-----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, LxZQ+ax4A/2Ar56PS6UkyPZzJTNQHoJpXa8A6cEqCAyz4Y0lKcIFnrgCU0WGKHBH b9qRCU3l8OgBfF21aNMJrQ== 0000914190-97-000240.txt : 19970520 0000914190-97-000240.hdr.sgml : 19970520 ACCESSION NUMBER: 0000914190-97-000240 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970516 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST TEAM SPORTS INC CENTRAL INDEX KEY: 0000820242 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 411545748 STATE OF INCORPORATION: MN FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-16442 FILM NUMBER: 97610507 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, 1997 Commission File No.: 0-16442 FIRST TEAM SPORTS, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-1545748 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 1201 Lund Boulevard Anoka, Minnesota 55303 (Address of principal executive offices) Registrant's telephone number, including area code: (612) 576-3500 ------------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share Preferred Stock Purchase Rights ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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 April 30, 1997 was approximately $29,510,788 based upon the closing sale price of the Registrant's Common Stock on such date. Shares of $.01 par value Common Stock outstanding at April 30, 1997: 5,752,596 shares. ------------------------ DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its 1997 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 and related accessory products. In-line roller 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 Exports, Inc., the Company's wholly owned subsidiary, was incorporated in April 1991 as 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 subsidiary. (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 marketed under the ULTRAWHEELS(R), SABOTAGE(R), SKATE ATTACK(R), STREET ATTACK(R), ROLL USA(R) and AIRBORNE(R) brand names. The Company also supplies in-line roller skates under various third party labels. ULTRAWHEELS brand skates, marketed to specialty and chain sporting goods dealers, are provided in twenty-six different models: Trion(TM), Millennium(TM), Millennium LS(TM), Spectrum(TM), Azure(TM), Durango(TM), Laguna(TM), Solana(TM), Taos(TM), Terra(TM), Legend(TM), Infinity(TM), Royale(TM), Vision(TM), Vision LS(TM), Prism(TM), Sabotage FY(TM), Sabotage ST(TM), Sabotage RP(TM), Sonic(TM), Sting(TM), Slant 6(TM), Lazar(TM), Wizard(TM), UltraRace(TM) and Brett Hull Power Play(TM). The twenty-six different models include styles designed for performance/fitness skaters, adult and youth recreational skaters, and in-line roller hockey players. The Sabotage models, also marketed to the specialty and chain sporting goods dealer, are designed specifically for aggressive in-line skaters. The Skate Attack, Street Attack, RollUSA and Airborne branded products are produced for sales to the mass merchant market. The Skate Attack brand skates are manufactured in seven models: Grind(TM), Corona(TM), Achieve(TM), Eclipse(TM), Swerve(TM), Siren(TM) and Sport(TM). The RollUSA brand consists of four models: Hawk(TM), Cyclone(TM), Team Gretzky(TM) and Storm(TM). The Company's in-line roller skates consist of a molded plastic boot with integrated frame, or a frame riveted to the bottom of the boot, and high-density polyurethane wheels mounted on ball bearings. - 2 - The industry's first line of women's specific protective gear was introduced under the UltraWheels brand name in December 1996. WSD(TM) wrist guards, elbow pads and knee pads are sold separately as well as in a three-pack. The Company believes the products offer women protective gear that is better suited to their needs--each item is very lightweight, anatomically designed and lined with CoolMax(TM) fabric to pull moisture away from skin. The Company began shipment of its new Softec(TM) line of fitness skates in March 1997. The Durango, Laguna, Solana, Taos and Terra models are constructed using patented technology allowing the skates to have the look and feel of an athletic shoe while maintaining the ankle and lower leg support demanded by in-line skates. All models feature a removable liner suitable for walking short distances. Tuff Guys(TM), the Company's first branded line of replacement wheel sets, began shipping to European customers in August 1996. The line features replacement wheel sets for aggressive, recreational, fitness and hockey skaters. The Company is currently considering marketing the Tuff Guys brand in the United States. (2) Status of products in development The Company continues to develop products for the growing aggressive, recreational and fitness categories, as well as improving upon existing models. The aggressive category continues to grow in image and size. Continuing with its investment in this area, the Company has expanded and improved upon the Sabotage(TM) line of aggressive skates and accessories. Shipments of the expanded line are expected to begin in December 1997. The early success of the Company's Softec products, marketed under the UltraWheels brand, has led to additional research and development in products featuring this type of technology. The Company also expects to begin shipment of skates in this category beginning in December 1997. 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. - 3 - The components for the Company's products are manufactured by independent contract manufacturers, also located in the United States and foreign countries, who have been procured by the Company's suppliers or, frequently, by management of the Company. The Company submits purchase orders to its manufacturers for the production of specific amounts of its products and has not entered into any long-term contracts for production. All purchase orders are in U.S. Dollars. (4) Patents, trademarks, licenses, franchises and concessions. The Company markets its products under a number of trade names and trademarks, including the following principal trademarks or registered trademarks of the Company: "Ultra- Wheels," "Skate Attack," "Official Skate of Street Hockey," "Euro-Sport," "Euro Rail," "Ultra- Ice" and "Street Attack." The Company owns approximately ten United States trademark registrations and, in addition, 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, figure skaters and related organizations as mentioned above. The Company has also filed five patent applications covering various parts of in-line skates and methods of producing its products. (5) and (6) Seasonality and Working Capital. The Company's marketing area covers North America, South America, Europe, Australia and the Far East. This large and diverse marketing area, along with the acceptance of the Company's products by athletes and recreational users, has helped reduce the seasonal variations in the Company's sales and in the demands on the Company's working capital. The Company's products are primarily used outdoors in the spring and summer months. With approximately 90% of the Company's sales occurring in North America and Europe, the Company does have increased sales and demands on its working capital during the spring selling season. (7) Major Customers. Certain customers of the Company have accounted for more than 10% of the Company's sales in one or more of the past three fiscal years. In fiscal 1997, Wal-Mart, based in Bentonville, Arkansas, accounted for approximately 23% of the Company's total revenues. In fiscal 1996, Wal-Mart accounted for approximately 27% of the Company's total revenues and Target Stores, based in Minneapolis, Minnesota, accounted for approximately 12% of the Company's total revenues. In fiscal 1995, Target Stores accounted for approximately 18% of the Company's total revenues and Wal-Mart accounted for approximately 18% of the Company's total revenues. - 4 - (8) Backlog. The Company had approximately $9,044,318 in unfilled purchase orders as of May 1, 1997, compared to approximately $10,369,364 in unfilled purchase orders on May 22, 1996. Approximately $5,481,931 of these backlog orders are a result of spring booking orders to be shipped at future dates and approximately $3,562,387 result from orders of products that are temporarily unavailable. (9) Government contracts. The Company has no Government contracts. (10) Competition. The principal competitive factors in the in-line roller skate industry are name recognition, price and product performance. The main areas of difference in product performance are in the weight and strength of the boot and frame, the hardness of the wheels and the quality and lubrication of the wheel bearings. The Company offers a 90-day warranty on its products, which the Company believes is an important competitive factor. Beyond such warranty, the Company does not offer service on its products and does not believe that service is an important competitive factor. The Company believes it has a significant share of the in-line roller skate market. Rollerblade, Inc., maker of Rollerblades, is considered to be the market leader; and K2, Inc. is a strong competitor. The Company competes with Rollerblade, Inc. and K2, Inc. in all price and quality ranges. The Company believes that it would not be difficult for other companies, both new enterprises and established members of the sporting goods industry, to enter the in-line roller skate market, and, in fact, many new companies have entered this market in recent years. (11) Research and development. Estimated research and development expenses for Company-sponsored research activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques were not material in fiscal 1997, 1996 or 1995. (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. - 5 - (13) Employees. As of May 1, 1997, the Company employed 81 full-time employees and 3 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 1997, First Team Sports Exports, Inc. had export sales of $25,506,141, which represented 33% of the total fiscal 1997 net sales of the Company. Export sales in fiscal 1996 were $25,818,632, which represented approximately 27% of total net sales; and, in fiscal 1995, they were $10,967,437, which represented approximately 13% of total net sales. Canadian net sales were $5,621,496 (7% of total net sales) in fiscal 1997, $10,358,169 (11% of total net sales) in fiscal 1996 and $4,986,591 (6% of total net sales) in fiscal 1995. Sales outside North America were $19,884,645 (26% of total net sales) in fiscal 1997, $15,460,463 (16% of total net sales) in fiscal 1996 and $5,980,846 (7% of total net sales) in fiscal 1995. 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 $4,503,000 as of May 1, 1997. 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, 1997. - 6 - 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 officers named below. Name and Age of Current Positions with Company and Principal Executive Officer Occupations for the Past Five Years John J. Egart President and Chief Executive Officer of the Company since 47 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 Vice Chairman of the Company since January 1994; Director 48 of the Company since the Company's inception in May 1986; President and Chief Executive Officer of the Company from the Company's inception in May 1986 to January 1994. Robert Lenius, Jr. Vice President and Chief Financial Officer of the Company 49 since July 1991; Vice President/Finance of the Company from July 1987 to July 1991. Susan L. Joch Vice President/Marketing of the Company since November 36 1993; Director of Marketing of the Company from July 1991 to November 1993; Product Marketing Manager for Tonka Corporation, a toy manufacturer, from June 1989 to July 1991. Kent A. Brunner Vice President of Finance of the Company since September 36 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. - 7 - 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 1996 and fiscal 1997 was as follows: Quarter Ended High Low May 31, 1995 $25-1/2 $18 August 31, 1995 $31-3/4 $19 November 30, 1995 $21-3/4 $10-3/4 February 29, 1996 $18-3/4 $12-1/4 May 31, 1996 $17-7/8 $12-3/4 August 31, 1996 $14-5/8 $ 7-1/2 November 30, 1996 $10 $ 7-1/8 February 28, 1997 $10-1/4 $ 5-1/2 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 April 30, 1997, there were approximately 459 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. - 8 - ITEM 6. SELECTED FINANCIAL DATA
Years ended February 28, 1997, February 29, 1996, February 28, 1995, 1994 and 1994 1997 1996 1995 1994 1993 ------ ------ ------ ------ ----- Operations Data: Net Sales $76,435,022 $97,667,448 $85,528,860 $35,534,892 $38,244,144 Net Income 2,725,282 7,811,857 6,098,757 635,409 2,961,948 Net Income Per Share .46 1.30 1.07 .12 .54 Cash Dividends Paid Per Share -- -- -- -- -- Balance Sheet Data: Total Assets $52,343,501 $55,957,802 $45,863,753 $29,596,443 $20,323,893 Working Capital 27,921,689 24,944,985 18,109,090 11,589,217 11,175,839 Long-Term Obligations 6,217,936 6,880,360 3,053,494 1,800,072 1,641,248 Shareholders' Equity 32,745,931 29,830,283 20,850,079 13,939,578 13,279,475
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net Sales. Net sales declined 22% in the fiscal year ended February 28, 1997 compared to an increase of 14% in fiscal year 1996. In-line skate sales volume decreases and a decrease in the average selling price of the Company's Skate Attack line were the principal factors in the Company's net sales decline in fiscal 1997. The Company's Skate Attack line is sold primarily through the mass merchant retail channel and carries a lower average selling price, which was pressured further downward in fiscal 1997 as a result of excess retail inventory levels and a slightly saturated market. The net sales increase in fiscal 1996 was due principally to increased sales volume. The Company's product groups consist of in-line skates, ice skates, accessories and parts (primarily protective wear and replacement wheels and bearings) and roller hockey products. Within the product groups, the Company maintains an UltraWheels and Skate Attack line of products. The UltraWheels line consists of higher quality and higher priced products that are targeted for the specialty and sporting goods chain store customers, and the Skate Attack line consists of lower priced products for mass merchant customers. In-line skate net sales were $65 million, $82 million and $69.3 million in fiscal 1997, 1996 and 1995. Ice skate net sales were insignificant, $1.4 million and $1 million in fiscal 1997, 1996 and 1995. Accessories and parts net sales were $9.3 million, $10.9 million and $10.3 million in fiscal 1997, 1996 and 1995. Roller hockey products net sales were $2.1 million, $2.8 million and $4.7 million in fiscal 1997, 1996 and 1995. - 9 - While the Company experienced a decrease in U.S. and Canadian sales, the European market continued to grow and expand for the Company's products. U.S. and Canadian sales were $56.4 million, $82.2 million and $79.5 million in fiscal 1997, 1996 and 1995. Excess inventories in the marketplace, an overall retail slowdown in in-line skate purchases and strong competition for the Company's mass merchant accounts are the primary reasons for the decrease in 1997. Sales in Europe were $14.1 million, $8.5 million and $2.2 million in fiscal 1997, 1996 and 1995. The European market has held strong growth rates due to customer acceptance of products and increased consumer participation in in-line skating. Other International sales were $5.9 million, $7 million and $3.8 million in fiscal 1997, 1996 and 1995. The decrease in other international sales in 1997 was primarily the result of excess inventory levels in the Pacific Rim marketplace. Gross Margin. As a percentage of net sales the gross margin was 25.6% in 1997, 29.9% in 1996 and 29.7% in 1995. The percentage decreased in 1997 was due to an overall retail slowdown of in-line skate sales and excess retail inventory levels. This resulted in increased competition and gross margin pressure at all levels from the mass merchants to the specialty shops. The Company's UltraWheels brand of in-line skates accounted for 51%, 42% and 36% of in-line skate sales in fiscal 1997, 1996 and 1995. The Skate Attack brand accounted for 47%, 53% and 60% of in-line skate sales in fiscal 1997, 1996 and 1995. Although the UltraWheels brand consists of higher end and higher margin products, the increased gross margin from these sales was limited due to the reasons discussed above and was partially offset by the gross margin pressure of the Skate Attack products and close-out product sales. Operating Expenses. Selling expenses were $7.2 million, $7.8 million and $7.1 million in fiscal 1997, 1996, and 1995. As a percentage of net sales the selling expenses were 9.4%, 8.0%, and 8.3% in fiscal 1997, 1996 and 1995. The decrease in the absolute dollar amount of selling expenses in 1997 was due primarily to a reduction in sales commissions and endorsement royalties associated with the decreased sales volume. The increase in selling expenses as a percentage of net sales in fiscal 1997 was due to continued efforts to advertise and market the Company's new products. The increase in the absolute dollar amount of selling expenses in 1996 was due primarily to additional commissions and advertising and promotional expenses associated with new products and the increased sales volume. General and administrative expenses were $6.8 million, $8.3 million and $7.9 million in fiscal 1997, 1996 and 1995. As a percentage of net sales the general and administrative expenses were 8.9%, 8.5% and 9.2% in fiscal 1997, 1996 and 1995. The decrease in the absolute dollar amount of general and administrative expenses in 1997 was due primarily to a reduction in personnel costs, savings associated with the Company's new office and warehouse facility, and reduced operating expenditures resulting from managements control over spending and expenses. The increase in general and administrative expenses in 1996 was the result of increased personnel and occupancy expenses incurred to manage the increased sales volume. - 10 - The overall decrease in operating expenses in 1997 was a direct result of managements continued efforts to closely monitor and control expenses, and the ability of management to respond on a timely basis to the Company's reduced sales activity. Other Income and Expense. Interest expense was $1.3 million, $.9 million and $.8 million in fiscal 1997, 1996 and 1995. The increases in interest expense in fiscal 1997 and 1996 were primarily due to the addition of the mortgage note associated with the Company's new office and warehouse facility. Provision for Income Taxes. The Company's effective tax rate decreased from 36.0% in 1995 to 35.7% in 1996 to 35.5% in 1997. The decrease was primarily the result of an increase in the Company's international sales as a percentage of total sales. The Company utilizes its wholly-owned subsidiary First Team Sports Exports, Inc., a foreign sale corporation, to help reduce the Company's tax burden. Net Income. Net income as a percent of net sales was 3.6%, 8.0% and 7.1% in fiscal 1997, 1996 and 1995. The decrease in 1997 and the increase in 1996 were a result of the factors discussed above. Liquidity and Capital Resources As of February 28, 1997, total cash and cash equivalents were $381,427 compared to $2,166,863 as of February 29, 1996. The decrease in cash and cash equivalents in fiscal 1997 was a result of $507,778 of cash provided by operating activities being offset by $1,591,220 of cash used in investing activities and $701,994 of cash used in financing activities. The net cash provided by operating activities was primarily from net income plus depreciation and the net effect of the decrease in inventories and payables. Inventory levels, primarily component parts, decreased significantly in fiscal 1997. This decrease was attributable to the Company having a higher percentage of its in-line skates made overseas. The accounts payable decrease was the result of the Company taking advantage of vendor discounts and the increased overseas manufacturing. Investing activities consumed $1,591,220 in cash during fiscal 1997 compared to $7,509,272 in fiscal 1996. In fiscal 1996 the Company purchased its new office and warehouse facility which accounted for approximately $5 million of cash used in investing activities. The capital expenditures for fiscal 1997 consisted primarily of production tooling required for new products. The Company expects to spend approximately $1.8 million for capital additions in fiscal 1998. The Company used $701,994 for financing activities in fiscal 1997 compared to $539,169 provided by financing activities in fiscal 1996. The major financing application of cash in fiscal 1997 was the reduction of the Company's line of credit balance, and the major source of cash from financing activities in fiscal 1997 was proceeds from the Company's office and warehouse facility mortgage. - 11 - The Company's debt-to-worth ratio was .6 to 1 as of February 28, 1997 compared to .9 to 1 as of February 29, 1996. The Company's long-term debt, which consists primarily of a mortgage note on the Company's facility and obligations under endorsement license agreements, less current maturities, was $6,217,936 as of February 28, 1997 (see Note 5 in Notes to Financial Statements). As of February 28, 1997, the Company had a revolving line of credit established with a bank that provides for borrowings of up to $15,000,000 of which $5,319,250 was outstanding. In addition, the Company has a line of credit established with the bank providing for borrowings of up to $1,000,000 for the purchase of equipment and improvements. As of February 28, 1997 there was no balance outstanding on this credit facility. The Company believes that its current cash position with funds available under existing bank arrangements and cash generated from profitable operations will be sufficient to finance the Company's operating requirements in fiscal 1998. Outlook: Issues and Uncertainties The Company does not provide forecasts of potential future financial performance. The statements contained in this outlook are based on current expectations. These statements are forward looking and the Company's actual results may differ materially. The Company believes that the total number of in-line skating participants worldwide will continue to grow in fiscal 1998. First Team Sports believes the dramatic and innovative new products currently on the market will re-awaken avid participants of in-line skating and will improve the recruitment of new participants. The Company's strategy has been and continues to be to introduce high quality, innovative, price valued products, consequently, driving consumer demand toward newer products. 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 higher performance products, revenues and earnings will likely be adversely impacted. The Company's gross margin is a sensitive function of the product mix sold, pricing and the market conditions in any period. Because the Company's Skate Attack brand is 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. As a result, future gross margin percentages are difficult to predict. The Company considers it imperative to maintain a strong research and development program to be able to continue offering innovative new products to consumers. Research and development expenditures in fiscal 1998 should be consistent with those in fiscal 1997. The Company also continues to closely monitor and control its selling and general and administrative expenditures. - 12 - While management of the Company is optimistic about the Company's long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating its growth outlook: Competition. The Company competes with numerous manufacturers of in-line skates domestically and internationally and anticipates future competition from other large and well-established sporting good manufacturers. Rollerblade, Inc. and K2 are the Company's primary competitors and have substantially greater resources than the Company. The intense 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) control manufacturing costs and offer products at commercially-acceptable prices; (ii) develop new products and generate market acceptance of such products; and (iii) continue to develop and expand its international business. Dependence on Key Customers. During the fiscal year ended February 28, 1997, sales to Wal-Mart and Target Stores accounted for 23% and 7%, respectively, 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 or Target Stores. Decreased orders from either of these customers could have a material adverse impact on the Company's financial results. Stock Market Volatility. Historically, the Company's stock price has been subject to significant volatility. Any deviation in the Company's actual results from market expectations has often resulted in significant stock price fluctuations, both positive and negative, and the Company has no reason to believe such stock price fluctuations will not continue to occur. 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 then on sales of other consumer products. First Team Sports believes that it has the product offerings, facilities, personnel, and competitive and financial resources for continued business success. However, future revenues, costs, margins, and profits are all influenced by a number of factors as discussed above. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedules listed below are included herein immediately following the signature page of this Form 10-K on the pages set forth: Page Independent Auditor's Report on Consolidated Financial Statements........F-1 Consolidated Balance Sheets as of February 28, 1997 and February 29, 1996....................................................F-2 - 13 - Consolidated Statements of Income for the years ended February 28, 1997, February 29, 1996 and February 28, 1995.......F-4 Consolidated Statements of Shareholders' Equity for the years ended February 28, 1997, February 29, 1996 and February 28, 1995............F-5 Consolidated Statements of Cash Flows for the years ended February 28, 1997, February 29, 1996 and February 28, 1995............F-6 Notes to Consolidated Financial Statements ..............................F-7 Independent Auditor's Report on Schedule II .............................F-16 Schedule II - Reserve Accounts .........................................F-17 Schedules I, III, IV and V 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 1997 in connection with the Company's 1997 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 1997 in connection with the Company's 1997 Annual Meeting of Shareholders. - 14 - 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 1997 in connection with the Company's 1997 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 1997 in connection with the Company's 1997 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. (1) Financial Statements. The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K: Independent Auditor's Report on Consolidated Financial Statements Consolidated Balance Sheets as of February 28, 1997 and February 29, 1996 Consolidated Statements of Income for the years ended February 28, 1997, February 29, 1996 and February 28, 1995 Consolidated Statements of Shareholders' Equity for the years ended February 28, 1997, February 29, 1996 and February 28, 1995 Consolidated Statements of Cash Flows for the years ended February 28, 1997, February 29, 1996 and February 28, 1995 Notes to Consolidated Financial Statements (2) Financial Statement Schedules. The following schedule is included in Part II, Item 8, of this Annual Report on Form 10-K: - 15 - Independent Auditor's Report on Financial Schedule II. Schedule II - Reserve Accounts. Schedules I, III, IV and V 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 report: 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, 1997. - 16 - 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 16, 1997 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 16, 1997 John J. Egart President, Chief Executive Officer and Director (Principal executive officer) /s/ David G. Soderquist May 16, 1997 David G. Soderquist Vice Chairman and Director (Signatures continued on following page) - 17 - Signature and Title Date /s/ Joe Mendelsohn May 16, 1997 Joe Mendelsohn Chairman and Director /s/ Timothy G. Rath May 16, 1997 Timothy G. Rath Director /s/ Stanley E. Hubbard May 16, 1997 Stanley E. Hubbard Director /s/ William J. McMahon May 16, 1997 William J. McMahon Director /s/ Robert L. Lenius, Jr. May 16, 1997 Robert L. Lenius, Jr. Vice President and Chief Financial Officer (Principal financial officer) /s/ Kent A. Brunner May 16, 1997 Kent A. Brunner Vice President of Finance (Principal accounting officer) - 18 - INDEPENDENT AUDITOR'S REPORT To the Board of Directors First Team Sports, Inc. Anoka, Minnesota We have audited the accompanying consolidated balance sheets of First Team Sports, Inc. and Subsidiary as of February 28, 1997, and February 29, 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three fiscal years in the period ended Febru ary 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evide nce supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Team Sports, Inc. and Subsidiary as of February 28, 1997, and February 29, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 28, 1997, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP St. Paul, Minnesota April 9, 1997 FIRST TEAM SPORTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS February 28, 1997 and February 29, 1996 ASSETS (Notes 4 and 5) 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents $ 381,427 $ 2,166,863 Receivables: Trade, less allowance for doubtful accounts 1997 $565,000; 1996 $489,000 17,039,679 16,228,666 Refundable income taxes 258,492 155,146 Inventory (Note 3) 20,881,845 22,813,850 Prepaid expenses 612,880 960,079 Deferred income taxes (Note 6) 997,000 827,000 ------------------------------------- Total current assets 40,171,323 43,151,604 ------------------------------------- Property and Equipment, at cost Land (Note 10) 600,000 600,000 Building 4,988,680 4,825,740 Production equipment 4,715,979 4,069,078 Office furniture and equipment 1,754,017 1,509,120 Warehouse equipment 325,361 315,509 Vehicles 19,567 46,925 ------------------------------------- 12,403,604 11,366,372 Less accumulated depreciation and amortization 2,588,404 1,511,689 ------------------------------------- 9,815,200 9,854,683 ------------------------------------- Other Assets License agreements, less accumulated amortization 1997 $3,039,000; 1996 $2,459,000 (Note 8) 2,065,611 2,645,268 Other 291,367 306,247 ------------------------------------- 2,356,978 2,951,515 ------------------------------------- $ 52,343,501 $ 55,957,802 ===================================== See Notes to Consolidated Financial Statements.
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Current Liabilities Note payable to bank (Note 4) $ 5,319,250 $ 5,268,000 Current maturities of long-term debt 662,414 943,060 Trade accounts payable 4,852,459 9,462,883 Accrued expenses 1,415,511 2,532,676 ------------------------------------- Total current liabilities 12,249,634 18,206,619 ------------------------------------- Long-Term Debt, less current maturities (Notes 4 and 5) 6,217,936 6,880,360 ------------------------------------- Deferred Income Taxes (Note 6) 530,000 440,000 ------------------------------------- Deferred Revenue (Note 10) 600,000 600,000 ------------------------------------- Commitments (Note 8) Shareholders' Equity (Notes 4 and 7) Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 1997 5,749,796 shares; 1996 5,721,000 shares 57,498 57,210 Additional paid-in capital 9,586,340 9,396,802 Retained earnings 23,102,093 20,376,811 ------------------------------------- 32,745,931 29,830,823 ------------------------------------- $ 52,343,501 $ 55,957,802 =====================================
FIRST TEAM SPORTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME Years Ended February 28, 1997, February 29, 1996, and February 28, 1995 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Net sales (Note 2) $ 76,435,022 $ 97,667,448 $ 85,528,860 Cost of goods sold 56,837,195 68,499,170 60,128,035 --------------------------------------------------------- Gross profit 19,597,827 29,168,278 25,400,825 --------------------------------------------------------- Operating expenses: Selling (Note 8) 7,190,515 7,774,248 7,060,747 General and administrative 6,789,276 8,341,008 7,879,569 --------------------------------------------------------- 13,979,791 16,115,256 14,940,316 --------------------------------------------------------- Operating income 5,618,036 13,053,022 10,460,509 Other expense: Interest expense (1,275,882) (892,321) (761,074) Other, net (113,872) (10,844) (175,678) --------------------------------------------------------- Income before income taxes 4,228,282 12,149,857 9,523,757 Federal and state income taxes (Note 6) 1,503,000 4,338,000 3,425,000 --------------------------------------------------------- Net income $ 2,725,282 $ 7,811,857 $ 6,098,757 ========================================================= Net income per common and common equivalent share (Note 7): Primary $ 0.46 $ 1.30 $ 1.07 Fully diluted 0.46 1.30 1.03 Weighted average common and common equivalent shares outstanding: Primary 5,884,175 6,007,004 5,706,932 Fully diluted 5,884,175 6,010,986 5,912,455 See Notes to Consolidated Financial Statements.
FIRST TEAM SPORTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended February 28, 1997, February 29, 1996, and February 28, 1995 Common Stock Additional Total ------------------------------ Paid-In Retained Shareholders' Shares Amount Capital Earnings Equity - ------------------------------------------------------------------------------------------------------------------------------ Balance, February 28, 1994 5,447,748 $ 54,477 $ 7,418,904 $ 6,466,197 $ 13,939,578 Shares issued upon exercise of stock options and warrants (Note 7) 180,479 1,805 810,561 - 812,366 Payout of fractional shares created by three-for-two stock split (43) - (622) - (622) Net income - - - 6,098,757 6,098,757 ----------------------------------------------------------------------------- Balance, February 28, 1995 5,628,184 56,282 8,228,843 12,564,954 20,850,079 Shares issued upon exercise of stock options (Note 7) 92,816 928 500,959 - 501,887 Tax benefit recognized from exercise of certain stock options (Note 7) - - 667,000 - 667,000 Net income - - - 7,811,857 7,811,857 ----------------------------------------------------------------------------- Balance, February 29, 1996 5,721,000 57,210 9,396,802 20,376,811 29,830,823 Shares issued upon exercise of stock options (Note 7) 28,796 288 189,538 - 189,826 Net income - - - 2,725,282 2,725,282 ----------------------------------------------------------------------------- Balance, February 28, 1997 5,749,796 $ 57,498 $ 9,586,340 $ 23,102,093 $ 32,745,931 ============================================================================= See Notes to Consolidated Financial Statements.
FIRST TEAM SPORTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended February 28, 1997, February 29, 1996, and February 28, 1995 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 2,725,282 $ 7,811,857 $ 6,098,757 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 1,537,073 771,045 569,442 Amortization of license agreements 579,657 651,562 557,173 Loss on retirement of equipment 108,510 13,950 174,256 Deferred income taxes (80,000) (225,000) (193,000) Noncash tax expense related to option exercise - 667,000 - Changes in current assets and liabilities: Receivables (811,013) 626,159 (5,486,640) Inventory 1,932,005 (1,975,679) (8,504,746) Prepaid expenses 347,199 (71,345) (19,467) Trade accounts payable (4,610,424) 447,507 3,193,893 Accrued expenses (1,117,165) (72,484) 2,083,381 Income taxes (103,346) (109,000) - --------------------------------------------------- Net cash provided by (used in) operating activities 507,778 8,535,572 (1,526,951) --------------------------------------------------- Cash Flows From Investing Activities Purchases of building and equipment (1,606,100) (7,419,793) (871,730) Other 14,880 (89,479) (57,321) --------------------------------------------------- Net cash used in investing activities (1,591,220) (7,509,272) (929,051) --------------------------------------------------- Cash Flows From Financing Activities Net borrowings (payments) under line of credit note (4,823,750) 1,079,000 2,490,000 Principal payments on long-term debt (943,070) (1,041,718) (662,335) Proceeds from exercise of stock options and warrants, net of fractional share payments 189,826 501,887 811,744 Proceeds of mortgage notes 4,875,000 - - --------------------------------------------------- Net cash provided by (used in) financing activities (701,994) 539,169 2,639,409 --------------------------------------------------- Increase (decrease) in cash and cash equivalents (1,785,436) 1,565,469 183,407 Cash and Cash Equivalents Beginning 2,166,863 601,394 417,987 --------------------------------------------------- Ending $ 381,427 $ 2,166,863 $ 601,394 =================================================== See Notes to Consolidated Financial Statements (Additional Cash Flow Information - Note 11).
SCHEDULE II FIRST TEAM SPORTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Business and Significant Accounting Policies Nature of business and concentration of credit risk: The Company sells in-line roller skates, ice skates, street hockey equipment, and related accessories under the brand names Ultra-Wheels(TM), Ultra-Ice(TM), Skate Attack(TM), Street Attack(TM), Gretzky 802(TM), and Roll U.S.A(TM) to retail and sporting goods stor es. These products are manufactured under outside production arrangements to the Company's specifications. Basis of financial statement presentation and accounting estimates: The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the year. Actual results could differ from those estimates. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, First Team Sports Exports, Inc. (a foreign sales corporation). All material intercompany accounts and transactions have been eliminated in consolidation. Cash and cash equivalents: For purposes of reporting cash flows, the Company considers all demand deposit accounts and short-term cash investments with an initial maturity of 90 days or less to be cash equivalents. The Company maintains its cash in bank checking accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Inventory: Inventory is valued at the lower of cost (first-in, first-out method) or market. Depreciation: Depreciation of property and equipment are computed on the straight-line method over the following estimated useful lives: Years Building 39 Production equipment 2-10 Office furniture and equipment 5-7 Warehouse equipment 6-10 Vehicles 5 License agreements: License agreement assets are being amortized over the terms of the agreements on a straight-line basis. Note 1. Nature of Business and Significant Accounting Policies (Continued) Accounting for long-lived assets: The Company periodically reviews its property, equipment, and license agreements 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 comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows) of the long-lived assets. To date, management has determined that no impairment of long-lived assets exists. Net income per common and common equivalent share: Net income per common share is computed based upon the weighted-average number of common shares and common share equivalents (warrants and options) outstanding during each year. Common share equivalents are included in the computations using the treasury stock method whenever their inclusion has a dilutive effect. Income taxes: Deferred taxes are provided using an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss or tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary di fferences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when management determines that it is more likely than not that some portion or all of the deferred tax ass ets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Advertising costs: The costs of advertising are expensed as incurred. Advertising expense for the fiscal years ended 1997, 1996, and 1995 was $2,421,000, $2,192,000, and $2,223,000, respectively. Fair value of financial instruments: The consolidated financial statements include the following financial instruments: cash and cash equivalents, trade receivables, note payable to bank, trade accounts payable, income taxes payable, and long-term debt. At February 28, 1997, no separate comparis on of 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. Note 2. Sales Information and Major Suppliers Major customers and credit risk: Net sales for fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995, include sales to certain major customers as follows: Percent of Net Sales Customer 1997 1996 1995 A 23 27 18 B 7 12 18 Note 2. Sales Information and Major Suppliers (Continued) At February 28, 1997, 22 percent of the Company's trade receivables were due from the aforementioned customers and 39 percent were due from customers outside of the United States. Credit, including foreign credit, is determined on an individual customer basis. The Company utilizes letter-of-credi t arrangements and wire transfers to minimize its foreign credit risk. Export sales: The Company's export sales approximated 33, 27, and 13 percent of total sales for fiscal years 1997, 1996, and 1995, respectively. Major suppliers: The Company had 46 percent of its products produced by three suppliers during fiscal 1997, 36 percent from two foreign suppliers and 10 percent from a domestic supplier. Management believes that alternative suppliers are available in the event the Company is unable to obtain serv ices from its three major suppliers. Note 3. Inventory Inventory consists of the following: February 28, February 29, 1997 1996 Component parts $4,881,571 $8,185,873 Finished goods: Skates 12,806,808 11,346,966 Accessories and replacement parts 3,193,466 3,281,011 ---------- ---------- $20,881,845 $22,813,850 ========== ========== Note 4. Notes Payable The Company has a line-of-credit arrangement with a bank subject to renewal on July 1, 1997, whereby it may borrow up to $15,000,000. Borrowings bear interest, payable monthly, at the bank's prime lending rate (8.25 percent at February 28, 1997) minus 0.55 percent. Borrowings under the credit arr angement are collateralized by substantially all corporate assets, excluding land and building. Outstanding borrowings under this arrangement totaled $5,319,250 and $10,143,000 ($4,875,000 of which is classified as long-term) at February 28, 1997, and February 29, 1996, respectively. In connection with the line-of-credit and term debt agreements, the Company has 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. Note 5. Long-Term Debt Long-term debt consists of the following:
February 28, February 29, 1997 1996 Obligations under license agreements, due in varying installments, with interest imputed at 6.7% to 9.25%, through 2004 (Note 8) $2,288,481 $2,732,777 Mortgage notes payable (representing line-of-credit debt reclassified as term debt for February 29, 1996, presentation), due in monthly installments of $57,638, including interest at 7.41% through April 2006, secured by a mortgage on the building. 4,591,869 4,875,000 Other - 215,643 ----------------------------- 6,880,350 7,823,420 Less current maturities 662,414 943,060 ----------------------------- Long-term portion $6,217,936 $6,880,360 =============================
Approximate aggregate future maturities of long-term debt as as follows: Years ending February: 1998 $662,000 1999 646,000 2000 689,000 2001 735,000 2002 784,000 Thereafter 3,364,000 --------- $6,880,000 ========= Note 6. Income Tax Matters Net deferred income taxes consist of the following components: February 28, February 29, 1997 1996 Deferred tax assets: Receivable allowances $197,000 $163,000 Inventory costs 408,000 308,000 Accrued expenses 392,000 356,000 License and patent agreements 97,000 74,000 ---------------------- 1,094,000 901,000 Deferred tax liabilities: Equipment (627,000) (514,000) ----------------------- Net deferred assets $ 467,000 $ 387,000 ====================== Note 6. Income Tax Matters (Continued) The net deferred tax assets have been classified on the accompanying consolidated balance sheets as follows: February 28, February 29, 1997 1996 Current assets $ 997,000 $ 827,000 Noncurrent liabilities (530,000) (440,000) -------------------------- $ 467,000 $ 387,000 ========================== The provisions for income taxes charged to operations for fiscal years 1997, 1996, and 1995 are as follows: 1997 1996 1995 Current tax expense $1,583,000 $4,563,000 $3,618,000 Deferred tax benefit (80,000) (225,000) (193,000) ---------------------------------------- $1,503,000 $4,338,000 $3,425,000 ======================================== The provisions for income taxes for fiscal years 1997, 1996, and 1995 differ from the amounts obtained by applying the U.S. federal income tax rate to pretax income as follows: 1997 1996 1995 Computed "expected" federal tax expense $1,480,000 $4,252,000 $3,333,000 Increase (decrease) in taxes resulting from: State income taxes, net of federal benefit 70,000 242,000 191,400 Other items individually insignificant, net (47,000) (156,000) (99,400) ---------------------------------------- $1,503,000 $4,338,000 $3,425,000 ======================================== Note 7. Shareholders' Equity Stock options: In prior years the Company reserved 975,000 common shares for issuance under the First Team Sports, Inc. 1987 Stock Option Plan (the 1987 Plan) and 525,000 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 P lans. 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. Note 7. Shareholders' Equity (Continued) The Company also established the First Team Sports, Inc. 1993 Employee Stock Purchase Plan (the 1993 Plan) and reserved 300,000 common shares for issuance thereunder. The 1993 Plan is intended to encourage stock ownership by all employees and is intended to qualify under Section 423 of the Interna l Revenue Code. All employees are eligible to participate in the 1993 Plan, with the exception of any employees owning 5 percent or more of the Company's total voting stock. 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 years 1997, 1996, and 1995 are summarized as follows: 1997 1996 1995 --------------------- ----------------- ------- Weighted Weighted Average Average Exercise Exercise Options Price Options Price Options - ------------------------------------------------------------------------------ Outstanding at beginning of year 776,854 $ 9.96 663,171 $8.41 615,750 Exercised (28,796) 5.30 (92,816) 5.56 (180,479) Canceled (51,596) 10.90 (473) 8.28 (7,380) Granted 229,558 6.55 206,972 12.95 235,280 ---------------------------------------------------- Outstanding at end of year 926,020 $ 9.21 776,854 $9.96 663,171 ==================================================== Weighted average fair value of options granted during 1997 and 1996 was $2.63 and $5.22, respectively. As of February 28, 1997, options covering 523,833 shares were exercisable at a price of $5.33 to $23.38 per share. In addition, the remaining stock options outstanding at February 28, 1997, become exercisable in the following fiscal years: Price Per Shares Share Years ending February: 1998 208,513 $5.33 - 16.50 1999 126,670 6.00 - 16.50 2000 65,504 6.00 - 16.50 2001 1,500 9.50 Note 7. Shareholders' Equity (Continued) The following table summarizes information about stock options outstanding at February 28, 1997: Options Outstanding Options Exercisable ------------------------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life(Years) Price Exercisable Price - ---------------------------------------------------------------------------- $ 5.33 - 8.00 540,354 5.1 $ 6.33 323,253 $ 6.53 8.92 - 12.63 207,916 6.3 12.16 76,580 12.02 14.17 - 23.38 177,750 5.1 14.52 124,000 14.62 - ---------------------------------------------------------------------------- $ 5.33 - 23.38 926,020 5.4 $ 9.21 523,833 $ 9.32 ============================================================================ As of April 9, 1997, the Company's Board of Directors repriced options covering 369,500 shares, which had exercise prices of $9.50, and above to an exercise price of $6.375 per share. The vesting terms of these options remained unchanged. When stock options are exercised, the par value of the shares issued is credited to common stock and the excess proceeds over par value are credited to additional paid-in capital. Under certain circumstances, when shares acquired through these options are sold, income tax benefits may be realized by the Company and are recorded as additional paid-in capital. The Company realized $667,000 of such tax benefits during fiscal 1996. On May 25, 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 provides that all outstanding incentive and nonqualified options granted under the Plans and all nonqualified stock options granted to consultants of the Company outside the Plans shall become fully exercisable upon the occurrence of such a change. Pro forma information: The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Accordingly, since options have been issued with exercise prices at or above market value of the Company's stock, no compensation expense has been recognized for the stock option plans. Had compensation expense for the Company's stock options been determined based on the fair value at the grant date for awards in 1997 and 1996 consistent with the provisions of SFAS 123, the Company's net income and net inc ome per share would have been reduced to the pro forma amounts reflected in the following table: 1997 1996 Reported net income $2,725,282 $7,811,857 Pro forma net income 2,131,000 7,748,000 Reported net income per share 0.46 1.30 Pro forma net income per share 0.36 1.29 Note 7. Shareholders' Equity (Continued) The above pro forma effects on net income and net income per share are not likely to be representative of the effects on reported net income for future years because options vest over several years and additional awards generally are made each year. The fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997 and 1996: 1997 1996 Expected dividend yield $ - $ - Expected stock price volatility 54.9% 63.2% Risk-free interest rate 6.3% 5.1% Expected life of options (years) 3 3 Preferred stock purchase rights: On February 28, 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 the common stock. Each right entitle s the holder to purchase one one-hundredth of a share of Series A preferred stock at a price of $55, subject to adjustment. The rights are not exercisable until ten days after the public announcement that a person or group of persons has acquired a beneficial interest of at least 15 percent of the Company's outstanding common stock or the commencement or announcement of an intention by a person or group to make a tender or exchange offer whose consummation would result in the beneficial ownership of at least 15 percent of the Company's outstanding common stock. Each right would entitle the rightholder to receive shares of common stock of the acquiring company upon merger or other business combination having a market value of twice the exercise price of the right or, upon exercise, that number of shares of preferred stock having a market value of twice the exercise price of the right. Preferred stock purchasable upon exercise of the rights will be entitled to certain voting privileges, minimum preferential quarterly dividends, an aggregate dividend in relation to dividends declared on common stock, and minimum preferential liquidation payments. The rights have no voting privileges and may be redeemed by the Board of Directors at a price of $0.01 per right at any time before they become exercisable. Note 8. 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 liabil ities (obligations under license agreements), and royalty payments based on percentages of sales of 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 $681,394, $1,583,268, and $1,233,981 during fiscal years 1997, 1996, and 1995, respectively. On March 1, 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. Note 9. 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 $245,000, $236,000, and $200,000 for fiscal years 1997, 1996, and 1995, respectively. Note 10. Land and Deferred Revenue In order to induce the Company to relocate its operating 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. At Februar y 29, 1996, the land and a 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 amortized into income over the then remaining useful life of the building. Note 11. Additional Cash Flow Information Years Ended February 28, February 29, Feburary 28, 1997 1996 1995 Supplemental disclosures of cash flow information: Cash payments for: Interest $1,284,091 $ 971,111 $ 719,425 Income taxes 1,686,346 3,780,000 3,510,858 ================================================ Supplemental schedule of noncash investing and financing activities: Present value of license agreement obligation financed by licensor $ - $ - $2,133,870 Land and corresponding deferred revenue recorded (Note 10) - 600,000 - Line of credit reclassified to long-term debt (Note 5) - 4,875,000 - ============================================== INDEPENDENT AUDITOR'S REPORT To the Board of Directors First Team Sports, Inc. Anoka, Minnesota Our audit of the consolidated financial statements of First Team Sports, Inc. and Subsidiary included Schedule II contained herein, for the years ended February 28, 1997, February 29, 1996, and February 28, 1995. In our opinion, such schedule presents fairly the information required to be set forth therein in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP St. Paul, Minnesota April 9, 1997 FIRST TEAM SPORTS, INC. AND SUBSIDIARY
RESERVE ACCOUNTS Years Ended February 28, 1997, February 29, 1996 and February 28, 1995 Balance at Additions Beginning Charged to Balance at of Period Expenses DEndcofoPeriod - --------------------------------------------------------------------------------------------------------------------------- 1995 allowance for doubtful accounts $ 134,991 $ 1,185,275 $ 758,744 $ 561,522 1996 allowance for doubtful accounts 561,522 524,746 596,869 489,399 1997 allowance for doubtful accounts 489,399 724,068 648,296 565,171 (1) Uncollectible accounts written off, net of recoveries.
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBIT INDEX TO FORM 10-K For the fiscal year ended Commission File No.: 0-16442 February 28, 1997 FIRST TEAM SPORTS, INC. Exhibit Number Description 3.1* Articles of Incorporation, as amended 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 Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended February 28, 1991 4.2 Certificate of Designations of Series A Preferred Stock (included in 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 on Form 8-A, Reg. No. 0-16422 10.1 The Company's 1987 Stock Option Plan, as amended by resolutions dated 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, 1991** 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** *Filed herewith. **Management contract or compensatory plan or arrangement. E-1 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 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 on Form 10-K for the year ended February 28, 1995 10.8 Player Agreement between the Company and Brett Hull dated as of April 7, 1992 -- incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended February 29, 1992 10.9 Company Bonus Plan for certain executive officers of the Company regarding fiscal 1996 -- incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended February 28, 1995** 10.10 Company Bonus Plan for certain executive officers of the Company for fiscal 1997 -- incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended February 29, 1996** 10.11* Company Bonus Plan for executive officers of the Company for fiscal 1998** 10.12 The Company's 1990 Nonqualified Stock Option Plan, as amended by resolutions dated May 25, 1989 -- incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended February 28, 1991** *Filed herewith. **Management contract or compensatory plan or arrangement. E-2 10.13 Agreement for consulting services dated August 19, 1992 between the Company and Joe Mendelsohn -- incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended February 28, 1993** 10.14 Amendment to Agreement for consulting services dated March 9, 1995 between the Company and Joe Mendelsohn -- incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended February 28, 1995** 10.15 Amendment to Agreement for consulting services dated April 1, 1996 between the Company and Joe Mendelsohn -- incorporated by reference to Exhibit 10.15 to the Company's Annual Report and Form 10-K for the year ended February 28, 1996** 10.16* Amendment to Agreement for consulting services dated April 7, 1997 between the Company and Joe Mendelsohn** 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 28, 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, Jr. -- 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** *Filed herewith. **Management contract or compensatory plan or arrangement. E-3 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 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 21 List of Subsidiaries -- incorporated by reference to Exhibit 22 to the Company's Annual Report on Form 10-K for the year ended February 28, 1994. 23* Consent of Independent Public Auditors 24* Power of Attorney of John J. Egart, David G. Soderquist, Joe Mendelsohn, Timothy G. Rath, Stanley E. Hubbard, William J. McMahon, Robert L. Lenius, Jr. and Kent A Brunner included in signature page on this Form 10-K 27* Financial Data Schedule (included in electronic version only) *Filed herewith. **Management contract or compensatory plan or arrangement. E-4 EX-3.1 2 RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 ARTICLES OF CORRECTION OF RESTATED ARTICLES OF INCORPORATION OF FIRST TEAM SPORTS, INC. Pursuant to the provisions of Minnesota Statutes, Section 5.16, the Restated Articles of Incorporation filed by First Team Sports, Inc. on May 22, 1996 incorrectly restated the corporation's existing Articles and all amendments thereto, which Restated Articles are hereby set forth correctly in their entirety on Exhibit A hereto. I swear that the foregoing is true and accurate and that I have the authority to sign this document on behalf of the corporation. Dated: July 8, 1996 /s/ John J. Egart John J. Egart, President EXHIBIT A RESTATED ARTICLES OF INCORPORATION OF FIRST TEAM SPORTS, INC. ARTICLE 1 - NAME 1.1) The name of the corporation shall be First Team Sports, Inc. ARTICLE 2 - REGISTERED OFFICE 2.1) The registered office of the corporation is located at 1201 Lund Boulevard, Anoka, Minnesota 55303. ARTICLE 3 - CAPITAL STOCK 3.1) Authorized Shares. The aggregate number of shares the corporation has authority to issue shall be 12,500,000 shares, which shall have a par value of $.01 per share solely for the purpose of a statute or regulation imposing a tax or fee based upon the capitalization of the corporation, and which shall consist of 10,000,000 common shares, 680,000 shares of Series A Preferred Stock, having the rights and preferences set forth on the Certificate of Designations attached hereto as Attachment A, and 1,820,000 undesignated shares. The Board of Directors of the corporation is authorized to establish from the undesignated shares, by resolution adopted and filed in the manner provided by law, one or more classes or series of shares, to designate each such class or series (which may include but is not limited to designation as additional common shares), and to fix the relative rights and preferences of each such class or series. 3.2) Issuance of Shares. The Board of Directors of the corporation is authorized from time to time to accept subscriptions for, issue, sell and deliver shares of any class or series of the corporation to such persons, at such times and upon such terms and conditions as the Board shall determine, valuing all nonmonetary consideration and establishing a price in money or other consideration, or a minimum price, or a general formula or method by which the price will be determined. 3.3) Issuance of Rights to Purchase Shares. The Board of Directors is further authorized from time to time to grant and issue rights to subscribe for, purchase, exchange - 1 - securities for, or convert securities into, shares of the corporation of any class or series, and to fix the terms, provisions and conditions of such rights, including the exchange or conversion basis or the price at which such shares may be purchased or subscribed for. 3.4) Issuance of Shares to Holders of Another Class or Series. The Board is further authorized to issue shares of one class or series to holders of that class or series or to holders of another class or series to effectuate share dividends or splits. ARTICLE 4 - RIGHTS OF SHAREHOLDERS 4.1) No Preemptive Rights. No shares of any class or series of the corporation shall entitle the holders to any preemptive rights to subscribe for or purchase additional shares of that class or series of any other class or series of the corporation now or hereafter authorized or issued. 4.2) No Cumulative Voting Rights. There shall be no cumulative voting by the shareholders of the corporation. ARTICLE 5 - LIMITATION OF DIRECTOR LIABILITY 5.1) To the fullest extent permitted by the Minnesota Business Corporation Act, as the same exists or may hereafter be amended, a director of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. ARTICLE 6 - MERGER, EXCHANGE, SALE OF ASSETS AND DISSOLUTION 6.1) Where approval of shareholders is required by law, the affirmative vote of the holders of at least a majority of the voting power of all shares entitled to vote shall be required to authorize the corporation (i) to merge into or with one or more other corporations, (ii) to exchange its shares for shares of one or more other corporations, (iii) to sell, lease, transfer or otherwise dispose of all or substantially all of its property and assets, including its good will, or (iv) to commence voluntary dissolution. ARTICLE 7 - AMENDMENT OF ARTICLES OF INCORPORATION 7.1) Any provision contained in these Articles of Incorporation may be amended, altered, changed or repealed by the affirmative vote of the holders of at least a majority of the voting power of all shares entitled to vote or such greater percentage as may be otherwise prescribed by the laws of the State of Minnesota. - 2 - ATTACHMENT A CERTIFICATE OF DESIGNATIONS OF SERIES A PREFERRED STOCK OF FIRST TEAM SPORTS, INC. (Pursuant to Chapter 302A of the Minnesota Business Corporation Act) First Team Sports, Inc., a corporation organized and existing under the Minnesota Business Corporation Act (hereinafter called the "Company"), hereby certifies that the following resolution was adopted by the Board of Directors of the Company as required by Section 302A.239 of the Minnesota Business Corporation Act (the "MBCA") by unanimous written action of the Board of Directors dated February 28, 1996: RESOLVED, that, pursuant to the authority granted to and vested in the Board of Directors of the Company (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Restated Articles of Incorporation, as amended to date (hereinafter called the "Articles of Incorporation"), the Board of Directors hereby creates a series of Preferred Stock, par value $.01 per share (the "Preferred Stock"), of the Company and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows: Series A Preferred Stock: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Preferred Stock" (the "Series A Preferred Stock"), and the number of shares constituting the Series A Preferred Stock shall be Six Hundred Eighty Thousand (680,000). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that, no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into Series A Preferred Stock. - 3 - Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock, par value $.01 per share (the "Preferred Stock"), of the Company or Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $.01 per share (the "Common Stock"), of the Company, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times (as adjusted, the "Dividend Multiple") the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the Dividend Multiple shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Company shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding - 4 - the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than sixty (60) days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes (as adjusted, the "Vote Multiple") on all matters submitted to a vote of the stockholders of the Company. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the Vote Multiple shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided in Section 10 hereof, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Company having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. - 5 - Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Company shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Company ranking junior (as to dividends and upon dissolution, liquidation and winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board) to all holders of such shares upon such terms as the Board, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series - 6 - of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made (A) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received the greater of (i) $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment; or (ii) subject to the provision for adjustment hereinafter set forth, 100 times (as adjusted, the "Liquidation Preference Multiple") the aggregate amount to be distributed per share to holders of shares of Common Stock, or (B) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the Liquidation Preference Multiple shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, Etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times (as adjusted, the "Exchange Multiple") the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the Exchange Multiple shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. - 7 - Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of Preferred Stock. Section 10. Amendment. If any proposed amendment to the Articles of Incorporation or this Certificate of Designation would alter or change the preferences, special rights or powers given to the Series A Preferred Stock so as to affect the Series A Preferred Stock adversely, or would authorize the issuance of a class or classes of stock having preferences or rights with respect to dividends or dissolutions or the distribution of assets that would be superior to the preferences or rights of the Series A Preferred Stock, then the holders of the Series A Preferred Stock shall be entitled to vote as a series upon such amendment, and the affirmative vote of two-thirds of the outstanding shares of Series A Preferred Stock shall be necessary to the adoption thereof, in addition to such other vote as may be required by the MBCA. - 8 - EX-10.6 3 AMENDMENT TO LICENSE AGREEMENT EXHIBIT 10.6 FIRST TEAM SPORTS, INC. 1201 Lund Boulevard Anoka, Minnesota 55305 As of March 1, 1997 Wayne D. Gretzky Janet Jones Gretzky c/o International Management Group 11755 Wilshire Boulevard, Suite 850 Los Angeles, California 90025 Attention: Michael G. Barnett RE: License Agreement dated December 1, 1994 by and among First Team Sports, Inc., Wayne D. Gretzky and Janet Jones Gretzky (the "License Agreement"). Dear Wayne and Janet: This letter sets forth our agreement to amend the License Agreement as set forth herein. References to Articles or Sections are to the License Agreement. Capitalized terms used and not otherwise defined herein shall mean as defined in the License Agreement. The License Agreement is hereby amended as follows: 1. Term. Article II is amended to extend the Term until November 30, 2004. All references in the License Agreement to dates related to the end of the Term shall be appropriately adjusted. 2. Workdays. Section 3.2 is amended to reduce the number of Workdays per Year from two (2) to one (1), which one Workday must be in the city of WDG's permanent residence, unless otherwise agreed to by WDG. Section 3.3 is amended to reduce the number of additional Workdays per Year after WDG's retirement from two (2) to one (1), which one additional Workday need not be in the city of WDG's permanent residence (but must be within North America, unless otherwise agreed to by WDG). 3. Guaranteed Fees. (a) Sections 5.1.1 and 5.1.2 are amended to provide that the In-Line Guarantee and the Street Hockey Guarantee are combined into a single guaranteed payment in the following annual amounts: Year Ending Amount November 30, 1997 $434,550 November 30, 1998 $349,500 November 30, 1999 $349,500 November 30, 2000 $349,500 November 30, 2001 $349,500 November 30, 2002 $349,500 November 30, 2003 $349,500 November 30, 2004 $349,500 Such combined In-Line Guarantee and Street Hockey Guaranty shall be paid in quarterly installments of $87,350 on each December 1, March 1, June 1, and September 1. (b) This Amendment shall be deemed effective March 1, 1997. Licensee acknowledges receipt of $87,350 upon the execution and delivery of this letter agreement, which payment shall constitute payment of the March 1, 1997 quarterly installment. (c) Section 5.4 is amended to provide that the combined In-Line Guarantee and Street Hockey Guaranty shall be credited against, and recoupable from, the Royalties otherwise payable to Personality in respect of both Gross Street Hockey Sales and Gross In-Line Sales, and that all Royalties to which Personality is entitled under the License Agreement shall continue through the expiration or earlier termination of the Term. 4. Termination. Article X of the License Agreement is amended to give Personality the additional right, exercisable in Personality's sole discretion, to terminate the License Agreement for any reason whatsoever, upon Personality giving Licensee not less than three (3) months' prior written notice. Section 10.6 is amended to change the four (4)-month inventory sell-off period to six (6) months, but Licensee shall not be entitled to utilize any advertising or promotional materials during the six-month sell-off period. Except as amended by the foregoing provisions, the License Agreement remains unchanged and in full force and effect. Subject to the approval of First Team Sports' Board of Directors (and, if necessary, shareholders), in consideration of the extension of the Term of the License Agreement and of WDG's advisory services to First Team Sports on the Workdays, First Team Sports shall grant WDG a non-qualified stock option under the Company's 1990 Stock Option Plan to purchase 50,000 shares of First Team Sports' Common Stock at an exercise price of $6.00 per share exercisable immediately. First Team Sports agrees to reimburse WDG and JJG their reasonable attorneys' fees and disbursements incurred in connection with the negotiation and execution of this Letter Agreement promptly upon presentation of an invoice from their legal counsel itemizing said fees and disbursements. Please indicate your acceptance of the foregoing provisions by signing and returning the undersigned the enclosed duplicate copy of this letter. Very truly yours, First Team Sports, Inc. By: /s/ David G. Soderquist Its: Vice Chairman ACCEPTANCE The undersigned acknowledges and agrees to the foregoing provisions. /s/ Wayne D. Gretzky /s/ Janet Jones Gretsky Wayne D. Gretzky Janet Jones Gretzky EX-10.11 4 FISCAL 1998 EXECUTIVE BONUS PLAN EXHIBIT 10.11 FISCAL 1998 EXECUTIVE BONUS PLAN PLAN *Company bonus plan is based on earnings before tax. *Bonus plan consists of the following levels: Earnings Before Tax EBT % Lower Level: $4,900,000 7.0% Middle Level: $5,568,000 7.4% Higher Level: $6,076,000 7.6% ELIGIBILITY
1998 1998 1998 % of Lower Middle Higher Total John $ 45,000 $135,000 $225,000 30.0% Dave $ 25,000 $ 75,000 $125,000 16.7% Bob $ 30,000 $ 90,000 $150,000 20.0% Susan $ 25,000 $ 75,000 $125,000 16.7% Kent $ 25,000 $ 75,000 $125,000 16.7% -------- -------- -------- ----- TOTALS $150,000 $450,000 $750,000 100.0%
BONUS CALCULATIONS *If earnings before tax and EBT % goals are met, appropriate bonus dollars will be paid. If only one of these goals are met, it will be the discretion of the Board how the bonus will be paid out. *If earnings before tax fall between the lower level and the higher level, bonus dollars will be pro-rated accordingly. CRITERIA *All participants will have objectives/goals established for them to achieve. *Individual achievement of objectives, as judged by the Compensation Committee, will determine bonus payments. EX-10.16 5 AMENDMENT TO AGREEMENT EXHIBIT 10.16 First Team Sports, Inc. 1201 Lund Boulevard Anoka, MN 55303 April 7, 1997 Mr. Joe Mendelsohn 1617 East McMillan Cincinnati, OH 45206 Dear Joe: This letter will confirm the conversations you and I have had in connection with the amendment of your August 19, 1992 Consulting Agreement. Other than the amendments set forth below, your consulting agreement shall remain in full force and affect through fiscal 1998. In addition to your monthly consulting fee of $3,000, you will be eligible for a performance payment as follows: Earnings Before Tax EBT % Payment Lower Level $4,900,000 7.0% $ 24,000 Middle Level $5,568,000 7.4% $ 72,000 Higher Level $6,076,000 7.6% $120,000 The above performance payment will be calculated and awarded with the same criteria as the 1998 Executive Bonus Plan. If earnings fall between the three above levels, bonus dollars will be pro-rated accordingly. In addition, you have been granted a seven-year, nonqualified stock option covering 30,000 shares at $6.00 per share. These options will vest at the rate of 33 1/3% per year over the next three years. If this letter accurately sets forth your understanding of the amendment to the terms of your consulting agreement, please sign both copies where indicated and return a signed copy to me. Very truly yours, /s/ John J. Egart John J. Egart President/CEO I have read the foregoing and am in agreement with the terms set forth therein. April 27, 1997 /s/ Joe Mendelsohn Date Joe Mendelsohn EX-23 6 CONSENT OF INDEPENDENT PUBLIC AUDITORS McGLADREY & PULLEN, LLP We hereby consent to the incorporation by reference of our report dated April 9, 1997, with respect to the consolidated financial statements of First Team Sports, Inc. and Subsidiary and our report dated April 9, 1997, with respect to Schedule II, both included in this Form 10-K, into the Company's previously filed Registration Statements Nos. 33-36123, 33-37308, 33-52344, 33-68164, and 33-84722. /s/ McGLADREY & PULLEN, LLP St. Paul, Minnesota May 16, 1997 EX-27 7 FDS --
5 1 U.S. Dollars YEAR FEB-28-1997 MAR-01-1996 FEB-28-1997 1 381,427 0 17,298,171 565,000 20,881,845 40,171,323 12,403,604 2,588,404 52,343,501 12,249,634 6,217,936 0 0 57,498 32,688,433 52,343,501 76,435,022 76,435,022 56,837,195 56,837,195 0 0 1,275,882 4,228,282 1,503,000 2,725,282 0 0 0 2,725,282 .46 .46
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