<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 MARCH 29, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
------ ------
Commission file number 0-16482
-------
RDM SPORTS GROUP, INC.
----------------------
(Exact name of Registrant as specified in its charter)
Delaware 84-1065239
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Suite 5,267 Highway 74 North, Peachtree City, Georgia 30269
-----------------------------------------------------------
(Address of principal executive offices, including zip code)
(404)586-9000
-------------
(Registrant's 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 June 20, 1997
--------------------------- ----------------------------
Common Stock $.01 par value 49,507,167 shares
1
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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>
March 29, December 31,
1997 1996
--------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,790 $ 32,141
Cash in escrow 8,855 2,615
Accounts and notes receivable, net 59,460 59,835
Inventories 64,057 70,550
Prepaid expenses and other assets 3,939 2,189
Deferred income taxes 11,985 11,987
-------- --------
Total current assets 154,086 179,317
Property, plant and equipment: 57,272 56,823
Less-Accumulated depreciation and amortization 15,161 14,130
-------- --------
Net property, plant and equipment 42,111 42,693
Deferred income taxes 18,297 18,297
Cash in escrow 10,158 10,158
Deferred financing and acquisition charges 16,072 16,554
Goodwill and other intangible assets, net 20,825 20,929
Long-term trade receivables 480 509
Other assets 4,765 4,755
-------- --------
Total assets $266,794 $293,212
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving lines of credit $ 64,942 $ 74,906
Current portion of long-term debt 453 558
Current portion of long-term liabilities 503 486
Accounts payable 49,059 46,552
Accrued expenses 31,166 41,098
-------- --------
Total current liabilities 146,123 163,600
Long-term Liabilities:
Deferred income taxes -- --
Long-term debt 55,542 55,339
Other long-term liabilities 1,014 1,035
Environmental liabilities 20,008 19,998
-------- --------
Total Long-term Liabilities 76,564 76,372
Stockholders' Equity:
Preferred stock -- --
</TABLE>
2
<PAGE> 3
RDM SPORTS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
Common stock 537 537
Additional paid-in capital 100,983 100,983
Retained (loss) earnings (44,287) (35,154)
Deferred compensation (2,216) (2,216)
Net unrealized (loss) gain on equity securities (347) (347)
-------- --------
54,670 63,803
Treasury stock, at cost (10,563) (10,563)
Total stockholders' equity -------- --------
44,107 53,240
-------- --------
Total liabilities and stocholders' equity $266,794 $293,212
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
RDM SPORTS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 29, 1997 MARCH 30, 1996
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 55,518 $ 129,414
Cost of sales 51,971 113,192
--------- ---------
Gross profit 3,547 16,222
Selling, general and
administrative expenses 8,663 16,417
Other income/expense, net:
Interest expense 3,568 7,963
Gain on sale of subsidiary -- (20,151)
Other, net 492 700
--------- ---------
4,060 (11,488)
--------- ---------
(Loss) earnings before income tax expense (9,176) 11,293
Income tax expense 64 6,663
--------- ---------
Net (loss) earnings $ (9,240) $ 4,630
========= =========
(Loss) earnings per common share:
Primary $ (0.19) $ 0.09
========= =========
Fully diluted $ (0.19) $ 0.09
========= =========
Weighted average common shares
outstanding and common stock
equivalents:
Primary 48,969 50,139
========= =========
Fully diluted 48,969 63,075
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
RDM SPORTS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 29, MARCH 30,
1997 1996
------------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $ (9,240) $ 4,630
Adjustments to reconcile net (loss) earnings to net cash
(used in) provided for operating activities:
Depreciation and amortization 2,141 4,196
Amortization of deferred compensation -- 215
Gain on sale of marketable securities -- (403)
Loss on sale of property, plant and equipment 9 182
Gain on sale of subsidiary -- (20,151)
Change in assets and liabilities:
Accounts receivable 362 60,737
Inventories 6,493 (16,272)
Prepaid expenses and other assets (1,750) (3,743)
Cash in escrow (6,240) (13,686)
Other assets 82 (430)
Accounts payable 2,508 (12,869)
Accrued expenses (9,932) (6,134)
Long-term liabilities (12) (159)
Income taxes -- 6,435
Deferred income taxes 2 (158)
----------------------
Net cash (used in) provided for operating activities (15,577) 2,390
----------------------
Cash flows from investing activities:
Additions to property, plant and equipment (777) (2,072)
Acquisitions -- (364)
Proceeds from sale of marketable securities -- 1,146
Purchase of marketable securities (169) --
Proceeds from sale of property, plant and equipment 41 79
Proceeds from sale of subsidiary -- 120,000
----------------------
Net cash (used in) provided for investing activities (905) 118,789
----------------------
Cash flows from financing activities:
Net change in revolving lines of credit (9,964) (125,324)
Principal payments of long-term debt (113) (352)
Debt refinancing cost incurred (129) (93)
Cumulative translation adjustments 108 (260)
Proceeds from issuance of long-term debt 228 --
----------------------
Net cash used in financing activities (9,870) (126,029)
----------------------
Net decrease in cash and cash equivalents (26,351) (4,850)
Cash and cash equivalents, beginning of period 32,141 8,417
----------------------
Cash and cash equivalents, end of period $ 5,790 $ 3,567
======================
</TABLE>
See accompanying notes.
5
<PAGE> 6
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 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. In the opinion of management, these unaudited consolidated
financial statements include all adjustments necessary for a fair presentation
of its financial position as of March 29, 1997, and the results of operations
and its cash flows for the three 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 months ended March 29, 1997 and March 30, 1996 are not necessarily
indicative of the results which may be expected for the full year.
For comparative purposes the quarter ending March 29, 1997 is consistent
with the same period ending March 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 used
$15.6 million of cash for operating purposes in the first quarter of 1997. In
contrast, on a consolidated basis, during 1996, the Company's operations used
cash of approximately $29.3 million.
The Company had operating losses of $5.1 million in the first quarter of
1997 compared to $195,000 in the first quarter 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
March 29, 1997 was $24.8 million, of which funds $19.8 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 quarter 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 (as
defined below). The Company previously had obtained waivers from the lenders in
1995 and amended its then existing revolving line of credit agreement in 1995
and in the first quarter of 1996. The Company was not in compliance with various
financial covenants under its Bank Credit Agreement as of March 29, 1997 and
December 31, 1996. 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 Second
Brunswick Transaction, on September 6, 1996, the Company had terminated its then
existing bank credit facility and entered into a new bank credit agreement (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
6
<PAGE> 7
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
and term credit facility pursuant to a Loan and Security Agreement (the "Loan
Agreement") between the Company's borrowing subsidiaries and certain financial
institutions. See Note (6) "Subsequent Events".
Management believes the availability of such funds is a necessary
component of the Company's strategy to improve its operating and financial
performance. The Company believes that borrowings available under the New Loan
Facility and internally generated funds should be adequate to implement the
strategies discussed below.
In 1996, the Company began to implement, and in 1997 is continuing 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
number of products offered, a shift from manufacturing of certain products to
sourcing, extensive piloting and testing of new product introductions, and
implementations of stringent quality assurance measures. Management expects the
full effects of such strategies will not be fully realized, if at all, until
late 1997.
3. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three months ended
March 29, March 30,
1997 1996
--------------------
<S> <C> <C>
Supplemental disclosures of cash flow
information:
(in thousands)
Cash paid for:
Interest $3,737 $ 10,630
====== ========
Income taxes $ 106 $ 209
====== ========
</TABLE>
4. INVENTORIES
At March 29, 1997 and December 31, 1996, inventories consisted of:
<TABLE>
<CAPTION>
(in thousands) March 29, December 31,
1997 1996
-------- -----------
<S> <C> <C>
Raw materials $ 30,167 $ 38,473
Work in process 4,765 2,733
Finished goods 29,125 29,344
-------- --------
Total inventory $ 64,057 $ 70,550
======== ========
</TABLE>
5. INCOME TAXES
In the first quarter of 1997, the income tax expense attributable to
(losses) earnings from continuing operations at statutory rates is based upon
the following:
<TABLE>
<CAPTION>
U.S. Foreign Total
---- ------- -----
<S> <C> <C> <C>
Income Tax (Benefit) Expense $(3,445) $ 64 $(3,381)
Valuation Allowance 3,445 - 3,445
------- ---- -------
Total Tax Provision $ - $ 64 $ 64
======= ==== =======
</TABLE>
7
<PAGE> 8
RDM SPORTS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company established a valuation allowance against the current year
net operating loss carry-forwards ("NOL's") since 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 or employing
other tax strategies prior to their expiration. Although realization is not
assured for the deferred tax assets relating to NOL's generated in prior
periods, management believes it is more likely than not that they will be
realized through future taxable earnings or alternative tax strategies. However,
overall net deferred tax assets could be reduced in the near term if
management's estimates of taxable income during the carry-forward period are
significantly reduced or alternative tax strategies are no longer viable.
6. SUBSEQUENT EVENTS
Debt Refinancing
Debt extinguishment costs related to the Bank Credit Agreement, which
were $2.6 million at March 29, 1997, will be written off in the second quarter
of 1997 as an extraordinary item.
On June 20, 1997 (the "Closing Date"), the Company entered into a new
$100 million revolving and term credit facility (the "New Loan Facility")
pursuant to a Loan and Security Agreement (the "Loan Agreement") between the
Company's borrowing subsidiaries and certain financial institutions. Borrowers
under the New Loan Facility are the Company's operating subsidiaries and the
first tier holding company subsidiary for the operating subsidiaries. The New
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 New 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 was obtained by the
Metromedia Company, an affiliate of Metromedia International Group, Inc.
("MIG"), the Company's largest stockholder. Such Letter of Credit cannot be
drawn until five days after a payment default under the New 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.
The New Loan Facility provides up to a $75 million revolving credit
facility and two term loan tranches aggregating $25 million. The New Loan
Facility has a four year term. Borrowings under the revolving credit portion of
the New Loan Facility are based on eligible inventory and receivables.
Borrowings and other obligations under the New Loan Facility bear interest at a
per annum interest rate equal to the base rate of the reference financial
institution (the "Reference Rate") plus one percent (1%) except $10 million of
the term loans ("Tranche A") bears interest at the Reference Rate plus 1.5%. The
rate for borrowings under the revolving credit facility is subject to decrease
to 0.5% above the Reference Rate based on the achievement of certain pricing
benchmarks and is 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 provides for a $750,000 closing fee, plus an
unused line fee equal to 0.25% of the average unused portion of the maximum
revolving amount (i.e. $75 million), plus an annual facility fee equal to .50%
of the total initial facility (i.e. $100 million). Additional fees and expenses
are payable to the agent for the Lenders. In consideration of providing the
letter of credit, the affiliate of MIG was granted 3 million warrants to
purchase Common Stock of the Company at an exercise price of $.50 per share. The
Warrants have a ten year term and are exercisable beginning ninety (90) days
from the Closing Date. Prepayment fees on the Bank Credit Agreement, origination
fees on the New Loan Facility, brokerage, and other closing costs incurred by
the Company in connection with the New Loan Facility aggregated approximately
$2.7 million, the majority of which were paid on the Closing Date.
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<PAGE> 9
The Loan Agreement contains 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 net worth, all as defined in the Loan Agreement. The Loan
Agreement also contains provisions requiring additional payments to the Lenders
in the event of the early termination of the Loan Agreement.
Resignation of Chairman of the Board 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 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 (60) 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 continue 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 March 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 that 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, earnings per share as of March 29, 1997 and March 30,
1996, would reflect basic loss per share of $0.19 and diluted loss per share of
$0.19, and basic earnings per share of $0.09 and diluted earnings per share of
$0.09.
9
<PAGE> 10
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.
RESULTS OF OPERATIONS
Net sales ("sales") decreased $73.9 million or 57%, in the first quarter
of 1997 compared to the first quarter of 1996. This decrease was primarily
attributable 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 first quarter of
1996, the Company's bicycle and snow products and camping operations had sales
of $57.1 million. Sales of the Company's remaining operating units decreased
$16.8 million or (23.2%) in the first quarter of 1997 compared to the first
quarter of 1996. Such decrease was primarily attributable to weaknesses in the
Company's swing set and fitness product sales.
Gross profit decreased $12.7 million or 78%, in the first quarter 1997
compared to the same period of 1996 primarily resulting from lower sales volume
and the discounted sales of certain discontinued products. Gross profit,
expressed as a percent of sales, was 6.3% in the first quarter of 1997 versus
12.5% in the first quarter of 1996. Gross profit margins for the Company's
fitness business were negatively impacted due to reduced sales volume and
underutilization of the Company's fitness manufacturing facility. The Company
has consolidated all fitness operations into its Opelika Alabama facility and is
continuing its streamlining of manufacturing processes and quality initiatives.
These efforts which include better production planning, improved inventory
control, and manufacturing process throughput and efficiency improvements will,
in the opinion of the Company's management, provide long-term benefits in
reducing costs and optimizing the utilization of the Company's fitness
manufacturing facility. However, the implementation of these actions will not
have a significant positive impact on gross profits until late 1997, if at all,
when the Company's new line of fitness products are expected to be introduced.
Selling, general and administrative expenses decreased $7.8 million in
the first quarter of 1997 versus the same period in 1996. This decrease was due
primarily to the sale of the Company's camping and bicycle and snow toy products
businesses and to a reduction in volume related expenses, such as commission
expenses. Product warranty costs decreased $1.7 million in the first quarter of
1997 versus 1996. Expressed as a percentage of sales, product warranty costs
were 4.6% of sales in the first quarter of 1997 versus 3.3% of sales in 1996.
The reduction in product warranty costs was due primarily to quality assurance
measures implemented in the Company's fitness business. This increase in product
warranty expenses as a percent of sales was primarily attributable to the sale
of the Company's camping, bicycle and snow toys business whose products had a
lower percentage of product warranty claims when compared to the Company fitness
equipment products, especially since the acquisition of the Company's
Diversified Products ("DP") operations, which had resulted in a higher number of
product claims with respect to fitness products produced at the former DP
facilities. Although no assurances can be given, the Company's quality efforts,
including improved product engineering and product simplification are expected
to result in continued lower product warranty costs throughout 1997.
Interest expense for the three months ended March 29, 1997 was $3.0
million versus $8.0 million in the comparable period of 1996. Expressed as a
percentage of sales, interest was 5.4% in the first three months of 1997 versus
6.2% in the first three months of 1996. The reduction in interest expense is due
to lower amounts outstanding on the Company's outstanding 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.
10
<PAGE> 11
The Company recognized income tax expense of $64,000 and $6.7 million in
the first quarter of 1997 and 1996, respectively. The 1997 tax expense
represents an effective rate of .7%. This compares to the 59% effective tax rate
recognized in the first quarter of 1996 which was attributable to the Federal
and State tax expense recorded as part of the sale of the Company's camping
business at a total rate of 50%. Tax benefits for losses from normal operations
in the first quarter of 1996 were recorded at 39%, generating the overall 59%
effective rate. In the first quarter of 1997, the income tax expense
attributable to earnings (losses) from continuing operations at statutory rates
is based upon the following:
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
U.S. Foreign Total
--- ------- -----
<S> <C> <C> <C>
Income Tax (Benefit) Expense $(3,445) $ 64 $(3,381)
Valuation Allowance 3,445 -- 3,445
------- ------- -------
Total Tax Provision $ -- $ 64 $ 64
======= ======= =======
</TABLE>
In the first quarter of 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.
Although realization is not assured for the deferred tax assets relating to
NOL's generated in prior periods, management believes it is more likely than not
that they will be realized through future taxable earnings or alternative tax
strategies. However, overall net deferred tax assets could be reduced in the
near term if management's estimates of taxable income during the carry-forward
period are significantly reduced or alternative tax strategies are no longer
viable.
LIQUIDITY AND CAPITAL RESOURCES
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 used
$15.6 million of cash for operating purposes in the first quarter of 1997. In
contrast, on a consolidated basis, during 1996, the Company's operations used
cash of approximately $29.3 million.
The Company had operating losses of $5.1 million in the first quarter of
1997 compared to $195,000 in the first quarter 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
March 29, 1997 was $24.8 million, of which funds $19.0 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 quarter 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 (as
defined below). The Company previously had obtained waivers from the lenders in
1995 and amended its then existing revolving line of credit agreement in 1995
and in the first quarter of 1996. The Company was not in compliance with various
financial covenants under its Bank Credit Agreement as of March 29, 1997 and
December 31, 1996. 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 Second
Brunswick Transaction, on September 6, 1996, the Company had terminated its then
existing bank credit facility and entered into a new bank credit agreement (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
11
<PAGE> 12
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.
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 balance at December 31, 1996 was $44.9 million, of which
funds $12.8 million was restricted as to use. The Company obtained waivers from
the lenders in 1995 and amended its then existing revolving line of credit
agreement in 1995 and in the first quarter of 1996. The Company was not in
compliance with various financial covenants under its Bank Credit Agreement as
of December 31, 1996. In the first quarter of 1997, the Company experienced
operating losses of $5.1 million, used $15.6 million of cash for operating
purposes, and 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 (as defined below). 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 Second Brunswick Transaction, on September 6, 1996,
the Company terminated its then existing bank credit facility and entered into a
new bank credit agreement (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 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 and term credit facility (the "New Loan Facility")
pursuant to a Loan and Security Agreement (the "Loan Agreement") between the
Company's borrowing subsidiaries and certain financial institutions. Borrowers
under the New Loan Facility are the Company's operating subsidiaries and the
first tier holding company subsidiary for the operating subsidiaries. The New
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 New 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 was obtained by the
Metromedia Company, an affiliate of Metromedia International Group, Inc.
("MIG"), the Company's largest stockholder. Such Letter of Credit cannot be
drawn until five days after a payment default under the New Loan Facility and
fifteen days after a non-payment default under the New Loan Facility.
Metromedia also is entitled to receive copies of all notices required under
the Loan Agreement.
The New Loan Facility provides up to a $75 million revolving credit
facility and two term loan tranches aggregating $25 million. The New Loan
Facility has a four year term. Borrowings under the revolving credit portion of
the New Loan Facility are based on eligible inventory and receivables.
Borrowings and other obligations under the New Loan Facility bear interest at a
per annum interest rate equal to the base rate of the reference financial
institution (the "Reference Rate") plus one percent (1%) except $10 million of
the term loans ("Tranche A") bears interest at the Reference Rate plus 1.5%.
The rate for borrowings under the revolving credit facility is subject to
decrease to 0.5% above the Reference Rate based on the achievement of certain
pricing benchmarks and is 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 provides for a $750,000 closing fee, plus an
unused line fee equal to 0.25% of the average unused portion of the maximum
revolving amount (i.e. $75 million), plus an annual facility fee equal to .50%
of the total initial facility (i.e. $100 million). Additional fees and expenses
are payable to the agent for the Lenders. In consideration of providing the
letter of credit, the affiliate of MIG was granted 3 million warrants to
purchase Common Stock of the Company at an exercise price of $.50 per share. The
Warrants have a ten year term and are exercisable beginning ninety (90) days
from the Closing Date. Prepayment fees on the Bank Credit Agreement, origination
fees on
12
<PAGE> 13
the New Loan Facility, brokerage, and other closing costs incurred by the
Company in connection with the New Loan Facility aggregated approximately $2.7
million, the majority of which were paid on the Closing Date.
The Loan Agreement contains 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 net worth, all as defined in the Loan Agreement. The Loan
Agreement also contains provisions requiring additional payments to the Lenders
in the event of the early termination of the Loan Agreement.
Management believes the Company is in material compliance with the terms
of the Loan Agreement and, based on the Company's internal financial
projections, that it will be in compliance with the terms of the Loan Agreement
on an on-going basis throughout 1997. Nevertheless, no assurances can be given
that the financial results actually achieved by the Company will be in accord
with its internal financial projections or that the results actually achieved
will be sufficient to enable the Company to comply with the financial and other
covenants contained in the Loan Agreement. In the event the Company were to be
in non-compliance with any of the provisions of the Loan Agreement, there can be
no assurances that any events of non-compliance could be cured or waived or that
the Lenders would agree to any amendment of the relevant provisions of the Loan
Agreement. In the event the Loan Agreement is terminated by the Lenders prior to
its scheduled expiration date, there can be no assurance that the Company could
arrange alternative sources of financing and the Company's inability to arrange
such alternative sources of financing would raise substantial doubt about the
Company's ability to continue as a going concern. A portion of the New Loan
Facility (approximately $54 million) was utilized on the Closing Date to
refinance the Company's prior bank facility and a portion was used to pay other
indebtedness. The remaining available funds will be for working capital and
other general corporate purposes. Following borrowings made on the Closing Date
under the New Loan Facility, the Company had available borrowing capacity under
the New Loan Facility of approximately $12 million.
Management believes the availability of such funds is a necessary
component of the Company's strategy to improve its operating and financial
performance. The Company believes that borrowings available under the New Loan
Facility and internally generated funds should be adequate to implement the
strategies discussed below.
In 1996, the Company began to implement, and in 1997 is continuing 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
number of products offered, a shift from manufacturing of certain products to
sourcing, extensive piloting and testing of new product introductions, and
implementations of stringent quality assurance measures. Management expects the
full effects of such strategies will not be fully realized, if at all, until
late 1997.
The Company must satisfy all of its working capital and capital
expenditure requirements from borrowings under the New Loan Facility, from cash
provided by operating activities, from the sale of assets or external
borrowings. 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 New Loan
Facility. Sales of such assets generally require the consent of the Lenders and
management believes that sales of assets which are not replaced would generally
require payments 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 is 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 the full
benefits expected therefrom.
The Company has two long-term debt issues, the $51.7 million Convertible
Subordinated Debentures due 2003 (the "Debentures") and $2.1 million of its
11.75% Senior Subordinated Notes due 2002 (the "Notes"). The Debentures are
redeemable at the option of the Company. Before the Company's Debentures can be
called for redemption, the Company's Common Stock must meet or exceed a minimum
closing price of $5.0625 per share for the thirty day period prior to such
notice of redemption. The Debentures are convertible, at the option of the
holders thereof, into Common Stock of the Company at a price of $4.00 per share.
The remaining Notes are redeemable at the option of the Company beginning
September 15, 1996, at a price of 105.875%. The redemption price declines to par
on or after December 15, 2000.
13
<PAGE> 14
On August 2, 1996, the Company commenced an Offer to Purchase and
Consent Solicitation (the "Offer") to the holders of its Notes, whereby the
Company offered to purchase up to all of the then outstanding Notes not held by
the Company ($90.1 million) at a purchase price equal to one hundred percent
(100%) of such Noses' principal amount, plus accrued but unpaid interest. Such
Offer terminated on August 29, 1996. Consents to the required Waivers under the
Indenture were obtained from the holders of $88.4 million principal amount of
the Notes and the Waivers to the relevant Indenture provisions were effected
thereafter. Of such amount, $88.0 million also were purchased.
The Notes and Debentures are obligations of the Company and the ability
of the Company to meet its debt service obligations is dependent on the ability
of its 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 New Loan Facility restricts, with limited exceptions,
distributions, dividends, and payments to the Company, but in each case, permits
dividends and interest on intercompany loans to be paid to the Company for,
among other things, the purpose of making interest payments on the Notes and
Debentures so long as the relevant subsidiary is not in default under the Loan
Agreement.
At March 29, 1997, the Company, on a consolidated basis, had
stockholders' equity of $44.1 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 $55.1 million, respectively.
The Company's capital expenditures plan contemplates 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 could be curtailed or deferred
depending on the availability of financing and the Company believes that less
than half of that amount is necessary to maintain production facilities. The
majority of the Company's capital expenditures are planned for tooling of new
products and cost reductions.
AVAILABILITY OF NOLS
The Company estimates that it had, for state and federal income tax
purposes, net operating loss carry-forwards ("NOLs") amounting to approximately
$10.2 million at March 29, 1997. Such NOLs expire predominantly 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 NOLs, if
the corporation experiences a more than 50% change in ownership during certain
periods. Changes in ownership in periods thereafter could substantially
restrict the Company's ability to utilize its tax net operating loss
carry-forwards. There can be no assurance that an ownership change will not
occur in the future. In addition, the NOLs 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 the materials price of plastics, cardboard and steel have
had a significant negative impact in 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 quarter ended March 29, 1997.
At March 29, 1997, the Company, on a consolidated basis, had
stockholders' equity of $44.1 million versus $53.2 million at December 31, 1996.
14
<PAGE> 15
Part II. OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
11 - Computation of Per Share Earnings
27 - Financial Data Schedule (for SEC use only)
b) Reports on Form 8-K.
None.
15
<PAGE> 16
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: July 1, 1997 By: /s/ JAMES L. MARDEN
---------------------------
James L. Marden
President
Dated: July 1, 1997 By: /s/CHARLES E. SANDERS
---------------------------
Charles E. Sanders
Principal Financial and
Accounting Officer
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------ ----------- ------
<S> <C> <C>
11 - Computation of Per Share Earnings, Three Months
Ended March 29, 1997 and March 30, 1996
27 - Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 11
RDM SPORTS GROUP, INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE MONTHS ENDED MARCH 29,1997 AND MARCH 30,1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 29, MARCH 30,
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Primary:
Weighted average common shares outstanding during period 48,969 49,177
Common shares issuable if all derivative securities other than
Debentures had been converted at the date of issuance _ 962
-------- --------
Average common shares outstanding for primary calculation 48,969 50,139
======== ========
Fully Diluted:
Weighted average common shares outstanding during period 48,969 49,177
Net common shares issuable on exercise of warrants -- 962
Assumed conversion of 8% subordinated debentures to Common
Stock as of date of issuance, August 5, 1993 -- 12,936
-------- --------
Average common shares outstanding for fully diluted calculation 48,969 63,075
======== ========
(Loss) earnings:
From net (loss) earnings $ (9,240) $ 4,630
Assumed conversion of 8% subordinated debentures as of date of
issuance, August 5, 1993:
Plus interest savings, net of tax -- 820
Net (loss) earnings $ (9,240) $ 5,450
Primary (loss) earnings per share:
Net (loss) earnings $ 0.19 $ 0.09
Fully diluted (loss) earnings per share:
From net (loss) earnings $ 0.19 $ 0.07
From debt conversion -- 0.02
Net (loss) earnings $ 0.19 $ 0.09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-29-1997
<CASH> 5,790
<SECURITIES> 0
<RECEIVABLES> 62,729
<ALLOWANCES> 3,269
<INVENTORY> 64,057
<CURRENT-ASSETS> 154,086
<PP&E> 57,272
<DEPRECIATION> 15,161
<TOTAL-ASSETS> 266,794
<CURRENT-LIABILITIES> 146,123
<BONDS> 55,542
0
0
<COMMON> 537
<OTHER-SE> 43,570
<TOTAL-LIABILITY-AND-EQUITY> 266,794
<SALES> 55,518
<TOTAL-REVENUES> 55,518
<CGS> 51,971
<TOTAL-COSTS> 8,663
<OTHER-EXPENSES> 1,036
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,024
<INCOME-PRETAX> (9,176)
<INCOME-TAX> 64
<INCOME-CONTINUING> (9,240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,240)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
