-----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, OBYW9jc22Y2EgcPOLVM6kaR1VTHDttkR5Re1WC1jV4hsO0gVqeVu7VmJNMLkg0p0 kqhJcZlvtxCfwiTUM8zYng== 0000914190-99-000224.txt : 19990624 0000914190-99-000224.hdr.sgml : 19990624 ACCESSION NUMBER: 0000914190-99-000224 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST TEAM SPORTS INC CENTRAL INDEX KEY: 0000820242 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 411545748 STATE OF INCORPORATION: MN FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-16442 FILM NUMBER: 99635092 BUSINESS ADDRESS: STREET 1: 1201 LUND BLVD CITY: ANOKA STATE: MN ZIP: 55303 BUSINESS PHONE: 6127804454 MAIL ADDRESS: STREET 1: 1201 LUND BLVD CITY: ANOKA STATE: MN ZIP: 55303-1092 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended February 28, 1999 Commission File No: 000-16442 FIRST TEAM SPORTS, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-1545748 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 1201 Lund Boulevard Anoka, Minnesota 55303 (Address of principal executive offices) Registrant's telephone number, including area code: (612) 576-3500 ---------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share Preferred Stock Purchase Rights --------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of May 7, 1999 was approximately $12,227,834 based upon the closing sale price of the Registrant's Common Stock on such date. Shares of $.01 par value Common Stock outstanding at May 7, 1999: 5,803,848. ----------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its 1999 Annual Meeting are incorporated by reference into Part III. PART I ITEM 1. BUSINESS (a) General Development of Business. First Team Sports, Inc. (the "Company") is engaged in the manufacture (through independent contract manufacturers) and distribution of in-line roller skates, ice skates, street hockey equipment, ice hockey sticks and equipment and related accessory products. In-line skates feature wheels mounted in a straight line on a light-weight metal or composite plastic frame, functioning much like the blade on an ice skate. First Team Sports, Inc. was incorporated under Minnesota law in May 1986 by David G. Soderquist, John J. Egart and Ronald W. Berg. Mr. Soderquist and Mr. Egart continue to serve as executive officers and directors of the Company. First Team Sports has the following wholly owned subsidiaries: Hespeler Hockey Company, a Nova Scotia, Canada unlimited liability company, Hespeler Hockey Holding, Inc., a Minnesota company, Mothership Distribution, Inc., a Minnesota company, First Team Sports GmbH, an Austrian company, and First Team Sports Exports, Inc., a U.S. Virgin Islands corporation. Unless the context otherwise requires, references in this Form 10-K to the "Company" refer to First Team Sports, Inc. and its subsidiaries. (b) Financial Information about Industry Segments. The Company is engaged at the present time in only one industry segment, namely the manufacture (through independent contract manufacturers) and distribution of sporting and athletic goods. Financial information concerning the Company's business is included in Items 6,7,8 and 14. (c) Narrative Description of Business. (1) Products. The Company's principal products are in-line roller skates and ice hockey sticks marketed under the ULTRAWHEELS(R), SKATE ATTACK(R), and HESPELER(R) brand names. The Company also supplies in-line roller skates under various third party labels. UltraWheels brand skates are marketed to specialty and chain sporting goods dealers. The Skate Attack products are produced for sales to the mass merchant market. The Hespeler brand is marketed to specialty, chain sporting goods dealers and larger mass merchants. The Company's in-line roller skates consist of a soft mesh and leather boot with internal supports and molded plastic boots with an integrated frame, or a frame riveted to the bottom of the boot, and high-density polyurethane wheels mounted on ball bearings. (2) Status of products in development The Company continues to develop products for the recreational, fitness and aggressive categories, as well as, improving upon existing in-line skate models. The Company also continues to develop products for the growing ice hockey market, including pro style sticks and protective equipment. The Company intends to introduce additional new products as testing is completed to its satisfaction and when funding is available. There is no assurance, however, that the Company will be successful in introducing new products or that such new products will prove commercially acceptable. (3) Source of Materials. The Company's products are sourced from independent contract manufacturers located in the United States and foreign countries. These suppliers manufacture, assemble and package the Company's products under the detailed specifications of the Company. The independent contract manufacturers are responsible for shipment to the Company's warehouse in Minneapolis, Minnesota or directly to certain major customers' distribution centers and warehouses. The components for the Company's products are manufactured by independent contract manufacturers, also located in the United States and foreign countries, who have been procured by the Company's suppliers or, frequently, by management of the Company. The Company submits purchase orders to its manufacturers for the production of specific amounts of its products and has not entered into any long-term contacts for production. All purchase orders are in U.S. dollars. (4) Patents, trademarks, licenses, franchises and concessions. The Company markets its products under a number of trade names and trademarks, including the following principal trademarks or registered trademarks of the Company: "UltraWheels", "Skate Attack", "Street Attack", "Ultra Ice", "Hespeler", "Heavy", and "Third World". The Company owns numerous United States trademark registrations and has several pending trademark applications. The Company owns a large number of foreign trademark registrations, regularly files for registration of its more important trademarks in the United States and in numerous foreign countries and has several pending applications. The Company relies to varying degrees upon its common law rights of trademark ownership, copyrights and registration of its trademarks. The Company has licenses to use the names and likeness of various hockey players, and related organizations as mentioned above. The Company has also filed five patent applications covering various parts of in-line skates and methods of producing its products. (5) and (6) Seasonality and Working Capital The Company's marketing area covers North America, South America, Europe, Australia and the Far East. This large and diverse marketing area, along with the acceptance of the Company's products by athletes and recreational users, has helped reduce the seasonal variations in the Company's sales and in the demands on the Company's working capital. The Company's products are primarily used outdoors in the spring and summer months and therefore, are dependent on weather conditions. With approximately 95% of the Company's sales occurring in North America and Europe, the Company does have increased sales and demands on its working capital during the spring selling season. (7) Major Customers. The Company believes that its customer relationships are excellent, and only one customer of the Company has accounted for more than 10% of the Company's sales in one or more of the past three fiscal years. In fiscal 1999, 1998 and 1997 Wal-Mart, based in Bentonville, Arkansas, accounted for approximately 23%, 29% and 23%, respectively, of the Company's net sales. (8) Backlog. The Company had approximately $7.6 million in unfilled purchase orders as of May 17, 1999, compared to approximately $5.1 million in unfilled purchase orders as of May 18, 1998. Approximately $6.8 million of these backlog orders are a result of spring booking orders to be shipped at future dates and approximately $787,000 result from orders of products that are temporarily unavailable. The backlog may be subject to cancellation or other adjustments and is not necessarily indicative of future sales. (9) Government contracts. The Company has no government contracts. (10) Competition. The principal competitive factors in the in-line roller skate industry are name recognition, price and product performance. The main areas of difference in product performance are in the weight and strength of the boot and frame, the hardness of the wheels and the quality and lubrication of the wheel bearings. The Company offers a 90-day warranty on its products, which the Company believes is an important competitive factor. Beyond such warranty, the Company does not offer service on its products and does not believe that service is an important competitive factor. The Company believes it has a significant share of the in-line roller skate market. Rollerblade, Inc., maker of rollerblades, is considered to be the market leader; and K2, Inc. is a strong competitor. The Company competes with Rollerblade, Inc. and K2, Inc. in all price and quality ranges. The Company believes that it would not be difficult for other companies, both new enterprises and established members of the sporting goods industry, to enter the in-line roller skate market, and, in fact, many new companies have entered this market in recent years. (11) Research and development. Estimated research and development expenses for Company-sponsored research activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques were not material in fiscal 1999, 1998 or 1997. (12) Effect of environmental regulation. To the extent that the Company's management can determine, there are no federal, state or local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment with which compliance by the Company has had or is expected to have a material effect upon the capital expenditures, earnings or competitive position of the Company. (13) Employees. As of May 1, 1999, the Company employed 81 full-time employees and 9 part-time employees. (d) Export Sales. The Company's wholly owned subsidiary, First Team Sports Exports, Inc., was formed in April 1991, which subsidiary has no assets attributable to any specific foreign geographic area. In fiscal 1999, 1998 and 1997 First Team Sports Exports, Inc. had export sales of $16.4 million, $17.9 million and $25.6 million representing approximately 39%, 31% and 33% , respectively, of the net sales of the Company. Canadian net sales were $10.4 million (25% of net sales) in fiscal 1999, $7.5 million (13% of net sales) in fiscal 1998 and $5.6 million (7% of net sales) in fiscal 1997. Sales outside North America were $6.0 million (14% of net sales) in fiscal 1999, $10.4 million (18% of net sales) in fiscal 1998 and $20.0 million (26% of net sales) in fiscal 1997. ITEM 2. PROPERTIES The Company owns and occupies approximately 25,000 square feet of office space and 180,000 square feet of warehouse space located at 1201 Lund Boulevard, Anoka, Minnesota, a suburb of Minneapolis, Minnesota. The Company has a real estate mortgage on the property, which had a balance of approximately $3,768,000 as of May 1, 1999. The Company also occupies approximately 2,000 to 4,000 square feet of office space in Toronto, Canada and Graz, Austria for its subsidiaries, Hespeler Hockey Company and First Team Sports GmbH, respectively. The Company leases these facilities with the leases having terms of one to four years. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's shareholders during the quarter ended February 28, 1999. EXECUTIVE OFFICERS OF THE COMPANY The following sets forth the names and ages of current executive officers of the Company in addition to information regarding their positions with the Company, their periods of service in such positions and their business experience for the past five years. Executive officers generally serve in office for terms of approximately one year. There are no family relationships among the officer's names below. Name and Age of Current Positions with Company and Principal Executive Officer Occupations for the Past Five Years - ------------------------- -------------------------------------------- John J. Egart, 49 President and Chief Executive Officer of the Company since January 1994; Director of the Company since the Company's inception in May 1986; Executive Vice President of the Company from the Company's inception in May 1986 to January 1994. David G. Soderquist, 50 Vice Chairman of the Company since January 1994; Director of the Company since the Company's inception in May 1986; President and Chief Executive Officer of the Company from the Company's inception in May 1986 to January 1994. Leonard R. Vinson, Jr., 38 Senior Vice President Sales and Marketing of the Company since March 1, 1999; Senior Vice President Sales and Marketing for Bravo, Inc., a sporting goods company, from January 1998 to February 1999; Vice President Sales and Marketing for Kryptonics, Inc., a sporting goods company, from October 1995 to January 1998; Co-founder of Pure Fun Sports, a sporting goods sales agency, from January 1990 to October 1995. Kent A. Brunner, 38 Vice President and Chief Financial Officer of the Company since September 1998; Vice President/Finance of the Company from September 1998 to September 1996; Controller of the Company from November 1994 to September 1996; Audit Manager for McGladrey & Pullen, LLP, a national certified public accounting firm, from June 1988 to November 1994. Susan L. Joch, 38 Vice President/Marketing of the Company since November 1993; Director of Marketing of the Company from July 1991 to November 1993; Product Marketing Manager for Tonka Corporation, a toy manufacturer, from June 1989 to July 1991. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information. The range of bid quotations for the Company's Common Stock during fiscal 1998 and fiscal 1999 was as follows: Quarter Ended High Low May 31, 1997 $7-1/2 $5 August 31, 1997 $9-1/8 $5-3/8 November 30, 1997 $6-5/8 $3-3/8 February 28, 1998 $3-15/16 $2 May 31, 1998 $4 $2-7/16 August 31, 1998 $2-11/16 $1-9/32 November 30, 1998 $1-15/16 $ 3/4 February 28, 1999 $2-1/8 $ 13/16 The Company's Common Stock is traded on the Nasdaq National Market under the symbol "FTSP". The above prices are bid quotations and may not necessarily represent actual transactions. (b) Holders. As of May 3, 1999, there were approximately 442 holders of record of the Company's Common Stock. (c) Dividends. The Company has never paid cash dividends and has no present intention to pay cash dividends in the foreseeable future. Under the Company's bank line of credit, the Company may not pay dividends without the bank's consent. ITEM 6. SELECTED FINANCIAL DATA
Years ended February 28, 1999, 1998 and 1997, February 29, 1996 and February 28, 1995. --------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Operations Data: Net Sales $42,397,426 $56,336,906 $76,435,022 $97,667,448 $85,528,860 Net Income/(Loss) ($5,845,104) ($2,609,233) 2,725,282 7,811,857 6,098,757 Net Income (Loss) Per Share: Basic (1.01) (.45) .47 1.37 1.09 Diluted (1.01) (.45) .46 1.30 1.03 Cash Dividends Paid Per Share -- -- -- -- -- Balance Sheet Data: Total Assets $39,134,394 $51,690,373 $52,343,501 $55,957,802 $45,863,753 Working Capital 17,371,669 25,051,180 27,921,689 24,944,985 18,109,090 Long-Term Debt 5,576,967 6,774,496 6,217,936 6,880,360 3,053,494 Shareholders' Equity 23,927,862 30,240,864 32,745,931 29,830,283 20,850,079
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Team Sports, Inc. designs, manufactures (through third-party contractors) and markets brand name sporting goods. The Company's product groups consist of in-line skates, in-line accessories and parts (primarily protective wear and replacement wheels and bearings), roller hockey products, ice hockey sticks and ice hockey protective wear and accessories. Within the product groups, the Company maintains Ultra Wheels(R), Skate Attack(R), Heavy(R) and Third World(R) in-line product lines and a Hespeler(R) ice hockey line. The Ultra Wheels, Heavy and Third World lines consist of higher quality and higher priced products that are targeted for the specialty and sporting goods chain store customers. The Skate Attack line consists of lower priced products for the mass merchant customers. The Hespeler ice hockey line consists of high quality products that are targeted primarily at the specialty and sporting goods chain stores. Results Of Operations Comparison Of Fiscal 1999 To 1998 Net Sales. Net sales decreased 25% to $42.4 million in fiscal 1999 from $56.3 million in fiscal 1998. The decline was primarily due to a decrease in the Company's in-line skate sales volume, combined with a decrease in the average selling price of both the Company's Skate Attack and Ultra Wheels in-line skate brands. The Company experienced continued pricing pressures from all areas of the in-line market place due primarily to excess inventory levels and competitive price cutting in the in-line skate industry. A breakdown and analysis of the Company's main product lines is as follows:
(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. A geographic breakdown of the Company's net sales is as follows:
(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 has continued to plague the in-line skate industry and a reduction in placement with the mass merchant distribution channels. This was a direct result of the mass merchants reducing their branded selections, as well as a continued decline in the average price of in-line skates. In addition, as part of the two-year malaise in the sporting goods industry, there has been a continued reduction of retail outlets, especially in the specialty area, and this also contributed significantly to the Company's reduced revenues. The increased sales in Canada were primarily the result of Hespeler ice hockey product sales and the continued strong acceptance of the Company's in-line products in Canada. The decrease in European sales was primarily the result of excess inventory levels in the European market and an increase in the number of customers buying direct from Pacific Rim manufacturers. The decrease in other international sales was primarily the result of continued excess inventory levels in both the Pacific Rim and South American marketplaces. While the Company believes there are positive signs that the market conditions in the in-line industry are improving, the national and international markets continue to be very competitive and under extreme price competition. Gross Profit. The Company's gross profit declined to $4.3 million, or 10.2 % of net sales in fiscal 1999, from $12.0 million, or 21.3% of net sales in fiscal 1998. The gross profit in fiscal 1999 was net of a $6 million charge described below. Excluding the impact of the charge, the gross profit as a percentage of net sales was 24.4%. During the second quarter of fiscal 1999, the Company conducted a thorough review of its in-line business and as a result the Company wrote down certain inventories, which was recorded in cost of goods sold. The major inventory reduction was in the Company's unfinished/component parts inventory. As a result of the Company's restructured production philosophy, the Company is shifting the majority of its in-line skate production to offshore sources in an effort to reduce product costs. The increase in the gross profit, after adjusting for the $6 million charge was due mainly to the sales mix, which included a larger portion of Hespeler ice hockey products. Operating Expenses. Selling expenses were $4.6 million or 10.9% of total net sales in fiscal 1999, compared to $5.8 million or 10.3% in fiscal 1998. The decrease in the absolute dollar amount of selling expenses in fiscal 1999 is primarily the result of a reduction in commissions, royalties and co-op advertising costs associated with the decreased sales volume and management's efforts to closely monitor and control its expenditures. General and administrative expenses were $7.4 million or 17.5% of total net sales in fiscal 1999, compared to $8.1 million or 14.3 % of total net sales in fiscal 1998. The decrease in the absolute dollar amount of the general and administrative expenses was primarily due to decreases in insurance costs and bad debt expenses associated with the reduced sales volume. The increase in general and administrative expenses as a percentage of net sales was primarily due to the reduction in the Company's sales volume versus the somewhat fixed nature of certain general and administrative expenses. Other Income and Expense. Interest expense was $.9 million in fiscal 1999, compared to $1.0 million in fiscal 1998. The decrease in interest expense is primarily due to a reduction in the average borrowings outstanding related to the Company's line of credit facility. Provision for Income Taxes. The Company's effective tax rate was 32.4% for fiscal 1999, compared to 33.7% for fiscal 1998. The slight change in fiscal 1999 is primarily due to the effect of state and foreign tax rates, the percentage of state and foreign revenues and the level of pre-tax loss. Net Loss. Net loss was ($5.8) million or (13.8%) of net sales in fiscal 1999, compared to ($2.6) million or (4.6%) of net sales in fiscal 1998. The decrease can be attributed to the decrease in both the sales volume and the gross profits, and the large write down of inventory as discussed above. Results Of Operations Comparison Of Fiscal 1998 To 1997 Net Sales. Net sales decreased 26% to $56.3 million in fiscal 1998, from $76.4 million in fiscal 1997. The decline was primarily due to a decrease in the Company's in-line skate sales volume, combined with a decrease in the average selling price of the in-line skates. The Company also experienced pricing pressures from all areas of the market place due to a decline in consumer demand and excess inventory levels in the market place, which created significant discounting by competitors. A breakdown and analysis of the Company's main product lines is as follows:
(amounts in millions) Fiscal 1999 Fiscal 1998 ---------------- ---------------- Amount % Amount % Change ------ ---- ------ ---- ------ In-line skates $47.0 83% $64.8 85% (27%) In-line Accessories and Parts 8.8 16% 11.6 15% (24%) Ice Hockey Sticks 0.3 1% -- -- 100% Ice Hockey Protective and Access 0.2 0% -- -- 100% ------ ---- ------ ---- Total Net Sales $56.3 100% $76.4 100% (26%) ====== ==== ====== ====
During the second half of fiscal 1998, the Company purchased Hespeler Hockey Company, a Canadian based company which markets and distributes ice hockey sticks and accessories (gloves and protective wear), and Mothership Distribution Inc., which markets and distributes aggressive in-line skate wheels, accessories, apparel and skateboards. Net sales for both Hespeler and Mothership were immaterial. Mothership Distribution was closed during fiscal 1999. The Company currently distributes products to numerous countries worldwide. A geographic breakdown of the Company's net sales is as follows:
(amounts in millions) Fiscal 1999 Fiscal 1998 ---------------- ------------------- Amount % Amount % Change ------ ---- ------ ---- ------ Domestic (United States) $38.4 63% $50.8 66% (24%) Canada 7.5 13% 5.6 7% 34% Europe 7.4 13% 14.1 19% (48%) Other International 3.0 6% 5.9 8% (49%) ------ ---- ------ ---- Total Net Sales $56.3 100% $76.4 100% (26%) ====== ==== ====== ====
Several factors contributed to the Company's sales performance in fiscal 1998. The decrease in domestic sales is the result of a change in consumer demand, continued excess inventory levels at retail and competitive price cutting which has continued to plague the in-line skate industry. The increase in Canadian sales was a result of continued strong acceptance of the Company's USA made products. The decrease in European sales was primarily the result of a slow spring and summer retail environment due to inclement weather conditions, which has resulted in excess retail inventory levels. The decrease in other international sales was primarily due to a decline in consumer demand in those areas and continued excess inventory levels on both the Pacific Rim and South American marketplaces. Gross Profit. The Company's gross profit declined to $12.0 million, or 21.3% of net sales in fiscal 1998, from $19.6 million, or 25.6% of net sales in fiscal 1997. The decrease in the gross profit was primarily due to competitive close-out sales, continued pricing pressures at all retail price points and fluctuations in certain foreign currency rates principally Canada. Operating Expenses. Selling expenses were $5.8 million, or 10.3% of total net sales in fiscal 1998 compared to $7.2 million, or 9.4% of total net sales in fiscal 1997. The decrease in the absolute dollar amount of the selling expenses was primarily the result of a reduction in commissions, royalties and co-op advertising costs associated with the decreased sales volume and management's efforts to closely monitor and control its expenditures. The increase in selling expenses as a percentage of total net sales was primarily due to efforts to promote and advertise the Company's two acquisitions, Hespeler Hockey Company and Mothership Distribution, Inc. General and administrative expenses were $8.1 million, or 14.3% of total net sales in fiscal 1998 compared to $6.8 million, or 8.9% of total net sales in fiscal 1997. The increase in general and administrative expenses was primarily due to an increase in expenses associated with the continued upgrading of the Company's computer systems, an increase in real estate taxes associated with the Company's newer facility and the expenses related to and associated with the purchases of the Company's two new subsidiaries and the opening of the Company's new European office. Other Income and Expense. Interest expense $1.0 million in fiscal 1998, compared to $1.3 million in fiscal 1997. The decrease in interest expense was primarily due to a reduction in the average borrowings outstanding related to the Company's line of credit facility. Provision for Income Taxes. The Company's effective tax rate was 33.7% for fiscal 1998 compared to 35.5% for fiscal 1997. The decline in the effective tax rate was primarily due to the effect of state and foreign tax rates and the percentage of state and foreign revenues. The Company utilizes its wholly-owned subsidiary First Team Sports Exports, Inc., a foreign sales corporation, to help reduce the Company's tax burden. Net Income (Loss). Net income (loss) was ($2.6) million, or (4.6%) of total net sales in fiscal 1998, compared to $2.7 million, or 3.6% of total net sales in fiscal 1997. The decrease can be attributed primarily to the reduction in sales and gross profits as discussed above. Liquidity And Capital Resources The Company's fiscal 1999 operations provided $6.5 million of cash compared to $2.6 million in the fiscal 1998. The net cash provided in the current year was primarily the result of the Company reducing its inventory balances. The net cash provided in the prior year was primarily the result of a reduction of the Company's receivable balances. Net cash used in investing activities was $.3 million in fiscal 1999 compared to $4.1 million in fiscal 1998. The use of cash for this activity was primarily attributable to expenditures relating to new licensing arrangements and new production tools in fiscal 1999. In fiscal 1998 the Company purchased two new subsidiaries, Hespeler Hockey Company and Mothership Distribution, Inc. Net cash used in financing activities was $7.3 million in fiscal 1999, compared to net cash provided by financing activities of $3.1 million in fiscal 1998. The use of cash for this activity in fiscal 1999 was primarily for paying down the Company's line of credit facility and long term debt obligations. The net cash provided by both short-term and long-term borrowings in fiscal 1998 was used primarily for the purchase of the Company's subsidiaries, Hespeler Hockey Company and Mothership Distribution, Inc. The Company's debt to worth ratio was .6 to 1 as of February 28, 1999, compared to .7 to 1 as of February 28, 1998. The Company's long-term debt, which consists primarily of a mortgage note on the Company's facility and obligations under endorsement license agreements, less current maturities, was $5.6 million as of February 28, 1999 (see Note 6 in Notes to Financial Statements). The Company's primary financing facility is a $10 million revolving credit line, which is subject to a borrowing base, which is calculated monthly, and is based on a percentage of eligible receivables and inventories. As of February 28, 1999 the borrowing base limitation was $10 million of which $2.5 million was outstanding. In connection with these credit facilities, the Company agreed, among other things, to maintain certain minimum financial ratio and income levels. The Company believes its current cash position, funds available under existing bank arrangements and cash generated from operations will be sufficient to finance the Company's operating requirements through fiscal 2000. Outlook: Issues And Uncertainties The Company does not provide forecasts of future financial performance. Certain statements contained in this report are based on current expectations. These statements are forward looking and the Company's actual results may differ materially. The Company believes that the total number of in-line skating participants worldwide will continue to remain strong in fiscal 2000, especially in the younger age categories. The Company believes the dramatic and innovative new products currently on the market will continue to intrigue avid participants of in-line skating and will improve the recruitment of new participants. The Company also believes that the number of ice hockey participants worldwide, especially in the United States, will continue to grow in fiscal 2000. The Company's strategy has been and continues to be to the introduction of high-quality, innovative, price-valued products designed specifically for the recreational and youth market segments, consequently, driving consumer demand toward newer products. In addition, the Company plans to continue its diversification through synergistic acquisitions. Future production capacity is planned based on the continued success of the Company's strategy. If the market does not continue to grow and move toward value-priced products, revenues and earnings will likely continue to be adversely impacted. The Company's gross margin is a sensitive function of the product mix sold, pricing and the market conditions in any given period. As a result of the Company's Skate Attack brand being sold to the mass merchant customer, the product is more of a commodity in nature and generally has lower gross margin percentages than the Company's UltraWheels brand and Hespeler Hockey products. As a result, future gross margin percentages are difficult to predict. While management is optimistic about the Company's long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating its growth outlook. Competition. The Company competes with numerous manufacturers of in-line skates domestically and internationally and anticipates future competition from other large and well-established sporting goods manufacturers. Rollerblade, Inc. and K2 are the Company's primary competitors and have substantially greater resources than the Company. The intense price competition in the in-line skate market has put pressure on the Company's profit margins. The Company's ability to remain competitive in the in-line skate market depends on several factors including its ability to: (i) offer products at commercially-acceptable prices; (ii) develop new products and generate market demand for such products; and (iii) continue to develop and expand its international business. Dependence on Key Customers. During the fiscal year ended February 28, 1999, sales to Wal-Mart accounted for 23% of the Company's revenues. Increased competition from other manufacturers, decreased demand for the Company's products or other circumstances may have an adverse impact upon the Company's' relationship with Wal-Mart and/or other major customers. Decreased orders from this customer or other major customers would have a material adverse impact on the Company's financial results. Other. The Company's products are primarily used outdoors and therefore adverse weather conditions can have a negative impact on consumer demand. Because the Company's products are of a recreational nature and not considered basic necessities, a general decline in overall economic conditions may have a greater adverse effect on the Company's sales. Year 2000 Issue. In fiscal 1997 the Company purchased a new software system and related computer hardware. As part of the selection process, the ability to recognize the year 2000 was a major requirement and thus the Company believes it is prepared for the change. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Based on preliminary information, costs of addressing potential problems are currently not expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. The Company is currently working to resolve the potential impact of the year 2000 on the processing of date sensitive information by the Company's computerized information systems, which might occur due to vendors and/or customers not being ready. The Company has and is continuing to survey its key suppliers and customers to determine their year 2000 readiness. The Company is currently in the process of identifying potential critical year 2000 issues involving key third parties and either resolving those issues or developing contingency plans to the extent practical. Market Risk. The Company's sales and results of operations are subject to foreign currency fluctuations. The Company's foreign operations are in countries with fairly stable currencies; therefore, the effect of foreign currencies has not been significant. The Company hedges its exposure to translation gains and losses by maintaining and controlling its foreign cash flows when possible, thus reducing such exposure. Considering both the foreign sales and results of operations for the next quarter, a hypothetical 10% weakening of the U.S. dollar relative to all other currencies would not materially adversely affect expected first quarter fiscal 2000 sales and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk. The Company's sales and results of operations are subject to foreign currency fluctuations. The Company's foreign operations are in countries with fairly stable currencies; therefore, the effect of foreign currencies has not been significant. The Company hedges its exposure to translation gains and losses by maintaining and controlling its foreign cash flows when possible, thus reducing such exposure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedules listed below are included herein immediately following the signature page of this Form 10-K on the pages set forth: Page Current Independent Auditor's Report on Consolidated Financial Statements and Schedule for the years ended February 28, 1999 and 1998...........F-1 Former Independent Auditor's Report on Consolidated Financial Statements for the year ended February 28, 1997..................................F-1.1 Consolidated Balance Sheets as of February 28, 1998 and 1997...............F-2 Consolidated Statements of Operations for the years ended February 28, 1999, 1998 and 1997............................F-4 Consolidated Statements of Shareholders' Equity for the years ended February 28, 1999, 1998 and 1997..................................F-5 Consolidated Statements of Cash Flows for the years ended February 28, 1999, 1998 and 1997..................................F-6 Notes to Consolidated Financial Statements.................................F-7 Former Independent Auditor's Report on Report on Schedule for the years ended February 28, 1997 ..........................................F-24 Schedule II - Reserve Account..............................................F-25 All other schedules are omitted since they are not applicable, not required or the information is presented in the consolidated financial statements or related notes. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Other than "Executive Officers of the Company", which is set forth at the end of Part I of this Form 10-K, the information required by Item 10 is incorporated herein by reference to the sections labeled "Election of Directors" and "Compliance With Section 16(a) of the Exchange Act", which appear in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not later than 120 days after the close of fiscal 1999 in connection with the Company's 1999 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the sections labeled "Management Compensation" and "Election of Directors", which appear in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not later than 120 days after the close of fiscal 1999 in connection with the Company's 1999 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the section labeled "Principal Shareholders and Management Shareholdings," which appears in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not later than 120 days after the close of fiscal 1999 in connection with the Company's 1999 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the section labeled "Management Compensation," which appears in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A not later than 120 days after the close of fiscal 1998 in connection with the Company's 1998 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. (1) Financial Statements. The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K: Current Independent Auditor's Report on Consolidated Financial Statements and Schedule for the years ended February 28, 1999 and 1998 Former Independent Auditor's Report on Consolidated Financial Statements for the year ended February 28, 1997 Consolidated Balance Sheets as of February 28, 1999 and 1998 Consolidated Statements of Operations for the years ended February 28, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity for the years ended February 28, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended February 28, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (2) Financial Statement Schedules. The following is included in Part II, Item 8, of this Annual Report on Form 10-K: Former Independent Auditor's Report on Report on Schedule for the years ended February 28, 1997 Schedule II - Reserve Accounts. All other schedules are omitted since they are not applicable, not required or the information is presented in the consolidated financial statements or related notes. (3) Exhibits. The following exhibits are included in this reports: See "Exhibit Index to Form 10-K" beginning at page E-1 immediately following the financial statements which follow the signature page of this Form 10-K. (b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the quarter ended February 28, 1999. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST TEAM SPORTS, INC. May 25, 1999 By: /s/ John J. Egart John J. Egart President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company, in the capacities, and on the dates, indicated. (Power of Attorney) Each person whose signature appears below constitutes and appoints John J. Egart and Robert L. Lenius, Jr. as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Signature and Title Date - ------------------- ---- /s/ John J. Egart May 25, 1999 John J. Egart President/Chief Executive Officer and Director (Principal executive officer) /s/ David G. Soderquist May 25, 1999 David G. Soderquist Vice Chairman and Director /s/ Joe Mendelsohn May 25, 1999 Joe Mendelsohn Chairman and Director (Signatures continued on following page) Signature and Title Date - ------------------- ---- /s/ Timothy G. Rath May 25, 1999 Timothy G. Rath Director - --------------------------- Stanley E. Hubbard Director /s/ William J. McMahon May 25, 1999 William J. McMahon Director /s/ Kent A. Brunner May 25, 1999 Kent A. Brunner Vice President and Chief Financial Officer (Principal financial and accounting officer) Report of Independent Auditors Shareholders and Board of Directors First Team Sports, Inc. We have audited the accompanying consolidated balance sheets of First Team Sports, Inc. as of February 28, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. Our audit also included the financial statement schedule for the years ended February 28, 1999 and 1998 listed in the Index at Item 14 (a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of First Team Sports, Inc. for the year ended February 28, 1997 were audited by other auditors whose report dated April 9, 1997 expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects the consolidated financial position of First Team Sports, Inc. at February 28, 1999 and 1998, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota April 14, 1999 F-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors First Team Sports, Inc. Anoka, Minnesota We have audited the accompanying consolidated statements of income, shareholders' equity and cash flows for the fiscal year ended February 28, 1997 of First Team Sports, Inc. and Subsidiary. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of First Team Sports, Inc. and Subsidiary as of February 28, 1997, in conformity with generally accepted accounting principles. St. Paul, Minnesota /s/ MCGLADREY & PULLEN, LLP April 9, 1997 F-1.1 First Team Sports, Inc. Consolidated Balance Sheets
February 28 1999 1998 ---------------------------- Assets Current assets: Cash and cash equivalents $ 723,574 $ 1,869,545 Trade receivables, less allowance for doubtful accounts: 1999--$642,000; 1998--$666,000 12,284,005 11,417,176 Recoverable income taxes 1,136,858 1,678,405 Inventories 10,047,020 22,238,564 Prepaid expenses 839,777 957,903 Deferred income taxes 1,175,000 896,000 ----------- ----------- Total current assets 26,206,234 39,057,593 Property, plant and equipment Land 600,000 600,000 Building 4,988,680 4,988,680 Production equipment 2,278,231 2,132,156 Office furniture and equipment 1,825,257 1,766,911 Warehouse equipment 937,677 820,626 Vehicles 104,380 102,906 ----------- ----------- 10,734,225 10,411,279 Less accumulated depreciation 3,316,390 1,993,004 ----------- ----------- 7,417,835 8,418,275 Deferred income taxes 1,988,000 -- Other assets License agreements, less accumulated amortization: 1999--3,687,000; 1998--$3,338,000 1,680,024 1,766,584 Goodwill, less accumulated amortization: 1999--$329,000; 1998--$64,000 1,119,197 1,462,291 Other 723,104 986,030 ----------- ----------- 3,522,325 4,214,905 ----------- ----------- $39,134,394 $51,690,773 =========== =========== F-2
February 28 1999 1998 ------------------------------- Liabilities and shareholders' equity Current liabilities: Notes payable to bank $ 2,525,000 $ 8,685,000 Trade accounts payable 3,692,759 2,697,675 Accrued expenses 1,311,043 1,644,773 Current maturities of long-term debt 1,305,763 978,965 ----------- ----------- Total current liabilities 8,834,565 14,006,413 Long-term debt, less current maturities 5,576,967 6,774,496 Deferred income taxes 195,000 69,000 Deferred revenue 600,000 600,000 Shareholders' equity Common Stock, par value $.01 per share Authorized 10,000,000 shares Issued and outstanding: 1999--5,803,848 shares; 1998--5,792,240 shares 58,039 57,923 Additional paid-in capital 9,825,240 9,806,341 Retained earnings 14,647,756 20,492,860 Accumulated other comprehensive loss (603,173) (116,260) ----------- ----------- 23,927,862 30,240,864 ----------- ----------- $ 39,134,394 $ 51,690,773 ============ ============
See accompanying notes. F-3 First Team Sports, Inc. Consolidated Statements of Operations
Year ended February 28 1999 1998 1997 --------------------------------------------------------- Net sales $42,397,426 $56,336,906 $76,435,022 Cost of goods sold 38,051,179 44,314,320 56,837,195 --------------------------------------------------------- Gross profit 4,346,247 12,022,586 19,597,827 Operating expenses: Selling 4,619,077 5,826,993 7,190,515 General and administrative 7,420,735 8,056,546 6,789,276 Writedown due to asset impairment - 974,018 - --------------------------------------------------------- 12,039,812 14,857,557 13,979,791 --------------------------------------------------------- Operating (loss) income (7,693,565) (2,834,971) 5,618,036 Interest expense (953,843) (1,009,657) (1,275,882) Other expense, net - (93,387) (113,872) --------------------------------------------------------- (Loss) income before income tax benefit (expense) (8,647,408) (3,938,015) 4,228,282 Income tax benefit (expense) 2,802,304 1,328,782 (1,503,000) --------------------------------------------------------- Net (loss) income $ (5,845,104) $ (2,609,233) $ 2,725,282 ========================================================= Net (loss) income per share: Basic $(1.01) $(.45) $.47 Diluted $(1.01) $(.45) $.46 Shares used in computation of net (loss) income per share: Basic 5,796,377 5,771,478 5,740,893 Diluted 5,796,377 5,771,478 5,884,175
See accompanying notes. F-4 First Team Sports, Inc. Consolidated Statement of Shareholders' Equity
Accumulated Other Common Stock Additional Other Total ------------------------------ Paid-In Retained Comprehensive Shareholders' Shares Amount Capital Earnings Loss Equity -------------------------------------------------------------------------------------------- Balance at February 29, 1996 5,721,000 $57,210 $9,396,802 $20,376,811 $ - $29,830,823 Exercise of stock options 28,796 288 189,538 - - 189,826 Net income - - - 2,725,282 - 2,725,282 -------------------------------------------------------------------------------------------- Balance at February 28, 1997 5,749,796 57,498 9,586,340 23,102,093 - 32,745,931 Exercise of stock options 12,910 129 65,517 - - 65,646 Common stock issued for acquisitions 29,534 296 154,484 - - 154,780 Comprehensive loss: Foreign currency translation - - - - (116,260) (116,260) Net loss - - - (2,609,233) - (2,609,233) ----------------- Total comprehensive loss (2,725,493) -------------------------------------------------------------------------------------------- Balance at February 28, 1998 5,792,240 57,923 9,806,341 20,492,860 (116,260) 30,240,864 Exercise of stock options 11,608 116 18,899 - - 19,015 Comprehensive loss: Foreign currency translation - - - - (486,913) (486,913) Net loss - - - (5,845,104) - (5,845,104) ----------------- Total comprehensive loss (6,332,017) -------------------------------------------------------------------------------------------- Balance at February 28, 1999 5,803,848 $58,039 $9,825,240 $14,647,756 $(603,173) $23,927,862 ============================================================================================
See accompanying notes. F-5 First Team Sports, Inc. Consolidated Statements of Cash Flows
Year ended February 28 1999 1998 1997 ------------------------------------------------------ Cash flows from operating activities Net (loss) income $ (5,845,104) $(2,609,233) $2,725,282 Adjustments required to reconcile net (loss) income to net cash provided by operating activities: Depreciation 1,332,718 1,880,137 1,537,073 Amortization 602,784 468,101 579,657 Loss on writedown due to asset impairment - 974,018 - Loss on retirement of equipment - 93,387 108,510 Deferred income taxes (2,141,000) (360,000) (80,000) Write-down of inventories 5,435,824 - - Write-off of Mothership goodwill and intangibles 293,000 - - Change in operating assets and liabilities: Receivables (1,272,837) 7,090,703 (811,013) Inventories 6,755,720 (966,257) 1,932,005 Prepaid expenses 116,296 (344,412) 347,199 Accounts payable 1,007,049 (2,377,925) (4,610,424) Accrued expenses (333,730) 230,709 (1,117,165) Income taxes 541,547 (1,512,753) (103,346) ------------------------------------------------------ Net cash provided by operating activities 6,492,267 2,566,475 507,778 Cash flows from investing activities Purchases of property, plant and equipment (330,496) (1,497,979) (1,606,100) Business acquisitions - (1,917,942) - Other - (696,328) 14,880 ------------------------------------------------------ Net cash used in investing activities (330,496) (4,112,249) (1,591,220) Cash flows from financing activities Net proceeds (payments) on short-term borrowings (6,160,000) 2,402,408 (4,823,750) Principal payments on long-term borrowings (1,134,158) (1,261,377) (943,070) Proceeds from long-term borrowings - 1,849,184 4,875,000 Net proceeds from exercise of stock options 19,015 65,646 189,826 ------------------------------------------------------ Net cash (used in) provided by financing activities (7,275,143) 3,055,861 (701,994) ------------------------------------------------------ (Decrease) increase in cash and cash equivalents (1,134,344) 1,510,087 (1,785,436) Effect of foreign currency translation (32,599) (21,969) - Cash and cash equivalents: Beginning of year 1,869,545 381,427 2,166,863 ------------------------------------------------------ Ending of year $ 723,574 $ 1,869,545 $ 381,427 ======================================================
See accompanying notes. F-6 First Team Sports, Inc. Notes to Consolidated Financial Statements February 28, 1999 1. Nature of Business and Significant Accounting Policies Nature of Business and Concentration of Credit Risk The Company, which operates in one business segment, sells in-line roller skates and related accessories under the brand names UltraWheels(TM), and Skate Attack(TM), and ice hockey equipment under the brand name Hespeler(TM) to retail and sporting goods stores. These products are manufactured under outside production arrangements to the Company's specifications. Net sales to a specific geographic region for the years ended February 28, 1999 and 1998 totaled 25% and 13%, respectively, for Canada and 11% and 13%, respectively, for Europe. Segment Reporting In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. We have determined that in 1999, 1998 and 1997, we operated in only one segment. Basis of Financial Statement Presentation and Accounting Estimates The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the year. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including First Team Sports Exports, Inc. (a foreign sales corporation), First Team Sports GmbH, Hespeler Hockey Company and Mothership Distribution, Inc. All material intercompany accounts and transactions have been eliminated. F-7 First Team Sports, Inc. Notes to Consolidated Financial Statements (continued) 1. Nature of Business and Significant Accounting Policies (continued) Foreign Currency Translation The functional currency for foreign operations is the local currency. Foreign currency financial statements are converted into United States dollars by translating balance sheet accounts at the current exchange rate at year-end and statement of operations items at the average exchange rate for the year, with the resulting translation adjustment included in accumulated other comprehensive loss in shareholders' equity. Cash and Cash Equivalents The Company considers all demand deposit accounts and short-term cash investments with an initial maturity of three months or less at the date of purchase to be cash equivalents. Short-term investments are classified as available-for-sale. The carrying value of cash equivalents approximates fair value at February 28, 1999 and 1998. Inventories Inventories are valued at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows: Building 39 years Production equipment 2 - 10 years Office furniture and equipment 5 - 7 years Warehouse equipment 6 - 10 years Vehicles 5 years F-8 1. Nature of Business and Significant Accounting Policies (continued) Other Assets Costs capitalized related to license agreement's rights are being amortized over the terms of the agreements on a straight-line method. Goodwill arising from acquisitions is amortized on a straight-line basis over a period up to 10 years. Other intangibles, consisting principally of trademarks and patents, are amortized on a straight-line basis over 5 to 10 years. Accounting for Long-Lived Assets The Company periodically reviews its property, plant, equipment, and other assets to determine potential impairment by comparing their carrying value with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by computing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows) of the long-lived assets. Management determined in fiscal 1998 that certain production assets of the Company had been impaired as a result of the changing in-line skate industry. In accordance with SFAS Statement 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of," the Company evaluated the ongoing value of its production tooling equipment. Based upon this evaluation, the Company determined that production tools with a carrying value of $1,142,172 were impaired and wrote them down by $974,018 to their fair value. Fair value of the production tools was determined by comparison to outside market value. Advertising Costs The costs of advertising are expensed as incurred. Advertising expense for the fiscal years 1999, 1998, and 1997 was $911,000, $1,755,000 and $2,421,000, respectively. F-9 1. Nature of Business and Significant Accounting Policies (continued) Income Taxes The Company accounts for income taxes utilizing the liability method. Deferred income taxes are recorded to reflect the tax consequences of differences between the tax and financial reporting basis of assets and liabilities. Net (Loss) Income Per Share Basic net (loss) income per share is the Company's net (loss) income divided by the weighted average number of Common Shares outstanding during the period. Diluted net (loss) income per share reflects the potential dilutive effects of stock options and warrants.
Basic Diluted ---------------------------------- ---------------------------------- 1999 1998 1997 1999 1998 1997 ---------------------------------- ---------------------------------- (In thousands, except per share data) Net (loss) income $(5,866) $(2,609) $2,725 $(5,866) $(2,609) $2,725 ================================== ================================== Weighted average common shares outstanding 5,796 5,771 5,741 5,796 5,771 5,741 Dilutive stock options - - - - - 143 ---------------------------------- ---------------------------------- Total common shares outstanding for diluted calculation 5,796 5,771 5,741 5,796 5,771 5,884 ================================== ================================== Net (loss) income per share $(1.01) $(.45) $.47 $(1.01) $(.45) $.46
Fair Value of Financial Instruments The consolidated financial statements include the following financial instruments: cash and cash equivalents, trade receivables, notes payable to bank, trade accounts payable and long-term debt. At February 28, 1999, no separate comparison for fair values versus carrying values is presented for the aforementioned financial instruments since their fair values are not significantly different than their balance sheet carrying amounts. The aggregate fair values of the financial instruments would not represent the underlying value of the Company. F-10 1. Nature of Business and Significant Accounting Policies (continued) Comprehensive Income As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Statement 130 established new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. Statement 130 requires the foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. Reclassification Certain amounts presented for fiscal 1998 have been reclassified to conform to the 1999 presentations. 2. Sales Information and Major Suppliers Major Customers and Credit Risk Net sales for fiscal years 1999, 1998 and 1997 include sales to one major customer representing 23%, 29% and 23% of net sales, respectively. At February 28, 1999, 18% of the Company's trade receivables were due from the aforementioned customer and 39% were due from customers outside of the United States. Credit, including foreign credit, is determined on an individual customer basis. The Company utilizes letter-of-credit arrangements and wire transfers to minimize its foreign credit risk. Export Sales The Company's export sales approximated 39%, 32% and 33% of net sales for fiscal years 1999, 1998 and 1997, respectively. F-11 2. Sales Information and Major Suppliers (continued) Major Suppliers The Company had 41% of its products produced by three suppliers during 1999. Management believes that alternative suppliers are available in the event the Company is unable to obtain services from its three major suppliers. 3. Acquisitions In September 1997, the Company purchased the net assets of Mothership Distribution, Inc. (Mothership), a designer, manufacturer and marketer of aggressive in-line skate accessories and apparel. Subsequently during fiscal year 1999, Mothership was closed and the related goodwill and intangibles were written off in accordance with FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The amount of the write-off totaled $293,000. The Company also purchased in September 1997 the common stock of Hespeler Hockey Company, a designer, manufacturer and marketer of ice hockey sticks, equipment and related accessories. The combined purchase price of the acquisitions was not material. These transactions were accounted for using the purchase method of accounting and the results of operation from those businesses have been included in the consolidated statements of operations from the respective dates of acquisition. The pro forma impact of the Mothership acquisition on the Company's results of operations for all periods presented was not material. The following summary, prepared on a pro forma basis, combines the consolidated results of operations as if the Hespeler Hockey operations had been acquired as of the beginning of the period presented, after including the impact of certain adjustments such as amortization of intangibles, increased interest expense on acquisition debt and related income tax effects (fiscal 1997 activity was immaterial): F-12 3. Acquisitions (continued) Pro forma information (unaudited) (In thousands, except per share amounts) 1998 ------------------- Net sales $58,124 Loss before income taxes (3,726) Net Loss (2,487) Basic and diluted loss per share $(.43) The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect results that would have occurred had the acquisition been made as of those dates or results which may occur in the future. 4. Inventories Inventories consist of the following: February 28 1999 1998 ------------------------------------ Finished goods $8,792,169 $16,182,063 Component parts 1,254,851 6,056,501 ------------------------------------ $10,047,020 $22,238,564 ==================================== During the fiscal year, management decided to write-down inventory through cost of goods sold. The total of this write-down was $5,435,824. F-13 5. Notes Payable The Company has a line-of-credit agreement with a bank subject to renewal on July 1, 1999, whereby it may borrow up to $10,000,000. Borrowings bear interest, payable monthly, at the bank's prime lending rate (7.75% at February 28, 1999). Borrowings under the credit arrangement are collateralized by substantially all corporate assets, excluding land and building. Outstanding borrowings under this arrangement totaled $2,525,000 and $8,685,000 at February 28, 1999 and 1998, respectively. In connection with the line-of-credit agreement, the Company agreed, among other things, to maintain a minimum tangible net worth, to not exceed a certain debt to tangible net worth ratio, to attain a certain net income level, to limit capital expenditures to certain amounts, and to not pay dividends without the bank's consent. 6. Long-Term Debt Long-term debt consists of the following:
February 28 1999 1998 ----------------------------- Obligations under license agreements, due in varying installments, with interest imputed at 9.25%, through 2004 (see note 9) $1,669,937 $1,989,654 Mortgage notes payable due in monthly installments of $57,638, including interest at 7.41% through April 2006, secured by the building 3,836,523 4,227,997 Note payable to bank, due in monthly installments of $27,800 to May 2000, plus interest at the bank's prime rate (7.75% at February 28, 1999) minus .30%, collateralized by substantially all of the Company's assets 426,075 750,000 Subordinated convertible exchangeable debentures, due in principal installments of $200,000 on March 1, 1999 and 2000, and $325,000 on October 1, 2002 plus interest at 5% 725,000 725,000 Other 225,195 60,810 ----------------------------- 6,882,730 7,753,461 Less current maturities 1,305,763 978,965 ----------------------------- $5,576,967 $6,774,496 =============================
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: 2000 $1,305,763 2001 1,172,168 2002 783,822 2003 1,161,397 2004 892,620 Thereafter 1,566,960 ------------------- $6,882,730 =================== The subordinated convertible debentures were issued with triggerable warrants attached which enable the debenture holder to purchase shares of common stock of the Company. The debentures are convertible at any time, in whole or in part, into shares of common stock of the Company at a conversion price of $5.75 to October 2002. 7. Income Taxes Net deferred income taxes consist of the following components: February 28 1999 1998 ------------------------------------ Deferred tax assets: Receivable allowances $ 261,000 $ 162,000 Inventory costs 286,000 367,000 Accrued expenses 328,000 367,000 License and patent agreements 284,000 137,000 Net operating loss carryforwards 2,204,000 - ------------------------------------ 3,363,000 1,033,000 Less: valuation allowance (200,000) - Deferred tax liabilities: Depreciation (195,000) (206,000) ------------------------------------ Net deferred tax assets $2,968,000 $ 827,000 ==================================== At February 28, 1999 the Company has net operating loss carry forwards of $6,500,000 for income tax purposes that expire at various times through 2019. F-15 7. Income Taxes (continued) The net deferred tax assets have been classified in the accompanying consolidated balance sheets as follows: February 28 1999 1998 ------------------------------------ Current assets $1,175,000 $896,000 Non-current assets 1,988,000 - Non-current liabilities (195,000) (69,000) ------------------------------------ $2,968,000 $827,000 ==================================== For financial reporting purposes, the (loss) income before income tax effect is as follows: February 28 1999 1998 1997 ---------------------------------------------- (Loss) income before income taxes: Domestic $(8,673,354) $(3,490,859) $4,228,282 Foreign 4,974 (447,156) - ---------------------------------------------- $(8,668,380) $(3,938,015) $4,228,282 ============================================== The provisions for income tax (benefit) expense for fiscal years 1999, 1998 and 1997 are as follows: 1999 1998 1997 ---------------------------------------------- Current: Federal $(637,304) $ (698,782) $1,476,000 State (26,000) (68,000) 107,000 Foreign 2,000 (202,000) - ---------------------------------------------- Total current (661,304) (968,782) 1,583,000 Deferred: Federal (1,985,000) (330,000) (77,000) State (156,000) (30,000) (3,000) ---------------------------------------------- Total deferred (2,141,000) (360,000) (80,000) ---------------------------------------------- Total income taxes $(2,802,304) $(1,328,782) $1,503,000 ============================================== F-16 7. Income Taxes (continued) The provisions for income tax (benefit) expense for fiscal years 1999, 1998 and 1997 differ from the amounts obtained by applying the federal income tax rate to pretax (loss) income as follows:
1999 1998 1997 --------------------------------------------------- Computed "expected" federal tax (benefit) expense $(3,034,000) $(1,378,000) $1,480,000 Increase (decrease) in taxes resulting from: State income taxes or benefit, net of federal effect (173,000) (79,000) 70,000 Other items individually insignificant, net 404,696 128,218 (47,000) --------------------------------------------------- $(2,802,304) $(1,328,782) $1,503,000 ===================================================
8. Shareholders' Equity Stock Options The Company has reserved 975,000 common shares for issuance under the First Team Sports, Inc. 1987 Stock Option Plan (the 1987 Plan) and 1,375,000 common shares under the First Team Sports, Inc. 1994 Stock Option and Incentive Compensation Plan (the 1994 Plan). Both plans provide for the granting of incentive stock options under Section 422 of the Internal Revenue Code and nonqualified options not meeting the requirements of Section 422. All key employees of the Company are eligible to receive incentive and nonqualified stock options pursuant to the 1987 and 1994 Plans. Directors of the Company who are not employees may be granted nonqualified options under the Plans. Options are granted at the discretion of the Stock Option Committee. Options are nontransferable and generally granted at a price equal to the quoted market price of the shares at the date of grant. The Company also established the First Team Sports, Inc. 1993 Employee Stock Purchase Plan (the 1993 Plan) and reserved 300,000 common shares for issuance thereunder. The 1993 Plan is intended to encourage stock ownership by all employees and is intended to qualify under Section 423 of the Internal Revenue Code. All employees are eligible to participate in the 1993 Plan, with the exception of any employees owning 5% or more of the Company's total voting stock. F-17 8. Shareholders' Equity (continued) The Company has also issued several nonqualified options to purchase its common stock in connection with various transactions. In January 1997, the Company issued incentive stock options covering 68,251 shares that are not covered by the aforementioned plans. Transactions involving stock options during fiscal year 1999, 1998 and 1997 are summarized as follows:
1999 1998 1997 ------------------------ --------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------ --------------------------- ------------------------- Outstanding at beginning of year 1,375,703 $3.06 926,020 $9.21 776,854 $ 9.96 Exercised - - (6,800) 5.33 (28,796) 5.30 Canceled (9,000) 2.75 (36,517) 8.75 (51,596) 10.90 Granted 302,000 1.48 493,000 3.62 229,558 6.55 ------------------------ --------------------------- ------------------------- Outstanding at end of 1,668,703 $2.77 1,375,703 $3.06 926,020 $ 9.21 year ======================== =========================== =========================
Weighted average fair value of options granted during 1999, 1998 and 1997 was $.62, $1.30 and $6.55, respectively. As of February 28, 1999, 1998 and 1997 options covering 1,137,369, 755,697 and 523,833 shares, respectively, were exercisable at a weighted average exercise price of $2.91, $2.97 and $9.32 per share, respectively. In addition, the remaining stock options outstanding at February 28, 1999, become exercisable in the following fiscal years: Shares Price Per Share ------------------------------------ 2000 334,340 $1.125 - $4.25 2001 164,998 1.125 - 2.75 2002 31,996 1.125 - 2.75 F-18 8. Shareholders' Equity (continued) The following table summarizes information about stock options outstanding at February 28, 1999:
Options Outstanding Options Exercisable ------------------------------- ------------------------------- Weighted Average Remaining Weighted Weighted Range of Number Contractual Average Number Average Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price ------------------------ --------------- ------------------------------- ------------------------------- $1.125 - $2.438 302,000 6.8 $1.48 93,334 $1.59 2.75 1,141,203 3.9 2.75 906,035 2.75 4.25 - 6.25 225,500 7.9 4.64 138,000 4.89 -------------- -------------- $1.125 - $6.25 1,668,703 5.0 $2.77 1,137,369 $2.91 ============== ==============
In January 1998, the Company's Board of Directors repriced options covering 956,703 shares, representing all of the qualified outstanding options with exercise prices ranging from $5.33 to $23.38, to an exercise price of $2.75 per share. The vesting terms of these options remained unchanged. When stock options are exercised, the par value of the shares issued is credited to common stock and the excess proceeds over par value are credited to additional paid-in capital. Under certain circumstances, when shares acquired through these options are sold, income tax benefits may be realized by the Company and are recorded as additional paid-in capital. In May 1989, the Board of Directors adopted a resolution providing for accelerated vesting of outstanding options in the event of defined changes in control of the Company. The resolution provided that all outstanding incentive and nonqualified options granted under the Plans and all nonqualified stock options granted to consultants of the Company outside the Plans shall become fully exercisable upon the occurrence of such a change. F-19 8. Shareholders' Equity (continued) Pro Forma Information The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Accordingly, since options have been issued with exercise prices at or above market value of the Company's stock, no compensation expense has been recognized for the stock option plans. Had compensation expense for the Company's stock options been determined based on the fair value of the grant date for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS 123, the Company's net income (loss) and the net income (loss) per share would be the pro forma amounts reflected in the following table:
1999 1998 1997 ------------------------------------------------------ Net income (loss) - as reported $(5,845,104) $(2,609,233) $2,725,282 Net income (loss) - pro forma (6,505,680) (3,238,483) 2,131,000 Net income (loss) per share - as reported: Basic $(1.01) $(.45) $.47 Diluted $(1.01) $(.45) $.46 Net income (loss) per share - pro forma: Basic $(1.12) $(.56) $.37 Diluted $(1.12) $(.56) $.36
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 1999, 1998 and 1997: 1999 1998 1997 -------------------------------- Expected dividend yield - - - Expected stock price volatility 54.1% 48.8% 54.9% Risk-free interest rate 6.4% 6.4% 6.3% Expected life of options (years) 3.0 3.0 3.0 Preferred Stock Purchase Rights In February 1996, the Board of Directors declared a dividend of one preferred stock purchase right for each outstanding share of Company common stock, which rights expire on March 14, 2006. The rights are transferable with common stock. Each right entitles the holder to purchase one one-hundredth of a share of Series A preferred stock at a price of $55, subject to adjustment. The rights are not exercisable until ten days after the public announcement that a person or group of persons has acquired a beneficial interest of at least 15% of the Company's outstanding common stock or the commencement or announcement of an intention by a person or group to make a tender or exchange offer whose consummation would result in the beneficial ownership of at least 15% of the Company's outstanding common stock. Each right would entitle the rightholder to receive shares of common stock of the acquiring company upon merger or other business combination having a market value of twice the exercise price of the right or, upon exercise, that number of shares of preferred stock having a market value of twice the exercise price of the right. Preferred stock purchasable upon exercise of the rights will be entitled to certain voting privileges, minimum preferential quarterly dividends, an aggregate dividend in relation to dividends declared on common stock, and minimum preferential liquidation payments. The rights have no voting privileges and may be redeemed by the Board of Directors at a price of $.01 per right at any time before they become exercisable. F-21 9. License Agreements The Company has entered into agreements with certain well-known celebrities to endorse the Company's products. The agreements, among other things, require the Company to make certain guaranteed payments, which have been recorded at their present value as both assets (license agreements) and liabilities (obligations under license agreements), and royalty payments based on percentages of sales for certain products. The Company is only liable to make sales royalty payments for the amount that sales royalties exceed the guaranteed payments each year. Total royalties and amortization of license agreements were $415,934, $357,790 and $681,394 during fiscal years 1999, 1998 and 1997, respectively. In March 1997, the main license agreement was extended through 2004. The extension of the agreement does not require any guaranteed payments in aggregate above those required under the original agreement. 10. Employee Benefit Plan The Company has a 401(k) Employee Benefit Plan for qualified employees. Company contributions to the plan are determined annually at the discretion of the Board of Directors. The Company's contributions to the plan were $156,000, $174,000 and $245,000 for fiscal years 1999, 1998 and 1997, respectively. 11. Land and Deferred Revenue In order to induce the Company to relocate its operation facility, the city of Anoka, Minnesota, gave the Company land in an industrial park with an approximate fair market value of $600,000. The gift was conditional upon the Company staying in the new building through January 1, 2003. The land and corresponding amount of deferred revenue have been recorded at $600,000, the estimated fair market value of the land. When the Company has satisfied the condition, the $600,000 of deferred revenue will be recognized in other income in fiscal 2003. F-22 12. Additional Cash Flow Information Year ended February 28 1999 1998 1997 ------------------------------------- Supplemental disclosures of cash flow information: Cash payments for: Interest $1,087,447 $963,009 $1,284,091 Income taxes 9,200 514,700 1,686,346 Non-cash: License agreement 262,760 - - F-23 INDEPENDENT AUDITOR'S REPORT To the Board of Directors First Team Sports, Inc. Anoka, Minnesota Our audit of the consolidated financial statements of First Team Sports, Inc. and Subsidiary included Schedule II for the year ended February 28, 1997. In our opinion, such schedule presents fairly the information required to be set forth therein in conformity with generally accepted accounting principles. St. Paul, Minnesota MCGLADREY & PULLEN, LLP April 9, 1997 F-24 SCHEDULE II FIRST TEAM SPORTS, INC. RESERVE ACCOUNTS Years Ended February 28, 1999 and 1998 and 1997
Balance at Additions Beginning Charged to Balance at Of Period Expenses Deductions End of Period - --------------------------------------------------------------------------------------------------------------------- 1997 allowance for doubtful accounts $ 489,399 $ 724,068 $ 648,296 $ 565,171 1998 allowance for doubtful accounts 565,171 1,215,469 1,115,137 665,503 1999 allowance for doubtful accounts 665,503 486,475 509,751 642,227 (1) Uncollectible accounts written off, net of recoveries.
F-25 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBIT INDEX TO FORM 10-K For the fiscal year ended: Commission File No.: 000-16422 February 28, 1999 - ------------------------------------------------------------------------------ FIRST TEAM SPORTS, INC. - ------------------------------------------------------------------------------ Exhibit Number Description 3.1 Articles of Incorporation, as amended - incorporated by reference to Exhibit 3.1 to the Company's Annual Report Form 10-K for the year ended February 28, 1997 3.2 Bylaws -- incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-18 Reg. No. 33-16345C 4.1 Specimen of Common Stock Certificate--incorporated by reference to 4.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1991 4.2 Certificate of Designations of Series A Preferred Stock (included in Restated Articles of Incorporation -- see Exhibit 3.1) 4.3 Rights Agreement dated as of March 15, 1996 between the Company and Norwest Bank Minnesota, N.A. as Rights Agent -- incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form 8-A, Reg. No. 0-16422 4.4 Form of Right Certificate -- incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form 8-A, Reg. No. 0-16422 4.5 Summary of Rights to Purchase Share of Series A Preferred Stock- incorporated by reference to Exhibit 2.3 to the Company's Registration Statement of Form 8-A, Reg. No. 0-16422 - ------------------ *Filed herewith **Management contract or compensatory plan or arrangement. E-1 Exhibit Number Description 10.1 The Company's 1987 Stock Option, as amended by resolutions dates May 25, 1989 -- incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended February 28, 1997** 10.2 Amendment dated April 22, 1992 to the Company's 1987 Stock Option Plan -- incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended February 29, 1992** 10.3 Form of Incentive Stock Option Agreement under 1987 Stock Option Plan -- incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-18, Reg. No. 33-16345C** 10.4 Form of Nonqualified Stock Option Agreement under 1987 Stock Option Plan -- incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-18, Reg. No. 33-16345C** 10.5 License Agreement between the Company, Wayne Gretzky and Janet Jones Gretzky dated as of December 1, 1994 -- incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended February 28, 1995 10.6 Amendment dated March 1, 1997 to License Agreement between the Company, Wayne Gretzky and Janet Jones Gretzky dated December 1, 1994 - incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended February 28, 1997 10.7 License Agreement between the Company and Creative Sports Concepts, Inc. dated as of October 31, 1994 -- incorporated by reference to Exhibit 10.11 to the Company's Annual Report Form 10-K for the year ended February 29, 1995 10.10 Company Bonus Plan for certain executive officers of the Company for fiscal 1999 -- incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended February 28, 1998** - ------------------ *Filed herewith **Management contract or compensatory plan or arrangement. E-2 Exhibit Number Description 10.11* Company Bonus Plan for executive officers of the Company for fiscal 2000** 10.12 The Company's 1990 Nonqualified Stock Option Plan, as amended by resolutions dated May 25, 1989 -- incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended February 28, 1991** 10.17 The Company's 1993 Employee Stock Purchase Plan -- incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended February 28, 1993** 10.18 The Company's 1994 Stock Option and Incentive Compensation Plan -- incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended February 29, 1994** 10.19 Employment Agreement dated January 23, 1996 between the Company and John J. Egart -- incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996** 10.20 Employment Agreement dated January 23, 1996 between the Company and David G. Soderquist -- incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996** 10.21 Employment Agreement dated January 23, 1996 between the Company and Robert L. Lenius-- incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996** 10.22 Employment Agreement dated January 23, 1996 between the Company and Susan L. Niles (Joch) -- incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996** 10.23 Mortgage Note in the amount of $3,656,250 dated March 19, 1996 in favor of LaSalle National Bank -- incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996 - ------------------ *Filed herewith **Management contract or compensatory plan or arrangement. E-3 Exhibit Number Description 10.24 Mortgage Note in the amount of $1,218,750 dated March 19, 1996 in favor of Marquette Capital Bank -- incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996 10.25 Mortgage dated March 19, 1996 between Company and LaSalle National Bank as agent for itself and Marquette Capital Bank -- incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996 10.26 Restated Revolving Credit and Term Loan Agreement dated June 30, 1995, as amended through May 28, 1997 between the Company and Marquette Capital Bank as agent for itself and LaSalle National Bank and Firstar Bank Milwaukee, N.A. incorporated by reference 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1997 10.27 Restated Security Agreement dated June 30, 1995, as amended through May 28, 1997 between the Company and Marquette Capital Bank, LaSalle National Bank and Firstar Bank Milwaukee, N.A. - incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the Quarter ended May 31, 1997 10.28 1994 Stock Option and Incentive Compensation Plan, as amended through May 27, 1998 - incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended August 31, 1998** 10.29 Employment Agreement dated August 18, 1997 between the Company and Kent Brunner - incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended August 31, 1997** 10.30 Amendment dated January 1, 1998 to Employment Agreement dated January 23, 1996 between the Company and John J. Egart - incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended February 28, 1998** - ------------------ *Filed herewith **Management contract or compensatory plan or arrangement. E-4 Exhibit Number Description 10.31 Amendment dated January 1, 1998 to Employment Agreement dated January 23, 1996 between the Company and David G. Soderquist - incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended February 28, 1998** 10.32 Restated Revolving Credit and Term Loan Agreement dated February 28, 1998 between the Company and Marquette Capital Bank as agent for itself and LaSalle National Bank and Firstar Bank Milwaukee, N.A. - incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended February 28, 1998 10.33 Credit Agreement dated November 20, 1998 between the Company, Marquette Capital Bank, N.A., LaSalle National Bank, and Firstar Bank Milwaukee, N.A. - incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998 21 List of Subsidiaries - incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended February 28, 1998 23.1* Consent of Ernst & Young LLP 23.2* Consent of McGladrey & Pullen LLP 24* Power of Attorney of John J. Egart, David G. Soderquist, Joe Mendelsohn, Timothy G. Rath, Stanley E. Hubbard, William J. McMahon and Kent A. Brunner included in signature page on this Form 10-K 27.1* Financial Data Schedule for the year ended February 28, 1999 (included in electronic version only) - ------------------ *Filed herewith **Management contract or compensatory plan or arrangement. E-5 EX-10.11 2 BONUS PLAN EXHIBIT 10.11 FIRST TEAM SPORTS FISCAL 2000 EXECUTIVE BONUS PLAN PLAN o Company bonus plan is based on earnings before tax o Bonus plan consists of the following levels: Earnings Before Taxes Bonus Pool Lower Level: $ 455,000 $150,000 Higher Level: $1,370,500 $650,000 ELIGIBLE Officers and key managers BONUS CALCULATIONS o If earnings before taxes goals are met, appropriate bonus dollars will be paid o If earnings before taxes fall between the lower level and the higher level, bonus dollars will be pro-rated accordingly CRITERIA o All participants will have objectives/goals established for them to achieve o Individual achievement of objectives, as judged by the Compensation Committee, will determine bonus payments EX-23.1 3 CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Forms S-8 of First Team Sports, Inc. pertaining to the 1987 Stock Option Plan (No. 33-36123), 1987 Stock Option Plan (No. 33-52344), 1990 Nonqualified Stock Option Plan (No. 33-37308), 1993 employee Stock Purchase Plan (No. 33-68164) and the 1994 Stock Option and Incentive Compensation Plan (No. 33-84722) of our report dated April 14, 1999, with respect to the consolidated financial statements and schedule of First Team Sports, Inc. included in the Annual Report (Form 10-K) for the year ended February 28, 1999. /s/ Ernst & Young LLP Minneapolis, Minnesota May 21, 1999 EX-23.2 4 CONSENT OF INDEPENDENT PUBLIC AUDITORS CONSENT OF INDEPENDENT PUBLIC AUDITORS We hereby consent to the incorporation of our report dated April 9, 1997, with respect to the consolidated financial statements of First Team Sports, inc. and Subsidiary and our report dated April 9, 1997, with respect to Schedule II, both included in this form 10-K, in the Company's previously filed Registration Statements Nos. 33-36123, 33-37308, 33-52344, 33-68164, and 33-84722. /s/ McGLADREY & PULLEN, LLP St. Paul, Minnesota May 7, 1999 EX-27 5 ART 5 FDS FOR YEAR ENDED 02/28/99
5 1 U.S. Dollars YEAR FEB-28-1999 MAR-01-1998 FEB-28-1999 1 723,574 0 12,926,005 642,000 10,047,020 26,206,234 10,734,225 3,316,390 39,134,394 8,834,565 5,576,967 58,039 0 0 23,869,823 39,134,394 42,397,426 42,397,426 38,051,179 38,051,179 0 0 953,843 (8,647,408) (2,802,304) (5,845,104) 0 0 0 (5,845,104) (1.01) (1.01)
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