SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: Commission File No.:
November 30, 1998 0-16442
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 No.)
1201 Lund Boulevard
Anoka, Minnesota 55303
(Address of principal executive offices)
Registrant's telephone number, including area code:
(612) 576-3500
--------------------------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,803,861 shares of Common
Stock, $.01 par value per share, outstanding as of January 11, 1999.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST TEAM SPORTS, INC.
CONSOLIDATED BALANCE SHEETS
November 30, 1998 and February 28, 1998
November 30, February 28,
ASSETS 1998 1998
----------- -----------
(Unaudited) (Note)
CURRENT ASSETS
Cash and cash equivalents $ 1,509,643 $ 1,869,545
Receivables:
Trade, less allowance for
doubtful accounts of $743,000 at
November 30, 1998 and $666,000
at February 28, 1998 9,481,650 11,417,176
Refundable income taxes 4,042,503 1,678,405
Inventories 9,766,198 22,709,519
Prepaid expenses 781,160 957,903
Deferred income taxes 885,000 896,000
----------- -----------
Total current assets 26,466,154 39,528,548
PROPERTY AND EQUIPMENT, at cost
Land 600,000 600,000
Building 4,988,680 4,988,680
Production equipment 2,278,885 2,132,156
Office furniture and equipment 1,809,154 1,766,911
Warehouse equipment 937,677 820,626
Vehicles 107,332 102,906
----------- -----------
10,721,728 10,411,279
Less accumulated depreciation 2,940,636 1,993,004
----------- -----------
7,781,092 8,418,275
OTHER ASSETS
License agreements, less accumulated
amortization of $3,600,000 at November
30, 1998 and $3,338,000 at February
28, 1998 1,767,354 1,766,584
Goodwill, less accumulated amortization
of $297,000 at November 30, 1998 and
$64,000 at February 28, 1998 1,134,308 1,462,291
Other 746,495 986,030
----------- -----------
3,648,157 4,214,905
----------- -----------
$37,895,403 $52,161,728
=========== ===========
Note: The balance sheet at February 28, 1998 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
<PAGE>
FIRST TEAM SPORTS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
November 30, 1998 and February 28, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
November 30, February 28,
1998 1998
------------ ------------
(Unaudited) (Note)
CURRENT LIABILITIES
Notes payable to bank $ 2,155,000 $ 8,685,000
Current maturities of
long-term debt 1,191,286 978,965
Accounts payable, trade 1,713,283 2,697,675
Accrued expenses 2,119,323 2,115,728
------------ ------------
Total current liabilities 7,178,892 14,477,368
LONG-TERM DEBT,
less current maturities 5,999,262 6,774,496
DEFERRED INCOME TAXES 58,000 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
5,797,429 shares at November 30, 1998,
5,792,240 shares at February 28, 1998 57,975 57,923
Additional paid-in capital 9,817,601 9,806,341
Retained earnings 14,613,847 20,492,860
Currency translation (430,174) (116,260)
------------ ------------
24,059,249 30,240,864
------------ ------------
$ 37,895,403 $ 52,161,728
============ ============
Note: The balance sheet at February 28, 1998 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
<PAGE>
FIRST TEAM SPORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
November 30, November 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 7,566,638 $ 10,350,148 $ 31,920,886 $ 46,459,022
Cost of goods sold 5,566,265 8,326,845 30,473,059 35,321,334
------------ ------------ ------------ ------------
Gross profit 2,000,373 2,023,303 1,447,827 11,137,688
Operating expenses:
Selling 845,808 1,112,682 3,625,962 4,368,598
General and
administrative 1,789,910 2,269,461 5,762,562 6,031,022
------------ ------------ ------------ ------------
2,635,718 3,382,143 9,388,524 10,399,620
------------ ------------ ------------ ------------
Operating (loss) income (635,345) (1,358,840) (7,940,697) 738,068
Interest expense (178,713) (237,394) (859,663) (760,684)
------------ ------------ ------------ ------------
Loss before income
tax benefit (814,058) (1,596,234) (8,800,360) (22,616)
Income tax benefit 237,042 548,972 2,921,345 2,671
------------ ------------ ------------ ------------
Net loss for the
period ($ 577,016) ($ 1,047,262) ($ 5,879,015) ($ 19,945)
============ ============ ============ ============
Net loss per share:
Basic ($ 0.10) ($ 0.18) ($ 1.01) ($ 0.00)
Diluted ($ 0.10) ($ 0.18) ($ 1.01) ($ 0.00)
Shares used in computation of
net loss per share:
Basic 5,797,385 5,782,910 5,793,951 5,764,680
Diluted 5,797,385 5,782,910 5,793,951 5,764,680
</TABLE>
See accompanying notes.
<PAGE>
FIRST TEAM SPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS For Nine Months Ended
November 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
November 30, November 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
------------ ------------
<S> <C> <C>
Net loss ($ 5,879,015) ($ 19,645)
Adjustments required to reconcile net
loss to net cash provided by
operating activities:
Depreciation 947,088 1,360,256
Amortization 726,052 309,634
Change in assets and liabilities:
Receivables 1,746,900 4,669,733
Inventories 12,933,905 (1,760,749)
Prepaid expenses 174,532 273,115
Accounts payable (973,549) (2,884,381)
Accrued expenses 13,286 174,208
Income taxes (2,370,578) (17,188)
------------ ------------
Net cash provided by
operating activities 7,318,621 2,104,983
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (303,456) (1,384,465)
Purchase of Hespeler Hockey Company -- (1,632,482)
Purchase of Mothership Distribution, Inc. -- (285,460)
Other (262,255) (217,066)
------------ ------------
Net cash used in investing activities (565,711) (3,519,473)
CASH FLOWS FROM FINANCING ACTIVITIES
Goodwill, less accumulated amortization (6,530,000) 1,319,422
Proceeds on long-term borrowings 262,760 1,125,301
Principal payments on long-term
borrowings (826,966) (725,888)
Net proceeds from issuances of common stock 11,312 56,683
------------ ------------
Net cash provided by (used in)
financing activities (7,082,894) 1,775,518
------------ ------------
Increase (decrease) in cash and
cash equvalents (329,984) 361,028
Effect of foreign currency translation (29,918) (5,964)
Cash and cash equivalents:
Beginning of period 1,869,545 381,427
------------ ------------
End of period $ 1,509,643 $ 736,491
============ ============
</TABLE>
See accompanying notes.
<PAGE>
FIRST TEAM SPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principals for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation have been
included. The operating results for the period ended November 30, 1998 are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report or Form 10-K for the year ended February
28, 1998.
NOTE 2.
As of March 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130 Report Comprehensive Income ("Statement 130"). Statement
130 establishes 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 shareholders' equity. Statement 130 requires the
Company's foreign currency translation, which prior to adoption was reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
During the quarters ended November 30, 1998 and 1997, total
comprehensive loss amounted to ($405,940) and ($1,074,892), respectively. During
the nine-month period ended November 30, 1998 and 1997, total comprehensive
income/(loss) amounted to ($6,309,189) and ($47,575), respectively.
<PAGE>
NOTE 3.
<TABLE>
<CAPTION>
Basic EPS Diluted EPS
1998 1997 1998 1997
(in thousands, except per share data)
Three Months Ended November 30
<S> <C> <C> <C> <C>
Net Loss ($ 577) ($1,047) ($ 577) ($1,047)
===================== =====================
Weighted average common
shares outstanding 5,797 5,783 5,797 5,783
Stock options -- -- -- --
--------------------- ---------------------
Total common equivalent
shares outstanding 5,797 5,783 5,797 5,783
===================== =====================
Net Loss per share ($ .10) ($ .18) ($ .10) ($ .18)
Nine Months Ended November 30
Net Loss ($5,879) ($ 20) ($5,879) ($ 20)
===================== =====================
Weighted average common
shares outstanding 5,794 5,765 5,794 5,765
Stock options -- -- -- --
--------------------- ---------------------
Total common equivalent
shares outstanding 5,794 5,765 5,794 5,765
===================== =====================
Net Loss per share ($ 1.01) $ .00 ($ 1.01) $ .00
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net Sales. Net sales were $7.6 million in the third quarter of fiscal
1999, a decrease of 27% over the comparable quarter of fiscal 1998 when sales
were $10.4 million. Net sales for the first nine months of fiscal 1999 were
$31.9 million, compared to $46.5 million for the first nine months of fiscal
1998, a decrease of 31%. In-line skate sales volume decreases, combined with a
decrease in the average selling price of both the Company's Skate Attack and
UltraWheels lines, were the principal factors in the Company's net sales decline
in the third quarter and nine-month period of fiscal 1999. The Company
experienced continued pricing pressures from all areas of the market place due
primarily to excess inventory levels and competitive price cutting in the
in-line skate industry.
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
UltraWheels(TM), Skate Attack(TM), Heavy(TM) and Third World(TM) in-line product
lines and a Hespeler ice hockey line. The UltraWheels, 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.
A breakdown and analysis of the Company's main product lines is as follows:
<TABLE>
<CAPTION>
Third Quarter
------------------------------------------
Fiscal 1999 Fiscal 1998
------- ------- ------- -------
(amounts in millions) Amount % Amount % Change
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
In-line Skates $ 4.9 64.5% $ 8.7 83.7% (43.7%)
In-line Accessories and Parts 1.1 14.5% 1.4 13.5% (21.4%)
Ice Hockey Sticks 0.4 5.3% 0.3 2.9% 33.3%
Ice Hockey Protective and Access 1.2 15.8% 0.0 0.0% 100.0%
------- ------ ------- ------
Total Net Sales $ 7.6 100.0% $ 10.4 100.0% (26.9%)
======= ====== ======= ======
First Nine Months
------------------------------------------
Fiscal 1999 Fiscal 1998
------- ------- ------- -------
Amount % Amount % Change
------- ------- ------- ------- ------
In-line Skates $ 22.9 71.8% $ 39.4 84.7% (41.9%)
In-line Accessories and Parts 4.3 13.5% 6.8 14.6% (36.8%)
Ice Hockey Sticks 1.8 5.6% 0.3 0.6% 500.0%
Ice Hockey Protective and Access 2.9 9.1% 0.0 0.0% 100.0%
------- ------- ------- ------- ------
Total Net Sales $ 31.9 100.0% $ 46.5 100.0% (31.4%)
======= ====== ======= ======
</TABLE>
<PAGE>
The Company purchased Hespeler Hockey Company in September 1997,
therefore there were no ice hockey product sales during the first nine months of
fiscal 1998.
The Company currently distributes products to numerous countries
worldwide. A geographic breakdown for the quarter and nine-month period is as
follows:
<TABLE>
<CAPTION>
Third Quarter
------------------------------------------
Fiscal 1999 Fiscal 1998
------- ------- ------- -------
(amounts in millions) Amount % Amount % Change
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Domestic $ 5.6 73.7% $ 8.3 79.8% (32.5%)
Canada 1.0 13.2% 0.5 4.8% 100.0%
Europe 0.5 6.6% 0.4 3.8% 25.0%
Other International 0.5 6.6% 1.2 11.5% (58.3%)
------- ------ ------- ------
Total Net Sales $ 7.6 100.0% $ 10.4 100.0% (26.9%)
======= ====== ======= ======
First Nine Months
------------------------------------------
Fiscal 1999 Fiscal 1998
------- ------- ------- -------
Amount % Amount % Change
------- ------- ------- ------- ------
Domestic $ 19.4 60.8% $ 32.2 69.2% (39.8%)
Canada 8.4 26.3% 6.0 12.9% 40.0%
Europe 3.1 9.7% 5.6 12.0% (44.6%)
Other International 1.0 3.1% 2.7 5.8% (63.0%)
------- ------- ------- ------- ------
Total Net Sales $ 31.9 100.0% $ 46.5 100.0% (31.4%)
======= ====== ======= ======
</TABLE>
Several factors contributed to the Company's sales performance in the
third quarter of fiscal 1999. The decrease in domestic sales is the result of
competitive price cutting which has continued to plague the in-line skate
industry and a loss in product placements with the mass merchant distribution
channels. This was a direct result of the mass merchants reduction in 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 has 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 is
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 is primarily the result
of continued excess inventory levels in both the Pacific Rim and South American
marketplaces.
While the Company believes there are some positive signs that the
market conditions in the in-line industry may be improving, the national and
international markets continue to be very competitive and under extreme price
competition.
<PAGE>
Gross Margin As a percentage of net sales, the gross margin was 26% in
the third quarter of fiscal 1999 compared to 20% in the third quarter of fiscal
1998. The gross margin as a percentage of net sales for the nine-month period of
fiscal 1999 was 5%, compared to 24% for fiscal 1998.
The increase in the gross margin as a percentage of net sales in the
third quarter of fiscal 1999 was primarily due to a reduction in close-out sales
and an increase in the percentage of total sales related to Hespeler products
which carry higher gross margins.
The decrease in the gross margin for the nine-month period is primarily
due to the Company's decision to restructure its future production philosophy.
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. The total amount of the writedown was approximately $6 million,
which was recorded in the cost of goods sold section of the second quarter's
Statement of Operations. 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 Company's UltraWheels brand accounted for approximately 37% and
45%, respectively, of total net sales in the third quarter and for the
nine-month period of fiscal 1999, compared to 36% and 51% , respectively, in
fiscal 1998.The Company's Skate Attack brand accounted for 42% and 40%,
respectively, of total net sales in the third quarter and for the nine-month
period of fiscal 1999 compared to 61% and 48%, respectively, in fiscal 1998. The
Hespeler brand accounted for approximately 21% and 15%, respectively, of total
net sales in the third quarter and for the nine-month period of fiscal 1999
compared to 3% and 1%, respectively, in fiscal 1998.
Operating Expenses. Selling expenses were $846,000, or 11.2% of total
net sales, in the third quarter and $3.6 million, or 11.4% of total net sales
for the nine-month period of fiscal 1999 compared to $1.1 million or 10.8% in
the third quarter and $4.4 million or 9.4% for the nine-month period of fiscal
1998. The increase in the selling expenses as a percentage of net sales in both
the third quarter and nine-month period was primarily due to the Company's
continued efforts to advertise and market the Company's two new subsidiaries
Hespeler Hockey and Mothership Distribution and the Company's new products. The
decrease in the absolute dollar amount of selling expenses for both the third
quarter and the nine-month period 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 $1.8 million, or 23.7% of
total net sales, in the third quarter and $5.8 million, or 18.1% of total net
sales, for the nine-month period of fiscal 1999 compared to $2.2 million or 21.9
% in the third quarter and $6.0 million or 13.0% for the nine-month period of
fiscal 1998. The increase in general and administrative expenses as a percentage
of net sales in both the third quarter and nine-month period of fiscal 1999 was
primarily due to the reduction in the Company's sales volume versus the somewhat
<PAGE>
fixed nature of certain general and administrative expenses. The decrease in the
absolute dollar amount of the general and administrative expenses for both the
third quarter and the nine-month period is primarily due to personnel cost
reductions, reduced bad debt expenses and reduced insurance costs associated
with the reduced sales volume.
In fiscal 1997 the Company purchased a new software system and
appropriate computer hardware. As part of the Company's selection process, the
ability to recognize the year 2000 was a major requirement and thus the Company
is prepared for the change. The Company is currently working to quantify and
minimize the potential impact of the year 2000 on the processing of date
sensitive information by the Company's vendors and/or customers. 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.
Other Income and Expense. Interest expense was $179,000 in the third
quarter and $860,000 for the nine-month period of fiscal 1999, compared to
$237,000 in the third quarter and $761,000 for the nine-month period of fiscal
1998. The decrease in interest expense for the third quarter and the increase in
interest expense for the nine-month period is primarily due to the interest
expense related to the Company's line of credit facility. The Company has
continued to manage its cash flows, which during the third quarter resulted in a
decrease in the outstanding balance of its line of credit facility as compared
to the prior year's third quarter. For the nine-month period, the interest
expense increase is the result of additional cash required to manage and operate
the day to day activities of the Company's subsidiaries, which has resulted in
an increase in the average outstanding balance on the Company's line of credit
facility for the nine-month period of fiscal 1999 as compared to the same
periods of fiscal 1998.
Provision for Income Taxes. The Company's effective tax rate was 29.1%
and 33.2%, respectively, in the third quarter and the nine-month period of
fiscal 1999 compared 34.4% and 11.8%, respectively, in the third quarter and
nine-month period of fiscal 1998. The slight decrease 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. The Company had a net loss of ($577,000), or ($.10) per
share, in the third quarter of fiscal 1999 compared to a net loss of ($1.0)
million, or ($.18) per share, in fiscal 1998. The Company had a net loss of
($5.9) million, or ($1.01) per share, for the nine month period of fiscal 1999
compared to a net loss of ($20,000), or ($.00) per share, in fiscal 1998. The
improvement for the third quarter can be attributed to an increase in the gross
margins and management's control over expenses as discussed above. The decrease
for the nine-month period can be attributed to the decrease in both the sales
volume and the gross margins, and the large write-down of inventory as discussed
above.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In the nine-month period of fiscal 1999, the Company's operations
provided $7.3 million of cash compared to $2.1 million in the nine-month period
of fiscal 1998. The increase in the net cash provided by operations is primarily
the result of the Company reducing its inventory balances.
Net cash used in investing activities was $566,000 in the nine-month
period of fiscal 1999 compared to $3.5 million in the nine-month period of
fiscal 1998. The use of cash for investing activities in fiscal 1999 was
primarily attributable to expenditures relating to new licensing arrangements
and new production tools. In fiscal 1998 the Company purchased two new
Subsidiaries, Hespeler Hockey Company and Mothership Distribution, Inc.,
resulting in a significant investment of cash in fiscal 1998.
Net cash used in financing activities was $7.1 million in the
nine-month period of fiscal 1999 compared to net cash provide by financing
activities of $1.8 million in the nine-month period of fiscal 1998. The use of
cash for this activity in fiscal 1999 was primarily for reducing balances
outstanding under the Company's line of credit facility and long term debt
obligations. The net cash provided by this activity in fiscal 1998 was 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 November 30, 1998,
compared to .7 to 1 as of February 28, 1998 and .6 to 1 as of November 30, 1997.
The Company's long-term debt, which consists primarily of a mortgage note on the
Company's facility and obligations under endorsement license agreements, less
current maturities, was $6.0 million as of November 30, 1998. As of November 30,
1998, the Company has a revolving line of credit with a bank that provides for
borrowings of up to $10 million, subject to a borrowing base, which is
calculated bi-weekly, and is based on a percentage of eligible receivables and
inventories. As of November 30, 1998 the borrowing base limitation was
approximately $6.6 million of which $2.2 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 1999.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Exhibit Index immediately following the
signature page of this Form 10-Q.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Registrant during the quarter to which this Form 10-Q relates.
<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.
By: /s/ John J. Egart
John J. Egart
President and CEO
and By: /s/ Kent A. Brunner
Kent A. Brunner
Vice President and CFO
Dated: January 11, 1999
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For Quarter Ended: Commission File No.: 0-16422
November 30, 1998
- -------------------------------------------------------------------------------
FIRST TEAM SPORTS, INC.
- -------------------------------------------------------------------------------
Exhibit Number Description
3.1 Restated Articles of Incorporation -- incorporated by reference to
Exhibit 3.1 to the Company's 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
10.1* Credit Agreement dated November 20, 1998 among the Company, Marquette
Capital Bank, N.A., LaSalle National Bank, and Firstar Bank Milwaukee,
N.A.
27* Financial Data Schedule (included in electronic version only)
- -------------
*Filed herewith
CREDIT AGREEMENT
THIS AGREEMENT is entered as of November 20, 1998, by and among First
Team Sports, Inc., a Minnesota corporation (the "Borrower"), Marquette Capital
Bank, N.A., individually and as Agent for the Lenders ("Marquette"), LaSalle
National Bank ("LaSalle"), and Firstar Bank Milwaukee, N.A. ("Firstar").
Marquette, LaSalle and Firstar are collectively called the "Lenders". In
consideration of the mutual agreements set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties, the Borrower and the Lenders agree as follows:
ARTICLE I.
Definitions
Section 1.01 Definitions. For purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Advance" means an advance of credit by the Bank to the Borrower in the
form of a loan pursuant to Section 2.01 and the aggregate outstanding amount of
the Letters of Credit.
"Agent" means Marquette, as agent for the Lenders.
"Borrower" has the meaning specified above.
"Borrowing Base" means the sum of (a) 75% of Eligible Accounts
Receivable, plus (b) the lesser of (i) the Inventory Cap or (ii) 30% of Eligible
Finished Goods Inventory.
"Borrowing Base Certificate" means the certificate attached hereto as
Exhibit A.
"Capital Expenditures" means all expenditures for any assets, or for
improvements, replacements, substitutions or additions therefor or thereto,
which are capitalized on the balance sheet and which, in accordance with GAAP,
are required to be included in or reflected by the property, plant or equipment
or similar fixed asset account reflected in such balance sheet, and shall
include without limitation capitalized lease obligations.
<PAGE>
"Certificate of Indebtedness and Liens" means the certificate attached
hereto as Exhibit B.
"Certificate of Subsidiaries" means the certificate attached hereto as
Exhibit C.
"Consolidated Tangible Net Worth" means the difference of:
(a) the tangible assets of the Borrower and the Subsidiaries
(excluding intercompany items) which, in accordance with GAAP, are
tangible assets, after deducting adequate reserves in each case where,
in accordance with GAAP, a reserve is proper, minus
(b) all Debt of the Borrower and the Subsidiaries;
provided, that (i) inventory shall be taken into account on the basis of the
cost or current market value, whichever is lower, (ii) in no event shall there
be included as such tangible assets patents, trademarks, tradenames, copyrights,
good will, memberships or treasury stock or any securities or debt of the
Borrower or any Subsidiary, or of any shareholder or affiliate of the Borrower
or any Subsidiary, or of any officer, director, employee, agent, shareholder or
affiliate of the Borrower, any Subsidiary, or any shareholder or affiliate of
the Borrower or any Subsidiary, or any other debt or securities unless the same
are readily marketable in the United States of America, (iii) securities
included as such tangible assets shall be taken into account at their current
market price or cost, whichever is lower, (iv) any write-up in the book value of
any assets shall not be taken into account, and (v) license agreements shall
constitute tangible assets.
"Covenant Compliance Certificate" means the certificate attached hereto
as Exhibit D.
"Credit Documents" means this Agreement, the Revolving Notes, the Term
Note, the Security Agreement, and all financing statements and all letter of
credit applications and agreements executed by the Borrower in favor of any of
the Lenders.
"Debt" means, on a consolidated basis (excluding all intercompany
items), the total of all items of indebtedness or liability of the Borrower and
the Subsidiaries which in accordance with GAAP would be included in determining
total liabilities as shown on the liabilities side of a balance sheet on the
date as of which Debt is to be determined.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Eligible Accounts Receivable" means only such accounts receivable of
the Borrower and the Guarantors as the Agent, in its sole discretion, shall deem
eligible. Without limiting the discretion of the Agent to consider any account
receivable not to be an Eligible Account Receivable, and by way of example only
of types of accounts receivable that the Agent will consider not to be Eligible
Accounts Receivable, notwithstanding any earlier classification of eligibility,
the following accounts receivable shall not be considered Eligible Accounts
<PAGE>
Receivable: (i) any account receivable that is more than 60 days past due; (ii)
any account receivable as to which any warranty is breached; (iii) any account
receivable as to which the account debtor or other obligor disputes liability or
makes any claim; (iv) any account receivable owed by the Borrower any Subsidiary
or by any officer, director or shareholder of the Borrower or any Subsidiary or
by any of their relatives or by any partnership, corporation, association, joint
venture or other business entity wholly or partly owned or controlled directly
or indirectly by any of them or any of their relatives; (v) any account
receivable owed by any person or entity as to which a petition in bankruptcy or
other application for relief is filed under any bankruptcy, reorganization,
receivership, moratorium, insolvency or similar law; (vi) any account receivable
owed by any person or entity that makes an assignment for the benefit of
creditors, becomes insolvent, fails, suspends business, or goes out of business;
(vii) any account receivable owed by the United States government or any agency
of the United States government; (viii) any account receivable owed by any
person or entity if 25% or more in amount of the accounts receivable owed by
such person or entity to the Borrower or any Guarantor are considered
ineligible; (ix) consignment receivables; (x) bonded receivables; (xi) any
account receivable constituting a retainage; (xii) any account receivable for
goods which have not been shipped or work which has not been fully performed;
(xiii) any account receivable owed by any person or entity located outside of
the United States of America and Canada, unless such receivable is approved by
the Agent in writing; and (xiv) any account receivable in which the Agent does
not have a perfected security interest constituting a first lien. In the event
the Borrower or any Guarantor owes any amount to any person or entity that owes
an account receivable to the Borrower or any Guarantor, such amount owed by the
Borrower or any Guarantor shall be deducted from that portion of the account
receivable which would otherwise qualify as an Eligible Account Receivable and
only the difference thereof shall be considered an Eligible Account Receivable.
No account receivable which does not qualify as an Eligible Account Receivable
shall be considered an Eligible Account Receivable unless the Agent, upon the
written request of the Borrower, states in writing that such account receivable
is to be considered an Eligible Account Receivable.
"Eligible Finished Goods Inventory" means the lesser of cost or fair
market value of only such finished goods inventory of the Borrower and the
Guarantors as the Agent, in its sole discretion, shall deem eligible, computed
on a first-in, first-out basis in accordance with GAAP. Without limiting the
discretion of the Agent to consider any inventory not to be Eligible Finished
Goods Inventory, notwithstanding any earlier classification of eligibility, the
following inventory shall not be considered Eligible Finished Goods Inventory:
(i) any inventory which does not constitute finished goods; (ii) any inventory
which does not meet all standards imposed by any governmental agency; (iii) any
inventory which is located in the Canadian province of Quebec or is located
outside of the United States of America and Canada; (iv) any inventory which is
obsolete, or which is not usable by the Borrower or such Guarantor in the normal
course of its business; (v) any inventory which is on consignment to or from any
other person or entity, or which has been sold or otherwise delivered,
transferred or conveyed to any other person or entity, or which is subject to
any bailment or lease; (vi) any finished goods inventory which is not held for
sale by the Borrower or any Guarantor in the normal course of its business, or
which is not saleable by the Borrower or any Guarantor in the normal course of
its business; and (vii) any inventory in which the Agent does not have a
perfected security interest constituting a first lien.
<PAGE>
"Environmental Laws" means all federal, state, local and foreign laws,
statutes, codes, ordinances, regulations, requirements, rules and common law
relating in any way to any hazardous or toxic materials or the protection of the
environment.
"Event of Default" has the meaning specified in Section 6.01.
"Firstar" has the meaning specified above.
"Funded Debt" means all indebtedness of the Borrower and the
Subsidiaries for borrowed money and capital leases, all other indebtedness of
the Borrower and the Subsidiaries evidenced by notes, bonds, debentures and
similar obligations, and all other interest-bearing indebtedness of the Borrower
and the Subsidiaries, including but not limited to all indebtedness to the Bank
under the Revolving Notes and the Term Note.
"GAAP" means generally accepted accounting principles. Except as
otherwise approved by the Agent in writing, all financial reporting, financial
record keeping, and financial calculations in connection with this Agreement
shall be made on the basis of accounting principles, methods, elections and
estimates that are consistent and that are consistent with the accounting
principles, methods, elections and estimates used in the financial statements
described in Section 4.04.
"GmbH" means First Team Sports GmbH, an Austrian corporation.
"GmbH Documents" means the Guaranty, the Third Party Security
Agreement, and all financing statements executed by GmbH in favor of any of the
Lenders.
"Guarantors" means GmbH, Hespeler, Holding, and Mothership.
"Guaranty" has the meaning specified in Section 3.01.
"Hespeler" means Hespeler Hockey Company, a Nova Scotia corporation.
"Hespeler Documents" means the Guaranty, the Third Party Security
Agreement, and all financing statements executed by Hespeler in favor of any of
the Lenders.
"Holding" means Hespeler Hockey Holding, Inc., a Minnesota corporation.
"Holding Documents" means the Guaranty, the Third Party Security
Agreement, and all financing statements executed by Holding in favor of any of
the Lenders.
<PAGE>
"Inventory Cap" means $3,000,000.00 during the period from February 1,
1999 through April 30, 1999, and $2,000,000.00 at all other times.
"LaSalle" has the meaning specified above.
"Lenders" has the meaning specified above.
"Letters of Credit" means all letters of credit issued by any of the
Lenders at the Borrower's request under the Line of Credit.
"Line of Credit" has the meaning specified in Section 2.01.
"Marquette" has the meaning specified above.
"Mothership" means Mothership Distribution, Inc., a Minnesota
corporation.
"Mothership Documents" means the Guaranty, the Third Party Security
Agreement, and all financing statements executed by Mothership in favor of any
of the Lenders.
"Plan" has the meaning specified in Section 4.10.
"Prohibited Transaction" has the meaning assigned to that term in
ERISA.
"Pro Rata Percentage" means 40% as to Marquette, 40% as to LaSalle, and
20% as to Firstar.
"Reportable Event" has the meaning assigned to that term in ERISA.
"Revolving Notes" has the meaning specified in Section 2.01.
"Security Agreement" has the meaning specified in Section 3.01.
"Subsidiary" means any corporation or company of which more than 50% of
the outstanding shares of capital stock or interests having general voting power
under ordinary circumstances irrespective of whether or not at the time stock or
interests of any other class or classes shall have or might have voting power by
reason of the happening of any contingency, is at the time directly or
indirectly owned by the Borrower, by the Borrower and one or more other such
corporations or companies, or by one or more other such corporations or
companies, including but not limited to each of the Guarantors.
"Term Note" has the meaning specified in Section 2.05.
<PAGE>
"Third Party Security Agreement" has the meaning specified in Section
3.01.
ARTICLE II.
Amount and Terms of Advances and Term Loan
Section 2.01 Advances. Subject to the provisions of this Agreement, the
Lenders shall make Advances to the Borrower from time to time during the period
from the date hereof to July 1, 1999 or the earlier date of termination of the
Line of Credit pursuant to Section 6.02, in an aggregate amount not to exceed at
any time outstanding $10,000,000.00, including loans and Letters of Credit made
or issued by the Lenders under the Line of Credit before, on and after the date
of this Agreement (the "Line of Credit"). Upon the Borrower's request for any
loan Advance, each of the Lenders shall be obligated to advance such Lender's
Pro Rata Percentage of such Advance. The obligation of each Lender under each
Letter of Credit (as between the Borrower and the Lenders) shall be such
Lender's Pro Rata Percentage of the outstanding amount of such Letter of Credit.
The total principal obligation of Marquette under the Line of Credit shall not
exceed $4,000,000.00 at any time outstanding. The total principal obligation of
LaSalle under the Line of Credit shall not exceed $4,000,000.00 at any time
outstanding. The total principal obligation of Firstar under the Line of Credit
shall not exceed $2,000,000.00 at any time outstanding. Each Advance in the form
of a loan shall be in the amount of $10,000.00 or an integral multiple thereof.
Within the limits of the Line of Credit, the Borrower may obtain Advances,
prepay, and obtain new Advances under this Section 2.01. The obligation to repay
the Advances and to pay interest and other charges, fees and expenses thereon is
evidenced by the Borrower's $4,000,000.00 Amended and Restated Revolving Note
dated the date hereof payable to the order of Marquette, the Borrower's
$4,000,000.00 Amended and Restated Revolving Note dated the date hereof payable
to the order of LaSalle, and the Borrower's $2,000,000.00 Amended and Restated
Revolving Note dated the date hereof payable to the order of Firstar (together
with any amendments, extensions, renewals and replacements thereof, called the
"Revolving Notes").
Section 2.02 Borrowing Base. The Borrower shall not at any time permit
the aggregate outstanding principal amount of the Advances (including loans and
Letters of Credit) to exceed the Borrowing Base.
Section 2.03 Letters of Credit. The total amount of all Letters of
Credit shall not exceed $2,000,000.00 at any time outstanding. Notwithstanding
any agreement to the contrary, the Lenders shall have no obligation to issue any
Letter of Credit, or to amend, extend, renew or replace any Letter of Credit.
Prior to the issuance, amendment, extension, renewal or replacement of any
Letter of Credit, the Borrower shall execute and deliver to the Agent such
applications and agreements for the same as the Agent may request, shall pay to
the Agent a letter of credit fee and an administrative fee in amounts to be
determined by the Agent, and shall comply with such other requirements as the
Agent, in its sole discretion, may request in connection with the same.
Notwithstanding any other agreement to the contrary, the Borrower shall pay to
the Agent all amounts paid by the issuer of each Letter of Credit under such
<PAGE>
Letter of Credit immediately upon such payment by such issuer, and the Lenders
are irrevocably authorized to receive any such payment, without demand or notice
of any kind, by making an Advance. In addition, in the event that any Letters of
Credit remain outstanding on July 1, 1999 or at any time after the occurrence of
an Event of Default, the Lenders are irrevocably authorized to make one or more
loan Advances in an amount equal to the aggregate outstanding amount of such
Letters of Credit, and Marquette (individually and as Agent) shall retain the
full amount of such Advances as security, and the Borrower grants Marquette
(individually and as Agent) a first lien and security interest in all such
funds, including without limitation all instruments evidencing such funds, and
all products and proceeds of the foregoing, as security for all now existing and
hereafter arising debts, obligations and liabilities of the Borrower to the
Lenders.
Section 2.04 Making the Advances. Each Advance shall be made on prior
written request from the Borrower to the Agent or prior telephonic request to
the Agent from any person purporting to be authorized to request Advances on
behalf of the Borrower, which request shall specify the date of the requested
Advance and the amount thereof, and which request shall be received by the Agent
no later than noon of the day on which the Advance is to be made. Upon
fulfillment of the terms and conditions hereof, at the Agent's request, each of
the Lenders shall disburse its Pro Rata Percentage of the amount of any
requested loan Advance by crediting the same to the Borrower's checking account
at Marquette or in such other manner as the Agent and the Borrower may from time
to time agree. The Borrower shall be obligated to repay all Advances
notwithstanding the fact that the person requesting the same was not authorized
to do so. Any request for an Advance shall be deemed to be a representation that
the statements set forth in Sections 3.02(c) and 3.02(d) are correct as of the
date of such request.
Section 2.05 Term Note. The Borrower also is obligated to Marquette
under the Borrower's $499,996.00 Amended and Restated Term Note dated the date
hereof payable to the order of Marquette (together with any amendments,
extensions, renewals and replacements thereof, called the "Term Note").
Marquette has no obligation to make any further loans under the Term Note.
Section 2.06 Payment, Balance and Setoff. All payments of principal,
interest and other charges, fees and expenses under the Revolving Notes, the
Term Note and this Agreement shall be made to Marquette in immediately available
funds. The Borrower agrees that the amount shown on the books and records of
Marquette as being the unpaid balance of principal, accrued interest and other
charges, fees and expenses under each of the Revolving Notes, the Term Note and
this Agreement shall be prima facie evidence thereof. The Borrower hereby
irrevocably authorizes the Agent and any of the Lenders, if and to the extent
payment is not promptly made pursuant hereto, to charge against any amount owing
by any of the Lenders to the Borrower an amount equal to the principal, accrued
interest and other charges, fees and expenses then due. In addition, the
Borrower hereby irrevocably authorizes the Agent and any of the Lenders to
collect interest and other charges, fees and expenses under the Revolving Notes,
the Term Note and this Agreement when due from time to time by charging the
Borrower's checking account with any of the Lenders.
<PAGE>
Section 2.07 Use of Proceeds. The Borrower shall use all proceeds of
the Advances and the Term Loan solely for general corporate purposes of the
Borrower and the Guarantors. The Borrower shall not, and shall not permit any
affiliate of the Borrower to, use any portion of the proceeds of the loan
Advances, nor have any Letter of Credit issued, either directly or indirectly,
for the purpose of purchasing any securities underwritten by ABN AMRO
Incorporated, an affiliate of LaSalle.
Section 2.08 Commitment Fee. The Borrower shall pay to the Agent a
commitment fee at the rate of 1/4 of 1% per annum on the average daily unused
amount of the Line of Credit from the date hereof and including the termination
date of the Line of Credit, computed on the basis of the actual number of days
elapsed and a 360-day year. The amount of such commitment fee accruing during
each calendar month shall be due and payable on or before the 10th day of the
next succeeding calendar month, provided that the commitment fee remaining
unpaid shall be due and payable on the termination date of the Line of Credit.
In this Section, "unused amount of the Line of Credit" means the difference of
$10,000,000.00 minus the aggregate outstanding principal amount of the Advances
(including loans and Letters of Credit) .
Section 2.09 Capital Adequacy. In the event that the Agent shall have
determined that the adoption of any law, treaty, governmental (or
quasi-governmental) rule, regulation, guideline or order regarding capital
adequacy, or any change therein or in the interpretation or application thereof,
or compliance by the Lenders with any request or directive regarding capital
adequacy (whether or not having the force of law and whether or not failure to
comply therewith would be unlawful) from any central bank or governmental or
quasi-governmental agency or body, does or shall have the effect of reducing the
rate of return on any Lender's capital as a consequence of its obligations
hereunder to a level below that which such Lender could have achieved but for
such adoption, change or compliance (taking into consideration such Lender's
policies with respect to capital adequacy) by any amount deemed by the Agent to
be material, then the Borrower shall from time to time, within 10 days after
written notice from the Agent, pay to the Agent additional amounts sufficient to
compensate the Lenders for such reduction. A certificate as to the amount of
such reduction, submitted to the Borrower by the Agent, shall, absent manifest
error, be final, conclusive and binding for all purposes.
ARTICLE III.
Conditions
Section 3.01 Required Documents. Each Advance shall be subject to the
condition precedent that the Agent shall have received prior thereto all of the
following, in form and substance acceptable to the Agent:
(a) The Revolving Notes and the Term Note, properly executed
by the Borrower.
<PAGE>
(b) A security agreement (the "Security Agreement"), properly
executed by the Borrower.
(c) A certificate of authority of the Borrower, attested by a
director of the Borrower. The Lenders may conclusively rely on such
certificate until the Agent shall receive a further certificate of
authority of the Borrower, in form and substance acceptable to the
Agent, canceling or amending the prior certificate.
(d) A certificate of good standing of the Borrower, issued by
the Minnesota Secretary of State.
(e) The Certificate of Indebtedness and Liens and the
Certificate of Subsidiaries, properly completed and executed by the
chief financial officer of the Borrower.
(f) An initial Borrowing Base Certificate and an initial
Covenant Compliance Certificate, properly completed and executed by the
chief financial officer of the Borrower.
(g) Four guaranty agreements (each called "Guaranty"),
properly executed by the Guarantors.
(h) Four third party security agreements (each called "Third
Party Security Agreement"), properly executed by the Guarantors.
(i) All financing statements, termination statements,
landlords' waivers, and other writings, properly executed, which are
deemed by the Bank to be necessary or desirable to grant Marquette
(individually and as Agent) a perfected security interest constituting
a first lien on the property described in the Security Agreement and
the Third Party Security Agreements, subject to such exceptions as
Marquette may approve.
(j) Certificates of insurance covering the tangible property
described in the Security Agreement and the Third Party Security
Agreements, in such amounts, against such risks and in such companies
as shall be acceptable to Marquette, which certificates shall name
Marquette as lender loss payee and shall provide for at least 30 days'
prior written notice to Marquette of any cancellation of such
insurance, and certificates of all other insurance required by Section
5.05.
(k) A certificate of authority of each of the Guarantors,
attested by a director of such Guarantor.
(l) Certificates of good standing of the Borrower, Holding,
and Mothership, issued by the Minnesota Secretary of State.
<PAGE>
Section 3.02 Other Conditions. Each Advance shall be subject to the
further conditions precedent that:
(a) The Agent shall have received all Borrowing Base
Certificates required to be delivered or mailed by the Borrower; and
(b) The most recent Borrowing Base Certificate shall show, to
the satisfaction of the Agent, that the sum of the aggregate
outstanding principal amount of all prior Advances plus the amount of
the requested Advances does not exceed the Borrowing Base; and
(c) The representations and warranties contained in Article IV
are correct as of the date of such Advance as though made as of such
date, except to the extent that such representations and warranties
relate solely to an earlier date; and
(d) No event has occurred, or would result from such Advance,
which constitutes an Event of Default or would constitute an Event of
Default with notice or passage of time or both.
ARTICLE IV.
Representations and Warranties
The Borrower represents and warrants to the Lenders as follows:
Section 4.01 Corporate Existence and Power. The Borrower and each
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of its respective state, province or country of
incorporation as stated in this Agreement, is duly licensed or qualified to
transact business in all jurisdictions where the character of the property owned
or leased or the nature of the business transacted by it makes such licensing or
qualification necessary, and has all requisite power and authority to own its
property and carry on its business. The Borrower has all requisite power and
authority to execute and deliver and to perform all of its obligations under the
Credit Documents. GmbH has all requisite power and authority to execute and
deliver and to perform all of its obligations under the GmbH Documents. Hespeler
has all requisite power and authority to execute and deliver and to perform all
of its obligations under the Hespeler Documents. Holding has all requisite power
and authority to execute and deliver and to perform all of its obligations under
the Holding Documents. Mothership has all requisite power and authority to
execute and deliver and to perform all of its obligations under the Mothership
Documents.
Section 4.02 Authorization. Such execution, delivery and performance
have been duly authorized by all requisite action and do and will not (a)
require any consent or approval of any person or entity or governmental
authority, (b) violate any law, rule, regulation, order, writ, injunction or
decree, or the articles of incorporation or bylaws of the Borrower or any of the
<PAGE>
Guarantors, (c) result in a breach of or constitute a default under any
contract, agreement or other writing to which the Borrower or any of the
Guarantors is a party or by which the Borrower or any of the Guarantors or any
property of the Borrower or any of the Guarantors may be bound or affected, or
(d) result in, or require the creation or imposition of, any mortgage, deed of
trust, assignment, security interest or other interest, encumbrance, claim or
charge of any nature, except in favor of Marquette (individually and as Agent),
upon or with respect to any property of the Borrower or any of the Guarantors.
Section 4.03 Legal Agreements. The Credit Documents constitute the
legal, valid and binding obligations of the Borrower, enforceable in accordance
with their respective terms, subject to bankruptcy, insolvency and similar laws,
statutes of limitation and principles of equity. The GmbH Documents constitute
the legal, valid and binding obligations of GmbH, enforceable in accordance with
their respective terms, subject to bankruptcy, insolvency and similar laws,
statutes of limitation and principles of equity. The Hespeler Documents
constitute the legal, valid and binding obligations of Hespeler, enforceable in
accordance with their respective terms, subject to bankruptcy, insolvency and
similar laws, statutes of limitation and principles of equity. The Holding
Documents constitute the legal, valid and binding obligations of Holding,
enforceable in accordance with their respective terms, subject to bankruptcy,
insolvency and similar laws, statutes of limitation and principles of equity.
The Mothership Documents constitute the legal, valid and binding obligations of
Mothership, enforceable in accordance with their respective terms, subject to
bankruptcy, insolvency and similar laws, statutes of limitation and principles
of equity.
Section 4.04 Financial Statements. The Borrower has furnished the
following financial statements to Marquette: annual audited financial statements
of the Borrower and the Subsidiaries for the fiscal year ending February 28,
1998, and interim unaudited financial statements of the Borrower and the
Subsidiaries for the period ending September 30, 1998. Said statements,
including all schedules and notes pertaining thereto, were prepared in
accordance with GAAP, and fully and fairly present the financial condition of
the Borrower and the Subsidiaries on the dates thereof and the results of its
operations for the periods covered thereby.
Section 4.05 No Adverse Change. There has been no material adverse
change in the business, property or condition (financial or otherwise) of the
Borrower or any of the Subsidiaries since the date of the latest financial
statement referred to in Sections 4.04 and 5.01.
Section 4.06 Titles and Liens. The Borrower or a Subsidiary has good
title to all of the property reflected in the latest balance sheet referred to
in Sections 4.04 and 5.01, free and clear of all mortgages, deeds of trust,
security interests and other interests, encumbrances, claims and charges, except
for liens permitted by Section 5.07.
Section 4.07 Taxes. The Borrower and each Subsidiary has filed all
required tax returns, has paid all due and payable taxes, assessments and other
governmental charges levied or imposed upon it or upon its income or profits or
upon any of its property, and has made adequate provision for the payment of
such taxes, assessments and other charges accruing but not yet due and payable.
<PAGE>
Section 4.08 Litigation. There is no pending or threatened notice,
claim, litigation, proceeding or investigation against or affecting the Borrower
or any Subsidiary or any property of the Borrower or any Subsidiary, whether or
not covered by insurance, that would involve the payment by the Borrower or any
Subsidiary of $100,000.00 or more or would otherwise have a material adverse
effect on the financial condition, business, prospects, property or operations
of the Borrower or any Subsidiary, and there is no basis for any such order,
notice, claim, litigation, proceeding or investigation.
Section 4.09 Margin Stock. Neither the Borrower nor any of the
Subsidiaries is engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System), and no part of the proceeds
of any Advance or the Term Loan has been used or will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
Section 4.10 Employee Benefit Plans. No Reportable Event or Prohibited
Transaction has occurred with respect to any employee benefit plan or other plan
maintained for employees of the Borrower or any Subsidiary ("Plan"). Each Plan
is in compliance with all applicable requirements of ERISA and all applicable
rulings and regulations thereunder.
Section 4.11 Subsidiary. The Certificate of Subsidiaries is a complete
and correct list of all present Subsidiaries and of the percentage ownership of
the Borrower or any other Subsidiary in each as of the date of this Agreement.
Except as otherwise stated in the Certificate of Subsidiaries, all shares of
each Subsidiary owned by the Borrower or by any other Subsidiary are validly
issued and fully paid and nonassessable.
Section 4.12 Environmental Matters.
(a) Neither the Borrower nor any of the Subsidiaries is in
violation of any Environmental Law; and
(b) No disposal or release of any hazardous or toxic material
has occurred on, from or under any property owned, operated or
controlled by the Borrower or any of the Subsidiaries, except as may
have occurred in accordance with all applicable Environmental Laws; and
(c) There has been no treatment, manufacturing, refining,
handling or storage of any hazardous or toxic material at any property
owned, operated or controlled by the Borrower or any of the
Subsidiaries, except as may have occurred in accordance with all
applicable Environmental Laws; and
<PAGE>
(d) No litigation, investigation or administrative action has
been commenced or is pending or threatened, nor has any settlement been
reached with any public or private party or parties, or any order
issued, relating in any way to any alleged or actual presence, disposal
or release of any hazardous or toxic material or any violation of any
Environmental Law with respect to any property owned, operated or
controlled by the Borrower or any of the Subsidiaries; and
(e) The Borrower and the Subsidiaries and all tenants of the
Borrower and all of the Subsidiaries have filed all notices and permit
applications required to be filed under the Environmental Laws with
respect to their businesses, property and operations; and
(f) Neither the Borrower nor any of the Subsidiaries has any
known contingent liability with respect to its business, property or
operations as now or previously owned, operated, controlled or
conducted by the Borrower or any of the Subsidiaries in connection with
any hazardous or toxic material or any Environmental Law.
ARTICLE V.
Covenants
So long as any now existing or hereafter arising debt, obligation or
liability of the Borrower to the Bank shall remain outstanding, the Borrower
shall comply with the following requirements:
Section 5.01 Financial Statements and Other Information. The Borrower
shall deliver to each of the Lenders, in form and substance acceptable to the
Lenders:
(a) As soon as available, and in any event within 90 days
after the end of each fiscal year of the Borrower, a copy of the annual
audit report of the Borrower with the unqualified opinion of
independent certified public accountants selected by the Borrower and
acceptable to the Agent, which report shall include the consolidated
and consolidating balance sheets of the Borrower and the Subsidiaries
as of the end of such fiscal year, and the related consolidated and
consolidating statements of income, cash flows and stockholders' equity
of the Borrower and the Subsidiaries for such fiscal year, including
all supporting schedules and notes, all in reasonable detail, prepared
in accordance with GAAP.
(b) As soon as available and in any event before the end of
each fiscal year of the Borrower, the projected consolidated and
consolidating financial statements of the Borrower and the Subsidiaries
for the next fiscal year of the Borrower, including but not limited to
monthly projected balance sheets and income statements; and, as soon as
available and in any event within 15 days after the same are drafted,
all revisions to such projected financial statements.
<PAGE>
(c) As soon as available and in any event within 30 days after
the end of each month: (i) the consolidated and consolidating balance
sheets and the agings of accounts receivable and inventory reports of
the Borrower and the Subsidiaries as of the end of such month, and the
related consolidated statements of income and cash flows of the
Borrower and the Subsidiaries for such month and for the year to date,
including all supporting schedules and notes, all in reasonable detail,
prepared by the chief financial officer of the Borrower in accordance
with GAAP, subject, however, to year-end audit adjustments, and (ii) a
Covenant Compliance Certificate completed with amounts determined as of
the end of such month and executed by the chief financial officer of
the Borrower.
(d) As soon as available, and in any event within 20 days
after the 15th day and the last day of each month, a Borrowing Base
Certificate completed with amounts determined as of such 15th or last
day and executed by the chief financial officer of the Borrower, and at
the same time the Borrower shall deliver to the Agent an aging of
accounts receivable of the Borrower and the Subsidiaries as of such
date.
(e) As soon as available, and in any event within 100 days
after the end of each fiscal year of the Borrower, a copy of the 10-K
Statement filed by the Borrower with the Securities and Exchange
Commission for such fiscal year.
(f) As soon as available, and in any event within 55 days
after the end of each calendar quarter, a copy of the quarterly 10-Q
Statement filed by the Borrower with the Securities and Exchange
Commission for such quarter.
(g) Promptly after sending, making available or filing the
same, copies of all other financial statements, reports, proxy
statements, registration statements and other communications which the
Borrower or any Subsidiary sends or makes available to its stockholders
or files with any governmental agency or securities exchange.
(h) As promptly as practicable (but in any event not later
than 5 days) after any officer of the Borrower obtains knowledge
thereof, written notice of all orders, notices, claims, litigation,
proceedings and investigations against or affecting the Borrower or any
Subsidiary or any property of the Borrower or any Subsidiary of the
type described in Section 4.08 or 4.12.
(i) As promptly as practicable (but in any event not later
than 5 days) after any officer of the Borrower obtains knowledge of the
occurrence of any event which constitutes an Event of Default or would
constitute an Event of Default with notice or passage of time or both,
written notice of such occurrence, together with a detailed statement
by a responsible officer of the Borrower of the steps being taken by
the Borrower to cure the effect of such event.
<PAGE>
(j) Within 10 days after Marquette's request therefor, such
other information respecting the condition (financial or otherwise),
business and property of the Borrower or any Subsidiary as Marquette
may from time to time reasonably request.
Section 5.02 Books and Records. The Borrower shall, and shall cause
each Subsidiary to, keep accurate books and records in which true and complete
entries will be made in accordance with GAAP. Upon request of Marquette, the
Borrower, during normal business hours, shall, and shall cause each Subsidiary
to, give any representatives of Marquette access to and permit such
representatives to examine and copy all books, records and other writings in its
possession, to inspect its property and to discuss its finances, accounts,
property and business with any of its officers and directors.
Section 5.03 Taxes and Other Claims. The Borrower shall, and shall
cause each Subsidiary to, file when due all required tax returns, pay when due
all taxes, assessments and other governmental charges levied or imposed upon it
or upon its income or profits or upon any of its property, and pay when due all
lawful claims for labor, materials and supplies which, if unpaid, might become a
lien or charge upon any property of the Borrower or any Subsidiary; provided,
that neither the Borrower nor any Subsidiary shall be required to pay any such
tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings.
Section 5.04 Maintenance of Properties. The Borrower shall, and shall
cause each Subsidiary to, keep and maintain its inventory, equipment, real
estate and other property necessary or useful in its business in good condition
and repair and pay when due all rental and mortgage payments due on such
property; provided, that nothing in this Section shall prevent the Borrower or
any Subsidiary from discontinuing the operation and maintenance of any such
property if such discontinuance is desirable in the conduct of the Borrower's or
such Subsidiary's business and not disadvantageous to the Lenders.
Section 5.05 Insurance. The Borrower shall, and shall cause each
Subsidiary to, obtain and maintain insurance with insurers that are acceptable
to Marquette, in such amounts and with such coverages (including without
limitation liability insurance, fire, hazard and extended coverage insurance on
all of its assets, necessary workers' compensation insurance, and all other
coverages as are consistent with industry practice) as are acceptable to
Marquette. In the event the Borrower or any Subsidiary fails to pay any premium
on any such insurance, Marquette may do so, and the Borrower shall reimburse
Marquette for any such payment on demand.
Section 5.06 Corporate Existence. The Borrower shall, and shall cause
each Subsidiary to, preserve and maintain its corporate existence and all of its
rights, privileges and franchises, and comply with all applicable laws and
regulations.
Section 5.07 Liens. The Borrower shall not, and shall not permit any
Subsidiary to, create, incur or permit to exist in favor of any person or entity
other than the Marquette (individually and as Agent) any mortgage, deed of
<PAGE>
trust, assignment, security interest or other lien on any of its property now
owned or hereafter acquired, except: (a) purchase money security interests
securing indebtedness permitted by Section 5.08(b), and (b) other mortgages,
deeds of trust, security interests and other liens in existence on the date of
this Agreement and listed in the Certificate of Indebtedness and Liens.
Section 5.08 Funded Debt. The Borrower shall not, and shall not permit
any Subsidiary to, incur, create, assume or permit to exist any Funded Debt,
except:
(a) Indebtedness to the Bank;
(b) Indebtedness in an aggregate amount not to exceed at any
time outstanding $100,000.00 incurred in the purchase (or borrowing for
the purchase) or lease of equipment; and
(c) Other indebtedness in existence on the date of this
Agreement and listed in the Certificate of Indebtedness and Liens.
Section 5.09 Guaranties. The Borrower shall not, and shall not permit
any Subsidiary to, guarantee, endorse, assume or otherwise become directly or
contingently liable in connection with any debt, obligation or liability of any
other person or entity, except by the endorsement of negotiable instruments by
the Borrower or any Subsidiary for deposit or collection or similar transactions
in the ordinary course of business.
Section 5.10 Dividends. The Borrower shall not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on
account of any shares of its stock, or make any payment on account of any
purchase, redemption or other retirement of any shares of such stock, or make
any other payment or distribution on account of any shares of stock or any
warrant or option therefor, either directly or indirectly.
Section 5.11 Sale of Assets. The Borrower shall not, and shall not
permit any Subsidiary to, sell, lease, assign, transfer or otherwise dispose of
all or a substantial part of its assets (whether in one or more transactions).
Section 5.12 Corporate Structure. The Borrower shall not, and shall not
permit any Subsidiary to, consolidate with or merge into any other person or
entity, or permit any other person or entity to merge into it, or acquire all or
a substantial part of the assets of any other person or entity.
Section 5.13 Nature of Business. The Borrower shall not, and shall not
permit any Subsidiary to, engage in any line of business materially different
from that presently engaged in by the Borrower or such Subsidiary.
<PAGE>
Section 5.14 Investments. The Borrower shall not, and shall not permit
any Subsidiary to, purchase or hold beneficially any shares of stock or other
securities or evidences of indebtedness of any other person or entity, or make
or permit to exist any loans or advances to any other person or entity, or make
any investment or acquire any interest whatsoever in any other person or entity,
except:
(a) Deposits in Marquette;
(b) Other deposits which are fully insured by the Federal
Deposit Insurance Corporation;
(c) Repurchase agreements with Marquette;
(d) Commercial paper issued by corporations incorporated in
the United States of America, rated "A-1" by Standard & Poors
Corporation or "Prime-1" by Moody's Investors Service, Inc.;
(e) Shares of money market mutual funds incorporated or
organized in the United States of America;
(f) Investments in Subsidiaries listed in the Certificate of
Subsidiaries, and loans made by the Borrower to any of the Guarantors
before the occurrence of an Event of Default;
(g) Obligations of, or guaranteed by, the United States
Government or any agency thereof;
(h) Business-related advances to officers and employees of the
Borrower or any Subsidiaries for travel relating to the business of the
Borrower or such Subsidiaries; and
(i) Advances in the form of progress payments, prepaid rent or
security deposits.
The Borrower shall maintain its principal operating deposit account at
Marquette.
Section 5.15 Sale and Leaseback. The Borrower shall not, and shall not
permit any Subsidiary to, enter into any arrangement, directly or indirectly,
with any other person or entity whereby the Borrower shall sell or transfer any
real or personal property and then or thereafter rent or lease as lessee such
property or any part thereof or any other property which the Borrower or such
Subsidiary, as the case may be, intends to use for substantially the same
purpose as the property being sold or transferred.
<PAGE>
Section 5.16 Guaranties and Security Interests. At Marquette's request,
the Borrower shall, and shall cause each of the Guarantors to, execute and
deliver to Marquette such guaranty agreements, security agreements, filings and
other writings as Marquette may request from time to time in order to give
Marquette (individually and as Agent) a perfected first lien on all of their
personal property and an enforceable guaranty of each of the Guarantors,
pursuant to Canadian and Austrian law. Section 5.17 Capital Expenditures. The
Borrower shall not permit the aggregate amount of Capital Expenditures made by
the Borrower and the Subsidiaries in the period from September 1, 1998 through
July 1, 1999 to exceed $750,000.00
Section 5.18 Third Quarter Net Income. The Borrower shall not permit
the total of the after-tax net income (excluding extraordinary gains) plus
depreciation plus amortization of the Borrower and the Subsidiaries, determined
on a consolidated basis for the Borrower's fiscal quarter ending November 30,
1998, to be less than ($250,000.00).
Section 5.19 Third and Fourth Quarter Net Income. The Borrower shall
not permit the total of the after-tax net income (excluding extraordinary gains)
plus depreciation plus amortization of the Borrower and the Subsidiaries,
determined on a consolidated basis for the period from September 1, 1998 through
February 28, 1999, to be less than $150,000.00.
Section 5.20 Leverage. The Borrower shall not at any time permit the
ratio of Debt to Consolidated Tangible Net Worth of the Borrower and the
Subsidiaries to be more than 1.20 to 1.
Section 5.21 Legal Opinion. On or before December 20, 1998 the Borrower
shall deliver to each of the Lenders a legal opinion of the Borrower's outside
legal counsel, substantially in the form of Exhibit E attached hereto.
Section 5.22 Year 2000 Compliance. "Year 2000 Compliant" means, with
regard to any person or entity, that all software, embedded microchips, and
other processing capabilities utilized by, and material to the business
operations or financial condition of, such person or entity are able to
interpret and manipulate data on and involving all calendar dates correctly and
without causing any abnormal ending scenario, including but not limited to all
dates in and after the year 2000 (through 2035). The Borrower represents and
warrants to the Lenders and agrees that: (a) the Borrower has made due inquiry
to determine whether the computer applications and hardware of the Borrower and
each of the Subsidiaries will be Year 2000 Compliant by January 1, 2000; and (b)
the Borrower and the Subsidiaries each has a plan in place to become Year 2000
Compliant by January 1, 2000, and the Borrower agrees to, and agrees to cause
each of the Subsidiaries to, devote adequate resources toward, diligently
pursue, and take all actions necessary to complete such plans and become Year
2000 Compliant by January 1, 2000; and (c) the Borrower agrees to deliver to the
Lenders such information regarding the plans and progress of the Borrower and
the Subsidiaries toward becoming Year 2000 Compliant as Marquette may reasonably
request from time to time. Breach of any representation, warranty or agreement
in this paragraph, or failure of the Borrower or any Subsidiary to become Year
2000 Compliant by January 1, 2000 shall constitute an Event of Default under
this Agreement.
<PAGE>
ARTICLE VI.
Events of Default, Rights and Remedies
Section 6.01 Events of Default. The occurrence of any of the following
events shall constitute an "Event of Default":
(a) Default in the payment of any amount due under this
Agreement, any of the Revolving Notes, the Term Note, or any of the
other Credit Documents, GmbH Documents, Hespeler Documents, Holding
Documents, or Mothership Documents; or
(b) Any statement, representation or warranty of the Borrower
or any Subsidiary (or any officer, employee, agent or attorney of the
Borrower or any Subsidiary) to any of the Lenders at any time,
including without limitation any statement, representation or warranty
made in this Agreement or in any writing contemplated by this
Agreement, shall be incorrect or misleading in any material respect
when made; or
(c) Default in the performance or breach of any other covenant
or agreement of the Borrower or any Guarantor in this Agreement, any
writing contemplated by this Agreement, or any other agreement with any
of the Lenders; or
(d) The Borrower or any Subsidiary shall become insolvent,
make an assignment for the benefit of creditors, apply for or consent
to the application or suffer the appointment of any receiver, trustee
or similar officer, or initiate or have initiated against it any act,
process or proceeding under any insolvency, bankruptcy, dissolution,
liquidation or similar law; or
(e) A default under any other bond, debenture, note or other
evidence of indebtedness of the Borrower or any Subsidiary (including
without limitation any note in favor of any of the Lenders) or under
any indenture or other writing under which any such evidence of
indebtedness has been issued or by which it is governed or the
acceleration of payment of any such indebtedness; or
(f) The Borrower or any Subsidiary shall suffer a final
judgment or other order for the payment of money in the amount of
$100,000.00 that is not or is no longer subject to a stay pending
appeal; or
<PAGE>
(g) The issuance or levy of any writ, warrant, attachment,
garnishment, execution or other process against any property of the
Borrower or any Subsidiary, or the attachment of any tax lien to any
property of the Borrower or any Subsidiary; or
(h) The occurrence of any Reportable Event or Prohibited
Transaction with respect to any Plan, or any Plan shall not be in
compliance with all applicable requirements of ERISA and all applicable
rules and regulations thereunder, or any Plan shall terminate, or a
trustee is appointed by any court to administer any Plan, or the
Pension Benefit Guaranty Corporation shall institute any proceeding
with respect to any Plan; or
(i) Any Guarantor shall take any action to revoke or terminate
any guaranty, liability or agreement in favor of any of the Lenders; or
(j) The Borrower or any Guarantor takes any action to
dissolve, liquidate, or go out of business; or
(k) There is a material adverse change in the condition
(financial or otherwise), business or property of the Borrower or any
Subsidiary.
Section 6.02 Rights and Remedies. Upon the commencement of any
proceeding under any bankruptcy, insolvency or similar law by or against the
Borrower or any Guarantor, the Line of Credit shall automatically terminate, and
all principal, interest, and other charges, fees and expenses under the
Revolving Notes, the Term Note, this Agreement and the other Credit Documents
automatically shall become immediately due and payable in full, all without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived by the Borrower. In addition, upon the occurrence of an
Event of Default or at any time thereafter until such Event of Default is cured
to the written satisfaction of the Marquette, Marquette (individually and as
Agent) may exercise any and all of the following rights and remedies:
(a) The Agent may, by notice to the Borrower, declare the Line
of Credit to be terminated, whereupon the same shall terminate.
(b) Marquette (individually and as Agent) may declare all
principal, interest and other charges, fees and expenses under the
Revolving Notes, the Term Note, this Agreement and the other Credit
Documents to be immediately due and payable in full, whereupon the same
shall become immediately due and payable in full, without presentment,
demand, protest or other notice of any kind, all of which are hereby
expressly waived by the Borrower.
(c) Marquette (individually and as Agent) may, without notice
to the Borrower or any other person or entity, apply any and all money
owing by any of the Lenders to the Borrower to the payment of
principal, interest and other charges, fees and expenses under the
Revolving Notes, the Term Note, this Agreement and the other Credit
Documents.
<PAGE>
(d) Marquette (individually and as Agent) may exercise and
enforce its rights and remedies under the Security Agreement, the Third
Party Security Agreements, the other writings contemplated hereby, the
Uniform Commercial Code and any other applicable law.
Section 6.03 Additional Rights and Remedies. In addition, immediately
upon the commencement of any proceeding under any bankruptcy, insolvency or
similar law by or against the Borrower or any Guarantor, and at the Agent's
option upon the occurrence of any other Event of Default, the Borrower shall pay
to the Agent a sum equal to the then outstanding amount of the Letters of
Credit, without presentment, demand, protest or other notice of any kind, all of
which are hereby expressly waived by the Borrower. The Borrower grants Marquette
(individually and as Agent) a first lien and security interest in all such funds
paid to the Agent, including without limitation all instruments evidencing such
funds, and all products and proceeds of the foregoing, as security for all now
existing and hereafter arising debts, obligations and liabilities of the
Borrower to the Lenders.
ARTICLE VII.
Miscellaneous
Section 7.01 Waiver and Amendment. This Agreement supersedes and
replaces the Restated Revolving Credit and Term Loan Agreement dated February
28, 1998 by and between the Borrower and the Lenders, and the Forbearance
Agreement dated October 22, 1998 by and among the Borrower and the Lenders, and
such two previous agreements are hereby terminated. No provision of any of the
Credit Documents can be waived, modified, amended, abridged, supplemented or
terminated, except by a writing executed by the Borrower and the Lenders. A
waiver shall be effective only in the specific instance and for the specific
purpose given. No delay or failure by Marquette (individually or as Agent) to
exercise any right or remedy shall be a waiver thereof, nor shall any single or
partial exercise by Marquette (individually or as Agent) of any right or remedy
preclude any other exercise thereof or the exercise of any other right or
remedy. All rights and remedies of the Lenders under this Agreement and any
other writing are cumulative and not exclusive.
Section 7.02 Indemnification. The Borrower agrees to indemnify and hold
harmless the Lenders and each of the Lender's former, present and future
officers, directors, employees, agents, shareholders, affiliates and attorneys,
and all of their respective heirs, representatives, successors and assigns, from
any and all losses, liabilities (including without limitation strict liability),
suits, obligations, fines, damages, judgments, penalties, actions, causes of
action, charges, costs and expenses, including but not limited to reasonable
attorneys' fees and legal expenses and consultants' fees and expenses, whether
based on tort, contract, implied or express warranty, statute, regulation,
<PAGE>
common law or otherwise, arising out of or related to the presence on,
remediation of or release from any property at any time owned, operated or
controlled by the Borrower or any of the Subsidiaries, including without
limitation any building, structure or equipment thereon, of any toxic or
hazardous waste, constituent or substance, or in connection with any
Environmental Law applicable to any such hazardous or toxic waste, constituent
or substance, unless the same was caused by any action or inaction of any of the
Lenders or any of its former, present or future officers, directors, employees,
agents, shareholders, affiliates or attorneys or any of their respective heirs,
representatives, successors or assigns.
Section 7.03 Costs and Expenses. The Borrower shall pay to Marquette on
demand all of Marquette's fees, costs and expenses, including but not limited to
audit fees and expenses and reasonable attorneys' fees and legal expenses, in
connection with the preparation, amendment, administration and enforcement of
this Agreement and the writings contemplated by this Agreement (including but
not limited to Marquette's costs, fees and expenses for not more than two
additional surveys of the Borrower and the Subsidiaries during the period before
the occurrence of an Event of Default). The Borrower shall pay to Marquette (for
the account of LaSalle) on demand all of LaSalle's costs, fees and expenses for
not more than two additional surveys of the Borrower and the Subsidiaries.
Section 7.04 Addresses. All notices, requests, demands and other
communications provided for under this Agreement and the writings contemplated
by this Agreement shall be in writing and shall be delivered in person, mailed
by U.S. mail, or faxed addressed as follows:
If to the Borrower:
First Team Sports, Inc.
Attention: Mr. Kent Brunner
1201 Lund Boulevard
Anoka, MN 55303
Fax No. (612) 576-3587
If to Marquette:
Marquette Capital Bank, N.A.
Attention: Mr. Todd A. Nieland
4000 Dain Rauscher Plaza
60 South Sixth Street
P.O. Box 1000
Minneapolis, MN 55480-1000
Fax No. (612) 661-4020
If to LaSalle:
LaSalle National Bank
Attention: Mr. Jay Goldner
135 South LaSalle Street
Chicago, IL 60603
Fax No. (312) 904-2780
<PAGE>
If to Firstar:
Firstar Bank Milwaukee, N.A.
Attention: Mr. Tom Lee
101 East 5th Street
St. Paul, MN 55101
Fax No. (651) 229-6494
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party complying as to delivery with the terms
of this Section. All such notices, requests, demands and other communications
shall be effective when actually delivered or deposited in the mail, except that
notices and requests to the Agent pursuant to Article II shall not be effective
until received by the Agent.
Section 7.05 Binding Effect and Assignment. The Credit Documents shall
bind and benefit the parties hereto and thereto and their respective successors
and assigns, except that the Borrower shall have no right to assign any of its
rights hereunder or thereunder or any interest herein or therein without the
prior written consent of the Lenders, and any such assignment in violation of
this sentence shall be void. If any provision or application of any of the
Credit Documents is held unlawful or unenforceable in any respect, such
illegality or unenforceability shall not affect the other provisions or
applications which can be given effect, and this Agreement and such writings
shall be construed as if the unlawful or unenforceable provision or application
had never been contained herein or therein or prescribed hereby or thereby.
Section 7.06 Jurisdiction and Venue. The Borrower consents to the
personal jurisdiction of the state and federal courts located in the State of
Minnesota in connection with any controversy related in any way to any of the
Credit Documents or any transaction or matter relating to any of the Credit
Documents, waives any argument that venue in such forums is not convenient, and
agrees that any litigation initiated by the Borrower against any of the Lenders
in connection with any of the Credit Documents or any transaction or matter
relating to any of the Credit Documents shall be venued in either the District
Court of Hennepin County, Minnesota, or the United States District Court,
District of Minnesota, Fourth Division.
Section 7.07 Headings. Article and Section headings in this Agreement
are for convenience of reference only, and shall not constitute a part of this
Agreement for any other purpose or a limitation of the scope of the particular
Articles or Sections to which they refer.
<PAGE>
Section 7.08 Governing Law. This Agreement and the writings
contemplated by this Agreement shall be governed by and construed in accordance
with the internal laws of the State of Minnesota (excluding conflict of law
rules).
Section 7.09 Counterparts. This Agreement may be executed in
counterparts, and all counterparts together constitute one and the same
Agreement.
Executed as of the date first above written.
THE BORROWER REPRESENTS, WARRANTS AND CERTIFIES TO THE LENDERS AND
AGREES THAT THE BORROWER HAS READ ALL OF THIS AGREEMENT AND UNDERSTANDS ALL OF
ITS PROVISIONS. THE BORROWER ALSO AGREES THAT THE LENDERS' COMPLIANCE WITH THE
EXPRESS PROVISIONS OF THE CREDIT DOCUMENTS SHALL CONSTITUTE GOOD FAITH AND SHALL
BE CONSIDERED REASONABLE FOR ALL PURPOSES.
FIRST TEAM SPORTS, INC.
By /s/ Kent Brunner
Title Vice President/Chief Financial Officer
MARQUETTE CAPITAL BANK, N.A.
By /s/ Todd A. Nieland
Title Vice President
LASALLE NATIONAL BANK
By /s/ Jay Goldner
Title First Vice President
FIRSTAR BANK MILWAUKEE, N.A.
By /s/ Thomas Lee
Title Vice President
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