===============================================================================
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 29, 1997
------------------------
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.)
C/O MASKA U.S., INC., 77 ROUTE 25, 05033
Pierson Industrial Park, Bradford VT
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 518-773-4401
---------------------
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.
CLASS OUTSTANDING AT MAY 16, 1997
-------------- ---------------------------
Common Stock, 6,500,000
$.01 par value
================================================================================
<PAGE>
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 Ended
March 29, 1997 and March 30, 1996 ........................... 1
Unaudited Consolidated Balance Sheets at
March 29, 1997 and December 31, 1996 ........................ 2
Unaudited Consolidated Statements of Cash
Flows for the Three Months Ended March 29, 1997
and March 30, 1996 .......................................... 3
Notes to Unaudited Consolidated Financial Statements .......... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 18
Item 5. Other Information ............................................. 18
Item 6. Exhibits and Reports on Form 8-K .............................. 18
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share data)
For the Three Months Ended
------------------------------
Mar. 29, 1997 Mar. 30, 1996
------------- -------------
Net sales .................................... $ 21,715 $ 26,463
Cost of goods sold ........................... 13,598 16,285
----------- -----------
Gross profit ............................... 8,117 10,178
Selling, general and administrative
expenses ................................... 9,217 10,419
Restructuring charges (see Note 6) ........... 6,315 --
----------- -----------
Operating loss ............................ (7,415) (241)
Debt related fees (see Note 7) ............... 932 1,714
Other expense, net ........................... 79 55
Interest expense ............................. 22 3,183
----------- -----------
Loss before income taxes ................... (8,448) (5,193)
Income taxes
Net loss ................................... $ (8,448) $ (5,193)
----------- -----------
Net loss per share ........................... $ (0.45) $ (0.28)
=========== ===========
Average shares outstanding* .................. 18,859,679 18,859,679
=========== ===========
- -------------
* Average shares outstanding represent the Company's common stock prior to
the new stockholders' equity structure under the Company's Reorganization
Plan (see Note 2).
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
1
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
Mar. 29, Dec. 31,
1997 1996
------- -------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................ $ 41,984 $ 35,589
Accounts receivable, net ............................. 16,967 33,313
Inventories .......................................... 43,270 37,179
Prepaid expenses and other assets .................... 5,160 5,757
Net assets of discontinued operations ................ 189 189
--------- ---------
Total current assets ............................ 107,570 112,027
Property, plant and equipment, net ................... 10,590 12,817
Other assets ......................................... 593 81
--------- ---------
Total assets .................................... $ 118,753 $ 124,925
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities ............. $ 17,826 $ 15,297
Long-term debt, current portion ...................... 298 369
Income taxes payable ................................. 642 648
Current portion of liabilities subject to
compromise under reorganization proceedings ......... 45,035 45,035
--------- ---------
Total current liabilities ....................... 63,801 61,349
Liabilities subject to compromise under
reorganization proceedings ......................... 160,164 160,164
Other liabilities .................................... 597 601
--------- ---------
Total liabilities ............................... 224,562 222,114
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock ......................................... 189 189
Additional paid-in capital ........................... 88,564 88,564
Retained deficit ..................................... (190,739) (182,291)
Foreign currency translation adjustments ............. (3,823) (3,651)
--------- ---------
Total stockholders' deficit ..................... (105,809) (97,189)
--------- ---------
Total liabilities and stockholders' deficit ..... $ 118,753 $ 124,925
========= =========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
For the Three Months Ended
--------------------------
Mar. 29, Mar. 30,
1997 1996
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ....................................................................... $ (8,448) $ (5,193)
Adjustments to reconcile net loss to net cash
used in operating activities:
Restructuring charges ...................................................... 6,315 --
Depreciation and amortization .............................................. 692 690
Provisions for inventory, doubtful accounts and other deductions ........... 1,873 1,960
Loss (gain) on sale and disposal of fixed assets ........................... 9 (6)
Loss on foreign exchange ................................................... 102 79
Change in operating assets and liabilities:
Accounts receivable ........................................................ 14,917 13,839
Inventories ................................................................ (6,478) (8,003)
Prepaid expenses and other assets .......................................... 828 (797)
Accounts payable and accrued liabilities ................................... (2,495) 244
Interest payable ........................................................... -- 3,144
Other ...................................................................... 3 31
Discontinued operations .................................................... -- 2,463
-------- --------
Net cash provided by operating activities .............................. 7,318 8,451
-------- --------
INVESTING ACTIVITIES:
Purchases of fixed assets .................................................. (268) (827)
Proceeds from sales of fixed assets ........................................ 6 20
-------- --------
Net cash used in investing activities .................................. (262) (807)
-------- --------
FINANCING ACTIVITIES:
Principal payments on debt ................................................. (71) (2,430)
Deferred financing costs ................................................... (561) --
-------- --------
Net cash used in financing activities ................................... (632) (2,430)
-------- --------
Effects of foreign exchange rate changes on cash................................ (29) (1)
-------- --------
Increase in cash ............................................................... 6,395 5,213
Cash at beginning of period .................................................... 35,589 18,605
-------- --------
Cash at end of period .......................................................... $ 41,984 $ 23,818
======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
3
<PAGE>
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. ("SLM") and subsidiaries
(collectively, the "Company"). SLM 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"). Since the Filing, the Debtors operated their businesses
in the ordinary course as debtors-in-possession subject to the jurisdiction of
the Bankruptcy Court. The Bankruptcy Court entered an order authorizing the
joint administration of the Debtors' Chapter 11 cases (the "Chapter 11 Cases").
On September 12, 1996, the Debtors filed a Chapter 11 Plan of Reorganization and
on November 13, 1996, the Debtors filed a First Amended Chapter 11 Plan of
Reorganization as amended from time to time (the "Reorganization Plan") with the
Bankruptcy Court. On January 23, 1997, the Bankruptcy Court confirmed the
Reorganization Plan which became effective on April 11, 1997 (the "Effective
Date") (see Notes 2 and 4).
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
Reorganization Plan.
The Reorganization Plan has a significant impact on the financial statements of
the reorganized Company (the "Reorganized Company"). The Company is required to
account for such Reorganization Plan using "fresh-start" reporting (see Note 4).
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 1997 and the corresponding period in 1996 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, 1996.
Cash and cash equivalents 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") and in U.S. Treasury bills. At March 29, 1997, the Company
had $13,505 invested in U.S. Government backed securities under agreements to
resell on dates through March 31, 1997. 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,
the Trust Department or vault. Also, included in cash equivalents at March 29,
1997 is $21,423 in U.S. Treasury bills. 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 the Reorganization Plan which was 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. Creditors holding pre-petition date claims ("Pre-petition Claims")
against the Company were required to file proofs of claim on or before a date
fixed by the Bankruptcy Court (the "Bar Date"). Differences between amounts
shown by the Company and claims filed by its creditors, including claims in
excess of what the Company has previously accrued, have been or will be
investigated and resolved consensually or by order of the Bankruptcy Court. The
ultimate amount and settlement terms for such liabilities are subject to the
Reorganization Plan.
4
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Under the Bankruptcy Code pursuant to the Reorganization Plan, the Company has
elected to assume or reject leases, employment contracts, service contracts and
other executory pre-Petition Date contracts, with Bankruptcy Court approval. The
Company has estimated the ultimate liability which may result from the filing of
claims for any rejected contracts, and provisions have been made for these items
upon the Effective Date of the Reorganization Plan (see Note 4).
From October 1, 1994 until April 11, 1997, the Company was not 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 have allowed these
lenders to accelerate repayment of these loans.
The Bankrupcty Court 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 provided the Company
with cash and liquidity so that it could conduct its operations. Until a
reorganization plan was effective, the Company funded its working capital and
capital expenditure requirements through cash generated by its operations. The
Reorganized Company expects to meet its working capital and capital expenditure
requirements through secured credit facilities from The Chase Manhattan Bank and
The Chase Manhattan Bank of Canada (see Note 9).
On June 26, 1996, the Debtors announced that they entered into an agreement with
representatives of the Debtors' Noteholders and trade and other unsecured
creditors (the "Unsecured Creditors Committee") on a term sheet (the "Term
Sheet") setting forth the material provisions of a Reorganization Plan.
Thereafter, the Debtors and Unsecured Creditors Committee reached an agreement
in principle with assignees of the Debtors' former lenders (the "Secured
Creditor Group") on the terms of the Reorganization Plan. On September 12, 1996,
the Debtors filed with the Bankruptcy Court a proposed Chapter 11 Plan of
Reorganization (the "Proposed Plan"). On September 19, 1996, the Debtors filed
with the Bankruptcy Court a Disclosure Statement Pursuant to Section 1125 of the
Bankruptcy Code incident to the Proposed Plan. After further negotiations and
term modifications among the Debtors and their creditor constituencies, on
November 13, 1996, the Debtors filed with the Court the Reorganization Plan and
the First Amended Disclosure Statement Pursuant to Section 1125 of the
Bankrupcty Code incident to the Reorganization Plan. On November 19, 1996, the
Bankruptcy Court approved the adequacy of the First Amended Disclosure Statement
as modified in open court (the "Disclosure Statement"). On January 23, 1997, the
Bankruptcy Court entered an order confirming the Reorganization Plan, as
modified, the effectiveness of which was contingent upon, among other things,
the completion of a secured credit facility. The Reorganization Plan represents
the culmination of management analyses and negotiation amongst representatives
of principal parties in interest regarding the best means to maximize and to
allocate value to the Debtors' creditors and stockholders in accordance with
their legal and contractual rights and priorities with due regard to the
potential causes of action and claims that could be asserted against and by
certain creditors. Upon the satisfaction of all conditions precedent to the
occurrence of the Effective Date, the Reorganization Plan was declared effective
on April 11, 1997.
Under the Reorganization Plan, among other things:
o The Debtors' secured creditors received $44,213 in cash, $29,500 principal
in new senior notes (the "New Senior Notes") and 2,470,000 shares of new
common stock (the "New Common Stock") of the Reorganized Company, in
exchange for approximately $108,000 of secured and unsecured indebtedness
(which amount includes the secured creditors estimate of post-filing
interest and expenses). The 2,470,000 shares of New Common Stock
represented (before dilution) 38.0% of the ownership of the Reorganized
Company. The lenders sold such shares to Wellspring Associates L.L.C. on
the Effective Date. The New Senior Notes have a term of seven years with
principal payments beginning in the fifth year. Interest thereon is due and
payable semi-annually at 14.0% (including 4.0% payable in kind ("PIK"),
with such PIK interest reduced permanently if the Company achieves certain
earnings levels established in the Reorganization Plan). The New Senior
Notes are pre-payable at 101% of principal plus accrued interest, are
secured by a lien on substantially all of
5
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
the Reorganized Company's assets, subordinate only to the Company's new
secured credit facilities, and have covenants, representations and other
terms customary in instruments of this nature.
o The Debtors' unsecured creditors received: 4,030,000 shares of New Common
Stock representing, at the time of issuance, 62.0% of the distributed
equity in the Reorganized Company, subject to dilution upon the exercise of
warrants distributed to equity security holders and stock options which may
be issued to the Company's officers and key personnel (up to 15.0% of the
New Common Stock at varying exercise prices), in exchange for approximately
$120,000 of unsecured indebtedness. For purposes of the Reorganization
Plan, the New Common Stock was valued at approximately $10.16 per share.
o The Company's equity security holders (who held 18,859,679 shares of Common
Stock plus the 1,000,000 shares to have been issued pursuant to the
settlement of a securities litigation lawsuit (see Note 10)) received a
total of 300,000 5-year warrants to purchase an aggregate of 300,000 shares
of New Common Stock at an exercise price of $16.92 per share. In addition,
the warrant holders have the option to receive an aggregate payment of $500
upon cancellation of such warrants in connection with a sale of the
Reorganized Company for more than $140,000.
The Reorganization Plan also provides for other terms including: structured
settlements with Fleet Credit Corporation (in connection with its claims arising
from equipment financing), NHL Enterprises, Inc. and its affiliates (in
connection with their claims arising from royalty obligations under licenses
with the Company and alleged infringement of their property) and with the
lessors under certain leases of real property (which lessors were former
officers and directors of the Company); the incorporated Consent Decree entered
in Vermont Superior Court by agreement with Maska U.S., Inc. ("Maska"); and
an overall structured settlement among and between all of the creditor classes
which results in, among other things, the recoveries described above for the
secured creditors and unsecured creditors collectively as well as an
intra-creditor structured recovery resulting (depending on the ultimate
resolution of disputed claims) in the Company's former Senior Noteholders
realizing approximately 40.9% on their claims, Maska's unsecured creditors
realizing approximately 56.6% on their claims and the unsecured creditors of the
other Debtors realizing approximately 31.9% on their claims.
3. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Substantially all the Company's liabilities as of the Petition Date are subject
to settlement under a plan of reorganization, except as otherwise provided by
order of the Bankruptcy Court. The Company was not permitted to make payments
with respect to its pre-Petition Date liabilities (except as noted in Note 2)
until a plan of reorganization was confirmed by the Bankruptcy Court and
consummated.
Mar. 29, Dec. 31,
1997 1996
--------- --------
Priority Claims ............................... $ 661 $ 661
Secured Debt
Principal ................................... 92,045 92,045
Interest .................................... 12,838 12,838
General Unsecured Claims ...................... 14,990 14,990
Unsecured Debt, Principal and Interest ........ 84,665 84,665
-------- --------
$205,199 $205,199
======== ========
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 cases until all of the pre-petition
claims have been resolved.
The Company recorded 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 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,
6
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
respectively, and for the year ended December 31, 1996 and through the three
months ended March 29, 1997 was approximately $18,100 and $25,000, respectively.
4. FRESH-START ACCOUNTING
The Company's financial statements following its emergence from bankruptcy will
not be comparable to the historical financial statements presented herein, which
do not reflect the Reorganization Plan. The Company has set forth below
unaudited pro forma condensed consolidated financial statements that reflect the
Reorganization Plan as if it has occurred on the dates specified therein.
The Company's unaudited pro forma condensed consolidated financial statements
have been prepared in accordance with the requirements of Statement of Position
90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code ("SOP 90-7"). Following emergence from bankruptcy, the Reorganized Company
will apply fresh-start reporting in accordance with SOP 90-7.
As of a result of the implementation of fresh-start reporting, the value of the
Reorganized Company will be allocated to the entity's net assets in conformity
with the procedures specified by Accounting Principles Board Opinion No. 16
Business Combinations. As a result, it is anticipated that adjustments to the
carrying values of the Company's assets and liabilities will be required to
reflect the terms of the Reorganization Plan. SOP 90-7 requires a determination
of the Company's reorganizational value, which represents the fair value of all
of the Company's assets and liabilities, and an allocation of such values to the
assets and liabilities (excluding deferred taxes) based on their relative fair
values with the excess in reorganizational value over market values recorded as
an intangible asset. The application of SOP 90-7 results in the creation of a
new reporting entity having no retained earnings or accumulated deficit. The
Company implemented fresh-start reporting as of April 11, 1997. Accordingly, the
estimated effects of fresh-start reporting reflected in the unaudited pro forma
information are subject to change.
For the purpose of the Reorganization Plan, the reorganizational equity value
was estimated to be $65,608, based in part on management's estimates of
future operating results. Reorganizational value necessarily assumes that the
Reorganized Company will achieve its estimated future operating results in all
material respects. If such results are not achieved, the value of the
Reorganized Company could be materially different.
The unaudited pro forma condensed consolidated financial information and
accompanying notes should be read in conjunction with the Company's historical
financial statements and the notes thereto appearing elsewhere herein. The
unaudited pro forma condensed consolidated financial statements are presented
for informational purposes only and do not purport to represent what the
Reorganized Company's financial position or results of operations would actually
have been if the consummation of the Reorganization Plan had occurred on such
dates, or to project the Reorganized Company's financial position or results of
operations at any future date or for any future period. The unaudited pro forma
condensed consolidated financial statements contain, in the opinion of
management, all adjustments necessary for a fair presentation thereof.
7
<PAGE>
<TABLE>
<CAPTION>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
March 29, 1997
(Unaudited)
ASSETS ACTUAL ADJUSTMENTS PRO FORMA
--------- ----------- ---------
<S> <C> <C> <C>
Cash ............................................................. $ 41,984 $ (35,034) a $ 6,950
Other current assets ............................................. 65,586 170 b 65,756
Total current assets ........................................... 107,570 (34,864) 72,706
Property, plant and equipment .................................... 10,590 10,590
Intangible and other assets, net ................................. 593 46,111 c 46,704
Total assets ................................................... $ 118,753 $ 11,247 $130,000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Short-term debt .................................................. $ $ 5,100 d $ 5,100
Accounts payable and accrued liabilities ......................... 18,468 5,792 e 24,260
Long-term debt, current portion .................................. 298 1,197 f 1,495
Current portion of liabilities subject to compromise under
reorganization proceedings ..................................... 45,035 (45,035) g
Total current liabilities ...................................... 63,801 (32,946) 30,855
Long-term debt 32,940 f 32,940
Other liabilities ................................................ 597 597
Liabilities subject to compromise under reorganization
proceedings ..................................................... 160,164 (160,164) g
Total liabilities .............................................. 224,562 (160,170) 64,392
Stockholders' equity (deficit) ................................... (105,809) 171,417 h 65,608
Total liabilities and stockholders' equity (deficit) ........... $ 118,753 $ 11,247 $130,000
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
The following is a brief description of the adjustments made in preparing the
Pro Forma Condensed Consolidated Balance Sheet (unaudited).
a. To reflect $44,134 paid out in accordance with the Reorganization Plan, net
of $9,100 borrowed under new credit facilities.
b. To reflect primarily the distribution of Net assets of discontinued
operations pursuant to the Reorganization Plan.
c. To record excess of identifiable asset value as a result of fresh-start
reporting, including principally a valuation associated with the Company's
trademarks.
d. To record borrowings under new credit facilities.
e. To record accounts payable and accrued liabilities incurred pursuant to the
Reorganization Plan.
f. To record current portion of long-term debt under new credit facilities,
New Senior Notes and other long-term debt incurred pursuant to the
Reorganization Plan.
g. To eliminate liabilities in accordance with the Reorganization Plan. The
Reorganization Plan will result in an extraordinary gain on debt
forgiveness of approximately $61,500.
h. To reflect fresh-start reporting and the new stockholders' equity structure
of the Reorganized Company pursuant to the Reorganization Plan.
8
<PAGE>
<TABLE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
March 29, 1997
(Unaudited)
<CAPTION>
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
<S> <C> <C> <C>
Net sales ................................... $ 21,715 $ $ 21,715
----------- ------ ----------
Operating (loss) income ..................... (7,415) 5,597(a) (1,818)
Debt related fees ........................... 932 (932)(b)
Other expense, net .......................... 79 79
Interest expense ............................ 22 1,261(c) 1,283
----------- ------ ----------
(Loss) income before income taxes ........... (8,448) 5,268 (3,180)
Income taxes
Net (loss) .................................. $ (8,448) 5,268 $ (3,180)
=========== ====== ==========
Net (loss) per share ........................ $ (0.45) $ (0.49)
=========== ==========
Weighted average common and common
equivalent shares outstanding.............. 18,859,679 6,500,000(d)
=========== ==========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
The Pro Forma Condensed Consolidated Statement of Operations (unaudited)
adjustments have been computed assuming the Effective Date was January 1, 1997
and includes adjustments which give effect to the events that are directly
attributable and expected to have a continuing impact on the Reorganized
Company.
The following is a brief description of the adjustments made in preparing the
Pro Forma Condensed Consolidated Statement of Operations (unaudited).
(a) To reflect amortization of the intangibles associated with fresh-start
reporting of $718, net of $6,315 of costs related to restructuring.
(b) To reflect adjustments for costs incurred by the Company outside of its
continuing operations.
(c) To reflect incremental interest expense associated with the Company's new
credit facilities and New Senior Notes.
(d) To reflect the stockholders' equity structure of the Reorganized Company
pursuant to the Reorganization Plan.
9
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
5. DISCONTINUED OPERATIONS
In December 1994, the Company determined that it would hold its investments in
its toy and fitness businesses operated primarily by its BuddyL Inc. and BuddyL
Canada Inc. subsidiaries (collectively, "BuddyL") 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 Bankruptcy
Court also approved the sale of the fitness business which was completed on June
30, 1995. During 1994 and 1995, the Company recorded losses of approximately
$36,900, net of income taxes, for the disposition of its discontinued
operations.
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
Chapter 11 plan and a disclosure statement for Smedley were filed and
subsequently amended with the Bankruptcy Court embodying the terms of the
Settlement Agreement. The Chapter 11 plan, as amended, was confirmed by the
Bankruptcy Court on October 3, 1996 and became effective on October 17, 1996.
6. RESTRUCTURING CHARGES
During the three months ended March 29, 1997, the Company recorded significant
restructuring charges totaling $6,315 to reflect the impact of reorganizing
operations strategically to position itself to sustain ongoing profitability.
These costs consist primarily of lease cancellation costs ($2,257) at its
Peterborough, N.H. and Beauport, Quebec facilities, impairment of fixed assets
($1,659), principally leasehold improvements at its Peterborough, N.H. facility,
and severance and employee costs associated with the shutdown of three of the
Company's manufacturing facilities.
7. DEBT RELATED FEES AND DEFAULT INTEREST
As a result of the Filing, the Company incurred significant legal and
professional fees totaling $932 and $1,714 for the three months ended March 29,
1997 and March 30, 1996, 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. The debt related fees for the three months
ended March 29, 1997 and March 30, 1996 are net of $401 and $99, respectively,
of interest earned on accumulated cash resulting from the Filing. These costs
are included as Debt Related Fees in the Unaudited Consolidated Statements of
Operations for the periods then ended. It is anticipated that additional
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
with its lenders, since February 1995 the Company was charged an additional 3.0%
interest on its bank debt. The higher interest rate resulted in incremental
interest expense of $1,007 for the three months ended March 30, 1996, which is
included in Interest Expense in the Unaudited Consolidated Statements of
Operations.
The debt related fees and default interest costs represent 11.0% and 52.4% of
the Company's net loss for the three months ended March 29, 1997 and March 30,
1996, respectively.
8. INVENTORIES
Inventories consist of:
Mar. 29, 1997 Dec. 31, 1996
------------- -------------
Finished products ................. $32,914 $26,592
Work in process ................... 2,572 2,669
Raw materials and supplies ........ 7,784 7,918
------- -------
$43,270 $37,179
======= =======
10
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
9. INDEBTEDNESS (SUBSEQUENT EVENT)
A. NEW INDEBTEDNESS
(1.) BANK AGREEMENTS
On the Effective Date of the Reorganization Plan, the Company and two of its
U.S. subsidiaries, Maska U.S., Inc. and #1 Apparel, Inc. (the "U.S.
Subsidiaries"), entered into a Credit Agreement (the "U.S. Credit Agreement")
with the lenders referred to therein (the "Lenders") and The Chase Manhattan
Bank, as Agent ("Chase"). Simultaneously, one of the Company's Canadian
subsidiaries, Sport Maska Inc., entered into a Credit Agreement (the "Canadian
Credit Agreement" and, together with the U.S. Credit Agreement, the "Credit
Agreements") with The Chase Manhattan Bank of Canada ("Chase Canada"). The
maximum amount of loans and letters of credit that may be outstanding under the
Credit Agreements is $74,000, consisting of $35,000 revolving credit loans under
the U.S. Credit Agreement, $35,000 of revolving credit loans under the Canadian
Credit Agreement and a $4,000 term loan under the U.S. Credit Agreement.
Borrowings under the Credit Agreements are guaranteed by certain subsidiaries
and are collateralized by substantially all of the assets (including, without
limitation, accounts receivable, inventory and the stock of certain
subsidiaries) of the Company, the U.S. Subsidiaries referred to above and the
Company's other subsidiaries which are guarantors. Total amounts outstanding
under the Credit Agreements were $9,100 at April 14, 1997.
Borrowings under the U.S. Credit Agreement bear interest at the alternate base
rate plus 1% per annum or at an interest rate based on LIBOR plus 2 3/4% per
annum. Borrowings under the Canadian Credit Agreement bear interest at Chase
Canada's prime rate or at an alternate base rate plus 1% per annum. In addition,
the Company is charged a quarterly commitment fee of up to 3/8 of 1% on the
unused portion of the revolving credit facilities under the Credit Agreements
and certain other fees.
The Credit Agreements include customary affirmative and negative covenants,
including those relating to capital expenditures, interest coverage and the
incurrence of additional indebtedness.
(2.) NEW SENIOR NOTES
On April 11, 1997 the Company issued $29,500 principal amount of 14% Senior
Secured Notes due April 1, 2004 (the "New Senior Notes"), pursuant to an
Indenture with The Bank of New York, as trustee. The New Senior Notes were
issued by the Company under the Reorganization Plan as partial satisfaction of
the Company's obligations to its former secured lenders under the Bank Agreement
referred to below.
Interest is payable on the New Senior Notes semi-annually at the rate of 14% per
annum, with such interest rate being permanently reduced if the Company meets
certain earnings tests. Further, of the initial 14% interest rate, 10% is
payable in cash and 4% is payable by the issuance of additional New Senior
Notes.
The New Senior Notes are guaranteed by certain subsidiaries and are
collateralized by substantially all of the assets of the Company (including,
without limitation, accounts receivable, inventory and the stock of certain
subsidiaries) of the Company. The lien of the trustee for the benefit of itself
and the New Senior Noteholders is junior to the liens of Chase and Chase Canada.
The Indenture also includes customary affirmative and negative covenants.
B. OLD INDEBTEDNESS
As a result of the Filing, certain of the Company's indebtedness has been
classified as liabilities subject to compromise under reorganization
proceedings, at March 29, 1997 and March 30, 1996. The Reorganization Plan
substantially altered the rights of most pre-petition unsecured creditors by
liquidating their allowed claims at less than 100% of their face value (see
Note 2).
Under the Plan, lenders under a Loan and Security Agreement received (i) $44,178
in cash; (ii) $29,500 principal in New Senior Notes; and (iii) 2,470,000 shares
of New Common Stock, representing approximately 38.0% of the outstanding New
Common Stock. The lenders sold such shares to Wellspring Associates L.L.C. on
the Effective Date. In addition, holders of the Company's 6.76% Senior Notes due
February 15, 2004 and the lender of a note issued to settle certain litigation
received distributions of shares of the Company's New Common Stock (see Notes
2 and 10).
11
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
10. CONTINGENCIES AND LITIGATION
A. ENVIRONMENTAL LITIGATION:
In 1991, the Vermont Department of Environmental Conservation ("VTDEC") notified
the Company that the Bradford, Vermont property operated by its wholly-owned
subsidiary, 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 was being evaluated for
possible remedial action. Under relevant environmental laws, Maska, as an owner
of the property, was potentially liable for the entire cost of investigating and
remediating the contamination allegedly emanating from its Bradford property and
certain civil penalties.
Maska undertook 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. The Company is seeking recovery
against the former owners and affiliates of the Bradford property and facility
and the owner of an adjacent parcel for the costs of such investigation and
remediation and are currently in negotiations to settle these claims. During
April 1996, Maska and the State of Vermont entered into a consent decree
("Consent Decree") setting forth the terms under which Maska has agreed to
remediate specified hazardous materials if, and to the extent, found on the
contaminated property or caused by Maska. The Consent Decree was approved by the
Bankruptcy Court on May 14, 1996 and approved and entered in Vermont Superior
Court on June 20, 1996. The Consent Decree is subject to several conditions,
including ongoing payment by the Company of certain State of Vermont oversight
fees up to a maximum of $60 per year. In addition, the Company paid to Vermont a
civil fine stipulated penalty of $250. While the total cost of investigation and
remediation cannot be determined until the investigation required by VTDEC is
complete and the extent of the Company's remedial obligations have been
determined, the Company believes that the remaining costs will be approximately
$1,400 in the aggregate, payable over the next several years.
Maska commenced an action in the United States District Court for the District
of Vermont (the "Vermont District Court") entitled Maska U.S. Inc. V. Kansa, et
al., Doc. No. 5:93-CV-309 (the "Insurance Litigation") against nine of its
liability insurers seeking coverage for environmental cleanup costs arising out
of claims brought by the State of Vermont and an adjoining landowner for their
failure to defend or to indemnify Maska with respect to these claims.
On September 30, 1996, United States Magistrate Judge Jerome J. Neidermeier
issued a Magistrate Judge's Report and Recommendation (the "Magistrate Report"),
which analyzes legal issues and recommends that the Vermont District Court grant
Maska's motion for partial summary judgment on the issue of the duty to defend.
The report also recommends that all the insurers' motions for summary judgment
be denied, except for two on certain individual policies which Maska conceded
provide no coverage for its claims. On December 2, 1996, Chief Judge J. Garvin
Murtha adopted the Magistrate Report in its entirety. Various motions for
reconsideration of that order and for certification of the issue for immediate
appeal have since been denied. After the completion of limited pre-trial
discovery, the case will be scheduled for trial.
Two holders of Maska's unsecured claims have asserted an equitable lien on
Maska's recovery, if any, in the Insurance Litigation and also have commenced an
independent action against the defendant insurance companies pursuant to
Vermont's direct action statute. The Company believes that the asserted
equitable lien is without merit and that the independent direct action violated
the automatic stay pursuant to Section 362 of the Bankruptcy Code. The Company
currently is evaluating its options for legal recourse in these matters.
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
12
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
payable in June 2000. The Company recorded a provision of $7,000 for this
settlement during the year ended December 31, 1995. Under the Plan, the adjacent
landowner received a distribution of shares of the Company's New Common Stock to
satisfy the note.
B. SECURITIES LITIGATION:
On February 14, 1996, the Company, together with certain of its former officers
and directors, reached a settlement with the plaintiffs in a class action
securities litigation. The settlement provides for the cash payment by the
Company's insurer of $8,750, on behalf of certain former officers and directors
of the Company who are defendants. In addition, the Company agreed to issue
1,000,000 shares of its Common Stock which was converted into warrants in the
Reorganization Plan. 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. 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 will be dismissed with prejudice in connection
with the Reorganization Plan.
C. PRODUCT LIABILITY LITIGATION:
A pre-petition personal injury claim involving a spinal injury which was filed
in 1989 has been asserted against the Company for which the Company did not have
sufficient insurance coverage. That claim and its attendant litigation have been
settled and has been approved by the Bankruptcy Court. The claim will be treated
under the Reorganization Plan pursuant to the terms of the settlement. The
Company is unaware of any other personal injury claims for which there is not
adequate insurance coverage.
In connection with the claim, American Home Assurance Company ("American Home"),
commenced in 1991 a declaratory judgment action against the Company in the U.S.
District Court for the District of Massachusetts ("Massachusetts District
Court") in respect of its duty to defend and to indemnify the Company and an
action in Montreal Superior Court in Quebec, Canada to recover defense costs.
During March 1996, the Massachusetts District Court dismissed the action without
prejudice. The Company filed a response to the declaratory judgment action and a
counterclaim in Montreal Superior Court alleging American Home failed to fulfill
its duty to defend the Company. American Home has alleged that it is entitled to
payment in full for any amounts it recovers against the Company. The Company
believes that American Home's claims and contentions are without merit and, in
any event, would be treated under the Reorganization Plan. In the event that the
Company is required to make such a payment, it anticipates having funds
sufficient to meet any Court-ordered obligation. American Home's claim in
respect of the recovery of defense costs against the Company is in the amount of
approximately $575.
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 financial position, results of operations, or cash flows, there is no other
litigation pending or threatened against the Company.
13
<PAGE>
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. Since the filing, the
Company and those subsidiaries operated their businesses in the ordinary course
as debtors-in-possession subject to the jurisdiction of the Bankruptcy Court.
The Bankruptcy Court also entered an order authorizing the joint administration
of the Debtors' Chapter 11 Cases. On September 12, 1996 the Debtors filed a
Chapter 11 Plan of Reorganization and on November 13, 1996, the Debtors filed a
First Amended Chapter 11 Plan of Reorganization, as amended from time to time
(the "Reorganization Plan"), with the Bankruptcy Court. On January 23, 1997, the
Bankruptcy Court confirmed the Reorganization Plan and the Plan became effective
on April 11, 1997. 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 in 1997.
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 discontinnued 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 9, 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 5 to the Unaudited Consolidated
Financial Statements presented elsewhere herein.
The following discussion provides an assessment of the Company's results of
continuing operations, financial condition 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)" refer to the Notes to the Unaudited Consolidated
Financial Statements.)
RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED MARCH 29, 1997
1997 COMPARED TO 1996
Net sales decreased 17.9% to $21.7 million in the three months ended March 29,
1997 as compared to $26.5 million in the three months ended March 30, 1996. The
decline in sales resulted primarily from the decrease of 38.1% in inline roller
skates. Compared to 1996, sales in 1997 were negatively affected by a continued
weak retail environment in the sports and leisure products industry and
increased amounts of deeply discounted merchandise offered by other
manufacturers. Furthermore, the Company 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, and has reduced or
eliminated certain incentives to customers.
Gross profit for the three months ended March 29, 1997 was $8.1 million compared
to $10.2 million in 1996, a decrease of 20.2%. Measured as a percentage of net
sales, gross profit margins decreased to 37.4% in 1997 from 38.5% in 1996. These
lower gross profit margins are a result of unfavorable product mix, under
absorbed factory overhead costs resulting from under utilized manufacturing
capacity and sales of excess inventory at lower gross profit margins.
For the three months ended March 29, 1997, selling, general and administrative
expenses decreased 11.5% to $9.2 million compared to $10.4 million in the prior
year period. Measured as a percentage of net sales, these expenses were 42.4% in
1997 versus 39.4% in 1996. Expenses decreased due to generally lower operating
expenses resulting from the Company's continued efforts to aggressively reduce
costs, reduced variable selling costs, principally commissions, and lower
administrative expenses, including personnel costs. Decreased selling,
14
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
general and administrative expenses in 1997 include the positive effect of the
Company's restructuring efforts, which are expected to continue after the
Company's emergence from Chapter 11 in April 1997.
During the three months ended March 29, 1997, the Company recorded one-time
restructuring costs of $6.3 million related to the downsizing of its
manufacturing and distribution operations. These costs consist primarily of
lease cancellation costs ($2.3 million) at its Peterborough, N.H. and Beauport,
Quebec facilities, impairment of fixed assets ($1.7 million), principally
leasehold improvements at its Peterborough, N.H. facility, and severance and
employee costs associated with the shutdown of three of the Company's
manufacturing facilities, and are included in Restructuring Charges in the
Unaudited Consolidated Statements of Operations.
Excluding the restructuring charges, operating loss for the three months ended
March 29, 1997 was $1.1 million. The 1997 operating loss was primarily the
result of the gross profit margins and selling, general and administrative
expenses discussed above. Including the restructuring charges, the operating
loss for the three months ended March 29, 1997 was $7.4 million. The operating
loss for the three months ended March 30, 1996 was $0.2 million; there were no
restructuring charges for that period.
As a result of the Company's Chapter 11 Cases, it incurred significant legal and
professional fees totaling $0.9 million and $1.7 million during the three months
ended March 29, 1997 and March 30, 1996, 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 11.0% and 33.0% of the Company's net loss for the three months
ended March 29, 1997 and March 30, 1996, respectively, and are included as Debt
Related Fees in the Unaudited Consolidated Statements of Operations for the
periods then ended. It is anticipated that additional fees and costs will be
incurred during the balance of 1997.
Interest expense approximated $3.1 million for the three months ended March 30,
1996. During the reorganization proceedings the Company is generally not
permitted to pay interest. Therefore, the Company recorded 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 net loss for the three months ended March 29, 1997 was $8.4
million ($0.45 per share) compared to $5.2 million ($0.28 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. Since the filing, the
Company and those subsidiaries operated their businesses in the ordinary course
as debtors-in-possession subject to the jurisdiction of the Bankruptcy Court.
The Bankruptcy Court entered an order authorizing the joint administration of
the Debtors' Chapter 11 Cases. On September 12, 1996 the Debtors filed a Chapter
11 Plan of Reorganization and on November 13, 1996, the Debtors filed a First
Amended Chapter 11 Plan of Reorganization, as amended from time to time (the
"Reorganization Plan"), with the Bankruptcy Court. On January 23, 1997, the
Bankruptcy Court confirmed the Reorganization Plan and the Plan became effective
on April 11, 1997 (the "Effective Date").
The Filing 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, were in most cases deferred
until the Reorganization Plan was approved by the Bankruptcy Court.
Management expects to finance the Company's short-term working capital and
capital expenditures requirements through cash generated by its operations and
through its new credit facilities. On the Effective Date of the Reorganization
Plan, the Company and two of its U.S. subsidiaries, Maska U.S., Inc. and #1
Apparel, Inc., entered into a Credit Agreement (the "U.S. Credit Agreement")
with the lenders referred to therein (the "Lenders") and The Chase Manhattan
Bank, as Agent ("Chase"). Simultaneously, one of the Company's Canadian
subsidiaries, Sport Maska Inc., entered into a Credit Agreement (the "Canadian
Credit Agreement" and, together with the U.S. Credit Agreement, the "Credit
Agreements") with The Chase Manhattan Bank of Canada ("Chase Canada"). The
maximum amount of loans and letters of credit that may be outstanding under the
Credit Agreements is $74.0 million, consisting of $35.0 million revolving credit
loans under the U.S. Credit Agreement, $35.0 million of
15
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
revolving credit loans under the Canadian Credit Agreement and a $4.0 million
term loan under the U.S. Credit Agreement. Borrowings under the Credit
Agreements are guaranteed by certain subsidiaries and are collateralized by
substantially all of the assets (including, without limitation, accounts
receivable, inventory and the stock of certain subsidiaries) of the Company.
Total amounts outstanding under the Credit Agreements were $9.1 million at April
14, 1997.
Borrowings under the U.S. Credit Agreement bear interest at the alternate base
rate plus 1% per annum or at an interest rate based on LIBOR plus 2 3/4% per
annum. Borrowings under the Canadian Credit Agreement bear interest at Chase
Canada's prime rate or at an alternative base rate plus 1% per annum. In
addition, the Company is charged a quarterly commitment fee of up to 3/8 of 1%
on the unused portion of the revolving credit facilities under the Credit
Agreements and certain other fees.
The Credit Agreements include customary affirmative and negative covenants,
including those relating to capital expenditures, interest coverage and the
incurrence of additional indebtedness.
On April 11, 1997 the Company issued $29.5 million principal amount of 14%
Senior Secured Notes due April 1, 2004 (the "New Senior Notes"), pursuant to an
Indenture with The Bank of New York, as trustee. The New Senior Notes were
issued by the Company under the Reorganization Plan as partial satisfaction of
the Company's obligations to its former senior lenders under a Loan and Security
Agreement ("Bank Agreement") with a syndicate of banks led by Fleet Credit
Corporation. Under the Plan, the lenders under the Bank Agreement also received
(i) $44.2 million in cash; and (ii) 2,470,000 shares of New Common Stock,
representing approximately 38.0% of the outstanding New Common Stock. The
lenders sold such shares to Wellspring Associates L.L.C. on the Effective Date.
Interest is payable on the New Senior Notes semi-annually at the rate of 14% per
annum, with such interest rate being permanently reduced if the Company meets
certain earnings tests. Further, of the initial 14% interest rate, 10% is
payable in cash and 4% is payable by the issuance of additional New Senior
Notes. The New Senior Notes have a term of seven years with principal payments
beginning in the fifth year.
The New Senior Notes are guaranteed by certain subsidiaries and are
collateralized by substantially all of the assets (including, without
limitation, accounts receivable, inventory and the stock of certain
subsidiaries) of the Company, the two U.S. Subsidiaries referred to above and
the Company's other subsidiaries which are guarantors. The lien of the trustee
for the benefit of itself and the New Senior Noteholders is junior to the liens
of Chase and Chase Canada. The Indenture also includes customary affirmative and
negative covenants.
The Company's financing requirements for long-term growth, future capital
expenditures and debt service are expected to be met through cash generated by
its operations and through its new credit facilities. During the three months
ended March 29, 1997, the Company's continuing operations provided $7.3 million
of cash from its operations as compared to $6.0 million in 1996. Discontinued
operations provided $2.5 million from operations in the three months ended March
30, 1996. The Company's cash from operations was primarily provided from
collections from customers and offset with build-up of inventory for sales
during the remainder of the year. The Company's continuing operations incurred a
loss of $8.4 million for the three months ended March 29, 1997 compared to a
loss of $5.2 million in 1996, however, the cash impact was mitigated due to
non-cash charges for receivables, inventory and certain restructuring charges.
Cash flows used in investing activities during the three months ended March 29,
1997 and March 30, 1996 included $0.3 million and $0.8 million, respectively, of
purchases of fixed assets.
Net cash flows used in financing activities during the three months ended March
29, 1997 of $0.6 million consisted primarily of deferred financing costs
associated with the Company's new credit agreements. Net cash flows used in
financing activities during the three months 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.
16
<PAGE>
SLM INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
17
<PAGE>
SLM INTERNATIONAL, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 10 of Notes to Unaudited Consolidated
Financial Statements included in Part I of this report.
ITEM 5. OTHER INFORMATION
On January 29, 1997, John A. Sarto, former Chief Financial Officer, left
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule for the three months ended
March 29, 1997.
(b) Reports filed on Form 8-K during the quarter ended March 29, 1997:
(i) On March 5, 1997 the Company filed a Form 8-K with respect
to the United States Bankruptcy Court for the District of
Delaware's January 23, 1997 confirmation of its Plan of
Reorganization.
18
<PAGE>
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/ Russell J. David
-------------------------------------
Name: Russell J. David
Title: Vice President, Finance
(Principal Financial and
Accounting Officer)
Date: May 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 29,
1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-29-1997
<CASH> 41,984
<SECURITIES> 0
<RECEIVABLES> 16,967
<ALLOWANCES> 0
<INVENTORY> 43,270
<CURRENT-ASSETS> 107,570
<PP&E> 10,590
<DEPRECIATION> 0
<TOTAL-ASSETS> 118,753
<CURRENT-LIABILITIES> 63,801
<BONDS> 0
0
0
<COMMON> 189
<OTHER-SE> (105,998)
<TOTAL-LIABILITY-AND-EQUITY> 118,753
<SALES> 21,715
<TOTAL-REVENUES> 21,715
<CGS> 13,598
<TOTAL-COSTS> 13,598
<OTHER-EXPENSES> 16,543
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (8,448)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,448)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
