-----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, P6kQEfv410QHpYieh+KQQ625ttZQdlwvuq83uX/aP+xQBM6qWu3/0EAEbPF47Y35 G2Ez5PBRobnJIU5JoUsLUQ== 0000914190-00-000177.txt : 20000526 0000914190-00-000177.hdr.sgml : 20000526 ACCESSION NUMBER: 0000914190-00-000177 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000525 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-K SEC ACT: SEC FILE NUMBER: 000-16442 FILM NUMBER: 643886 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-K 1 FORM 10-K FOR YEAR ENDED 2/29/2000 ================================================================================ 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 29, 2000 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 Number) of incorporation or organization) 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. [ ] The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of May 8, 2000 was approximately $14,395,722 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 8, 2000: 5,861,140. ----------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its 2000 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, 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 primarily to specialty and sporting goods chain store customers. The Company's in-line roller skates consist of a soft mesh and leather boot with internal supports and molded plastic boots with an integrated frame, or a frame riveted to the bottom of the boot, and high-density polyurethane wheels mounted on ball bearings. (2) Status of products in development The Company continues to develop products for the recreational, and fitness 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 contracts for production. All purchase orders are in U.S. dollars. (4) Patents, trademarks, licenses, franchises and concessions. The Company markets its products under a number of trade names and trademarks, including the following principal trademarks or registered trademarks of the Company: "UltraWheels", "Skate Attack", "Street Attack", "Ultra Ice", and "Hespeler". 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 eleven 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 and therefore, are dependent on weather conditions. With approximately 96% of the Company's sales occurring in North America and Europe, the Company does have increased sales and demands on its working capital during the spring selling season. (7) Major Customers. The Company believes that its customer relationships are excellent, and only one customer of the Company has accounted for more than 10% of the Company's sales in one or more of the past three fiscal years. In fiscal 2000, 1999 and 1998 Wal-Mart, based in Bentonville, Arkansas, accounted for approximately 12%, 23% and 29%, respectively, of the Company's net sales. (8) Backlog. The Company had approximately $7.9 million in unfilled purchase orders as of May 17, 2000, compared to approximately $7.6 million in unfilled purchase orders as of May 17, 1999. Approximately $7.0 million of these backlog orders are a result of spring booking orders to be shipped at future dates and approximately $887,000 result from orders of products that are temporarily unavailable. The backlog may be subject to cancellation or other adjustments and is not necessarily indicative of future sales. (9) Government contracts. The Company has no government contracts. (10) Competition. The principal competitive factors in the in-line roller skate industry are name recognition, price and product performance. The main areas of difference in product performance are in the weight and strength of the boot and frame, the hardness of the wheels and the quality and lubrication of the wheel bearings. The Company offers a 90-day warranty on its products, which the Company believes is an important competitive factor. Beyond such warranty, the Company does not offer service on its products and does not believe that service is an important competitive factor. The Company believes it has a significant share of the in-line roller skate market. K2 Inc. and Rollerblade, Inc., are considered to be the market leaders. The Company competes with K2 Inc., and Rollerblade, 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. 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 2000, 1999 or 1998. (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, 2000, the Company employed 73 full-time employees and 4 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 2000, 1999 and 1998 First Team Sports Exports, Inc. had export sales of $19.1 million, $16.4 million and $17.9 million representing approximately 42%, 39% and 32%, respectively, of the net sales of the Company. Canadian net sales were $12.8 million (28% of net sales) in fiscal 2000, $10.4 million (25% of net sales) in fiscal 1999, and $7.5 million (13% of net sales) in fiscal 1998. Sales outside North America were $6.2 million (14% of net sales) in fiscal 2000, $6.0 million (14% of net sales) in fiscal 1999, $10.4 million (18% of net sales) in fiscal 1998. 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 $4,350,000 as of May 1, 2000. The Company also occupies approximately 2,000 to 4,000 square feet of office space in Toronto, Canada and Graz, Austria for its subsidiaries, Hespeler Hockey Company and First Team Sports GmbH respectively. The Company leases these facilities with the leases having terms of one to four years. 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 29, 2000. EXECUTIVE OFFICERS OF THE COMPANY The following sets forth the names and ages of the current executive officers of the Company in addition to information regarding their positions with the Company, their periods of service in such positions and their business experience for the past five years. Executive officers generally serve in office for terms of approximately one year. There are no family relationships among the officers named below. Name and Age of Current Positions with Company and Principal Executive Officer Occupations for the Past Five Years John J. Egart, 50 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, 51 Vice Chairman of the Company since January 1994; Director of the Company since the Company's inception in May 1986; President and Chief Executive Officer of the Company from the Company's inception in May 1986 to January 1994. Leonard R. Vinson, Jr., 39 Senior Vice President Sales and Marketing of the Company since March 1, 1999; Senior Vice President Sales and Marketing for Bravo, Inc., a sporting goods company, from January 1998 to February 1999; Vice President Sales and Marketing for Kryptonics, Inc., a sporting goods company, from October 1995 to January 1998; Co-founder of Pure Fun Sports, a sporting goods sales agency, from January 1990 to October 1995. Kent A. Brunner, 39 Vice President and Chief Financial Officer of the Company since September 1998; Vice President/Finance of the Company from September 1998 to September 1996; Controller of the Company from November 1994 to September 1996; Audit Manager for McGladrey & Pullen, LLP, a national certified public accounting firm, from June 1988 to November 1994. 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 2000 and fiscal 1999 was as follows: Quarter Ended High Low ------------- ---- --- May 31, 1998 $4.000 $2.437 August 31, 1998 $2.687 $1.281 November 30, 1998 $1.937 $0.750 February 28, 1999 $2.125 $0.812 May 31, 1999 $3.250 $2.437 August 31, 1999 $3.313 $1.281 November 30, 1999 $2.469 $0.750 February 28, 2000 $3.500 $0.812 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 2, 2000, there were approximately 411 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 29, 2000, February 28, 1998 and 1997, and February 29, 1996. -------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Operations Data: Net Sales $45,003,424 $42,397,426 $56,336,906 $76,435,022 $97,667,448 Net Income/(Loss) $17,505 ($5,845,104) ($2,609,233) $2,725,282 $7,811,857 Net Income (Loss) Per Share: Basic $.00 ($1.01) ($.45) $.47 $1.37 Diluted $.00 ($1.01) ($.45) $.46 $1.30 Cash Dividends Paid Per Share -- -- -- -- -- Balance Sheet Data: Total Assets $42,248,508 $39,134,394 $51,690,373 $52,343,501 $55,957,802 Working Capital 19,214,465 17,371,669 25,051,180 27,921,689 24,944,985 Long-Term Debt 5,693,696 5,576,967 6,774,496 6,217,936 6,880,360 Shareholders' Equity 23,787,172 23,927,862 30,240,864 32,745,931 29,830,282
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Team Sports, Inc. is a leading manufacturer, designer and marketer of brand name sporting goods. The Company's product groups consist of in-line skates, in-line accessories and parts (primarily protective wear and replacement wheels and bearings), ice hockey sticks and ice hockey protective wear and accessories. Within the product groups, the Company maintains Ultra Wheels(TM) and Skate Attack(TM) in-line product lines and a Hespeler(TM) ice hockey line. The Ultra Wheels line consists of higher quality and higher priced products that are targeted for the specialty and sporting goods chain store customers. The Skate Attack line consists of lower priced products for the mass merchant customers. The Hespeler ice hockey line consists of high quality products that are targeted primarily for the specialty and sporting goods chain stores. RESULTS OF OPERATIONS: COMPARISON OF FISCAL 2000 TO 1999 Net Sales. Net sales increased 6% to $45.0 million in fiscal 2000 from $42.4 million in fiscal 1999. The improvement was primarily due to an increase in the Company's in-line skate unit sales and an increase in the unit sales of the Company's Hespeler ice hockey products. A breakdown and analysis of the Company's main product lines is as follows: (dollar amounts in millions) Fiscal 2000 Fiscal 1999 --------------- -------------- Amount % Amount % Change ------ ---- ------ ---- ------ In-line Skates $32.5 72% $31.1 73% 5% In-line Accessories And Parts 5.7 13% 5.8 14% (2%) Ice Hockey Sticks 2.5 6% 2.2 5% 14% Ice Hockey Protective And Access 4.3 9% 3.3 8% 30% ------ ---- ------ ---- ------ Total Net Sales $45.0 100% $42.4 100% 6% The Company currently distributes products to numerous countries worldwide. A geographic breakdown of the Company's net sales is as follows: (dollar amounts in millions) Fiscal 2000 Fiscal 1999 --------------- --------------- Amount % Amount % Change ------ ---- ------ ---- ------ Domestic $26.0 58% $26.0 61% -- Canada 12.8 28% 10.4 25% 23% Europe 4.5 10% 4.9 11% (8%) Otner International 1.7 4% 1.1 3% 55% ------ ---- ------ ---- ------ Total Net Sales $45.0 100% $42.4 100% 6% Several factors contributed to the Company's sales performance in fiscal 2000. Although domestic sales were relatively unchanged, the Company achieved strong acceptance of its UltraWheels products and significantly increased sales to the large national sporting goods chains ("big box" retailers). This increase offset the decline in sales of the Company's Skate Attack products to mass merchant customers due to their reduction in branded inline skate offerings. The increase in Canadian sales was the result of continued acceptance of the Company's in-line products and an increase in sales of Hespeler ice hockey products. The decrease in European sales was primarily the result of continued competitive pressures in the European in-line skate market, in-line skate customers continuing to buy direct from Pacific Rim manufacturers and the effect of the strong U.S. dollar versus European currencies. The increase in other international sales is the result of continued efforts by the Company to increase its international presence and the acceptance of the Company's strong product lines. While the Company believes there are some positive signs that the market conditions in the in-line industry are improving, the national and international markets continue to be very competitive and under extreme price competition. Gross Profit The Company's gross profit increased to $13.1 million (or 29.2 % of net sales) in fiscal 2000, from $4.3 million (or 10.2% of net sales) in fiscal 1999. The gross profit in fiscal 1999 was net of a $6 million inventory write-down charge. Excluding the impact of this charge, the gross profit as a percentage of net sales in fiscal 1999 was 24.4%. The increase in the gross margin in fiscal 2000 was primarily due to an increase in the percentage of UltraWheels in-line skate sales as compared to Skate Attack in-line skate sales, as well as an increase in the percentage of total sales related to Hespeler products(1). During the second quarter of fiscal 1999, the Company conducted a thorough review of its in-line business and as a result the Company wrote down certain inventories, by approximately $6.0 million, which was recorded in cost of goods sold. The major inventory reduction was in the Company's unfinished/component parts inventory. As a result of the Company's restructured production philosophy, the Company shifted the majority of its in-line skate production to offshore sources in an effort to reduce product costs. The Company's UltraWheels brand accounted for approximately 61% of total net sales in fiscal 2000 compared to 47% in fiscal 1999. The Company's Skate Attack brand accounted for approximately 24% of total net sales in fiscal 2000 compared to 40% in fiscal 1999. The Hespeler brand accounted for approximately 15% of total net sales in fiscal 2000 compared to 13% in fiscal 1999. Operating Expenses. Selling expenses were $4.5 million (or 10.1% of total net sales) in fiscal 2000 compared to $4.6 million (or 10.9%) in fiscal 1999. The decrease in selling expenses in fiscal 2000 was primarily due to management's efforts to control expenditures which resulted in a reduction of tradeshow and license costs. General and administrative expenses were $7.6 million (or 16.9% of total net sales) in fiscal 2000 compared to $7.4 million (or 17.5 % of total net sales) in fiscal 1999. The increase in the absolute dollar amount of the general and administrative expenses was primarily due to increased personnel costs. The decrease in general and administrative expenses as a percentage of net sales was primarily due to the increase in the Company's sales volume versus the somewhat fixed nature of certain general and administrative expenses. Other Income and Expense. Interest expense was $.9 million in both fiscal 2000 and fiscal 1999. Interest expense is primarily related to the Company's working capital line of credit and the mortgage note on the Company headquarters. - --------------- 1 The Company's Skate Attack brand, which is sold to mass merchant customers, is more of a commodity product in nature and generally has lower gross margin percentages than the Company's UltraWheel's brand and Hespeler products. Provision for Income Taxes. The Company's effective tax rate was 45.4% for fiscal 2000 compared to 32.4% for fiscal 1999. The increase in fiscal 2000 is primarily due to the effect of state and foreign tax rates. Management believes that the deferred tax asset will more likely than not be recognized in future periods. Net Income/(Loss). Net income was $17,505 (or .04% of net sales) in fiscal 2000 compared to a net loss of ($5.8) million (or (13.8%) of net sales) in fiscal 1999. The improvement can be attributed to the increase in both the sales volume and the gross profits as discussed above. RESULTS OF OPERATIONS: COMPARISON OF FISCAL 1999 TO 1998 Net Sales. Net sales decreased 25% to $42.4 million in fiscal 1999 from $56.3 million in fiscal 1998. The decline was primarily due to a decrease in the Company's in-line skate sales volume, combined with a decrease in the average selling price of both the Company's Skate Attack and UltraWheels in-line skate brands. The Company also experienced continued pricing pressures from all areas of the market place due primarily to excess inventory levels and competitive price cutting in the in-line skate industry. A breakdown and analysis of the Company's main product lines is as follows: (dollar amounts in millions) Fiscal 1999 Fiscal 1998 --------------- --------------- Amount % Amount % Change ------ ---- ------ ---- ------ In-line Skates $31.1 73% $47.0 83% (34%) In-line Accessories and Parts 5.8 14% 8.8 16% (34%) Ice Hockey Sticks 2.2 5% 0.3 1% 100% Ice Hockey Protective and Access 3.3 8% 0.2 0% 100% ------ ---- ------ ---- ------ Total Net Sales $42.4 100% $56.3 100% (25%) The Company purchased Hespeler Hockey Company in September 1997; therefore, there were no ice hockey product sales during the first six months of fiscal 1998. The Company currently distributes products to numerous countries worldwide. A geographic breakdown of the Company's net sales is as follows: (dollar amounts in millions) Fiscal 1999 Fiscal 1998 --------------- --------------- Amount % Amount % Change ------ ---- ------ ---- ------ Domestic $26.0 61% $38.4 68% (32%) Canada 10.4 25% 7.5 13% 39% Europe 4.9 11% 7.4 13% (34%) Other International 1.1 3% 3.0 6% (63%) ------ ---- ------ ---- ------ Total Net Sales $42.4 100% $56.3 100% (25%) Several factors contributed to the Company's sales performance in fiscal 1999. The decrease in domestic sales was the result of competitive price cutting which continued to plague the in-line skate industry and a reduction in placement with the mass merchant distribution channels. This was a direct result of the mass merchants reducing their branded selections as well as a continued decline in the average price of in-line skates. In addition, as part of the two-year malaise in the sporting goods industry, there has been a continued reduction of retail outlets, especially in the specialty area, and this also contributed significantly to our reduced revenues. The increased sales in Canada were primarily the result of Hespeler ice hockey product sales and the continued strong acceptance of the Company's in-line products in Canada. The decrease in European sales was primarily the result of excess inventory levels in the European market and an increase in the number of customers buying direct from Pacific Rim manufacturers. The decrease in other international sales was primarily the result of continued excess inventory levels in both the Pacific Rim and South American marketplaces. Gross Profit The Company's gross profit declined to $4.3 million (or 10.2 % of net sales) in fiscal 1999, from $12.0 million (or 21.3% of net sales) in fiscal 1998. The gross profit in fiscal 1999 was net of a $6.0 million inventory write-down. Excluding the impact of this charge, the gross profit as a percentage of net sales increased to 24.4%. During the second quarter of fiscal 1999 the Company conducted a thorough review of its in-line business and as a result the Company wrote down certain inventories, which was recorded in cost of goods sold. The major inventory reduction was in the Company's unfinished/component parts inventory. As a result of the Company's restructured production philosophy, the Company is shifting the majority of its in-line skate production to offshore sources in an effort to reduce product costs. The remaining increase in the gross profit was due mainly to the sales mix, which included a larger portion of Hespeler ice hockey products. Operating Expenses. Selling expenses were $4.6 million (or 10.9% of total net sales) in fiscal 1999 compared to $5.8 million (or 10.3%) in fiscal 1998. The decrease in the absolute dollar amount of selling expenses in fiscal 1999 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. General and administrative expenses were $7.4 million (or 17.5% of total net sales) in fiscal 1999 compared to $8.1 million (or 14.3 % of total net sales) in fiscal 1998. The decrease in the absolute dollar amount of the general and administrative expenses was primarily due to decreases in insurance costs and bad debt expenses associated with the reduced sales volume. The increase in general and administrative expenses as a percentage of net sales was primarily due to the reduction in the Company's sales volume versus the somewhat fixed nature of certain general and administrative expenses. Other Income and Expense. Interest expense was $.9 million in fiscal 1999 compared to $1.0 million in fiscal 1998. The decrease in interest expense was primarily due to a reduction of the interest costs related to the Company's line of credit facility. Provision for Income Taxes. The Company's effective tax rate was 32.4% for fiscal 1999 compared to 33.7% for fiscal 1998. The slight change in fiscal 1999 is primarily due to the effect of state and foreign tax rates, the percentage of state and foreign revenues and the level of pre-tax income/(loss). Net Loss. Net loss was ($5.8) million (or (13.8%) of net sales) in fiscal 1999, compared to ($2.6) million (or (4.6%) of net sales) in fiscal 1998. The decrease can be attributed to the decrease in both the sales volume and the gross profits, and the large write-down of inventory as discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company's operations used $1.7 million of cash in fiscal 2000 compared to providing $6.5 million of cash in fiscal 1999. The cash used in the current year was primarily the result of an increase in the Company's receivables due to increased sales volume in the last quarter and increased inventory balances from improved product shipment by vendors. The large amount of cash provided by operations in the prior year was primarily the result of the Company's conversion of old inventory to cash through bargain sales. Net cash used in investing activities was $.3 million in fiscal 2000 and in fiscal 1999. The use of cash for this activity was primarily attributable to expenditures relating to new computer and production equipment and in fiscal 1999 to new licensing arrangements. Net cash provided by financing activities was $2.2 million in fiscal 2000 compared to net cash used in financing activities of $7.3 million in fiscal 1999. The net cash provided by this activity in fiscal 2000 was primarily for funding the normal day-to-day operations of the Company. The net use of cash for this activity in fiscal 1999 was primarily from paying down the Company's line of credit facility and long-term debt obligations. Effective September 8, 1999, the Company entered into a new financing package. This package included a new operating facility and a refinancing of the Company's mortgage note. The Company's total debt to worth ratio was .8 to 1 as of February 29, 2000, compared to .6 to 1 as of February 28, 1999. The Company's long-term debt, which consists primarily of a mortgage note on the Company's facility and obligations under endorsement license agreements, less current maturities, was $5.7 million as of February 29, 2000 (see Note 6 in Notes to Financial Statements). The Company's primary financing facility is a $10 million revolving credit line, which is subject to a borrowing base that is calculated monthly and updated periodically during each month. The borrowing base is based on a percentage of eligible receivables and inventories. As of February 29, 2000 the borrowing base limitation was $10 million, of which $4.9 million was outstanding. In connection with this credit facility, the Company agreed, among other things, to maintain certain minimum financial ratios and income levels. The Company believes its current cash position, funds available under existing bank arrangements and cash generated from operations will be sufficient to finance the Company's operating requirements through fiscal 2001. Outlook: Issues And Uncertainties The Company does not provide forecasts of future financial performance. Certain statements contained in this report are based on current expectations. These statements are forward looking and are subject to certain risks and uncertainties. The Company's actual results may differ materially from those projected. The Company believes that the total number of in-line skating participants worldwide will continue to remain strong in fiscal 2001, especially in the younger age categories. The Company believes the innovative new products currently on the market will continue to intrigue avid participants of in-line skating and will improve the recruitment of new participants. The Company also believes that the number of ice hockey participants worldwide, especially in the United States, will continue to grow in fiscal 2001. The Company's strategy has been, and continues to be, to introduce high-quality, innovative, price-valued products designed specifically for the recreational, fitness and youth market segments, consequently, driving customer 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 customers, the product is more like a commodity and generally has lower gross margin percentages than the Company's UltraWheels brand and Hespeler Hockey products. As a result, future gross margin percentages are difficult to predict. While management is optimistic about the Company's long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating its growth outlook. Competition. The Company competes with numerous manufacturers of in-line skates domestically and internationally, and anticipates future competition from other large and well-established sporting goods manufacturers. K2 and Rollerblade 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 innovative products at commercially-acceptable prices; (ii) develop new innovative 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 29, 2000, sales to Wal-Mart accounted for 12% of the Company's revenues. Increased competition from other manufacturers, decreased demand for the Company's products or other circumstances may have an adverse impact upon the Company's relationship with Wal-Mart and/or other major customers. Decreased orders from this customer or other major customers would have a material adverse impact on the Company's financial results. Other. The Company's products are primarily used outdoors and therefore adverse weather conditions can have a negative impact on consumer demand. Because the Company's products are of a recreational nature and not considered basic necessities, a general decline in overall economic conditions may have a greater adverse effect on the Company's sales. Market Risk. The Company's sales and results of operations are subject to foreign currency fluctuations. The Company's foreign operations are in countries with fairly stable currencies; therefore, the effect of foreign currencies has not been significant. The Company attempts to limit its exposure to translation gains and losses by maintaining and controlling its foreign cash flows whenever possible. Considering both the anticipated foreign sales and results of operations for the next year, a hypothetical 10% weakening of the U.S. dollar relative to all other currencies would not materially adversely affect expected fiscal 2001 sales and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk. The Company's sales and results of operations are subject to foreign currency fluctuations. The Company's foreign operations are in countries with fairly stable currencies; therefore, the effect of foreign currencies has not been significant. The Company limits its exposure to translation gains and losses by maintaining and controlling its foreign cash flows when possible. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedules listed below are included herein immediately following the signature page of this Form 10-K on the pages set forth: Page Independent Auditor's Report on Consolidated Financial Statements and Schedule for the years ended February 29, 2000, February 28, 1999 and 1998..............................................F-1 Consolidated Balance Sheets as of February 29, 2000 and February 28, 1999....F-2 Consolidated Statements of Operations for the years ended February 29, 2000 and February 28, 1999 and 1998 .............F-4 Consolidated Statements of Shareholders' Equity for the years ended February 29, 2000 and February 28, 1999 and 1998....................F-5 Consolidated Statements of Cash Flows for the years ended February 29, 2000, and February 28, 1999, and 1998 .................F-6 Notes to Consolidated Financial Statements...................................F-7 Schedule II - Reserve Accounts..............................................F-24 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 2000 in connection with the Company's 2000 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 2000 in connection with the Company's 2000 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 2000 in connection with the Company's 2000 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 2000 in connection with the Company's 2000 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. (1) Financial Statements. The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K: Independent Auditor's Report on Consolidated Financial Statements and Schedule for the years ended February 29, 2000 and February 28, 1999 and 1998. Consolidated Balance Sheets as of February 29, 2000 and February 28, 1999 and 1998. Consolidated Statements of Operations for the years ended February 29, 2000 and February 28, 1999, and 1998. Consolidated Statements of Shareholders' Equity for the years ended February 29, 2000, and February 28, 1999, and 1998. Consolidated Statements of Cash Flows for the years ended February 29, 2000 and February 28, 1999, and 1998. 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: 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 29, 2000. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST TEAM SPORTS, INC. May 25, 2000 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 as his true and lawful attorney-in-fact and agent, 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 attorney-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 attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Signature and Title Date /s/ John J. Egart May 25, 2000 John J. Egart President/Chief Executive Officer and Director (Principal executive officer) /s/ David G. Soderquist May 25, 2000 David G. Soderquist Vice Chairman and Director /s/ Joe Mendelsohn May 25, 2000 Joe Mendelsohn Chairman and Director (Signatures continued on following page) Signature and Title Date /s/ Timothy G. Rath May 25, 2000 Timothy G. Rath Director /s/ Stanley E. Hubbard May 25, 2000 Stanley E. Hubbard Director /s/ William J. McMahon May 25, 2000 William J. McMahon Director /s/ Kent A. Brunner May 25, 2000 Kent A. Brunner Vice President and Chief Financial Officer (Principal financial and accounting officer) Report of Independent Auditors Shareholders and Board of Directors First Team Sports, Inc. We have audited the accompanying consolidated balance sheets of First Team Sports, Inc. as of February 29, 2000 and February 28, 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended February 29, 2000. Our audit also included the financial statement schedule 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 2000 and 1999 financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Team Sports, Inc. at February 29, 2000 and February 28, 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 29, 2000, in conformity with accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Minneapolis, Minnesota April 14, 2000 F-1 First Team Sports, Inc. Consolidated Balance Sheets
February 29 2000 February 28 1999 -------------------------------------- Assets Current assets: Cash and cash equivalents $ 860,671 $ 723,574 Trade receivables, less allowance for doubtful accounts: 2000--$765,000; 1999--$642,000 15,918,474 12,284,005 Recoverable income taxes - 1,136,858 Inventories 12,079,722 10,047,020 Prepaid expenses 1,331,238 839,777 Deferred income taxes 1,179,000 1,175,000 -------------------------------------- Total current assets 31,369,105 26,206,234 Property, plant and equipment Land 600,000 600,000 Building 4,988,680 4,988,680 Production equipment 2,382,555 2,278,231 Office furniture and equipment 1,956,004 1,825,257 Warehouse equipment 945,377 937,677 Vehicles 97,007 104,380 -------------------------------------- 10,969,623 10,734,225 Less accumulated depreciation 4,411,801 3,316,390 -------------------------------------- 6,557,822 7,417,835 Deferred income taxes 1,821,000 1,988,000 Other assets License agreements, less accumulated amortization: 2000--$4,036,000; 1999--3,687,000 1,330,704 1,680,024 Goodwill, less accumulated amortization: 2000--$463,000; 1999--$329,000 1,029,528 1,119,197 Other 140,349 723,104 -------------------------------------- 2,500,581 3,522,325 -------------------------------------- $42,248,508 $39,134,394 ======================================
F-2
February 29, 2000 February 28, 1999 -------------------------------------- Liabilities and shareholders' equity Current liabilities: Notes payable to bank $ 4,912,275 $ 2,525,000 Trade accounts payable 4,656,107 3,692,759 Accrued expenses 1,735,399 1,311,043 Current maturities of long-term debt 850,859 1,305,763 -------------------------------------- Total current liabilities 12,154,640 8,834,565 Long-term debt, less current maturities 5,693,696 5,576,967 Deferred income taxes 90,000 195,000 Deferred revenue 523,000 600,000 Shareholders' equity Common Stock, par value $.01 per share Authorized 10,000,000 shares Issued and outstanding: 2000--5,860,140 shares; 1999--5,803,848 shares 58,602 58,039 Additional paid-in capital 9,926,180 9,825,240 Retained earnings 14,665,261 14,647,756 Accumulated other comprehensive loss (862,871) (603,173) -------------------------------------- 23,787,172 23,927,862 -------------------------------------- $42,248,508 $39,134,394 ======================================
See accompanying notes. F-3 First Team Sports, Inc. Consolidated Statements of Operations
Year ended February 29, Year ended February 28, 2000 1999 1998 --------------------------------------------------------- Net sales $45,003,424 $42,397,426 $56,336,906 Cost of goods sold 31,871,379 38,051,179 44,314,320 --------------------------------------------------------- Gross profit 13,132,045 4,346,247 12,022,586 Operating expenses: Selling 4,532,710 4,619,077 5,826,993 General and administrative 7,621,020 7,420,735 8,056,546 Writedown due to asset impairment - - 974,018 --------------------------------------------------------- 12,153,730 12,039,812 14,857,557 --------------------------------------------------------- Operating income (loss) 978,315 (7,693,565) (2,834,971) Interest expense (946,242) (953,843) (1,009,657) Other expense, net - - (93,387) --------------------------------------------------------- Income (loss) before income tax benefit (expense) 32,073 (8,647,408) (3,938,015) Income tax (expense) benefit (14,568) 2,802,304 1,328,782 ========================================================= Net income (loss) $ 17,505 $ (5,845,104) $ (2,609,233) ========================================================= Net income (loss) per share: Basic $.00 $(1.01) $(.45) Diluted $.00 $(1.01) $(.45) Shares used in computation of net income (loss) per share: Basic 5,839,021 5,796,377 5,771,478 Diluted 5,953,730 5,796,377 5,771,478
See accompanying notes. F-4 First Team Sports, Inc. Consolidated Statement of Shareholders' Equity
Common Stock Additional Accumulated Other Total ------------------------- Paid-In Retained Comprehensive Shareholders' Shares Amount Capital Earnings Loss Equity -------------------------------------------------------------------------------------------- Balance at February 28, 1997 5,749,796 $57,498 $9,586,340 $23,102,093 $ - $32,745,931 Exercise of stock options 12,910 129 65,517 - - 65,646 Common stock issued for acquisitions 29,534 296 154,484 - - 154,780 Comprehensive loss: Foreign currency - - - - (116,260) (116,260) translation Net loss - - - (2,609,233) - (2,609,233) ------------------ Total comprehensive loss (2,725,493) -------------------------------------------------------------------------------------------- Balance at February 28, 1998 5,792,240 57,923 9,806,341 20,492,860 (116,260) 30,240,864 Exercise of stock options 11,608 116 18,899 - - 19,015 Comprehensive loss: Foreign currency - - - - (486,913) (486,913) translation Net loss - - - (5,845,104) - (5,845,104) ------------------ Total comprehensive loss (6,332,017) -------------------------------------------------------------------------------------------- Balance at February 28, 1999 5,803,848 58,039 9,825,240 14,647,756 (603,173) 23,927,862 Exercise of stock options 56,292 563 100,940 - - 101,503 Comprehensive loss: Foreign currency - - - - (259,698) (259,698) translation Net income - - - 17,505 - 17,505 ------------------ Total comprehensive loss (242,193) -------------------------------------------------------------------------------------------- Balance at February 29, 2000 5,860,140 $58,602 $9,926,180 $14,665,261 $(862,871) $23,787,172 ============================================================================================
See accompanying notes. F-5 First Team Sports, Inc. Consolidated Statements of Cash Flows
Year ended February 29, Year ended February 28, 2000 1999 1998 -------------------------------------------------- Cash flows from operating activities Net income (loss) $ 17,505 $ (5,845,104) $(2,609,233) Adjustments required to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation 1,101,379 1,332,718 1,880,137 Amortization 577,557 602,784 468,101 Loss on writedown due to asset impairment - - 974,018 Loss on retirement of equipment - - 93,387 Deferred income taxes 58,000 (2,141,000) (360,000) Deferred revenue (77,000) - - Write-down of inventories - 5,435,824 - Write-off of Mothership goodwill and intangibles - 293,000 - Change in operating assets and liabilities: Receivables (3,874,204) (1,272,837) 7,090,703 Inventories (2,040,235) 6,755,720 (966,257) Prepaid expenses 1,235 116,296 (344,412) Accounts payable 958,774 1,007,049 (2,377,925) Accrued expenses 258,365 (333,730) 230,709 Income taxes 1,319,425 541,547 (1,512,753) -------------------------------------------------- Net cash (used in) provided by operating activities (1,699,199) 6,492,267 2,566,475 Cash flows from investing activities Purchases of property, plant and equipment (250,986) (330,496) (1,497,979) Business acquisitions - - (1,917,942) Other - - (696,328) -------------------------------------------------- Net cash used in investing activities (250,986) (330,496) (4,112,249) Cash flows from financing activities Net proceeds (payments) on short-term borrowings 2,387,275 (6,160,000) 2,402,408 Principal payments on long-term borrowings (4,837,277) (1,134,158) (1,261,377) Proceeds from long-term borrowings 4,500,000 - 1,849,184 Net proceeds from exercise of stock options 101,503 19,015 65,646 -------------------------------------------------- Net cash provided by (used in) financing activities 2,151,501 (7,275,143) 3,055,861 -------------------------------------------------- Increase (decrease) in cash and cash equivalents 201,316 (1,134,344) 1,510,087 Effect of foreign currency translation (64,219) (32,599) (21,969) Cash and cash equivalents: Beginning of year 723,574 1,869,545 381,427 -------------------------------------------------- Ending of year $ 860,671 $ 723,574 $ 1,869,545 ==================================================
F - 6 See accompanying notes. First Team Sports, Inc. Notes to Consolidated Financial Statements February 29, 2000 1. Nature of Business and Significant Accounting Policies Nature of Business and Concentration of Credit Risk The Company, which operates in one business segment, sells in-line roller skates and related accessories under the brand names UltraWheels(TM), and Skate Attack(TM), and ice hockey equipment under the brand name Hespeler(TM) to retail and sporting goods stores. These products are manufactured under outside production arrangements to the Company's specifications. Net sales to a specific geographic region for the years ended February 29, 2000 and February 28, 1999 totaled 28% and 25%, respectively, for Canada and 10% and 11%, respectively, for Europe. Basis of Financial Statement Presentation and Accounting Estimates The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. 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 included in accumulated other comprehensive loss in shareholders' equity. F - 7 First Team Sports, Inc. Notes to Consolidated Financial Statements (continued) 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. Short-term investments are classified as available-for-sale. The carrying value of cash equivalents approximates fair value at February 29, 2000 and February 28, 1999. 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 3 - 7 years Warehouse equipment 6 - 10 years Vehicles 5 years Other Assets Costs capitalized related to license agreement's rights are being amortized over the terms of the agreements on a straight-line method. Goodwill arising from acquisitions is amortized on a straight-line basis over a period up to 10 years. Other intangibles, consisting principally of trademarks and patents, are amortized on a straight-line basis over 5 to 10 years. F - 8 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 determined in fiscal 1998 that certain production assets of the Company had been impaired as a result of the changing in-line skate industry. In accordance with SFAS Statement 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of," the Company evaluated the ongoing value of its production tooling equipment. Based upon this evaluation, the Company determined that production tools with a carrying value of $1,142,172 were impaired and wrote them down by $974,018 to their fair value. Fair value of the production tools was determined by comparison to outside market value. Advertising Costs The costs of advertising are expensed as incurred. Advertising expense for the fiscal years 2000, 1999, and 1998 was $956,000, $911,000 and $1,755,000, 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. F - 9 1. Nature of Business and Significant Accounting Policies (continued) Net Income (Loss) Per Share Basic net income (loss) per share is the Company's net income (loss) divided by the weighted average number of Common Shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilutive effects of stock options and warrants.
Basic Diluted -------------------------------- --------------------------------- 2000 1999 1998 2000 1999 1998 -------------------------------- --------------------------------- (In thousands, except per share data) Net income (loss) $ 18 $(5,845) $(2,609) $ 18 $(5,845) $(2,609) ================================ ================================= Weighted average common shares outstanding 5,839 5,796 5,771 5,839 5,796 5,771 Dilutive stock options - - - 115 - - -------------------------------- --------------------------------- Total common shares outstanding for diluted calculation 5,839 5,796 5,771 5,954 5,796 5,771 ================================ ================================= Net income (loss) per share $.00 $(1.01) $(.45) $.00 $(1.01) $(.45)
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 29, 2000, no separate comparison for fair values versus carrying values is presented for the aforementioned financial instruments since their fair values are not significantly different than their balance sheet carrying amounts. The aggregate fair values of the financial instruments would not represent the underlying value of the Company. F - 10 1. Nature of Business and Significant Accounting Policies (continued) Comprehensive Loss Comprehensive loss consists of the Company's net income (loss) and foreign currency translation adjustment and is presented in the consolidated statement of stockholders' equity. 2. Sales Information and Major Suppliers Major Customers and Credit Risk Net sales for fiscal years 2000, 1999 and 1998 include sales to one major customer representing 12%, 23% and 29% of net sales, respectively. At February 29, 2000, 9% of the Company's trade receivables were due from the aforementioned customer and 40% 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 42%, 39% and 32% of net sales for fiscal years 2000, 1999 and 1998, respectively. Major Suppliers The Company had 56% of its products produced by three suppliers during fiscal 2000. Management believes that alternative suppliers are available in the event the Company is unable to obtain services from its three major suppliers. F - 11 3. Acquisitions In September 1997, the Company purchased the net assets of Mothership Distribution, Inc. (Mothership), a designer, manufacturer and marketer of aggressive in-line skate accessories and apparel. Subsequently during fiscal year 1999, Mothership was closed and the related goodwill and intangibles were written off in accordance with FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The amount of the write-off totaled $293,000. The Company also purchased in September 1997 the common stock of Hespeler Hockey Company, a designer, manufacturer and marketer of ice hockey sticks, equipment and related accessories. The combined purchase price of the acquisitions was not material. These transactions were accounted for using the purchase method of accounting and the results of operation from those businesses have been included in the consolidated statements of operations from the respective dates of acquisition. The pro forma impact of the Mothership acquisition on the Company's results of operations for all periods presented was not material. The following summary, prepared on a pro forma basis, combines the consolidated results of operations as if the Hespeler Hockey operations had been acquired as of the beginning of the period presented, after including the impact of certain adjustments such as amortization of intangibles, increased interest expense on acquisition debt and related income tax effects (fiscal 1997 activity was immaterial): Pro forma information (unaudited) (In thousands, except per share amounts) 1998 ------------------- Net sales $58,124 Loss before income taxes (3,726) Net Loss (2,487) Basic and diluted loss per share $(.43) The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect results that would have occurred had the acquisition been made as of those dates or results which may occur in the future. F - 12 4. Inventories Inventories consist of the following: February 29, 2000 February 28, 1999 ---------------------------------------- Finished goods $11,103,385 $8,792,169 Component parts 976,337 1,254,851 ---------------------------------------- $12,079,722 $10,047,020 ======================================== 5. Notes Payable The Company has a line-of-credit agreement with a bank subject to renewal on August 31, 2002, whereby it may borrow up to $10,000,000. Borrowings bear interest, payable monthly, at the bank's prime lending rate (8.75% at February 29, 2000). Borrowings under the credit arrangement are collateralized by substantially all corporate assets, excluding land and building. Outstanding borrowings under this arrangement totaled $4,912,275 and $2,525,000 at February 29, 2000 and February 28, 1999, 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. F - 13 6. Long-Term Debt Long-term debt consists of the following:
February 29, 2000 February 28, 1999 -------------------------------------- Obligations under license agreements, due in varying installments, with interest imputed at 9.25%, through 2004 (see note 9) $1,468,307 $1,669,937 Mortgage note payable, due in monthly installments of $18,750 to August 2002, plus interest at the bank's prime rate (8.75% at February 29, 2000), secured by the building 4,406,250 - Mortgage notes payable, refinanced during fiscal 2000 - 3,836,523 Note payable to bank - 426,075 Subordinated convertible exchangeable debentures, due in principal installments of $200,000 on March 1, 2000, and $325,000 on October 1, 2002 plus interest at 5% 525,000 725,000 Other 144,999 225,195 -------------------------------------- 6,544,556 6,882,730 Less current maturities 850,859 1,305,763 -------------------------------------- $5,693,696 $5,576,967 ======================================
F - 14 6. Long-Term Debt (continued) Aggregate future maturities of long-term debt for the next five fiscal years and the aggregate thereafter are as follows: 2001 $ 850,859 2002 520,240 2003 4,591,607 2004 326,248 2005 255,602 Thereafter - ------------------- $6,544,556 =================== The subordinated convertible debentures were issued with triggerable warrants attached which enable the debenture holder to purchase 69,565 shares of common stock of the Company. The debentures are convertible at any time, in whole or in part, into shares of common stock of the Company at a conversion price of $5.75 to October 2002. 7. Income Taxes Net deferred income taxes consist of the following components: February 29, 2000 February 28, 1999 ------------------------------------ Deferred tax assets: Receivable allowances $ 269,000 $ 261,000 Inventory costs 193,000 286,000 Accrued expenses 317,000 328,000 License and patent agreements 323,000 284,000 Net operating loss carryforwards 2,098,000 2,204,000 ------------------------------------ 3,200,000 3,363,000 Less: valuation allowance (200,000) (200,000) Deferred tax liabilities: Depreciation (90,000) (195,000) ------------------------------------ Net deferred tax assets $2,910,000 $2,968,000 ==================================== F - 15 7. Income Taxes (continued) The net deferred tax assets have been classified in the accompanying consolidated balance sheets as follows: February 29, 2000 February 28, 1999 ------------------------------------ Current assets $1,179,000 $1,175,000 Non-current assets 1,821,000 1,988,000 Non-current liabilities (90,000) (195,000) ------------------------------------ $2,910,000 $2,968,000 ==================================== For financial reporting purposes, the income (loss) before income tax effect is as follows: February 29, February 28, 2000 1999 1998 --------- ------------------------- Income (loss) before income taxes: Domestic $371,628 $(8,652,382) $(3,490,859) Foreign (339,555) 4,974 (447,156) --------- ------------------------- $ 32,073 $(8,647,408) $(3,938,015) ========= ========================= The provisions for income tax (expense)/benefit for fiscal years 2000, 1999 and 1998 are as follows: 2000 1999 1998 ------------------------------------------------ Current: Federal $ (66,568) $ 637,304 $ 698,782 State (5,000) 26,000 68,000 Foreign 115,000 (2,000) 202,000 ------------------------------------------------ Total current 43,432 661,304 968,782 Deferred: Federal (54,000) 1,985,000 330,000 State (4,000) 156,000 30,000 ------------------------------------------------ Total deferred (58,000) 2,141,000 360,000 ================================================ Total income taxes $ (14,568) $2,802,304 $1,328,782 ================================================ F - 16 7. Income Taxes (continued) The provisions for income tax expense benefit for fiscal years 2000, 1999 and 1998 differ from the amounts obtained by applying the federal income tax rate to pretax income (loss) as follows:
2000 1999 1998 ----------------------------------------- Computed "expected" federal tax (benefit) expense $(11,000) $3,034,000 $1,378,000 Increase (decrease) in taxes resulting from: State income taxes or benefit, net of federal effect (5,000) 173,000 79,000 Other items individually insignificant, net 1,432 (404,696) (128,218) ----------------------------------------- $(14,568) $2,802,304 $1,328,782 =========================================
At February 29, 2000, the Company had operating loss carryforwards of $5.7 million that expire through 2019. 8. Shareholders' Equity Stock Options The Company has reserved 975,000 common shares for issuance under the First Team Sports, Inc. 1987 Stock Option Plan (the 1987 Plan) and 1,725,000 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. F - 17 8. Shareholders' Equity (continued) The Company also established the First Team Sports, Inc. 1993 Employee Stock Purchase Plan (the 1993 Plan) and reserved 300,000 common shares for issuance thereunder. The 1993 Plan is intended to encourage stock ownership by all employees and is intended to qualify under Section 423 of the Internal Revenue Code. All employees are eligible to participate in the 1993 Plan, with the exception of any employees owning 5% or more of the Company's total voting stock. 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 2000, 1999 and 1998 are summarized as follows:
2000 1999 1998 ---------------------------------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ---------------------------------------------------- ------------------------- Outstanding at beginning of year 1,797,703 $2.70 1,375,703 $3.06 926,020 $9.21 Exercised (30,500) 2.18 - - (6,800) 5.33 Canceled (256,503) 2.54 (9,000) 2.75 (36,517) 8.75 Granted 380,000 2.31 431,000 1.55 493,000 3.62 ---------------------------------------------------- ------------------------- Outstanding at end of 1,890,700 $2.62 1,797,703 $2.70 1,375,703 $3.06 year ==================================================== =========================
Weighted average fair value of options granted during 2000, 1999 and 1998 was $.91, $.65 and $1.30, respectively. F - 18 8. Shareholders' Equity (continued) As of February 29, 2000 and February 28, 1999 and 1998 options covering 1,468,540, 1,137,369 and 755,697 shares, respectively, were exercisable at a weighted average exercise price of $2.80, $2.91 and $2.97 per share, respectively. In addition, the remaining stock options outstanding at February 29, 2000, become exercisable in the following fiscal years: Shares Price Per Share ------------------------------------- 2001 300,831 $1.125 - $2.75 2002 119,663 1.125 - 2.75 2003 1,666 1.875 The following table summarizes information about stock options outstanding at February 29, 2000:
Options Outstanding Options Exercisable ------------------------------------ ------------------------------- Weighted Average Remaining Weighted Weighted Range of Number Contractual Life Average Number Average Exercise Prices Outstanding (Years) Exercise Price Exercisable Exercise Price - -------------------------------------- ------------------------------------ ------------------------------- $1.125 - $2.625 747,000 6.4 $1.85 395,920 $1.83 2.750 - 3.125 918,200 3.0 2.75 847,120 2.75 4.250 - 6.250 225,500 6.9 4.64 225,500 4.64 --------------- --------------- $1.125 - $6.250 1,890,700 1,468,540 =============== ===============
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. F - 19 8. Shareholders' Equity (continued) 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 option plans. Had compensation expense for the Company's stock options been determined based on the fair value at the grant date for awards in 2000, 1999 and 1998 consistent with the provisions of SFAS 123, the Company's net income (loss) and the net income (loss) per share would be the pro forma amounts reflected in the following table: 2000 1999 1998 ------------------------------------ Net income (loss) - as reported $ 17,505 $(5,845,104) $(2,609,233) Net income (loss) - pro forma (414,965) (6,515,977) (3,238,483) Net income (loss) per share - as reported: Basic $.00 $(1.01) $(.45) Diluted $.00 $(1.01) $(.45) Net income (loss) per share - pro forma: Basic $(.07) $(1.12) $(.56) Diluted $(.07) $(1.12) $(.56) The above pro forma effects on net income (loss) and net income (loss) per share are not likely to be representative of the effects on reported net income for future years because options vest over several years and additional awards generally are made each year. F - 20 8. Shareholders' Equity (continued) The fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999 and 1998: 2000 1999 1998 ------------------------------------------- Expected dividend yield - - - Expected stock price volatility 54.4% 54.1% 48.8% Risk-free interest rate 6.4% 6.4% 6.4% Expected life of options (years) 3.0 3.0 3.0 Preferred Stock Purchase Rights In February 1996, the Board of Directors declared a dividend of one preferred stock purchase right for each outstanding share of Company common stock, which rights expire on March 14, 2006. The rights are transferable with common stock. Each right entitles the holder to purchase one one-hundredth of a share of Series A preferred stock at a price of $55, subject to adjustment. The rights are not exercisable until ten days after the public announcement that a person or group of persons has acquired a beneficial interest of at least 15% of the Company's outstanding common stock or the commencement or announcement of an intention by a person or group to make a tender or exchange offer whose consummation would result in the beneficial ownership of at least 15% of the Company's outstanding common stock. Each right would entitle the rightholder to receive shares of common stock of the acquiring company upon merger or other business combination having a market value of twice the exercise price of the right or, upon exercise, that number of shares of preferred stock having a market value of twice the exercise price of the right. Preferred stock purchasable upon exercise of the rights will be entitled to certain voting privileges, minimum preferential quarterly dividends, an aggregate dividend in relation to dividends declared on common stock, and minimum preferential liquidation payments. The rights have no voting privileges and may be redeemed by the Board of Directors at a price of $.01 per right at any time before they become exercisable. F - 21 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 $355,103, $415,934 and $357,790 during fiscal years 2000, 1999 and 1998, 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 $160,000, $156,000 and $174,000 for fiscal years 2000, 1999 and 1998, 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 December 31, 1999. The land and corresponding amount of deferred revenue have been recorded at $600,000, the estimated fair market value of the land. The $600,000 of deferred revenue is being recognized as a reduction of depreciation over the life of the building, 39 years. F - 22 12. Additional Cash Flow Information Year ended February 29, Year ended February 28, 2000 1999 1998 -------------- ----------------------- Supplemental disclosures of cash flow information: Cash payments for: Interest $913,799 $1,087,447 $963,009 Income taxes 16,409 9,200 514,700 Non-cash: License agreement - 262,760 - F - 23 SCHEDULE II FIRST TEAM SPORTS, INC. RESERVE ACCOUNTS Years Ended February 29, 2000, February 28, 1999 and 1998
Balance at Additions Beginning Charged to Balance at Of Period Expenses Deductions* End of Period - --------------------------------------------------------------------------------------------------------------------- 1998 allowance for doubtful accounts $565,171 $1,215,469 $1,115,137 $665,503 1999 allowance for doubtful accounts 665,503 486,475 509,751 642,227 2000 allowance for doubtful accounts 642,227 266,251 143,693 764,785
(*) Uncollectible accounts written off, net of recoveries. F-24 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 29, 2000 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 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** Exhibit Number Description 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 28, 1995 10.8 Company Bonus Plan for certain executive officers of the Company for fiscal 2000 -- incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended February 29, 1999** 10.9* Company Bonus Plan for executive officers of the Company for fiscal 2001** 10.10 The Company's 1990 Nonqualified Stock Option Plan, as amended by resolutions dated May 25, 1989 -- incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended February 28, 1991** 10.11 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** - ---------------- *Filed herewith **Management contract or compensatory plan or arrangement. Exhibit Number Description 10.12 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** 10.13 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** 10.14 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** 10.15 1994 Stock Option and Incentive Compensation Plan, as amended through May 27, 1998 - incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended August 31, 1998** 10.16 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** 10.17 Amendment dated January 1, 1998 to Employment Agreement dated January 23, 1996 between the Company and John J. Egart - incorporated by reference to Exhibit 10.2 to the Company's quarterly report on form 10-Q for the quarter ended May 31, 1999** 10.18 Amendment dated January 1, 1998 to Employment Agreement dated January 23, 1996 between the Company and David G. Soderquist - incorporated by reference to Exhibit 10.3 to the Company's quarterly report on form 10-Q for the quarter ended May 31, 1999** 10.19 Amendment dated December 1, 1998 to 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 May 31, 1999** 10.20* Employment agreement dated January 1, 2000 between the Company and Leonard R. Vinson Jr. ** 10.21* $8.5 million Revolving Note agreement dated September 8, 1999 between the Company and Norwest Bank Minnesota, N.A. - ---------------- *Filed herewith **Management contract or compensatory plan or arrangement. Exhibit Number Description 10.22* $1.5 million Revolving Note agreement dated September 8, 1999 between the Company and Norwest Bank Minnesota, N.A. 10.23* $4.5 million Revolving Tern Note agreement dated September 8, 1999 between the Company and Norwest Bank Minnesota, N.A. 10.24* Credit and Security Agreement dated September 8, 1999 between the Company and Norwest Bank Minnesota, N.A. 10.25* Mortgage and Security Agreement dated September 8, 1999 between the Company and Norwest Bank Minnesota, N.A. 21 List of Subsidiaries - incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended February 28, 1998 23.1* Consent of Ernst & Young LLP 24* Power of Attorney of John J. Egart, David G. Soderquist, Joe Mendelsohn, Timothy G. Rath, Stanley E. Hubbard, William J. McMahon and Kent A. Brunner included in signature page on this Form 10-K 27.1* Financial Data Schedule for the year ended February 29, 2000 (included in electronic version only) - ---------------- *Filed herewith **Management contract or compensatory plan or arrangement. EX-9 2 BONUS PLAN FIRST TEAM SPORTS FISCAL 2001 EXECUTIVE BONUS PLAN PLAN o Company bonus plan is based on earnings before tax o Bonus plan consists of the following levels: Earnings Before Tax Lower Level $ 350,000 Middle Level $ 850,000 Higher Level $1,390,000 ELIGIBILITY % of Lower Middle Higher Total John Egart $ 60,000 $150,000 $240,000 40.0% Kent Brunner $ 41,250 $103,125 $165,000 27.5% Sonny Vinson $ 41,250 $103,125 $165,000 27.5% Dave Soderquist $ 7,500 $ 18,750 $ 30,000 5.0% -------- -------- -------- ----- TOTAL $150,000 $375,000 $600,000 100.0% BONUS CALCULATIONS o If earnings before tax goals are met, appropriate bonus dollars will be paid o If earnings before tax fall between levels, bonus dollars will be pro-rated accordingly CRITERIA o All participants will have objectives established for them to achieve o Individual achievement of objectives, as judged by the Compensation Committee, will determine bonus payments EX-10.20 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS AGREEMENT effective as of January 1, 2000, between FIRST TEAM SPORTS, INC., a Minnesota corporation (the "Company"), and Leonard R. Vinson, Jr., a resident of Minnesota ("Executive"). WITNESSETH WHEREAS, Executive has been employed as Senior Vice President of Sales and Marketing; and WHEREAS, the Company desires to continue to have the benefit of Executive's experience and loyalty, and Executive is willing to provide Executive's services on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Definitions. The following capitalized terms used in this Agreement shall be defined as follows: "Agreement" shall mean this Agreement between the Company and Executive. "Base Salary" shall mean the annual base salary payable to Executive pursuant to Section 4(a) hereof, and "monthly Base Salary" shall mean the Base Salary divided by twelve (12). "Board" shall mean the Board of Directors of First Team Sports, Inc. "Cause" shall mean Executive's (1) gross misconduct, dishonesty or disloyalty; (2) willful and material breach of this Agreement by Executive; or (3) conviction or entry of a plea of guilty or nolo contendere to any felony or to any misdemeanor involving fraud, misrepresentation or theft. A "Change of Control" shall be deemed to have occurred if (1) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power (with respect to the election of directors) of the Company's then outstanding securities; (2) at any time after the execution of this Agreement, individuals who as of the date of the execution of this Agreement constitute the Board (and any new director whose election to the Board or nomination for election to the Board by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office) cease for any reason to constitute a majority of the Board; (3) the consummation of a merger or consolidation of the Company with or into any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power (with respect to the election of directors) of the securities of the Company or of such surviving entity outstanding immediately after such merger or consolidation; or (4) the consummation of a plan of complete liquidation of the Company or of an agreement for the sale or disposition by the Company of all or substantially all of the Company's business or assets. "Change of Control Payments" shall mean any payment (including any benefit or transfer of property) in the nature of compensation, to or for the benefit of Executive under any arrangement, which is partially or entirely contingent on a Change of Control, or is deemed to be contingent on a Change of Control for purposes of Section 280G of the Code. As used in this definition, the term "arrangement" includes any agreement between Executive and the Company and any and all of the Company's salary, bonus, incentive, compensation or benefit plans, programs or arrangements, and shall include this Agreement. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder. A "Commencement Date" shall occur on (1) such date as the Company enters into negotiations leading toward an agreement in principle or definitive agreement pursuant to which a Change of Control thereafter occurs; or (2) the date on which a tender or exchange offer or proxy contest is commenced pursuant to which a Change of Control thereafter occurs. "Company" shall mean First Team Sports, Inc., a Minnesota corporation, any subsidiaries thereof, and any successors or assigns, including any Successor. "Company Product" means any product, product line or service (including any component thereof or research to develop information useful in connection with a product or service) that is being designed, developed, manufactured, marketed or sold by the Company or with respect to which the Company has acquired Confidential Information which it intends to use, or uses, in the design, development, manufacture, marketing or sale of a product or service. "Competitive Product" means any product, product line or service (including any component thereof or research to develop information in connection with a product or service) that is being designed, developed, manufactured, marketed or sold by anyone other than the Company and is of the same general type, performs similar functions, or is used for the same purposes as a Company Product. "Confidential Information" means any information or compilation of information that Executive learns or develops during the course of Executive's employment that derives independent economic value from not being generally known, or readily ascertainable by proper means, by other persons who can obtain economic value from its disclosure or use. It includes but is not limited to trade secrets, inventions, and discoveries, and may relate to such matters as research and development, manufacturing processes, management systems and techniques, and sales and marketing plans and information. "Executive" shall mean Leonard R. Vinson, Jr., a resident of Minnesota. "Good Reason" shall mean (1) a substantial reduction in the nature or status of Executive's responsibilities hereunder; (2) a reduction by the Company in the Base Salary of Executive except to the extent permitted under Section 4(a) hereof; (3) the failure by the Company to allow Executive to participate to the full extent to which Executive is eligible in all plans, programs or benefits in accordance with Sections 4(b) to (e), inclusive, hereof; or (4) relocation of Executive's principal office more than 20 miles from its current location. Notwithstanding the foregoing, "Good Reason" shall be deemed to occur only if such event enumerated in (1) through (4) above has not been corrected by the Company within two weeks of receipt of notice from Executive of the occurrence of such event, which notice shall specifically describe such event. "Incentive Stock Option Plans" shall mean any such plans within the meaning of Section 422 of the Code or any successor provision thereof. "Inventions" means any inventions, discoveries, improvements, ideas, or works of authorship (whether patentable or not and including those which may be subject to copyright protection) generated, conceived, authored, or reduced to practice by Executive alone or in conjunction with others, during or after working hours, while an employee of the Company, and that: (i) are derived in whole or in part from, or use, incorporate, or represent any improvement to any Invention or trade secret of the Company; or (ii) result from any work Executive performs for the Company; or (iii) use any of the Company's equipment, supplies, or facilities, or trade secret information; or (iv) otherwise relate to the Company's products or the Company's present or possible future research or development. "Permanently Disabled" shall mean permanently disabled in accordance with the Company's long-term disability plan in effect at the time of commencement of such permanent disability and as evaluated by sufficient documentation including doctors statements, etc. as requested by the Company. "Person" shall mean an individual, partnership, corporation, estate or trust or other entity. "Short-Term Plan" shall mean the annual Executive Bonus Plan of the Company in effect from time to time. "Successor" shall be any entity acquiring substantially all of the assets of the Company or a corporation into which the Company is merged or with which it is consolidated. "Term" shall mean the term of Executive's employment including any period of renewal, under Section 3 hereof. "Transition Period" shall be that period of time commencing on the earlier of a Commencement Date or a Change of Control and continuing for 365 days following a Change of Control. 2. Employment and Duties. (a) General. The Company hereby employs Executive as Vice President-Finance upon the terms and conditions set forth in this Agreement. Executive agrees to serve as Vice President-Finance and perform the duties and responsibilities normally vested in the Vice President-Finance of a company, and those duties and responsibilities as may, from time to time, be assigned to Executive by the Board. (b) Exclusive Services. Throughout the Term, Executive shall, except as may from time to time be otherwise agreed in writing by the Company and unless prevented by ill health, devote his full-time working hours to his duties hereunder. (c) No Other Employment. Throughout the Term, Executive shall not, directly or indirectly, render services to any other person or organization for which he receives compensation (excluding volunteer services or outside Board activities with modest time commitments) without the consent of the Board or otherwise engage in activities which would interfere significantly with the performance of his duties hereunder. 3. Term of Employment. The Company shall retain Executive and Executive shall serve in the employ of the Company for a minimum period of two (2) years commencing as of the date of this Agreement; provided, however, that either Executive or the Company may terminate the employment of Executive during the Term in accordance with, and subject to the right of Executive to receive payments and other benefits that may be due pursuant to, this Agreement. This Agreement will be subject to automatic renewals for successive additional two (2)-year periods, unless nonrenewed as provided in Section 9 of this Agreement or terminated as provided in Section 9 of this Agreement. 4. Compensation and Other Benefits. Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits to Executive during the Term as compensation for services rendered hereunder: (a) Base Salary. The Company shall pay to Executive a Base Salary at the rate of $120,000 per annum (increasing to $130,000 per annum effective March 1, 2000), payable semi-monthly. The Company shall be entitled to deduct or withhold all taxes and charges which the Company may be required to deduct or withhold therefrom. The Base Salary will be reviewed not less than annually by the Board and may be increased, reduced, or left unchanged; provided, however, that any reduction shall be permitted only if the Company then reduces the base compensation of its executive employees generally and shall not exceed the average percentage reduction for all such executive employees. (b) Incentive Compensation. At all times during the Term, unless prohibited by the Code or other applicable law, Executive shall be entitled to participate in all incentive compensation plans and programs of the Company, currently existing or subsequently adopted. (c) Stock Options. At all times during the Term, Executive shall, unless prohibited by the Code or other applicable law, be entitled to participate in all stock option plans and programs of the Company currently existing or subsequently adopted, unless otherwise agreed to by Executive and the Board or unless such plan or program is specifically for the Company's non-executive employees. (d) Executive Benefit Plans. At all times during the Term, Executive shall, unless prohibited by the Code or other applicable law, be eligible to participate in all pension and welfare plans and programs of the Company for executive employees, currently existing or subsequently adopted, including but not limited to the following: (i) all qualified pension plans (e.g., profit sharing and 401(k) plans); (ii) all long-term disability and life insurance plans and programs; (iii) all group health insurance plans; and (iv) all supplemental retirement plans and programs. 5. Termination of Employment for Cause; Resignation Without Good Reason. (a) Compensation and Benefits. If, prior to the expiration of the Term, Executive's employment is terminated by the Company for Cause or if Executive resigns from employment hereunder other than for Good Reason, then Executive shall not be eligible to receive any compensation or benefits, or to participate in any benefit plans or programs, under Section 4 hereof with respect to future periods after the date of such termination or resignation except for the right to receive any vested benefits in accordance with the terms of such plan or program, or to continue or convert at Executive's expense group insurance coverage as provided by law or the terms of such plan or program. (b) Date of Termination. The date of termination of Executive's employment by the Company under this Section 5 shall be one (1) month after receipt by Executive of written notice of termination. The date of resignation by Executive under this Section 5 shall be one (1) month after receipt by the Company of written notice of resignation. 6. Termination of Employment Without Cause or Resignation for Good Reason Other Than During Change of Control. (a) Compensation and Benefits. If, other than during a Transition Period, Executive's employment is terminated by the Company without Cause or Executive resigns from his employment hereunder for Good Reason, Executive shall be entitled only to receive the following from the Company promptly following the Effective Date of termination or cessation of employment with the Company: (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 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. (ii) With respect to any stock options, SARs, restricted stock awards or performance share awards granted to Executive and outstanding immediately prior to such termination or resignation, all restrictions (other than those imposed by law) on all shares of restricted stock awards shall lapse immediately, all outstanding options and SARs will become exercisable immediately, and all performance share objectives shall be deemed to be met. (iii) Executive shall be entitled to continued participation in the Company's group health insurance plan as permitted by COBRA and the terms of such plan. Company shall, for a one-year period following termination of Executive's employment, continue to pay a portion of Executive's Company group health insurance premiums equivalent to that portion it pays on behalf of its employees during such one-year period, subject to Executive paying the employee portion of such premiums and subject to termination of participation upon Executive becoming entitled to group health insurance coverage on subsequent employment or upon Executive's electing not to continue coverage or termination of such plan by Company. (b) Date of Termination. The date of termination of Executive's employment by the Company under this Section 6 shall be the date specified in the written notice of termination to Executive, or if no such date is specified therein, the date on which such notice is given to Executive. The date of resignation by Executive under this Section 6 shall be two weeks after receipt by the Company of written notice of resignation, provided that the Good Reason specified in such notice shall not have been corrected by the Company during such two-week period. 7. Termination of Employment Without Cause or Resignation With Good Reason After Change of Control. (a) Compensation and Benefits. If, prior to the expiration of the Term and as of a date during a Transition Period, Executive's employment is terminated by the Company or its Successor without Cause or if Executive resigns from employment hereunder for Good Reason, Executive shall, subject to subsection (c) below, be entitled only to receive the following from the Company or its Successor promptly following the Effective Date of termination or cessation of employment with the Company: (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, and the amount of incentive bonuses which, absent termination of Executive's employment, could have been earned by Executive during the fiscal year of the Company in which Executive's employment under this Agreement ceases. For purposes of Clause (B), the computation of the amount of incentive bonuses shall be based upon the bonus programs in effect at the time of termination of Executive's employment and such computation shall assume that target performance levels are satisfied for all purposes during such fiscal year. Such payment shall be made in cash within fifteen (15) days from and after termination of Executive's employment. (ii) Executive shall not be eligible to receive any compensation or benefits or to participate in any plans or programs with respect to future periods after the date of such termination or resignation except for the right to receive any vested benefits in accordance with the terms of such plan or program or to continue or convert at Executive's expense group insurance coverage as provided by law or the terms of such plan or program. With respect to any stock options, SARs, restricted stock awards or performance share awards granted to Executive and outstanding immediately prior to such termination or resignation, all restrictions (other than those imposed by law) on all shares of restricted stock awards shall lapse immediately, all outstanding options and SARs will become exercisable immediately, and all performance share objectives shall be deemed to be met. (b) Date of Termination. The date of termination of Executive's employment by the Company under this Section 7 shall be the date specified in the written notice of termination to Executive, or if no such date is specified therein, the date on which such notice is given to Executive. The date of resignation by Executive under this Section 7 shall be two weeks after receipt by the Company of written notice of resignation, provided that the Good Reason specified in such notice shall not have been corrected by the Company during such two-week period. (c) Limitation on Change of Control Compensation. In the event that Executive is a "disqualified individual" within the meaning of Section 280G of the Code, the parties expressly agree that the payments described in this Section 7 or in Section 9 shall be considered together with all Change of Control Payments so that, with respect to Executive, all Change of Control Payments are collectively subject to an overall maximum limit. Such maximum limit shall be One Dollar ($1.00) less than the largest amount under which no portion of the Change of Control Payments is considered a "parachute payment" within the meaning of Section 280G of the Code. Accordingly, to the extent that the Change of Control Payments would be considered a "parachute payment" with respect to Executive, then the portions of such Change of Control payments shall be reduced or eliminated in the following order until the remaining Change of Control Payments with respect to Executive is one Dollar ($1.00) less than the maximum allowable which would not be considered a "parachute payment" under the Code: (i) First, any cash payment to Executive; (ii) Second, any Change of Control Payments not described in this Agreement; and (iii) Third, any forgiveness of indebtedness of Executive to the Company. Executive expressly and irrevocably waives any and all rights to receive any Change of Control payments which would be considered a "parachute payment" under the Code. 8. Termination of Employment by Disability or Death. (a) Compensation and Benefits. If Executive becomes Permanently Disabled prior to the expiration of the Term, the Company shall be entitled to terminate Executive's employment subject to the Company's normal policies in such matters as applied to all other salaried employees. In the event of such termination of Executive's employment or termination of Executive's employment by reason of the death of Executive prior to the expiration of the Term, the Executive (or Executive's estate, as the case may be) shall be entitled to receive from the Company only the following: (i) In the event of termination after Executive has become Permanently Disabled, Executive shall be entitled to continued participation in hospital and medical plans and programs of the Company at Executive's own expense, as required by COBRA and in accordance with Company policy as it pertains to disabled salaried employees; that is for the period of said disability or until normal retirement age subject to rules and practice of the plan(s). Company may, in its discretion, provide the benefits described herein under the Company's group plans or under no less favorable insurance contracts or arrangements secured by the Company. (ii) Executive (or, in the event of Executive's death, Executive's estate or Executive's designated beneficiary) shall be entitled to receive any vested benefits in accordance with the terms of any such benefit plans. Executive shall be entitled to continued contributions under the Company's qualified profit sharing and 401(k) plans to the extent permitted in said plans. (b) Date of Termination. The date of termination of Executive's employment under this Section 8 shall be the date Executive becomes Permanently Disabled or the date of Executive's death as the case may be. 9. Termination of Employment by Written Notice of Nonrenewal. (a) Notice. This Agreement may be terminated with or without Cause upon delivery of written notice of nonrenewal by either party to the other between ninety (90) and sixty (60) days prior to the end of the Term or of any renewal period. (b) Compensation and Benefits. If Executive's employment is not renewed under this Section 9, Executive shall be entitled only to the following severance benefits: (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 bonuses which, absent termination of Executive's employment, could have been earned by Executive during the fiscal year of the Company in which Executive's employment under this Agreement ceases. For purposes of Clause (B), the computation of the amount of incentive bonuses shall be based upon the bonus programs in effect at the time of termination of Executive's employment and such computation shall assume that target performance levels are satisfied for all purposes during such fiscal year. Such payment shall be made in cash within fifteen (15) days from and after termination of Executive's employment. (ii) Executive shall be entitled to continued participation in Company's group health insurance plan as permitted by COBRA and the terms of such plan. Company shall, for a one-year period following termination of Executive's employment, continue to pay a portion of Executive's Company group health insurance premiums equivalent to that portion it pays on behalf of its employees during such one-year period, subject to Executive paying the employee portion of such premiums and subject to termination of participation upon Executive becoming entitled to group health insurance coverage on subsequent employment or upon Executive's electing not to continue coverage or termination of such plan by Company. (c) Date of Termination. The date of termination of Executive's employment by the Company under this Section 9 shall be the date on which the term of Executive's employment expires. 10. Legal Fees and Expenses. The Company shall pay or reimburse Executive for all reasonable legal fees and expenses incurred by Executive in seeking to obtain or enforce any right or benefit provided by this Agreement from or against the Company in a proceeding before a court of competent jurisdiction. 11. Assignment of Inventions. Executive agrees to promptly disclose to the Company in writing all Inventions. All such Inventions shall be the exclusive property of the Company and are hereby assigned by Executive to the Company. Further, Executive will, at the Company's expense, give the Company all assistance it reasonably requires to perfect, protect, enforce, and use its rights to Inventions. In particular, but without limitation, Executive will sign all documents, do all things, and supply all information that the Company may deem necessary or desirable to: (i) transfer or record the transfer of Executive's entire right, title and interest in Inventions; and (ii) enable the Company to obtain or enforce patent, copyright or trademark protection for Inventions anywhere in the world. The obligations of this Section shall continue beyond the termination of employment with respect to Inventions conceived or made by Executive during the period of Executive's employment and shall be binding upon assigns, executors, administrators and other legal representatives. For purposes of this Agreement, any Invention relating to the business of the Company on which Executive files a patent application within six (6) months after termination of employment with the Company shall be presumed to cover Inventions conceived by Executive during the term of Executive's employment, subject to proof to the contrary by good faith, written and duly corroborated records establishing that such Invention was conceived and made following termination of employment. NOTICE: Pursuant to Minnesota Statutes ss. 181.78, Executive is hereby notified that this Section 11 does not apply to any invention for which no equipment, supplies, facility, or trade secret information of the Company was used and which was developed entirely on Executive's own time, and (1) which does not relate (a) directly to the business of the Company or (b) to the Company's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the employee for the Company. 12. Confidential Information. Executive agrees not to directly or indirectly use or disclose Confidential Information for the benefit of anyone other than the Company, either during or after employment, for as long as the information retains the characteristics of Confidential Information described in Section 1 above. 13. Return of Documents and Property. All documents and tangible items provided to Executive by the Company, or possessed, obtained, or created by Executive for use in connection with Executive's employment, are the property of the Company and shall be promptly returned to the Company on termination of employment together with all copies, recordings, abstracts, notes or reproductions of any kind made from or about the documents and tangible items or the information they contain. 14. Noncompetition. In consideration of Executive's rights under this Agreement, including without limitation Sections 5 through 9 hereof, Executive agrees that, from and after the Effective Date and continuing until the one-year anniversary of termination or cessation of Executive's employment with the Company, Executive will not, alone or in any capacity with another person or entity: (i) directly or indirectly, own any interest in, control, be employed by or associated with, or render services to (including but not limited to services in research), any person, entity, or subsidiary, subdivision, division, or joint venture of such entity in connection with the design, development, manufacture, marketing, or sale of a Competitive Product that is sold or intended for use or sale in any geographic area in which the Company actively markets a Company Product or intends to actively market a Company Product of the same general type or function; (ii) directly or indirectly, solicit any of the Company's present or future employees for the purpose of hiring them or inducing them to leave their employment with the Company; (iii) directly or indirectly, solicit, attempt to solicit, interfere, or attempt to interfere with the Company's relationship with its customers or potential customers, on behalf of Executive or any other person or entity engaged in the design, development, manufacture, marketing, or sale of a Competitive Product; or (iv) directly or indirectly design, develop, manufacture, market, or sell any Competitive Product that is sold or intended for use or sale in any geographic area in which the Company actively markets a Company Product or intends to actively market a Company Product of the same general type or function. 15. Breach of Noncompetition Provisions of this Agreement. In addition to any other relief or remedies afforded by law or in equity, if Executive breaches Section 14 of this Agreement, Executive agrees that the Company shall be entitled, as a matter of right, to injunctive relief in any court of competent jurisdiction plus its costs, including but not limited to its reasonable attorneys' fees for securing such relief. Executive recognizes and hereby admits that irreparable damage will result to the Company if Executive violates or threatens to violate the terms of Section 14 of this Agreement. This Section 15 shall not preclude the granting of any other appropriate relief including, without limitation, money damages against Executive for breach of Section 14 of this Agreement. 16. Effect of Other Obligations. It is intended that the obligation of the parties to perform the terms of this Agreement is unconditional and does not depend on the performance or non-performance of any terms, duties or obligations not specifically recited in this Agreement. 17. Binding Agreement. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any Successor to or assigns of the Company, and Executive's heirs and the personal representative of Executive's estate. 18. Severability. If a Court finds that any provision of this Agreement is not enforceable, Executive and the Company agree that the Court should modify the provision to make it enforceable to the maximum extent possible. If the provision cannot be modified, Executive and the Company agree that the provision may be severed, and the other provisions of this Agreement shall remain in full force and effect. 19. Amendment; Waiver. This Agreement may not be modified, amended or waived in any manner except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 20. Governing Law. All matters affecting this Agreement, including the validity thereof, are to be governed by, interpreted and construed in accordance with the laws of the State of Minnesota. 21. Notices. Any notice hereunder by either party to the other shall be given in writing by personal delivery or certified mail, return receipt requested. If addressed to Executive, the notice shall be delivered or mailed to Executive at the address specified under Executive's signature hereto, or if addressed to the Company, the notice shall be delivered or mailed to the Company at its executive offices to the attention of the Board of Directors of the Company. A notice shall be deemed given, if by personal delivery, on the date of such delivery or, if by certified mail, on the date shown on the applicable return receipt. 22. Supersedes Previous Agreements. This Agreement supersedes all prior or contemporaneous negotiations, commitments, agreements and writings with respect to the subject matter hereof, all such other negotiations, commitments, agreements and writings will have no further force or effect, and the parties to any such other negotiation, commitment, agreement or writing will have no further rights or obligations thereunder. 23. Headings; Construction. The headings of Sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. This Agreement shall be construed without regard to any presumption or other rule requiring construction hereof against the party causing this Agreement to be drafted. 24. Benefit. Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 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/ John J. Egart John J. Egart, President /s/ Leonard R. Vinson, Jr. Leonard R. Vinson, Jr. EX-10.21 4 $8.5 MILLION REVOLVING NOTE REVOLVING NOTE $8,500,000 Minneapolis, Minnesota September 8, 1999 For value received, the undersigned, First Team Sports, Inc., a Minnesota corporation, Hespeler Hockey Holding, Inc., a Minnesota corporation, Hespeler Hockey Company, a Nova Scotia unlimited liability company, and First Team Sports GmbH, an Austrian corporation (collectively, the "Borrower"), hereby promises to pay on the Termination Date under the Credit Agreement (defined below), to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Eight Million Five Hundred Thousand Dollars ($8,500,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. FIRST TEAM SPORTS, INC. By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO HESPELER HOCKEY HOLDING, INC. By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO HESPELER HOCKEY COMPANY By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO FIRST TEAM SPORTS GmbH By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: Acting Agent EX-10.22 5 $1.5 MILLION REVOLVING NOTE REVOLVING NOTE $1,500,000 Minneapolis, Minnesota September 8, 1999 For value received, the undersigned, First Team Sports, Inc., a Minnesota corporation, Hespeler Hockey Holding, Inc., a Minnesota corporation, Hespeler Hockey Company, a Nova Scotia unlimited liability company, and First Team Sports GmbH, an Austrian corporation (collectively, the "Borrower"), hereby promises to pay on the Termination Date under the Credit Agreement (defined below), to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of One Million Five Hundred Thousand Dollars ($1,500,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. FIRST TEAM SPORTS, INC. By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO HESPELER HOCKEY HOLDING, INC. By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO HESPELER HOCKEY COMPANY By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO FIRST TEAM SPORTS GmbH By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: Acting Agent EX-10.23 6 $4.5 MILLION TERM NOTE TERM NOTE $4,500,000 Minneapolis, Minnesota September 8, 1999 For value received, the undersigned, First Team Sports, Inc., a Minnesota corporation, Hespeler Hockey Holding, Inc., a Minnesota corporation, Hespeler Hockey Company, a Nova Scotia unlimited liability company, and First Team Sports GmbH, an Austrian corporation (collectively, the "Borrower"), hereby promises to pay on the Termination Date under the Credit Agreement (defined below), to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Four Million Five Hundred Thousand Dollars ($4,500,000) or, if less, the aggregate unpaid principal amount of the Term Advance made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Term Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. FIRST TEAM SPORTS, INC. By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO HESPELER HOCKEY HOLDING, INC. By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO HESPELER HOCKEY COMPANY By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO FIRST TEAM SPORTS GmbH By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: Acting Agent EX-10.24 7 CREDIT AND SECURITY AGREEMENT ---------------------------------------------- ---------------------------------------------- CREDIT AND SECURITY AGREEMENT BY AND BETWEEN FIRST TEAM SPORTS, INC., HESPELER HOCKEY HOLDING, INC., HESPELER HOCKEY COMPANY, FIRST TEAM SPORTS GmbH AND NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION Dated as of: September 8, 1999 [GRAPHIC OMITTED][GRAPHIC OMITTED] ---------------------------------------------- ---------------------------------------------- CREDIT AND SECURITY AGREEMENT Dated as of September 8, 1999 First Team Sports, Inc., a Minnesota corporation, Hespeler Hockey Holding, Inc., a Minnesota corporation, Hespeler Hockey Company, a Nova Scotia unlimited liability company, and First Team Sports GmbH, an Austrian corporation (collectively, the "Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), hereby agree as follows: 1. Definitions 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. "Accounts" means all of the Borrower's accounts, as such term is defined in the UCC and the PPSA, including without limitation the aggregate unpaid obligations of customers and other account debtors to the Borrower arising out of the sale or lease of goods or rendition of services by the Borrower on an open account or deferred payment basis. "Advance" means a Revolving Advance or a Term Advance. "Affiliate" or "Affiliates" means any Person controlled by, controlling or under common control with the Borrower, including (without limitation) any Subsidiary of the Borrower. For purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Credit and Security Agreement, as amended, supplemented or restated from time to time. "Availability" means the difference of (i) the Borrowing Base and (ii) the outstanding principal balance of the Revolving Note plus the L/C Amount. "Banking Day" means a day other than a Saturday, Sunday or other day on which banks are generally not open for business in Minneapolis, Minnesota. "Borrowing Base" means, at any time and subject to change from time to time in the Lender's commercially reasonable judgment, the lesser of: (a) the Maximum Line; or (b) the sum of: (i) 100% of the balance of the Custodial Account, as determined after conversion into U.S. Dollars at Opening Norwest Spot Price in the North American foreign exchange session as quoted by Reuters, plus (ii) 80% of Eligible Accounts, plus (iii) 35% of Eligible Finished Goods Inventory and 20% of Eligible In-Transit Inventory, provided that in no event shall Availability attributable to Eligible In-Transit Inventory exceed $400,000, provided, further, that (x) during the period from February 1 through May 31 in any year, Advances against Eligible Inventory shall not exceed $3,500,000, or (y) during the period from June 1 through January 31 in any year, Advances against Eligible Inventory shall not exceed $2,500,000. "City of Anoka Subordination Agreement" means the Subordination Agreement of even date herewith, executed by the City of Anoka, Minnesota in the Lender's favor and acknowledged by the Borrower. "Collateral" means all of the Borrower's Equipment, General Intangibles, Inventory, Receivables, Investment Property, all sums on deposit in the Custodian Account and in any Collateral Account or Toronto Dominion Collateral Account, and any items in any Lockbox or Toronto Dominion Lockbox; together with (i) all substitutions and replacements for and products of any of the foregoing; (ii) proceeds of any and all of the foregoing; (iii) in the case of all tangible goods, all accessions; (iv) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any tangible goods; and (v) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods. "Collateral Account" has the meaning given in the Collateral Account Agreement. "Collateral Account Agreement" means the Collateral Account Agreement of even date herewith by and among the Borrower and the Lender. "Commitment" means the Lender's commitment to make Advances to or for the Borrower's account pursuant to Article 2. "Credit Facility" means the credit facility being made available to the Borrower by the Lender pursuant to Article 2. "Custodial Pledge Agreement" means the Custodial Pledge and Security Agreement of even date herewith by and among the Borrower and the Lender. "Custodial Account" means those accounts maintained with the Lender, in the name of the Lender on behalf of the Borrower, to hold Austrian shillings and Canadian Dollars. "Dated Accounts" means (i) all Accounts of First Team Sports, Inc. that have a stated due date of more than thirty (30) days from the invoice date of such Account and (ii) all Accounts of Hespeler Hockey Company that have a stated due date of more than forty-five (45) days from the invoice date of such Account. "Debt" of any Person means all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet of that Person as at the date as of which Debt is to be determined. For purposes of determining a Person's aggregate Debt at any time, "Debt" shall also include the aggregate payments required to be made by such Person at any time under any lease that is considered a capitalized lease under GAAP. "Default" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default. "Default Period" means any period of time beginning on the earlier of (i) the day when a Default or Event of Default occurs or (ii) the fifteen day of any month during which a Default or Event of Default has occurred, and in either case ending on the date the Lender notifies the Borrower in writing that such Default or Event of Default has been cured or waived. "Default Rate" means, with respect to the Revolving Advances, an annual rate equal to two percent (2%) over the Revolving Floating Rate, which rate shall change when and as the Revolving Floating Rate changes and with respect to the Term Advance, an annual rate equal to two percent (2%) over the Term Floating Rate, which rate shall change when and as the Term Floating Rate changes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Earnings After Taxes" for a period means, post-tax earnings from continuing operations for such period. "Eligible Accounts" means all unpaid Accounts, net of any credits, except the following shall not in any event be deemed Eligible Accounts: (i) That portion of (i) Accounts of First Team Sports, Inc. that have a stated due date of 30 days or less after the invoice date that are unpaid after the earlier of 60 days or more after such stated due date or 150 days after the shipping date, or (ii) Accounts of Hespeler Hockey Company that have a stated due date of 45 days or less after the invoice date that are unpaid after the earlier of 60 days or more after such stated due date or 150 days after the shipping date, provided, however, that Dated Accounts shall be ineligible if not paid within 30 days of the stated due date or 150 days after the shipping date; (ii) That portion of Accounts that is disputed or subject to a claim of offset or a contra account; (iii) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer; (iv) Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which the Borrower has provided evidence satisfactory to the Lender that (A) the Lender has a first priority perfected security interest and (B) such Accounts may be enforced by the Lender directly against such unit of government under all applicable laws); (v) Accounts owed by an account debtor located outside the United States or Canada which are not (A) backed by a bank letter of credit naming the Lender as beneficiary or assigned to the Lender, in the Lender's possession and acceptable to the Lender in all respects, in its sole discretion, (B) covered by a foreign receivables insurance policy acceptable to the Lender in its sole discretion; (vi) Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business; (vii) Accounts owed by a shareholder, Subsidiary, Affiliate, officer or employee of the Borrower; (viii) Accounts not subject to a duly perfected security interest in the Lender's favor or which are subject to any lien, security interest or claim in favor of any Person other than the Lender including without limitation any payment or performance bond; (ix) That portion of Accounts that has been restructured, extended, amended or modified; (x) That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes; (xi) Accounts owed by an account debtor, regardless of whether otherwise eligible, if 25% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (ix) above; (xii) Accounts owed by any one account debtor to the extent such Accounts exceed 15% of the Borrower's total Accounts; (xiii) Accounts of First Team Sports GmbH; (xiv) Accounts whose invoice amount equals or exceeds $50,000, unless the Lender receives copies of such invoices and corresponding shipping documents and such documents are deemed acceptable to the Lender in its sole discretion; and (xv) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in its sole discretion. "Eligible Finished Goods Inventory" means Eligible Inventory consisting of finished goods ready for sale by Borrower. "Eligible In-Transit Inventory" means Inventory manufactured in Asia that the Borrower takes title to immediately after such Inventory has left its Asian port in route to the United States. "Eligible Inventory" means all Inventory of the Borrower, at the lower of cost or market value as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Inventory: (i) (i) Inventory that is: in-transit (but not including Eligible In-Transit Inventory as such term is defined herein); located at any warehouse, job site or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title; on consignment from any Person; on consignment to any Person or subject to any bailment unless such consignee or bailee has executed an agreement with the Lender; (ii) Supplies, packaging, parts, raw materials or sample Inventory; (iii) Work-in-process Inventory; (iv) Inventory that is damaged, obsolete, slow moving or not currently saleable in the normal course of the Borrower's operations; (v) Inventory that the Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof; (vi) Inventory that is perishable or live; (vii) Inventory manufactured by the Borrower pursuant to a license unless the applicable licensor has agreed in writing to permit the Lender to exercise its rights and remedies against such Inventory except that Kablooe Product Inc. and Creative Pool Trendscouting GmbH shall be deemed Eligible Inventory; provided, however, if no Default or Event of Default has occurred and is continuing hereunder, the Inventory manufactured by the Borrower pursuant to those certain license agreements between the Borrower and WDG Enterprises, Inc. and International Marketing Management, L.L.C., respectively, shall be deemed to be Eligible Inventory for a period of ninety (90) days from the date of this Agreement even though such licensors have not agreed in writing to permit the Lender to exercise its rights and remedies against such Inventory; (viii) Inventory that is subject to a security interest in favor of any Person other than the Lender; (ix) Inventory that is located in Canada or Austria; and (x) Inventory otherwise deemed ineligible by the Lender in its sole discretion. "Environmental Indemnity Agreement" means the Environmental Indemnity Agreement dated of even date herewith and executed by First Team Sports, Inc. in favor of the Lender with regard to the Premises. "Environmental Laws" has the meaning specified in Section 5.12. "Equipment" means all of the Borrower's equipment, as such term is defined in the UCC and the PPSA, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and record-keeping equipment, parts, tools, supplies, and including specifically (without limitation) the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by the Borrower. "Event of Default" has the meaning specified in Section 8.1. "Funding Date" has the meaning given in Section 2.1. "GAAP" means generally accepted accounting principles, applied on a basis consistent with the accounting practices applied in the financial statements described in Section 5.5. "General Intangibles" or "Intangibles" means all of the Borrower's general intangibles, as such term is defined in the UCC and the PPSA, whether now owned or hereafter acquired, including (without limitation) all present and future patents, patent applications, copyrights, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use the Borrower's name, and the goodwill of the Borrower's business. "Hazardous Substance" has the meaning given in Section 5.12. "Inventory" means all of the Borrower's inventory, as such term is defined in the UCC and the PPSA, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. "Investment Property" means all of the Borrower's investment property, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all securities, security entitlements, securities accounts, commodity contracts, commodity accounts, stocks, bonds, mutual fund shares, money market shares and U.S. Government securities. "L/C Amount" means the sum of (i) the aggregate undrawn face amount of any issued and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of Reimbursement. "L/C Application" means an application and agreement for letters of credit in a form acceptable to the Lender. "Letter of Credit" has the meaning specified in Section 2.2. "Life Insurance Assignment" means an Assignment of Life Insurance Policy as Collateral to be executed by the owner and the beneficiary thereof, in form and substance satisfactory to the Lender, granting the Lender a first priority lien on the Life Insurance Policy to secure payment of the Obligations. "Life Insurance Policy" has the meaning given in Section 6.11. "Loan Documents" means this Agreement, the Notes and the Security Documents. "Lockbox" has the meaning given in the Lockbox Agreement. "Lockbox Agreement" means the Lockbox Agreement by and among the Borrower and the Lender, of even date herewith. "Maturity Date" means August 31, 2002. "Maximum Line" means $10,000,000, unless said amount is reduced pursuant to Section 2.10, in which event it means the amount to which said amount is reduced. "Mortgage" means the Mortgage and Security Agreement and Fixture Financing Statement dated of even date herewith and executed by First Team Sports, Inc. in favor of the Lender, granting the Lender a first priority lien with regard to the Borrower's facility in the Premises. "Net Worth" means the Borrower's fiscal year-to-date after-tax net worth minus any dividends distributed by the Borrower in such fiscal year, as determined in accordance with GAAP. "Note" means the Revolving Note or the Term Note, and "Notes" means the Revolving Note and the Term Note. "Obligations" means the Notes and each and every other debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, all indebtedness of the Borrower arising under this Agreement, the Notes or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into. "Obligations of Reimbursement" has the meaning given in Section 2.3. "Patent Security Agreement" means the Patent and Trademark Security Agreement by the Borrower in favor of the Lender of even date herewith. "Permitted Lien" has the meaning given in Section 7.1. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan or other plan maintained for the Borrower's employees and covered by Title IV of ERISA. "PPSA" means the Personal Property Security Act (Ontario), as in effect from time to time. "Premises" means all premises where the Borrower conducts its business and has any rights of possession, including, but not limited to, the premises legally described in Exhibit D attached hereto. "Prime Rate" means the rate of interest publicly announced from time to time by the Lender as its "prime rate" or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender. "Receivables" means each and every right of the Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by the Borrower or by some other person who subsequently transfers such person's interest to the Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which the Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles. "Reportable Event" shall have the meaning assigned to that term in Title IV of ERISA. "Revolving Advance" has the meaning given in Section 2.1. "Revolving Floating Rate" means an annual rate equal to the Prime Rate, which annual rate shall change when and as the Prime Rate changes. "Revolving Note" means the Borrower's revolving promissory notes, payable to the order of the Lender in substantially the form of Exhibit A hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. "Security Documents" means this Agreement, the Mortgage, the Environmental Indemnity Agreement, the Collateral Account Agreement, the Lockbox Agreement, the Toronto-Dominion Lockbox Agreement, the Custodial Pledge Agreement, the Patent Security Agreement and any other document delivered to the Lender from time to time to secure the Obligations, as the same may hereafter be amended, supplemented or restated from time to time. "Security Interest" has the meaning given in Section 3.1. "Subordination Agreement" means the City of Anoka Subordiantion Agreement and any other subordination agreement accepted by the Lender from time to time, as the same may hereafter be amended, supplemented or restated from time to time. "Subsidiary" means any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. "Term Advance" has the meaning specified in Section 2.4. "Term Floating Rate" means an annual rate equal to the Prime Rate, which annual rate shall change when and as the Prime Rate changes. "Term Note" means the Borrower's promissory note, payable to the order of the Lender in substantially the form of Exhibit B hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. "Termination Date" means the earliest of (i) the Maturity Date, (ii) the date the Borrower terminates the Credit Facility, or (iii) the date the Lender demands payment of the Obligations. "Toronto-Dominion Lockbox" has the meaning given in the Toronto-Dominion Lockbox Agreement. "Toronto-Dominion Lockbox Agreement" means the Lockbox Agreement by and among the Borrower and The Toronto-Dominion Bank, of even date herewith. "UCC" means the Uniform Commercial Code as in effect from time to time in the state designated in Section 9.13 as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. 1.2 Cross References. All references in this Agreement to Articles, Sections and subsections, shall be to Articles, Sections and subsections of this Agreement unless otherwise explicitly specified. 2. Amount and Terms of the Credit Facility 2.1 Revolving Advances. The Lender agrees to make advances to the Borrower from time to time from the date all of the conditions set forth in Section 4.1 are satisfied (the "Funding Date") to the Termination Date, on the terms and subject to the conditions herein set forth (the "Revolving Advances"). The Lender shall have no obligation to make a Revolving Advance if, after giving effect to such requested Revolving Advance, the sum of the outstanding and unpaid Revolving Advances would exceed the Borrowing Base. The Borrower's obligation to pay the Revolving Advances shall be evidenced by the Revolving Note and shall be secured by the Collateral as provided in Article 3 and by the Mortgage, provided, however, that the amount of Revolving Advances secured by the Mortgage shall be limited to $1,500,000. Within the limits set forth in this Section 2.1, the Borrower may borrow, prepay pursuant to Section 2.10 and reborrow. The Borrower agrees to comply with the following procedures in requesting Revolving Advances under this Section 2.1: (a) The Borrower shall make each request for a Revolving Advance to the Lender before 11:00 a.m. (Minneapolis time) of the day of the requested Revolving Advance. Requests may be made in writing or by telephone, specifying the date of the requested Revolving Advance and the amount thereof. Each request shall be by (i) any officer of the Borrower; or (ii) any person designated as the Borrower's agent by any officer of the Borrower in a writing delivered to the Lender; or (iii) any person whom the Lender reasonably believes to be an officer of the Borrower or such a designated agent. (b) Upon fulfillment of the applicable conditions set forth in Article 4, the Lender shall disburse the proceeds of the requested Revolving Advance by crediting the same to the Borrower's demand deposit account maintained with the Lender unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Upon the Lender's request, the Borrower shall promptly confirm each telephonic request for an Advance by executing and delivering an appropriate confirmation certificate to the Lender. The Borrower shall repay all Advances even if the Lender does not receive such confirmation and even if the person requesting an Advance was not in fact authorized to do so. Any request for an Advance, whether written or telephonic, shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the time of the request. 2.2 Letters of Credit. (a) The Lender agrees, on the terms and subject to the conditions herein set forth, to issue, from the Funding Date to the Termination Date, one or more irrevocable standby or documentary letters of credit (each, a "Letter of Credit") for the Borrower's account. The Lender shall have no obligation to issue any Letter of Credit if the face amount of the Letter of Credit to be issued would exceed the Borrowing Base less the sum of (A) all outstanding and unpaid Revolving Advances and (B) the L/C Amount. Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into by the Borrower and the Lender and completed in a manner satisfactory to the Lender. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application and the terms of this Agreement are inconsistent, the terms hereof shall control. (b) No Letter of Credit shall be issued with an expiration date later than the Termination Date in effect as of the date of issuance. (c) Any request to cause the Lender to issue a Letter of Credit under this Section 2.2 shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the date of the request. 2.3 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement. The Borrower agrees to pay to the Lender any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, and the amounts designated below, when and as designated: (a) The Borrower hereby agrees to pay the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Lender may pay or incur relative to such draw and the applicable L/C Application, plus interest on all such amounts, charges and expenses as set forth below (the Borrower's obligation to pay all such amounts is herein referred to as the "Obligation of Reimbursement"). (b) Whenever a draft is submitted under a Letter of Credit, the Lender shall make a Revolving Advance in the amount of the Obligation of Reimbursement and shall apply the proceeds of such Revolving Advance thereto. Such Revolving Advance shall be repayable in accordance with and be treated in all other respects as a Revolving Advance hereunder. (c) If a draft is submitted under a Letter of Credit when the Borrower is unable, because a Default Period then exists or for any other reason, to obtain a Revolving Advance to pay the Obligation of Reimbursement, the Borrower shall pay to the Lender on demand and in immediately available funds, the amount of the Obligation of Reimbursement together with interest, accrued from the date of the draft until payment in full at the Default Rate. Notwithstanding the Borrower's inability to obtain a Revolving Advance for any reason, the Lender is irrevocably authorized, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement and all accrued but unpaid interest thereon. (d) The Borrower's obligation to pay any Revolving Advance made under this Section 2.3 shall be evidenced by Revolving Note and shall bear interest as provided in Section 2.6. 2.4 Term Advance. The Lender agrees, on the terms and subject to the conditions herein set forth, to make a single advance to the Borrower (via a title insurance company) in an amount not to exceed $4,500,000, on or after the Funding Date (the "Term Advance"). The Borrower's obligation to pay the Term Advance shall be evidenced by the Term Note and shall be secured by the Mortgage. Upon fulfillment of the applicable conditions set forth in Article 4, the Lender shall deposit the proceeds of the Term Advance by crediting the same to the Borrower's demand deposit account identified in Section 2.1(b), unless the Lender and the Borrower shall agree in writing to another manner of disbursement. 2.5 Payment of Term Note. The outstanding principal balance of the Term Note shall be due and payable as follows: (a) Beginning on October 1, 1999, and on the first day of each month thereafter, in monthly principal installments equal to $18,750, plus interest. (b) On the Termination Date, the entire unpaid principal balance of the Term Note, and all unpaid interest accrued thereon, shall in any event be due and payable. 2.6 Interest; Default Interest; Participations; Usury. Interest accruing on the Notes shall be due and payable in arrears on the first day of each month. (a) Revolving Note. Except as set forth in Sections 2.6(c) and 2.6(e), the outstanding principal balance of the Revolving Note shall bear interest at the Revolving Floating Rate; provided, however, if the Borrower generates Net Income of no less than $500,000 for its fiscal year ending February 28, 2000 and no Default or Event of Default has occurred and is continuing hereunder, the Revolving Note shall bear interest at the Revolving Floating Rate less one quarter of one percent (.25%) per annum, effective within thirty (30) days of the Lender's receipt of the audited financial statements required under Section 6.1(a). (b) Term Note. Except as set forth in Sections 2.6(c) and 2.6(e), the outstanding principal balance of the Term Note shall bear interest at the Term Floating Rate; provided, however, if the Borrower generates Net Income of no less than $500,000 for its fiscal year ending February 28, 2000 and no Default or Event of Default has occurred and is continuing hereunder, the Term Note shall bear interest at the Term Floating Rate less one quarter of one percent (.25%) per annum, effective within thirty (30) days of the Lender's receipt of the audited financial statements required under Section 6.1(a). (c) Default Interest Rate. At any time during any Default Period, in the Lender's sole discretion and without waiving any of its other rights and remedies, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective for any periods designated by the Lender from time to time during that Default Period. (d) Participations. If any Person shall acquire a participation in the Advances under this Agreement, the Borrower shall be obligated to the Lender to pay the full amount of all interest calculated under this Agreement, along with all other fees, charges and other amounts due under this Agreement, regardless if such Person elects to accept interest with respect to its participation at a lower rate than the Revolving Floating Rate or the Term Floating Rate, or otherwise elects to accept less than its pro rate share of such fees, charges and other amounts due under this Agreement. (e) Usury. In any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. 2.7 Fees. (a) Origination Fee. The Borrower hereby agrees to pay the Lender a fully earned and non-refundable origination fee of $34,000, due and payable upon the execution of this Agreement. The Lender acknowledges receipt of $19,000 toward payment of this fee and the fees, costs and expenses described in Sections 2.7(b) and 9.6. (b) Unused Line Fee. For the purposes of this Section 2.7(b), "Unused Amount" means the Maximum Line reduced by outstanding Revolving Advances and the L/C Amount. The Borrower agrees to pay to the Lender an unused line fee at the rate of one quarter of one percent (.25%) per annum on the average daily Unused Amount from the date of this Agreement to and including the Termination Date, due and payable monthly in arrears on the first day of the month and on the Termination Date. (c) Audit Fees. The Borrower hereby agrees to pay the Lender, on demand, audit fees in connection with any audits or inspections conducted by the Lender of any Collateral or the Borrower's operations or business at the rates established from time to time by the Lender as its audit fees (which fees are currently $500 per day per auditor or $62.50 per hour per auditor), together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection; provided, however, that except during Default Periods, the Borrower shall not have to reimburse the Lender for such fees, costs and expenses to the extent they exceed $5000 per calendar year. For the purposes of this subsection, the term "audit fees" shall not include the fees incured by the Lender as a result of due diligence and audit pick-ups conducted prior to the date of this Agreement, which fees shall be reimbursed by the Borrower up to the amount of $5000. 2.8 Computation of Interest and Fees; When Interest Due and Payable. Interest accruing on the outstanding principal balance of the Advances and fees hereunder outstanding from time to time shall be computed on the basis of actual number of days elapsed in a year of 360 days. Interest shall be payable in arrears on the first day of each month and on the Termination Date. 2.9 Capital Adequacy. If any Related Lender determines at any time that its Return has been reduced as a result of any Rule Change, such Related Lender may require the Borrower to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change; provided, however, that the Borrower may prepay without penalty under Section 2.11 or this Section 2.9, all, but not part, of the Revolving Advances and the Term Advance by obtaining a firm commitment to lend with terms substantially similar to the terms of the Loan Facility but, after giving effect to the Rule Change, the loan resulting from such firm commitment will not subject the Borrower to the costs being required by such Related Lender to restore its Return. For purposes of this Section 2.9: (a) "Capital Adequacy Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (b) "Return," for any period, means the return as determined by such Related Lender on the Advances based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules then in effect. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination in whole of this Agreement. (c) "Rule Change" means any change in any Capital Adequacy Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the Closing Date are scheduled to take place under the existing Capital Adequacy Rules or any increases in the capital that any Related Lender is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of the financial condition of such Related Lender. (d) "Related Lender" includes (but is not limited to) the Lender, any parent corporation of the Lender and any assignee of any interest of the Lender hereunder and any participant in the loans made hereunder. Certificates of any Related Lender sent to the Borrower from time to time claiming compensation under this Section 2.9, stating the reason therefor and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to the Related Lender hereunder to restore its Return shall be conclusive absent manifest error. In determining such amounts, the Related Lender may use any reasonable averaging and attribution methods. 2.10 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by the Borrower. Except as otherwise provided herein, the Borrower may prepay the Revolving Advances in whole at any time or from time to time in part. The Borrower may prepay the Term Advance (other than in accordance with Section 2.5), terminate the Credit Facility or reduce the Maximum Line at any time if it (i) gives the Lender at least 30 days' prior written notice and (ii) pays the Lender the prepayment, termination or line reduction fees in accordance with Section 2.11. Any prepayment of the Term Advance (other than in accordance with Section 2.5) or reduction in the Maximum Line must be in an amount not less than $100,000 or an integral multiple thereof. If the Borrower reduces the Maximum Line to zero, all Obligations shall be immediately due and payable. Any partial prepayments of the Term Note (other than in accordance with Section 2.5) shall be applied to principal payments due and owing in inverse order of their maturities. Upon termination of the Credit Facility and payment and performance of all Obligations, the Lender shall release or terminate the Security Interest and the Security Documents. 2.11 Termination and Line Reduction Fees; Prepayment Fees. (a) Termination and Line Reduction Fees. If the Credit Facility is terminated for any reason as of a date other than the Maturity Date, or the Borrower reduces the Maximum Line, the Borrower shall pay to the Lender a fee in an amount equal to a percentage of the Maximum Line (or the reduction, as the case may be) as follows: (i) three percent (3%) if the termination or reduction occurs on or before the first anniversary of the Funding Date; (ii)two percent (2%) if the termination or reduction occurs after the first anniversary of the Funding Date but on or before the second anniversary of the Funding Date; and (iii) one percent (1%) if the termination or reduction occurs after the second anniversary of the Funding Date. (b) Prepayment Fees. If any portion of the Term Note is paid other than in accordance with Section 2.5, the Borrower shall pay to the Lender a prepayment fee in an amount equal to a percentage of the amount so paid as follows: (i) three percent (3%) if the payment occurs on or before the first anniversary of the Funding Date; (ii) two percent (2%) if the payment occurs after the first anniversary of the Funding Date but on or before the second anniversary of the Funding Date; and (iii) one percent (1%) if the payment occurs after the second anniversary of the Funding Date. Any partial prepayments of the Term Note shall be applied to principal payments due and owing in inverse order of their maturities and must be in a minimum amount of $100,000. (c) Waiver of Termination, Line Reduction and Prepayment Fees. The Borrower will not be required to pay the termination, line reduction and prepayment fees otherwise due under this Section 2.11 if such termination, line reduction or prepayment is made because of increased cash flow generated from the Borrower's operations or refinancing by an affiliate of the Lender. 2.12 Mandatory Prepayment. Without notice or demand, if the outstanding principal balance of the Revolving Advances shall at any time exceed the Borrowing Base, the Borrower shall immediately prepay the Revolving Advances to the extent necessary to eliminate such excess. Any payment received by the Lender under this Section 2.12 or under Section 2.10 may be applied to the Obligations, in such order and in such amounts as the Lender, in its discretion, may from time to time determine; provided that any prepayment under Section 2.10 which the Borrower designates as a partial prepayment of the Term Note shall be applied to principal installments of the Term Note in inverse order of maturity. 2.13 Payment. The Lender from time to time at its discretion shall, after allowing two (2) Banking Days, apply deposited funds in the Collateral Account to the payment of the Obligations, in any order or manner of application satisfactory to the Lender, by transferring such funds to the Lender's general account. All wire transfer funds received by the Lender on behalf of the Borrower shall be applied on a same-day basis (provided such funds are received prior to 1:00 p.m. central standard time). The Lender may hold all payments not constituting immediately available funds for up to three (3) additional days before applying them to the Obligations. Notwithstanding anything in Section 2.1, the Borrower hereby authorizes the Lender, in its discretion at any time or from time to time without the Borrower's request and even if the conditions set forth in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount equal to the portion of the Obligations from time to time due and payable. 2.14 Payment on Non-Banking Days. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances or the fees hereunder, as the case may be. 2.15 Use of Proceeds. The Borrower shall use the proceeds of Advances for ordinary working capital purposes and to payoff loans from its senior lenders. 2.16 Liability Records. The Lender may maintain from time to time, at its discretion, liability records as to the Obligations. All entries made on any such record shall be presumed correct until the Borrower establishes the contrary. Upon the Lender's demand, the Borrower will admit and certify in writing the exact principal balance of the Obligations that the Borrower then asserts to be outstanding. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrower unless the Borrower gives the Lender specific written notice of exception within 45 days after receipt. 3. Security Interest; Occupancy; Setoff 3.1 Grant of Security Interest. The Borrower hereby pledges, assigns and grants to the Lender a security interest (collectively referred to as the "Security Interest") in the Collateral, as security for the payment and performance of the Obligations. The Security Interest created hereby is intended to commence when this Agreement is executed by the Borrower and delivered to the Lender. 3.2 Notification of Account Debtors and Other Obligors. The Lender may at any time (whether or not a Default Period then exists) notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The Borrower will join in giving such notice if the Lender so requests. At any time after the Borrower or the Lender gives such notice to an account debtor or other obligor, the Lender may, but need not, in the Lender's name or in the Borrower's name, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor; and (b) as the Borrower's agent and attorney-in-fact, notify the United States Postal Service to change the address for delivery of the Borrower's mail to any address designated by the Lender, otherwise intercept the Borrower's mail, and receive, open and handle the Borrower's mail, applying all Collateral as permitted under this Agreement and holding all other mail for the Borrower's account or forwarding such mail to the Borrower's last known address. 3.3 Assignment of Insurance. As additional security for the payment and performance of the Obligations, the Borrower hereby assigns to the Lender any and all monies (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto, and the Borrower hereby directs the issuer of any such policy to pay all such monies directly to the Lender. At any time, whether or not a Default Period then exists, the Lender may (but need not), in the Lender's name or in the Borrower's name, execute and deliver proof of claim, receive all such monies, endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. 3.4 Occupancy. (a) The Borrower hereby irrevocably grants to the Lender the right to take possession of the Premises at any time during a Default Period. (b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Collateral and for other purposes that the Lender may in good faith deem to be related or incidental purposes. (c) The Lender's right to hold the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all Obligations and termination of the Commitment, and (ii) final sale or disposition of all goods constituting Collateral and delivery of all such goods to purchasers. (d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, that if the Lender does pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Borrower shall reimburse the Lender promptly for the full amount thereof. In addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Agreement or the provisions of this Section 3.4. 3.5 License. Without limiting the generality of the Patent Security Agreement, the Borrower hereby grants to the Lender a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, franchises, trade names, copyrights and patents of the Borrower for the purpose of selling, leasing or otherwise disposing of any or all Collateral during any Default Period. 3.6 Financing Statement. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by the Borrower is sufficient as a financing statement and may be filed as a financing statement in any state or province to perfect the security interests granted hereby. The Borrower authorizes the Lender to file such financing statements and financing change statements as the Lender may deem appropriate to perfect on an on-going basis and continue the Security Interest. For this purpose, the following information is set forth: Name and address of Debtor: First Team Sports, Inc. 1201 Lund Boulevard Anoka, Minnesota 55303 Federal Tax Identification No. 41-1545748 Hespeler Hockey Holding, Inc. 1201 Lund Boulevard Anoka, Minnesota 55303 Federal Tax Identification No. 41-1912022 Hespeler Hockey Company 1201 Lund Boulevard Anoka, Minnesota 55303 Federal Tax Identification No. 873538193 First Team Sports GmbH Triester Strasse 391 Graz, Austria 8055 Federal Tax Identification No. 990/9505 Name and address of Secured Party: Norwest Bank Minnesota, National Association Norwest Center Sixth Street and Marquette Avenue N9312-040 Minneapolis, Minnesota 55479 Federal Tax Identification No. 41-1592157 3.7 Setoff. The Borrower agrees that the Lender may at any time or from time to time, at its sole discretion and without demand and without notice to anyone, setoff any liability owed to the Borrower by the Lender, whether or not due, against any Obligation, whether or not due. In addition, each other Person holding a participating interest in any Obligations shall have the right to appropriate or setoff any deposit or other liability then owed by such Person to the Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to the Borrower the amount of such participating interest. 3.8 Rights and Remedies under PPSA. In addition to those rights granted herein and in any other agreement now or hereafter in effect between the Borrower and the Lender and in addition to any other rights the Lender may have at law or in equity, the Lender shall have, both before and after any Event of Default, all rights and remedies of a secured party under the PPSA. However, the Lender shall not be liable or accountable for any failure to exercise its remedies, take possession of, collect, enforce, realize, sell, lease, license or otherwise dispose of Collateral or to institute any proceedings for such purposes. 3.9 Appointment of Receiver. Upon the occurrence of and during the continuance of any Event of Default, the Lender may appoint or reappoint by instrument in writing, any person or persons, whether an officer or officers or an employee or employees of the Lender or not, to be a receiver or receivers (hereinafter called a "Receiver," which term when used herein shall include a receiver and manager) of Collateral (including any interest, income or profits therefrom) and may remove any Receiver so appointed and appoint another in his/her stead. Any such Receiver shall, so far as concerns responsibility for his/her acts, be deemed the agent of the Borrower and not of the Lender and the Lender shall not be in any way responsible for any misconduct, negligence or non-feasance on the part of any such Receiver, his/her servants, agents or employees. Subject to the provisions of the instrument appointing him/her, any such Receiver shall have power to take possession of Collateral, to preserve Collateral or its value, to carry on or concur in carrying on all or any part of the business of the Borrower and to sell, lease, license or otherwise dispose of or concur in selling, leasing, licensing or otherwise disposing of Collateral. To facilitate the foregoing powers, any such Receiver may, to the exclusion of all others, to the extent permitted by law (provided that any limitations under applicable law shall only apply to the extent that they may not be waived or otherwise varied), including the Borrower, enter upon, use and occupy all premises owned or occupied by the Borrower wherein Collateral may be situate, maintain Collateral upon such premises, borrow money on a secured or unsecured basis and use Collateral directly in carrying on the Borrower's business or as security for loans or advances to enable the Receiver to carry on Borrower's business or otherwise, as such Receiver shall, in its discretion, determine. Except as may be otherwise directed by the Lender, all Money received from time to time by such Receiver in carrying out his/her appointment shall be received in trust for and paid over to the Lender. Every such Receiver may, in the discretion of the Lender, be vested with all or any of the rights and powers of the Lender. This Section 3.9 shall only apply to the Collateral of Hespeler Hockey Company located in Canada. 4. Conditions of Lending 4.1 Conditions Precedent to the Initial Revolving and Term Advance. The Lender's obligation to make the initial Revolving Advance and Term Advance hereunder shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) This Agreement, properly executed by the Borrower. (b) The Notes, properly executed by the Borrower. (c) The Mortgage, properly executed by First Team Sports, Inc. (d) The Environmental Indemnity Agreement, properly executed by First Team Sports, Inc. (e) A commitment for a mortgagee's title insurance policy regarding the Premises secured by the Mortgage, in form and substance acceptable to the Lender. (f) The Life Insurance Assignment, properly executed by the beneficiary and owner thereof, and the Life Insurance Policy, each in form and substance satisfactory to the Lender, together with such evidence as the Lender may request that the Life Insurance Policy is subject to no assignments or encumbrances other than the Life Insurance Assignment. (g) The Collateral Account Agreement, properly executed by the Borrower. (h) The Lockbox Agreement, properly executed by the Borrower. (i) The Toronto-Dominion Lockbox Agreement, properly executed by the Borrower and The Toronto-Dominion Bank. (j) The Custodial Pledge Agreement, properly executed by the Borrower. (k) The Patent Security Agreement, properly executed by the Borrower. (l) The City of Anoka Subordination Agreement, properly executed by the City of Anoka, Minnesota and acknowledged by the Borrower. (m) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against the Borrower, (ii) no financing statements or assignments of patents, trademarks or copyrights have been filed and remain in effect against the Borrower except those financing statements and assignments of patents, trademarks or copyrights relating to Permitted Liens or to liens held by Persons who have agreed in writing that upon receipt of proceeds of the Advances, they will deliver UCC or PPSA releases and/or terminations and releases of such assignments of patents, trademarks or copyrights satisfactory to the Lender, and (iii) the Lender has duly filed all financing statements (including Canadian financing statements) necessary to perfect the Security Interest, to the extent the Security Interest is capable of being perfected by filing. (n) A certificate of the Borrower's Secretary or Assistant Secretary certifying as to (i) the resolutions of the Borrower's directors and, if required, shareholders, authorizing the execution, delivery and performance of the Loan Documents, (ii) the Borrower's articles of incorporation and bylaws, and (iii) the signatures of the Borrower's officers or agents authorized to execute and deliver the Loan Documents and other instruments, agreements and certificates, including Advance requests, on the Borrower's behalf. (o) A current certificate issued by the Secretary of State or similar governing authority of the state or jurisdiction where each Borrower is incorporated, certifying that such Borrower is in compliance with all applicable organizational requirements of such state or jurisdiction. (p) Evidence that the Borrower is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. (q) A certificate of an officer of the Borrower in his personal capacity as an officer of the Borrower, confirming, in his personal capacity, the representations and warranties set forth in Article 5. (r) An opinion of counsel to the Borrower, addressed to the Lender. (s) Certificates of the insurance required hereunder, with all hazard insurance containing a lender's loss payable endorsement in the Lender's favor and with all liability insurance naming the Lender as an additional insured. (t) After giving effect to the requested initial Revolving Advance, Availability will still total at least $1,000,000; (u) Payment of the fees and commissions due through the date of the initial Advance under Section 2.7 and expenses incurred by the Lender through such date and required to be paid by the Borrower under Section 9.6, including all legal expenses incurred through the date of this Agreement. (v) Such other documents as the Lender in its sole discretion may require. 4.2 Conditions Precedent to All Advances. The Lender's obligation to make each Advance shall be subject to the further conditions precedent that on such date: (a) the representations and warranties contained in Article 5 are correct on and as of the date of such Advance as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance which constitutes a Default or an Event of Default. 5. Representations and Warranties The Borrower represents and warrants to the Lender as follows: 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Tax Identification Number. First Team Sports, Inc. is a corporation, duly organized, validly existing and in good standing under the laws of the State of Minnesota, Hespeler Hockey Holding, Inc. is a corporation, duly organized, validly existing and in good standing under the laws of the State of Minnesota, Hespeler Hockey Company is an unlimited liability company, duly organized, validly existing and in good standing under the laws of Nova Scotia, and First Team Sports GmbH is a corporation, duly organized, validly existing and in good standing under the laws of Austria. Each Borrower is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. Each Borrower has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. During their existence, each Borrower has done business solely under the names set forth in Schedule 5.1 hereto. The Borrower's chief executive office and principal place of business is located at the address set forth in Schedule 5.1 hereto, and all of the Borrower's records relating to its business or the Collateral are kept at that location. All Inventory and Equipment is located at that location or at one of the other locations set forth in Schedule 5.1 hereto. Each Borrower's tax identification number is correctly set forth in Section 3.6 hereto. 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements. The execution, delivery and performance by the Borrower of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the Borrower's stockholders; (ii) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof (except for the Mortgage and fixture financing statements that will be filed by the Lender after the execution of this Agreement); (iii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or of the Borrower's articles of incorporation or bylaws; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; provided, however, the Borrower makes no representations or warranties under this subsection (iv) about any license agreements the Borrower may have with any of its licensors listed in Section 8.1(r); or (v) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than the Security Interest and the Mortgage lien) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. 5.3 Legal Agreements. This Agreement constitutes and, upon due execution by the Borrower, the other Loan Documents will constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. 5.4 Subsidiaries. Except as set forth in Schedule 5.4 hereto, the Borrower has no Subsidiaries. 5.5 Financial Condition; No Adverse Change. The Borrower has heretofore furnished to the Lender audited financial statements of the Borrower for its fiscal year ended February 29, 1999 and unaudited financial statements of the Borrower for the fiscal year-to-date period ended June 30, 1999 and those statements fairly present the Borrower's financial condition on the dates thereof and the results of its operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements, there has been no material adverse change in the Borrower's business, properties or condition (financial or otherwise). 5.6 Litigation. Except as set forth in Schedule 5.6 hereto, there are no actions, suits or proceedings pending or, to the Borrower's knowledge, threatened against or affecting the Borrower or any of its Affiliates or the properties of the Borrower or any of its Affiliates before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Affiliates, would have a material adverse effect on the financial condition, properties or operations of the Borrower or any of its Affiliates. 5.7 Regulation U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. 5.8 Taxes. The Borrower and its Affiliates have paid or caused to be paid to the proper authorities when due all federal, state, provincial, municipal and local taxes required to be withheld by each of them. The Borrower and its Affiliates have filed all federal, state, provincial and local tax returns which to the knowledge of the officers of the Borrower or any Affiliate, as the case may be, are required to be filed, and the Borrower and its Affiliates have paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due. 5.9 Titles and Liens. The Borrower has good and absolute title to all Collateral described in the collateral reports provided to the Lender and all other Collateral, properties and assets reflected in the latest financial statements referred to in Section 5.5 and all proceeds thereof, free and clear of all mortgages, security interests, liens and encumbrances, except for Permitted Liens. No financing statement naming the Borrower as debtor is on file in any office except to perfect only Permitted Liens. 5.10 Plans. Except as set forth in Schedule 5.10 hereto, neither the Borrower nor any of its Affiliates maintains or has maintained any Plan. Neither the Borrower nor any Affiliate has received any notice or has any knowledge to the effect that it is not in full compliance with any of the requirements of ERISA. No Reportable Event or other fact or circumstance which may have an adverse effect on the Plan's tax qualified status exists in connection with any Plan. Neither the Borrower nor any of its Affiliates has: (a) Any accumulated funding deficiency within the meaning of ERISA; or (b) Any liability or knows of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which are or which may become payable to participants or beneficiaries of any such Plan). 5.11 Default. The Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could have a material adverse effect on the Borrower's financial condition, properties or operations. 5.12 Environmental Matters. (a) Definitions. As used in this Agreement, the following terms shall have the following meanings: (i) "Environmental Law" means any federal, state, provincial, local or other governmental statute, regulation, law or ordinance dealing with the protection of human health and the environment. (ii) "Hazardous Substances" means pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and fractions thereof, and all other chemicals, wastes, substances and materials listed in, regulated by or identified in any Environmental Law. (b) Except as provided on Schedule 5.12 hereto, to the Borrower's best knowledge, there are not present in, on or under the Premises any Hazardous Substances in such form or quantity as to create any liability or obligation for either the Borrower or the Lender under common law of any jurisdiction or under any Environmental Law, and no Hazardous Substances have ever been stored, buried, spilled, leaked, discharged, emitted or released in, on or under the Premises in such a way as to create any such liability. (c) To the Borrower's best knowledge, the Borrower has not disposed of Hazardous Substances in such a manner as to create any liability under any Environmental Law. (d) There are not and there never have been any requests, claims, notices, investigations, demands, administrative proceedings, hearings or litigation, relating in any way to the Premises or the Borrower, alleging liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant thereto. To the Borrower's best knowledge, no such matter is threatened or impending. (e) To the Borrower's best knowledge, the Borrower's businesses are and have in the past always been conducted in accordance with all Environmental Laws and all licenses, permits and other authorizations required pursuant to any Environmental Law and necessary for the lawful and efficient operation of such businesses are in the Borrower's possession and are in full force and effect. No permit required under any Environmental Law is scheduled to expire within 12 months and there is no threat that any such permit will be withdrawn, terminated, limited or materially changed. (f) To the Borrower's best knowledge, the Premises are not and never have been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state, provincial or local list, schedule, log, inventory or database. (g) The Borrower has delivered to Lender all environmental assessments, audits, reports, permits, licenses and other documents describing or relating in any way to the Premises or Borrower's businesses. 5.13 Submissions to Lender. All financial and other information provided to the Lender by or on behalf of the Borrower in connection with the Borrower's request for the credit facilities contemplated hereby is true and correct in all material respects and, as to projections, valuations or pro forma financial statements, present a good faith opinion as to such projections, valuations and pro forma condition and results. 5.14 Financing Statements. The Borrower has provided to the Lender signed financing statements, or has authorized the Lender's agent to file financing statements, sufficient when filed to perfect the Security Interest and the other security interests created by the Security Documents. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral and all other collateral described in the Security Documents which is capable of being perfected by filing financing statements. None of the Collateral or other collateral covered by the Security Documents is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. 5.15 Rights to Payment. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral or other collateral covered by the Security Documents is (or, in the case of all future Collateral or such other collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in the Borrower's records pertaining thereto as being obligated to pay such obligation. 6. Borrower's Affirmative Covenants So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing: 6.1 Reporting Requirements. The Borrower will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail acceptable to the Lender: (a) as soon as available, and in any event within 90 days after the end of each fiscal year of the Borrower, the Borrower's audited financial statements with the unqualified opinion of independent certified public accountants selected by the Borrower and acceptable to the Lender, which annual financial statements shall include the Borrower's balance sheet as at the end of such fiscal year and the related statements of the Borrower's income, retained earnings and cash flows for the fiscal year then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Affiliates, all in reasonable detail and prepared in accordance with GAAP, together with (i) copies of all management letters prepared by such accountants; (ii) a report signed by such accountants stating that in making the investigations necessary for said opinion they obtained no knowledge, except as specifically stated, of any Default or Event of Default hereunder 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 Sections 6.13 and 6.14; and (iii) a certificate of the Borrower's chief financial officer stating that such financial statements have been prepared in accordance with GAAP and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) as soon as available and in any event within 20 days after the end of each month, an unaudited/internal balance sheet and statements of income of the Borrower as at the end of and for such month and for the year to date period then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Affiliates, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end audit adjustments; and accompanied by a certificate of the Borrower's chief financial officer, substantially in the form of Exhibit C hereto stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied 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 Sections 6.13 and 6.14; (c) within 15 days after the end of each month or more frequently if the Lender so requires, agings of the Borrower's accounts receivable and its accounts payable, an inventory certification report, and a calculation of the Borrower's Accounts, Eligible Accounts, Inventory and Eligible Inventory as at the end of such month or shorter time period; (d) at least 30 days before the beginning of each fiscal year of the Borrower, the projected balance sheets and income statements for each month of such year, each in reasonable detail, representing the Borrower's good faith projections and certified by the Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by the Borrower for internal planning purposes, together with such supporting schedules and information as the Lender may in its discretion require; (e) immediately after the commencement thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower of the type described in Section 5.12 or which seek a monetary recovery against the Borrower in excess of $100,000; (f) as promptly as practicable (but in any event not later than five business days) after an officer of the Borrower obtains knowledge of the occurrence of any breach, default or event of default under any Security Document or any event which constitutes a Default or Event of Default hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower of the steps being taken by the Borrower to cure the effect of such breach, default or event; (g) as soon as possible and in any event within 30 days after the Borrower knows or has reason to know that any Reportable Event with respect to any Plan has occurred, the statement of the Borrower's chief financial officer setting forth details as to such Reportable Event and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation; (h) as soon as possible, and in any event within 10 days after the Borrower fails to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, the statement of the Borrower's chief financial officer setting forth details as to such failure and the action which the Borrower proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation; (i) promptly upon knowledge thereof, notice of (i) any disputes or claims by the Borrower's customers exceeding $50,000 individually or $150,000 in the aggregate during any fiscal year; (ii) credit memos exceeding $100,000; (iii) any goods returned to or recovered by the Borrower exceeding $100,000; and (iv) any change in the persons constituting the Borrower's officers and directors; (j) promptly upon knowledge thereof, notice of any loss of or material damage to any Collateral or other collateral covered by the Security Documents or of any substantial adverse change in any Collateral or such other collateral or the prospect of payment thereof; (k) promptly upon their distribution, copies of all financial statements, reports and proxy statements which the Borrower shall have sent to its stockholders; (l) promptly after the sending or filing thereof, copies of all regular and periodic reports which the Borrower shall file with the Securities and Exchange Commission or any national securities exchange; (m) promptly upon knowledge thereof, notice of the Borrower's violation of any law, rule or regulation, the non-compliance with which could materially and adversely affect the Borrower's business or its financial condition; and (n) from time to time, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may request. 6.2 Books and Records; Inspection and Examination. The Borrower will keep accurate books of record and account for itself pertaining to the Collateral and pertaining to the Borrower's business and financial condition and such other matters as the Lender may from time to time request in which true and complete entries will be made in accordance with GAAP and, upon the Lender's request, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all corporate and financial books and records of the Borrower at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to the Borrower, and to discuss the Borrower's affairs with any of its directors, officers, employees or agents. The Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral, other collateral covered by the Security Documents or any other property of the Borrower at any time during ordinary business hours. 6.3 Account Verification. The Lender may at any time and from time to time send or require the Borrower to send requests for verification of Accounts or notices of assignment to account debtors and other obligors. The Lender may also at any time and from time to time telephone account debtors and other obligors to verify Accounts. The Lender will endeavor to use a nominee name when conducting Account verifications, but is not obligated hereunder to do so. 6.4 Compliance with Laws. (a) The Borrower will (i) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition and (ii) use and keep the Collateral, and require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. (b) Without limiting the foregoing undertakings, the Borrower specifically agrees that it will comply with all applicable Environmental Laws and obtain and comply with all permits, licenses and similar approvals required by any Environmental Laws, and will not generate, use, transport, treat, store or dispose of any Hazardous Substances in such a manner as to create any liability or obligation under the common law of any jurisdiction or any Environmental Law. 6.5 Payment of Taxes and Other Claims. The Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach thereto, (b) all federal, state, provincial, municipal and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of the Borrower; provided, that the Borrower shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made. 6.6 Maintenance of Properties. (a) The Borrower will keep and maintain the Collateral, the other collateral covered by the Security Documents and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section 6.6 shall prevent the Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the Lender's judgment, desirable in the conduct of the Borrower's business and not disadvantageous in any material respect to the Lender. (b) The Borrower will defend the Collateral against all claims or demands of all persons (other than the Lender) claiming the Collateral or any interest therein. (c) The Borrower will keep all Collateral and other collateral covered by the Security Documents free and clear of all security interests, liens and encumbrances except Permitted Liens. 6.7 Insurance. The Borrower will obtain and at all times maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower operates. Without limiting the generality of the foregoing, the Borrower will at all times maintain business interruption insurance including coverage for force majeure and keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable to the Lender to the extent of its interest, and all policies of such insurance shall contain a lender's loss payable endorsement for the Lender's benefit acceptable to the Lender and a mortgagee clause. All policies of liability insurance required hereunder shall name the Lender as an additional insured. 6.8 Preservation of Existence. The Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. 6.9 Delivery of Instruments. Upon request by the Lender, the Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by the Borrower. 6.10 Collateral Account. (a) If, notwithstanding the instructions to debtors to make payments to the Lockbox, the Borrower receives any payments on Receivables (other than the Receivables of First Team Sports GmbH), the Borrower shall deposit such payments into the Collateral Account or Custodial Account. Until so deposited, the Borrower shall hold all such payments in trust for and as the property of the Lender and shall not commingle such payments with any of its other funds or property. (b) Amounts deposited in the Collateral Account shall not bear interest and shall not be subject to withdrawal by the Borrower, except after full payment and discharge of all Obligations. (c) All deposits in the Collateral Account shall constitute proceeds of Collateral and shall not constitute payment of the Obligations. The Lender from time to time at its discretion shall, after allowing two (2) Banking Days, apply deposited funds in the Collateral Account to the payment of the Obligations, in any order or manner of application satisfactory to the Lender, by transferring such funds to the Lender's general account. (d) All items deposited in the Collateral Account shall be subject to final payment. If any such item is returned uncollected, the Borrower will immediately pay the Lender, or, for items deposited in the Collateral Account, the bank maintaining such account, the amount of that item, or such bank at its discretion may charge any uncollected item to the Borrower's commercial account or other account. The Borrower shall be liable as an endorser on all items deposited in the Collateral Account, whether or not in fact endorsed by the Borrower. 6.11 Key Person Life Insurance. First Team Sports, Inc. shall maintain insurance upon the lives of (i) John J. Egart, its president and chief executive officer and (ii) David G. Soderquist, its vice chairman, in both instances with a death benefit thereunder in an amount not less than $500,000 (collectively, the "Life Insurance Policy"). The right to receive the proceeds of the Life Insurance Policy shall be assigned to the Lender by the Life Insurance Assignment. 6.12 Performance by the Lender. If the Borrower at any time fails to perform or observe any of the foregoing covenants contained in this Article 6 or elsewhere herein, and if such failure shall continue for a period of ten calendar days after the Lender gives the Borrower written notice thereof (or in the case of the agreements contained in Sections 6.5, 6.7, and 6.10, immediately upon the occurrence of such failure, without notice or lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of the Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrower shall thereupon pay to the Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the applicable floating rate. To facilitate the Lender's performance or observance of such covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of the Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by the Borrower under this Section 6.12. 6.13 Minimum Net Worth. The Borrower's Net Worth, determined as at the end of each month, shall not decrease by more than $1,750,000 at any time from February 28, 1999 through the period ending July 31, 2000. 6.14 Minimum Earnings After Taxes. The Borrower will achieve as of its fiscal year ending February 29, 2000, Earnings After Taxes, of not less than $1.00 and will achieve as of July 31, 2000, Earnings After Taxes of not less than $100,000. 6.15 New Covenants. On or before July 31, 2000, the Borrower and the Lender shall agree on new mutually acceptable covenant levels for Sections 6.13 and 6.14 for periods after such date. The new covenant levels will be based at such a level as to require the Borrower to maintain sufficient cash flow to service its Debt and capital expenditures. 7. Negative Covenants So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower agrees that, without the Lender's prior written consent: 7.1 Liens. The Borrower will not create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness; excluding, however, from the operation of the foregoing, the following (collectively, "Permitted Liens"): (a) in the case of any of the Borrower's property which is not Collateral or other collateral described in the Security Documents, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the Borrower's business or operations as presently conducted; (b) mortgages, deeds of trust, pledges, liens, security interests and assignments in existence on the date hereof and listed in Schedule 7.1 hereto, securing indebtedness for borrowed money permitted under Section 7.2; (c) the Security Interest and liens and security interests created by the Security Documents; and (d) purchase money security interests relating to the acquisition of machinery and equipment of the Borrower not exceeding the cost or fair market value thereof and so long as no Default Period is then in existence and none would exist immediately after such acquisition. 7.2 Indebtedness. The Borrower will not incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money or letters of credit issued on the Borrower's behalf, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) indebtedness arising hereunder; (b) indebtedness of the Borrower in existence on the date hereof and listed in Schedule 7.2 hereto; and (c) indebtedness relating to liens permitted in accordance with Section 7.1. 7.3 Guaranties. The Borrower will not assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by the Borrower for deposit or collection or similar transactions in the ordinary course of business; and (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons, in existence on the date hereof and listed in Schedule 7.2 hereto. 7.4 Investments and Subsidiaries. (a) The Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically but without limitation any partnership or joint venture, except: (i) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (ii) travel advances or loans to the Borrower's officers and employees not exceeding at any one time an aggregate of $25,000; (iii) ownership of or advances to a Borrower or a Subsidiary listed in Schedule 5.4; (iv) advances not to exceed $50,000 in the aggregate to vendors of telephone and copier support and credit report contracts; and (v) advances in the form of progress payments or prepaid rent, not exceeding two (2) months or security deposits. (b) The Borrower will not create or permit to exist any Subsidiary, other than the Subsidiaries in existence on the date hereof and listed in Schedule 5.4. 7.5 Dividends. Except as set forth below, the Borrower will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly. 7.6 Sale or Transfer of Assets; Suspension of Business Operations. The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than the sale of Inventory in the ordinary course of business and will not liquidate, dissolve or suspend business operations; provided, however, that the Borrower may either dissolve Mothership Distribution, Inc. or merge such entity into First Team Sports, Inc. The Borrower will not in any manner transfer any property without prior or present receipt of full and adequate consideration. 7.7 Consolidation and Merger; Asset Acquisitions. The Borrower will not consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person; provided, however, that the Borrower may merge Mothership Distribution, Inc. into First Team Sports, Inc. 7.8 Sale and Leaseback. The Borrower will not enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower intends to use for substantially the same purpose or purposes as the property being sold or transferred. 7.9 Restrictions on Nature of Business. The Borrower will not engage in any line of business materially different from that presently engaged in by the Borrower and will not purchase, lease or otherwise acquire assets not related to its business. 7.10 Accounting. The Borrower will not adopt any material change in accounting principles other than as required by GAAP. The Borrower will not adopt, permit or consent to any change in its fiscal year. 7.11 Discounts. The Borrower will not, after notice from the Lender, grant any discount, credit or allowance to any customer of the Borrower or accept any return of goods sold, or at any time (whether before or after notice from the Lender) modify, amend, subordinate, cancel or terminate the obligation constituting an Eligible Account of any account debtor or other obligor of the Borrower. 7.12 Defined Benefit Pension Plans. The Borrower will not adopt, create, assume or become a party to any defined benefit pension plan, unless disclosed to the Lender pursuant to Section 5.10. 7.13 Other Defaults. The Borrower will not permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon the Borrower that would have a material adverse effect on the financial condition, properties or operations of the Borrower. 7.14 Place of Business; Name. The Borrower will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location. The Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or province or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. The Borrower will not change its name. 7.15 Organizational Documents; S Corporation Status. No Borrower will amend its certificate of incorporation, articles of incorporation or bylaws. No Borrower will become an S Corporation within the meaning of the Internal Revenue Code of 1986, as amended. 7.16 Change in Ownership. Except for First Team Sports, Inc., no Borrower will issue or sell any of its stock so as to change the percentage of voting and non-voting stock owned by such Borrower's shareholders, and except for First Team Sports, Inc., no Borrower will permit or suffer to occur the sale, transfer, assignment, pledge or other disposition of any or all of the issued and outstanding shares of stock of such Borrower. 8. Events of Default, Rights and Remedies 8.1 Events of Default. "Event of Default", wherever used herein, means any one of the following events: (a) Default in the payment of the Obligations on demand or on any portion of the Obligations that otherwise becomes due and payable; (b) Default in the payment of any fees, commissions, costs or expenses required to be paid by the Borrower under this Agreement; (c) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in this Agreement; provided, however, that no Event of Default shall be deemed to exist with regard to a Default in the performance of Section 6.13 or Section 6.14 unless such Default continues for a period of thirty (30) days from the commencement of the Default Period for such Default under Section 6.13 or Section 6.14; (d) Any Borrower shall be or become insolvent, or admit in writing its inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or any Borrower shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed without the application or consent of such Borrower; or any Borrower shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against any Borrower; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of any Borrower; (e) A petition shall be filed by or against any Borrower under the United States Bankruptcy Code or the Bankruptcy and Insolvency Act (Canada) naming such Borrower as debtor; (f) The Life Insurance Policy shall be terminated, by the Borrower or otherwise; or the Life Insurance Policy shall be scheduled to terminate within 30 days and the Borrower shall not have delivered a satisfactory renewal thereof to the Lender; or the Borrower shall fail to pay any premium on the Life Insurance Policy when due; or the Borrower shall take any other action that impairs the value of the Life Insurance Policy; (g) Any representation or warranty made by the Borrower in this Agreement, or by the Borrower (or any of its officers) in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or delivered pursuant to or in connection with this Agreement or any such guaranty shall prove to have been incorrect in any material respect when deemed to be effective; (h) The rendering against the Borrower of a final judgment, decree or order for the payment of money in excess of $50,000 and the continuance of such judgment, decree or order unsatisfied and in effect for any period of 30 consecutive days without a stay of execution; (i) A default under any bond, debenture, note or other evidence of indebtedness of the Borrower owed to any Person other than the Lender, or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any lease of any of the Premises, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument or lease; (j) Any Reportable Event, which the Lender determines in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Plan, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or the Borrower shall have filed for a distress termination of any Plan under Title IV of ERISA; or the Borrower shall have failed to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, which the Lender determines in good faith may by itself, or in combination with any such failures that the Lender may determine are likely to occur in the future, result in the imposition of a lien on the Borrower's assets in favor of the Plan; (k) An event of default shall occur under any Security Document or under any other security agreement, mortgage, deed of trust, assignment or other instrument or agreement securing any obligations of the Borrower hereunder or under any note; (l) Any Borrower shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell all or substantially all of its assets, without the Lender's prior written consent; (m) Any Borrower shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due (other than any tax deficiency 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) or notice of any state or federal tax liens shall be filed or issued; (n) Default in the payment of any amount owed by the Borrower to the Lender other than any indebtedness arising hereunder; (o) The Borrower shall take or participate in any action which would be prohibited under the provisions of any Subordination Agreement or make any payment on the Subordinated Indebtedness (as defined in any Subordination Agreement) that any Person was not entitled to receive under the provisions of such Subordination Agreement; (p) Any event or circumstance with respect to the Borrower shall occur such that the Lender shall believe in good faith that the prospect of payment of all or any part of the Obligations or the performance by the Borrower under the Loan Documents is impaired or any material adverse change in the business or financial condition of the Borrower shall occur; (q) Any breach, default or event of default by or attributable to any Affiliate under any agreement between such Affiliate and the Lender; 8.2 Rights and Remedies. During any Default Period, the Lender may exercise any or all of the following rights and remedies: (a) the Lender may, by notice to the Borrower, declare the Commitment to be terminated, whereby the same shall forthwith terminate. (b) the Lender may, by notice to the Borrower, declare the Obligations to be forthwith due and payable, whereupon all Obligations shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which the Borrower hereby expressly waives; (c) the Lender may, without notice to the Borrower and without further action, apply any and all money owing by the Lender to the Borrower to the payment of the Obligations; (d) the Lender may exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC and the PPSA, including, without limitation, the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and, in connection therewith, the Borrower will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (e) the Lender may exercise and enforce its rights and remedies under the Loan Documents; and (f) the Lender may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in subsections (d) or (e) of Section 8.1, the Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind. 8.3 Certain Notices. If notice to the Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 9.3) at least ten calendar days before the date of intended disposition or other action. 9. Miscellaneous 9.1 No Waiver; Cumulative Remedies. No failure or delay by the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. 9.2 Amendments. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. 9.3 Addresses for Notices. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States or Canadian mail, as the case may be, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopier number as set forth below: If to the Borrower: First Team Sports, Inc., et al. 1201 Lund Boulevard Anoka, Minnesota 55303 Telecopier: (612) 576-8000 Attention: Kent Brunner If to the Lender: Norwest Bank Minnesota, National Association Norwest Center Sixth Street and Marquette Avenue N9312-040 Minneapolis, Minnesota 55479 Telecopier: (612) 341-2472 Attention: Susan Mack or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of Article 2 shall not be effective until received by the Lender. 9.4 Further Documents. The Borrower will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements and other agreements and writings that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interest or the Lender's rights under the Loan Documents (but any failure to request or assure that the Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of the Loan Documents and the Security Interest, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). 9.5 Collateral. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, the Borrower is entitled to any surplus and shall remain liable for any deficiency. The Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral, or in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Lender need not otherwise preserve, protect, insure or care for any Collateral. The Lender shall not be obligated to preserve any rights the Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. 9.6 Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses, including (without limitation) attorneys' fees, incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including without limitation all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest. 9.7 Indemnity. In addition to the payment of expenses pursuant to Section 9.6, the Borrower agrees to indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees, attorneys and agents of the foregoing (the "Indemnitees") from and against any of the following (collectively, "Indemnified Liabilities"): (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Loan Documents or the making of the Advances; (ii) any claims, loss or damage to which any Indemnitee may be subjected if any representation or warranty contained in Section 5.12 proves to be incorrect in any respect or as a result of any violation of the covenant contained in Section 6.4(b); and (iii) any and all other liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with the foregoing and any other investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against any such Indemnitee, in any manner related to or arising out of or in connection with the making of the Advances and the Loan Documents or the use or intended use of the proceeds of the Advances. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon such Indemnitee's request, the Borrower, or counsel designated by the Borrower and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee, at the Borrower's sole costs and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Borrower's obligation under this Section 9.7 shall survive the termination of this Agreement and the discharge of the Borrower's other obligations hereunder. 9.8 Participants. The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the Lender's participants, successors or assigns. 9.9 Execution in Counterparts. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. 9.10 Binding Effect; Assignment; Complete Agreement; Exchanging Information. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the Lender's prior written consent. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Without limiting the Lender's right to share information regarding the Borrower and its Affiliates with the Lender's participants, accountants, lawyers and other advisors, the Lender, Norwest Corporation, and all direct and indirect subsidiaries of Norwest Corporation, may exchange any and all information they may have in their possession regarding the Borrower and its Affiliates, and the Borrower waives any right of confidentiality it may have with respect to such exchange of such information. 9.11 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 9.12 Headings. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The Loan Documents shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. This Agreement shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. The parties hereto hereby (i) consent to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Agreement; (ii) waive any argument that venue in any such forum is not convenient, (iii) agree that any litigation initiated by the Lender or the Borrower in connection with this Agreement or the other Loan Documents shall be venued in either the District Court of Hennepin County, Minnesota, or the United States District Court, District of Minnesota, Fourth Division; and (iv) agree that a final judgment in any such suit, action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT. 9.14 Taxes. All payments of principal of, and interest on, the Notes and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, capital, goods and services, use, stamp or franchise taxes and other taxes, surtaxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any governmental authority, excluding franchise taxes and taxes imposed on or measured by the Lender's net income or receipts (all non-excluded items being called "Taxes"). If any withholding or deduction from any payment to be made by any Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then such Borrowers will: (1) pay directly to the relevant authority the full amount required to be so withheld or deducted; (2) promptly forward to the Lender an official receipt or other documentation satisfactory to the Lender evidencing such payment to such authority; and (3) pay to the Lender as additional interest such additional amount or amounts as is necessary to ensure that the net amount actually received by the Lender will equal the full amount the Lender would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against the Lender with respect to any payment received by the Lender hereunder, the Lender may pay such Taxes and the Borrower will promptly pay such additional amounts (including any penalty, interest or expense) as is necessary in order that the net amount received by the Lender after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount the Lender would have received had such Taxes not been asserted. If any Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Lender, the required receipts or other required documentary evidence, the Borrower shall indemnify the Lender for any incremental Taxes, interest or penalties that may become payable by the Lender as a result of any such failure, whether or not such Taxes were correctly or legally asserted. For purposes of this Section 9.14, a distribution hereunder by the Lender shall be deemed a payment by the Borrower. 9.15 Joint and Several Liability. This Agreement and the Notes are executed by more than one Borrower and each Borrower agrees to be jointly and severally liable hereon, and the release by the Lender of one or more such Borrowers shall not release or diminish the liability of the remaining Borrowers hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION FIRST TEAM SPORTS, INC. By: /s/ Susan N. Mack By: /s/ Kent A. Brunner Name: Susan N. Mack Name: Kent A. Brunner Title: Vice President Title: CFO HESPELER HOCKEY HOLDING, INC. By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO HESPELER HOCKEY COMPANY By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO FIRST TEAM SPORTS GmbH By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: Acting Agent Table of Contents 1. DEFINITIONS.................................................................1 1.1 Definitions............................................................1 1.2 Cross References......................................................10 2. AMOUNT AND TERMS OF THE CREDIT FACILITY....................................10 2.1 Revolving Advances....................................................10 2.2 Letters of Credit.....................................................11 2.3 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement...........................................11 2.4 Term Advance..........................................................12 2.5 Payment of Term Note..................................................12 2.6 Interest; Default Interest; Participations; Usury.....................13 2.7 Fees..................................................................13 2.8 Computation of Interest and Fees; When Interest Due and Payable.......14 2.9 Capital Adequacy......................................................14 2.10 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by the Borrower...............................15 2.11 Termination and Line Reduction Fees; Prepayment Fees.................15 2.12 Mandatory Prepayment.................................................16 2.13 Payment..............................................................16 2.14 Payment on Non-Banking Days..........................................17 2.15 Use of Proceeds......................................................17 2.16 Liability Records....................................................17 3. SECURITY INTEREST; OCCUPANCY; SETOFF.......................................17 3.1 Grant of Security Interest............................................17 3.2 Notification of Account Debtors and Other Obligors....................17 3.3 Assignment of Insurance...............................................18 3.4 Occupancy.............................................................18 3.5 License...............................................................18 3.6 Financing Statement...................................................18 3.7 Setoff................................................................20 4. CONDITIONS OF LENDING......................................................21 4.1 Conditions Precedent to the Initial Revolving and Term Advance........21 4.2 Conditions Precedent to All Advances..................................23 5. REPRESENTATIONS AND WARRANTIES.............................................23 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Tax Identification Number..........24 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements.......24 5.3 Legal Agreements......................................................25 5.4 Subsidiaries..........................................................25 5.5 Financial Condition; No Adverse Change................................25 5.6 Litigation............................................................25 5.7 Regulation U..........................................................25 5.8 Taxes.................................................................25 5.9 Titles and Liens......................................................26 5.10 Plans................................................................26 5.11 Default..............................................................26 5.12 Environmental Matters................................................26 5.13 Submissions to Lender................................................27 5.14 Financing Statements.................................................27 5.15 Rights to Payment....................................................28 6. BORROWER'S AFFIRMATIVE COVENANTS...........................................28 6.1 Reporting Requirements................................................28 6.2 Books and Records; Inspection and Examination.........................30 6.3 Account Verification..................................................31 6.4 Compliance with Laws..................................................31 6.5 Payment of Taxes and Other Claims.....................................31 6.6 Maintenance of Properties.............................................31 6.7 Insurance.............................................................32 6.8 Preservation of Existence.............................................32 6.9 Delivery of Instruments...............................................32 6.10 Collateral Account...................................................32 6.11 Key Person Life Insurance............................................33 6.12 Performance by the Lender............................................33 6.13 Minimum Net Worth....................................................34 6.14 Minimum Earnings After Taxes.........................................34 6.15 New Covenants........................................................34 7. NEGATIVE COVENANTS.........................................................34 7.1 Liens.................................................................34 7.2 Indebtedness..........................................................35 7.3 Guaranties............................................................35 7.4 Investments and Subsidiaries..........................................35 7.5 Dividends.............................................................36 7.6 Sale or Transfer of Assets; Suspension of Business Operations.........36 7.7 Consolidation and Merger; Asset Acquisitions..........................36 7.8 Sale and Leaseback....................................................36 7.9 Restrictions on Nature of Business....................................37 7.10 Accounting...........................................................37 7.11 Discounts............................................................37 7.12 Defined Benefit Pension Plans........................................37 7.13 Other Defaults.......................................................37 7.14 Place of Business; Name..............................................37 7.15 Organizational Documents; S Corporation Status.......................38 7.16 Change in Ownership..................................................38 8. EVENTS OF DEFAULT, RIGHTS AND REMEDIES.....................................38 8.1 Events of Default.....................................................38 8.2 Rights and Remedies...................................................40 8.3 Certain Notices.......................................................41 9. MISCELLANEOUS..............................................................41 9.1 No Waiver; Cumulative Remedies........................................41 9.2 Amendments............................................................41 9.3 Addresses for Notices.................................................41 9.4 Further Documents.....................................................42 9.5 Collateral............................................................42 9.6 Costs and Expenses....................................................43 9.7 Indemnity.............................................................43 9.8 Participants..........................................................44 9.9 Execution in Counterparts.............................................44 9.10 Binding Effect; Assignment; Complete Agreement; Exchanging Information..........................................................44 9.11 Severability of Provisions...........................................44 9.12 Headings.............................................................44 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.............45 9.14 Taxes................................................................45 9.15 Joint and Several Liability..........................................46 EX-10.25 8 MORTGAGE AND SECURITY AGREEMENT MORTGAGE AND SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT THIS INDENTURE (hereinafter referred to as the "Mortgage"), made as of September 8, 1999, between FIRST TEAM SPORTS, INC., a Minnesota corporation (hereinafter collectively referred to as the "Mortgagor"), whose post office address is 1201 Lund Boulevard, Anoka, Minnesota 55303, and Norwest Bank Minnesota, National Association, a national banking association (hereinafter referred to as the "Mortgagee"), whose post office address is Norwest Center, Sixth and Marquette, Minneapolis, Minnesota 55479. THIS MORTGAGE SECURES, AMONG OTHER THINGS, A REVOLVING NOTE, PURSUANT TO WHICH ADVANCES WILL BE MADE TO THE MORTGAGOR AND SUCH AMOUNTS MAY BE REPAID AND REBORROWED. WITNESSETH, that the Mortgagor in consideration of the debt hereinafter described and the sum of One and 00/100 Dollars ($1.00) to the Mortgagor in hand paid by the Mortgagee, the receipt whereof is hereby acknowledged, does hereby MORTGAGE, GRANT, BARGAIN, SELL AND CONVEY unto the Mortgagee, its successors and assigns, forever, AND GRANTS TO THE MORTGAGEE A MORTGAGE LIEN AND SECURITY INTEREST IN the following properties (all of the following being hereafter collectively referred to as the "Premises"): A. REAL PROPERTY All the tracts or parcels of real property lying and being in the County of Anoka, State of Minnesota, all as more fully described in Exhibit "A" attached hereto and made a part hereof, together with all the estates and rights in and to the real property and in and to lands lying in streets, alleys and roads adjoining the real property and all buildings, structures, improvements, fixtures and annexations, access rights, easements, rights of way or use, servitudes, licenses, tenements, hereditaments and appurtenances now or hereafter belonging or pertaining to the real property and all proceeds derived therefrom; and B. IMPROVEMENTS, FIXTURES All buildings, equipment, fixtures, improvements, building supplies and materials and personal property now or hereafter attached to or necessary to the use, operation or maintenance of the improvements on the Premises including, but without being limited to, all machinery, fittings, fixtures, apparatus, equipment or articles used to supply heating, gas, electricity, air conditioning, water, light, waste disposal, power, refrigeration, ventilation, and fire and sprinkler protection, as well as all elevators, escalators, overhead cranes, hoists and assists, and the like, and all furnishings, supplies, draperies, maintenance and repair equipment, floor coverings, screens, storm windows, blinds, awnings, shrubbery and plants, stoves, ranges, ovens, refrigerators, air conditioners, dishwashers, clothes dryers, washing machines, disposals and compactors (it being understood that the enumeration of any specific articles of property shall in no way be held to exclude any items of property not specifically enumerated), as well as renewals, replacements, proceeds, additions, accessories, increases, parts, fittings, insurance payments, awards and substitutes thereof, together with all interest of the Mortgagor in any such items hereafter acquired, all of which personal property mentioned herein shall be deemed fixtures and accessory to the freehold and a part of the realty and not severable in whole or in part without material injury to the Premises, but excluding therefrom the trade fixtures, inventory, equipment and removable personal property of any tenant of the Premises; and C. RENTS, LEASES AND PROFITS All rents, issues, income, revenue, receipts, fees, and profits now due or which may hereafter become due under or by virtue of and together with all right, title and interest of the Mortgagor in and to any lease, license, sublease, contract or other kind of occupancy agreement, whether written or verbal, for the use or occupancy of the Premises or any part thereof; and D. JUDGMENTS, CONDEMNATION AWARDS AND INSURANCE PROCEEDS All awards, compensation or settlement proceeds made by any governmental or other lawful authorities for the threatened or actual taking or damaging by eminent domain of the whole or any part of the Premises, including any awards for a temporary taking, change of grade of streets or taking of access, together with all insurance proceeds resulting from a casualty to any portion of the Premises; and E. LICENSES, PERMITS, EQUIPMENT LEASES AND SERVICE AGREEMENTS All right, title and interest of the Mortgagor in and to any licenses, permits regulatory approvals, government authorizations, franchise agreements and equipment or chattel leases, service contracts or agreements and all proceeds therefrom, arising from, issued in connection with or in any way related to the use, occupancy, operation, maintenance or security of the Premises, together with all replacements, additions, substitutions and renewals thereof, which may be assigned pursuant to agreement or law; and F. ACCOUNTS RECEIVABLE AND GENERAL INTANGIBLES All accounts receivable, chattel paper, general intangibles, instruments, and all proceeds therefrom, whether cash or noncash, derived by the Mortgagor from the use, occupancy or operation of the Premises, including, without limitation, all third party payments, but excepting the proceeds of any borrowed funds, and reserving to the Mortgagor a license to collect the same unless and until an Event of Default occurs under this Mortgage. AND THE MORTGAGOR for the Mortgagor, the Mortgagor's heirs, administrators, personal representatives, successors and assigns, covenant with the Mortgagee, its successors and assigns, that the Mortgagor is lawfully seized of the Premises and has good right to sell and convey the same; that the Premises are free from all encumbrances except as may be set forth in Exhibit "B" attached hereto and made a part hereof (hereinafter referred to as the "Permitted Encumbrances"); that the Mortgagee, its successors and assigns, shall quietly enjoy and possess the Premises; and that the Mortgagor will WARRANT AND DEFEND the title to the same against all lawful claims not specifically excepted in this Mortgage. TO HAVE AND TO HOLD THE SAME, together with the possession and right of possession of the Premises, unto the Mortgagee, its successors and assigns, forever. PROVIDED NEVERTHELESS, that if the Mortgagor, the Mortgagor's heirs, administrators, personal representatives, successors or assigns, shall pay to the Mortgagee, its successors or assigns, the sum of Six Million Dollars ($6,000,000), according to the terms of that certain Term Note dated of even date herewith in the principal amount of Four Million Five Hundred Thousand Dollars ($4,500,000) and that certain Revolving Note dated of even date herewith in the principal amount of One Million Five Hundred Thousand Dollars ($1,500,000) (hereinafter collectively referred to herein as the "Note"), the terms and conditions of which are incorporated herein by reference and made a part hereof, together with any extensions or renewals thereof, due and payable with interest thereon at the variable rate set forth therein, executed by the Mortgagor and payable to the Mortgagee, the balance of said principal sum together with interest thereon being due and payable in any event on September 30, 2002, and shall repay to the Mortgagee, its successors or assigns, at the times demanded and with interest thereon at the same rate as specified in the Note, all sums advanced in protecting the lien of this Mortgage, including taxes, assessments, charges, claims, fines, impositions, insurance premiums, amounts due upon prior or superior mortgages and other prior or superior liens, encumbrances and interests, and legal expenses and attorney's fees and all sums advanced for any other purpose authorized herein (the Note and all such sums, together with interest thereon, being hereinafter collectively referred to as the "Indebtedness Secured Hereby"), and shall keep and perform all of the covenants and agreements herein contained, then this Mortgage shall become null and void, and shall be released at the Mortgagor's expense. AND IT IS FURTHER COVENANTED AND AGREED AS FOLLOWS: 1. 1. GENERAL REPRESENTATIONS AND WARRANTIES 1.1 REPRESENTATIONS AND WARRANTIES. The Mortgagor represents and warrants as follows: The Mortgagor is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota, is duly qualified to do business in the State of Minnesota and has all requisite power and authority to own and operate the Premises, to enter into the Note, this Mortgage, the Credit and Security Agreement dated of even date herewith (together with all amendments, supplements and restatements, the "Credit Agreement"), and any other document securing the Note and to borrow the monies and otherwise assume and perform as contemplated thereunder, and is in compliance with all laws, regulations, ordinances and orders of public authorities applicable to it. Neither the borrowing of the monies nor the execution, delivery of the Note, this Mortgage, the Credit Agreement, or any other document securing the Note nor the performance or the provisions of the agreements therein contained on the part of the Mortgagor will contravene, violate or constitute a default under the Articles of Incorporation or By-Laws of the Mortgagor, or any agreement with the shareholders of the Mortgagor, or any creditors of the Mortgagor, or any law, ordinance, governmental regulation, agreement or indenture to which the Mortgagor is a party or by which the Mortgagor or the Mortgagor's properties are bound. There are no (i) bankruptcy proceedings involving the Mortgagor; (ii) dissolution proceedings involving the Mortgagor; (iii) unsatisfied judgments of record against the Mortgagor; or (iv) tax liens filed against the Mortgagor. The Note, this Mortgage, the Credit Agreement and all other documentation executed in connection with the loan evidenced by the Note have been duly executed and delivered by the Mortgagor and constitute the legal, valid and binding obligations of the Mortgagor, enforceable in accordance with their terms, except as to enforcement of remedies, as may be limited by bankruptcy, insolvency or similar laws affecting generally the enforcement of creditor's remedies. There are no judgments, suits, actions or proceedings at law or in equity or by or before any governmental instrumentality or agency now pending against or, to the best of Mortgagor's knowledge, threatened against the Mortgagor or its properties, or both, nor has any judgment, decree or order been issued against the Mortgagor or its properties, or both, which would have a material adverse effect on the Premises or the financial condition of the Mortgagor or Mortgagor's properties. No consent or approval of any regulatory authority having jurisdiction over Mortgagor is necessary or required by law as a prerequisite to the execution, delivery and performance of the terms of the Note, this Mortgage, the Credit Agreement or any other document securing the Note. The Premises is free from any mechanics' or materialmen's liens or claims. There has been no labor or materials furnished to the Premises that has not been paid for in full. The Mortgagor has no notice, information or knowledge of any change contemplated in any applicable law, ordinance, regulation or restriction, or any judicial, administrative, governmental or quasi-governmental action, or any action by adjacent land owners, or natural or artificial condition existing upon the Premises which would limit, restrict, or prevent the contemplated or intended use and purpose of the Premises. There is no pending condemnation or similar proceeding affecting the Premises, or any portion thereof nor, to the best knowledge of the Mortgagor, is any such action being presently contemplated. No part of the Premises is being used for agricultural purposes. The Premises is undamaged by fire, windstorm or other casualty. The Mortgagor is not, as of the date hereof, in default in the payment of any of the Mortgagor's obligations. The Premises complies with all zoning ordinances, energy and environmental codes, building and use restrictions and codes, and any requirements with respect to licenses, permits and agreements necessary for the lawful use and operation of the Premises. The heating, electrical, sanitary sewer plumbing, storm sewer plumbing, potable water plumbing and other building equipment, fixtures and fittings are in good condition and working order, are adequate in quantity and quality for normal and usual use, and are fit for the purposes intended and the use contemplated. 1.2 CONTINUING OBLIGATION. All statements made hereunder are true and correct and all information provided to Mortgagee by the Mortgagor relating to this transaction has not and does not contain any statement which, at the time and in the light of the circumstances under which it was made, would be false and misleading with respect to any material fact, or would omit any material fact necessary in order to make any such statement contained therein not false or misleading in any material respect. Should the Mortgagor subsequently obtain knowledge that such representation was or is untrue, the Mortgagor shall immediately notify Mortgagee as to the untrue nature of said representation and agree to take such action as may be necessary to cause such representation to become true. 2. COVENANTS AND AGREEMENTS 2.1 PAYMENT OF INDEBTEDNESS: OBSERVANCE OF COVENANTS. The Mortgagor will duly and punctually pay each and every installment of principal and interest on the Note and all other Indebtedness Secured Hereby, as and when the same shall become due, and shall duly and punctually perform and observe all of the covenants, agreements and provisions contained herein, in the Note and any other instrument given as security for the payment of the Note. 2.2 MAINTENANCE: REPAIRS. The Mortgagor agrees that it will keep and maintain the Premises in good condition, repair and operating condition free from any waste or misuse, and will comply with all requirements of law, municipal ordinances and regulations, restrictions and covenants affecting the Premises and their use, and will promptly repair or restore any buildings, improvements or structures now or hereafter on the Premises which may become damaged or destroyed to their condition prior to any such damage or destruction subject to the provisions of Article 5 hereof. The Mortgagor further agrees that without the prior written consent of the Mortgagee it will not expand any improvements on the Premises, erect any new improvements or make any material alterations in any improvements which will alter the basic structure, adversely affect the market value or change the existing architectural character of the Premises, and will complete within a reasonable time any buildings now or at any time in the process of erection on the Premises. The Mortgagor agrees not to acquiesce in any rezoning classification, modification or restriction affecting the Premises without the written consent of the Mortgagee. The Mortgagor agrees that it will not abandon or vacate the Premises. The Mortgagor agrees that it will provide, improve, grade, surface and thereafter maintain, clean, repair and adequately light all parking areas within the Premises, together with any sidewalks, aisles, streets, driveways and sidewalk cuts and sufficient paved areas for ingress and right-of-way to and from the adjacent public thoroughfare necessary or desirable for the use thereof. 2.3 PAYMENT OF OPERATING COSTS; LIENS; AND PRIOR INDEBTEDNESS. The Mortgagor agrees that it will pay all operating costs and expenses of the Premises; keep the Premises free from mechanics' liens, materialmen's liens, judgment liens and other liens, executions, attachments or levies (hereinafter collectively referred to as "Liens"); and will pay when due all permitted indebtedness which may be secured by mortgage, lien or charge on the Premises and upon request will exhibit to the Mortgagee satisfactory evidence of such payment and discharge. 2.4 PAYMENT OF IMPOSITIONS. The Mortgagor will pay when due and before any penalty all taxes, installments of assessments, water charges, sewer charges and other fees, taxes, charges and assessments of every kind and nature whatsoever assessed or charged against or constituting a lien on the Premises or any interest therein or the Indebtedness Secured Hereby (hereinafter referred to as the "Impositions"); and will upon demand furnish to the Mortgagee proof of the payment of any such Impositions. In the event of a court decree or an enactment after the date hereof by any legislative authority of any law imposing upon a mortgagee the payment of the whole or any part of the Impositions herein required to be paid by the Mortgagor, or changing in any way the laws relating to the taxation of mortgages or debts secured by mortgages or a mortgagee's interest in mortgaged premises, so as to impose such Imposition on the Mortgagee or on the interest of the Mortgagee in the Premises, then, in any such event, the Mortgagor shall bear and pay the full amount of such Imposition, provided that if for any reason payment by the Mortgagor of any such Imposition would be unlawful, or if the payment thereof would constitute usury or render the Indebtedness Secured Hereby wholly or partially usurious, the Mortgagee, at its option, may declare the whole sum secured by this Mortgage with interest thereon to be immediately due and payable, without prepayment premium, or the Mortgagee, at its option, may pay that amount or portion of such Imposition as renders the Indebtedness Secured Hereby unlawful or usurious, in which event the Mortgagor shall concurrently therewith pay the remaining lawful and non-usurious portion or balance of said Imposition. 2.5 CONTEST OF LIENS AND IMPOSITIONS. The Mortgagor shall not be required to pay, discharge or remove any Liens or Impositions so long as the Mortgagor shall in good faith contest the same or the validity thereof by appropriate legal proceedings which shall operate to prevent the collection of the Liens or Impositions so contested and the sale of the Premises, or any part thereof to satisfy the same, provided that the Mortgagor shall, prior to any such contest, have given such security as may be demanded by the Mortgagee to insure such payments and prevent any sale or forfeiture of the Premises by reason of such nonpayment. Any such contest shall be prosecuted with due diligence and the Mortgagor shall promptly after final determination thereof pay the amount of any such Liens or Impositions so determined, together with all interest and penalties, which may be payable in connection therewith. Notwithstanding the provisions of this Section, the Mortgagor shall (and if the Mortgagor shall fail so to do, the Mortgagee, may but shall not be required to) pay any such Liens or Impositions notwithstanding such contest if in the reasonable opinion of the Mortgagee, the Premises shall be in jeopardy or in danger of being forfeited or foreclosed. 2.6 PROTECTION OF SECURITY. The Mortgagor agrees to promptly notify the Mortgagee of and appear in and defend any suit, action or proceeding that affects the value of the Premises, the Indebtedness Secured Hereby or the rights or interest of the Mortgagee hereunder. The Mortgagee may elect to appear in or defend any such action or proceeding and the Mortgagor agrees to indemnify and reimburse the Mortgagee from any and all loss, damage, expense or cost arising out of or incurred in connection with any such suit, action or proceeding, including costs of evidence of title and reasonable attorney's fees. 2.7 REPORTING REQUIREMENTS. During the term of this Mortgage, the Mortgagor will deliver, or cause to be delivered, to the Mortgagee all information and reports required pursuant to section 6.1 of the Credit Agreement. 2.8 ADDITIONAL ASSURANCES. The Mortgagor agrees upon reasonable request by the Mortgagee to execute and deliver such further instruments, financing statements under the Uniform Commercial Code and assurances and will do such further acts as may be necessary or proper to carry out more effectively the purposes of this Mortgage and, without limiting the foregoing, to make subject to the lien hereof any property agreed to be subjected hereto or covered by the granting clause hereof, or intended so to be. The Mortgagor agrees to pay any recording fees, filing fees, stamp taxes or other charges arising out of or incident to the filing, the issuance and delivery of the Note, the filing or recording of the Mortgage or the delivery of such further assurances and instruments as may be required pursuant to the terms of this Section. 2.9 DUE ON SALE OR MORTGAGING, ETC. In the event: (a) the Mortgagor sells, conveys, transfers, further mortgages, changes the form of ownership or encumbers or disposes of the Premises, or any part thereof, or any interest therein; or (b) any corporate ownership interest in the Mortgagor is sold, conveyed, transferred, pledged or encumbered, whether voluntarily or involuntarily, or there is an agreement so to do (except as disclosed in the Credit Agreement); without the written consent of the Mortgagee being first obtained, then at the sole option of the Mortgagee, the Mortgagee may declare the entire principal and interest evidenced by the Note due and payable in full and call for payment of the same at once, together with the prepayment premium then in effect under the terms of the Note. 2.10 UPDATED APPRAISALS. Mortgagor agrees that upon request of Mortgagee, it shall pay the costs of any updated appraisal of the Premises in form and content acceptable to Mortgagee at any time that either (a) an Event of Default shall have occurred hereunder, or (b) Mortgagee determines in its commercially reasonable judgment that the security for the loan evidenced by the Note has been physically or financially impaired in any material manner. 3. INSURANCE 3.1 INSURANCE. The Mortgagor shall obtain and keep in full force and effect during the term of this Mortgage at its sole cost and expense the following insurance: (a) insurance against loss by fire, lightning and risk customarily covered by standard extended coverage endorsement, including the cost of debris removal, together with a vandalism and malicious mischief endorsement, or all perils endorsements, all in the amount of not less than the full replacement cost of the improvements on the Premises, and together with an inflation-guard endorsement, an agreed-amount endorsement, a replacement cost endorsement and a waiver of subrogation endorsement; (b) Broad Form Boiler and Machinery Insurance on all equipment and pressure-fired vehicles or apparatus situate on the Premises, and providing for full repair and replacement cost coverage; (c) Flood Insurance in such minimal amounts and with such minimal limits as the Mortgagee may require unless evidence is provided that the Premises are not within a flood plain as defined by the Federal Insurance Administration and the Premises is not designated as being within a flood plain during the term of this Mortgage; (d) Comprehensive General Public Liability Insurance covering the legal liability of the Mortgagor against claims for bodily injury, death or property damage occurring on, in or about the Premises in such minimal amounts and with such minimal limits as the Mortgagee may require; (e) Sprinkler Insurance, if applicable; (f) Contingent Liability Insurance and Worker's Compensation Insurance during the making of any alterations or improvements to the Premises; and (g) Such other forms of insurance as the Mortgagee may require or as may be required by law. Such insurance policies shall be written on forms and with insurance companies having a minimum noncontingent rating in Best's Casualty Reports of A, shall be satisfactory to the Mortgagee, shall name as the insured parties the Mortgagor and the Mortgagee, as their interests may appear, shall be in amounts sufficient to prevent the Mortgagor from becoming a co-insurer of any loss thereunder, and shall bear a satisfactory mortgagee clause in favor of the Mortgagee with loss proceeds under any such policies to be made payable to the Mortgagee. All required policies of insurance or acceptable certificates thereof, together with evidence of the payment of current premiums therefor, shall be delivered to the Mortgagee and shall provide that the Mortgagee shall receive at least sixty (60) days' advance written notice prior to cancellation, amendment or termination of any such policy of insurance. The Mortgagor shall, within sixty (60) days prior to the expiration of any such policy, deliver other original policies or certificates of the insurer evidencing the renewal of such insurance together with evidence of the payment of current premiums therefor. The Mortgagor shall at its expense furnish evidence of the replacement value of the improvements on the Premises in form satisfactory to the Mortgagee on renewal of insurance policies or upon request of the Mortgagee. Insurance coverage must at all times be maintained in proper relationship to such replacement value and must always provide for agreed amount coverage. In the event of a foreclosure of this Mortgage or any acquisition of the Premises by the Mortgagee, all such policies and any proceeds payable therefrom, whether payable before or after a foreclosure sale, or during the period of redemption, if any, shall become the absolute property of the Mortgagee to be utilized at its discretion. In the event of foreclosure or the failure to obtain and keep any required insurance, the Mortgagor empowers the Mortgagee to effect insurance upon the Premises at the Mortgagor's expense and for the benefit of the Mortgagee in the amounts and types aforesaid for a period of time covering the time of redemption prior to foreclosure sale, and if necessary therefor, to cancel any or all existing insurance policies. The Mortgagor agrees to furnish the Mortgagee copies of all inspection reports and insurance recommendations received by the Mortgagor from any insurer. The Mortgagee makes no representations that the above insurance requirements are adequate protection for a prudent mortgagor. 4. UNIFORM COMMERCIAL CODE 4.1 SECURITY AGREEMENT. This Mortgage shall constitute a security agreement as defined in the Uniform Commercial Code (hereinafter referred to as the "Code"), and the Mortgagor hereby grants to the Mortgagee a security interest within the meaning of the Code in favor of the Mortgagee on the Improvements, Fixtures, Equipment and Personal Property, the Rents, Leases and Profits, the Judgments, Condemnation Awards and Insurance Proceeds, the Licenses, Permits, Equipment Leases and Service Agreements, and the Accounts Receivable and General Intangibles described in Granting Clauses B, C, D, E and F of this Mortgage (hereinafter referred to as the "Collateral"). 4.2 FIXTURE FILING. As to those items of Collateral described in this Mortgage that are, or are to become fixtures related to the real estate mortgaged herein, it is intended as to those items that THIS MORTGAGE SHALL BE EFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTURE FILING from the date of its filing in the real estate records of the County where the Premises are situate. The name of the record owner of said real estate is the Mortgagor set forth in page one to this Mortgage. Information concerning the security interest created by this instrument may be obtained from the Mortgagee, as secured party, at its address as set forth in page one of this Mortgage. The address of the Mortgagor, as debtor, is as set forth in page one to this Mortgage. This document covers goods which are or are to become fixtures. The Federal tax identification number of the Mortgagor is 41-1545748. 4.3 REPRESENTATIONS AND AGREEMENTS. (a) The Mortgagor is and will be the true and lawful owner of the Collateral, subject to no liens, charges, security interest and encumbrances other than the lien hereof and the Permitted Encumbrances; (b) the Collateral is to be used by the Mortgagor solely for business purposes being installed upon the Premises for the Mortgagor's own use or as the equipment and furnishings leased or furnished by the Mortgagor, as landlord, to tenants of the Premises; (c) the Collateral will not be removed from the Premises without the consent of the Mortgagee except in accordance with Section 4.4 hereof; (d) unless stated otherwise in this Mortgage the only persons having any interest in the Collateral are the Mortgagor and the Mortgagee and no financing statement covering any such property and any proceeds thereof is on file in any public office except pursuant hereto; (e) the remedies of the Mortgagee hereunder are cumulative and separate, and the exercise of any one or more of the remedies provided for herein or under the Uniform Commercial Code shall not be construed as a waiver of any of the other rights of the Mortgagee including having such Collateral deemed part of the realty upon any foreclosure thereof; (f) if notice to any party of the intended disposition of the Collateral is required by law in a particular instance, such notice shall be deemed commercially reasonable if given at least ten (10) days prior to such intended disposition and may be given by advertisement in a newspaper accepted for legal publications either separately or as part of a notice given to foreclose the real property or may be given by private notice if such parties are known to the Mortgagee; (g) the Mortgagor will from time to time provide the Mortgagee on request with itemizations of all such Collateral on the Premises; (h) the filing of a financing statement pursuant to the Code shall never impair the stated intention of this Mortgage that all Improvements, Fixtures, Equipment and Personal Property described in Granting Clause B hereof are, and at all times and for all purposes and in all proceedings both legal or equitable shall be regarded as part of the real property mortgaged hereunder irrespective of whether such item is physically attached to the real property or any such item is referred to or reflected in a financing statement; (i) the Mortgagor will on demand deliver all financing statements that may from time to time be required by the Mortgagee to establish and perfect the priority of the Mortgagee's security interest in such Collateral; (j) the Mortgagor shall give advance written notice of any proposed change in the Mortgagor's name, identity, address or structure and will execute and deliver to the Mortgagee prior to or concurrently with such change all additional financing statements that the Mortgagee may require to establish and perfect the priority of the Mortgagee's security interest; and (k) the Mortgagor shall renew and pay all expenses of renewing the financing statement covering the Collateral in the event the security interest in such Collateral will expire by reason of statutory law prior to the end of the term of this Mortgage. 4.4 MAINTENANCE OF PROPERTY. Subject to the provisions of this Section, in any instance where the Mortgagor in its discretion determines that any item subject to a security interest under this Mortgage has become inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary for the operation of the Premises, the Mortgagor may, at its expense, remove and dispose of it and substitute and install other items not necessarily having the same function, provided, that such removal and substitution shall not impair the operating utility and unity of the Premises. All substituted items shall become a part of the Premises and subject to the lien of the Mortgage. Any amounts received or allowed the Mortgagor upon the sale or other disposition of the removed items of property shall be applied only against the cost of acquisition and installation of the substituted items. Nothing herein contained shall be construed to prevent any tenant or subtenant from removing from the Premises trade fixtures, furniture and equipment installed by it and removable by tenant under its terms of the lease, on the condition, however, that the tenant or subtenant shall at its own cost and expense, repair any and all damages to the Premises resulting from or caused by the removal thereof. 5. APPLICATION OF INSURANCE AND AWARDS 5.1 DAMAGE OR DESTRUCTION OF THE PREMISES. The Mortgagor will give the Mortgagee prompt notice of any damage to or destruction of the Premises, and in case of loss covered by policies of insurance, the Mortgagee (whether before or after foreclosure sale) is hereby authorized at its option to settle and adjust any claim arising out of such policies and collect and receipt for the proceeds payable therefrom, provided, that the Mortgagor may itself adjust and collect for any losses arising out of a single occurrence aggregating not in excess of Twenty-Five Thousand Dollars ($25,000). Any expense incurred by the Mortgagee in the adjustment and collection of insurance proceeds (including the cost of any independent appraisal of the loss or damage on behalf of the Mortgagee) shall be reimbursed to the Mortgagee first out of any proceeds. Except as provided in Section 5.3 hereof, the proceeds or any part thereof shall be applied to reduction of the Indebtedness Secured Hereby then most remotely to be paid, whether due or not, without the application of any prepayment premium, or to the restoration or repair of the Premises, the choice of application to be solely at the discretion of the Mortgagee. 5.2 CONDEMNATION. The Mortgagor will give the Mortgagee prompt notice of any action, actual or threatened, in condemnation or eminent domain and hereby assigns, transfers and sets over to the Mortgagee the entire proceeds of any award or claim for damages for all or any part of the Premises taken or damaged under the power of eminent domain or condemnation, the Mortgagee being hereby authorized to intervene in any such action and to collect and receive from the condemning authorities and give proper receipts and acquittances for such proceeds. The Mortgagor will not enter into any agreements with the condemning authority permitting or consenting to the taking of the Premises unless prior written consent of the Mortgagee is obtained. Any expenses incurred by the Mortgagee in intervening in such action or collecting such proceeds (including the cost of any independent appraisal) shall be reimbursed to the Mortgagee first out of the proceeds. Except as provided in Section 5.3 hereof, the proceeds or any part thereof shall be applied upon or in reduction of the Indebtedness Secured Hereby then most remotely to be paid, whether due or not, together with any applicable prepayment premium, or to the restoration or repair of the Premises, the choice of application to be solely at the discretion of the Mortgagee. 5.3 THE MORTGAGEE TO MAKE PROCEEDS AVAILABLE UNDER CERTAIN CONDITIONS. Notwithstanding the provisions of Section 5.1 and 5.2 above, in the event of any damage to the improvements on the Premises as a result of an insured casualty or taking, the Mortgagee agrees to make the proceeds of any insurance or condemnation award available to the restoration or repair of the improvements on the Premises in accordance with the provisions of Section 5.4 hereof provided: (a) the improvements can be rebuilt substantially to the same as those originally financed and can with restoration and repair continue to be operated for the purposes utilized prior to such damage or taking; (b) no Event of Default shall exist under this Mortgage, the Note, or other documents securing the Note; (c) the appraised value of the Premises after such restoration or repair shall not have been reduced from its appraised value as of the date hereof and (d) such restoration or repair shall be completed prior to the maturity of the Notes and this Mortgage. 5.4 DISBURSEMENT OF INSURANCE AND CONDEMNATION PROCEEDS. Should any insurance or condemnation proceeds be applied to the restoration or repair of the Premises in accordance with this Article 5, the restoration or repair shall be done under the supervision of an architect acceptable to the Mortgagee and pursuant to site and building plans and specifications approved by the Mortgagee. The proceeds shall be held by the Mortgagee for such purposes and will from time to time be disbursed by the Mortgagee to defray the costs of such restoration or repair under such safeguards and controls as the Mortgagee may require and in accordance with standard construction loan procedures. Prior to the payment or application of insurance proceeds or a condemnation or eminent domain award to the repair or restoration of the improvements upon the Premises, the Mortgagee shall be entitled to receive the following: Evidence that no Event of Default exists under any of the terms, covenants and conditions of this Mortgage, the Note, or other collateral security documents. Evidence that all leasing requirements for the Premises as established by the Mortgagee have been met. Reasonably satisfactory proof that such improvements have been fully restored, or that the expenditure of money as may be received from such insurance proceeds or eminent domain award will be sufficient to repair, restore or rebuild the Premises, free and clear of all liens, except the lien of this Mortgage. In the event such insurance proceeds or eminent domain award shall be insufficient to repair, restore or rebuild the said improvements, the Mortgagor or its lessee shall deposit with the Mortgagee funds equaling such deficiency, which, together with the insurance proceeds or eminent domain award, shall be sufficient to restore, repair and rebuild the Premises. A statement of the Mortgagor's architect, certifying the extent of the repair and restoration completed to the date thereof, and that such repairs, restoration and rebuilding have been performed to date in conformity with the plans and specifications approved by the Mortgagee, together with appropriate evidence of payment for labor or materials furnished to the Premises, and total or partial lien waivers substantiating such payments. A waiver of subrogation from any insurer who claims that it has no liability as to the Mortgagor or the then owner or other insured under the policy of insurance in question. Such performance and payment bonds, and such insurance, in such amounts, issued by such company or companies and in such forms and substance, as are required by the Mortgagee. In the event the Mortgagor shall fail to restore, repair or rebuild the improvements upon the Premises within a reasonable time, then the Mortgagee, at its option, and upon not less than thirty (30) days written notice to the Mortgagor, may commence to restore, repair or rebuild the said improvements for or on behalf of said Mortgagor, and its tenants, and for such purpose, may perform all necessary acts to accomplish such restoration, repair or rebuilding. In the event insurance proceeds or an eminent domain award shall exceed the amount necessary to complete the repair, restoration or the rebuilding of the improvements upon the Premises, such excess may, at the Mortgagee's option, be applied on account of the last maturing installments of the Indebtedness Secured Hereby, irrespective of whether such installments are then due and payable without application of a prepayment premium, or be returned to the Mortgagor. In the event the Mortgagor shall fail to restore, repair or rebuild the improvements upon the Premises within the reasonable time, and if the Mortgagee does not restore, repair or rebuild the said improvements as herein provided, then the Mortgagee may, at its option, apply all or any part of the insurance proceeds or condemnation or eminent domain award on account of the last maturing installments of the Indebtedness Secured Hereby whether then due or not, without application of a prepayment premium, or return the same to the Mortgagor. 6. LEASES AND RENTS 6.1 MORTGAGOR TO COMPLY WITH LEASES. The Mortgagor represents and warrants that there are currently no leases in existence in connection with any portion of the Premises. The Mortgagor further covenants and warrants that it shall not enter into leases for any portion of the Premises without obtaining the prior written consent of the Mortgagee. With reference to any leases executed in accordance with this Section 6.1, the Mortgagor will, at its own cost and expense, perform, comply with and discharge all of the obligations of the Mortgagor under any leases and use its best efforts to enforce or secure the performance of each obligation and undertaking of the respective tenants under any such leases and will appear in and defend, at its own cost and expense, any action or proceeding arising out of or in any manner connected with the Mortgagor's interest in any leases of the Premises. The Mortgagor will not modify, extend, renew, terminate, accept a surrender of, or in any way alter the terms of the leases, nor borrow against, pledge or assign any rentals due under the leases nor consent to a subordination or assignment of the interest of the tenants thereunder to any party other than the Mortgagee, nor anticipate the rents thereunder for more than one (1) month in advance or reduce the amount of rents and other payments thereunder, nor waive, excuse, condone or in any manner release or discharge the tenants of or from their obligations, covenants, conditions and agreements to be performed. Notwithstanding anything to the contrary herein contained, the Mortgagor may amend or modify any existing leases without the prior written consent of the Mortgagee provided that such amendments or modifications are made in the ordinary course of business and do not diminish any material benefit accruing to the landlord under such lease or reduce either the length of the term, the rental or the size of the demised premises. 6.2 THE MORTGAGEE'S RIGHT TO PERFORM UNDER LEASES. Should the Mortgagor fail to perform, comply with or discharge any obligations of the Mortgagor under any lease or should the Mortgagee become aware of or be notified by any tenant under any lease of a failure on the part of the Mortgagor to so perform, comply with or discharge its obligations under said lease, the Mortgagee may, but shall not be obligated to, and without further demand upon the Mortgagor, and without waiving or releasing the Mortgagor from any obligation in this Mortgage contained, remedy such failure, and the Mortgagor agrees to repay upon demand all sums incurred by the Mortgagee in remedying any such failure together with interest at the rate then in effect under the terms of the Note. All such sums, together with interest as aforesaid shall become so much additional Indebtedness Secured Hereby, but no such advance shall be deemed to relieve the Mortgagor from any default hereunder. 6.3 ASSIGNMENT OF LEASES AND RENTS. The Mortgagor does hereby sell, assign and transfer unto the Mortgagee all of the leases, rents and profits now due and which may hereafter become due under or by virtue of any lease, whether written or verbal, or any agreement for the use or occupancy of the Premises, whether presently in existence or entered into at any time during the term of this Mortgage, it being the intention of this Mortgage to establish an absolute transfer and assignment of all such leases and agreements and all of the rents and profits from the Premises unto the Mortgagee and the Mortgagor does hereby appoint irrevocably the Mortgagee its true and lawful attorney in its name and stead, which appointment is coupled with an interest, to collect all of said rents and profits; provided, the Mortgagor shall have the right to collect and retain such rents and profits unless and until an Event of Default exists under this Mortgage. 6.4 REMEDIES. Upon an Event of Default and whether before or after the institution of legal proceedings to foreclose the lien hereof or before or after sale thereunder or during any period of redemption, the Mortgagee, without regard to waste, adequacy of the security or solvency of the Mortgagor, may revoke the privilege granted the Mortgagor hereunder to collect the rents and profits, and may, at its option, without notice, either: (a) in person or by agent, with or without taking possession of or entering the Premises, with or without bringing any action or proceeding, give, or require the Mortgagor to give, notice to any or all tenants under any lease authorizing and directing the tenant to pay such rents and profits to the Mortgagee; collect all of the rents and profits; enforce the payment thereof and exercise all of the rights of the landlord under the leases and all of the rights of the Mortgagee hereunder; may enter upon, take possession of, manage and operate said Premises, or any part thereof; may cancel, enforce or modify the leases, and fix or modify rents, and do any acts which the Mortgagee deems proper to protect the security hereof with or without taking possession of the Premises; or (b) apply for the appointment of a receiver in accordance with the statutes and law made and provided for, which receivership the Mortgagor hereby consents to, who shall collect the rents and profits, and all other income of any kind; manage the Premises so to prevent waste; execute leases within or beyond the period of receivership, and perform the terms of this Mortgage and apply the rents and profits as hereinafter provided. The entering upon and taking possession of the Premises, the appointment of a receiver, the collection of such rents and profits and the application thereof as aforesaid shall not cure or waive any Event of Default under this Mortgage nor in any way operate to prevent the Mortgagee from pursuing any other remedy which it may now or hereafter have under the terms of this Mortgage nor shall it in any way be deemed to constitute the Mortgagee a mortgagee-in-possession. The rights and powers of the Mortgagee hereunder shall remain in full force and effect both prior to and after any foreclosure of the Mortgage and any sale pursuant thereto and until expiration of the period of redemption from said sale, regardless of whether a deficiency remains from said sale. The purchaser at any foreclosure sale, including the Mortgagee, shall have the right, at any time and without limitation as provided in Minnesota Statutes section 582.03, to advance money to any receiver appointed hereunder to pay any part or all of the items which the receiver would otherwise be authorized to pay if cash were available from the Premises and the sum so advanced, with interest at the rate then in effect under the terms of the Note, shall be a part of the sum required to be paid to redeem from any foreclosure sale. The rights hereunder shall in no way be dependent upon and shall apply without regard to whether the Premises are in danger of being lost, materially injured or damaged or whether the Premises are adequate to discharge the Indebtedness Secured Hereby. 6.5 APPLICATION OF RENTS. Any rents collected pursuant to the terms of Section 6.4 hereof shall be applied in the following order: (a) to payment of all reasonable fees of any receiver appointed hereunder; (b) to application of tenant's security deposits as required by Minnesota Statutes section 504.20; (c) to payment when due of prior or current real estate taxes or special assessments with respect to the Premises or, if this Mortgage so requires, to the periodic escrow for payment of the taxes or special assessments then due; (d) to payment when due of premiums for insurance of the type required by this Mortgage or, if this Mortgage so requires, to the periodic escrow for the payment of premiums then due; and (e) to payment of all expenses for normal maintenance of the Premises. Any rents remaining after application of the above items shall be applied to the Indebtedness Secured Hereby on a monthly basis. If the Premises shall be foreclosed and sold pursuant to a foreclosure sale, then: (a) if the Mortgagee is the purchaser at the foreclosure sale, the rents shall be paid to the Mortgagee to be applied to the extent of any deficiency remaining after the sale, the balance to be retained by the Mortgagee, and if the Premises be redeemed by the Mortgagor or any other party entitled to redeem, to be applied as a credit against the redemption price with any remaining excess rents to be paid to the Mortgagor, provided, if the Premises not be redeemed, any remaining excess rents to belong to the Mortgagee, whether or not a deficiency exists. (b) if the Mortgagee is not the purchaser at the foreclosure sale, the rents shall be paid to the Mortgagee to be applied first, to the extent of any deficiency remaining after the sale, the balance to be retained by the purchaser, and if the Premises be redeemed by the Mortgagor or any other party entitled to redeem, to be applied as a credit against the redemption price with any remaining excess rents to be paid to the Mortgagor, provided, if the Premises not be redeemed any remaining excess rents shall be paid first, to the purchaser at the foreclosure sale in an amount equal to the interest accrued upon the sale price pursuant to Minnesota Statutes section 580.23 or section 581.10, then to the Mortgagee to the extent of any deficiency remaining unpaid and the remainder to the purchaser. 7. RIGHTS OF THE MORTGAGEE 7.1 RIGHT TO CURE EVENT OF DEFAULT. If the Mortgagor shall fail to comply with any of the covenants or obligations of this Mortgage, the Mortgagee may, but shall not be obligated to, without demand upon the Mortgagor, and without waiving or releasing the Mortgagor from any obligation in this Mortgage contained, remedy such failure, and the Mortgagor agrees to repay upon demand all sums incurred by the Mortgagee in remedying any such failure together with interest at the Default Rate, as defined under the terms of the Credit Agreement. All such sums, together with interest as aforesaid shall become so much additional Indebtedness Secured Hereby, but no such advance shall be deemed to relieve the Mortgagor from any failure hereunder. 7.2 NO CLAIM AGAINST THE MORTGAGEE. Nothing contained in this Mortgage shall constitute any consent or request by the Mortgagee, express or implied, for the performance of any labor or services or for the furnishing of any materials or other property in respect of the Premises or any part thereof, nor as giving the Mortgagor or any party in interest with the Mortgagor any right, power or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would create any personal liability against the Mortgagee in respect thereof or would permit the making of any claim that any lien based on the performance of such labor or services or the furnishing of any such materials or other property is prior to the lien of this Mortgage. 7.3 INSPECTION. The Mortgagor will permit the Mortgagee's authorized representatives to enter the Premises at all times during normal business hours for the purpose of inspecting the same; provided the Mortgagee shall have no duty to make such inspections and shall not incur any liability or obligation for making or not making any such inspections. 7.4 WAIVERS; RELEASES; RESORT TO OTHER SECURITY, ETC. Without affecting the liability of any party liable for payment of any Indebtedness Secured Hereby or performance of any obligation contained herein, and without affecting the rights of the Mortgagee with respect to any security not expressly released in writing, the Mortgagee may, at any time, and without notice to or the consent of the Mortgagor or any party in interest with the Premises or the Note: (a) release any person liable for payment of all or any part of the Indebtedness Secured Hereby or for performance of any obligation herein; (b) make any agreement extending the time or otherwise altering the terms of payment of all or any part of the Indebtedness Secured Hereby or modifying or waiving any obligation, or subordinating, modifying or otherwise dealing with the lien or charge hereof; (c) accept any additional security; (d) release or otherwise deal with any property, real or personal, including any or all of the Premises, including making partial releases of the Premises; or (e) resort to any security agreements, pledges, contracts of guarantee, assignments of rents and leases or other securities, and exhaust any one or more of said securities and the security hereunder, either concurrently or independently and in such order as it may determine. 7.5 RIGHTS CUMULATIVE. Each right, power or remedy herein conferred upon the Mortgagee is cumulative and in addition to every other right, power or remedy, express or implied, now or hereafter arising, available to the Mortgagee, at law or in equity, or under the Uniform Commercial Code, or under any other agreement, and each and every right, power and remedy herein set forth or otherwise so existing may be exercised from time to time as often and in such order as may be deemed expedient by the Mortgagee and any such exercise shall not be a waiver of the right to exercise at any time thereafter any other right, power or remedy. No delay or omission by the Mortgagee in the exercise of any right, power or remedy arising hereunder or arising otherwise shall impair any such right, power or remedy or the right of the Mortgagee to resort thereto at a later date or be construed to be a waiver of any Event of Default under this Mortgage or the Note. 7.6 SUBSEQUENT AGREEMENTS. Any agreement hereafter made by the Mortgagor and the Mortgagee pursuant to this Mortgage shall be superior to the rights of the holder of any intervening lien or encumbrance. 7.7 WAIVER OF APPRAISEMENT, HOMESTEAD, MARSHALING. The Mortgagor hereby waives to the full extent lawfully allowed the benefit of any homestead, appraisement, evaluation, stay and extension laws now or hereinafter in force. The Mortgagor hereby waives any rights available with respect to marshaling of assets so as to require the separate sales of any portion of the Premises, or as to require the Mortgagee to exhaust its remedies against a specific portion of the Premises before proceeding against the other and does hereby expressly consent to and authorize the sale of the Premises or any part thereof as a single unit or parcel. 7.8 BUSINESS LOAN REPRESENTATION. The Mortgagor represents and warrants to the Mortgagee that the loan evidenced by the Note is a business loan transacted solely for the purpose of carrying on the business of the Mortgagor and the Premises does not constitute the homestead of the Mortgagor. 8. EVENTS OF DEFAULT AND REMEDIES 8.1 EVENTS OF DEFAULT. The violation of any provision of this Mortgage or the occurrence of any Event of Default as defined in the Credit Agreement shall constitute an Event of Default hereunder ("Event of Default"). 8.2 THE MORTGAGEE'S RIGHT TO ACCELERATE. If an Event of Default shall occur the Mortgagee may immediately and without notice to the Mortgagor declare the entire unpaid principal balance of the Note together with all other Indebtedness Secured Hereby to be immediately due and payable and thereupon all such unpaid principal balance of the Note together with all accrued interest thereon and all other Indebtedness Secured Hereby shall be and become immediately due and payable. 8.3 REMEDIES OF THE MORTGAGEE AND RIGHT TO FORECLOSE. If an Event of Default shall occur the Mortgagee shall have the right to enforce the provisions of this Mortgage and may, either with or without entry or taking possession, proceed by suit or suits at law or in equity or by any other appropriate proceedings or remedy to enforce payment of the Indebtedness Secured Hereby or the performance of any other term hereof or any other right and the Mortgagor hereby authorizes and fully empowers the Mortgagee to foreclose this Mortgage by judicial proceedings or by advertisement with full authority to sell the Premises at public auction and convey the same to the purchaser in fee simple, either in one parcel or separate lots and parcels, all in accordance with and in the manner prescribed by law, and out of the proceeds arising from sale and foreclosure to retain the principal and interest due on the Note and the Indebtedness Secured Hereby together with all such sums of money as the Mortgagee shall have expended or advanced pursuant to this Mortgage or pursuant to statute together with interest thereon as herein provided and all costs and expenses of such foreclosure, including, but not limited to, maximum lawful attorney's fees, costs of environmental inspections and appraisal costs and expenses, with the balance, if any, to be paid to the persons entitled thereto by law. 8.4 RECEIVER. Upon the occurrence of an Event of Default, the Mortgagee shall be entitled as a matter of right without notice and without giving bond and without regard to the solvency or insolvency of the Mortgagor, or waste of the premises or adequacy of the security of the Premises, to apply for the appointment of a receiver under any statute or law who shall have all the rights, powers and remedies as provided by such statute or law, including without limitation the rights of receiver pursuant to Minnesota Statutes section 576.01, as amended, and who shall from the date of his appointment through any period of redemption existing at law collect the rents, and all other income of any kind; manage the Premises so as to prevent waste; execute leases within or beyond the use of receivership; and perform the terms of this Mortgage and apply the rents, issues and profits to the payment of the expenses enumerated in Minnesota Statutes section 576.01, subdivision 2 in the priority mentioned therein and to all expenses for maintenance of the Premises and to the costs and expenses of the receivership, including reasonable attorneys fees, to the repayment of the Indebtedness Secured Hereby. The Mortgagor does hereby irrevocably consent to such appointment. 8.5 RIGHTS UNDER UNIFORM COMMERCIAL CODE. In addition to the rights available to a mortgagee of real property, the Mortgagee shall also have all the rights, remedies and recourse available to a secured party under the Uniform Commercial Code including the right to proceed under the provisions of the Uniform Commercial Code governing default as to any Collateral as defined in Section 4.1 of this Mortgage which may be included in the Premises or which may be deemed nonrealty in a foreclosure of this Mortgage or to proceed as to such Collateral in accordance with the procedures and remedies available pursuant to a foreclosure of real estate. 8.6 RIGHT TO DISCONTINUE PROCEEDINGS. In the event the Mortgagee shall have proceeded to invoke any right, remedy or recourse permitted under this Mortgage and shall thereafter elect to discontinue or abandon the same for any reason, the Mortgagee shall have the unqualified right to do so and in such event the Mortgagor and the Mortgagee shall be restored to their former positions with respect to the Indebtedness Secured Hereby. This Mortgage, the Premises and all rights, remedies and recourse of the Mortgagee shall continue as if the same had not been invoked. 8.7 ACKNOWLEDGMENT OF WAIVER OF HEARING BEFORE SALE. The Mortgagor understands and agrees that if an Event of Default shall occur, the Mortgagee has the right, inter alia, to foreclose this Mortgage by advertisement pursuant to Minnesota Statutes chapter 580, as hereafter amended, or pursuant to any similar or replacement statute hereafter enacted; that if the Mortgagee elects to foreclose by advertisement, it may cause the Premises, or any part thereof, to be sold at public auction; that notice of such sale must be published for six (6) successive weeks at least once a week in a newspaper of general circulation and that no personal notice is required to be served upon the Mortgagor. The Mortgagor further understands that upon the occurrence of an Event of Default, the Mortgagee may also elect its rights under the Uniform Commercial Code and take possession of the Collateral and dispose of the same by sale or otherwise in one or more parcels provided that at least ten (10) days' prior notice of such disposition must be given, all as provided for by the Uniform Commercial Code, as hereafter amended or by any similar or replacement statute hereafter enacted. The Mortgagor further understands that under the Constitution of the United States and the Constitution of the State of Minnesota it may have the right to notice and hearing before the Premises may be sold and that the procedure for foreclosure by advertisement described above does not insure that notice will be given to the Mortgagor and neither said procedure for foreclosure by advertisement nor the Uniform Commercial Code requires any hearing or other judicial proceeding. THE MORTGAGOR HEREBY EXPRESSLY CONSENTS AND AGREES THAT THE PREMISES MAY BE FORECLOSED BY ADVERTISEMENT AND THAT THE PERSONAL PROPERTY MAY BE DISPOSED OF PURSUANT TO THE UNIFORM COMMERCIAL CODE, ALL AS DESCRIBED ABOVE. THE MORTGAGOR ACKNOWLEDGES THAT IT IS REPRESENTED BY LEGAL COUNSEL; THAT BEFORE SIGNING THIS DOCUMENT THIS SECTION AND THE MORTGAGOR'S CONSTITUTIONAL RIGHTS WERE FULLY EXPLAINED BY SUCH COUNSEL AND THAT THE MORTGAGOR UNDERSTANDS THE NATURE AND EXTENT OF THE RIGHTS WAIVED HEREBY AND THE EFFECT OF SUCH WAIVER. 9. HAZARDOUS MATERIALS 9.1 DEFINITIONS. Any terms used in this Article which are defined in state or federal statutes and/or regulations promulgated in relation thereto shall have the meaning subscribed to such terms in said statutes and regulations. 9.2 REPRESENTATIONS BY THE MORTGAGOR. The Mortgagor hereby represents to the Mortgagee that: (a) to the best of the Mortgagor's knowledge after due inquiry, the Premises has never been used either by previous owners or occupants or by the Mortgagor or current occupants to generate, manufacture, refine, transport, treat, store, handle or dispose of any toxic material, hazardous substance or hazardous waste and no such material, substance or waste currently exists on the Premises or in its soil or groundwater; (b) to the best of the Mortgagor's knowledge after due inquiry, no portion of the improvements on the Premises has been constructed with asbestos, asbestos-containing materials, urea formaldehyde insulation or any other chemical or substance which has been determined to be a hazard to health and environment; (c) to the best of the Mortgagor's knowledge after due inquiry, there are no electrical transformers or other equipment which have dielectric fluid-containing polychlorinated biphenyls (PCBs) located in, on or under the Premises (the materials, substances and wastes described in subparagraphs 9.2(a), (b) and (c) above are hereinafter sometimes collectively referred to as "Hazardous Wastes and Substances"); (d) to the best of the Mortgagor's knowledge after due inquiry, the Premises has never contained any underground storage tanks; and (e) the Mortgagor has not received nor does it have any knowledge of any summons, citation, directive, letter or other communication, written or oral, from any local, state or federal governmental agency concerning (i) the existence of Hazardous Wastes and Substances on the Premises or in the immediate vicinity or (ii) any intentional or unintentional action or omission on the part of the Mortgagor or any occupant of the Premises resulting in the releasing, spilling, leaking, pumping, pouring, emitting, emptying, or dumping of Hazardous Wastes or Substances onto the Premises or into waters or other lands. 9.3 COVENANTS OF THE MORTGAGOR. The Mortgagor hereby covenants to the Mortgagee that (a) the Mortgagor shall (i) comply and shall cause all occupants of the Premises to comply with all federal, state and local laws, rules, regulations and orders with respect to the discharge, generation, removal, transportation, storage and handling of Hazardous Wastes and Substances, (ii) remove any Hazardous Wastes and Substances immediately upon discovery of same, and (iii) pay or cause to be paid all costs associated with such removal; (b) the Mortgagor shall keep the Premises free of any lien imposed pursuant to any state or federal law, rule, regulation or order in connection with the existence of Hazardous Wastes and Substances on the Premises; (c) the Mortgagor shall not install or permit to be installed or to exist in or on the Premises any asbestos, asbestos-containing materials, urea formaldehyde insulation or any other chemical or substance which has been determined to be a hazard to health and environment; and (d) the Mortgagor shall not cause or permit to exist, as a result of an intentional or unintentional act or omission on the part of the Mortgagor or any occupant of the Premises, a releasing, spilling, leaking, pumping, emitting, pouring, emptying or dumping of any Hazardous Wastes or Substances onto the Premises or into waters or other lands. 9.4 EVENTS OF DEFAULT AND REMEDIES. It shall constitute an Event of Default hereunder and the Mortgagee shall be entitled to exercise all remedies available to it hereunder if: (a) any of the Mortgagor's representations contained in Section 9.2 hereof prove to be false, inaccurate or misleading; (b) the Mortgagor shall fail to comply with the covenants contained in Section 9.3 hereof; (c) any Hazardous Wastes or Substances are hereafter found to exist on the Premises or in its soil or groundwater; or (d) any summons, citation, directive, letter or other communication, written or oral, shall be issued by any local, state or federal governmental agency concerning the matters described in Section 9.2(e)(i) and (ii) above. The Mortgagor hereby grants the Mortgagee and its employees and agents an irrevocable and non-exclusive license to enter the Premises, subject to rights of tenants, in order to inspect, conduct testing and remove Hazardous Wastes and Substances. All costs of such inspection, testing and removal shall immediately become due and payable to the Mortgagee, shall be secured by this Mortgage and shall constitute additional Indebtedness Secured Hereby. 9.5 INDEMNIFICATION. The Mortgagor hereby agrees to defend, indemnify and hold harmless the Mortgagee, its directors, officers, employees, agents, contractors, subcontractors, licensees, invitees, successors and assigns ("Indemnified Parties") from and against any and all claims, losses, damages, liabilities, judgments, costs and expenses (including, without limitation, reasonable attorneys' fees and costs incurred in the investigation, defense and settlement of claims) incurred by the Indemnified Parties as a result of or in connection with the presence or removal of any Hazardous Wastes or Substances or as a result of or in connection with activities prohibited under this Article. The Mortgagor shall bear, pay and discharge, as and when the same become due and payable, any and all such judgments or claims for damages, penalties or otherwise, against the Indemnified Parties, shall hold the Indemnified Parties harmless against all claims, losses, damages, liabilities, costs and expenses, and shall assume the burden and expense of defending all suits, administrative proceedings, and negotiations of any description with any and all persons, political subdivisions or government agencies arising out of any of the occurrences set forth in this Article. This indemnification shall remain in full force and effect and shall survive the repayment of the Indebtedness Secured Hereby and the satisfaction of the documents securing the same, as well as the exercise of any remedy by the Mortgagee hereunder or under the other documents securing this Mortgage, including a foreclosure of the Mortgage or the acceptance of a deed in lieu of foreclosure. 10. MISCELLANEOUS 10.1 RELEASE OF MORTGAGE. When all Indebtedness Secured Hereby has been paid, this Mortgage and all assignments herein contained shall be void and this Mortgage shall be released by the Mortgagee at the Mortgagor's expense. 10.2 CHOICE OF LAW. This Mortgage is made and executed under the laws of the State of Minnesota and is intended to be governed by the laws of said State. 10.3 SUCCESSORS AND ASSIGNS. This Mortgage and each and every covenant, agreement, indemnity and other provision hereof shall be binding upon the Mortgagor and its successors and assigns including without limitation each and every from time to time record owner of the Premises or any other person having an interest therein, shall run with the land and shall inure to the benefit of the Mortgagee and its successors and assigns. As used herein the words "successors and assigns" shall also be deemed to include the heirs, representatives, administrators and executors of any natural person who is a party to this Mortgage. 10.4 UNENFORCEABILITY OF CERTAIN CLAUSES. The unenforceability or invalidity of any provisions hereof shall not render any other provision or provisions herein contained unenforceable or invalid. 10.5 CAPTIONS AND HEADINGS. The captions and headings of the various sections of this Mortgage are for convenience only and are not to be construed as confining or limiting in any way the scope or intent of the provisions hereof. Whenever the context requires or permits the singular shall include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable. 10.6 NOTICES. Any notice which any party hereto may desire or may be required to give to any other party shall be in writing and the mailing thereof by certified mail to their respective addresses as set forth herein, or to such other places any party hereto may hereafter by notice in writing designate shall constitute service of notice hereunder. 10.7 INTEREST LIMITATION. All agreements between the Mortgagor and the Mortgagee are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the Indebtedness Secured Hereby or otherwise, shall the amount paid or agreed to be paid to the Mortgagee for the use, forbearance, loaning or detention of the Indebtedness Secured Hereby exceed the maximum permissible under applicable law. If from any circumstances whatsoever, fulfillment of any provisions hereof or of the Note, the Credit Agreement or any other document securing this Mortgage at any time given shall involve transcending the limit of validity prescribed by law, then, the obligation to be fulfilled shall automatically be reduced to the limit of such validity, and if from any circumstances the Mortgagee should ever receive as interest an amount which would exceed the highest lawful rate of interest, such amount which would be in excess of interest shall be applied to the reduction of the principal balance secured by the Note and not to the payment of interest thereunder. This provision shall control every other provision of all agreements between the Mortgagor and Mortgagee and shall also be binding upon and available to any subsequent holder of the Note. Nothing herein contained shall affect or impair the liability or obligation of any guarantor or other person who by separate instrument shall be or become liable upon the Indebtedness Secured Hereby. IN WITNESS WHEREOF, the Mortgagor has caused this Mortgage to be executed as of the date first above written. FIRST TEAM SPORTS, INC. By: /s/ Kent A. Brunner Name: Kent A. Brunner Title: CFO ACKNOWLEDGMENT STATE OF MINNESOTA ) ) COUNTY OF _________ ) The foregoing instrument was acknowledged before me this ____ day of September, 1999, by _________________________, the __________________________ of First Team Sports, Inc., a Minnesota corporation on behalf of said corporation. _________________________ Notary Public THIS DOCUMENT WAS DRAFTED BY: OPPENHEIMER WOLFF & DONNELLY LLP 45 South Seventh Street Suite 3400 Minneapolis, Minnesota 55402 (612) 607-7000 EXHIBIT "A" LEGAL DESCRIPTION Lots 2 and 2A, Block 1, Anoka Enterprise Park Third Addition, according to the recorded plat thereof, Anoka County, Minnesota. EXHIBIT "B" PERMITTED ENCUMBRANCES EX-23.1 9 CONSENT OF INDEPENDENT AUDITORS 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. 33-68164) and the 1994 Stock Option and Incentive Compensation Plan (No. 33-84722) of our report dated April 14, 2000, 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, 2000. /s/ Ernst & Young LLP Minneapolis, Minnesota May 25, 2000 EX-27 10 ART 5 FDS FOR YEAR ENDED 2/29/2000
5 1 U.S. Dollars YEAR FEB-29-2000 MAR-01-1999 FEB-29-2000 1 860,671 0 16,683,474 765,000 12,079,722 31,369,105 10,969,623 4,411,801 42,248,508 12,154,640 5,693,696 0 0 58,602 23,728,570 42,248,508 45,003,424 45,003,424 31,871,379 31,871,379 0 0 946,242 32,073 14,568 17,505 0 0 0 17,505 0.00 0.00
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