report.
2. PRO FORMA INCOME TAX EXPENSE
On October 3, 1995 the Company elected to terminate its S corporation
status in connection with the initial public offering of common stock as
discussed in Note 5. Prior to this date, the Company did not pay federal or
state income tax on its taxable income. Instead, the shareholders reported
on their personal income tax returns their proportionate share of the
Company's taxable income and tax credits. Accordingly, the provision for
income taxes for all periods prior to the date of termination of the
company's S corporation status represents a pro forma adjustment to reflect
income taxes as if the Company had been a C corporation rather than an S
corporation, based upon an assumed combined federal and state tax rate of
39.5%.
3. PRO FORMA NET INCOME PER SHARE
Pro forma net income per share for periods presented has been computed by
dividing pro forma net income by the number of shares outstanding, assuming
that the 1,178-for-1 stock split and recapitalization in connection
therewith were completed at the beginning of fiscal 1995. In addition,
pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 55, pro forma shares outstanding have been adjusted to include 766,666
of the shares issued by the Company in the offering at the initial public
offering price of $15.00 per share, the proceeds of which were used to pay
the $11,500,000 divided of undistributed previously taxed S corporation
earnings and profits.
4. SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
Supplemental pro forma net income per share is based on pro forma net
income adjusted for a pro forma elimination of interest expense, less the
related income tax effect, associated with the portion of the offering
proceeds used to retire indebtedness. The increase in pro forma net
earnings due to this supplemental adjustment is $191,000 for the three
months ended September 30, 1995. Supplemental pro forma net income per
share is calculated by dividing supplemental pro forma net income by the
number of shares outstanding after the offering (6,070,778).
5. INITIAL PUBLIC OFFERING
On October 4, 1995, the Company completed a public offering of 2,000,000
shares of common stock at $15.00 per share, and on the same date sold an
additional 300,000 shares in connection with the underwriters' exercise of
their over-allotment option. Net proceeds received by the Company, after
deducting offering expenses and underwriting discounts, were approximately
$31,529,000.
6
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Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
SUMMARY
The Company's pro forma net income for the first quarter of fiscal year 1997 was
$2.1 million, up 49% from the $1.4 million achieved during the first quarter of
fiscal year 1996. Pro forma earnings per share increased from $.31 per share in
the first quarter of fiscal 1996 to $.35 per share in the first quarter of
fiscal 1997. The first quarter fiscal 1997 earnings per share compared to fiscal
1996 is negatively impacted by the increase in shares outstanding from 4.54
million shares in fiscal 1996 to 6.07 million shares in fiscal 1997.
Supplemental pro forma earnings per share increased from $.26 per share in the
first quarter of fiscal 1996 to $.35 per share in the first quarter of fiscal
1997.
RESULTS OF OPERATIONS
Net Sales
Net sales for the first quarter increased 8% to $30.8 million compared to the
same quarter last year. The increase is primarily attributable to increased
catalog circulation and increased average order value due to a change in product
mix. Retail and private label sales as a percent of total sales have not
significantly changed from prior quarters.
Demand for premiere product, especially Nike/R/, continued to exceed current
allocations. This resulted in a 40% increase in out of stock in the first
quarter orders over last year. The Company continues to work with vendors on
product allocations. The Company's allocation of Nike product to be received in
the second quarter of fiscal 1997 is more than double the amount received in the
second quarter last year. In the third quarter of fiscal 1997 the Company's
expected allocation of Nike product increased four fold over the same quarter
last year. Nike product represented 48% of total sales for the first quarter
this year versus 43% last year. No other vendors represented more than 10% of
total sales.
Gross Profit
During the quarter, gross profit increased 23% over the same period last year
from $12.8 million to $15.7 million. The company's gross margin percentage for
the first quarter of fiscal 1997 increased to 51% compared to 45% during the
same period in the prior year. This increase is due principally to higher
product margins due to a change in product mix, fewer liquidation sales and
better control over freight expenses compared to the prior year.
Operating Expenses
Operating expenses for the quarter were 22% greater than in the first quarter of
fiscal year 1996. Increases in operating expenses resulted principally from
variable publicity costs associated with catalog product and circulation. Paper
prices were consistent with the prior year. Circulation increased 29% over the
first fiscal quarter of 1996.
Interest Income and Expense
Surplus cash not required for day to day operations generated interest income of
$90,000 for the quarter compared to $0 for the same quarter last year.
Interest expense for the quarter was $3,000 compared to $316,000 for the same
quarter last year. This decrease is attributable to the elimination of bank debt
early in the second quarter of fiscal 1996 with the proceeds received from the
initial public offering.
Income Taxes
The tax provision for the quarter is $1,372,000 for an effective tax rate of
39.5%. This compares to a $920,000 provision for income taxes for prior periods
representing a pro forma adjustment to reflect income taxes as if the Company
had been a C corporation rather than an S corporation, based on an assumed
combined federal and state tax of 39.5% for the first quarter of fiscal 1996.
Pro forma Net Income
For the three months ended September 30, 1996, pro forma net income was $2.1
million, up 49% from the $1.4 million achieved during the first three months of
fiscal 1996. Pro forma earnings per share for the three months ended September
30, 1996 increased to $.35 per share compared to $.31 per share for the three
months ended September 30, 1995.
7
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LIQUIDITY AND CAPITAL RESOURCES
Cash Provided by Operations
Cash used in operations totaled $3 million during the quarter due mainly to
increased inventory levels. This compares with $1.6 million of cash used in
operations during the first quarter of fiscal 1996.
Capital Expenditures
Capital expenditures totaled $405,000 during the first quarter of 1997. This was
attributable to purchases of computer equipment and furnishings for a second
phone center in Oshkosh, Wisconsin and upgrades to computer equipment and
software at the corporate headquarters in Wausau, Wisconsin. Capital
expenditures for the first quarter last year were $158,000.
The Company announced an agreement to purchase a 90,000 square foot building
which will serve as its future headquarters and retail store. This purchase will
require a cash outlay of approximately $1.4 million in November 1996. An
additional $1.6 million will be expended for building renovations during fiscal
1997. Cash provided by operations and the credit facility are expected to meet
working capital needs and planned capital expenditure requirements.
Financing
The Company's credit facility consists of a $5 million demand line of credit and
a $5 million revolving credit agreement. At September 30, 1996, there were no
outstanding borrowings under the credit facility. The Company believes borrowing
under the demand line of credit will occur during the second quarter of the
current fiscal year due to further expansion of inventory levels necessary to
meet sales demand of the Christmas selling season.
The company leases its warehouse facilities in Wausau, Wisconsin and continues
to evaluate the need to purchase or construct a permanent distribution center.
The Company believes additional financing is readily available should it be
needed to fund this expansion.
Forward Looking Statements
A number of the matters and subject areas discussed in this Form 10-Q that are
not historical or current facts deal with potential future circumstances and
developments. These include expected future financial results, liquidity needs,
financing ability, management's or the Company's expectations and beliefs and
similar matters discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations. The discussions of such matters and subject
areas is qualified by the inherent risk and uncertainties surrounding future
expectations generally, and also may materially differ from the Company's actual
future experience. The Company's business, operations and financial performance
are subject to certain risks and uncertainties which could result in material
differences in actual results from the Company's current expectations. These
risks and uncertainties include, but are not limited to, general economic
conditions, demand for the Company's products, product availability, inventory
selection, and costs of operation such as paper prices and freight costs.
SEASONALITY
The Company's business is somewhat seasonal. In particular, gross profit and
income from operations have historically been weaker during the fourth quarter
of the Company's fiscal year. As a result, results of operations for the three
month period ending September 30, 1996 should not be considered to be indicative
of results to be reported for the balance of the year.
PART II - OTHER INFORMATION
Item 5 Other Information
The Company announced an agreement to purchase, subject to certain
contingencies, the Riverside Plaza in Wausau, Wisconsin to be used as the future
headquarters and retail store for the Company. Riverside Plaza is a 90,000
square foot shopping center located near the Company's current headquarters in
downtown Wausau.
8
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Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amended and Restated Articles of Incorporation of the Company.
Incorporated by reference to Exhibit 3.1 of Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration Statement
No. 33-95368) filed by the Company with the Securities and Exchange
Commission on September 12, 1995.
3.2 Amended and Restated By-Laws of the Company. Incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form S-1
(Registration Statement No. 33-95368) filed by the Company with the
Securities and Exchange Commission on August 3, 1995.
27 Financial Data Schedule.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K for
the quarter ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 14th day of November, 1996
EASTBAY, INC.
BY /s/ HARRY H. COLCORD
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Harry H. Colcord, President and
Chief Executive Officer
BY /s/ JOHN V. SCHAEFER
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John V. Schaefer, Vice President of
Operations, Chief Financial Officer and Secretary
9
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EXHIBIT INDEX
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Exhibit Page No.
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27. Financial Data Schedule 11
</TABLE>
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
financial statements within the 10-Q for the first quarter ended 9/30/96 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,087,000
<SECURITIES> 0
<RECEIVABLES> 1,461,000
<ALLOWANCES> 89,000
<INVENTORY> 39,863,000
<CURRENT-ASSETS> 49,777,000
<PP&E> 6,264,000
<DEPRECIATION> 3,504,000
<TOTAL-ASSETS> 52,943,000
<CURRENT-LIABILITIES> 12,990,000
<BONDS> 0
<COMMON> 61,000
0
0
<OTHER-SE> 3,989,200
<TOTAL-LIABILITY-AND-EQUITY> 52,943,000
<SALES> 30,816,000
<TOTAL-REVENUES> 30,816,000
<CGS> 15,105,000
<TOTAL-COSTS> 15,105,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,000
<INCOME-PRETAX> 3,472,000
<INCOME-TAX> 1,372,000
<INCOME-CONTINUING> 2,100,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,100,000
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
