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, 1998 Commission File No: 000-16442
FIRST TEAM SPORTS, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1545748
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
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 the 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 May 1, 1998 was approximately $15,124,688 based upon the
closing sale price of the Registrant's Common Stock on such date.
Shares of $.01 par value Common Stock outstanding at May 1, 1998: 5,792,240.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting are
incorporated by reference into Part III.
<PAGE>
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, ice hockey sticks and equipment and
related accessory products. In-line 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 has the following wholly owned
subsidiaries: Hespeler Hockey Company; a Nova Scotia, Canada unlimited liability
company, Hespeler Hockey Holding, Inc.; a Minnesota company, Mothership
Distribution, Inc.; a Minnesota company, First Team Sports GmbH; an Austrian
company, and First Team Sports Exports, Inc., 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 subsidiaries.
(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 and ice
hockey sticks marketed under the ULTRAWHEELS(R), SKATE ATTACK(R), and
HESPELER(R) brand names. The Company also supplies in-line roller skates under
various third party labels. UltraWheels brand skates are marketed to specialty
and chain sporting goods dealers. The Skate Attack products are produced for
sales to the mass merchant market. The Hespeler brand is marketed to specialty,
chain sporting goods dealers and larger mass merchants. 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.
(2) Status of products in development
The Company continues to develop products for the recreational, fitness
and aggressive categories, as well as, improving upon existing in-line skate
models. The Company also continues to develop products for the growing ice
hockey market, including pro style sticks and protective equipment.
<PAGE>
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.
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 contacts 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: "UltraWheels", "Skate Attack", "Street Attack",
"Ultra Ice", "Hespeler", "Heavy", and "Third World". The Company owns numerous
United States trademark registrations and 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,
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.
<PAGE>
(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
1998, 1997 and 1996 Wal-Mart, based in Bentonville, Arkansas, accounted for
approximately 29%, 23% and 27%, respectively, of the Company's net sales. In
fiscal 1996, Target stores based in Minneapolis, Minnesota, accounted for
approximately 12% of the Company's net sales.
(8) Backlog.
The Company had approximately $5.1 million in unfilled purchase orders
as of May 18, 1998, compared to approximately $9.1 million in unfilled purchase
orders as of May 1, 1997. Approximately $4.9 million of these backlog orders are
a result of spring booking orders to be shipped at future dates and
approximately $200,000 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.
<PAGE>
(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 1998, 1997 or 1996.
(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.
(13) Employees.
As of May 1, 1998, the Company employed 80 full-time employees and 10
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 1998, 1997 and 1996 First Team
Sports Exports, Inc. had export sales of $17.5 million, $25.5 million and $25.8
million representing approximately 31%, 33% and 26%, respectively, of the net
sales of the Company. Canadian net sales were $7.1 million (13% of net sales) in
fiscal 1998, $5.6 million (7% of net sales) in fiscal 1997, and $10.4 million
(11% of net sales) in fiscal 1996. Sales outside North America were $10.4
million (18% of net sales) in fiscal 1998, $19.8 million (26% of net sales) in
fiscal 1997, and $15.5 million (16% of net sales) in fiscal 1996.
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 approximately
$4,133,000 as of May 1, 1998.
The Company also occupies approximately 2,000 to 4,000 square feet of
office space, in, Toronto, Canada, Graz, Austria, and Fife, Washington for its
subsidiaries, Hespeler Hockey Company, First Team Sports GmbH, and Mothership
Distribution, Inc., respectively. The Company leases these facilities with the
leases having terms of 1 to 4 years.
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, 1998.
<PAGE>
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
officer's names below.
Name and Age of Current Positions with Company and Principal
Executive Officer Occupations for the Past Five Years
John J. Egart, 48 President and Chief Executive Officer of the
Company since 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, 49 Vice Chairman of the Company since January
1994; Director 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 L. Lenius, Jr., 50 Vice President and Chief Financial Officer
of the Company since July 1991; Vice
President/Finance of the Company from July
1987 to July 1991.
Susan L. Joch, 37 Vice President/Marketing of the Company
since November 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, 37 Vice President/Finance of the Company since
September 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.
<PAGE>
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 1997 and fiscal 1998 was as follows:
Quarter Ended High Low
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
May 31, 1997 $7-1/2 $5
August 31, 1997 $9-1/8 $5-3/8
November 30, 1997 $6-5/8 $3-3/8
February 28, 1998 $3-15/16 $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 May 1, 1998, there were approximately 436 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.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended February 28, 1998 and 1997,
February 29, 1996, February 28, 1995 and 1994.
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations Data:
Net Sales $56,336,906 $76,435,022 $97,667,448 $85,528,860 $35,534,892
Net Income/(Loss) ($2,609,233) 2,725,282 7,811,857 6,098,757 635,409
Net Income (Loss)
Per Share:
Basic (.45) .47 1.37 1.09 .12
Diluted (.45) .46 1.30 1.03 .12
Cash Dividends Paid
Per Share -- -- -- -- --
Balance Sheet Data:
Total Assets $52,161,728 $52,343,501 $55,957,802 $45,863,753 $29,596,443
Working Capital 25,051,180 27,921,689 24,944,985 18,109,090 11,589,217
Long-Term Debt 6,774,496 6,217,936 6,880,360 3,053,494 1,800,072
Shareholders' Equity 30,240,864 32,745,931 29,830,283 20,850,079 13,939,578
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results Of Operations
Net Sales. Net sales declined 26% in the fiscal year ended February 28,
1998 compared to a decrease of 22% in fiscal year 1997. In-line skate sales
volume decreases, combined with a decrease in the average selling price of both
the Company's Skate Attack and Ultra Wheels lines were the principal factors in
the Company's net sales decline in fiscal 1998. The Company experienced
continued pricing pressures from all areas of the market place due primarily to
excess inventory levels at retail and subsequent competitive price cutting in
the in-line skate industry.
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
Ultra Wheels and Skate Attack line of products. The Ultra Wheels 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 the mass merchant customers. During the later part of
fiscal 1998 the Company acquired Hespeler Hockey Company, a Canadian based
company which markets and distributes ice hockey sticks and accessories (gloves
and protective wear) and Mothership Distribution Inc., which markets and
distributes aggressive in-line skate wheels, accessories, apparel and
skateboards. Net sales in fiscal 1998 for both Hespeler and Mothership were
negligible.
<PAGE>
In-line skate net sales were $47 million, $65 million and $82 million in fiscal
1998, 1997 and 1996. Accessories, parts and roller hockey product net sales were
$8.6 million, $11.4 million and $15.7 million in fiscal 1998, 1997 and 1996. Net
sales of ice hockey products from Hespeler Hockey Company were approximately
$500,000 for fiscal 1998 and net sales of wheels, accessories and apparel from
Mothership Distribution Inc. were approximately $200,000 for fiscal 1998.
The Company currently distributes products to more then 60 countries worldwide.
Domestic sales were $38.4 million, $50.8 million and $71.8 million in fiscal
1998, 1997 and 1996. Canadian sales were $7.5 million, $5.6 million and $10.4
million in fiscal 1998, 1997 and 1996. Sales in Europe were $7.4 million, $14.1
million and $8.5 million in fiscal 1998, 1997 and 1996. Other International
sales were $3.0 million, $5.9 million and $7.0 million in fiscal 1998, 1997 and
1996.
Several factors contributed to the Company's sales performance in fiscal 1998
and 1997. The decrease in domestic sales in both fiscal 1998 and 1997 is the
result of a change in consumer demand, continued excess inventory levels at
retail and competitive price cutting which has continued to plague the in-line
skate industry. These market conditions are expected to continue at least
through the first six months of fiscal 1999. The increase in fiscal 1998
Canadian sales was the result of continued strong acceptance of the Company's
USA made products. The decrease in fiscal 1997 Canadian sales from fiscal 1996
was the result of excess inventory levels at retail. The decrease in European
sales in fiscal 1998 was primarily the result of a slow spring and summer retail
environment due to inclemate weather conditions, which has resulted in excess
retail inventory levels and increased pricing pressures due to many orient
manufacturers selling direct to retailers. The increase in fiscal 1997 European
sales from fiscal 1996 was the result of increased consumer participation in the
European market. The decrease in other international sales for both fiscal 1998
and 1997 was primarily the result of continued excess inventory levels in both
the Pacific Rim and South American marketplaces.
Gross Margin. As a percentage of net sales, the gross margin was 21.3%
in 1998, 25.6% in 1997 and 29.9% in 1996. The decrease in the gross margin in
fiscal 1998 is primarily due to competitive close-out sales, continued pricing
pressures at all retail price points and fluctuations in certain foreign
currency rates, principally Canada. The decrease in the gross margin in fiscal
1997 was primarily due to an overall retail slowdown of in-line skate sales and
excess retail inventory levels, which 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 54%, 51% and 42%
of in-line skate sales in fiscal 1998, 1997 and 1996. The Skate Attack brand
accounted for 46%, 49% and 58% of in-line skate sales in fiscal 1998, 1997 and
1996.
<PAGE>
Operating Expenses. Selling expenses were $5.8 million, $7.2 million
and $7.8 million in fiscal 1998, 1997 and 1996. As a percentage of net sales the
selling expenses were 10.3%, 9.4% and 8.0% in fiscal 1998, 1997 and 1996. The
decrease in the absolute dollar amount of selling expenses in 1998 was primarily
the result of a reduction in commissions, royalties and co-op advertising costs
associated with the decreased sales volume and management's efforts to closely
monitor and control its expenditures. The increase in selling expenses as a
percentage of net sales in fiscal 1998 was primarily due to efforts to promote
and advertise the Company's two acquisitions, Hespeler Hockey Company and
Mothership Distribution, Inc. The decrease in the absolute dollar amount of
selling expenses in fiscal 1997 was due primarily to a reduction in commissions
and endorsement royalties associated with the decreased sales volume. The
increase in the selling expenses as a percentage of sales in fiscal 1997 was due
to continued efforts to advertise and market the Company's new products.
General and administrative expenses were $8.1 million, $6.8 million and $8.3
million in fiscal 1998, 1997 and 1996. As a percentage of net sales the general
and administrative expenses were 14.3%, 8.9% and 8.5% in fiscal 1998, 1997 and
1996. The increase in general and administrative expenses in 1998 was primarily
due to an increase in expenses associated with the continued upgrading of the
Company's computer systems, an increase in the real estate taxes associated with
the Company's facility, and the expenses related to and associated with the
purchases of the Company's two new subsidiaries and the opening of the Company's
new European office. The decrease in the absolute dollar amount of general and
administrative expenses in 1997 was due primarily to a reduction in personnel
costs and savings associated with the Company's new office and warehouse
facility.
Other Income and Expense. Interest expense was $1.0 million, $1.3
million and $.9 million in fiscal 1998, 1997 and 1996. The decrease in interest
expense for 1998 was primarily due to a reduction of the interest costs related
to the Company's line of credit facility. This interest expense reduction is the
result of management's continued control over the Company's expenditures and
cash management procedures. The increase in interest expense in 1997 was
primarily due to the addition of the mortgage note associated with the Company's
new office and warehouse facility.
Provisions for Income Taxes. The Company's effective income tax rate
was 33.7% , 35.5% and 35.7% in fiscal 1998, 1997 and 1996. The decrease in 1998
is primarily due to the effect of state and foreign tax rates and the percentage
of state and foreign revenues. The decrease in 1997 was primarily the result of
an increase in the Company's international sales as a percentage of total sales.
The Company utilizes it wholly-owned subsidiary First Team Sports Exports, Inc.,
a foreign sales corporation to help reduce the Company's tax burden.
Net Income (Loss). Net income (loss) as a percentage of net sales was
(4.6%), 3.6% and 8.0% in fiscal 1998, 1997 and 1996. The decrease in 1998 and
1997 was a result of the factors discussed above.
<PAGE>
Liquidity And Capital Resources
The Company's fiscal 1998 operations provided $2.6 million of cash compared to
approximately $500,000 in fiscal 1997. The increase in the net cash provided by
operations is primarily the result of the Company reducing its receivable
balances which was offset by cash used to increase inventories and pay income
taxes and accounts payable balances.
Net cash used in investing activities was $4.1 million in 1998 as compared to
$1.6 million in 1997. Cash in both years was used primarily for capital
expenditures relating to new production tooling and warehousing equipment and
the purchase of the Company's new subsidiaries in fiscal 1998.
Net cash provided by financing activities was $3.1 million in 1998 compared to
cash used of approximately $700,000 in 1997. The cash provided in 1998 was
primarily due to proceeds from the Company's line of credit facility. The
proceeds on the line of credit facility in fiscal 1998 were used primarily for
the acquisition of the Company's new subsidiaries.
The Company's debt to worth ratio was .7 to 1 as of February 28, 1998 compared
to .6 to 1 as of February 28, 1997. The Company's long-term debt, which consists
primarily of a mortgage note on the Company's facility and obligations under
endorsement license agreements, less current maturities, was $6,774,496 as of
February 28, 1998 (see Note 6 in Notes to Financial Statements). As of February
28, 1998, the Company had a revolving line of credit with a bank that provides
for borrowings of up to $15,000,000 of which $8,685,000 was outstanding. In
addition, the Company had a line of credit established with a bank providing for
borrowings of up to $1,000,000 for the purchase of equipment and improvements.
As of February 28, 1998 there was a $750,000 balance outstanding under this
credit facility.
The Company believes its current cash position, funds available under existing
bank arrangements and cash generated from operations will be sufficient to
finance the Company's operating requirements at least through fiscal 1999.
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 1999, especially in the
younger age categories. The Company believes the dramatic and innovative new
products currently on the market will continue to intrigue avid participants of
in-line skating and will improve the recruitment of new participants. It is
uncertain, however, whether the excess inventory levels and competitive
price-cutting which plagued the inline industry in fiscal 1998 have abated. The
Company also believes that the number of ice hockey participants worldwide,
especially in the United States, will grow in 1999.
<PAGE>
The Company's strategy has been and continues to be the introduction of
high quality, innovative, price-valued products designed specifically for the
recreational and youth market segments, consequently, driving consumer demand
toward newer products. In addition, the Company plans to continue its
diversification through synergistic acquisitions. 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 value priced products, revenues and
earnings will likely continue to be adversely impacted.
The Company's gross margin is a sensitive function of the product mix
sold, pricing and the market conditions in any given period. As a result of the
Company's Skate Attack brand being 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 and Hespeler Hockey products.
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 1999 should be
consistent with those in fiscal 1998. The Company also continues to closely
monitor and control its selling and general and administrative expenditures.
While management 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 price 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) offer products at
commercially-acceptable prices; (ii) develop new products and generate market
demand for such products; and (iii) continue to develop and expand its
international business.
Dependence on Key Customers. During the fiscal year ended February 28,
1998, sales to Wal-Mart accounted for 29% 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 and/or other major customers. Decreased orders from
this customer or other major customers would have a material adverse impact on
the Company's financial results.
<PAGE>
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 sale.
In fiscal 1997, the Company purchased a new software system and
appropriate computer hardware. As part of the selection process, the ability to
recognize the year 2000 was a major requirement and thus the company believes it
is prepared for the change. The Company is currently working to resolve the
potential impact of the year 2000 on the processing of date sensitive
information by the Company's computerized information systems, which might occur
due to vendors and/or customers not being ready. The year 2000 problem is the
result of computer programs being written using two digits (rather than four) to
define the applicable year. Based on preliminary information, costs of
addressing potential problems are currently not expected to have a material
adverse impact on the Company's financial position, results of operations or
cash flows in future periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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
Current Independent Auditor's Report on Consolidated
Financial Statements and Schedule for the year
ended February 28, 1998.........................................F-1
Former Independent Auditor's Report on Consolidated
Financial Statements for the year ended February 28, 1997
and February 29, 1996...........................................F-1.1
Consolidated Balance Sheets as of February 28, 1998 and 1997......F-2
Consolidated Statements of Operations for the years
ended February 28, 1998, 1997 and February 29, 1996.............F-4
Consolidated Statements of Shareholders' Equity for the years
ended February 28, 1998, 1997 and February 29, 1996.............F-5
Consolidated Statements of Cash Flows for the years ended
February 28, 1998, 1997 and February 29, 1996...................F-6
Notes to Consolidated Financial Statements........................F-7
<PAGE>
Former Independent Auditor's Report on Report on Schedule
for the years ended February 28, 1997 and February 29, 1996.....F-22
Schedule II - Reserve Account.....................................F-23
All other schedules 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 1998 in connection with the
Company's 1998 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 1998 in
connection with the Company's 1998 Annual Meeting of Shareholders.
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 1998 in
connection with the Company's 1998 Annual Meeting of Shareholders.
<PAGE>
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 1998 in connection with the Company's 1998
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:
Current Independent Auditor's Report on Consolidated Financial
Statements and Schedule For the year ended February 28, 1998
Former Independent Auditor's Report on Consolidated Financial
Statements For the year ended February 28, 1997 and February
29, 1996
Consolidated Balance Sheets as of February 28, 1998 and 1997.
Consolidated Statements of Operations for the years ended
February 28, 1998, 1997 and February 29, 1996
Consolidated Statements of Shareholders' Equity for the years
ended February 28, 1998, 1997 and February 29, 1996
Consolidated Statements of Cash Flows for the years ended
February 28, 1998, 1997 and February 29, 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. The following is included
in Part II, Item 8, of this Annual Report on Form 10-K:
Former Independent Auditor's Report on Report on Schedule for
the years ended February 28, 1997 and February 29, 1996
<PAGE>
Schedule II - Reserve Accounts.
All other schedules 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 reports: 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, 1998.
<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 29, 1998 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 29, 1998
John J. Egart
President/Chief Executive Officer and Director
(Principal executive officer)
/s/ David G. Soderquist May 29, 1998
David G. Soderquist
Vice Chairman and Director
/s/ Joe Mendelsohn May 29, 1998
Joe Mendelsohn
Chairman and Director
(Signatures continued on following page)
<PAGE>
Signature and Title Date
/s/ Timothy G. Rath May 29, 1998
Timothy G. Rath
Director
/s/ Stanley E. Hubbard May 29, 1998
Stanley E. Hubbard
Director
/s/ William J. McMahon May 29, 1998
William J. McMahon
Director
/s/ Robert L. Lenius, Jr. May 29, 1998
Robert L. Lenius, Jr.
Vice President and Chief Financial Officer
(Principal financial officer)
/s/ Kent A. Brunner May 29, 1998
Kent A. Brunner
Vice President of Finance
(Principal accounting officer)
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
First Team Sports, Inc.
We have audited the accompanying consolidated balance sheet of First Team
Sports, Inc. as of February 28, 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended. Our
audit also included the financial statement schedule for the year ended February
28, 1998 listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit 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, evidence 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects the consolidated financial position of First Team
Sports, Inc. at February 28, 1998, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Minneapolis, Minnesota /s/ ERNST & YOUNG, LLP
April 17, 1998
<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 the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the two fiscal years in the period ended February 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, evidence
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 the results of their
operations and their cash flows for each of the two fiscal years in the period
ended February 28, 1997, in conformity with generally accepted accounting
principles.
St. Paul, Minnesota /s/ MCGLADREY & PULLEN, LLP
April 9, 1997
<PAGE>
First Team Sports, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 28
1998 1997
------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,869,545 $ 381,427
Trade receivables, less allowance for doubtful accounts:
1998--$666,000; 1997--$565,000 11,417,176 17,039,679
Refundable income taxes 1,678,405 258,492
Inventories 22,709,519 20,881,845
Prepaid expenses 957,903 612,880
Deferred income taxes 896,000 997,000
------------------------------------
Total current assets 39,528,548 40,171,323
Property, plant and equipment
Land 600,000 600,000
Building 4,988,680 4,988,680
Production equipment 2,132,156 4,715,979
Office furniture and equipment 1,766,911 1,754,017
Warehouse equipment 820,626 325,361
Vehicles 102,906 19,567
------------------------------------
10,411,279 12,403,604
Less accumulated depreciation 1,993,004 2,588,404
------------------------------------
8,418,275 9,815,200
Other assets
License agreements, less accumulated amortization:
1998--$3,338,000; 1997--$3,039,000 1,766,584 2,065,611
Goodwill, less accumulated amortization: 1998--$64,000 1,462,291 -
Other 986,030 291,367
------------------------------------
4,214,905 2,356,978
------------------------------------
$52,161,728 $52,343,501
====================================
</TABLE>
<PAGE>
First Team Sports, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 28
1998 1997
------------------------------------
Liabilities and shareholders' equity Current liabilities:
<S> <C> <C>
Notes payable to bank $ 8,685,000 $ 5,319,250
Trade accounts payable 2,697,675 4,852,459
Accrued expenses 2,115,728 1,415,511
Current maturities of long-term debt 978,965 662,414
------------------------------------
Total current liabilities 14,477,368 12,249,634
Long-term debt, less current maturities 6,774,496 6,217,936
Deferred income taxes 69,000 530,000
Deferred revenue 600,000 600,000
Shareholders' equity
Common Stock, par value $.01 per share
Authorized 10,000,000 shares
Issued and outstanding: 1998--5,792,240 shares;
1997--5,749,796 shares 57,923 57,498
Additional paid-in capital 9,806,341 9,586,340
Retained earnings 20,492,860 23,102,093
Foreign currency translation (116,260) -
------------------------------------
30,240,864 32,745,931
------------------------------------
$52,161,728 $52,343,501
====================================
</TABLE>
See accompanying notes.
<PAGE>
First Team Sports, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended
Year ended February 28 February 29,
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Net sales $56,336,906 $76,435,022 $97,667,448
Cost of goods sold 44,314,320 56,837,195 68,499,170
------------------------------------------------------
Gross profit 12,022,586 19,597,827 29,168,278
Operating expenses:
Selling 5,826,993 7,190,515 7,774,248
General and administrative 8,056,546 6,789,276 8,341,008
Writedown due to asset impairment 974,018 - -
------------------------------------------------------
14,857,557 13,979,791 16,115,256
------------------------------------------------------
Operating (loss) income (2,834,971) 5,618,036 13,053,022
Interest expense (1,009,657) (1,275,882) (892,321)
Other expense, net (93,387) (113,872) (10,844)
------------------------------------------------------
(Loss) income before income tax benefit (expense)
(3,938,015) 4,228,282 12,149,857
Income tax benefit (expense) 1,328,782 (1,503,000) (4,338,000)
======================================================
Net (loss) income $ (2,609,233) $ 2,725,282 $ 7,811,857
======================================================
Net (loss) income per share:
Basic $(.45) $.47 $1.37
Diluted $(.45) $.46 $1.30
Shares used in computation of net (loss) income per share:
Basic 5,771,478 5,740,893 5,704,840
Diluted 5,771,478 5,884,175 6,010,986
</TABLE>
See accompanying notes.
<PAGE>
First Team Sports, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Additional Foreign Total
Common Stock Paid-In Retained Currency Shareholders'
--------------------------------
Shares Amount Capital Earnings Translation Equity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at February 28, 1995 5,628,184 $56,282 $8,228,843 $12,564,954 $ - $20,850,079
Exercise of stock options 92,816 928 500,959 - - 501,887
Tax benefit related to
stock options - - 667,000 - - 667,000
Net income - - - 7,811,857 - 7,811,857
--------------------------------------------------------------------------------------------
Balance at February 29, 1996 5,721,000 57,210 9,396,802 20,376,811 - 29,830,823
Exercise of stock options 28,796 288 189,538 - - 189,826
Net income - - - 2,725,282 - 2,725,282
--------------------------------------------------------------------------------------------
Balance at February 28, 1997 5,749,796 57,498 9,586,340 23,102,093 - 32,745,931
Exercise of stock options 12,910 129 65,517 - - 65,646
Common stock issued for
acquisitions 29,534 296 154,484 - - 154,780
Foreign currency - - - - (116,260) (116,260)
translation
Net loss - - - (2,609,233) - (2,609,233)
--------------------------------------------------------------------------------------------
Balance at February 28, 1998 5,792,240 $57,923 $9,806,341 $20,492,860 $(116,260) $30,240,864
============================================================================================
</TABLE>
See accompanying notes.
<PAGE>
First Team Sports, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended
Year ended February 28 February 29,
1998 1997 1996
------------------------------------------------------
Cash flows from operating activities
<S> <C> <C> <C>
Net (loss) income $(2,609,233) $2,725,282 $7,811,857
Adjustments required to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation 1,880,137 1,537,073 771,045
Amortization 468,101 579,657 651,562
Loss on writedown due to asset impairment 974,018 - -
Loss on retirement of equipment 93,387 108,510 13,950
Deferred income taxes (360,000) (80,000) (225,000)
Noncash tax expense related to stock option exercise
- - 667,000
Change in operating assets and liabilities:
Receivables 7,090,703 (811,013) 626,159
Inventories (1,437,212) 1,932,005 (1,975,679)
Prepaid expenses (344,412) 347,199 (71,345)
Accounts payable (2,377,925) (4,610,424) 447,507
Accrued expenses 701,664 (1,117,165) (72,484)
Income taxes (1,512,753) (103,346) (109,000)
------------------------------------------------------
Net cash provided by operating activities 2,566,475 507,778 8,535,572
Cash flows from investing activities
Purchases of property, plant and equipment (1,497,979) (1,606,100) (7,419,793)
Business acquisitions (1,917,942) - -
Other (696,328) 14,880 (89,479)
------------------------------------------------------
Net cash used in investing activities (4,112,249) (1,591,220) (7,509,272)
Cash flows from financing activities
Net proceeds (payments) on short-term borrowings 2,402,408 (4,823,750) 1,079,000
Principal payments on long-term borrowings (1,261,377) (943,070) (1,041,718)
Proceeds from long-term borrowings 1,849,184 4,875,000 -
Net proceeds from exercise of stock options and warrants
65,646 189,826 501,887
------------------------------------------------------
Net cash provided by (used in) financing activities 3,055,861 (701,994) 539,169
------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,510,087 (1,785,436) 1,565,469
Effect of foreign currency translation (21,969) - -
Cash and cash equivalents:
Beginning of year 381,427 2,166,863 601,394
------------------------------------------------------
Ending of year $ 1,869,545 $ 381,427 $2,166,863
======================================================
</TABLE>
See accompanying notes.
<PAGE>
First Team Sports, Inc.
Notes to Consolidated Financial Statements
February 28, 1998
1. Nature of Business and Significant Accounting Policies
Nature of Business and Concentration of Credit Risk
The Company sells in-line roller skates and related accessories under the brand
names UltraWheels(TM), and Skate Attack(TM), and ice hockey equipment under the
brand name Hespeler(TM) to retail and sporting goods stores. 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 subsidiaries including First Team Sports Exports, Inc. (a
foreign sales corporation), First Team Sports GmbH, Hespeler Hockey Company and
Mothership Distribution, Inc. All material intercompany accounts and
transactions have been eliminated.
Foreign Currency Translation
The functional currency for foreign operations is the local currency. Foreign
currency financial statements are converted into United States dollars by
translating balance sheet accounts at the current exchange rate at year-end and
statement of operations items at the average exchange rate for the year, with
the resulting translation adjustment made to a separate component of
shareholders' equity.
<PAGE>
1. Nature of Business and Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all demand deposit accounts and short-term cash
investments with an initial maturity of three months or less at the date of
purchase to be cash equivalents. The carrying value of cash equivalents
approximates fair value at February 28, 1998 and 1997.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is computed on
the straight-line method over the estimated useful lives of the assets as
follows:
Building 39 years
Production equipment 2 - 10 years
Office furniture and equipment 5 - 7 years
Warehouse equipment 6 - 10 years
Vehicles 5 years
License Agreements
License agreement assets are being amortized over the terms of the agreements on
a straight-line method.
Other Assets
Goodwill arising from acquisitions is amortized on a straight-line basis over a
period up to 10 years. Other intangibles are amortized on a straight-line basis
over 5 to 10 years.
<PAGE>
1. Nature of Business and Significant Accounting Policies (continued)
Accounting for Long-Lived Assets
The Company periodically reviews its property, plant, equipment, and other
assets 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 computing the amount by which the carrying value exceeds the fair
value (estimated discounted future cash flows) of the long-lived assets.
Management has determined that certain production assets of the Company have
been impaired as a result of the changing in-line skate industry. In accordance
with SFAS Statement 121, "Accounting for the Impairment of Long-lived Assets and
Long-lived Assets to Be Disposed Of," the Company evaluated the ongoing value of
its production tooling equipment. Based upon this evaluation, the Company
determined that production tools with a carrying value of $1,142,172 were
impaired and wrote them down by $974,018 to their fair value. Fair value of the
production tools was determined by comparison to outside market value.
Advertising Costs
The costs of advertising are expensed as incurred. Advertising expense for the
fiscal years 1998, 1997, and 1996 was $1,755,000, $2,421,000 and $2,192,000,
respectively.
Income Taxes
The Company accounts for income taxes utilizing the liability method. Deferred
income taxes are recorded to reflect the tax consequences of differences between
the tax and financial reporting basis of assets and liabilities.
<PAGE>
1. Nature of Business and Significant Accounting Policies (continued)
Net Income (Loss) Per Share
In 1997, Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share" (EPS) was issued. All EPS amounts herein have been restated to
reflect its adoption. Basic EPS (which replaces primary) is net earnings divided
by the average number of Common Shares outstanding during the period. Diluted
EPS (which replaces fully diluted) reflects the potential dilutive effects of
stock options and warrants.
<TABLE>
<CAPTION>
Basic EPS Diluted EPS
---------------------------------- ----------------------------------
1998 1997 1996 1998 1997 1996
---------------------------------- ----------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $(2,609) $2,725 $7,812 $(2,609) $2,725 $7,812
================================== ==================================
Weighted average common shares
outstanding 5,771 5,741 5,705 5,771 5,741 5,705
Stock options - - - - 143 306
---------------------------------- ----------------------------------
Total common equivalent shares
outstanding 5,771 5,741 5,705 5,771 5,884 6,011
================================== ==================================
Net (loss) income per share $(.45) $.47 $1.37 $(.45) $.46 $1.30
</TABLE>
Fair Value of Financial Instruments
The consolidated financial statements include the following financial
instruments: cash and cash equivalents, trade receivables, notes payable to
bank, trade accounts payable and long-term debt. At February 28, 1998, no
separate comparison for 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.
<PAGE>
2. Sales Information and Major Suppliers
Major Customers and Credit Risk
Net sales for fiscal years 1998, 1997 and 1996 include sales to certain major
customers as follows:
Percent of Net Sales
Customer 1998 1997 1996
- --------------------------------------------------------------------------------
A 29 23 27
B 3 7 12
At February 28, 1998, 29 percent of the Company's trade receivables were due
from the aforementioned customers and 35 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-credit arrangements
and wire transfers to minimize its foreign credit risk.
Export Sales
The Company's export sales approximated 32, 33 and 27 percent of net sales for
fiscal years 1998, 1997 and 1996, respectively.
Major Suppliers
The Company had 62 percent of its products produced by three suppliers during
1998 (6 percent from a domestic supplier). Management believes that alternative
suppliers are available in the event the Company is unable to obtain services
from its three major suppliers.
3. Acquisitions
In September 1997, the Company purchased the net assets of Mothership
Distribution, Inc. (Mothership), a designer, manufacturer and marketer of
aggressive in-line skate accessories and apparel. The Company also purchased in
September 1997 the common stock of Hespeler Hockey Company, a designer,
manufacturer and marketer of ice hockey
<PAGE>
3. Acquisitions (continued)
sticks, equipment and related accessories. The combined purchase price of the
acquisitions was not material. These transactions were accounted for using the
purchase method of accounting and the results of operation from those businesses
have been included in the consolidated statements of operations from the
respective dates of acquisition. The pro forma impact of the Mothership
acquisition on the Company's results of operations for all periods presented was
not material.
The following summary, prepared on a pro forma basis, combines the consolidated
results of operations as if the Hespeler Hockey operations had been acquired as
of the beginning of the period presented, after including the impact of certain
adjustments such as amortization of intangibles, increased interest expense on
acquisition debt and related income tax effects (fiscal 1997 and 1996 activity
was immaterial):
Pro forma information (unaudited)
(In thousands, except per share amounts) 1998
---------------
Net sales $58,124
Income (loss) before income taxes (3,726)
Net income (loss) (2,487)
Basic and diluted earnings (loss) per share $(.43)
The pro forma information is provided for informational purposes only. It is
based on historical information and does not necessarily reflect results that
would have occurred had the acquisition been made as of those dates or results
which may occur in the future.
4. Inventories
Inventories consist of the following:
February 28
1998 1997
------------------------------------
Finished goods $16,653,018 $16,000,274
Component parts 6,056,501 4,881,571
====================================
$22,709,519 $20,881,845
====================================
<PAGE>
5. Notes Payable
The Company has a line-of-credit agreement with a bank subject to renewal on
July 1, 1999, 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,
1998) minus 0.30 percent. Borrowings under the credit arrangement are
collateralized by substantially all corporate assets, excluding land and
building. Outstanding borrowings under this arrangement totaled $8,685,000 and
$5,319,250 at February 28, 1998 and 1997, respectively.
In connection with the line-of-credit agreement, the Company 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.
6. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
February 28
1998 1997
-----------------------------
<S> <C> <C>
Obligations under license agreements, due in varying installments, with
interest imputed at 6.7% to 9.25%, through 2004 (see note 9) $1,989,654 $2,288,481
Mortgage notes payable due in monthly installments of $57,638, including
interest at 7.41% through April 2006, secured by the building 4,227,997 4,591,869
Note payable to bank, due in monthly installments of $27,800 to May 2000,
plus interest at the bank's prime rate (8.25% at February 28, 1998)
minus .30%, collateralized by substantially all of the Company's assets 750,000 -
Subordinated convertible exchangeable debentures, are due in installments of
$200,000 on March 1, 1999 and 2000, and $325,000 on October 1, 2002
plus interest at 5% 725,000 -
Other 60,810 -
-----------------------------
7,753,461 6,880,350
Less current maturities 978,965 662,414
-----------------------------
$6,774,496 $6,217,936
=============================
</TABLE>
<PAGE>
6. Long-Term Debt (continued)
Approximate aggregate future maturities of long-term debt are as follows:
Years ending February 28 or 29:
1999 $ 979,000
2000 1,301,000
2001 999,000
2002 784,000
2003 1,161,000
Thereafter 2,529,000
-------------------
$7,753,000
===================
The subordinated convertible debentures were issued with triggerable warrants
attached which enable the debenture holder to purchase shares of common stock of
the Company. The debentures are convertible at any time, in whole or in part,
into shares of common stock of the Company at a conversion price of $5.75.
7. Income Taxes
Net deferred income taxes consist of the following components:
February 28
1998 1997
------------------------------------
Deferred tax assets:
Receivable allowances $ 162,000 $ 197,000
Inventory costs 367,000 408,000
Accrued expenses 367,000 392,000
License and patent agreements 137,000 97,000
------------------------------------
1,033,000 1,094,000
Deferred tax liabilities:
Equipment (206,000) (627,000)
------------------------------------
Net deferred tax assets $ 827,000 $ 467,000
====================================
<PAGE>
7. Income Taxes (continued)
The net deferred tax assets have been classified in the accompanying
consolidated balance sheets as follows:
February 28
1998 1997
------------------------------------
Current assets $896,000 $997,000
Non-current liabilities (69,000) (530,000)
------------------------------------
$827,000 $467,000
====================================
For financial reporting purposes, the (losses) income from continuing operations
before income taxes effect is as follows:
<TABLE>
<CAPTION>
February 28
1998 1997 1996
--------------------------------------------
(Loss) income before income taxes:
<S> <C> <C> <C>
Domestic $(3,490,859) $4,228,282 $12,149,857
Foreign (447,156) - -
--------------------------------------------
$(3,938,015) $4,228,282 $12,149,857
============================================
</TABLE>
The provisions for income tax (benefit) expense for fiscal years 1998, 1997 and
1996 are as follows:
1998 1997 1996
----------------------------------------------
Current:
Federal $ (698,782) $1,476,000 $4,193,000
State (68,000) 107,000 370,000
Foreign (202,000) - -
----------------------------------------------
Total current (968,782) 1,583,000 4,563,000
Deferred:
Federal (330,000) (77,000) (160,000)
State (30,000) (3,000) (65,000)
Foreign - - -
----------------------------------------------
Total deferred (360,000) (80,000) (225,000)
----------------------------------------------
Total income taxes $(1,328,782) $1,503,000 $4,338,000
==============================================
<PAGE>
7. Income Taxes (continued)
The provisions for income tax benefit (expense) for fiscal years 1998, 1997 and
1996 differ from the amounts obtained by applying the federal income tax rate to
pretax income (loss) as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Computed "expected" federal tax
benefit (expense) $1,378,000 $(1,480,000) $(4,252,000)
(Increase) decrease in taxes resulting from:
State income taxes, net of federal benefit 79,000 (70,000) (242,000)
Other items individually insignificant, net (128,218) 47,000 156,000
----------------------------------------------------
$1,328,782 $(1,503,000) $(4,338,000)
====================================================
</TABLE>
8. Shareholders' Equity
Stock Options
The Company has reserved 975,000 common shares for issuance under the First Team
Sports, Inc. 1987 Stock Option Plan (the 1987 Plan) and 975,000 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 Plans. 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.
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 Internal 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.
<PAGE>
8. Shareholders' Equity (continued)
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 year 1998, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ---------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------ ---------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 926,020 $9.21 776,854 $ 9.96 663,171 $ 8.41
Exercised (6,800) 5.33 (28,796) 5.30 (92,816) 5.56
Canceled (36,517) 8.75 (51,596) 10.90 (473) 8.28
Granted 318,000 3.27 229,558 6.55 206,972 12.95
------------------------- --------------------------- -------------------------
Outstanding at end of 1,200,703 $2.89 926,020 $ 9.21 776,854 $ 9.96
year
========================= =========================== =========================
</TABLE>
Weighted average fair value of options granted during 1998, 1997 and 1996 was
$1.28, $6.55 and $12.95, respectively.
As of February 28, 1998, 1997 and February 29, 1996 options covering 755,697,
523,833 and 312,152 shares, respectively, were exercisable at a weighted average
exercisable price of $2.97, $9.32 and $8.24 per share, respectively. In
addition, the remaining stock options outstanding at February 28, 1998, become
exercisable in the following fiscal years:
Price Per
Shares Share
-------------------------------
Years ending February 28 or 29:
1999 211,670 $2.75
2000 149,504 $2.75
2001 83,832 $2.75
<PAGE>
8. Shareholders' Equity (continued)
The following table summarizes information about stock options outstanding at
February 28, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- -------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
------------------------ --------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
$2.75 1,150,203 4.9 $2.75 705,197 $2.75
$6.00 - $6.25 50,500 4.0 6.00 50,500 6.00
------------------------ --------------- ------------------------------- -------------------------------
$2.75 - $6.25 1,200,703 4.8 $2.89 755,697 $2.97
======================== =============== =============================== ===============================
</TABLE>
In January 1998, the Company's Board of Directors repriced options covering
956,703 shares, representing all of the qualified outstanding options with
exercise prices ranging from $5.33 to $23.38, to an exercise price of $2.75 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.
In May 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 provided 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
<PAGE>
8. Shareholders' Equity (continued)
option plans. Had compensation expense for the Company's stock options been
determined based on the fair value of the grant date for awards in 1998, 1997
and 1996 consistent with the provisions of SFAS 123, the Company's net income
(loss) and the net income (loss) per share would have been reduced to the pro
forma amounts reflected in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $(2,609,233) $2,725,282 $7,811,857
Net income (loss) - pro forma (3,238,483) 2,131,000 7,748,000
Net income (loss) per share - as reported:
Basic (.45) .47 1.37
Diluted (.45) .46 1.30
Net income (loss) per share - pro forma:
Basic (.56) .37 1.36
Diluted (.56) .36 1.29
</TABLE>
The above pro forma effects on net income (loss) and net income (loss) 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 1998, 1997 and 1996:
1998 1997 1996
--------------------------------------
Expected dividend yield - - -
Expected stock price volatility 48.8% 54.9% 63.2%
Risk-free interest rate 6.4% 6.3% 5.1%
Expected life of options (years) 3.0 3.0 3.0
<PAGE>
8. Shareholders' Equity (continued)
Preferred Stock Purchase Rights
In February 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 common stock.
Each right entitles 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 $.01 per right at any time before they
become exercisable.
9. 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 liabilities (obligations
under license agreements), and royalty payments based on percentages of sales
for 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 $357,790, $681,394
and $1,583,268 during fiscal years 1998, 1997 and 1996, respectively. In March
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>
10. 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 $174,000, $245,000
and $236,000 for fiscal years 1998, 1997 and 1996, respectively.
11. Land and Deferred Revenue
In order to induce the Company to relocate its operation 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. The land and
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 recognized in other income
in fiscal 2003.
12. Additional Cash Flow Information
<TABLE>
<CAPTION>
Year ended
Year ended February 28 February 29,
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash payments for:
Interest $963,009 $1,284,091 $ 971,111
Income taxes 514,700 1,686,346 3,780,000
Supplemental schedule of noncash
investment and financing activities:
Land and corresponding deferred revenue
recorded - - 600,000
Line of credit reclassified to long-term debt
- - 4,875,000
</TABLE>
<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 for the years ended February 28, 1997 and
February 29, 1996. In our opinion, such schedule presents fairly the information
required to be set forth therein in conformity with generally accepted
accounting principles.
St. Paul, Minnesota /s/ MCGLADREY & PULLEN, LLP
April 9, 1997
<PAGE>
SCHEDULE II
FIRST TEAM SPORTS, INC.
RESERVE ACCOUNTS
Years Ended February 28, 1998 and 1997 and February 29, 1996
<TABLE>
<CAPTION>
Balance at Additions
Beginning Charged to Balance at
Of Period Expenses Deductions End of Period
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
1998 allowance for doubtful accounts 565,171 1,215,469 1,115,137 665,503
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-K
For the fiscal year ended: Commission File No.: 000-16422
February 28, 1998
- --------------------------------------------------------------------------------
FIRST TEAM SPORTS, INC.
- --------------------------------------------------------------------------------
Exhibit
Number Description
3.1 Articles of Incorporation, as amended - incorporated by reference to
Exhibit 3.1 to the Company's Annual Report Form 10-K for the year ended
February 28, 1997
3.2 Bylaws -- incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-18 Reg. No. 33-16345C
4.1 Specimen of Common Stock Certificate--incorporated by reference to 4.1
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1991
4.2 Certificate of Designations of Series A Preferred Stock (included in
Restated Articles of Incorporation -- see Exhibit 3.1)
4.3 Rights Agreement dated as of March 15, 1996 between the Company and
Norwest Bank Minnesota, N.A. as Rights Agent -- incorporated by
reference to Exhibit 2.1 to the Company's Registration Statement on
Form 8-A, Reg. No. 0-16422
4.4 Form of Right Certificate -- incorporated by reference to Exhibit 2.2
to the Company's Registration Statement on Form 8-A, Reg. No. 0-16422
4.5 Summary of Rights to Purchase Share of Series A Preferred Stock-
incorporated by reference to Exhibit 2.3 to the Company's Registration
Statement of Form 8-A, Reg. No. 0-16422
- ------------------
*Filed herewith
**Management contract or compensatory plan or arrangement.
<PAGE>
Exhibit
Number Description
10.1 The Company's 1987 Stock Option, as amended by resolutions dates 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, 1997**
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**
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 -
incorporated by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended February 28, 1997
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 Form 10-K for the year
ended February 29, 1995
10.10 Company Bonus Plan for certain executive officers of the Company for
fiscal 1998 -- incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended February 29,
1997**
10.11* Company Bonus Plan for executive officers of the Company for fiscal
1999**
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.
<PAGE>
Exhibit
Number Description
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**
10.16 Amendment to Agreement for consulting services April 7, 1997 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, 1997**
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 29, 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-- 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**
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
- ------------------
*Filed herewith
**Management contract or compensatory plan or arrangement.
<PAGE>
Exhibit
Number Description
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
10.26 Restated Revolving Credit and Term Loan Agreement dated June 30, 1995,
as amended through May 28, 1997 between the Company and Marquette
Capital Bank as agent for itself and LaSalle National Bank and Firstar
Bank Milwaukee, N.A. incorporated by reference 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1997
10.27 Restated Security Agreement dated June 30, 1995, as amended through May
28, 1997 between the Company and Marquette Capital Bank, LaSalle
National Bank and Firstar Bank Milwaukee, N.A. - incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the Quarter ended May 31, 1997
10.28 1994 Stock Option and Incentive Compensation Plan, as amended through
June 17, 1997 - incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended August
31, 1997**
10.29 Employment Agreement dated August 18, 1997 between the Company and Kent
Brunner - incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended August 31, 1997**
10.30* Amendment dated January 1, 1998 to Employment Agreement dated January
23, 1996 between the Company and John J. Egart**
10.31* Amendment dated January 1, 1998 to Employment Agreement dated January
23, 1996 between the Company and David G. Soderquist**
10.32* Restated Revolving Credit and Term Loan Agreement dated February 28,
1998 between the Company and Marquette Capital Bank as agent for itself
and LaSalle National Bank and Firstar Bank Milwaukee, N.A.
- ------------------
*Filed herewith
**Management contract or compensatory plan or arrangement.
<PAGE>
Exhibit
Number Description
21* List of Subsidiaries
23.1* Consent of Ernst & Young LLP
23.2* Consent of McGladrey & Pullen, LLP
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
27.1* Financial Data Schedule for the year ended February 28, 1998 (included
in electronic version only)
27.2* Restated Financial Data Schedule for the quarter ended August 31, 1997
(included in electronic version only)
27.3* Restated Financial Data Schedule for the year ended February 28, 1997
(included in electronic version only)
27.4* Restated Financial Data Schedule for the quarter ended November 30,
1996 (included in electronic version only)
27.5* Restated Financial Data Schedule for the quarter ended August 31, 1996
(included in electronic version only)
27.6* Restated Financial Data Schedule for the quarter ended May 31, 1996
(included in electronic version only)
27.7* Restated Financial Data Schedule for the year ended February 29, 1996
(included in electronic version only)
- ------------------
*Filed herewith
**MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
EXHIBIT 10.11
FIRST TEAM SPORTS
FISCAL 1999 EXECUTIVE BONUS PLAN
PLAN
* Company bonus plan is based on earnings before tax
* Bonus plan consists of the following levels:
<TABLE>
<CAPTION>
Earnings Before Tax Officer Bonus Pool Discretionary Bonus Pool
<S> <C> <C> <C>
Lower Level: $ 971,000 $240,000 $ 60,000
Higher Level: $3,146,000 $700,000 $100,000
</TABLE>
ELIGIBLE
* First Team Sports Officers
BONUS CALCULATIONS
* If earnings before tax goals are met, appropriate bonus dollars will be paid.
* 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 object/goals established for them to achieve.
* Individual achievement of objectives, as judged by the Compensation Committee,
will determine bonus payments.
EXHIBIT 10.30
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT effective as of January 1, 1998,
between FIRST TEAM SPORTS, INC., a Minnesota corporation (the "Company") and
JOHN J. EGART, a resident of Andover, Minnesota ("Executive").
WITNESSETH
WHEREAS, the Company and Executive have entered into an Employment
Agreement dated as of January 23, 1996 (the "Employment Agreement"); and
WHEREAS, Sections 6, 7 and 9 of the Employment Agreement provides that
Executive shall receive certain cash payments calculated on the basis of
Executive's "Base Salary" in the event Executive's employment is terminated by
the Company under various circumstances or in the event the term of the
Employment Agreement is not renewed; and
WHEREAS, in light of the disappointing recent financial performance of
the Company and the in-line skate industry generally, Executive has voluntarily
agreed to accept a reduction in the amount of Base Salary payable to Executive
under the Employment Agreement; provided that such reduction does not reduce the
amounts to which Executive would otherwise be entitled pursuant to Sections 6, 7
or 9 of the Employment Agreement in the event of a termination or nonrenewal of
employment;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto agree as follows:
1. Amendment of Section 6 of Employment Agreement. Section 6(a)(i) of
the Employment Agreement is hereby amended to read in its entirety as follows:
"(i) The Company shall make a cash payment to
Executive equal to the greater of (A) the sum of the highest
monthly Base Salary in effect any time during the three-year
period immediately preceding such termination times the number
of months remaining in the Term (without regard to renewals)
under this Agreement, plus an amount equal to the incentive
bonus earned by Executive in the prior fiscal year multiplied
by the number of months remaining in the Term (without regard
to renewals) divided by twelve (12), or (B) the sum of the
highest annual Base Salary in effect any time during the
three-year period immediately preceding such termination, plus
the amount of incentive bonus earned by Executive during the
prior fiscal year. Such payment shall be made in cash within
fifteen (15) days from and after termination of Executive's
employment."
2. Amendment of Section 7 of Employment Agreement. Section 7(a)(i) of
the Employment Agreement is hereby amended to read in its entirety as follows:
<PAGE>
"(i) Subject to paragraph (c) hereof, the Company
shall make a cash payment to Executive equal to the greater of
(A) the sum of the highest monthly Base Salary in effect any
time during the three-year period immediately preceding such
termination times the number of months remaining in the Term
(without regard to renewals) under this Agreement, plus an
amount equal to the incentive bonus earned by Executive in the
prior fiscal year multiplied by the number of months remaining
in the Term (without regard to renewals) divided by twelve
(12), or (B) 2 times the sum of the highest annual Base Salary
in effect any time during the three-year period immediately
preceding such termination, plus the amount of incentive bonus
earned by Executive during the prior fiscal year. Such payment
shall be made in cash within fifteen (15) days from and after
termination of Executive's employment."
3. Amendment of Section 9(b) of Employment Agreement. Section 9(b)(i)
of the Employment Agreement is hereby amended to read in its entirety as
follows:
"(i) Unless the notice of nonrenewal is given during
a Transition Period, the Company shall make a cash payment
equal to the amount of the highest annual Base Salary in
effect any time during the three-year period immediately
preceding termination of employment. Such payment shall be
made in cash within fifteen (15) days from and after the end
of Executive's employment term. If the notice of renewal is
given during a Transition Period, then, subject to Section
7(c), the Company shall make a cash payment to Executive equal
to two (2) times the sum of (A) the amount of the highest
annual Base Salary in effect any time during the three-year
period immediately preceding termination of Executive's
employment and (B) the amount of incentive bonus earned by
Executive during the prior fiscal year. Such payment shall be
made in cash within fifteen (15) days from and after
Executive's employment under this Agreement ceases."
4. Other Provisions Unaffected. Except as provided herein, all other
provisions of the Employee Agreement shall remain in force and unaffected by
this Amendment.
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed
by its officer pursuant to the authority of its Board, and Executive has
executed this Agreement, as of the day and year first written above.
FIRST TEAM SPORTS, INC.
By: /s/ Kent Brunner
Its: VP-Finance
/s/ John J. Egart
John J. Egart
EXHIBIT 10.31
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT effective as of January 1, 1998,
between FIRST TEAM SPORTS, INC., a Minnesota corporation (the "Company") and
DAVID G. SODERQUIST, a resident of Anoka, Minnesota ("Executive").
WITNESSETH
WHEREAS, the Company and Executive have entered into an Employment
Agreement dated as of January 23, 1996 (the "Employment Agreement"); and
WHEREAS, Sections 6, 7 and 9 of the Employment Agreement provides that
Executive shall receive certain cash payments calculated on the basis of
Executive's "Base Salary" in the event Executive's employment is terminated by
the Company under various circumstances or in the event the term of the
Employment Agreement is not renewed; and
WHEREAS, in light of the disappointing recent financial performance of
the Company and the in-line skate industry generally, Executive has voluntarily
agreed to accept a reduction in the amount of Base Salary payable to Executive
under the Employment Agreement; provided that such reduction does not reduce the
amounts to which Executive would otherwise be entitled pursuant to Sections 6, 7
or 9 of the Employment Agreement in the event of a termination or nonrenewal of
employment;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto agree as follows:
1. Amendment of Section 6 of Employment Agreement. Section 6(a)(i) of
the Employment Agreement is hereby amended to read in its entirety as follows:
"(i) The Company shall make a cash payment to
Executive equal to the greater of (A) the sum of the highest
monthly Base Salary in effect any time during the three-year
period immediately preceding such termination times the number
of months remaining in the Term (without regard to renewals)
under this Agreement, plus an amount equal to the incentive
bonus earned by Executive in the prior fiscal year multiplied
by the number of months remaining in the Term (without regard
to renewals) divided by twelve (12), or (B) the sum of the
highest annual Base Salary in effect any time during the
three-year period immediately preceding such termination, plus
the amount of incentive bonus earned by Executive during the
prior fiscal year. Such payment shall be made in cash within
fifteen (15) days from and after termination of Executive's
employment."
2. Amendment of Section 7 of Employment Agreement. Section 7(a)(i) of
the Employment Agreement is hereby amended to read in its entirety as follows:
<PAGE>
"(i) Subject to paragraph (c) hereof, the Company
shall make a cash payment to Executive equal to the greater of
(A) the sum of the highest monthly Base Salary in effect any
time during the three-year period immediately preceding such
termination times the number of months remaining in the Term
(without regard to renewals) under this Agreement, plus an
amount equal to the incentive bonus earned by Executive in the
prior fiscal year multiplied by the number of months remaining
in the Term (without regard to renewals) divided by twelve
(12), or (B) 2 times the sum of the highest annual Base Salary
in effect any time during the three-year period immediately
preceding such termination, plus the amount of incentive bonus
earned by Executive during the prior fiscal year. Such payment
shall be made in cash within fifteen (15) days from and after
termination of Executive's employment."
3. Amendment of Section 9(b) of Employment Agreement. Section 9(b)(i)
of the Employment Agreement is hereby amended to read in its entirety as
follows:
"(i) Unless the notice of nonrenewal is given during
a Transition Period, the Company shall make a cash payment
equal to the amount of the highest annual Base Salary in
effect any time during the three-year period immediately
preceding termination of employment. Such payment shall be
made in cash within fifteen (15) days from and after the end
of Executive's employment term. If the notice of renewal is
given during a Transition Period, then, subject to Section
7(c), the Company shall make a cash payment to Executive equal
to two (2) times the sum of (A) the amount of the highest
annual Base Salary in effect any time during the three-year
period immediately preceding termination of Executive's
employment and (B) the amount of incentive bonus earned by
Executive during the prior fiscal year. Such payment shall be
made in cash within fifteen (15) days from and after
Executive's employment under this Agreement ceases."
4. Other Provisions Unaffected. Except as provided herein, all other
provisions of the Employee Agreement shall remain in force and unaffected by
this Amendment.
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed
by its officer pursuant to the authority of its Board, and Executive has
executed this Agreement, as of the day and year first written above.
FIRST TEAM SPORTS, INC.
By: /s/ Kent Brunner
Its: VP-Finance
/s/ David G. Soderquist
David G. Soderquist
RESTATED REVOLVING CREDIT
AND TERM LOAN AGREEMENT
THIS AGREEMENT, made as of the 28th day of February, 1998, by and between FIRST
TEAM SPORTS, INC., a Minnesota corporation (the "Borrower"), and MARQUETTE
CAPITAL BANK, N.A., a national banking association with its main banking house
located in Minneapolis, Minnesota ("Marquette") and, in its capacity as agent
for the "Banks" (hereinafter defined) (the "Agent") and LASALLE NATIONAL BANK, a
national banking association ("LaSalle") and FIRSTAR BANK MILWAUKEE, N.A., a
national banking association ("Firstar") (Marquette, LaSalle and Firstar are
sometimes referred to herein collectively as the "Banks").
W I T N E S S E T H:
WHEREAS, the Borrower and the Banks previously entered into that certain
Restated Revolving Credit and Term Loan Agreement dated as of March 6, 1995 (the
"Original Loan Agreement"); and
WHEREAS, the Borrower has recently acquired certain subsidiaries who will
benefit from and guarantee the loans described herein; and
WHEREAS, the Borrower and the Banks desire to modify certain terms of the
Original Loan Agreement; and
WHEREAS, this Restated Revolving Credit and Term Loan Agreement constitutes an
amendment and restatement of the Original Loan Agreement; and
WHEREAS, the Borrower has requested and the Banks have agreed to make a
revolving credit facility available to the Borrower, in an aggregate amount not
exceeding $15,000,000 (the "Revolving Loan"); and
WHEREAS, Marquette has also made a term credit facility available to the
Borrower, in an aggregate amount not exceeding $1,000,000 (the "Term Loan") (the
Revolving Loan and the Term Loan are referred to herein collectively as the
"Loans"); and
WHEREAS, the Banks have purchased the following amounts of the "Revolving Loan"
established pursuant to this Credit Agreement:
Bank Amount Percentage
Marquette $6,000,000 40%
LaSalle $6,000,000 40%
Firstar $3,000,000 20%
<PAGE>
WHEREAS, the Banks and the Borrower desire to set forth their respective rights
and obligations relating to the Loans in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. DEFINED TERMS. As used in this Agreement, the following terms shall have the
meanings set out respectively after each (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
A. Affiliate: The Guarantors and any other person or entity (i) which
directly or indirectly through one or more intermediaries controls, or
is controlled by, or is under common control with, the Borrower or any
of its subsidiaries, or (ii) five percent (5%) or more of the equity
interest of which is held beneficially or of record by the Borrower or
any of its subsidiaries. Control for purposes of this definition means
the possession, directly or indirectly, of the power to cause the
direction of management and policies of a person or entity, whether
through the ownership of voting securities or otherwise.
B. After-tax Net Income: After-tax earnings from continuing operations.
C. Borrower's Compliance Certificate: The monthly compliance
certificate in the form attached hereto as Exhibit A to be delivered by
the Borrower to the Agent, within thirty (30) days after the end of
each calendar month.
D. Borrower Documents: collectively, this Agreement, the Notes, the
Security Agreement, the Guaranties, the Guarantor Security Agreements
and the Financing Statements, and any and all other documents,
instruments and agreements executed by the Borrower and delivered to
the Banks in connection with the financing transactions contemplated
hereby.
E. Borrower Obligations: collectively, the payment and performance of
the Revolving Notes, the Term Note and any and all other liabilities
and indebtedness of the Borrower to the Banks.
F. Collateral: the collateral as defined in the Security Agreement and
the Guarantor Security Agreements.
G. Events of Default: as defined in Section 10 hereof.
H. Expiration Date: the date that first occurs: (i) July 1, 1999, or
(ii) the occurrence of an Event of Default.
<PAGE>
I. Financing Statements: UCC-1 Financing Statements naming the Borrower
and the Guarantors as debtors and the Banks as secured parties and
describing the Collateral as the property covered thereby.
J. Guaranties: collectively, the guaranties of even date herewith
executed by the Guarantors in favor of the Banks pursuant to which the
Guarantors have guaranteed payment of all of the Obligations.
K. Guarantor Security Agreements: collectively, the guarantor security
agreements of even date herewith, executed by the Guarantors, as
debtor, and delivered to the Agent, naming the Banks as secured parties
and Marquette as agent for the Banks, and all exhibits and schedules
attached thereto.
L. Guarantor(s): collectively or individually, as the context requires,
First Team Sports GmbH, Hespeler Hockey Company, Hespeler Hockey
Holding, Inc. and Mothership Distribution, Inc.
M. Indebtedness: collectively, (i) all items which, in accordance with
generally accepted accounting principles, would be included in the
liability side of a balance sheet on the date as of which Indebtedness
is to be determined excluding capital stock, surplus capital and earned
surplus, (ii) all indebtedness secured by any mortgage, pledge,
security interest or lien existing on property owned subject to such
mortgage, pledge, security interest or lien whether or not the
indebtedness secured thereby shall have been assumed, and (iii) all
amounts representing the capitalization of rentals in accordance with
generally accepted accounting principles.
N. Letters of Credit: collectively, any letters of credit issued by the
Banks for the account of the Borrower pursuant to Section 2.A. hereof.
O. Net Worth: Shareholder's equity computed on the basis of generally
accepted accounting principles specifically excluding officer,
director, or shareholder loans and specifically including goodwill and
the value of all license agreements as identified on the Borrower's
financial statements.
P. Notes: collectively, the Revolving Notes and the Term Notes.
Q. Outstanding Indebtedness: the sum of (i) the aggregate outstanding
loan balance under the Revolving Notes plus (ii) the face amount of any
outstanding Letters of Credit.
R. Permitted Interests: those liens and encumbrances listed on Exhibit
B attached hereto.
S. Revolving Commitment of the Banks: the obligation of the Banks to
make loans to the Borrower under Section 2.A. hereof and the Revolving
Notes up to an aggregate principal amount at any one time outstanding
equal to the Revolving Loan Amount.
T. Revolving Loan: the $15,000,000 revolving loan of even date herewith
made by the Banks to the Borrower and evidenced by the Revolving Notes.
<PAGE>
U. Revolving Loan Amount: $15,000,000.
V. Revolving Notes: collectively, that certain restated promissory note
of even date herewith, in the original principal amount of $6,000,000
payable to Marquette (the "Marquette Note"), that certain restated
promissory note of even date herewith, in the original principal amount
of $6,000,000 payable to LaSalle (the "LaSalle Note") and that certain
restated promissory note of even date herewith, in the original
principal amount of $3,000,000 payable to Firstar (the "Firstar Note")
each as heretofore and hereinafter amended and extended with a
termination date of July 1, 1999.
W. Security Agreement: the Security Agreement of even date herewith
executed by the Borrower and delivered to the Agent, naming the Banks
as secured parties and Marquette as agent for the Banks, and all
exhibits and schedules attached thereto.
X. Term Loan: the term loans made by Marquette to the Borrower
hereunder in an aggregate amount not to exceed the Term Loan Amount.
Y. Term Loan Amount: up to $1,000,000
Z. Term Notes: collectively or individually, as the context requires,
any promissory note(s) executed by the Borrower in favor of Marquette
evidencing any advance(s) made against the Term Loan pursuant to
Section 2.B.
2. LINES OF CREDIT.
A. Revolving Loan. Subject to and upon the terms, covenants and
conditions hereinafter set forth, the Banks hereby agree to make loans
to the Borrower under this Section 2.A. from time to time until and
including the Expiration Date (and thereafter until and including July
1 of each succeeding calendar year if no "Event of Default" has
occurred and if this Agreement is extended in writing by the Banks and
the Borrower for additional one year period(s) pursuant to Section
13.J. herein), at such time and in such amount as to each loan as the
Borrower shall request, up to but not exceeding in aggregate principal
amount at any one time outstanding the Revolving Loan Amount. In
addition, at the request of Borrower, which request shall be made by
the execution and delivery by Borrower to the Agent of the Banks'
standard form application for letters of credit duly completed to
reflect the letter of credit being requested, the Banks will make
advances pursuant to the Revolving Commitment of the Banks in the form
of a letter of credit, the form and substance of which shall be
determined by the Banks, but without limiting the generality of the
foregoing, the Banks may require a draft thereunder to be accompanied
by such documentation as the Banks may deem necessary. In no event
shall the Banks be required to issue any such letter of credit with a
term extending beyond the Expiration Date. Any and all letters of
credit issued by the Banks shall be treated as an advance under the
Revolving Loan. The obligation of Borrower to reimburse the Banks for
any draft(s) submitted under and paid by the Banks pursuant to any such
letter(s) of credit shall be evidenced by the Revolving Notes. In no
event shall the Banks be required to issue any letter(s) of credit
hereunder in an aggregate amount in excess of $2,000,000.00. Subject to
the foregoing and upon the terms and conditions set forth herein, the
Borrower may borrow, repay and re-borrow within the limit of the
Revolving Loan Amount under this Section 2.A. from the date hereof to
and including the Expiration Date.
<PAGE>
B. Term Loan. Subject to and upon the terms, covenants and conditions
hereinafter set forth, Marquette may make loans to the Borrower in
addition to the Revolving Loans, in Marquette's sole and absolute
discretion pursuant to this Section 2.B. from time to time until and
including the Expiration Date, at such time and in such amount as to
each loan as the Borrower may request, up to but not exceeding in
aggregate principal amount the Term Loan Amount.
3. PROMISSORY NOTES.
A. Revolving Notes. The obligation of the Borrower to repay any and all
loans made and/or Letters of Credit issued, drawn upon and paid
pursuant to Section 2.A. hereof shall be evidenced by the Revolving
Notes. Reference is hereby made to the Revolving Notes for the terms
thereof relating to maturity, repayment schedule, interest rate and
other matters governing the repayment of the loans made hereunder.
Notwithstanding any provision of the Revolving Notes, however, interest
shall be payable at the rate provided for therein only on such portion
of the loan proceeds as actually have been disbursed hereunder pursuant
to Section 2.A. hereof and remain unpaid. The Banks' records shall be
conclusive evidence (absent manifest error) as to whether the Borrower
has authorized any advance made by the Banks hereunder pursuant to
Section 2.A. hereof and as to the amount of advances which have been
made hereunder and remain unpaid.
B. Term Notes. The obligation of the Borrower to repay any and all
loans pursuant to Section 2.B. hereof shall be evidenced by the Term
Notes. At the time any loan is made by Marquette to the Borrower
pursuant to Section 2.B. hereof, the Borrower shall execute a Term Note
in the original principal amount equal to the amount of such loan and
payable to Marquette, which Term Note shall be in a form acceptable to
Marquette.
4. MANNER OF BORROWING. Each time the Borrower desires to obtain a loan advance
pursuant to Section 2.A. or 2.B. hereof, any one of the following people shall
request such loan on behalf of the Borrower either orally or in writing: (i)
John Egart, Robert Lenius; or (ii) any person designated as the Borrower's agent
by the Board of Directors of the Borrower in a writing delivered to the Agent.
Except as otherwise instructed in writing by such officer, agent or person, the
Banks may disburse loan proceeds by depositing such in the Borrower's account at
Marquette. The Borrower shall be obligated to repay all advances notwithstanding
the fact that the person requesting the same was not in fact authorized to do
so.
5. COLLATERAL. As a condition precedent to the establishment of the Revolving
Commitment of the Banks and the agreement of the Banks to make the Revolving
Loan and of Marquette to make the Term Loan, the Borrower agrees as follows:
A. Security Agreement. The Borrower shall have executed and delivered
to the Agent the Security Agreement pursuant to which the Borrower
shall have granted a valid and perfected first security interest
(except as expressly otherwise provided therein) to the Banks in and to
the Collateral to secure the payment and performance of the Notes and
any and all other liabilities and indebtedness of the Borrower to the
Banks.
<PAGE>
B. Guarantor Security Agreements. The Guarantors shall have executed
and delivered to the Agent the Guarantor Security Agreements pursuant
to which the Guarantors shall have granted a valid and perfected first
security interest (except as expressly otherwise provided therein) to
the Banks in and to the Collateral to secure the payment and
performance of the Notes and any and all other liabilities and
indebtedness of the Borrower or the Guarantors to the Banks.
C. Financing Statements. The Borrower and the Guarantors shall have
executed and delivered to the Agent for filing with the Secretary of
State of the State of Minnesota, and the appropriate county office or
offices in Minnesota and each and every other country, state,
jurisdiction and county in which all or any part of the Collateral is
located, UCC-1 Financing Statements (or equivalent documents) naming
the Borrower and the Guarantors as debtors and the Banks as secured
parties (and Marquette as the agent of the Banks) and describing the
Collateral as the property covered thereby, together with any and all
other appropriate UCC-1 Financing Statements and other documents and
instruments as the Banks may request in order to perfect the security
interest granted to it in and to the Collateral pursuant to the
Security Agreement and the Guarantor Security Agreements.
6. BORROWER REPRESENTATIONS. In order to induce the Banks to make advances
hereunder, the Borrower hereby warrants and represents to the Banks as follows:
A. Corporate Existence and Power. The Borrower is a corporation duly
organized and validly existing in the State of Minnesota, and is fully
qualified to do business and in good standing in the State of
Minnesota, and in every other jurisdiction wherein the nature of its
businesses or the character of its properties makes such qualification
necessary, and has all requisite power and authority to carry on its
businesses as now conducted and as presently proposed to be conducted.
B. Corporate Authority. The Borrower has full power and authority to
execute and deliver the Borrower Documents and to incur and perform its
obligations hereunder and thereunder; the execution, delivery and
performance by the Borrower of the Borrower Documents and any and all
other documents and transactions contemplated hereby or thereby have
been duly authorized by all necessary corporate action, will not
violate any provision of law or the Articles of Incorporation or Bylaws
of the Borrower or result in the breach of, constitute a default under,
or create or give rise to any lien under, any indenture or other
agreement or instrument to which the Borrower is a party or by which
the Borrower or its property may be bound or affected; and the Borrower
Documents have been executed and delivered to the Banks by the
corporate officers of the Borrower who have been authorized by the
Borrower's Board of Directors, and who are authorized by and specified
in the Borrower's Bylaws, to execute and so deliver such agreements.
C. Enforceability. The Borrower Documents each constitute the legal,
valid and binding obligations of the Borrower enforceable in accordance
with their respective terms.
<PAGE>
D. Financial Condition. The financial statements of the Borrower
heretofore furnished to the Banks are complete and correct in all
material respects and fairly present the financial condition of the
Borrower at the dates of such statements and the results of its
operations for the period ended on said date, and have been prepared in
accordance with generally accepted accounting principles, consistently
applied. Since the most recent set of financial statements delivered by
the Borrower to the Banks, there have been no material adverse changes
in the financial condition of the Borrower.
E. Litigation. Except as disclosed on Exhibit C hereto, there is no
action, suit or proceeding pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower which, if
adversely determined, would have a material adverse effect on the
condition (financial or otherwise), business, properties or assets of
the Borrower or which would question the validity of the Borrower
Documents or any instrument, document or other agreement related hereto
or required hereby, or impair the ability of the Borrower to perform
its obligations under the foregoing agreements.
F. Licenses and Infringement. Except as disclosed on Exhibit D hereto,
the Borrower possesses adequate licenses, permits, franchises, patents,
copyrights, trademarks and trade names, or rights thereto, to conduct
its respective business substantially as now conducted and as presently
proposed to be conducted. There does not exist and there is no reason
to anticipate that there may exist, any liability to the Borrower with
respect to any claim of infringement regarding any franchise, patent,
copyright, trademark or trade name possessed or used by the Borrower.
G. Default. The Borrower is not in default of a material provision
under any material agreement, instrument, decree or order to which it
is a party or by which it or its respective property is bound or
affected.
H. Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, or notice to, any
governmental authority or any third party is required in connection
with the execution and delivery of the Borrower Documents, or any of
the agreements or instruments herein mentioned to which the Borrower is
a party or the carrying out or performance of any of the transactions
required or contemplated hereby or thereby or, if required, such
consent, approval, order or authorization has been obtained or such
registration, declaration or filing has been accomplished or such
notice has been given prior to the date hereof and the Banks have been
provided with a copy of such consent, approval, order, authorization,
registration, declaration, filing or notice, as the case may be.
I. Taxes. The Borrower has filed all tax returns required to be filed
and either paid all taxes shown thereon to be due, including interest
and penalties, which are not being contested in good faith and by
appropriate proceedings, or provided adequate reserves for payment
thereof, and the Borrower has no any information or knowledge of any
objections to or claims for additional taxes in respect of federal
income or excess profits tax returns for prior years.
<PAGE>
J. Titles, etc. The Borrower has good title to all of its properties
and assets, including, without limitation, the Collateral, free and
clear of all mortgages, liens and encumbrances, except the Permitted
Interests and those minor irregularities in title which do not
interfere with the occupation, use and enjoyment by the Borrower of
such properties and assets in the normal course of its businesses as
presently conducted or materially impair the value thereof for such
businesses ("Minor Irregularities"), and except such liens and
encumbrances as may from time to time be consented to in writing by the
Banks. Except for Permitted Interests, the security interest granted to
the Banks by the Borrower pursuant to the Security Agreement
constitutes a valid and perfected first lien in and to the Collateral.
K. Pension Plans. The Borrower has not established or maintained, or
made any contributions to, any employee benefit plan which is subject
to Part 3 of Subtitle B of Title 1 of ERISA or, if such a plan has been
so established, maintained or contributed to, such plan did not have an
"accumulated funding deficiency" (as that term is defined in Section
302 of ERISA) as of the date hereof, and, without limiting the
generality of the foregoing, the Borrower has not incurred any material
liability to the Pension Benefit Guaranty Corporation with respect to
any such plan.
L. Use of Loans. The Borrower is not engaged principally, or as one of
its important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System),
and no part of the proceeds of any loan hereunder will be used to
purchase or carry any such margin stock or to extend credit to others
for the purpose of purchasing or carrying any such margin stock.
Each of the foregoing warranties and representations shall be deemed to be
repeated and reaffirmed on and as of the date any loan is made hereunder by the
Banks to the Borrower pursuant to Section 2 hereof.
7. GUARANTOR REPRESENTATIONS. In order to induce the Banks to make advances
hereunder, each of the Guarantors hereby, jointly and severally, warrants and
represents to the Banks as follows:
A. Corporate Existence and Power.
(i) First Team Sports GmbH, is a corporation duly organized and
validly existing in the Country of Austria, and is fully
qualified to do business and in good standing in the Country
of Austria, the State of Minnesota, and in every other
jurisdiction wherein the nature of its businesses or the
character of its properties makes such qualification
necessary, and has all requisite power and authority to carry
on its businesses as now conducted and as presently proposed
to be conducted.
(ii) Hespeler Hockey Company, is a corporation duly organized and
validly existing in Nova Scotia, and is fully qualified to do
business and in good standing in Nova Scotia, the State of
Minnesota, and in every other jurisdiction wherein the nature
of its businesses or the character of its properties makes
such qualification necessary, and has all requisite power and
authority to carry on its businesses as now conducted and as
presently proposed to be conducted.
<PAGE>
(iii) Hespeler Hockey Holding, Inc. is a corporation duly organized
and validly existing in the State of Minnesota, and is fully
qualified to do business and in good standing in the State of
Minnesota, and in every other jurisdiction wherein the nature
of its businesses or the character of its properties makes
such qualification necessary, and has all requisite power and
authority to carry on its businesses as now conducted and as
presently proposed to be conducted.
(iv) Mothership Distribution, Inc. is a corporation duly organized
and validly existing in the State of Minnesota, and is fully
qualified to do business and in good standing in the State of
Minnesota, and in every other jurisdiction wherein the nature
of its businesses or the character of its properties makes
such qualification necessary, and has all requisite power and
authority to carry on its businesses as now conducted and as
presently proposed to be conducted.
B. Corporate Authority. Each of the Guarantors has full power and
authority to execute and deliver the Guaranties and Guarantor Security
Agreements and to incur and perform its obligations hereunder and
thereunder; the execution, delivery and performance by the Guarantor of
the Guaranties and Guarantor Security Agreements and any and all other
documents and transactions contemplated hereby or thereby have been
duly authorized by all necessary corporate action, will not violate any
provision of law or the Articles of Incorporation or Bylaws of the
Guarantor or result in the breach of, constitute a default under, or
create or give rise to any lien under, any indenture or other agreement
or instrument to which the Guarantor is a party or by which the
Guarantor or its property may be bound or affected; and the Guaranties
and Guarantor Security Agreements have been executed and delivered to
the Banks by the corporate officers of the Guarantor who have been
authorized by the Guarantor's Board of Directors, and who are
authorized by and specified in the Guarantor's Bylaws, to execute and
so deliver such agreements.
C. Enforceability. The Guaranties and Guarantor Security Agreements
each constitute the legal, valid and binding obligations of the
Guarantor enforceable in accordance with their respective terms.
D. Financial Condition. The financial statements of the Guarantor
heretofore furnished to the Banks are complete and correct in all
material respects and fairly present the financial condition of the
Guarantor at the dates of such statements and the results of its
operations for the period ended on said date, and have been prepared in
accordance with generally accepted accounting principles, consistently
applied. Since the most recent set of financial statements delivered by
the Guarantor to the Banks, there have been no material adverse changes
in the financial condition of the Guarantor.
E. Litigation. Except as disclosed on Exhibit E hereto, there is no
action, suit or proceeding pending or, to the knowledge of the
Guarantor, threatened against or affecting the Guarantor which, if
adversely determined, would have a material adverse effect on the
condition (financial or otherwise), business, properties or assets of
the Guarantor or which would question the validity of the Guaranties
and Guarantor Security Agreements or any instrument, document or other
agreement related hereto or required hereby, or impair the ability of
the Guarantor to perform its obligations under the foregoing
agreements.
<PAGE>
F. Licenses and Infringement. Except as disclosed on Exhibit F hereto,
the Guarantor possesses adequate licenses, permits, franchises,
patents, copyrights, trademarks and trade names, or rights thereto, to
conduct its respective business substantially as now conducted and as
presently proposed to be conducted. There does not exist and there is
no reason to anticipate that there may exist, any liability to the
Guarantor with respect to any claim of infringement regarding any
franchise, patent, copyright, trademark or trade name possessed or used
by the Guarantor.
G. Default. The Guarantor is not in default of a material provision
under any material agreement, instrument, decree or order to which it
is a party or by which it or its respective property is bound or
affected.
H. Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, or notice to, any
governmental authority or any third party is required in connection
with the execution and delivery of the Guaranties and Guarantor
Security Agreements, or any of the agreements or instruments herein
mentioned to which the Guarantor is a party or the carrying out or
performance of any of the transactions required or contemplated hereby
or thereby or, if required, such consent, approval, order or
authorization has been obtained or such registration, declaration or
filing has been accomplished or such notice has been given prior to the
date hereof and the Banks have been provided with a copy of such
consent, approval, order, authorization, registration, declaration,
filing or notice, as the case may be.
I. Taxes. The Guarantor has filed all tax returns required to be filed
and either paid all taxes shown thereon to be due, including interest
and penalties, which are not being contested in good faith and by
appropriate proceedings, or provided adequate reserves for payment
thereof, and the Guarantor has no any information or knowledge of any
objections to or claims for additional taxes in respect of federal
income or excess profits tax returns for prior years.
J. Titles, etc. The Guarantor has good title to all of its properties
and assets, including, without limitation, the Collateral, free and
clear of all mortgages, liens and encumbrances, except the Permitted
Interests and those minor irregularities in title which do not
interfere with the occupation, use and enjoyment by the Guarantor of
such properties and assets in the normal course of its businesses as
presently conducted or materially impair the value thereof for such
businesses, and except such liens and encumbrances as may from time to
time be consented to in writing by the Banks. Except for Permitted
Interests, the security interest granted to the Banks by the Guarantor
pursuant to the Guarantor Security Agreement constitutes a valid and
perfected first lien in and to the Collateral.
<PAGE>
K. Pension Plans. The Guarantor has not established or maintained, or
made any contributions to, any employee benefit plan which is subject
to Part 3 of Subtitle B of Title 1 of ERISA or, if such a plan has been
so established, maintained or contributed to, such plan did not have an
"accumulated funding deficiency" (as that term is defined in Section
302 of ERISA) as of the date hereof, and, without limiting the
generality of the foregoing, the Guarantor has not incurred any
material liability to the Pension Benefit Guaranty Corporation with
respect to any such plan.
L. Use of Loans. The Guarantor is not engaged principally, or as one of
its important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System),
and no part of the proceeds of any loan hereunder will be used to
purchase or carry any such margin stock or to extend credit to others
for the purpose of purchasing or carrying any such margin stock.
Each of the foregoing warranties and representations shall be deemed to be
repeated and reaffirmed on and as of the date any loan is made hereunder by the
Banks to the Guarantor pursuant to Section 2 hereof.
8. COVENANTS OF THE BORROWER. On and after the date hereof and until the payment
in full of the Notes and all of the other Borrower's Obligations, and the
performance of all other obligations of the Borrower hereunder, and so long as
any portion of the Revolving Commitment of the Banks or the Term Loan remains in
full force and effect, the Borrower agrees that, unless the Banks shall
otherwise consent in writing:
A. Financial Statements; Other Information. The Borrower shall deliver
to each of the Banks:
(i) as soon as available, and in any event within 90 days
after the end of each fiscal year of the Borrower, a copy of
the annual audit report of the Borrower with the unqualified
opinion of independent certified public accountants selected
by the Borrower and reasonably acceptable to the Banks, which
annual report shall include a consolidated balance sheet of
the Borrower and the Guarantors, and related statements of
income, retained earnings and changes in financial position of
the Borrower and the Guarantors for the fiscal year then
ended, all in reasonable detail and all prepared in accordance
with generally accepted accounting principles applied on a
basis consistent with the accounting practices applied in the
annual financial statements referred to in Section 6.D.,
together with (i) a report signed by such accountants stating
that in making the investigations necessary for such opinion
they obtained no knowledge, except as specifically stated, of
any Event of Default hereunder or of any event or circumstance
which with notice or lapse of time or both would constitute
such an Event of Default and all relevant facts in reasonable
detail to evidence, and the computations as to, whether or not
the Borrower is in compliance with the requirements set forth
in Section 8 hereof; (ii) any management letter(s) prepared by
the Borrower's accountants; and (iii) a certificate of the
chief financial officer of the Borrower in the form attached
hereto as Exhibit G stating that such financial statements
have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with the
accounting practices reflected in the annual financial
statements referred to in Section 6.D. and whether or not he
has knowledge of the occurrence of any Event of Default
hereunder or of any event not theretofore reported and
remedied which with notice or lapse of time or both would
constitute such an Event of Default and, if so, stating in
reasonable detail the facts with respect thereto;
<PAGE>
(ii) as soon as available and in any event within thirty (30)
days after the end of each calendar month, individual,
consolidated and consolidating financial statements of the
Borrower and the Guarantors (including balance sheets as of
the end of such month and related statements of income and
retained earnings for such monthly period and for the year to
date), in reasonable detail, all prepared in accordance with
generally accepted accounting principles applied on a basis
consistent with the accounting practices reflected in the
annual financial statements referred to in Section 6.D. and
certified by the chief financial officer of the Borrower;
subject, however, to year-end audit adjustments, and
accompanied by a certificate of said officer stating (i) that
such financial statements have been prepared in accordance
with generally accepted accounting principles applied on a
basis consistent with the accounting practices reflected in
the annual financial statements referred to in Section 6.D.,
and (ii) whether or not he has knowledge of the occurrence of
any Event of Default hereunder or of any event or circumstance
which with notice or lapse of time or both would constitute
such an Event of Default and, if so, stating in reasonable
detail the facts with respect thereto and (iii) all relevant
facts in reasonable detail to evidence, and the computations
as to, whether or not the Borrower is in compliance with the
requirements set forth in Section 8 hereof;
(iii) within thirty (30) days after the end of each calendar
month, a monthly Borrower's Compliance Certificate and a
current "inventory opportunity buy report";
(iv) within fifty-five (55) days after the end of each
calendar quarter, a copy of the quarterly 10-Q Statement filed
by the Borrower with the Securities and Exchange Commission;
(v) prior to each year end, a projection for the following
fiscal year;
(vi) as soon as available, and in any event within one hundred
(100) days after the end of each fiscal year, a copy of the
10-K Statement filed by the Borrower with the Securities and
Exchange Commission and any and all other filings made at any
time by the Borrower with the Securities and Exchange
Commission or any other state or federal agency;
(vii) such other information respecting the financial
condition and results of operations of the Borrower or the
Guarantors as the Banks may from time to time reasonably
request.
<PAGE>
B. Taxes and Claims. The Borrower shall pay and discharge all taxes,
assessments and governmental charges or levies imposed upon it or upon
its respective income or profits, or upon any of its assets or
properties, prior to the date on which penalties attach thereto, and
all lawful claims which, if unpaid, might become a lien or charge upon
its respective property or assets; provided, however, that the Borrower
shall not be required to pay any such tax, assessment, charge, levy or
claim the payment of which is being contested in good faith and by
proper proceedings and for which it shall have set aside on its books
adequate reserves therefor.
C. Insurance. The Borrower shall maintain insurance coverage with
responsible insurance companies licensed to do business in the State of
Minnesota (or, in the case of any Collateral located in any other
state, then in such state) in such amounts and against such risks as is
reasonably requested by the Banks or as required by law, including,
without limitation, property, hazard, fire, wind, hail, theft,
collapse, comprehensive general public liability, product liability and
business interruption insurance, and worker's compensation or similar
insurance. The Borrower shall furnish to the Agent full information and
written evidence as to the insurance maintained by the Borrower.
D. Maintenance of Existence; Conduct of Business. The Borrower shall
maintain, its corporate existence and preserve all of its rights,
privileges and franchises necessary in the normal conduct of its
business; conduct its business in an orderly, efficient and regular
manner.
E. Maintenance of Properties. The Borrower shall keep all of the assets
and properties necessary in its respective business, including, without
limitation, any tangible Collateral, in good working order and
condition, ordinary wear and tear and the termination of service of
obsolete or unnecessary equipment excepted.
F. Compliance with Applicable Laws. The Borrower shall comply with the
requirements of all applicable state and federal laws, and of all
rules, regulations and orders of any governmental or other authority or
agency, a breach of which would materially and adversely affect its
respective business or credit, except where contested in good faith and
by proper proceedings.
G. Litigation. The Borrower shall promptly provide the Agent notice in
writing of all litigation and of all proceedings by or before any court
or governmental or regulatory agency affecting the Borrower, except
litigation or proceedings which, if adversely determined, would not
materially affect the financial condition or business of the Borrower.
H. Liens. The Borrower will not create, incur, assume or suffer to
exist any mortgage, lease, deed of trust, pledge, lien, security
interest, or other charge or encumbrance of any nature on any of its
assets, now owned or hereafter acquired, securing any indebtedness or
obligation to the Banks, except (1) the Permitted Interests, and Minor
Irregularities and (2) any security interest granted herein or by any
document related hereto to the Banks or consented to in writing by the
Banks.
<PAGE>
I. Access to Books and Inspection. The Borrower shall at all times keep
proper books of record and accounts for itself, and, upon request of
the Banks, the Borrower shall provide any duly authorized
representative of the Banks access during normal business hours to, and
permit such representative to examine, make extracts or a reasonable
number of copies from, any and all books, records and documents in the
Borrower's possession or control relating to the Borrower's affairs, to
conduct collateral audits from time to time and to inspect any of its
facilities and properties; provided, however, that the Banks shall
treat all such books and records as confidential and shall only be
permitted to disclose the information contained therein to their
respective legal counsel, independent public accountants, any other
participating banks, or in connection with any action to collect the
Notes or to enforce this Agreement with the documents related hereto,
or as otherwise permitted or required by law.
J. Collection of Accounts. Upon the request of the Agent or the Banks,
at any time after the occurrence of an Event of Default, the Borrower
shall notify its account debtors and other obligors to make payment
directly to a post office box specified by and under the sole control
of the Agent, and Marquette, for itself and as agent for the Banks,
shall be entitled to take control of any proceeds thereof.
K. Sale of Assets. The Borrower will not sell, lease, assign, transfer
or otherwise dispose of all or a substantial part of its assets
(whether in one transaction or in a series of transactions) to any
other person or entity other than in the ordinary course of business.
L. Consolidation and Merger. The Borrower will not consolidate with or
merge into any person or entity, or permit any other person or entity
to merge into it, or acquire (in a transaction analogous in purpose or
effect to a consolidation or merger) all or substantially all of the
assets of any other person or entity, nor liquidate, dissolve, suspend
business operations or sell all or substantially all of its assets.
M. Benefit to Third Persons. Except for credit sales made in the
ordinary course of business and transactions described on Exhibit H,
the Borrower shall not lend money to or guaranty the payment or
performance of any liabilities of any third person who is a
shareholder, officer, employee or otherwise related to or closely
associated with the Borrower.
N. Equipment and Operating Leases. The Borrower shall not create,
incur, assume, or suffer to exist any equipment or operating lease
obligations other than lease obligations incurred in the ordinary
course of business of the Borrower as such business is presently
conducted.
O. Capital Expenditures. The Borrower and the Guarantors collectively
shall not pay or incur, or commit to pay or incur, any capital
expenditures (including capitalized lease obligations) during any
fiscal year of the Borrower which exceed $2,000,000 in the aggregate.
<PAGE>
P. Loans, Guaranties and Investments. Except for the investments in and
loans to the subsidiaries and affiliates described on Exhibit I hereto,
the Borrower shall not assume, guarantee, endorse, contingently agree
to purchase or otherwise become liable (directly or indirectly,
absolutely or contingently) in connection with the obligations of any
other person, firm or corporation, nor shall the Borrower make or
permit to exist any loans or advances by the Borrower to, or purchase
or otherwise acquire all or any substantial portion of the assets of,
or shares of stock or similar interest in or to any other person,
corporation or entity.
Q. Other Borrowings. The Borrower shall not borrow or obtain any loan
or advance from, or otherwise be or become indebted for money borrowed
from, any person, firm, corporation (including, without limitation, the
Banks), partnership, association or other entity, other than (i)
current accounts payable incurred by the Borrower in the ordinary
course of its business, provided that the same shall be paid when due
in accordance with customary trade terms unless contested by
appropriate proceedings; (ii) the endorsement to the Agent of checks
payable to the order of the Borrower in the ordinary course of
business; (iii) capital lease obligations permitted by Section 8.O
hereof; and (iv) and other loans not to exceed a cumulative total of
$50,000.
R. Financial Covenants. The Borrower will maintain on a consolidated
basis:
(i) A ratio of Indebtedness to Net Worth no greater than 1.5:1
at any time during the term of this Agreement.
(ii) At all times the Borrower shall maintain a Net Worth of
at least $29,500,000.
(iii) At the end of each of the fiscal quarters specified
below, a minimum After Tax Net Income, on a cumulative basis
for the applicable fiscal year (March 1 - February 28) as
follows:
as of May 31, 1998 at least $ 500,000
as of August 30, 1998 a cumulative loss no
greater than (250,000)
as of November 30, 1998 a cumulative loss no
greater than (250,000)
as of February 28, 1999 at least $1.00
as of May 31, 1999 at least 500,000
S. Non-Business Assets. The Borrower shall not purchase, lease or
otherwise acquire any right, title or interest in or to, any real or
personal property not directly related to or necessary in connection
with the present operations of the Borrower.
T. Notification. The Borrower shall notify the Agent immediately of a
change in location of any of the Collateral.
<PAGE>
U. Redemptions, Dividends. The Borrower shall not purchase or redeem or
agree to purchase or redeem, any of its capital stock nor shall the
Borrower pay or declare any dividends in any calendar year without the
approval of the Banks (other than non-cash dividends) with respect to
any of its capital stock.
V. Access. The Borrower shall grant to the Banks' agents and any entity
authorized by the Banks access to its property at any reasonable time
in order to inspect the Collateral, the Borrower's property and
business.
W. Transfer of the Collateral. The Borrower shall not sell, dispose of,
lease, mortgage, assign, sublet or transfer any of its right, title or
interest in or to the Collateral (other than sales of Collateral
consisting of inventory in the ordinary course of Borrower's business)
without the prior written consent of the Banks.
X. Pension Plans. The Borrower shall maintain any pension plan in
compliance with all material requirements of ERISA, the Internal
Revenue Code, and all other applicable laws, rules, regulations and
rulings.
9. COVENANTS OF THE GUARANTORS. On and after the date hereof and until the
payment in full of the Notes and all of the other Borrower's Obligations, and
the performance of all obligations of each Guarantor hereunder and under the
Guaranties, and so long as any portion of the Revolving Commitment of the Banks
or the Term Loan remains in full force and effect, each Guarantor, jointly and
severally, agrees that, unless the Banks shall otherwise consent in writing:
A. Taxes and Claims. The Guarantor shall pay and discharge all taxes,
assessments and governmental charges or levies imposed upon it or upon
its respective income or profits, or upon any of its assets or
properties, prior to the date on which penalties attach thereto, and
all lawful claims which, if unpaid, might become a lien or charge upon
its respective property or assets; provided, however, that the
Guarantor shall not be required to pay any such tax, assessment,
charge, levy or claim the payment of which is being contested in good
faith and by proper proceedings and for which it shall have set aside
on its books adequate reserves therefor.
B. Insurance. The Guarantor shall maintain insurance coverage with
responsible insurance companies licensed to do business in the
jurisdiction of its incorporation (or, in the case of any Collateral
located in any other state, then in such state) in such amounts and
against such risks as is reasonably requested by the Banks or as
required by law, including, without limitation, property, hazard, fire,
wind, hail, theft, collapse, comprehensive general public liability,
product liability and business interruption insurance, and worker's
compensation or similar insurance. The Guarantor shall furnish to the
Agent full information and written evidence as to the insurance
maintained by the Guarantor.
<PAGE>
C. Maintenance of Existence; Conduct of Business. The Guarantor shall
maintain, its corporate existence and preserve all of its rights,
privileges and franchises necessary in the normal conduct of its
business; conduct its business in an orderly, efficient and regular
manner.
D. Maintenance of Properties. The Guarantor shall keep all of the
assets and properties necessary in its respective business, including,
without limitation, any tangible Collateral, in good working order and
condition, ordinary wear and tear and the termination of service of
obsolete or unnecessary equipment excepted.
E. Compliance with Applicable Laws. The Guarantor shall comply with the
requirements of all applicable state and federal laws, and of all
rules, regulations and orders of any governmental or other authority or
agency, a breach of which would materially and adversely affect its
respective business or credit, except where contested in good faith and
by proper proceedings.
F. Litigation. The Guarantor shall promptly provide the Agent notice in
writing of all litigation and of all proceedings by or before any court
or governmental or regulatory agency affecting the Guarantor, except
litigation or proceedings which, if adversely determined, would not
materially affect the financial condition or business of the Guarantor.
G. Liens. The Guarantor will not create, incur, assume or suffer to
exist any mortgage, lease, deed of trust, pledge, lien, security
interest, or other charge or encumbrance of any nature on any of its
assets, now owned or hereafter acquired, securing any indebtedness or
obligation to the Banks, except (1) the Permitted Interests, and Minor
Irregularities and (2) any security interest granted herein or by any
document related hereto to the Banks or consented to in writing by the
Banks.
H. Access to Books and Inspection. The Guarantor shall at all times
keep proper books of record and accounts for itself, and, upon request
of the Banks, the Guarantor shall provide any duly authorized
representative of the Banks access during normal business hours to, and
permit such representative to examine, make extracts or a reasonable
number of copies from, any and all books, records and documents in the
Guarantor's possession or control relating to the Guarantor's affairs,
to conduct collateral audits from time to time and to inspect any of
its facilities and properties; provided, however, that the Banks shall
treat all such books and records as confidential and shall only be
permitted to disclose the information contained therein to their
respective legal counsel, independent public accountants, any other
participating banks, or in connection with any action to collect the
Notes or to enforce this Agreement with the documents related hereto,
or as otherwise permitted or required by law.
I. Collection of Accounts. Upon the request of the Agent or the Banks,
at any time after the occurrence of an Event of Default, the Guarantor
shall notify its account debtors and other obligors to make payment
directly to a post office box specified by and under the sole control
of the Agent, and Marquette, for itself and as agent for LaSalle, shall
be entitled to take control of any proceeds thereof.
<PAGE>
J. Sale of Assets. The Guarantor will not sell, lease, assign, transfer
or otherwise dispose of all or a substantial part of its assets
(whether in one transaction or in a series of transactions) to any
other person or entity other than in the ordinary course of business.
K. Consolidation and Merger. The Guarantor will not consolidate with or
merge into any person or entity, or permit any other person or entity
to merge into it, or acquire (in a transaction analogous in purpose or
effect to a consolidation or merger) all or substantially all of the
assets of any other person or entity, nor liquidate, dissolve, suspend
business operations or sell all or substantially all of its assets.
L. Benefit to Third Persons. Except for credit sales made in the
ordinary course of business, the Guarantor shall not lend money to or
guaranty the payment or performance of any liabilities of any third
person who is a shareholder, officer, employee or otherwise related to
or closely associated with the Guarantor.
M. Equipment and Operating Leases. The Guarantor shall not create,
incur, assume, or suffer to exist any equipment or operating lease
obligations other than lease obligations incurred in the ordinary
course of business of the Guarantor as such business is presently
conducted.
N. Capital Expenditures. The Guarantors and the Borrower collectively
shall not pay or incur, or commit to pay or incur, any capital
expenditures (including capitalized lease obligations) during any
fiscal year which exceeds $2,000,000 in the aggregate.
O. Loans, Guaranties and Investments. Except for the investments in and
loans to the subsidiaries and affiliates described on Exhibit J hereto,
the Guarantor shall not assume, guarantee, endorse, contingently agree
to purchase or otherwise become liable (directly or indirectly,
absolutely or contingently) in connection with the obligations of any
other person, firm or corporation, nor shall the Guarantor make or
permit to exist any loans or advances by the Guarantor to, or purchase
or otherwise acquire all or any substantial portion of the assets of,
or shares of stock or similar interest in or to any other person,
corporation or entity.
P. Other Borrowings. The Guarantor shall not borrow or obtain any loan
or advance from, or otherwise be or become indebted for money borrowed
from, any person, firm, corporation (including, without limitation, the
Banks), partnership, association or other entity, other than (i)
current accounts payable incurred by the Guarantor in the ordinary
course of its business, provided that the same shall be paid when due
in accordance with customary trade terms unless contested by
appropriate proceedings; (ii) the endorsement to the Agent of checks
payable to the order of the Guarantor in the ordinary course of
business and (iii) capital lease obligations permitted by Section 9.N
hereof.
Q. Non-Business Assets. The Guarantor shall not purchase, lease or
otherwise acquire any right, title or interest in or to, any real or
personal property not directly related to or necessary in connection
with the present operations of the Guarantor.
<PAGE>
R. Notification. The Guarantor shall notify the Agent immediately of a
change in location of any of the Collateral.
S. Redemptions, Dividends. The Guarantor shall not purchase or redeem
or agree to purchase or redeem, any of its capital stock nor shall the
Guarantor pay or declare any dividends in any calendar year without the
approval of the Banks (other than non-cash dividends) with respect to
any of its capital stock.
T. Access. The Guarantor shall grant to the Banks' agents and any
entity authorized by the Banks access to its property at any reasonable
time in order to inspect the Collateral, the Guarantor's property and
business.
U. Transfer of the Collateral. The Guarantor shall not sell, dispose
of, lease, mortgage, assign, sublet or transfer any of its right, title
or interest in or to the Collateral (other than sales of Collateral
consisting of inventory in the ordinary course of Guarantor's business)
without the prior written consent of the Banks.
V. Pension Plans. The Guarantor shall maintain any pension plan in
compliance with all material requirements of ERISA, the Internal
Revenue Code, and all other applicable laws, rules, regulations and
rulings.
10. EVENTS OF DEFAULT AND REMEDIES. Any one or more of the following events and
circumstances shall constitute an Event of Default:
A. the Borrower shall fail to pay any amounts required to be paid by
the Borrower under the Notes, the Borrower Documents or any other
indebtedness of the Borrower to the Banks or any material indebtedness
to any third party whether any such indebtedness is now existing or
hereafter arises and whether direct or indirect, due or to become due,
absolute or contingent, primary or secondary or joint or joint and
several; or
B. any Guarantor shall fail to pay any amounts required to be paid by
the Guarantor under the Guaranty or any other indebtedness of the
Guarantor to the Banks or any material indebtedness to any third party
whether any such indebtedness is now existing or hereafter arises and
whether direct or indirect, due or to become due, absolute or
contingent, primary or secondary or joint or joint and several; or
C. the Borrower or any Guarantor shall fail to observe or perform any
covenant, condition or agreement to be observed or performed by it
under any of the Borrower Documents or any other document related
hereto for a period of thirty (30) days after written notice,
specifying such default and requesting that it be remedied, given to
the Borrower or the Guarantors by the Banks, unless the Banks shall
agree in writing to an extension of such time prior to its expiration,
or for such longer period as may be reasonable necessary to remedy such
default (other than defaults which can be cured by a money payment)
provided that the Borrower and the Guarantors are proceeding with
reasonable diligence to remedy the same; or
<PAGE>
D. the Borrower or any Guarantors shall be in default in the
performance of any covenants or obligation under any other document or
instrument heretofore or hereafter executed and delivered to the Banks
by such party in connection with any other loan or credit
transaction(s) and such default is not cured within the period, if any,
allowed by such documents for the cure thereof; or
E. the Borrower or any Guarantor shall file a petition in bankruptcy or
for reorganization or for an arrangement pursuant to any present or
future state or federal bankruptcy act or under any similar federal or
state law, or shall be adjudicated to be bankrupt or insolvent, or
shall make a general assignment for the benefit of its creditors, or
shall be unable to pay its debts generally as they become due; or if an
order for relief under any present or future federal bankruptcy act or
similar state or federal law shall be entered against the Borrower or
any Guarantor; or if a petition or answer requesting or proposing the
entry of such order for relief or the adjudication of the Borrower or
any Guarantor as a debtor or to be bankrupt or its reorganization under
any present or future state or federal bankruptcy act or any similar
federal or state law shall be filed in any court and such petition or
answer shall not be discharged or denied within ninety (90) days after
the filing thereof; or if a receiver, trustee or liquidator of the
Borrower or any Guarantor or of all or substantially all of the assets
of the Borrower or any Guarantor; or the Collateral, or any part
thereof, shall be appointed in any proceeding brought against the
Borrower or any Guarantor and shall not be discharged within ninety
(90) days of such appointment; or if the Borrower or any Guarantor
shall consent to or acquiesce in such appointment; or if any property
of the Borrower or any Guarantor (including, without limitation, the
estate or interest of the Borrower or any Guarantor in the Collateral,
or any part thereof) shall be levied upon or attached in any
proceeding; or
F. final judgment(s) for the payment of money in excess of $100,000 and
not covered by insurance shall be rendered against the Borrower or any
Guarantor and shall remain undischarged for a period of thirty (30)
days during which execution shall not be effectively stayed; or
G. the Borrower or any Guarantor shall be or become insolvent (whether
in the equity or bankruptcy sense); or
H. any representation or warranty made by the Borrower or any Guarantor
herein or in any document related hereto shall prove to be untrue or
misleading in any material respect, or any statement, certificate or
report furnished hereunder or under any of the foregoing documents by
or on behalf of the Borrower or any Guarantor shall prove to be untrue
or misleading in any material respect on the date when the facts set
forth and recited therein are stated or certified; or I. the Borrower
or any Guarantor shall liquidate, wind up, merge, dissolve, terminate
or suspend its respective business operations, or sell all or
substantially all of its respective assets, without the prior written
consent of the Banks; or
J. the Borrower or any Guarantor shall sell, dispose of, lease,
mortgage, assign, sublet or transfer any of its right, title or
interest in or to the Collateral (except as expressly provided herein
or in the Security Agreement or the Guarantor Security Agreements)
without the prior written consent of the Banks; or
<PAGE>
K. the Borrower or any Guarantor shall fail to pay, withhold, collect
or remit any tax or tax deficiency when assessed or due or notice of
any state or federal tax lien shall be filed or issued; or
L. any property of the Borrower or any Guarantor (including, without
limitation, the Collateral), shall be garnished or attached in any
proceeding and such garnishment or attachment shall remain undischarged
for a period of thirty (30) days during which execution is not
effectively stayed.
Upon the occurrence of an Event of Default and at any time thereafter, any one
or more of the following remedial steps may be taken by the Agent, on behalf of
the Banks, upon the direction of the Banks:
(a) by written notice to the Borrower and/or any Guarantor, declare all
or part of the principal balance of the Notes plus accrued interest
thereon to be immediately due and payable, whereupon the same shall
become immediately due and payable by the Borrower and the Guarantors;
(b) take whatever action at law or in equity as may appear necessary or
appropriate to collect the amounts then due and thereafter to become
due under the Notes and/or the other Borrower Documents; and
(c) take whatever action in law or in equity as may appear necessary or
appropriate to collect any other amounts then due and thereafter to
become due under this Agreement and the documents related hereto and to
enforce performance and observance of any obligation, agreement or
covenant of the Borrower or the Guarantors thereunder.
11. TERMINATION. Upon the occurrence of an Event of Default, the Revolving
Commitment of the Banks shall terminate without further notice to the Borrower.
12. NOTICES. All notices, consents, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given when
delivered by mail, postage prepaid, first class, certified or registered mail,
return receipt requested, to the following address or such other address of
which a party subsequently may give notice to all the other parties:
IF TO THE BORROWER OR THE GUARANTORS:
First Team Sports, Inc.
2274 Woodale Drive
Mounds View, Minnesota 55112-4900
Attention: Robert Lenius
<PAGE>
IF TO MARQUETTE:
Marquette Capital Bank, N.A.
4000 Dain Rauscher Plaza
P.O. Box 1000
60 South Sixth Street
Minneapolis, Minnesota 55480-1000
Attention: Todd A. Nieland
IF TO LASALLE:
LaSalle National Bank
135 South LaSalle Street - Financial Institutions Department
Chicago, Illinois 60603
Attention: Jay Goldner
IF TO FIRSTAR:
Firstar Bank Milwaukee, N.A.
101 East Fifth Street, 9th Floor
St. Paul, Minnesota 55101
Attention: Hunt W. Gildner
13. MISCELLANEOUS.
A. Waivers, etc. No failure on the part of the Banks to exercise, and
no delay in exercising, any right or remedy hereunder or under
applicable law or any document or agreement related hereto shall
operate as a waiver thereof; nor shall any single or partial exercise
of any such right or remedy preclude any other or further exercise
thereof or the exercise of any other right or remedy. A waiver of any
of the Banks' rights or remedies hereunder or under applicable law or
any document or agreement related hereto shall be effective only if
such waiver is in a writing signed by the Banks. The remedies herein
provided are cumulative and not exclusive of any remedies provided by
law.
B. Expenses. The Borrower shall reimburse the Banks for any and all
costs and expenses, including, without limitation, reasonable
attorneys' fees, paid or incurred by either of the Banks in connection
with (i) the preparation of the Borrower Documents and any other
document or agreement related hereto or thereto, and the transactions
contemplated hereby, which amount shall be paid prior to the making of
any advance hereunder; (ii) the negotiation of any amendments,
modifications or extensions to or any of the foregoing documents,
instruments or agreements and the preparation of any and all documents
necessary or desirable to effect such amendments, modifications or
extensions; and (iii) enforcement by the Banks during the term hereof
or thereafter of any of the rights or remedies of the Banks under any
of the foregoing documents, instruments or agreements or under
applicable law, whether or not suit is filed with respect thereto and
whether or not such costs are paid or incurred, or to be paid or
incurred, prior to or after the entry of judgment.
C. Amendments, etc. The Borrower Documents may not be amended or
modified, nor may any of their terms (including, without limitation,
terms affecting the maturity of or rate of interest on the Revolving
Notes) be modified or waived, except by written instruments signed by
the Banks and the Borrower. Terms contained in the Borrower Documents
affecting only the maturity of or rate of interest on the Term Notes
may be modified or waived only by written instruments signed by
Marquette and the Borrower.
<PAGE>
D. Successors. This Agreement shall be binding upon and inure to the
benefit of the Borrower and the Banks and their respective successors
and assigns; provided, however, that the Borrower may not transfer or
assign its rights to borrow hereunder without the prior written consent
of the Banks.
E. Offsets. Nothing in this Agreement shall be deemed a waiver or
prohibition of the Banks' rights of banker's lien, offset, or
counterclaim, which right the Borrower and the Guarantors hereby grants
to the Banks.
F. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one
agreement, and any of the parties hereto may execute this Agreement by
signing any such counterpart.
G. Accounting. Unless otherwise expressly provided herein, or unless
the Banks otherwise consent in writing, all accounting terms used
herein which are not expressly defined in this Agreement shall have the
meanings respectively given to them in accordance with generally
accepted accounting principles and all financial statements and reports
furnished to the Agent hereunder shall be prepared, and all
computations and determinations pursuant hereto shall be made, in
accordance with generally accepted accounting principles and practices,
applied on a basis not materially inconsistent with that applied in
preparing the respective financial statements referred to in Sections
6.D. and 8.A.(i) hereof.
H. Governing Law. The Borrower Documents and all other agreements
related hereto, shall be construed in accordance with and governed by
the laws of the State of Minnesota.
I. Headings. The descriptive headings for the several sections of this
Agreement are inserted for convenience only and shall not define or
limit any of the terms or provisions hereof.
J. Term. Unless sooner terminated by either party pursuant to the
provisions hereof, the original term of this Agreement shall commence
as of the date hereof and continue thereafter until the Notes, and all
other Borrower's Obligations have been paid in full and the Revolving
Commitment of the Banks has expired pursuant to Section 2 hereof, which
term may be extended by written agreement of the parties hereto.
Notwithstanding anything to the contrary contained herein, the Banks
shall not be obligated to extend the term hereof pursuant to this
subsection under any circumstances or conditions whatsoever, and the
Borrower hereby acknowledges that the Banks have not agreed, warranted
or represented in any manner whatsoever that they would extend the
Revolving Commitment of the Banks. The Borrower shall be entitled to
terminate the Revolving Commitment of the Banks at any time the then
outstanding and unpaid balance of the Revolving Notes is zero by giving
written notice of said termination to the Banks. The Borrower may
terminate this Agreement by written notice to the Banks at any time the
then unpaid principal balances of the Notes, and any other Borrower's
Obligations are zero and the Revolving Commitment of the Banks has
either expired or been terminated by either the Banks or the Borrower
pursuant to the provisions hereof.
<PAGE>
K. Agent. Borrower hereby acknowledges that, the Banks have appointed
Marquette as Agent to exercise certain rights, remedies and obligations
of the Banks hereunder. The Borrower may rely upon the designations,
appointment and authorization conferred upon the Agent and agrees to
deliver and submit all reports and to make all payments required
hereunder or under any of the Borrower Documents in the manner
designated by the Agent, for the benefit of the Banks. The obligations
of the Banks hereunder are several, and no Bank shall be responsible
for the obligations of the other Bank hereunder, nor will the failure
of any Bank to perform any of its obligations hereunder relieve the
Agent or any Bank from the performance of its obligations hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
FIRST TEAM SPORTS, INC.
By: /s/ Robert Lenius Jr
Its: Vice President/Chief Financial Officer
And: /s/ Kent Brunner
Its: Vice President Finance
MARQUETTE CAPITAL BANK, N.A.,
individually and as Agent
By: /s/ Todd Nieland
Its: Vice President
LASALLE NATIONAL BANK
By: /s/ Jay Goldner
Its: Vice President
FIRSTAR BANK MILWAUKEE, N.A.
By: /s/ Hunt Gildner
Its: Vice President
EXHIBIT 21
SUBSIDIARIES
OF
FIRST TEAM SPORTS, INC.
Company State or Place of Organization
First Team Sports GmbH Austria
First Team Sports Exports, Inc. U.S. Virgin Islands
Mothership Distribution, Inc. Minnesota
Hespeler Hockey Holding, Inc. Minnesota
Hespeler Hockey Company* Nova Scotia
*Subsidiary of Hespeler Hockey Holding, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Forms S-8 of First Team Sports, Inc. pertaining to the 1987 Stock Option Plan
(No. 33-36123), 1987 Stock Option Plan (No. 33-52344), 1990 Nonqualified Stock
Option Plan (No. 33-37308), 1993 Employee Stock Purchase Plan (No. 33-63164) and
the 1994 Stock Option and Incentive Compensation Plan (No. 33-84722) of our
report dated April 17, 1998, with respect to the consolidated financial
statements and schedule of First Team Sports, Inc. included in the Annual Report
(Form 10-K) for the year ended February 28, 1998.
Minneapolis, Minnesota /s/ ERNST & YOUNG LLP
May 26, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC AUDITORS
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 27, 1998
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