<PAGE> 1
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 quarterly period ended March 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________ to ______________________
Commission file number 0 - 19596
SLM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-36-32297
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
30 Rockefeller Plaza, Suite 4314, New York, New York 10112-4399
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 212-332-1610
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 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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at May 17, 1996
- -------------------------------------------------------------------------------
<S> <C>
Common Stock, 18,859,679
$.01 par value
</TABLE>
<PAGE> 2
SLM INTERNATIONAL, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
- -----------------------------------------------------------------------------------
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Unaudited Statements of Operations for the Three
Months Ended March 30, 1996 and April 1, 1995 1
Consolidated Unaudited Balance Sheets as of March 30, 1996 and
December 31, 1995 2
Consolidated Unaudited Statements of Cash Flows for the Three
Months Ended March 30, 1996 and April 1, 1995 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II Other Information
Item 1. Legal Proceedings 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE> 3
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Three Months Ended
March 30, April 1,
1996 1995
------------ ------------
<S> <C> <C>
Net sales $ 26,463 $ 30,778
Cost of goods sold 16,285 20,247
----------- -----------
Gross profit 10,178 10,531
Selling, general and administrative expenses 10,419 13,171
----------- -----------
Operating (loss) (241) (2,640)
Debt related fees 1,714 1,721
Interest expense 3,183 2,872
Other expense, net 55 34
----------- -----------
(Loss) from continuing operations before income taxes (5,193) (7,267)
Income taxes -- --
----------- -----------
(Loss) from continuing operations (5,193) (7,267)
(Loss) from discontinued operations -- --
----------- -----------
Net (loss) $ (5,193) $ (7,267)
=========== ===========
(Loss) per share from continuing operations $ (0.28) $ (0.39)
(Loss) per share from discontinued operations -- --
----------- -----------
Net (loss) per share $ (0.28) $ (0.39)
=========== ===========
Average shares outstanding 18,859,679 18,859,679
=========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
1
<PAGE> 4
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
March 30, Dec. 31,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 23,818 $ 18,605
Accounts receivable, net 25,678 41,346
Inventories 58,215 50,898
Prepaid expenses and other assets 4,712 3,704
Net assets of discontinued operations 7,393 9,856
--------- ---------
Total current assets 119,816 124,409
Property, plant and equipment, net 13,648 13,496
Other assets 70 123
--------- ---------
Total assets $ 133,534 $ 138,028
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Short-term debt $ -- $ --
Accounts payable and accrued liabilities 12,440 13,083
Long-term debt, current portion 596 702
Income taxes payable 533 536
--------- ---------
Total current liabilities 13,569 14,321
Liabilities subject to compromise under
reorganization proceedings 203,194 201,814
Other liabilities 535 535
--------- ---------
Total liabilities 217,298 216,670
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT)
Common stock 189 189
Additional paid-in capital 88,564 88,564
Retained (deficit) (168,762) (163,569)
Foreign currency translation adjustments (3,755) (3,826)
--------- ---------
Total stockholders' (deficit) (83,764) (78,642)
--------- ---------
Total liabilities and stockholders' (deficit) $ 133,534 $ 138,028
========= =========
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
2
<PAGE> 5
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 30, April 1,
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) $ (5,193) $ (7,267)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation and amortization 690 959
Provisions for inventory, doubtful accounts and 1,960 2,002
other deductions
Gain on sale and disposal of fixed assets (6) --
Loss on foreign exchange 79 29
Change in operating assets and liabilities:
Accounts receivable 13,839 18,400
Inventories (8,003) (2,058)
Other assets (797) (1,120)
Accounts payable and accrued liabilities 244 (3,516)
Interest payable 3,144 (421)
Other 31 (139)
Discontinued operations 2,463 --
-------- --------
Net cash provided by operating activities 8,451 6,869
-------- --------
INVESTING ACTIVITIES:
Purchases of fixed assets (827) (774)
Proceeds from sales of fixed assets 20 --
-------- --------
Net cash used in investing activities (807) (774)
-------- --------
FINANCING ACTIVITIES:
Principal payments on debt (2,430) (13,608)
-------- --------
Net cash used in provided by financing activities (2,430) (13,608)
-------- --------
Effects of foreign exchange rate changes on cash (1) 2
-------- --------
Increase (decrease) in cash 5,213 (7,511)
-------- --------
Cash at beginning of period 18,605 8,344
-------- --------
Cash at end of period $ 23,818 $ 833
======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
3
<PAGE> 6
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements appearing
in this quarterly report have been prepared on a basis consistent with the
annual financial statements of SLM International, Inc. and subsidiaries (the
"Company"). SLM International, Inc. and six of its subsidiaries (collectively,
the "Debtors") filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code (the "Filing") in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court") on October 24, 1995
(the "Petition Date"). The Company and those subsidiaries are presently
operating their businesses in the ordinary course as debtors-in-possession
subject to the jurisdiction of the Bankruptcy Court. The Bankruptcy Court has
entered an order authorizing the joint administration of the Debtors' Chapter
11 cases (the "Chapter 11 Cases") (see Note 2).
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to a going concern which, except as otherwise disclosed, assumes that assets
will be realized and liabilities will be discharged in the normal course of
business, and do not include any adjustments which might result from the outcome
of the Chapter 11 Cases.
In the opinion of management, all normal recurring adjustments necessary for a
fair presentation of the Company's Unaudited Consolidated Statements of
Operations, Balance Sheets and Statements of Cash Flows for the interim period
in 1996 and the corresponding period in 1995 have been included. These unaudited
interim consolidated financial statements do not include all of the information
and footnotes required by generally accepted accounting principles to be
included in a full set of financial statements. Results for the interim period
are not necessarily a basis from which to project results for the full year due
to the seasonality of the Company's business and the Chapter 11 Filing. These
unaudited consolidated financial statements should be read in conjunction with
the Company's annual report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1995. Certain prior-year
amounts have been reclassified to conform to the current year presentation.
Cash consists of cash and highly liquid short-term investments with original
maturities of three months or less. The Company invests excess funds in
reverse-repurchase agreements with Fleet Credit Corporation ("Fleet"). On March
30, 1996, the Company purchased $16,918 of U.S. Government backed securities
under agreements to resell on dates through April 3, 1996. Due to the short-term
nature of these investments, the Company did not take physical possession of the
securities, which were instead held in Fleet's safe keeping account at the
Federal Reserve, their Trust Department or vault. The Company believes it is not
exposed to any significant credit risk on cash equivalents.
2. REORGANIZATION CASE
In the Chapter 11 Cases, substantially all liabilities as of the Petition Date
are subject to resolution under a plan of reorganization to be voted upon by the
Company's creditors and stockholders and confirmed by the Bankruptcy Court.
Schedules have been filed by the Company with the Bankruptcy Court setting forth
its assets and liabilities as of the Petition Date as shown by its accounting
records. Differences between amounts shown by the Company and claims filed by
creditors will be investigated and resolved. The ultimate amount and settlement
terms for such liabilities are subject to a plan of reorganization, and
accordingly, are not presently determinable.
Under the Bankruptcy Code, the Company may elect to assume or reject leases,
employment contracts, service contracts and other executory pre-Petition Date
contracts, subject to Bankruptcy Court approval. The Company cannot presently
4
<PAGE> 7
determine or reasonably estimate the ultimate liability which may result from
the filing of claims for any rejected contracts, and no provisions have yet been
made for these items.
Since October 1, 1994, the Company has not been in compliance with certain
financial and other covenants in its principal financing agreements, including
those with its banks and with the holders of the Company's 6.76% senior notes
(the "Senior Noteholders") which would allow these lenders to accelerate
repayment of these loans. However, as a result of the Filing, no principal or
interest payments will be made on any pre-Petition Date debt without Bankruptcy
Court approval or until a reorganization plan defining the repayment terms has
been confirmed.
The Bankruptcy Court has authorized the Company to use the cash generated by its
operations to continue to fund its business obligations, and to pay pre-Petition
Date wages, salaries, sales commissions, employee benefits and customs duties,
honor manufacturer's warranties and pay certain non-U.S. pre-Petition Date
liabilities. These various Bankruptcy Court authorizations provide the Company
with cash and liquidity so that it can conduct its operations. The Company
expects to continue to fund its working capital and capital expenditures
requirements through either cash generated by its operations or through credit
facilities as necessary. However, there can be no assurance that the Company
will be able to obtain such credit facilities or, if obtained, that such
facilities will be sufficient to enable the Company to meet its liquidity
requirements. The Company's financing requirements for long-term growth, future
capital expenditures and debt service cannot be determined until a plan of
reorganization is developed and confirmed by the Bankruptcy Court. The Company
is not presently able to predict when the Chapter 11 Cases will be concluded or
on what basis.
3. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Substantially all of the Company's liabilities as of the Petition Date are
subject to settlement under a plan of reorganization. The Company is generally
not permitted to make payments with respect to its pre-Petition Date liabilities
until a plan of reorganization has been confirmed by the Bankruptcy Court.
Liabilities subject to compromise under reorganization proceedings consisted of:
<TABLE>
<CAPTION>
Mar. 30, Dec. 31,
1996 1995
-------- --------
<S> <C> <C>
Priority Claims $ 605 $ 605
Secured Debt
Principal 98,552 100,876
Interest 6,657 3,513
General Unsecured Claims 12,715 12,155
Unsecured Debt, Principal and Interest 84,665 84,665
-----------------------------------------------------------------------------------------
$203,194 $201,814
=========================================================================================
</TABLE>
Priority claims, the repayment of which the Company is required to prioritize
under bankruptcy law, are comprised principally of income and property tax
claims. Unsecured debt includes amounts which may ultimately be deemed secured.
It is not practicable to estimate the fair value of the Company's liabilities
subject to compromise under reorganization proceedings.
4. DISCONTINUED OPERATIONS
In December 1994, the Company determined that it would hold its investments in
its Buddy L toy and fitness businesses for sale. Accordingly, the results of
operations of these businesses have been accounted for as discontinued
operations for all periods in the accompanying unaudited consolidated financial
statements. On March 2, 1995, Buddy L Inc. filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
District of Delaware. On May 9, 1995, the Company accepted the bid to sell
certain assets and liabilities of the Buddy L toy business to Empire of
Carolina, Inc. The bid was approved by the Bankruptcy Court on May 19, 1995
5
<PAGE> 8
and the transaction closed on July 7, 1995. The court approved sale of the
fitness business was completed on June 30, 1995. At December 31, 1994, the
Company recorded a loss of $11,335, net of income taxes, for the disposition of
its discontinued operations, including the estimated 1995 operating loss through
the disposition date. As a result of the finalization of the sale of the Buddy L
toy and fitness businesses, the terms of which changed substantially from those
previously proposed; a change in the anticipated distribution of the sale
proceeds amongst the various creditors and the liquidation of the remaining
Buddy L assets (primarily accounts receivable and real property); and an
increase in estimated phase out costs, an additional loss from disposition of
discontinued operations of $25,569 was recorded during the second quarter of the
year ended December 31, 1995. Net assets of discontinued operations of $7,393 at
March 30, 1996 and $9,856 at December 31, 1995, consisted primarily of accounts
receivable and real property.
On December 19, 1995, the Bankruptcy Court approved a settlement agreement (the
"Settlement Agreement") in the Buddy L Inc. Chapter 11 case between the Company,
Buddy L Inc., its creditors and the Company's banks and Senior Noteholders,
resolving the allocation of the proceeds and expenses from the disposition of
the Buddy L toy and fitness businesses. A plan of reorganization and a
disclosure statement for Buddy L Inc. were filed with the Bankruptcy Court
embodying the terms of the Settlement Agreement. A hearing on the adequacy of
the disclosure statement has not yet been scheduled.
5. DEBT RELATED FEES
As a result of the Company's significant losses in the year ended December 31,
1994, the resultant non-compliance with covenants in its various financing
agreements, the involuntary bankruptcy action initiated by its Senior
Noteholders, the Standstill Agreements with its lenders and the Filing, the
Company's continuing operations incurred significant legal and professional fees
totaling $1,714 and $1,721 for the three months ended March 30, 1996 and April
1, 1995, respectively. These fees include the cost of the Company's legal
counsellors, financial advisors and consultants, as well as those of its
bankers, Senior Noteholders and creditors and additionally, 1995 included
certain payments made directly to these lenders. The debt related fees for the
three months ended March 30, 1996 are net of $99 of interest earned on
accumulated cash resulting from the Filing. These costs are included as Debt
Related Fees in the Unaudited Consolidated Statement of Operations for the
periods then ended. It is anticipated that additional significant reorganization
related fees will be incurred in future periods.
Additionally, as a result of the Company's defaults under its financing
agreements, its financial condition and the terms of the Standstill Agreements,
since February 1995 the Company has been charged an additional 3.0% interest on
its bank debt and the interest rate on the 6.76% Senior Notes has been increased
to 15%. These higher interest rates resulted in incremental interest expense of
$1,007 and $783 for the three months ended March 30, 1996 and April 1, 1995,
respectively, which is included in Interest Expense in the Unaudited
Consolidated Statements of Operations.
The debt related fees and default interest costs represent 52.4% and 34.5% of
the Company's loss from continuing operations for the periods then ended.
6. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
March 30, 1996 Dec. 31, 1995
-------------- -------------
<S> <C> <C>
Finished products $48,418 $38,948
Work in process 3,303 4,143
Raw materials and supplies 6,494 7,807
------- -------
$58,215 $50,898
======= =======
</TABLE>
6
<PAGE> 9
7. INDEBTEDNESS
As a result of the Chapter 11 Filing, certain of the Company's indebtedness is
subject to resolution under a plan of reorganization to be voted upon by the
Company's creditors and stockholders and confirmed by the Bankruptcy Court. The
related debt has been classified as non-current and included in liabilities
subject to compromise under reorganization proceedings, at March 30, 1996 and
December 31, 1995. Since October 1, 1994, the Company has not been in compliance
with certain financial and other covenants in its principal financing
agreements, including those with its banks and Senior Noteholders.
On June 5, 1995, the Company and its bank lenders and Senior Noteholders entered
into standstill agreements (the "Standstill Agreements") that provided a period
of continued financing of the Company by its lenders, a sharing of certain
collateral by its bank lenders and Senior Noteholders and provided the Company
with a period in which to restructure its debt without further judicial
proceedings. Under the terms of the Standstill Agreements, the interest rate on
the 6.76% Senior Notes was increased to 15% effective February 15, 1995 and,
subject to certain adjustments, would have increased to a maximum of 19% during
the agreement period and the interest was payable at 9% with the remaining
interest payable at the end of the Standstill Agreement period. The Standstill
Agreements provided the Company's lenders with warrants for an aggregate of 2.0
million shares of the Company's common stock, with an exercise price of $2.45
per share and 0.5 million shares with an exercise price of $2.27 per share.
Under certain conditions the Company may repurchase these warrants below the
exercise price. Additionally, in June 1995, in connection with the Standstill
Agreements, the Senior Noteholders withdrew the March 1995 involuntary
bankruptcy petitions they had filed against the Company and its subsidiaries in
Canada.
In December 1992, the Company entered into a Loan and Security Agreement ("Bank
Agreement") with a syndicate of banks led by Fleet Credit Corporation.
Borrowings under the Bank Agreement are collateralized by certain of the
Company's accounts receivable and inventory, and the common stock of certain
subsidiaries and are cross collateralized and guaranteed by such subsidiaries.
Borrowings are based upon eligible accounts receivable and inventories. Total
amounts outstanding under the Bank Agreement were $94,006 and $96,330 at March
30, 1996 and December 31, 1995, respectively, and as a result of the Filing are
classified as liabilities subject to compromise under reorganization
proceedings.
The Bank Agreement contains certain administrative and financial covenants which
require maintenance of specified ratios and cross-defaults with the Company's
other financing agreements. Since October 1, 1994, the Company has not been in
compliance with these covenants.
Borrowings under the Bank Agreement bear interest at the bank's U.S. prime rate
(8.25% at March 30, 1996 and 8.5% at December 31, 1995) plus 1.0% payable
monthly. In addition, the Company is charged a monthly commitment fee of 0.25%
to 0.375% of the unused portion of the facility. However, since February 23,
1995, the Company has been charged a default rate of interest at the U.S. prime
rate plus 4.0% payable monthly.
In March 1994, the Company completed a private placement of $75,000 of its 6.76%
Senior Notes due February 15, 2004 ("Senior Notes") with a group of eight
insurance companies. The Senior Notes contain certain administrative and
financial covenants including maintenance of minimum net worth and debt
limitation and cross-default with the Company's other financing agreements.
Additionally, the Senior Notes are cross-guaranteed by certain of the Company's
subsidiaries, the shares of which are co-pledged to the Senior Noteholders and
the lenders under the Bank Agreement. Since October 1, 1994 the Company has not
been in compliance with these covenants.
During the reorganization proceedings the Company is generally not permitted to
pay interest. During such time, the Company will record interest expense only to
the extent paid or earned during the proceedings and to the extent it is
probable that the Bankruptcy Court will allow interest on pre-Petition Date
7
<PAGE> 10
debt as a priority, secured or unsecured claim. The excess of contractual
interest expense over recorded interest expense for the year ended December 31,
1995 and through the three months ended March 30, 1996 was approximately $2,100
and $5,800, respectively.
8. CONTINGENCIES AND LITIGATION
Under Section 362 of the Bankruptcy Code, the Company's filing of a Chapter 11
petition, among other things, operates as an automatic stay of the commencement
or continuation of any legal action against the Company or any act to enforce a
lien on its property with respect to claims that arose prior to the commencement
of the Chapter 11 Cases. Accordingly, pending litigation against the Company and
its subsidiaries arising from pre-Petition Date claims has been stayed by reason
of the Filing in accordance with the Bankruptcy Code, unless and until the stay
is lifted with respect to a particular case.
A. PRODUCT LIABILITY:
Certain subsidiaries of the Company are defendants in a personal injury action
which was filed in the United States District Court for the District of
Massachusetts in 1989 involving a spinal injury incurred by the plaintiff while
wearing a hockey helmet purported to have been manufactured or sold by such
subsidiaries. In view of the Filing, the Court dismissed the case without
prejudice to either party moving to restore it to the dockets upon final
determination of the bankruptcy proceedings. The plaintiff seeks damages related
to his quadriplegia consisting of approximately $6,300 for economic loss and
long-term medical and health care costs and $2,700 for, among other things, pain
and suffering. The plaintiff has further asserted a claim under Massachusetts
General Laws, Chapter 93A, for breach of warranty, including a claim for treble
damages for any and all loss. The Company has insurance coverage of
approximately $400 plus the substantial portion of legal costs for this action.
Based on the facts of this case, the Company believes that it has meritorious
defenses to the claim. However, an adverse outcome of this matter could have a
materially adverse effect on the reorganization of the Company and on its
financial condition. The Company has not provided for any loss in its
consolidated financial statements which might result from this litigation.
The Company is also a defendant in other product liability suits for personal
injuries. The Company believes that any resulting losses and defense costs will
be within applicable insurance coverage and the Company's provision for such
losses and costs.
B. ENVIRONMENTAL MATTERS:
In 1991, the Vermont Department of Environmental Conservation ("VTDEC")
notified the Company that the Bradford, Vermont property operated by its
wholly-owned subsidiary, Maska U.S., Inc. ("Maska"), had been included on the
U.S. Environmental Protection Agency's Comprehensive Environmental Response,
Compensation and Liability Information System and the Vermont Hazardous Sites
List and was being evaluated for possible remedial action. Under relevant
environmental laws, Maska, as an owner of the property, is potentially liable
for the entire cost of investigating and remediating the contamination
emanating from its Bradford property and certain civil penalties. It is
possible that VTDEC's claims, if any, against Maska are stayed by virtue of the
pendency of Maska's Chapter 11 case. VTDEC has expressed the view that they are
not. The Company can make no assurance that these actions are stayed.
Maska has undertaken its own investigation to determine the extent of
contamination, the rate of movement and the concentration of the contaminants,
the appropriate action required for site remediation and the identification of
other parties who should bear a share of the costs of remediation. Maska may
seek recovery against the former owners of its Bradford property and facility
and certain of their affiliated companies for the costs of such investigation,
remediation and the settlement with the adjacent property owner discussed below.
In addition, Maska has brought suit against certain of its insurance carriers
for their failure to defend or indemnify Maska with respect to these claims. It
is uncertain at this time whether the prior owner or the Company's
8
<PAGE> 11
insurers will bear their share of the costs and any damages. During April 1996,
Maska and the State of Vermont signed a consent decree setting forth the terms
under which Maska will remediate the contaminated property. The consent decree
was approved by the Bankruptcy Court on May 14, 1996. The consent decree is
subject to several conditions, including payment by the Company of approximately
$250 in certain civil penalties and certain State of Vermont oversight fees. The
Company has previously accrued approximately $250 related to the consent decree.
While the total cost of investigation and remediation cannot be determined until
the investigation required by VTDEC is complete and the extent of Maska's
remedial obligations has been determined, the Company believes that it is
reasonably possible that these costs will be in a range of $1,000 to $2,000. The
Company has previously accrued approximately $1,400 toward these costs, which
includes capital costs and operating, maintenance and monitoring costs over a
period of up to 30 years after construction of the remedy.
While the Company believes that other parties, including insurers, may be liable
for some or all of these costs, there can be no assurance that these parties
will bear these costs and therefore the Company has not assumed any recovery
from such third parties in estimating its potential liabilities. Based on
information available to the Company at this time, an outcome other than
anticipated for Maska's obligations for site remediation could have a materially
adverse effect on the financial condition of the Company.
In 1992, the owner of a property adjacent to Maska's manufacturing facility in
Bradford, Vermont, filed an action in Vermont Superior Court alleging that its
property has been contaminated as a result of the Company's manufacturing
activities and seeking compensatory and punitive damages under the Vermont
Groundwater Protection Law and various common law theories. During June 1995,
Maska reached a settlement of all claims with the adjacent landowner consisting
of $1,000 cash (which was paid during July 1995) and a $6,000 note bearing
interest at 10% payable over five years based on a twenty year amortization with
the balance of principal payable in June 2000. The Company recorded a provision
of $7,000 for this settlement during the year ended December 31, 1995.
C. SECURITIES LITIGATION:
During May 1994, the Company was served with three complaints, in each case
filed in the U.S. District Court for the Southern District of New York, that
alleged violations of Sections 10(b) and 20 of the Securities Exchange Act of
1934 (the "1934 Act"). Each complaint also named as defendants certain current
and former officers and directors of the Company, sought class action status,
unspecified damages and certain fees and expenses. On July 14, 1994, the
respective plaintiffs filed a consolidated complaint that was purportedly
brought on behalf of all purchasers of the Company's common stock between July
12, 1993 and April 15, 1994. The defendants stipulated to certification of the
purported class for procedural purposes. On August 3, 1994, the Company and
other defendants filed a motion to dismiss the consolidated complaint. The
Court has not ruled on that motion.
In November 1994, another complaint was filed in the U.S. District Court for the
Southern District of New York, which was purportedly brought on behalf of all
purchasers of the Company's common stock between May 2, 1994 and November 15,
1994. The complaint named as defendants the Company and certain current and
former officers and directors, and alleged violations of Section 10(b) and 20 of
the 1934 Act. The plaintiff in that complaint, the plaintiffs in the
consolidated complaint, and two additional plaintiffs together filed a second
consolidated complaint on January 5, 1995. The second consolidated complaint was
purportedly brought on behalf of all purchasers of the Company's common stock
between July 12, 1993 and November 21, 1994; names as defendants the Company and
certain current and former officers and directors; alleges violations of
Sections 10(b) and 20 of the 1934 Act; seeks class action status; unspecified
damages, and certain fees and expenses. The Company and
9
<PAGE> 12
individual defendants have filed an answer to the second consolidated complaint,
which denied all substantive allegations.
On February 14, 1996, the Company, together with certain of its former and
present officers and directors, reached a settlement with the plaintiffs in this
litigation. The settlement provides for the cash payment by the Company's
insurer of $8,750, on behalf of certain former and present officers and
directors of the Company who are defendants. In addition, the Company will issue
1,000,000 shares of its Common Stock. The settlement is subject to several
conditions, including the approval of the Bankruptcy Court and the U.S. District
Court for the Southern District of New York. As a result of this settlement, the
Company recorded a provision of approximately $1,563 (the market value of
1,000,000 shares of common stock on the date the settlement was agreed to) in
the year ended December 31, 1995.
Other than certain legal proceedings arising from the ordinary course of
business, which the Company believes will not have a material adverse impact on
the results of operations, there is no other litigation pending or threatened
against the Company.
10
<PAGE> 13
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On October 24, 1995, SLM International, Inc. and six of its subsidiaries filed
for relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware. The Company and those
subsidiaries chose to seek court protection from creditors in order to conduct
their operations while preparing a reorganization plan. The Bankruptcy Court has
authorized the Company to use the cash generated by its operations to continue
to fund its business obligations. While the Company attempted, and would have
preferred, to reorganize outside of a bankruptcy court proceeding, the Company
viewed the Filing as the most viable alternative available given the adverse
impact on the businesses of inadequate liquidity. Nevertheless, disruptions that
occurred prior to and which may have been or may be caused by the Filing will
affect the Company's operating performance for a given period and could continue
to affect the Company's results throughout 1996.
On March 6, 1995, the Senior Noteholders filed involuntary bankruptcy petitions
against certain of the Company's U.S. subsidiaries in the U.S. and against the
Company and certain of its Canadian subsidiaries in Canada. On March 24, 1995,
the United States Bankruptcy Court dismissed the involuntary petition filed
against two of the Company's U.S. subsidiaries (Maska U.S., Inc. and #1 Apparel,
Inc.). During June 1995, the Company entered into Standstill Agreements with its
bank lenders and Senior Noteholders that provided a period of continued
financing by its lenders, a sharing of collateral by the bank lenders and Senior
Noteholders and provided the Company a period (through December 31, 1995) in
which to restructure its debt without further judicial proceedings.
Additionally, the Company retained the investment banking firm of Bear Stearns &
Co., Inc. to assist the Company in exploring a wide variety of possible
financial transactions, including refinancing existing debt and obtaining equity
capital. In June 1995, in connection with the Standstill Agreements, the
Noteholders withdrew involuntary bankruptcy filings against the Company and its
subsidiaries in Canada.
As a result of significant operating losses in its toy and fitness businesses
during 1994, the Company decided in December 1994 that it would hold its
investment in Buddy L for sale. Consequently, these businesses have been
accounted for as discontinued operations. On March 2, 1995, the Company's
wholly-owned subsidiary Buddy L Inc. filed for reorganization under Chapter 11
of the United States Bankruptcy Code. On May 9, 1995, the Company accepted the
bid to sell certain assets and liabilities of the Buddy L toy business to Empire
of Carolina, Inc. The bid was approved by the Bankruptcy Court on May 19, 1995
and the transaction closed on July 7, 1995. The court approved sale of the
fitness business was completed on June 30, 1995. For further information
concerning discontinued operations, see Note 4 to the Unaudited Consolidated
Financial Statements presented elsewhere herein.
The following discussion provides an assessment of the Company's results of
continuing operations and liquidity and capital resources and should be read in
conjunction with the Unaudited Consolidated Financial Statements of the Company
and Notes thereto included elsewhere herein. (All references to "Note(s)" are to
the Notes to Unaudited Consolidated Financial Statements).
RESULTS OF CONTINUING OPERATIONS FOR THE QUARTER ENDED MARCH 30, 1996
1996 COMPARED TO 1995
Net sales of the Company's continuing operations decreased 14.0% to $26.5
million in the three months ended March 30, 1996 as compared to $30.8 million in
the three months ended April 1, 1995. The decline in sales included decreases of
17.7% in hockey, figure and in-line roller skates and 9.7% in protective
equipment, while sales of licensed sports apparel declined 13.3%.
11
<PAGE> 14
Sales in 1996 were negatively affected by a generally weak retail environment,
high retailer inventories, poor weather and reduced sales of excess, obsolete
and slow moving inventories. Furthermore, the Company has reduced the levels of
business it conducts with certain specialty retailers and mass merchandisers to
whom previous sales were made at low margins and high credit risk. In addition,
the growth rate of in-line skate sales has slowed as the market begins to
mature.
Gross profit for the three months was $10.2 million in 1996 compared to $10.5
million in 1995, a decrease of 3.4%. Measured as a percentage of net sales,
gross profit margins increased to 38.5% in 1996 from 34.2% in 1995. Gross profit
margins in 1996 increased due to a favorable product mix, and by lower sales of
excess, obsolete and slow moving inventories as compared to 1995. In addition,
gross profit during the three months ended April 1, 1995 was negatively affected
by unabsorbed factory overhead costs resulting from a lockout of unionized
employees at the Company's skate blade manufacturing facility in Beauport,
Quebec.
For the three months ended March 30, 1996, selling, general and administrative
expenses decreased 20.9% to $10.4 million compared to $13.2 million in the prior
year period. Measured as a percentage of net sales, these expenses were 39.4% in
1996 versus 42.8% in 1995. Expenses decreased primarily as a result of reduced
variable selling costs, principally royalties and commissions, lower legal
expenses associated with certain cases that were either settled or delayed due
to the Company's financial difficulties and generally lower operating expenses
due to the Company's efforts to reduce costs.
Operating losses for the three months ended March 30, 1996 were $0.2 million
compared to $2.6 million in the comparable prior year period.
As a result of the Company's Chapter 11 Cases, its continuing operations
incurred significant legal and professional fees totaling $1.7 million during
the three months ended March 30, 1996 and $1.7 million during the same prior
year period. These fees include the cost of the Company's legal counsellors,
financial advisors and consultants, as well as those of certain of its
creditors. These costs, which represent approximately 33.0% and 23.7% of the
Company's net loss for the three months ended March 30, 1996 and April 1, 1995,
respectively, are included as Debt Related Fees in the Unaudited Consolidated
Statements of Operations for the periods then ended. It is anticipated that
additional debt related fees will be incurred during the balance of 1996.
Interest expense increased to $3.2 million in the three months ended March 30,
1996 from $2.9 million in the three months ended April 1, 1995. The increase is
due to a higher average secured debt level in 1996 and the allocation of
interest expense to discontinued operations in 1995. In addition, during the
reorganization proceedings the Company is generally not permitted to pay
interest. During such time, the Company will record interest expense only to the
extent paid or earned during the proceedings and to the extent it is probable
that the Bankruptcy Court will allow interest on pre-Petition Date debt as a
priority, secured or unsecured claim.
The Company's loss from continuing operations for the three months ended March
30, 1996 was $5.2 million ($0.28 per share) compared to $7.3 million ($0.39 per
share) in the comparable prior year period.
LIQUIDITY AND CAPITAL RESOURCES
On October 24, 1995, SLM International, Inc. and six of its subsidiaries filed
for relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware. The Bankruptcy Court has
authorized the Company and these subsidiaries to operate their businesses in the
ordinary course while seeking to work out a plan of reorganization. The
Bankruptcy Court has also authorized the Company to use the cash generated by
its operations to continue to fund its business obligations, and to pay, among
other things, pre-Petition Date wages, salaries, sales commissions,
12
<PAGE> 15
employee benefits and customs duties, honor manufacturer's warranties and pay
certain non-U.S. pre-Petition Date liabilities.
The Filing has enabled the Company to stabilize its liquidity position because
the cash requirements for the payment of accrued interest, accounts payable and
other liabilities, which arose prior to the Filing, are in most cases deferred
until a plan of reorganization is approved by the Bankruptcy Court. Under the
Bankruptcy Code, the Company may elect to assume or reject leases, employment
contracts, service contracts and other executory pre-Petition Date contracts,
subject to Bankruptcy Court approval. The Company cannot presently determine or
reasonably estimate the ultimate liability which may result from the filing of
claims for any rejected contracts and no provisions have yet been made for these
items.
Management expects to finance the Company's short-term working capital and
capital expenditures requirements through cash generated by its operations, as
authorized by the Bankruptcy Court, or through credit facilities as necessary.
However, there can be no assurance that the Company will be able to obtain such
credit facilities or, if obtained, that such facilities will be sufficient to
enable the Company to meet its liquidity requirements. The Company's financing
requirements for long-term growth, future capital expenditures and debt service
cannot be determined until a plan of reorganization is developed and confirmed
by the Bankruptcy Court.
Currently, the Company is considering its options in connection with its
reorganization efforts. Those options include a reorganization plan which
provides for the Company to emerge as a stand-alone entity, or which provides
for a change of control either through a sale of the Company's common stock (or
similar transaction with a third party) or a sale of the Company's assets. In
addition, other parties of interest in the Company's reorganization proceedings,
such as creditors and shareholders, may obtain leave from the Bankruptcy Court
to propose one or more reorganization plans for the Company and its
subsidiaries. The Company is not presently able to predict when the Chapter 11
Cases will be concluded or on what basis.
During the three months ended March 30, 1996, net cash provided by operating
activities was $8.5 million compared to $6.9 million in the three months ended
April 1, 1995. Cash provided in 1996 included $2.5 million from discontinued
operations.
Cash flows used in investing activities during both the three months ended March
30, 1996 and April 1, 1995 included purchases of fixed assets of $0.8 million.
Net cash flows used by financing activities during the period ended March 30,
1996 were approximately $2.4 million, resulting primarily from the use of cash
from discontinued operations for principal payments on the Company's secured
debt as allowed by the Bankruptcy Court. In the comparable 1995 period, net cash
flows used by financing activities were approximately $13.6 million, resulting
from the repayment of short-term bank borrowings.
The Company follows the customary practice in the sporting goods industry of
offering extended payment terms to credit worthy customers on qualified orders.
The Company's working capital requirements generally peak in the third and
fourth quarters as it builds inventory and makes shipments under these extended
payment terms.
13
<PAGE> 16
SLM INTERNATIONAL, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 8 of Notes to Unaudited Consolidated
Financial Statements included in Part I of this report.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: None
(b) Reports filed on Form 8-K during the quarter ended March 30, 1996.
On March 15, 1996, the Company filed a Form 8-K with respect to
entering into a Memorandum of Understanding with the plaintiffs in
the class action litigation in In Re SLM International, Inc.
Securities Litigation.
14
<PAGE> 17
SLM INTERNATIONAL, INC.
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
SLM INTERNATIONAL, INC.
(REGISTRANT)
By: /s/ John A. Sarto
-------------------------------------
Name: John A. Sarto
Title: Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Kenneth A. Bloom
-------------------------------------
Name: Kenneth A. Bloom
Title: Vice President
(Principal Accounting Officer)
Date: May 20, 1996
<PAGE> 18
EXHIBIT INDEX
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) March
30, 1996 Form 10-Q and is qualified in its entirety by reference to such (b)
Form 10-Q Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-30-1996
<CASH> 23,818
<SECURITIES> 0
<RECEIVABLES> 25,678
<ALLOWANCES> 0
<INVENTORY> 58,215
<CURRENT-ASSETS> 119,816
<PP&E> 13,648
<DEPRECIATION> 0
<TOTAL-ASSETS> 133,534
<CURRENT-LIABILITIES> 13,569
<BONDS> 0
0
0
<COMMON> 189
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 133,534
<SALES> 26,463
<TOTAL-REVENUES> 26,463
<CGS> 16,285
<TOTAL-COSTS> 16,285
<OTHER-EXPENSES> 1,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,183
<INCOME-PRETAX> (5,193)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,193)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
