<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter period ended June 29, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
ACT OF 1934
For the transition period from to
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Commission file number 0-16482
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RDM SPORTS GROUP, INC.
----------------------
(Exact name of Registrant as specified in its charter)
Delaware 84-1065239
- --------------------------------------------------------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
267 Highway 74 North, Suite 5, Peachtree City, Georgia 30269
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(404) 586-9000
--------------
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock net of treasury stock, as of the latest practicable date.
Class Outstanding at August 5, 1997
--------------------------- -----------------------------
Common Stock $.01 par value 49,507,167 shares
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RDM SPORTS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 29, December 31,
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,348 $ 32,141
Cash in escrow 1,085 2,615
Accounts and notes receivable, net 46,701 59,835
Inventories 51,486 70,550
Prepaid expenses and other assets 5,143 2,189
Deferred income taxes 11,797 11,987
--------- ---------
Total current assets 119,560 179,317
Property, plant and equipment: 57,485 56,823
Less-Accumulated depreciation and amortization 16,497 14,130
--------- ---------
Net property, plant and equipment 40,988 42,693
Deferred income taxes 18,297 18,297
Cash in escrow 10,158 10,158
Deferred financing and acquisition charges 16,392 16,554
Goodwill and other intangible assets, net 20,603 20,929
Long-term trade receivables 146 509
Other assets 4,697 4,755
--------- ---------
Total assets $ 230,841 $ 293,212
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving lines of credit $ -- $ 74,906
Current portion of long-term debt 3,004 558
Current portion of long-term liabilities 23 486
Accounts payable 51,367 46,552
Accrued expenses 29,584 41,098
--------- ---------
Total current liabilities 83,978 163,600
</TABLE>
2
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<TABLE>
<S> <C> <C>
Long-term Liabilities:
Revolving lines of credit 22,108 --
Long-term debt 77,983 55,339
Other long-term liabilities 1,014 1,035
Environmental liabilities 20,008 19,998
--------- ---------
Total long-term liabilities 121,113 76,372
Stockholders' Equity:
Preferred stock -- --
Common stock 537 537
Additional paid-in capital 103,233 100,983
Retained (loss) earnings (65,580) (35,154)
Deferred compensation (1,856) (2,216)
Net unrealized (loss) gain on equity securities (21) (347)
--------- ---------
36,313 63,803
Treasury stock, at cost (10,563) (10,563)
--------- ---------
Total stockholders' equity 25,750 53,240
--------- ---------
Total liabilities and stockholders' equity $ 230,841 $ 293,212
========= =========
</TABLE>
See accompanying notes.
3
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RDM SPORTS GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 29, 1997 JUNE 30, 1996 JUNE 29, 1997 JUNE 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 39,988 $ 104,338 $ 95,505 $ 233,752
Cost of sales 41,820 93,375 93,957 206,567
--------- --------- --------- ---------
Gross (loss) profit (1,832) 10,963 1,548 27,185
Selling, general and administrative 11,597 12,005 20,094 28,422
expenses
Other (income) expense, net:
Interest expense 3,032 6,595 6,056 14,558
Gain on sale of subsidiary -- -- -- (20,151)
Other, net 1,187 705 2,223 1,405
--------- --------- --------- ---------
4,219 7,300 8,279 (4,188)
--------- --------- --------- ---------
(Loss) earnings before income tax
(benefit) expense and extraordinary item (17,648) (8,342) (26,825) 2,951
Income tax expense (benefit) 689 (3,209) 753 3,454
--------- --------- --------- ---------
(Loss) before extraordinary item (18,337) (5,133) (27,578) (503)
Extraordinary loss, net of tax 2,805 -- 2,805 --
--------- --------- --------- ---------
Net (loss) $ (21,142) $ (5,133) $ (30,383) $ (503)
========= ========= ========= =========
(Loss) per common share, primary
and Fully diluted:
(Loss) before extraordinary item $ (0.36) (0.10) (0.55) (0.01)
Extraordinary loss (0.06) -- (0.06) --
--------- --------- --------- ---------
Net (loss) $ (0.42) $ (0.10) $ (0.61) $ (0.01)
========= ========= ========= =========
Weighted average common shares
outstanding and common stock
equivalents:
Primary and fully diluted 50,653 49,177 49,819 49,177
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
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RDM SPORTS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (30,383) $ (503)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,201 7,920
Amortization of deferred compensation 360 343
Loss (gain) on sale of marketable securities 325 (568)
(Gain) loss on sale of property, plant and equipment (110) 199
Gain on sale of subsidiaries -- (20,151)
Loss on extinguishment of debt 2,305 --
Change in assets and liabilities:
Accounts receivable 13,112 71,497
Inventories 19,064 (5,154)
Prepaid expenses and other assets (2,954) (4,211)
Cash in escrow 1,530 (13,761)
Other assets 495 (2,594)
Accounts payable 4,815 (36,500)
Accrued expenses (12,238) (9,942)
Income taxes 724 2,677
Deferred income taxes 190 (693)
Other long-term liabilities (11) (170)
--------- ---------
Net cash provided by (used in) operating activities 1,425 (11,611)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,110) (5,325)
Acquisitions -- (1,175)
Purchase of marketable securities (169) --
Proceeds from sale of marketable securities -- 1,537
Proceeds from sale of property, plant and equipment 260 514
Proceeds from sale of subsidiaries -- 120,000
--------- ---------
Net cash used (provided by) in investing activities (1,019) 115,551
--------- ---------
Cash flows from financing activities:
Net change in revolving lines of credit (22,670) (104,845)
Proceeds from issuance of long term debt 50,974 --
Principal payments of long term debt (600) (1,244)
Retirement of debt (53,626) --
Debt refinancing cost incurred (3,234) (442)
Cumulative transalation adjustments (43) (320)
--------- ---------
Net cash (used in) provided by financing activities (29,199) (106,851)
--------- ---------
Net decrease in cash and cash equivalents (28,793) (2,911)
Cash and cash equivalents, beginning of period 32,141 8,417
--------- ---------
Cash and cash equivalents, end of period $ 3,348 $ 5,506
========= =========
</TABLE>
See accompanying notes
5
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RDM SPORTS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
by RDM Sports Group, Inc. ("RDM" or the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the most recent
annual audited financial statements of the Company. (See Note 8 Subsequent
Events) In the opinion of management, these unaudited consolidated financial
statements include all adjustments necessary for a fair presentation of its
financial position as of June 29, 1997, and the results of operations and its
cash flows for the six months then ended. Such adjustments were of a normal
recurring nature.
The Company's business is seasonal in nature and subject to general economic
conditions and other factors. Accordingly, the results of operations for the
three and six months ended June 29, 1996 and June 30, 1996 are not necessarily
indicative of the results which may be expected for the full year.
For comparative purposes, the quarter ending June 29, 1997 is consistent with
the same period ending June 30, 1996. The Company prepares its financial
statements on thirteen (13) week quarters comprised of two four-week periods and
one five-week period.
2. LIQUIDITY
Historically, the Company's working capital has been obtained primarily from
revolving lines of credit from banks and internally generated funds. The
seasonal nature of the Company's sales imposes fluctuating demands on its cash
flow, due to the temporary buildup of inventories in anticipation of, and
receivables subsequent to, the peak seasonal period, which historically has
occurred around November of each year. On a consolidated basis, the Company
provided $1.4 million in cash for operating purposes in the first six months of
1997. In contrast, on a consolidated basis, during all of 1996, the Company's
operations used cash of approximately $29.3 million.
The Company had operating losses of $18.5 million in the first six months of
1997 compared to losses of $1.2 million in the first six months of 1996. In
addition, the Company had operating losses of $69.8 million, and $37.2 million
for the years ended December 31, 1996 and 1995, respectively. The Company's
consolidated cash, cash equivalents, and cash in escrow pursuant to various
contractual obligations at June 29, 1997 was $14.6 million, of which funds $11.2
million was restricted as to use. In contrast, the Company's consolidated cash,
cash equivalents, and cash in escrow pursuant to various contractual obligations
balance at December 31, 1996 was $44.9 million, of which funds $12.8 million was
restricted as to use.
In the first six months of 1997, the Company was not in compliance with various
financial covenants under its Bank Credit Agreement until the termination of
such agreement in connection with the execution of the Loan Facility on June 20,
1997 (as defined below). The Company previously had obtained waivers from the
lenders in 1995 and amended its then existing revolving line of credit agreement
(as amended, the "Amended and Restated Revolver") in 1995 and 1996. The Company
was out of compliance with various financial covenants under its Bank Credit
Agreement (the "Bank Credit Agreement") as of December 31, 1996 and up until the
execution of the Loan Facility. At no time was the Company in default with
respect
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to the payment of indebtedness under the Bank Credit Agreement or the
predecessor agreements thereto as in effect in 1995 and 1996. In connection with
the sale of the Company's bicycle and snow toys products to Brunswick
Corporation (the "Second Brunswick Transaction"), on September 6, 1996, the
Company had terminated its then existing bank credit facility and entered into
the Bank Credit Agreement. The Bank Credit Agreement was for a three year term,
maturing September 1999, and provided for borrowings up to $130.0 million based
on certain inventories and accounts receivable. Interest was calculated at the
Agent's referenced rate (generally the "prime rate") plus 1.25% and included a
LIBOR rate option which equaled LIBOR plus 1.25%. The monthly unused facility
fee was .25% on the available unused portion of the facility provided by the
Bank Credit Agreement. At December 31, 1996, the Company had outstanding
borrowings of $74.9 million under the Bank Credit Agreement and, as noted above,
was not in compliance with various financial covenants contained therein.
On June 20, 1997, the Company entered into a new $100 million revolving loan and
term credit facility (the "Loan Facility") pursuant to a Loan and Security
Agreement (the "Loan Agreement") between the Company's borrowing subsidiaries
and certain financial institutions. See Note 5 "Debt Refinancing". On August 22,
1997, the lenders under the Loan Agreement declared an Event of Default under
the Loan Agreement, asserting, among other things, that a Material Adverse
Change had occurred with respect to the Company and its subsidiaries. (See Note
8 Subsequent Events)
On August 29, 1997, the Company filed for protection under the United States
bankruptcy laws. The filing by the Company for protection under the federal
bankruptcy laws (see Note 8 Subsequent Events) constituted an automatic Event of
Default under the Loan Agreement and an automatic acceleration of the
obligations owed thereunder under the terms of such Agreement. Borrowings under
the Loan Agreement were $49.4 million at June 29, 1997.
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3. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(in thousands) Six months ended
June 29, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 4,733 $13,253
======= =======
Income taxes $ 53 $ 635
======= =======
Supplemental schedule of non-cash investing and financing
activities:
Issuance of common stock warrants relating to
refinancing of debt $ 2,250 $ --
======= =======
</TABLE>
4. INVENTORIES
At June 29, 1997 and December 31, 1996, inventories consisted of:
(in thousands)
<TABLE>
<CAPTION>
June 29, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Raw materials $ 29,385 $ 38,473
Work in process 3,989 2,733
Finished goods 18,112 29,344
-------- --------
Total inventory $ 51,486 $ 70,550
======== ========
</TABLE>
5. DEBT REFINANCING
On June 20, 1997 (the "Closing Date"), the Company entered into a new $100
million revolving loan and term credit facility (the "Loan Facility") pursuant
to a Loan and Security Agreement (the "Loan Agreement") among the Company, the
Company's borrowing subsidiaries and certain financial institutions. Borrowers
under the Loan Facility are the Company's operating subsidiaries and the first
tier holding company subsidiary for the operating subsidiaries. The Loan
Facility replaced the Bank Credit Agreement which was repaid in full plus
$500,000 in prepayment fees. Borrowings under the Loan Facility are guaranteed
by the Company and are secured by substantially all of the assets of the Company
and all of its subsidiaries. In addition, the Loan Facility is guaranteed by a
letter of credit in the amount of $15 million in favor of the lenders there
under (the "Lenders"), which letter of credit initially was obtained by the
Metromedia Company ("MC"), an affiliate of Metromedia International Group, Inc.
("Metromedia"), the Company's largest stockholder. The initial letter of credit
was replaced by a subsequent letter of credit obtained by Metromedia in the
third quarter. Such letter of credit cannot be drawn until five days after
payment default under the Loan Facility and fifteen days after a non-payment
default. Metromedia is also entitled to receive copies of all notices required
under the Loan Agreement. In consideration of providing
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the letter of credit, MC was granted 3 million warrants to purchase Common Stock
of the Company at an exercise price of $.50 per share. Such warrants have a ten
year term and are exercisable beginning 90 days from the Closing Date. In
connection with the issuance of the substitute letter of credit, such warrants
and the rights thereunder were assigned by MC to Metromedia.
The Loan Facility provided up to a $75 million revolving credit facility and two
term loan tranches aggregating $25 million. The Loan Facility had a four year
term. Borrowings under the revolving credit portion of the Loan Facility were
based on certain eligible inventory and accounts receivables. Borrowings and
other obligations under the Loan Facility bore interest at a per annum interest
rate equal to the base rate of the reference financial institution (the
"Reference Rate") plus 1%, except $10 million of the term loans ("Tranche A")
bore interest at the Reference Rate plus 1.5%. The rate for borrowings under the
revolving credit facility were subject to decrease to 0.5% above the Reference
Rate based on the achievement of certain pricing benchmarks and were subject to
increase by 4% in the event borrowings against inventories exceed certain levels
under specified circumstances. All borrowings are subject to an interest rate
increase of 4% upon the occurrence and during the continuance of an event of
default as defined in the Loan Agreement. The Reference Rate as of the date of
the Loan Agreement was 8.5% per annum.
The Loan Agreement also provided for a $750,000 closing fee, plus an unused line
fee equal to 0.25% of the average unused portion of the maximum borrowing amount
(i.e. $75 million), plus an annual facility fee equal to 0.5% of the total
initial facility (i.e. $100 million). Additional fees and expenses are payable
to the agent for the Lenders.
Origination fees on the Loan Facility, brokerage, and other closing costs
incurred by the Company in connection with the Loan Facility aggregated
approximately $3.2 million, the majority of which were paid on the Closing Date.
Debt costs of $2.8 million, related to the Bank Credit Agreement, were written
off in the second quarter of 1997 as an extraordinary item.
The Loan Agreement contained numerous financial and non-financial covenants,
including limitations on the incurrence of additional indebtedness, limitations
on the incurrence of liens, limitations on capital expenditures, limitations on
the sale of assets, maintenance of specified ratios of current assets to current
liabilities, total liabilities to tangible net worth, and minimum tangible new
worth, all as defined in the Loan Agreement. The Loan Agreement also contained
provisions requiring additional payments to the Lenders in the event of the
early termination of the Loan Agreement. The filing for protection by the
Company or any of its subsidiaries also constituted an Event of Default under
the Loan Agreement. See Note 8 Subsequent Event. Events of Default under the
Loan Agreement include a Material Adverse Change (as defined) with respect to
the Company or an insolvency or bankruptcy proceeding commenced by or against
the Company or any of its subsidiaries.
On August 22, 1997, the Lenders under the Loan Agreement declared an Event of
Default under the Loan Agreement, asserting, among other things, that a Material
Adverse Change has occurred with respect to the Company and its subsidiaries.
(See Note 8 Subsequent Events)
6. OTHER EVENTS
Resignation of Chairman of the Board of Directors and Chief Executive Officer
Henry Fong resigned from all his positions with the Company and its
subsidiaries, including Chief Executive Officer and a director of the Company,
on June 20, 1997. Mr. Fong's employment agreement was subject to automatic
renewal for additional one year terms unless terminated by either Mr. Fong or
the Company upon thirty days written notice prior to the end of the initial or
successive terms. The Company and Mr. Fong have entered into discussions with
respect to the amount owed to Mr. Fong in settlement of
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all amounts owed to him under his employment agreement or otherwise. In the
event the Company and Mr. Fong cannot agree on such amount within sixty days of
Mr. Fong's resignation, each party will be able to assert any and all rights
under the Employment Agreement which they may have had at such time as if such
resignation had not occurred.
Finally, Mr. Fong's Employment Agreement provided that it could be terminated
without cause while the Company was not profitable, in such event the Company
would have been obligated to pay Mr. Fong his compensation payable under his
Employment Agreement during the remainder of its then current term. There are no
amounts reflected in the financial statements at June 29, 1997, relative to the
amounts owed to Mr. Fong, if any, under the Employment Agreement.
Termination of Benefit Plans
During 1997, the Company made a determination, subject to approval of its Board
of Directors, to terminate the three qualified benefit plans. The Company
estimates there will be no impact on pension expense related to these
terminations. The Company is also in the process of terminating the Actava Plan
and the DP Plan.
7. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share" ("SFAS 128"). SFAS
128 is effective for financial statements for periods ending after December 15,
1997. The Company will adopt this statement and reflect its disclosures in the
Company's 1997 financial statements. SFAS 128 requires dual presentation of
basic and diluted earnings per share, as defined. This statement requires that
prior period earnings per share data be restated. As a result, loss per share as
of June 28, 1997 and June 30, 1996, would reflect the following:
<TABLE>
<CAPTION>
June 29, June 30,
1997 1996
-------- --------
<S> <C> <C>
Operating loss per share $ (0.56) $ (0.01)
Extraordinary loss (0.06) --
------- -------
Basic loss per share $ (0.62) $ (0.01)
======= =======
</TABLE>
8. SUBSEQUENT EVENTS
On August 15, 1997, the Company did not pay the semi-annual interest payment due
on the Debentures in the amount of $2,069,000. On August 22, 1997, the Lenders
under the Loan Agreement declared an Event of Default thereunder, asserting,
among other things, that a Material Adverse Change had occurred with respect to
the Company and its subsidiaries. In such Notice, the Lenders demanded immediate
payment of Amounts Due under the Loan Agreement of $59,564,933 inclusive of
$5,276,604 representing issued letters of credit. On August 27, 1997, the
Trustee for the Company's Debentures and Notes issued notices of default under
the respective governing indentures. On August 29, 1997, RDM Sports Group, Inc.
filed its Chapter 11 petition with the United States Bankruptcy Court for the
Northern District of Georgia, Newnan Division (the "Court") in In Re: RDM Sports
Group, Inc., Case No. 97-12788. Concurrent cases were filed with the Court by
all of the Company's U.S. operating subsidiaries: RDM Holdings, Inc. (f/k/a
Roadmaster Corporation); Sports Group, Inc. (which includes the Company's DP
Fitness and Flexible Flyer
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Toys divisions); International Sports and Fitness, Diversified Trucking
Corp.; Diversified Products Corporation; Willow Hosiery Company, Inc.;
Hutch Sports USA Inc.; and T.Q., Inc.
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a going concern that presume the
realization of assets and the settlement of liabilities in the ordinary
course of business, rather than through a process of forced
liquidation. Accordingly, the statements do not purport to present the
realizable values of all assets or the settlement amounts of all
liabilities.
Under the bankruptcy proceedings, certain liabilities have priority and
the payment of certain other liabilities, existing at June 29, 1997,
has been deferred. Such liabilities have not been set forth separately
in the financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements made above relating to plans, conditions,
objectives, and economic performance go beyond historical information
and may provide an indication of future results. To that extent, they
are forward-looking statements within the meaning of Section 21E of the
Exchange Act, and each is subject to factors that could cause actual
results to differ from those in the forward-looking statement. Should
one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, or projected.
GENERAL
The Company operates in an intensively competitive environment. The
Company has experienced significant losses in the eighteen months
ending June 29, 1997, which losses have continued subsequent to the end
of the second quarter. Factors contributing to these losses included,
among other things, excess financial leverage, adverse publicity
associated with the Company's financial difficulties, excess labor
costs, quality control problems, poor operating performance, and
difficulties in obtaining adequate levels of working capital.
The Company has sought to de-leverage its financial position through
the sale of various assets, including its camping operations, its
bicycle operations and its snow products operations and is continuing
to seek to further de-leverage its operations through the sales of both
strategic and non-strategic assets. Despite such asset sales which have
occurred to date, the Company operations continue to be adversely
affected by the problems identified above, including excess financial
leverage. Although the Company has sought to improve its financial
condition and operating performance by, among other things, reducing
labor and other operating and financing costs, the Company has been
generally unable to improve its results of operations in either the
first six months or the third quarter to date, due to, among other
things, insufficient financial resources.
The Company has no unused credit lines and must satisfy substantially
all of its working capital and capital expenditure requirements from
cash provided by operating activities and from external capital sources
or from the sale of assets. Substantially all of the Company's assets
are pledged to secure existing indebtedness. Due to its current
financial position and working capital deficiency, the Company was
forced to shut down substantially all of its manufacturing operations,
and on August 29, 1997 filed for protection under the United States
bankruptcy laws with the United States Bankruptcy Court for the
Northern District of Georgia, Newnan Division (the "Court") in In Re:
RDM Sports Group, Inc., Case No. 97-12788. Concurrent cases were filed
with the Court by all of the Company's operating U.S.
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subsidiaries: RDM Holdings, Inc. (f/k/a Roadmaster Corporation); Sports
Group, Inc. (which includes the Company's DP Fitness and Flexible Flyer
Toys divisions); International Sports and Fitness, Inc.; Diversified
Trucking Corp.; Diversified Products Corporation; Willow Hosiery
Company, Inc.; Hutch Sports USA Inc.; and T.Q., Inc. The Company has
received initial debtor in possession ("DIP") financing; however, the
Company may require additional DIP financing in order to, among other
things, allow it to complete orders utilizing existing raw materials
and management believes additional DIP financing will be required in
connection with any possible reorganization. While the Company is
negotiating with its existing DIP lenders and other potential DIP
lenders to receive such additional funding, no assurances can be given
as to when, if at all, such additional DIP financing will be secured
and management believes any such additional DIP financing will be
obtainable, if at all, only after the sale of one or more of the
Company's existing operations.
Management intends to seek additional DIP financing to allow the
Company to fill post petition orders for its products. However, many of
the Company's mass merchandiser customers do not place firm or
committed orders and the Company historically has produced products on
the basis of its customers' program estimates for the year. In the
absence of firm or committed orders, the Company may not be able to
secure additional DIP financing and/or reorganize one or more portions
of its operations. In light of the Company's financial condition, no
assurances also can be given that the Company will be selected by its
customers to participate in their production programs. Accordingly, the
Company may be subject to a rapid and substantial decline in its
customer base, which could have a material adverse effect on its
ability to reorganize one or more portions of its businesses under the
protection of the federal bankruptcy laws. In the event the Company is
unable to secure prompt permission from its creditors and the
bankruptcy court to sell various assets, the value of such assets could
be rapidly and materially impaired. In such event, the Company may be
required to liquidate all of its assets to satisfy its creditors. No
assurances can be given as to when, if at all, the Company will receive
sufficient working capital to resume its operations, either on a
temporary basis or otherwise. In any reorganization, management
anticipates that it will be necessary to sell one or more of its
product lines and the assets associated therewith in connection with
the Company's reorganization efforts.
The Company has sought or expects to seek approval from the Bankruptcy
Court to, among other things, negotiate the sale of its toy products
operations (swing sets, trampolines, bulk plastic toys and hobby
horses), its free weight fitness equipment operations, (including its
operations with respect thereto in Olney, Illinois), its Opelika,
Alabama manufacturing facility and its trucking operations. The Company
also has received some preliminary expressions of interest with respect
to its other fitness equipment operations. The exact nature and scope
of the operations to be disposed of will depend on the interest of
third persons in such operations, the price offered for such operations
and the timing of such offers, and any such sales are subject to
consent of the Company's DIP Lenders, the existing lenders under the
Loan Agreement and the Bankruptcy Court. While the Company has granted
an option to purchase its Opelika facility and has received expressions
of interest with respect to certain of its other assets and divisions,
no assurances can be given as to whether such potential transactions
will be realized, the amount to be realized in such transactions, and
whether necessary approvals can be obtained.
The Company does not have a commitment from any lender to provide
further DIP financing. Any obligation to provide additional DIP
financing, whether under the existing DIP Facility, or otherwise, will
arise only upon the negotiation, execution and delivery of definitive
documents, with all necessary approvals, in form and substance
satisfactory to all parties and after any such further financing is
authorized pursuant to Section 364 of the Bankruptcy Code. No assurance
can be given that the Company will be able to procure any DIP financing
beyond the DIP Facility which it has obtained to date.
Borrowers under the existing DIP Facility include all "Borrowers" under
the existing Loan Agreement, plus RDM Sports Group, Inc. The DIP
Facility is a "roll-up" of the pre-petition working capital and letter
of
12
<PAGE> 13
credit advances under the Loan Agreement, plus additional available
financing in the form of authorized over advances of approximately
$5,000,000. The Facility provides the Borrowers with a working capital
line up to $40,000,000. Approximately $31,086,556 was drawn down under
the DIP Facility at closing, and of which $30,541,423 was applied to
pay indebtedness under the Loan Agreement. Readers are cautioned that
no conclusions with respect to the amount of availability, if any,
under the DIP Facility can be inferred from the total size of such DIP
Facility or from the drawings thereunder at the closing thereof.
The terms of the Loan Agreement governing borrowing availability have
been revised in the DIP Facility. All Post-petition working capital
advances will be under the DIP Facility and the Borrower's ability to
draw funds under the Loan Agreement has been terminated.
The DIP Facility is a senior secured, super-priority facility as
provided for by Sections 364(c) and (d) of the Bankruptcy Code. The DIP
Facility is secured by all assets of the Borrowers including, but not
limited to, first priority security interest in pre- and post-petition
accounts receivables, inventory, general intangibles, stock of
subsidiaries, personal and real property, trademarks, tradenames,
patents, licenses, etc. and proceeds therefrom. The DIP Facility
effectively "primes" the Lenders' collateral position under the Loan
Agreement with respect to the remaining $25,000,000 term loans under
the Loan Agreement. The interest rate under the DIP Facility has a rate
equal to the Reference Rate plus 3% (for a current rate of 11.5% per
annum), with a minimum rate of interest of 8% per annum, subject to
adjustment on a monthly basis.
The DIP Facility requires all of the net proceeds from any asset sales
to be applied first, to interest and expenses (if any) outstanding
under the DIP Facility, second, to principal amounts under the Tranche
B Fixed Period Loan under the Loan Agreement, third, to principal
amounts under the DIP Facility, and lastly, to amounts outstanding
under the Tranche A Fixed Period Loan under the Loan Agreement.
The DIP Facility includes other financial and financial reporting
covenants. The DIP Facility also requires the Company to provide
"adequate protection" to the Lenders under the Loan Agreement in the
form of interest payments at default interest rates (for continued use
of the Company's manufacturing facilities) as to the $25,000,000
Tranche A and B Fixed Period Loans. The DIP Facility further requires
the Borrowers to sell certain assets or operating divisions, whether as
part of a reorganization effort, or otherwise.
The Company's ability to improve its financial position and meet its
financial obligations will depend upon a variety of factors, including
the ability to obtain sufficient DIP financing -- whether from its
existing lenders under the DIP Facility and/or additional financing
from third party sources -- a continued ability to participate in
customer product programs and thereby preserve its customer base,
favorable pricing environments for its products, a substantial
reduction in the rate of product returns, especially in fitness
products, the absence of adverse general economic conditions, effective
operating cost control measures and the sale of additional assets and
the consent of its lenders to such sale, including the ability to
utilize a portion of such assets for operating requirements. Management
believes the Company's recurring losses from operations and its limited
sources of additional liquidity raise substantial doubt about the
Company's ability to reorganize as a going concern. Prior to filing for
bankruptcy protection, the Company had been unable to attract new
capital and/or reschedule or restructure a number of its current
obligations. Furthermore, management does not believe the Company can
expect additional financial support from any of its principal
stockholders. Accordingly, whether as part of a reorganization or a
liquidation, management believes the Company will be required to sell
one or more of its current operations. No assurance can be given that
the Company will be successful in generating the operating results,
attracting new capital or restructuring sufficient indebtedness
required for future viability.
13
<PAGE> 14
RESULTS OF OPERATIONS
Net sales ("sales") decreased $64.4 million or 62% and $138.2 million
or 59% in the second quarter and first six months of 1997, respectively,
compared to the second quarter and first six months of 1996. This decrease was
attributable in part, to the sale of the Company's bicycle and snow products to
Brunswick Corporation ("Brunswick") on September 6, 1996 (the "Second Brunswick
Transaction") and to a lesser extent, the sale of the Company's
Nelson/Weather-Rite, Inc. ("Nelson/Weather-Rite") camping products subsidiary on
March 8, 1996 (the "First Brunswick Transaction"). During the second quarter and
first six months of 1996, the Company's bicycle and snow products and camping
operations had sales of $46.5 million and $103.5 million, respectively. Sales by
the Company's remaining operating units decreased $17.9 million or 17% and $34.7
million or 15% in the second quarter and first six months of 1997, respectively,
compared to sales by such operations in the same periods in 1996. Such decrease
was primarily attributable to continued weakness in the sales of Company's
fitness products, weakness in sales of swingsets and decreases in sports hosiery
sales based on the Company's decision to discontinue its sports hosiery
operations. In addition, the Company's business is seasonal and sales of fitness
products historically are lower in the second quarter of the year. Sales of
fitness products in the third quarter and the remainder of the year may
adversely affected by continued weakness in such market as well as operational
difficulties attributable to the Company's financial condition, adverse
publicity associated with Company's filing for protection under the federal
bankruptcy laws, or other decisions with respect to the Company's business
strategy.
Gross profit decreased $12.8 million or 117% and $25.6 million or 94%
in the second quarter and first six months of 1997, respectively, compared to
the same period of 1996 primarily resulting from lower sales volume and
manufacturing variances and seasonal underutilization in the Company's fitness
manufacturing operations. The Company recorded gross losses in an amount equal
to 5% of sales in the second quarter of 1997 and gross profits, expressed as a
percent of sales, of 2% in the first six months of 1997 versus gross profits,
expressed as a percent of sales, of 11% and 12%, respectively, for the same
periods in 1996. Gross profit margins for the Company's fitness business were
negatively impacted due to reduced sales volume and increased fixed costs as a
percent of sales due to underutilization of the production capacity at Company's
fitness manufacturing facility. All of the Company's fitness operations (except
for its weight filling operations) were conducted at its Opelika, Alabama
facility.
Expressed as a percent of sales, selling, general, and administrative
("SG&A") expenses were 29% and 21% for the second quarter and first six months
of 1997, respectively, versus 12% and 12% for the same periods in 1996. SG&A
expenses decreased $400,000 and $8.3 million in the second quarter and first six
months of 1997, respectively, versus the same periods in 1996. SG&A expense
reductions relating to the sale of its camping and bicycle and snow toy products
businesses and reductions in volume related expenses, such as commission
expenses, were offset by continued historically high product warranty costs in
the Company's fitness business. Product warranty expenses decreased $1.9 million
in the second quarter of 1997 versus the same period in 1996; however, product
warranty expenses in the second quarter were approximately $5.0 million versus
approximately $2.6 million in 1997. Expressed as a percentage of sales, product
warranty costs were 13% and 8% of sales in the second quarter and first six
months of 1997, respectively versus 5% and 4% of sales in same periods in 1996.
Product warranty expenses were 4.6% of sales in the first quarter of 1997. Such
increase was attributable to increased reserves for potential product warranty
claims associated with sales of fitness products for current and prior quarters.
Such product warranty costs related primarily to quality issues in fitness
products produced in previous periods at the Company's Opelika, Alabama facility
as well as to fitness products formerly produced at the Company's former Tyler,
Texas and Olney, Illinois facilities.
Despite the implementation by the Company of various quality assurance
measures in its fitness operations, including improved product engineering;
extensive piloting and testing of new product
14
<PAGE> 15
introductions; reductions in the number of products offered; the exiting of the
opening price point treadmill business, which traditionally has had a higher
than normal product warranty rate; and the implementation of additional quality
assurance measures; and product simplification, product warranty expenses
escalated in the second quarter. Accordingly, no assurances can be given that
warranty expenses, as a percentage of sales, will decline in the future due to
the Company's quality control efforts, and, the effect of such actions are not
expected to be realized, if at all, before late 1997.
Interest expense for the three and six months ended June 29, 1997 was
$3.0 million and $6.0 million, respectively, decreases of $3.6 million and $8.5
million from the same periods in 1996. The reduction in interest expense was due
to lower amounts outstanding on the Company's revolving lines of credit as a
result of the First and Second Brunswick Transactions and the reduction in the
Company's outstanding indebtedness, resulting from the purchase and retirement
of all but $2.1 million of its outstanding 11.75% Senior Subordinated Notes in
September 1996.
The Company recorded a $2.8 million extraordinary loss for debt
costs related to replacement of the Company's former Bank Credit Agreement with
the New Loan Facility.
The Company recorded tax expense of $753,000 in the first six months of
1997 compared to $3.5 million recorded in the same period in 1996. The 1997 tax
expense represents an effective rate of 3%. This compares to the effective
rate of 117% recognized in the first six months of 1996 which was attributable
to the Federal and State tax expense recorded as part of the sale of the
Company's camping business.
In 1997, the Company established a valuation allowance against the
current year net operating loss carry-forwards ("NOL's") since management
believes there is a risk that these may expire unused in the future. Realization
of deferred tax assets associated with the NOL's is dependent upon generating
sufficient taxable income prior to their expiration. Furthermore, overall net
deferred tax assets could be further reduced in the near term if management's
estimates of taxable income during the carryforward period are significantly
reduced or if alternative tax strategies are not viable.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has a working capital deficiency and the Lenders
under its Loan Agreement have declared an Event of Default hereunder and
demanded repayment of the Amounts Owed thereunder. Historically, the Company's
working capital has been obtained primarily from revolving lines of credit from
banks and internally generated funds. The seasonal nature of the Company's sales
imposes fluctuating demands on its cash flow, due to the temporary buildup of
inventories in anticipation of, and receivables subsequent to, the peak seasonal
period, which historically has occurred around November of each year. On a
consolidated basis, the Company provided $1.4 million in cash for operating
purposes in the first six months of 1997. In contrast, on a consolidated basis,
during all of 1996, the Company's operations used cash of approximately $29.3
million.
The Company had operating losses of $18.5 million in the first six
months of 1997 compared to losses of $1.2 million in the first six months of
1996. In contrast, the Company had operating losses of $69.8 million, and $37.2
million for the years ended December 31, 1996 and 1995, respectively. The
Company's consolidated cash, cash equivalents, and cash in escrow pursuant to
various contractual obligations at June 29, 1997 was $14.6 million, of which
funds $11.2 million was restricted as to use. In contrast, the Company's
consolidated cash, cash equivalents, and cash in escrow pursuant to various
contractual obligations balance at December 31, 1996 was $44.9 million, of which
funds $12.8 million was restricted as to use.
15
<PAGE> 16
In the first six months of 1997, the Company was not in compliance with
various financial covenants under its Bank Credit Agreement until the
termination of such agreement in connection with the execution of the New Loan
Facility on June 20, 1997 (as defined below). The Company previously had
obtained waivers from the lenders in 1995 and amended its then existing
revolving line of credit agreement (as amended, the "Amended and Restated
Revolver") in 1995 and 1996. The Company was out of compliance with various
financial covenants under its new Bank Credit Agreement (the "Bank Credit
Agreement") as of December 31, 1996 and up until the execution of the New Loan
Facility. At no time was the Company in default with respect to the payment of
indebtedness under the Bank Credit Agreement or the predecessor agreements
thereto as in effect in 1995 and 1996. In connection with the sale of the
Company's bicycle and snow toys products to Brunswick Corporation (the "Second
Brunswick Transaction"), on September 6, 1996, the Company had terminated its
then existing bank credit facility and entered into the Bank Credit Agreement.
The Bank Credit Agreement was for a three year term, maturing September 1999,
and provided for borrowings up to $130.0 million based on certain inventories
and accounts receivable. Interest was calculated at the Agent's referenced rate
(generally the "prime rate") plus 1.25% and included a LIBOR rate option which
equaled LIBOR plus 1.25%. The monthly unused facility fee was .25% on the
available unused portion of the facility provided by the Bank Credit Agreement.
At December 31, 1996, the Company had outstanding borrowings of $74.9 million
under the Bank Credit Agreement and, as noted above, was not in compliance with
various financial covenants contained therein.
On June 20, 1997 (the "Closing Date"), the Company entered into a new
$100 million revolving loan and term credit facility (the "Loan Facility")
pursuant to a Loan and Security Agreement (the "Loan Agreement") among the
Company, the Company's borrowing subsidiaries and certain financial
institutions. Borrowers under the Loan Facility are the Company's operating
subsidiaries and the first tier holding company subsidiary for the operating
subsidiaries. The Loan Facility replaced the Bank Credit Agreement which was
repaid in full plus $500,000 in prepayment fees. Borrowings under the New Loan
Facility are guaranteed by the Company and are secured by substantially all of
the assets of the Company and all of its subsidiaries. In addition, the Loan
Facility is guaranteed by a letter of credit in the amount of $15 million in
favor of the lenders there under (the "Lenders"), which letter of credit
initially was obtained by the Metromedia Company ("MC"), an affiliate of
Metromedia International Group, Inc. ("Metromedia"), the Company's largest
stockholder. The initial letter of credit was replaced by a subsequent letter of
credit obtained by Metromedia in the third quarter. Such letter of credit cannot
be drawn until five days after payment default under the Loan Facility and
fifteen days after a non-payment default. Metromedia is also entitled to receive
copies of all notices required under the Loan Agreement. In consideration of
providing the letter of credit, MC was granted 3 million warrants to purchase
Common Stock of the Company at an exercise price of $.50 per share. Such
warrants have a ten year term and are exercisable beginning 90 days from the
Closing Date. In connection with the issuance of the substitute letter of
credit, such warrants and the rights thereunder were assigned by MC to
Metromedia.
The Loan Facility provided up to a $75 million revolving credit
facility and two term loan tranches aggregating $25 million. The Loan Facility
had a four year term. Borrowings under the revolving credit portion of the Loan
Facility were based on certain eligible inventory and accounts receivables.
Borrowings and other obligations under the Loan Facility bore interest at a per
annum interest rate equal to the base rate of the reference financial
institution (the "Reference Rate") plus 1%, except $10 million of the term loans
("Tranche A") bore interest at the Reference Rate plus 1.5%. The rate for
borrowings under the revolving credit facility were subject to decrease to 0.5%
above the Reference Rate based on the achievement of certain pricing benchmarks
and were subject to increase by 4% in the event borrowings against inventories
exceed certain levels under specified circumstances. All borrowings are subject
to an interest rate increase of 4% upon the occurrence and during the
continuance of an event of default as defined in the Loan Agreement. The
Reference Rate as of the date of the Loan Agreement was 8.5% per annum.
16
<PAGE> 17
The Loan Agreement also provided for a $750,000 closing fee, plus an
unused line fee equal to 0.25% of the average unused portion of the maximum
borrowing amount (i.e. $75 million), plus an annual facility fee equal to 0.5%
of the total initial facility (i.e. $100 million). Additional fees and expenses
are payable to the agent for the Lenders.
Origination fees on the Loan Facility, brokerage, and other closing
costs incurred by the Company in connection with the Loan Facility aggregated
approximately $3.2 million, the majority of which were paid on the Closing
Date. Debt costs of $2.8 million, related to the Bank Credit Agreement, were
written off in the second quarter of 1997 as an extraordinary item.
The Loan Agreement contained numerous financial and non-financial
covenants, including limitations on the incurrence of additional indebtedness,
limitations on the incurrence of liens, limitations on capital expenditures,
limitations on the sale of assets, maintenance of specified ratios of current
assets to current liabilities, total liabilities to tangible net worth, and
minimum tangible new worth, all as defined in the Loan Agreement. The Loan
Agreement also contained provisions requiring additional payments to the Lenders
in the event of the early termination of the Loan Agreement. Events of Default
under the Loan Agreement included, among other things, the occurrence of a
Material Adverse Change as defined. Material Adverse Change was defined to
include, among other things, a material adverse change in the business,
prospects, operations, results of operations, assets, liabilities or condition
(financial or otherwise) of any Borrower under the Loan Agreement, the material
impairment of any Borrower's ability to perform its obligations under the loan
documents to which it is a party, or of the Lenders to enforce the obligations
under the Loan Agreement or realize upon the collateral securing such agreement,
a material adverse effect on the value of the collateral, or the amount that the
Lenders would be likely to receive (after giving consideration to delays in
payment and cost of enforcement) in the liquidation of Collateral. On August 22,
1997, the Lenders under the Loan Agreement declared an Event of Default
thereunder, asserting, among other things, that a Material Adverse Change had
occurred with respect to the Company and its subsidiaries. In such notice the
Lenders demanded immediate payment of Amounts Due under the Loan Agreement of
$59,564,933 inclusive of $5,276,604 representing issued letters of credit.
In 1996, the Company began to implement, and in 1997 continued to
implement, various strategies intended to improve its financial condition and
operating performance. These strategies include expense reduction programs,
inventory management reduction programs, reorganization of the fitness
production facility, production related employee training programs, reduction in
the number of products offered, a shift from manufacturing certain products to
sourcing, extensive piloting and testing of new product introductions, and
implementation of stringent quality assurance measures. Management is unable to
predict when, if at all, the full effects of such strategies will be realized,
especially in light of the Company's working capital deficiency, the current
shut down of its production facilities and the Company's decision to file for
protection under the United States bankruptcy laws. To date, such strategies
have not been sufficient to improve the Company's operating results in the light
of its limited financial resources.
The Company's businesses are seasonal. The peak selling season for the
Company's toy products, including swing sets and trampolines, occurs primarily
in the second quarter of the year, with cash revenues for such sales typically
realized in the second and third quarters of the year. The peak selling season
for the Company's fitness products occurs in the third and fourth quarters of
the year, with cash revenues for such sales typically realized in the fourth and
first quarters of the year. Accordingly, even if the Company is able to secure
substantial DIP financing, the historical seasonality of the Company's business
means that revenues from operations during the remainder of the year can be
expected to be substantially dependent on revenues from sales of fitness
products.
As noted above, the Company's future viability will be primarily
dependent upon its ability to attract new capital resources and to develop an
operating plan which will improve its results of operations.
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<PAGE> 18
No assurance can be given that any of the initiatives already implemented or any
new initiatives, if implemented, will be successful or, if successful, that such
initiatives will produce results sufficient to offset the continuing negative
impact of the above-referenced factors on the Company's financial results or
result in an improvement of the cash position of the Company, or that the
Company will be successful in generating the operating revenues, cash and
additional external investments required for the profitable operations or future
viability.
The Company must satisfy all of its working capital and capital
expenditure requirements from cash provided by operating activities, from the
sale of assets, or borrowings under its DIP Facility.
Despite the sale of its camping, bicycle and snow toys assets, the
Company remains highly leveraged. As noted above, substantially all of the
Company's assets have been pledged to secure borrowings under the Loan Facility
and the DIP Facility. Sales of such assets generally require the consent of the
Lenders and management expects that sales of assets would generally require
payments of some or all of the indebtedness secured thereby, which indebtedness
could exceed the immediately realizable value of such assets. To the extent the
Company's access to capital continues to be constrained, the Company may not be
able to make certain capital expenditures or implement certain other aspects of
its on-going business plan and the Company may, therefore, be unable to achieve
some of any of the benefits expected from such capital improvements and/or from
the protection provided by the federal bankruptcy laws.
The Company has two long-term debt issues, the $51.7 million
Convertible Subordinated Debentures due 2003 (the "Debentures") and the
remaining $2.1 million of its 11.75% Senior Subordinated Notes due 2002 Notes
outstanding and not held by the Company (the "Notes"). Semi-annual interest
payments on the Debentures are due by their terms on August 15 and February 15
of each year. Semiannual interest payments on the Notes are due by their terms
on January 15 and July 15 of each year.
The Debentures and Notes are obligations solely of RDM Sports Group,
Inc. ("RDM") and the ability of RDM to meet its debt service obligations is
dependent on the ability of its operating subsidiaries to generate funds from
operations sufficient to meet their respective debt service and other
obligations and, second, to pay or distribute amounts to the Company sufficient
to enable it to meet its debt service and other obligations. The Loan Facility
restricts, with limited exceptions, distributions, dividends and payments to
RDM, and does not permit dividends and interest on intercompany loans to be paid
so long as a default exists or would result under the Loan Agreement.
On August 15, 1997, the Company did not pay the semi-annual interest
payment due on the Debentures in the amount of $2,069,000. On August 22, 1997,
the Lenders under the Loan Agreement declared an Event of Default thereunder,
asserting, among other things, that a Material Adverse Change had occurred with
respect to the Company and its subsidiaries. In such Notice, the Lenders
demanded immediate payment of Amounts Due under the Loan Agreement of
$59,564,933 inclusive of $5,276,604 representing issued letters of credit. On
August 27, 1997, the Trustee for the Company's Debentures and Notes issued
notices of default under the respective governing indentures. On August 29,
1997, the Company filed for protection under the United States Bankruptcy Act.
The filing by the Company for protection under the federal bankruptcy laws
constituted an Event of Default under the governing indenture for such
Debentures. Accordingly, the holders of not less than twenty-five percent (25%)
in principal amount of the Debentures may declare the principal of all the
Debentures to be due and payable immediately. Payments on the Debentures are
subordinated under specified circumstances and for specified periods to payments
of Senior Indebtedness of the Company, as such term is defined in the governing
indenture, such Senior Indebtedness includes indebtedness outstanding under the
Company's Loan Agreement.
18
<PAGE> 19
The filing by the Company for protection under the federal bankruptcy
laws also constitutes an additional Event of Default pursuant to the governing
indenture under which the Company's Notes were issued. Accordingly, the holders
of not less than 25% aggregate principal amount of the Notes then outstanding
and not held by the Company may declare all the principal of the Notes to be due
and payable immediately. Payments on the Notes are subordinated under specified
circumstances and for specified periods to payments of Senior Indebtedness of
the Company, as such term is defined in the indenture; such Senior Indebtedness
includes indebtedness outstanding under the Company's Loan Agreement.
At June 29, 1997, the Company, on a consolidated basis, had
stockholders' equity of $25.7 million. In contrast, at December 31, 1996 and
December 31, 1995, the Company on a consolidated basis, had stockholders' equity
of $53.2 million and $55.5 million, respectively.
The Company's capital expenditures plan formerly contemplated the
investment of up to approximately $10.0 million for plant improvements,
expansion of production capability, and other capital improvements of its
businesses over the next two years. Such capital expenditures program is
expected to be curtailed or deferred in light of the Company's financial
condition and management believes less than half of that amount is necessary to
maintain production facilities. The majority of the Company's non-maintenance
related capital expenditures were planned for tooling of new products and cost
reductions.
The Company has been informed by the New York Stock Exchange of the
Exchange's intent to permanently suspend trading in, and seek delisting of, the
Company's common stock and its Debentures due to the Company's failure to meet
the Exchange's requirements for continued listing. No assurances can be given
that, even if the Company is able to reorganize its operations, that a
reorganized Company will meet the financial criteria for (or obtain waivers with
respect to) listing on any stock exchange or other national market.
AVAILABILITY OF NOL'S
The Company estimates that it had, for state and federal income tax
purposes, NOL's amounting to approximately $10.2 million at June 29, 1997. Such
NOL's expire predominately in 2011 if not utilized before then to offset taxable
income. Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations issued thereunder, impose limitations on the ability of
corporations to use NOL's, if the corporation experiences a more than 50% change
in ownership in periods. Changes in ownership in periods thereafter could
substantially restrict the Company's ability to utilize its tax net NOL's. There
can be no assurance that an ownership change will not occur in the future,
especially in connection with any reorganization may occur under the United
States bankruptcy laws. In addition, the NOL's are subject to examination by the
IRS, and thus, are subject to adjustment or disallowance resulting from any such
IRS examination.
INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
Increases in material prices of plastics, cardboard, and steel have had
a significant negative impact on the results of operations. The manner in which
sales programs are set causes a delay in price adjustments which limits the
Company's ability to pass some or all of these increased costs on to the
Company's customers as such costs are incurred. Furthermore, depending on the
competitive environment, the Company may or may not be able to timely pass along
material price increases to its customers.
Although the Company's foreign operations are subject to transaction
exposure based on the value of the Canadian dollar versus the U.S. dollar, such
transaction exposure did not have a material effect on the Company's results of
operations for the first six months and quarter ended June 29, 1997.
19
<PAGE> 20
Part II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.
a) Exhibits:
11(a) - Computation of Per Share Earnings, Three Months
Ended June 29, 1997 and June 30, 1996
11(b) - Computation of Per Share Earnings, Six Months
Ended June 29, 1997 and June 30, 1996
27 - Financial Data Schedule (submitted in electronic form to SEC
only)
b) Reports on Form 8-K.
On June 24, 1997, the Company filed a report on Form 8-K to
announce the closing of a new $100,000,000 credit facility and the
resignation of Henry Fong from all positions with the Company.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
RDM SPORTS GROUP, INC.
Dated: September 10, 1997 By: /s/ James L. Marden
----------------------------------------------
James L. Marden
President
By: /s/ Charles E. Sanders
----------------------------------------------
Charles E. Sanders
Principal Financial and Accounting Officer
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <C>
11(a) - Computation of Per Share Earnings, Three Months
Ended June 29, 1997 and June 30, 1996 22
11(b) - Computation of Per Share Earnings, Six Months
Ended June 29, 1997 and June 30, 1996 23
27 - Financial Data Schedule (submitted in electronic
form to SEC only) N/A
</TABLE>
21
<PAGE> 1
EXHIBIT 11(a)
RDM SPORTS GROUP, INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE MONTHS ENDED JUNE 29, 1997 AND JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Primary:
Weighted average common shares outstanding during period 48,986 49,177
Common shares issuable if all warrants had been converted
at the date of issuance 1,667 --
-------- --------
Average common shares outstanding for primary calculation 50,653 49,177
======== ========
Fully Diluted:
Weighted average common shares outstanding during period 48,986 49,177
Net common shares issuable on exercise of warrants 1,667 --
-------- --------
Average common shares outstanding for fully diluted calculation 50,653 49,177
======== ========
Loss before extraordinary item $(18,337) $ (5,133)
Extraordinary item - loss on extinguishment of debt (2,805) --
-------- --------
Net loss $(21,142) $ (5,133)
======== ========
Earnings per share, primary and fully diluted:
Loss before extraordinary item $ (0.36) $ (0.10)
Extraordinary item - loss on extinguishment of debt (0.06) --
-------- --------
Net loss $ (0.42) $ (0.10)
======== ========
</TABLE>
22
<PAGE> 1
EXHIBIT 11(b)
ROADMASTER INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
FOR THE SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Primary:
Weighted average common shares outstanding during period 48,986 49,177
Common shares issuable if all warrants had been converted
at the date of issuance 833 --
-------- --------
Average common shares outstanding for primary calculation 49,819 49,177
======== ========
Fully Diluted:
Weighted average common shares outstanding during period 48,986 49,177
Net common shares issuable on exercise of warrants 833 --
-------- --------
Average common shares outstanding for fully diluted calculation 49,819 49,177
======== ========
Loss before extraordinary item $(27,578) $ (503)
Extraordinary item - loss on extinguishment of debt (2,805) --
-------- --------
Net loss $(30,383) $ (503)
======== ========
Earnings per share, primary and fully diluted:
Loss before extraordinary item $ (0.55) $ (0.01)
Extraordinary item - loss on extinguishment of debt (0.06) --
-------- --------
Net loss $ (0.61) $ (0.01)
======== ========
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-29-1997
<EXCHANGE-RATE> 1
<CASH> 4,433
<SECURITIES> 0
<RECEIVABLES> 49,830
<ALLOWANCES> 3,129
<INVENTORY> 51,486
<CURRENT-ASSETS> 119,560
<PP&E> 57,485
<DEPRECIATION> 16,497
<TOTAL-ASSETS> 230,841
<CURRENT-LIABILITIES> 83,978
<BONDS> 77,983
0
0
<COMMON> 537
<OTHER-SE> 25,213
<TOTAL-LIABILITY-AND-EQUITY> 230,841
<SALES> 39,988
<TOTAL-REVENUES> 39,988
<CGS> 41,820
<TOTAL-COSTS> 11,597
<OTHER-EXPENSES> 1,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,032
<INCOME-PRETAX> (17,648)
<INCOME-TAX> 689
<INCOME-CONTINUING> (18,337)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,805)<F1>
<CHANGES> 0
<NET-INCOME> (21,142)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
<FN>
<F1>EXTRAORDINARY ITEM IS FOR THE LOSS ON THE EARLY EXTINGUISHMENT OF DEBT.
</FN>
</TABLE>
