SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
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, 1999 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
of incorporation or organization) Identification Number)
1201 Lund Boulevard
Anoka, Minnesota 55303
(Address of principal executive offices)
Registrant's telephone number, including area code:
(612) 576-3500
----------------------
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
---------------------
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 7, 1999 was approximately $12,227,834 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 7, 1999: 5,803,848.
-----------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1999 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 soft mesh and leather boot with internal supports and
molded plastic boots with an 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
<PAGE>
the demands on the Company's working capital. The Company's products are
primarily used outdoors in the spring and summer months and therefore, are
dependent on weather conditions. With approximately 95% of the Company's sales
occurring in North America and Europe, the Company does have increased sales and
demands on its working capital during the spring selling season.
(7) Major Customers.
The Company believes that its customer relationships are excellent, and
only one customer of the Company has accounted for more than 10% of the
Company's sales in one or more of the past three fiscal years. In fiscal 1999,
1998 and 1997 Wal-Mart, based in Bentonville, Arkansas, accounted for
approximately 23%, 29% and 23%, respectively, of the Company's net sales.
(8) Backlog.
The Company had approximately $7.6 million in unfilled purchase orders
as of May 17, 1999, compared to approximately $5.1 million in unfilled purchase
orders as of May 18, 1998. Approximately $6.8 million of these backlog orders
are a result of spring booking orders to be shipped at future dates and
approximately $787,000 result from orders of products that are temporarily
unavailable. The backlog may be subject to cancellation or other adjustments and
is not necessarily indicative of future sales.
(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 1999, 1998 or 1997.
(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, 1999, the Company employed 81 full-time employees and 9
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 1999, 1998 and 1997 First Team
Sports Exports, Inc. had export sales of $16.4 million, $17.9 million and $25.6
million representing approximately 39%, 31% and 33% , respectively, of the net
sales of the Company. Canadian net sales were $10.4 million (25% of net sales)
in fiscal 1999, $7.5 million (13% of net sales) in fiscal 1998 and $5.6 million
(7% of net sales) in fiscal 1997. Sales outside North America were $6.0 million
(14% of net sales) in fiscal 1999, $10.4 million (18% of net sales) in fiscal
1998 and $20.0 million (26% of net sales) in fiscal 1997.
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
$3,768,000 as of May 1, 1999.
The Company also occupies approximately 2,000 to 4,000 square feet of
office space in Toronto, Canada and Graz, Austria for its subsidiaries, Hespeler
Hockey Company and First Team Sports GmbH, respectively. The Company leases
these facilities with the leases having terms of one to four years.
<PAGE>
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, 1999.
<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, 49 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, 50 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.
Leonard R. Vinson, Jr., 38 Senior Vice President Sales and Marketing of
the Company since March 1, 1999; Senior Vice
President Sales and Marketing for Bravo,
Inc., a sporting goods company, from January
1998 to February 1999; Vice President Sales
and Marketing for Kryptonics, Inc., a
sporting goods company, from October 1995 to
January 1998; Co-founder of Pure Fun Sports,
a sporting goods sales agency, from January
1990 to October 1995.
Kent A. Brunner, 38 Vice President and Chief Financial Officer
of the Company since September 1998; Vice
President/Finance of the Company from
September 1998 to 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.
Susan L. Joch, 38 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.
<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 1998 and fiscal 1999 was as follows:
Quarter Ended High Low
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
May 31, 1998 $4 $2-7/16
August 31, 1998 $2-11/16 $1-9/32
November 30, 1998 $1-15/16 $ 3/4
February 28, 1999 $2-1/8 $ 13/16
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 3, 1999, there were approximately 442 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.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended February 28, 1999, 1998 and 1997,
February 29, 1996 and February 28, 1995.
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations Data:
Net Sales $42,397,426 $56,336,906 $76,435,022 $97,667,448 $85,528,860
Net Income/(Loss) ($5,845,104) ($2,609,233) 2,725,282 7,811,857 6,098,757
Net Income (Loss)
Per Share:
Basic (1.01) (.45) .47 1.37 1.09
Diluted (1.01) (.45) .46 1.30 1.03
Cash Dividends Paid
Per Share -- -- -- -- --
Balance Sheet Data:
Total Assets $39,134,394 $51,690,373 $52,343,501 $55,957,802 $45,863,753
Working Capital 17,371,669 25,051,180 27,921,689 24,944,985 18,109,090
Long-Term Debt 5,576,967 6,774,496 6,217,936 6,880,360 3,053,494
Shareholders' Equity 23,927,862 30,240,864 32,745,931 29,830,283 20,850,079
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
First Team Sports, Inc. designs, manufactures (through third-party
contractors) and markets brand name sporting goods. The Company's product groups
consist of in-line skates, in-line accessories and parts (primarily protective
wear and replacement wheels and bearings), roller hockey products, ice hockey
sticks and ice hockey protective wear and accessories. Within the product
groups, the Company maintains Ultra Wheels(R), Skate Attack(R), Heavy(R) and
Third World(R) in-line product lines and a Hespeler(R) ice hockey line. The
Ultra Wheels, Heavy and Third World lines consist of higher quality and higher
priced products that are targeted for the specialty and sporting goods chain
store customers. The Skate Attack line consists of lower priced products for the
mass merchant customers. The Hespeler ice hockey line consists of high quality
products that are targeted primarily at the specialty and sporting goods chain
stores.
Results Of Operations
Comparison Of Fiscal 1999 To 1998
Net Sales. Net sales decreased 25% to $42.4 million in fiscal 1999 from
$56.3 million in fiscal 1998. The decline was primarily due to a decrease in the
Company's in-line skate sales volume, combined with a decrease in the average
selling price of both the Company's Skate Attack and Ultra Wheels in-line skate
brands. The Company experienced continued pricing pressures from all areas of
the in-line market place due primarily to excess inventory levels and
competitive price cutting in the in-line skate industry.
A breakdown and analysis of the Company's main product lines is as follows:
<TABLE>
<CAPTION>
(amounts in millions) Fiscal 1999 Fiscal 1998
---------------- ----------------
Amount % Amount % Change
------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
In-line skates $31.1 73% $47.0 83% (34%)
In-line Accessories and Parts 5.8 14% 8.8 16% (34%)
Ice Hockey Sticks 2.2 5% 0.3 1% 100%
Ice Hockey Protective and Access 3.3 8% 0.2 0% 100%
------ ---- ------ ----
Total Net Sales $42.4 100% $56.3 100% (25%)
====== ==== ====== ====
</TABLE>
The Company purchased Hespeler Hockey Company in September 1997; therefore there
were no ice hockey product sales during the first six months of fiscal 1998.
<PAGE>
The Company currently distributes products to numerous countries. A geographic
breakdown of the Company's net sales is as follows:
<TABLE>
<CAPTION>
(amounts in millions) Fiscal 1999 Fiscal 1998
---------------- -------------------
Amount % Amount % Change
------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Domestic $26.0 61% $38.4 68% (32%)
Canada 10.4 25% 7.5 13% 39%
Europe 4.9 11% 7.4 13% (34%)
Other International 1.1 3% 3.0 6% (63%)
------ ---- ------ ----
Total Net Sales $42.4 100% $56.3 100% (25%)
====== ==== ====== ====
</TABLE>
Several factors contributed to the Company's sales performance in
fiscal 1999. The decrease in domestic sales was the result of competitive price
cutting which has continued to plague the in-line skate industry and a reduction
in placement with the mass merchant distribution channels. This was a direct
result of the mass merchants reducing their branded selections, as well as a
continued decline in the average price of in-line skates. In addition, as part
of the two-year malaise in the sporting goods industry, there has been a
continued reduction of retail outlets, especially in the specialty area, and
this also contributed significantly to the Company's reduced revenues. The
increased sales in Canada were primarily the result of Hespeler ice hockey
product sales and the continued strong acceptance of the Company's in-line
products in Canada. The decrease in European sales was primarily the result of
excess inventory levels in the European market and an increase in the number of
customers buying direct from Pacific Rim manufacturers. The decrease in other
international sales was primarily the result of continued excess inventory
levels in both the Pacific Rim and South American marketplaces.
While the Company believes there are positive signs that the market
conditions in the in-line industry are improving, the national and international
markets continue to be very competitive and under extreme price competition.
Gross Profit. The Company's gross profit declined to $4.3 million, or
10.2 % of net sales in fiscal 1999, from $12.0 million, or 21.3% of net sales in
fiscal 1998. The gross profit in fiscal 1999 was net of a $6 million charge
described below. Excluding the impact of the charge, the gross profit as a
percentage of net sales was 24.4%.
During the second quarter of fiscal 1999, the Company conducted a
thorough review of its in-line business and as a result the Company wrote down
certain inventories, which was recorded in cost of goods sold. The major
inventory reduction was in the Company's unfinished/component parts inventory.
As a result of the Company's restructured production philosophy, the Company is
shifting the majority of its in-line skate production to offshore sources in an
effort to reduce product costs. The increase in the gross profit, after
adjusting for the $6 million charge was due mainly to the sales mix, which
included a larger portion of Hespeler ice hockey products.
<PAGE>
Operating Expenses. Selling expenses were $4.6 million or 10.9% of
total net sales in fiscal 1999, compared to $5.8 million or 10.3% in fiscal
1998. The decrease in the absolute dollar amount of selling expenses in fiscal
1999 is 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.
General and administrative expenses were $7.4 million or 17.5% of total
net sales in fiscal 1999, compared to $8.1 million or 14.3 % of total net sales
in fiscal 1998. The decrease in the absolute dollar amount of the general and
administrative expenses was primarily due to decreases in insurance costs and
bad debt expenses associated with the reduced sales volume. The increase in
general and administrative expenses as a percentage of net sales was primarily
due to the reduction in the Company's sales volume versus the somewhat fixed
nature of certain general and administrative expenses.
Other Income and Expense. Interest expense was $.9 million in fiscal
1999, compared to $1.0 million in fiscal 1998. The decrease in interest expense
is primarily due to a reduction in the average borrowings outstanding related to
the Company's line of credit facility.
Provision for Income Taxes. The Company's effective tax rate was 32.4%
for fiscal 1999, compared to 33.7% for fiscal 1998. The slight change in fiscal
1999 is primarily due to the effect of state and foreign tax rates, the
percentage of state and foreign revenues and the level of pre-tax loss.
Net Loss. Net loss was ($5.8) million or (13.8%) of net sales in fiscal
1999, compared to ($2.6) million or (4.6%) of net sales in fiscal 1998. The
decrease can be attributed to the decrease in both the sales volume and the
gross profits, and the large write down of inventory as discussed above.
Results Of Operations
Comparison Of Fiscal 1998 To 1997
Net Sales. Net sales decreased 26% to $56.3 million in fiscal 1998,
from $76.4 million in fiscal 1997. The decline was primarily due to a decrease
in the Company's in-line skate sales volume, combined with a decrease in the
average selling price of the in-line skates. The Company also experienced
pricing pressures from all areas of the market place due to a decline in
consumer demand and excess inventory levels in the market place, which created
significant discounting by competitors.
<PAGE>
A breakdown and analysis of the Company's main product lines is as follows:
<TABLE>
<CAPTION>
(amounts in millions) Fiscal 1999 Fiscal 1998
---------------- ----------------
Amount % Amount % Change
------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
In-line skates $47.0 83% $64.8 85% (27%)
In-line Accessories and Parts 8.8 16% 11.6 15% (24%)
Ice Hockey Sticks 0.3 1% -- -- 100%
Ice Hockey Protective and Access 0.2 0% -- -- 100%
------ ---- ------ ----
Total Net Sales $56.3 100% $76.4 100% (26%)
====== ==== ====== ====
</TABLE>
During the second half of fiscal 1998, the Company purchased 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 for both Hespeler and
Mothership were immaterial. Mothership Distribution was closed during fiscal
1999.
The Company currently distributes products to numerous countries
worldwide. A geographic breakdown of the Company's net sales is as follows:
<TABLE>
<CAPTION>
(amounts in millions) Fiscal 1999 Fiscal 1998
---------------- -------------------
Amount % Amount % Change
------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Domestic (United States) $38.4 63% $50.8 66% (24%)
Canada 7.5 13% 5.6 7% 34%
Europe 7.4 13% 14.1 19% (48%)
Other International 3.0 6% 5.9 8% (49%)
------ ---- ------ ----
Total Net Sales $56.3 100% $76.4 100% (26%)
====== ==== ====== ====
</TABLE>
Several factors contributed to the Company's sales performance in
fiscal 1998. The decrease in domestic sales 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. The
increase in Canadian sales was a result of continued strong acceptance of the
Company's USA made products. The decrease in European sales was primarily the
result of a slow spring and summer retail environment due to inclement weather
conditions, which has resulted in excess retail inventory levels. The decrease
in other international sales was primarily due to a decline in consumer demand
in those areas and continued excess inventory levels on both the Pacific Rim and
South American marketplaces.
Gross Profit. The Company's gross profit declined to $12.0 million, or
21.3% of net sales in fiscal 1998, from $19.6 million, or 25.6% of net sales in
<PAGE>
fiscal 1997. The decrease in the gross profit was primarily due to competitive
close-out sales, continued pricing pressures at all retail price points and
fluctuations in certain foreign currency rates principally Canada.
Operating Expenses. Selling expenses were $5.8 million, or 10.3% of
total net sales in fiscal 1998 compared to $7.2 million, or 9.4% of total net
sales in fiscal 1997. The decrease in the absolute dollar amount of the selling
expenses 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 total net sales was primarily
due to efforts to promote and advertise the Company's two acquisitions, Hespeler
Hockey Company and Mothership Distribution, Inc.
General and administrative expenses were $8.1 million, or 14.3% of
total net sales in fiscal 1998 compared to $6.8 million, or 8.9% of total net
sales in fiscal 1997. The increase in general and administrative expenses was
primarily due to an increase in expenses associated with the continued upgrading
of the Company's computer systems, an increase in real estate taxes associated
with the Company's newer 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.
Other Income and Expense. Interest expense $1.0 million in fiscal 1998,
compared to $1.3 million in fiscal 1997. The decrease in interest expense was
primarily due to a reduction in the average borrowings outstanding related to
the Company's line of credit facility.
Provision for Income Taxes. The Company's effective tax rate was 33.7%
for fiscal 1998 compared to 35.5% for fiscal 1997. The decline in the effective
tax rate was primarily due to the effect of state and foreign tax rates and the
percentage of state and foreign revenues. The Company utilizes its 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) was ($2.6) million, or (4.6%) of
total net sales in fiscal 1998, compared to $2.7 million, or 3.6% of total net
sales in fiscal 1997. The decrease can be attributed primarily to the reduction
in sales and gross profits as discussed above.
Liquidity And Capital Resources
The Company's fiscal 1999 operations provided $6.5 million of cash
compared to $2.6 million in the fiscal 1998. The net cash provided in the
current year was primarily the result of the Company reducing its inventory
balances. The net cash provided in the prior year was primarily the result of a
reduction of the Company's receivable balances.
Net cash used in investing activities was $.3 million in fiscal 1999
compared to $4.1 million in fiscal 1998. The use of cash for this activity was
primarily attributable to expenditures relating to new licensing arrangements
and new production tools in fiscal 1999. In fiscal 1998 the Company purchased
two new subsidiaries, Hespeler Hockey Company and Mothership Distribution, Inc.
<PAGE>
Net cash used in financing activities was $7.3 million in fiscal 1999,
compared to net cash provided by financing activities of $3.1 million in fiscal
1998. The use of cash for this activity in fiscal 1999 was primarily for paying
down the Company's line of credit facility and long term debt obligations. The
net cash provided by both short-term and long-term borrowings in fiscal 1998 was
used primarily for the purchase of the Company's subsidiaries, Hespeler Hockey
Company and Mothership Distribution, Inc.
The Company's debt to worth ratio was .6 to 1 as of February 28, 1999,
compared to .7 to 1 as of February 28, 1998. 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 $5.6 million
as of February 28, 1999 (see Note 6 in Notes to Financial Statements).
The Company's primary financing facility is a $10 million revolving
credit line, which is subject to a borrowing base, which is calculated monthly,
and is based on a percentage of eligible receivables and inventories. As of
February 28, 1999 the borrowing base limitation was $10 million of which $2.5
million was outstanding.
In connection with these credit facilities, the Company agreed, among
other things, to maintain certain minimum financial ratio and income levels.
The Company believes its current cash position, funds available under
existing bank arrangements and cash generated from operations will be sufficient
to finance the Company's operating requirements through fiscal 2000.
Outlook: Issues And Uncertainties
The Company does not provide forecasts of future financial performance.
Certain statements contained in this report 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 remain strong in fiscal 2000, 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. The
Company also believes that the number of ice hockey participants worldwide,
especially in the United States, will continue to grow in fiscal 2000.
The Company's strategy has been and continues to be to 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
<PAGE>
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.
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 goods 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,
1999, sales to Wal-Mart accounted for 23% 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.
Other. The Company's products are primarily used outdoors and therefore
adverse weather conditions can have a negative impact on consumer demand.
Because the Company's products are of a recreational nature and not considered
basic necessities, a general decline in overall economic conditions may have a
greater adverse effect on the Company's sales.
Year 2000 Issue. In fiscal 1997 the Company purchased a new software
system and related 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 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.
<PAGE>
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 Company has and is continuing to survey its key
suppliers and customers to determine their year 2000 readiness. The Company is
currently in the process of identifying potential critical year 2000 issues
involving key third parties and either resolving those issues or developing
contingency plans to the extent practical.
Market Risk. The Company's sales and results of operations are subject
to foreign currency fluctuations. The Company's foreign operations are in
countries with fairly stable currencies; therefore, the effect of foreign
currencies has not been significant. The Company hedges its exposure to
translation gains and losses by maintaining and controlling its foreign cash
flows when possible, thus reducing such exposure.
Considering both the foreign sales and results of operations for the
next quarter, a hypothetical 10% weakening of the U.S. dollar relative to all
other currencies would not materially adversely affect expected first quarter
fiscal 2000 sales and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk. The Company's sales and results of operations are subject
to foreign currency fluctuations. The Company's foreign operations are in
countries with fairly stable currencies; therefore, the effect of foreign
currencies has not been significant. The Company hedges its exposure to
translation gains and losses by maintaining and controlling its foreign cash
flows when possible, thus reducing such exposure.
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 years ended February 28, 1999 and 1998...........F-1
Former Independent Auditor's Report on Consolidated Financial Statements
for the year ended February 28, 1997..................................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, 1999, 1998 and 1997............................F-4
<PAGE>
Consolidated Statements of Shareholders' Equity for the years ended
February 28, 1999, 1998 and 1997..................................F-5
Consolidated Statements of Cash Flows for the years ended
February 28, 1999, 1998 and 1997..................................F-6
Notes to Consolidated Financial Statements.................................F-7
Former Independent Auditor's Report on Report on Schedule for the years
ended February 28, 1997 ..........................................F-24
Schedule II - Reserve Account..............................................F-25
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 1999 in connection with the
Company's 1999 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 1999 in
connection with the Company's 1999 Annual Meeting of Shareholders.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the section labeled "Principal Shareholders and Management Shareholdings,"
which appears in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A not later than 120 days after the close of fiscal 1999 in
connection with the Company's 1999 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the section labeled "Management Compensation," which appears in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A not later than
120 days after the close of fiscal 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 years ended February 28, 1999
and 1998
Former Independent Auditor's Report on Consolidated Financial
Statements for the year ended February 28, 1997
Consolidated Balance Sheets as of February 28, 1999 and 1998
Consolidated Statements of Operations for the years ended
February 28, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
February 28, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
February 28, 1999, 1998 and 1997
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
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, 1999.
<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 25, 1999 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 25, 1999
John J. Egart
President/Chief Executive Officer and Director
(Principal executive officer)
/s/ David G. Soderquist May 25, 1999
David G. Soderquist
Vice Chairman and Director
/s/ Joe Mendelsohn May 25, 1999
Joe Mendelsohn
Chairman and Director
(Signatures continued on following page)
<PAGE>
Signature and Title Date
- ------------------- ----
/s/ Timothy G. Rath May 25, 1999
Timothy G. Rath
Director
- ---------------------------
Stanley E. Hubbard
Director
/s/ William J. McMahon May 25, 1999
William J. McMahon
Director
/s/ Kent A. Brunner May 25, 1999
Kent A. Brunner
Vice President and Chief Financial Officer
(Principal financial and accounting officer)
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
First Team Sports, Inc.
We have audited the accompanying consolidated balance sheets of First Team
Sports, Inc. as of February 28, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended. Our audit also included the financial statement schedule for the
years ended February 28, 1999 and 1998 listed in the Index at Item 14 (a). 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 audit. The financial statements of First Team Sports, Inc. for the year
ended February 28, 1997 were audited by other auditors whose report dated April
9, 1997 expressed an unqualified opinion on those statements.
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 financial statements referred to above present fairly, in
all material respects the consolidated financial position of First Team Sports,
Inc. at February 28, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the years 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.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
April 14, 1999
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First Team Sports, Inc.
Anoka, Minnesota
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows for the fiscal year ended February 28, 1997
of First Team Sports, Inc. and Subsidiary. 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 audit.
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 results of operations and cash flows of
First Team Sports, Inc. and Subsidiary as of February 28, 1997, in conformity
with generally accepted accounting principles.
St. Paul, Minnesota /s/ MCGLADREY & PULLEN, LLP
April 9, 1997
F-1.1
<PAGE>
First Team Sports, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 28
1999 1998
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 723,574 $ 1,869,545
Trade receivables, less allowance for doubtful accounts:
1999--$642,000; 1998--$666,000 12,284,005 11,417,176
Recoverable income taxes 1,136,858 1,678,405
Inventories 10,047,020 22,238,564
Prepaid expenses 839,777 957,903
Deferred income taxes 1,175,000 896,000
----------- -----------
Total current assets 26,206,234 39,057,593
Property, plant and equipment
Land 600,000 600,000
Building 4,988,680 4,988,680
Production equipment 2,278,231 2,132,156
Office furniture and equipment 1,825,257 1,766,911
Warehouse equipment 937,677 820,626
Vehicles 104,380 102,906
----------- -----------
10,734,225 10,411,279
Less accumulated depreciation 3,316,390 1,993,004
----------- -----------
7,417,835 8,418,275
Deferred income taxes 1,988,000 --
Other assets
License agreements, less accumulated amortization:
1999--3,687,000; 1998--$3,338,000 1,680,024 1,766,584
Goodwill, less accumulated amortization:
1999--$329,000; 1998--$64,000 1,119,197 1,462,291
Other 723,104 986,030
----------- -----------
3,522,325 4,214,905
----------- -----------
$39,134,394 $51,690,773
=========== ===========
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 28
1999 1998
-------------------------------
Liabilities and shareholders' equity Current liabilities:
<S> <C> <C>
Notes payable to bank $ 2,525,000 $ 8,685,000
Trade accounts payable 3,692,759 2,697,675
Accrued expenses 1,311,043 1,644,773
Current maturities of long-term debt 1,305,763 978,965
----------- -----------
Total current liabilities 8,834,565 14,006,413
Long-term debt, less current maturities 5,576,967 6,774,496
Deferred income taxes 195,000 69,000
Deferred revenue 600,000 600,000
Shareholders' equity
Common Stock, par value $.01 per share
Authorized 10,000,000 shares
Issued and outstanding: 1999--5,803,848 shares;
1998--5,792,240 shares 58,039 57,923
Additional paid-in capital 9,825,240 9,806,341
Retained earnings 14,647,756 20,492,860
Accumulated other comprehensive loss (603,173) (116,260)
----------- -----------
23,927,862 30,240,864
----------- -----------
$ 39,134,394 $ 51,690,773
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
First Team Sports, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended February 28
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Net sales $42,397,426 $56,336,906 $76,435,022
Cost of goods sold 38,051,179 44,314,320 56,837,195
---------------------------------------------------------
Gross profit 4,346,247 12,022,586 19,597,827
Operating expenses:
Selling 4,619,077 5,826,993 7,190,515
General and administrative 7,420,735 8,056,546 6,789,276
Writedown due to asset impairment - 974,018 -
---------------------------------------------------------
12,039,812 14,857,557 13,979,791
---------------------------------------------------------
Operating (loss) income (7,693,565) (2,834,971) 5,618,036
Interest expense (953,843) (1,009,657) (1,275,882)
Other expense, net - (93,387) (113,872)
---------------------------------------------------------
(Loss) income before income tax benefit (expense)
(8,647,408) (3,938,015) 4,228,282
Income tax benefit (expense) 2,802,304 1,328,782 (1,503,000)
---------------------------------------------------------
Net (loss) income $ (5,845,104) $ (2,609,233) $ 2,725,282
=========================================================
Net (loss) income per share:
Basic $(1.01) $(.45) $.47
Diluted $(1.01) $(.45) $.46
Shares used in computation of net (loss) income per share:
Basic 5,796,377 5,771,478 5,740,893
Diluted 5,796,377 5,771,478 5,884,175
</TABLE>
See accompanying notes.
F-4
<PAGE>
First Team Sports, Inc.
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated Other
Common Stock Additional Other Total
------------------------------ Paid-In Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Loss Equity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Comprehensive loss:
Foreign currency
translation - - - - (116,260) (116,260)
Net loss - - - (2,609,233) - (2,609,233)
-----------------
Total comprehensive loss (2,725,493)
--------------------------------------------------------------------------------------------
Balance at February 28, 1998 5,792,240 57,923 9,806,341 20,492,860 (116,260) 30,240,864
Exercise of stock options 11,608 116 18,899 - - 19,015
Comprehensive loss:
Foreign currency
translation - - - - (486,913) (486,913)
Net loss - - - (5,845,104) - (5,845,104)
-----------------
Total comprehensive loss (6,332,017)
--------------------------------------------------------------------------------------------
Balance at February 28, 1999 5,803,848 $58,039 $9,825,240 $14,647,756 $(603,173) $23,927,862
============================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
First Team Sports, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended February 28
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income $ (5,845,104) $(2,609,233) $2,725,282
Adjustments required to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation 1,332,718 1,880,137 1,537,073
Amortization 602,784 468,101 579,657
Loss on writedown due to asset impairment - 974,018 -
Loss on retirement of equipment - 93,387 108,510
Deferred income taxes (2,141,000) (360,000) (80,000)
Write-down of inventories 5,435,824 - -
Write-off of Mothership goodwill and intangibles
293,000 - -
Change in operating assets and liabilities:
Receivables (1,272,837) 7,090,703 (811,013)
Inventories 6,755,720 (966,257) 1,932,005
Prepaid expenses 116,296 (344,412) 347,199
Accounts payable 1,007,049 (2,377,925) (4,610,424)
Accrued expenses (333,730) 230,709 (1,117,165)
Income taxes 541,547 (1,512,753) (103,346)
------------------------------------------------------
Net cash provided by operating activities 6,492,267 2,566,475 507,778
Cash flows from investing activities
Purchases of property, plant and equipment (330,496) (1,497,979) (1,606,100)
Business acquisitions - (1,917,942) -
Other - (696,328) 14,880
------------------------------------------------------
Net cash used in investing activities (330,496) (4,112,249) (1,591,220)
Cash flows from financing activities
Net proceeds (payments) on short-term borrowings (6,160,000) 2,402,408 (4,823,750)
Principal payments on long-term borrowings (1,134,158) (1,261,377) (943,070)
Proceeds from long-term borrowings - 1,849,184 4,875,000
Net proceeds from exercise of stock options 19,015 65,646 189,826
------------------------------------------------------
Net cash (used in) provided by financing activities (7,275,143) 3,055,861 (701,994)
------------------------------------------------------
(Decrease) increase in cash and cash equivalents (1,134,344) 1,510,087 (1,785,436)
Effect of foreign currency translation (32,599) (21,969) -
Cash and cash equivalents:
Beginning of year 1,869,545 381,427 2,166,863
------------------------------------------------------
Ending of year $ 723,574 $ 1,869,545 $ 381,427
======================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
First Team Sports, Inc.
Notes to Consolidated Financial Statements
February 28, 1999
1. Nature of Business and Significant Accounting Policies
Nature of Business and Concentration of Credit Risk
The Company, which operates in one business segment, 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. Net sales to a specific
geographic region for the years ended February 28, 1999 and 1998 totaled 25% and
13%, respectively, for Canada and 11% and 13%, respectively, for Europe.
Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers.
We have determined that in 1999, 1998 and 1997, we operated in only one segment.
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.
F-7
<PAGE>
First Team Sports, Inc.
Notes to Consolidated Financial Statements (continued)
1. Nature of Business and Significant Accounting Policies (continued)
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 included in accumulated other comprehensive
loss in shareholders' equity.
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. Short-term investments are classified as
available-for-sale. The carrying value of cash equivalents approximates fair
value at February 28, 1999 and 1998.
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
F-8
<PAGE>
1. Nature of Business and Significant Accounting Policies (continued)
Other Assets
Costs capitalized related to license agreement's rights are being amortized over
the terms of the agreements on a straight-line method.
Goodwill arising from acquisitions is amortized on a straight-line basis over a
period up to 10 years. Other intangibles, consisting principally of trademarks
and patents, are amortized on a straight-line basis over 5 to 10 years.
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 determined in fiscal 1998 that certain production assets of the
Company had 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 1999, 1998, and 1997 was $911,000, $1,755,000 and $2,421,000,
respectively.
F-9
<PAGE>
1. Nature of Business and Significant Accounting Policies (continued)
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.
Net (Loss) Income Per Share
Basic net (loss) income per share is the Company's net (loss) income divided by
the weighted average number of Common Shares outstanding during the period.
Diluted net (loss) income per share reflects the potential dilutive effects of
stock options and warrants.
<TABLE>
<CAPTION>
Basic Diluted
---------------------------------- ----------------------------------
1999 1998 1997 1999 1998 1997
---------------------------------- ----------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $(5,866) $(2,609) $2,725 $(5,866) $(2,609) $2,725
================================== ==================================
Weighted average common shares
outstanding 5,796 5,771 5,741 5,796 5,771 5,741
Dilutive stock options - - - - - 143
---------------------------------- ----------------------------------
Total common shares outstanding
for diluted calculation 5,796 5,771 5,741 5,796 5,771 5,884
================================== ==================================
Net (loss) income per share $(1.01) $(.45) $.47 $(1.01) $(.45) $.46
</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, 1999, 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.
F-10
<PAGE>
1. Nature of Business and Significant Accounting Policies (continued)
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement 130 established
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires the foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
Reclassification
Certain amounts presented for fiscal 1998 have been reclassified to conform to
the 1999 presentations.
2. Sales Information and Major Suppliers
Major Customers and Credit Risk
Net sales for fiscal years 1999, 1998 and 1997 include sales to one major
customer representing 23%, 29% and 23% of net sales, respectively.
At February 28, 1999, 18% of the Company's trade receivables were due from the
aforementioned customer and 39% 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 39%, 32% and 33% of net sales for fiscal
years 1999, 1998 and 1997, respectively.
F-11
<PAGE>
2. Sales Information and Major Suppliers (continued)
Major Suppliers
The Company had 41% of its products produced by three suppliers during 1999.
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. Subsequently during fiscal
year 1999, Mothership was closed and the related goodwill and intangibles were
written off in accordance with FAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The amount of
the write-off totaled $293,000.
The Company also purchased in September 1997 the common stock of Hespeler Hockey
Company, a designer, manufacturer and marketer of ice hockey 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 activity was
immaterial):
F-12
<PAGE>
3. Acquisitions (continued)
Pro forma information (unaudited)
(In thousands, except per share amounts) 1998
-------------------
Net sales $58,124
Loss before income taxes (3,726)
Net Loss (2,487)
Basic and diluted 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
1999 1998
------------------------------------
Finished goods $8,792,169 $16,182,063
Component parts 1,254,851 6,056,501
------------------------------------
$10,047,020 $22,238,564
====================================
During the fiscal year, management decided to write-down inventory through cost
of goods sold. The total of this write-down was $5,435,824.
F-13
<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 $10,000,000. Borrowings bear interest,
payable monthly, at the bank's prime lending rate (7.75% at February 28, 1999).
Borrowings under the credit arrangement are collateralized by substantially all
corporate assets, excluding land and building. Outstanding borrowings under this
arrangement totaled $2,525,000 and $8,685,000 at February 28, 1999 and 1998,
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
1999 1998
-----------------------------
Obligations under license agreements, due in varying installments, with
<S> <C> <C>
interest imputed at 9.25%, through 2004 (see note 9) $1,669,937 $1,989,654
Mortgage notes payable due in monthly installments of $57,638, including
interest at 7.41% through April 2006, secured by the building 3,836,523 4,227,997
Note payable to bank, due in monthly installments of $27,800 to May 2000,
plus interest at the bank's prime rate (7.75% at February 28, 1999)
minus .30%, collateralized by substantially all of the Company's assets 426,075 750,000
Subordinated convertible exchangeable debentures, due in principal
installments of $200,000 on March 1, 1999 and 2000, and $325,000 on
October 1, 2002 plus interest at 5% 725,000 725,000
Other 225,195 60,810
-----------------------------
6,882,730 7,753,461
Less current maturities 1,305,763 978,965
-----------------------------
$5,576,967 $6,774,496
=============================
</TABLE>
F-14
<PAGE>
6. Long-Term Debt (continued)
Aggregate future maturities of long-term debt for the next five fiscal years and
the aggregate thereafter are as follows:
2000 $1,305,763
2001 1,172,168
2002 783,822
2003 1,161,397
2004 892,620
Thereafter 1,566,960
-------------------
$6,882,730
===================
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 to
October 2002.
7. Income Taxes
Net deferred income taxes consist of the following components:
February 28
1999 1998
------------------------------------
Deferred tax assets:
Receivable allowances $ 261,000 $ 162,000
Inventory costs 286,000 367,000
Accrued expenses 328,000 367,000
License and patent agreements 284,000 137,000
Net operating loss carryforwards 2,204,000 -
------------------------------------
3,363,000 1,033,000
Less: valuation allowance (200,000) -
Deferred tax liabilities:
Depreciation (195,000) (206,000)
------------------------------------
Net deferred tax assets $2,968,000 $ 827,000
====================================
At February 28, 1999 the Company has net operating loss carry forwards of
$6,500,000 for income tax purposes that expire at various times through 2019.
F-15
<PAGE>
7. Income Taxes (continued)
The net deferred tax assets have been classified in the accompanying
consolidated balance sheets as follows:
February 28
1999 1998
------------------------------------
Current assets $1,175,000 $896,000
Non-current assets 1,988,000 -
Non-current liabilities (195,000) (69,000)
------------------------------------
$2,968,000 $827,000
====================================
For financial reporting purposes, the (loss) income before income tax effect is
as follows:
February 28
1999 1998 1997
----------------------------------------------
(Loss) income before income taxes:
Domestic $(8,673,354) $(3,490,859) $4,228,282
Foreign 4,974 (447,156) -
----------------------------------------------
$(8,668,380) $(3,938,015) $4,228,282
==============================================
The provisions for income tax (benefit) expense for fiscal years 1999, 1998 and
1997 are as follows:
1999 1998 1997
----------------------------------------------
Current:
Federal $(637,304) $ (698,782) $1,476,000
State (26,000) (68,000) 107,000
Foreign 2,000 (202,000) -
----------------------------------------------
Total current (661,304) (968,782) 1,583,000
Deferred:
Federal (1,985,000) (330,000) (77,000)
State (156,000) (30,000) (3,000)
----------------------------------------------
Total deferred (2,141,000) (360,000) (80,000)
----------------------------------------------
Total income taxes $(2,802,304) $(1,328,782) $1,503,000
==============================================
F-16
<PAGE>
7. Income Taxes (continued)
The provisions for income tax (benefit) expense for fiscal years 1999, 1998 and
1997 differ from the amounts obtained by applying the federal income tax rate to
pretax (loss) income as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Computed "expected" federal tax
(benefit) expense $(3,034,000) $(1,378,000) $1,480,000
Increase (decrease) in taxes resulting from:
State income taxes or benefit, net of federal
effect (173,000) (79,000) 70,000
Other items individually insignificant, net 404,696 128,218 (47,000)
---------------------------------------------------
$(2,802,304) $(1,328,782) $1,503,000
===================================================
</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 1,375,000 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% or more of the Company's total voting
stock.
F-17
<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 1999, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ --------------------------- -------------------------
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 1,375,703 $3.06 926,020 $9.21 776,854 $ 9.96
Exercised - - (6,800) 5.33 (28,796) 5.30
Canceled (9,000) 2.75 (36,517) 8.75 (51,596) 10.90
Granted 302,000 1.48 493,000 3.62 229,558 6.55
------------------------ --------------------------- -------------------------
Outstanding at end of 1,668,703 $2.77 1,375,703 $3.06 926,020 $ 9.21
year
======================== =========================== =========================
</TABLE>
Weighted average fair value of options granted during 1999, 1998 and 1997 was
$.62, $1.30 and $6.55, respectively.
As of February 28, 1999, 1998 and 1997 options covering 1,137,369, 755,697 and
523,833 shares, respectively, were exercisable at a weighted average exercise
price of $2.91, $2.97 and $9.32 per share, respectively. In addition, the
remaining stock options outstanding at February 28, 1999, become exercisable in
the following fiscal years:
Shares Price Per Share
------------------------------------
2000 334,340 $1.125 - $4.25
2001 164,998 1.125 - 2.75
2002 31,996 1.125 - 2.75
F-18
<PAGE>
8. Shareholders' Equity (continued)
The following table summarizes information about stock options outstanding at
February 28, 1999:
<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>
$1.125 - $2.438 302,000 6.8 $1.48 93,334 $1.59
2.75 1,141,203 3.9 2.75 906,035 2.75
4.25 - 6.25 225,500 7.9 4.64 138,000 4.89
-------------- --------------
$1.125 - $6.25 1,668,703 5.0 $2.77 1,137,369 $2.91
============== ==============
</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.
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.
F-19
<PAGE>
8. Shareholders' Equity (continued)
Pro Forma Information
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123). Accordingly, since options have been issued with exercise prices at or
above market value of the Company's stock, no compensation expense has been
recognized for the stock option plans. Had compensation expense for the
Company's stock options been determined based on the fair value of the grant
date for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS
123, the Company's net income (loss) and the net income (loss) per share would
be the pro forma amounts reflected in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $(5,845,104) $(2,609,233) $2,725,282
Net income (loss) - pro forma (6,505,680) (3,238,483) 2,131,000
Net income (loss) per share - as reported:
Basic $(1.01) $(.45) $.47
Diluted $(1.01) $(.45) $.46
Net income (loss) per share - pro forma:
Basic $(1.12) $(.56) $.37
Diluted $(1.12) $(.56) $.36
</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.
F-20
<PAGE>
8. Shareholders' Equity (continued)
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 1999, 1998 and 1997:
1999 1998 1997
--------------------------------
Expected dividend yield - - -
Expected stock price volatility 54.1% 48.8% 54.9%
Risk-free interest rate 6.4% 6.4% 6.3%
Expected life of options (years) 3.0 3.0 3.0
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% 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% 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.
F-21
<PAGE>
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 $415,934, $357,790
and $681,394 during fiscal years 1999, 1998 and 1997, 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.
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 $156,000, $174,000
and $245,000 for fiscal years 1999, 1998 and 1997, 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.
F-22
<PAGE>
12. Additional Cash Flow Information
Year ended February 28
1999 1998 1997
-------------------------------------
Supplemental disclosures of cash flow
information:
Cash payments for:
Interest $1,087,447 $963,009 $1,284,091
Income taxes 9,200 514,700 1,686,346
Non-cash:
License agreement 262,760 - -
F-23
<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 year ended February 28, 1997.
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 MCGLADREY & PULLEN, LLP
April 9, 1997
F-24
<PAGE>
SCHEDULE II
FIRST TEAM SPORTS, INC.
RESERVE ACCOUNTS
Years Ended February 28, 1999 and 1998 and 1997
<TABLE>
<CAPTION>
Balance at Additions
Beginning Charged to Balance at
Of Period Expenses Deductions End of Period
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
1999 allowance for doubtful accounts 665,503 486,475 509,751 642,227
(1) Uncollectible accounts written off, net of recoveries.
</TABLE>
F-25
<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, 1999
- ------------------------------------------------------------------------------
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.
E-1
<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 1999 -- incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended February 28,
1998**
- ------------------
*Filed herewith
**Management contract or compensatory plan or arrangement.
E-2
<PAGE>
Exhibit
Number Description
10.11* Company Bonus Plan for executive officers of the Company for fiscal
2000**
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**
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.
E-3
<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
May 27, 1998 - incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended August
31, 1998**
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 - incorporated by
reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K
for the year ended February 28, 1998**
- ------------------
*Filed herewith
**Management contract or compensatory plan or arrangement.
E-4
<PAGE>
Exhibit
Number Description
10.31 Amendment dated January 1, 1998 to Employment Agreement dated January
23, 1996 between the Company and David G. Soderquist - incorporated by
reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the year ended February 28, 1998**
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. -
incorporated by reference to Exhibit 10.32 to the Company's Annual
Report on Form 10-K for the year ended February 28, 1998
10.33 Credit Agreement dated November 20, 1998 between the Company, Marquette
Capital Bank, N.A., LaSalle National Bank, and Firstar Bank Milwaukee,
N.A. - incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1998
21 List of Subsidiaries - incorporated by reference to Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended February 28,
1998
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 and
Kent A. Brunner included in signature page on this Form 10-K
27.1* Financial Data Schedule for the year ended February 28, 1999 (included
in electronic version only)
- ------------------
*Filed herewith
**Management contract or compensatory plan or arrangement.
E-5
EXHIBIT 10.11
FIRST TEAM SPORTS
FISCAL 2000 EXECUTIVE BONUS PLAN
PLAN
o Company bonus plan is based on earnings before tax
o Bonus plan consists of the following levels:
Earnings
Before Taxes Bonus Pool
Lower Level: $ 455,000 $150,000
Higher Level: $1,370,500 $650,000
ELIGIBLE
Officers and key managers
BONUS CALCULATIONS
o If earnings before taxes goals are met, appropriate bonus dollars will
be paid
o If earnings before taxes fall between the lower level and the higher
level, bonus dollars will be pro-rated accordingly
CRITERIA
o All participants will have objectives/goals established for them to
achieve
o Individual achievement of objectives, as judged by the Compensation
Committee, will determine bonus payments
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. 33-68164) and
the 1994 Stock Option and Incentive Compensation Plan (No. 33-84722) of our
report dated April 14, 1999, 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, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 21, 1999
CONSENT OF INDEPENDENT PUBLIC AUDITORS
We hereby consent to the incorporation 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, in 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 7, 1999
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1999
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