===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------------------------------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number 0 - 19596
--------------------------------------------------------
THE HOCKEY COMPANY
(Exact name of registrant as specified in its charter)
Delaware 13-36-32297
-------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
c/o Maska U.S., Inc., 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
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES X NO
------ ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under the plan
confirmed by the court :
YES X NO
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2001
-------------------------------------------------------------------------------
Common Stock, 6,500,549
$.01 par value
PAGE NO.
--------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
Unaudited and Audited Consolidated Balance Sheets
at September 30, 2001 and December 31, 2000 1
Unaudited Consolidated Statements of Operations
for the Three and Nine Months ended September 30,
2001 and for the Three and Nine Months ended
September 30, 2000 2
Unaudited Consolidated Statements of Comprehensive
Income (Loss) for the Three and Nine Months ended
September 30, 2001 and for the Three and Nine
Months ended September 30, 2000 3
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2001 and
for the Nine Months ended September 30, 2000 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
THE HOCKEY COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
Unaudited Audited
-------------------------------------------
Sept. 30, 2001 Dec. 31, 2000
-------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 3,153 $ 2,423
Accounts receivable, net 67,837 39,376
Inventories (Note 2) 45,564 42,110
Prepaid expenses and other receivables 3,818 3,931
Income taxes receivable 1,774 4,043
-------------------------------
Total current assets 122,146 91,883
Property, plant and equipment, net of
accumulated depreciation and
amortization ($14,470 and $12,310,
respectively) 17,451 21,142
Intangible and other assets, net of
accumulated amortization (Note 3) 79,157 82,554
-------------------------------
Total assets $218,754 $195,579
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings (Note 4) $ 48,025 $ 12,282
Accounts payable and accrued liabilities 21,669 23,673
Income taxes payable 3,166 3,322
Long term debt, current portion 243 264
Other current liabilities 698 698
-------------------------------
Total current liabilities 73,801 40,239
Long-term debt (Note 4) 86,901 91,252
Deferred income taxes 517 495
-------------------------------
Total liabilities 161,219 131,986
-------------------------------
Contingencies (Note 8)
13% Pay-In-Kind preferred stock (Note 5) 11,511 11,333
Stockholders' equity
Common stock, par value $0.01 per share,
20,000,000 shares authorized
6,500,549 shares issued and outstanding 65 65
Re-organization warrants, 300,000 issued and
299,451 outstanding -- --
Common stock purchase warrants, 699,101 and
159,127 issued and outstanding at
September 30, 2001 and December 31, 2000,
respectively 5,115 1,665
Additional paid-in capital 66,515 66,515
Deficit (18,608) (9,290)
Foreign currency translation adjustments (7,063) (6,695)
-------------------------------
Total stockholders' equity 46,024 52,260
-------------------------------
Total liabilities and stockholders' equity $218,754 $195,579
===============================
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
1
THE HOCKEY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
For the Three For the Nine For the Three For the Nine
Months ended Months ended Months ended Months ended
Sept. 30, 2001 Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2000
------------------------------------------------------------------
Net sales $65,899 $142,986 $68,024 $147,044
Cost of goods sold before restructuring charges 38,479 83,931 40,458 86,763
Restructuring charges (Note 6) 286 1,187 -- -
-----------------------------------------------------------------
Gross profit 27,134 57,868 27,566 60,281
Selling, general and administrative expenses before
restructuring charges 15,446 44,294 17,459 48,412
Restructuring charges (Note 6) 810 2,815 -- -
Amortization of excess reorganization value and goodwill 1,098 3,303 1,119 3,381
-----------------------------------------------------------------
Operating income
9,780 7,456 8,988 8,488
Other (income) expense, net 885 1,989 (82) 280
Interest expense 3,622 10,335 3,793 9,941
-----------------------------------------------------------------
Income (loss) before income taxes and extraordinary item
5,273 (4,868) 5,277 (1,733)
Income taxes 1,378 1,604 1,557 1,066
-----------------------------------------------------------------
Net income (loss) before extraordinary item 3,895 (6,472) 3,720 (2,799)
Extraordinary item
Loss on early extinguishing of debt (Note 3) -- 1,091 -- --
-----------------------------------------------------------------
Net income (loss) $ 3,895 $ (7,563) $ 3,720 $ (2,799)
=================================================================
Preferred stock dividends 526 1,577 456 1,404
Accretion of 13% Pay-In-Kind preferred stock 59 178 58 179
-----------------------------------------------------------------
Net income (loss) attributable to common shareholders $ 3,310 $ (9,318) $ 3,206 $ (4,382)
=================================================================
Basic income (loss) before extraordinary item per share
(See Note 7) $ 0.46 $ (1.17) $ 0.48 $ (0.66)
Diluted income (loss) before extraordinary item per share
(See Note7) $ 0.46 $ (1.17) $ 0.48 $ (0.66)
Basic income (loss) per share (See Note 7) $ 0.46 $ (1.32) $ 0.48 $ (0.66)
Diluted income (loss) per share (See Note 7) $ 0.46 $ (1.32) $ 0.48 $ (0.66)
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
2
THE HOCKEY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For the Three For the Nine For the Three For the Nine
Months ended Months ended Months ended Months ended
Sept. 30, 2001 Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2000
------------------------------------------------------------------
Net income (loss) $3,895 $(7,563) $ 3,720 $(2,799)
Foreign currency translation adjustments 1,421 (368) (1,209) (1,834)
------------------------------------------------------------------
Net comprehensive income (loss) $5,316 $(7,931) $ 2,511 $(4,633)
==================================================================
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
3
THE HOCKEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
-------------------------------------------
For the Nine For the Nine
Months ended Months ended
Sept. 30, 2001 Sept. 30, 2000
-------------------------------------------
OPERATING ACTIVITIES:
Net loss before extraordinary items $ (6,472) $ (2,799)
Adjustments to reconcile net loss to net cash used in operating activities:
Restructuring charges 4,002 --
Depreciation and amortization 8,699 8,221
Provisions for inventory, doubtful accounts and other deductions 4,599 3,510
Deferred Income Taxes 167 (170)
Gain on sales of fixed assets (8) (17)
Gain on foreign exchange (298) (425)
Other 145 --
Change in operating assets and liabilities:
Accounts receivable (33,887) (30,317)
Inventories (6,203) (2,590)
Prepaid expenses and other assets 2,891 2,565
Accounts payable and accrued liabilities (6,848) (2,779)
Income taxes payable (36) (33)
-------------------------------------------
Net cash used in operating activities (33,249) (24,834)
===========================================
INVESTING ACTIVITIES:
Purchases of fixed assets (984) (2,204)
Proceeds from sales of fixed assets 342 29
Deferred expenses -- (1,292)
-------------------------------------------
Net cash used in investing activities (642) (3,467)
===========================================
FINANCING ACTIVITIES:
Net change in short-term borrowings 36,561 26,059
Proceeds from long-term debt 420 1,118
Principal payments on debt (184) (70)
Issuance of warrants 3,450 --
Deferred financing costs (5,550) --
-------------------------------------------
Net cash provided by financing activities 34,697 27,107
-------------------------------------------
Effects of foreign exchange rate changes on cash (76) (238)
-------------------------------------------
Increase (decrease) in cash 730 (1,432)
Cash and cash equivalents at beginning of period 2,423 3,519
-------------------------------------------
Cash and cash equivalents at end of period $ 3,153 $ 2,087
===========================================
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
4
THE HOCKEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS, CHANGE OF CORPORATE NAME AND PRINCIPLES OF
CONSOLIDATION
The Hockey Company ("THC" or the "Company") was incorporated in September 1991
and reorganized in April 1997.
The consolidated financial statements include the accounts of THC and its
wholly-owned subsidiaries. The Company designs, develops, manufactures and
markets a broad range of hockey and hockey related products. The Company
manufactures these 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(R), Jofa (R),
Koho (R), Heaton (R), Titan(R) and Canadien(R) brand names, and private label
brands and licensed sports apparel under the CCM(R) and #1 ApparEL tm brand
names. THC sells its products world-wide to a diverse customer base consisting
of mass merchandisers, sporting goods chains, independent retailers and
international distributors. THC manufactures and distributes most of its
products at facilities in North America, Finland and Sweden and sources products
internationally.
B. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements appearing
in this quarterly report have been prepared on a basis consistent with the
annual financial statements of THC and its subsidiaries.
In the opinion of management, all normal recurring adjustments necessary for a
fair presentation of the Company's Unaudited Consolidated Balance Sheets,
Statements of Operations, Statements of Comprehensive Income (Loss) and
Statements of Cash Flows for the 2001 and 2000 periods, have been included.
These unaudited interim consolidated financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles to be included in a full set of financial statements. Results for the
interim periods are not necessarily a basis from which to project results for
the full year due to the seasonality of the Company's business. These unaudited
consolidated financial statements should be read in conjunction with the
Company's annual report on Form 10-K, filed with the Securities and Exchange
Commission for the year ended December 31, 2000. Certain prior period amounts
have been reclassified to conform to the current period presentation.
C. ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounts Standards No 133 as of
January 2001, and no significant transition adjustment resulted from its
adoption.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No 141, Business Combinations, and No 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of $4,400 ($0.61 per share) per year. During 2002, the Company
will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, effective for fiscal year beginning after December 15,
2001. The new rules retain many of the fundamental recognition and measurement
provisions of Statement of Financial Accounting Standards No 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of.
The Company will apply the new rules effective January 1, 2002 and does not
expect that Statement of Financial Accounting Standards No 144 will have a
significant impact on the earnings and financial position of the Company.
5
THE HOCKEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
2. INVENTORIES
Net inventories consist of:
Sept. 30, 2001 December 31, 2000
-------------------------------------------------------------------------------
Finished products $33,611 $29,745
Work in process 3,279 2,727
Raw materials and supplies 8,674 9,638
--------------------------------------------
$45,564 $42,110
===============================================================================
3. INTANGIBLE AND OTHER ASSETS
Net intangible and other assets consist of:
Sept. 30, 2001 December 31, 2000
-------------------------------------------------------------------------------
Goodwill $43,582 $46,643
Excess Reorganization intangible 28,331 30,052
Deferred Financing Costs 4,388 2,084
Other 2,856 3,775
--------------------------------------------
$79,157 $82,554
===============================================================================
Amortization expense for intangible assets was $1,661 and $5,401 for the
three and nine months ended September 30, 2001 respectively, and $6,569 for the
twelve months ended December 31, 2000. A write-off of $1,091 of deferred
financing costs was recorded as an extraordinary item as a result of the
substantive modifications of the terms of the Company's Credit agreement. - (see
Note 4 b).
4. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
a) SHORT-TERM BORROWINGS
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 "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 "Canadian Credit Agreement") with
the lenders referred to therein and General Electric Capital Canada
Inc., as Agent and Lender. The 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
North American subsidiaries.
On March 14, 2001, (i) the Second Amendment to the U.S. Credit
Agreement was entered into by Maska U.S., as borrower, the Credit
Parties, the U.S. Lenders and General Electric Capital Corporation, as
Agent and Lender, and (ii) the Second Amendment to the Canadian Credit
Agreement was entered into by Sport Maska, as borrower, the Credit
Parties, the Canadian Lenders and General Electric Capital Canada
Inc., as Agent and Lender. On terms and subject to the conditions of
each of the Second Amendments, the Credit Agreements were amended to
reflect the Amended and Restated Credit Agreement (as hereinafter
defined). The maximum amount of loans and letters of credit that may
be outstanding under the two credit agreements is $60,000. Total
borrowings outstanding under the Credit Agreements at September 30,
2001 and December 31, 2000 were $42,933 and $12,282, respectively
(excluding outstanding letters of credit). The Credit Agreements were
for a period of two years with a possible extension of one year by the
Company.
6
THE HOCKEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Borrowings under the U.S. Credit Agreement bear interest at rates of
either U.S. prime rate plus 0.50%-1.25% or LIBOR plus 1.75%-2.75%
depending on the borrower's Operating Cash Flow Ratio, as defined in
the agreement. Borrowings under the Canadian Credit Agreement bear
interest at rates of either the Canadian prime rate plus 0.75%-1.50%
or LIBOR plus 1.75%-2.75% 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
credit agreements and certain other fees.
The 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 ("Jofa"), 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 65,000 ($6,325). The
facility is collateralized by the assets of Jofa, excluding
intellectual property, bears interest at a rate of STIBOR plus 0.65%
and is renewable annually. Total borrowings at September 30, 2001 and
December 31, 2000 were SEK 45,792 ($4,456) and nil, respectively.
Effective July 14, 1999, KHF Sports Oy ("KHF"), 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 30,000 ($4,602). The
facility is collateralized by the assets of KHF, bears interest at a
rate of EURIBOR plus 2.0% and is renewable annually. Total borrowings
as at September 2001 and December 31, 2000 were nil.
b) LONG-TERM DEBT
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 ("Caisse") to borrow a total of
Canadian $135,800. The loan was for a period of two years, renewable on November
19, 2000 at the Company's option.
On March 14, 2001, an Amended and Restated Credit Agreement was entered into by
the Company and Sport Maska, as borrowers, Caisse, as Agent and Lender, and
Montreal Trust Company, as Paying Agent (the "Amended and Restated Credit
Agreement"). On the terms and subject to the conditions of the Amended and
Restated Credit Agreement, Facility 1 of the Caisse Loan, which is a facility in
the maximum amount of Canadian $90,000, was extended to June 30, 2004, and
Facility 2 of the Caisse Loan, which is a facility in the maximum amount of
Canadian $45,800, was extended to October 31, 2002. A repayment of Facility 1 in
the minimum amount of Canadian $5,000 is due on January 31, 2004. Facility 1 and
Facility 2 have been fully utilized and no new advances are expected to be made
under the Amended and Restated Credit Agreement. Each facility bears interest
equal to the Canadian Banker's Acceptance Rate plus 6%, and Facility 2 bears
additional interest of 3.5% which is to be capitalized and repaid on Facility 2
maturity.
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 contains customary negative and affirmative covenants including those
relating to capital expenditures, total indebtedness to EBITDA and minimum
interest coverage.
In May 2000, Jofa AB, a subsidiary of the Company, entered into a loan agreement
with MeritaNordBanken Sweden to borrow SEK 10,000 ($1,100). The loan is for four
years with annual principal repayments of SEK 2,500 ($275). The loan is secured
by a chattel mortgage on the assets of the subsidiary and bears an interest rate
of STIBOR plus 1.25%.
5. COMMON STOCK, WARRANTS AND PREFERRED STOCK
The Company has authorized 20,000,000 shares of common stock, of which 6,500,549
are issued and outstanding.
7
THE HOCKEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Pursuant to the Warrant Agreement, dated as of March 14, 2001, between the
Company and Caisse, the Company issued a warrant to Caisse to purchase 539,974
shares of common stock, par value $.01 per share, of the Company, representing
approximately 7.5% of the outstanding common stock, on a fully diluted basis, at
an exercise price of $.01 per share. The number of shares issuable upon exercise
of the warrants is subject to certain adjustments as provided in the Warrant
Agreement. The fair value of the warrants was determined to be $3,450 and has
been recorded in shareholders' equity as stock purchase warrants. In addition,
the Company also issued warrants to Caisse to acquire 993,408 shares of common
stock, par value $.01 per share, which are only exercisable by Caisse if a
minimum EBITDA required is not met and if Facility 2 is not repaid in cash on
October 31, 2002.
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 September 30, 2001 unpaid
dividends totalled $5,253.
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
2001 104.333%
2002 102.166%
2003 and thereafter 100.000%
The preferred stock must be redeemed by the Company at the earlier of a change
of control or by November 19, 2005.
On September 26, 2001 the Company authorized the grant of employee stock options
to purchase 440,000 shares of common stock at an exercise price of $8.50 per
share, of which 255,000 shares are allocated to executive officers. In addition,
the Company has approved the reduction of the exercise price per share of stock
options held by certain employees relating to 160,000 shares at prices of $10.00
to $14.00 to $8.50, of which 150,000 shares are subject to options held by
executive officers.
6. RESTRUCTURING CHARGES
Effective January 24, 2001, the Company embarked on a plan to rationalize its
operations. This rationalization involved the elimination of certain
redundancies, both in terms of personnel and operations as well as the
consolidation of facilities including the closure of its Mount Forest, Ontario
plant. Accordingly, the Company has set up reserves totaling $4,002.
The Company has estimated that the restructuring charges would total $4,002 as
follows:
An amount of $2,986 has been accrued for severance packages in Canada and the
U.S., including the closure of the Mount Forest, Ontario plant. To date $2,212
has been spent.
An amount of $1,016 has been accrued to cover the cost of facility
consolidations. To date $736 has been spent.
7. EARNINGS PER SHARE
8
THE HOCKEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Net income (loss) per share for the three and nine-month periods are as follows:
For the Three Months For the Nine Months For the Three Months For the Nine Months
ended Sept. 30, 2001 ended Sept. 30, 2001 ended Sept. 30, 2000 ended Sept. 30, 200
---------------------------------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before
extraordinary item
attributable to common
stockholders $ 3,310 $ 3,310 $ (8,227) $ (8,227) $ 3,206 $ 3,206 $ (4,382) $ (4,382)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
attributable to common
stockholders $ 3,310 $ 3,310 $ (9,318) $ (9,318) $ 3,206 $ 3,206 $ (4,382) $ (4,382)
---------------------------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares outstanding:
---------------------------------------------------------------------------------------------------------------------------------
Common stock 6,500,549 6,500,549 6,500,549 6,500,549 6,500,549 6,500,549 6,500,549 6,500,549
---------------------------------------------------------------------------------------------------------------------------------
Common equiv. Shares (a) 698,114 698,114 548,333 548,333 158,946 158,946 158,946 158,946
---------------------------------------------------------------------------------------------------------------------------------
Total weighted average
common and common
equivalent shares
outstanding 7,198,663 7,198,663 7,048,882 7,048,882 6,659,495 6,659,495 6,659,495 6,659,495
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before
extraordinary item per
common share (b) $ 0.46 $ 0.46 $ (1.17) $ (1.17) $ 0.48 $ 0.48 $ (0.66) $ (0.66)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per
common share (b) $ 0.46 $ 0.46 $ (1.32) $ (1.32) $ 0.48 $ 0.48 $ (0.66) $ (0.66)
---------------------------------------------------------------------------------------------------------------------------------
(a) Common equivalent shares include warrants and stock options issuable for
little or no cash consideration.
(b) Other warrants and stock options are considered in diluted earning per share
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.
(c) Options to purchase 1,322,222 shares of common stock and warrants to
purchase 299,451 shares of common stock were outstanding during 2001
(982,222 and 299,451 in 2000 respectively) but were not included in the
computation of diluted earnings per share because the options exercise price
was greater than the average book value of the common stock.
8. CONTINGENCIES AND LITIGATION
A. ENVIRONMENTAL LITIGATION
In 1992, T. Copeland & Sons, Inc. (" Copeland "), the owner of a property
adjacent to Maska's former manufacturing and distribution 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 as a secured claim, the difference between
the aggregate value of the Common Stock and the amount of the promissory
note. In October 1998, Copeland's claim in the Bankruptcy Court to recover
this difference was disallowed without an evidentiary hearing. Copeland
filed an appeal of this decision. On May 1, 2000, the District Court
overruled the Bankruptcy Court's decision and remanded the claim to the
Bankruptcy Court for an evidentiary hearing. In February 2001, the Company
reached an agreement with Copeland and settled this claim for $1,000 in
cash.
9
THE HOCKEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
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 and October 20, 1997, ZMD Sports Investments Inc. and
2938201 Canada Inc., landlords of the Company's properties located in St.
Jean, Quebec and St. Hyacinthe, Quebec, respectively brought motions against
the Company which would require the Company to undertake certain repairs to
the properties for an estimated $630. The Company believes these motions to
be without merit.
Other than certain legal proceedings arising from the ordinary course of
business, which we believe 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 us.
9. 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 baseball style caps, jackets and other casual
apparel using its own designs and graphics.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
Segment assets only include inventory.
INFORMATION ABOUT SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
2001 Equipment Apparel Segment Total
--------------------------------------------------------------------------------------------
For the Three For the Nine For the Three For the Nine For the Three For the Nine
Months ended Months ended Months ended Months ended Months ended Months ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30 Sept. 30 Sept. 30
--------------------------------------------------------------------------------------------
Net sales to external customers $49,635 $105,326 $16,264 $37,660 $65,899 $142,986
Gross profit 19,789 42,032 7,345 15,836 27,134 57,868
Depreciation of property, plant
and equipment 611 1,962 92 343 703 2,305
Inventories 27,316 27,316 18,248 18,248 45,564 45,564
2000 Equipment Apparel Segment Total
--------------------------------------------------------------------------------------------
For the Three For the Nine For the Three For the Nine For the Three For the Nine
Months ended Months ended Months ended Months ended Months ended Months ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30 Sept. 30 Sept. 30
--------------------------------------------------------------------------------------------
Net sales to external customers $52,200 $114,204 $15,824 $32,840 $68,024 $147,044
Gross profit 21,089 47,383 6,477 12,898 27,566 60,281
10
THE HOCKEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Depreciation of property, plant
and equipment 689 2,086 136 411 825 2,497
Inventories 32,319 32,319 16,665 16,665 48,984 48,984
RECONCILIATION OF SEGMENT PROFIT OR LOSS
----------------------------------------------------------------
For the Three For the Nine For the Three For the Nine
Months ended Months ended Months ended Months ended
Sept. 30, 2001 Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2000
----------------------------------------------------------------
Segment Gross Profit $27,134 $57,868 $27,566 $60,281
Unallocated amounts:
Selling general and administrative expenses 15,446 44,294 17,459 48,412
Restructuring charges 810 2,815 - -
Amortization of excess reorganizational value
and goodwill 1,098 3,303 1,119 3,381
Other (income) expense, net 885 1,989 (82) 280
Interest expense 3,622 10,335 3,793 9,941
--------------- ---------------- --------------- ----------------
Income (loss) before income taxes and extraordinary item 5,273 (4,868) 5,277 (1,733)
--------------- ---------------- --------------- ----------------
11
THE HOCKEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2.
INTRODUCTION
The Hockey Company ("THC" or the "Company") was incorporated in September
1991 and reorganized in April 1997.
The operations of The Hockey Company and its subsidiaries include the
design, development, manufacturing and marketing of hockey and hockey related
products, including hockey uniforms, hockey sticks, protective equipment,
hockey, figure and inline skates and street hockey products, marketed under the
CCM(R), Jofa (R), Koho (R), Heaton (R), Titan(R) and Canadien (R) brand names,
and private label brands and licensed hockey apparel under the CCM(R), and #1
Apparel TM names. The Company sells its products worldwide to a diverse customer
base consisting of mass merchandisers, sporting goods chains, independent
retailers and international distributors. The Company manufactures and
distributes most of its products at facilities in North America, Finland and
Sweden and sources products internationally.
The Company's business is seasonal. The seasonality of the Company's
business affects net sales and borrowings under the Company's credit agreements.
Traditional quarterly fluctuations in the Company's business may vary in the
future depending upon, among other things, changes in order cycles and product
mix.
SELECTED FINANCIAL DATA
The following discussion provides an assessment of the Company's results of
continuing operations, financial condition and liquidity and capital resources,
and should be read in conjunction with the Unaudited Consolidated Financial
Statements of the Company and Notes thereto included elsewhere herein. (All
references to "Note(s)" refer to the Notes to Unaudited Consolidated Financial
Statements.)
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.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
2001 COMPARED TO 2000
Apparel net sales increased 14.7% to $37.7 million in the nine months ended
September 30, 2001, as compared to $32.8 million in the nine months ended
September 30, 2000. For the three months ended September 30, 2001, apparel net
sales were $16.3 million, representing a 2.8% increase compared to net sales in
the three months ended September 30, 2000 of $15.8 million. The increase was
attributable primarily to stronger demand resulting from the Company's exclusive
status under its license agreement with NHL Enterprises, LP, the marketing
affiliate of the NHL.
Equipment net sales decreased 7.8% to $105.3 million in the nine months
ended September 30, 2001, as compared to $114.2 million in the nine months ended
September 30, 2000. For the three months ended September 30, 2001, equipment net
sales were $49.6 million, representing a 4.9% decrease compared to net sales in
the three months ended September 30, 2000 of $52.2 million. The decrease was
attributable primarily to unfavourable exchange rates in 2001 compared to last
year and weaker sales of ice skates, protective equipment and sticks.
Gross profit on apparel sales before restructuring charges for the nine
months ended September 30, 2001 was $17.0 million compared to $12.9 million in
2000, an increase of 32.0%. Gross profit on apparel sales before restructuring
charges for the three months ended September 30, 2001 was $7.6 million compared
to $6.5 million in 2000, an increase of 17.8%.
12
THE HOCKEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Measured as a percentage of apparel net sales, gross profit margins before
restructuring charges increased to 45.2% in the first nine months of 2001 from
39.3% in the same period in 2000.
Gross profit on equipment sales for the nine months ended September 30,
2001 was $42.0 million compared to $47.4 million in 2000, a decrease of 11.3%.
Gross profit on equipment sales for the three months ended September 30, 2001
was $19.8 million compared to $21.1 million in 2000, a decrease of 6.2%.
Measured as a percentage of equipment net sales, gross profit margins decreased
to 39.9% in the first nine months of 2001 from 41.5% in the same period in 2000.
For the nine months ended September 30, 2001, selling, general and
administrative expenses before restructuring charges decreased 8.5% to $44.3
million compared to $48.4 million in the first nine months of 2000. In the three
months ended September 30, 2001, these expenses decreased 11.5% to $15.4 million
from $17.5 million in 2000. Measured as a percentage of net sales, in the first
nine months of the year the ratio also decreased to 31.0% in 2001 from 32.9% in
2000. The decrease in the selling, general and administrative expenses is a
result of first quarter restructuring activities (see Restructuring reserves),
offset by increased NHL commitments.
The amortization of excess reorganization value and goodwill decreased
slightly from $3.4 million in the first nine months of 2000 to $3.3 million in
the first nine months of 2001. The operating income before restructuring charges
for the nine months ended September 30, 2001 was $11.5 million, compared to $8.5
million for the nine months ending September 30, 2000.
Other expense consists primarily of amortization of deferred financing
costs.
Earnings before interest, taxes, depreciation and amortization (EBITDA),
which is a measure of cash generated from operations, was $18.8 million for the
nine months ($13.0 million for the three months) ended September 30, 2001
compared to $16.6 million for the nine months ($11.7 million for the three
months) ended September 30, 2000.
Interest expense of $10.3 million for the nine months ended September 30,
2001 increased by $0.4 million from the same period for the prior year ($9.9
million). The increase is mainly attributable to extension fees on short-term
borrowings the Company incurred in the first quarter of the year. For the three
months ended September 30, 2001 interest expense decreased to $3.6 million
compared to $3.8 million for the same period of the prior year.
As a result of a business restructuring at the beginning of the year, the
Company incurred costs related to severance and facility closures (restructuring
charges). - see Restructuring reserves.
The Company's net loss for the nine months ended September 30, 2001 was
$7.6 million compared to $2.8 million for the nine months ended September 30,
2000. For the three months ended September 30, 2001, the Company had a net
income of $3.9 million compared to $3.7 million for the three months ended
September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Management expects to finance the Company's working capital and capital
expenditure requirements through cash generated by its operations and through
its new credit facilities established on November 19, 1998 and amended and
restated on March 14, 2001.
Effective November 19, 1998, two of the Company's subsidiaries, Maska U.S,
Inc. and SHC Hockey Inc. entered into a credit agreement (the "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 " 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 "Credit
Agreements") is $60.0 million.
The Credit Agreements were for a period of two years with a possible
extension of one year by the Company, and were amended and restated on March 14,
2001. Total borrowings outstanding under the Credit Agreements were $42.9
million on September 30, 2001 (excluding $5.5 million of letters of credit
outstanding). Total borrowings as at December 31, 2000 under the Credit
Agreements were $12.3 million (excluding $0.9 million of letters of credit
outstanding).
13
THE HOCKEY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition, on March 14, 2001, an Amended and Restated Credit Agreement
was entered into by the Company and Sport Maska, as borrowers, Caisse de depot
et placement du Quebec ("Caisse"), as Agent and Lender, and Montreal Trust
Company, as Paying Agent (the "Amended and Restated Credit Agreement "). On the
terms and subject to the conditions of the Amended and Restated Credit
Agreement, Facility 1 of the Caisse Loan, which is a facility in the maximum
amount of Canadian $90 million, was extended to June 30, 2004, and Facility 2 of
the Caisse Loan, which is a facility in the maximum amount of Canadian $45.8
million, was extended to October 31, 2002. A repayment of Facility 1 in the
minimum amount of Canadian $5 million is due on January 31, 2004. Facility 1 and
Facility 2 have been fully utilized and no new advances are expected to be made
under the Amended and Restated Credit Agreement.
The Company's financing requirements for long-term growth, future capital
expenditures and debt service are expected to be met through its operations as
well as cash borrowed under its Credit Agreements. During the nine months ended
September 30, 2001, the Company's operations used $33.2 million of cash from its
operations as compared to $24.8 million of cash used in the same nine months of
2000.
Investing activities during the nine months ended September 30, 2001 and
the nine months ended September 30, 2000 included $1.0 million and $2.2 million,
respectively, of purchases of fixed assets.
During the nine months period ended September 30, 2001, financing
activities provided $36.6 million from borrowings under the Company's New Credit
Agreements and provided $26.1 million for the same period last year.
The Company follows the customary practice in the sporting goods industry
of offering extended payment terms to credit-worthy customers on qualified
orders. The Company's working capital requirements generally peak in the third
and fourth quarters as it builds inventory and makes shipments under these
extended payment terms.
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.
Management currently believes that the introduction of the Euro will not have a
material impact related to pricing or foreign currency exposures. Finland is one
of the countries adopting the Euro, however Sweden has not yet chosen to adopt
the new currency. The Finnish subsidiaries' base currency is now the Euro,
Sweden has yet to decide on adopting the new currency. The Company foresees no
adverse impact resulting from the Euro conversion, including competitive
implications related to pricing and foreign currency considerations. However,
uncertainty exists as to the effects the Euro will have on the marketplace.
RESTRUCTURING RESERVES
Effective January 24, 2001, the Company embarked on a plan to rationalize its
operations. This rationalization involved the elimination of certain
redundancies, both in terms of personnel and operations as well as the
consolidation of facilities including the closure of its Mount Forest, Ontario
plant. Accordingly, the Company has set up reserves totaling $4.0 million.
The Company has estimated that the restructuring charges would total $4.0
million as follows:
An amount of $3.0 million has been accrued for severance packages in Canada and
the U.S., including the closure of the Mount Forest, Ontario plant. To date $2.2
million has been spent.
An amount of $1.0 million has been accrued to cover the cost of facility
consolidations. To date $0.7 million has been spent.
14
THE HOCKEY COMPANY
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 8 of the Notes to Unaudited Consolidated
Financial Statements included in Part I of this report.
ITEM 2. CHANGES IN SECURITIES.
On September 26, 2001 the Company authorized the grant of employee
stock options to purchase 440,000 shares of common stock at an
exercise price of $8.50 per share, of which 255,000 shares are
allocated to executive officers. In addition, the Company has
approved the reduction of the exercise price per share of stock
options held by certain employees relating to 160,000 shares at
prices of $10.00 to $14.00 to $8.50, of which 150,000 shares are
subject to options held by executive officers.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the three months ended
September 30, 2001.
15
SIGNATURES
----------
Pursuant to the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
THE HOCKEY COMPANY
(REGISTRANT)
By: /s/ Robert A. Desrosiers
Name: Robert A. Desrosiers
Title: Vice President, Finance and Administration
(Principal Financial and Accounting Officer)
Date: October 31, 2001