-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ibcw8nEIF2UXoOTRNKYVPHpmqNnp14UAlfg1doipy90/Vd5NGDed64pJELoW3v3d TXdc5DKZYjrcQOwVyjqywA== 0000914190-98-000231.txt : 19980601 0000914190-98-000231.hdr.sgml : 19980601 ACCESSION NUMBER: 0000914190-98-000231 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980529 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST TEAM SPORTS INC CENTRAL INDEX KEY: 0000820242 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 411545748 STATE OF INCORPORATION: MN FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-16442 FILM NUMBER: 98633887 BUSINESS ADDRESS: STREET 1: 1201 LUND BLVD CITY: ANOKA STATE: MN ZIP: 55303 BUSINESS PHONE: 6127804454 MAIL ADDRESS: STREET 1: 1201 LUND BLVD CITY: ANOKA STATE: MN ZIP: 55303-1092 10-K405 1 FORM 10-K FOR YEAR ENDED 2/28/98 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, 1998 Commission File No: 000-16442 FIRST TEAM SPORTS, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-1545748 (State or other jurisdiction (I.R.S. Employer Identification of incorporation or organization) Number) 1201 Lund Boulevard Anoka, Minnesota 55303 (Address of principal executive offices) Registrant's telephone number, including area code: (612) 576-3500 ---------------------- 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 1, 1998 was approximately $15,124,688 based upon the closing sale price of the Registrant's Common Stock on such date. Shares of $.01 par value Common Stock outstanding at May 1, 1998: 5,792,240. ----------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting are incorporated by reference into Part III. PART I ITEM 1. BUSINESS (a) General Development of Business. First Team Sports, Inc. (the "Company") is engaged in the manufacture (through independent contract manufacturers) and distribution of in-line roller skates, ice skates, street hockey equipment, ice hockey sticks and equipment and related accessory products. In-line skates feature wheels mounted in a straight line on a light-weight metal or composite plastic frame, functioning much like the blade on an ice skate. First Team Sports, Inc. was incorporated under Minnesota law in May 1986 by David G. Soderquist, John J. Egart and Ronald W. Berg. Mr. Soderquist and Mr. Egart continue to serve as executive officers and directors of the Company. First Team Sports has the following wholly owned subsidiaries: Hespeler Hockey Company; a Nova Scotia, Canada unlimited liability company, Hespeler Hockey Holding, Inc.; a Minnesota company, Mothership Distribution, Inc.; a Minnesota company, First Team Sports GmbH; an Austrian company, and First Team Sports Exports, Inc., a U.S. Virgin Islands corporation. Unless the context otherwise requires, references in this Form 10-K to the "Company" refer to First Team Sports, Inc. and its subsidiaries. (b) Financial Information about Industry Segments. The Company is engaged at the present time in only one industry segment, namely the manufacture (through independent contract manufacturers) and distribution of sporting and athletic goods. Financial information concerning the Company's business is included in Items 6,7,8 and 14. (c) Narrative Description of Business. (1) Products. The Company's principal products are in-line roller skates and ice hockey sticks marketed under the ULTRAWHEELS(R), SKATE ATTACK(R), and HESPELER(R) brand names. The Company also supplies in-line roller skates under various third party labels. UltraWheels brand skates are marketed to specialty and chain sporting goods dealers. The Skate Attack products are produced for sales to the mass merchant market. The Hespeler brand is marketed to specialty, chain sporting goods dealers and larger mass merchants. The Company's in-line roller skates consist of a molded plastic boot with integrated frame, or a frame riveted to the bottom of the boot, and high-density polyurethane wheels mounted on ball bearings. (2) Status of products in development The Company continues to develop products for the recreational, fitness and aggressive categories, as well as, improving upon existing in-line skate models. The Company also continues to develop products for the growing ice hockey market, including pro style sticks and protective equipment. The Company intends to introduce additional new products as testing is completed to its satisfaction and when funding is available. There is no assurance, however, that the Company will be successful in introducing new products or that such new products will prove commercially acceptable. (3) Source of Materials. The Company's products are sourced from independent contract manufacturers located in the United States and foreign countries. These suppliers manufacture, assemble and package the Company's products under the detailed specifications of the Company. The independent contract manufacturers are responsible for shipment to the Company's warehouse in Minneapolis, Minnesota or directly to certain major customers' distribution centers and warehouses. The components for the Company's products are manufactured by independent contract manufacturers, also located in the United States and foreign countries, who have been procured by the Company's suppliers or, frequently, by management of the Company. The Company submits purchase orders to its manufacturers for the production of specific amounts of its products and has not entered into any long-term contacts for production. All purchase orders are in U.S. dollars. (4) Patents, trademarks, licenses, franchises and concessions. The Company markets its products under a number of trade names and trademarks, including the following principal trademarks or registered trademarks of the Company: "UltraWheels", "Skate Attack", "Street Attack", "Ultra Ice", "Hespeler", "Heavy", and "Third World". The Company owns numerous United States trademark registrations and has several pending trademark applications. The Company owns a large number of foreign trademark registrations, regularly files for registration of its more important trademarks in the United States and in numerous foreign countries and has several pending applications. The Company relies to varying degrees upon its common law rights of trademark ownership, copyrights and registration of its trademarks. The Company has licenses to use the names and likeness of various hockey players, and related organizations as mentioned above. The Company has also filed five patent applications covering various parts of in-line skates and methods of producing its products. (5) and (6) Seasonality and Working Capital The Company's marketing area covers North America, South America, Europe, Australia and the Far East. This large and diverse marketing area, along with the acceptance of the Company's products by athletes and recreational users, has helped reduce the seasonal variations in the Company's sales and in the demands on the Company's working capital. The Company's products are primarily used outdoors in the spring and summer months. With approximately 90% of the Company's sales occurring in North America and Europe, the Company does have increased sales and demands on its working capital during the spring selling season. (7) Major Customers. Certain customers of the Company have accounted for more than 10% of the Company's sales in one or more of the past three fiscal years. In fiscal 1998, 1997 and 1996 Wal-Mart, based in Bentonville, Arkansas, accounted for approximately 29%, 23% and 27%, respectively, of the Company's net sales. In fiscal 1996, Target stores based in Minneapolis, Minnesota, accounted for approximately 12% of the Company's net sales. (8) Backlog. The Company had approximately $5.1 million in unfilled purchase orders as of May 18, 1998, compared to approximately $9.1 million in unfilled purchase orders as of May 1, 1997. Approximately $4.9 million of these backlog orders are a result of spring booking orders to be shipped at future dates and approximately $200,000 result from orders of products that are temporarily unavailable. (9) Government contracts. The Company has no government contracts. (10) Competition. The principal competitive factors in the in-line roller skate industry are name recognition, price and product performance. The main areas of difference in product performance are in the weight and strength of the boot and frame, the hardness of the wheels and the quality and lubrication of the wheel bearings. The Company offers a 90-day warranty on its products, which the Company believes is an important competitive factor. Beyond such warranty, the Company does not offer service on its products and does not believe that service is an important competitive factor. The Company believes it has a significant share of the in-line roller skate market. Rollerblade, Inc., maker of rollerblades, is considered to be the market leader; and K2, Inc. is a strong competitor. The Company competes with Rollerblade, Inc. and K2, Inc. in all price and quality ranges. The Company believes that it would not be difficult for other companies, both new enterprises and established members of the sporting goods industry, to enter the in-line roller skate market, and, in fact, many new companies have entered this market in recent years. (11) Research and development. Estimated research and development expenses for Company-sponsored research activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques were not material in fiscal 1998, 1997 or 1996. (12) Effect of environmental regulation. To the extent that the Company's management can determine, there are no federal, state or local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment with which compliance by the Company has had or is expected to have a material effect upon the capital expenditures, earnings or competitive position of the Company. (13) Employees. As of May 1, 1998, the Company employed 80 full-time employees and 10 part-time employees. (d) Export Sales. The Company's wholly owned subsidiary, First Team Sports Exports, Inc., was formed in April 1991, which subsidiary has no assets attributable to any specific foreign geographic area. In fiscal 1998, 1997 and 1996 First Team Sports Exports, Inc. had export sales of $17.5 million, $25.5 million and $25.8 million representing approximately 31%, 33% and 26%, respectively, of the net sales of the Company. Canadian net sales were $7.1 million (13% of net sales) in fiscal 1998, $5.6 million (7% of net sales) in fiscal 1997, and $10.4 million (11% of net sales) in fiscal 1996. Sales outside North America were $10.4 million (18% of net sales) in fiscal 1998, $19.8 million (26% of net sales) in fiscal 1997, and $15.5 million (16% of net sales) in fiscal 1996. ITEM 2. PROPERTIES The Company owns and occupies approximately 25,000 square feet of office space and 180,000 square feet of warehouse space located at 1201 Lund Boulevard, Anoka, Minnesota, a suburb of Minneapolis, Minnesota. The Company has a real estate mortgage on the property, which had a balance of approximately $4,133,000 as of May 1, 1998. The Company also occupies approximately 2,000 to 4,000 square feet of office space, in, Toronto, Canada, Graz, Austria, and Fife, Washington for its subsidiaries, Hespeler Hockey Company, First Team Sports GmbH, and Mothership Distribution, Inc., respectively. The Company leases these facilities with the leases having terms of 1 to 4 years. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's shareholders during the quarter ended February 28, 1998. EXECUTIVE OFFICERS OF THE COMPANY The following sets forth the names and ages of current executive officers of the Company in addition to information regarding their positions with the Company, their periods of service in such positions and their business experience for the past five years. Executive officers generally serve in office for terms of approximately one year. There are no family relationships among the officer's names below. Name and Age of Current Positions with Company and Principal Executive Officer Occupations for the Past Five Years John J. Egart, 48 President and Chief Executive Officer of the Company since January 1994; Director of the Company since the Company's inception in May 1986; Executive Vice President of the Company from the Company's inception in May 1986 to January 1994. David G. Soderquist, 49 Vice Chairman of the Company since January 1994; Director of the Company since the Company's inception in May 1986; President and Chief Executive Officer of the Company from the Company's inception in May 1986 to January 1994. Robert L. Lenius, Jr., 50 Vice President and Chief Financial Officer of the Company since July 1991; Vice President/Finance of the Company from July 1987 to July 1991. Susan L. Joch, 37 Vice President/Marketing of the Company since November 1993; Director of Marketing of the Company from July 1991 to November 1993; Product Marketing Manager for Tonka Corporation, a toy manufacturer, from June 1989 to July 1991. Kent A. Brunner, 37 Vice President/Finance of the Company since September 1996; Controller of the Company from November 1994 to September 1996; Audit Manager for McGladrey & Pullen, LLP, a national certified public accounting firm, from June 1988 to November 1994. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information. The range of bid quotations for the Company's Common Stock during fiscal 1997 and fiscal 1998 was as follows: Quarter Ended High Low May 31, 1996 $17-7/8 $12-3/4 August 31, 1996 $14-5/8 $7-1/2 November 30, 1996 $10 $7-1/8 February 28, 1997 $10-1/4 $5-1/2 May 31, 1997 $7-1/2 $5 August 31, 1997 $9-1/8 $5-3/8 November 30, 1997 $6-5/8 $3-3/8 February 28, 1998 $3-15/16 $2 The Company's Common Stock is traded on the Nasdaq National Market under the symbol "FTSP". The above prices are bid quotations and may not necessarily represent actual transactions. (b) Holders. As of May 1, 1998, there were approximately 436 holders of record of the Company's Common Stock. (c) Dividends. The Company has never paid cash dividends and has no present intention to pay cash dividends in the foreseeable future. Under the Company's bank line of credit, the Company may not pay dividends without the bank's consent. ITEM 6. SELECTED FINANCIAL DATA
Years ended February 28, 1998 and 1997, February 29, 1996, February 28, 1995 and 1994. --------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Operations Data: Net Sales $56,336,906 $76,435,022 $97,667,448 $85,528,860 $35,534,892 Net Income/(Loss) ($2,609,233) 2,725,282 7,811,857 6,098,757 635,409 Net Income (Loss) Per Share: Basic (.45) .47 1.37 1.09 .12 Diluted (.45) .46 1.30 1.03 .12 Cash Dividends Paid Per Share -- -- -- -- -- Balance Sheet Data: Total Assets $52,161,728 $52,343,501 $55,957,802 $45,863,753 $29,596,443 Working Capital 25,051,180 27,921,689 24,944,985 18,109,090 11,589,217 Long-Term Debt 6,774,496 6,217,936 6,880,360 3,053,494 1,800,072 Shareholders' Equity 30,240,864 32,745,931 29,830,283 20,850,079 13,939,578
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results Of Operations Net Sales. Net sales declined 26% in the fiscal year ended February 28, 1998 compared to a decrease of 22% in fiscal year 1997. In-line skate sales volume decreases, combined with a decrease in the average selling price of both the Company's Skate Attack and Ultra Wheels lines were the principal factors in the Company's net sales decline in fiscal 1998. The Company experienced continued pricing pressures from all areas of the market place due primarily to excess inventory levels at retail and subsequent competitive price cutting in the in-line skate industry. The Company's product groups consist of in-line skates, ice skates, accessories and parts (primarily protective wear and replacement wheels and bearings) and roller hockey products. Within the product groups, the Company maintains an Ultra Wheels and Skate Attack line of products. The Ultra Wheels line consists of higher quality and higher priced products that are targeted for the specialty and sporting goods chain store customers, and the Skate Attack line consists of lower priced products for the mass merchant customers. During the later part of fiscal 1998 the Company acquired Hespeler Hockey Company, a Canadian based company which markets and distributes ice hockey sticks and accessories (gloves and protective wear) and Mothership Distribution Inc., which markets and distributes aggressive in-line skate wheels, accessories, apparel and skateboards. Net sales in fiscal 1998 for both Hespeler and Mothership were negligible. In-line skate net sales were $47 million, $65 million and $82 million in fiscal 1998, 1997 and 1996. Accessories, parts and roller hockey product net sales were $8.6 million, $11.4 million and $15.7 million in fiscal 1998, 1997 and 1996. Net sales of ice hockey products from Hespeler Hockey Company were approximately $500,000 for fiscal 1998 and net sales of wheels, accessories and apparel from Mothership Distribution Inc. were approximately $200,000 for fiscal 1998. The Company currently distributes products to more then 60 countries worldwide. Domestic sales were $38.4 million, $50.8 million and $71.8 million in fiscal 1998, 1997 and 1996. Canadian sales were $7.5 million, $5.6 million and $10.4 million in fiscal 1998, 1997 and 1996. Sales in Europe were $7.4 million, $14.1 million and $8.5 million in fiscal 1998, 1997 and 1996. Other International sales were $3.0 million, $5.9 million and $7.0 million in fiscal 1998, 1997 and 1996. Several factors contributed to the Company's sales performance in fiscal 1998 and 1997. The decrease in domestic sales in both fiscal 1998 and 1997 is the result of a change in consumer demand, continued excess inventory levels at retail and competitive price cutting which has continued to plague the in-line skate industry. These market conditions are expected to continue at least through the first six months of fiscal 1999. The increase in fiscal 1998 Canadian sales was the result of continued strong acceptance of the Company's USA made products. The decrease in fiscal 1997 Canadian sales from fiscal 1996 was the result of excess inventory levels at retail. The decrease in European sales in fiscal 1998 was primarily the result of a slow spring and summer retail environment due to inclemate weather conditions, which has resulted in excess retail inventory levels and increased pricing pressures due to many orient manufacturers selling direct to retailers. The increase in fiscal 1997 European sales from fiscal 1996 was the result of increased consumer participation in the European market. The decrease in other international sales for both fiscal 1998 and 1997 was primarily the result of continued excess inventory levels in both the Pacific Rim and South American marketplaces. Gross Margin. As a percentage of net sales, the gross margin was 21.3% in 1998, 25.6% in 1997 and 29.9% in 1996. The decrease in the gross margin in fiscal 1998 is primarily due to competitive close-out sales, continued pricing pressures at all retail price points and fluctuations in certain foreign currency rates, principally Canada. The decrease in the gross margin in fiscal 1997 was primarily due to an overall retail slowdown of in-line skate sales and excess retail inventory levels, which increased competition and gross margin pressure at all levels from the mass merchants to the specialty shops. The Company's UltraWheels brand of in-line skates accounted for 54%, 51% and 42% of in-line skate sales in fiscal 1998, 1997 and 1996. The Skate Attack brand accounted for 46%, 49% and 58% of in-line skate sales in fiscal 1998, 1997 and 1996. Operating Expenses. Selling expenses were $5.8 million, $7.2 million and $7.8 million in fiscal 1998, 1997 and 1996. As a percentage of net sales the selling expenses were 10.3%, 9.4% and 8.0% in fiscal 1998, 1997 and 1996. The decrease in the absolute dollar amount of selling expenses in 1998 was primarily the result of a reduction in commissions, royalties and co-op advertising costs associated with the decreased sales volume and management's efforts to closely monitor and control its expenditures. The increase in selling expenses as a percentage of net sales in fiscal 1998 was primarily due to efforts to promote and advertise the Company's two acquisitions, Hespeler Hockey Company and Mothership Distribution, Inc. The decrease in the absolute dollar amount of selling expenses in fiscal 1997 was due primarily to a reduction in commissions and endorsement royalties associated with the decreased sales volume. The increase in the selling expenses as a percentage of sales in fiscal 1997 was due to continued efforts to advertise and market the Company's new products. General and administrative expenses were $8.1 million, $6.8 million and $8.3 million in fiscal 1998, 1997 and 1996. As a percentage of net sales the general and administrative expenses were 14.3%, 8.9% and 8.5% in fiscal 1998, 1997 and 1996. The increase in general and administrative expenses in 1998 was primarily due to an increase in expenses associated with the continued upgrading of the Company's computer systems, an increase in the real estate taxes associated with the Company's facility, and the expenses related to and associated with the purchases of the Company's two new subsidiaries and the opening of the Company's new European office. The decrease in the absolute dollar amount of general and administrative expenses in 1997 was due primarily to a reduction in personnel costs and savings associated with the Company's new office and warehouse facility. Other Income and Expense. Interest expense was $1.0 million, $1.3 million and $.9 million in fiscal 1998, 1997 and 1996. The decrease in interest expense for 1998 was primarily due to a reduction of the interest costs related to the Company's line of credit facility. This interest expense reduction is the result of management's continued control over the Company's expenditures and cash management procedures. The increase in interest expense in 1997 was primarily due to the addition of the mortgage note associated with the Company's new office and warehouse facility. Provisions for Income Taxes. The Company's effective income tax rate was 33.7% , 35.5% and 35.7% in fiscal 1998, 1997 and 1996. The decrease in 1998 is primarily due to the effect of state and foreign tax rates and the percentage of state and foreign revenues. The decrease in 1997 was primarily the result of an increase in the Company's international sales as a percentage of total sales. The Company utilizes it wholly-owned subsidiary First Team Sports Exports, Inc., a foreign sales corporation to help reduce the Company's tax burden. Net Income (Loss). Net income (loss) as a percentage of net sales was (4.6%), 3.6% and 8.0% in fiscal 1998, 1997 and 1996. The decrease in 1998 and 1997 was a result of the factors discussed above. Liquidity And Capital Resources The Company's fiscal 1998 operations provided $2.6 million of cash compared to approximately $500,000 in fiscal 1997. The increase in the net cash provided by operations is primarily the result of the Company reducing its receivable balances which was offset by cash used to increase inventories and pay income taxes and accounts payable balances. Net cash used in investing activities was $4.1 million in 1998 as compared to $1.6 million in 1997. Cash in both years was used primarily for capital expenditures relating to new production tooling and warehousing equipment and the purchase of the Company's new subsidiaries in fiscal 1998. Net cash provided by financing activities was $3.1 million in 1998 compared to cash used of approximately $700,000 in 1997. The cash provided in 1998 was primarily due to proceeds from the Company's line of credit facility. The proceeds on the line of credit facility in fiscal 1998 were used primarily for the acquisition of the Company's new subsidiaries. The Company's debt to worth ratio was .7 to 1 as of February 28, 1998 compared to .6 to 1 as of February 28, 1997. The Company's long-term debt, which consists primarily of a mortgage note on the Company's facility and obligations under endorsement license agreements, less current maturities, was $6,774,496 as of February 28, 1998 (see Note 6 in Notes to Financial Statements). As of February 28, 1998, the Company had a revolving line of credit with a bank that provides for borrowings of up to $15,000,000 of which $8,685,000 was outstanding. In addition, the Company had a line of credit established with a bank providing for borrowings of up to $1,000,000 for the purchase of equipment and improvements. As of February 28, 1998 there was a $750,000 balance outstanding under this credit facility. The Company believes its current cash position, funds available under existing bank arrangements and cash generated from operations will be sufficient to finance the Company's operating requirements at least through fiscal 1999. Outlook: Issues and Uncertainties The Company does not provide forecasts of potential future financial performance. The statements contained in this outlook are based on current expectations. These statements are forward looking and the Company's actual results may differ materially. The Company believes that the total number of in-line skating participants worldwide will continue to grow in fiscal 1999, especially in the younger age categories. The Company believes the dramatic and innovative new products currently on the market will continue to intrigue avid participants of in-line skating and will improve the recruitment of new participants. It is uncertain, however, whether the excess inventory levels and competitive price-cutting which plagued the inline industry in fiscal 1998 have abated. The Company also believes that the number of ice hockey participants worldwide, especially in the United States, will grow in 1999. The Company's strategy has been and continues to be the introduction of high quality, innovative, price-valued products designed specifically for the recreational and youth market segments, consequently, driving consumer demand toward newer products. In addition, the Company plans to continue its diversification through synergistic acquisitions. Future production capacity is planned based on the continued success of the Company's strategy. If the market does not continue to grow and move toward value priced products, revenues and earnings will likely continue to be adversely impacted. The Company's gross margin is a sensitive function of the product mix sold, pricing and the market conditions in any given period. As a result of the Company's Skate Attack brand being sold to the mass merchant customer, the product is more of a commodity in nature and generally has lower gross margin percentages than the Company's UltraWheels brand and Hespeler Hockey products. As a result, future gross margin percentages are difficult to predict. The Company considers it imperative to maintain a strong research and development program to be able to continue offering innovative new products to consumers. Research and development expenditures in fiscal 1999 should be consistent with those in fiscal 1998. The Company also continues to closely monitor and control its selling and general and administrative expenditures. While management is optimistic about the Company's long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating its growth outlook. Competition. The Company competes with numerous manufacturers of in-line skates domestically and internationally and anticipates future competition from other large and well-established sporting good manufacturers. Rollerblade, Inc. and K2 are the Company's primary competitors and have substantially greater resources than the Company. The intense price competition in the in-line skate market has put pressure on the Company's profit margins. The Company's ability to remain competitive in the in-line skate market depends on several factors including its ability to: (i) offer products at commercially-acceptable prices; (ii) develop new products and generate market demand for such products; and (iii) continue to develop and expand its international business. Dependence on Key Customers. During the fiscal year ended February 28, 1998, sales to Wal-Mart accounted for 29% of the Company's revenues. Increased competition from other manufacturers, decreased demand for the Company's products or other circumstances may have an adverse impact upon the Company's relationship with Wal-Mart and/or other major customers. Decreased orders from this customer or other major customers would have a material adverse impact on the Company's financial results. Other. The Company's products are primarily used outdoors and therefore adverse weather conditions can have a negative impact on consumer demand. Because the Company's products are of a recreational nature and not considered basic necessities, a general decline in overall economic conditions may have a greater adverse effect on the Company's sale. In fiscal 1997, the Company purchased a new software system and appropriate computer hardware. As part of the selection process, the ability to recognize the year 2000 was a major requirement and thus the company believes it is prepared for the change. The Company is currently working to resolve the potential impact of the year 2000 on the processing of date sensitive information by the Company's computerized information systems, which might occur due to vendors and/or customers not being ready. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Based on preliminary information, costs of addressing potential problems are currently not expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedules listed below are included herein immediately following the signature page of this Form 10-K on the pages set forth: Page Current Independent Auditor's Report on Consolidated Financial Statements and Schedule for the year ended February 28, 1998.........................................F-1 Former Independent Auditor's Report on Consolidated Financial Statements for the year ended February 28, 1997 and February 29, 1996...........................................F-1.1 Consolidated Balance Sheets as of February 28, 1998 and 1997......F-2 Consolidated Statements of Operations for the years ended February 28, 1998, 1997 and February 29, 1996.............F-4 Consolidated Statements of Shareholders' Equity for the years ended February 28, 1998, 1997 and February 29, 1996.............F-5 Consolidated Statements of Cash Flows for the years ended February 28, 1998, 1997 and February 29, 1996...................F-6 Notes to Consolidated Financial Statements........................F-7 Former Independent Auditor's Report on Report on Schedule for the years ended February 28, 1997 and February 29, 1996.....F-22 Schedule II - Reserve Account.....................................F-23 All other schedules are omitted since they are not applicable, not required or the information is presented in the consolidated financial statements or related notes. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Other than "Executive Officers of the Company", which is set forth at the end of Part I of this Form 10-K, the information required by Item 10 is incorporated herein by reference to the sections labeled "Election of Directors" and "Compliance With Section 16(a) of the Exchange Act", which appear in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not later than 120 days after the close of fiscal 1998 in connection with the Company's 1998 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the sections labeled "Management Compensation" and "Election of Directors", which appear in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not later than 120 days after the close of fiscal 1998 in connection with the Company's 1998 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the section labeled "Principal Shareholders and Management Shareholdings," which appears in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not later than 120 days after the close of fiscal 1998 in connection with the Company's 1998 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the section labeled "Management Compensation," which appears in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not later than 120 days after the close of fiscal 1998 in connection with the Company's 1998 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. (1) Financial Statements. The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K: Current Independent Auditor's Report on Consolidated Financial Statements and Schedule For the year ended February 28, 1998 Former Independent Auditor's Report on Consolidated Financial Statements For the year ended February 28, 1997 and February 29, 1996 Consolidated Balance Sheets as of February 28, 1998 and 1997. Consolidated Statements of Operations for the years ended February 28, 1998, 1997 and February 29, 1996 Consolidated Statements of Shareholders' Equity for the years ended February 28, 1998, 1997 and February 29, 1996 Consolidated Statements of Cash Flows for the years ended February 28, 1998, 1997 and February 29, 1996 Notes to Consolidated Financial Statements (2) Financial Statement Schedules. The following is included in Part II, Item 8, of this Annual Report on Form 10-K: Former Independent Auditor's Report on Report on Schedule for the years ended February 28, 1997 and February 29, 1996 Schedule II - Reserve Accounts. All other schedules are omitted since they are not applicable, not required or the information is presented in the consolidated financial statements or related notes. (3) Exhibits. The following exhibits are included in this reports: See "Exhibit Index to Form 10-K" beginning at page E-1 immediately following the financial statements which follow the signature page of this Form 10-K. (b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the quarter ended February 28, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST TEAM SPORTS, INC. May 29, 1998 By: /s/ John J. Egart John J. Egart President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company, in the capacities, and on the dates, indicated. (Power of Attorney) Each person whose signature appears below constitutes and appoints John J. Egart and Robert L. Lenius, Jr. as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Signature and Title........ Date /s/ John J. Egart May 29, 1998 John J. Egart President/Chief Executive Officer and Director (Principal executive officer) /s/ David G. Soderquist May 29, 1998 David G. Soderquist Vice Chairman and Director /s/ Joe Mendelsohn May 29, 1998 Joe Mendelsohn Chairman and Director (Signatures continued on following page) Signature and Title Date /s/ Timothy G. Rath May 29, 1998 Timothy G. Rath Director /s/ Stanley E. Hubbard May 29, 1998 Stanley E. Hubbard Director /s/ William J. McMahon May 29, 1998 William J. McMahon Director /s/ Robert L. Lenius, Jr. May 29, 1998 Robert L. Lenius, Jr. Vice President and Chief Financial Officer (Principal financial officer) /s/ Kent A. Brunner May 29, 1998 Kent A. Brunner Vice President of Finance (Principal accounting officer) REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors First Team Sports, Inc. We have audited the accompanying consolidated balance sheet of First Team Sports, Inc. as of February 28, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended February 28, 1998 listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1998 financial statements referred to above present fairly, in all material respects the consolidated financial position of First Team Sports, Inc. at February 28, 1998, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Minneapolis, Minnesota /s/ ERNST & YOUNG, LLP April 17, 1998 INDEPENDENT AUDITOR'S REPORT To the Board of Directors First Team Sports, Inc. Anoka, Minnesota We have audited the accompanying consolidated balance sheets of First Team Sports, Inc. and Subsidiary as of February 28, 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two fiscal years in the period ended February 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Team Sports, Inc. and Subsidiary as of February 28, 1997, and the results of their operations and their cash flows for each of the two fiscal years in the period ended February 28, 1997, in conformity with generally accepted accounting principles. St. Paul, Minnesota /s/ MCGLADREY & PULLEN, LLP April 9, 1997 First Team Sports, Inc. Consolidated Balance Sheets
February 28 1998 1997 ------------------------------------ Assets Current assets: Cash and cash equivalents $ 1,869,545 $ 381,427 Trade receivables, less allowance for doubtful accounts: 1998--$666,000; 1997--$565,000 11,417,176 17,039,679 Refundable income taxes 1,678,405 258,492 Inventories 22,709,519 20,881,845 Prepaid expenses 957,903 612,880 Deferred income taxes 896,000 997,000 ------------------------------------ Total current assets 39,528,548 40,171,323 Property, plant and equipment Land 600,000 600,000 Building 4,988,680 4,988,680 Production equipment 2,132,156 4,715,979 Office furniture and equipment 1,766,911 1,754,017 Warehouse equipment 820,626 325,361 Vehicles 102,906 19,567 ------------------------------------ 10,411,279 12,403,604 Less accumulated depreciation 1,993,004 2,588,404 ------------------------------------ 8,418,275 9,815,200 Other assets License agreements, less accumulated amortization: 1998--$3,338,000; 1997--$3,039,000 1,766,584 2,065,611 Goodwill, less accumulated amortization: 1998--$64,000 1,462,291 - Other 986,030 291,367 ------------------------------------ 4,214,905 2,356,978 ------------------------------------ $52,161,728 $52,343,501 ====================================
First Team Sports, Inc. Consolidated Balance Sheets
February 28 1998 1997 ------------------------------------ Liabilities and shareholders' equity Current liabilities: Notes payable to bank $ 8,685,000 $ 5,319,250 Trade accounts payable 2,697,675 4,852,459 Accrued expenses 2,115,728 1,415,511 Current maturities of long-term debt 978,965 662,414 ------------------------------------ Total current liabilities 14,477,368 12,249,634 Long-term debt, less current maturities 6,774,496 6,217,936 Deferred income taxes 69,000 530,000 Deferred revenue 600,000 600,000 Shareholders' equity Common Stock, par value $.01 per share Authorized 10,000,000 shares Issued and outstanding: 1998--5,792,240 shares; 1997--5,749,796 shares 57,923 57,498 Additional paid-in capital 9,806,341 9,586,340 Retained earnings 20,492,860 23,102,093 Foreign currency translation (116,260) - ------------------------------------ 30,240,864 32,745,931 ------------------------------------ $52,161,728 $52,343,501 ====================================
See accompanying notes. First Team Sports, Inc. Consolidated Statements of Operations
Year ended Year ended February 28 February 29, 1998 1997 1996 ------------------------------------------------------ Net sales $56,336,906 $76,435,022 $97,667,448 Cost of goods sold 44,314,320 56,837,195 68,499,170 ------------------------------------------------------ Gross profit 12,022,586 19,597,827 29,168,278 Operating expenses: Selling 5,826,993 7,190,515 7,774,248 General and administrative 8,056,546 6,789,276 8,341,008 Writedown due to asset impairment 974,018 - - ------------------------------------------------------ 14,857,557 13,979,791 16,115,256 ------------------------------------------------------ Operating (loss) income (2,834,971) 5,618,036 13,053,022 Interest expense (1,009,657) (1,275,882) (892,321) Other expense, net (93,387) (113,872) (10,844) ------------------------------------------------------ (Loss) income before income tax benefit (expense) (3,938,015) 4,228,282 12,149,857 Income tax benefit (expense) 1,328,782 (1,503,000) (4,338,000) ====================================================== Net (loss) income $ (2,609,233) $ 2,725,282 $ 7,811,857 ====================================================== Net (loss) income per share: Basic $(.45) $.47 $1.37 Diluted $(.45) $.46 $1.30 Shares used in computation of net (loss) income per share: Basic 5,771,478 5,740,893 5,704,840 Diluted 5,771,478 5,884,175 6,010,986
See accompanying notes. First Team Sports, Inc. Consolidated Statements of Shareholders' Equity
Additional Foreign Total Common Stock Paid-In Retained Currency Shareholders' -------------------------------- Shares Amount Capital Earnings Translation Equity -------------------------------------------------------------------------------------------- Balance at February 28, 1995 5,628,184 $56,282 $8,228,843 $12,564,954 $ - $20,850,079 Exercise of stock options 92,816 928 500,959 - - 501,887 Tax benefit related to stock options - - 667,000 - - 667,000 Net income - - - 7,811,857 - 7,811,857 -------------------------------------------------------------------------------------------- Balance at February 29, 1996 5,721,000 57,210 9,396,802 20,376,811 - 29,830,823 Exercise of stock options 28,796 288 189,538 - - 189,826 Net income - - - 2,725,282 - 2,725,282 -------------------------------------------------------------------------------------------- Balance at February 28, 1997 5,749,796 57,498 9,586,340 23,102,093 - 32,745,931 Exercise of stock options 12,910 129 65,517 - - 65,646 Common stock issued for acquisitions 29,534 296 154,484 - - 154,780 Foreign currency - - - - (116,260) (116,260) translation Net loss - - - (2,609,233) - (2,609,233) -------------------------------------------------------------------------------------------- Balance at February 28, 1998 5,792,240 $57,923 $9,806,341 $20,492,860 $(116,260) $30,240,864 ============================================================================================
See accompanying notes. First Team Sports, Inc. Consolidated Statements of Cash Flows
Year ended Year ended February 28 February 29, 1998 1997 1996 ------------------------------------------------------ Cash flows from operating activities Net (loss) income $(2,609,233) $2,725,282 $7,811,857 Adjustments required to reconcile net (loss) income to net cash provided by operating activities: Depreciation 1,880,137 1,537,073 771,045 Amortization 468,101 579,657 651,562 Loss on writedown due to asset impairment 974,018 - - Loss on retirement of equipment 93,387 108,510 13,950 Deferred income taxes (360,000) (80,000) (225,000) Noncash tax expense related to stock option exercise - - 667,000 Change in operating assets and liabilities: Receivables 7,090,703 (811,013) 626,159 Inventories (1,437,212) 1,932,005 (1,975,679) Prepaid expenses (344,412) 347,199 (71,345) Accounts payable (2,377,925) (4,610,424) 447,507 Accrued expenses 701,664 (1,117,165) (72,484) Income taxes (1,512,753) (103,346) (109,000) ------------------------------------------------------ Net cash provided by operating activities 2,566,475 507,778 8,535,572 Cash flows from investing activities Purchases of property, plant and equipment (1,497,979) (1,606,100) (7,419,793) Business acquisitions (1,917,942) - - Other (696,328) 14,880 (89,479) ------------------------------------------------------ Net cash used in investing activities (4,112,249) (1,591,220) (7,509,272) Cash flows from financing activities Net proceeds (payments) on short-term borrowings 2,402,408 (4,823,750) 1,079,000 Principal payments on long-term borrowings (1,261,377) (943,070) (1,041,718) Proceeds from long-term borrowings 1,849,184 4,875,000 - Net proceeds from exercise of stock options and warrants 65,646 189,826 501,887 ------------------------------------------------------ Net cash provided by (used in) financing activities 3,055,861 (701,994) 539,169 ------------------------------------------------------ Increase (decrease) in cash and cash equivalents 1,510,087 (1,785,436) 1,565,469 Effect of foreign currency translation (21,969) - - Cash and cash equivalents: Beginning of year 381,427 2,166,863 601,394 ------------------------------------------------------ Ending of year $ 1,869,545 $ 381,427 $2,166,863 ======================================================
See accompanying notes. First Team Sports, Inc. Notes to Consolidated Financial Statements February 28, 1998 1. Nature of Business and Significant Accounting Policies Nature of Business and Concentration of Credit Risk The Company sells in-line roller skates and related accessories under the brand names UltraWheels(TM), and Skate Attack(TM), and ice hockey equipment under the brand name Hespeler(TM) to retail and sporting goods stores. These products are manufactured under outside production arrangements to the Company's specifications. Basis of Financial Statement Presentation and Accounting Estimates The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the year. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including First Team Sports Exports, Inc. (a foreign sales corporation), First Team Sports GmbH, Hespeler Hockey Company and Mothership Distribution, Inc. All material intercompany accounts and transactions have been eliminated. Foreign Currency Translation The functional currency for foreign operations is the local currency. Foreign currency financial statements are converted into United States dollars by translating balance sheet accounts at the current exchange rate at year-end and statement of operations items at the average exchange rate for the year, with the resulting translation adjustment made to a separate component of shareholders' equity. 1. Nature of Business and Significant Accounting Policies (continued) Cash and Cash Equivalents The Company considers all demand deposit accounts and short-term cash investments with an initial maturity of three months or less at the date of purchase to be cash equivalents. The carrying value of cash equivalents approximates fair value at February 28, 1998 and 1997. Inventories Inventories are valued at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows: Building 39 years Production equipment 2 - 10 years Office furniture and equipment 5 - 7 years Warehouse equipment 6 - 10 years Vehicles 5 years License Agreements License agreement assets are being amortized over the terms of the agreements on a straight-line method. Other Assets Goodwill arising from acquisitions is amortized on a straight-line basis over a period up to 10 years. Other intangibles are amortized on a straight-line basis over 5 to 10 years. 1. Nature of Business and Significant Accounting Policies (continued) Accounting for Long-Lived Assets The Company periodically reviews its property, plant, equipment, and other assets to determine potential impairment by comparing their carrying value with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by computing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows) of the long-lived assets. Management has determined that certain production assets of the Company have been impaired as a result of the changing in-line skate industry. In accordance with SFAS Statement 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of," the Company evaluated the ongoing value of its production tooling equipment. Based upon this evaluation, the Company determined that production tools with a carrying value of $1,142,172 were impaired and wrote them down by $974,018 to their fair value. Fair value of the production tools was determined by comparison to outside market value. Advertising Costs The costs of advertising are expensed as incurred. Advertising expense for the fiscal years 1998, 1997, and 1996 was $1,755,000, $2,421,000 and $2,192,000, respectively. Income Taxes The Company accounts for income taxes utilizing the liability method. Deferred income taxes are recorded to reflect the tax consequences of differences between the tax and financial reporting basis of assets and liabilities. 1. Nature of Business and Significant Accounting Policies (continued) Net Income (Loss) Per Share In 1997, Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" (EPS) was issued. All EPS amounts herein have been restated to reflect its adoption. Basic EPS (which replaces primary) is net earnings divided by the average number of Common Shares outstanding during the period. Diluted EPS (which replaces fully diluted) reflects the potential dilutive effects of stock options and warrants.
Basic EPS Diluted EPS ---------------------------------- ---------------------------------- 1998 1997 1996 1998 1997 1996 ---------------------------------- ---------------------------------- (In thousands, except per share data) Net (loss) income $(2,609) $2,725 $7,812 $(2,609) $2,725 $7,812 ================================== ================================== Weighted average common shares outstanding 5,771 5,741 5,705 5,771 5,741 5,705 Stock options - - - - 143 306 ---------------------------------- ---------------------------------- Total common equivalent shares outstanding 5,771 5,741 5,705 5,771 5,884 6,011 ================================== ================================== Net (loss) income per share $(.45) $.47 $1.37 $(.45) $.46 $1.30
Fair Value of Financial Instruments The consolidated financial statements include the following financial instruments: cash and cash equivalents, trade receivables, notes payable to bank, trade accounts payable and long-term debt. At February 28, 1998, no separate comparison for fair values versus carrying values is presented for the aforementioned financial instruments since their fair values are not significantly different than their balance sheet carrying amounts. The aggregate fair values of the financial instruments would not represent the underlying value of the Company. 2. Sales Information and Major Suppliers Major Customers and Credit Risk Net sales for fiscal years 1998, 1997 and 1996 include sales to certain major customers as follows: Percent of Net Sales Customer 1998 1997 1996 - -------------------------------------------------------------------------------- A 29 23 27 B 3 7 12 At February 28, 1998, 29 percent of the Company's trade receivables were due from the aforementioned customers and 35 percent were due from customers outside of the United States. Credit, including foreign credit, is determined on an individual customer basis. The Company utilizes letter-of-credit arrangements and wire transfers to minimize its foreign credit risk. Export Sales The Company's export sales approximated 32, 33 and 27 percent of net sales for fiscal years 1998, 1997 and 1996, respectively. Major Suppliers The Company had 62 percent of its products produced by three suppliers during 1998 (6 percent from a domestic supplier). Management believes that alternative suppliers are available in the event the Company is unable to obtain services from its three major suppliers. 3. Acquisitions In September 1997, the Company purchased the net assets of Mothership Distribution, Inc. (Mothership), a designer, manufacturer and marketer of aggressive in-line skate accessories and apparel. The Company also purchased in September 1997 the common stock of Hespeler Hockey Company, a designer, manufacturer and marketer of ice hockey 3. Acquisitions (continued) sticks, equipment and related accessories. The combined purchase price of the acquisitions was not material. These transactions were accounted for using the purchase method of accounting and the results of operation from those businesses have been included in the consolidated statements of operations from the respective dates of acquisition. The pro forma impact of the Mothership acquisition on the Company's results of operations for all periods presented was not material. The following summary, prepared on a pro forma basis, combines the consolidated results of operations as if the Hespeler Hockey operations had been acquired as of the beginning of the period presented, after including the impact of certain adjustments such as amortization of intangibles, increased interest expense on acquisition debt and related income tax effects (fiscal 1997 and 1996 activity was immaterial): Pro forma information (unaudited) (In thousands, except per share amounts) 1998 --------------- Net sales $58,124 Income (loss) before income taxes (3,726) Net income (loss) (2,487) Basic and diluted earnings (loss) per share $(.43) The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect results that would have occurred had the acquisition been made as of those dates or results which may occur in the future. 4. Inventories Inventories consist of the following: February 28 1998 1997 ------------------------------------ Finished goods $16,653,018 $16,000,274 Component parts 6,056,501 4,881,571 ==================================== $22,709,519 $20,881,845 ==================================== 5. Notes Payable The Company has a line-of-credit agreement with a bank subject to renewal on July 1, 1999, whereby it may borrow up to $15,000,000. Borrowings bear interest, payable monthly, at the bank's prime lending rate (8.25 percent at February 28, 1998) minus 0.30 percent. Borrowings under the credit arrangement are collateralized by substantially all corporate assets, excluding land and building. Outstanding borrowings under this arrangement totaled $8,685,000 and $5,319,250 at February 28, 1998 and 1997, respectively. In connection with the line-of-credit agreement, the Company agreed, among other things, to maintain a minimum tangible net worth, to not exceed a certain debt to tangible net worth ratio, to attain a certain net income level, to limit capital expenditures to certain amounts, and to not pay dividends without the bank's consent. 6. Long-Term Debt Long-term debt consists of the following:
February 28 1998 1997 ----------------------------- Obligations under license agreements, due in varying installments, with interest imputed at 6.7% to 9.25%, through 2004 (see note 9) $1,989,654 $2,288,481 Mortgage notes payable due in monthly installments of $57,638, including interest at 7.41% through April 2006, secured by the building 4,227,997 4,591,869 Note payable to bank, due in monthly installments of $27,800 to May 2000, plus interest at the bank's prime rate (8.25% at February 28, 1998) minus .30%, collateralized by substantially all of the Company's assets 750,000 - Subordinated convertible exchangeable debentures, are due in installments of $200,000 on March 1, 1999 and 2000, and $325,000 on October 1, 2002 plus interest at 5% 725,000 - Other 60,810 - ----------------------------- 7,753,461 6,880,350 Less current maturities 978,965 662,414 ----------------------------- $6,774,496 $6,217,936 =============================
6. Long-Term Debt (continued) Approximate aggregate future maturities of long-term debt are as follows: Years ending February 28 or 29: 1999 $ 979,000 2000 1,301,000 2001 999,000 2002 784,000 2003 1,161,000 Thereafter 2,529,000 ------------------- $7,753,000 =================== The subordinated convertible debentures were issued with triggerable warrants attached which enable the debenture holder to purchase shares of common stock of the Company. The debentures are convertible at any time, in whole or in part, into shares of common stock of the Company at a conversion price of $5.75. 7. Income Taxes Net deferred income taxes consist of the following components: February 28 1998 1997 ------------------------------------ Deferred tax assets: Receivable allowances $ 162,000 $ 197,000 Inventory costs 367,000 408,000 Accrued expenses 367,000 392,000 License and patent agreements 137,000 97,000 ------------------------------------ 1,033,000 1,094,000 Deferred tax liabilities: Equipment (206,000) (627,000) ------------------------------------ Net deferred tax assets $ 827,000 $ 467,000 ==================================== 7. Income Taxes (continued) The net deferred tax assets have been classified in the accompanying consolidated balance sheets as follows: February 28 1998 1997 ------------------------------------ Current assets $896,000 $997,000 Non-current liabilities (69,000) (530,000) ------------------------------------ $827,000 $467,000 ==================================== For financial reporting purposes, the (losses) income from continuing operations before income taxes effect is as follows:
February 28 1998 1997 1996 -------------------------------------------- (Loss) income before income taxes: Domestic $(3,490,859) $4,228,282 $12,149,857 Foreign (447,156) - - -------------------------------------------- $(3,938,015) $4,228,282 $12,149,857 ============================================
The provisions for income tax (benefit) expense for fiscal years 1998, 1997 and 1996 are as follows: 1998 1997 1996 ---------------------------------------------- Current: Federal $ (698,782) $1,476,000 $4,193,000 State (68,000) 107,000 370,000 Foreign (202,000) - - ---------------------------------------------- Total current (968,782) 1,583,000 4,563,000 Deferred: Federal (330,000) (77,000) (160,000) State (30,000) (3,000) (65,000) Foreign - - - ---------------------------------------------- Total deferred (360,000) (80,000) (225,000) ---------------------------------------------- Total income taxes $(1,328,782) $1,503,000 $4,338,000 ============================================== 7. Income Taxes (continued) The provisions for income tax benefit (expense) for fiscal years 1998, 1997 and 1996 differ from the amounts obtained by applying the federal income tax rate to pretax income (loss) as follows:
1998 1997 1996 ---------------------------------------------------- Computed "expected" federal tax benefit (expense) $1,378,000 $(1,480,000) $(4,252,000) (Increase) decrease in taxes resulting from: State income taxes, net of federal benefit 79,000 (70,000) (242,000) Other items individually insignificant, net (128,218) 47,000 156,000 ---------------------------------------------------- $1,328,782 $(1,503,000) $(4,338,000) ====================================================
8. Shareholders' Equity Stock Options The Company has reserved 975,000 common shares for issuance under the First Team Sports, Inc. 1987 Stock Option Plan (the 1987 Plan) and 975,000 common shares under the First Team Sports, Inc. 1994 Stock Option and Incentive Compensation Plan (the 1994 Plan). Both plans provide for the granting of incentive stock options under Section 422 of the Internal Revenue Code and nonqualified options not meeting the requirements of Section 422. All key employees of the Company are eligible to receive incentive and nonqualified stock options pursuant to the 1987 and 1994 Plans. Directors of the Company who are not employees may be granted nonqualified options under the Plans. Options are granted at the discretion of the Stock Option Committee. Options are nontransferable and generally granted at a price equal to the quoted market price of the shares at the date of grant. The Company also established the First Team Sports, Inc. 1993 Employee Stock Purchase Plan (the 1993 Plan) and reserved 300,000 common shares for issuance thereunder. The 1993 Plan is intended to encourage stock ownership by all employees and is intended to qualify under Section 423 of the Internal Revenue Code. All employees are eligible to participate in the 1993 Plan, with the exception of any employees owning 5 percent or more of the Company's total voting stock. 8. Shareholders' Equity (continued) The Company has also issued several nonqualified options to purchase its common stock in connection with various transactions. In January 1997, the Company issued incentive stock options covering 68,251 shares that are not covered by the aforementioned plans. Transactions involving stock options during fiscal year 1998, 1997 and 1996 are summarized as follows:
1998 1997 1996 ------------------------ ---------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------ ---------------------------- ------------------------- Outstanding at beginning of year 926,020 $9.21 776,854 $ 9.96 663,171 $ 8.41 Exercised (6,800) 5.33 (28,796) 5.30 (92,816) 5.56 Canceled (36,517) 8.75 (51,596) 10.90 (473) 8.28 Granted 318,000 3.27 229,558 6.55 206,972 12.95 ------------------------- --------------------------- ------------------------- Outstanding at end of 1,200,703 $2.89 926,020 $ 9.21 776,854 $ 9.96 year ========================= =========================== =========================
Weighted average fair value of options granted during 1998, 1997 and 1996 was $1.28, $6.55 and $12.95, respectively. As of February 28, 1998, 1997 and February 29, 1996 options covering 755,697, 523,833 and 312,152 shares, respectively, were exercisable at a weighted average exercisable price of $2.97, $9.32 and $8.24 per share, respectively. In addition, the remaining stock options outstanding at February 28, 1998, become exercisable in the following fiscal years: Price Per Shares Share ------------------------------- Years ending February 28 or 29: 1999 211,670 $2.75 2000 149,504 $2.75 2001 83,832 $2.75 8. Shareholders' Equity (continued) The following table summarizes information about stock options outstanding at February 28, 1998:
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 ------------------------ --------------- ------------------------------- ------------------------------- $2.75 1,150,203 4.9 $2.75 705,197 $2.75 $6.00 - $6.25 50,500 4.0 6.00 50,500 6.00 ------------------------ --------------- ------------------------------- ------------------------------- $2.75 - $6.25 1,200,703 4.8 $2.89 755,697 $2.97 ======================== =============== =============================== ===============================
In January 1998, the Company's Board of Directors repriced options covering 956,703 shares, representing all of the qualified outstanding options with exercise prices ranging from $5.33 to $23.38, to an exercise price of $2.75 per share. The vesting terms of these options remained unchanged. When stock options are exercised, the par value of the shares issued is credited to common stock and the excess proceeds over par value are credited to additional paid-in capital. Under certain circumstances, when shares acquired through these options are sold, income tax benefits may be realized by the Company and are recorded as additional paid-in capital. The Company realized $667,000 of such tax benefits during fiscal 1996. In May 1989, the Board of Directors adopted a resolution providing for accelerated vesting of outstanding options in the event of defined changes in control of the Company. The resolution provided that all outstanding incentive and nonqualified options granted under the Plans and all nonqualified stock options granted to consultants of the Company outside the Plans shall become fully exercisable upon the occurrence of such a change. Pro Forma Information The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Accordingly, since options have been issued with exercise prices at or above market value of the Company's stock, no compensation expense has been recognized for the stock 8. Shareholders' Equity (continued) option plans. Had compensation expense for the Company's stock options been determined based on the fair value of the grant date for awards in 1998, 1997 and 1996 consistent with the provisions of SFAS 123, the Company's net income (loss) and the net income (loss) per share would have been reduced to the pro forma amounts reflected in the following table:
1998 1997 1996 ------------------------------------------------------ Net income (loss) - as reported $(2,609,233) $2,725,282 $7,811,857 Net income (loss) - pro forma (3,238,483) 2,131,000 7,748,000 Net income (loss) per share - as reported: Basic (.45) .47 1.37 Diluted (.45) .46 1.30 Net income (loss) per share - pro forma: Basic (.56) .37 1.36 Diluted (.56) .36 1.29
The above pro forma effects on net income (loss) and net income (loss) per share are not likely to be representative of the effects on reported net income for future years because options vest over several years and additional awards generally are made each year. The fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: 1998 1997 1996 -------------------------------------- Expected dividend yield - - - Expected stock price volatility 48.8% 54.9% 63.2% Risk-free interest rate 6.4% 6.3% 5.1% Expected life of options (years) 3.0 3.0 3.0 8. Shareholders' Equity (continued) Preferred Stock Purchase Rights In February 1996, the Board of Directors declared a dividend of one preferred stock purchase right for each outstanding share of Company common stock, which rights expire on March 14, 2006. The rights are transferable with common stock. Each right entitles the holder to purchase one one-hundredth of a share of Series A preferred stock at a price of $55, subject to adjustment. The rights are not exercisable until ten days after the public announcement that a person or group of persons has acquired a beneficial interest of at least 15 percent of the Company's outstanding common stock or the commencement or announcement of an intention by a person or group to make a tender or exchange offer whose consummation would result in the beneficial ownership of at least 15 percent of the Company's outstanding common stock. Each right would entitle the rightholder to receive shares of common stock of the acquiring company upon merger or other business combination having a market value of twice the exercise price of the right or, upon exercise, that number of shares of preferred stock having a market value of twice the exercise price of the right. Preferred stock purchasable upon exercise of the rights will be entitled to certain voting privileges, minimum preferential quarterly dividends, an aggregate dividend in relation to dividends declared on common stock, and minimum preferential liquidation payments. The rights have no voting privileges and may be redeemed by the Board of Directors at a price of $.01 per right at any time before they become exercisable. 9. License Agreements The Company has entered into agreements with certain well-known celebrities to endorse the Company's products. The agreements, among other things, require the Company to make certain guaranteed payments, which have been recorded at their present value as both assets (license agreements) and liabilities (obligations under license agreements), and royalty payments based on percentages of sales for certain products. The Company is only liable to make sales royalty payments for the amount that sales royalties exceed the guaranteed payments each year. Total royalties and amortization of license agreements were $357,790, $681,394 and $1,583,268 during fiscal years 1998, 1997 and 1996, respectively. In March 1997, the main license agreement was extended through 2004. The extension of the agreement does not require any guaranteed payments in aggregate above those required under the original agreement. 10. Employee Benefit Plan The Company has a 401(k) Employee Benefit Plan for qualified employees. Company contributions to the plan are determined annually at the discretion of the Board of Directors. The Company's contributions to the plan were $174,000, $245,000 and $236,000 for fiscal years 1998, 1997 and 1996, respectively. 11. Land and Deferred Revenue In order to induce the Company to relocate its operation facility, the city of Anoka, Minnesota, gave the Company land in an industrial park with an approximate fair market value of $600,000. The gift was conditional upon the Company staying in the new building through January 1, 2003. The land and corresponding amount of deferred revenue have been recorded at $600,000, the estimated fair market value of the land. When the Company has satisfied the condition, the $600,000 of deferred revenue will be recognized in other income in fiscal 2003. 12. Additional Cash Flow Information
Year ended Year ended February 28 February 29, 1998 1997 1996 ------------------------------------------------------ Supplemental disclosures of cash flow information: Cash payments for: Interest $963,009 $1,284,091 $ 971,111 Income taxes 514,700 1,686,346 3,780,000 Supplemental schedule of noncash investment and financing activities: Land and corresponding deferred revenue recorded - - 600,000 Line of credit reclassified to long-term debt - - 4,875,000
INDEPENDENT AUDITOR'S REPORT To the Board of Directors First Team Sports, Inc. Anoka, Minnesota Our audit of the consolidated financial statements of First Team Sports, Inc. and Subsidiary included Schedule II for the years ended February 28, 1997 and February 29, 1996. In our opinion, such schedule presents fairly the information required to be set forth therein in conformity with generally accepted accounting principles. St. Paul, Minnesota /s/ MCGLADREY & PULLEN, LLP April 9, 1997 SCHEDULE II FIRST TEAM SPORTS, INC. RESERVE ACCOUNTS Years Ended February 28, 1998 and 1997 and February 29, 1996
Balance at Additions Beginning Charged to Balance at Of Period Expenses Deductions End of Period - --------------------------------------------------------------------------------------------------------------------- 1996 allowance for doubtful accounts $ 561,522 $ 524,746 $ 596,869 $ 489,399 1997 allowance for doubtful accounts 489,399 724,068 648,296 565,171 1998 allowance for doubtful accounts 565,171 1,215,469 1,115,137 665,503
(1) Uncollectible accounts written off, net of recoveries. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBIT INDEX TO FORM 10-K For the fiscal year ended: Commission File No.: 000-16422 February 28, 1998 - -------------------------------------------------------------------------------- FIRST TEAM SPORTS, INC. - -------------------------------------------------------------------------------- Exhibit Number Description 3.1 Articles of Incorporation, as amended - incorporated by reference to Exhibit 3.1 to the Company's Annual Report Form 10-K for the year ended February 28, 1997 3.2 Bylaws -- incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-18 Reg. No. 33-16345C 4.1 Specimen of Common Stock Certificate--incorporated by reference to 4.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1991 4.2 Certificate of Designations of Series A Preferred Stock (included in Restated Articles of Incorporation -- see Exhibit 3.1) 4.3 Rights Agreement dated as of March 15, 1996 between the Company and Norwest Bank Minnesota, N.A. as Rights Agent -- incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form 8-A, Reg. No. 0-16422 4.4 Form of Right Certificate -- incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form 8-A, Reg. No. 0-16422 4.5 Summary of Rights to Purchase Share of Series A Preferred Stock- incorporated by reference to Exhibit 2.3 to the Company's Registration Statement of Form 8-A, Reg. No. 0-16422 - ------------------ *Filed herewith **Management contract or compensatory plan or arrangement. Exhibit Number Description 10.1 The Company's 1987 Stock Option, as amended by resolutions dates May 25, 1989 -- incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended February 28, 1997** 10.2 Amendment dated April 22, 1992 to the Company's 1987 Stock Option Plan -incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended February 29, 1992** 10.3 Form of Incentive Stock Option Agreement under 1987 Stock Option Plan -- incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-18, Reg. No. 33-16345C** 10.4 Form of Nonqualified Stock Option Agreement under 1987 Stock Option Plan -- incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-18, Reg. No. 33-16345C** 10.5 License Agreement between the Company, Wayne Gretzky and Janet Jones Gretzky dated as of December 1, 1994 -- incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended February 28, 1995 10.6 Amendment dated March 1, 1997 to License Agreement between the Company, Wayne Gretzky and Janet Jones Gretzky dated December 1, 1994 - incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended February 28, 1997 10.7 License Agreement between the Company and Creative Sports Concepts, Inc. dated as of October 31, 1994 -- incorporated by reference to Exhibit 10.11 to the Company's Annual Report Form 10-K for the year ended February 29, 1995 10.10 Company Bonus Plan for certain executive officers of the Company for fiscal 1998 -- incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended February 29, 1997** 10.11* Company Bonus Plan for executive officers of the Company for fiscal 1999** 10.12 The Company's 1990 Nonqualified Stock Option Plan, as amended by resolutions dated May 25, 1989 -- incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended February 28, 1991** - ------------------ *Filed herewith **Management contract or compensatory plan or arrangement. Exhibit Number Description 10.13 Agreement for consulting services dated August 19, 1992 between the Company and Joe Mendelsohn -- incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended February 28, 1993** 10.16 Amendment to Agreement for consulting services April 7, 1997 between the Company and Joe Mendelsohn - incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended February 28, 1997** 10.17 The Company's 1993 Employee Stock Purchase Plan -- incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended February 28, 1993** 10.18 The Company's 1994 Stock Option and Incentive Compensation Plan -incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended February 29, 1994** 10.19 Employment Agreement dated January 23, 1996 between the Company and John J. Egart -- incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996** 10.20 Employment Agreement dated January 23, 1996 between the Company and David G. Soderquist -- incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996** 10.21 Employment Agreement dated January 23, 1996 between the Company and Robert L. Lenius-- incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996** 10.22 Employment Agreement dated January 23, 1996 between the Company and Susan L. Niles (Joch) -- incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996** 10.23 Mortgage Note in the amount of $3,656,250 dated March 19, 1996 in favor of LaSalle National Bank -- incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996 - ------------------ *Filed herewith **Management contract or compensatory plan or arrangement. Exhibit Number Description 10.24 Mortgage Note in the amount of $1,218,750 dated March 19, 1996 in favor of Marquette Capital Bank -- incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996 10.25 Mortgage dated March 19, 1996 between Company and LaSalle National Bank as agent for itself and Marquette Capital Bank -- incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996 10.26 Restated Revolving Credit and Term Loan Agreement dated June 30, 1995, as amended through May 28, 1997 between the Company and Marquette Capital Bank as agent for itself and LaSalle National Bank and Firstar Bank Milwaukee, N.A. incorporated by reference 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1997 10.27 Restated Security Agreement dated June 30, 1995, as amended through May 28, 1997 between the Company and Marquette Capital Bank, LaSalle National Bank and Firstar Bank Milwaukee, N.A. - incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the Quarter ended May 31, 1997 10.28 1994 Stock Option and Incentive Compensation Plan, as amended through June 17, 1997 - incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended August 31, 1997** 10.29 Employment Agreement dated August 18, 1997 between the Company and Kent Brunner - incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended August 31, 1997** 10.30* Amendment dated January 1, 1998 to Employment Agreement dated January 23, 1996 between the Company and John J. Egart** 10.31* Amendment dated January 1, 1998 to Employment Agreement dated January 23, 1996 between the Company and David G. Soderquist** 10.32* Restated Revolving Credit and Term Loan Agreement dated February 28, 1998 between the Company and Marquette Capital Bank as agent for itself and LaSalle National Bank and Firstar Bank Milwaukee, N.A. - ------------------ *Filed herewith **Management contract or compensatory plan or arrangement. Exhibit Number Description 21* List of Subsidiaries 23.1* Consent of Ernst & Young LLP 23.2* Consent of McGladrey & Pullen, LLP 24* Power of Attorney of John J. Egart, David G. Soderquist, Joe Mendelsohn, Timothy G. Rath, Stanley E. Hubbard, William J. McMahon, Robert L. Lenius, Jr. and Kent A. Brunner included in signature page on this Form 10-K 27.1* Financial Data Schedule for the year ended February 28, 1998 (included in electronic version only) 27.2* Restated Financial Data Schedule for the quarter ended August 31, 1997 (included in electronic version only) 27.3* Restated Financial Data Schedule for the year ended February 28, 1997 (included in electronic version only) 27.4* Restated Financial Data Schedule for the quarter ended November 30, 1996 (included in electronic version only) 27.5* Restated Financial Data Schedule for the quarter ended August 31, 1996 (included in electronic version only) 27.6* Restated Financial Data Schedule for the quarter ended May 31, 1996 (included in electronic version only) 27.7* Restated Financial Data Schedule for the year ended February 29, 1996 (included in electronic version only) - ------------------ *Filed herewith **MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT. EX-10.11 2 1999 EXECUTIVE BONUS PLAN EXHIBIT 10.11 FIRST TEAM SPORTS FISCAL 1999 EXECUTIVE BONUS PLAN PLAN * Company bonus plan is based on earnings before tax * Bonus plan consists of the following levels:
Earnings Before Tax Officer Bonus Pool Discretionary Bonus Pool Lower Level: $ 971,000 $240,000 $ 60,000 Higher Level: $3,146,000 $700,000 $100,000
ELIGIBLE * First Team Sports Officers BONUS CALCULATIONS * If earnings before tax goals are met, appropriate bonus dollars will be paid. * If earnings before tax fall between the lower level and the higher level, bonus dollars will be pro-rated accordingly. CRITERIA * All participants will have object/goals established for them to achieve. * Individual achievement of objectives, as judged by the Compensation Committee, will determine bonus payments. EX-10.30 3 EGART EMPLOYMENT AGREEMENT AMENDMENT EXHIBIT 10.30 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT effective as of January 1, 1998, between FIRST TEAM SPORTS, INC., a Minnesota corporation (the "Company") and JOHN J. EGART, a resident of Andover, Minnesota ("Executive"). WITNESSETH WHEREAS, the Company and Executive have entered into an Employment Agreement dated as of January 23, 1996 (the "Employment Agreement"); and WHEREAS, Sections 6, 7 and 9 of the Employment Agreement provides that Executive shall receive certain cash payments calculated on the basis of Executive's "Base Salary" in the event Executive's employment is terminated by the Company under various circumstances or in the event the term of the Employment Agreement is not renewed; and WHEREAS, in light of the disappointing recent financial performance of the Company and the in-line skate industry generally, Executive has voluntarily agreed to accept a reduction in the amount of Base Salary payable to Executive under the Employment Agreement; provided that such reduction does not reduce the amounts to which Executive would otherwise be entitled pursuant to Sections 6, 7 or 9 of the Employment Agreement in the event of a termination or nonrenewal of employment; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto agree as follows: 1. Amendment of Section 6 of Employment Agreement. Section 6(a)(i) of the Employment Agreement is hereby amended to read in its entirety as follows: "(i) The Company shall make a cash payment to Executive equal to the greater of (A) the sum of the highest monthly Base Salary in effect any time during the three-year period immediately preceding such termination times the number of months remaining in the Term (without regard to renewals) under this Agreement, plus an amount equal to the incentive bonus earned by Executive in the prior fiscal year multiplied by the number of months remaining in the Term (without regard to renewals) divided by twelve (12), or (B) the sum of the highest annual Base Salary in effect any time during the three-year period immediately preceding such termination, plus the amount of incentive bonus earned by Executive during the prior fiscal year. Such payment shall be made in cash within fifteen (15) days from and after termination of Executive's employment." 2. Amendment of Section 7 of Employment Agreement. Section 7(a)(i) of the Employment Agreement is hereby amended to read in its entirety as follows: "(i) Subject to paragraph (c) hereof, the Company shall make a cash payment to Executive equal to the greater of (A) the sum of the highest monthly Base Salary in effect any time during the three-year period immediately preceding such termination times the number of months remaining in the Term (without regard to renewals) under this Agreement, plus an amount equal to the incentive bonus earned by Executive in the prior fiscal year multiplied by the number of months remaining in the Term (without regard to renewals) divided by twelve (12), or (B) 2 times the sum of the highest annual Base Salary in effect any time during the three-year period immediately preceding such termination, plus the amount of incentive bonus earned by Executive during the prior fiscal year. Such payment shall be made in cash within fifteen (15) days from and after termination of Executive's employment." 3. Amendment of Section 9(b) of Employment Agreement. Section 9(b)(i) of the Employment Agreement is hereby amended to read in its entirety as follows: "(i) Unless the notice of nonrenewal is given during a Transition Period, the Company shall make a cash payment equal to the amount of the highest annual Base Salary in effect any time during the three-year period immediately preceding termination of employment. Such payment shall be made in cash within fifteen (15) days from and after the end of Executive's employment term. If the notice of renewal is given during a Transition Period, then, subject to Section 7(c), the Company shall make a cash payment to Executive equal to two (2) times the sum of (A) the amount of the highest annual Base Salary in effect any time during the three-year period immediately preceding termination of Executive's employment and (B) the amount of incentive bonus earned by Executive during the prior fiscal year. Such payment shall be made in cash within fifteen (15) days from and after Executive's employment under this Agreement ceases." 4. Other Provisions Unaffected. Except as provided herein, all other provisions of the Employee Agreement shall remain in force and unaffected by this Amendment. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer pursuant to the authority of its Board, and Executive has executed this Agreement, as of the day and year first written above. FIRST TEAM SPORTS, INC. By: /s/ Kent Brunner Its: VP-Finance /s/ John J. Egart John J. Egart EX-10.31 4 SODERQUIST EMPLOYMENT AGREEMENT AMENDMENT EXHIBIT 10.31 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT effective as of January 1, 1998, between FIRST TEAM SPORTS, INC., a Minnesota corporation (the "Company") and DAVID G. SODERQUIST, a resident of Anoka, Minnesota ("Executive"). WITNESSETH WHEREAS, the Company and Executive have entered into an Employment Agreement dated as of January 23, 1996 (the "Employment Agreement"); and WHEREAS, Sections 6, 7 and 9 of the Employment Agreement provides that Executive shall receive certain cash payments calculated on the basis of Executive's "Base Salary" in the event Executive's employment is terminated by the Company under various circumstances or in the event the term of the Employment Agreement is not renewed; and WHEREAS, in light of the disappointing recent financial performance of the Company and the in-line skate industry generally, Executive has voluntarily agreed to accept a reduction in the amount of Base Salary payable to Executive under the Employment Agreement; provided that such reduction does not reduce the amounts to which Executive would otherwise be entitled pursuant to Sections 6, 7 or 9 of the Employment Agreement in the event of a termination or nonrenewal of employment; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto agree as follows: 1. Amendment of Section 6 of Employment Agreement. Section 6(a)(i) of the Employment Agreement is hereby amended to read in its entirety as follows: "(i) The Company shall make a cash payment to Executive equal to the greater of (A) the sum of the highest monthly Base Salary in effect any time during the three-year period immediately preceding such termination times the number of months remaining in the Term (without regard to renewals) under this Agreement, plus an amount equal to the incentive bonus earned by Executive in the prior fiscal year multiplied by the number of months remaining in the Term (without regard to renewals) divided by twelve (12), or (B) the sum of the highest annual Base Salary in effect any time during the three-year period immediately preceding such termination, plus the amount of incentive bonus earned by Executive during the prior fiscal year. Such payment shall be made in cash within fifteen (15) days from and after termination of Executive's employment." 2. Amendment of Section 7 of Employment Agreement. Section 7(a)(i) of the Employment Agreement is hereby amended to read in its entirety as follows: "(i) Subject to paragraph (c) hereof, the Company shall make a cash payment to Executive equal to the greater of (A) the sum of the highest monthly Base Salary in effect any time during the three-year period immediately preceding such termination times the number of months remaining in the Term (without regard to renewals) under this Agreement, plus an amount equal to the incentive bonus earned by Executive in the prior fiscal year multiplied by the number of months remaining in the Term (without regard to renewals) divided by twelve (12), or (B) 2 times the sum of the highest annual Base Salary in effect any time during the three-year period immediately preceding such termination, plus the amount of incentive bonus earned by Executive during the prior fiscal year. Such payment shall be made in cash within fifteen (15) days from and after termination of Executive's employment." 3. Amendment of Section 9(b) of Employment Agreement. Section 9(b)(i) of the Employment Agreement is hereby amended to read in its entirety as follows: "(i) Unless the notice of nonrenewal is given during a Transition Period, the Company shall make a cash payment equal to the amount of the highest annual Base Salary in effect any time during the three-year period immediately preceding termination of employment. Such payment shall be made in cash within fifteen (15) days from and after the end of Executive's employment term. If the notice of renewal is given during a Transition Period, then, subject to Section 7(c), the Company shall make a cash payment to Executive equal to two (2) times the sum of (A) the amount of the highest annual Base Salary in effect any time during the three-year period immediately preceding termination of Executive's employment and (B) the amount of incentive bonus earned by Executive during the prior fiscal year. Such payment shall be made in cash within fifteen (15) days from and after Executive's employment under this Agreement ceases." 4. Other Provisions Unaffected. Except as provided herein, all other provisions of the Employee Agreement shall remain in force and unaffected by this Amendment. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer pursuant to the authority of its Board, and Executive has executed this Agreement, as of the day and year first written above. FIRST TEAM SPORTS, INC. By: /s/ Kent Brunner Its: VP-Finance /s/ David G. Soderquist David G. Soderquist EX-10.32 5 LOAN AGREEMENT RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT THIS AGREEMENT, made as of the 28th day of February, 1998, by and between FIRST TEAM SPORTS, INC., a Minnesota corporation (the "Borrower"), and MARQUETTE CAPITAL BANK, N.A., a national banking association with its main banking house located in Minneapolis, Minnesota ("Marquette") and, in its capacity as agent for the "Banks" (hereinafter defined) (the "Agent") and LASALLE NATIONAL BANK, a national banking association ("LaSalle") and FIRSTAR BANK MILWAUKEE, N.A., a national banking association ("Firstar") (Marquette, LaSalle and Firstar are sometimes referred to herein collectively as the "Banks"). W I T N E S S E T H: WHEREAS, the Borrower and the Banks previously entered into that certain Restated Revolving Credit and Term Loan Agreement dated as of March 6, 1995 (the "Original Loan Agreement"); and WHEREAS, the Borrower has recently acquired certain subsidiaries who will benefit from and guarantee the loans described herein; and WHEREAS, the Borrower and the Banks desire to modify certain terms of the Original Loan Agreement; and WHEREAS, this Restated Revolving Credit and Term Loan Agreement constitutes an amendment and restatement of the Original Loan Agreement; and WHEREAS, the Borrower has requested and the Banks have agreed to make a revolving credit facility available to the Borrower, in an aggregate amount not exceeding $15,000,000 (the "Revolving Loan"); and WHEREAS, Marquette has also made a term credit facility available to the Borrower, in an aggregate amount not exceeding $1,000,000 (the "Term Loan") (the Revolving Loan and the Term Loan are referred to herein collectively as the "Loans"); and WHEREAS, the Banks have purchased the following amounts of the "Revolving Loan" established pursuant to this Credit Agreement: Bank Amount Percentage Marquette $6,000,000 40% LaSalle $6,000,000 40% Firstar $3,000,000 20% WHEREAS, the Banks and the Borrower desire to set forth their respective rights and obligations relating to the Loans in this Agreement. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINED TERMS. As used in this Agreement, the following terms shall have the meanings set out respectively after each (such meanings to be equally applicable to both the singular and plural forms of the terms defined): A. Affiliate: The Guarantors and any other person or entity (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Borrower or any of its subsidiaries, or (ii) five percent (5%) or more of the equity interest of which is held beneficially or of record by the Borrower or any of its subsidiaries. Control for purposes of this definition means the possession, directly or indirectly, of the power to cause the direction of management and policies of a person or entity, whether through the ownership of voting securities or otherwise. B. After-tax Net Income: After-tax earnings from continuing operations. C. Borrower's Compliance Certificate: The monthly compliance certificate in the form attached hereto as Exhibit A to be delivered by the Borrower to the Agent, within thirty (30) days after the end of each calendar month. D. Borrower Documents: collectively, this Agreement, the Notes, the Security Agreement, the Guaranties, the Guarantor Security Agreements and the Financing Statements, and any and all other documents, instruments and agreements executed by the Borrower and delivered to the Banks in connection with the financing transactions contemplated hereby. E. Borrower Obligations: collectively, the payment and performance of the Revolving Notes, the Term Note and any and all other liabilities and indebtedness of the Borrower to the Banks. F. Collateral: the collateral as defined in the Security Agreement and the Guarantor Security Agreements. G. Events of Default: as defined in Section 10 hereof. H. Expiration Date: the date that first occurs: (i) July 1, 1999, or (ii) the occurrence of an Event of Default. I. Financing Statements: UCC-1 Financing Statements naming the Borrower and the Guarantors as debtors and the Banks as secured parties and describing the Collateral as the property covered thereby. J. Guaranties: collectively, the guaranties of even date herewith executed by the Guarantors in favor of the Banks pursuant to which the Guarantors have guaranteed payment of all of the Obligations. K. Guarantor Security Agreements: collectively, the guarantor security agreements of even date herewith, executed by the Guarantors, as debtor, and delivered to the Agent, naming the Banks as secured parties and Marquette as agent for the Banks, and all exhibits and schedules attached thereto. L. Guarantor(s): collectively or individually, as the context requires, First Team Sports GmbH, Hespeler Hockey Company, Hespeler Hockey Holding, Inc. and Mothership Distribution, Inc. M. Indebtedness: collectively, (i) all items which, in accordance with generally accepted accounting principles, would be included in the liability side of a balance sheet on the date as of which Indebtedness is to be determined excluding capital stock, surplus capital and earned surplus, (ii) all indebtedness secured by any mortgage, pledge, security interest or lien existing on property owned subject to such mortgage, pledge, security interest or lien whether or not the indebtedness secured thereby shall have been assumed, and (iii) all amounts representing the capitalization of rentals in accordance with generally accepted accounting principles. N. Letters of Credit: collectively, any letters of credit issued by the Banks for the account of the Borrower pursuant to Section 2.A. hereof. O. Net Worth: Shareholder's equity computed on the basis of generally accepted accounting principles specifically excluding officer, director, or shareholder loans and specifically including goodwill and the value of all license agreements as identified on the Borrower's financial statements. P. Notes: collectively, the Revolving Notes and the Term Notes. Q. Outstanding Indebtedness: the sum of (i) the aggregate outstanding loan balance under the Revolving Notes plus (ii) the face amount of any outstanding Letters of Credit. R. Permitted Interests: those liens and encumbrances listed on Exhibit B attached hereto. S. Revolving Commitment of the Banks: the obligation of the Banks to make loans to the Borrower under Section 2.A. hereof and the Revolving Notes up to an aggregate principal amount at any one time outstanding equal to the Revolving Loan Amount. T. Revolving Loan: the $15,000,000 revolving loan of even date herewith made by the Banks to the Borrower and evidenced by the Revolving Notes. U. Revolving Loan Amount: $15,000,000. V. Revolving Notes: collectively, that certain restated promissory note of even date herewith, in the original principal amount of $6,000,000 payable to Marquette (the "Marquette Note"), that certain restated promissory note of even date herewith, in the original principal amount of $6,000,000 payable to LaSalle (the "LaSalle Note") and that certain restated promissory note of even date herewith, in the original principal amount of $3,000,000 payable to Firstar (the "Firstar Note") each as heretofore and hereinafter amended and extended with a termination date of July 1, 1999. W. Security Agreement: the Security Agreement of even date herewith executed by the Borrower and delivered to the Agent, naming the Banks as secured parties and Marquette as agent for the Banks, and all exhibits and schedules attached thereto. X. Term Loan: the term loans made by Marquette to the Borrower hereunder in an aggregate amount not to exceed the Term Loan Amount. Y. Term Loan Amount: up to $1,000,000 Z. Term Notes: collectively or individually, as the context requires, any promissory note(s) executed by the Borrower in favor of Marquette evidencing any advance(s) made against the Term Loan pursuant to Section 2.B. 2. LINES OF CREDIT. A. Revolving Loan. Subject to and upon the terms, covenants and conditions hereinafter set forth, the Banks hereby agree to make loans to the Borrower under this Section 2.A. from time to time until and including the Expiration Date (and thereafter until and including July 1 of each succeeding calendar year if no "Event of Default" has occurred and if this Agreement is extended in writing by the Banks and the Borrower for additional one year period(s) pursuant to Section 13.J. herein), at such time and in such amount as to each loan as the Borrower shall request, up to but not exceeding in aggregate principal amount at any one time outstanding the Revolving Loan Amount. In addition, at the request of Borrower, which request shall be made by the execution and delivery by Borrower to the Agent of the Banks' standard form application for letters of credit duly completed to reflect the letter of credit being requested, the Banks will make advances pursuant to the Revolving Commitment of the Banks in the form of a letter of credit, the form and substance of which shall be determined by the Banks, but without limiting the generality of the foregoing, the Banks may require a draft thereunder to be accompanied by such documentation as the Banks may deem necessary. In no event shall the Banks be required to issue any such letter of credit with a term extending beyond the Expiration Date. Any and all letters of credit issued by the Banks shall be treated as an advance under the Revolving Loan. The obligation of Borrower to reimburse the Banks for any draft(s) submitted under and paid by the Banks pursuant to any such letter(s) of credit shall be evidenced by the Revolving Notes. In no event shall the Banks be required to issue any letter(s) of credit hereunder in an aggregate amount in excess of $2,000,000.00. Subject to the foregoing and upon the terms and conditions set forth herein, the Borrower may borrow, repay and re-borrow within the limit of the Revolving Loan Amount under this Section 2.A. from the date hereof to and including the Expiration Date. B. Term Loan. Subject to and upon the terms, covenants and conditions hereinafter set forth, Marquette may make loans to the Borrower in addition to the Revolving Loans, in Marquette's sole and absolute discretion pursuant to this Section 2.B. from time to time until and including the Expiration Date, at such time and in such amount as to each loan as the Borrower may request, up to but not exceeding in aggregate principal amount the Term Loan Amount. 3. PROMISSORY NOTES. A. Revolving Notes. The obligation of the Borrower to repay any and all loans made and/or Letters of Credit issued, drawn upon and paid pursuant to Section 2.A. hereof shall be evidenced by the Revolving Notes. Reference is hereby made to the Revolving Notes for the terms thereof relating to maturity, repayment schedule, interest rate and other matters governing the repayment of the loans made hereunder. Notwithstanding any provision of the Revolving Notes, however, interest shall be payable at the rate provided for therein only on such portion of the loan proceeds as actually have been disbursed hereunder pursuant to Section 2.A. hereof and remain unpaid. The Banks' records shall be conclusive evidence (absent manifest error) as to whether the Borrower has authorized any advance made by the Banks hereunder pursuant to Section 2.A. hereof and as to the amount of advances which have been made hereunder and remain unpaid. B. Term Notes. The obligation of the Borrower to repay any and all loans pursuant to Section 2.B. hereof shall be evidenced by the Term Notes. At the time any loan is made by Marquette to the Borrower pursuant to Section 2.B. hereof, the Borrower shall execute a Term Note in the original principal amount equal to the amount of such loan and payable to Marquette, which Term Note shall be in a form acceptable to Marquette. 4. MANNER OF BORROWING. Each time the Borrower desires to obtain a loan advance pursuant to Section 2.A. or 2.B. hereof, any one of the following people shall request such loan on behalf of the Borrower either orally or in writing: (i) John Egart, Robert Lenius; or (ii) any person designated as the Borrower's agent by the Board of Directors of the Borrower in a writing delivered to the Agent. Except as otherwise instructed in writing by such officer, agent or person, the Banks may disburse loan proceeds by depositing such in the Borrower's account at Marquette. The Borrower shall be obligated to repay all advances notwithstanding the fact that the person requesting the same was not in fact authorized to do so. 5. COLLATERAL. As a condition precedent to the establishment of the Revolving Commitment of the Banks and the agreement of the Banks to make the Revolving Loan and of Marquette to make the Term Loan, the Borrower agrees as follows: A. Security Agreement. The Borrower shall have executed and delivered to the Agent the Security Agreement pursuant to which the Borrower shall have granted a valid and perfected first security interest (except as expressly otherwise provided therein) to the Banks in and to the Collateral to secure the payment and performance of the Notes and any and all other liabilities and indebtedness of the Borrower to the Banks. B. Guarantor Security Agreements. The Guarantors shall have executed and delivered to the Agent the Guarantor Security Agreements pursuant to which the Guarantors shall have granted a valid and perfected first security interest (except as expressly otherwise provided therein) to the Banks in and to the Collateral to secure the payment and performance of the Notes and any and all other liabilities and indebtedness of the Borrower or the Guarantors to the Banks. C. Financing Statements. The Borrower and the Guarantors shall have executed and delivered to the Agent for filing with the Secretary of State of the State of Minnesota, and the appropriate county office or offices in Minnesota and each and every other country, state, jurisdiction and county in which all or any part of the Collateral is located, UCC-1 Financing Statements (or equivalent documents) naming the Borrower and the Guarantors as debtors and the Banks as secured parties (and Marquette as the agent of the Banks) and describing the Collateral as the property covered thereby, together with any and all other appropriate UCC-1 Financing Statements and other documents and instruments as the Banks may request in order to perfect the security interest granted to it in and to the Collateral pursuant to the Security Agreement and the Guarantor Security Agreements. 6. BORROWER REPRESENTATIONS. In order to induce the Banks to make advances hereunder, the Borrower hereby warrants and represents to the Banks as follows: A. Corporate Existence and Power. The Borrower is a corporation duly organized and validly existing in the State of Minnesota, and is fully qualified to do business and in good standing in the State of Minnesota, and in every other jurisdiction wherein the nature of its businesses or the character of its properties makes such qualification necessary, and has all requisite power and authority to carry on its businesses as now conducted and as presently proposed to be conducted. B. Corporate Authority. The Borrower has full power and authority to execute and deliver the Borrower Documents and to incur and perform its obligations hereunder and thereunder; the execution, delivery and performance by the Borrower of the Borrower Documents and any and all other documents and transactions contemplated hereby or thereby have been duly authorized by all necessary corporate action, will not violate any provision of law or the Articles of Incorporation or Bylaws of the Borrower or result in the breach of, constitute a default under, or create or give rise to any lien under, any indenture or other agreement or instrument to which the Borrower is a party or by which the Borrower or its property may be bound or affected; and the Borrower Documents have been executed and delivered to the Banks by the corporate officers of the Borrower who have been authorized by the Borrower's Board of Directors, and who are authorized by and specified in the Borrower's Bylaws, to execute and so deliver such agreements. C. Enforceability. The Borrower Documents each constitute the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms. D. Financial Condition. The financial statements of the Borrower heretofore furnished to the Banks are complete and correct in all material respects and fairly present the financial condition of the Borrower at the dates of such statements and the results of its operations for the period ended on said date, and have been prepared in accordance with generally accepted accounting principles, consistently applied. Since the most recent set of financial statements delivered by the Borrower to the Banks, there have been no material adverse changes in the financial condition of the Borrower. E. Litigation. Except as disclosed on Exhibit C hereto, there is no action, suit or proceeding pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower which, if adversely determined, would have a material adverse effect on the condition (financial or otherwise), business, properties or assets of the Borrower or which would question the validity of the Borrower Documents or any instrument, document or other agreement related hereto or required hereby, or impair the ability of the Borrower to perform its obligations under the foregoing agreements. F. Licenses and Infringement. Except as disclosed on Exhibit D hereto, the Borrower possesses adequate licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct its respective business substantially as now conducted and as presently proposed to be conducted. There does not exist and there is no reason to anticipate that there may exist, any liability to the Borrower with respect to any claim of infringement regarding any franchise, patent, copyright, trademark or trade name possessed or used by the Borrower. G. Default. The Borrower is not in default of a material provision under any material agreement, instrument, decree or order to which it is a party or by which it or its respective property is bound or affected. H. Consents. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any governmental authority or any third party is required in connection with the execution and delivery of the Borrower Documents, or any of the agreements or instruments herein mentioned to which the Borrower is a party or the carrying out or performance of any of the transactions required or contemplated hereby or thereby or, if required, such consent, approval, order or authorization has been obtained or such registration, declaration or filing has been accomplished or such notice has been given prior to the date hereof and the Banks have been provided with a copy of such consent, approval, order, authorization, registration, declaration, filing or notice, as the case may be. I. Taxes. The Borrower has filed all tax returns required to be filed and either paid all taxes shown thereon to be due, including interest and penalties, which are not being contested in good faith and by appropriate proceedings, or provided adequate reserves for payment thereof, and the Borrower has no any information or knowledge of any objections to or claims for additional taxes in respect of federal income or excess profits tax returns for prior years. J. Titles, etc. The Borrower has good title to all of its properties and assets, including, without limitation, the Collateral, free and clear of all mortgages, liens and encumbrances, except the Permitted Interests and those minor irregularities in title which do not interfere with the occupation, use and enjoyment by the Borrower of such properties and assets in the normal course of its businesses as presently conducted or materially impair the value thereof for such businesses ("Minor Irregularities"), and except such liens and encumbrances as may from time to time be consented to in writing by the Banks. Except for Permitted Interests, the security interest granted to the Banks by the Borrower pursuant to the Security Agreement constitutes a valid and perfected first lien in and to the Collateral. K. Pension Plans. The Borrower has not established or maintained, or made any contributions to, any employee benefit plan which is subject to Part 3 of Subtitle B of Title 1 of ERISA or, if such a plan has been so established, maintained or contributed to, such plan did not have an "accumulated funding deficiency" (as that term is defined in Section 302 of ERISA) as of the date hereof, and, without limiting the generality of the foregoing, the Borrower has not incurred any material liability to the Pension Benefit Guaranty Corporation with respect to any such plan. L. Use of Loans. The Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any loan hereunder will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. Each of the foregoing warranties and representations shall be deemed to be repeated and reaffirmed on and as of the date any loan is made hereunder by the Banks to the Borrower pursuant to Section 2 hereof. 7. GUARANTOR REPRESENTATIONS. In order to induce the Banks to make advances hereunder, each of the Guarantors hereby, jointly and severally, warrants and represents to the Banks as follows: A. Corporate Existence and Power. (i) First Team Sports GmbH, is a corporation duly organized and validly existing in the Country of Austria, and is fully qualified to do business and in good standing in the Country of Austria, the State of Minnesota, and in every other jurisdiction wherein the nature of its businesses or the character of its properties makes such qualification necessary, and has all requisite power and authority to carry on its businesses as now conducted and as presently proposed to be conducted. (ii) Hespeler Hockey Company, is a corporation duly organized and validly existing in Nova Scotia, and is fully qualified to do business and in good standing in Nova Scotia, the State of Minnesota, and in every other jurisdiction wherein the nature of its businesses or the character of its properties makes such qualification necessary, and has all requisite power and authority to carry on its businesses as now conducted and as presently proposed to be conducted. (iii) Hespeler Hockey Holding, Inc. is a corporation duly organized and validly existing in the State of Minnesota, and is fully qualified to do business and in good standing in the State of Minnesota, and in every other jurisdiction wherein the nature of its businesses or the character of its properties makes such qualification necessary, and has all requisite power and authority to carry on its businesses as now conducted and as presently proposed to be conducted. (iv) Mothership Distribution, Inc. is a corporation duly organized and validly existing in the State of Minnesota, and is fully qualified to do business and in good standing in the State of Minnesota, and in every other jurisdiction wherein the nature of its businesses or the character of its properties makes such qualification necessary, and has all requisite power and authority to carry on its businesses as now conducted and as presently proposed to be conducted. B. Corporate Authority. Each of the Guarantors has full power and authority to execute and deliver the Guaranties and Guarantor Security Agreements and to incur and perform its obligations hereunder and thereunder; the execution, delivery and performance by the Guarantor of the Guaranties and Guarantor Security Agreements and any and all other documents and transactions contemplated hereby or thereby have been duly authorized by all necessary corporate action, will not violate any provision of law or the Articles of Incorporation or Bylaws of the Guarantor or result in the breach of, constitute a default under, or create or give rise to any lien under, any indenture or other agreement or instrument to which the Guarantor is a party or by which the Guarantor or its property may be bound or affected; and the Guaranties and Guarantor Security Agreements have been executed and delivered to the Banks by the corporate officers of the Guarantor who have been authorized by the Guarantor's Board of Directors, and who are authorized by and specified in the Guarantor's Bylaws, to execute and so deliver such agreements. C. Enforceability. The Guaranties and Guarantor Security Agreements each constitute the legal, valid and binding obligations of the Guarantor enforceable in accordance with their respective terms. D. Financial Condition. The financial statements of the Guarantor heretofore furnished to the Banks are complete and correct in all material respects and fairly present the financial condition of the Guarantor at the dates of such statements and the results of its operations for the period ended on said date, and have been prepared in accordance with generally accepted accounting principles, consistently applied. Since the most recent set of financial statements delivered by the Guarantor to the Banks, there have been no material adverse changes in the financial condition of the Guarantor. E. Litigation. Except as disclosed on Exhibit E hereto, there is no action, suit or proceeding pending or, to the knowledge of the Guarantor, threatened against or affecting the Guarantor which, if adversely determined, would have a material adverse effect on the condition (financial or otherwise), business, properties or assets of the Guarantor or which would question the validity of the Guaranties and Guarantor Security Agreements or any instrument, document or other agreement related hereto or required hereby, or impair the ability of the Guarantor to perform its obligations under the foregoing agreements. F. Licenses and Infringement. Except as disclosed on Exhibit F hereto, the Guarantor possesses adequate licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct its respective business substantially as now conducted and as presently proposed to be conducted. There does not exist and there is no reason to anticipate that there may exist, any liability to the Guarantor with respect to any claim of infringement regarding any franchise, patent, copyright, trademark or trade name possessed or used by the Guarantor. G. Default. The Guarantor is not in default of a material provision under any material agreement, instrument, decree or order to which it is a party or by which it or its respective property is bound or affected. H. Consents. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any governmental authority or any third party is required in connection with the execution and delivery of the Guaranties and Guarantor Security Agreements, or any of the agreements or instruments herein mentioned to which the Guarantor is a party or the carrying out or performance of any of the transactions required or contemplated hereby or thereby or, if required, such consent, approval, order or authorization has been obtained or such registration, declaration or filing has been accomplished or such notice has been given prior to the date hereof and the Banks have been provided with a copy of such consent, approval, order, authorization, registration, declaration, filing or notice, as the case may be. I. Taxes. The Guarantor has filed all tax returns required to be filed and either paid all taxes shown thereon to be due, including interest and penalties, which are not being contested in good faith and by appropriate proceedings, or provided adequate reserves for payment thereof, and the Guarantor has no any information or knowledge of any objections to or claims for additional taxes in respect of federal income or excess profits tax returns for prior years. J. Titles, etc. The Guarantor has good title to all of its properties and assets, including, without limitation, the Collateral, free and clear of all mortgages, liens and encumbrances, except the Permitted Interests and those minor irregularities in title which do not interfere with the occupation, use and enjoyment by the Guarantor of such properties and assets in the normal course of its businesses as presently conducted or materially impair the value thereof for such businesses, and except such liens and encumbrances as may from time to time be consented to in writing by the Banks. Except for Permitted Interests, the security interest granted to the Banks by the Guarantor pursuant to the Guarantor Security Agreement constitutes a valid and perfected first lien in and to the Collateral. K. Pension Plans. The Guarantor has not established or maintained, or made any contributions to, any employee benefit plan which is subject to Part 3 of Subtitle B of Title 1 of ERISA or, if such a plan has been so established, maintained or contributed to, such plan did not have an "accumulated funding deficiency" (as that term is defined in Section 302 of ERISA) as of the date hereof, and, without limiting the generality of the foregoing, the Guarantor has not incurred any material liability to the Pension Benefit Guaranty Corporation with respect to any such plan. L. Use of Loans. The Guarantor is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any loan hereunder will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. Each of the foregoing warranties and representations shall be deemed to be repeated and reaffirmed on and as of the date any loan is made hereunder by the Banks to the Guarantor pursuant to Section 2 hereof. 8. COVENANTS OF THE BORROWER. On and after the date hereof and until the payment in full of the Notes and all of the other Borrower's Obligations, and the performance of all other obligations of the Borrower hereunder, and so long as any portion of the Revolving Commitment of the Banks or the Term Loan remains in full force and effect, the Borrower agrees that, unless the Banks shall otherwise consent in writing: A. Financial Statements; Other Information. The Borrower shall deliver to each of the Banks: (i) as soon as available, and in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the annual audit report of the Borrower with the unqualified opinion of independent certified public accountants selected by the Borrower and reasonably acceptable to the Banks, which annual report shall include a consolidated balance sheet of the Borrower and the Guarantors, and related statements of income, retained earnings and changes in financial position of the Borrower and the Guarantors for the fiscal year then ended, all in reasonable detail and all prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices applied in the annual financial statements referred to in Section 6.D., together with (i) a report signed by such accountants stating that in making the investigations necessary for such opinion they obtained no knowledge, except as specifically stated, of any Event of Default hereunder or of any event or circumstance which with notice or lapse of time or both would constitute such an Event of Default and all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Section 8 hereof; (ii) any management letter(s) prepared by the Borrower's accountants; and (iii) a certificate of the chief financial officer of the Borrower in the form attached hereto as Exhibit G stating that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements referred to in Section 6.D. and whether or not he has knowledge of the occurrence of any Event of Default hereunder or of any event not theretofore reported and remedied which with notice or lapse of time or both would constitute such an Event of Default and, if so, stating in reasonable detail the facts with respect thereto; (ii) as soon as available and in any event within thirty (30) days after the end of each calendar month, individual, consolidated and consolidating financial statements of the Borrower and the Guarantors (including balance sheets as of the end of such month and related statements of income and retained earnings for such monthly period and for the year to date), in reasonable detail, all prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements referred to in Section 6.D. and certified by the chief financial officer of the Borrower; subject, however, to year-end audit adjustments, and accompanied by a certificate of said officer stating (i) that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements referred to in Section 6.D., and (ii) whether or not he has knowledge of the occurrence of any Event of Default hereunder or of any event or circumstance which with notice or lapse of time or both would constitute such an Event of Default and, if so, stating in reasonable detail the facts with respect thereto and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Section 8 hereof; (iii) within thirty (30) days after the end of each calendar month, a monthly Borrower's Compliance Certificate and a current "inventory opportunity buy report"; (iv) within fifty-five (55) days after the end of each calendar quarter, a copy of the quarterly 10-Q Statement filed by the Borrower with the Securities and Exchange Commission; (v) prior to each year end, a projection for the following fiscal year; (vi) as soon as available, and in any event within one hundred (100) days after the end of each fiscal year, a copy of the 10-K Statement filed by the Borrower with the Securities and Exchange Commission and any and all other filings made at any time by the Borrower with the Securities and Exchange Commission or any other state or federal agency; (vii) such other information respecting the financial condition and results of operations of the Borrower or the Guarantors as the Banks may from time to time reasonably request. B. Taxes and Claims. The Borrower shall pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its respective income or profits, or upon any of its assets or properties, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a lien or charge upon its respective property or assets; provided, however, that the Borrower shall not be required to pay any such tax, assessment, charge, levy or claim the payment of which is being contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor. C. Insurance. The Borrower shall maintain insurance coverage with responsible insurance companies licensed to do business in the State of Minnesota (or, in the case of any Collateral located in any other state, then in such state) in such amounts and against such risks as is reasonably requested by the Banks or as required by law, including, without limitation, property, hazard, fire, wind, hail, theft, collapse, comprehensive general public liability, product liability and business interruption insurance, and worker's compensation or similar insurance. The Borrower shall furnish to the Agent full information and written evidence as to the insurance maintained by the Borrower. D. Maintenance of Existence; Conduct of Business. The Borrower shall maintain, its corporate existence and preserve all of its rights, privileges and franchises necessary in the normal conduct of its business; conduct its business in an orderly, efficient and regular manner. E. Maintenance of Properties. The Borrower shall keep all of the assets and properties necessary in its respective business, including, without limitation, any tangible Collateral, in good working order and condition, ordinary wear and tear and the termination of service of obsolete or unnecessary equipment excepted. F. Compliance with Applicable Laws. The Borrower shall comply with the requirements of all applicable state and federal laws, and of all rules, regulations and orders of any governmental or other authority or agency, a breach of which would materially and adversely affect its respective business or credit, except where contested in good faith and by proper proceedings. G. Litigation. The Borrower shall promptly provide the Agent notice in writing of all litigation and of all proceedings by or before any court or governmental or regulatory agency affecting the Borrower, except litigation or proceedings which, if adversely determined, would not materially affect the financial condition or business of the Borrower. H. Liens. The Borrower will not create, incur, assume or suffer to exist any mortgage, lease, deed of trust, pledge, lien, security interest, or other charge or encumbrance of any nature on any of its assets, now owned or hereafter acquired, securing any indebtedness or obligation to the Banks, except (1) the Permitted Interests, and Minor Irregularities and (2) any security interest granted herein or by any document related hereto to the Banks or consented to in writing by the Banks. I. Access to Books and Inspection. The Borrower shall at all times keep proper books of record and accounts for itself, and, upon request of the Banks, the Borrower shall provide any duly authorized representative of the Banks access during normal business hours to, and permit such representative to examine, make extracts or a reasonable number of copies from, any and all books, records and documents in the Borrower's possession or control relating to the Borrower's affairs, to conduct collateral audits from time to time and to inspect any of its facilities and properties; provided, however, that the Banks shall treat all such books and records as confidential and shall only be permitted to disclose the information contained therein to their respective legal counsel, independent public accountants, any other participating banks, or in connection with any action to collect the Notes or to enforce this Agreement with the documents related hereto, or as otherwise permitted or required by law. J. Collection of Accounts. Upon the request of the Agent or the Banks, at any time after the occurrence of an Event of Default, the Borrower shall notify its account debtors and other obligors to make payment directly to a post office box specified by and under the sole control of the Agent, and Marquette, for itself and as agent for the Banks, shall be entitled to take control of any proceeds thereof. K. Sale of Assets. The Borrower will not sell, lease, assign, transfer or otherwise dispose of all or a substantial part of its assets (whether in one transaction or in a series of transactions) to any other person or entity other than in the ordinary course of business. L. Consolidation and Merger. The Borrower will not consolidate with or merge into any person or entity, or permit any other person or entity to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all of the assets of any other person or entity, nor liquidate, dissolve, suspend business operations or sell all or substantially all of its assets. M. Benefit to Third Persons. Except for credit sales made in the ordinary course of business and transactions described on Exhibit H, the Borrower shall not lend money to or guaranty the payment or performance of any liabilities of any third person who is a shareholder, officer, employee or otherwise related to or closely associated with the Borrower. N. Equipment and Operating Leases. The Borrower shall not create, incur, assume, or suffer to exist any equipment or operating lease obligations other than lease obligations incurred in the ordinary course of business of the Borrower as such business is presently conducted. O. Capital Expenditures. The Borrower and the Guarantors collectively shall not pay or incur, or commit to pay or incur, any capital expenditures (including capitalized lease obligations) during any fiscal year of the Borrower which exceed $2,000,000 in the aggregate. P. Loans, Guaranties and Investments. Except for the investments in and loans to the subsidiaries and affiliates described on Exhibit I hereto, the Borrower shall not assume, guarantee, endorse, contingently agree to purchase or otherwise become liable (directly or indirectly, absolutely or contingently) in connection with the obligations of any other person, firm or corporation, nor shall the Borrower make or permit to exist any loans or advances by the Borrower to, or purchase or otherwise acquire all or any substantial portion of the assets of, or shares of stock or similar interest in or to any other person, corporation or entity. Q. Other Borrowings. The Borrower shall not borrow or obtain any loan or advance from, or otherwise be or become indebted for money borrowed from, any person, firm, corporation (including, without limitation, the Banks), partnership, association or other entity, other than (i) current accounts payable incurred by the Borrower in the ordinary course of its business, provided that the same shall be paid when due in accordance with customary trade terms unless contested by appropriate proceedings; (ii) the endorsement to the Agent of checks payable to the order of the Borrower in the ordinary course of business; (iii) capital lease obligations permitted by Section 8.O hereof; and (iv) and other loans not to exceed a cumulative total of $50,000. R. Financial Covenants. The Borrower will maintain on a consolidated basis: (i) A ratio of Indebtedness to Net Worth no greater than 1.5:1 at any time during the term of this Agreement. (ii) At all times the Borrower shall maintain a Net Worth of at least $29,500,000. (iii) At the end of each of the fiscal quarters specified below, a minimum After Tax Net Income, on a cumulative basis for the applicable fiscal year (March 1 - February 28) as follows: as of May 31, 1998 at least $ 500,000 as of August 30, 1998 a cumulative loss no greater than (250,000) as of November 30, 1998 a cumulative loss no greater than (250,000) as of February 28, 1999 at least $1.00 as of May 31, 1999 at least 500,000 S. Non-Business Assets. The Borrower shall not purchase, lease or otherwise acquire any right, title or interest in or to, any real or personal property not directly related to or necessary in connection with the present operations of the Borrower. T. Notification. The Borrower shall notify the Agent immediately of a change in location of any of the Collateral. U. Redemptions, Dividends. The Borrower shall not purchase or redeem or agree to purchase or redeem, any of its capital stock nor shall the Borrower pay or declare any dividends in any calendar year without the approval of the Banks (other than non-cash dividends) with respect to any of its capital stock. V. Access. The Borrower shall grant to the Banks' agents and any entity authorized by the Banks access to its property at any reasonable time in order to inspect the Collateral, the Borrower's property and business. W. Transfer of the Collateral. The Borrower shall not sell, dispose of, lease, mortgage, assign, sublet or transfer any of its right, title or interest in or to the Collateral (other than sales of Collateral consisting of inventory in the ordinary course of Borrower's business) without the prior written consent of the Banks. X. Pension Plans. The Borrower shall maintain any pension plan in compliance with all material requirements of ERISA, the Internal Revenue Code, and all other applicable laws, rules, regulations and rulings. 9. COVENANTS OF THE GUARANTORS. On and after the date hereof and until the payment in full of the Notes and all of the other Borrower's Obligations, and the performance of all obligations of each Guarantor hereunder and under the Guaranties, and so long as any portion of the Revolving Commitment of the Banks or the Term Loan remains in full force and effect, each Guarantor, jointly and severally, agrees that, unless the Banks shall otherwise consent in writing: A. Taxes and Claims. The Guarantor shall pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its respective income or profits, or upon any of its assets or properties, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a lien or charge upon its respective property or assets; provided, however, that the Guarantor shall not be required to pay any such tax, assessment, charge, levy or claim the payment of which is being contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor. B. Insurance. The Guarantor shall maintain insurance coverage with responsible insurance companies licensed to do business in the jurisdiction of its incorporation (or, in the case of any Collateral located in any other state, then in such state) in such amounts and against such risks as is reasonably requested by the Banks or as required by law, including, without limitation, property, hazard, fire, wind, hail, theft, collapse, comprehensive general public liability, product liability and business interruption insurance, and worker's compensation or similar insurance. The Guarantor shall furnish to the Agent full information and written evidence as to the insurance maintained by the Guarantor. C. Maintenance of Existence; Conduct of Business. The Guarantor shall maintain, its corporate existence and preserve all of its rights, privileges and franchises necessary in the normal conduct of its business; conduct its business in an orderly, efficient and regular manner. D. Maintenance of Properties. The Guarantor shall keep all of the assets and properties necessary in its respective business, including, without limitation, any tangible Collateral, in good working order and condition, ordinary wear and tear and the termination of service of obsolete or unnecessary equipment excepted. E. Compliance with Applicable Laws. The Guarantor shall comply with the requirements of all applicable state and federal laws, and of all rules, regulations and orders of any governmental or other authority or agency, a breach of which would materially and adversely affect its respective business or credit, except where contested in good faith and by proper proceedings. F. Litigation. The Guarantor shall promptly provide the Agent notice in writing of all litigation and of all proceedings by or before any court or governmental or regulatory agency affecting the Guarantor, except litigation or proceedings which, if adversely determined, would not materially affect the financial condition or business of the Guarantor. G. Liens. The Guarantor will not create, incur, assume or suffer to exist any mortgage, lease, deed of trust, pledge, lien, security interest, or other charge or encumbrance of any nature on any of its assets, now owned or hereafter acquired, securing any indebtedness or obligation to the Banks, except (1) the Permitted Interests, and Minor Irregularities and (2) any security interest granted herein or by any document related hereto to the Banks or consented to in writing by the Banks. H. Access to Books and Inspection. The Guarantor shall at all times keep proper books of record and accounts for itself, and, upon request of the Banks, the Guarantor shall provide any duly authorized representative of the Banks access during normal business hours to, and permit such representative to examine, make extracts or a reasonable number of copies from, any and all books, records and documents in the Guarantor's possession or control relating to the Guarantor's affairs, to conduct collateral audits from time to time and to inspect any of its facilities and properties; provided, however, that the Banks shall treat all such books and records as confidential and shall only be permitted to disclose the information contained therein to their respective legal counsel, independent public accountants, any other participating banks, or in connection with any action to collect the Notes or to enforce this Agreement with the documents related hereto, or as otherwise permitted or required by law. I. Collection of Accounts. Upon the request of the Agent or the Banks, at any time after the occurrence of an Event of Default, the Guarantor shall notify its account debtors and other obligors to make payment directly to a post office box specified by and under the sole control of the Agent, and Marquette, for itself and as agent for LaSalle, shall be entitled to take control of any proceeds thereof. J. Sale of Assets. The Guarantor will not sell, lease, assign, transfer or otherwise dispose of all or a substantial part of its assets (whether in one transaction or in a series of transactions) to any other person or entity other than in the ordinary course of business. K. Consolidation and Merger. The Guarantor will not consolidate with or merge into any person or entity, or permit any other person or entity to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all of the assets of any other person or entity, nor liquidate, dissolve, suspend business operations or sell all or substantially all of its assets. L. Benefit to Third Persons. Except for credit sales made in the ordinary course of business, the Guarantor shall not lend money to or guaranty the payment or performance of any liabilities of any third person who is a shareholder, officer, employee or otherwise related to or closely associated with the Guarantor. M. Equipment and Operating Leases. The Guarantor shall not create, incur, assume, or suffer to exist any equipment or operating lease obligations other than lease obligations incurred in the ordinary course of business of the Guarantor as such business is presently conducted. N. Capital Expenditures. The Guarantors and the Borrower collectively shall not pay or incur, or commit to pay or incur, any capital expenditures (including capitalized lease obligations) during any fiscal year which exceeds $2,000,000 in the aggregate. O. Loans, Guaranties and Investments. Except for the investments in and loans to the subsidiaries and affiliates described on Exhibit J hereto, the Guarantor shall not assume, guarantee, endorse, contingently agree to purchase or otherwise become liable (directly or indirectly, absolutely or contingently) in connection with the obligations of any other person, firm or corporation, nor shall the Guarantor make or permit to exist any loans or advances by the Guarantor to, or purchase or otherwise acquire all or any substantial portion of the assets of, or shares of stock or similar interest in or to any other person, corporation or entity. P. Other Borrowings. The Guarantor shall not borrow or obtain any loan or advance from, or otherwise be or become indebted for money borrowed from, any person, firm, corporation (including, without limitation, the Banks), partnership, association or other entity, other than (i) current accounts payable incurred by the Guarantor in the ordinary course of its business, provided that the same shall be paid when due in accordance with customary trade terms unless contested by appropriate proceedings; (ii) the endorsement to the Agent of checks payable to the order of the Guarantor in the ordinary course of business and (iii) capital lease obligations permitted by Section 9.N hereof. Q. Non-Business Assets. The Guarantor shall not purchase, lease or otherwise acquire any right, title or interest in or to, any real or personal property not directly related to or necessary in connection with the present operations of the Guarantor. R. Notification. The Guarantor shall notify the Agent immediately of a change in location of any of the Collateral. S. Redemptions, Dividends. The Guarantor shall not purchase or redeem or agree to purchase or redeem, any of its capital stock nor shall the Guarantor pay or declare any dividends in any calendar year without the approval of the Banks (other than non-cash dividends) with respect to any of its capital stock. T. Access. The Guarantor shall grant to the Banks' agents and any entity authorized by the Banks access to its property at any reasonable time in order to inspect the Collateral, the Guarantor's property and business. U. Transfer of the Collateral. The Guarantor shall not sell, dispose of, lease, mortgage, assign, sublet or transfer any of its right, title or interest in or to the Collateral (other than sales of Collateral consisting of inventory in the ordinary course of Guarantor's business) without the prior written consent of the Banks. V. Pension Plans. The Guarantor shall maintain any pension plan in compliance with all material requirements of ERISA, the Internal Revenue Code, and all other applicable laws, rules, regulations and rulings. 10. EVENTS OF DEFAULT AND REMEDIES. Any one or more of the following events and circumstances shall constitute an Event of Default: A. the Borrower shall fail to pay any amounts required to be paid by the Borrower under the Notes, the Borrower Documents or any other indebtedness of the Borrower to the Banks or any material indebtedness to any third party whether any such indebtedness is now existing or hereafter arises and whether direct or indirect, due or to become due, absolute or contingent, primary or secondary or joint or joint and several; or B. any Guarantor shall fail to pay any amounts required to be paid by the Guarantor under the Guaranty or any other indebtedness of the Guarantor to the Banks or any material indebtedness to any third party whether any such indebtedness is now existing or hereafter arises and whether direct or indirect, due or to become due, absolute or contingent, primary or secondary or joint or joint and several; or C. the Borrower or any Guarantor shall fail to observe or perform any covenant, condition or agreement to be observed or performed by it under any of the Borrower Documents or any other document related hereto for a period of thirty (30) days after written notice, specifying such default and requesting that it be remedied, given to the Borrower or the Guarantors by the Banks, unless the Banks shall agree in writing to an extension of such time prior to its expiration, or for such longer period as may be reasonable necessary to remedy such default (other than defaults which can be cured by a money payment) provided that the Borrower and the Guarantors are proceeding with reasonable diligence to remedy the same; or D. the Borrower or any Guarantors shall be in default in the performance of any covenants or obligation under any other document or instrument heretofore or hereafter executed and delivered to the Banks by such party in connection with any other loan or credit transaction(s) and such default is not cured within the period, if any, allowed by such documents for the cure thereof; or E. the Borrower or any Guarantor shall file a petition in bankruptcy or for reorganization or for an arrangement pursuant to any present or future state or federal bankruptcy act or under any similar federal or state law, or shall be adjudicated to be bankrupt or insolvent, or shall make a general assignment for the benefit of its creditors, or shall be unable to pay its debts generally as they become due; or if an order for relief under any present or future federal bankruptcy act or similar state or federal law shall be entered against the Borrower or any Guarantor; or if a petition or answer requesting or proposing the entry of such order for relief or the adjudication of the Borrower or any Guarantor as a debtor or to be bankrupt or its reorganization under any present or future state or federal bankruptcy act or any similar federal or state law shall be filed in any court and such petition or answer shall not be discharged or denied within ninety (90) days after the filing thereof; or if a receiver, trustee or liquidator of the Borrower or any Guarantor or of all or substantially all of the assets of the Borrower or any Guarantor; or the Collateral, or any part thereof, shall be appointed in any proceeding brought against the Borrower or any Guarantor and shall not be discharged within ninety (90) days of such appointment; or if the Borrower or any Guarantor shall consent to or acquiesce in such appointment; or if any property of the Borrower or any Guarantor (including, without limitation, the estate or interest of the Borrower or any Guarantor in the Collateral, or any part thereof) shall be levied upon or attached in any proceeding; or F. final judgment(s) for the payment of money in excess of $100,000 and not covered by insurance shall be rendered against the Borrower or any Guarantor and shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed; or G. the Borrower or any Guarantor shall be or become insolvent (whether in the equity or bankruptcy sense); or H. any representation or warranty made by the Borrower or any Guarantor herein or in any document related hereto shall prove to be untrue or misleading in any material respect, or any statement, certificate or report furnished hereunder or under any of the foregoing documents by or on behalf of the Borrower or any Guarantor shall prove to be untrue or misleading in any material respect on the date when the facts set forth and recited therein are stated or certified; or I. the Borrower or any Guarantor shall liquidate, wind up, merge, dissolve, terminate or suspend its respective business operations, or sell all or substantially all of its respective assets, without the prior written consent of the Banks; or J. the Borrower or any Guarantor shall sell, dispose of, lease, mortgage, assign, sublet or transfer any of its right, title or interest in or to the Collateral (except as expressly provided herein or in the Security Agreement or the Guarantor Security Agreements) without the prior written consent of the Banks; or K. the Borrower or any Guarantor shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due or notice of any state or federal tax lien shall be filed or issued; or L. any property of the Borrower or any Guarantor (including, without limitation, the Collateral), shall be garnished or attached in any proceeding and such garnishment or attachment shall remain undischarged for a period of thirty (30) days during which execution is not effectively stayed. Upon the occurrence of an Event of Default and at any time thereafter, any one or more of the following remedial steps may be taken by the Agent, on behalf of the Banks, upon the direction of the Banks: (a) by written notice to the Borrower and/or any Guarantor, declare all or part of the principal balance of the Notes plus accrued interest thereon to be immediately due and payable, whereupon the same shall become immediately due and payable by the Borrower and the Guarantors; (b) take whatever action at law or in equity as may appear necessary or appropriate to collect the amounts then due and thereafter to become due under the Notes and/or the other Borrower Documents; and (c) take whatever action in law or in equity as may appear necessary or appropriate to collect any other amounts then due and thereafter to become due under this Agreement and the documents related hereto and to enforce performance and observance of any obligation, agreement or covenant of the Borrower or the Guarantors thereunder. 11. TERMINATION. Upon the occurrence of an Event of Default, the Revolving Commitment of the Banks shall terminate without further notice to the Borrower. 12. NOTICES. All notices, consents, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered by mail, postage prepaid, first class, certified or registered mail, return receipt requested, to the following address or such other address of which a party subsequently may give notice to all the other parties: IF TO THE BORROWER OR THE GUARANTORS: First Team Sports, Inc. 2274 Woodale Drive Mounds View, Minnesota 55112-4900 Attention: Robert Lenius IF TO MARQUETTE: Marquette Capital Bank, N.A. 4000 Dain Rauscher Plaza P.O. Box 1000 60 South Sixth Street Minneapolis, Minnesota 55480-1000 Attention: Todd A. Nieland IF TO LASALLE: LaSalle National Bank 135 South LaSalle Street - Financial Institutions Department Chicago, Illinois 60603 Attention: Jay Goldner IF TO FIRSTAR: Firstar Bank Milwaukee, N.A. 101 East Fifth Street, 9th Floor St. Paul, Minnesota 55101 Attention: Hunt W. Gildner 13. MISCELLANEOUS. A. Waivers, etc. No failure on the part of the Banks to exercise, and no delay in exercising, any right or remedy hereunder or under applicable law or any document or agreement related hereto shall operate as a waiver thereof; nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. A waiver of any of the Banks' rights or remedies hereunder or under applicable law or any document or agreement related hereto shall be effective only if such waiver is in a writing signed by the Banks. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. B. Expenses. The Borrower shall reimburse the Banks for any and all costs and expenses, including, without limitation, reasonable attorneys' fees, paid or incurred by either of the Banks in connection with (i) the preparation of the Borrower Documents and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, which amount shall be paid prior to the making of any advance hereunder; (ii) the negotiation of any amendments, modifications or extensions to or any of the foregoing documents, instruments or agreements and the preparation of any and all documents necessary or desirable to effect such amendments, modifications or extensions; and (iii) enforcement by the Banks during the term hereof or thereafter of any of the rights or remedies of the Banks under any of the foregoing documents, instruments or agreements or under applicable law, whether or not suit is filed with respect thereto and whether or not such costs are paid or incurred, or to be paid or incurred, prior to or after the entry of judgment. C. Amendments, etc. The Borrower Documents may not be amended or modified, nor may any of their terms (including, without limitation, terms affecting the maturity of or rate of interest on the Revolving Notes) be modified or waived, except by written instruments signed by the Banks and the Borrower. Terms contained in the Borrower Documents affecting only the maturity of or rate of interest on the Term Notes may be modified or waived only by written instruments signed by Marquette and the Borrower. D. Successors. This Agreement shall be binding upon and inure to the benefit of the Borrower and the Banks and their respective successors and assigns; provided, however, that the Borrower may not transfer or assign its rights to borrow hereunder without the prior written consent of the Banks. E. Offsets. Nothing in this Agreement shall be deemed a waiver or prohibition of the Banks' rights of banker's lien, offset, or counterclaim, which right the Borrower and the Guarantors hereby grants to the Banks. F. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. G. Accounting. Unless otherwise expressly provided herein, or unless the Banks otherwise consent in writing, all accounting terms used herein which are not expressly defined in this Agreement shall have the meanings respectively given to them in accordance with generally accepted accounting principles and all financial statements and reports furnished to the Agent hereunder shall be prepared, and all computations and determinations pursuant hereto shall be made, in accordance with generally accepted accounting principles and practices, applied on a basis not materially inconsistent with that applied in preparing the respective financial statements referred to in Sections 6.D. and 8.A.(i) hereof. H. Governing Law. The Borrower Documents and all other agreements related hereto, shall be construed in accordance with and governed by the laws of the State of Minnesota. I. Headings. The descriptive headings for the several sections of this Agreement are inserted for convenience only and shall not define or limit any of the terms or provisions hereof. J. Term. Unless sooner terminated by either party pursuant to the provisions hereof, the original term of this Agreement shall commence as of the date hereof and continue thereafter until the Notes, and all other Borrower's Obligations have been paid in full and the Revolving Commitment of the Banks has expired pursuant to Section 2 hereof, which term may be extended by written agreement of the parties hereto. Notwithstanding anything to the contrary contained herein, the Banks shall not be obligated to extend the term hereof pursuant to this subsection under any circumstances or conditions whatsoever, and the Borrower hereby acknowledges that the Banks have not agreed, warranted or represented in any manner whatsoever that they would extend the Revolving Commitment of the Banks. The Borrower shall be entitled to terminate the Revolving Commitment of the Banks at any time the then outstanding and unpaid balance of the Revolving Notes is zero by giving written notice of said termination to the Banks. The Borrower may terminate this Agreement by written notice to the Banks at any time the then unpaid principal balances of the Notes, and any other Borrower's Obligations are zero and the Revolving Commitment of the Banks has either expired or been terminated by either the Banks or the Borrower pursuant to the provisions hereof. K. Agent. Borrower hereby acknowledges that, the Banks have appointed Marquette as Agent to exercise certain rights, remedies and obligations of the Banks hereunder. The Borrower may rely upon the designations, appointment and authorization conferred upon the Agent and agrees to deliver and submit all reports and to make all payments required hereunder or under any of the Borrower Documents in the manner designated by the Agent, for the benefit of the Banks. The obligations of the Banks hereunder are several, and no Bank shall be responsible for the obligations of the other Bank hereunder, nor will the failure of any Bank to perform any of its obligations hereunder relieve the Agent or any Bank from the performance of its obligations hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. FIRST TEAM SPORTS, INC. By: /s/ Robert Lenius Jr Its: Vice President/Chief Financial Officer And: /s/ Kent Brunner Its: Vice President Finance MARQUETTE CAPITAL BANK, N.A., individually and as Agent By: /s/ Todd Nieland Its: Vice President LASALLE NATIONAL BANK By: /s/ Jay Goldner Its: Vice President FIRSTAR BANK MILWAUKEE, N.A. By: /s/ Hunt Gildner Its: Vice President EX-21 6 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF FIRST TEAM SPORTS, INC. Company State or Place of Organization First Team Sports GmbH Austria First Team Sports Exports, Inc. U.S. Virgin Islands Mothership Distribution, Inc. Minnesota Hespeler Hockey Holding, Inc. Minnesota Hespeler Hockey Company* Nova Scotia *Subsidiary of Hespeler Hockey Holding, Inc. EX-23.1 7 CONSENT OF INDEPENDENT AUDITOR EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Forms S-8 of First Team Sports, Inc. pertaining to the 1987 Stock Option Plan (No. 33-36123), 1987 Stock Option Plan (No. 33-52344), 1990 Nonqualified Stock Option Plan (No. 33-37308), 1993 Employee Stock Purchase Plan (No. 33-63164) and the 1994 Stock Option and Incentive Compensation Plan (No. 33-84722) of our report dated April 17, 1998, with respect to the consolidated financial statements and schedule of First Team Sports, Inc. included in the Annual Report (Form 10-K) for the year ended February 28, 1998. Minneapolis, Minnesota /s/ ERNST & YOUNG LLP May 26, 1998 EX-23.2 8 CONSENT OF INDEPENDENT AUDITOR EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC AUDITORS We hereby consent to the incorporation by reference of our report dated April 9, 1997, with respect to the consolidated financial statements of First Team Sports, Inc. and Subsidiary and our report dated April 9, 1997, with respect to Schedule II, both included in this Form 10-K, into the Company's previously filed Registration Statements Nos. 33-36123, 33-37308, 33-52344, 33-68164, and 33-84722. /s/ McGLADREY & PULLEN, LLP St. Paul, Minnesota May 27, 1998 EX-27.1 9 FDS FOR YEAR ENDED 2/28/98
5 1 U.S. Dollars YEAR FEB-28-1998 MAR-01-1997 FEB-28-1998 1 1,869,545 0 12,083,176 666,000 22,709,519 39,528,548 10,411,279 1,993,004 52,161,728 14,477,368 6,774,496 0 0 57,923 30,182,941 52,161,728 56,336,906 56,336,906 44,314,320 44,314,320 0 0 1,009,657 (3,938,015) (1,328,782) (2,609,233) 0 0 0 (2,609,233) (.45) (.45)
EX-27.2 10 FDS FOR 2ND QUARTER 1998
5 1 U.S. Dollars 6-MOS FEB-28-1998 MAR-01-1997 AUG-31-1997 1 686,098 0 14,652,445 319,000 21,257,549 37,976,510 13,116,091 3,486,304 49,798,086 8,333,586 6,504,266 57,600 0 0 33,772,634 49,798,086 36,108,873 36,108,873 26,994,488 26,994,488 0 0 523,290 1,573,620 546,000 1,027,620 0 0 0 1,027,620 .18 .18
EX-27.3 11 FDS FOR YEAR ENDED 2/28/97
5 1 U.S. Dollars YEAR FEB-28-1997 MAR-01-1996 FEB-28-1997 1 381,427 0 17,298,171 565,000 20,881,845 40,171,323 12,403,604 2,588,404 52,343,501 12,249,634 6,217,936 0 0 57,498 32,688,433 52,343,501 76,435,022 76,435,022 56,837,195 56,837,195 0 0 1,275,882 4,228,282 1,503,000 2,725,282 0 0 0 2,725,282 .47 .46
EX-27.4 12 FDS FOR 3RD QUARTER 1997
5 1 U.S. Dollars 9-MOS FEB-28-1997 MAR-01-1996 NOV-30-1996 1 835,049 0 18,733,522 726,000 21,285,736 42,092,766 12,610,845 2,566,189 54,648,483 14,169,942 6,181,071 57,474 0 0 33,199,996 54,648,483 62,878,324 62,878,324 45,909,026 45,909,026 0 0 1,060,938 5,037,152 1,787,000 3,250,152 0 0 0 3,250,152 .57 .55
EX-27.5 13 FDS FOR 2ND QUARTER 1997
5 1 U.S. Dollars 6-MOS FEB-28-1997 MAR-01-1996 AUG-31-1996 1 616,399 0 18,562,800 748,000 24,027,859 44,721,021 12,402,091 2,169,689 57,615,758 17,238,763 6,345,345 0 0 57,388 32,934,262 57,615,758 46,221,743 46,221,743 32,978,677 32,978,677 0 0 723,071 4,753,170 1,687,000 3,066,170 0 0 0 3,066,170 .53 .52
EX-27.6 14 FDS FOR 1ST QUARTER 1997
5 1 U.S. Dollars 3-MOS FEB-28-1997 MAR-01-1996 MAY-31-1996 1 1,476,281 0 25,591,135 595,000 23,810,053 52,600,606 11,774,974 1,843,189 65,343,137 24,853,418 6,671,715 0 0 57,383 32,720,621 65,343,137 30,586,799 30,586,799 21,504,002 21,504,002 0 0 323,260 4,432,190 1,577,000 2,855,190 0 0 0 2,855,190 .50 .48
EX-27.7 15 FDS FOR YEAR ENDED 2/29/96
5 1 U.S. Dollars YEAR FEB-29-1996 MAR-01-1995 FEB-29-1996 1 2,166,863 0 16,228,666 489,000 22,813,850 43,151,604 11,366,372 1,511,689 55,957,802 18,206,619 6,880,360 0 0 57,210 29,773,613 55,957,802 97,667,448 97,667,448 68,499,170 68,499,170 0 0 892,321 12,149,857 4,338,000 7,811,857 0 0 0 7,811,857 1.37 1.30
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