SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 28, 1997 Commission File No.: 0-16442
FIRST TEAM SPORTS, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1545748
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1201 Lund Boulevard
Anoka, Minnesota 55303
(Address of principal executive offices)
Registrant's telephone number, including area code:
(612) 576-3500
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Preferred Stock Purchase Rights
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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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of April 30, 1997 was approximately $29,510,788 based upon the
closing sale price of the Registrant's Common Stock on such date.
Shares of $.01 par value Common Stock outstanding at April 30, 1997:
5,752,596 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1997 Annual Meeting are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
(a) General Development of Business.
First Team Sports, Inc. (the "Company") is engaged in the manufacture
(through independent contract manufacturers) and distribution of in-line roller
skates, ice skates, street hockey equipment and related accessory products.
In-line roller skates feature wheels mounted in a straight line on a
light-weight metal or composite plastic frame, functioning much like the blade
on an ice skate. First Team Sports, Inc. was incorporated under Minnesota law in
May 1986 by David G. Soderquist, John J. Egart and Ronald W. Berg. Mr.
Soderquist and Mr. Egart continue to serve as executive officers and directors
of the Company. First Team Sports Exports, Inc., the Company's wholly owned
subsidiary, was incorporated in April 1991 as a U.S. Virgin Islands corporation.
Unless the context otherwise requires, references in this Form 10-K to the
"Company" refer to First Team Sports, Inc. and its subsidiary.
(b) Financial Information about Industry Segments.
The Company is engaged at the present time in only one industry segment,
namely the manufacture (through independent contract manufacturers) and
distribution of sporting and athletic goods. Financial information concerning
the Company's business is included in Items 6, 7, 8 and 14.
(c) Narrative Description of Business.
(1) Products.
The Company's principal products are in-line roller skates marketed under
the ULTRAWHEELS(R), SABOTAGE(R), SKATE ATTACK(R), STREET ATTACK(R), ROLL USA(R)
and AIRBORNE(R) brand names. The Company also supplies in-line roller skates
under various third party labels. ULTRAWHEELS brand skates, marketed to
specialty and chain sporting goods dealers, are provided in twenty-six different
models: Trion(TM), Millennium(TM), Millennium LS(TM), Spectrum(TM), Azure(TM),
Durango(TM), Laguna(TM), Solana(TM), Taos(TM), Terra(TM), Legend(TM),
Infinity(TM), Royale(TM), Vision(TM), Vision LS(TM), Prism(TM), Sabotage FY(TM),
Sabotage ST(TM), Sabotage RP(TM), Sonic(TM), Sting(TM), Slant 6(TM), Lazar(TM),
Wizard(TM), UltraRace(TM) and Brett Hull Power Play(TM). The twenty-six
different models include styles designed for performance/fitness skaters, adult
and youth recreational skaters, and in-line roller hockey players. The Sabotage
models, also marketed to the specialty and chain sporting goods dealer, are
designed specifically for aggressive in-line skaters. The Skate Attack, Street
Attack, RollUSA and Airborne branded products are produced for sales to the mass
merchant market. The Skate Attack brand skates are manufactured in seven models:
Grind(TM), Corona(TM), Achieve(TM), Eclipse(TM), Swerve(TM), Siren(TM) and
Sport(TM). The RollUSA brand consists of four models: Hawk(TM), Cyclone(TM),
Team Gretzky(TM) and Storm(TM). The Company's in-line roller skates consist of a
molded plastic boot with integrated frame, or a frame riveted to the bottom of
the boot, and high-density polyurethane wheels mounted on ball bearings.
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The industry's first line of women's specific protective gear was
introduced under the UltraWheels brand name in December 1996. WSD(TM) wrist
guards, elbow pads and knee pads are sold separately as well as in a three-pack.
The Company believes the products offer women protective gear that is better
suited to their needs--each item is very lightweight, anatomically designed and
lined with CoolMax(TM) fabric to pull moisture away from skin.
The Company began shipment of its new Softec(TM) line of fitness skates in
March 1997. The Durango, Laguna, Solana, Taos and Terra models are constructed
using patented technology allowing the skates to have the look and feel of an
athletic shoe while maintaining the ankle and lower leg support demanded by
in-line skates. All models feature a removable liner suitable for walking short
distances.
Tuff Guys(TM), the Company's first branded line of replacement wheel sets,
began shipping to European customers in August 1996. The line features
replacement wheel sets for aggressive, recreational, fitness and hockey skaters.
The Company is currently considering marketing the Tuff Guys brand in the United
States.
(2) Status of products in development
The Company continues to develop products for the growing aggressive,
recreational and fitness categories, as well as improving upon existing models.
The aggressive category continues to grow in image and size. Continuing
with its investment in this area, the Company has expanded and improved upon the
Sabotage(TM) line of aggressive skates and accessories. Shipments of the
expanded line are expected to begin in December 1997.
The early success of the Company's Softec products, marketed under the
UltraWheels brand, has led to additional research and development in products
featuring this type of technology. The Company also expects to begin shipment of
skates in this category beginning in December 1997.
The Company intends to introduce additional new products as testing is
completed to its satisfaction and when funding is available. There is no
assurance, however, that the Company will be successful in introducing new
products or that such new products will prove commercially acceptable.
(3) Source of Materials.
The Company's products are sourced from independent contract manufacturers
located in the United States and foreign countries. These suppliers manufacture,
assemble and package the Company's products under the detailed specifications of
the Company. The independent contract manufacturers are responsible for shipment
to the Company's warehouse in Minneapolis, Minnesota or directly to certain
major customers' distribution centers and warehouses.
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The components for the Company's products are manufactured by independent
contract manufacturers, also located in the United States and foreign countries,
who have been procured by the Company's suppliers or, frequently, by management
of the Company.
The Company submits purchase orders to its manufacturers for the production
of specific amounts of its products and has not entered into any long-term
contracts for production. All purchase orders are in U.S. Dollars.
(4) Patents, trademarks, licenses, franchises and concessions.
The Company markets its products under a number of trade names and
trademarks, including the following principal trademarks or registered
trademarks of the Company: "Ultra- Wheels," "Skate Attack," "Official Skate of
Street Hockey," "Euro-Sport," "Euro Rail," "Ultra- Ice" and "Street Attack." The
Company owns approximately ten United States trademark registrations and, in
addition, has several pending trademark applications. The Company owns a large
number of foreign trademark registrations, regularly files for registration of
its more important trademarks in the United States and in numerous foreign
countries and has several pending applications. The Company relies to varying
degrees upon its common law rights of trademark ownership, copyrights and
registration of its trademarks. The Company has licenses to use the names and
likeness of various hockey players, figure skaters and related organizations as
mentioned above. The Company has also filed five patent applications covering
various parts of in-line skates and methods of producing its products.
(5) and (6) Seasonality and Working Capital.
The Company's marketing area covers North America, South America, Europe,
Australia and the Far East. This large and diverse marketing area, along with
the acceptance of the Company's products by athletes and recreational users, has
helped reduce the seasonal variations in the Company's sales and in the demands
on the Company's working capital. The Company's products are primarily used
outdoors in the spring and summer months. With approximately 90% of the
Company's sales occurring in North America and Europe, the Company does have
increased sales and demands on its working capital during the spring selling
season.
(7) Major Customers.
Certain customers of the Company have accounted for more than 10% of the
Company's sales in one or more of the past three fiscal years. In fiscal 1997,
Wal-Mart, based in Bentonville, Arkansas, accounted for approximately 23% of the
Company's total revenues. In fiscal 1996, Wal-Mart accounted for approximately
27% of the Company's total revenues and Target Stores, based in Minneapolis,
Minnesota, accounted for approximately 12% of the Company's total revenues. In
fiscal 1995, Target Stores accounted for approximately 18% of the Company's
total revenues and Wal-Mart accounted for approximately 18% of the Company's
total revenues.
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(8) Backlog.
The Company had approximately $9,044,318 in unfilled purchase orders as of
May 1, 1997, compared to approximately $10,369,364 in unfilled purchase orders
on May 22, 1996. Approximately $5,481,931 of these backlog orders are a result
of spring booking orders to be shipped at future dates and approximately
$3,562,387 result from orders of products that are temporarily unavailable.
(9) Government contracts.
The Company has no Government contracts.
(10) Competition.
The principal competitive factors in the in-line roller skate industry are
name recognition, price and product performance. The main areas of difference in
product performance are in the weight and strength of the boot and frame, the
hardness of the wheels and the quality and lubrication of the wheel bearings.
The Company offers a 90-day warranty on its products, which the Company believes
is an important competitive factor. Beyond such warranty, the Company does not
offer service on its products and does not believe that service is an important
competitive factor.
The Company believes it has a significant share of the in-line roller skate
market. Rollerblade, Inc., maker of Rollerblades, is considered to be the market
leader; and K2, Inc. is a strong competitor. The Company competes with
Rollerblade, Inc. and K2, Inc. in all price and quality ranges. The Company
believes that it would not be difficult for other companies, both new
enterprises and established members of the sporting goods industry, to enter the
in-line roller skate market, and, in fact, many new companies have entered this
market in recent years.
(11) Research and development.
Estimated research and development expenses for Company-sponsored research
activities relating to the development of new products, services or techniques
or the improvement of existing products, services or techniques were not
material in fiscal 1997, 1996 or 1995.
(12) Effect of environmental regulation.
To the extent that the Company's management can determine, there are no
federal, state or local provisions regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment with
which compliance by the Company has had or is expected to have a material effect
upon the capital expenditures, earnings or competitive position of the Company.
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(13) Employees.
As of May 1, 1997, the Company employed 81 full-time employees and 3
part-time employees.
(d) Export Sales.
The Company's wholly owned subsidiary, First Team Sports Exports, Inc., was
formed in April 1991, which subsidiary has no assets attributable to any
specific foreign geographic area. In fiscal 1997, First Team Sports Exports,
Inc. had export sales of $25,506,141, which represented 33% of the total fiscal
1997 net sales of the Company. Export sales in fiscal 1996 were $25,818,632,
which represented approximately 27% of total net sales; and, in fiscal 1995,
they were $10,967,437, which represented approximately 13% of total net sales.
Canadian net sales were $5,621,496 (7% of total net sales) in fiscal 1997,
$10,358,169 (11% of total net sales) in fiscal 1996 and $4,986,591 (6% of total
net sales) in fiscal 1995. Sales outside North America were $19,884,645 (26% of
total net sales) in fiscal 1997, $15,460,463 (16% of total net sales) in fiscal
1996 and $5,980,846 (7% of total net sales) in fiscal 1995.
ITEM 2. PROPERTIES
The Company owns and occupies approximately 25,000 square feet of office
space and 180,000 square feet of warehouse space located at 1201 Lund Boulevard,
Anoka, Minnesota, a suburb of Minneapolis, Minnesota. The Company has a real
estate mortgage on the property which had a balance of $4,503,000 as of May 1,
1997.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's shareholders during the
quarter ended February 28, 1997.
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EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth the names and ages of current executive officers
of the Company in addition to information regarding their positions with the
Company, their periods of service in such positions and their business
experience for the past five years. Executive officers generally serve in office
for terms of approximately one year. There are no family relationships among the
officers named below.
Name and Age of Current Positions with Company and Principal
Executive Officer Occupations for the Past Five Years
John J. Egart President and Chief Executive Officer of the Company since
47 January 1994; Director of the Company since the Company's
inception in May 1986; Executive Vice President of the
Company from the Company's inception in May 1986 to
January 1994.
David G. Soderquist Vice Chairman of the Company since January 1994; Director
48 of the Company since the Company's inception in May 1986;
President and Chief Executive Officer of the Company
from the Company's inception in May 1986 to January 1994.
Robert Lenius, Jr. Vice President and Chief Financial Officer of the Company
49 since July 1991; Vice President/Finance of the Company
from July 1987 to July 1991.
Susan L. Joch Vice President/Marketing of the Company since November
36 1993; Director of Marketing of the Company from July 1991
to November 1993; Product Marketing Manager for Tonka
Corporation, a toy manufacturer, from June 1989 to
July 1991.
Kent A. Brunner Vice President of Finance of the Company since September
36 1996; Controller of the Company from November 1994 to
September 1996; Audit Manager for McGladrey & Pullen,
LLP, a national certified public accounting firm, from
June 1988 to November 1994.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information.
The range of bid quotations for the Company's Common Stock during fiscal
1996 and fiscal 1997 was as follows:
Quarter Ended High Low
May 31, 1995 $25-1/2 $18
August 31, 1995 $31-3/4 $19
November 30, 1995 $21-3/4 $10-3/4
February 29, 1996 $18-3/4 $12-1/4
May 31, 1996 $17-7/8 $12-3/4
August 31, 1996 $14-5/8 $ 7-1/2
November 30, 1996 $10 $ 7-1/8
February 28, 1997 $10-1/4 $ 5-1/2
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "FTSP." The above prices are bid quotations and may not necessarily
represent actual transactions.
(b) Holders.
As of April 30, 1997, there were approximately 459 holders of record of the
Company's Common Stock.
(c) Dividends.
The Company has never paid cash dividends and has no present intention to
pay cash dividends in the foreseeable future. Under the Company's bank line of
credit, the Company may not pay dividends without the bank's consent.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended February 28, 1997, February 29, 1996,
February 28, 1995, 1994 and 1994
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Operations Data:
Net Sales $76,435,022 $97,667,448 $85,528,860 $35,534,892 $38,244,144
Net Income 2,725,282 7,811,857 6,098,757 635,409 2,961,948
Net Income Per Share .46 1.30 1.07 .12 .54
Cash Dividends Paid Per Share -- -- -- -- --
Balance Sheet Data:
Total Assets $52,343,501 $55,957,802 $45,863,753 $29,596,443 $20,323,893
Working Capital 27,921,689 24,944,985 18,109,090 11,589,217 11,175,839
Long-Term Obligations 6,217,936 6,880,360 3,053,494 1,800,072 1,641,248
Shareholders' Equity 32,745,931 29,830,283 20,850,079 13,939,578 13,279,475
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales. Net sales declined 22% in the fiscal year ended February 28,
1997 compared to an increase of 14% in fiscal year 1996. In-line skate sales
volume decreases and a decrease in the average selling price of the Company's
Skate Attack line were the principal factors in the Company's net sales decline
in fiscal 1997. The Company's Skate Attack line is sold primarily through the
mass merchant retail channel and carries a lower average selling price, which
was pressured further downward in fiscal 1997 as a result of excess retail
inventory levels and a slightly saturated market. The net sales increase in
fiscal 1996 was due principally to increased sales volume.
The Company's product groups consist of in-line skates, ice skates,
accessories and parts (primarily protective wear and replacement wheels and
bearings) and roller hockey products. Within the product groups, the Company
maintains an UltraWheels and Skate Attack line of products. The UltraWheels line
consists of higher quality and higher priced products that are targeted for the
specialty and sporting goods chain store customers, and the Skate Attack line
consists of lower priced products for mass merchant customers.
In-line skate net sales were $65 million, $82 million and $69.3 million in
fiscal 1997, 1996 and 1995. Ice skate net sales were insignificant, $1.4 million
and $1 million in fiscal 1997, 1996 and 1995. Accessories and parts net sales
were $9.3 million, $10.9 million and $10.3 million in fiscal 1997, 1996 and
1995. Roller hockey products net sales were $2.1 million, $2.8 million and $4.7
million in fiscal 1997, 1996 and 1995.
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While the Company experienced a decrease in U.S. and Canadian sales, the
European market continued to grow and expand for the Company's products. U.S.
and Canadian sales were $56.4 million, $82.2 million and $79.5 million in fiscal
1997, 1996 and 1995. Excess inventories in the marketplace, an overall retail
slowdown in in-line skate purchases and strong competition for the Company's
mass merchant accounts are the primary reasons for the decrease in 1997. Sales
in Europe were $14.1 million, $8.5 million and $2.2 million in fiscal 1997, 1996
and 1995. The European market has held strong growth rates due to customer
acceptance of products and increased consumer participation in in-line skating.
Other International sales were $5.9 million, $7 million and $3.8 million in
fiscal 1997, 1996 and 1995. The decrease in other international sales in 1997
was primarily the result of excess inventory levels in the Pacific Rim
marketplace.
Gross Margin. As a percentage of net sales the gross margin was 25.6% in
1997, 29.9% in 1996 and 29.7% in 1995. The percentage decreased in 1997 was due
to an overall retail slowdown of in-line skate sales and excess retail inventory
levels. This resulted in increased competition and gross margin pressure at all
levels from the mass merchants to the specialty shops.
The Company's UltraWheels brand of in-line skates accounted for 51%, 42%
and 36% of in-line skate sales in fiscal 1997, 1996 and 1995. The Skate Attack
brand accounted for 47%, 53% and 60% of in-line skate sales in fiscal 1997, 1996
and 1995. Although the UltraWheels brand consists of higher end and higher
margin products, the increased gross margin from these sales was limited due to
the reasons discussed above and was partially offset by the gross margin
pressure of the Skate Attack products and close-out product sales.
Operating Expenses. Selling expenses were $7.2 million, $7.8 million and
$7.1 million in fiscal 1997, 1996, and 1995. As a percentage of net sales the
selling expenses were 9.4%, 8.0%, and 8.3% in fiscal 1997, 1996 and 1995. The
decrease in the absolute dollar amount of selling expenses in 1997 was due
primarily to a reduction in sales commissions and endorsement royalties
associated with the decreased sales volume. The increase in selling expenses as
a percentage of net sales in fiscal 1997 was due to continued efforts to
advertise and market the Company's new products. The increase in the absolute
dollar amount of selling expenses in 1996 was due primarily to additional
commissions and advertising and promotional expenses associated with new
products and the increased sales volume.
General and administrative expenses were $6.8 million, $8.3 million and
$7.9 million in fiscal 1997, 1996 and 1995. As a percentage of net sales the
general and administrative expenses were 8.9%, 8.5% and 9.2% in fiscal 1997,
1996 and 1995. The decrease in the absolute dollar amount of general and
administrative expenses in 1997 was due primarily to a reduction in personnel
costs, savings associated with the Company's new office and warehouse facility,
and reduced operating expenditures resulting from managements control over
spending and expenses. The increase in general and administrative expenses in
1996 was the result of increased personnel and occupancy expenses incurred to
manage the increased sales volume.
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The overall decrease in operating expenses in 1997 was a direct result of
managements continued efforts to closely monitor and control expenses, and the
ability of management to respond on a timely basis to the Company's reduced
sales activity.
Other Income and Expense. Interest expense was $1.3 million, $.9 million
and $.8 million in fiscal 1997, 1996 and 1995. The increases in interest expense
in fiscal 1997 and 1996 were primarily due to the addition of the mortgage note
associated with the Company's new office and warehouse facility.
Provision for Income Taxes. The Company's effective tax rate decreased from
36.0% in 1995 to 35.7% in 1996 to 35.5% in 1997. The decrease was primarily the
result of an increase in the Company's international sales as a percentage of
total sales. The Company utilizes its wholly-owned subsidiary First Team Sports
Exports, Inc., a foreign sale corporation, to help reduce the Company's tax
burden.
Net Income. Net income as a percent of net sales was 3.6%, 8.0% and 7.1% in
fiscal 1997, 1996 and 1995. The decrease in 1997 and the increase in 1996 were a
result of the factors discussed above.
Liquidity and Capital Resources
As of February 28, 1997, total cash and cash equivalents were $381,427
compared to $2,166,863 as of February 29, 1996. The decrease in cash and cash
equivalents in fiscal 1997 was a result of $507,778 of cash provided by
operating activities being offset by $1,591,220 of cash used in investing
activities and $701,994 of cash used in financing activities.
The net cash provided by operating activities was primarily from net income
plus depreciation and the net effect of the decrease in inventories and
payables. Inventory levels, primarily component parts, decreased significantly
in fiscal 1997. This decrease was attributable to the Company having a higher
percentage of its in-line skates made overseas. The accounts payable decrease
was the result of the Company taking advantage of vendor discounts and the
increased overseas manufacturing.
Investing activities consumed $1,591,220 in cash during fiscal 1997
compared to $7,509,272 in fiscal 1996. In fiscal 1996 the Company purchased its
new office and warehouse facility which accounted for approximately $5 million
of cash used in investing activities. The capital expenditures for fiscal 1997
consisted primarily of production tooling required for new products. The Company
expects to spend approximately $1.8 million for capital additions in fiscal
1998.
The Company used $701,994 for financing activities in fiscal 1997 compared
to $539,169 provided by financing activities in fiscal 1996. The major financing
application of cash in fiscal 1997 was the reduction of the Company's line of
credit balance, and the major source of cash from financing activities in fiscal
1997 was proceeds from the Company's office and warehouse facility mortgage.
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The Company's debt-to-worth ratio was .6 to 1 as of February 28, 1997
compared to .9 to 1 as of February 29, 1996. 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 $6,217,936 as
of February 28, 1997 (see Note 5 in Notes to Financial Statements). As of
February 28, 1997, the Company had a revolving line of credit established with a
bank that provides for borrowings of up to $15,000,000 of which $5,319,250 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 February 28, 1997 there was no balance outstanding on
this credit facility.
The Company believes that its current cash position with funds available
under existing bank arrangements and cash generated from profitable operations
will be sufficient to finance the Company's operating requirements in fiscal
1998.
Outlook: Issues and Uncertainties
The Company does not provide forecasts of potential future financial
performance. The statements contained in this outlook are based on current
expectations. These statements are forward looking and the Company's actual
results may differ materially.
The Company believes that the total number of in-line skating participants
worldwide will continue to grow in fiscal 1998. First Team Sports believes the
dramatic and innovative new products currently on the market will re-awaken avid
participants of in-line skating and will improve the recruitment of new
participants.
The Company's strategy has been and continues to be to introduce high
quality, innovative, price valued products, consequently, driving consumer
demand toward newer products. Future production capacity is planned based on the
continued success of the Company's strategy. If the market does not continue to
grow and move toward higher performance products, revenues and earnings will
likely be adversely impacted.
The Company's gross margin is a sensitive function of the product mix sold,
pricing and the market conditions in any period. Because the Company's Skate
Attack brand is sold to the mass merchant customer, the product is more of a
commodity in nature and generally has lower gross margin percentages than the
Company's UltraWheels brand. As a result, future gross margin percentages are
difficult to predict.
The Company considers it imperative to maintain a strong research and
development program to be able to continue offering innovative new products to
consumers. Research and development expenditures in fiscal 1998 should be
consistent with those in fiscal 1997. The Company also continues to closely
monitor and control its selling and general and administrative expenditures.
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While management of the Company is optimistic about the Company's long-term
prospects, the following issues and uncertainties, among others, should be
considered in evaluating its growth outlook:
Competition. The Company competes with numerous manufacturers of in-line
skates domestically and internationally and anticipates future competition from
other large and well-established sporting good manufacturers. Rollerblade, Inc.
and K2 are the Company's primary competitors and have substantially greater
resources than the Company. The intense competition in the in-line skate market
has put pressure on the Company's profit margins. The Company's ability to
remain competitive in the in-line skate market depends on several factors
including its ability to: (i) control manufacturing costs and offer products at
commercially-acceptable prices; (ii) develop new products and generate market
acceptance of such products; and (iii) continue to develop and expand its
international business.
Dependence on Key Customers. During the fiscal year ended February 28,
1997, sales to Wal-Mart and Target Stores accounted for 23% and 7%,
respectively, of the Company's revenues. Increased competition from other
manufacturers, decreased demand for the Company's products or other
circumstances may have an adverse impact upon the Company's relationship with
Wal-Mart or Target Stores. Decreased orders from either of these customers could
have a material adverse impact on the Company's financial results.
Stock Market Volatility. Historically, the Company's stock price has been
subject to significant volatility. Any deviation in the Company's actual results
from market expectations has often resulted in significant stock price
fluctuations, both positive and negative, and the Company has no reason to
believe such stock price fluctuations will not continue to occur.
Other. The Company's products are primarily used outdoors and therefore
adverse weather conditions can have a negative impact on consumer demand.
Because the Company's products are of a recreational nature and not considered
basic necessities, a general decline in overall economic conditions may have a
greater adverse effect on the Company's sales then on sales of other consumer
products.
First Team Sports believes that it has the product offerings, facilities,
personnel, and competitive and financial resources for continued business
success. However, future revenues, costs, margins, and profits are all
influenced by a number of factors as discussed above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed below are included herein
immediately following the signature page of this Form 10-K on the pages set
forth:
Page
Independent Auditor's Report on Consolidated Financial Statements........F-1
Consolidated Balance Sheets as of February 28, 1997 and
February 29, 1996....................................................F-2
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Consolidated Statements of Income for the years
ended February 28, 1997, February 29, 1996 and February 28, 1995.......F-4
Consolidated Statements of Shareholders' Equity for the years ended
February 28, 1997, February 29, 1996 and February 28, 1995............F-5
Consolidated Statements of Cash Flows for the years ended
February 28, 1997, February 29, 1996 and February 28, 1995............F-6
Notes to Consolidated Financial Statements ..............................F-7
Independent Auditor's Report on Schedule II .............................F-16
Schedule II - Reserve Accounts .........................................F-17
Schedules I, III, IV and V are omitted since they are not applicable, not
required or the information is presented in the consolidated financial
statements or related notes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Other than "Executive Officers of the Company," which is set forth at the
end of Part I of this Form 10-K, the information required by Item 10 is
incorporated herein by reference to the sections labeled "Election of Directors"
and "Compliance With Section 16(a) of the Exchange Act," which appear in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not
later than 120 days after the close of fiscal 1997 in connection with the
Company's 1997 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the sections labeled "Management Compensation" and "Election of Directors,"
which appear in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the close of fiscal 1997 in
connection with the Company's 1997 Annual Meeting of Shareholders.
- 14 -
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the section labeled "Principal Shareholders and Management Shareholdings," which
appears in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the close of fiscal 1997 in
connection with the Company's 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the section labeled "Management Compensation," which appears in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A not later than
120 days after the close of fiscal 1997 in connection with the Company's 1997
Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report.
(1) Financial Statements. The following financial statements are included
in Part II, Item 8 of this Annual Report on Form 10-K:
Independent Auditor's Report on Consolidated Financial Statements
Consolidated Balance Sheets as of February 28, 1997 and February 29, 1996
Consolidated Statements of Income for the years ended February
28, 1997, February 29, 1996 and February 28, 1995
Consolidated Statements of Shareholders' Equity for the years
ended February 28, 1997, February 29, 1996 and February 28, 1995
Consolidated Statements of Cash Flows for the years ended
February 28, 1997, February 29, 1996 and February 28, 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. The following schedule is included in
Part II, Item 8, of this Annual Report on Form 10-K:
- 15 -
<PAGE>
Independent Auditor's Report on Financial Schedule II.
Schedule II - Reserve Accounts.
Schedules I, III, IV and V are omitted since they are not applicable, not
required or the information is presented in the consolidated financial
statements or related notes.
(3) Exhibits.
The following exhibits are included in this report: See "Exhibit Index to
Form 10-K" beginning at page E-1 immediately following the financial statements
which follow the signature page of this Form 10-K.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended February
28, 1997.
- 16 -
<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.
May 16, 1997 By /s/ John J. Egart
John J. Egart
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Company, in the
capacities, and on the dates, indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints John J.
Egart and Robert L. Lenius, Jr. as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
Signature and Title Date
/s/ John J. Egart May 16, 1997
John J. Egart
President, Chief Executive Officer and Director
(Principal executive officer)
/s/ David G. Soderquist May 16, 1997
David G. Soderquist
Vice Chairman and Director
(Signatures continued on following page)
- 17 -
<PAGE>
Signature and Title Date
/s/ Joe Mendelsohn May 16, 1997
Joe Mendelsohn
Chairman and Director
/s/ Timothy G. Rath May 16, 1997
Timothy G. Rath
Director
/s/ Stanley E. Hubbard May 16, 1997
Stanley E. Hubbard
Director
/s/ William J. McMahon May 16, 1997
William J. McMahon
Director
/s/ Robert L. Lenius, Jr. May 16, 1997
Robert L. Lenius, Jr.
Vice President and Chief Financial Officer
(Principal financial officer)
/s/ Kent A. Brunner May 16, 1997
Kent A. Brunner
Vice President of Finance
(Principal accounting officer)
- 18 -
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First Team Sports, Inc.
Anoka, Minnesota
We have audited the accompanying consolidated balance sheets of First Team
Sports, Inc. and Subsidiary as of February 28, 1997, and February 29, 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three fiscal years in the period ended Febru ary 28, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evide nce supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as 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 financial position of First Team Sports,
Inc. and Subsidiary as of February 28, 1997, and February 29, 1996, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended February 28, 1997, in conformity with generally
accepted accounting principles.
/s/ McGladrey & Pullen, LLP
St. Paul, Minnesota
April 9, 1997
<PAGE>
FIRST TEAM SPORTS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
February 28, 1997 and February 29, 1996
ASSETS (Notes 4 and 5) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 381,427 $ 2,166,863
Receivables:
Trade, less allowance for doubtful accounts
1997 $565,000; 1996 $489,000 17,039,679 16,228,666
Refundable income taxes 258,492 155,146
Inventory (Note 3) 20,881,845 22,813,850
Prepaid expenses 612,880 960,079
Deferred income taxes (Note 6) 997,000 827,000
-------------------------------------
Total current assets 40,171,323 43,151,604
-------------------------------------
Property and Equipment, at cost
Land (Note 10) 600,000 600,000
Building 4,988,680 4,825,740
Production equipment 4,715,979 4,069,078
Office furniture and equipment 1,754,017 1,509,120
Warehouse equipment 325,361 315,509
Vehicles 19,567 46,925
-------------------------------------
12,403,604 11,366,372
Less accumulated depreciation and amortization 2,588,404 1,511,689
-------------------------------------
9,815,200 9,854,683
-------------------------------------
Other Assets
License agreements, less accumulated amortization
1997 $3,039,000; 1996 $2,459,000 (Note 8) 2,065,611 2,645,268
Other 291,367 306,247
-------------------------------------
2,356,978 2,951,515
-------------------------------------
$ 52,343,501 $ 55,957,802
=====================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Note payable to bank (Note 4) $ 5,319,250 $ 5,268,000
Current maturities of long-term debt 662,414 943,060
Trade accounts payable 4,852,459 9,462,883
Accrued expenses 1,415,511 2,532,676
-------------------------------------
Total current liabilities 12,249,634 18,206,619
-------------------------------------
Long-Term Debt, less current maturities (Notes 4 and 5) 6,217,936 6,880,360
-------------------------------------
Deferred Income Taxes (Note 6) 530,000 440,000
-------------------------------------
Deferred Revenue (Note 10) 600,000 600,000
-------------------------------------
Commitments (Note 8)
Shareholders' Equity (Notes 4 and 7)
Common stock, par value $0.01 per share; authorized
10,000,000 shares; issued and outstanding
1997 5,749,796 shares; 1996 5,721,000 shares 57,498 57,210
Additional paid-in capital 9,586,340 9,396,802
Retained earnings 23,102,093 20,376,811
-------------------------------------
32,745,931 29,830,823
-------------------------------------
$ 52,343,501 $ 55,957,802
=====================================
</TABLE>
<PAGE>
FIRST TEAM SPORTS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended February 28, 1997, February 29, 1996, and February 28, 1995
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 2) $ 76,435,022 $ 97,667,448 $ 85,528,860
Cost of goods sold 56,837,195 68,499,170 60,128,035
---------------------------------------------------------
Gross profit 19,597,827 29,168,278 25,400,825
---------------------------------------------------------
Operating expenses:
Selling (Note 8) 7,190,515 7,774,248 7,060,747
General and administrative 6,789,276 8,341,008 7,879,569
---------------------------------------------------------
13,979,791 16,115,256 14,940,316
---------------------------------------------------------
Operating income 5,618,036 13,053,022 10,460,509
Other expense:
Interest expense (1,275,882) (892,321) (761,074)
Other, net (113,872) (10,844) (175,678)
---------------------------------------------------------
Income before income taxes 4,228,282 12,149,857 9,523,757
Federal and state income taxes (Note 6) 1,503,000 4,338,000 3,425,000
---------------------------------------------------------
Net income $ 2,725,282 $ 7,811,857 $ 6,098,757
=========================================================
Net income per common and common equivalent
share (Note 7):
Primary $ 0.46 $ 1.30 $ 1.07
Fully diluted 0.46 1.30 1.03
Weighted average common and common equivalent shares outstanding:
Primary 5,884,175 6,007,004 5,706,932
Fully diluted 5,884,175 6,010,986 5,912,455
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
FIRST TEAM SPORTS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended February 28, 1997, February 29, 1996, and February 28, 1995
Common Stock Additional Total
------------------------------ Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1994 5,447,748 $ 54,477 $ 7,418,904 $ 6,466,197 $ 13,939,578
Shares issued upon exercise of stock options and
warrants (Note 7) 180,479 1,805 810,561 - 812,366
Payout of fractional shares created by three-for-two
stock split (43) - (622) - (622)
Net income - - - 6,098,757 6,098,757
-----------------------------------------------------------------------------
Balance, February 28, 1995 5,628,184 56,282 8,228,843 12,564,954 20,850,079
Shares issued upon exercise of stock options
(Note 7) 92,816 928 500,959 - 501,887
Tax benefit recognized from exercise of certain
stock options (Note 7) - - 667,000 - 667,000
Net income - - - 7,811,857 7,811,857
-----------------------------------------------------------------------------
Balance, February 29, 1996 5,721,000 57,210 9,396,802 20,376,811 29,830,823
Shares issued upon exercise of stock options
(Note 7) 28,796 288 189,538 - 189,826
Net income - - - 2,725,282 2,725,282
-----------------------------------------------------------------------------
Balance, February 28, 1997 5,749,796 $ 57,498 $ 9,586,340 $ 23,102,093 $ 32,745,931
=============================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
FIRST TEAM SPORTS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 28, 1997, February 29, 1996, and February 28, 1995
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,725,282 $ 7,811,857 $ 6,098,757
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 1,537,073 771,045 569,442
Amortization of license agreements 579,657 651,562 557,173
Loss on retirement of equipment 108,510 13,950 174,256
Deferred income taxes (80,000) (225,000) (193,000)
Noncash tax expense related to option exercise - 667,000 -
Changes in current assets and liabilities:
Receivables (811,013) 626,159 (5,486,640)
Inventory 1,932,005 (1,975,679) (8,504,746)
Prepaid expenses 347,199 (71,345) (19,467)
Trade accounts payable (4,610,424) 447,507 3,193,893
Accrued expenses (1,117,165) (72,484) 2,083,381
Income taxes (103,346) (109,000) -
---------------------------------------------------
Net cash provided by (used in) operating
activities 507,778 8,535,572 (1,526,951)
---------------------------------------------------
Cash Flows From Investing Activities
Purchases of building and equipment (1,606,100) (7,419,793) (871,730)
Other 14,880 (89,479) (57,321)
---------------------------------------------------
Net cash used in investing activities (1,591,220) (7,509,272) (929,051)
---------------------------------------------------
Cash Flows From Financing Activities
Net borrowings (payments) under line of credit note (4,823,750) 1,079,000 2,490,000
Principal payments on long-term debt (943,070) (1,041,718) (662,335)
Proceeds from exercise of stock options and warrants, net
of fractional share payments 189,826 501,887 811,744
Proceeds of mortgage notes 4,875,000 - -
---------------------------------------------------
Net cash provided by (used in) financing
activities (701,994) 539,169 2,639,409
---------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,785,436) 1,565,469 183,407
Cash and Cash Equivalents
Beginning 2,166,863 601,394 417,987
---------------------------------------------------
Ending $ 381,427 $ 2,166,863 $ 601,394
===================================================
See Notes to Consolidated Financial Statements
(Additional Cash Flow Information - Note 11).
</TABLE>
<PAGE>
SCHEDULE II
FIRST TEAM SPORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business and concentration of credit risk: The Company sells in-line
roller skates, ice skates, street hockey equipment, and related accessories
under the brand names Ultra-Wheels(TM), Ultra-Ice(TM), Skate Attack(TM), Street
Attack(TM), Gretzky 802(TM), and Roll U.S.A(TM) to retail and sporting goods
stor es. These products are manufactured under outside production arrangements
to the Company's specifications.
Basis of financial statement presentation and accounting estimates: The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the balance sheet and revenues and expenses
for the year. Actual results could differ from those estimates.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, First Team Sports
Exports, Inc. (a foreign sales corporation). All material intercompany accounts
and transactions have been eliminated in consolidation.
Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all demand deposit accounts and short-term cash investments with an
initial maturity of 90 days or less to be cash equivalents.
The Company maintains its cash in bank checking accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
Inventory: Inventory is valued at the lower of cost (first-in, first-out method)
or market.
Depreciation: Depreciation of property and equipment are computed on the
straight-line method over the following estimated useful lives:
Years
Building 39
Production equipment 2-10
Office furniture and equipment 5-7
Warehouse equipment 6-10
Vehicles 5
License agreements: License agreement assets are being amortized over the terms
of the agreements on a straight-line basis.
<PAGE>
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Accounting for long-lived assets: The Company periodically reviews its property,
equipment, and license agreements to determine potential impairment by comparing
their carrying value with the estimated future net undiscounted cash flows
expected to result from the use of the assets, including cash flows from
disposition. Should the sum of the expected future net cash flows be less than
the carrying value, the Company would recognize an impairment loss at that date.
An impairment loss would be measured by comparing the amount by which the
carrying value exceeds the fair value (estimated discounted future cash flows)
of the long-lived assets. To date, management has determined that no impairment
of long-lived assets exists.
Net income per common and common equivalent share: Net income per common share
is computed based upon the weighted-average number of common shares and common
share equivalents (warrants and options) outstanding during each year. Common
share equivalents are included in the computations using the treasury stock
method whenever their inclusion has a dilutive effect.
Income taxes: Deferred taxes are provided using an asset and liability method,
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary di fferences are the
differences between the amounts of assets and liabilities recorded for income
tax and financial reporting purposes. Deferred tax assets are reduced by a
valuation allowance when management determines that it is more likely than not
that some portion or all of the deferred tax ass ets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Advertising costs: The costs of advertising are expensed as incurred.
Advertising expense for the fiscal years ended 1997, 1996, and 1995 was
$2,421,000, $2,192,000, and $2,223,000, respectively.
Fair value of financial instruments: The consolidated financial statements
include the following financial instruments: cash and cash equivalents, trade
receivables, note payable to bank, trade accounts payable, income taxes payable,
and long-term debt. At February 28, 1997, no separate comparis on of fair values
versus carrying values is presented for the aforementioned financial instruments
since their fair values are not significantly different than their balance sheet
carrying amounts. The aggregate fair values of the financial instruments would
not represent the underlying value of the Company.
Note 2. Sales Information and Major Suppliers
Major customers and credit risk: Net sales for fiscal years ended February 28,
1997, February 29, 1996, and February 28, 1995, include sales to certain major
customers as follows:
Percent of Net Sales
Customer 1997 1996 1995
A 23 27 18
B 7 12 18
<PAGE>
Note 2. Sales Information and Major Suppliers (Continued)
At February 28, 1997, 22 percent of the Company's trade receivables were due
from the aforementioned customers and 39 percent were due from customers outside
of the United States. Credit, including foreign credit, is determined on an
individual customer basis. The Company utilizes letter-of-credi t arrangements
and wire transfers to minimize its foreign credit risk.
Export sales: The Company's export sales approximated 33, 27, and 13 percent of
total sales for fiscal years 1997, 1996, and 1995, respectively.
Major suppliers: The Company had 46 percent of its products produced by three
suppliers during fiscal 1997, 36 percent from two foreign suppliers and 10
percent from a domestic supplier. Management believes that alternative suppliers
are available in the event the Company is unable to obtain serv ices from its
three major suppliers.
Note 3. Inventory
Inventory consists of the following:
February 28, February 29,
1997 1996
Component parts $4,881,571 $8,185,873
Finished goods:
Skates 12,806,808 11,346,966
Accessories and replacement parts 3,193,466 3,281,011
---------- ----------
$20,881,845 $22,813,850
========== ==========
Note 4. Notes Payable
The Company has a line-of-credit arrangement with a bank subject to renewal on
July 1, 1997, whereby it may borrow up to $15,000,000. Borrowings bear interest,
payable monthly, at the bank's prime lending rate (8.25 percent at February 28,
1997) minus 0.55 percent. Borrowings under the credit arr angement are
collateralized by substantially all corporate assets, excluding land and
building. Outstanding borrowings under this arrangement totaled $5,319,250 and
$10,143,000 ($4,875,000 of which is classified as long-term) at February 28,
1997, and February 29, 1996, respectively.
In connection with the line-of-credit and term debt agreements, the Company has
agreed, among other things, to maintain a minimum tangible net worth, to not
exceed a certain debt to tangible net worth ratio, to attain a certain net
income level, to limit capital expenditures to certain amounts, and to not pay
dividends without the bank's consent.
<PAGE>
Note 5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
February 28, February 29,
1997 1996
<S> <C> <C>
Obligations under license agreements, due in varying
installments, with interest imputed at 6.7% to 9.25%, through
2004 (Note 8) $2,288,481 $2,732,777
Mortgage notes payable (representing line-of-credit debt
reclassified as term debt for February 29, 1996, presentation),
due in monthly installments of $57,638, including interest at
7.41% through April 2006, secured by a mortgage on the
building. 4,591,869 4,875,000
Other - 215,643
-----------------------------
6,880,350 7,823,420
Less current maturities 662,414 943,060
-----------------------------
Long-term portion $6,217,936 $6,880,360
=============================
</TABLE>
Approximate aggregate future maturities of long-term debt as as follows:
Years ending February:
1998 $662,000
1999 646,000
2000 689,000
2001 735,000
2002 784,000
Thereafter 3,364,000
---------
$6,880,000
=========
Note 6. Income Tax Matters
Net deferred income taxes consist of the following components:
February 28, February 29,
1997 1996
Deferred tax assets:
Receivable allowances $197,000 $163,000
Inventory costs 408,000 308,000
Accrued expenses 392,000 356,000
License and patent agreements 97,000 74,000
----------------------
1,094,000 901,000
Deferred tax liabilities:
Equipment (627,000) (514,000)
-----------------------
Net deferred assets $ 467,000 $ 387,000
======================
<PAGE>
Note 6. Income Tax Matters (Continued)
The net deferred tax assets have been classified on the accompanying
consolidated balance sheets as follows:
February 28, February 29,
1997 1996
Current assets $ 997,000 $ 827,000
Noncurrent liabilities (530,000) (440,000)
--------------------------
$ 467,000 $ 387,000
==========================
The provisions for income taxes charged to operations for fiscal years 1997,
1996, and 1995 are as follows:
1997 1996 1995
Current tax expense $1,583,000 $4,563,000 $3,618,000
Deferred tax benefit (80,000) (225,000) (193,000)
----------------------------------------
$1,503,000 $4,338,000 $3,425,000
========================================
The provisions for income taxes for fiscal years 1997, 1996, and 1995 differ
from the amounts obtained by applying the U.S. federal income tax rate to pretax
income as follows:
1997 1996 1995
Computed "expected" federal
tax expense $1,480,000 $4,252,000 $3,333,000
Increase (decrease) in taxes
resulting from:
State income taxes, net of
federal benefit 70,000 242,000 191,400
Other items individually
insignificant, net (47,000) (156,000) (99,400)
----------------------------------------
$1,503,000 $4,338,000 $3,425,000
========================================
Note 7. Shareholders' Equity
Stock options: In prior years the Company reserved 975,000 common shares for
issuance under the First Team Sports, Inc. 1987 Stock Option Plan (the 1987
Plan) and 525,000 common shares under the First Team Sports, Inc. 1994 Stock
Option and Incentive Compensation Plan (the 1994 Plan). Both Plans provide for
the granting of incentive stock options under Section 422 of the Internal
Revenue Code and nonqualified options not meeting the requirements of Section
422. All key employees of the Company are eligible to receive incentive and
nonqualified stock options pursuant to the 1987 and 1994 P lans. Directors of
the Company who are not employees may be granted nonqualified options under the
Plans. Options are granted at the discretion of the Stock Option Committee.
Options are nontransferable and generally granted at a price equal to the quoted
market price of the shares at the date of grant.
<PAGE>
Note 7. Shareholders' Equity (Continued)
The Company also established the First Team Sports, Inc. 1993 Employee Stock
Purchase Plan (the 1993 Plan) and reserved 300,000 common shares for issuance
thereunder. The 1993 Plan is intended to encourage stock ownership by all
employees and is intended to qualify under Section 423 of the Interna l Revenue
Code. All employees are eligible to participate in the 1993 Plan, with the
exception of any employees owning 5 percent or more of the Company's total
voting stock.
The Company has also issued several nonqualified options to purchase its common
stock in connection with various transactions. In January 1997, the Company
issued incentive stock options covering 68,251 shares that are not covered by
the aforementioned plans.
Transactions involving stock options during fiscal years 1997, 1996, and 1995
are summarized as follows:
1997 1996 1995
--------------------- ----------------- -------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price Options
- ------------------------------------------------------------------------------
Outstanding at beginning
of year 776,854 $ 9.96 663,171 $8.41 615,750
Exercised (28,796) 5.30 (92,816) 5.56 (180,479)
Canceled (51,596) 10.90 (473) 8.28 (7,380)
Granted 229,558 6.55 206,972 12.95 235,280
----------------------------------------------------
Outstanding at end
of year 926,020 $ 9.21 776,854 $9.96 663,171
====================================================
Weighted average fair value of options granted during 1997 and 1996 was $2.63
and $5.22, respectively.
As of February 28, 1997, options covering 523,833 shares were exercisable at a
price of $5.33 to $23.38 per share. In addition, the remaining stock options
outstanding at February 28, 1997, become exercisable in the following fiscal
years:
Price Per
Shares Share
Years ending February:
1998 208,513 $5.33 - 16.50
1999 126,670 6.00 - 16.50
2000 65,504 6.00 - 16.50
2001 1,500 9.50
<PAGE>
Note 7. Shareholders' Equity (Continued)
The following table summarizes information about stock options outstanding at
February 28, 1997:
Options Outstanding Options Exercisable
-------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life(Years) Price Exercisable Price
- ----------------------------------------------------------------------------
$ 5.33 - 8.00 540,354 5.1 $ 6.33 323,253 $ 6.53
8.92 - 12.63 207,916 6.3 12.16 76,580 12.02
14.17 - 23.38 177,750 5.1 14.52 124,000 14.62
- ----------------------------------------------------------------------------
$ 5.33 - 23.38 926,020 5.4 $ 9.21 523,833 $ 9.32
============================================================================
As of April 9, 1997, the Company's Board of Directors repriced options covering
369,500 shares, which had exercise prices of $9.50, and above to an exercise
price of $6.375 per share. The vesting terms of these options remained
unchanged.
When stock options are exercised, the par value of the shares issued is credited
to common stock and the excess proceeds over par value are credited to
additional paid-in capital. Under certain circumstances, when shares acquired
through these options are sold, income tax benefits may be realized by the
Company and are recorded as additional paid-in capital. The Company realized
$667,000 of such tax benefits during fiscal 1996.
On May 25, 1989, the Board of Directors adopted a resolution providing for
accelerated vesting of outstanding options in the event of defined changes in
control of the Company. The resolution provides that all outstanding incentive
and nonqualified options granted under the Plans and all nonqualified stock
options granted to consultants of the Company outside the Plans shall become
fully exercisable upon the occurrence of such a change.
Pro forma information: The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Accordingly, since options have been issued with
exercise prices at or above market value of the Company's stock, no
compensation expense has been recognized for the stock option plans. Had
compensation expense for the Company's stock options been determined based on
the fair value at the grant date for awards in 1997 and 1996 consistent with the
provisions of SFAS 123, the Company's net income and net inc ome per share would
have been reduced to the pro forma amounts reflected in the following table:
1997 1996
Reported net income $2,725,282 $7,811,857
Pro forma net income 2,131,000 7,748,000
Reported net income per share 0.46 1.30
Pro forma net income per share 0.36 1.29
<PAGE>
Note 7. Shareholders' Equity (Continued)
The above pro forma effects on net income and net income per share are not
likely to be representative of the effects on reported net income for future
years because options vest over several years and additional awards generally
are made each year.
The fair value of each option grant has been estimated as of the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996:
1997 1996
Expected dividend yield $ - $ -
Expected stock price volatility 54.9% 63.2%
Risk-free interest rate 6.3% 5.1%
Expected life of options (years) 3 3
Preferred stock purchase rights: On February 28, 1996, the Board of Directors
declared a dividend of one preferred stock purchase right for each outstanding
share of Company common stock, which rights expire on March 14, 2006. The rights
are transferable with the common stock. Each right entitle s the holder to
purchase one one-hundredth of a share of Series A preferred stock at a price of
$55, subject to adjustment. The rights are not exercisable until ten days after
the public announcement that a person or group of persons has acquired a
beneficial interest of at least 15 percent of the Company's outstanding common
stock or the commencement or announcement of an intention by a person or group
to make a tender or exchange offer whose consummation would result in the
beneficial ownership of at least 15 percent of the Company's outstanding common
stock. Each right would entitle the rightholder to receive shares of common
stock of the acquiring company upon merger or other business combination having
a market value of twice the exercise price of the right or, upon exercise, that
number of shares of preferred stock having a market value of twice the exercise
price of the right. Preferred stock purchasable upon exercise of the rights will
be entitled to certain voting privileges, minimum preferential quarterly
dividends, an aggregate dividend in relation to dividends declared on common
stock, and minimum preferential liquidation payments. The rights have no voting
privileges and may be redeemed by the Board of Directors at a price of $0.01 per
right at any time before they become exercisable.
Note 8. License Agreements
The Company has entered into agreements with certain well-known celebrities to
endorse the Company's products. The agreements, among other things, require the
Company to make certain guaranteed payments, which have been recorded at their
present value as both assets (license agreements) and liabil ities (obligations
under license agreements), and royalty payments based on percentages of sales of
certain products. The Company is only liable to make sales royalty payments for
the amount that sales royalties exceed the guaranteed payments each year. Total
royalties and amortization of license agreements were $681,394, $1,583,268, and
$1,233,981 during fiscal years 1997, 1996, and 1995, respectively. On March 1,
1997, the main license agreement was extended through 2004. The extension of the
agreement does not require any guaranteed payments in aggregate above those
required under the original agreement.
<PAGE>
Note 9. Employee Benefit Plan
The Company has a 401(k) Employee Benefit Plan for qualified employees. Company
contributions to the plan are determined annually at the discretion of the Board
of Directors. The Company's contributions to the plan were $245,000, $236,000,
and $200,000 for fiscal years 1997, 1996, and 1995, respectively.
Note 10. Land and Deferred Revenue
In order to induce the Company to relocate its operating facility, the city of
Anoka, Minnesota, gave the Company land in an industrial park with an
approximate fair market value of $600,000. The gift was conditional upon the
Company staying in the new building through January 1, 2003. At Februar y 29,
1996, the land and a corresponding amount of deferred revenue have been recorded
at $600,000, the estimated fair market value of the land. When the Company has
satisfied the condition, the $600,000 of deferred revenue will be amortized into
income over the then remaining useful life of the building.
Note 11. Additional Cash Flow Information
Years Ended
February 28, February 29, Feburary 28,
1997 1996 1995
Supplemental disclosures of
cash flow information:
Cash payments for:
Interest $1,284,091 $ 971,111 $ 719,425
Income taxes 1,686,346 3,780,000 3,510,858
================================================
Supplemental schedule of
noncash investing and
financing activities:
Present value of license
agreement obligation
financed by licensor $ - $ - $2,133,870
Land and corresponding
deferred revenue
recorded (Note 10) - 600,000 -
Line of credit reclassified
to long-term debt
(Note 5) - 4,875,000 -
==============================================
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First Team Sports, Inc.
Anoka, Minnesota
Our audit of the consolidated financial statements of First Team Sports, Inc.
and Subsidiary included Schedule II contained herein, for the years ended
February 28, 1997, February 29, 1996, and February 28, 1995.
In our opinion, such schedule presents fairly the information required to be set
forth therein in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
St. Paul, Minnesota
April 9, 1997
<PAGE>
FIRST TEAM SPORTS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
RESERVE ACCOUNTS
Years Ended February 28, 1997, February 29, 1996 and February 28, 1995
Balance at Additions
Beginning Charged to Balance at
of Period Expenses DEndcofoPeriod
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 allowance for doubtful accounts $ 134,991 $ 1,185,275 $ 758,744 $ 561,522
1996 allowance for doubtful accounts 561,522 524,746 596,869 489,399
1997 allowance for doubtful accounts 489,399 724,068 648,296 565,171
(1) Uncollectible accounts written off, net of recoveries.
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-K
For the fiscal year ended Commission File No.: 0-16442
February 28, 1997
FIRST TEAM SPORTS, INC.
Exhibit Number Description
3.1* Articles of Incorporation, as amended
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 Exhibit 4.1 to the Company's Annual Report on
Form 10-K for the year ended February 28, 1991
4.2 Certificate of Designations of Series A Preferred Stock
(included in 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 on Form 8-A, Reg. No.
0-16422
10.1 The Company's 1987 Stock Option Plan, as amended by
resolutions dated May 25, 1989 -- incorporated by reference
to Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the year ended February 28, 1991**
10.2 Amendment dated April 22, 1992 to the Company's 1987 Stock
Option Plan -- incorporated by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended
February 29, 1992**
*Filed herewith.
**Management contract or compensatory plan or arrangement.
E-1
<PAGE>
10.3 Form of Incentive Stock Option Agreement under 1987 Stock
Option Plan -- incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-18, Reg. No.
33-16345C**
10.4 Form of Nonqualified Stock Option Agreement under 1987 Stock
Option Plan -- incorporated by reference to Exhibit 10.3 to
the Company's Registration Statement on Form S-18, Reg. No.
33-16345C**
10.5 License Agreement between the Company, Wayne Gretzky and
Janet Jones Gretzky dated as of December 1, 1994 --
incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended February 28,
1995
10.6* Amendment dated March 1, 1997 to License Agreement between
the Company, Wayne Gretzky and Janet Jones Gretzky dated
December 1, 1994
10.7 License Agreement between the Company and Creative Sports
Concepts, Inc. dated as of October 31, 1994 -- incorporated
by reference to Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the year ended February 28, 1995
10.8 Player Agreement between the Company and Brett Hull dated as
of April 7, 1992 -- incorporated by reference to Exhibit
10.13 to the Company's Annual Report on Form 10-K for the
year ended February 29, 1992
10.9 Company Bonus Plan for certain executive officers of the
Company regarding fiscal 1996 -- incorporated by reference
to Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the year ended February 28, 1995**
10.10 Company Bonus Plan for certain executive officers of the
Company for fiscal 1997 -- incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the year ended February 29, 1996**
10.11* Company Bonus Plan for executive officers of the Company for
fiscal 1998**
10.12 The Company's 1990 Nonqualified Stock Option Plan, as
amended by resolutions dated May 25, 1989 -- incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the year ended February 28, 1991**
*Filed herewith.
**Management contract or compensatory plan or arrangement.
E-2
<PAGE>
10.13 Agreement for consulting services dated August 19, 1992
between the Company and Joe Mendelsohn -- incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the year ended February 28, 1993**
10.14 Amendment to Agreement for consulting services dated March
9, 1995 between the Company and Joe Mendelsohn --
incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ended February 28,
1995**
10.15 Amendment to Agreement for consulting services dated April
1, 1996 between the Company and Joe Mendelsohn --
incorporated by reference to Exhibit 10.15 to the Company's
Annual Report and Form 10-K for the year ended February 28,
1996**
10.16* Amendment to Agreement for consulting services dated April
7, 1997 between the Company and Joe Mendelsohn**
10.17 The Company's 1993 Employee Stock Purchase
Plan--incorporated by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year ended
February 28, 1993**
10.18 The Company's 1994 Stock Option and Incentive Compensation
Plan-- incorporated by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the year ended
February 28, 1994**
10.19 Employment Agreement dated January 23, 1996 between the
Company and John J. Egart -- incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the year ended February 29, 1996**
10.20 Employment Agreement dated January 23, 1996 between the
Company and David G. Soderquist -- incorporated by reference
to Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the year ended February 29, 1996**
10.21 Employment Agreement dated January 23, 1996 between the
Company and Robert L. Lenius, Jr. -- incorporated by
reference to Exhibit 10.20 to the Company's Annual Report on
Form 10-K for the year ended February 29, 1996**
10.22 Employment Agreement dated January 23, 1996 between the
Company and Susan L. Niles (Joch) -- incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the year ended February 29, 1996**
*Filed herewith.
**Management contract or compensatory plan or arrangement.
E-3
<PAGE>
10.23 Mortgage Note in the amount of $3,656,250 dated March 19,
1996 in favor of LaSalle National Bank -- incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on
Form 10-K for the year ended February 29, 1996
10.24 Mortgage Note in the amount of $1,218,750 dated March 19,
1996 in favor of Marquette Capital Bank -- incorporated by
reference to Exhibit 10.24 to the Company's Annual Report on
Form 10-K for the year ended February 29, 1996
10.25 Mortgage dated March 19, 1996 between Company and LaSalle
National Bank as agent for itself and Marquette Capital Bank
-- incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the year ended
February 29, 1996
21 List of Subsidiaries -- incorporated by reference to Exhibit
22 to the Company's Annual Report on Form 10-K for the year
ended February 28, 1994.
23* Consent of Independent Public Auditors
24* Power of Attorney of John J. Egart, David G. Soderquist, Joe
Mendelsohn, Timothy G. Rath, Stanley E. Hubbard, William J.
McMahon, Robert L. Lenius, Jr. and Kent A Brunner included
in signature page on this Form 10-K
27* Financial Data Schedule (included in electronic version
only)
*Filed herewith.
**Management contract or compensatory plan or arrangement.
E-4
EXHIBIT 3.1
ARTICLES OF CORRECTION OF
RESTATED ARTICLES OF INCORPORATION
OF
FIRST TEAM SPORTS, INC.
Pursuant to the provisions of Minnesota Statutes, Section 5.16, the
Restated Articles of Incorporation filed by First Team Sports, Inc. on May 22,
1996 incorrectly restated the corporation's existing Articles and all amendments
thereto, which Restated Articles are hereby set forth correctly in their
entirety on Exhibit A hereto.
I swear that the foregoing is true and accurate and that I have the
authority to sign this document on behalf of the corporation.
Dated: July 8, 1996 /s/ John J. Egart
John J. Egart, President
<PAGE>
EXHIBIT A
RESTATED ARTICLES OF INCORPORATION
OF
FIRST TEAM SPORTS, INC.
ARTICLE 1 - NAME
1.1) The name of the corporation shall be First Team Sports, Inc.
ARTICLE 2 - REGISTERED OFFICE
2.1) The registered office of the corporation is located at 1201 Lund
Boulevard, Anoka, Minnesota 55303.
ARTICLE 3 - CAPITAL STOCK
3.1) Authorized Shares. The aggregate number of shares the corporation has
authority to issue shall be 12,500,000 shares, which shall have a par value of
$.01 per share solely for the purpose of a statute or regulation imposing a tax
or fee based upon the capitalization of the corporation, and which shall consist
of 10,000,000 common shares, 680,000 shares of Series A Preferred Stock, having
the rights and preferences set forth on the Certificate of Designations attached
hereto as Attachment A, and 1,820,000 undesignated shares. The Board of
Directors of the corporation is authorized to establish from the undesignated
shares, by resolution adopted and filed in the manner provided by law, one or
more classes or series of shares, to designate each such class or series (which
may include but is not limited to designation as additional common shares), and
to fix the relative rights and preferences of each such class or series.
3.2) Issuance of Shares. The Board of Directors of the corporation is
authorized from time to time to accept subscriptions for, issue, sell and
deliver shares of any class or series of the corporation to such persons, at
such times and upon such terms and conditions as the Board shall determine,
valuing all nonmonetary consideration and establishing a price in money or other
consideration, or a minimum price, or a general formula or method by which the
price will be determined.
3.3) Issuance of Rights to Purchase Shares. The Board of Directors is
further authorized from time to time to grant and issue rights to subscribe for,
purchase, exchange
- 1 -
<PAGE>
securities for, or convert securities into, shares of the corporation of any
class or series, and to fix the terms, provisions and conditions of such rights,
including the exchange or conversion basis or the price at which such shares may
be purchased or subscribed for.
3.4) Issuance of Shares to Holders of Another Class or Series. The Board is
further authorized to issue shares of one class or series to holders of that
class or series or to holders of another class or series to effectuate share
dividends or splits.
ARTICLE 4 - RIGHTS OF SHAREHOLDERS
4.1) No Preemptive Rights. No shares of any class or series of the
corporation shall entitle the holders to any preemptive rights to subscribe for
or purchase additional shares of that class or series of any other class or
series of the corporation now or hereafter authorized or issued.
4.2) No Cumulative Voting Rights. There shall be no cumulative voting by
the shareholders of the corporation.
ARTICLE 5 - LIMITATION OF DIRECTOR LIABILITY
5.1) To the fullest extent permitted by the Minnesota Business Corporation
Act, as the same exists or may hereafter be amended, a director of this
corporation shall not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director.
ARTICLE 6 - MERGER, EXCHANGE, SALE OF ASSETS AND DISSOLUTION
6.1) Where approval of shareholders is required by law, the affirmative
vote of the holders of at least a majority of the voting power of all shares
entitled to vote shall be required to authorize the corporation (i) to merge
into or with one or more other corporations, (ii) to exchange its shares for
shares of one or more other corporations, (iii) to sell, lease, transfer or
otherwise dispose of all or substantially all of its property and assets,
including its good will, or (iv) to commence voluntary dissolution.
ARTICLE 7 - AMENDMENT OF ARTICLES OF INCORPORATION
7.1) Any provision contained in these Articles of Incorporation may be
amended, altered, changed or repealed by the affirmative vote of the holders of
at least a majority of the voting power of all shares entitled to vote or such
greater percentage as may be otherwise prescribed by the laws of the State of
Minnesota.
- 2 -
<PAGE>
ATTACHMENT A
CERTIFICATE OF DESIGNATIONS
OF
SERIES A PREFERRED STOCK
OF
FIRST TEAM SPORTS, INC.
(Pursuant to Chapter 302A of the
Minnesota Business Corporation Act)
First Team Sports, Inc., a corporation organized and existing under the
Minnesota Business Corporation Act (hereinafter called the "Company"), hereby
certifies that the following resolution was adopted by the Board of Directors of
the Company as required by Section 302A.239 of the Minnesota Business
Corporation Act (the "MBCA") by unanimous written action of the Board of
Directors dated February 28, 1996:
RESOLVED, that, pursuant to the authority granted to and vested in the
Board of Directors of the Company (hereinafter called the "Board of Directors"
or the "Board") in accordance with the provisions of the Restated Articles of
Incorporation, as amended to date (hereinafter called the "Articles of
Incorporation"), the Board of Directors hereby creates a series of Preferred
Stock, par value $.01 per share (the "Preferred Stock"), of the Company and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series A Preferred Stock:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Preferred Stock" (the "Series A Preferred Stock"), and
the number of shares constituting the Series A Preferred Stock shall be Six
Hundred Eighty Thousand (680,000). Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that, no decrease
shall reduce the number of shares of Series A Preferred Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon the exercise of outstanding options, rights or warrants or
upon the conversion of any outstanding securities issued by the Company
convertible into Series A Preferred Stock.
- 3 -
<PAGE>
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock, par value $.01 per share (the "Preferred Stock"), of the
Company or Preferred Stock (or any similar stock) ranking prior and superior to
the Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock, in preference to the holders of Common Stock, par
value $.01 per share (the "Common Stock"), of the Company, and of any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June, September and
December in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth,
100 times (as adjusted, the "Dividend Multiple") the aggregate per share amount
of all cash dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock. In the event the
Company shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
Dividend Multiple shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Company shall declare a dividend or distribution on the Series A
Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided, that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding
- 4 -
<PAGE>
the date of issue of such shares, unless the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date of issue of
such shares, or unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares of
Series A Preferred Stock entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series A Preferred Stock in an amount less than the total amount
of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than sixty (60) days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 100 votes
(as adjusted, the "Vote Multiple") on all matters submitted to a vote of the
stockholders of the Company. In the event the Company shall at any time declare
or pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the Vote Multiple shall be adjusted by multiplying
such number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) Except as otherwise provided in Section 10 hereof, in any other
Certificate of Designations creating a series of Preferred Stock or any similar
stock, or by law, the holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock and any other capital stock of the Company
having general voting rights shall vote together as one class on all matters
submitted to a vote of stockholders of the Company.
(C) Except as set forth herein, or as otherwise provided by law, holders of
Series A Preferred Stock shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for taking any corporate action.
- 5 -
<PAGE>
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Company shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
A Preferred Stock, provided that the Company may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in
exchange for shares of any stock of the Company ranking junior (as to
dividends and upon dissolution, liquidation and winding up) to the
Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock ranking
on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board) to all holders of such shares upon such terms as the
Board, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Company shall not permit any subsidiary of the Company to purchase
or otherwise acquire for consideration any shares of stock of the Company unless
the Company could, under paragraph (A) of this Section 4, purchase or otherwise
acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series
- 6 -
<PAGE>
of Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Articles of Incorporation, or in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Company, no distribution shall be made (A) to
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock unless,
prior thereto, the holders of shares of Series A Preferred Stock shall have
received the greater of (i) $100 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the date
of such payment; or (ii) subject to the provision for adjustment hereinafter set
forth, 100 times (as adjusted, the "Liquidation Preference Multiple") the
aggregate amount to be distributed per share to holders of shares of Common
Stock, or (B) to the holders of shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Company shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the Liquidation Preference Multiple shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, Etc. In case the Company shall enter into
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash and/or any other property, then in any such case each share of Series A
Preferred Stock shall at the same time be similarly exchanged or changed into an
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 100 times (as adjusted, the "Exchange Multiple") the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Company shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the Exchange Multiple shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
- 7 -
<PAGE>
Section 8. No Redemption. The shares of Series A Preferred Stock shall not
be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of Preferred Stock.
Section 10. Amendment. If any proposed amendment to the Articles of
Incorporation or this Certificate of Designation would alter or change the
preferences, special rights or powers given to the Series A Preferred Stock so
as to affect the Series A Preferred Stock adversely, or would authorize the
issuance of a class or classes of stock having preferences or rights with
respect to dividends or dissolutions or the distribution of assets that would be
superior to the preferences or rights of the Series A Preferred Stock, then the
holders of the Series A Preferred Stock shall be entitled to vote as a series
upon such amendment, and the affirmative vote of two-thirds of the outstanding
shares of Series A Preferred Stock shall be necessary to the adoption thereof,
in addition to such other vote as may be required by the MBCA.
- 8 -
EXHIBIT 10.6
FIRST TEAM SPORTS, INC.
1201 Lund Boulevard
Anoka, Minnesota 55305
As of March 1, 1997
Wayne D. Gretzky
Janet Jones Gretzky
c/o International Management Group
11755 Wilshire Boulevard, Suite 850
Los Angeles, California 90025
Attention: Michael G. Barnett
RE: License Agreement dated December 1, 1994 by and among First Team Sports,
Inc., Wayne D. Gretzky and Janet Jones Gretzky (the "License Agreement").
Dear Wayne and Janet:
This letter sets forth our agreement to amend the License Agreement as set
forth herein. References to Articles or Sections are to the License Agreement.
Capitalized terms used and not otherwise defined herein shall mean as defined in
the License Agreement.
The License Agreement is hereby amended as follows:
1. Term. Article II is amended to extend the Term until November 30, 2004.
All references in the License Agreement to dates related to the end of the Term
shall be appropriately adjusted.
2. Workdays. Section 3.2 is amended to reduce the number of Workdays per
Year from two (2) to one (1), which one Workday must be in the city of WDG's
permanent residence, unless otherwise agreed to by WDG. Section 3.3 is amended
to reduce the number of additional Workdays per Year after WDG's retirement from
two (2) to one (1), which one additional Workday need not be in the city of
WDG's permanent residence (but must be within North America, unless otherwise
agreed to by WDG).
3. Guaranteed Fees.
(a) Sections 5.1.1 and 5.1.2 are amended to provide that the In-Line
Guarantee and the Street Hockey Guarantee are combined into a single guaranteed
payment in the following annual amounts:
<PAGE>
Year Ending Amount
November 30, 1997 $434,550
November 30, 1998 $349,500
November 30, 1999 $349,500
November 30, 2000 $349,500
November 30, 2001 $349,500
November 30, 2002 $349,500
November 30, 2003 $349,500
November 30, 2004 $349,500
Such combined In-Line Guarantee and Street Hockey Guaranty shall be paid in
quarterly installments of $87,350 on each December 1, March 1, June 1, and
September 1.
(b) This Amendment shall be deemed effective March 1, 1997. Licensee
acknowledges receipt of $87,350 upon the execution and delivery of this letter
agreement, which payment shall constitute payment of the March 1, 1997 quarterly
installment.
(c) Section 5.4 is amended to provide that the combined In-Line Guarantee
and Street Hockey Guaranty shall be credited against, and recoupable from, the
Royalties otherwise payable to Personality in respect of both Gross Street
Hockey Sales and Gross In-Line Sales, and that all Royalties to which
Personality is entitled under the License Agreement shall continue through the
expiration or earlier termination of the Term.
4. Termination. Article X of the License Agreement is amended to give
Personality the additional right, exercisable in Personality's sole discretion,
to terminate the License Agreement for any reason whatsoever, upon Personality
giving Licensee not less than three (3) months' prior written notice. Section
10.6 is amended to change the four (4)-month inventory sell-off period to six
(6) months, but Licensee shall not be entitled to utilize any advertising or
promotional materials during the six-month sell-off period.
Except as amended by the foregoing provisions, the License Agreement
remains unchanged and in full force and effect.
Subject to the approval of First Team Sports' Board of Directors (and, if
necessary, shareholders), in consideration of the extension of the Term of the
License Agreement and of
WDG's advisory services to First Team Sports on the Workdays, First Team Sports
shall grant WDG a non-qualified stock option under the Company's 1990 Stock
Option Plan to purchase 50,000 shares of First Team Sports' Common Stock at an
exercise price of $6.00 per share exercisable immediately.
First Team Sports agrees to reimburse WDG and JJG their reasonable
attorneys' fees and disbursements incurred in connection with the negotiation
and execution of this Letter Agreement promptly upon presentation of an invoice
from their legal counsel itemizing said fees and disbursements.
<PAGE>
Please indicate your acceptance of the foregoing provisions by signing and
returning the undersigned the enclosed duplicate copy of this letter.
Very truly yours,
First Team Sports, Inc.
By: /s/ David G. Soderquist
Its: Vice Chairman
ACCEPTANCE
The undersigned acknowledges and agrees to the foregoing provisions.
/s/ Wayne D. Gretzky /s/ Janet Jones Gretsky
Wayne D. Gretzky Janet Jones Gretzky
EXHIBIT 10.11
FISCAL 1998 EXECUTIVE BONUS PLAN
PLAN
*Company bonus plan is based on earnings before tax.
*Bonus plan consists of the following levels:
Earnings Before Tax EBT %
Lower Level: $4,900,000 7.0%
Middle Level: $5,568,000 7.4%
Higher Level: $6,076,000 7.6%
ELIGIBILITY
<TABLE>
<CAPTION>
1998 1998 1998 % of
Lower Middle Higher Total
<S> <C> <C> <C> <C>
John $ 45,000 $135,000 $225,000 30.0%
Dave $ 25,000 $ 75,000 $125,000 16.7%
Bob $ 30,000 $ 90,000 $150,000 20.0%
Susan $ 25,000 $ 75,000 $125,000 16.7%
Kent $ 25,000 $ 75,000 $125,000 16.7%
-------- -------- -------- -----
TOTALS $150,000 $450,000 $750,000 100.0%
</TABLE>
BONUS CALCULATIONS
*If earnings before tax and EBT % goals are met, appropriate bonus dollars will
be paid. If only one of these goals are met, it will be the discretion of the
Board how the bonus will be paid out.
*If earnings before tax fall between the lower level and the higher level, bonus
dollars will be pro-rated accordingly.
CRITERIA
*All participants will have objectives/goals established for them to achieve.
*Individual achievement of objectives, as judged by the Compensation Committee,
will determine bonus payments.
EXHIBIT 10.16
First Team Sports, Inc.
1201 Lund Boulevard
Anoka, MN 55303
April 7, 1997
Mr. Joe Mendelsohn
1617 East McMillan
Cincinnati, OH 45206
Dear Joe:
This letter will confirm the conversations you and I have had in connection with
the amendment of your August 19, 1992 Consulting Agreement. Other than the
amendments set forth below, your consulting agreement shall remain in full force
and affect through fiscal 1998.
In addition to your monthly consulting fee of $3,000, you will be eligible for a
performance payment as follows:
Earnings Before Tax EBT % Payment
Lower Level $4,900,000 7.0% $ 24,000
Middle Level $5,568,000 7.4% $ 72,000
Higher Level $6,076,000 7.6% $120,000
The above performance payment will be calculated and awarded with the same
criteria as the 1998 Executive Bonus Plan. If earnings fall between the three
above levels, bonus dollars will be pro-rated accordingly.
In addition, you have been granted a seven-year, nonqualified stock option
covering 30,000 shares at $6.00 per share. These options will vest at the rate
of 33 1/3% per year over the next three years.
If this letter accurately sets forth your understanding of the amendment to the
terms of your consulting agreement, please sign both copies where indicated and
return a signed copy to me.
Very truly yours,
/s/ John J. Egart
John J. Egart
President/CEO
I have read the foregoing and am in agreement with the terms set forth therein.
April 27, 1997 /s/ Joe Mendelsohn
Date Joe Mendelsohn
McGLADREY & PULLEN, LLP
We hereby consent to the incorporation by reference of our report dated April 9,
1997, with respect to the consolidated financial statements of First Team
Sports, Inc. and Subsidiary and our report dated April 9, 1997, with respect to
Schedule II, both included in this Form 10-K, into the Company's previously
filed Registration Statements Nos. 33-36123, 33-37308, 33-52344, 33-68164, and
33-84722.
/s/ McGLADREY & PULLEN, LLP
St. Paul, Minnesota
May 16, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<EXCHANGE-RATE> 1
<CASH> 381,427
<SECURITIES> 0
<RECEIVABLES> 17,298,171
<ALLOWANCES> 565,000
<INVENTORY> 20,881,845
<CURRENT-ASSETS> 40,171,323
<PP&E> 12,403,604
<DEPRECIATION> 2,588,404
<TOTAL-ASSETS> 52,343,501
<CURRENT-LIABILITIES> 12,249,634
<BONDS> 6,217,936
0
0
<COMMON> 57,498
<OTHER-SE> 32,688,433
<TOTAL-LIABILITY-AND-EQUITY> 52,343,501
<SALES> 76,435,022
<TOTAL-REVENUES> 76,435,022
<CGS> 56,837,195
<TOTAL-COSTS> 56,837,195
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,275,882
<INCOME-PRETAX> 4,228,282
<INCOME-TAX> 1,503,000
<INCOME-CONTINUING> 2,725,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,725,282
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
