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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission file number 0-19596
THE HOCKEY COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 13-36-32297
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
C/O MASKA U.S., INC., 929 HARVEST LANE, P.O. BOX 1200, WILLISTON, VT 05495
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (802) 872-4226
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK,
PAR VALUE $.01
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: YES X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 6, 2000 has not been determined due to the extremely
limited trading volume in the Registrant's Common Stock; however, 1,060,286
shares of the voting stock were held by non-affiliates of the registrant on
March 6, 2000.
As of March 6, 1999, 6,500,549 shares of the Registrant's Common Stock, $.01 par
value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Business..........................................................................................3
Item 2. Properties........................................................................................7
Item 3. Legal Proceedings.................................................................................7
Item 4. Submission of Matters to a Vote of Security Holders...............................................9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................10
Item 6. Selected Financial Data..........................................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............12
Item 7a. Qualitative and Quantitative Disclosures about Market Risk ......................................19
Item 8. Financial Statements and Supplementary Data......................................................20
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.............52
PART III
Item 10. Directors and Executive Officers of the Registrant...............................................53
Item 11. Executive Compensation...........................................................................55
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................58
Item 13. Certain Relationships and Related Transactions...................................................60
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................60
PART I
ITEM 1. BUSINESS
OVERVIEW
The Hockey Company ("THC" or the "Company") was incorporated in
September 1991 and reorganized in April 1997.
THC designs, develops, manufactures and markets a broad range of
sporting goods. The Company manufactures hockey and hockey related products,
including hockey uniforms, hockey sticks, goaltender equipment, protective
equipment, hockey, figure and inline skates as well as street hockey
products. These are marketed under the CCM-Registered Trademark-,
JOFA-Registered Trademark-, KOHO-Registered Trademark-, HEATON-Registered
Trademark-, TITAN-Registered Trademark- and CANADIEN-TM- brand names, and
private label brands and licensed sports apparel under the CCM-Registered
Trademark- and #1 APPAREL-TM- brand names. The Company sells its products
world-wide to a diverse customer base consisting of mass merchandisers,
retailers, wholesalers, sporting goods shops and international distributors.
THC manufactures and distributes most of its products at facilities in North
America, Finland and Sweden and sources products internationally. THC
products are worn by some of the top professional players in the NHL,
including Mats Sundin, captain of the Toronto Maple Leafs, Mark Recchi of the
Philadelphia Flyers, Patrick Roy of the Colorado Avalanche and Martin Brodeur
of the New Jersey Devils.
OPERATIONS
INDUSTRY BACKGROUND
The worldwide hockey equipment market is estimated at approximately
$485 million and is divided into the following segments:
Ice & roller hockey skates $185 Million
Protective equipment $135 Million
Hockey sticks $125 Million
Goaltender's equipment $ 40 Million
The NHL-Registered Trademark- licensed apparel sales market is
approximately $200 million. The popularity of NHL-Registered Trademark-
licensed merchandise has been attributed to increased marketing efforts by
the NHL-Registered Trademark- as well as the continued expansion into new
markets such as Nashville in 1998, Atlanta in 1999 and Columbus and Minnesota
in 2000.
STRATEGY
The Hockey Company's strategy is based on superior product technology
and brand leadership. The hockey equipment market is driven by new product
innovation and the Company manages a portfolio of the world's leading brands -
CCM-Registered Trademark-, KOHO-Registered Trademark- & JOFA-Registered
Trademark-- that market these new technologies. Each brand is focused on a
different consumer segment and multiple channels of distribution. The strategy
is intended to allow the Company to fully penetrate all viable hockey markets
with products it develops, manufactures and markets. The Company believes it can
achieve annual revenue growth at a higher rate than the expected growth of the
world-wide hockey market.
3
HOCKEY SKATES
The Company markets a range of hockey and figure skates from
professional caliber premium hockey skates to popular priced figure and
recreational hockey skates. These products are sold under the CCM-Registered
Trademark-(which includes the TACKS-Registered Trademark- line of premium hockey
skates), Jofa-Registered Trademark- (in Europe) and Koho-Registered Trademark-
brands. The Company estimates that during the 1999-2000 season approximately 30%
of NHL-Registered Trademark- players are wearing its hockey skates. The Company
also manufactures private label skates using specific retailers' brand names.
The Company believes that it was the second largest manufacturer of hockey and
figure skates in the world in 1999, based on units sold.
PROTECTIVE EQUIPMENT
The Company manufactures and markets a complete line of hockey
helmets, pants, shin pads, shoulder pads, elbow pads and gloves. These products
are marketed under the CCM-Registered Trademark-, Jofa-Registered Trademark- and
Koho-Registered Trademark- brand names. The Company estimates that, during the
1999-2000 hockey season, more than 96% of NHL-Registered Trademark- players are
using one or more protective equipment distributed by the Company.
HOCKEY STICKS
The Company manufactures and markets wood-fiberglass hockey sticks
and replacement blades under the CCM-Registered Trademark-, Heaton-Registered
Trademark-, Koho-Registered Trademark-, Titan-Registered Trademark-,
Heaton-Registered Trademark- and Canadien-TM- brands. The Company believes that
it is the largest and most technologically advanced hockey stick manufacturer in
the world, with its facilities in Cowansville and Drummondville, Quebec, Canada,
and Forssa, Finland.
GOALTENDERS' PROTECTIVE EQUIPMENT
The Company manufactures and markets a complete range of goaltenders'
protective equipment under the Heaton-Registered Trademark- and Koho-Registered
Trademark- brands. The product offering includes leg pads, catch mitts,
blockers, pants, masks and arm and body protectors. The Company has grown
rapidly in this very segmented market, and has become an industry leader.
SPORTS APPAREL
LICENSED HOCKEY APPAREL. The Company markets a broad range of hockey
apparel under the CCM-Registered Trademark- brand, including authentic and
replica NHL-Registered Trademark- hockey jerseys for all NHL teams which are
sold pursuant to certain license agreements with the NHL-Registered Trademark-
which run until the 2003-2004 hockey season. The Company also manufactures the
authentic jerseys that are used by several teams in the East Coast Hockey League
and most major NCAA hockey teams, as well as many amateur hockey teams in North
America. These authentic and replica jerseys are sold primarily through
retailers. The Company believes that it is among the world's largest
manufacturers of hockey jerseys (authentic, replica and amateur gamewear) based
on total dollars and units sold.
CREATIVE APPAREL. The Company's #1 Apparel division manufactures and
markets a high quality line of baseball style caps, jackets and other casual
apparel using its own designs and graphics under licenses from the
NHL-Registered Trademark-, IHL, AHL, ECHL, major colleges and universities and
the NCAA. The division also distributes a line of authentic on-ice apparel worn
by coaching staff and trainers. This division operates a custom embroidering
business, selling to major corporations in North America.
SALES AND MARKETING
The Company's products are sold throughout the world. In North
America, the Company sells to more than 4,000 customers, including independent
sporting goods stores, cooperative buying groups, mass merchandisers,
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sporting goods chains, department stores and wholesalers. Internationally, the
Company has selling offices in France, Sweden, Finland and Norway and
distributors in over 40 countries in Europe, South America, Central America,
Africa, Australia and the Far East. Sporting goods products are sold to certain
large customers by the Company's in-house sales staff, while an extensive
network of approximately 90 independent sales representatives services other
accounts. In 1999, no single account represented more than 10% of the Company's
consolidated net sales. The Company distributes its products from distribution
centers in the United States, Canada, Finland and Sweden.
Retail sales of hockey products are seasonal, with the majority of
retail sales occurring in the second and third calendar quarters.
GENERAL
TIMING OF ORDERS
The timing of orders is largely influenced by the degree of consumer
demand for product lines, inventory levels of retailers, marketing strategies,
seasonality and overall economic conditions. The major period during which the
Company receives its booking orders is January to May.
TRADEMARKS, PATENTS AND LICENSES
The principal trademarks used by the Company are listed in the table
set forth below. All are owned by the Company except for the "CCM-Registered
Trademark-" trademarks which are owned by CCM Holdings (1983) Inc., which in
turn is 50% owned by the Company through certain of its subsidiaries. The
remaining 50% is owned by an unaffiliated Canadian company. All of the
trademarks, including the "CCM-Registered Trademark-" trademark, are exclusive
and perpetual for the product categories indicated. All of the trademarks,
excluding the "CCM-Registered Trademark-" trademark, are also royalty free. The
"CCM-Registered Trademark-" trademark carries a nominal annual fixed fee due to
CCM Holdings (1983) Inc. that is not based on sales.
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Trademarks Category
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CCM-Registered Trademark- Ice and roller hockey skates, figure
skates, ice and roller hockey protective
equipment, ice and roller hockey sticks,
hockey jerseys and socks and related
accessories and apparel
KOHO-Registered Trademark- Ice and roller hockey skates, protective
equipment (including goaltender equipment),
hockey sticks and related accessories
JOFA-Registered Trademark- Protective equipment, ice skates, hockey
sticks and related accessories
HEATON-Registered Trademark- Goaltender protective equipment, skates,
sticks and related accessories
TITAN-Registered Trademark- Hockey sticks
CANADIEN-TM- Hockey sticks
# 1 APPAREL-Registered Trademark- Creative apparel
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The Company's principal license agreements are with National Hockey
League Enterprises, L.P. ("NHLE") and the National Hockey League Players
Association ("NHLPA"). Under the NHLE agreements the Company has the right to
use NHL-Registered Trademark- team logos, names and designs on hockey jerseys,
headwear and accessories. Beginning with the 1999-2000 season, the Company has
signed a "Center Ice" license agreement with the NHLE allowing it to market
T-shirts, golf shirts, workout wear, outerwear & activewear bearing
NHL-Registered Trademark- logos, names and designs. The Company also
manufactures and markets hockey protective equipment under license from the
NHLE. The protective equipment includes two categories, "Center Ice", also
referred to as "the official equipment worn by the NHL-Registered Trademark-" in
the shoulder, elbow and shin guard categories, and "Licensed Equipment", in the
same three categories sold at more popular price points and targeted at the
youth market.
Under the NHLPA agreement, the Company has the right to use
NHL-Registered Trademark- player names and numbers on NHL-Registered Trademark-
licensed jerseys.
5
The NHLE agreements, which run until the end of the 2003-2004 hockey
season, provide the Company with the exclusive right to market and sell
authentic jerseys for 15 NHL teams beginning with the 1999-2000 season, replica
jerseys for all 30 NHL teams, and the authentic and replica NHL-Registered
Trademark- All-Star game jerseys.
The NHLE agreements expire on June 30, 2004. The NHLPA agreements
expired on June 30, 1999; they have been extended, pending the resolution of
negotiations between the parties and the execution of a new license agreement.
MANUFACTURING AND SOURCING
NORTH AMERICA. The Company manufactures and distributes the majority
of its products in 12 facilities located in Vermont, and Ontario and Quebec,
Canada. Collectively these facilities have capabilities for knitting, cutting,
sewing, embroidery, silk screen printing, injection and vacuum molding, skate
and equipment manufacturing, and hockey stick manufacturing.
FOREIGN. The Company manufactures and distributes some of its
products in three facilities in Sweden and Finland. In addition, the Company
sources products from Asia and the Czech Republic.
The Company currently has one supplier who is responsible for
products which are included as components in more than 10% of the Company's
consolidated net sales. The Company has mitigated associated risks through
retention of title and ownership of the tools and molds used in the process and
management believes, it would, if necessary, be able to transition the process
to other suppliers with no significant adverse effect on the Company's
operations.
RESEARCH AND PRODUCT DEVELOPMENT
The majority of the Company's products are conceived of and developed
at its own facilities, or are developed jointly with third party inventors. The
Company operates research and development facilities in St. Jean, Quebec and
Malung, Sweden. The employees include designers, engineers and model makers.
These facilities include testing equipment, woodworking, spray painting, molding
and sculpting capabilities, and have creative services departments which are
responsible for packaging, catalogue design and development.
COMPETITION
The sporting goods industry is highly fragmented. The Company
competes with numerous companies in team related sporting goods, equipment and
sports apparel. The Company is renowned for its high quality and innovative
products and provides high levels of service to its customers. The Company
competes directly with a number of ice hockey and roller hockey specific
vendors. The Company's major competitors are Bauer Nike Hockey Inc., Easton
Sports Inc., Mission Hockey Company and Sherwood Drolet Ltd.
In NHL-Registered Trademark- licensed apparel, the Company competes
with Pro Player Inc., a subsidiary of Fruit of the Loom, Inc. (currently under
Chapter 11 protection).
EMPLOYEES
As of December 31, 1999, the Company employed 1,756 persons. 1,471
are employed in Canada, 79 are employed in the United States and the balance are
employed in Europe. None of the Company's employees in the United States are
unionized. Approximately 350 of its employees at its St. Jean, Quebec facility ,
75 employees at its Drummondville, Quebec facility and 55 employees of the
Harrow, Ontario facility are unionized. The collective bargaining agreements
with the unions expire in 2001 for Drummondville and in 2003 for St. Jean. The
first collective bargaining agreement for Harrow is presently being negotiated.
6
ITEM 2. PROPERTIES
The Company believes that its existing manufacturing and distribution
facilities have sufficient capacity to support the Company's business without
the need for significant additional or upgraded equipment or capital
expenditures. The following table summarizes each of the Company's principal
facilities for its operations.
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LOCATION USE APPROXIMATE LEASE/
SQUARE FEET OWN
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UNITED STATES
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Bradford, Vermont U.S. apparel distribution 84,000 Own
Georgia, Vermont Cross-dock and warehouse 16,500 Lease
Williston, Vermont U.S. equipment distribution center, executive and 70,000 Lease
administrative offices
Branford, Connecticut U.S Apparel offices 2,432 Lease
CANADA
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Cowansville, Quebec Hockey stick manufacturing 45,428 Own
Drummondville, Quebec Hockey stick manufacturing 63,235 Own
Lachine, Quebec Administrative offices and distribution center 68,461 Lease
St. Jean, Quebec Hockey equipment and skate manufacturing 138,000 Lease
St. Hyacinthe, Quebec Hockey apparel, cutting and sewing 78,000 Lease
St. Hyacinthe, Quebec Canadian distribution center and administrative offices 200,000 Lease
Cap de la Madeleine, Quebec Hockey apparel sewing 12,000 Lease
Westmount, Quebec Executive offices 23,000 Lease
Mt. Forest, Ontario Apparel manufacturing 125,000 Own
Harrow, Ontario Goaltender equipment manufacturing 15,000 Lease
EUROPE
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Paris, France European sales office 1,200 Lease
Forssa, Finland Warehouse 38,736 Lease
Tammela, Finland Hockey stick factory, warehouse and offices 50,249 Lease
Helsinki, Finland Sales office 1,474 Lease
Malung, Sweden Protective equipment factory, warehouse and offices 96,805 Lease
Fredrikstad, Norway Office and warehouse 14,526 Lease
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ITEM 3. LEGAL PROCEEDINGS
A. ENVIRONMENTAL LITIGATION
In 1992, T. Copeland & Sons, Inc. (" Copeland "), the owner of a
property adjacent to Maska's former manufacturing facility in Bradford, Vermont
(now used as a US apparel distribution centre), filed an action in Vermont
Superior Court alleging that its property had been contaminated as a result of
the Company's manufacturing activities and seeking compensatory and punitive
damages under the Vermont Groundwater Protection Law and various common law
theories. In June 1995, Maska settled this action for $1 million cash, paid in
July 1995, and a $6 million promissory note. Subsequently, Copeland received a
distribution of shares of THC's
7
Common Stock to satisfy the note. Copeland asserted the right to recover from
the Company the difference between the aggregate value of the Common Stock and
the amount of the promissory note. In October 1998, Copeland's claim to recover
this difference was disallowed. Copeland filed an appeal of this decision, which
is pending.
Maska commenced an action in the United States District Court for the
District of Vermont (the "Vermont District Court") entitled MASKA U.S. INC. V.
KANSA, ET AL., Doc. No. 1: 93-CV-309 against its liability insurers seeking
coverage for environmental cleanup costs arising out of claims brought by the
State of Vermont and Copeland for their failure to defend or to indemnify Maska
with respect to these claims. Maska reached settlements with three of the
liability insurers prior to trial. The trial against three remaining liability
insurers resulted in a jury verdict, in July 1998, in Maska's favor in the
amount of $9.2 million. The jury verdict compensated Maska for its costs to
defend itself against the claims and to clean up the soil and groundwater around
its property. In October 1998, appeals were filed by two of the remaining
liability insurers in the United States Court of Appeals for the Second Circuit.
In September 1999, the Company reached a settlement with one of the appealing
insurers. The appeal by the remaining liability insurer was allowed and the
Company intends no further action.
B. PRODUCT LIABILITY LITIGATION
The Company is unaware of any personal injury claims for which there is
inadequate insurance coverage.
C. OTHER LITIGATION
On October 16, 1997, ZMD Sports Investments Inc. and 2938201 Canada
Inc., landlords of the Company's properties located in St. Jean, Quebec and St.
Hyacinthe, Quebec, brought motions against the Company requiring the Company to
undertake certain repairs to the properties for an estimated $630,000. The
Company believes these motions to be without merit.
In October 1997, Sports Holdings Corp. (subsequently acquired by the
Company) sold the assets of its ski and snowboard division to Trak Inc. and
3410137 Inc., collectively "Trak". In July 1998, Trak filed a claim against the
Company (SHC, SHC Hockey Inc. and Tropsport Acquisitions Inc.), alleging certain
incorrect representations and warranties in the context of this sale, for an
amount in excess of $350,000. The Company believes that this claim is without
merit.
In September of 1999, NHL Enterprises, LP and NHL Enterprises Canada
Inc. (together "NHL") asserted that the Company was in breach of its obligation
to pay royalties pursuant to License Agreements between the NHL and the Company
dated as of October 6, 1995, as amended. The NHL is claiming an overdue amount
of $905,000 plus interest pursuant to a US license agreement and an overdue
amount of CDN$267,000 plus interest, pursuant to a Canadian license agreement.
The Company has denied these claims and has counter-claimed that its payment
obligations pursuant to both license agreements were reduced due to the NHL work
stoppage in 1994-95, and that the Company is therefore entitled to refunds from
the NHL of $375,000 plus interest from the US license agreement and CDN$188,000
plus interest from the Canadian license agreement.
The Company and the NHL have submitted their dispute with respect to the
US license agreement to binding arbitration pursuant to its terms. The dispute
between the Company and the NHL with respect to the Canadian license agreement
is also be subject to binding arbitration, but has not yet been submitted. The
Company believes that the claims of the NHL are without merit.
Other than certain legal proceedings arising from the ordinary course of
business, which the Company believes will not have a material adverse effect,
either individually or collectively, on the financial position, results of
operations or cash flows, there is no other litigation pending or threatened
against the Company.
D. REORGANIZATION CASE
THC and six of its subsidiaries (collectively, "Old THC") filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code (the "Filing") in the United States Bankruptcy Court for the
8
District of Delaware (the "Bankruptcy Court") on October 24, 1995 (the "Petition
Date"). The Bankruptcy Court entered an order authorizing the joint
administration of Old THC's Chapter 11 cases (the "Chapter 11 Cases"). On
September 12, 1996, Old THC filed a Chapter 11 Plan of Reorganization and on
November 13, 1996, Old THC filed a First Amended Chapter 11 Plan of
Reorganization as amended from time to time (the "Reorganization Plan") with the
Bankruptcy Court. On January 23, 1997, the Bankruptcy Court confirmed the
Reorganization Plan which became effective on April 11, 1997 (the "Effective
Date") and Old THC emerged from bankruptcy ("New THC"). See Note 2(b) to the
Notes to Consolidated Financial Statements, page 33.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
A. PRICE RANGE OF COMMON STOCK
Between May 24, 1995 and April 11, 1997, Old THC's common stock ("Old
Common Stock") traded on the NASD Electronic Bulletin Board under the symbol
"SLMI" (through October 1996) and "SLMIQ" thereafter. Prior to that date, Old
THC's Old Common Stock was traded on the NASDAQ Stock Market.
On April 11, 1997, the Effective Date of the Company's Plan of
Reorganization, Old THC's Old Common Stock was extinguished and the holders of
the Old Common Stock received a total of 300,000 five-year warrants (the
"Warrants") to purchase an aggregate of 300,000 shares of new common stock ("New
Common Stock") at an exercise price of $16.92 per share (subject to adjustments
for stock splits, stock dividends, recapitalizations and similar transactions).
Each holder of 67 shares of Old Common Stock received one Warrant to purchase,
for cash, one share of new common stock , with no fractional warrants issued. On
the Effective Date, New THC issued an aggregate of 6,500,000 shares of New
Common Stock, $0.01 par value (as adjusted to take account of fractional
interests pursuant to the Plan). New THC's New Common Stock and Warrants are
quoted on the OTC Bulletin Board under the trade symbols "THCX" and "THCXW",
respectively. The range of closing prices of the New Common Stock is not
provided, as there has been a limited amount of trading activity in New THC's
New Common Stock.
B. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
The approximate number of record holders of New THC's New Common Stock as
of March 6, 2000 was 300. The Company did not pay dividends on its Old Common
Stock and has no current plans to pay cash dividends on its New Common Stock in
the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K. The selected consolidated
financial data as of and for the years ended December 31, 1999, 1998, 1997, 1996
and 1995 are derived from the consolidated financial statements of the Company.
For the presentation of this statement, results for New THC and Old THC have
been combined for 1997.
EBITDA is a measure of the cash generated from operations and has been
included in the selected income statement highlights, because management
believes that it would be a useful indicator for readers. EBITDA is defined as
the earnings (net income) before interest, income and capital taxes,
depreciation and amortization, and unusual items. EBITDA is not a measure of
performance or financial condition under generally accepted accounting
principles, but is presented because it is a widely accepted indicator of a
company's ability to source and incur debt. EBITDA should not be considered as
an alternative to net income as an indicator of the company's operating
performance or as an alternative to cash flows as a measure of liquidity.
Following emergence from bankruptcy the Company adopted fresh-start
reporting in accordance with Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7").
Note that the pro-forma results presented here will differ from those
previously presented in the 8-K, incorporated by reference, given that the
latter were only for the nine-month period ended September 30, 1998.
10
YEARS ENDED DECEMBER 31
(in thousands)
--------------------------
1999 1998(1) 1998 1997(2) 1996 1995
PROFORMA
UNAUDITED
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INCOME STATEMENT HIGHLIGHTS:
Net sales $ 190,603 $ 183,158 $ 110,817 $ 123,754 $ 140,321 $ 160,973
Cost of goods sold 109,778 108,637 65,026 73,775 92,613 107,266
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GROSS PROFIT 80,825 74,521 45,791 49,979 47,708 53,707
Gross profit margin (%) 42.4% 40.7% 41.3% 40.4% 34.0% 33.4%
Selling, general and administrative
expenses 58,990 58,484 35,272 38,237 45,831 59,753
% 30.9% 31.9% 31.8% 30.9% 32.7% 37.1%
OPERATING INCOME (LOSS) 17,263 11,585 6,013 3,715 (2,156) (21,517)
Interest expense 12,025 11,400 4,108 3,922 9,555 17,078
NET INCOME (LOSS) BEFORE TAXES 3,502 842 6,493 (2,162) (19,170) (51,274)
Income taxes 5,276 2,875 4,603 4,665 (448) 605
Extraordinary gain on discharge of debt - - - 58,726 - -
NET INCOME (LOSS) (1,774) (2,033) 1,890 51,899 (18,722) (51,879)
Earnings per Share(3) (Basic) (0.54) (0.31) 0.25
EBITDA 27,319 23,474 15,893 14,316 5,401 (4,386)
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BALANCE SHEET HIGHLIGHTS:
Working capital $ 60,416 $ 51,149 $ 45,736 $ 50,678 $ 110,088
TOTAL ASSETS 209,611 207,178 118,780 124,925 138,028
Short-term debt 14,055 8,572 2,966 45,404 702
Long Term debt 94,171 88,568 30,064 - -
STOCKHOLDERS' EQUITY 63,637 69,238 68,882 (97,189) (78,642)
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CASH FLOW STATEMENT HIGHLIGHTS:
Cash provided by Operations $ 876 $ 19,118 $ 18,258 $ 18,948 $ (8,571)
Cash provided (used) by Investing
Activities (4,649) (66,267) 422 3,478 15,606
Cash provided (used) by Financing 4,696 41,775 (46,010) (5,414) 3,107
Activities
TOTAL CASH INCREASE (DECREASE) 926 (5,458) (27,538) 16,984 10,261
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(1) Effective November 19, 1998, the Company acquired all of the issued and
outstanding share capital of Sports Holdings Corp. The results of
operations related to the acquisition have been included in the above table
of selected consolidated financial data as if the acquisition had taken
place on January 1, 1998. See Note 2a to the Notes to Consolidated
Financial Statements for more information, p. 31.
(2) For presentation purposes, 1997 results for Old THC and New THC have been
combined.
(3) EPS for years before 1998 are not presented because they are not
meaningful.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
See Part I, Item 1 Overview
The following discussion provides an assessment of the Company's results of
continuing operations, financial condition and liquidity and capital resources,
and should be read in conjunction with the Consolidated Financial Statements of
the Company and Notes thereto included elsewhere herein. (All references to
"Note(s)" refer to the Notes to the Consolidated Financial Statements.) The
consolidated financial information presented below should be read in conjunction
with the Results of Operations included in this Form 10-K. For the presentation
of this statement, certain pro-forma financial comparisons of the year ended
December 31, 1998 are based on results for that year compared to combined
results of THC as if the acquisition of Sports Holdings Corp. ("SHC") had taken
place on January 1, 1998. A Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1997 giving effect to the
consummation of the Reorganization Plan, including the implementation of
fresh-start reporting, as if consummation had occurred on January 1, 1997 is
provided in Note 21 to the Notes to Consolidated Financial Statements on page 49
of this Form 10-K.
RESULTS OF OPERATIONS
The Company's results of operations as a percentage of net sales for the
periods indicated were as follows:
1999 1998 1997
PRO FORMA (A)
% UNAUDITED %
%
----------------------------------------------------
Net sales 100.0 100.0 100.0
GROSS PROFIT 42.4 40.7 40.4
----------------------------------------------------
Selling, general and administrative expenses 30.9 31.9 30.9
Amortization of excess reorganization value and
goodwill 2.4 2.4 1.4
Restructuring and unusual charges 0.4 - 5.1
----------------------------------------------------
OPERATING INCOME 9.1 6.3 3.0
Chapter 11 and debt related fees - - 1.0
Other (income) expense, net 0.9 (0.4) 0.6
Interest expense 6.3 6.2 3.1
----------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
GAIN ON DISCHARGE OF DEBT 1.8 0.5 (1.7)
Income taxes 2.8 1.6 3.8
----------------------------------------------------
Loss before extraordinary gain on discharge of debt (0.9) (1.1) (5.5)
Extraordinary gain on discharge of debt - - 47.4
----------------------------------------------------
NET INCOME (LOSS) (0.9) (1.1) 41.9
EBITDA 14.3 12.8 11.3
(a) Effective November 19, 1998, the Company acquired all of the issued and
outstanding share capital of SHC. The results of operations related to the
acquisition have been included in the above table of selected consolidated
financial data as if the acquisition had taken place on January 1, 1998. See
Note 2a to the Notes to Consolidated Financial Statements for more
information, p. 31.
(b) For presentation purposes, 1997 results for Old THC and New THC have been
combined.
12
1999 COMPARED TO PRO FORMA 1998
EFFECTIVE NOVEMBER 18, 1998, THE COMPANY ACQUIRED ALL THE ISSUED AND
OUTSTANDING CAPITAL STOCK OF SHC. THIS TRANSACTION RESULTED IN SIGNIFICANT
INCREASES TO THE COMPANY'S SALES AND COST OF SALES, AS WELL AS TO OPERATING
EXPENSES (SELLING, GENERAL AND ADMINISTRATIVE, GOODWILL AMORTIZATION AND
INTEREST). THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 ARE
THEREFORE BEING COMPARED TO THE UNAUDITED PROFORMA RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1998. THIS COMPARES 1999 RESULTS TO 1998 RESULTS AS IF
THE ACQUISITION OF SHC HAD TAKEN PLACE ON JANUARY 1, 1998. THE COMPANY BELIEVES
THAT THIS COMPARISON IS MORE MEANINGFUL THAN A COMPARISON TO ACTUAL 1998
RESULTS.
Net sales grew by 4.1% in 1999 to $190.6 million, from $183.2 million
in 1998. Factors contributing to this growth include strengthening apparel
sales, an increase in average selling price of the Company's goaltender
equipment, and stronger stick sales which were offset, in part, by the
anticipated continuing softness in roller hockey skate sales. Apparel sales were
fueled in part by the withdrawal of Starter Corporation ("Starter") and Nike,
Inc. ("Nike") from the replica jersey business and the increased number of NHL
teams for which THC provides authentic on-ice jerseys pursuant to its license
with the NHL.
Gross profit was $80.8 million in 1999 compared to $74.5 million in
1998, an increase of 8.5%. Measured as a percentage of net sales, gross margin
increased to 42.4% in 1999 from 40.7% in 1998. This increase is largely
attributable to (i) the positive effects of the Company's new product
introductions and focus on branding, allowing it to target higher price points
for its equipment products; (ii) a favorable product mix; (iii) the benefits
realized from previous investments in the Company's manufacturing
infrastructure; and (iv) the discontinuation of low margin product lines. In
addition to lower standard costs resulting from capital investments, THC's
growing production volumes continue to improve overhead absorption. Improvements
in gross margin were offset, in part, by temporary softness in apparel prices
resulting from the high volumes of Starter and Nike closeout merchandise
associated with their exit from the replica market.
Selling, general & administrative expenses decreased as a percentage of
sales to 30.9 % of 1999 sales, from 31.9% of total 1998 sales. In dollar terms,
there was a slight increase to $59.0 million in 1999 from $58.5 in 1998. The
decrease in SG&A as a percentage of total sales was due to administrative cost
synergies realized from THC's acquisition of SHC offset by higher dollar
marketing expenditures in accordance with THC's focus on developing its sales
and marketing infrastructure.
Operating income for the year ended December 1999 was $17.3 million
compared to $11.6 million in the year ended December 1998.
Interest expense approximated $12.0 million and $11.4 million for 1999
and 1998, respectively.
Net income before taxes was $3.5 million in 1999 versus $0.8 million for
1998. Income taxes increased in 1999 due to the U.S. tax consequences of (i) the
initial effect of the pledging of the shares of the Company's European
subsidiaries as security for the U.S. debt incurred in the acquisition of SHC
and (ii) increased amount of non-deductible goodwill (52 weeks in 1999 compared
to 5 weeks in 1998), again relating to the acquisition of SHC. The majority of
these taxes were non-cash.
The Company's net loss for the year ended December 31, 1999 was $1.8
million compared to a $2.0 million loss in the results for the year ended
December 31, 1998.
13
1998 COMPARED TO 1997
Net sales decreased 10.5% to $110.8 million for the year ended December
31, 1998 as compared to $123.8 million in the year ended December 31, 1997. The
decline in sales resulted primarily from continued softness of the inline skate
market, including the Company's decision to exit the recreational inline skate
market, the continued softness in the licensed sports apparel industry, and in
licensed hockey apparel in particular, the unfavorable exchange rate for the
Canadian dollar in comparison to 1997 and a severe ice storm that struck the
north eastern parts of North America in January 1998, paralyzing businesses
throughout the affected regions including the Company's Quebec operations during
January and part of February 1998. In addition, sales of discontinued inventory
were significantly below 1997 levels as the Company significantly reduced its
excess inventory during 1997. Also, net sales in 1997 included $1.2 million of
sales from Mitchel & King Skates Limited which was sold in May 1997. Helping
partially offset this shortfall is the fact that sales from new subsidiaries
acquired in November 1998 are included in 1998 sales ($7.2 million).
Gross profit was $45.8 million in 1998 compared to $50.0 million in 1997,
a decrease of 8.4%. Measured as a percentage of net sales, gross profit margin
increased to 41.3% in 1998 from 40.4% in 1997. These higher gross profit margins
were the result of ongoing manufacturing cost reductions due to strategic
Investments made in plant and equipment during the last two years, favorable
product mix and reduced sales of discontinued inventory at lower gross margins.
The decrease in gross profit resulted primarily from the decreased net sales
noted above, offset in part, by the improved gross profit margins.
For the year ended December 31, 1998, selling, general and administrative
expenses decreased 7.6% to $35.3 million compared to $38.2 million in the prior
year period. Measured as a percentage of net sales, these expenses were 31.8% in
1998 versus 30.9% in 1997. Selling, general and administrative expenses
decreased due to generally lower operating expenses resulting from the Company's
restructuring efforts, lower variable expenses associated with the decline in
sales mentioned above, a reduction in the allowance for doubtful accounts as a
result of a change in estimate related to a major customer offset, in part, by
increased advertising costs, which are expected to have a favourable future
impact.
The amortization of excess reorganization value and goodwill increased
from $1.7 million in 1997 to $2.6 million in 1998. The increase is mainly due to
the fact that in 1997, the Company began amortizing its excess reorganization
value, which was established in accordance with fresh start reporting, in April
1997. This amortization approximated $2.4 million in 1998 compared to $1.7
million in 1997. The 1998 expense also includes amortization of the goodwill
created by the acquisition of SHC in November 1998 ($0.2 million).
During the year ended December 31, 1998, the Company recorded
restructuring and unusual costs of $1.9 million. These charges are related to
severance costs associated with the reorganization of the Company's operations
following the acquisition of SHC ($1.5 million) and the portion of unrecoverable
costs resulting from a severe ice storm that struck the northeastern parts of
North America in January 1998. During 1997, prior to its emergence from
bankruptcy, the Company recorded significant restructuring charges totaling $6.3
million to reflect the impact of strategically reorganizing its operations to
position itself to sustain ongoing profitability. These costs consisted
primarily of lease cancellation costs ($2.3 million) at its Peterborough, N.H.
and Beauport, Quebec facilities, impairment of fixed assets ($1.7 million),
principally leasehold improvements at its Peterborough, N.H. facility, and
severance costs associated with the shut down of three of the Company's
manufacturing facilities.
Operating income for the year ended December 1998 was $6.0 million
compared to $3.7 million in the year ended December 1997.
As a result of Old THC's Chapter 11 Cases, the Company incurred
significant legal and professional fees totaling $1.2 million for the year ended
December 31, 1997. These fees include the cost of the Company's legal
14
counselors, financial advisors and consultants, as well as those of its bankers,
senior noteholders and creditors. These costs are included as Chapter 11 and
debt related fees in the Consolidated Statements of Operations.
The Company received $5.0 million in 1998 as proceeds from settlements
with three of its former liability insurers relative to an action against these
insurers (see Note 18A p.45). Other income for the year ended December 31, 1998
include this $5.0 million of income, net of $0.8 million of related professional
fees.
During the reorganization proceedings the Company was generally not
permitted to pay interest. Therefore, the Company recorded interest expense only
to the extent paid or earned during the proceedings and to the extent it was
probable that the Bankruptcy Court would allow interest on Pre-Petition Date
debt as a priority, secured or unsecured claim. On the Effective Date, the
Company entered into various debt agreements (see "Liquidity and Capital
Resources" below) resulting in interest expense thereafter. Interest expense
approximated $4.1 million and $3.9 million for 1998 and 1997, respectively.
The Company's income (loss) before income taxes and extraordinary gain on
discharge of debt was $6.5 million and ($2.2) million for 1998 and 1997,
respectively, excluding restructuring and unusual charges, amortization of
excess reorganizational value and goodwill and Chapter 11 and debt related fees.
The Company's income (loss) before extraordinary gain on discharge of debt for
the year ended December 31, 1998 was $1.9 million compared to a loss of $6.8
million in the year ended December 31, 1997. On April 11, 1997, the Company
emerged from bankruptcy and as a result of its Reorganization Plan and
implementation of fresh start reporting, approximately $58.7 million of its
liabilities were forgiven and were included in Extraordinary Gain on Discharge
of Debt in the Consolidated Statements of Operations in 1997.
The Company's net income for the year ended December 31, 1998 was $1.9
million compared to $51.9 million in the year ended December 31, 1997.
INCOME TAXES
The Company's income tax provision is comprised of both United States and
foreign tax components. Due to changes in the relative contribution of income or
loss by country, differences in the effective tax rates between countries
(principally the U.S. and Canada) and permanent differences in effective tax
rates between income for financial statement purposes and tax purposes, the
consolidated effective tax rates may vary significantly from period to period.
The Company and its U.S. subsidiaries consolidate their income for U.S. federal
income tax purposes. However, gains and losses of certain subsidiaries may not
be available to other subsidiaries for tax purposes.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Fresh-start reporting requires the Company to report a provision in lieu
of income taxes when there is a book taxable income and utilization of a
pre-reorganization net operating loss carry-forward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carry-forward and other deferred tax assets would substantially reduce the
related federal income tax payable. The current and future year tax benefit
related to the carry-forward is recorded as a reduction of reorganizational
value in excess of amounts allocable to identifiable assets until exhausted and
then as a direct increase to paid in capital. The amount of income tax provision
which has been used to reduce the reorganizational value in excess of amounts
allocable to identifiable assets is reflected as a provision in lieu of income
taxes in the Company's Consolidated Statements of Operations.
15
LIQUIDITY AND CAPITAL RESOURCES
During March 1998, the Company amended its Credit Agreements (the
"Amended Credit Agreements") to take advantage of its improved borrowing
capacity. In completing the amendments the Company redeemed, in full, its 14%
Senior Secured Notes, due April 1, 2004 in the aggregate amount of $29.5 million
and all amounts outstanding under the Term Loan under its former Credit
Agreement. The redemptions were effected by the Amended Credit Agreements
(additional revolving credit loan borrowings under the Amended Credit Agreements
and the Amended Term Loan) and use of the Company's cash on hand. The maximum
amount of loans that may have been outstanding under the Amended Credit
Agreements was $60.0 million, consisting of $45.0 million revolving credit loans
and a $15.0 million term loan (the "Amended Term Loan"). Borrowings under the
Amended Credit Agreements bore interest at an alternate base rate per annum or
at an interest rate based on LIBOR plus 1 3/4% per annum on Amended U.S.
revolving credit loans, at Chase Canada's prime rate or at an alternate base
rate per annum on Canadian revolving credit loans, and an alternate base rate
plus 1/4% per annum or at an interest rate based on LIBOR plus 2% per annum on
the Amended Term Loan. Interest and principal on the Amended Term Loan were
payable in quarterly installments ($0.6 million principal) through April 2000,
beginning in April 1998.
During November 1998, the "Amended Credit Agreements" were replaced by
new credit agreements ("New Credit Agreements"). Effective November 19, 1998,
two of the Company's subsidiaries, Maska U.S. Inc. and SHC Hockey Inc. entered
into a credit agreement (the "New U.S. Credit Agreement") with the lenders
referred to therein and with General Electric Capital Corporation, as Agent and
Lender. Simultaneously, two of the Company's Canadian subsidiaries, Sport Maska
Inc. and Tropsport Acquisitions Inc., entered into a credit agreement (the "New
Canadian Credit Agreement") with the lenders referred to therein and General
Electric Capital Canada Inc., as Agent and Lender. The maximum amount of loans
and letters of credit that may be outstanding under the two credit agreements
(collectively, the "New Credit Agreements") is U.S. $70 million. Each of the New
Credit Agreements is subject to a minimum excess requirement of $1.75 million.
The New Credit Agreements are collateralized by eligible accounts receivable and
inventories of the borrowers and are further collateralized by a guarantee of
the Company and its other subsidiaries.
Total borrowings outstanding (excluding outstanding letters of credit)
under the New Credit Agreements at December 31, 1999 amounted to $15.4 million.
The New Credit Agreements are for a period of two years with a possible
extension of one year by the Company.
Borrowings under the New U.S. Credit Agreement bear interest at rates
between U.S. prime plus 0.25% to 1.00% and LIBOR plus 1.50% to 2.50% depending
on the borrowers' Operating Cash Flow Ratio, as defined in the agreement.
Borrowings under the New Canadian Credit Agreement bear interest at rates
between the Canadian prime rate plus 0.75% to 2.00% and LIBOR plus 0.75% to
2.00% depending on the borrowers' Operating Cash Flow Ratio, as defined in the
agreement. In addition, the borrowers are charged a GECC monthly commitment fee
at an annual rate of up to 3/8 of 1% on the unused portion of the revolving
credit facilities under the Credit Agreements and certain other fees.
The New Credit Agreements contain customary negative and affirmative
covenants including those relating to capital expenditures, total indebtedness
to EBITDA, minimum interest coverage and fixed charge coverage.
16
On November 19, 1998, in connection with its acquisition of Sports
Holdings Corp., the Company and Sport Maska Inc. entered into a credit agreement
with the Caisse de Depot et Placement du Quebec to borrow the Canadian dollar
equivalent of $87.5 million. The loan is for a period of two years, maturing
November 19, 2000 and may be extended for an additional one year term at the
Company's request and upon payment of an extension fee. The loan bears interest
at a rate equal to the Canadian Bankers' Acceptance Rate plus 4% or the Canadian
Prime Rate plus 4.5%. At December 31, 1999, the interest rate was 11.0%.
The loan is collateralized by all of the tangible and intangible assets
of the Company subject to the prior ranking claims on accounts receivable and
inventories by the lenders under the Company's revolving credit facilities. The
loan is guaranteed by the Company and certain of its subsidiaries.
The loan contains customary negative and affirmative covenants including
those relating to capital expenditures, total indebtedness to EBITDA and minimum
interest coverage.
The Company's anticipated financing requirements for long-term growth,
future capital expenditures and debt service are expected to be met through cash
generated from its operations and borrowings under its New Credit Facilities.
During the year ended December 31, 1999, the Company's operations provided $0.3
million of cash compared to $19.1 million in 1998. The Company earned income of
$0.7 million in 1999, compared to $1.9 million in 1998. Earnings before
interest, taxes, depreciation, amortization, restructuring and unusual charges
and Chapter 11 and debt related fees (EBITDA) was $27.3 million for the year
ended December 31, 1999 compared to $15.9 million for the previous year.
Included in EBITDA is a non cash charge of $ 0.8 million related to foreign
exchange conversion in the year ended December 31, 1999 compared to a non-cash
cash revenue of $1.4 million in 1998.
Cash used in investing activities during the year ended December 31, 1999
of $4.6 million compared to $66.3 million in 1998 which included $62.9 million
used for the acquisition of Sports Holdings Corp. and $3.5 million of purchases
of fixed assets.
Net cash flow provided by financing activities during 1999 was
approximately $5.3 million compared to $41.8 million in 1998 primarily from
proceeds from long term debt ($102.5 million), issuance of preferred stock
($10.8 million) and common share purchase warrants ($1.7 million) and proceeds
from borrowings ($3.0 million) offset by principal payments of debt ($70.9
million) and financing costs incurred towards the acquisition of Sports Holdings
Corp. ($5.3 million).
The Company follows the customary practice in the sporting goods industry
of offering extended payment terms to creditworthy customers on qualified
orders. The Company's working capital requirements generally peak in the third
and fourth quarters as it builds inventory and makes shipments under these
extended payment terms.
RESTRUCTURING RESERVES
Effective November 19, 1998, the Company acquired all of the issued and
outstanding capital stock of SHC. Following the acquisition, the Company
embarked on a plan to integrate and rationalize the operations of SHC into its
own. This rationalization involved the elimination of certain redundancies, both
in terms of personnel and operations as well as the consolidation of facilities.
Accordingly, the Company set up reserves for the expected cost of the
integration.
The Company originally estimated that the restructuring charges capitalized as
part of the acquisition would total $5.0 million as follows:
$2.8 million had been accrued for severance packages and a facility
closing in Canada. Some administrative departments including many accounting,
credit, MIS, human resource and customer service positions, were made redundant
following the acquisition. Also the former SHC head office in Lachine Quebec is
17
in the process of being closed with the warehouse operations being transferred
to the Company's existing distribution center in St. Hyacinthe, Quebec. To date
$1.7 million has been spent.
An amount of $0.6 million has been accrued to cover U.S. severance
packages (primarily in sales, credit and customer service) and the restructuring
of warehouse operations. To date this entire reserve has been realized. The
Company has also spent $0.3 million on restructuring and rationalizing European
operation, of an original estimate of $1.6 million.
The Company has reversed, within the one year time-frame from the
acquisition date, $1.3 million of accrued restructuring expenses and
consequently reduced the goodwill recognized on the acquisition by the same
amount.
In addition, the Company recognized $1.9 million in restructuring
expenses related to 1999 that consisted of $1.5 million to reflect the impact
(primarily employee severance costs) of re-organizing the operations with those
of the acquired company. As at December 31, 1999, $0.4 million remained unpaid.
A further $0.4 million was charged reflecting expenses incurred from the January
1998 ice storm. No amounts remain unpaid at year-end.
INTANGIBLE ASSETS
The Company has a significant amount of intangible assets on its balance
sheet. As at December 31, 1999 the Company had $85.7 million (1998-$95.7
million) representing 40.9% (1998- 46.2%) of total assets. This goodwill is
comprised of several components. Upon the acquisition of SHC the Company
recognized $53.1 million of goodwill (see note 2a p. 32). This amount, being the
difference between the purchase price and the amount of tangible net assets
acquired, represents the value to the Company of the brands acquired.
JOFA-Registered Trademark-, KOHO-Registered Trademark-, CANADIEN-TM-,
TITAN-Registered Trademark- and HEATON-REGISTERED Trademark- are world class
hockey brands and management believes that there is significant long-term
earning potential to be realized from the brands. Accordingly, the amortization
of this goodwill is over 25 years.
In connection with the Reorganization Plan and fresh-start accounting,
the Company recognized $49.0 million of excess reorganization value (see note
21, p. 49), which is another component of goodwill. This amount arose primarily
as debt forgiveness in the reorganization. It is included in goodwill because it
represents among other things the value of its premier CCM-Registered Trademark-
brand. Again management believes that significant long-term earning potential
exists and is amortizing the excess reorganization value over 20 years.
Also included in intangible assets are the financing costs related the debt
incurred in relation to the acquisition of SHC, which is being amortized over
the life of the debt.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
sovereign currencies and the Euro. The participating countries agreed to adopt
the Euro as their common legal currency on that date. Fixed conversion rates
between these participating countries' existing currencies (the legacy
currencies) and the Euro were established as of that date. The legacy currencies
are scheduled to remain legal tender as denominations of the Euro until at least
January 1, 2002 (but not later than July 1, 2002). During this transition
period, parties may settle transactions using either the Euro or a participating
country's legacy currency. The Company is addressing the potential impact
resulting from the Euro conversion, including competitive implications related
to pricing and foreign currency considerations.
18
Management currently believes that the introduction of the Euro will not
have a material impact related to pricing or foreign currency exposures. Finland
and Sweden, which are the locations of the Company's foreign subsidiaries, are
not member countries of the European Union, and as a result, did not adopt the
Euro. The subsidiaries' transactions and debt are denominated in their local
currencies. However, uncertainty exists as to the effects the Euro will have on
the marketplace.
YEAR 2000 CONVERSION
During 1999, the Company concluded its efforts to address the Year 2000
issue. The Year 2000 issue involves the inability of date-sensitive computer
applications to process dates beyond the year 2000. The Company's preparation
focused on identifying and mitigating risks involving the Company's internal
systems and supplier readiness. The Company addressed the Year 2000 issue
involving its internal systems through a combination of replacement and
remediation projects.
As of the date of this filing, March 21, 2000, the Company has not
encountered any significant business disruptions as a result of internal or
external Year 2000 issues. However, while no such occurrence has developed, Year
2000 issues may arise that may not become immediately apparent. Therefore, the
Company will continue to monitor and work to remediate any issues that may
arise. Although the Company expects not to be materially impacted, such future
events cannot be known with certainty.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, in the normal course of doing business, is exposed to
market risk from changes in foreign currency exchange rates and interest
rates. The Company's principal currency exposures relate to the Canadian
dollar and to certain European currencies. Management's objective, regarding
foreign currency risk is to protect cash flows resulting from sales,
purchases and other costs from the adverse impact of exchange rate movements.
The European and Canadian subsidiaries each have operating credit
facilities denominated in their respective local currencies, these debt
facilities are hedged by the operating revenues generated in the local
currencies of the subsidiaries. The Company's long term debt is denominated in
Canadian dollars (Cdn$135.8 million). The Company's equity investment in its
Canadian subsidiary is effectively hedged by the Canadian dollar denominated
debt. However, as the Company directly holds no debt denominated in the
currencies of its European subsidiaries, its equity investments in those
entities are exposed to foreign currency fluctuations. The Company does not
engage in speculative hedging activities.
The Company is exposed to changes in interest rates primarily as a
result of its long-term debt and operating credit facilities used to maintain
liquidity and fund capital expenditures. Management's objective, regarding
interest rate risk, is to limit the impact of interest rate changes on
earnings and cash flows and to reduce overall borrowing costs. To achieve
these objectives the Company maintains the ability to borrow funds in
different markets, thereby mitigating the effect of large changes in any one
market.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Reports of Independent Accountants
Ernst & Young L.L.P. 21
PriceWaterhouseCoopers 22
KPMG 23
Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1999 and 1998 24
Consolidated Statements of Operations
for the years ended December 31, 1999, 1998, April 12 through
December 31, 1997, January 1 through April 11, 1997 25
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1999, 1998, April 12 through
December 31, 1997, January 1 through April 11, 1997. 26
Statement of Comprehensive Income (Loss)
for the years ended December 31, 1999, 1998, April 12 through
December 31, 1997, January 1 through April 11, 1997 26
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998, April 12 through
December 31, 1997, January 1 through April 11, 1997 27
Notes to Consolidated Financial Statements 28-52
20
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
The Hockey Company (formerly SLM International, Inc.)
We have audited the accompanying consolidated balance sheet of The Hockey
Company (formerly SLM International, Inc.) as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1999, 1998 and for the periods
January 1, 1997 to April 11, 1997 and April 12, 1997 to December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit. We did not audit the balance sheet of KHF Sport Oy
or Jofa Holdings Group, wholly-owned subsidiaries acquired in 1998, which
statements reflects total assets and revenues of $31.2 million and $4.3 million
respectively, as of December 31, 1998. Those balance sheets were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the balance sheet data included for KHF Sports Oy and Jofa
Holdings Group, is based solely on the report of other auditors.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
On April 11, 1997, The Hockey Company (formerly SLM International, Inc.)
reorganized and emerged from bankruptcy. As discussed in Notes 1, 2 and 21 to
the consolidated financial statements, as a result of the reorganization, the
financial statements at December 31, 1997 reflect fresh-start reporting in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7. The consolidated financial statements as of December 31, 1997
and for the post reorganization period from April 12, 1997 to December 31, 1997
are presented on the new basis, and accordingly, are not comparable to the
financial statements for the period January 1, 1997 to April 11, 1997, which
have been prepared on a pre-reorganization basis.
In our opinion, based on our audits and, as to the balance sheets at December
31, 1999 and 1998, and the report of other auditors, the financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of The Hockey Company as of December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for the year
ended December 31, 1999, 1998, and the periods January 1, 1997 to April 11, 1997
and April 12, 1997 to December 31, 1997, in conformity with generally accepted
accounting principles in the United States.
Montreal, Canada /s/ Ernst & Young
March 10, 2000 Chartered Accountants
21
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of Jofa Holding Group.
We have audited the consolidated balance sheet of Jofa Holding Group as December
31, 1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audit.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Jofa Holding Group and Subsidiaries as of December 31, 1998, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with United States generally accepted accounting principles.
Borlange
February 12, 1999
PriceWaterhouseCoopers
22
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of KHF Sports Oy
We have audited the consolidated balance sheet of KHF Sports OY as of December
31, 1998 and the related consolidated statements of operations, stockholder's
equity and cash flows for the year ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audit.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
KHF Sports OY and Subsidiaries as of December 31, 1998, and the consolidated
results of their operations and their cash flows for the year ended December 31,
1998 in conformity with United States generally accepted accounting principles.
Helsinki
February 12, 1999
KPMG Wideri Oy Ab
23
THE HOCKEY COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
Dec. 31, 1999 Dec. 31, 1998
----------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 3,519 $ 2,593
Accounts receivable, net (See Note 3) 42,998 36,790
Inventories (See Note 4) 48,955 42,244
Prepaid expenses 2,622 3,513
Income taxes and other receivables 2,963 4,329
----------------------------------------
Total current assets $ 101,057 $ 89,469
Property, plant and equipment, net of accumulated depreciation (see note 5 ) 22,860 22,063
Intangible and other assets, net of accumulated amortization (See note 6) 85,694 95,646
----------------------------------------
Total assets $209,611 $ 207,178
----------------------------------------
----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term debt (See Note 7) $ 14,055 $ 8,572
Accounts payable 7,779 8,660
Accrued liabilities 11,855 11,899
Accrued restructuring expenses (See Note 2b, 10 and 11) 1,482 5,180
Accrued dividends payable 1,815 190
Income taxes payable 2,957 2,689
Other current liabilities 698 1,130
----------------------------------------
Total current liabilities $ 40,641 $ 38,320
Long-term debt (See Note 7) 94,171 88,568
Deferred income taxes (See Note 15) 66 182
----------------------------------------
Total liabilities $134,878 $ 127,070
----------------------------------------
Commitments and contingencies (See Notes 13,14 and 18)
11,096 10,870
13% Pay-In-Kind redeemable preferred stock (See Note 9)
Stockholders' equity
Commonstock, par value $0.01 per share, 15,000,000 shares authorized,
6,500,549 shares issued and outstanding at December 31, 1999
(1998-6,500,507) 65 65
Re-organization warrants, 300,000 issued and 299,451 outstanding (See Note2b) - -
Common stock purchase warrants, 159,127 issued and outstanding at
December 31, 1999 and December 31, 1998 (See Note 9) 1,665 1,665
Additional paid-in capital 66,515 66,515
Retained earnings 899 4,524
Foreign currency translation adjustments (5,507) (3,531)
----------------------------------------
Total stockholders' equity $ 63,637 $ 69,238
----------------------------------------
Total liabilities and stockholders' equity $ 209,611 $ 207,178
----------------------------------------
----------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
24
THE HOCKEY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31
(In thousands, except share data)
1999 1998(a) 1997(a) 1997(a)
New THC Old THC
Apr 12 -Dec31 Jan 1 - Apr. 11
--------------------------------------------------------------
Net sales $ 190,603 $ 110,817 $ 98,215 $ 25,539
Cost of goods sold 109,778 65,026 57,768 16,007
--------------------------------------------------------------
GROSS PROFIT 80,825 45,791 40,447 9,532
Selling, general and administrative expenses 58,990 35,272 26,916 11,321
Amortization of excess reorganization
value and goodwill 4,572 2,606 1,712 -
Restructuring and unusual charges (See Note 10) 1,900 - 6,315
--------------------------------------------------------------
OPERATING INCOME (LOSS) 17,263 6,013 11,819 (8,104)
Chapter 11 and debt related fees (See Note 11) - - - 1,243
Other (income) expense, net 1,736 (4,588) 519 193
Interest expense 12,025 4,108 3,808 114
--------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND 3, 502 6,493 7,492 (9,654)
EXTRAORDINARY GAIN ON DEBT DISCHARGE
Income taxes (see Note 15) 5,276 4,603 4,633 32
--------------------------------------------------------------
Income (loss) before extraordinary gain on
debt discharge (1,774) 1,890 2,859 (9,686)
Extraordinary gain on debt discharge - - - 58,726
--------------------------------------------------------------
NET INCOME (LOSS) $ (1,774) $ 1,890 $ 2,859 $ 49,040
--------------------------------------------------------------
--------------------------------------------------------------
Preferred stock dividends 1,625 190 - -
Accretion of 13% Pay-In-Kind preferred Stock 226 35 - -
--------------------------------------------------------------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (3,625) $ 1,665 $ 2,859 $ 49,040
--------------------------------------------------------------
--------------------------------------------------------------
Basic (loss) earnings per share(a)
(See Note 16) $ (0.54) $ 0.25
Diluted (loss) earnings per share (a)
(See Note 16) $ (0.54) $ 0.25
(a) Per share data is omitted because, due to the Reorganization Plan and the
implementation of fresh-start reporting, it is not meaningful.
The accompanying notes are an integral part of the consolidated financial
statements.
25
THE HOCKEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (Deficit)
Year ended December 31
(In thousands)
Common Stock Common Additional Retained Currency Total
# of Stock Amount Stock Paid-in Earnings Translation
Purchase Capital (Deficit) Adjustments
Warrants
------------------------------------------------------------------------------------------------
Balance at April 11, 1997 6,500 65 - 66,507 - - 66,572
Net income - - - - 2,859 - 2,859
Foreign currency translation adj. - - - - - (549) (549)
------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,500 $65 - $66,507 $2,859 $(549) $68,882
Net income 1,890 1,890
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Exercise of stock warrants (See 1 8 8
Note 8)
Issuance of common stock purchase 1,665 1,665
warrants (See Note 8)
Dividend on preferred stock (190) (190)
(see note 9)
Accretion of 13% Pay-in-Kind (35) (35)
preferred stock
Foreign currency translation adj. (2,892) (2,892)
------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,501 $65 $1,665 $66,515 $4,524 $(3,531) $69,238
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Net income (1.774) (1,774)
Exercise of stock warrants (See
Note 8)
Dividend on preferred stock (1,625) (1,625)
(see note 9)
Accretion of 13% Pay-in-Kind (226) (226)
preferred stock
Foreign currency translation adj. (1,976) (1,976)
------------------------------------------------------------------------------------------------
Balance at December 31, 1999 6,501 $65 $1,665 $66,515 $899 $(5,507) $63,637
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Year ended December 31
(In Thousands)
1999 1998 1997 1997
---- ---- ----
APR. 12 TO JAN. 1 TO
DEC. 31 APR. 11
-------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ (1,774) $ 1,890 $ 2,859 $ 49,040
Foreign currency translation adjustments (1,976) (2,982) (549) 85
-------------------------------------------------------------
Comprehensive income (loss) for the year (3,750) (1,092) 2,310 49,125
-------------------------------------------------------------
-------------------------------------------------------------
ACCUMULATED COMPREHENSIVE INCOME (LOSS)
- ---------------------------------------
Balance at the beginning of year $ 1,218 2,310 0 (185,942)
Comprehensive income (loss) for the year (3,750) (1,092) 2,310 49,125
Re-organization adjustments (note 2) - - - 136,817
-------------------------------------------------------------
BALANCE AT END OF YEAR (2,532) 1,218 2,310 0
-------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
26
THE HOCKEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
(In thousands)
1999 1998 1997 1997
----------------------------------------------------------
Apr. 12 - Jan 1 -
Dec 31 Apr. 11
----------------------------------------------------------
OPERATING ACTIVITIES:
Net (loss) income $ (1,774) $ 1,890 $ 2,859 $ 49,040
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities:
Depreciation and amortization 10,664 7,145 3,807 6,315
Change in provisions for inventory, doubtful accounts and other 6,352 2,623 9,791 807
Deferred income taxes (245) (258) 918 2,301
Provision in lieu of taxes 3,519 3,418 2,985
Loss (gain) on sale and disposal of fixed assets 24 (71) (160) 5
Loss (gain) on foreign exchange 1,475 (1,373) 649 263
Extraordinary gain on discharge of debt - (58,726)
Restructuring charges 1,453
Change in operating assets and liabilities:
Accounts receivable (10,899) 6,456 (15,697) 14,660
Inventories (7,087) 1,448 12,176 (7,026)
Prepaid expenses 916 (511) 371 596
Income tax receivable 249 (447) 80 44
Other receivables 1,191 (1,755) (618) 176
Accounts payable and accrued liabilities (2,893) (1,752) (7,941) (1,450)
Interest payable (699) 117 1,145
Income taxes payable 174 378 522 240
Other (91) 357 28
Net effect of discontinued operations 189
----------------------------------------------------------
Net cash (used in) provided by operating activities $ 876 $ 19,118 $ 10,915 $ 7,343
----------------------------------------------------------
INVESTING ACTIVITIES:
Acquisition of a subsidiary, net of cash acquired (62,933) - -
Proceeds of sales of subsidiary - 1,831 -
Purchases of fixed assets (4,821) (3,480) (1,732) (285)
Proceeds from sales of fixed assets 172 146 535 73
----------------------------------------------------------
Net cash (used in) provided by investing activities (4,649) (66,267) $ 634 $ (212)
----------------------------------------------------------
FINANCING ACTIVITIES:
Net change in short-term borrowings 5,428 2,979 (4,685) -
Principal payments on debt (300) (70,924) - (89)
Proceeds from long-term debt - 102,500 (2,929) -
Exercise of warrants - 8 - -
Issuance of redeemable preferred stock - 10,835
Issuance of common stock purchase warrants - 1,665
Deferred financing costs - (5,288) (63) (2,146)
Liabilities subject to compromise (432) - - (36,098)
----------------------------------------------------------
Net cash (used in) provided by financing activities $ 4,696 $ 41,775 $ (7,677) $ (38, 333)
----------------------------------------------------------
Effects of foreign exchange rate changes on cash 3 (84) (277) (22)
----------------------------------------------------------
Increase (Decrease) in cash $ 926 $ (5,458) $ 3,595 $ (31,133)
Cash and cash equivalents at beginning of period 2,593 8,051 4,456 35,589
----------------------------------------------------------
Cash and cash equivalents at end of period 3,519 $ 2,593 $ 8,051 $ 4,456
----------------------------------------------------------
----------------------------------------------------------
SUPPLEMENTAL INFORMATION
Cash taxes paid 2,714 100 130 (22)
Cash interest paid 12,153 4,000 2,531 -
The accompanying notes are an integral part of the consolidated
financial statements.
27
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS, CHANGE OF CORPORATE NAME AND PRINCIPLES OF
CONSOLIDATION:
The Hockey Company was incorporated in September 1991 and reorganized in
April 1997.
On January 31, 1999, the Board of Directors of The Hockey Company
unanimously adopted an amendment to the Company's Certificate of Incorporation
to change the name of the Company from SLM International Inc. to The Hockey
Company. The amendment was filed with the Secretary of the State of the State of
Delaware on February 9, 1999.
The consolidated financial statements include the accounts of THC and its
wholly-owned subsidiaries (collectively, the "Company"). The Company designs,
develops, manufactures and markets a broad range of sporting goods. The Company
manufactures hockey and hockey related products, including hockey uniforms,
hockey sticks, protective equipment, hockey, figure and inline skates as well as
street hockey products, marketed under the CCM-Registered Trademark-,
KOHO-Registered Trademark-, JOFA-Registered Trademark-, TITAN-Registered
Trademark-, CANADIEN-TM- and HEATON-Registered Trademark- brand names, and
private label brands and licensed sports apparel under CCM-Registered Trademark-
and #1 APPAREL-TM- brand names. The Company sells its products worldwide to a
diverse customer base consisting of mass merchandisers, retailers, wholesalers,
sporting goods shops and international distributors. The Company manufactures
and distributes most of its products at facilities in North America, Finland and
Sweden and sources products internationally.
B. BASIS OF PRESENTATION:
THC and six of its subsidiaries (collectively, "Old THC") filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code (the
"Filing") in the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court") on October 24, 1995 (the "Petition Date"). On September
12, 1996, Old THC filed a Chapter 11 Plan of Reorganization and on November 13,
1996, Old THC filed a First Amended Chapter 11 Plan of Reorganization as amended
from time to time (the "Reorganization Plan") with the Bankruptcy Court. On
January 23, 1997, the Bankruptcy Court confirmed the Reorganization Plan which
became effective on April 11, 1997 (the "Effective Date") and Old THC emerged
from bankruptcy ("New THC") (see Notes 2 and 21).
The accompanying consolidated financial statements for the year ended
December 31, 1997 have been prepared in accordance with generally accepted
accounting principles applicable to a going concern which, except as otherwise
disclosed, assumes that assets will be realized and liabilities will be
discharged in the normal course of business. The financial statements prior to
the Effective Date do not include any adjustments which resulted from the
Reorganization Plan. The Reorganization Plan had a significant impact on the
financial statements of New THC and the Company accounted for such
Reorganization Plan using "fresh-start" reporting (see Note 21).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
28
C. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of cash and highly liquid short-term
investments with original maturities of three months or less. The Company
invests excess funds in bank term deposits, Canadian Government promissory notes
and in U.S. Treasury bills. At December 31, 1999, the Company had $1,185
(1998-$80) invested in bank term deposits and $nil (1998-$325) in Quebec
Government promissory notes secured by a Canadian bank.
D. CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of temporary cash investments and
accounts receivable. The Company restricts its cash investments to temporary
investments in institutions with high credit standing and to short-term
securities backed by the full faith and credit of the United States and Canadian
and Quebec Governments. The Company sells its products principally to retailers
and distributors and, in accordance with industry practice, grants extended
payment terms to qualified customers. Concentration of accounts receivable
credit risk is mitigated due to the performance of credit reviews that are
considered in determining credit policies and allowances for doubtful accounts.
The Company provides allowances for expected sales returns, net of related
inventory cost recoveries, discounts, rebates and cooperative advertising. The
Company does not collateralize its receivables, except with respect to its debt
agreements as described in Note 7 in the Notes to Consolidated Financial
Statements. In 1999, no single account receivable represented more than 10% of
the Company's consolidated net sales.
E. REVENUE RECOGNITION:
Revenue is recognized when products are shipped to customers.
F. INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. The Company provides allowances for
excess, obsolete and slow moving inventories.
G. RESEARCH & DEVELOPMENT EXPENSES:
Costs for new product research and development as well as changes to
existing products are expensed as incurred and totaled $2,289, $1,171 and $1,096
for the years ended December 31, 1999, 1998, and 1997, respectively. During the
year ended December 31, 1997, $611 of the expense was incurred from April 12
through December 31, 1997.
H. PREPAID EXPENSES:
The Company expenses advertising and promotion costs as incurred. Royalty
payments are deferred to the extent that the related sales have not yet been
recorded. Such costs are included in prepaid expenses.
I. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using
principally the straight-line method of depreciation.
29
The estimated service lives of the respective assets are as follows:
Years
-----
Buildings and improvements 5 - 40
Machinery and equipment 3 - 10
Tools, dies and molds 3 - 5
Office furniture and equipment 3 - 10
Accelerated methods of depreciation are used where permitted for tax
reporting purposes. Significant additions or major improvements are capitalized,
while normal maintenance and repair costs are expensed. When assets are sold,
retired or otherwise disposed of, the applicable costs and accumulated
depreciation are removed from the accounts, and the resulting gain or loss is
recognized.
The Company periodically reviews property, plant and equipment for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. When such circumstances occur, the
Company estimates future cash flows expected to result from the use and eventual
disposition of the assets. If the expected future cash flows are less than the
carrying amount, the Company recognizes an impairment loss (see Note 10).
J. INCOME TAXES:
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense consists of both the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
The Company does not provide for withholding income taxes on the
undistributed earnings of its non-U.S. subsidiaries, since such earnings are not
expected to be remitted to the Company in the foreseeable future. The Company
has provided, in its U.S. tax provision, taxes on all of the unremitted earnings
of its non-U.S. subsidiaries to December 31, 1999.
Fresh-start reporting requires the Company to report a provision in lieu
of income taxes when there is a book taxable income and utilization of a
pre-reorganization net operating loss carry-forward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carry-forward and other deferred tax assets would eliminate the related federal
income tax payable. The current and future year tax benefit related to the carry
forward is recorded as a reduction of reorganizational value in excess of
amounts allocable to identifiable assets until exhausted and then as a direct
increase to paid-in capital.
K. FOREIGN CURRENCY TRANSLATION:
The balance sheets of the Company's non-U.S. subsidiaries are translated
into U.S. dollars at the exchange rates in effect at the end of each year.
Revenues, expenses and cash flows are translated at weighted average rates of
exchange. Gains or losses resulting from foreign currency transactions are
included in earnings, while those resulting from translation of financial
statement balances are shown as a separate component of stockholders'
30
equity. The functional currencies of the Company's non-U.S. subsidiaries, which
are primarily located in Canada, Finland and Sweden, are the respective local
currencies in each foreign country.
The net investment in the Canadian subsidiary is being hedged up to the
extent of the Company's Canadian dollar denominated debt.
L. INTANGIBLE ASSETS:
Intangible assets are recorded at cost and are amortized on a
straight-line basis. These amounts include the excess purchase price over fair
values assigned ("goodwill"), reorganizational value in excess of amounts
allocable to identifiable assets ("excess reorganizational value") (see Notes 2,
6 and 21) and deferred financing costs (amortized over the life of the
financing). Goodwill is amortized on a straight-line basis over twenty-five
years. Excess reorganizational value is amortized on a straight-line basis over
twenty years and is being reduced by the realization of deferred tax assets.
The Company periodically reviews intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. When such circumstances occur, the Company estimates
future cash flows expected to result from the use and eventual disposition of
the intangibles. If the expected future cash flows are less than the carrying
amount, the Company recognizes an impairment loss.
M. EARNINGS PER SHARE:
Basic and diluted earnings per share of common stock are computed based
on the average number of shares of common stock assumed to be outstanding during
each year. Common stock equivalents are included when dilutive (see Notes 8, 9,
16 and 17).
2. SIGNIFICANT ACTIVITIES
a) Business Acquisition - Sports Holdings Corporation
Effective November 19, 1998 ("Acquisition Date"), the Company acquired
all of the issued and outstanding capital stock of Sports Holdings Corporation,
a privately held manufacturer and distributor of hockey equipment sold under the
Canadien-TM-, Heaton-Registered Trademark-, Titan-Registered Trademark-,
Jofa-Registered Trademark- and Koho-Registered Trademark- brand names, with
operations in Canada, the United States, Finland and Sweden. The operations are
carried out through Tropsport Acquisitions Inc. in Canada, SHC Hockey Inc.
(formerly Karhu U.S.A. Inc.) in the United States, KHF Sports Oy in Finland, and
JOFA Holding AB, JOFA AB, and JOFA Norge A/S in Sweden, all of which were
100-owned by Sports Holdings Corp. at the Acquisition Date. The acquisition has
been accounted for using the purchase method and, accordingly, the purchase
price was allocated to the acquired assets and liabilities based on their
estimated fair value as at the Acquisition Date. The excess of the purchase
price over the fair value of the identifiable net assets acquired has been
recorded as goodwill and is being amortized on a straight-line basis over a
period of 25 years.
The results of operations related to this acquisition have been included
in these consolidated financial statements from the effective date of
acquisition.
31
Details of the acquired assets and liabilities at fair value are as
follows:
$
- -------------------------------------------------------------------------------------------------------------------
Cash 2,727
Current assets net of current liabilities 22,427
Property, plant and equipment 12,244
Long-term debt (24,830)
----------------
IDENTIFIABLE ASSETS IN EXCESS OF IDENTIFIABLE LIABILITIES 12,568
CONSIDERATION PAID
Cash consideration 63,553
Acquisition costs 2,107
----------------
TOTAL CONSIDERATION PAID 65,660
GOODWILL ON ACQUISITION 53,092
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
In connection with the above acquisition, Sports Holdings Corp. undertook
a rationalization program which included severance and related employee costs
and anticipated costs related to the modification or closure of certain
facilities in North America and Europe.
The restructuring and acquisition-related charges were determined based
on formal plans approved by the Company's management using the best information
available to it at the time. The amounts the Company may ultimately incur may
change as the balance of the Company's initiative to integrate the businesses
related to this acquisition is executed.
The related restructuring costs approximated $5,019 and have been
included in the above purchase price allocation. The disposition of these
amounts to December 31, 1999 can be summarized as follows:
- -------------------------------------------------------------------------------------------------------------------
LIABILITY
Total restructuring costs capitalized in the purchase price allocation at November 19, 1998 5,019
1998 Translation adjustments (35)
Amount of restructuring costs paid for the period November 19, 1998 to December 31, 1998 (1,191)
- -------------------------------------------------------------------------------------------------------------------
Remaining liability included on the December 31, 1998 Consolidated Balance Sheet 3,793
- -------------------------------------------------------------------------------------------------------------------
1999 Translation adjustments 66
Amount of restructuring costs reversed in 1999 (1,370)
Amount of restructuring costs paid for the period January 1 to December 31, 1999 (1,521)
- -------------------------------------------------------------------------------------------------------------------
Remaining liability included on the December 31, 1999 Consolidated Balance Sheet 968
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
32
b) REORGANIZATION CASE
- - On April 11, 1997 the Company emerged from bankruptcy.
- - Under the Reorganization Plan, among other things:
- - Old THC's secured creditors received $44,213 in cash, $29,500 principal
in new senior notes (the "Senior Secured Notes") and 2,470,000 shares of
new common stock (the "New Common Stock") of New THC, in exchange for
approximately $108,000 of secured and unsecured indebtedness (which
amount includes the secured creditors' estimate of post-filing interest
and expenses). The 2,470,000 shares of New Common Stock represented
(before dilution) 38.0% of the ownership of New THC. The lenders sold
such shares to W.S. Acquisition L.L.C. on the Effective Date. The Senior
Secured Notes had a term of seven years with principal payments beginning
in the fifth year. On March 16, 1998, the Company prepaid the Senior
Secured Notes in full (see Note 7).
- - Old THC's unsecured creditors received 4,030,000 shares of New Common
Stock representing, at the time of issuance, 62.0% of the ownership of
New THC, subject to dilution upon the exercise of warrants distributed to
equity security holders and stock options which have been or may be
issued to New THC's officers and key personnel (up to 15.0% of the New
Common Stock at varying exercise prices), in exchange for approximately
$120,000 of unsecured indebtedness. For purposes of the Reorganization
Plan, the New Common Stock was valued at approximately $10.16 per share.
- - Old THC's equity security holders (who held 18,859,679 shares of Common
Stock plus the 1,000,000 shares to have been issued pursuant to the
settlement of a securities litigation lawsuit) received a total of
300,000 5-year warrants to purchase an aggregate of 300,000 shares of New
Common Stock at an exercise price of $16.92 per share. In addition, the
warrant holders have the option to receive an aggregate payment of $0.5
million upon cancellation of such warrants in connection with a sale of
the Reorganized Company for more than $140,000.
c) LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Substantially all the Company's liabilities as of the Petition Date were
subject to compromise under a plan of reorganization, except as otherwise
provided by order of the Bankruptcy Court. The Company was generally not
permitted to make payments with respect to its pre-Petition Date liabilities
until a plan of reorganization was confirmed by the Bankruptcy Court and
consummated.
Liabilities subject to compromise under reorganization proceedings
consist of priority claims, the repayment of which the Company is required to
prioritize under bankruptcy law, which are comprised principally of income and
property tax claims. At December 31, 1999, and December 31, 1998, priority
claims of $698 and $1,130, respectively remain subject to resolution with the
Bankruptcy Court.
33
3. ACCOUNTS RECEIVABLE
Net accounts receivable include:
- ---------------------------------------------------------------------------------------------------------
1999 1998
----------------------------------
Allowance for doubtful accounts $ 2,237 $ 2,444
Allowance for returns, discounts, rebates and
Cooperative advertising 5,541 5,384
- ---------------------------------------------------------------------------------------------------------
$ 7,778 $ 7,828
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Bad debt (recovery) expense for the years ended December 31, 1999, 1998,
and 1997 was $480, ($1,387), and $716, respectively. Bad debt expense for the
year ended December 31, 1997 includes $468 incurred during April 12 through
December 31, 1997.
4. INVENTORIES
Net inventories consist of:
- ---------------------------------------------------------------------------------------------------------
1999 1998
---------------------------------------
Finished products $ 36,344 $ 31,659
Work in process 2,679 2,145
Raw materials and supplies 9,932 8,440
- ---------------------------------------------------------------------------------------------------------
$ 48,955 $ 42,244
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Allowances for excess, obsolete and slow moving inventories were $2,369
and $3,150 at December 31, 1999 and 1998, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
1999 1998
-----------------------------------------
Land and improvements $ 247 $ 236
Buildings and improvements 6,612 6,307
Machinery and equipment 15,960 13,354
Tools, dies and molds 3,173 1,718
Office furniture and equipment 4,504 4,053
-----------------------------------------
30,496 25,668
Less accumulated depreciation and amortization 7,636 3,605
- ---------------------------------------------------------------------------------------------------------
$ 22,860 $ 22,063
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Depreciation and amortization expense for the years ended December
31, 1999,1998, and 1997, was $4,330, $2,585, and $2,371, respectively.
Depreciation and amortization expense for the year ended December 31, 1997
includes $1,571 for April 12 through December 31, 1997.
34
6. INTANGIBLE AND OTHER ASSETS
Net intangible and other assets consist of:
1999 1998
-------------------------------------------
Goodwill $ 49,615 $ 52,913
Excess Reorganization intangible 32,639 37,485
Deferred Financing Costs 3,349 5,248
Other 91 370
- ---------------------------------------------------------------------------------------------------------
$ 85,694 $ 95,646
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Amortization expense for intangible assets was $ 6,334, $4,560 and $2,236
at December 31, 1999, 1998 and 1997, respectively.
Excess reorganizational value was reduced by $2,574 for the year ended
December 31, 1999 by the realization of deferred tax assets (reduced by $3,418
in 1998 and by $2,985 from April 12 through December 31, 1997).
Goodwill was also reduced by $2,315 for the year ended 1999 by the
realization of $945 of deferred tax assets and the reversal of $1,370 for a
restructuring provision taken at the time of the acquisition of SHC (Note 2a).
7. REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT
a) REVOLVING CREDIT FACILITIES
Revolving credit facilities consist of the following:
1999 1998
Revolving credit facilities with General Electric Capital Inc. $ 11,421 $8,572
Revolving credit facilities with MeritaNordBanken Sweden 2,634 -
-----------------------------------
$ 14,055 $8,572
i) Effective November 19, 1998, two of the Company's U.S.
subsidiaries, Maska U.S. Inc. and SHC Hockey Inc. entered into a credit
agreement (the "New U.S. Credit Agreement") with the lenders referred to
therein and with General Electric Capital Corporation as Agent and
Lender. Simultaneously, two of the Company's Canadian subsidiaries, Sport
Maska Inc. and Tropsport Acquisitions Inc. entered into a credit
agreement (the "New Canadian Credit Agreement") with the lenders referred
to therein and General Electric Capital Canada Inc. as Agent and Lender.
The maximum amount of loans and letters of credit that may be outstanding
under the two credit agreements (collectively, the "New Credit
Agreements") is U.S. $70
35
million, $35 million for each of the New Credit Agreements (or its
Canadian dollar equivalent in the case of the Canadian Credit Agreement).
Each of the New Credit Agreements is subject to a minimum excess
requirement of $1,750. The New Credit Agreements are collateralized by
eligible accounts receivable and inventories of the borrowers and are
further collateralized by a guarantee of the Company and its other
subsidiaries. Total borrowings outstanding (excluding outstanding letters
of credit) under the New Credit Agreements at December 31, 1999 amount to
$11,421 (1988 - $8,572). The New Credit Agreements are for a period of
two years with a possible extension of one year by the Company.
Borrowings under the New U.S. Credit Agreements bear interest at
rates of either U.S. prime rate (8.50% at December 31, 1999) (1998-8.25%)
plus 0.25%-1.00% or LIBOR plus 1.50%-2.50% (there were no LIBOR-based
borrowings at year end) depending on the borrower's Operating Cash Flow
Ratio, as defined in the agreement. Borrowings under the New Canadian
Credit Agreement bear interest at rates of either the Canadian prime rate
(6.50% at December 31, 1999) (1998-6.50%) plus 0.75%-2.00% or LIBOR plus
0.75%-2.00% (there were no LIBOR-based borrowings at year end) depending
on the borrower's Operating Cash Flow Ratio, as defined in the agreement.
In addition, the borrowers are charged a monthly commitment fee at an
annual rate of up to 3/8 of 1% on the unused portion of the revolving
credit facilities under the New Credit Agreements and certain other fees.
The New Credit Agreements contain customary negative and affirmative
covenants including those relating to capital expenditures, total
indebtedness to EBITDA, minimum interest coverage and fixed charges
coverage ratio.
ii) Effective March 18, 1999, Jofa AB, a Swedish subsidiary of the
Company, entered into a credit agreement with MeritaNordbanken in Sweden.
The maximum amount of loans and letters of credit that may be outstanding
under the agreement is SEK 50 million ($6 million). The facility is
collateralized by the assets of the Company, excluding intellectual
property, bears interest at a rate of STIBOR (3.95% at December 31, 1999)
plus 0.65% and is renewable annually. Total borrowings as at December 31,
1999 were SEK 22.4 million ($2,634).
Effective July 14, 1999, KHF Sports Oy, a Finnish subsidiary of the
Company, entered into a credit agreement with MeritaNordbanken in
Finland. The maximum amount of loans and letters of credit that may be
outstanding under the agreement is FIM 30 million ($5.3 million). The
facility is collateralized by the assets of the Company and bears
interest at a rate of EURIBOR (3.34% at December 31, 1999) plus 2.0% and
is renewable annually. There were no borrowings as at December 31, 1999.
(iii) During March 1998, the Company amended its old credit agreements
(the "Amended Credit Agreements") to take advantage of its improved
borrowing capacity. In completing the amendments the Company redeemed, in
full, its Senior Secured Notes and all amounts outstanding under the
$4,000 Term Loan under its old U.S. credit agreement. The redemptions
were effected by the Amended Credit Agreements (additional revolving
credit loan borrowings under the Amended Credit Agreements and the
Amended Term Loan) and use of the Company's cash on hand. The maximum
amount of loans that may have been outstanding under the Amended Credit
Agreements was $60.0 million, consisting of $45.0 million revolving
credit loans and a $15.0 million term loan (the "Amended Term Loan").
Borrowings under the Amended Credit Agreements bore interest at an
alternate base rate per annum or at an interest rate based on LIBOR plus
1 3/4% per annum on Amended U.S. revolving credit loans, at Chase
Canada's prime rate or at an alternate base rate per annum on Canadian
revolving credit loans, and an alternate base rate plus1/4per annum or at
an interest rate based on LIBOR plus 2% per annum on the Amended Term
Loan. Interest and
36
principal on the Amended Term Loan were payable in quarterly installments
($0.6 million principal) through April 2000, beginning in April 1998.
The old credit agreements were fully repaid and the Amended Credit
Agreements were canceled when the Company entered into the New Credit
Agreements with General Electric Capital Inc.
The weighted average interest rate on short-term debt outstanding at
December 31, 1999 , 1998 and 1997 was 8.32% , 11.3% and 8.2%,
respectively.
b) LONG-TERM DEBT
The Company's long-term debt at December 31 was as follows:
1999 1998
Secured loans from Caisse de Depot et Placement du Quebec
Canadian $135,800) $ 94,092 $ 88,182
Other long-term debt 79 386
------------------------------------------
94,171 88,568
Less: amounts contractually due within one year - -
------------------------------------------
Total long-term debt, excluding current portion $ 94,171 $ 88,568
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
SECURED LOANS
On November 19,1998, in connection with its acquisition of Sports
Holdings Corp., the Company and Sport Maska Inc. entered into a Secured Loan
Agreement with the Caisse de Depot et Placement du Quebec to borrow a total of
Canadian $135,800. The loan is for a period of two years, maturing November 19,
2000 and will be extended for an additional one year term at the Company's
request and upon payment of an extension fee (1% of principal amount). The loan
bears interest at a rate equal to the Canadian Bankers' Acceptance Rate plus 4%
or the Canadian Prime Rate plus 4.5%. At December 31, 1999 the interest rate was
11.00%.
The loan is collateralized by all of the tangible and intangible assets
of the Company subject to the prior ranking claims on accounts receivable and
inventories by the lenders under the Company's revolving credit facilities (see
Note 7a). The loan is guaranteed by the Company and all of its subsidiaries in
Canada and the U.S. and by certain subsidiaries in Finland and Sweden.
The loan contains customary negative and affirmative covenants including
those relating to capital expenditures, total indebtedness to EBITDA, minimum
total EBITDA and minimum interest coverage.
SENIOR SECURED NOTES
On April 11, 1997 the Company issued $29,500 principal amount of 14%
Senior Secured Notes due April 1, 2004 (the "Senior Secured Notes"), pursuant to
an Indenture with The Bank of New York, as trustee. The Senior Secured Notes
were issued by the Company under the Reorganization Plan as partial satisfaction
of the Company's obligations to its former secured lenders under the Loan and
Security Agreement referred to below.
37
Interest was payable on the Senior Secured Notes semi-annually at the
rate of 14% per annum, with such interest rate being permanently reduced by up
to 4% if the Company met certain earnings tests. Further, of the initial 14%
interest rate, 10% was payable in cash and 4% was payable in cash or by the
issuance of additional Senior Secured Notes. On October 1, 1997, the Company
elected to make the entire first interest payment in cash.
The Senior Secured Notes were guaranteed by certain subsidiaries and were
collateralized by substantially all of the assets of the Company (including,
without limitation, accounts receivable, inventory and the stock of certain
subsidiaries). The lien of the trustee for the benefit of itself and the Senior
Secured Noteholders was junior to the liens of Chase and Chase Canada. The
Indenture also included customary affirmative and negative covenants.
In March 1998, the Company redeemed, in full, the Senior Secured Notes
with the proceeds of additional borrowings under its Amended Credit Agreements
and with the proceeds from the Amended Term Loan in the principal amount of
$15,000 bearing interest at an alternate base rate plus 0.25% per annum or at an
interest rate based on LIBOR plus 2.00% per annum. Interest and principal on the
New Term Loan was payable in quarterly installments ($625 principal) through
April 2000, beginning in April 1998. The New Term Loan was repaid in full when
the Company entered into its Secured Loan Agreement on November 19, 1998.
At December 31, 1999, future maturities of long-term debt based upon
original terms were:
---------------------------------------------------------
2000 -
2001 $94,171
2002 -
2003 -
2004 and beyond -
---------------------------------------------------------
Based on the borrowing rates currently available to the Company for bank
loans and other financing with similar terms, the Company estimated that the
fair value of its short-term debt and long-term debt at December 31, 1999 and
1998 was equivalent to the carrying values in the financial statements. These
values represent a general approximation of possible value and may never be
realized.
8. EQUITY TRANSACTIONS
As of the Effective Date, New THC had 15,000,000 shares of New Common
Stock authorized. In addition, in April 1997, New THC issued 300,000 5-year
warrants to Old THC's shareholders to purchase an aggregate of 300,000 shares of
New Common Stock at an exercise price of $16.92 per share. During the year ended
December 31, 1999, New THC issued 42 share of New Common Stock with respect to
the exercise of warrants. At December 31, 1999, 6,500,549 shares of New Common
Stock were issued and outstanding. The Company also has 1,000,000 shares of
preferred stock authorized at December 31, 1999.
On November 19, 1998, the Company issued (to the preferred shareholders)
warrants to purchase 159,127 shares of New Common Stock of the Company at a
purchase price of $.01 per share for a cash consideration of $1,665.
38
9. PREFERRED STOCK
On November 19, 1998, the Company issued 100,000 shares of 13%
Pay-In-Kind redeemable, $0.01 par value per share, cumulative preferred stock
together with warrants to purchase 159,127 common shares of the Company at a
purchase price of $0.01 per share, for cash consideration of $12,500 (par
value).
The fair value of the warrants was determined to be $1,665 and has been
recorded in Stockholder's Equity as common stock purchase warrants. The balance
of the proceeds, $10,835, has been recorded as 13% Pay-In-Kind preferred stock.
The difference between the redemption value of the preferred stock and the
recorded amount is being accreted on a straight-line basis over the seven-year
period ending November 19, 2005, by a charge to retained earnings.
Dividends, which are payable semi-annually from November 19, 1998, may be
paid in cash or in shares of the 13% Pay-In-Kind preferred stock, at the
Company's option. The preferred stock is non-voting. If the Company fails to
redeem the preferred stock on or before November 19, 2005 and for a sixty day
period or more after being notified of its failure to redeem the preferred
stock, then the preferred stockholders, as a class of stockholders, have the
option to elect one director to the Company's Board of Directors with the
provision that the preferred stockholders are to elect 28% of the Company's
directors. At December 31, 1999 unpaid dividends of $1,815 (1998-$190) have been
accrued on the preferred stock and are included in accrued liabilities.
The preferred stock is redeemable, at any time after November 19, 2000,
in whole or in part, at the option of the Company, at a redemption price
(together with all accumulated and unpaid dividends) as follows:
YEAR PERCENTAGE OF PAR VALUE
2000 106.500%
2001 104.333%
2002 102.166%
2003 and thereafter 100.000%
The preferred stock must be redeemed by the Company upon a change of
control or by November 19, 2005.
10. RESTRUCTURING AND UNUSUAL CHARGES
During 1998, as a result of the acquisition of Sports Holdings Corp., the
Company recorded significant restructuring charges totaling $1,453 to reflect
the impact of reorganizing its operations with those of the acquired company.
The costs consist primarily of employee and related severance costs that have
been accounted for as an unusual item.
- ---------------------------------------------------------------------------------------------------------------
EXPENSE
Total restructuring charges recorded at November 19, 1998 1,453
Amount of restructuring costs paid for the period November 19, 1998 to December 31, 1998 (101)
- ---------------------------------------------------------------------------------------------------------------
Unpaid Charges as at the December 31, 1998 1,352
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
39
Translation Effects 97
Amount of restructuring costs paid for the period January 1 to December 31, 1999 (1,010)
- ---------------------------------------------------------------------------------------------------------------
Unpaid Charges as at the December 31, 1999 439
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Also during 1998, some unrecoverable costs totaling $447 resulting from a
severe ice storm that struck the northeastern parts of North America were
accounted for as an unusual item.
11. CHAPTER 11 AND DEBT RELATED FEES
As a result of the Company's Filing, Old THC's continuing operations
incurred significant legal and professional fees totaling $1,243 ($75 still
unpaid at December 31, 1999 (1998 - $112)) for January 1 through April 11, 1997.
These fees include the cost of the Company's legal counselors, financial
advisors and consultants, as well as those of its bankers, senior noteholders
and creditors. The Chapter 11 and debt related fees for January 1, 1997 through
April 11, 1997 are net of $500 of interest earned on accumulated cash resulting
from the Filing. These costs are included as Chapter 11 and debt related fees in
the Consolidated statements of Operations.
12. RELATED PARTY TRANSACTIONS
In 1998, the Company paid its controlling shareholder, Wellspring Capital
Management LLC a fee of $975 for investment banking services provided in
connection with the acquisition of Sports Holdings Corp. and related acquisition
financing. During 1998 the Company issued 100,000 shares of 13% Pay-In-Kind
preferred stock to Phoenix Home Life Mutual Insurance Company, a common
shareholder (see Note 9).
Old THC (including discontinued operations) leased property from
companies controlled by certain former officers and directors of Old THC.
Related party rent expense for January 1 through April 11, 1997 was $617.
13. LEASES
Certain of the Company's subsidiaries lease office and warehouse
facilities and equipment are under operating lease agreements. Some lease
agreements provide for annual rent increases based upon certain factors
including the Consumer Price Index.
The following is a schedule of future minimum lease payments under
non-cancelable operating leases with initial terms in excess of one year at
December 31, 1999:
$
2000 3,176
2001 2,777
2002 2,449
2003 2,151
2004 and beyond 3,197
--------------------------------------------------------
$ 13,750
--------------------------------------------------------
--------------------------------------------------------
40
Rental expense, including those to related parties (in 1997), for the
years ended December 31, 1999, 1998 and 1997 was approximately $3,293, $2,724
and $3,022, respectively. Rental expense for the year ended December 31, 1997
includes $1,938 for April 12 through December 31, 1997.
14. ROYALTIES AND ENDORSEMENTS
Certain of the Company's subsidiaries have entered into agreements
which call for royalty payments generally based on net sales of certain products
and product lines. Certain agreements require guaranteed minimum payments over
the royalty term. The Company pays also certain professional players and teams
an endorsement fee in exchange for the promotion of the Company's brands. The
following is a schedule of the future minimum payment and annual obligation
under these contracts.
$
2000 8,279
2001 7,020
2002 6,327
2003 6,208
2004 and beyond 9,122
---------------------------------------
$ 36,956
---------------------------------------
---------------------------------------
Royalty and endorsement expenses for the years ended December 31, 1999
and 1998 was $7,436, $3,247 and $3,401 (of which $2,261 relates to the period
April 12 through December 31), respectively.
15. INCOME TAXES
The components of income taxes are:
1999 1998 1997 1997
---- ---- ---- ----
APRIL 12 JANUARY 1
THROUGH THROUGH
DECEMBER 31 APRIL 11
--------------------------------------------------------------------
Current: U.S. $ 468 $ 140 $ 165 $ 18
Non-U.S. 1,534 1,303 565 14
- --------------------------------------------------------------------------------------------------------------------------
2,002 1,443 730 32
- --------------------------------------------------------------------------------------------------------------------------
Deferred: U.S. (352) - - -
Non-U.S. 107 (258) 918 -
(245) (258) 918 -
Provision in Lieu of Taxes: U.S. 3,201 2,400 1,150 -
Non-U.S. 318 1,018 1,835 -
- --------------------------------------------------------------------------------------------------------------------------
3,519 3,418 2,985 -
- --------------------------------------------------------------------------------------------------------------------------
5,276 $ 4,603 $ 4,633 $ 32
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
41
The 1999 U.S. current tax provision is presented net of tax benefits in
the amount of $1,430 resulting from the application of a prior year's loss
carried forward.
The Company's effective income tax rate from continuing operations
differed from the federal statutory rate as follows:
1999 1998 1997 1997
---- ---- ---- ----
APRIL 12 JANUARY 1
THROUGH THROUGH
DECEMBER 31 APRIL 11
------------------------------------------------------------------
Income taxes based on U.S. federal tax rate 34% 34% 34% (34%)
Non-U.S. and state tax rates (4%) 1% 3% (1%)
Valuation allowance (52%) (15%) 13% 35%
Goodwill amortization 48% 14% - -
Deemed dividend under subpart F, net of foreign
tax credit 112% 26% - -
Other, net 12% 11% 12% -
Effective income tax rate 150% 71% 62% -%
- ----------------------------------------------------- ---------------- ---------------- ---------------- ---------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
1998 are as follows:
1999 1998
---- ----
U.S. NON-U.S. U.S. NON-U.S.
- --------------------------------------------------------------------------------------------------------------------------------
Accounts receivable, principally due to allowance for
doubtful accounts $ 1,400 $ - $ 1,500 $ -
Inventories, principally due to additional costs inventoried -
for tax purposes 540 - 630
Accrued interest and royalties 2,705 - - -
Other, net 134 - 430 -
----------------------------------------------------------------
4,779 - 2,560 -
Valuation allowance (4,779) - (2,560) -
----------------------------------------------------------------
Total current deferred tax assets (liabilities) $ - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Net operating loss carry-forwards $ 20,040 $ - $ 23,300 $ 463
Plant, equipment and depreciation (100) (2,273) (8) (1,686)
Restructuring accruals - 1,041 - 1,581
Other, net 45 1,616 730 (540)
----------------------------------------------------------------
19,985 (66) 24,022 (182)
Valuation allowance (19,985) - (24,022) -
----------------------------------------------------------------
Total non-current deferred tax assets (liabilities) $ - $ (66) $ - $ (182)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
42
Fresh-start reporting requires the Company to report a provision in lieu
of income taxes when there is a book taxable income and utilization of a
pre-reorganization net operating loss carry-forward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carry-forward and other deferred tax assets would eliminate the related federal
income tax payable. The current and future year tax benefit related to the
carry-forward is recorded as a reduction of reorganizational value in excess of
amounts allocable to identifiable assets until exhausted and then as a direct
increase to paid in capital. The amount of income tax provision which has been
used to reduce the reorganizational value in excess of amounts allocable to
identifiable assets has been reflected as a provision in lieu of income taxes in
the Company's Consolidated Statements of Operations.
At December 31, 1999, the Company has pre-reorganization net operating
loss carry-forwards related to U.S. operations for income tax purposes of
approximately $53,000 ($64,000 in 1998). The carry-forward balances begin to
expire in 2009 and have been fully reserved by a valuation allowance. The
Company's ability to use remaining carry-forwards is limited in use on an annual
basis as a result of a change in control of the Company on April 11, 1997 in
connection with the Reorganization Plan, and as a result of its acquisition of
SHC in 1998.
In addition, the Company has post-reorganization foreign tax credit
carryover in the amount of $3,000, which will begin to expire December 31, 2005.
Undistributed earnings from continuing operations of subsidiaries outside
the U.S., for which no provision for U.S. taxes has been made, amounted to
approximately $ nil, $4,700 and $7,000 at December 31, 1999, 1998 and 1997
respectively.
16. EARNINGS PER SHARE
Net income per share for the year ended December 31, 1999, and 1998:
- ----------------------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted
- ----------------------------------------------------------------------------------------------------------------------
Net (loss) income attributable to common
stockholders $ (3,625) $ (3,625) $ 1,665 $ 1,665
- ----------------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares
outstanding:
- ----------------------------------------------------------------------------------------------------------------------
Common stock 6,500,549 6,500,549 6,500,507 6,500,507
- ----------------------------------------------------------------------------------------------------------------------
Common equivalent shares (a) 158,977 193,741 158,977 191,203
- ----------------------------------------------------------------------------------------------------------------------
Total weighted average common and common
equivalent shares outstanding 6,659,526 6,694,290 6,659,484 6,691,710
- ----------------------------------------------------------------------------------------------------------------------
Net (loss) income per common share (b) $ (0.54) $ (0.54) $ 0.25 $ 0.25
- ----------------------------------------------------------------------------------------------------------------------
(a) Common equivalent shares include warrants and stock options. The Company
used the average book value of its common stock in calculating the common
equivalent shares as required by Statement of Financial Accounting
Standards No. 128 due to the fact that the Company's stock had extremely
limited trading volume during the period.
(b) Common equivalent shares include warrants and stock options when
dilutive. The Company used the average book value of its common stock in
calculating the common equivalent shares as required by statement of
Financial Accounting Standards no. 128 due to the fact that Company's
stock had extremely limited trading volume during the period.
43
17. STOCK OPTION PLAN
During 1999, the Company granted 25,000 additional stock options. Prior
to 1999, the Company granted stock options to purchase 1,007,222 shares of New
Common Stock in the Company at a weighted average exercise price of $11.33 to
certain key employees. The exercise prices of the stock options are not less
than the estimated fair market value of the shares at the time the options were
granted. Generally, these stock options become exercisable over a five-year
vesting period and expire 10 years from the date of the grant.
Options granted for the New Common Stock are as follows:
SHARES EXERCISE PRICE
- ----------------------------------------------------------------------------------
DECEMBER 31, 1998 1,007,222 10.00 - 16.00
Options Granted 25,000 14.00
Options Canceled (16,767) 10.00
Options Exercised - -
- ----------------------------------------------------------------------------------
DECEMBER 31, 1999 1,015,455 $ 10.00 - 16.00
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at December 31, 1999.
OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------------------------------------------------------------
EXERCISE PRICE RANGE SHARES AVERAGE LIFE(a) AVERAGE EXERCISE SHARES AVERAGE EXERCISE
PRICE PRICE
- --------------------------------------------------------------------------------------------------------------------------
$10.00-11.99 604,345 6.77 $10.00 350,900 $10.00
12.00-14.99 266,666 7.49 13.19 135,000 13.04
15.00-16.00 144,444 6.52 15.50 86,666 15.50
- --------------------------------------------------------------------------------------------------------------------------
Total 1,015,455 6.96 $11.62 572,566 $11.55
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
(a) Average contractual life remaining in years.
The fair value of each option is estimated on the date of grant using the
Black Scholes option pricing model with the following weighted average
assumptions for options granted in 1997: dividend yields of 0%, weighted average
expected volatility of 40%, weighted average risk-free interest rate of 8.5%,
and weighted average expected lives of 5.5 years.
As at December 31, 1999 , 1,015,455 stock options were outstanding with a
weighted-average exercise price of $11.62 ($10.00 - $16.00 range of exercise
prices), weighted average remaining contractual life of 7.0 years and 572,566
exercisable at December 31, 1999. As at December 31, 1998 there were 1,007,222
stock options outstanding with weighted average exercise price of $11.53 ($10.00
- - $16.00 range of exercise prices), weighted average remaining contractual life
of 7.8 years and 363,889 exercisable at December 31, 1998. As at December 31,
1997 , 952,222 stock options were outstanding with weighted average exercise
price of $11.21 ($10.00 - $16.00 range of exercise prices), weighted average
remaining contractual life of 8.8 years and 154,444 exercisable at December 31,
1997;
44
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for stock options. Accordingly, no compensation cost has been
recognized. Had compensation cost for the stock options been determined based on
the fair value at the grant dates for awards, consistent with the alternative
method set forth under Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation, the Company's net income
and net income per share would have been reduced. The impact of SFAS 123 may not
be representative of the effect on income in the future years because options
vest over several years and additional option grants may be made each year.
18. CONTINGENCIES AND LITIGATION
A. ENVIRONMENTAL LITIGATION
In 1992, T. Copeland & Sons, Inc. (" Copeland ") the owner of a property
adjacent to Maska's manufacturing facility in Bradford, Vermont, filed an action
in Vermont Superior Court alleging that its property had been contaminated as a
result of the Company's manufacturing activities and seeking compensatory and
punitive damages under the Vermont Groundwater Protection Law and various common
law theories. In June 1995,
Maska settled this action for $1,000 cash, paid in July 1995, and a $6,000
promissory note. Subsequently, Copeland received a distribution of shares of
THC's Common Stock to satisfy the note. Copeland asserted the right to recover
from the Company the difference between the aggregate value of the Common Stock
and the amount of the promissory note. In October 1998, Copeland's claim to
recover this difference was disallowed. Copeland filed an appeal of this
decision, which is pending.
B. PRODUCT LIABILITY LITIGATION
The Company is unaware of any personal injury claims for which there is
inadequate insurance coverage.
C. OTHER LITIGATION
On October 16, 1997, ZMD Sports Investments Inc. and 2938201 Canada
Inc., landlords of the Company's properties located in St. Jean, Quebec and St.
Hyacinthe, Quebec, brought motions against the Company requiring the Company to
undertake certain repairs to the properties for an estimated $630. The Company
believes these motions to be without merit.
In October 1997, Sports Holding Corp. (subsequently acquired by the
Company) sold the assets of its ski and snowboard division to Trak Inc. and
3410137 Inc., collectively "Trak". In July 1998, Trak filed a claim against the
Company (SHC, SHC Hockey Inc. and Tropsport Acquisitions Inc.), alleging certain
incorrect representations and warranties in the context of this sale, for an
amount in excess of $350. The Company believes that this claim is without merit.
In September of 1999, NHL Enterprises, LP and NHL Enterprises Canada
Inc. (together "NHL") asserted that the Company was in breach of its obligation
to pay royalties pursuant to License Agreements between the NHL and the Company
dated as of October 6, 1995, as amended. The NHL is claiming an overdue amount
of $905 plus
45
interest pursuant to a US license agreement and an overdue amount of CDN$267
plus interest, pursuant to a Canadian license agreement. The Company has denied
these claims and has counter-claimed that its payment obligations pursuant to
both license agreements were reduced due to the NHL work stoppage in 1994-95,
and that the Company is therefore entitled to refunds from the NHL of $375 plus
interest from the US license agreement and CDN$188 plus interest from the
Canadian license agreement.
The Company and the NHL have submitted their dispute with respect to
the US license agreement to binding arbitration pursuant to its terms. The
dispute between the Company and the NHL with respect to the Canadian license
agreement is also subject to binding arbitration, but has not yet been
submitted. The Company believes that the claims of the NHL are without merit.
Other than certain legal proceedings arising from the ordinary course of
business, which the Company believes will not have a material adverse effect on
the financial position, results of operations or cash flows, there is no other
litigation pending or threatened against the Company.
19. SEGMENT INFORMATION
REPORTABLE SEGMENTS
The Company has two reportable segments: Equipment and Apparel. The
Equipment segment derives its revenue from the sale of skates, including ice
hockey, roller hockey and figure skates, as well as protective hockey equipment
and sticks for both players and goaltenders. The Apparel segment derives its
revenue from the sale of hockey apparel, such as authentic and replica hockey
jerseys, as well as a high quality line of licensed and branded apparel,
baseball style caps, and jackets.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Segment assets only include
inventory.
INFORMATION ABOUT SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
For the year ended and as at December 31, 1999
EQUIPMENT APPAREL SEGMENT
TOTALS
- ---------------------------------------------------------------------------------------------------------------------
Net sales $ 147,852 $ 42,751 $ 190,603
Gross profit 61,679 19,146 80,825
Depreciation of property, plant and equipment 2,165 483 2,648
Segment assets 35,752 13,203 48,955
- ---------------------------------------------------------------------------------------------------------------------
For the year ended and as at December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
Net sales $ 73,983 $ 36,834 $ 110,817
Gross profit 29,848 15,943 45,791
Depreciation of property, plant and equipment 861 379 1,240
Segment assets 31,019 11,225 42,244
- ---------------------------------------------------------------------------------------------------------------------
46
For the year ended and as at December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
Net sales $ 82,626 $ 41,128 $ 123,754
Gross profit 32,913 17,066 49,979
Depreciation of property, plant and equipment 892 412 1,304
Segment assets 18,186 10,289 28,475
- ---------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS FOR THE YEARS ENDED
DECEMBER 31:
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------
SEGMENT PROFIT OR LOSS
Gross Profit $ 80,825 $ 45,791 49,979
Unallocated amounts:
Selling general and administrative expenses 58,990 35,272 38,237
Amortization of excess reorganizational value and goodwill 4,572 2,606 1,712
Restructuring and unusual charges - 1,900 6,315
Chapter 11 and debt related fees - - 1,243
Other (income) expense, net 1,736 (4,588) 712
Interest expense 12,025 4,108 3,922
--------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES, AND EXTRAORDINARY
GAIN ON DISCHARGE OF DEBT $ 3,502 $ 6,493 (2,162)
- ---------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
SEGMENTS ASSETS
Total assets for reportable segments $ 48,955 $ 42,244
Unallocated amounts
Cash 3,519 2,593
Account receivable 42,998 36,790
Prepaid expenses 2,622 3,513
Income taxes receivable 722 971
Other receivables 2,241 3,358
Unallocated property, plant and equipment, net 22,860 22,063
Intangible and other assets, net 85,694 91,044
Deferred income taxes - 4,420
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 209,611 $ 206,996
- ---------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
----------------------
NET SALES 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
United States 76,230 53,101 70,269
Canada 76,728 53,392 70,052
Europe 37,645 4,324 -
- ---------------------------------------------------------------------------------------------------------------------
190,603 110,817 140,321
- ---------------------------------------------------------------------------------------------------------------------
47
Sales breakdown was based on location of the subsidiaries from which the sales
originated.
CAPITAL ASSETS & GOODWILL 1999 1998
- --------------------------------------------------------------------------------------------------
Canada 77,370 77,150
USA 11,746 15,360
Europe 15,998 19,951
- --------------------------------------------------------------------------------------------------
105,114 112,461
- --------------------------------------------------------------------------------------------------
20. NEW ACCOUNTING PRONOUNCEMENTS
Effective June 15, 2000, the Company will be required to implement
Statement of Financial Accounting Standard 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. The Company has not yet completed
its evaluation of the impact of SFAS 133 on the financial statements however the
Company does not include significant use of derivative instruments or hedging
activities in its business operations.
21. FRESH-START ACCOUNTING
In connection with the emergence from bankruptcy, the Company adopted
fresh-start reporting, as of April 11, 1997, in accordance with the requirements
of Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code ("SOP 90-7").
In applying fresh-start reporting, the value of New THC was allocated to
the Company's net assets in conformity with the procedures specified by
Accounting Principles Board Opinion No. 16 Business Combinations. SOP 90-7
required a determination of the Company's reorganizational value, representing
the fair value of all of the Company's assets and liabilities, and an allocation
of such values to the assets and liabilities (excluding deferred taxes) based on
their relative fair values with the excess in reorganizational value over market
values recorded as an intangible asset. As a result, the carrying values of the
Company's assets and liabilities were adjusted to fair value as of April 11,
1997. Reorganizational value in excess of amounts allocable to identifiable
assets of approximately $48.0 million is being amortized on a straight line
basis over twenty years. The application of SOP 90-7 resulted in the creation of
a new reporting entity having no retained earnings or accumulated deficit.
For the purpose of the Reorganization Plan, the reorganizational equity
value was estimated to be $66.6 million based in part on management's estimates
of future operating results. Reorganizational value necessarily assumes that New
THC will achieve its estimated future operating results in all material
respects. If such results are not achieved, the value of New THC that is
ultimately realized could be materially different.
The Reorganization Plan had a significant impact on the financial
statements of New THC, including the creation of a new reporting entity upon
emergence from bankruptcy through the application of fresh-start reporting
pursuant to SOP 90-7. Accordingly, the Company's post-reorganization balance
sheets, statements of operations and statements of cash flows, which reflect the
application of fresh-start reporting, have not been prepared on a consistent
basis with the pre-reorganization financial statements and are not comparable in
all respects to the financial statements prior to the reorganization. For
accounting purposes, the inception date of New THC is deemed to be April 12,
1997.
48
The effects of the Reorganization Plan and fresh-start reporting on the
Company's balance sheet at April 11, 1997 are as follows:
CONDENSED CONSOLIDATED BALANCE SHEET
April 11, 1997
ASSETS OLD THC ADJUSTMENTS NEW THC
Cash $ 40,554 $ (36,098) a $ 4,456
Other current assets 64,878 (189) b 64,689
------------------------------------------------------------
Total current assets 105,432 (36,287) 69,145
Property, plant and equipment 10,382 - 10,382
Intangible and other assets, net 1,494 48,979 c 50,473
------------------------------------------------------------
Total assets $117,308 $ 12,692 $ 130,000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Short-term debt $ - $ 5,100 d $ 5,100
Accounts payable and accrued liabilities 18,029 3,162 e 21,191
Long term debt, current portion 280 1,202 f 1,482
Current portion of liabilities subject to 45,035 (42,905) g 2,130
compromise under
reorganization proceedings
------------------------------------------------------------
Total current liabilities 63,344 (33,441) 29,903
Long-term debt - 32,935 f 32,935
Other liabilities 590 - 590
Liabilities subject to compromise under 160,164 (160,164) g -
reorganization proceedings
------------------------------------------------------------
Total liabilities 224,098 (160,670) 63,428
Stockholders' equity (deficit) (106,790) 173,362 h 66,572
------------------------------------------------------------
Total liabilities and stockholders' equity $ 117,308 $ 12,692 $ 130,000
------------------------------------------------------------
------------------------------------------------------------
The following is a brief description of the adjustments made in preparing the
above Condensed Consolidated Balance Sheet.
a. To reflect $45,198 paid out in accordance with the Reorganization Plan,
net of $9,100 borrowed under new credit facilities.
b. To reflect the distribution of net assets of discontinued operations
pursuant to the Reorganization Plan.
c. To record excess of identifiable asset value as a result of fresh-start
reporting, including principally a valuation associated with New THC's
trademarks and costs associated with obtaining new credit facilities.
d. To record borrowings under new credit facilities.
49
e. To record accounts payable and accrued liabilities incurred pursuant to
the Reorganization Plan.
f. To record long-term debt under new credit facilities, Senior Secured
Notes and other long-term debt incurred pursuant to the Reorganization
Plan.
g. To eliminate liabilities in accordance with the Reorganization Plan. The
Reorganization Plan resulted in an extraordinary gain on debt forgiveness
of approximately $58,726.
h. To reflect fresh-start reporting and the new equity structure of New THC
pursuant to the Reorganization Plan.
The following Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1997 has been prepared giving effect to the
consummation of the Reorganization Plan, including the implementation of
fresh-start reporting, as if consummation had occurred on January 1, 1997. Due
to the Reorganization Plan and implementation of fresh-start reporting,
financial statements effective April 12, 1997 for New THC are not comparable to
financial statements prior to that date for Old THC. However, for presentation
of this statement, total results for 1997 are shown under the caption "Total
Before Adjustments". The adjustments which give effect to the events that are
directly attributable and expected to have a continuing impact on New THC and
which are set forth under the caption "Adjustments" reflect the implementation
of the Reorganization Plan and the adoption of fresh-start reporting as if they
had occurred on January 1, 1997.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended
December 31, 1997
(Unaudited) (in thousands)
TOTAL BEFORE
ADJUSTMENTS ADJUSTMENTS PRO FORMA
-------------------------------------------------------------
Net sales $ 123,754 $ - $ 123,754
-------------------------------------------------------------
Operating income 3,715 5,608 a 9,323
Debt related fees 1,243 (1,243) b -
Other expense, net 712 210 c 922
Interest expense 3,922 1,464 d 5,386
-------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and extraordinary (2,162) 5,177 3,015
gain on discharge of debt
Income taxes 4,665 1,856 e 6,521
-------------------------------------------------------------
Net income (loss) from continuing operations
before extraordinary gain on discharge (6,827) 3,321 (3,506)
of debt
50
Extraordinary gain on discharge of debt 58,726 (58,726) f -
-------------------------------------------------------------
Net income (loss) $ 51,899 $ (55,405) $ (3,506)
-------------------------------------------------------------
-------------------------------------------------------------
The following is a brief description of the adjustments made in preparing
the Pro Forma Condensed Consolidated Statement of Operations (unaudited).
a. To reflect adjustments of $6,315 for restructuring charges, net of $707
for amortization of the intangible associated with fresh-start reporting.
b. To reflect adjustments for costs incurred by Old THC outside of its
continuing operations.
c. To reflect amortization of the deferred financing costs associated with
New THC's new credit facilities.
d. To reflect incremental interest expense associated with New THC's new
credit facilities and Senior Secured Notes.
e. To reflect income taxes associated with adjustments.
f. To reflect adjustments for extraordinary gain on discharge of debt.
51
Schedule II
THE HOCKEY COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended December 31, 1999, 1998, and 1997
(In thousands)
ADDITIONS
----------------------------
BALANCE AT CHARGED TO ACQUISITION BALANCE AT
DECEMBER 31, COSTS AND TRANSLATION DECEMBER 31,
DESCRIPTION 1998 EXPENSES ADJUSTMENTS DEDUCTIONS 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts $2,444 421 - 100 728(A) $ 2,237
Allowance for returns, discounts,
rebates and cooperative advertising $5,384 4,758 - 188 4,789(B) $ 5,541
Allowance for excess, obsolete and
slow moving inventories $3,150 1,173 - 88 2,042 $ 2,369
ADDITIONS
----------------------------
BALANCE AT CHARGED TO ACQUISITION BALANCE AT
DECEMBER 31, COSTS AND TRANSLATION DECEMBER 31,
DESCRIPTION 1997 EXPENSES ADJUSTMENTS DEDUCTIONS 1998
Allowance for doubtful accounts $4,046 (2,109) 455 (75) (127) A) $ 2,444
Allowance for returns, discounts,
rebates and cooperative advertising $5,886 3,388 837 (130) 4,597(B) $ 5,384
Allowance for excess, obsolete and
slow moving inventories $3,418 1,344 441 (111) 1,942 $ 3,150
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
APRIL 11, 1997 COSTS AND OTHER TRANSLATION DECEMBER 31,
DESCRIPTION EXPENSES ACCOUNTS ADJUSTMENTS DEDUCTIONS 1997
Allowance for doubtful accounts $3,489 468 - (50) (139)(A) $ 4,046
Allowance for returns, discounts,
rebates and cooperative
advertising $4,231 7,883 - (57) 6,171(B) $ 5,886
Allowance for excess, obsolete and
slow moving inventories $3,891 1,440 - (70) 1,843 $ 3,418
(A) Accounts written off as uncollectible, net of recoveries
(B) Deductions taken by customers.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position With Company
- ---- --- ---------------------
Gerald B. Wasserman 63 Chief Executive Officer, President, Chairman of the Board
Paul M. Chute 45 Director
Greg S. Feldman 43 Director
Jason B. Fortin 29 Director
James C. Pendergast 43 Director
Phil Bakes 54 Director
Russell J. David 41 Senior Vice President, Finance and Administration
Gordon T. Halliday 46 Senior Vice President, Operations
Matthew H. O'Toole 37 Senior Vice President, Sales and Marketing
Johnny Martinsson 56 Senior Vice President, Europe
David Terreri 46 Vice President, Distribution and Customer Service
Jacques Cordeau 48 Vice President, Manufacturing
T. Blaine Hoshizaki 49 Vice President, Product Development
Gerald B. Wasserman became Chairman of the Board and Director of the
Company in April 1997. He has served as Chief Executive Officer and President of
the Company since September 1996 and currently serves as Chief Executive Officer
of each of the Company's subsidiaries. From 1994 until September 1996, Mr.
Wasserman was a consultant and from 1993 to 1994 he served as Chief Executive
Officer of Weider Health and Fitness, a fitness and publishing company. Mr.
Wasserman was Chief Executive Officer of Canstar Inc. (c/k/a Bauer Nike Hockey
Inc.), a manufacturer and distribution of hockey related products, from 1985
through 1993.
Paul M. Chute became a Director of the Company in April 1997. Since
January 1995, Mr. Chute has served as a Managing Director of Phoenix Duff &
Phelps Corp., an investment advisor to its affiliate Phoenix Home Life Mutual
Insurance Company. He was a Managing Director of Phoenix Home Life Mutual
Insurance Company from January 1992 to December 1994.
Greg S. Feldman became a Director of the Company in July 1998. Mr.
Feldman is a co-founder and Managing Partner of Wellspring Associates LLC
("Wellspring") and Wellspring Capital Management LLC. For four years prior to
joining Wellspring, he was a vice president in charge of acquisitions at EXOR
America Inc. (formerly IFINT USA, Inc.) the U.S. investment arm of Agnelli
Group. For two years before joining EXOR, Mr. Feldman was vice-president and
co-founder of Clegg Industries, an investment firm backed by Drexel Burnham
Lambert Inc. which invested in leveraged acquisitions of middle market
manufacturing companies.
Jason B. Fortin became a Director of the Company in December 1998. Mr.
Fortin is a vice president of Wellspring and has been employed by them since
March 1995. From 1992 until 1995, Mr. Fortin was in the corporate finance
department of Donaldson, Lufkin & Jenrette Securities Corporation.
James C. Pendergast became a Director of the Company in April 1997. Since
July 1993, Mr. Pendergast has been a Managing Director of Alliance Corporate
Finance Group Inc., an investment advisor to its affiliate The Equitable Life
Assurance Society of the United States ("Equitable"). From July 1986 until July
1993, he was employed by Equitable Capital Management Corp., a subsidiary of
Equitable.
53
Phil Bakes became a Director in October 1999. Mr. Bakes is the Chairman
and Chief Executive Officer of FAR&WIDE Travel Corp., a leading value-added
travel tour operator, which he founded in 1997. Bakes had been president of
Sojourn Enterprises, Inc., a Miami advisory and merchant banking firm he founded
in 1990.
Russell J. David, Senior Vice President, Finance & Administration, joined
the Company in November 1996. From July 1994 through November 1996, he was
Senior Vice President and Chief Financial Officer of Peerless Carpet
Corporation, an international carpet and floor covering manufacturer and
distributor. From June 1992 through July 1994, he was Executive Vice President
and Chief Operating Officer of Perrette Inc., a convenience store chain. From
1989 to 1992 he was Executive Vice President and Chief Operating Officer of
Gildan Activewear, a vertically integrated apparel manufacturer.
Gordon T. Halliday became Senior Vice President, Operations of the
Company in January 1997. Mr. Halliday was Vice President, Corporate and Systems
Development of Canstar Inc. (c/k/a Bauer Nike Hockey Inc.) from 1988 to January
1997.
Matthew H. O'Toole, Senior Vice President, Sales and Marketing, joined
the Company in May 1999, having previously served as vice-president of
world-wide marketing and sales for the Tear Drop Golf Company. From 1994 to 1997
he served as vice-president of sales for Tommy Armour Golf Company. Prior to
that he spent nine years in marketing and sales management at Wilson Sporting
Goods Company, which included business manager and marketing director of golf
clubs, product manager and district sales manager.
Johnny Martinsson, Senior Vice President, Europe joined the Company on
the acquisition of Sports Holdings Corp. in 1998. He has had a long and
successful tenure with Jofa AB holding a variety of position over a 30 year
career.
David Terreri became Vice President, Distribution & Customer Service of
the Company in January 1997. Mr. Terreri was employed by Canstar Inc. (c/k/a
Bauer Nike Hockey Inc.) from June 1978 to January 1997 eventually rising to Vice
President, Distribution & Logistics.
Jacques Cordeau, Vice President, Manufacturing has been employed by the
Company for 16 years. Since joining in 1984 as an Industrial Engineering
Manager, he has worked at various functions including Production Manager and
Plant Manager.
T. Blaine Hoshizaki, Vice President, Product Development joined the
Company in 1997. From 1995 to 1997 he worked as a product development consultant
and from 1989 to 1995 he was Vice-President of Research and Development at
Bauer. Prior to that was an Associate Professor in the Biomechanics of Sport at
McGill University. He holds a PhD from the University of Illinois.
BOARD OF DIRECTORS
The Board of Directors has responsibility for establishing broad
corporate policies and for overseeing the performance of the Company, although
it is not involved in day-to-day operations. Members of the Board are kept
informed of the Company's business by various reports and documents sent on a
regular basis as well as by operating and financial reports presented at Board
and various Committee meetings. The Board of Directors held 4 meetings during
1999.
The Board does not have audit, nominating or other corporation
committees, but acts, as a whole, in
54
performing the functions of such committees.
Directors do not receive any compensation for services rendered in their
capacity as such: however, they do receive reimbursement of reasonable
out-of-pocket expenses in respect of attendance at meetings.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, the Company's
Directors, executive officers and holders of more than 10% of the Common Stock
are required to report their initial ownership of the Company's equity
securities and any subsequent changes in that ownership to the Securities and
Exchange Commission ("SEC"). Specific due dates for these reports have been
established, and the Company is required to disclose any failure to file by
these dates with respect to 1999. Based on representations of its directors and
executive officers and copies of the reports they have filed with the SEC, there
were no late reports filed for 1999.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth certain information
for the years ended December 31, 1999, 1998 and 1997 concerning the cash and
non-cash compensation earned by or awarded to the Chief Executive Officer and
the four other most highly compensated executive officers of the Company as at
December 31, 1999 and as at the date hereof:
- ---------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- ---------------------------------------------------------------------------------------------------------------------
Fiscal Other Annual Stock All Other
Name and position Year Salary Bonus Compensation(1) Options Compensation
Gerald B. Wasserman 1999 $350,000 $ - $ - - $ -
Chief Executive Officer 1998 350,000 - - - -
and President 1997 350,000 100,000 - - -
Russell J. David(1) 1999 141,314 - - - -
Senior Vice President, Finance 1998 138,300 25,000 - - -
and Administration 1997 144,780 29,000 - - -
Gordon T. Halliday(1) 1999 141,314 - - - -
Senior Vice President, 1998 138,000 25,000 - - -
Operations 1997 132,700 29,000 - 65,000 -
Matthew H. O'Toole (2) 1999 85,542 - - 25,000 -
Senior Vice President,
Sales and Marketing
David Terreri 1999 183,855 - - - -
Vice-president, Distribution & 1998 178,500 - - - -
Customer Service 1997 174,311 35,000 - 50,000 -
55
(1) Mr. David and Mr. Halliday earn an annualized salary of Canadian $210,000
(2) Mr. O'Toole joined the Company in May, 1999 at an annualized salary of
Canadian $225,000
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following tables set forth certain information concerning the
granting of options to purchase shares of the Company's New Common Stock to each
of the executive officers of the Company named in the Summary Compensation Table
above, as well as certain information concerning the exercise and value of such
stock options for each of the individuals. Options generally become exercisable
over periods of five years and subject to certain exceptions, expire no later
than ten years from the date of grant.
STOCK OPTIONS GRANTED IN 1999
NAME AND POSITION # GRANTED EXERCISE PRICE
- ----------------- --------- --------------
Matthew H. O'Toole,
Senior Vice President, Sales & Marketing 25,000 $14.00
OPTIONS EXERCISED IN 1999 AND VALUE OF OPTIONS AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
Shares
acquired on Value Number of Unexercised Value of Unexercised
Name exercise Received Options held at Year End In-the-Money Options at Year End
- --------------------------------------------------------------------------------------------------------------------------
Exercisable Not exercisable Exercisable Not exercisable
- --------------------------------------------------------------------------------------------------------------------------
Gerald B. Wasserman - - 433,333 288,889 N/A N/A
Russell J. David - - 15,000 10,000 N/A N/A
Gordon T. Halliday - - 39,000 26,000 N/A N/A
Matthew H. O'Toole - - - 25,000 N/A N/A
David Terreri - - 20,000 30,000 N/A N/A
The Company's New Common Stock was not issued until April 11, 1997, the
Effective Date of the Re-organization Plan. The value of unexercised
in-the-money options at year-end has not been determined due to the extremely
limited amount of trading activity in the Company's New Common Stock.
EMPLOYMENT AGREEMENTS
Effective September 1, 1996, the Company entered into a five-year
employment agreement with Gerald B. Wasserman employing him as President and
Chief Executive Officer of the Company. The employment agreement will be renewed
automatically for successive one-year periods unless either party provides
timely notice. As compensation for his services during the term of his
employment agreement, Mr. Wasserman is entitled to receive a base salary at a
rate of $350,000 per year, which base salary may be increased by the Board of
Directors on an annual basis. In addition, Mr. Wasserman was granted options to
purchase an aggregate of 722,222 shares of the Company's New Common Stock (of
such options, options to purchase 650,000 shares were granted in 1996). An
option (the "First Option" with respect to 361,111 of such shares) was granted
at an exercise price of $10.00 per share, and an option (the "Second Option",
and together with the First Option, the "Options") with respect to 361,111 such
shares was granted at exercise prices ranging from $12.00 per share through
$16.00 per share. Subject to the provisions of the employment agreement related
to early terminations, the Options have a term of ten
56
years from the date of grant and vest in five equal annual installments on
September 1 of each year, commencing on September 1, 1997.
In the event the Company terminates Mr. Wasserman's employment without
`"cause", as defined, the Company will be obligated to make severance payments
to Mr. Wasserman in an aggregate amount equal to six months of the then-current
base salary for each completed year of service up to an aggregate amount equal
to one-year's of the then-current base salary. In addition, all granted but
unvested First Options will vest immediately and Mr. Wasserman will be entitled
to any options which have vested as of the date of such termination. In the
event the Company terminates the employment agreement for "cause", as defined,
all of the Company's obligations under the employment agreement will terminate
as of the date of such termination, except that Mr. Wasserman will be entitled
to any Options which have vested as of such date. If Mr. Wasserman resigns by
reason of a Downgrading Event following a Change of Control (both as defined
therein), the Company will be obligated to pay him an aggregate of twelve months
of the then-current base salary. Upon a Change of Control, all Options will vest
immediately.
Mr. Russell J. David, Senior Vice President, Finance and
Administration joined the Company on November 11, 1996. Mr. David receives an
annual salary of Canadian $210,000, subject to annual review, and is eligible
to participate in the Company's bonus plan up to a maximum of 40% of
then-current salary pursuant to such plan, with a guaranteed bonus of 20% of
his salary for the first year of his employment. Mr. David also has been
granted stock options to purchase 25,000 shares of the Company's New Common
Stock at an exercise price of $10.00 per share. These options have a term of
ten years, vest ratably over five years and vest immediately upon a Change of
Control and ratably upon a termination of employment of Mr. David without
"cause". Upon three months' notice of termination of employment by the
Company, Mr. David will be entitled to receive as severance one year's salary
in the first year of service with the Company and up to a maximum of fifteen
months thereafter.
Effective January 27, 1997, Gordon T. Halliday was appointed Senior
Vice President, Operations of the Company. Mr. Halliday receives annual
compensation of Canadian $210,000, subject to annual review, and is eligible
to participate in the Company's bonus plan up to a maximum of 40% of
then-current salary with a bonus of 20% of Mr. Halliday's salary guaranteed
in the first year of his employment. Mr. Halliday has also been granted stock
options to purchase 65,000 shares of the Company's New Common Stock at an
exercise price of $10.00 per share. These options have a term of ten years
and vest ratably over five years, with all options fully vested upon a Change
of Control and ratably upon a termination of Mr. Halliday's employment
without "cause". Upon three months' notice of termination of employment by
the Company, Mr. Halliday will be entitled to receive as severance six
months' salary per year of service with the Company up to a maximum of
fifteen months thereafter.
Effective May 10, 1999, Matthew H O'Toole was appointed Senior Vice
President, Sales & Marketing of the Company. Mr. O'Toole receives annual
compensation of Canadian $225,000, subject to review annually, and is
eligible to participate in the Company's bonus plan up to a maximum of 40% of
then-current salary, with a bonus of Canadian $90,000 guaranteed in 2000. Mr.
O'Toole has also been granted stock options to purchase 25,000 shares of the
Company's New Common Stock at an exercise price of $14.00 per share. These
options have a term of ten years and vest ratably over five years, with all
options fully vested upon a Change of Control and ratably upon a termination
of Mr. O'Toole's employment without "cause". Upon three months' notice of
termination of employment by the Company, Mr. O'Toole will be entitled to
receive as severance six months' salary per year of service with the Company
up to a maximum of fifteen months thereafter.
Effective January 9, 1997, David Terreri was appointed Vice President,
Distribution & Customer Service of the Company at a base salary of $175,000 per
year, subject to annual review. Mr. Terreri is also eligible to participate in
the Company's bonus plan up to a maximum of 40% of then-current salary with a
bonus of 20% of
57
Mr. Terreri's salary guaranteed in the first year of his employment. Mr.
Terreri has been granted stock options to purchase 50,000 shares of the
Company's New Common Stock at an exercise price of $10.00 per share. These
options have a term of ten years, vest ratably over five years and vest
immediately upon a Change of Control and ratably upon a termination of Mr.
Terreri's employment without "cause". Upon three months' notice of
termination of employment by the Company, Mr. Terreri will be entitled to
receive as severance six months' salary per year of service in the first year
of service and twelve months' salary per year of service with the Company
thereafter up to a maximum of fifteen months.
RETIREMENT AND LONG-TERM INCENTIVE PLANS
During 1998 the Company introduced a contributory defined contribution
plan (the "Pension Plan"). The executive officers of the Company entered into
supplementary executive retirement agreements ("SERP"). The SERP benefit equals
2% of base earnings at retirement times years of service minus the pension
provided by the Company's Pension Plan. These SERPs are unfunded. The Company
also maintains a 401(k) defined contribution plan for its U.S. employees, under
which the Company makes a matching contribution of up to 50% of eligible
employee contributions. During the year ended December 31, 1999, matching
contributions totaling $42,488 (1998 - $29,704) were made by the Company on
behalf of these executive officers.
PERFORMANCE GRAPH
Normally, the Company would present a graph comparing the cumulative
total stockholder return on the Company's Common Stock with that of the NASDAQ
Composite Index for U.S. companies and the Dow Jones Recreation Products Group
which is comprised of toy, entertainment, sporting goods, recreation and leisure
product companies. However, on April 11, 1997, as a result of the Company's
reorganization, all outstanding shares of the Company's Old Common Stock were
converted into warrants to purchase shares of the Company's New Common Stock. In
addition, since April 11, 1997 there has been extremely limited trading volume
of the Company's New Common Stock. Therefore, a performance graph is not
presented as it would not be meaningful.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's New Common Stock as of March 6, 2000 with respect to
(a) each person known to the beneficial owner of more than 5% of the outstanding
shares of New Common Stock, (b) each Director of the Company, (c) the Company's
executive officers and (d) all officers and directors of the Company as a group.
(Except as indicated in the footnotes to the table, all such shares of New
Common Stock are owned with sole voting power and investment power.)
- ----------------------------------------------------------------------------------------------------------------------
No. of % of Total number of shares beneficially owned
Name of Beneficial Owner(1) shares Class that can be acquired within 60 days
- ----------------------------------------------------------------------------------------------------------------------
BENEFICIAL OWNERS OF MORE THAN 5% OF NEW COMMON STOCK
- ----------------------------------------------------------------------------------------------------------------------
WS Acquisition LLC(2) 3,289,867 49.1%
- ----------------------------------------------------------------------------------------------------------------------
The Equitable Life Assurance Society of the
United States(3) 1,253,684 18.7%
- ----------------------------------------------------------------------------------------------------------------------
Phoenix Home Life Mutual Insurance Company(5) 517,322 7.7% 159,127
- ----------------------------------------------------------------------------------------------------------------------
The Northwestern Mutual Life Insurance
Company(4) 394,015 5.9%
- ----------------------------------------------------------------------------------------------------------------------
58
COMPANY DIRECTORS
- ----------------------------------------------------------------------------------------------------------------------
Gerald B. Wasserman(6)(8) 216,667 3.2% 216,667
- ----------------------------------------------------------------------------------------------------------------------
Paul M. Chute(5) -
- ----------------------------------------------------------------------------------------------------------------------
Greg S. Feldman(2) -
- ----------------------------------------------------------------------------------------------------------------------
Jason B. Fortin(2) -
- ----------------------------------------------------------------------------------------------------------------------
James C. Pendergast(3) -
- ----------------------------------------------------------------------------------------------------------------------
Phil Bakes(9) - -
- ----------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
- ----------------------------------------------------------------------------------------------------------------------
Russell J. David(6)(8) 15,000 - 15,000
- ----------------------------------------------------------------------------------------------------------------------
Gordon T. Halliday(6)(8) 39,000 0.1% 39,000
- ----------------------------------------------------------------------------------------------------------------------
Matthew O'Toole(6)(8) - -
- ----------------------------------------------------------------------------------------------------------------------
Johnny Martinsson(7)(8) 5,000 - 5,000
- ----------------------------------------------------------------------------------------------------------------------
David Terreri(6)(8) 20,000 - 20,000
- ----------------------------------------------------------------------------------------------------------------------
Jacques Cordeau(6)(8) 10,000 - 10,000
- ----------------------------------------------------------------------------------------------------------------------
T. Blaine Hoshizaki(6)(8) 15,000 - 15,000
- ----------------------------------------------------------------------------------------------------------------------
ALL OFFICERS AND DIRECTORS AS A GROUP
(13 PERSONS) 320,667 4.8% 320,667
- ----------------------------------------------------------------------------------------------------------------------
(1) Beneficial ownership excludes 538,517 shares of the Company's New Common
Stock which have not yet been allocated pursuant to the Company's Reorganization
Plan. Such shares will either be issued to the holders of certain unsecured
claims or issued to holders of the Company's outstanding shares of New Common
Stock. Such holders of unsecured claims may elect to sell such shares to WS
Acquisitions LLC pursuant to a cash option agreement between the Company and
Wellspring Associates LLC, an affiliate of WS Acquisitions LLC. All percentages
are calculated based on 6,693,725 shares of New Common Stock outstanding (which
excludes the 538,517 aforementioned shares) but includes 731,693 shares of New
Common Stock which may be acquired within 60 days.
(2) The address for such owners is WS Acquisition LLC, 620 Fifth Avenue, New
York, New York 10020. Greg S. Feldman's beneficial ownership excludes 3,289,867
shares owned by WS Acquisition LLC. Mr. Feldman is a Managing Partner of
Wellspring Associates LLC, an affiliate of WS Acquisition LLC. Mr. Jason
Fortin's beneficial ownership excludes those 3,289,867 shares. Mr. Fortin is a
Vice-President of Wellspring Associates LLC.
(3) The address of such owners is 1290 Avenue of the Americas, New York, New
York 10104. James C. Pendergast's beneficial ownership excludes 1,253,684
shares owned by The Equitable Life Assurance Society of the United States.
Mr. Pendergast is a Managing Director of Alliance Corporate Finance group
Inc., an affiliate of The Equitable Life Assurance Society of the United
States.
(4) The address of such owner is 720 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202
(5) The address of such owners is 1 American Row, Hartford, Connecticut 06115.
Paul M. Chute's beneficial ownership excludes 358,195 shares owned by Phoenix
Home Life Mutual Insurance Company. Mr. Chute is a Managing Director of Phoenix,
Duff & Phelps Corp., an affiliate of Phoenix Home Life Mutual Insurance Company.
(6) The address of such owners is c/o Maska U.S., Inc., 929 Harvest Lane,
Williston, Vermont 05495-8919.
59
(7) The address of such owner is c/o Jofa AB, S-782 22 Malung, Sweden
(8) Does not include stock options granted but which have not vested as of
March 8, 2000 (see item 11)
(9) The address of such owner is 80 S.W. 8th Street, Miami, FL 33130-3047
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1999 the Company had no related transactions with shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1)Financial Statements required by Item 14 are included and indexed in Part
II, Item 8.
(a)(2)The financial statement schedules filed as part of this report include
the following:
SCHEDULE PAGE
--------- ----
II Valuation and Qualifying Accounts and Reserves 52
(a)(3)The following is a list of all Exhibits filed as part of this Report:
Exhibit No. Description
- ----------- -----------
2.1 First Amended Joint Chapter 11 Plan (as modified), dated
November 12, 1996, filed with the United States Bankruptcy
Court for the District of Delaware. Filed as Exhibit 1 to
the Company's Current Report on Form 8-K dated December 6,
1996, incorporated herein by reference.
2.2 First Modification, dated January 15, 1997, to First
Amended Joint Chapter 11 Plan. Filed as Exhibit 2.2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
2.3 Second Modification, dated January 23, 1997, to First
Amended Joint Chapter 11 Plan (as modified), dated November
12, 1996. Filed as Exhibit 2.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference.
2.4 Third Modification, dated March 14, 1997, to First Amended
Joint Chapter 11 Plan (as modified), dated November 12,
1996. Filed as Exhibit 2.4 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
3.1 Amended and Restated Certificate of Incorporation of the
Company dated March 31, 1997. Filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
3.2 Amended and Restated By-Laws of the Company. Filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated herein by
reference.
60
10.1 Cash Option Agreement, dated January 6, 1997 between the
Company and Wellspring Associates L.L.C. Filed as Exhibit
10.1 to the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1996 and incorporated herein by
reference.
10.2 Amendment to Cash Option Agreement, dated April 8, 1997,
between the Company and Wellspring Associates L.L.C. Filed
as Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated
herein by reference.
10.3 Stockholders Agreement, dated as of April 11, 1997, between
the Company and the persons set forth on Schedule A
thereto. Filed as Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference.
10.4 Warrant Agreement, dated as of April 11, 1997, between the
Company and American Stock Transfer & Trust Company, as
Warrant Agent. Filed as Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference.
10.5 Retail License Agreement, dated March 8, 1995, between
Maska U.S., Inc. and NHL Enterprises Inc. Filed as Exhibit
10.30 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by
reference.
10.6 Retail License Agreement, dated March 8, 1995, between
Sport Maska Inc. and NHL Enterprises Canada Inc. Filed as
Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 and incorporated
herein by reference.
10.7 Retail License Agreement, dated October 6, 1995, between
NHL Enterprises and Maska U.S., Inc. Filed as Exhibit 10.31
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by
reference.
10.8 Retail License Agreement, dated October 6, 1995, between
NHL Enterprises and Sport Maska Inc. Filed as Exhibit 10.32
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by
reference.
10.9 Deed of Lease, dated April 11, 1997, between ZMD Sports
Investments Inc. and Sport Maska Inc. Filed as Exhibit
10.38 to the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1996 and incorporated herein by
reference.
10.10 Deed of Lease, dated April 11, 1997, between ZMD Sports
Investments Inc. and Sport Maska Inc. Filed as Exhibit
10.40 to the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1996 and incorporated herein by
reference.
10.11 Deed of Lease, dated April 11, 1997, between ZMD Sports
Investments Inc. and Sport Maska Inc. Filed as Exhibit
10.41 to the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1996 and incorporated herein by
reference.
10.12 Deed of Lease, dated April 11, 1997, between 2938201 Canada
Inc. and Sport Maska Inc. Filed as Exhibit 10.42 to the
Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996 and incorporated herein by reference.
61
10.13 Settlement Agreement, dated November 21, 1995, among the
Company, certain subsidiaries, the Buddy L Creditors
Committee and certain Lenders. Filed as Exhibit 10.40 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference.
10.14 Form of U.S. Debenture Delivery Agreement, dated as of
April 1, 1997. Filed as Exhibit 10.44 to the Company's
Annual Report on Form 10-K/A for the year ended December
31, 1996 and incorporated herein by reference.
10.15 License and sponsorship agreement, dated September 25,
1998, among NHL Enterprises, L.P., NHL Enterprises
Canada, L.P., NHL Enterprises B.V., Sport Maska, Inc. and
Maska U.S. Inc. (filed herewith).
10.16 Amendment to license agreement, dated October 27, 1998,
among [as above] (filed herewith).
21 Subsidiaries of the Company (filed herewith).
27.1 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
On February 9, 1999, the Company filed a Current Report on Form 8-K with respect
to the filing of an amendment to the Company's Amended and Restated Certificate
of Incorporation pursuant to which the Company changed its name to "The Hockey
Company." This report was filed in compliance with Item 5 of Form 8-K.
On February 9, 1999, the Company filed a Current Report on Form 8-K with respect
to the completion of the acquisition of Sports Holdings Corp. This report was
filed in compliance with Item 2 of Form 8-K.
On March 9, 1999, the Company filed a Current Report on Form 8-K with respect to
the extension to subsidiaries of the Company of revolving credit loans furnished
by General Electric Capital Corporation and General Electric Capital Canada Inc.
This report was filed in compliance with Item 5 of Form 8-K.
62
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Williston, State
of Vermont, on the 21st day of March, 2000.
THE HOCKEY COMPANY
By: /s/ Russell J. David
--------------------------------------
Name: Russell J. David
Title: Senior Vice President, Finance & Administration
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has
been signed by the following persons in the capacities and on the dates
indicated. Each person whose signature to this Form 10-K appears below hereby
appoints Russell J. David as his attorney-in-fact to sign on his behalf
individually and in the capacity stated below and to file all amendments and
post-effective amendments to this Form 10-K, and any and all instruments or
documents filed as part of or in connection with this Form 10-K or the
amendments thereto, and any such attorney-in-fact may make such changes and
additions in this Form 10-K as such attorney-in-fact may deem necessary or
appropriate.
Signature Title Date
--------- ------ ----
/s/ Gerald B. Wasserman Chairman of the Board, President and March 21, 2000
--------------------------------------- Chief Executive Officer
Gerald B. Wasserman
/s/ Russell J. David Senior Vice President, Finance & March 21, 2000
--------------------------------------- Administration
Russell J. David
/s/ Paul M. Chute Director March 21, 2000
---------------------------------------
Paul M. Chute
/s/ Phil Bakes Director March 21, 2000
---------------------------------------
Phil Bakes
/s/ Greg S. Feldman Director March 21, 2000
---------------------------------------
Greg S. Feldman
/s/ Jason B. Fortin Director March 21, 2000
---------------------------------------
Jason B. Fortin
/s/ James C. Pendergast Director March 21, 2000
---------------------------------------
James C. Pendergast
63