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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-19596
SLM INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-36-32297
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
c/o Maska U.S., Inc., 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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES X NO
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under the plan
confirmed by the court :
YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 8, 1998
--------------- --------------------------
Common Stock, 6,500,507
$.01 par value
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<PAGE>
SLM INTERNATIONAL, INC.
FORM 10-Q
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INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets at
March 28, 1998 and December 31, 1997 ........................ 1
Unaudited Consolidated Statements of Operations
for the Three Months Ended March 28, 1998
and March 29, 1997 .......................................... 2
Unaudited Consolidated Statements of Comprehensive Loss
for the Three Months Ended March 28, 1998
and March 29, 1997 .......................................... 3
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 28, 1998
and March 29, 1997 .......................................... 4
Notes to Unaudited Consolidated Financial Statements ........ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................... 12
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ......................................... 15
ITEM 5. OTHER INFORMATION ......................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................... 15
<PAGE>
SLM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
Mar. 28, Dec. 31,
1998 1997
-------- --------
ASSETS
Current assets
Cash and cash equivalents ......................... $ 77 $ 8,051
Accounts receivable, net .......................... 13,238 22,759
Inventories (see Note 8) .......................... 30,538 28,475
Prepaid expenses and other assets ................. 4,797 4,805
-------- --------
Total current assets .............................. 48,650 64,090
Property, plant and equipment, net of accumulated
depreciation and amortization
(1998 -- $2,091; 1997 -- $1,466) .................. 9,613 9,508
Intangible and other assets, net of accumulated
amortization (1998 -- $3,014; 1997 - $2,226) ....... 44,519 45,182
-------- --------
Total assets ...................................... $102,782 $118,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term debt (see Note 9) ...................... $ 4,564 $ 415
Accounts payable and accrued liabilities .......... 14,002 14,174
Long-term debt, current portion (see Note 9) ...... 2,826 1,421
Income taxes payable .............................. 999 1,214
Liabilities subject to compromise under
reorganization proceedings (see Note 3) ......... 1,130 1,130
-------- --------
Total current liabilities ......................... 23,521 18,354
Long-term debt (see Note 9) .......................... 12,670 30,064
Deferred income taxes ................................ 1,501 1,480
-------- --------
Total liabilities ................................. 37,692 49,898
-------- --------
Commitments and contingencies (see Note 11)
Stockholders' equity
Common stock, par value $0.01 per share, 15,000,000
shares authorized, 6,500,507 shares issued and
outstanding at March 28, 1998 and 6,500,000 shares
issued and outstanding at December 31, 1997 ........ 65 65
Additional paid-in capital ........................... 66,515 66,507
Retained earnings (deficit) .......................... (1,113) 2,859
Foreign currency translation adjustments ............. (377) (549)
-------- --------
Total stockholders' equity ........................ 65,090 68,882
-------- --------
Total liabilities and stockholders' equity ........ $102,782 $118,780
======== ========
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
1
<PAGE>
SLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
New SLM Old SLM
------------- -------------
For the Three For the Three
Months ended Months ended
Mar. 28, 1998 Mar. 29, 1997
------------- -------------
Net sales ...................................... $17,821 $21,715
Cost of goods sold ............................. 11,196 13,598
------- -------
Gross profit ............................... 6,625 8,117
Selling, general and administrative
expenses ..................................... 8,654 9,217
Amortization of excess reorganization
value (see Note 12) .......................... 624
Restructuring charges (see Note 5) ............. 6,315
------- -------
Operating loss ............................ (2,653) (7,415)
Chapter 11 and debt related fees
(see Note 6) 932
Other expense, net ............................. 105 79
Interest expense (see Note 9(B)) ............... 1,191 22
------- -------
Loss before income taxes ................... (3,949) (8,448)
Income taxes ................................... 23
------- -------
Net loss ................................... $(3,972) $(8,448)
======= =======
Basic net loss per share (b)(see Note 10) ...... $ (0.61)
=======
- ----------
(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 Unaudited Consolidated
Financial Statements" for more information on the Reorganization Plan and
implementation of fresh-start reporting.
(b) Common shares and per share data for the three months ended March 29, 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
unaudited consolidated financial statements.
2
<PAGE>
SLM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
New SLM Old SLM
------------- -------------
For the Three For the Three
Months ended Months ended
Mar. 28, 1998 Mar. 29, 1997
------------- -------------
Net loss ....................................... $(3,972) $(8,448)
Foreign currency translation adjustments ....... 172 (172)
------- -------
Net comprehensive loss ......................... $(3,800) $(8,620)
======= =======
- ----------
(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 Unaudited 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
unaudited consolidated financial statements.
3
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
New SLM Old SLM
------------- -------------
For the Three For the Three
Months ended Months ended
Mar. 28, 1998 Mar. 29, 1997
------------- -------------
OPERATING ACTIVITIES:
Net loss .......................................... $ (3,972) $ (8,448)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Restructuring charges ......................... 6,315
Depreciation and amortization ................. 1,427 692
Provisions for inventory, doubtful accounts
and other deductions ........................ 2,430 1,873
Loss (gain) on sale and disposal of
fixed assets ................................ (13) 9
Loss on foreign exchange ...................... 102
Change in operating assets and liabilities:
Accounts receivable ........................... 7,419 14,917
Inventories ................................... (1,878) (6,478)
Prepaid expenses and other assets ............. (228) 828
Accounts payable and accrued liabilities ...... 417 (2,486)
Interest payable .............................. (1,112)
Income taxes payable .......................... 73 (6)
-------- --------
Net cash provided by operating activities .. 4,563 7,318
-------- --------
INVESTING ACTIVITIES:
Purchases of fixed assets ..................... (636) (268)
Proceeds from sales of fixed assets ........... 30 6
-------- --------
Net cash used in investing activities ...... (606) (262)
-------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings, net ................. 4,149
Principal payments on debt .................... (30,990) (71)
Proceeds from long-term debt .................. 15,000
Exercise of warrants .......................... 8
Deferred financing costs ...................... (90) (561)
-------- --------
Net cash used in financing activities ...... (11,923) (632)
-------- --------
Effects of foreign exchange rate changes on cash .. (8) (29)
-------- --------
Increase (decrease) in cash ....................... (7,974) 6,395
Cash and cash equivalents at beginning of period .. 8,051 35,589
-------- --------
Cash and cash equivalents at end of period ........ $ 77 $ 41,984
======== ========
- ----------
(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 Unaudited 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
unaudited consolidated financial statements.
4
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO UNAUDITED 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 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 have been eliminated.
B. BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements appearing
in this quarterly report have been prepared on a basis consistent with the
annual financial statements of SLM and its subsidiaries (collectively, the
"Company"). 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 12).
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to a going concern which, except as otherwise disclosed, assumes that assets
will be realized and liabilities will be discharged in the normal course of
business. 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 12).
In the opinion of management, all normal recurring adjustments necessary for a
fair presentation of the Company's Unaudited Consolidated Balance Sheets,
Statements of Operations, Statements of Comprehensive Loss and Statements of
Cash Flows for the interim periods in 1998 and 1997 have been included. These
unaudited interim consolidated financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
to be included in a full set of financial statements. Results for the interim
periods are not necessarily a basis from which to project results for the full
year due to the seasonality of the Company's business and the Filing. These
unaudited consolidated financial statements should be read in conjunction with
the Company's annual report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1997. Certain prior period amounts
have been reclassified to conform to the current period presentation.
C. ACCOUNTING PRONOUNCEMENTS:
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income". SFAS 130
establishes new rules for the reporting of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. SFAS 130 requires reporting, most
notably, adjustments arising from foreign currency translation adjustments,
which prior to the adoption were reported separately in stockholders' equity to
be included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS 130.
5
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
2. REORGANIZATION CASE
On April 11, 1997 the Company emerged from bankruptcy.
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, representations and other terms customary in instruments
of this nature. On March 16, 1998 the Company prepaid the Senior Secured
Notes in full (see Note 9).
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) 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
priority claims, the repayment of which the Company is required to prioritize
under bankruptcy law, which are comprised principally of income and property tax
claims. At March 28, 1998 and 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. RESTRUCTURING CHARGES
During the three months ended March 29, 1997, the Company recorded significant
restructuring charges totaling $6,315 to reflect the impact of reorganizing
operations strategically to position itself to sustain ongoing profitability.
These costs consist primarily of lease cancellation costs ($2,257) at its
Peterborough, N.H. and Beauport, Quebec facilities, impairment of fixed assets
($1,659), principally leasehold improvements at its Peterborough, N.H. facility,
and severance and employee costs associated with the shutdown of three of the
Company's manufacturing facilities.
6
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
6. CHAPTER 11 AND DEBT RELATED FEES
As a result of the Company's Filing, Old SLM's continuing operations incurred
significant legal and professional fees totaling $932 for the three months ended
March 29, 1997. 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. The Chapter 11 and debt related fees for the three
months ended March 29, 1997 are net of $401 of interest earned on accumulated
cash resulting from the Filing. These costs are included as Chapter 11 and debt
related fees in the Unaudited Consolidated Statements of Operations for the
periods then ended.
The Chapter 11 and debt related fees represent 11.0% of the Company's net loss
for the three months ended March 29, 1997.
7. EQUITY TRANSACTIONS
As of the Effective Date, New SLM has 15,000,000 shares of New Common Stock
authorized. 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. During the three months
ended March 28, 1998, New SLM issued 507 shares of New Common Stock with respect
to the exercise of warrants. At March 28, 1998, 6,500,507 shares of New Common
Stock were issued and outstanding.
8. INVENTORIES
Net inventories consist of:
Mar. 28, 1998 Dec. 31, 1997
------------- -------------
Finished products ........................... $23,274 $20,894
Work in process ............................. 1,407 1,561
Raw materials and supplies .................. 5,857 6,020
------- -------
$30,538 $28,475
======= =======
9. INDEBTEDNESS
(A) 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 could be outstanding under the Credit Agreements was
$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.
During March 1998, the Company amended its Credit Agreements (the "New Credit
Agreements"). 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"). 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
borrowings under the New Credit Agreements (revolving credit loan and term loan
borrowings) and use of the Company's cash on hand.
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. Under the New Term Loan, interest is payable on a monthly
basis and principal is payable in quarterly installments ($625 principal)
through April 2000, beginning in April 1998. 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 New Credit Agreements and certain other
fees.
7
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Borrowings under the New 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. Borrowings
under the New Canadian Credit Agreement are further collateralized by a letter
of credit amounting to $7,500 at March 28, 1998. Total amounts outstanding under
the New Credit Agreements and the Credit Agreements were $19,564 and $1,790 at
March 28, 1998 and December 31, 1997, respectively.
The New Credit Agreements include customary affirmative and negative covenants,
including those relating to capital expenditures, debt service coverage and the
incurrence of additional indebtedness.
(B) 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. 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.
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.
In March 1998, the Company redeemed, in full, the Senior Secured Notes and
incurred a pre-payment charge of approximately $300, which is included in
Interest Expense. (see Note 9A).
10. EARNINGS PER SHARE
Net loss per share for the three months ended March 28, 1998 is as follows:
Basic(a)
---------
Net loss ......................................................... $ (3,949)
=========
Weighted average common shares outstanding ....................... 6,500,437
=========
Net loss per share ............................................... $ (0.61)
=========
- ----------
(a) Common stock equivalents are included when dilutive. As required by
Statement of Financial Accounting Standards No. 128, the Company used the
average market price during the period in determining common equivalent
shares to be used in the dilutive calculation. The Company's stock had
extremely limited trading volume during the period. As a result of the net
loss for the three months ended March 28, 1998 and the market price used,
there was an antidilutive effect and, therefore, Diluted earnings per share
equals Basic earnings per share.
11. 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 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
8
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
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.
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. 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, would be treated under the Reorganization Plan. In the event
that the Company is required to make such a payment, it anticipates having funds
sufficient to meet any Court-ordered obligation. American Home's claim in
respect of the recovery of defense costs against the Company is in the amount of
approximately $575.
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>
SLM INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
12. 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.
The following Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the three months ended March 29, 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, results for the three months ended March 29, 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.
10
<PAGE>
SLM INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended March 29, 1997
(Unaudited) (in thousands)
TOTAL BEFORE
ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ----------- ---------
Net sales ............................. $21,715 $ $21,715
------- ------- -------
Operating (loss) income ............... (7,415) 5,709 a 1,706
Chapter 11 and debt related fees ...... 932 (932)b
Other expense, net .................... 79 180 c 259
Interest expense ...................... 22 1,261 d 1,283
------- ------ -------
Income (loss) from operations before
income taxes ....................... (8,448) 5,200 (3,248)
Income taxes
------- ------ -------
Net income (loss) ..................... $ (8,448) $5,200 $(3,248)
======== ====== ========
The following is a brief description of the adjustments made in preparing the
Unaudited Pro Forma Condensed Consolidated Statement of Operations.
a. To reflect adjustments of $6,315 for restructuring charges, net of $606 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.
11
<PAGE>
SLM INTERNATIONAL, INC.
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. 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.
Financial comparisons herein are based on the results of New SLM for the three
months ended March 28, 1998 as compared to the results of Old SLM for the three
months ended March 29, 1997.
The following discussion provides an assessment of the Company's results of
continuing operations, financial condition and liquidity and capital resources,
and should be read in conjunction with the Unaudited Consolidated Financial
Statements of the Company and Notes thereto included elsewhere herein. (All
references to "Note(s)" refer to the Notes to the Unaudited Consolidated
Financial Statements.) The Unaudited Pro Forma Condensed Consolidated Statement
of Operations for the three months ended March 29, 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 11 of this Form 10-Q.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28, 1998
1998 COMPARED TO 1997
Net sales decreased 17.9% to $17.8 million in the three months ended March 28,
1998, as compared to $21.7 million in the three months ended March 29, 1997. The
decline in sales resulted primarily from a severe ice storm that struck the
north eastern parts of North America in January 1998, paralyzing business
throughout the affected regions including the Company's Quebec operations during
January and part of February 1998. In addition, net sales in 1997 included $0.7
million of sales from Mitchel & King Skates Limited which was sold in May 1997.
Gross profit for the three months ended March 28, 1998 was $6.6 million compared
to $8.1 million in 1997, a decrease of 18.4%. Measured as a percentage of net
sales, gross profit margins decreased to 37.2% in 1998 from 37.4% in 1997.
For the three months ended March 28, 1998, selling, general and administrative
expenses decreased 6.1% to $8.7 million compared to $9.2 million in 1997.
Measured as a percentage of net sales, these expenses were 48.6% in 1998 versus
42.5% in 1997. Selling, general and administrative expenses decreased due to
generally lower operating expenses resulting from the Company's restructuring
efforts, and lower variable expenses associated with the decline in sales
mentioned above.
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 $0.6 million in the three months ended March
28, 1998.
During the three months ended March 29, 1997, the Company recorded restructuring
charges of $6.3 million relating to the downsizing of its manufacturing and
distribution operations. These costs consisted primarily of lease cancellation
costs ($2.3 million) at its Peterborough, N.H. and Beauport, Quebec facilities,
impairment of fixed assets ($1.7 million), principally leasehold improvements at
its Peterborough, N.H. facility, and severance and employee costs associated
with the shutdown of three of the Company's manufacturing facilities, and are
included in Restructuring Charges in the Unaudited Consolidated Statements of
Operations. These restructuring charges represent 74.8% Company's net loss for
the three months ended March 29, 1997.
Operating loss for the three months ended March 28, 1998 was $2.0 million,
compared to $1.1 million for the three months ended March 29, 1997, excluding
the amortization of excess reorganization value and restructuring charges.
Including the amortization of excess reorganization value and restructuring
charges, the operating loss was $2.7 million for the three months ended March
28, 1998, compared to $7.4 million for the three months ended March 29, 1997.
12
<PAGE>
SLM INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a result of Old SLM's Chapter 11 Filing, the Company incurred significant
legal and professional fees totaling $0.9 million for the three months ended
March 29, 1997. 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 Unaudited Consolidated Statements of Operations. These costs
represent approximately 11.0% of the Company's net loss for the three months
ended March 29, 1997.
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 interest expense thereafter.
Interest expense of $1.2 million for the three months ended March 28, 1998
includes a pre-payment charge of $0.3 million associated with the redemption of
the Senior Secured Notes in March 1998.
The Company's net loss for the three months ended March 28, 1998 was $4.0
million compared to $8.4 million for the comparable prior year period.
LIQUIDITY AND CAPITAL RESOURCES
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
10). 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 could
be outstanding under the Credit Agreements was $74.0 million. Total amounts
outstanding under the Credit Agreements were $1.8 million at December 31, 1997.
In addition, on April 11, 1997 the Company issued $29.5 million principal amount
of 14% Senior Secured Notes due April 11, 2004 (the "Senior Secured Notes"),
pursuant to an Indenture with the Bank of New York, as trustee.
During March 1998, the Company amended its Credit Agreements (the "New Credit
Agreements") to take advantage of its improved borrowing capacity. 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"). 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 (revolving credit loan and term loan borrowings) and use of
the Company's cash on hand. Total amounts outstanding under the New Credit
Agreements were $19.6 million at March 28, 1998. (See Note 9 for further
description).
The Company's financing requirements for long-term growth, future capital
expenditures and debt service are expected to be met through cash generated by
its operations and through its New Credit Facilities. During the three months
ended March 28, 1998, the Company's operations provided $4.6 million of cash
from its operations as compared to $7.3 million in 1997. The Company's cash from
operations was primarily provided from collections from customers and offset
with build-up of inventory for sales during the remainder of the year. The
Company incurred a loss of $4.0 million for the three months ended March 28,
1998 compared to a loss of $8.4 in 1997; however, the cash impact was mitigated
due to non-cash provisions for receivables, inventory and certain restructuring
charges. Loss before interest, taxes, depreciation, amortization, restructuring
charges and Chapter 11 and debt related fees (EBITDA) was $1.3 million for the
three months ended March 28, 1998 compared to $0.5 million in 1997.
Cash flows used in investing activities during the three months ended March 28,
1998 and March 29, 1997 included $0.6 million and $0.3 million, respectively, of
purchases of fixed assets.
Net cash flows used in financing activities during the three months ended March
28, 1998 and March 29, 1997 were approximately $11.9 million and $0.6 million,
respectively. The use of cash in 1998 resulted primarily from
13
<PAGE>
SLM INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
principal payments on debt ($31.0 million) including the redemption of the
Senior Secured Notes ($29.5 million) and the term loan under the U.S. Credit
Agreement ($1.4 million), offset in part by borrowings under the Company's New
Credit Agreements for the redemption of its long-term debt. Net cash flows used
in financing activities during the three months ended March 29, 1997 of $0.6
million consisted primarily of costs incurred to secure debt facilities.
The Company follows the customary practice in the sporting goods industry of
offering extended payment terms to creditworthy customers on qualified orders.
The Company's working capital requirements generally peak in the third and
fourth quarters as it builds inventory and makes shipments under these extended
payment terms.
14
<PAGE>
SLM INTERNATIONAL, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 11 of Notes to Unaudited Consolidated
Financial Statements included in Part I of this report.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports filed on Form 8-K during the quarter ended March 28, 1998:
(i) On March 27, 1998 the Company filed a Form 8-K with respect to
Waiver and Amendment No. 4 to Credit Agreement with The Chase
Manhattan Bank, as Agent, and Amending Agreement No. 2 with
The Chase Manhattan Bank of Canada.
15
<PAGE>
SLM INTERNATIONAL, INC.
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SLM INTERNATIONAL, INC.
(REGISTRANT)
By: /s/ Russell J. David
---------------------------------
Name: Russell J. David
Title: Senior Vice President, Finance
(Principal Financial and Accounting Officer)
Date: May 11, 1998
<PAGE>
SLM INTERNATIONAL, INC.
SLM INTERNATIONAL, INC.
(REGISTRANT)
By:
---------------------------------
Name: Russell J. David
Title: Senior Vice President, Finance
(Principal Financial and Accounting Officer)
Date: May 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 28,
1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS CONTAINED THEREIN.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-28-1998
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<RECEIVABLES> 13,238
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<CURRENT-ASSETS> 48,650
<PP&E> 9,613
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0
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