<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 June 29, 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 August 23, 1996
----- ------------------------------
<S> <C>
Common Stock, 18,859,679
$.01 par value
</TABLE>
<PAGE> 2
SLM INTERNATIONAL, INC.
FORM 10-Q
INDEX
PAGE NO.
--------
Part I Financial Information
Item 1. Financial Statements
Unaudited Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 29, 1996 and July 1, 1995 1
Unaudited Consolidated Balance Sheets as of
June 29, 1996 and December 31, 1995 2
Unaudited Consolidated Statements of Cash
Flows for the Six Months Ended June 29, 1996
and July 1, 1995 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II Other Information
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE> 3
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
June 29, 1996 July 1, 1995 June 29, 1996 July 1, 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 33,252 $ 38,173 $ 59,715 $ 68,951
Cost of goods sold 21,371 23,537 37,656 43,784
------------ ------------ ------------ ------------
Gross profit 11,881 14,636 22,059 25,167
Selling, general and administrative expenses 10,809 12,847 21,228 26,018
Unusual charges (see Note 5) -- 7,000 -- 7,000
------------ ------------ ------------ ------------
Operating income (loss) 1,072 (5,211) 831 (7,851)
Debt related fees (see Note 6) 1,912 3,556 3,626 5,277
Other expense (income), net (18) 122 37 156
Interest expense 3,097 3,438 6,280 6,310
------------ ------------ ------------ ------------
(Loss) from continuing operations before
income taxes (3,919) (12,327) (9,112) (19,594)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
(Loss) from continuing operations (3,919) (12,327) (9,112) (19,594)
(Loss) from disposition of discontinued
operations, net of income taxes of nil
(see Note 4) -- (25,569) -- (25,569)
------------ ------------ ------------ ------------
Net (loss) $ (3,919) $ (37,896) $ (9,112) $ (45,163)
============ ============ ============ ============
(Loss) per share from continuing operations $ (0.21) $ (0.65) $ (0.48) $ (1.03)
(Loss) per share from disposition of
discontinued operations -- (1.36) -- (1.36)
------------ ------------ ------------ ------------
Net (loss) per share $ (0.21) $ (2.01) $ (0.48) $ (2.39)
============ ============ ============ ============
Average shares outstanding 18,859,679 18,859,679 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>
June 29, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 15,816 $ 18,605
Accounts receivable, net 33,827 41,346
Inventories 58,697 50,898
Prepaid expenses and other assets 4,551 3,704
Net assets of discontinued operations 5,910 9,856
--------- ---------
Total current assets 118,801 124,409
Property, plant and equipment, net 13,331 13,496
Other assets 62 123
--------- ---------
Total assets $ 132,194 $ 138,028
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Short-term debt $ -- $ --
Accounts payable and accrued liabilities 13,057 13,083
Long-term debt, current portion 513 702
Income taxes payable 561 536
--------- ---------
Total current liabilities 14,131 14,321
Liabilities subject to compromise under
reorganization proceedings 205,274 201,814
Other liabilities 535 535
--------- ---------
Total liabilities 219,940 216,670
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT)
Common stock 189 189
Additional paid-in capital 88,564 88,564
Retained (deficit) (172,681) (163,569)
Foreign currency translation adjustments (3,818) (3,826)
--------- ---------
Total stockholders' (deficit) (87,746) (78,642)
--------- ---------
Total liabilities and stockholders' (deficit) $ 132,194 $ 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 Six Months Ended
June 29, 1996 July 1, 1995
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) $ (9,112) $(45,163)
Adjustments to reconcile net (loss) to net cash provided by
(used in) operating activities:
Loss from discontinued operations, including loss on
disposal -- 25,569
Litigation settlements -- 7,000
Depreciation and amortization 1,406 1,785
Provisions for inventory, doubtful accounts and other
deductions 5,340 3,849
Gain on sale and disposal of fixed assets (31) --
Loss on foreign exchange 91 362
Change in operating assets and liabilities:
Accounts receivable 3,438 11,552
Inventories (8,981) (592)
Other assets (722) (715)
Accounts payable and accrued liabilities 668 (9,136)
Interest payable 6,205 2,478
Other -- (171)
Discontinued operations 3,946 --
-------- --------
Net cash provided by (used in) operating activities 2,248 (3,182)
-------- --------
INVESTING ACTIVITIES:
Purchases of fixed assets (1,342) (1,320)
Proceeds from sales of fixed assets 165 --
-------- --------
Net cash used in investing activities (1,177) (1,320)
-------- --------
FINANCING ACTIVITIES:
Principal payments on debt (3,858) (2,238)
-------- --------
Net cash used in financing activities (3,858) (2,238)
-------- --------
Effects of foreign exchange rate changes on cash (2) 68
-------- --------
Decrease in cash (2,789) (6,672)
-------- --------
Cash at beginning of period 18,605 8,344
-------- --------
Cash at end of period $ 15,816 $ 1,672
======== ========
</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 UNAUDITED 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.
Upon confirmation of a Reorganization Plan, the Company will be required to
account for such Reorganization Plan using "fresh start" reporting. Accordingly,
all assets and liabilities would be restated to approximate fair value at the
date of reorganization and any excess in reorganizational value over market
value of identifiable assets would be recorded as an intangible asset. If the
Term Sheet described below is approved, the Company would record an
extraordinary gain from reorganization, a decrease in debt and an increase in
equity. In addition, existing shareholders would be significantly diluted.
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 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 period 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"). At June
29, 1996, the Company had $10,500 invested in U.S. Government backed securities
under agreements to resell on dates through July 5, 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, including claims in excess of what the Company has previously
accrued, 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
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.
4
<PAGE> 7
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
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.
On June 26, 1996, the Debtors announced that they entered into an agreement with
the Company's Unsecured Creditors Committee on a term sheet (the "Term Sheet")
setting forth the material provisions of a Reorganization Plan. The Unsecured
Creditors Committee represents the Debtors' Senior Noteholders and trade and
other unsecured creditors. The Term Sheet specifies that a Reorganization Plan
will contain the following treatment for creditors and equity security holders:
- - The Debtors' secured creditors will receive at least $10,000 in cash and up
to $65,000 in New Senior Secured Notes, the terms of which have not yet
been determined, in exchange for $75,000 of secured indebtedness.
- - The Debtors' unsecured creditors will receive 6,200,000 shares of New
Common Stock representing, at the time of issuance, 100% of the distributed
equity in the Reorganized Company, subject to dilution upon the exercise of
warrants distributed to equity security holders, in exchange for
approximately $120,000 of unsecured indebtedness. It is presumed that the
New Common Stock will have an initial value of $10 per share.
- - The Company's equity security holders (currently holding 18,859,679 shares
of Common Stock) will receive a total of 300,000 5-year warrants to
purchase an aggregate of 300,000 shares of new common stock currently
expected to be at an exercise price above the initial value of the New
Common Stock. The warrants would be exercisable at an enterprise valuation
of $175,000; based on a presumed initial value of $10 per share, this would
be an exercise price of approximately $17 per share. In addition, the
warrant holders will have the option to receive an aggregate payment of
$500 upon cancellation of such warrants in connection with a sale of the
Company for more than $140,000.
The Term Sheet, which is predicated upon an estimated Company valuation of
$130,000, exclusive of cash for distribution under a Reorganization Plan, and as
now modified to reflect certain agreements reached with the secured creditors
group (the "Secured Creditors Group") who now support the plan agreement in
principle, also provides for other terms including the creation of a new
5-member Board of Directors (consisting of three directors selected by the
Unsecured Creditors Committee, and one each by the Secured Creditors Group and
the then Chief Executive Officer. In addition to the Term Sheet, the Company,
the Unsecured Creditors Committee and the Secured Creditors Group agreed to, and
the Bankruptcy Court approved on August 21, 1996, the Company's adoption of an
incentive, retention and severance protection plan for the Company's employees
which provides for the assumption of certain existing employment arrangements,
the adoption of severance benefits for certain employees and the payment of
incentive and retention compensation in certain circumstances to certain
employees.
The provisions set forth in the Term Sheet are subject to change in advance of
the filing of the definitive plan of reorganization as a result of continuing
negotiations with the Unsecured Creditors Committee and the Secured Creditors
Group. In this regard, the Company's ongoing negotiations with these creditor
constituencies may result in the proposal of a plan of reorganization with terms
significantly different than those set forth in the Term Sheet. At present,
these discussions principally relate to modifications of the aggregate
distributions to creditors which may, if modified, result in associated
modifications to the corporate governance provisions. Although the provisions
relating to distribution to shareholders may also change, no pending
modifications have been agreed to by any constituency. The Company believes that
it is unlikely that the aggregate distribution to shareholders will be enhanced
from that set forth in the Term Sheet and can offer no assurances that such
distribution will not be reduced as a result of pending negotiations or
otherwise. In addition, the effectiveness of the Reorganization Plan is subject
to, among other things, the Bankruptcy Court's prior approval of a disclosure
statement describing the provisions and effect of the plan of reorganization
(which has not yet been filed with the Bankruptcy Court), a creditor and equity
security holder vote on such plan and Bankruptcy Court approval of such plan.
Completion of this process will take at least two months and may take longer
unless the plan of reorganization is accepted by voting constituencies and the
approval of such plan is not subject to material opposition. There is no
5
<PAGE> 8
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
assurance that the Debtors will reach agreement on a definitive plan of
reorganization, that any constituent group will vote in favor of the
Reorganization Plan or that such plan will be approved. Currently, the Company
is continuing to consider its options in connection with its reorganization
efforts. In addition to the Plan(s) discussed above, those options include a
reorganization plan 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, therefore, 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>
June 29, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
Priority Claims $ 605 $ 605
Secured Debt
Principal 97,207 100,876
Interest 9,718 3,513
General Unsecured Claims 13,079 12,155
Unsecured Debt, Principal and Interest 84,665 84,665
-------- --------
$205,274 $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 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 three and six months
ended July 1, 1995. Net assets of discontinued operations of $5,910 at June 29,
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 Smedley Industries, Inc. (f/k/a Buddy L Inc.)
("Smedley") Chapter 11 case among the Company, Smedley, 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 Smedley were filed and
subsequently amended with the Bankruptcy Court embodying the terms of the
Settlement Agreement. A hearing on the adequacy of the disclosure statement was
held on June 28, 1996, at which time the Court entered an order, among other
things, approving the disclosure statement, as amended, authorizing its
transmittal to creditors for voting and scheduling a hearing on confirmation of
the plan of reorganization, as amended. The hearing on confirmation of the plan
of reorganization, as amended, is scheduled for September 12, 1996. Voting must
be completed by August 26, 1996 on which date objections, if any, to
confirmation of the plan of reorganization, as amended, also must be filed with
the Court.
6
<PAGE> 9
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
5. UNUSUAL CHARGES
During the three and six months ended July 1, 1995, the Company recorded
significant unusual charges in continuing operations totaling $7,000 due to the
settlement of certain environmental litigation (see Note 9). The unusual charges
represented 56.8% and 35.7% of the Company's loss from continuing operations for
the three and six months ended July 1, 1995, respectively.
6. 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 $1,912 and $3,556 for the three months ended and $3,626 and $5,277 for
the six months ended June 29, 1996 and July 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 and six months ended June 29, 1996
are net of $223 and $322, respectively, 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 was charged an additional 3.0% interest on its
bank debt and the interest rate on the 6.76% Senior Notes was increased to 15%.
These higher interest rates resulted in incremental interest expense of $537 and
$1,133 for the three months ended and $1,554 and $1,816 for the six months ended
June 29, 1996 and July 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 62.5% and 38.0% of
the Company's loss from continuing operations for the three months ended June
29, 1996 and July 1, 1995, respectively, and 56.8% and 36.2% for the six months
then ended.
7. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
June 29, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
Finished products $ 49,003 $ 38,948
Work in process 2,440 4,143
Raw materials and supplies 7,254 7,807
------------- -------------
$ 58,697 $ 50,898
============= =============
</TABLE>
8. 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 June 29, 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
2,000,000 shares of the Company's common stock, with an exercise price of $2.45
per share and 500,000 shares with an exercise price of $2.27 per share. Under
certain conditions the Company could 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 certain subsidiaries
in Canada.
7
<PAGE> 10
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
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 $92,661 and $96,330 at June
29, 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 June 29, 1996 and 8.5% at December 31, 1995) plus 1.0% payable
monthly. In addition, the Company was 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
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 six months ended June 29, 1996 was approximately $2,100 and
$9,600, respectively, and $3,800 for the three months ended June 29, 1996.
9. 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 docket 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. In furtherance of the foregoing, the plaintiff has
asserted a $10,000 contingent unsecured claim in the Chapter 11 Cases. This
claim has not yet been resolved. 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 claims. 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
8
<PAGE> 11
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
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. During April 1996, Maska and the State of Vermont entered into a Joint
Pleading and Stipulation which sets forth the elements of the State of Vermont's
claims against Maska pertaining to the releases of contaminants ("Releases")
into the groundwater and soil at the Bradford site and also sets forth the
compromise and settlement of those claims in the form of a Consent Decree
incorporated therein. The Consent Decree provides that Maska shall remediate the
Releases in accordance with approved workplans, reimburse the State for its
costs to oversee the remediation and pay a civil penalty of $250. The Consent
Decree was approved by the Bankruptcy Court on May 14, 1996 and entered by the
Washington County Superior Court of the State of Vermont on June 10, 1996. In
July 1996, the Company paid the State of Vermont their oversight costs to date
and the civil penalty in accordance with the Consent Decree. The Company had
previously accrued approximately $250 related to the Consent Decree.
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 insurers will
bear their share of the costs and any damages.
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 three months ended July 1, 1995. The
Company's performance of its payment obligations under this settlement have been
stayed in accordance with 11 U.S.C. Section 362 (a) by virtue of the pendency of
the Chapter 11 Cases. Accordingly, these obligations are classified as
liabilities subject to compromise under reorganization proceedings. In addition,
the owner of another adjacent property has asserted an identical claim against
Maska in the Chapter 11 Cases. Maska believes that, for several reasons
including the lack of evidence of liability as well as Maska's remediation, this
claim is not meritorious. In any event, this claim is subject to compromise by
virtue of the Chapter 11 Cases.
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
did not rule 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
9
<PAGE> 12
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
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; named as
defendants the Company and certain current and former officers and directors;
alleged violations of Sections 10(b) and 20 of the 1934 Act; sought class action
status; unspecified damages, and certain fees and expenses. The Company and
individual defendants 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. During July 1996, the settlement was
approved by the Bankruptcy Court and the U.S. District Court for the Southern
District of New York. Additionally, during August 1996 certain of the Company's
creditors filed an appeal with the Bankruptcy Court with respect to the
Bankruptcy Court's approval of the settlement which has not yet been resolved.
As a result of the 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 June 26, 1996, the Debtors announced that they entered into an agreement with
the Company's Unsecured Creditors Committee on a Term Sheet setting forth the
material provisions of a Reorganization Plan. The Unsecured Creditors Committee
represents the Debtors' Senior Noteholders and trade and other unsecured
creditors. The Term Sheet specifies that a Reorganization Plan will contain the
following treatment for creditors and equity security holders:
- - The Debtors' secured creditors will receive at least $10 million in cash
and up to $65 million in New Senior Secured Notes, the terms of which have
not yet been determined, in exchange for $75 million of secured
indebtedness.
- - The Debtors' unsecured creditors will receive 6.2 million shares of New
Common Stock representing, at the time of issuance, 100% of the distributed
equity in the Reorganized Company, subject to dilution upon the exercise of
warrants distributed to equity security holders, in exchange for
approximately $120 million of unsecured indebtedness. It is presumed that
the New Common Stock will have an initial value of $10 per share.
- - The Company's equity security holders (currently holding 18,859,679 shares
of Common Stock) will receive a total of 300,000 5-year warrants to
purchase an aggregate of 300,000 shares of new common stock currently
expected to be at an exercise price above the initial value of the New
Common Stock. The warrants would be exercisable at an enterprise valuation
of $175 million; based on a presumed initial value of $10 per share, this
would be an exercise price of approximately $17 per share. In addition, the
warrant holders will have the option to receive an aggregate payment of
$0.5 million upon cancellation of such warrants in connection with a sale
of the Company for more than $140 million.
The Term Sheet, which is predicated upon an estimated Company valuation of $130
million, exclusive of cash for distribution under a Reorganization Plan, and as
now modified to reflect certain agreements reached with the secured creditors
group (the "Secured Creditors Group") who now support the plan agreement in
principle, also provides for other terms including the creation of a new
5-member Board of Directors (consisting of three directors selected by the
Unsecured Creditors Committee, and one each by the Secured Creditors Group and
the then Chief Executive Officer. In addition to the Term Sheet, the Company,
the Unsecured Creditors Committee and the Secured Creditors Group agreed to, and
the Bankruptcy Court approved on August 21, 1996, the Company's adoption of an
incentive, retention and severance protection plan for the Company's employees
which provides for the assumption of certain existing employment arrangements,
the adoption of severance benefits for certain employees and the payment of
incentive and retention compensation in certain circumstances to certain
employees.
The provisions set forth in the Term Sheet are subject to change in advance of
the filing of the definitive plan of reorganization as a result of continuing
negotiations with the Unsecured Creditors Committee and the Secured Creditors
Group. In this regard, the Company's ongoing negotiations with these creditor
constituencies may result in the proposal of a plan of reorganization with terms
significantly different than those set forth in the Term Sheet. At present,
these discussions principally relate to modifications of the aggregate
distributions to creditors which may, if modified, result in associated
modifications to the corporate governance provisions. Although the provisions
relating to distribution to shareholders may also change, no pending
modifications have been agreed to by any constituency. The Company believes that
it is unlikely that the aggregate distribution to shareholders will be enhanced
from that set forth in the Term Sheet and can offer no assurances that such
distribution will not be reduced as a result of pending negotiations or
otherwise. In addition, the effectiveness of the Reorganization Plan is subject
to, among other things, the Bankruptcy Court's prior approval of a disclosure
statement describing the provisions and effect of the plan of reorganization
(which has not yet been filed with the Bankruptcy Court), a creditor and equity
security holder vote on such plan and Bankruptcy Court approval of such plan.
Completion of this process will take at least two months and may take longer
unless the plan of reorganization is accepted by
11
<PAGE> 14
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
voting constituencies and the approval of such plan is not subject to material
opposition. There is no assurance that the Debtors will reach agreement on a
definitive plan of reorganization, that any constituent group will vote in favor
of the Reorganization Plan or that such plan will be approved. Currently, the
Company is continuing to consider its options in connection with its
reorganization efforts. In addition to the Plan(s) discussed above, those
options include a reorganization plan 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,
therefore, is not presently able to predict when the Chapter 11 Cases will be
concluded or on what basis.
Upon confirmation of a Reorganization Plan, the Company will be required to
account for such Reorganization Plan using "fresh start" reporting. Accordingly,
all assets and liabilities would be restated to approximate fair value at the
date of reorganization and any excess in reorganizational value over market
value of identifiable assets would be recorded as an intangible asset. If the
Term Sheet described above is approved, the Company would record an
extraordinary gain from reorganization, a decrease in debt and an increase in
equity. In addition, existing shareholders would be significantly diluted.
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 Senior
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 SIX MONTHS AND THREE MONTHS ENDED
JUNE 29, 1996
1996 COMPARED TO 1995
Net sales decreased 13.4% to $59.7 million in the six months ended June 29, 1996
as compared to $69.0 million in the six months ended July 1, 1995. The decline
in sales included decreases of 18.7% in hockey, figure and in-line roller skates
(sales of hockey and figure skates increased 15.9%, while in-line skates
declined 36.9%), 2.2% in protective equipment and 11.5% in licensed sports
apparel. Overall sales in 1996 were negatively affected by a generally weak
retail environment in the sports and leisure products industry compared to 1995,
high retailer inventories, poor weather in the U.S. and Canada 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, in-line skate sales slowed as the market has begun to
mature. Net sales decreased 12.9% to $33.3 million in the three months ended
June 29, 1996 as compared to $38.2 million in the three months ended July 1,
1995. The decline in sales included decreases of 19.4% in hockey, figure and
in-line roller skates (sales of hockey and figure skates increased 17.2%, while
in-line
12
<PAGE> 15
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
skates declined 46.7%) and 9.7% in licensed sports apparel. Sales for the six
months and three months ended June 29, 1996 were also negatively affected by the
Company's Chapter 11 status.
Gross profit for the six months was $22.1 million in 1996 compared to $25.2
million in 1995, a decrease of 12.3%. Measured as a percentage of net sales,
gross profit margins increased to 36.9% in 1996 from 36.5% in 1995 due to a
favorable product mix, and by reduced sales of excess, obsolete and slow moving
inventories as compared to 1995. Gross profit for the three months ended June
29, 1996 was $11.9 million compared to $14.6 million in 1995, a decrease of
18.8%. Measured as a percentage of net sales, gross profit margins decreased to
35.7% in 1996 from 38.3% in 1995. Gross profit was adversely affected by
decreased sales, downward pricing pressure in the industry and the under
utilization of manufacturing capacity as the Company decreased production.
For the six months ended June 29, 1996, selling, general and administrative
expenses decreased 18.4% to $21.2 million compared to $26.0 million in the prior
year period. Measured as a percentage of net sales, these expenses were 35.5% in
1996 versus 37.7% 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. In the three months ended June 29,
1996, selling, general and administrative expenses decreased 15.9% to $10.8
million due to the factors noted above. Measured as a percentage of net sales,
these expenses decreased to 32.5% from 33.7%.
During the three months ended July 1, 1995, the Company recorded an unusual
charge of $7.0 million due to the settlement of certain environmental
litigation.
Excluding the unusual charges, operating income for the six months ended June
29, 1996 was $0.8 million compared to an operating loss of $0.9 million in the
comparable prior year period. The 1996 operating income was primarily the result
of increased gross profit margins and lower selling, general and administrative
expenses discussed above. Including the unusual charges, the operating loss for
the six months ended July 1, 1995 was $7.9 million.
As a result of the Company's Chapter 11 Cases, it incurred significant legal and
professional fees totaling $3.6 million and $5.3 million during the six months
and $1.9 million and $3.6 million in the three months ended June 29, 1996 and
July 1, 1995, respectively. 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 39.8% and 26.9% of the
Company's loss from continuing operations for the six months ended June 29, 1996
and July 1, 1995, respectively, and 48.8% and 28.8% for the three months then
ended, 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 approximated $6.3 million for the six months ended June 29,
1996 and July 1, 1995. During the reorganization proceedings the Company is
generally not permitted to pay interest. Therefore, 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. Interest
expense in 1995 resulted from working capital borrowings at higher short-term
interest rates as well as default interest rates being charged on the Company's
bank debt and Senior Notes due to defaults, offset in part by the allocation of
interest expense to discontinued operations.
The Company's loss from continuing operations for the six months ended June 29,
1996 was $9.1 million ($0.48 per share) compared to $19.6 million ($1.03 per
share) in the comparable prior year period. The loss from continuing operations
for the three months ended June 29, 1996 was $3.9 million ($0.21 per share)
compared to $12.3 ($0.65 per share) million 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, 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
13
<PAGE> 16
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 continuing to consider its options in connection with
its reorganization efforts. In addition to the Plan(s) previously discussed (see
Note 2 and Introduction), those options include a reorganization plan 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, therefore, is not presently able to predict when
the Chapter 11 Case will be concluded or on what basis.
During the six months ended June 29, 1996, net cash provided by operating
activities was $2.2 million compared to cash used of $3.2 million in the six
months ended July 1, 1995. Cash provided in 1996 included $3.9 million from
discontinued operations.
Net cash flows used in investing activities during the six months ended June 29,
1996 and July 1, 1995 included purchases of fixed assets of $1.3 million. Net
cash flows used in financing activities during the period ended June 29, 1996
were approximately $3.9 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 in financing activities were approximately $2.2 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.
14
<PAGE> 17
SLM INTERNATIONAL, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 9 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:
27.1 Financial Data Schedule for the six month period
June 29, 1996 (filed herewith).
(b) Reports filed on Form 8-K during the quarter ended June 29,
1996:
(1) On June 26, 1996, the Company filed a Form 8-K with
respect to a Letter, dated June 25, 1996, from the
Company to the Official Committee of Unsecured
Creditors of SLM International, Inc.
15
<PAGE> 18
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: August 23, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 29,
1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-29-1996
<CASH> 15,816
<SECURITIES> 0
<RECEIVABLES> 33,827
<ALLOWANCES> 0
<INVENTORY> 58,697
<CURRENT-ASSETS> 118,801
<PP&E> 13,331
<DEPRECIATION> 0
<TOTAL-ASSETS> 132,194
<CURRENT-LIABILITIES> 14,131
<BONDS> 0
0
0
<COMMON> 189
<OTHER-SE> (87,935)
<TOTAL-LIABILITY-AND-EQUITY> 132,194
<SALES> 59,715
<TOTAL-REVENUES> 59,715
<CGS> 37,656
<TOTAL-COSTS> 37,656
<OTHER-EXPENSES> 24,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,280
<INCOME-PRETAX> (9,112)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,112)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,112)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
