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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 0-19596
SLM INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE 13-36-32297
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
C/O MASKA U.S., INC., 139 HARVEST LANE,
P.O. BOX 1200, WILLISTON, VT 05495
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (802) 872-4226
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK,
PAR VALUE $.01
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 26, 1998 has not been determined due to the extremely
limited trading volume in the Registrant's Common Stock; however, 658,500 shares
of the voting stock were held by non-affiliates of the registrant on March 26,
1998.
As of March 26, 1998, 6,500,500 shares of the Registrant's Common Stock, $.01
par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 are incorporated by reference to the SLM International,
Inc. Proxy Statement for the 1998 Annual Meeting of Stockholders to be held on
June 17, 1998 into Part III of this Form 10-K. (A definitive proxy statement
will be filed with the Securities and Exchange Commission within 120 days after
the close of the fiscal year covered by this Form 10-K.)
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<PAGE>
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business ........................................................ 1
Item 2. Properties ...................................................... 8
Item 3. Legal Proceedings ............................................... 8
Item 4. Submission of Matters to a Vote of Security Holders ............. 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ........................................... 10
Item 6. Selected Financial Data ......................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 12
Item 8. Financial Statements and Supplementary Data ..................... 19
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ........................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant .............. 53
Item 11. Executive Compensation .......................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management .................................................... 53
Item 13. Certain Relationships and Related Transactions .................. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................... 54
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
The operations of SLM International, Inc. ("SLM") and its subsidiaries
(collectively, the "Company") include the design, development, manufacturing and
marketing of a wide range of ice and roller hockey products, marketed under the
CCM brand name, and licensed sports apparel under the CCM and #1 Apparel brand
names. The Company maintains a diversified mix of products to avoid dependence
upon the success of a single product, product category, theme or fad. The
Company has expanded its business since its inception in 1976 through new
product development, strategic acquisitions and licensing arrangements.
The Company believes that it is one of the world's leading manufacturers of
hockey and hockey related products, including hockey uniforms, protective
equipment, hockey, figure and roller hockey skates, street hockey products and
licensed sports apparel.
The Company sells its products to more than 4,000 customers in North America,
including mass merchandisers, department stores, warehouse clubs, catalogue
retailers, wholesalers, cooperative buying groups, sporting goods shops and
specialty retailers. Outside North America, the Company sells its products in
approximately 30 countries worldwide through a network of international
distributors.
The Company's growth has included acquisitions of stock or certain assets of
companies, often with recognized trademarks, including those of CCM Inc.,
acquired in 1983 (hockey skates and equipment), St. Lawrence Manufacturing
Company Inc., acquired in 1985 (ice skate blades), and #1 Apparel, Inc. and #1
Apparel Canada Inc. ("#1 Apparel"), acquired in 1994 (licensed sports apparel).
REORGANIZATION CASE
SLM and six of its subsidiaries (collectively, "Old SLM") 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
Bankruptcy Court entered an order authorizing the joint administration of Old
SLM's Chapter 11 cases (the "Chapter 11 Cases"). On September 12, 1996, Old SLM
filed a Chapter 11 Plan of Reorganization and on November 13, 1996, Old SLM
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") and Old SLM emerged from bankruptcy ("New
SLM").
Under the Reorganization Plan, among other things:
o Old SLM's secured creditors received $44.2 million in cash, $29.5 million
principal in senior secured notes (the " Senior Secured Notes") and
2,470,000 shares of new common stock (the "New Common Stock") of New SLM,
in exchange for approximately $108.0 million 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 New SLM. The
lenders sold such shares to W.S. Acquisition L.L.C. on the Effective Date.
The Senior Secured Notes had a term of seven years with principal payments
beginning in the fifth year. Interest thereon was due and payable
semi-annually at 14.0% (including 4.0% payable in kind ("PIK"), with such
PIK interest reduced permanently if New SLM achieved certain earnings
levels established in the Senior Secured Note Indenture). The Senior
Secured Notes were pre-payable at 101% of principal plus accrued interest,
were secured by a lien on substantially all of New SLM`s assets,
subordinate only to New SLM's new secured credit facilities, and had
covenants, representations and other terms customary in instruments of this
nature. On March 16, 1998 New SLM prepaid the Senior Secured Notes in full.
o Old SLM's unsecured creditors received: 4,030,000 shares of New Common
Stock representing, at the time of issuance, 62.0% of the ownership of New
SLM, subject to dilution upon the exercise of warrants distributed to
equity security holders and stock options which have been or may be issued
to New SLM's officers and key personnel (up to 15.0% of the New Common
Stock at varying exercise prices), in exchange for approximately $120.0
million of unsecured indebtedness. For purposes of the Reorganization Plan,
the New Common Stock was valued at approximately $10.16 per share.
o Old SLM'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) 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
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<PAGE>
share. In addition, the warrant holders have the option to receive an
aggregate payment of $0.5 million upon cancellation of such warrants in
connection with a sale of New SLM for more than $140.0 million.
FRESH-START ACCOUNTING
In connection with the emergence from bankruptcy, the Company adopted
fresh-start reporting, as of April 11, 1997, in accordance with the requirements
of Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code ("SOP 90-7").
In applying fresh-start reporting, the value of New SLM was allocated to the
Company's net assets in conformity with the procedures specified by Accounting
Principles Board Opinion No. 16 Business Combinations. SOP 90-7 required a
determination of the Company's reorganizational value, representing 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. As a result, the carrying values of the
Company's assets and liabilities were adjusted to fair value as of April 11,
1997. Reorganizational value in excess of amounts allocable to identifiable
assets of approximately $48.0 million is being amortized on a straight line
basis over twenty years. The application of SOP 90-7 resulted in the creation of
a new reporting entity having no retained earnings or accumulated deficit.
For the purpose of the Reorganization Plan, the reorganizational equity value
was estimated to be $66.6 million based in part on management's estimates of
future operating results. Reorganizational value necessarily assumes that New
SLM will achieve its estimated future operating results in all material
respects. If such results are not achieved, the value of New SLM that is
ultimately realized could be materially different.
The Reorganization Plan had a significant impact on the financial statements of
New SLM, including the creation of a new reporting entity upon emergence from
bankruptcy through the application of fresh-start reporting pursuant to SOP
90-7. Accordingly, the Company's post-Reorganization balance sheets, statements
of operations and statements of cash flows, which reflect the application of
fresh-start reporting, have not been prepared on a consistent basis with the
pre-Reorganization financial statements and are not comparable in all respects
to the financial statements prior to the Reorganization. For accounting
purposes, the inception date of New SLM is deemed to be April 12, 1997.
The effects of the Reorganization Plan and fresh-start reporting on the
Company`s balance sheet at April 11, 1997 are as follows:
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CONDENSED CONSOLIDATED BALANCE SHEET
April 11, 1997
(in thousands)
<TABLE>
<CAPTION>
ASSETS OLD SLM ADJUSTMENTS NEW SLM
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<S> <C> <C> <C>
Cash $ 40,554 $ (36,098) a $ 4,456
Other current assets 64,878 (189) b 64,689
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Total current assets 105,432 (36,287) 69,145
Property, plant and equipment 10,382 10,382
Intangible and other assets, net 1,494 48,979 c 50,473
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Total assets $ 117,308 $ 12,692 $ 130,000
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Short-term debt $ $ 5,100 d $ 5,100
Accounts payable and accrued liabilities 18,029 3,162 e 21,191
Long term debt, current portion 280 1,202 f 1,482
Current portion of liabilities subject to compromise under
reorganization proceedings 45,035 (42,905) g 2,130
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Total current liabilities 63,344 (33,441) 29,903
Long-term debt 32,935 f 32,935
Other liabilities 590 590
Liabilities subject to compromise under reorganization 160,164 (160,164) g
proceedings
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Total liabilities 224,098 (160,670) 63,428
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Stockholders' equity (deficit) (106,790) 173,362 h 66,572
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Total liabilities and stockholders' equity (deficit) $ 117,308 $ 12,692 $ 130,000
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</TABLE>
The following is a brief description of the adjustments made in preparing the
above Condensed Consolidated Balance Sheet.
a. To reflect $45,198 paid out in accordance with the Reorganization Plan, net
of $9,100 borrowed under new credit facilities.
b. To reflect 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 New SLM's
trademarks and costs associated with obtaining new credit facilities.
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 long-term debt under new credit facilities, Senior Secured 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 resulted in an extraordinary gain on debt forgiveness
of approximately $58,726.
h. To reflect fresh-start reporting and the new equity structure of New SLM
pursuant to the Reorganization Plan.
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The following Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1997 has been prepared giving effect to the consummation
of the Reorganization Plan, including the implementation of fresh-start
reporting, as if consummation had occurred on January 1, 1997. Due to the
Reorganization Plan and implementation of fresh-start reporting, financial
statements effective April 12, 1997 for New SLM are not comparable to financial
statements prior to that date for Old SLM. However, for presentation of this
statement, total results for 1997 are shown under the caption "Total Before
Adjustments". The adjustments which give effect to the events that are directly
attributable and expected to have a continuing impact on New SLM and which are
set forth under the caption "Adjustments" reflect the implementation of the
Reorganization Plan and the adoption of fresh-start reporting as if they had
occurred on January 1, 1997.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1997
(Unaudited)(in thousands)
<TABLE>
<CAPTION>
TOTAL BEFORE
ADJUSTMENTS ADJUSTMENTS PRO FORMA
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<S> <C> <C> <C>
Net sales $ 123,754 $ $ 123,754
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Operating income 3,715 5,608 a 9,323
Debt related fees 1,243 (1,243) b
Other expense, net 712 210 c 922
Interest expense 3,922 1,464 d 5,386
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Income (loss) from continuing operations before income taxes
and extraordinary gain on discharge of debt (2,162) 5,177 3,015
Income taxes 4,665 1,856 e 6,521
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Net income (loss) from continuing operations before
extraordinary gain on discharge of debt (6,827) 3,321 (3,506)
Extraordinary gain on discharge of debt 58,726 (58,726) f
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Net income (loss) $ 51,899 $ (55,405) $ (3,506)
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</TABLE>
The following is a brief description of the adjustments made in preparing the
Pro Forma Condensed Consolidated Statement of Operations (unaudited).
a. To reflect adjustments of $6,315 for restructuring charges, net of $707 for
amortization of the intangible associated with fresh-start reporting.
b. To reflect adjustments for costs incurred by Old SLM outside of its
continuing operations.
c. To reflect amortization of the deferred financing costs associated with New
SLM's new credit facilities.
d. To reflect incremental interest expense associated with New SLM's new
credit facilities and Senior Secured Notes.
e. To reflect income taxes associated with adjustments.
f. To reflect adjustments for extraordinary gain on discharge of debt.
4
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OPERATIONS
Industry Background
The 1997 North American license business represents almost $11 billion in sales
divided among four professional leagues covering basketball, football, baseball
and hockey (the National Basketball Association ("NBA"), the National Football
League ("NFL"), Major League Baseball ("MLB") and the National Hockey League
("NHL")) and the National Collegiate Athletic Association ("NCAA"). The license
category for the NHL represents $1.2 billion in licensed sales, of which 58% is
in apparel ($0.7 billion). In North America, licensed sales have increased from
$1 billion in 1996.
There was a 37% increase, from 1996 to 1997, in consumer purchases of
professional sports licensed apparel while university and college licensed
apparel remained unchanged.
The increase in sales of NHL licensed merchandise has been credited primarily to
the further NHL expansion in the U.S. (i.e. Florida, California, Arizona and
Texas), the excitement generated by the NHL's new format All-Star game (North
America vs. World) and the first ever professional participation at the 1998
Winter Olympic Games in Nagano.
In 1997, the world wide hockey hardgoods market had approximately $435 million
in wholesale sales.
According to the NHL, U.S. participation in hockey among American youth has
grown by 182% from 1992 to 1997. USA Hockey has shown an increase to 29,000
teams registered in 1996. Over 440,000 participants played hockey for registered
teams in the U.S. in 1996. It is estimated that another 1,000,000 non-registered
players participated in hockey last year in various non-competitive leagues.
The roller hockey segment has also seen dramatic growth and is expected to
increase hockey equipment sales. In 1996, 3.2 million Americans played roller
hockey, a 43% increase over 1995 and, according to USA Inline (the roller hockey
governing body), further growth is anticipated in this market.
The primary limiting factor in the growth of ice hockey in the U.S. has been the
restriction of available ice time. While only 300 ice hockey rinks were added
between 1990-1996, USA Hockey estimates 250 new arenas are currently under
construction and as many as 500 more may be added by the year 2000.
Strategy
The Company's strategy with respect to hockey products is to maximize the
visibility of the CCM trademark in the NHL and other professional and amateur
hockey leagues. This strategy is based upon the Company's belief that the high
visibility of the CCM trademark leads to greater retail sales of its hockey
products. The CCM trademark appears on players' helmets, jerseys, pants, gloves
and skates. Unlike some of its competitors, the Company has pursued a strategy
of a limited number of player endorsees, and enhancing its relationships with
the major hockey leagues. The Company has licenses for certain hockey jerseys
with the NHL, the Canadian Hockey League and most major NCAA hockey teams. To
complement this strategy, the Company provides both professional and amateur
hockey players with a high level of service.
The Company's existing sourcing and manufacturing capabilities allowed it to
launch new products such as the 952 Tacks hockey skate in January 1997. The 952
Tacks hockey skate features technology such as the new Dynamic Sidewall
Technology outsole which incorporates forefoot and heel wrapping to provide
strong support and stability. In addition, the Company has introduced materials
such as Kevlar reinforced nylon, developed with Dupont, new molded graphic
applications in conjunction with Flex Systems USA and lightweight composite
reinforcement plates with the help of bio-mechanical composites. These
partnerships are examples of the Company's capabilities to develop and market
the most advanced products.
Hockey Skates.
The Company markets a range of hockey and figure skates from professional
caliber premium hockey skates to popular priced figure and recreational hockey
skates. All of these products, including the Tacks line of premium hockey skates
and the Edge line, are sold under the CCM trademark. The Company estimates that
during the 1997-1998 season more than 35% of NHL players are wearing its CCM
hockey skates. The Company also
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manufactures private label skates using specific retailers' brand names, as well
as the CCM trademark. The Company believes that it was the second largest
manufacturer of hockey and figure skates in North America in 1997, based on
units sold. The Company's hockey skate blades, which are sold under the SLM and
CCM trademarks, are used by players of all skill levels from novice to
professional.
Protective Equipment
The Company manufactures and markets a complete range of hockey helmets, pants,
shin pads, shoulder pads, elbow pads and gloves. All of the Company's protective
equipment is marketed under the CCM trademark. Sub-brands Supra, Ultra,
Powerline and Tacks, which accompany the CCM trademark, differentiate the
product by quality and price point. The Company estimates that during the
1997-1998 hockey season more than 50% of NHL players are using its hockey pants,
gloves or helmets.
Sports Apparel
Hockey Apparel. Under the CCM trademark, the Company markets a broad range of
hockey apparel, including authentic and replica NHL hockey jerseys which are
sold pursuant to certain license agreements with the NHL. The Company also
manufactures the authentic jerseys that are used by all of the players in the
Canadian Hockey League and most major NCAA hockey teams, as well as many amateur
hockey teams in North America. These authentic and replica jerseys are sold
primarily through retailers. The Company believes that it is among the world's
largest manufacturers of hockey jerseys (authentic, replica and amateur
gamewear) based on total dollars and units sold.
#1 Apparel.
The Company's #1 Apparel division manufactures a high quality line of baseball
style caps, jackets and other casual apparel using its own designs and graphics
under licenses from the NHL, IHL, AHL, Team Canada, major colleges and
universities and the NCAA. This division also operates a corporate, premium
business, selling to major corporations in North America.
Sales and Marketing
The Company's sporting goods products are sold throughout the world. In North
America, the Company sells to more than 4,000 customers, including independent
sporting goods stores, cooperative buying groups, mass merchandisers, sporting
goods chains, department stores and wholesalers. Internationally, the Company
has distributors in 30 countries in Europe, South America, Central America,
Africa, Australia and the Far East. Sporting goods products are sold to certain
large customers by the Company's in-house sales staff, while other accounts are
serviced by an extensive network of approximately 50 independent sales
representatives. In 1997, no single account represented more than 10% of the
Company's consolidated net sales of sporting goods. The Company distributes its
sporting goods products from distribution centers in the United States and
Canada.
Retail sales of hockey products are seasonal, with the majority of retail sales
occurring in the second and third calendar quarters. The Company believes that
first quarter sales of roller hockey products and #1 Apparel licensed products
reduces the Company's reliance on second and third quarter sales of hockey
products.
GENERAL
Backlog
The timing of orders is largely influenced by the degree of consumer demand for
product lines, inventory levels of retailers, marketing strategies, seasonality
and overall economic conditions. The major period during which the Company
receives its booking orders is January to April. The Company's consolidated
order backlog at December 31, 1997 decreased 2.6% to approximately $11.5 million
as compared to December 31, 1996.
Trademarks, Patents and Licenses
The principal trademarks used by the Company are listed in the table set forth
below. All are owned by the Company except for the "CCM" trademarks which are
owned by CCM Holdings (1983) Inc., which in turn is 50% owned by the Company
through certain of its subsidiaries. The remaining 50% is owned by an
unaffiliated Canadian bicycle manufacturer. All of the trademarks, including the
"CCM" trademarks, are exclusive and perpetual for the product categories
indicated. All of the trademarks, excluding the "CCM" trademarks, are also
royalty free. The "CCM" trademarks carry a nominal annual fixed fee due to CCM
Holdings (1983) Inc. which is not based on sales.
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<TABLE>
<CAPTION>
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Trademarks Category
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<S> <C>
CCM Hockey apparel, ice and roller hockey protective equipment and
ice, figure and roller hockey skates
Tacks Ice and roller hockey skates and protective equipment
Edge Ice skates
Supra, Ultra, Powerline Hockey pants and protective equipment
Ultrafil, Airknit, Suprafil Hockey apparel
# 1 Apparel Apparel
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</TABLE>
The Company's principal license agreements are with National Hockey League
Enterprises, L.P. ("NHLE") and the National Hockey League Players Association
("NHLPA"). Under the NHLE agreements the Company has the right to use NHL team
logos, names and designs on hockey jerseys, headwear and accessory and equipment
bags. Under the NHLPA agreements the Company has the right to use the NHL player
names and numbers on NHL licensed jerseys.
The NHLE agreements provide the Company with the exclusive right to market and
sell a) the authentic jerseys for ten NHL teams, b) the authentic and replica
NHL All-Star game jerseys and c) the authentic and replica practice jerseys.
They also provide the non-exclusive right to market and sell replica jerseys,
headwear and accessory and equipment bags for all NHL teams.
The NHLPA agreements expire on June 30, 1998 and the Company presently believes
that these agreements will be renewed in the ordinary course. The NHLE
agreements expire on June 30, 1999.
Manufacturing and Sourcing
North America. The Company manufactures and distributes the majority of its
products in seven facilities located in Vermont, Ontario and Quebec.
Collectively these facilities have capabilities for knitting, cutting, sewing,
embroidery, silk screen printing, injection and vacuum molding and skate and
equipment manufacturing.
Foreign. The Company sources products from China, Hong Kong, Korea, Taiwan,
Thailand and the Philippines.
The Company currently has one supplier who is responsible for products which are
included as components in more than 10% of the Company's consolidated net sales.
The Company has mitigated associated risks through retention of title and
ownership of the tools and molds used in the process and should be able to
transition the process to other suppliers with no significant effect on the
Company's operations.
Research and Product Development
The majority of the Company's products are conceived of and developed at its own
facilities, or are developed jointly with third party inventors. The Company
operates research and development facilities in St. Jean, Quebec. The employees
include designers, engineers and model makers. These facilities include
woodworking, spray painting, molding and sculpting capabilities, and have
creative services departments which are responsible for apparel, packaging and
catalog design and development.
Competition
The sporting goods industry is highly fragmented. The Company competes with
numerous companies in team related sporting goods, equipment and sports apparel.
The Company is renowned for its high quality and innovative products and
provides high levels of service to its customers. The Company competes directly
with a number of ice hockey and roller hockey specific vendors. Many of these
same vendors are attempting to crossover from ice to roller and vice versa, as
well as expand into the skate categories which the Company ("CCM") and Bauer
Inc. ("Bauer") have dominated for many years. The Company's major competitors
are Bauer (acquired by Nike, Inc. ("Nike") in February 1995), Sports Holdings
Corp. ("Karhu"), Easton Sports and Mission.
In NHL licensed apparel, the Company competes with Starter Inc., Nike and Bauer.
Employees
As of December 31, 1997, the Company employed approximately 1,140 persons.
Approximately 1,060 are employed in Canada, 77 are employed in the United States
and the balance are employed abroad. None of the
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Company's employees in the United States are unionized, while approximately 350
of its employees at its St. Jean, Quebec plant are unionized. The Company's
collective bargaining agreement with the union expired in 1997. Negotiations are
ongoing and are expected to result in a new collective bargaining agreement in
the second quarter of 1998. The Company maintains good relations with this
union.
ITEM 2. PROPERTIES
The Company believes that its existing manufacturing and distribution facilities
have sufficient capacity to support the Company's business without the need for
significant additional or upgraded equipment or capital expenditures. The
following table summarizes each of the Company's principal facilities for its
operations.
<TABLE>
<CAPTION>
============================================================================================================================
APPROXIMATE LEASE/
LOCATION USE SQUARE FEET OWN
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES
Bradford, Vermont U.S. apparel distribution 84,000 Own
Williston, Vermont U.S. hardgoods distribution center, executive and
administrative offices 70,000 Lease
CANADA
St. Jean, Quebec Hockey equipment and skate manufacturing 138,000 Lease
St. Hyacinthe, Quebec Hockey apparel, cutting and sewing 72,000 Lease
St. Hyacinthe, Quebec Canadian distribution center and administrative offices 200,000 Lease
Cap de la Madeleine, Quebec Hockey apparel sewing 12,000 Lease
Westmount, Quebec Executive offices 7,000 Lease
Mt. Forest, Ontario Apparel manufacturing 135,000 Own
EUROPE
Paris, France European sales office 2,000 Lease
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</TABLE>
ITEM 3. LEGAL PROCEEDINGS
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 U.S., Inc. ("Maska"), had been included on the U.S.
Environmental Protection Agency's Comprehensive Environmental Response,
Compensation and Liability Information System and the Vermont Hazardous Sites
List and was being evaluated for possible remedial action. Under relevant
environmental laws, Maska, as an owner of the property, was potentially liable
for the entire cost of investigating and remediating the contamination allegedly
emanating from its Bradford property and, in addition, 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 property for the costs of such investigation and
remediation. 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 $0.1 million per year. In addition, the
Company paid to Vermont a civil fine stipulated penalty of $0.3 million. While
the total cost of investigation and remediation cannot be determined until the
investigation required by VTDEC is complete and the extent of the
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Company's remedial obligations have been determined, the Company currently
estimates the future cost of oversight and remediation to be approximately $3.2
million in the aggregate, payable over the next several years. The Company
believes it has accrued sufficient amounts for this matter.
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. 1:93-CV-309 against seven 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 recommended that the Vermont District Court grant Maska's motion for
partial summary judgment on the issue of the duty to defend. The report also
recommended 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. The case is scheduled for trial on or after June
9, 1998.
In 1992, T. Copeland & Sons, Inc. ("Copeland") 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. In June 1995, Maska settled this action for $1.0 million cash,
paid in July 1995, and a $6.0 million promissory note. Under the Plan, Copeland
received a distribution of shares of New SLM's New Common Stock to satisfy the
note. Copeland asserted the right to recover from the Company the difference
between the aggregate value of the New Common Stock and the amount of the
promissory note. The Company believes that this claim is without merit.
B. PRODUCT LIABILITY LITIGATION:
The Company is unaware of any personal injury claims for which there is
inadequate insurance coverage.
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 in an action in Quebec Superior
Court in Montreal, Canada to recover defense costs related to a personal injury
claim filed in 1989. This claim was settled and approved by the Bankruptcy Court
and treated under the Reorganization Plan. The Company filed a response to the
declaratory judgment action and a counterclaim in Quebec 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, were 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 $0.6 million.
C. OTHER LITIGATION
On October 16, 1997, ZMD Sports Investments Inc. and 2938201 Canada Inc.,
landlords of the Company's properties located in St. Jean, Quebec and St.
Hyacinthe, Quebec, brought motions against the Company requiring the Company to
undertake certain repairs to the properties. The Company believes these motions
to be without merit.
Other than certain legal proceedings arising from the ordinary course of
business, which the Company believes will not have a material adverse effect on
the financial position, results of operations, or cash flows, there is no other
litigation pending or threatened against the Company.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) PRICE RANGE OF COMMON STOCK
Between May 24, 1995 and April 11, 1997, Old SLM's common stock ("Old Common
Stock") traded on the NASD Electronic Bulletin Board ("EBB") under the symbol
"SLMI" (through October 1996) and "SLMIQ" thereafter. Prior to that date, Old
SLM's Old Common Stock was traded on the NASDAQ Stock Market ("NASDAQ"). The
following chart sets forth, for the calendar periods indicated, the range of
closing prices for the Old Common Stock as reported on NASDAQ and EBB:
HIGH LOW
---- ---
1996 First Quarter $ 2.13 $ 1.06
Second Quarter $ 1.81 $ 0.50
Third Quarter $ 0.88 $ 0.20
Fourth Quarter $ 0.43 $ 0.11
1997 First Quarter $ 0.47 $ 0.11
On April 11, 1997, the Effective Date of the Company's Plan of Reorganization,
Old SLM's Old Common Stock was extinguished and the holders of the Old Common
Stock received a total of 300,000 five year warrants (the "Warrants") to
purchase an aggregate of 300,000 shares of new common stock ("New Common Stock")
at an exercise price of $16.92 per share (subject to adjustments for stock
splits, stock dividends, recapitalizations and similar transactions). Each
holder of 67 shares of Old Common Stock received one Warrant to purchase, for
cash, one share of new common stock, with no fractional warrants issued. On the
Effective Date, New SLM issued an aggregate of 6,500,000 shares of New Common
Stock, $0.01 par value (as adjusted to take account of fractional interests
pursuant to the Plan). New SLM's New Common Stock and Warrants are quoted on the
OTC Bulletin Board under the trade symbols "SLMM-BB" and "SLMMW-BB",
respectively. The range of closing prices of the New Common Stock is not
provided as there has been a limited amount of trading activity in New SLM's New
Common Stock
(B) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
The approximate number of record holders of New SLM's New Common Stock as of
March 26, 1998 was 300. The Company did not pay dividends on its Old Common
Stock and has no current plans to pay cash dividends on its New Common Stock in
the foreseeable future.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected combined consolidated financial data presented below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K. The selected consolidated
financial data as of and for the years ended December 31, 1997, 1996, 1995, 1994
and 1993 are derived from the consolidated financial statements of the Company.
For the presentation of this statement, results for New SLM and Old SLM have
been combined for 1997.
The Company's financial statements following its emergence from bankruptcy are
not comparable to the historical financial statements preceding its emergence,
which do not reflect the Reorganization Plan. Following emergence from
bankruptcy the Company adopted fresh-start reporting in accordance with
Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code (" SOP 90-7").
In December 1994, the Company determined that it would hold its investment in
its toy and fitness businesses operated by its Buddy L Inc. and Buddy L Canada
Inc. subsidiaries for sale. Accordingly, these businesses have been reported as
discontinued operations for all income statement data presented below. However,
balance sheet data prior to December 31, 1994 has not been restated for these
discontinued operations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(in thousands)
COMBINED
1997 (1) 1996(1) 1995 (1) 1994 (1) 1993 (1)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 123,754 $ 140,321 $ 160,973 $ 180,806 $ 126,034
Cost of goods sold 73,775 92,613 107,266 113,577 75,104
-----------------------------------------------------------------------------------
Gross profit 49,979 47,708 53,707 67,229 50,930
Gross profit margin (%) 40.4% 34.0% 33.4% 37.2% 40.4%
Selling, general and administrative expenses 38,237 45,831 59,753 67,031 38,600
Amortization of excess reorganization value 1,712
Restructuring and unusual charges 6,315 4,033 15,471
-----------------------------------------------------------------------------------
Operating income (loss) 3,715 (2,156) (21,517) 198 12,330
Chapter 11 and debt related fees 1,243 7,432 11,195
Other expense (income), net 712 27 1,484 (260) (499)
Interest expense 3,922 9,555 17,078 6,713 3,356
-----------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and extraordinary
gain on discharge of debt (2,162) (19,170) (51,274) (6,255) 9,473
Income taxes 4,665 (448) 605 (11) 3,779
-----------------------------------------------------------------------------------
Income (loss) from continuing operations
before extraordinary gain on discharge
of debt (6,827) (18,722) (51,879) (6,244) 5,694
Extraordinary gain on discharge of debt 58,726
-----------------------------------------------------------------------------------
Income (loss) from continuing operations $ 51,899 $ (18,722) $ (51,879) $ (6,244) $ 5,694
===================================================================================
BALANCE SHEET DATA:
Working capital (deficit) $ 45,736 $ 50,678 $ 110,088 $ (38,360) $ 78,623
Total assets 118,780 124,925 138,028 192,838 254,283
Short-term debt, including, long-term
debt, current portion and current
portion of liabilities subject to
compromise under reorganization
proceedings 2,966 45,404 702 173,471 79,700
Long-term debt 30,064 16,113
Liabilities subject to compromise under
reorganization proceedings 160,164 201,814
Stockholders' equity (deficit) 68,882 (97,189) (78,642) (6,284) 106,878
</TABLE>
- ----------
(1) Common shares and per share data are omitted because, due to the
Reorganization Plan and implementation of fresh-start reporting, they are
not meaningful.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
On October 24, 1995, SLM International, Inc. ("SLM") and six of its subsidiaries
(collectively, "Old SLM") filed for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. SLM and those subsidiaries chose to seek court protection from
creditors in order to conduct their operations while preparing a reorganization
plan. The Bankruptcy Court entered an order authorizing the joint administration
of Old SLM's Chapter 11 Cases. On September 12, 1996 Old SLM filed a Chapter 11
Plan of Reorganization and on November 13, 1996, Old SLM filed a First Amended
Chapter 11 Plan of Reorganization, as amended from time to time, with the
Bankruptcy Court. On January 23, 1997, the Bankruptcy Court confirmed the
Reorganization Plan which became effective on April 11, 1997 and Old SLM emerged
from bankruptcy ("New SLM"). Disruptions that occurred prior to and which may
have been caused by the Filing affected the Company's operating performance for
a given period and continued 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 discontinued operations. For further information concerning
discontinued operations, see Note 5 to the Consolidated Financial Statements
presented elsewhere herein.
Financial comparisons herein are based on the combined results for New SLM and
Old SLM for the year ended December 31, 1997 as compared to results for Old SLM
for the years ended December 1996 and 1995.
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 Consolidated Financial Statements of
the Company and Notes thereto included elsewhere herein. (All references to
"Note(s)" refer to the Notes to the Consolidated Financial Statements.) The
combined consolidated financial information presented below should be read in
conjunction with the Results of Operations included in this Form 10-K. FOR THE
PRESENTATION OF THIS STATEMENT, RESULTS FOR NEW SLM AND OLD SLM HAVE BEEN
COMBINED FOR 1997 (SEE PAGE 11 OF THIS FORM 10-K FOR 1997 COMBINED RESULTS). Pro
Forma Condensed Consolidated Statement of Operations for the year ended December
31, 1997 giving effect to the consummation of the Reorganization Plan, including
the implementation of fresh-start reporting, as if consummation had occurred on
January 1, 1997 is provided on page 4 of this Form 10-K.
RESULTS OF OPERATIONS
The Company's results of operations as a percentage of net sales for the periods
indicated were as follows:
<TABLE>
<CAPTION>
COMBINED
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross profit 40.4% 34.0% 33.4%
Selling, general and administrative expenses 30.9% 32.7% 37.1%
Amortization of excess reorganization value 1.4% -- --
Restructuring and unusual charges 5.1% 2.9% 9.6%
Operating income (loss) 3.0% (1.6%) (13.3%)
Chapter 11 and debt related fees 1.0% 5.3% 7.0%
Other expense, net 0.6% -- 0.9%
Interest expense 3.1% 6.8% 10.6%
Loss from continuing operations before
income taxes and extraordinary gain on
discharge of debt (1.7%) (13.7%) (31.8%)
Income taxes 3.8% (0.4%) 0.4%
Loss from continuing operations before
extraordinary gain on discharge of debt (5.5%) (13.3%) (32.2%)
Extraordinary gain on discharge of debt 47.4% -- --
Income (loss) from continuing operations 41.9% (13.3%) (32.2%)
</TABLE>
12
<PAGE>
1997 COMPARED TO 1996
Net sales decreased 11.8% to $123.8 million for the year ended December 31, 1997
as compared to $140.3 million in the year ended December 31, 1996. While the
Company experienced an overall decline in net sales of 11.8%, recreational
inline skate sales decreased approximately 51.5%, representing a significant
portion of the overall sales decline. This decline was caused to a large extent
by the Company's decision to exit the recreational inline skate market and to
concentrate its efforts on the premium or high-end roller hockey skate market in
1997. As well, a generally weak retail environment in the recreational inline
skate market, increased amounts of deeply discounted merchandise offered by
other manufacturers and delays in receiving goods from overseas suppliers during
the second half of 1997 led to lower sales of inline skates. Sales in 1997
continued to be negatively affected by the Company's Chapter 11 status, despite
the Company's emergence from bankruptcy in April 1997, as the major period
during which the Company receives its booking orders is January to April.
Finally, 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, and has reduced or eliminated certain
incentives to customers, negatively affecting overall sales as compared to 1996.
Gross profit was $50.0 million in 1997 compared to $47.7 million in 1996, an
increase of 4.8%. Measured as a percentage of net sales, gross profit margins
increased to 40.4% in 1997 from 34.0% in 1996. These higher gross profit margins
are a result of favorable customer and product mixes, improved utilization of
manufacturing capacities, reduced overhead costs resulting from restructuring
efforts and reduced sales of excess, obsolete and slow moving inventories as
compared to 1996.
For the year ended December 31, 1997, selling, general and administrative
expenses decreased 16.6% to $38.2 million compared to $45.8 million in the prior
year period. Measured as a percentage of net sales, these expenses were 30.9% in
1997 versus 32.7% in 1996. Selling general and administrative expenses decreased
due to generally lower operating expenses resulting from the Company's ongoing
efforts to reduce costs, including reduced variable selling costs, and lower
distribution and administrative expenses.
Effective April 12, 1997, the Company began amortizing its excess reorganization
value which was established in accordance with fresh-start reporting. This
non-cash amortization amounted to $1.7 million in the period April 12 through
December 31, 1997.
During the year ended December 31, 1997, the Company recorded restructuring
costs of $6.3 million relating 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 and Unusual Charges in the Consolidated Statements of
Operations. During 1996, the Company recorded restructuring charges totaling
$4.0 million. These costs consisted primarily of severance pay ($3.4 million),
including that of the Company's former Chief Executive and Chief Financial
Officers, and the impairment of long lived assets ($0.6 million), primarily
machinery and equipment at one of its Canadian facilities. These restructuring
charges represent 92.5% and 21.5% of the Company's income (loss) from continuing
operations before extraordinary gain on discharge of debt for the years ended
December 31, 1997 and 1996, respectively.
Operating income for the year ended December 31, 1997 was $11.7 million,
compared to $1.9 million in the year ended December 31, 1996, excluding the
amortization of excess reorganization value and restructuring and unusual
charges. The 1997 operating income was primarily the result of increased gross
profit margins and lower selling, general and administrative expenses discussed
above. Including the amortization of excess reorganization value and
restructuring and unusual charges, the operating income was $3.7 million in the
year ended December 31, 1997 compared to an operating loss of $2.2 million for
the year ended December 31, 1996.
As a result of Old SLM's Chapter 11 Cases, the Company incurred significant
legal and professional fees totaling $1.2 million and $7.4 million for the years
ended December 31, 1997 and 1996, respectively. These fees include the cost of
the Company's legal counselors, financial advisors and consultants, as well as
those of its bankers, senior noteholders and creditors. These costs are included
as Chapter 11 and Debt Related Fees in the Consolidated Statements of Operations
for the periods then ended. These costs represent approximately 18.2% and 39.7%
of the
13
<PAGE>
Company's income (loss) before extraordinary gain on discharge of debt for the
years ended December 31, 1997 and 1996, respectively.
Interest expense approximated $3.9 million and $9.6 million for 1997 and 1996,
respectively. During the reorganization proceedings the Company was 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
was probable that the Bankruptcy Court would allow interest on pre-Petition Date
debt as a priority, secured or unsecured claim. On the Effective Date, the
Company entered into various debt agreements (see "Liquidity and Capital
Resources" below) resulting in 1997 interest expense.
The Company's income (loss) from continuing operations before extraordinary gain
on discharge of debt was $2.4 million and $(7.3) million for 1997 and 1996,
respectively, excluding restructuring and unusual charges, amortization of
excess reorganizational value and Chapter 11 and debt related fees. The
Company's loss from continuing operations before extraordinary gain on discharge
of debt for the year ended December 31, 1997 was $6.8 million compared to a loss
of $18.7 million in the year ended December 31, 1996. The restructuring and
unusual charges, amortization of excess reorganizational value and Chapter 11
and debt related fees represented 135.8% and 61.2% of the Company's income
(loss) from continuing operations before extraordinary gain on discharge of debt
for the years ended December 31, 1997 and 1996, respectively.
On April 11, 1997, the Company emerged from bankruptcy and, as a result of its
Reorganization Plan and implementation of fresh-start reporting, approximately
$58.7 million of its liabilities were forgiven and are included in Extraordinary
Gain on Discharge of Debt in the Consolidated Statements of Operations.
The Company`s net income for the year ended December 31, 1997 was $51.9 million
compared to a net loss of $18.7 million in the year ended December 31, 1996.
1996 COMPARED TO 1995
Net sales decreased 12.8% to $140.3 million for the year ended December 31, 1996
as compared to $161.0 million in the year ended December 31, 1995. The decline
in sales included decreases of 36.2% in inline roller skates, 11.6% in hockey
and figure skates, 6.0% in licensed sports apparel and 3.5% in protective
equipment. Compared to 1995, sales in 1996 were negatively affected by the
Company's Chapter 11 status, a generally weak retail environment in the sports
and leisure products industry, particularly in the recreational inline skate
market, increased amounts of deeply discounted merchandise offered by other
manufacturers and poor weather in the U.S. and Canada. 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, and has reduced or eliminated certain incentives to customers.
Gross profit was $47.7 million in 1996 compared to $53.7 million in 1995, a
decrease of 11.2%. Measured as a percentage of net sales, gross profit margins
increased to 34.0% in 1996 from 33.4% in 1995. These higher gross profit margins
are principally a result of favorable customer and product mixes as compared to
1995. In addition, 1995 was adversely affected by aggressive sales of excess,
obsolete and slow moving inventories to generate cash needed to support the
Company's operations during the period of its financial difficulties.
For the year ended December 31, 1996, selling, general and administrative
expenses decreased 23.3% to $45.8 million compared to $59.8 million in the prior
year period. Measured as a percentage of net sales, these expenses were 32.7% in
1996 versus 37.1% in 1995. Expenses decreased as a result of generally lower
operating expenses due to the Company's continued efforts to aggressively reduce
costs, reduced variable selling costs, principally royalties and commissions,
decreased bad debt expense, and lower administrative expenses including legal
expenses associated with certain cases that were either settled or delayed due
to the Company's financial difficulties.
During 1996, the Company recorded significant unusual charges in continuing
operations totaling $4.0 million to reflect the impact of strategically
reorganizing management to position itself for a definitive restructuring plan.
These costs consist primarily of severance pay ($3.4 million), including that of
the Company's former Chief Executive and Chief Financial Officers, and the
impairment of long lived assets ($0.6 million), primarily machinery and
equipment at one of its Canadian facilities. During 1995, the Company recorded
significant unusual charges in continuing operations totaling $15.5 million due
principally to litigation settlements ($8.8 million) and reassessment, during
the fourth quarter of 1995, of the intangible assets associated with the
acquisition of #1 Apparel ($6.4 million). Litigation settlements include
settlements of environmental litigation ($7.0 million, recorded in the second
quarter and $0.25 million, recorded in the fourth quarter 1995) and securities
14
<PAGE>
litigation ($1.6 million recorded in the fourth quarter 1995). The unusual
charges represent 21.5% and 29.8% of the Company's loss from continuing
operations for the years ended December 31, 1996 and 1995, respectively.
Excluding the unusual charges, operating income for the year ended December 31,
1996 was $1.9 million compared to an operating loss of $6.0 million in 1995. 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 1996 was $2.2 million and
$21.5 million for 1995.
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 $7.4 million and $11.2 million for the years ended December 31, 1996
and 1995, respectively. These fees include the cost of the Company's legal
counselors, 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 year
ended December 31, 1996 is net of $0.7 million of interest earned on accumulated
cash resulting from the Filing. These costs are included as Chapter 11 and debt
related fees in the Consolidated Statement of Operations for the periods then
ended.
Interest expense approximated $9.6 million and $17.1 million for 1996 and 1995,
respectively. During the reorganization proceedings the Company was 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
was probable that the Bankruptcy Court would 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 year ended December 31,
1996 was $18.7 million compared to a loss of $51.9 million in the year ended
December 31, 1995. Excluding unusual charges and debt related fees, the
Company's net loss was $7.3 million and $25.2 million for 1996 and 1995,
respectively. The unusual charges and debt related fees represented 61.2% and
51.4% of the Company's losses from continuing operations for the year ended
December 31, 1996 and 1995, respectively.
For the year ended December 31, 1995, the Company recognized a loss on
discontinued operations of $25.6 million due to the finalization of the terms of
sale of these operations.
INCOME TAXES
The Company's income tax provision is comprised of both United States and
foreign tax components. Due to changes in the relative contribution of income or
loss by country, differences in the effective tax rates between countries
(principally the U.S. and Canada) and permanent differences in effective tax
rates between income for financial statement purposes, the consolidated
effective tax rates may vary significantly from period to period. The Company
and its U.S. subsidiaries consolidate their income for U.S. federal income tax
purposes. However, gains and losses of certain subsidiaries may not be available
to other subsidiaries for tax purposes.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. A full valuation
allowance was provided in 1997 and 1996.
Fresh-start reporting requires the Company to report a provision in lieu of
income taxes when there is a book taxable income and utilization of a
pre-reorganization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carryforward and other deferred tax assets would eliminate the related federal
income tax payable. The current and future year tax benefit related to the
carryforward is recorded as a reduction of reorganizational value in excess of
amounts allocable to identifiable assets until exhausted and then as a direct
increase to paid in capital. The amount of income tax provision which has been
used to reduce the reorganizational value in excess of amounts allocable to
identifiable assets is reflected as a provision in lieu of income taxes in the
Company's Consolidated Statements of Operations.
15
<PAGE>
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. From the Filing to April
11, 1997, 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 Old SLM's Chapter 11 Cases. On September 12, 1996 Old SLM
filed a Chapter 11 Plan of Reorganization and on November 13, 1996, Old SLM
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 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 working capital and capital
expenditures requirements through cash generated by its operations and through
its new credit facilities (these facilities were amended in March 1998, see Note
20). 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 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 of revolving credit loans under the U.S. Credit Agreement, $35.0 million
of revolving credit loans under the Canadian Credit Agreement and a $4.0 million
term loan (which was permanently reduced by $2.1 million in June 1997 with the
proceeds from the sale of one of the Company's subsidiaries (see Note 4)) under
the U.S. Credit Agreement. Borrowings under the Credit Agreements are guaranteed
by certain subsidiaries and are secured 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 $1.8 million at December 31, 1997.
Borrowings under the U.S. Credit Agreement bear interest at an 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.
On April 11, 1997 the Company issued $29.5 million principal amount of 14%
Senior Secured Notes due April 1, 2004 (the "Senior Secured Notes"), pursuant to
an Indenture with The Bank of New York, as trustee. The Senior Secured 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 W.S. Acquisition L.L.C. on the Effective Date.
Interest was payable on the Senior Secured Notes semi-annually at the rate of
14% per annum, with such interest rate being permanently reduced by up to 4% if
the Company met certain earnings tests. Further, of the initial 14% interest
rate, 10% was payable in cash and 4% was payable in cash or by the issuance of
additional Senior Secured Notes. The Senior Secured Notes had a term of seven
years with principal payments beginning in the fifth year. The Senior Secured
Notes were guaranteed by certain subsidiaries and were 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 were guarantors. The lien of the trustee for the benefit of itself and the
Senior Secured Noteholders was junior to the
16
<PAGE>
liens of Chase and Chase Canada. The Indenture also included customary
affirmative and negative covenants. On March 16, 1998, the Company prepaid the
Senior Secured Notes in full.
During March 1998, the Company amended its Credit Agreements ("New Credit
Agreements") to take advantage of its improved borrowing capacity. In completing
the amendments the Company redeemed, in full, its Senior Secured Notes and all
amounts outstanding under the Term Loan under its U.S. Credit Agreement. The
redemptions were effected by the New Credit Agreements (additional revolving
credit loan borrowings under the New Credit Agreements and the New Term Loan)
and use of the Company's cash on hand. The maximum amount of loans that may be
outstanding under the New Credit Agreements is $60.0 million, consisting of
$45.0 million revolving credit loans and a $15.0 million term loan ("New Term
Loan"). Borrowings under the New Credit Agreements bear interest at an alternate
base rate per annum or at an interest rate based on LIBOR plus 1 3/4% per annum
on U.S. revolving credit loans, at Chase Canada's prime rate or at an alternate
base rate per annum on Canadian revolving credit loans, and an alternate base
rate plus 1/4% per annum or at an interest rate based on LIBOR plus 2% per annum
on the New Term Loan. Interest and principal on the New Term Loan are payable in
quarterly installments ($0.6 million principal) through April 2000, beginning in
April 1998.
The Company's financing requirements for long-term growth, future capital
expenditures and debt service are expected to be met through cash generated from
its operations and through its New Credit Agreements. During the year ended
December 31, 1997, the Company's operations provided $18.4 million, cash
compared to $18.9 million in 1996. The Company incurred a loss of $6.8 million,
exclusive of the extraordinary gain on discharge of debt, compared to a loss of
$18.7 million in 1996; however, the cash impact was mitigated due to non-cash
charges for receivables, inventory, intangibles and restructuring charges.
Earnings before interest, taxes, depreciation, amortization, restructuring and
unusual charges and Chapter 11 and debt related fees (EBITDA) was $13.9 for the
year ended December 31, 1997 compared to $5.1 million for the previous year.
Included in EBITDA is a non-cash charge of $0.6 million related to foreign
exchange conversion in the year ended December 31, 1997. EBITDA for the year
ended December 31, 1997 does not include the full effect of the cost reductions
from the Company's restructuring plan, as many of the cost reductions only began
in May 1997.
Cash provided by investing activities during the year ended December 31, 1997 of
$0.4 million includes $1.8 million of net proceeds from the sale of one of the
Company`s subsidiaries, offset, in part, by $2.0 million of purchases of fixed
assets. Cash provided by investing activities of $3.5 million during the year
ended December 31, 1996 consisted primarily of $5.9 million from the proceeds
from the disposal of discontinued operations, offset by $2.8 million of
purchases of fixed assets.
Net cash flows used in financing activities during 1997 and 1996 were
approximately $46.0 million and $5.4 million, respectively. The use of cash in
1997 resulted primarily from payments to creditors on the Effective Date to
satisfy claims ($36.1 million), costs incurred to secure new debt facilities
($2.2 million), principal payments on debt ($3.0 million) including payment on
the term loan under the U.S. Credit Agreement and repayments of borrowings under
the Company`s Credit Agreements ($4.7 million) for its short-term working
capital requirements. Net cash used in financing activities during the year
ended December 31, 1996 consisted primarily of cash from net assets of
discontinued operations used for principal payments on the Company's secured
debt as allowed by the Bankruptcy Court.
The Company, in its continuing efforts to increase efficiency and improve
operations, has initiated information system modifications. The information
system modifications include, but are not limited to, Year 2000 compliance
programs to ensure that systems and key processes will remain functional. This
objective is expected to be achieved either by modifying present systems using
existing internal and external programming resources or by installing new
systems and by monitoring supplier and other third party interfaces. While there
can be no assurance that all such modifications will be successful, management
does not expect that either the costs of modifications or the consequences of
any unsuccessful modifications should have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
During January 1998 a severe ice storm struck the North Eastern parts of North
America paralyzing businesses throughout the affected regions. As a result, the
Company's Quebec operations ceased for the majority of the month of January
1998. It is anticipated that this will negatively affect the Company's first
quarter of 1998 operations through, amongst others, reduced sales, unabsorbed
overhead and increased selling, general and administrative expenses. The Company
maintains business interruption insurance which may offset, in part, these costs
in a future quarter.
17
<PAGE>
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.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
- --------------------------------------------------------------------------------
Reports of Independent Accountants
Ernst & Young 20
Coopers & Lybrand L.L.P. 21
Raymond, Chabot, Martin, Pare 22
Consolidated Financial Statements
Consolidated Balance Sheets at December 31,
1997 and 1996 28
Consolidated Statements of Operations
for April 12 through December 31, 1997,
January 1 through April 11, 1997 and the years
ended December 31, 1996 and 1995 29
Consolidated Statements of Stockholders' Equity
(Deficit) for April 12 through December 31,
1997, January 1 through April 11, 1997 and the
years ended December 31, 1996 and 1995 30
Consolidated Statements of Cash Flows
for April 12 through December 31, 1997, January
1 through April 11, 1997 and the years ended
December 31, 1996 and 1995 31
Notes to Consolidated Financial Statements 32
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
SLM International, Inc.
We have audited the accompanying consolidated balance sheet of SLM
International, Inc. as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the periods
January 1, 1997 to April 11, 1997 and April 12, 1997 to December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
On April 11, 1997, SLM International, Inc. reorganized and emerged from
bankruptcy. As discussed in Notes 1, 2, and 24 to the consolidated financial
statements, as a result of the reorganization, the financial statements at
December 31, 1997 reflect fresh-start reporting in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7. The
consolidated financial statements as of December 31, 1997 and for the post
reorganization period from April 12, 1997 to December 31, 1997 are presented on
the new basis, and accordingly, are not comparable to the financial statements
for the period January 1, 1997 to April 11, 1997, which have been prepared on a
pre-reorganization basis.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SLM International,
Inc. as of December 31, 1997, and the consolidated results of their operations
and their cash flows for the periods January 1, 1997 to April 11, 1997 and April
12, 1997 to December 31, 1997, in conformity with generally accepted accounting
principles in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Montreal, Canada, /s/ Ernst & Young
March 13, 1998. Chartered Accountants
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
SLM International, Inc.
We have audited the accompanying consolidated balance sheet of SLM
International, Inc. and Subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for the years ended December 31, 1996 and 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audit. We did not audit the 1996 and 1995 financial
statements of certain companies, whose financial statements include total assets
of $70,147,000 as of December 31, 1996 and total net sales of $67,182,000 and
$68,101,000 for the years ended December 31, 1996 and 1995, respectively. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it related to the amounts included for those
companies, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
As discussed in Note 1, SLM International, Inc. and certain of its subsidiaries
filed for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court on October 24, 1995. On April 11, 1997, the First
Amended, as amended, Plan of Reorganization (the "Reorganization") was declared
effective by the Bankruptcy Court. The Reorganization significantly altered,
compromised or modified the Company's historical capital structure as reflected
in the accompanying consolidated balance sheet as of December 31, 1996. The
Company will account for the Reorganization on April 11, 1997 and will, at that
date, adopt fresh-start reporting as described in Note 24. No effects of
accounting for the Reorganization are reflected in the accompanying consolidated
financial statements.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of SLM International, Inc. and Subsidiaries
as of December 31, 1996, and the consolidated results of their operations and
their cash flows for the years ended December 31, 1996 and 1995 in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Albany, New York
April 14, 1997
21
<PAGE>
AUDITORS' REPORT
To the Shareholder of
#1 Apparel Canada Inc.
We have audited the balance sheet of #1 Apparel Canada Inc. as at December 31,
1996 and the statements of earnings and deficit and changes in cash resources
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1996 and the
results of its operations and the changes in its financial position for the year
then ended in accordance with generally accepted accounting principles in
Canada.
As discussed in Note 3, the Company filed for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court on October
24, 1995. On April 11, 1997, the First Amended, as amended, Plan of
Reorganization (the "Reorganization") was declared to be effective for the
Company by the Bankruptcy Court. The Reorganization significantly altered,
compromised, or modified the Company's historical capital structure as reflected
in the accompanying balance sheet as of December 31, 1996.
/s/ Raymond, Chabot, Martin, Pare
Chartered Accountants
Montreal, Canada
April 14, 1997
22
<PAGE>
AUDITORS' REPORT
To the Shareholder of
Sport Maska Inc.
We have audited the consolidated balance sheet of Sport Maska Inc. as at
December 31, 1996 and the consolidated statements of earnings and deficit and
changes in cash resources for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1996
and the results of its operations and the changes in its financial position for
the year then ended in accordance with generally accepted accounting principles
in Canada.
As discussed in Note 3, the Company filed for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court on October
24, 1995. On April 11, 1997, the First Amended, as amended, Plan of
Reorganization (the "Reorganization") was declared to be effective for the
Company by the Bankruptcy Court. The Reorganization significantly altered,
compromised, or modified the Company's historical capital structure as reflected
in the accompanying consolidated balance sheet as of December 31, 1996. The
Company will account for the Reorganization on April 11, 1997 and will, at that
date, adopt fresh-start reporting as described in Note 4. No effects of
accounting for the Reorganization are reflected in the accompanying consolidated
financial statements.
/s/ Raymond, Chabot, Martin, Pare
Chartered Accountants
Montreal, Canada
April 14, 1997
23
<PAGE>
AUDITORS' REPORT
To the Shareholder of
St.Lawrence Manufacturing Canada Inc.
We have audited the balance sheet of St. Lawrence Manufacturing Canada Inc. as
at December 31, 1996 and the statements of earnings and deficit and changes in
cash resources for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1996
and the results of its operations and the changes in its financial position for
the year then ended in accordance with generally accepted accounting principles
in Canada.
As discussed in Note 3, the Company filed for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court on October
24, 1995. On April 11, 1997, the First Amended, as amended, Plan of
Reorganization (the "Reorganization") was declared to be effective for the
Company by the Bankruptcy Court. The Reorganization significantly altered,
compromised, or modified the Company's historical capital structure as reflected
in the accompanying balance sheet as of December 31, 1996.
/s/ Raymond, Chabot, Martin, Pare
Chartered Accountants
Montreal, Canada
April 14, 1997
24
<PAGE>
AUDITORS' REPORT
To the Shareholder of
#1 Apparel Canada Inc.
We have audited the statements of earnings and deficit and changes in cash
resources of #1 Apparel Canada Inc. for the year ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the results of operations and the changes in financial position of the
Company for the year ended December 31, 1995 in accordance with generally
accepted accounting principles in Canada.
/s/ Raymond, Chabot, Martin, Pare
Chartered Accountants
Montreal, Canada
April 25, 1996
COMMENTS BY INDEPENDENT AUDITORS FOR UNITED STATES READERS
ON CANADA - UNITED STATES REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by going concern considerations as described in Note 2
of the financial statements as at December 31, 1995. Our report to the
shareholder dated April 25, 1996 is expressed in accordance with Canadian
reporting standards which do not permit a reference to such considerations in
the auditors' report when the going concern considerations are adequately
disclosed in the financial statements.
/s/ Raymond, Chabot, Martin, Pare
Chartered Accountants
Montreal, Canada
April 25, 1996
25
<PAGE>
AUDITORS' REPORT
To the Shareholder of
St. Lawrence Manufacturing Canada Inc.
We have audited the statements of earnings and deficit and changes in cash
resources of St. Lawrence Manufacturing Canada Inc. for the year ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the results of operations and the changes in financial position of the
Company for the year ended December 31, 1995 in accordance with generally
accepted accounting principles in Canada.
/s/ Raymond, Chabot, Martin, Pare
Chartered Accountants
Montreal, Canada
April 25, 1996
COMMENTS BY INDEPENDENT AUDITORS FOR UNITED STATES READERS
ON CANADA - UNITED STATES REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by going concern considerations as described in Note 2
of the financial statements as at December 31, 1995. Our report to the
shareholder dated April 25, 1996 is expressed in accordance with Canadian
reporting standards which do not permit a reference to such considerations in
the auditors' report when the going concern considerations are adequately
disclosed in the financial statements.
/s/ Raymond, Chabot, Martin, Pare
Chartered Accountants
Montreal, Canada
April 25, 1996
26
<PAGE>
AUDITORS' REPORT
To the Shareholder of
Sport Maska Inc.
We have audited the consolidated statements of earnings and retained earnings
and changes in cash resources of Sport Maska Inc. for the year ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the results of operations and the changes in financial
position of the Company for the year ended December 31, 1995 in accordance with
generally accepted accounting principles in Canada.
/s/ Raymond, Chabot, Martin, Pare
Chartered Accountants
Montreal, Canada
April 25, 1996
COMMENTS BY INDEPENDENT AUDITORS FOR UNITED STATES READERS
ON CANADA - UNITED STATES REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by going concern considerations as described in Note 2
of the financial statements as at December 31, 1995. Our report to the
shareholder dated April 25, 1996 is expressed in accordance with Canadian
reporting standards which do not permit a reference to such considerations in
the auditors' report when the going concern considerations are adequately
disclosed in the financial statements.
/s/ Raymond, Chabot, Martin, Pare
Chartered Accountants
Montreal, Canada
April 25, 1996
27
<PAGE>
SLM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(In thousands)
NEW SLM OLD SLM
1997 1996
-----------------------
ASSETS
Current assets
Cash and cash equivalents (see Note 1) $ 8,051 $ 35,589
Accounts receivable, net (see Note 9) 22,759 33,313
Inventories (see Note 10) 28,475 37,179
Prepaid expenses 2,847 4,069
Income taxes receivable 298 418
Net assets of discontinued operations 189
Other receivables 1,660 1,270
-----------------------
Total current assets 64,090 112,027
Property, plant and equipment, net (see
Note 11) 9,508 12,817
Intangible and other assets, net 45,182 81
-----------------------
Total assets $ 118,780 $ 124,925
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Short-term debt (see Notes 12 and 20) $ 415 $
Accounts payable 4,262 2,938
Accrued liabilities 8,059 9,499
Accrued professional fees 1,853 2,860
Long-term debt, current portion (see
Notes 12 and 20) 1,421 369
Income taxes payable 1,214 648
Current portion of liabilities subject to
compromise under reorganization
proceedings (see Note 3) 1,130 45,035
-----------------------
Total current liabilities 18,354 61,349
Long-term debt (see Notes 12 and 20) 30,064
Deferred income taxes (see Note 16) 1,480 601
Liabilities subject to compromise under
reorganization proceedings (see Note 3) 160,164
-----------------------
Total liabilities (see Note 3) 49,898 222,114
-----------------------
Commitments and contingencies (see Note 19)
Stockholders' equity (deficit)
Preferred stock, nil at December 31, 1997
and no par, 100,000 shares authorized, none
issued or outstanding at December 31, 1996
Common stock, par value $0.01 per share,
15,000,000 shares authorized, 6,500,000
shares issued and outstanding at December 31,
1997 and 50,000,000 shares authorized,
18,859,679 shares issued and outstanding
at December 31, 1996 65 189
Additional paid-in capital 66,507 88,564
Retained earnings (deficit) 2,859 (182,291)
Foreign currency translation adjustments (549) (3,651)
-----------------------
Total stockholders' equity (deficit) 68,882 (97,189)
-----------------------
Total liabilities and stockholders' equity
(deficit) $ 118,780 $ 124,925
=======================
Due to the Reorganization Plan and implementation of fresh-start reporting,
financial statements after April 11, 1997 are not comparable to financial
statements prior to that date. See "Notes to Consolidated Financial Statements"
for more information on the Reorganization Plan and implementation of
fresh-start reporting.
The accompanying notes are an integral part of the
consolidated financial statements.
28
<PAGE>
SLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
NEW SLM OLD SLM
----------- -----------------------------------------------
1997 1997 1996 1995
---- ---- ---- ----
APRIL 12 JANUARY 1
THROUGH THROUGH
DECEMBER 31 APRIL 11
----------- -----------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 98,215 $ 25,539 $ 140,321 $ 160,973
Cost of goods sold 57,768 16,007 92,613 107,266
-------------------------------------------------------------------
Gross profit 40,447 9,532 47,708 53,707
Selling, general and administrative 26,916 11,321 45,831 59,753
expenses
Amortization of excess reorganization
value (see Note 24) 1,712
Restructuring and unusual charges (see
Note 6) 6,315 4,033 15,471
-------------------------------------------------------------------
Operating income (loss) 11,819 (8,104) (2,156) (21,517)
Chapter 11 and debt related fees (see
Note 7) 1,243 7,432 11,195
Other expense, net 519 193 27 1,484
Interest expense (see Note 7) 3,808 114 9,555 17,078
-------------------------------------------------------------------
Income (loss) from continuing 7,492 (9,654) (19,170) (51,274)
operations before income taxes and
extraordinary gain on discharge of
debt
Income taxes 4,633 32 (448) 605
-------------------------------------------------------------------
Income (loss) from continuing 2,859 (9,686) (18,722) (51,879)
operations before extraordinary
gain on discharge of debt
Extraordinary gain on discharge of debt 58,726
-------------------------------------------------------------------
Income (loss) from continuing
operations 2,859 49,040 (18,722) (51,879)
Loss from disposition of discontinued
operations (see Note 5) (25,569)
-------------------------------------------------------------------
Net income (loss) $ 2,859 $ 49,040 $ (18,722) $ (77,448)
===================================================================
Net income per share (b)(see Note 17):
Basic net income per share (see Note 17) $ 0.44
===============
Diluted net income per share (see Note 17) $ 0.41
===============
</TABLE>
(a) Due to the Reorganization Plan and implementation of fresh-start reporting,
financial statements after April 11, 1997 are not comparable to financial
statements prior to that date. See "Notes to Consolidated Financial
Statements" for more information on the Reorganization Plan and
implementation of fresh-start reporting. (See "Management`s Discussion and
Analysis" (page 12) for comparison purposes.)
(b) Common shares and per share data for periods prior to April 12, 1997 are
omitted because, due to the Reorganization Plan and implementation of
fresh-start reporting, they are not meaningful.
The accompanying notes are an integral part of
the consolidated financial statements.
29
<PAGE>
SLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED CURRENCY
------------------------ PAID-IN EARNINGS TRANSLATION
# OF SHARES AMOUNT CAPITAL (DEFICIT) AJUSTMENTS TOTAL
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 18,860 $ 189 $ 87,764 $ (86,121) $ (8,116) $ (6,284)
Net (loss) (77,448) (77,448)
Issuance of stock
warrants 800 800
Foreign currency
translation
adjustments 4,290 4,290
--------------------------------------------------------------------------------------------
Balance at December 31, 1995 18,860 189 88,564 (163,569) (3,826) (78,642)
Net (loss) (18,722) (18,722)
Foreign currency
translation
adjustments 175 175
--------------------------------------------------------------------------------------------
Balance at December 31, 1996 18,860 189 88,564 (182,291) (3,651) (97,189)
Net income 49,040 49,040
Foreign currency
translation
adjustments 85 85
Restructuring:
Cancellation of
Predecessor
Company's Deficit (18,860) (189) (88,564) 133,521 3,566 48,064
Issuance of stock
warrants 464 464
3,566
Issuance of
Reorganized
Company Stock 6,500 65 66,043 66,108
--------------------------------------------------------------------------------------------
Balance at April 11, 1997 6,500 65 66,507 66,572
Net income 2,859 2,859
Foreign currency
translation
adjustments (549) (549)
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,500 $ 65 $ 66,507 $2,8859 $ (549) $ 68,882
============================================================================================
</TABLE>
Due to the Reorganization Plan and implementation of fresh-start reporting,
financial statements after April 11, 1997 are not comparable to financial
statements prior to that date. See "Notes to Consolidated Financial Statements"
for more information on the Reorganization Plan and implementation of
fresh-start reporting.
The accompanying notes are an integral part of
the consolidated financial statements.
30
<PAGE>
SLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
NEW SLM OLD SLM
----------- ----------------------------------------------
1997 1997 1996 1995
---- ---- ---- ----
APRIL 12 JANUARY 1
THROUGH THROUGH
DECEMBER 31 APRIL 11
---------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,859 $ 49,040 $(18,722) $(77,448)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Extraordinary gain on discharge of
debt (58,726)
Loss from disposal of discontinued
operations 25,569
Loss on impairment of long-lived and
intangible assets 662 6,416
Litigation settlements 7,813
Stock warrants 800
Restructuring charges 6,315
Depreciation and amortization 3,807 807 2,565 2,870
Provisions for inventory, doubtful
accounts and other deductions 9,791 2,301 13,969 22,726
Deferred income taxes 918 66 496
Provision in lieu of taxes 2,985
(Gain) loss on sale and disposal of
fixed assets (160) 5 (45) 266
Loss on foreign exchange 649 263 222 1,029
Change in operating assets and liabilities:
Accounts receivable (15,697) 14,660 (1,552) (4,073)
Inventories 12,176 (7,026) 9,303 2,447
Prepaid expenses 371 596 (2,137) (257)
Income taxes receivable 80 44 (162) 1,365
Other receivables (618) 176 256 24
Accounts payable and accrued
liabilities (7,941) (1,450) 5,002 1,473
Interest payable 1,145 9,408 4,402
Income taxes payable 522 240 112 549
Other 28 1 (136)
Net effect of discontinued operations 189 (4,902)
---------------------------------------------------------------
Net cash provided by (used in) operating
activities 10,915 7,434 18,948 (8,571)
---------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of subsidiary, net 1,831
Purchases of fixed assets (1,732) (285) (2,776) (3,354)
Proceeds from sales of fixed assets 535 73 307 119
Proceeds from disposal of discontinued
operations 5,947 18,841
---------------------------------------------------------------
Net cash provided by (used in) investing
activities 634 (212) 3,478 15,606
---------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from (repayments of) borrowings (4,685) 323 4,168
Principal payments of debt (2,929) (89) (5,737) (1,061)
Deferred financing costs (63) (2,146)
Liabilities subject to compromise (36,098)
---------------------------------------------------------------
Net cash provided by (used in) by
financing activities (7677) (38,333) (5,414) 3,107
---------------------------------------------------------------
Effects of foreign exchange rate changes
on cash and cash equivalents (277) (22) (28) 119
---------------------------------------------------------------
Increase (decrease) in cash 3,595 (31,133) 16,984 10,261
Cash and cash equivalents at beginning
of period 4,456 35,589 18,605 8,344
---------------------------------------------------------------
Cash and cash equivalents at end of
period $ 8,051 $ 4,456 $ 35,589 $ 18,605
===============================================================
</TABLE>
Due to the Reorganization Plan and implementation of fresh-start reporting,
financial statements after April 11, 1997 are not comparable to financial
statements prior to that date. See "Notes to Consolidated Financial Statements"
for more information on the Reorganization Plan and implementation of
fresh-start reporting.
The accompanying notes are an integral part
of the consolidated financial statements.
31
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION:
SLM International, Inc. ("SLM") was incorporated in September 1991 and
reorganized in April 1997. The consolidated financial statements include the
accounts of SLM and its wholly-owned subsidiaries (collectively, the "Company").
The Company designs, develops, manufactures and markets a broad range of
sporting goods. The Company manufactures hockey and hockey related products,
including hockey uniforms, protective equipment, hockey figure and inline skates
and street hockey products, marketed under the CCM brand name, and private label
brands and licensed sports apparel under the CCM and #1 Apparel names. The
Company sells its products worldwide to a diverse customer base consisting of
mass merchandisers, retailers, wholesalers, sporting goods shops and
international distributors. The Company manufactures and distributes most of its
products at facilities in North America and sources products internationally.
All significant intercompany transactions and accounts are eliminated. The
Company's investment in its toy and fitness businesses are classified as
discontinued operations (see Note 5).
B. BASIS OF PRESENTATION:
SLM and six of its subsidiaries (collectively, "Old SLM") 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"). On September
12, 1996, Old SLM filed a Chapter 11 Plan of Reorganization and on November 13,
1996, Old SLM 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") and Old SLM emerged
from bankruptcy ("New SLM") (see Notes 2 and 24).
The accompanying 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.
The financial statements for periods preceding the Effective Date do not include
any adjustments which resulted from the Reorganization Plan. The Reorganization
Plan had a significant impact on the financial statements of New SLM and the
Company accounted for such Reorganization Plan using "fresh-start" reporting
(see Note 24).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
C. CASH AND CASH EQUIVALENTS:
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 bank term deposits, Canadian Government promissory
notes, reverse-repurchase agreements with Fleet Credit Corporation ("Fleet") and
in U.S. Treasury bills. At December 31, 1997, the Company had $1,673 invested in
bank term deposits and $6,257 in Canadian Government promissory notes secured by
a Canadian bank. At December 31, 1996, Old SLM had $5,425 invested in U.S.
Government backed securities under agreements to resell on dates through January
23, 1997. Due to the short-term nature of these investments, Old SLM 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 December 31, 1996 is $18,241 in U.S.
Treasury bills. The Company believes it is not exposed to any significant credit
risk on cash equivalents.
D. CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments and accounts
receivable. The Company restricts its cash investments to temporary investments
in institutions with high credit standing and to short-term securities backed by
the full faith and credit of the United States and Canadian Governments. The
Company sells its products principally to retailers and distributors and, in
accordance with industry practice, grants extended payment terms to qualified
customers. Concentration of accounts receivable credit risk is mitigated due to
the performance of credit reviews which are considered in determining credit
policies and allowances for doubtful accounts. The Company
32
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
provides allowances for expected sales returns, net of related inventory cost
recoveries, discounts, rebates and cooperative advertising. The Company does not
collateralize its receivables, except with respect to its debt agreements as
described in Note 12 in the Consolidated Financial Statements.
E. REVENUE RECOGNITION:
Revenue is recognized when products are shipped to customers.
F. INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. The Company provides allowances for excess,
obsolete and slow moving inventories.
G. RESEARCH & DEVELOPMENT EXPENSES:
Costs for new product research and development as well as changes to existing
products are expensed as incurred and totaled $1,096, $1,410 and $1,692 for the
years ended December 31, 1997, 1996 and 1995, respectively. During the year
ended December 31, 1997, $611 of the expense was incurred from April 12 through
December 31, 1997.
H. PREPAID EXPENSES:
The Company expenses advertising and promotion costs as incurred. Royalty
payments are deferred to the extent that the related sales have not yet been
recorded. Such costs are included in prepaid expenses.
I. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives using principally the
straight-line method of depreciation.
The estimated service lives of the respective assets are as follows:
Years
--------------------------------------
Buildings and improvements 5- 40
Machinery and equipment 3- 10
Tools, dies and molds 3 - 5
Office furniture and equipment 3- 10
--------------------------------------
Accelerated methods of depreciation are used where permitted for tax reporting
purposes. Significant additions or major improvements are capitalized, while
normal maintenance and repair costs are expensed. When assets are sold, retired
or otherwise disposed of, the applicable costs and accumulated depreciation are
removed from the accounts, and the resulting gain or loss is recognized.
The Company periodically reviews property, plant and equipment for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. When such circumstances occur, the Company estimates
future cash flows expected to result from the use and eventual disposition of
the assets. If the expected future cash flows are less than the carrying amount,
the Company recognizes an impairment loss (see Note 6).
J. INCOME TAXES:
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
consists of both the tax payable for the period and the change during the period
in deferred tax assets and liabilities.
The Company does not provide for deferred income taxes on the undistributed
earnings of its non-U.S. subsidiaries, since such earnings are not expected to
be remitted to the Company in the foreseeable future.
Fresh-start reporting requires the Company to report a provision in lieu of
income taxes when there is a book taxable income and utilization of a
pre-reorganization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carryforward and other deferred tax assets would eliminate the related federal
income tax payable. The current and future year tax benefit related to
33
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
the carryforward is recorded as a reduction of reorganizational value in excess
of amounts allocable to identifiable assets until exhausted and then as a direct
increase to paid in capital.
K. FOREIGN CURRENCY TRANSLATION:
The balance sheets of the Company's non-U.S. subsidiaries are translated into
U.S. dollars at the exchange rates in effect at the end of each year. Revenues,
expenses and cash flows are translated at weighted average rates of exchange.
The functional currency of the Company's non-U.S. subsidiaries, which are
primarily in Canada, is their local currency. Gains or losses resulting from
foreign currency transactions are included in earnings, while those resulting
from translation of financial statements are shown as a separate component of
stockholders' equity.
L. INTANGIBLE ASSETS:
Intangible assets are recorded at cost and are amortized on a straight-line
basis. These amounts include reorganizational value in excess of amounts
allocable to identifiable assets ("excess reorganizational value") (see Notes 16
and 24) and deferred financing costs (amortized over the life of the financing)
at December 31, 1997 and the excess purchase prices over fair values assigned to
net assets acquired (which were amortized on a straight-line basis over twenty
years) at December 31, 1996. Excess reorganizational value is amortized on a
straight-line basis over twenty years and is being reduced by the realization of
deferred tax assets (reduced by $2,985 from April 12 through December 31, 1997).
The Company periodically reviews intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. When such circumstances occur, the Company estimates future cash
flows expected to result from the use and eventual disposition of the
intangibles. If the expected future cash flows are less than the carrying
amount, the Company recognizes an impairment loss (see Note 6).
Accumulated amortization of intangible assets was $2,226 and $61 at December 31,
1997 and 1996, respectively.
M. EARNINGS PER SHARE:
Basic and diluted earnings per share of common stock are computed based on the
average number of shares of common stock assumed to be outstanding during each
year. Common stock equivalents are included when dilutive (see Notes 2, 8, 17
and 18).
2. REORGANIZATION CASE
On April 11, 1997 the Company emerged from bankruptcy.
SLM and six of its subsidiaries (collectively, the "Old SLM") 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
Bankruptcy Court entered an order authorizing the joint administration of Old
SLM's Chapter 11 cases (the "Chapter 11 Cases"). On September 12, 1996, Old SLM
filed a Chapter 11 Plan of Reorganization and on November 13, 1996, Old SLM
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").
Under the Reorganization Plan, among other things:
o Old SLM's secured creditors received $44,213 in cash, $29,500 principal in
new senior notes (the "Senior Secured Notes") and 2,470,000 shares of new
common stock (the "New Common Stock") of New SLM, 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 New SLM. The lenders sold such shares
to W.S. Acquisition L.L.C. on the Effective Date. The Senior Secured Notes
had a term of seven years with principal payments beginning in the fifth
year. Interest thereon was due and payable semi-annually at 14.0%
(including 4.0% payable in kind ("PIK"), with such PIK interest reduced
permanently if New SLM achieved certain earnings levels established in the
Senior Secured Note Indenture). The Senior Secured Notes were pre-payable
at 101% of principal plus accrued interest, were secured by a lien on
substantially all of New SLM`s assets, subordinate only to New SLM's new
secured credit facilities, and had covenants,
34
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
representations and other terms customary in instruments of this nature. On
March 16, 1998 the Company prepaid the Senior Secured Notes in full (see
Notes 12 and 20).
o Old SLM's unsecured creditors received: 4,030,000 shares of New Common
Stock representing, at the time of issuance, 62.0% of the ownership of New
SLM, subject to dilution upon the exercise of warrants distributed to
equity security holders and stock options which have been or may be issued
to New SLM'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 Old SLM'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 19)) 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.
3. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Substantially all the Company's liabilities as of the Petition Date were subject
to compromise under a plan of reorganization, except as otherwise provided by
order of the Bankruptcy Court. The Company was generally not permitted to make
payments with respect to its pre-Petition Date liabilities until a plan of
reorganization was confirmed by the Bankruptcy Court and consummated.
Liabilities subject to compromise under reorganization proceedings consisted of:
1997 1996
--------------------------------------------------------------
Priority Claims $ 1,130 $ 661
Secured Debt
Principal 92,045
Interest 12,838
General Unsecured Claims 14,990
Unsecured Debt, Principal and Interest 84,665
--------------------------------------------------------------
1,130 205,199
==============================================================
Priority claims, the repayment of which the Company is required to prioritize
under bankruptcy law, are comprised principally of income and property tax
claims. At December 31, 1997, priority claims of $1,130 remain subject to
resolution with the Bankruptcy Court.
4. SALE OF SUBSIDIARY
In May 1997, the Company sold for cash of $2,125 (including $294 cash on hand)
the shares of one of its wholly owned subsidiaries, Mitchel & King Skates
Limited. The operating results of Mitchel & King Skates Limited are reflected in
the Company's consolidated financial statements through the date of sale.
5. 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 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. 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 year ended December 31, 1995.
35
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
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
Court on October 3, 1996 and became effective on October 17, 1996.
6. RESTRUCTURING AND UNUSUAL CHARGES
During 1997, prior to its emergence from bankruptcy, the Company recorded
significant restructuring charges in continuing operations 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.
During 1996, the Company recorded significant unusual charges totaling $4,033.
These costs consisted primarily of severance pay ($3,371), including that of the
Company's former Chief Executive and Chief Financial Officers, and the
impairment of long lived assets ($662), primarily machinery and equipment at one
of its Canadian facilities.
During 1995, the Company recorded significant unusual charges in continuing
operations totaling $15,471 due principally to litigation settlements ($8,813)
and reassessment, during the fourth quarter of 1995, of the intangible assets
associated with an acquisition ($6,416). Litigation settlements (see Note 19)
include settlements of environmental litigation ($7,000, recorded in the second
quarter and $250, recorded in the fourth quarter of 1995) and securities
litigation ($1,563 recorded in the fourth quarter of 1995). The restructuring
and unusual charges represent 12.9%, 21.5% and 29.8% of Old SLM's income (loss)
from continuing operations for January 1 through April 11, 1997 and the years
ended December 31, 1996 and 1995, respectively.
7. CHAPTER 11 AND DEBT RELATED FEES AND DEFAULT INTEREST
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, Old
SLM's continuing operations incurred significant legal and professional fees
totaling $1,243, $7,432 and $11,195 for January 1 through April 11, 1997 and the
years ended December 31, 1996 and 1995, respectively. These fees include the
cost of the Company's legal counselors, 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
Chapter 11 and debt related fees for the years ended December 31, 1997 and 1996
are net of $500 and $705, respectively, of interest earned on accumulated cash
resulting from the Filing. These costs are included as Chapter 11 and debt
related fees in the Consolidated Statements of Operations for the periods then
ended.
Additionally, as a result of the Company's defaults under its financing
agreements, its financial condition and the terms of the Standstill Agreements,
from February 1995 through April 11, 1997 the Company was charged an additional
3.0% interest on its bank debt and the interest rate on its 6.76% senior notes
was increased to 15%. These higher interest rates resulted in incremental
interest expense of $2,350 and $5,679 for the years ended December 31, 1996 and
1995, respectively, which is included in interest expense in the Consolidated
Statements of Operations.
The Chapter 11 and debt related fees and default interest costs represent 2.5%,
52.2% and 32.5% of Old SLM's income (loss) from continuing operations for
January 1 through April 11, 1997 and the years ended December 31, 1996 and 1995.
8. EQUITY TRANSACTIONS
Effective in April 1997, New SLM has 15,000,000 shares of New Common Stock
authorized and 6,500,000 shares were issued and outstanding. In addition, in
April 1997, New SLM issued 300,000 5-year warrants to Old SLM's shareholders to
purchase an aggregate of 300,000 shares of New Common Stock at an exercise price
of $16.92 per share.
36
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
In January 1995, the Board of Directors of Old SLM declared a dividend
distribution of one Right for each outstanding share of common stock of Old SLM
to stockholders of record at the close of business on March 1, 1995. Each Right
entitled the registered holder to purchase from Old SLM a unit consisting of one
one-thousandth of a share ("Unit") of the Series A Junior Participating
Preferred Shares, par value $0.01 per share, of Old SLM, at a purchase price of
$32.00 per Unit, subject to adjustment. The Rights were not exercisable until
the Distribution Date, as defined, and no longer exist under New SLM.
9. ACCOUNTS RECEIVABLE
Net accounts receivable include:
1997 1996
------------------------------------------------------------------
Allowance for doubtful accounts $ 4,046 $ 3,596
Allowance for returns, discounts, rebates
and cooperative advertising 5,886 5,112
------------------------------------------------------------------
$ 9,932 $ 8,708
==================================================================
Bad debt expense for the years ended December 31, 1997, 1996 and 1995 was $716,
$621, and $4,679, respectively. Bad debt expense for the year ended December 31,
1997 includes $468 incurred during April 12 through December 31, 1997.
10. INVENTORIES
Net inventories consist of:
1997 1996
------------------------------------------------------------------
Finished products $20,894 $26,592
Work in process 1,561 2,669
Raw materials and supplies 6,020 7,918
------------------------------------------------------------------
$28,475 $37,179
==================================================================
Allowances for excess, obsolete and slow moving inventories were $3,418 and
$4,791 at December 31, 1997 and 1996, respectively.
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
1997 1996
------------------------------------------------------------------
Land and improvements $ 79 $ 79
Buildings and improvements 2,873 5,418
Machinery and equipment 4,856 14,352
Tools, dies and molds 749 2,958
Office furniture and equipment 2,417 7,182
------------------------------------------------------------------
10,974 29,989
Less accumulated depreciation and
amortization 1,466 17,172
------------------------------------------------------------------
$ 9,508 $12,817
==================================================================
In applying fresh-start reporting, as of April 11, 1997, property, plant end
equipment was stated at fair value.
Property, plant and equipment under capital leases, primarily machinery and
equipment, included above totaled $543 and $2,020 at December 31, 1997 and 1996,
respectively. Accumulated amortization for the same periods was $81 and $1,200,
respectively.
Depreciation and amortization expense for the years ended December 31, 1997,
1996 and 1995 was $2,371, $2,524, and $2,407, respectively. Depreciation and
amortization expense for the year ended December 31, 1997 includes $1,571 for
April 12 through December 31, 1997.
37
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
12. INDEBTEDNESS
A. NEW INDEBTEDNESS
(1.) BANK AGREEMENTS
On the Effective Date of the Reorganization Plan, SLM 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 (which was permanently reduced by $2,125 in June 1997
with the proceeds from the sale of one of the Company's subsidiaries) 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 two U.S. Subsidiaries referred to
above and the Company's other subsidiaries which are guarantors. The Canadian
Credit Agreement is further collateralized by a letter of credit amounting to
$35,000 at December 31, 1997. Total amounts outstanding under the Credit
Agreements were $1,790 at December 31, 1997. (See Note 20 for amendments in
1998).
Borrowings under the U.S. Credit Agreement bear interest at an alternate base
rate plus 1% per annum or at an interest rate based on LIBOR plus 2 3/4% per
annum (9.5% and 8.5% at December 31, 1997, respectively). Borrowings under the
Canadian Credit Agreement bear interest at Chase Canada's prime rate or at an
alternate base rate plus 1% per annum (6.0% and 5.6% at December 31, 1997,
respectively). 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.
The weighted average interest rate on short term debt outstanding at December
31, 1997 was 9.5%.
(2.) SENIOR SECURED NOTES
On April 11, 1997 the Company issued $29,500 principal amount of 14% Senior
Secured Notes due April 1, 2004 (the "Senior Secured Notes"), pursuant to an
Indenture with The Bank of New York, as trustee. The Senior Secured 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 Loan and
Security Agreement referred to below.
Interest was payable on the Senior Secured Notes semi-annually at the rate of
14% per annum, with such interest rate being permanently reduced by up to 4% if
the Company met certain earnings tests. Further, of the initial 14% interest
rate, 10% was payable in cash and 4% was payable in cash or by the issuance of
additional Senior Secured Notes. On October 1, 1997, the Company elected to make
the entire first interest payment in cash.
The Senior Secured Notes were guaranteed by certain subsidiaries and were
collateralized by substantially all of the assets of the Company (including,
without limitation, accounts receivable, inventory and the stock of certain
subsidiaries). The lien of the trustee for the benefit of itself and the Senior
Secured Noteholders was junior to the liens of Chase and Chase Canada. The
Indenture also included customary affirmative and negative covenants.
In March 1998, the Company redeemed, in full, the Senior Secured Notes (see Note
20).
38
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(3.) LONG-TERM DEBT
The Company's long-term debt at December 31, 1997 was as follows:
1997
- --------------------------------------------------------------------------
Senior Secured Notes (see Note 12A.(2.)) $29,500
Term Loan (see note 12A.(1.)) 1,375
Capital leases 165
Other long-term debt 445
- --------------------------------------------------------------------------
31,485
Less amounts contractually due within one year (1,421)
- --------------------------------------------------------------------------
Total long-term debt, excluding current portion $30,064
==========================================================================
At December 31, 1997, future maturities of long-term debt based upon original
terms were:
CAPITAL LEASES OTHER LONG-TERM DEBT TOTAL
-------------------------------------------------------------------------
1998 $ 170 $ 1,256 $ 1,426
1999 451 451
2000 83 83
2001 4,030 4,030
2002 8,000 8,000
Thereafter 17,500 17,500
-------------------------------------------------------------------------
Total Minimum payments 170 31,320 31,490
Amount representing
interest (5) (5)
-------------------------------------------------------------------------
Present value of
payments $ 165 $ 31,320 $ 31,485
=========================================================================
Cash payments of interest were $2,531 for April 12 through December 31, 1997.
Based on the borrowing rates currently available to the Company for bank loans
and other financing with similar terms, the Company estimated that the fair
value of its short-term debt and long-term debt at December 31, 1997 was $415
(its carrying value) and $31,780, respectively. These values represent a general
approximation of possible value and may never be realized.
B. OLD INDEBTEDNESS
As a result of the Filing, certain of the Company's indebtedness was classified
as liabilities subject to compromise under reorganization proceedings, at
December 31, 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.
(1.) BANK AGREEMENTS
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 were collateralized by certain of the
Company's accounts receivable and inventory, and the common stock of certain
subsidiaries and were cross collateralized and guaranteed by such subsidiaries.
Total amounts outstanding under the Bank Agreement was $91,219 at December 31,
1996. As a result of the Filing, the amounts are classified as liabilities
subject to compromise under reorganization proceedings.
Under the Reorganization Plan, lenders under a Loan and Security Agreement
received (i) $44,213 in cash; (ii) $29,500 principal in Senior Secured 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 W.S.
Acquisition L.L.C. on the Effective Date.
39
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(2.) LONG-TERM DEBT
Old SLM's long-term debt at December 31, 1996 was as follows:
1996
- --------------------------------------------------------------------------
6.76% Senior Notes (see Note 12B.(3.)) $75,000
Note payable (see Note 12B.(4.)) 6,000
Capital leases (see Note 12B.(5.)) 369
Other long-term debt 826
- --------------------------------------------------------------------------
82,195
Less amounts contractually due within one year (1,277)
- --------------------------------------------------------------------------
Total long-term debt, excluding current portion $80,918
==========================================================================
(3.) 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.
Under the Reorganization Plan, the holders of the Senior Notes received a
distribution of 3,173,414 shares of New SLM's New Common Stock (see Note 2).
(4.) During June 1995, the Company entered into an agreement to settle certain
litigation for $7,000, including a note in the principal amount of $6,000
bearing interest at 10% payable over five years based on a twenty year
amortization with the balance of principal payable in June 2000.
Under the Reorganization Plan, the lender of the note received a distribution of
shares of New SLM's New Common Stock to satisfy the note.
(5.) Capital leases on molds, machinery and equipment, with variable interest
rates to 14% and maturing on various dates through 1998. By authorization of the
Bankruptcy Court, the Company continued to pay these leases and therefore the
amount of $369 was classified as current at December 31, 1996.
(6.) Cash payments for interest were $14, $109, and $17,337 for January 1
through April 11, 1997 and the years ended December 31, 1996 and 1995,
respectively. During the reorganization proceedings the Company was generally
not permitted to pay interest. During such time, Old SLM recorded interest
expense only to the extent paid or earned during the proceedings and to the
extent that it was probable that the Bankruptcy Court would 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 years ended
December 31, 1996 and 1995 was approximately $18,134 and $2,100, respectively.
There was no interest expense recorded in 1997 on pre-Petition debt.
(7.) The weighted average interest rate on short term debt outstanding at
December 31, 1996 was 10.1%.
13. RELATED PARTY TRANSACTIONS
Old SLM (including discontinued operations) leased property from companies
controlled by certain former officers and directors of Old SLM. Related party
rent expense for January 1 through April 11, 1997 and the years ended December
31, 1996 and 1995 was $617, $2,160, and $1,791, respectively.
Old SLM was charged $350 in management fees by companies controlled by certain
former officers and directors of Old SLM for the year ended December 31, 1995.
14. LEASES
Certain of the Company's subsidiaries lease office and warehouse facilities and
equipment under operating lease agreements. Some lease agreements provide for
annual rent increases based upon certain factors including the consumer price
index.
40
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
The following is a schedule of future minimum lease payments under noncancelable
operating leases with initial terms in excess of one year at December 31, 1997:
Operating Leases
- -----------------------------------------------
1998 $ 2,063
1999 1,594
2000 1,408
2001 1,361
2002 1,341
Thereafter 2,909
- -----------------------------------------------
$ 10,676
===============================================
Rental expense, including those to related parties, for the years ended December
31, 1997, 1996 and 1995 were approximately $3,022, $4,188, and $7,686,
respectively. Rental expense for the year ended December 31, 1997 includes
$1,938 for April 12 through December 31, 1997.
15. ROYALTIES
Certain of the Company's subsidiaries have entered into agreements which call
for royalty payments generally based on net sales of certain products and
product lines. Certain agreements require guaranteed minimum payments over the
royalty term. Future minimum payments under the agreements, for the years ended
December 31, are as follows:
Royalties
- -----------------------------------------------
1998 $ 3,531
1999 3,569
Thereafter --
- -----------------------------------------------
$ 7,100
===============================================
Royalty expense for the years ended December 31, 1997, 1996 and 1995, including
guaranteed minimum payments, was approximately $3,401, $3,716, and $4,190,
respectively. Royalty expense for the year ended December 31, 1997 includes
$2,261 for April 12 through December 31, 1997.
16. INCOME TAXES
The components of income taxes are:
NEW SLM OLD SLM
---------- -----------------------
1997 1997 1996 1995
---------- -----------------------
APRIL 12 JANUARY 1
THROUGH THROUGH
DECEMBER 31 APRIL 11
- --------------------------------------------------------------------------------
Current: U.S. $ 165 $ 18 $ 151 $205
Non-U.S 565 14 (665) (96)
- --------------------------------------------------------------------------------
730 32 (514) 109
- --------------------------------------------------------------------------------
Deferred: U.S. -- -- -- --
Non-U.S 918 -- 66 496
- --------------------------------------------------------------------------------
918 -- 66 496
- --------------------------------------------------------------------------------
Provision in Lieu of Taxes:
U.S 1,150 -- -- --
Non-U.S 1,835 -- -- --
- --------------------------------------------------------------------------------
2,985 -- -- --
- --------------------------------------------------------------------------------
$ 4,633 $ 32 $(448) $605
================================================================================
41
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
The Company's effective income tax rate from continuing operations differed from
the federal statutory rate as follows:
NEW SLM OLD SLM
---------- ---------------------------------
1997 1997 1996 1995
---------- ---------------------------------
APRIL 12 JANUARY 1
THROUGH THROUGH
DECEMBER 31 APRIL 11
- --------------------------------------------------------------------------------
Income taxes based on U.S. federal
tax rate 34% (34%) 34% 34%
Non-U.S. and state tax rates 3% (1%) (1%) (1%)
Valuation Allowance 13% 35% (29%) (33%)
Other, net 12% --% (2%) (1%)
- --------------------------------------------------------------------------------
Effective income tax rate 62% --% 2% (1%)
================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1997 and 1996 are as
follows:
NEW SLM OLD SLM
-------------------- -------------------
1997 1996
U.S. Non-U.S. U.S. Non-U.S.
- --------------------------------------------------------------------------------
Accounts receivable, principally
due to allowance for doubtful
accounts $ 980 $ -- $ 1,539 $ --
Inventories, principally due to
additional costs inventoried
for tax purposes 1,600 -- 1,156 --
Other, net 320 -- 401 --
- --------------------------------------------------------------------------------
2,900 -- 3,096 --
Valuation allowance (2,900) -- (3,096) --
- --------------------------------------------------------------------------------
Total current deferred tax
assets (liabilities) $ -- $ -- $ -- $ --
================================================================================
Net operating loss carryforwards 17,750 819 $49,709 $ 3,152
Plant, equipment and depreciation (150) (538) (180) (900)
Other, net 1,000 (942) 7,850 1,020
- --------------------------------------------------------------------------------
18,600 (661) 57,379 3,272
Valuation allowance (18,600) (819) (57,379) (3,873)
- --------------------------------------------------------------------------------
Total non-current deferred tax
assets (liabilities) $ -- $(1,480) $ -- $ (601)
================================================================================
Fresh-start reporting requires the Company to report a provision in lieu of
income taxes when there is a book taxable income and utilization of a
pre-reorganization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carryforward and other deferred tax assets would eliminate the related federal
income tax payable. The current and future year tax benefit related to the
carryforward is recorded as a reduction of reorganizational value in excess of
amounts allocable to identifiable assets until exhausted and then as a direct
increase to paid in capital. The amount of income tax provision which has been
used to reduce the reorganizational value in excess of amounts allocable to
identifiable assets has been reflected as a provision in lieu of income taxes in
the Company's Consolidated Statements of Operations.
At December 31, 1997, the Company has pre-reorganization net operating loss
carryforwards related to U.S. operations for income tax purposes of
approximately $52,000, and pre-reorganization net operating loss carryforwards
related to foreign operations for income tax purposes of approximately $2,000.
These carryforwards begin to expire in 2001 and have been fully reserved by a
valuation allowance. The Company's ability to use remaining carryforwards is
limited in use on an annual basis as a result of a change in control of the
Company on April 11, 1997 in connection with the Reorganization Plan.
Undistributed earnings from continuing operations of subsidiaries outside the
U.S., for which no provision for U.S. taxes has been made, amounted to
approximately $7,000 at December 31, 1997. In the event earnings of these
subsidiaries are remitted, foreign tax credits may be available to offset U.S.
taxes.
42
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Net cash payments (refunds) for income taxes for the years ended December 31,
1997, 1996 and 1995 were $108, $389, and $(2,726) respectively. Net cash
payments for income taxes for the year ended December 31, 1997 includes $130 for
April 12 through December 31, 1997.
17. EARNINGS PER SHARE
Net income per share for April 12 through December 31, 1997:
BASIC DILUTED
- --------------------------------------------------------------------------------
Net income $ 2,859 $ 2,859
================================================================================
Weighted average common and common
equivalent shares outstanding:
Common shares 6,500,000 6,500,000
Common equivalent shares (a) -- 457,017
- --------------------------------------------------------------------------------
Total weighted average common and
common equivalent shares outstanding 6,500,000 6,957,017
================================================================================
Net income per share $ 0.44 $ 0.41
================================================================================
(a) Common equivalent shares include warrants and stock options. In addition, as
required by Statement of Financial Accounting Standards No. 128, the Company
used average market price during the period in determining common equivalent
shares. The Company's stock had extremely limited trading volume during the
period.
18. STOCK OPTION PLAN
During 1997 and 1996 the Company granted, stock options to purchase 952,222
shares of New Common Stock in the Company at a weighted average exercise price
of $11.52 to certain key employees. The exercise prices of the stock options are
not less than the estimated fair market value of the shares at the time the
options were granted. Generally, these stock options become exercisable over a
five-year vesting period and expire 10 years from the date of the grant.
Options granted for the New Common Stock are as follows:
SHARES EXERCISE PRICE
- ----------------------------------------------------------------------------
December 31, 1995 -- $ --
Options Granted 840,000 10.00-16.00
Options Canceled -- --
Options Exercised -- --
- ----------------------------------------------------------------------------
December 31, 1996 840,000 10.00-16.00
Options Granted 112,222 10.00-16.00
Options Canceled -- --
Options Exercised -- --
============================================================================
December 31, 1997 952,222 $10.00-16.00
============================================================================
43
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
The following table summarizes information about stock options outstanding at
December 31, 1997.
OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------------------
EXERCISE PRICE SHARES AVERAGE LIFE AVERAGE SHARES AVERAGE
RANGE (A) EXERCISE PRICE EXERCISE
PRICE
- --------------------------------------------------------------------------------
$10.00-12.00 591,112 8.85 $10.00 82,222 $10.00
12.00-14.00 216,666 8.71 13.00 43,333 13.00
14.00-16.00 144,444 8.71 15.50 28,889 15.50
================================================================================
Total 952,222 $11.52 154,444 $11.87
================================================================================
(a) Average contractual life remaining in years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1996: dividend yields of zero percent;
weighted-average expected volatility of 40.0% and 61.4%, respectively;
weighted-average risk free interest rate of 8.5% and 6.7%, respectively and
weighted-average expected lives of 5.5 and 3.5 years, respectively. Stock
options outstanding at December 31, 1997 were 952,222 shares with
weighted-average exercise price of $11.52 ($10.00 - $16.00 range of exercise
prices), weighted-average remaining contractual life of 8.8 years and 154,444
exercisable at December 31, 1997; stock options outstanding at December 31, 1996
were 840,000 shares with weighted-average price of $11.55 ($10.00 - $16.00 range
of exercise prices), weighted average remaining contractual life of 9.8 years
and none exercisable at December 31, 1996
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for stock options. Accordingly, no compensation cost has been recognized. Had
compensation cost for the stock options been determined based on the fair value
at the grant dates for awards, consistent with the alternative method set forth
under Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation, the Company's net income and net income
per share would have been reduced. The impact of SFAS 123 may not be
representative of the effect on income in the future years because options vest
over several years and additional option grants may be made each year.
The pro forma amounts for April 12 through December 31, 1997 are:
AS REPORTED PRO FORMA
- -------------------------------------------------------
Net income $ 2,859 $ 2,249
- -------------------------------------------------------
Net income per share:
Basic net income per
share $ 0.44 $ 0.35
- -------------------------------------------------------
Diluted net income per
share $ 0.41 $ 0.32
- -------------------------------------------------------
The Pro Forma net income (loss) amounts of Old SLM for January 1 through April
11, 1997 and the years ended December 31, 1996 and 1995 were $48,829, $(19,186)
and $(77,448), respectively.
44
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
19. 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 and 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, in addition, 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 property for the costs of such investigation and
remediation. 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 currently estimates the future
cost of oversight and remediation to be approximately $3,200 in the aggregate,
payable over the next several years. The Company believes it has accrued
sufficient amounts for this matter.
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. 1:93-CV-309 against seven 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 recommended that the Vermont District Court grant Maska's motion for
partial summary judgment on the issue of the duty to defend. The report also
recommended 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. The case is scheduled for trial on or after June
9, 1998.
In 1992, T. Copeland & Sons, Inc. ("Copeland") 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. In June 1995, Maska settled this action for $1,000 cash, paid in
July 1995, and a $6,000 promissory note. Under the Plan, Copeland received a
distribution of shares of New SLM's New Common Stock to satisfy the note.
Copeland asserted the right to recover from the Company the difference between
the aggregate value of the New Common Stock and the amount of the promissory
note. The Company believes that this claim is without merit.
45
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
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 provided 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 were converted into warrants under
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 was dismissed with prejudice in connection with
the Reorganization Plan.
C. PRODUCT LIABILITY LITIGATION:
The Company is unaware of any personal injury claims for which there is
inadequate insurance coverage.
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 in an action in Quebec Superior
Court in Montreal, Canada to recover defense costs related to a personal injury
claim filed in 1989. This claim was settled and approved by the Bankruptcy Court
and treated under the Reorganization Plan. The Company filed a response to the
declaratory judgment action and a counterclaim in Quebec 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, were 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.
D. OTHER LITIGATION
On October 16, 1997, ZMD Sports Investments Inc. and 2938201 Canada Inc.,
landlords of the Company's properties located in St. Jean, Quebec and St.
Hyacinthe, Quebec, brought motions against the Company requiring the Company to
undertake certain repairs to the properties. The Company believes these motions
to be without merit.
Other than certain legal proceedings arising from the ordinary course of
business, which the Company believes will not have a material adverse effect on
the financial position, results of operations, or cash flows, there is no other
litigation pending or threatened against the Company.
20. SUBSEQUENT EVENT
During March 1998, the Company amended its Credit Agreements ("New Credit
Agreements"). In completing the amendments, the Company redeemed, in full, its
Senior Secured Notes and all amounts outstanding under the Term Loan under its
U.S. Credit Agreement. The redemptions were effected by the New Credit
Agreements (additional revolving credit loan borrowings under the New Credit
Agreements and the New Term Loan) and use of the Company's cash on hand. The
maximum amount of loans that may be outstanding under the New Credit Agreements
is $60,000, consisting of $45,000 revolving credit loans and a $15,000 term loan
("New Term Loan"). Borrowings under the New Credit Agreements bear interest at
an alternate base rate per annum or at an interest rate based on LIBOR plus 1
3/4% per annum on U.S. revolving credit loans, at Chase Canada's prime rate or
at an alternate base rate per annum on Canadian revolving credit loans, and at
an alternate base rate plus 1/4% per annum or at an interest rate based on LIBOR
plus 2% per annum on the New Term Loan. Interest and principal on the New Term
Loan are payable in quarterly installments ($625 principal) through April 2000,
beginning in April 1998.
46
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
21. GEOGRAPHICAL INFORMATION
The following table shows data by geographic area for the periods noted below:
NEW SLM OLD SLM
----------- -----------------------------------
1997 1997 1996 1995
----------- -----------------------------------
APRIL 12 JANUARY 1
THROUGH THROUGH
DECEMBER 31 APRIL 11
- --------------------------------------------------------------------------------
Net sales to unaffiliated
customers from operations
within:
United States $ 46,732 $ 12,157 $ 70,269 $ 89,631
Canada 51,084 12,547 67,183 68,101
Other (A) 399 835 2,869 3,241
- --------------------------------------------------------------------------------
98,215 25,539 140,321 160,973
Intercompany sales to other
geographic areas from
operations within:
United States 2,497 440 2,155 3,123
Canada 15,129 6,951 22,136 30,141
Intercompany transfers
between geographic areas (17,626) (7,391) (24,291) (33,264)
- --------------------------------------------------------------------------------
Net sales $ 98,215 $ 25,539 $ 140,321 $ 160,973
================================================================================
Operating income (loss)
within:
United States $ 7,882 $ (4,664) $ (17) $ (23,415)
Canada 3,060 (3,377) (1,772) 219
Other (A) 73 88 187 490
Intercompany adjustments 804 (151) (554) 1,189
- --------------------------------------------------------------------------------
Operating income (loss) $ 11,819 $ (8,104) $ (2,156) $ (21,517)
================================================================================
Identifiable assets at year
end:
United States $ 177,161 $ 242,441 $ 235,213
Canada 64,065 72,589 71,570
Other (A) (B) -- 3,062 12,273
Intercompany balances (122,446) (193,167) (181,028)
- --------------------------------------------------------------------------------
Identifiable assets $ 118,780 $ 124,925 $ 138,028
================================================================================
(A) Other includes the United Kingdom.
(B) Other identifiable assets include net assets of discontinued operations.
Foreign currency translation losses amounted to $912, $222, and $1,029 for the
years ended December 31, 1997, 1996 and 1995, respectively. Foreign currency
translation losses for the year ended December 31, 1997 includes $649 loss for
April 12 through December 31, 1997.
47
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
22. NEW ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1998 the Company will be required to implement Statement
of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive
Income" and No. 131 ("SFAS 131") "Disclosures About Segments of an Enterprise
and Related Information". SFAS 130 will require display of certain information
about adjustments to equity, most notably, adjustments arising from foreign
currency translation adjustments. SFAS 131 will require additional information
about industry segments. Neither of these standards will have any effect on the
Company's financial position or results of operations.
23. RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED)
New SLM's quarterly information is as follows:
APRIL 12 JUNE 29 SEPT. 28
THROUGH THROUGH THROUGH
JUNE 28 SEPT. 27 DEC. 31
1997: (AS RESTATED) (AS RESTATED)
- --------------------------------------------------------------------------------
Net sales $28,077 $38,696 $31,442
Gross profit 11,166 15,810 13,471
Net income 838 1,518 503
Basic net income per share $ 0.13 $ 0.23 $ 0.08
The April 12 through June 28, 1997 and June 29 through September 27, 1997 Net
income and Basic net income per share have been reduced by $1,207 and $0.18 and
$2,344 and $0.36, respectively, from the amounts previously reported by the
Company for these periods. These reductions occurred primarily because the
amount of reorganizational value in excess of amounts allocable to identifiable
assets has been reduced by the income tax provisions relating to the realization
of pre-reorganization net operating losses carried forward.
24. FRESH-START ACCOUNTING
In connection with the emergence from bankruptcy, the Company adopted
fresh-start reporting, as of April 11, 1997, in accordance with the requirements
of Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code ("SOP 90-7").
In applying fresh-start reporting, the value of New SLM was allocated to the
Company's net assets in conformity with the procedures specified by Accounting
Principles Board Opinion No. 16 Business Combinations. SOP 90-7 required a
determination of the Company's reorganizational value, representing 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. As a result, the carrying values of the
Company's assets and liabilities were adjusted to fair value as of April 11,
1997. Reorganizational value in excess of amounts allocable to identifiable
assets of approximately $48,000 is being amortized on a straight line basis over
twenty years. The application of SOP 90-7 resulted in the creation of a new
reporting entity having no retained earnings or accumulated deficit.
For the purpose of the Reorganization Plan, the reorganizational equity value
was estimated to be $66,572 based in part on management's estimates of future
operating results. Reorganizational value necessarily assumes that New SLM will
achieve its estimated future operating results in all material respects. If such
results are not achieved, the value of New SLM that is ultimately realized could
be materially different.
The Reorganization Plan had a significant impact on the financial statements of
the Reorganized Company, including the creation of a new reporting entity upon
emergence from bankruptcy through the application of fresh-start reporting
pursuant to SOP 90-7. Accordingly, the Company's post-Reorganization balance
sheets, statements of operations and statements of cash flows, which reflect the
application of fresh-start reporting, have not been prepared on a consistent
basis with the pre-Reorganization financial statements and are not comparable in
all respects to the financial statements prior to the Reorganization. For
accounting purposes, the inception date of New SLM is deemed to be April 12,
1997.
48
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
The effects of the Reorganization Plan and fresh-start reporting on the
Company`s balance sheet at April 11, 1997 are as follows:
CONDENSED CONSOLIDATED BALANCE SHEET
April 11, 1997
<TABLE>
<CAPTION>
OLD SLM ADJUSTMENTS NEW SLM
------------------------------------
<S> <C> <C> <C>
ASSETS
Cash $ 40,554 $ (36,098) a $ 4,456
Other current assets 64,878 (189) b 64,689
------------------------------------
Total current assets 105,432 (36,287) 69,145
Property, plant and equipment 10,382 10,382
Intangible and other assets, net 1,494 48,979 c 50,473
------------------------------------
Total assets $ 117,308 $ 12,692 $130,000
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Short-term debt $ $ 5,100 d $ 5,100
Accounts payable and accrued liabilities 18,029 3,162 e 21,191
Long term debt, current portion 280 1,202 f 1,482
Current portion of liabilities subject to
compromise under reorganization
proceedings 45,035 (42,905) g 2,130
------------------------------------
Total current liabilities 63,344 (33,441) 29,903
Long-term debt 32,935 f 32,935
Other liabilities 590 590
Liabilities subject to compromise
under reorganization proceedings 160,164 (160,164) g
------------------------------------
Total liabilities 224,098 (160,670) 63,428
------------------------------------
Stockholders' equity (deficit) (106,790) 173,362 h 66,572
------------------------------------
Total liabilities and
stockholders' equity $ 117,308 $ 12,692 $130,000
====================================
</TABLE>
The following is a brief description of the adjustments made in preparing the
above Condensed Consolidated Balance Sheet.
a. To reflect $45,198 paid out in accordance with the Reorganization Plan, net
of $9,100 borrowed under new credit facilities.
b. To reflect 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 New SLM's
trademarks and costs associated with obtaining new credit facilities.
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 long-term debt under new credit facilities, Senior Secured 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 resulted in an extraordinary gain on debt forgiveness
of approximately $58,726.
h. To reflect fresh-start reporting and the new equity structure of New SLM
pursuant to the Reorganization Plan.
49
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
The following Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1997 has been prepared giving effect to the consummation
of the Reorganization Plan, including the implementation of fresh-start
reporting, as if consummation had occurred on January 1, 1997. Due to the
Reorganization Plan and implementation of fresh-start reporting, financial
statements effective April 12, 1997 for New SLM are not comparable to financial
statements prior to that date for Old SLM. However, for presentation of this
statement, total results for 1997 are shown under the caption "Total Before
Adjustments". The adjustments which give effect to the events that are directly
attributable and expected to have a continuing impact on New SLM and which are
set forth under the caption "Adjustments" reflect the implementation of the
Reorganization Plan and the adoption of fresh-start reporting as if they had
occurred on January 1, 1997.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1997
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
TOTAL BEFORE
ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------------------------------------
<S> <C> <C> <C>
Net sales $ 123,754 $ $ 123,754
------------------------------------------
Operating income 3,715 5,608 a 9,323
Debt related fees 1,243 (1,243) b
Other expense, net 712 210 c 922
Interest expense 3,922 1,464 d 5,386
------------------------------------------
Income (loss) from continuing operations
before income taxes and extraordinary
gain on discharge of debt (2,162) 5,177 3,015
Income taxes 4,665 1,856 e 6,521
------------------------------------------
Net income (loss) from continuing
operations before extraordinary gain on
discharge of debt (6,827) 3,321 (3,506)
Extraordinary gain on discharge of debt 58,726 (58,726) f
------------------------------------------
Net income (loss) $ 51,899 $ (55,405) $ (3,506)
==========================================
</TABLE>
The following is a brief description of the adjustments made in preparing the
Pro Forma Condensed Consolidated Statement of Operations (unaudited).
a. To reflect adjustments of $6,315 for restructuring charges, net of $707 for
amortization of the intangible associated with fresh-start reporting.
b. To reflect adjustments for costs incurred by Old SLM outside of its
continuing operations.
c. To reflect amortization of the deferred financing costs associated with New
SLM's new credit facilities.
d. To reflect incremental interest expense associated with New SLM's new
credit facilities and Senior Secured Notes.
e. To reflect income taxes associated with adjustments.
f. To reflect adjustments for extraordinary gain on discharge of debt.
50
<PAGE>
Schedule II
SLM INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended December 31, 1997, 1996, and 1995
(In thousands)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE CHARGED TO CHARGED BALANCE AT
AT APRIL COSTS AND TO OTHER TRANSLATION DECEMBER
DESCRIPTION 11, 1997 EXPENSES ACCOUNTS ADJUSTMENTS DEDUCTIONS 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts $3,489 468 0 (50) (139)(A) $4,046
Allowance for
returns, discounts,
rebates and cooperative
advertising $4,231 7,883 0 (57) 6,171 (B) $5,886
Allowance for excess,
obsolete and slow
moving inventories $3,891 1,440 0 (70) 1,843 $3,418
</TABLE>
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
DECEMBER COSTS AND TO OTHER TRANSLATION APRIL 11,
DESCRIPTION 31, 1996 EXPENSES ACCOUNTS ADJUSTMENTS DEDUCTIONS 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts $3,596 248 0 (27) 328(A) $3,489
Allowance for
returns, discounts,
rebates and cooperative
advertising $5,112 2,002 0 (28) 2,855(B) $4,231
Allowance for excess,
obsolete and slow
moving inventories $4,791 51 0 (26) 925 $3,891
</TABLE>
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
DECEMBER COSTS AND TO OTHER TRANSLATION DECEMBER 31,
DESCRIPTION 31, 1995 EXPENSES ACCOUNTS ADJUSTMENTS DEDUCTIONS 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts $5,337 621 0 (6) 2,356(A) $3,596
Allowance for
returns, discounts,
rebates and cooperative
advertising $7,301 8,968 0 (7) 11,150(B) $5,112
Allowance for excess,
obsolete and slow
moving inventories $6,536 4,380 0 (11) 6,114 $4,791
</TABLE>
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
DECEMBER COSTS AND TO OTHER TRANSLATION DECEMBER 31,
DESCRIPTION 31, 1994 EXPENSES ACCOUNTS ADJUSTMENTS DEDUCTIONS 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts $3,398 4,679 0 7 2,747(A) $5,337
Allowance for
returns, discounts,
rebates and cooperative
advertising $5,438 12,301 0 41 10,479(B) $7,301
Allowance for excess,
obsolete and slow
moving inventories $5,226 5,746 47 57 4,540 $6,536
</TABLE>
- ----------
(A) Accounts written off as uncollectible, net of recoveries.
(B) Deductions taken by customers.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(i) The Company's former accountants, Cooper & Lybrand L.L.P., were
dismissed on May 7, 1997.
(ii) Coopers & Lybrand L.L.P.'s report on the Company's financial
statements for the fiscal year ended December 31, 1995 was
qualified by a paragraph reading as follows:
"The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
described in Note 1 to the financial statements, the Company has
incurred significant losses from operations and negative cash
flows for the year ended December 31, 1995. In addition, Buddy L
Inc., a subsidiary, filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court on March 2, 1995, and six other
subsidiaries filed for relief under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court on
October 24, 1995. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's
plans in regards to these matters are described in Note 1. The
financial statements do not include any adjustments that might
result from the outcome of these uncertainties". The report of
Coopers & Lybrand L.L.P. for the fiscal year ended December 31,
1996 did not contain an adverse opinion or a disclaimer of
opinion or any qualification or modification as to uncertainty,
audit scope or accounting principles.
(iii) The Company's change of accountants was approved by the
Company's Board of Directors on April 30, 1997.
(iv) During the fiscal years ended December 31, 1995 and 1996, and all
subsequent interim periods through May 7, 1997 (i.e. the date of
dismissal), there were no disagreements with the Company's former
accountants on any matter of accounting principles or practices,
financial statement disclosure or accounting scope or procedure.
(v) None of the events set forth below have occurred during the
fiscal years ended December 31, 1995 or 1996:
(A) The Company's former accountants having advised the Company
that the internal controls necessary for the Company to
develop reliable financial statements do not exist;
(B) The Company's former accountants having advised the Company
that information has come to their attention that has led it
to no longer be able to rely on management's
representations, or that has made it unwilling to be
associated with the financial statements prepared by
management;
(C) (1) The Company's former accountants having advised the
Company of the need to expand significantly the scope of its
audit, or that information has come to their attention
during the fiscal years ended December 31, 1995 and December
31, 1996, that if further investigated may: (i) materially
impact the fairness or reliability of either: a previously
issued audit report of the underlying financial statements;
or the financial statements issued or to be issued covering
the fiscal period(s) subsequent to the date of the most
recent financial statements covered by an audit report
(including information that may prevent it from rendering an
unqualified audit report on those financial statements), or
(ii) cause it to be unwilling to rely on management's
representations or be associated with the Company's
financial statements, and (2) Due to the Company's former
accountants dismissal, or for any other reason, the
accountants did not so expand the scope of its audit or
conduct such further investigation; or
(D) (1) The Company's former accountants having advised the
Company that information has come to their attention that it
has concluded materially impacts the fairness or reliability
of either: (i) a previously issued audit report or the
52
<PAGE>
underlying financial statements, or (ii) the financial
statements issued or to be issued covering the fiscal
period(s) subsequent to the date of the most recent
financial statements covered by an audit report (including
information that, unless resolved to their satisfaction,
would prevent it from rendering an unqualified audit report
on those financial statements), and
(2) Due to the Company's former accountants dismissal, or
for any other reason, the issue has not been resolved to the
accountants' satisfaction prior to its dismissal.
(vi) During the most recent two fiscal years and subsequent interim
period preceding the appointment of Ernst & Young as the
Company's auditors, on April 25, 1997, Ernst & Young had not been
consulted regarding: (A) the application of accounting principles
to a specified transaction, either completed or proposed; (B) the
type of opinion that might be rendered on the Company's financial
statement; or (C) any matter that was either the subject of a
disagreement or a reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 will be set forth under "Election of Directors"
in the Company's 1998 Proxy Statement, which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 will be set forth under "Executive Compensation"
in the Company's 1998 Proxy Statement, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 will be set forth under "Security Ownership of
Beneficial Holders" in the Company's 1998 Proxy Statement, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 will be set forth under "Certain Transactions"
in the Company's 1998 Proxy Statement, which is incorporated herein by
reference.
53
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements required by Item 14 are included and indexed in Part
II, Item 8.
(a)(2) The financial statement schedules filed as part of this report include
the following:
SCHEDULE PAGE
II Valuation and Qualifying Accounts and Reserves 51
(a)(3) The following is a list of all Exhibits filed as part of this Report:
Exhibit No. Description
- ----------- -----------
2.1 First Amended Joint Chapter 11 Plan (as modified), dated November
12, 1996, filed with the United States Bankruptcy Court for the
District of Delaware. Filed as Exhibit 1 to the Company's Current
Report on Form 8-K dated December 6, 1996, incorporated herein by
reference.
2.2 First Modification, dated January 15, 1997, to First Amended Joint
Chapter 11 Plan. Filed as Exhibit 2.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
2.3 Second Modification, dated January 23, 1997, to First Amended
Joint Chapter 11 Plan (as modified), dated November 12, 1996.
Filed as Exhibit 2.3 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference.
2.4 Third Modification, dated March 14, 1997, to First Amended Joint
Chapter 11 Plan (as modified), dated November 12, 1996. Filed as
Exhibit 2.4 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
3.1 Amended and Restated Certificate of Incorporation of the Company
dated March 31, 1997. Filed as Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
3.2 Amended and Restated By-Laws of the Company. Filed as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
10.1 Cash Option Agreement, dated January 6, 1997 between the Company
and Wellspring Associates L.L.C. Filed as Exhibit 10.1 to the
Company's Annual Report on Form 10-K/A for the year ended December
31, 1996 and incorporated herein by reference.
10.2 Amendment to Cash Option Agreement, dated April 8, 1997, between
the Company and Wellspring Associates L.L.C. Filed as Exhibit 10.2
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
10.3 Stockholders Agreement, dated as of April 11, 1997, between the
Company and the persons set forth on Schedule A thereto. Filed as
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
10.4 Warrant Agreement, dated as of April 11, 1997, between the Company
and American Stock Transfer & Trust Company, as Warrant Agent.
Filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference.
10.5 Form of Credit Agreement, dated as of April 1, 1997, among the
Company, Maska U.S., Inc., #1 Apparel, Inc., the Lenders referred
to therein and The Chase Manhattan Bank, as Agent, filed as
Exhibit 10.5 to the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1996 and incorporated herein by reference.
10.6 Credit Agreement, dated April 1, 1997, between Sport Maska Inc.
and The Chase Manhattan Bank of Canada. Filed as Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
54
<PAGE>
10.7 Form of Security Agreement, dated as of April 1, 1997, among the
Company, certain subsidiaries of the Company and The Chase
Manhattan Bank, as Agent. Filed as Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference.
10.8 Form of Security Agreement and Mortgage - Trademarks and Patents,
dated as of April 1, 1997, among the Company, certain subsidiaries
of the Company and The Chase Manhattan Bank, as Agent. Filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
10.9 Security Agreement (Intellectual Property), dated as of April 1,
1997, between Sport Maska Inc. and The Chase Manhattan Bank, as
Agent. Filed as Exhibit 10.9 to the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1996 and incorporated
herein by reference.
10.10 Form of Pledge Agreement and Irrevocable Proxy, dated as of April
1, 1997, among the Company, certain subsidiaries of the Company
and The Chase Manhattan Bank, as Agent. Filed as Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
10.11 Form of Charge Over Shares and Irrevocable Proxy, dated as of
April 1, 1997, among the Company and The Chase Manhattan Bank, as
Agent. Filed as Exhibit 10.11 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 and incorporated
herein by reference.
10.12 Quebec Pledge Agreement, dated April 1, 1997, between SLM
Trademark Acquisition Canada Corporation and The Chase Manhattan
Bank. Filed as Exhibit 10.12 to the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1996 and incorporated
herein by reference.
10.13 Form of U.S. Guaranty, dated as of April 1, 1997, from SLM
Trademark Acquisition Corp. Filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K/A for the year ended December
31, 1996 and incorporated herein by reference.
10.14 Form of Canadian Guarantee, dated April 1, 1997, from each
Canadian and U.S. subsidiary of the Company. Filed as Exhibit
10.14 to the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1996 and incorporated herein by reference.
10.15 Form of Debenture, dated April 1, 1997, between each of the
Company, Maska U.S., Inc., #1 Apparel, Inc., SLM Trademark
Acquisition Corp. Filed as Exhibit 10.15 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1996 and
incorporated herein by reference.
10.16 Form of Deed of Hypothec, bearing formal date as of April 1, 1997,
between each of the Company, Maska U.S., Inc., #1 Apparel, Inc.,
SLM Trademark Acquisition Corp., Sport Maska Inc., #1 Apparel
Canada Inc., and SLM Trademark Acquisition Canada Corporation and
The Chase Manhattan Bank. Filed as Exhibit 10.16 to the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1996
and incorporated herein by reference.
10.17 Form of Debenture, dated as of April 1, 1997, between each of
Sport Maska Inc., #1 Apparel Canada Inc. and SLM Trademark
Acquisition Canada Corporation and The Chase Manhattan Bank of
Canada. Filed as Exhibit 10.17 to the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1996 and incorporated
herein by reference.
10.18 Form of Deed of Hypothec, bearing formal date as of April 1, 1997,
between each of Sport Maska Inc., #1 Apparel Canada Inc. and SLM
Trademark Acquisition Canada Corporation and The Chase Manhattan
Bank of Canada. Filed as Exhibit 10.18 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1996 and
incorporated herein by reference.
10.19 Form of Mortgage, Security Agreement, and Assignment of Leases and
Rents, dated as of April 1, 1997, from Maska U.S., Inc. to The
Chase Manhattan Bank, as Agent. Filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by reference.
55
<PAGE>
10.20 Amendment to Credit Agreement, dated as of May 28, 1997, among the
Company, #1 Apparel, Inc., Maska U.S., Inc., the Lenders named
therein and The Chase Manhattan Bank, as agent. Filed as Exhibit 1
to the Company's Form 8-K dated May 29, 1997 and incorporated
herein by reference.
10.21 Amendment No. 2 to Credit Agreement, dated as of January 30, 1997,
among the Company, #1 Apparel, Inc., Maska U.S., Inc., the Lenders
named therein and The Chase Manhattan Bank, as agent (filed
herewith).
10.22 Waiver and Amendment No. 3 to Credit Agreement, dated as of
September 30, 1997, among the Company, #1 Apparel, Inc., Maska
U.S., Inc., the Lenders named therein and The Chase Manhattan
Bank, as agent (filed herewith).
10.23 Waiver and Amendment No. 4 to Credit Agreement, dated as of March
6, 1998, among the Company, #1 Apparel, Inc., Maska U.S., Inc.,
the Lenders named therein and The Chase Manhattan Bank, as agent.
Filed as Exhibit 1 to the Company's Form 8-K dated March 16, 1998
and incorporated herein by reference.
10.24 Amending Agreement No. 2, dated March 10, 1998 among Sport Maska
Inc., SLM Trademark Acquisition Canada Corporation and The Chase
Manhattan Bank of Canada. Filed as Exhibit 2 to the Company's Form
8-K dated March 16, 1998 and incorporated herein by reference.
10.25 Retail License Agreement, dated March 8, 1995, between Maska U.S.,
Inc. and NHL Enterprises Inc. Filed as Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference.
10.26 Retail License Agreement, dated March 8, 1995, between Sport Maska
Inc. and NHL Enterprises Canada Inc. Filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference.
10.27 Retail License Agreement, dated October 6, 1995, between NHL
Enterprises and Maska U.S., Inc. Filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference.
10.28 Retail License Agreement, dated October 6, 1995, between NHL
Enterprises and Sport Maska Inc. Filed as Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference.
10.29 Deed of Lease, dated April 11, 1997, between ZMD Sports
Investments Inc. and Sport Maska Inc. Filed as Exhibit 10.38 to
the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996 and incorporated herein by reference.
10.30 Deed of Lease, dated April 11, 1997, between ZMD Sports
Investments Inc. and Sport Maska Inc. Filed as Exhibit 10.40 to
the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996 and incorporated herein by reference.
10.31 Deed of Lease, dated April 11, 1997, between ZMD Sports
Investments Inc. and Sport Maska Inc. Filed as Exhibit 10.41 to
the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996 and incorporated herein by reference.
10.32 Deed of Lease, dated April 11, 1997, between 2938201 Canada Inc.
and Sport Maska Inc. Filed as Exhibit 10.42 to the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1996
and incorporated herein by reference.
10.33 Settlement Agreement, dated November 21, 1995, among the Company,
certain subsidiaries, the Buddy L Creditors Committee and certain
Lenders. Filed as Exhibit 10.40 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference.
10.34 Form of U.S. Debenture Delivery Agreement, dated as of April 1,
1997. Filed as Exhibit 10.44 to the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1996 and incorporated
herein by reference.
56
<PAGE>
10.35 Form of Security Agreement (Intellectual Property), dated as of
April 1, 1997, from each Canadian Subsidiary to The Chase
Manhattan Bank and The Chase Manhattan Bank of Canada. Filed as
Exhibit 10.45 to the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1996 and incorporated herein by
reference.
10.36 Security, dated as of April 1, 1997, from Sport Maska Inc. to The
Chase Manhattan Bank of Canada. Filed as Exhibit 10.46 to the
Company's Annual Report on Form 10-K/A for the year ended December
31, 1996 and incorporated herein by reference.
10.37 Form of Canadian Debenture Delivery Agreement, dated April 1,
1997. Filed as Exhibit 10.47 to the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1996 and incorporated
herein by reference.
10.38 Charge/Mortgage of Land by #1 Apparel Canada Inc. in favor of The
Chase Manhattan Bank. Filed as Exhibit 10.48 to the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1996
and incorporated herein by reference.
10.39 Charge/Mortgage of Land Delivery Agreement dated as of April 1,
1997 in favor of The Chase Manhattan Bank. Filed as Exhibit 10.49
to the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996 and incorporated herein by reference.
10.40 Charge/Mortgage of Land by #1 Apparel Canada Inc. in favor of The
Bank of New York. Filed as Exhibit 10.50 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1996 and
incorporated herein by reference.
10.41 Charge/Mortgage of Land Delivery Agreement, dated as of April 1,
1997 in favor of The Bank of New York. Filed as Exhibit 10.51 to
the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996 and incorporated herein by reference.
21 Subsidiaries of the Company (filed herewith).
27.1 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
1. On March 5, 1997, the Company filed a current report on Form 8-K. This
report was filed in compliance with Items 5 and 7 of Form 8-K.
2. On April 17, 1997, the Company filed a current report on Form 8-K. This
report was filed in compliance with Items 5 and 7 of Form 8-K.
3. On May 9, 1997, the Company filed a current report on Form 8-K. This
report was filed in compliance with Items 4 and 7 of Form 8-K.
4. On May 29, 1997, the Company filed a current report on Form 8-K/A. This
report was filed in compliance with Items 5 and 7 of Form 8-K.
5. On March 27, 1998, the Company filed a current report on Form 8-K. This
report was filed in compliance with Items 5 and 7 of Form 8-K.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Williston, State
of Vermont, on the 27th day of March, 1998.
SLM INTERNATIONAL, INC.
By: /s/ RUSSELL J. DAVID
-----------------------------------
Name: Russell J. David
Title: Senior Vice President, Finance
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has
been signed by the following persons in the capacities and on the dates
indicated. Each person whose signature to this Form 10-K appears below hereby
appoints Russell J. David as his attorney-in-fact to sign on his behalf
individually and in the capacity stated below and to file all amendments and
post-effective amendments to this Form 10-K, and any and all instruments or
documents filed as part of or in connection with this Form 10-K or the
amendments thereto, and any such attorney-in-fact may make such changes and
additions in this Form 10-K as such attorney-in-fact may deem necessary or
appropriate.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ GERALD B. WASSERMAN Chief Executive Officer, March 27, 1998
- --------------------------- Chairman of the Board,
Gerald B. Wasserman and Director (Principal
Executive Officer)
/s/ RUSSELL J. DAVID Senior Vice President, March 27, 1998
- --------------------------- Finance (Principal
Russell J. David Financial and Accounting
Officer)
/s/ PAUL M. CHUTE Director March 27, 1998
- ---------------------------
Paul M. Chute
/s/ MARTIN S. DAVIS Director March 27, 1998
- ---------------------------
Martin S. Davis
/s/ DOUGLAS W. ROTATORI Director March 27, 1998
- ---------------------------
Douglas W. Rotatori
/s/ JAMES C. PENDERGAST Director March 27, 1998
- ---------------------------
James C. Pendergast
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
10.21 Amendment No. 2 to Credit Agreement
10.22 Waiver and Amendment No. 3 to Credit Agreement
21 Subsidiaries of the Company
27 Financial Data Schedule
EXHIBIT 10.21
AMENDMENT NO. 2 TO CREDIT AGREEMENT
AMENDMENT NO. 2 TO CREDIT AGREEMENT dated as of June 30, 1997 (this
"Amendment"), by and among SLM International, Inc., a Delaware corporation
("Parent"), its wholly-owned subsidiaries #1 Apparel, Inc., a Delaware
corporation, and Maska U.S., Inc., a Vermont corporation (the Parent and such
wholly-owned subsidiaries being herein referred to jointly and severally as the
"Borrowers"), the lenders (the "Lenders") named in Schedules 2.01(a) and 2.01(b)
to the Credit Agreement, as amended (as hereinafter defined) and The Chase
Manhattan Bank, as agent (in such capacity, the "Agent") for the Lenders.
WHEREAS, the Borrowers, the Lenders, and the Agent are party to the Credit
Agreement dated as of April 1, 1997 (as amended, modified or supplemented from
time to time in accordance with its terms, the "Credit Agreement");
WHEREAS, the Borrowers desire to amend Section 6.16 and Section 6.19 of the
Credit Agreement;
WHEREAS, in connection with such request, the parties to the Credit
Agreement have agreed to amend Section 6.16 and Section 6.19 of the Credit
Agreement as hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Credit Agreement.
2. Amendment to Credit Agreement. Subject to the conditions as to
effectiveness set forth in Paragraph 4 of this Amendment, the Credit Agreement
is hereby amended as follows:
(a) Section 6.16 of the Credit Agreement is hereby amended to provide in
its entirety as follows:
"SECTION 6.16. Additional Pledge and Surveys. (a) No later than July 31,
1997, pledge the stock of Sport Maska Europe S.A.R.L. to the Agent for the
ratable benefit of the Lenders by agreements in form and substance satisfactory
to the Agent.
(b) No later than July 11, 1997, deliver to the Agent surveys of each
of the premises subject to the Mortgages together with amendments
to title policies in form and substance satisfactory to the
Agent."
<PAGE>
(a) Section 6.19 of the Credit Agreement is hereby amended to provide in
its entirety as follows:
"SECTION 6.19. Inactive Subsidiaries. (a) The Company shall cause (i)
each Inactive Subsidiary (other than Buddy L. International Ltd. (now known
as Smedley Industries International Limited), Maska H.K. Limited and
Smedley Industries (Hong Kong) Limited) to cease to exist (whether through
dissolution, amalgamation, merger or otherwise) no later than January 15,
1998, (ii) Buddy L. International Ltd. (now known as Smedley Industries
International Limited) and Smedley Industries (Hong Kong) Limited to cease
to exist (whether through dissolution, amalgamation, merger or otherwise)
as soon as practicable and (iii) #1 Apparel Canada Inc. to transfer all of
its assets and liabilities to Sport Maska Inc. and cease to exist (whether
through dissolution, amalgamation, merger or otherwise) no later than
January 15, 1998 (in each case providing the Agent with satisfactory
evidence of such cessation of existence and/or transfer, as applicable).
(b) The Company shall cause each Inactive Subsidiary (other than Maska H.K.
Limited) and #1 Apparel Canada Inc. (after it has transferred its assets
and liabilities to Sport Maska Inc.) to engage in no activities (including,
without limitation, the incurring of Liens or Indebtedness, acquiring
assets or making investments) other than those reasonably required in
connection with the cessation of its existence. The Company will cause each
Inactive Subsidiary to have no material assets or liabilities.
(c) The Company shall cause Maska H.K. Limited to engage in no activities
(including, without limitation, the incurring of Liens or Indebtedness,
acquiring assets or making investments) unless Maska H.K. Limited obtains
further consent from the Required Lenders."
3. Representations and Warranties. The Borrowers hereby represent and
warrant as of the date hereof as follows (which representations and warranties
shall survive the execution and delivery of this Amendment):
(a) Each Borrower has the power to execute, deliver and carry out the
terms and provisions of this Amendment.
(b) This Amendment has been duly executed and delivered and
constitutes the legal, valid and binding obligation of the Borrowers, and
is enforceable in accordance with its terms.
(a) No Default or Event of Default under the Credit Agreement has occurred
or is continuing.
2
<PAGE>
(a) 4. Conditions Precedent. Notwithstanding any term or provision of this
Amendment to the contrary, Paragraph 2 hereof shall not become effective until
the Agent shall have determined that each of the following conditions precedent
shall have been satisfied:
(a) All required corporate actions in connection with the execution
and delivery of this Amendment shall have been taken, and each shall be
satisfactory in form and substance to the Agent, and the Agent shall have
received all information and copies of all documents, including, without
limitation, records of requisite corporate action that the Agent may
reasonably request, to be certified by the appropriate corporate person or
government authorities.
(b) All representations and warranties made by the Borrowers in
Paragraph 3 hereof shall be true and correct in all material respects on
the date of effectiveness of this Amendment with the same effect as though
such representations and warranties had been made on such date after giving
effect to this Amendment (except to the extent any such representation or
warranty relates expressly to an earlier date).
(c) Counterparts of this Amendment shall have been duly executed and
delivered on behalf of the Borrowers, the Required Lenders and the Agent.
5. References to Credit Agreements. The term "Agreement", "hereof",
"herein" and similar terms as used in the Credit Agreement, and references in
the other Loan Documents to the Credit Agreement, shall mean and refer to, from
and after the effective date of the amendment contained herein as determined in
accordance with Paragraph 4 hereof, the Credit Agreement as amended by this
Amendment.
6. Continued Effectiveness. Except as expressly set forth herein, nothing
herein shall be deemed to be a waiver of any covenant or agreement contained in,
or any Default or Event of Default under, the Credit Agreement, and each of the
parties hereto agrees that, as amended by this Amendment, all of the covenants
and agreements and other provisions contained in the Credit Agreement and the
other Loan Documents are hereby ratified and confirmed in all respects and shall
remain in full force and effect from and after the date of this Amendment.
7. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be an original, and all of which, taken
together, shall constitute a single instrument. Delivery of an executed
counterpart of a signature page to this Amendment by telecopier shall be
effective as delivery of a manually executed counterpart of this Amendment.
3
<PAGE>
8. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (OTHER THAN THE CONFLICTS OF LAWS
PRINCIPLES THEREOF).
[Signature pages follow]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective officers thereunto duly authorized as of the
day and year first above written.
SLM INTERNATIONAL, INC.
By: /s/ RUSSELL J. DAVID
---------------------------------
Russell J. David
Vice President, Finance
MASKA U.S., INC.
By: /s/ RUSSELL J. DAVID
---------------------------------
Russell J. David
Vice President, Finance
#1 APPAREL, INC.
By: /s/ RUSSELL J. DAVID
---------------------------------
Russell J. David
Vice President, Finance
THE CHASE MANHATTAN BANK, as Agent and
as a Lender
By: /s/ JOHN T. ZELLER
---------------------------------
Name: John T. Zeller
Title: John T. Zeller
5
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION,
as a Lender
By: /s/ CHARLES D. CHIODO
------------------------------------
Name: Charles D. Chiodo
Title: Duly Authorized Signature
SANWA BUSINESS CREDIT CORPORATION, as a
Lender
By: /s/ PETER L. SKAVLA
------------------------------------
Name: Peter L. Skavla
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION, as a
Lender
By: /s/ FRANCES D. PHILLIPS
------------------------------------
Name: Frances D. Phillips
Title: Vice President
IBJ SCHRODER BANK & TRUST COMPANY, as a
Lender
By: /s/ ALFRED J. SCOYNI
------------------------------------
Name: Alfred J. Scoyni
Title: Vice President
6
EXHIBIT 10.22
WAIVER AND AMENDMENT NO. 3 TO CREDIT AGREEMENT
WAIVER AND AMENDMENT NO. 3 TO CREDIT AGREEMENT dated as of September 30,
1997 (this "Waiver and Amendment"), by and among SLM International, Inc., a
Delaware corporation ("Parent") and its wholly-owned subsidiary, Maska U.S.,
Inc., a Vermont corporation (the Parent and such wholly-owned subsidiary being
herein referred to jointly and severally as the "Borrowers"), the lenders (the
"Lenders") named in Schedules 2.01(a) and 2.01(b) to the Credit Agreement, as
amended (as hereinafter defined) and The Chase Manhattan Bank, as agent for the
Lenders (in such capacity, the "Agent").
WHEREAS, the Borrowers, #1 Apparel, Inc., a Delaware corporation (which has
been merged into Maska U.S., Inc.), the Lenders, and the Agent entered into the
Credit Agreement dated as of April 1, 1997 (as amended, modified or supplemented
from time to time in accordance with its terms, the "Credit Agreement");
WHEREAS, IBJ Schroder Bank & Trust Company has assigned its interests under
the Credit Agreement to IBJ Schroder Business Credit Corporation;
WHEREAS, the Borrowers are requesting the consent of the Agent and the
Lenders in order to make the interest payment due on October 1, 1997 in the
amount of $1,950,277.78 in cash to the holders of the Senior Secured Notes;
WHEREAS, in connection with such request, the Agent and the Lenders desire
to amend the definition of "Seasonal Amount";
WHEREAS, in connection with such requests, the Agent and the Lenders have
agreed to waive Section 7.15(c) of the Credit Agreement and the Borrowers have
agreed to the amendment of the definition of "Seasonal Amount" and certain
schedules, in each case as hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise specifically defined herein, all
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Credit Agreement.
2. Waivers to Credit Agreement. Subject to the conditions as to
effectiveness set forth in Paragraph 5 of this Waiver, the Agent and each of the
Lenders hereby waive the provisions of Section 7.15(c) of the Credit Agreement
with respect to the interest payment to be made to the holders of the Senior
Secured Notes on October 1, 1997 to permit the Borrowers to make such interest
payment in cash.
3. Amendment to Credit Agreement. Subject to the conditions as to
effectiveness set forth in Paragraph 5 of this Amendment, the Credit Agreement
is hereby amended as follows:
(a) In Section 1.01 of the Credit Agreement, the following definition
is hereby amended to provide in its entirety as follows:
<PAGE>
"Seasonal Amount" shall mean at any time an amount designated by
the Borrowers (which may be zero) not to exceed (x) $3,050,000 during
the period commencing five days subsequent to the Closing Date through
October 31, 1997; $3,500,000 during a seven month period to be
mutually agreed upon by the Agent and the Borrowers in Fiscal Year
1998; $3,000,000 during a seven month period to be mutually agreed
upon by the Agent and the Borrowers in Fiscal Year 1999; and if the
Total Revolving Credit Commitment is extended as provided for herein,
an amount equal to $2,000,000 during a seven month period to be
mutually agreed upon by the Agent and the Borrowers in Fiscal Year
2000 less (y) the amount designated by the Canadian Borrower and
confirmed to the Agent as a "Seasonal Amount" under the Canadian
Credit Agreement."
(b) Schedules 2.01(a), 2.01(b), 2.02, 2.03 and 2.18 of the Credit
Agreement are hereby amended by deleting the name IBJ Schroder Bank & Trust
Company, each place it appears in such Schedule and replacing it with the
name IBJ Schroder Business Credit Corporation.
4. Representations and Warranties. The Borrowers hereby represent and
warrant as of the date hereof as follows (which representations and warranties
shall survive the execution and delivery of this Waiver and Amendment):
(a) Each Borrower has the power to execute, deliver and carry out the
terms and provisions of this Waiver and Amendment.
(b) This Waiver and Amendment has been duly executed and delivered and
constitutes the legal, valid and binding obligation of the Borrowers, and
is enforceable in accordance with its terms.
(c) No Default or Event of Default under the Credit Agreement has
occurred or is continuing.
5. Conditions Precedent. Notwithstanding any term or provision of this
Waiver and Amendment to the contrary, Paragraphs 2 and 3 hereof shall not become
effective until the Agent shall have determined that each of the following
conditions precedent shall have been satisfied:
(a) All representations and warranties made by the Borrowers in
Paragraph 4 hereof shall be true and correct in all material respects on
the date of effectiveness of this Waiver and Amendment with the same effect
as though such representations and warranties had been made on such date
after giving effect to this Waiver and Amendment (except to the extent any
such representation or warranty relates expressly to an earlier date).
(b) Counterparts of this Waiver and Amendment shall have been duly
executed and delivered on behalf of the Borrowers, the Required Lenders and
the Agent.
6. References to Credit Agreements. The term "Agreement", "hereof",
"herein" and similar terms as used in the Credit Agreement, and references in
the other Loan Documents to the Credit Agreement, shall mean and refer to, from
and after the effective date of the waiver and amendment contained herein as
determined in accordance with Paragraph 5 hereof, the Credit Agreement as
modified or supplemented by this Waiver and Amendment.
2
<PAGE>
7. Continued Effectiveness. Except as expressly set forth herein, nothing
herein shall be deemed to be a waiver of any covenant or agreement contained in,
or any Default or Event of Default under, the Credit Agreement, and each of the
parties hereto agrees that, as modified or supplemented by this Waiver and
Amendment, all of the covenants and agreements and other provisions contained in
the Credit Agreement and the other Loan Documents are hereby ratified and
confirmed in all respects and shall remain in full force and effect from and
after the date of this Waiver and Amendment.
8. Counterparts. This Waiver and Amendment may be executed in two or more
counterparts, each of which shall be an original, and all of which, taken
together, shall constitute a single instrument. Delivery of an executed
counterpart of a signature page to this Waiver and Amendment by telecopier shall
be effective as delivery of a manually executed counterpart of this Waiver and
Amendment.
9. GOVERNING LAW. THIS WAIVER AND AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (OTHER THAN
THE CONFLICTS OF LAWS PRINCIPLES THEREOF).
[Signature pages follow]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Waiver and
Amendment to be duly executed by their respective officers thereunto duly
authorized as of the day and year first above written.
SLM INTERNATIONAL, INC.
By: /s/ RUSSELL J. DAVID
----------------------------------
Russell J. David
Vice President, Finance
MASKA U.S., INC.
By: /s/ RUSSELL J. DAVID
----------------------------------
Russell J. David
Vice President, Finance
THE CHASE MANHATTAN BANK, as Agent and as
a Lender
By: /s/ MICHAEL W. LEWIS
----------------------------------
Name: Michael W. Lewis
Title: Vice President
4
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION,
as a Lender
By: /s/ RICK LUCK
----------------------------------
Name: Rick Luck
Title: Being Duly Authorized
SANWA BUSINESS CREDIT CORPORATION,
as a Lender
By: /s/ PETER L. SKAVLA
----------------------------------
Name: Peter L. Skavla
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION,
as a Lender
By: /s/ FRANCES D. PHILLIPS
----------------------------------
Name: Frances D. Phillips
Title: Vice President
IBJ SCHRODER BUSINESS CREDIT CORPORATION,
as a Lender
By: /s/ ALFRED J. SCOYNI
----------------------------------
Name: Alfred J. Scoyni
Title: Vice President
6
EXHIBIT 21 SUBSIDIARIES OF THE COMPANY
Maska U.S., Inc.
SLM Trademark Acquisition Corp.
Sport Maska Inc.
SLM Trademark Acquisition Canada Corporation
Sport Maska Europe S.A.R.L.
Maska H.K. Limited
#1 Apparel Canada Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS CONTAINED THEREIN.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-12-1997
<PERIOD-END> APR-11-1997 DEC-31-1997
<CASH> 0 8,051
<SECURITIES> 0 0
<RECEIVABLES> 0 32,691
<ALLOWANCES> 0 (9,932)
<INVENTORY> 0 28,475
<CURRENT-ASSETS> 0 64,090
<PP&E> 0 10,974
<DEPRECIATION> 0 (1,466)
<TOTAL-ASSETS> 0 118,780
<CURRENT-LIABILITIES> 0 18,354
<BONDS> 0 0
0 0
0 0
<COMMON> 0 65
<OTHER-SE> 0 68,817
<TOTAL-LIABILITY-AND-EQUITY> 0 118,780
<SALES> 25,539 98,215
<TOTAL-REVENUES> 25,539 98,215
<CGS> 16,007 57,768
<TOTAL-COSTS> 16,007 57,768
<OTHER-EXPENSES> 19,072 29,147
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 114 3,808
<INCOME-PRETAX> (9,654) 7,492
<INCOME-TAX> 32 4,633
<INCOME-CONTINUING> (9,686) 2,859
<DISCONTINUED> 0 0
<EXTRAORDINARY> 58,726 0
<CHANGES> 0 0
<NET-INCOME> 49,040 2,859
<EPS-PRIMARY> 0 0.44
<EPS-DILUTED> 0 0.41
</TABLE>
