SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-24556
MARKER INTERNATIONAL
(Exact name of registrant as specified in its charter)
Utah 87-0372759
(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
1070 West 2300 South
Salt Lake City, Utah 84119
(Address of principal executive offices)
(801) 972-2100
(Registrant's telephone number, including area code)
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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filings
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at August 13, 1999
--------------------- ------------------------------
Common Stock, $0.01 par value 11,140,577
1
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MARKER INTERNATIONAL
TABLE OF CONTENTS
Part I - Financial Information
<S> <C>
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets
As of June 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations
For the Three Months Ended
June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended
June 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Part II - Other Information
Item 3. Defaults Upon Senior Securities 34
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 38
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MARKER INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
June 30, March 31,
1999 1999
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 1,903 $ 5,547
Accounts receivable, net of allowance for doubtful
accounts of $1,429 and $1,721, respectively 17,125 22,392
Inventories 23,333 18,752
Prepaid and other current assets 587 391
-------- --------
Total current assets 42,948 47,082
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 386 386
Building and improvements 4,584 4,645
Machinery and equipment 19,063 20,096
Furniture, fixtures and office equipment 4,050 4,797
-------- --------
28,083 29,924
Less accumulated depreciation and amortization (18,106) (18,725)
-------- --------
Net property, plant and equipment 9,977 11,199
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INTANGIBLE ASSETS, net of accumulated amortization -- 244
-------- --------
OTHER ASSETS 446 448
-------- --------
$ 53,371 $ 58,973
======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
3
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MARKER INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
June 30, March 31,
1999 1999
-------- --------
CURRENT LIABILITIES:
Notes payable to banks $ 51,495 $ 46,062
Current maturities of long-term debt 4,256 5,595
Current maturities of Series A Bonds, issued to a
related party 11,175 11,399
Accounts payable 3,157 5,948
Other current liabilities 12,045 12,937
-------- --------
Total current liabilities 82,128 81,941
-------- --------
LONG-TERM DEBT, net of current maturities 2,426 3,821
-------- --------
REDEEMABLE SERIES B PREFERRED STOCK 3,000 3,000
-------- --------
SHAREHOLDERS' DEFICIT:
Common stock 111 111
Additional paid-in capital 36,736 36,311
Accumulated deficit (69,572) (64,658)
Accumulated other comprehensive loss (1,458) (1,553)
-------- --------
Total shareholders' deficit (34,183) (29,789)
-------- --------
$ 53,371 $ 58,973
======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
4
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MARKER INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
For the Three Months
Ended June 30,
--------------------
1999 1998
------- -------
<S> <C> <C>
NET SALES $ 3,070 $ 2,662
COST OF SALES 2,179 1,597
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GROSS PROFIT 891 1,065
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OPERATING EXPENSES:
Selling 1,698 2,434
General and administrative 2,299 2,436
Research and development 440 684
Warehousing and shipping 311 370
------- -------
4,748 5,924
------- -------
OPERATING LOSS (3,857) (4,859)
------- -------
OTHER INCOME (EXPENSE):
Interest expense (960) (1,492)
Other, net (48) 238
------- -------
(1,008) (1,254)
------- -------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (4,865) (6,113)
PROVISION FOR INCOME TAXES (62) --
------- -------
LOSS FROM CONTINUING OPERATIONS (4,927) (6,113)
------- -------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued snowboard business, net
of income taxes -- (241)
Income on disposal of snowboard business, net of income
taxes 81 --
------- -------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 81 (241)
------- -------
NET LOSS $(4,846) $(6,354)
======= =======
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
5
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MARKER INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------
For the Three Months
Ended June 30,
----------------------------
1999 1998
----------- -----------
LOSS PER COMMON SHARE (Both Basic and Diluted):
<S> <C> <C>
Loss from continuing operations $ (0.44) $ (0.55)
----------- -----------
Income (Loss) from operations of discontinued snowboard business -- (0.02)
Income (Loss) on disposal of snowboard business 0.01 --
----------- -----------
-
Income (Loss) from discontinued operations 0.01 (0.02)
---------- -----------
Net loss $ (0.43) $ (0.57)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Both
Basic and Diluted) 11,140,577 11,130,577
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
6
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MARKER INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
- -------------------------------------------------------------------------------------------
For the Three Months
Ended June 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,846) $ (6,354)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest -- (52)
Depreciation and amortization 1,011 1,273
Change in assets and liabilities:
Decrease in accounts receivable, net 2,025 5,851
Increase in inventories (6,856) (16,205)
Increase in prepaid and other assets (263) (251)
Increase in accounts payable 80 1,686
Decrease in other current liabilities (825) (1,395)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (9,674) (15,447)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (339) (1,951)
Proceeds from disposition of equipment 160 --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (179) (1,951)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes payable to banks 8,498 15,771
Proceeds from issuance of long-term debt -- 360
Principal payments on long-term debt (2,541) (490)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,957 15,641
-------- --------
Effect of foreign exchange rate changes on cash and cash equivalents 252 96
-------- --------
Net decrease in cash and cash equivalents (3,644) (1,661)
Cash and cash equivalents at beginning of period 5,547 4,241
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,903 $ 2,580
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
7
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MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Interim Financial Statements
The accompanying condensed consolidated financial statements include
the accounts of Marker International and its subsidiaries (the "Company"). The
condensed consolidated financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally required in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary to fairly
present the financial position, results of operations and cash flows for the
periods presented.
The Company's financial statements for the year ended March 31, 1999
and unaudited financial statements for the quarter ended June 30, 1999 have been
prepared on a going concern basis, which contemplates the realization of assets
and settlement of liabilities and commitments in the normal course of business.
The Company incurred net losses of approximately $4.8 million for the quarter
ended June 30, 1999 and approximately $48.0 million for the year ended March 31,
1999. As of June 30, 1999, the Company had a shareholders' deficit of
approximately $34.2 million. The Company was not, and continues not to be, in
compliance with covenants of various debt and other obligations and has
insufficient working capital to fund operations (See Note 2 for a discussion of
obligations in default). These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Management's plans with respect to these matters include, among other
things, restructuring the Company's obligations, obtaining additional financing,
consummating the transactions contemplated by the asset purchase agreement dated
as of July 30, 1999 between the Company and Marker International GmbH and filing
a voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code. Management is actively pursuing these plans as discussed below. There can
be no assurance that the Company will be successful in such endeavors or that
the Company will not be forced into an involuntary bankruptcy in the near term.
The results of operations for the three months ended June 30, 1999 are
not necessarily indicative of the results for the full fiscal year. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's latest Annual Report on Form 10-K as filed with the SEC.
8
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MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
Note 2. Recent Events
Purchase Agreement with Market International GmbH - On July 30, 1999,
Marker International (the "Company") entered into an asset purchase agreement
(the "Purchase Agreement") with Marker International GmbH ("Newco"), providing
for the sale by the Company of substantially all of its assets (including the
equity securities of its subsidiaries) to Newco. In exchange, Newco will assume
certain liabilities of the Company and the Company will receive a 15% equity
interest in Newco. The remaining 85% equity interest in Newco will be held by CT
Sports Holding AG ("CT"), a newly formed joint venture between Tecnica S.p.A.
and H.D. Cleven, the principal shareholder of the Volkl Group.
Pursuant to the terms of the Purchase Agreement, CT will contribute
$15,000,000 in cash (subject to reduction by $1,025,501 as a result of the
consummation of the sale to CT of the 66.66% equity interest in Marker Canada,
Ltd.) to Newco in consideration for an 85% equity interest in Newco. Newco is a
GmbH organized under the laws of Switzerland and is currently a wholly-owned
subsidiary of CT. In connection with the Purchase Agreement, the Company and CT
will enter into an operating agreement which, among other things, will provide
that CT will be granted an option (the "Option") to purchase the Company's 15%
equity interest in Newco at any time on or after the second anniversary of the
consummation date of the plan of reorganization at the then fair market value,
subject to the reduction of an amount equal to the sum of (x) all unreimbursed
Advances (as defined below) and litigation costs incurred by Newco under
Sections 10.4(b)(i) and (ii) of the Purchase Agreement, together with accrued
interest thereon, plus (y) $775,000.
Pursuant to the Purchase Agreement and so long as the Company is not in
default of any of its obligations under the Purchase Agreement or the operating
agreement, Newco will advance to the Company from time to time an aggregate
amount of up to $300,000 for each twelve month period following the closing (the
"Advances"); provided that the Advances will be used solely for certain expenses
as more specifically set forth in the Purchase Agreement. Newco will have no
obligations to make any Advances to the Company after the earlier of (a) the
second anniversary of the closing, (b) the Company's breach of its obligations
under Section 7.8(a) of the Purchase Agreement and (c) the Company's ceasing to
be the holder of record of its 15% equity interest in Newco. The proceeds of the
exercise of the Option (after payment of any unpaid fees, costs and taxes) will
then be distributed to the shareholders of the Company in liquidation.
The Purchase Agreement provides for the consummation of the sale to be
effected through a pre-negotiated Chapter 11 bankruptcy proceeding and requires
the Company, DNR USA, Inc. ("DNR USA"), and DNR North America, Inc. ("DNR North
America") to commence the bankruptcy proceeding by August 20, 1999. In
connection therewith, the Company is preparing to file its petition for
reorganization, obtain approval of its disclosure statement and commence its
post-bankruptcy solicitation process. The Company has reached
9
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MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
agreements-in-principle regarding the restructuring of its debt with certain of
its creditors who are impaired under the plan of reorganization.
Pursuant to the Purchase Agreement, the Company is obligated to pay a
$1.0 million break-up fee to Newco if the acquisition is not consummated and (i)
any plan of reorganization other than the plan agreed upon by Newco is
confirmed, or (ii) the Company consummates any sale of its stock or assets other
than as contemplated by the Purchase Agreement upon terms more favorable to the
shareholders of the Company (an "Alternative Sale"). The Company is not
obligated to pay the break-up fee if its failure to consummate the acquisition
is due to (i) circumstances beyond its reasonable control, the Company is not in
material breach of the Purchase Agreement and the Company has not consummated or
agreed to consummate an Alternative Sale, or (ii) a material breach by Newco of
the Purchase Agreement. The Company is also required to reimburse Newco and its
affiliates for actual costs and expenses incurred by them in connection with the
acquisition unless (i) the Purchase Agreement is terminated in accordance with
its terms or as a result of a material breach by Newco, or (ii) Newco elects to
abandon the acquisition.
There are numerous conditions to Newco's obligation to consummate the
acquisition. Such conditions include, but are not limited to, (a) Newco entering
into employment agreements with key members of the Company's management, (b)
there not being any material adverse change in the business of the Company, (c)
acceptable pre-bankruptcy agreements with key creditors, (d) the bankruptcy
court's approval of the proposed sale and the court's confirmation of the
Company's pre-negotiated bankruptcy plan of reorganization, and (e) the issuance
of consents or waivers by various third parties. There can be no assurance that
the Company will be able to satisfy the conditions precedent under the Purchase
Agreement.
The closing of the sale is expected to be consummated in the Company's
fiscal third quarter. After the closing, the Company will not be engaged in the
conduct of business and will operate for the sole purpose of liquidating its
assets (including, without limitation, its equity interest in Newco). Pursuant
to the terms of the operating agreement, the Company is required to dissolve and
liquidate all of its assets no earlier than the second anniversary of the
closing and no later than the fifth anniversary of the closing.
The transaction does not require the Company's other subsidiaries,
including Marker USA, Marker Japan, Marker Ltd., Marker Austria GmbH ("Marker
Austria") and Marker Deutschland GmbH ("Marker Germany"), to file a voluntary
petition for relief under Chapter 11 and, therefore, the Company currently does
not anticipate filing voluntary petitions for these subsidiaries.
Sale of Marker Canada Interest - On June 18, 1999, CT, the Company,
Marker Canada and Lapointe Rosenstein, as escrow agent, entered into a
shareholders agreement (the "Shareholders Agreement") pursuant to which CT
purchased 200 class "A" shares of Marker Canada for a purchase price of Canadian
10
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MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
Dollar ("Cdn") $1.5 million (approximately U.S. $1.0 million). The 200 class "A"
shares represent 66.66% of the outstanding voting and participating shares of
Marker Canada. The remaining 100 class "A" shares, representing 33.33% of the
outstanding and voting shares, are held by the Company. The purpose of this
transaction was to provide working capital to Marker Canada.
CT holds its 200 shares in the name of and on behalf of Newco, the
shareholder of such shares. The purchase price of Cdn $1.5 million
(approximately U.S. $1.0 million) will be deducted from the U.S. $15,000,000
required to be contributed by CT to Newco pursuant to the Purchase Agreement. CT
has the option (the "Canada Option") to require the Company to sell to CT all of
the Company's 100 shares of Marker Canada for a purchase price of Cdn $750,000
(approximately U.S. $0.5 million), less all amounts then payable by the Company
or any of its subsidiaries to Marker Canada, CT or any subsidiary or affiliate
of CT. The Canada Option is exercisable if (i) the transactions contemplated by
the Purchase Agreement are not consummated on or before December 31, 1999, (ii)
the Company or any of its subsidiaries is acquired by, merges with or sells all
or a substantial part of its assets or securities to a person other than CT, its
subsidiaries or affiliates, (iii) the Company makes a motion or application in
the bankruptcy court to reject the Canada Option, or (iv) the Company contests
the validity or enforceability of the Canada Option or denies it has any
obligations under the Shareholders Agreement.
In connection with the Shareholders Agreement, each of the Company,
Tecnica S.p.A. and the Volkl Group entered into distribution agreements with
Marker Canada granting Marker Canada the exclusive right to distribute certain
products in Canada for a period of five years.
As of June 19, 1999, the Company recorded its share of equity ownership
in Marker Canada using the equity method. As of June 30, 1999, the Company's
investment in Marker Canada was approximately $0. As of June 30, 1999, Marker
Germany had an outstanding receivable balance of approximately $570,000 due from
Marker Canada.
Marker Germany and Marker Austria Stockholder's Deficit - As of June
30, 1999, each of Marker Germany and Marker Austria, on a stand alone
unconsolidated basis, had a net stockholder's deficit. Under the applicable
foreign laws and regulations, in order to avoid involuntary bankruptcy
proceedings, these entities require additional capital infusions. The Company
and CT are in the process of negotiating debt restructuring arrangements with
certain of the Company's creditors. If successful, these negotiations will
result in capital infusions which will increase the stockholder's equity of
these entities. There can be no assurance that the Company will be able to reach
agreements with its creditors or be successful in increasing stockholder's
equity to a level sufficient to avoid such bankruptcy proceedings.
Non-compliance with Debt Covenants / Defaults / Debt Restructuring - As
of June 30, 1999, Marker Canada was not in compliance with a minimum tangible
net worth covenant under a $3.0 million Canadian Dollar (U.S. $2.0 million) line
of credit agreement with the Royal Bank of Canada ("Royal Bank"). Marker Canada
was also not in compliance with margin requirements under the same line of
11
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MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
credit as of June 30, 1999. On June 22, 1999, the Royal Bank notified Marker
Canada of several terms and conditions that it requires Marker Canada to meet in
order for the Royal Bank to continue to provide financing to Marker Canada. The
Company guarantees Marker Canada's obligations under the Royal Bank facility.
Marker Canada is currently in the process of attempting to comply with the terms
and conditions that the Royal Bank has outlined in its letter and has signed a
definitive agreement with Laurentian Bank of Canada in order to obtain
additional financing. In the event that the non-compliance is not cured or
waived, the Royal Bank may exercise its rights to demand payment of all amounts
due and/or foreclose on Marker Canada's assets which are pledged as collateral
under the agreement which could also lead to cross-defaults under the Company's
other credit arrangements. There can be no assurance that the Company will be
able to cure its non-compliance and reach a satisfactory agreement with the
Royal Bank or that Marker Canada will be able to obtain additional financing
from Laurentian Bank.
On March 31, 1999, Marker Germany's DM 58.7 million (U.S. $32.3
million) line of credit with HypoVereinsbank, Deutsche Bank AG and BFG Bank
expired (together, the "German Banks"). HypoVereinsbank and Deutsche Bank AG
have agreed to extend the credit line through August 31, 1999 based on numerous
conditions. Such conditions include, but are not limited to, (i) the
consummation of the transactions contemplated by the Purchase Agreement, (ii)
the Company and/or CT entering into acceptable pre-bankruptcy agreements with
key creditors, and (iii) product purchase guarantees by CT. There can be no
assurance that the Company will be successful in meeting these conditions. In
the event that the Company is unable to meet these conditions, the German Banks
could terminate the bank line immediately and force Marker Germany into an
involuntary bankruptcy. HypoVereinsbank and Deutsche Bank AG could also obtain
judgments against the Company and Marker USA for the outstanding obligations
since each of Marker USA and the Company has individually guaranteed repayment
of the outstanding obligations of Marker Germany to each of these banks.
On April 15, 1999, the Company did not make a required principal and
interest payment of DM 900,000 (U.S. $496,000) on a note payable to
HypoVereinsbank, New York. On April 16, 1999, HypoVereinsbank notified the
Company that the nonpayment of principal and interest constituted a default
under the terms of the note and that the entire balance of DM 6.4 million (U.S.
$3.5 million) was immediately due and payable. As a result, HypoVereinsbank
applied the proceeds of a time deposit that was held as security by the bank in
the amount of $2.0 million against the outstanding balance due on the note. The
Company is currently negotiating with HypoVereinsbank to restructure the
outstanding balance of $1.5 million as of June 30, 1999. In the event that an
agreement is not reached, HypoVereinsbank could proceed to obtain a judgment
against the Company and force the Company into an involuntary bankruptcy. There
can be no assurance that the Company will reach a satisfactory agreement with
HypoVereinsbank.
The Company did not make the required interest payments of $125,000 due
in October 1998 and $125,000 due in April 1999 on the Series A Bonds. As a
12
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MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
result, the bondholder has the right to declare the Series A Bonds in default
and accelerate the entire outstanding balance of $12.0 million, plus accrued
interest thereon, as of June 30, 1999. On March 26, 1999, CT entered into a
restructuring agreement, as amended, with the bondholder which is contingent
upon numerous conditions. Under the agreement, the Series A Bonds will be
reduced to an aggregate principal amount of $5,750,000 and payable in four equal
annual installments of $750,000 with $2,750,000 payable after 5 years. The
agreement also requires interest payments at 2% per annum during the first four
years, and thereafter at a variable rate not exceeding the prime rate on
commercial loans in Japan plus 0.5%. The agreement also requires that certain
personal guarantees of Eiichi Isomura on Marker Japan's debt obligations be
satisfied commencing on the sixth anniversary of the bankruptcy court confirming
a plan of reorganization. The agreement prohibits the bondholder from taking any
enforcement action against the Company or its subsidiaries or exercising any
other rights or remedies that the bondholder may have under the documentation
relating to the Series A Bonds or applicable law. However, if the conditions of
the agreement are not met, there can be no assurance that the bondholder will
not declare the Series A Bonds in default and accelerate the outstanding
balance.
The Company notified Manufacturers and Traders Trust Company ("M&T
Bank") and KeyBank National Association ("KeyBank"), banks with which the
Company has certain foreign exchange arrangements, in May 1999 and June 1999,
respectively, that the Company would be unable to utilize its foreign exchange
contracts as originally intended. As a result, on May 25, 1999, M&T Bank
terminated the foreign exchange netting agreement (the "Netting Agreement") with
the Company dated May 1, 1997. Pursuant to its rights under the Netting
Agreement, M&T Bank canceled and closed out all outstanding foreign exchange
contracts for a loss of $3.7 million as of May 21, 1999 and demanded immediate
payment of such amount. On July 26, 1999, the Company entered into a letter
agreement with M&T Bank, Newco and CT whereby M&T Bank agreed, subject to
certain conditions (including, but not limited to, consummation of the
transactions contemplated by the Purchase Agreement by November 30, 1999), to
reduce their obligation to $1.8 million payable in installments through 2004.
The Company entered into a Supplemental Agreement with M&T Bank, Newco and CT on
August 11, 1999 (the "Supplemental Agreement") whereby M&T agreed not to take
any enforcement action against the Company and/or its subsidiaries or exercise
any rights or remedies under the Netting Agreement or any other documentation
relating thereto. The Supplemental Agreement is subject to numerous conditions,
including, without limitation, bankruptcy court approval of the plan of
reorganization. On August 13, 1999, the Company and KeyBank agreed to terminate
all outstanding foreign exchange contracts for a recognized loss of $1.3
million. The Company is currently negotiating with KeyBank to restructure the
resulting outstanding obligation of $1.3 million. In the event that a
restructuring agreement is not executed, KeyBank could proceed to obtain a
judgment against the Company.
As of June 30, 1999, the Company was not in compliance with several loan
covenants under the terms and conditions of the revolving credit agreement dated
October 30, 1998, as amended, among the Company, its U.S. subsidiaries and First
Security Bank (the "Revolving Credit Agreement"). On June 14, 1999, First
Security Bank notified the Company
13
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
that the termination of the Netting Agreement with M&T Bank constituted a
default under the Revolving Credit Facility. Also, as of June 30, 1999, the
Company's outstanding balance on its line of credit exceeded the available
borrowing base for a period greater than the ten day mandatory repayment period
allowed under the Revolving Credit Agreement which also constitutes a default.
On July 30, 1999, the Company, its U.S. subsidiaries, Marker Germany, Newco and
First Security Bank entered into a Standstill Agreement (the "Standstill
Agreement"). Under the Standstill Agreement, First Security Bank agreed to
refrain from exercising any of its rights or remedies under the Revolving Credit
Agreement and other related loan documentation or under applicable law
including, without limitation, exercise any right of setoff, institute any suit
or foreclose on their collateral until the earlier of November 30, 1999 or the
date upon which any default under the Standstill Agreement occurs. Events which
could occur and constitute defaults under the Standstill Agreement include, but
are not limited to, the following: (i) the contemplated bankruptcy cases are
dismissed or converted to a case under Chapter 7 of the United States Code, (ii)
the Exclusive Distributorship Agreement by and among the Company, Marker USA and
Marker Germany is rejected or otherwise terminated by any of the parties
thereto, or such party materially breaches its obligations thereunder, and (iii)
if at any time the borrowing base (as defined in the Revolving Credit Agreement)
is less that 80% of the outstanding obligations under the Revolving Credit
Agreement. In the event of a default under the Standstill Agreement, the First
Security Bank can exercise its rights to demand payment of all amounts due under
the Revolving Credit Agreement, foreclose on the Company's assets which are
pledged as collateral under the agreement, or force the Company into an
involuntary bankruptcy.
On January 14, 1999, the Company, in coordination with Zions First
National Bank ("Zions") disposed of its leased snowboard equipment through an
auction. The net proceeds of the auction were paid to Zions. The remaining
balance of $1.8 million was to be paid according to the original terms of the
lease. On March 17, 1999, the Company signed an agreement with Zions whereby the
Company would make a lump sum payment of $170,391.65 on or before July 1, 1999
as full settlement of the remaining lease obligation of $1,703,916.45. On June
30, 1999, the Company signed a revised agreement with Zions whereby the Company
paid $30,000 on June 30, 1999, and must pay the remaining $140,391.65 on or
before October 1, 1999. In the event this payment is not made, the Company
remains liable for the entire $1,703,916.45 (less the $30,000 paid on June 30,
1999) obligation. There can be no assurance that the Company will be able to
satisfy its obligation to pay the remaining $140,391.65 to Zions by October 1,
1999.
Although the Company is seeking to alleviate its current fiscal
problems by, among other things, restructuring the Company's obligations,
obtaining additional financing, consummating the transactions contemplated by
the Purchase Agreement with Newco, and filing a voluntary petition for relief
under Chapter 11 of the United States Code, there can be no assurance that the
Company will be successful in such endeavors or that the Company will not be
forced into an involuntary bankruptcy.
14
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
Discontinued Operations
- -----------------------
The Company is in the process of exiting the snowboard business through
dissolution and sale of its snowboard subsidiaries and related assets. The
components of net assets of discontinued operations included in the condensed
consolidated balance sheets at June 30, 1999 and March 31, 1999, were as
follows:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------ ------------
(In Thousands)
<S> <C> <C>
Accounts receivable, net $ 103 $ 171
Inventories -- --
Prepaid and other current assets 12 9
Current portion of long-term debt -- --
Accounts payable (8) (8)
Other current liabilities (1,885) (2,032)
------------ ------------
Net current assets $ (1,778) $ (1,860)
============ ============
Net property, plant and equipment $ -- $ --
Intangible assets, net -- --
Other assets -- --
Long-term liabilities -- --
Minority interest -- --
----------- ----------
Net long-term assets $ -- $ --
=========== ==========
</TABLE>
As of June 30, 1999, the liabilities of the discontinued operations
exceeded the assets by approximately $1.8 million. The net losses of these
operations prior to September 1998 are included in the condensed consolidated
statements of operations under "loss (income) from operations of discontinued
snowboard business." Revenues from the discontinued operations were
approximately $0 and $348,000 for the three months ended June 30, 1999 and 1998,
respectively. The disposal estimates represent management's best estimates of
the potential loss. However, actual results could differ from those estimates.
Note 3. Cash and Cash Equivalents
Cash and cash equivalents include investments in certificates of
deposit with original maturities of less than 30 days and restricted cash.
Note 4. Inventories
Inventories include direct materials, direct labor and manufacturing
overhead costs and are recorded at the lower of cost (using the first-in,
first-out method) or market. The major classes of inventories, including
inventories of the discontinued operations, are as follows:
15
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
June 30, 1999 March 31, 1999
--------------- --------------
(In Thousands)
Raw materials $ 196 $ 542
Work in process 2,165 1,821
Finished goods 20,972 16,389
---------- ----------
$ 23,333 $ 18,752
========== ==========
Note 5. Earnings per Share
For the three months ended June 30, 1999, options and warrants to
purchase 1,531,800 shares of common stock were not included in the computation
of diluted net income (loss) per common share because the exercise prices of
such options and warrants were greater than the average market price of common
shares or because the Company incurred a net loss.
Note 6. Comprehensive Loss
As of April 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." The following table displays components of the Company's
comprehensive loss for the three month periods ended June 30, 1999 and 1998:
Three Months Ended
June 30,
---------------------
(In Thousands)
1999 1998
------- -------
Net Loss $(4,846) $(6,354)
Other Comprehensive Income (Loss) Items:
Foreign Currency Translation Adjustments 94 180
------- -------
Comprehensive Loss $(4,752) $(6,174)
======= =======
Note 7. Derivative Instruments and Hedging Activities
Derivative financial instruments held by the Company are generally used
to manage well-defined foreign exchange and interest rate risks which occur in
the normal course of business.
16
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
From time to time the Company has entered into
derivatives that require speculative accounting treatment.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company has not
determined if it will adopt SFAS 133 prior to its effective date. The Company is
unable to determine if this pronouncement will have a material impact on the
Company's result of operations, financial position or liquidity.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts to reduce the
potential impact of unfavorable fluctuations in foreign exchange rates.
Contracts that are intended to hedge firm commitments are deferred and
recognized as part of the cost of the underlying transaction being hedged. Gains
and losses on foreign exchange contracts that do not qualify as hedges are
reported currently in income. During fiscal 1999, given the financial position
of the Company, the Company determined that all gains and losses on foreign
exchange contracts should be reported in income.
The Company and its subsidiaries have numerous intercompany receivables
and payables and commitments denominated in foreign currencies that create
exposure to fluctuations in foreign currency rates. The Company entered into
forward foreign exchange contracts to reduce the potential impact of unfavorable
fluctuations in foreign exchange rates. The Company had commitments to buy and
sell foreign currencies relating to foreign exchange contracts in order to hedge
against future currency fluctuations.
The Company held forward exchange contracts to purchase German Marks
with Japanese Yen and U.S. Dollars. The contracts mature at various dates
through April 2000. The outstanding forward exchange purchase and sale contracts
at June 30, 1999, were as follows:
17
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
<TABLE>
<CAPTION>
Selling Buying Contracted
Amount Amount Forward Rate Unrealized Loss Maturity
-------------- -------------- ------------- --------------- --------
<S> <C> <C> <C> <C>
(Y) 677,810,000 DM 10,000,000 64.080 - 69.430 $ (383,630) 11/24/99-4/20/00
$ 9,000,000 DM 15,081,100 1.6565 - 1.6994 $(1,030,103) 9/16/99-12/29/99
</TABLE>
The U.S. Dollar amount of the Yen contracts based upon the June 30,
1999 spot rate was approximately $5.6 million. Due to the Company's financial
position, the Company determined that it would be unable to utilize the foreign
exchange contracts as originally intended. Accordingly, all contracts have been
accounted for as speculative and marked to market. This resulted in a cumulative
unrealized loss of $1.4 million as of June 30, 1999.
The Company notified M&T Bank and KeyBank, banks with which the Company
has certain foreign exchange arrangements, in May 1999 and June 1999,
respectively, that the Company would be unable to utilize its foreign exchange
contracts as originally intended. As a result, on May 25, 1999, M&T Bank
terminated the Netting Agreement. Pursuant to its rights under the Netting
Agreement, M&T Bank canceled and closed out all outstanding foreign exchange
contracts for a loss of $3.7 million as of May 21, 1999 and demanded immediate
payment of such amount. On July 26, 1999, the Company entered into a letter
agreement with M&T Bank, Newco and CT whereby M&T Bank agreed, subject to
certain conditions (including, but not limited to, consummation of the
transactions contemplated by the Purchase Agreement by November 30, 1999), to
reduce their obligation to $1.8 million payable in installments through 2004.
The Company entered into the Supplemental Agreement whereby M&T agreed not to
take any enforcement action against the Company and/or its subsidiaries or
exercise any rights or remedies under the Netting Agreement or any other
documentation relating thereto. The Supplemental Agreement is subject to
numerous conditions, including, without limitation, bankruptcy court approval of
the plan of reorganization. On August 13, 1999, the Company and KeyBank agreed
to terminate all outstanding foreign exchange contracts for a recognized loss of
$1.3 million. The Company is currently negotiating with KeyBank to restructure
the resulting outstanding obligation of $1.3 million. In the event that a
restructuring agreement is not executed, KeyBank could proceed to obtain a
judgment against the Company.
18
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
Note 8. Segment Reporting
The Company's reportable operating segments are strategic business
units that offer different products and services. The Company's reportable
operating segments as of June 30, 1999, are consistent with the Company's
reportable operating segments as of March 31, 1999, as described in the
Company's Annual Report on Form 10-K for the year ended March 31, 1999.
Intersegment sales, eliminated in consolidation, are not material. The
information for fiscal year 1999 have been restated from the prior year's
segment presentation in order to conform to the fiscal year 2000 presentation.
The accounting policies of the Company's reportable operating segments are the
same as those described in Note 1. Summarized financial information concerning
the Company's reportable operating segments is shown in the following table. The
information in the following table is derived directly from the operating
segments' internal financial information used for corporate management purposes.
While the major portion of the Company's operations is derived from the
ski bindings and other hard goods segment, the Company also had a clothing and
other soft goods segment. Effective April 1, 1999, the right to manufacture and
sell Company's clothing and other softgoods was licensed to Ski & Sports
Recreation Company, L.L.C. ("SSRC") in return for royalty payments equal to a
percentage of net sales which ranges form 3% to 5%. In connection with the
license agreement, SSRC purchased certain assets of Marker Ltd. for $859,000, of
which $450,000 was paid at closing, $204,500 was paid on August 2, 1999 and
$204,500 is due on August 31, 1999. With respect to certain Olympic inventory,
SSRC agreed to pay 60% to 75% of the net sales price to the Company as the sales
price is received. Substantially all of the Company's ski bindings are
manufactured by Marker Germany, which also distributes bindings in Germany, and
sells to subsidiaries of the Company, and to independent distributors in
countries where the Company does not have a distribution subsidiary. No single
customer accounted for more than 10% of the Company's sales for these periods.
19
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
Information concerning continuing operations by reportable operating
segments for each of the three month periods ended June 30, 1999 and 1998, and
as of June 30, 1999 and March 31, 1999, is as follows:
Three Months Ended June 30,
---------------------------------------
1999 1998
----------- -----------
(In Thousands)
Revenues from Unrelated Entities:
Ski Bindings and Other Hard Goods $ 1,995 $ 2,052
Clothing and Other Soft Goods 1,075 610
----------- -----------
$ 3,070 $ 2,662
=========== ===========
Operating (Loss) Income:
Ski Bindings and Other Hard Goods $ (3,156) $ (4,832)
Clothing and Other Soft Goods 10 91
Unallocated Corporate (711) (118)
----------- -----------
$ (3,857) $ (4,859)
=========== ===========
As Of
---------------------------------------
June 30, 1999 March 31, 1999
--------------- --------------
(In Thousands)
Total Assets:
Ski Bindings and Other Hard Goods $ 49,048 $ 49,133
Clothing and Other Soft Goods 666 2,631
Unallocated Corporate 3,542 7,030
Discontinued Operations 115 179
----------- -----------
$ 53,371 $ 58,973
=========== ===========
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
General
The Company incurred net losses of $4.8 million for the quarter ended
June 30, 1999, and $48.0 million for the year ended March 31, 1999. As of June
30, 1999, the Company had a shareholders' deficit of $34.2 million (see Note 1
to the condensed consolidated financial statements). The Company currently has
inadequate working capital to fund operations and service repayment of debt. The
Company is not in compliance with certain financial covenants and is in default
under its obligations to certain creditors (see "Liquidity and Capital
Resources"). Accordingly, there is substantial doubt that the Company will be
able to continue as a going concern. Although the Company is seeking to
alleviate its current fiscal problems by, among other things, restructuring the
Company's obligations, obtaining additional financing, consummating the
transactions contemplated by the Purchase Agreement with Newco, and filing a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code, there can be no assurance that the Company will be successful in such
endeavors or that the Company will not be forced into an involuntary bankruptcy.
The Company is a leading designer, developer, manufacturer and marketer
of alpine ski bindings in North America, Europe and Asia. The Company is a
holding company which operates through its subsidiaries, Marker Germany, Marker
USA, Marker Japan, Marker Austria and Marker Canada (see "General - Sale of
Marker Canada Interest" regarding the sale of 66.66% of the equity interest in
Marker Canada). Substantially all of the Company's ski bindings are manufactured
by Marker Germany, which also distributes bindings in Germany, and sells to
subsidiaries of the Company and to independent distributors in countries where
the Company does not have a distribution subsidiary. Each of Marker USA and
Marker Japan has an independent sales force and marketing department for sales
and marketing of bindings and related parts directly to retailers in the United
States and to both retailers and wholesalers in Japan, respectively.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
Purchase Agreement with Market International GmbH - On July 30, 1999,
the Company entered into the Purchase Agreement with Newco, providing for the
sale by the Company of substantially all of its assets (including the equity
securities of its subsidiaries) to Newco. In exchange, Newco will assume certain
liabilities of the Company and the Company will receive a 15% equity interest in
Newco. The remaining 85% equity interest in Newco will be held by CT, a newly
formed joint venture between Tecnica S.p.A. and H.D. Cleven, the principal
shareholder of the Volkl Group.
Pursuant to the terms of the Purchase Agreement, CT will contribute
$15,000,000 in cash (subject to reduction by $1,025,501 as a result of the
consummation of the sale to CT of the 66.66% equity interest in Marker Canada,
Ltd.) to Newco in consideration for an 85% equity interest in Newco. Newco is a
GmbH organized under the laws of Switzerland and is currently a wholly-owned
subsidiary of CT. In connection with the Purchase Agreement, the Company and CT
will enter into an operating agreement which, among other things, will provide
that CT will be granted an option (the "Option") to purchase the Company's 15%
equity interest in Newco at any time on or after the second anniversary of the
consummation date of the plan of reorganization at the then fair market value,
subject to the reduction of an amount equal to the sum of (x) all unreimbursed
Advances (as discussed in Note 2 to the Financial Statements) and litigation
costs incurred by Newco under Sections 10.4(b)(i) and (ii) of the Purchase
Agreement, together with accrued interest thereon, plus (y) $775,000. The
proceeds of the exercise of the Option (after payment of any unpaid fees, costs
and taxes) will then be distributed to the shareholders of the Company in
liquidation.
The Purchase Agreement provides for the consummation of the sale to be
effected through a pre-negotiated Chapter 11 bankruptcy proceeding and requires
the Company, DNR USA, and DNR North America to commence the bankruptcy
proceeding by August 20, 1999. In connection therewith, the Company is preparing
to file its petition for reorganization, obtain approval of its disclosure
statement and commence its post-bankruptcy solicitation process. The Company has
reached agreements-in-principle regarding the restructuring of its debt with
certain of its creditors who are impaired under the plan of reorganization.
Pursuant to the Purchase Agreement, the Company is obligated to pay a
$1.0 million break-up fee to Newco if the acquisition is not consummated and (i)
any plan of reorganization other than the plan agreed upon by Newco is
confirmed, or (ii) the Company consummates any sale of its stock or assets other
than as contemplated by the Purchase Agreement upon terms more favorable to the
shareholders of the Company (an "Alternative Sale"). The Company is not
obligated to pay the break-up fee if its failure to consummate the acquisition
is due to (i) circumstances beyond its reasonable control, the Company is not in
material breach of the Purchase Agreement and the Company has not consummated or
has agreed to consummate an Alternative Sale, or (ii) a material breach by Newco
of the Purchase Agreement. The Company is also required to reimburse Newco and
its affiliates for actual costs and expenses incurred by them in connection with
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
the acquisition unless (i) the Purchase Agreement is terminated in accordance
with its terms or as a result of a material breach by Newco, or (ii) Newco
elects to abandon the acquisition.
There are numerous conditions to Newco's obligation to consummate the
acquisition. Such conditions include, but are not limited to, (a) Newco entering
into employment agreements with key members of the Company's management, (b)
there not being any material adverse change in the business of the Company, (c)
acceptable pre-bankruptcy agreements with key creditors, (d) the bankruptcy
court's approval of the proposed sale and the court's confirmation of the
Company's pre-negotiated bankruptcy plan of reorganization, and (e) the issuance
of consents or waivers by various third parties. There can be no assurance that
the Company will be able to satisfy the conditions precedent under the Purchase
Agreement.
The closing of the sale is expected to be consummated in the Company's
fiscal third quarter. After the closing, the Company will not be engaged in the
conduct of business and will operate for the sole purpose of liquidating its
assets (including, without limitation, its equity interest in Newco). Pursuant
to the terms of the Operating Agreement, the Company is required to dissolve and
liquidate all of its assets no earlier than the second anniversary of the
closing and no later than the fifth anniversary of the closing.
The transaction does not require the Company's other subsidiaries,
including Marker USA, Marker Japan, Marker Ltd., Marker Austria and Marker
Germany, to file a voluntary petition for relief under Chapter 11 and,
therefore, the Company currently does not anticipate filing voluntary petitions
for these subsidiaries.
Sale of Marker Canada Interest - On June 18, 1999, CT, the Company,
Marker Canada and Lapointe Rosenstein, as escrow agent, entered into a
shareholders agreement (the "Shareholders Agreement") pursuant to which CT
purchased 200 class "A" shares of Marker Canada for a purchase price of Cdn $1.5
million (approximately U.S. $1.0 million). The 200 class "A" shares represent
66.66% of the outstanding voting and participating shares of Marker Canada. The
remaining 100 class "A" shares, representing 33.33% of the outstanding and
voting shares, are held by the Company. The purpose of this transaction was to
provide working capital to Marker Canada.
CT holds its 200 shares in the name of and on the behalf of Newco, the
shareholder of such shares. The purchase price of Cdn $1.5 million
(approximately U.S. $1.0 million) will be deducted from the U.S. $15,000,000
required to be contributed by CT to Newco pursuant to the Purchase Agreement. CT
has the option to require the Company to sell to CT all of the Company's 100
shares of Marker Canada for a purchase price of Cdn $750,000 (approximately U.S.
$500,000), less all amounts then payable by the Company or any of its
subsidiaries to Marker Canada, CT or any subsidiary or affiliate of CT..
In connection with the Shareholders Agreement, each of the Company,
Tecnica S.p.A. and the Volkl Group entered into distribution agreements with
Marker Canada granting Marker Canada the exclusive right to distribute certain
products in Canada for a period of five years.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
As of June 19, 1999, the Company recorded its share of equity ownership
in Marker Canada using the equity method. As of June 30, 1999, the Company's
investment in Marker Canada was approximately $0. As of June 30, 1999, Marker
Germany had an outstanding receivable balance of approximately $570,000 due from
Marker Canada.
Marker Germany and Marker Austria Stockholder's Deficit - As of June
30, 1999, each of Marker Germany and Marker Austria, on a stand alone
unconsolidated basis, had a net stockholder's deficit. Under the applicable
foreign laws and regulations, in order to avoid involuntary bankruptcy
proceedings, these entities require additional capital infusions. The Company
and CT are in the process of negotiating debt restructuring arrangements with
certain of the Company's creditors. If successful, these negotiations will
result in capital infusions which will increase the stockholder's equity of
these entities. There can be no assurance that the Company will be able to reach
agreements with its creditors or be successful in increasing stockholder's
equity to a level sufficient to avoid such bankruptcy proceedings.
Marker Germany receives payment primarily in German Marks ("Marks") for
ski bindings sold. For subsidiaries of the Company (principally Marker USA and
Marker Japan), Marker Germany may allow payment for ski bindings sold to be made
in the functional currency of the subsidiary. Marker Germany or the distribution
subsidiary, as applicable, routinely enters into forward foreign exchange
contracts with financial institutions in order to fix the cost of converting the
functional currency to Marks. Sales prices for the ski bindings offered to the
subsidiaries and ultimately the price the subsidiaries receive from their
customers is based upon, among other things, market conditions and the rate
afforded by the forward foreign exchange contracts. Accordingly, the
relationship of the exchange rate between the functional currency of the
subsidiary and the Mark has a direct impact on the cost of the products sold by
the distribution subsidiary.
In accordance with United States generally accepted accounting
principles, upon consolidation of the Company's financial statements, the income
and expense items of the Company's foreign subsidiaries are translated at the
weighted average rates of exchange prevailing during the period. Therefore, the
Company's results of operations are subject to translation risks and can vary as
a result of fluctuations in the exchange rates between the functional currencies
of such foreign subsidiaries and the Dollar.
For the three months ended June 30, 1999, average exchange rates
between the Dollar and the Yen, the Dollar and the Mark and the Dollar and the
Canadian Dollar resulted in an effective increase in the value of the Yen
against the Dollar of approximately 11.0%, and a decrease in the value of the
Mark against the Dollar and the Canadian Dollar against the Dollar of
approximately 3.1% and 1.8%, respectively, compared to the corresponding period
of the prior year. Such currency exchange activity resulted in corresponding
fluctuations in the value of the revenues and expenses of Marker Japan, Marker
Germany and Marker Canada.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
In addition, upon consolidation of the Company's financial statements,
the assets and liabilities of the Company's foreign subsidiaries are translated
into Dollars from their functional currencies at the rate of exchange on the
last day of the fiscal year. Therefore, the Company's consolidated assets and
liabilities may vary as a result of fluctuations in the exchange rates between
the functional currencies of such foreign subsidiaries and the Dollar. The
resulting translation adjustments from foreign currency fluctuations are
recorded in shareholders' equity as accumulated other comprehensive loss
adjustments.
The Company's business is seasonal in nature and results of operations
vary from quarter to quarter. Orders for the Company's products from retailers
are highest during the Company's first fiscal quarter, which ends June 30.
During its second and third fiscal quarters, the Company ships its products to
fill those orders, and records a significant portion of its annual sales. The
Company then collects a substantial portion of its receivables during its third
and fourth fiscal quarters. In accordance with industry practice, a substantial
portion of the Company's accounts receivable remains outstanding for five to six
months and a small percentage remains outstanding for up to ten months or
longer. These factors result in variations in the Company's results of
operations and cash flows.
Results of Operations
Comparison of the three months ended June 30, 1999 with the three months ended
- ------------------------------------------------------------------------------
June 30, 1998 (continuing operations)
- --------------------------------------
Consistent with the seasonal nature of the Company's business and the
ski industry in general, the Company has historically recorded a small
percentage of its annual net sales during its first fiscal quarter. These sales
amounts have historically represented less than 5% of the Company's annual net
sales and are primarily attributable to close-out products sold late in the ski
season. As such, sales results and gross profit margins are not necessarily
indicative of the results to be expected for the full fiscal year.
Net sales for the quarter ended June 30, 1999 increased to $3.0
million, compared to $2.7 million for the corresponding quarter of the prior
fiscal year. The increase in sales is primarily attributable to a bulk sale of
clothing and other soft goods inventory for $0.8 million to SSRC, the licensee
of Marker clothing and other soft goods.
Gross profit for the quarter ended June 30, 1999 was $0.9 million, or
29.0% of net sales, compared to $1.1 million, or 40.0% of net sales, for the
corresponding period of the prior fiscal year. The decrease in the gross profit
percentage is primarily due to the bulk sale of clothing and other softgoods
inventory for approximately book value to SSRC. The clothing and other softgoods
inventory had been written down to the bulk sales price as of March 31, 1999.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
Operating expenses for the three months ended June 30, 1999 decreased
to $4.7 million, compared to $5.9 million for the same period of the prior
fiscal year. The decrease relates primarily to cost reductions and the licensing
of clothing and other softgoods to SSRC resulting in lower operating expenses
which was partially offset by legal and advisory fees paid to assist the Company
in developing and implementing restructuring plans and negotiating with lenders.
Interest expense for the three months ended June 30, 1999 decreased to
$1.0 million, compared to $1.5 million for the corresponding period of the prior
fiscal year. This decrease was attributable to lower borrowing requirements due
to the liquidation of snowboard related assets and lower inventory levels
compared to the same period of the prior fiscal year.
Other income (loss) for the quarter ended June 30, 1999 decreased to
$(48,000), compared to $238,000 for the corresponding period of the prior fiscal
year. The decrease in other income (loss) is due to the write-off of the
Company's receivables from Marker Canada which was one of the conditions of the
sale of 66.66% of Marker Canada to CT.
Liquidity and Capital Resources
The Company incurred net losses of $4.8 for the quarter ended June
30,1999 and $48.0 million for the year ended March 31, 1999. As of June 30,
1999, the Company had a shareholders' deficit of $34.2 million. The Company
currently has inadequate working capital to fund operations and service
repayment of debt. The Company is not in compliance with certain financial
covenants and is in default under its obligations to certain creditors (see Note
2 to the Financial Statements).
Although the Company is seeking to alleviate its current fiscal
problems by, among other things, restructuring the Company's obligations,
obtaining additional financing, consummating the transactions contemplated by
the Purchase Agreement with CT, and filing a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code, there can be no assurance that
the Company will be successful in such endeavors or that the Company will not be
forced into an involuntary bankruptcy.
The Company's primary cash needs are for purchases of raw materials
inventory for production, finished goods inventory, funding of accounts
receivable and capital expenditures. Historically, the Company's primary sources
of cash for its business activities have been cash flows from operations and
borrowings under its lines of credit and term loans.
Working capital decreased from $(34.8) million at March 31, 1999 to
$(39.2) million, at June 30, 1999. The decrease in working capital is primarily
attributable to the Company's losses.
At June 30, 1999, the Company's primary sources of liquidity consisted
of $1.9 million in cash and cash equivalents and available borrowings under
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
lines of credit. At June 30, 1999, the Company had approximately $51.5 million
available borrowings under lines of credit, of which it had borrowed
approximately $51.5 million.
As of June 30, 1999, each of Marker Germany and Marker Austria, on a
stand alone unconsolidated basis, had a net stockholder's deficit. Under the
applicable foreign laws and regulations, in order to avoid involuntary
bankruptcy proceedings, these entities require additional capital infusions. The
Company and CT are in the process of negotiating debt restructuring arrangements
with certain of the Company's creditors. If successful, these negotiations will
result in capital infusions which will increase the stockholder's equity of
these entities. There can be no assurance that the Company will be able to reach
agreements with its creditors or be successful in increasing stockholder's
equity to a level sufficient to avoid such bankruptcy proceedings.
As of June 30, 1999, Marker Canada was not in compliance with a minimum
tangible net worth covenant under a $3.0 million Canadian Dollar (U.S. $2.0
million) line of credit agreement with the Royal Bank. Marker Canada was also
not in compliance with margin requirements under the same line of credit as of
June 30, 1999. On June 22, 1999, the Royal Bank notified Marker Canada of
several terms and conditions that it requires Marker Canada to meet in order for
the Royal Bank to continue to provide financing to Marker Canada. The Company
guarantees Marker Canada's obligations under the Royal Bank facility. Marker
Canada is currently in the process of attempting to comply with the terms and
conditions that the Royal Bank has outlined in its letter and has signed a
definitive agreement with Laurentian Bank of Canada in order to obtain
additional financing. In the event that the non-compliance is not cured or
waived, the Royal Bank may exercise its rights to demand payment of all amounts
due and/or foreclose on Marker Canada's assets which are pledged as collateral
under the agreement which could also lead to cross-defaults under the Company's
other credit arrangements. There can be no assurance that the Company will be
able to cure its non-compliance and reach a satisfactory agreement with the
Royal Bank or that Marker Canada will be able to obtain additional financing
from Laurentian Bank.
On April 15, 1999, the Company did not make a required principal and
interest payment of DM 900,000 (U.S. $496,000) on a note payable to
HypoVereinsbank, New York. On April 16, 1999, HypoVereinsbank notified the
Company that the nonpayment of principal and interest constituted a default
under the terms of the note and that the entire balance of DM 6.4 million (U.S.
$3.5 million) was immediately due and payable. As a result, HypoVereinsbank
applied the proceeds of a time deposit that was held as security by the bank in
the amount of $2.0 million against the outstanding balance due on the note. The
Company is currently negotiating with HypoVereinsbank to restructure the
outstanding balance of $1.5 million as of June 30, 1999. In the event that an
agreement is not reached, HypoVereinsbank could proceed to obtain a judgment
against the Company and force the Company into an involuntary bankruptcy. There
can be no assurance that the Company will reach a satisfactory agreement with
HypoVereinsbank.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
The Company did not make the required interest payments of $125,000 due
in October 1998 and $125,000 due in April 1999 on the Series A Bonds. As a
result, the bondholder has the right to declare the Series A Bonds in default
and accelerate the entire outstanding balance of $12.0 million, plus accrued
interest thereon, as of June 30, 1999. On March 26, 1999, CT entered into a
restructuring agreement, as amended, with the bondholder which is contingent
upon numerous conditions. Under the agreement, the Series A Bonds will be
reduced to an aggregate principal amount of $5,750,000 and payable in four equal
annual installments of $750,000 with $2,750,000 payable after 5 years. The
agreement also requires interest payments at 2% per annum during the first four
years, and thereafter at a variable rate not exceeding the prime rate on
commercial loans in Japan plus 0.5%. The agreement also requires that certain
personal guarantees of Eiichi Isomura on Marker Japan's debt obligations be
satisfied commencing on the sixth anniversary of the bankruptcy court confirming
a plan of reorganization. The agreement prohibits the bondholder from taking any
enforcement action against the Company or its subsidiaries or exercising any
other rights or remedies that the bondholder may have under the documentation
relating to the Series A Bonds or applicable law. However, if the conditions of
the agreement are not met, there can be no assurance that the bondholder will
not declare the Series A Bonds in default and accelerate the outstanding
balance.
The Company notified M&T Bank and KeyBank, banks with which the Company
has certain foreign exchange arrangements, in May 1999 and June 1999,
respectively, that the Company would be unable to utilize its foreign exchange
contracts as originally intended. As a result, on May 25, 1999, M&T Bank
terminated the Netting Agreement. Pursuant to its rights under the Netting
Agreement, M&T Bank canceled and closed out all outstanding foreign exchange
contracts for a loss of $3.7 million as of May 21, 1999 and demanded immediate
payment of such amount. On July 26, 1999, the Company entered into a letter
agreement with M&T Bank, Newco and CT whereby M&T Bank agreed, subject to
certain conditions (including, but not limited to, consummation of the
transactions contemplated by the Purchase Agreement by November 30, 1999), to
reduce their obligation to $1.8 million payable in installments through 2004.
The Company entered into the Supplemental Agreement whereby M&T agreed not to
take any enforcement action against the Company and/or its subsidiaries or
exercise any rights or remedies under the Netting Agreement or any other
documentation relating thereto. The Supplemental Agreement is subject to
numerous conditions, including, without limitation, bankruptcy court approval of
the plan of reorganization. On August 13, 1999, the Company and KeyBank agreed
to terminate all outstanding foreign exchange contracts for a recognized loss of
$1.3 million. The Company is currently negotiating with KeyBank to restructure
the resulting outstanding obligation of $1.3 million. In the event that a
restructuring agreement is not executed, KeyBank could proceed to obtain a
judgment against the Company.
As of June 30, 1999, the Company was not in compliance with several
loan covenants under the terms and conditions of the Revolving Credit Agreement.
On June 14, 1999, First Security Bank notified the Company that the termination
of the Netting Agreement with M&T Bank constituted a default under the Revolving
Credit Facility. Also, as of June 30, 1999, the Company's outstanding balance on
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
its line of credit exceeded the available borrowing base for a period greater
than the ten day mandatory repayment period allowed under the Revolving Credit
Agreement which also constitutes a default. On July 30, 1999, the Company, its
U.S. subsidiaries, Marker Germany, Newco and First Security Bank entered into
the Standstill Agreement. Under the Standstill Agreement, First Security Bank
agreed to refrain from exercising any of its rights or remedies under the
Revolving Credit Agreement and other related loan documentation or under
applicable law including, without limitation, exercise any right of setoff,
institute any suit or foreclose on their collateral until the earlier of
November 30, 1999 or the date upon which any default under the Standstill
Agreement occurs. Events which could occur and constitute defaults under the
Standstill Agreement include, but are not limited to, the following: (i) the
contemplated bankruptcy cases are dismissed or converted to a case under Chapter
7 of the United States Bankruptcy Code, (ii) the Exclusive Distributorship
Agreement by and among the Company, Marker USA and Marker Germany is rejected or
otherwise terminated by any of the parties thereto, or such party materially
breaches its obligations thereunder, and (iii) if at any time the borrowing base
(as defined in the Revolving Credit Agreement) is less that 80% of the
outstanding obligations under the Revolving Credit Agreement. In the event of a
default under the Standstill Agreement, the First Security Bank can exercise its
rights to demand payment of all amounts due under the Revolving Credit
Agreement, foreclose on the Company's assets which are pledged as collateral
under the agreement, or force the Company into an involuntary bankruptcy.
On March 31, 1999, Marker Germany's DM 58.7 million (U.S. $32.3
million) line of credit with HypoVereinsbank, Deutsche Bank AG and BFG Bank
expired (together, the "German Banks"). HypoVereinsbank and Deutsche Bank AG
have agreed to extend the credit line through August 31, 1999 based on numerous
conditions. Such conditions include, but are not limited to, (i) the
consummation of the transactions contemplated by the Purchase Agreement, (ii)
the Company and/or CT entering into acceptable pre-bankruptcy agreements with
key creditors, and (iii) product purchase guarantees by CT. There can be no
assurance that Marker Germany will be successful in meeting these conditions. In
the event that Marker Germany is unable to meet these conditions, the German
Banks could terminate the bank line immediately and force Marker Germany into an
involuntary bankruptcy. HypoVereinsbank and Deutsche Bank AG could also obtain
judgments against the Company and Marker USA for the outstanding obligations
since each of Marker USA and the Company has individually guaranteed repayment
of the outstanding obligations of Marker Germany to each of these banks.
On January 14, 1999, the Company, in coordination with Zions disposed
of its leased snowboard equipment through an auction. The net proceeds of the
auction were paid to Zions. The remaining balance of $1.8 million was to be paid
according to the original terms of the lease. On March 17, 1999, the Company
signed an agreement with Zions whereby the Company would make a lump sum payment
of $170,391.65 on or before July 1, 1999 as full settlement of the remaining
lease obligation of $1,703,916.45. On June 30, 1999, the Company signed a
revised agreement with Zions whereby the Company paid $30,000 on June 30, 1999,
and must pay the remaining $140,391.65 on or before October 1, 1999. In the
event this payment is not made, the Company remains liable for the entire
$1,703,916.45 (less the $30,000 paid on June 30, 1999) obligation. There can be
no assurance that the Company will be able to satisfy its obligation to pay the
remaining $140,391.65 to Zions by October 1, 1999.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
Year 2000 Computer Issue
Many currently installed computer systems and software are coded to
accept only two digit entries in the date code field. Beginning the year 2000,
these date code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. As a result, within the
next four months, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. The Company
has assessed the potential impact of Year 2000 on the processing of
date-sensitive information by the Company's information systems, manufacturing
systems and other ancillary systems. While there can be no assurance that Year
2000 matters will be satisfactorily identified and resolved, the Company
currently believes, based on discussions with its information systems vendors,
that Year 2000 issues will not have a material adverse effect on the Company.
The Company's Year 2000 initiative is being managed by a team of
internal staff and is designed to ensure that there are no adverse effects on
the Company's ability to conduct business. The initiative covers the corporate
office network and financial systems, payroll processing, corporate computers,
manufacturing systems and telephone systems. In addition, the Company is
reviewing the Year 2000 compliance efforts of the Company's key suppliers and
other principal business partners.
The Company believes it has brought its systems into Year 2000
compliance and is in the process of testing the systems to ensure that they are
Year 2000 compliant. The Company has established a target date of September 1,
1999 to complete testing of all systems, which depending on the results of such
tests could result in additional modifications of the applicable systems and
additional Year 2000 testing. The Company's ability to meet the target date is
dependent upon the responsiveness of its suppliers and contractors to potential
problems that could be identified during the testing phase. The Company has
established a supplier compliance program, and is working with its key suppliers
to minimize such risks. The Company currently estimates that it will incur
expenses of approximately $150,000 through 1999 in connection with its
anticipated Year 2000 efforts. The timing and amount of the Company's expenses
may vary and are not necessarily indicative of readiness efforts or progress to
date.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
The Company is in the process of developing contingency and business
continuity plans tailored for Year 2000-related occurrences. The Company
believes its significant hardware and software systems are Year 2000 compliant.
The Company believes that the most reasonably likely worst case scenario of
failure by the Company or its suppliers to adequately resolve Year 2000 issues
would arise from a failure of its order entry and accounts receivable system.
Such a failure would require the Company to resort to "non-computerized" means
to undertake such sales and distribution functions as placing customer orders
and ordering inventory. While the Company believes that it is equipped to
operate in such a "non-computerized" mode to address such a failure, there can
be no assurance that the Company would not, as a result of such or any other
unanticipated Year 2000 failure, suffer from lost revenues, increased operating
costs, loss of customers or other business interruptions of a material nature.
The above information is based on the Company's current best estimates,
which were derived using numerous assumptions of future events, including the
availability and future costs of certain technological and other resources,
third party modification actions and other factors. Given the complexity of
these issues and possible as yet unidentified risks, actual results may vary
materially from those anticipated and discussed above. Specific factors that
might cause such differences include, among others, the availability and cost of
personnel trained in this area, the ability to locate and correct all affected
computer codes, the timing and success of remedial efforts of the Company's
third party suppliers and similar uncertainties.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk, including various interest rate
and foreign currency exchange rate risks.
Foreign Currency Risk - The Company has international operations
resulting in receipts and payments in currencies that differ from the functional
currency of the Company. The Company's functional currency is the U.S. Dollar.
Forward foreign exchange contracts historically have been used by the Company to
reduce the potential impact of unfavorable fluctuations in foreign exchange
rates. The Company had commitments to buy and sell foreign currencies relating
to foreign exchange contracts in order to hedge against future currency
fluctuations.
The Company held forward foreign exchange contracts to purchase German
Marks with Japanese Yen and U.S. Dollars. The contracts mature at various dates
through April 2000. The outstanding forward exchange purchase and sale contracts
at June 30, 1999, were as follows:
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
<TABLE>
<CAPTION>
Selling Buying Contracted
Amount Amount Forward Rate Unrealized Loss Maturity
-------------- -------------- ------------- --------------- --------
<S> <C> <C> <C> <C>
(Y) 677,810,000 DM 10,000,000 64.080 - 69.430 $ (383,630) 11/24/99-4/20/00
$ 9,000,000 DM 15,081,100 1.6565 - 1.6994 $(1,030,103) 9/16/99-12/29/99
</TABLE>
The U.S. Dollar amount of the Yen contracts based upon the June 30,
1999 spot rate was approximately $5.6 million. Due to the Company's financial
position, the Company determined that it would be unable to utilize the foreign
exchange contracts as originally intended. Accordingly, all contracts have been
accounted for as speculative and marked to market. This resulted in a cumulative
unrealized loss of $1.4 million as of June 30, 1999.
The Company notified M&T Bank and KeyBank, banks with which the Company
has certain foreign exchange arrangements, in May 1999 and June 1999,
respectively, that the Company would be unable to utilize its foreign exchange
contracts as originally intended. As a result, on May 25, 1999, M&T Bank
terminated the Netting Agreement. Pursuant to its rights under the Netting
Agreement, M&T Bank canceled and closed out all outstanding foreign exchange
contracts for a loss of $3.7 million as of May 21, 1999 and demanded immediate
payment of such amount. On July 26, 1999, the Company entered into a letter
agreement with M&T Bank, Newco and CT whereby M&T Bank agreed, subject to
certain conditions (including, but not limited to, consummation of the
transactions contemplated by the Purchase Agreement by November 30, 1999), to
reduce their obligation to $1.8 million payable in installments through 2004.
The Company entered into a Supplemental Agreement whereby M&T agreed not to take
any enforcement action against the Company and/or its subsidiaries or exercise
any rights or remedies under the Netting Agreement or any other documentation
relating thereto. The Supplemental Agreement is subject to numerous conditions,
including, without limitation, bankruptcy court approval of the plan of
reorganization. On August 13, 1999, the Company and KeyBank agreed to terminate
all outstanding foreign exchange contracts for a recognized loss of $1.3
million. The Company is currently negotiating with KeyBank to restructure the
resulting outstanding obligation of $1.3 million. In the event that a
restructuring agreement is not executed, KeyBank could proceed to obtain a
judgment against the Company.
Interest Rate Risk - The Company's exposure to market risks for changes
in interest rates is tied to its outstanding borrowings. The Company's
borrowings consist of operating line-of-credits with variable interest rates to
finance its operations and long-term debt with fixed interest rates to finance
its capital expenditures. Changes in the general level of interest rates can
affect the Company's interest expense incurred in connection with its
interest-bearing liabilities. The interest rates on the Company's variable rate
debt ranged from 2.0% to 10.00% on a total outstanding balance of $53.2 million
as of June 30, 1999. The interest rates on the Company's fixed rate debt ranged
from 2.1% to 9.7% on a total outstanding balance of $5.0 million as of June 30,
1999.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
With the exception of historical information (information relating to
the Company's financial condition and results of operations at historical dates
or for historical periods), the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. These forward-looking statements
are based on management's expectations as of the date hereof, and the Company
does not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these forward-looking statements as a result of the factors
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations and the Business Risks described in the Company's
Annual Report on Form 10-K for the year ended March 31, 1999 and elsewhere in
the Company's filings with the Securities and Exchange Commission.
33
<PAGE>
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
As of June 30, 1999, Marker Canada was not in compliance with a minimum
tangible net worth covenant under a $3.0 million Canadian Dollar (U.S. $2.0
million) line of credit agreement with the Royal Bank. Marker Canada was also
not in compliance with margin requirements under the same line of credit as of
June 30, 1999. On June 22, 1999, the Royal Bank notified Marker Canada of
several terms and conditions that it requires Marker Canada to meet in order for
the Royal Bank to continue to provide financing to Marker Canada. The Company
guarantees Marker Canada's obligations under the Royal Bank facility. Marker
Canada is currently in the process of attempting to comply with the terms and
conditions that the Royal Bank has outlined in its letter and has signed a
definitive agreement with Laurentian Bank of Canada in order to obtain
additional financing. In the event that the non-compliance is not cured or
waived, the Royal Bank may exercise its rights to demand payment of all amounts
due and/or foreclose on Marker Canada's assets which are pledged as collateral
under the agreement which could also lead to cross-defaults under the Company's
other credit arrangements. There can be no assurance that the Company will be
able to cure its non-compliance and reach a satisfactory agreement with the
Royal Bank or that Marker Canada will be able to obtain additional financing
from Laurentian Bank.
On April 15, 1999, the Company did not make a required principal and
interest payment of DM 900,000 (U.S. $496,000) on a note payable to
HypoVereinsbank, New York. On April 16, 1999, HypoVereinsbank notified the
Company that the nonpayment of principal and interest constituted a default
under the terms of the note and that the entire balance of DM 6.4 million (U.S.
$3.5 million) was immediately due and payable. As a result, HypoVereinsbank
applied the proceeds of a time deposit that was held as security by the bank in
the amount of $2.0 million against the outstanding balance due on the note. The
Company is currently negotiating with HypoVereinsbank to restructure the
outstanding balance of $1.5 million as of June 30, 1999. In the event that an
agreement is not reached, HypoVereinsbank could proceed to obtain a judgment
against the Company and force the Company into an involuntary bankruptcy. There
can be no assurance that the Company will reach a satisfactory agreement with
HypoVereinsbank.
The Company did not make the required interest payments of $125,000 due
in October 1998 and $125,000 due in April 1999 on the Series A Bonds. As a
result, the bondholder has the right to declare the Series A Bonds in default
and accelerate the entire outstanding balance of $12.0 million, plus accrued
interest thereon, as of June 30, 1999. On March 26, 1999, CT entered into a
restructuring agreement, as amended, with the bondholder which is contingent
upon numerous conditions. Under the agreement, the Series A Bonds will be
reduced to an aggregate principal amount of $5,750,000 and payable in four equal
annual installments of $750,000 with $2,750,000 payable after 5 years. The
agreement also requires interest payments at 2% per annum during the first four
years, and thereafter at a variable rate not exceeding the prime rate on
commercial loans in Japan plus 0.5%. The agreement also requires that certain
personal guarantees of Eiichi Isomura on Marker Japan's debt obligations be
satisfied commencing on the sixth anniversary of the bankruptcy court confirming
a plan of reorganization. The agreement prohibits the bondholder from taking any
34
<PAGE>
PART II - OTHER INFORMATION - (continued)
enforcement action against the Company or its subsidiaries or exercising any
other rights or remedies that the bondholder may have under the documentation
relating to the Series A Bonds or applicable law. However, if the conditions of
the agreement are not met, there can be no assurance that the bondholder will
not declare the Series A Bonds in default and accelerate the outstanding
balance.
The Company notified M&T Bank and KeyBank, banks with which the Company
has certain foreign exchange arrangements, in May 1999 and June 1999,
respectively, that the Company would be unable to utilize its foreign exchange
contracts as originally intended. As a result, on May 25, 1999, M&T Bank
terminated the Netting Agreement. Pursuant to its rights under the Netting
Agreement, M&T Bank canceled and closed out all outstanding foreign exchange
contracts for a loss of $3.7 million as of May 21, 1999 and demanded immediate
payment of such amount. On July 26, 1999, the Company entered into a letter
agreement with M&T Bank, Newco and CT whereby M&T Bank agreed, subject to
certain conditions (including, but not limited to, consummation of the
transactions contemplated by the Purchase Agreement by November 30, 1999), to
reduce their obligation to $1.8 million payable in installments through 2004.
The Company entered into a Supplemental Agreement whereby M&T agreed not to take
any enforcement action against the Company and/or its subsidiaries or exercise
any rights or remedies under the Netting Agreement or any other documentation
relating thereto. The Supplemental Agreement is subject to numerous conditions,
including, without limitation, bankruptcy court approval of the plan of
reorganization. On August 13, 1999, the Company and KeyBank agreed to terminate
all outstanding foreign exchange contracts for a recognized loss of $1.3
million. The Company is currently negotiating with KeyBank to restructure the
resulting outstanding obligation of $1.3 million. In the event that a
restructuring agreement is not executed, KeyBank could proceed to obtain a
judgment against the Company.
As of June 30, 1999, the Company was not in compliance with several
loan covenants under the terms and conditions of the Revolving Credit Agreement.
On June 14, 1999, First Security Bank notified the Company that the termination
of the Netting Agreement with M&T Bank constituted a default under the Revolving
Credit Facility. Also, as of June 30, 1999, the Company's outstanding balance on
its line of credit exceeded the available borrowing base for a period greater
than the ten day mandatory repayment period allowed under the Revolving Credit
Agreement which also constitutes a default. On July 30, 1999, the Company, its
U.S. subsidiaries, Marker Germany, Newco and First Security Bank entered into
the Standstill Agreement. Under the Standstill Agreement, First Security Bank
agreed to refrain from exercising any of its rights or remedies under the
Revolving Credit Agreement and other related loan documentation or under
applicable law including, without limitation, exercise any right of setoff,
institute any suit or foreclose on their collateral until the earlier of
November 30, 1999 or the date upon which any default under the Standstill
Agreement occurs. Events which could occur and constitute defaults under the
Standstill Agreement include, but are not limited to, the following: (i) the
contemplated bankruptcy cases are dismissed or converted to a case under Chapter
7 of the United States Bankruptcy Code, (ii) the Exclusive Distributorship
Agreement by and among the Company, Marker USA and Marker Germany is rejected or
otherwise terminated by any of the parties thereto, or such party materially
breaches its obligations thereunder, and (iii) if at any time the borrowing base
(as defined in the Revolving Credit Agreement) is less that 80% of the
35
<PAGE>
PART II - OTHER INFORMATION - (continued)
outstanding obligations under the Revolving Credit Agreement. In the event of a
default under the Standstill Agreement, the First Security Bank can exercise its
rights to demand payment of all amounts due under the Revolving Credit
Agreement, foreclose on the Company's assets which are pledged as collateral
under the agreement, or force the Company into an involuntary bankruptcy.
On March 31, 1999, Marker Germany's DM 58.7 million (U.S. $32.3
million) line of credit with HypoVereinsbank, Deutsche Bank AG and BFG Bank
expired (together, the "German Banks"). HypoVereinsbank and Deutsche Bank AG
have agreed to extend the credit line through August 31, 1999 based on numerous
conditions. Such conditions include, but are not limited to, (i) the
consummation of the transactions contemplated by the Purchase Agreement, (ii)
the Company and/or CT entering into acceptable pre-bankruptcy agreements with
key creditors, and (iii) product purchase guarantees by CT. There can be no
assurance that Marker Germany will be successful in meeting these conditions. In
the event that Marker Germany is unable to meet these conditions, the German
Banks could terminate the bank line immediately and force Marker Germany into an
involuntary bankruptcy. HypoVereinsbank and Deutsche Bank AG could also obtain
judgments against the Company and Marker USA for the outstanding obligations
since each of Marker USA and the Company has individually guaranteed repayment
of the outstanding obligations of Marker Germany to each of these banks.
Although the Company is seeking to alleviate its current fiscal
problems by, among other things, restructuring the Company's obligations,
obtaining additional financing, consummating the Purchase Agreement with CT, and
filing a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code, there can be no assurance that the Company will be successful
in such endeavors or that the Company will not be forced into an involuntary
bankruptcy.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
---------
27 Financial Data Schedule. *
b) Reports filed on Form 8-K:
--------------------------
Current Report on Form 8-K filed on July 2, 1999 reporting
under Item 2 the execution of the Shareholders Agreement
between CT Sports Holding AG, Marker International, Marker
Canada, Ltd. and Lapointe Rosenstein, as escrow agent.
36
<PAGE>
PART II - OTHER INFORMATION - (continued)
Current Report on Form 8-K filed on August 6, 1999 reporting
under Item 2 the execution of the Purchase Agreement between
Marker International and Marker International GmbH.
- ----------------------
* Filed herewith.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
MARKER INTERNATIONAL
--------------------
Registrant
Dated: August 16, 1999 /s/ Peter C. Weaver
--------------------
Peter C. Weaver
President and Chief Executive Officer
Dated: August 16, 1999 /s/ Kevin Hardy
----------------
Kevin Hardy
Chief Financial Officer
38
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 1903
<SECURITIES> 0
<RECEIVABLES> 17125
<ALLOWANCES> 1429
<INVENTORY> 23333
<CURRENT-ASSETS> 42948
<PP&E> 28083
<DEPRECIATION> 18106
<TOTAL-ASSETS> 53371
<CURRENT-LIABILITIES> 82128
<BONDS> 11175
3000
0
<COMMON> 111
<OTHER-SE> (34294)
<TOTAL-LIABILITY-AND-EQUITY> 53371
<SALES> 3070
<TOTAL-REVENUES> 3070
<CGS> 2179
<TOTAL-COSTS> 4748
<OTHER-EXPENSES> (48)
<LOSS-PROVISION> (298)
<INTEREST-EXPENSE> (960)
<INCOME-PRETAX> (4865)
<INCOME-TAX> (62)
<INCOME-CONTINUING> (4927)
<DISCONTINUED> 81
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4846)
<EPS-BASIC> (.43)
<EPS-DILUTED> (.43)
</TABLE>
