Fanatics, Inc.
Years Ended February 28, 2011 and February 28, 2010
With Report of Independent Certified Public Accountants
Report of Independent Certified Public Accountants | 1 | |||
Consolidated Financial Statements | ||||
Consolidated Statements of Financial Position | 2 | |||
Consolidated Statements of Operations | 3 | |||
Consolidated Statements of Changes in Shareholders’ Equity | 4 | |||
Consolidated Statements of Cash Flows | 5 | |||
Notes to Consolidated Financial Statements | 6 |
Report of Independent Certified Public Accountants
The Board of Directors
Fanatics, Inc.
We have audited the accompanying consolidated statements of financial position of Fanatics, Inc. and subsidiaries as of February 28, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fanatics, Inc. and subsidiaries at February 28, 2011 and 2010, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Jacksonville, Florida
April 15, 2011
1
(In Thousands, Except Share Data)
February 28 | ||||||||
2011 | 2010 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 8,241 | $ | 18,658 | ||||
Short-term investments | 12,979 | 5,937 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $37 and $100, respectively | 921 | 1,170 | ||||||
Inventory, net | 25,616 | 19,102 | ||||||
Prepaid and other current assets | 1,363 | 445 | ||||||
Deferred income taxes | 3,029 | 2,617 | ||||||
Total current assets | 52,149 | 47,929 | ||||||
Property and equipment, net | 18,033 | 7,194 | ||||||
Goodwill | 1,834 | 1,834 | ||||||
Intangible assets, net | 1,426 | 2,086 | ||||||
Other assets | 979 | 67 | ||||||
Total assets | $ | 74,421 | $ | 59,110 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,015 | $ | 3,952 | ||||
Accrued expenses | 8,000 | 4,542 | ||||||
Deferred revenue | 798 | 784 | ||||||
Current portion of long-term debt | — | 31 | ||||||
Income taxes payable | 824 | 3,353 | ||||||
Fan cash liability | 1,587 | 1,223 | ||||||
Total current liabilities | 16,224 | 13,885 | ||||||
Long-term liabilities: | ||||||||
Notes payable | — | 886 | ||||||
Deferred income taxes | 3,477 | 1,037 | ||||||
Deferred rent | 861 | 55 | ||||||
Total long-term liabilities | 4,338 | 1,978 | ||||||
Commitments and contingencies(Note 10) | ||||||||
Shareholders’ equity: | ||||||||
Series A preferred stock, $0.001 par value; 7,758,621 shares authorized; 7,758,620 shares issued and outstanding at February 28, 2011 and 2010 | 45,000 | 45,000 | ||||||
Class A common stock, $0.001 par value; 40,000,000 shares authorized; 22,472 shares issued at February 28, 2011 and 0 issued at February 28, 2010 | — | — | ||||||
Class B common stock, $0.001 par value; 20,000,000 shares authorized; 14,827,588 outstanding at February 28, 2011 and 2010, and 5,172,412 shares held in treasury at February 28, 2011 and 2010 | 15 | 15 | ||||||
Less cost of treasury shares | (22,245 | ) | (22,239 | ) | ||||
Additional paid-in capital | 1,981 | 1,048 | ||||||
Retained earnings | 29,108 | 19,423 | ||||||
Total shareholders’ equity | 53,859 | 43,247 | ||||||
Total liabilities and shareholders’ equity | $ | 74,421 | $ | 59,110 | ||||
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(In Thousands)
Year Ended February 28 | ||||||||
2011 | 2010 | |||||||
Net revenue | $ | 189,102 | $ | 141,693 | ||||
Cost of goods sold (excluding depreciation and amortization shown below) | 93,605 | 71,574 | ||||||
Gross profit | 95,497 | 70,119 | ||||||
Selling, general, and administrative expenses | 75,496 | 50,719 | ||||||
Depreciation and amortization | 4,298 | 2,655 | ||||||
Impairment of intangible assets | 393 | — | ||||||
Income from operations | 15,310 | 16,745 | ||||||
Other expense (income): | ||||||||
Interest expense | 62 | 75 | ||||||
Interest income | (27 | ) | (33 | ) | ||||
Other expense (income), net | (164 | ) | (116 | ) | ||||
Total other expense (income) | (129 | ) | (74 | ) | ||||
Income before income taxes | 15,439 | 16,819 | ||||||
Provision for income taxes | 5,754 | 6,140 | ||||||
Net income | $ | 9,685 | $ | 10,679 | ||||
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(In Thousands, Except Share Data)
Redeemable | ||||||||||||||||||||||||||||||||||||||||||||
Convertible Preferred | Common Stock | Common Stock | Additional | Total | ||||||||||||||||||||||||||||||||||||||||
Stock | Treasury Stock | Class A | Class B | Paid-In | Retained | Shareholders’ | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||||||||||||||||||||
Balance, February 28, 2009 | 7,758,620 | 45,000 | 5,172,412 | (22,239 | ) | — | — | 14,827,588 | 15 | 433 | 8,744 | 31,953 | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | 10,679 | 10,679 | |||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | — | — | 615 | — | 615 | |||||||||||||||||||||||||||||||||
Balance, February 28, 2010 | 7,758,620 | 45,000 | 5,172,412 | (22,239 | ) | — | — | 14,827,588 | 15 | 1,048 | 19,423 | 43,247 | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | 9,685 | 9,685 | |||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | — | — | 733 | — | 733 | |||||||||||||||||||||||||||||||||
Stock option exercise | — | — | (1,250 | ) | 5 | — | — | 1,250 | — | — | — | 5 | ||||||||||||||||||||||||||||||||
Common stock repurchase | — | — | 1,250 | (11 | ) | — | — | (1,250 | ) | — | — | — | (11 | ) | ||||||||||||||||||||||||||||||
Common stock issuance | — | — | — | — | 22,472 | — | — | — | 200 | — | 200 | |||||||||||||||||||||||||||||||||
Balance, February 28, 2011 | 7,758,620 | $ | 45,000 | 5,172,412 | $ | (22,245 | ) | 22,472 | $ | — | 14,827,588 | $ | 15 | $ | 1,981 | $ | 29,108 | $ | 53,859 | |||||||||||||||||||||||||
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(In Thousands)
Year Ended February 28 | ||||||||
2011 | 2010 | |||||||
Operating activities | ||||||||
Net income | $ | 9,685 | $ | 10,679 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 4,298 | 2,655 | ||||||
Impairment of intangible assets | 393 | — | ||||||
Stock-based compensation | 733 | 615 | ||||||
Deferred income taxes | 2,441 | (636 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 249 | (596 | ) | |||||
Income taxes | (2,529 | ) | 255 | |||||
Inventories | (6,514 | ) | (3,654 | ) | ||||
Accounts payable and accrued expenses | 4,520 | 548 | ||||||
Fan cash liability | 364 | 343 | ||||||
Other assets | (2,242 | ) | (136 | ) | ||||
Other liabilities | 819 | 462 | ||||||
Net cash provided by operating activities | 12,217 | 10,535 | ||||||
Investing activities | ||||||||
Business acquisition, net of cash received | — | (3,548 | ) | |||||
Proceeds from investments | 10,969 | — | ||||||
Purchases of investments | (18,010 | ) | (5,931 | ) | ||||
Purchases of property and equipment | (14,870 | ) | (2,852 | ) | ||||
Net cash used in investing activities | (21,911 | ) | (12,331 | ) | ||||
Financing activities | ||||||||
Principal payments on long-term debt | (917 | ) | (29 | ) | ||||
Proceeds from issuance of common stock | 205 | — | ||||||
Repurchase of common stock | (11 | ) | — | |||||
Dividends | — | — | ||||||
Net cash used in financing activities | (723 | ) | (29 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (10,417 | ) | (1,825 | ) | ||||
Cash and cash equivalents, beginning of year | 18,658 | 20,483 | ||||||
Cash and cash equivalents, end of year | $ | 8,241 | $ | 18,658 | ||||
Supplemental disclosures | ||||||||
Cash paid for interest | $ | 102 | $ | 74 | ||||
Cash paid for income taxes | $ | 6,255 | $ | 6,463 |
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2. | Summary of Significant Accounting Policies (continued) |
7
• | Five years for furniture and equipment |
• | Three years for computer hardware and software, including internal use software |
• | Five years for autos |
• | The lesser of fifteen years or lease term for leasehold improvements |
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Tangible current assets | $ | 895 | ||
Intangible assets | 627 | |||
Goodwill | 1,834 | |||
Tangible noncurrent assets | 114 | |||
Current liabilities | (141 | ) | ||
Noncurrent liabilities | (263 | ) | ||
Net assets acquired | $ | 3,066 | ||
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Current assets | $ | 8 | ||
Property and equipment | 80 | |||
Identifiable intangibles | 1,012 | |||
Assets transferred and cash paid | $ | 1,100 | ||
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Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. |
Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities. |
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
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February 28 | ||||||||
2011 | 2010 | |||||||
Furniture and equipment | $ | 21,992 | $ | 8,903 | ||||
Software | 4,613 | 4,079 | ||||||
Leaseholds | 1,983 | 755 | ||||||
Autos | 33 | 14 | ||||||
28,621 | 13,751 | |||||||
Less accumulated depreciation | (10,588 | ) | (6,557 | ) | ||||
Property and equipment, net | $ | 18,033 | $ | 7,194 | ||||
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Useful Life | February 28 | |||||||||||
(In Years) | 2011 | 2010 | ||||||||||
Trade name | $ | — | $ | 393 | ||||||||
Total indefinite-lived intangibles | — | 393 | ||||||||||
Non-compete agreements | 4–5 | 1,049 | 1,049 | |||||||||
Proprietary designs | 4 | 46 | 46 | |||||||||
Domain names | 20 | 596 | 596 | |||||||||
Customer relationships | 10 | 136 | 136 | |||||||||
Total definite-lived intangibles | 1,827 | 1,827 | ||||||||||
Accumulated amortization | (401 | ) | (134 | ) | ||||||||
Net carrying value | $ | 1,426 | $ | 2,086 | ||||||||
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2012 | $ | 267 | ||
2013 | 267 | |||
2014 | 243 | |||
2015 | 243 | |||
2016 | 43 |
February 28 | ||||||||
2011 | 2010 | |||||||
Payroll and benefits | $ | 1,517 | $ | 875 | ||||
Sales taxes | 1,697 | 1,292 | ||||||
Professional fees | 1,660 | 449 | ||||||
Internet commissions | 675 | 294 | ||||||
Accrued returns | 592 | 591 | ||||||
Other | 1,859 | 1,041 | ||||||
Total accrued expenses | $ | 8,000 | $ | 4,542 | ||||
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Fiscal Year: | ||||
2011 | $ | 1,049 | ||
2012 | 1,222 | |||
2013 | 956 | |||
2014 | 1,077 | |||
2015 | 531 | |||
2016 | 8 | |||
Total future minimum lease payments | $ | 4,843 | ||
Fiscal Year: | ||||
2011 | $ | 3,545 | ||
2012 | 3,212 | |||
2013 | 2,334 | |||
2014 | 1,219 | |||
2015 | 403 | |||
Total future minimum guaranteed payments | $ | 10,713 | ||
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12. | Stock Awards (continued) |
February 28 | ||||||||
2011 | 2010 | |||||||
Expected term of options(1) | 7 years | 7 years | ||||||
Expected volatility(2) | 41.13–46.54 | 50 | ||||||
Risk-free rate(3) | 1.92–2.69 | 3.22 | ||||||
Expected dividend yield(4) | — | — |
(1) | An estimated expected life of 7 years before exercise was used for the grants during the years ended February 28, 2011 and 2010, respectively, based on the expected holding period of the option-holder at which time all shares would expect to be vested and then exercised. | |
(2) | The expected volatility for each grant was estimated using the weighted average of historical weekly price changes of the Company’s competitors’ common stock over the most recent period equal to the expected option life of the grant. | |
(3) | The risk-free interest rate for periods equal to the expected term of the share option is based on the rate of treasury securities with the same term as the option as of the grant date. | |
(4) | An expected dividend yield of 0% was used because the Company has not, and does not plan to pay out dividends in the foreseeable future. |
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Weighted- | Weighted | |||||||||||||||
Average | Average | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Shares | Price | Term (Years) | Value | |||||||||||||
Outstanding at February 28, 2010 | 1,116,048 | $ | 4.15 | 8.33 | $ | 5,301 | ||||||||||
Granted | 521,066 | 9.23 | ||||||||||||||
Exercised | (1,250 | ) | 4.15 | |||||||||||||
Forfeited | (363,427 | ) | 8.86 | |||||||||||||
Outstanding at February 28, 2011 | 1,272,437 | $ | 4.89 | 7.62 | $ | 8,668 | ||||||||||
Exercisable at February 28, 2011 | 546,023 | $ | 4.27 | 7.34 | $ | 4,022 | ||||||||||
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February 28 | ||||||||
2011 | 2010 | |||||||
Deferred tax assets: | ||||||||
Inventory reserve and capitalization | $ | 908 | $ | 846 | ||||
Accrued compensation and benefits | 469 | 283 | ||||||
Deferred revenue | 586 | 452 | ||||||
State tax liability | 574 | 458 | ||||||
Stock compensation | 657 | 411 | ||||||
Other | 780 | 548 | ||||||
Total deferred tax assets | 3,974 | 2,998 | ||||||
Deferred tax liabilities: | ||||||||
Property and equipment | (4,422 | ) | (1,418 | ) | ||||
Total deferred tax liabilities | (4,422 | ) | (1,418 | ) | ||||
Net deferred tax asset (liability) | $ | (448 | ) | $ | 1,580 | |||
February 28 | ||||||||
2011 | 2010 | |||||||
Net current deferred tax asset | $ | 3,029 | $ | 2,617 | ||||
Net noncurrent deferred tax liability | (3,477 | ) | (1,037 | ) | ||||
Total net deferred tax assets (liabilities) | $ | (448 | ) | $ | 1,580 | |||
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February 28 | ||||||||
2011 | 2010 | |||||||
Current provision: | ||||||||
Federal | $ | 3,147 | $ | 6,170 | ||||
State | 578 | 606 | ||||||
Subtotal current | 3,725 | 6,776 | ||||||
Deferred provision: | ||||||||
Federal | 2,084 | (610 | ) | |||||
State | (55 | ) | (26 | ) | ||||
Subtotal deferred | 2,029 | (636 | ) | |||||
Total provision for income taxes | $ | 5,754 | $ | 6,140 | ||||
Years Ended February 28 | ||||||||
2011 | 2010 | |||||||
Statutory federal rate | 35.0 | % | 35.0 | % | ||||
State income taxes | 2.0 | % | 2.2 | % | ||||
Other | 0.3 | % | (0.7 | )% | ||||
Effective tax rate | 37.3 | % | 36.5 | % | ||||
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