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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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
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THE HOCKEY COMPANY
*AND THE SUBSIDIARIES LISTED
IN TABLE OF ADDITIONAL REGISTRANTS
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-36-32297
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3500 Boulevard De Maisonneuve, Suite 800 H3Z 3C1
Montreal, Quebec, Canada (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (514) 932-1118
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
None REGISTERED
None
Securities registered pursuant to Section 12(g) of the Act:
NON-VOTING EXCHANGEABLE COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /x/
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes No X
----- -----
The common stock of the registrant is not publicly registered or traded and,
therefore, no market value of the common stock held by affiliates or
non-affiliates can be readily ascertained.
As of February 19, 2004, 6,500,537 shares of the registrant's non
-voting exchangeable common stock, $.01 par value per share, and 5,475,174
shares of the registrant's voting common stock, $.01 par value per share, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
None
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*TABLE OF ADDITIONAL REGISTRANTS
NAME OF STATE OR OTHER JURISDICTION I.R.S. EMPLOYER
ADDITIONAL REGISTRANT# OF INCORPORATION OR FORMATION IDENTIFICATION NUMBER
--------------------------------------- ------------------------------- ------------------------
Jofa AB Sweden -
Jofa Holding AB Sweden -
Maska U.S., Inc. Vermont 03-0279482
SLM Trademark Acquisition New Brunswick -
Canada Corp.
SLM Trademark Acquisition Delaware 98-0229816
Corp.
Sport Maska Inc. New Brunswick -
Sports Holdings Corp. Delaware 03-0337606
WAP Holdings Inc. Delaware 03-0337605
# Addresses and telephone numbers of principal executive offices are the
same as those of The Hockey Company.
# No Additional Registrant has securities registered pursuant to Section
12(b) or Section 12(g) of the Act.
TABLE OF CONTENTS
PART I
Item 1. Business...........................................................................................2
Item 2. Properties........................................................................................18
Item 3. Legal Proceedings.................................................................................19
Item 4. Submission of Matters to a Vote of Security Holders...............................................19
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters.............................20
Item 6. Selected Consolidated Financial Data..............................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................39
Item 8. Financial Statements and Supplementary Data.......................................................40
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..............78
Item 9A. Controls and Procedures...........................................................................78
PART III
Item 10. Directors and Executive Officers of the Registrant................................................79
Item 11. Executive Compensation............................................................................82
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.........................................................................................87
Item 13. Certain Relationships and Related Transactions....................................................89
Item 14. Principal Accountant Fees and Services............................................................89
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................90
1
PART I
ITEM 1. BUSINESS
INDUSTRY OVERVIEW
The sporting goods industry serves a large and growing market, which
was estimated to represent approximately $49.8 billion in the United States in
2003. Within the sporting goods industry, we primarily compete in the hockey
equipment and related apparel market. The hockey equipment and related apparel
market is seasonal in nature, with the third and fourth quarters of the calendar
year representing the largest volume of sales. We estimate the size of this
worldwide market to be $681 million in sales in 2002. We are the leader in this
market with an approximate market share of 30%. Our principal competitors in
this market are Bauer Nike Hockey Inc., a subsidiary of Nike, Inc., with an
estimated market share in 2002 of 15%, and Easton Sports, Inc., with an
estimated market share in 2002 of 12%. The remaining market is highly
fragmented.
SPORTING GOODS INDUSTRY TRENDS
BABY BOOMERS. Baby boomers currently represent approximately 28% of the
total U.S. population. Baby boomers are entering their peak earning years, have
high disposable income and high-level leisure time, therefore stimulating
expenditures in the sporting goods industry. It is estimated that the mature
market, ages 55 and older, will grow by approximately 40% between 2000 and 2010,
representing an opportunity for higher end products.
RECREATION AND EXERCISE. There is heightened awareness of the
importance of recreation and exercise in general for health benefits.
Consequently, this trend has contributed to increased consumer spending in the
sporting goods industry.
INTERNATIONAL MARKETS. According to Sporting Goods Intelligence, a
publication of the National Sporting Goods Association, the sporting goods
markets in the U.S., Europe and Japan in 2000 represented $45.5 billion, $33.6
billion and $18.0 billion, respectively, in retail volume. The Sporting Goods
Manufacturers' Association has projected that total industry sales in the U.S.
measured in wholesale dollars, including footwear, apparel and equipment, will
grow by 1.3% to a record $50.4 billion in 2004.
HOCKEY EQUIPMENT AND APPAREL INDUSTRY TRENDS
YOUNG, AFFLUENT AND EDUCATED FANS. When compared with the National
Football League, Major League Baseball, the National Basketball Association and
NASCAR, a higher percentage of these NHL fans: are in the 18-49 age group; have
household incomes of more than $50,000; have a bachelor's degree or higher
education; have internet access; and own a personal computer. Fans are key
drivers of hockey-related apparel and, to the extent that fans are also hockey
participants, there is an opportunity for a more frequent product replacement
cycle and a likelihood that consumers will trade up for higher priced equipment
and apparel.
MARKET CONSOLIDATION. Retailers are increasingly focused on reducing
the number of suppliers they deal with. This favours manufacturers with a broad
product offering and has resulted in a consolidation of manufacturers in the
hockey equipment and related apparel market in recent years. This trend is
expected to continue.
OUR COMPANY
The Hockey Company, referred to as the Company, was incorporated in
September 1991 and reorganized in April 1997.
2
On February 9, 1999, The Hockey Company filed an amendment to change
the name of the company from SLM.
On June 11, 2003, we entered into a corporate reorganization whereby
we became a wholly owned subsidiary of The Hockey Company Holdings Inc.,
referred to as THC Holdings. THC Holdings completed an initial public offering,
referred to as the Offering, and issued 4,500,000 common shares for proceeds of
approximately $47.2 million (Cdn$64.1 million), net of issue fees and expenses
of approximately $5.8 million (Cdn$7.8 million). As a result, we issued
4,500,000 shares of a new class of voting common stock, par value $.01 per
share, to THC Holdings for proceeds of approximately $37.0 million (Cdn$50.4
million). On July 11, 2003, THC Holdings closed on the exercise by the
underwriters of their over-allotment option in connection with the initial
public offering. The underwriters purchased an additional 429,200 common shares
for proceeds of approximately $4.7 million (Cdn$6.4 million), net of issue fees
and expenses of approximately $0.4 million (Cdn$0.5 million). As a result, we
also issued 429,200 shares of voting common stock of the Company to THC Holdings
for proceeds of approximately $4.7 million (Cdn$6.4 million). THC Holdings'
common shares are listed on the Toronto Stock Exchange under the symbol "HCY".
As of December 31, 2002, the Company completed a reorganization of its
European subsidiaries whereby a Swedish holding company, named Nordic Hockey
Company AB, was formed. Nordic Hockey Company AB, pursuant to a series of share
transfers and contributions, became the direct parent company of each of Jofa
HoldingsAB and KHF Sports Oy. The reorganization was undertaken principally for
intercompany financing arrangements by having a Swedish company, rather than a
U.S. company, as the direct parent of each company.
We are the world's largest designer, manufacturer and marketer of
hockey equipment and related apparel. Our primary brands, CCM, JOFA and KOHO,
are among the most widely recognized brands in hockey and we estimate that we
have approximately a 30% share of the worldwide hockey equipment and related
apparel market. We also design, manufacture and market recreational skates and
other non-hockey products. We sell our products to a diverse customer base
consisting of specialty retailers, sporting goods shops, mass merchandisers and
international distributors. We manufacture in-house at six highly efficient
facilities, four of which are located in Canada and two in Europe. In addition,
where it makes business sense, we outsource the manufacturing of certain
products. We have distribution facilities located in North America, Finland,
Sweden and, as of January 2004, Germany. Our products are sold in approximately
45 countries. For the fiscal year ended December 31, 2003, we generated revenue
of $239.9 million and EBITDA, as defined on page 23, of $50.9 million.
We offer a complete line of hockey equipment, related apparel,
recreational skates and other non-hockey products. In 2003, hockey equipment
represented approximately 69% of our sales (including 3% attributable to
recreational skates and 5% to non-hockey products) and hockey-related apparel
represented approximately 31% of our sales.
We have been a National Hockey League, or NHL, licensee since 1967. We
are currently the exclusive supplier of hockey jerseys to every NHL team and
"on-ice" official and have the exclusive worldwide right to market authentic and
replica NHL jerseys. On March 28, 2003 we entered into a new license agreement
with the NHL which extends and enhances our exclusive relationship with the NHL
until at least June 2014. In addition, commencing with the 2003/2004 hockey
season, we have also become the exclusive supplier of helmets, pants, gloves,
shoulder, shin and elbow protective equipment, jerseys and socks to all teams in
the Canadian Hockey League, or CHL. An estimated 54% of current NHL players have
previously played in the CHL. We also have a very strong international presence
through sponsorship agreements with most of the major ice hockey organizations
in the world, including the International Ice Hockey Federation, Ice Hockey
Federation of Russia, Slovak Association of Ice Hockey and the national teams of
Finland, Sweden, Denmark, Norway and the Czech Republic.
We also entered into an on-ice equipment and apparel marketing and
licensing deal with the U.S. based ECHL, which will commence at the start of the
2004/2005 season and establishes us as the exclusive supplier of hockey sticks,
helmets, visors, gloves, pants and protective equipment to all 31 ECHL teams.
Our products are the most widely used by NHL players, which we believe
highlights and reinforces the marketplace's view of the innovative nature and
high quality of our equipment and apparel. As of October 2003, approximately 99%
of NHL
3
players used at least one piece of our equipment. In addition, ten of the top
17 ranked goaltenders in the NHL, as rated by The Hockey News for the
2002/2003 hockey season, used our goalie equipment. Furthermore, every NHL
player uses our apparel. We are the leading provider of helmets and other
protective equipment to NHL players. We are also the NHL's second largest
provider of other equipment, including skates, composite sticks and shafts
and blades for sticks. Many elite athletes have already switched to our CCM
Vector one-piece composite hockey sticks. In addition, approximately 100 NHL
players have already adopted the new CCM Vector Pro skate since its
commercial launch in the fall of 2003.
HOCKEY EQUIPMENT. Our comprehensive line of ice and roller hockey
equipment includes skates, protective equipment, hockey sticks and
goaltender equipment. This line provides a wide range of choices for
players at all levels of competition. Our products are sold at various
price points and range from high performance products used by
professionals in the NHL and other professional hockey leagues, to
intermediate performance products used by players of all ages and
calibre and to entry-level products for the beginner.
HOCKEY-RELATED APPAREL. Our comprehensive line of hockey-related
athletic apparel includes licensed hockey jerseys, team uniforms and
socks, licensed and branded performance apparel, outerwear, headwear
and activewear. We are also the world's largest manufacturer of team
uniforms and socks worn by players in hockey leagues, camps, schools
and associations. Our licensed and branded activewear lines include
high quality fleece wear, pants, shirts, T-shirts, polo shirts,
turtlenecks, outerwear and headwear embroidered with the NHL and/or NHL
teams' logos, CHL and other league logos and team logos.
RECREATIONAL SKATES. In the fall of 2002, we introduced our new Comfort
Series of recreational skates. This skate is designed for women and
girls who seek a product that is warmer, more comfortable and more
stylish than a traditional figure skate. This line of products fills a
gap in the market for customers who seek an alternative to the
traditional white skate. We believe that our new Comfort Series will
accelerate the product replacement cycle by encouraging traditional
skate users to migrate to our recreational line of skates. We also
introduced our Classic Series of recreational and figure skates in the
fall of 2002. Our Comfort Series and the figure skates in our Classic
Series are endorsed by 2002 Olympic pairs figure skating gold
medallists, Jamie Sale and David Pelletier.
OTHER NON-HOCKEY PRODUCTS. In addition to our primary hockey-related
equipment and apparel and our recreational skates, we are the exclusive
distributor of Merrell footwear, a leading outdoor footwear brand, in
Finland and Sweden. We also design, manufacture and market other
non-hockey-related equipment, including alpine skiing and equestrian
helmets.
Please refer to the Consolidated Financial Statements and related notes
included in this Form 10-K for more information on our segments.
OUR COMPETITIVE STRENGTHS
LEADING WORLDWIDE BRANDS AND MARKET POSITION. We have many of the
world's most established and widely recognized hockey brands, including CCM,
JOFA and KOHO. The CCM brand has been in existence since 1899, JOFA since 1926
and KOHO since 1964. Each brand is focused on a specific segment of the market:
CCM is one of the industry's icon brands and embodies the tradition and history
of hockey; the JOFA brand represents precision engineered Swedish equipment and
appeals to the "technically savvy" hockey player; and KOHO is our "fast," "fun,"
"irreverent" brand, largely geared to the "free-wheeling" type of player, with
an emphasis on the youth market. We estimate the worldwide hockey equipment and
related apparel market at $681 million in sales in 2002. We estimate our share
of this market at 30%. Our closest competitor's market share is estimated at
15%. We believe that our new NHL, CHL and ECHL agreements will help further our
market share gain in the sector going forward.
EXCLUSIVE NHL, CHL ECHL AND AHL RELATIONSHIPS AND OTHER
RELATIONSHIPS. Pursuant to our current license agreement with National Hockey
League Enterprises, LP, or NHL Enterprises, referred to as the Current NHL
License Agreement, we are the exclusive supplier of hockey jerseys to every
NHL team and have the exclusive worldwide rights to market authentic and
replica NHL jerseys. Our jerseys are worn by every player and "on-ice"
official in the NHL. Since the 2000/2001 NHL season, the CCM logo appears
above each player's name on every
4
"home" NHL jersey, while the KOHO logo appears above each player's name on every
"away" and "third" NHL jersey. We are also the exclusive supplier of "on-ice"
jerseys and pants for NHL officials under the JOFA brand name. While the Current
NHL License Agreement expires on June 30, 2005, on March 28, 2003 we entered
into a new license agreement effective July 1, 2004, referred to as the New NHL
License Agreement, with NHL Enterprises, which extends our exclusive
relationship with the NHL until at least June 2014. The New NHL License
Agreement significantly enhances our relationship with the NHL by providing us
with numerous additional rights and opportunities, which were not included in
the Current NHL License Agreement. Certain of our new rights include:
o the exclusive right to manufacture and market authentic vintage NHL
jerseys;
o the semi-exclusive right to manufacture and market replica vintage NHL
jerseys along with one other supplier;
o the right to define, in cooperation with the NHL, the future look of
hockey;
o the exclusive right to manufacture and market hockey socks with the
trademarks of the NHL and/or NHL teams;
o the exclusive right to manufacture and market NHL price point jerseys
(which simulate replica jerseys), except to certain U.S. customers;
o the right to market collectable mini jerseys;
o the right to manufacture and market skates, sticks, helmets, pants,
gloves, equipment bags, shin, shoulder, and elbow pads bearing
trademarks of the NHL and/or NHL teams;
o the right to use the NHL team logos on fan and vintage apparel,
including T-shirts, headwear, workout wear, outerwear and activewear;
and
o the exclusive right to market headwear bearing NHL team logos, names
and designs under the NHL Center Ice trademark.
Pursuant to a separate agreement with the National Hockey League Players
Association, referred to as the NHLPA, we are entitled to market authentic and
replica game and practice jerseys identified with the names and numbers of every
NHL player.
Similar to our New NHL License Agreement, we have the exclusive right
to manufacture and sell authentic and replica jerseys to all 56 CHL teams
pursuant to a new five-year agreement with the CHL commencing with the 2003/2004
hockey season. We also have the exclusive right to supply all CHL players with
helmets, pants, gloves, shoulder, shin and elbow protective equipment and socks.
In addition, we will become the exclusive supplier of pants, helmets and jerseys
to all "on-ice" officials in the CHL. The CHL is the premier junior hockey
league in the world with 56 teams and approximately 1,300 players. An estimated
54% of current NHL players have previously played in the CHL. Most of the 56 CHL
teams are located in cities, which do not currently have an NHL franchise,
thereby significantly extending the reach of our brands.
We also entered into an on-ice equipment and apparel marketing and
licensing deal with the U.S. based ECHL, which will commence at the start of the
2004/2005 hockey season and establishes us as the exclusive supplier of hockey
sticks, helmets, visors, gloves, pants and protective equipment to all 31 ECHL
teams. The ECHL has 31 teams in 17 states which play 1,116 games, making it the
largest league in professional hockey. There have been 235 ECHL players that
have advanced to the NHL, including 20 in the 2003/2004 hockey season that have
made their first NHL appearance since playing in the ECHL. There were 53 former
ECHL players on NHL 2003/2004 season opening-day rosters. The ECHL has
affiliations with 21 of the 30 teams in the NHL in the 2003/2004 hockey season
and there has been an ECHL player on each of the 30 NHL teams during the
2003/2004 hockey season. We also have sponsorship agreements with most of the
major hockey organizations in the world, including the International Ice Hockey
Federation, Ice Hockey Federation of Russia, Slovak Association of Ice Hockey,
national teams of Finland, Sweden, Denmark, Norway and the Czech Republic,
American Hockey League, U.S. Hockey League and USA Hockey.
We recently reached a sponsorship agreement with the American Hockey
League "AHL", which will commence at the start of the 2004/2005 hockey season
and establishes us as the exclusive supplier of hockey sticks, helmets
gloves, pants jerseys and socks to 26 of the 28 teams. The terms of the
agreement is 10 years made up of a 4 year term plus two additional 3 year
terms at the AHL's option. The multi-faceted partnership encompasses on-ice
branding programs, in-arena and grass roots marketing programs, as well as a
licensed jersey & apparel program. The AHL has entered its 68th season with
28 teams across North America. All AHL teams have a direct affiliation with
an NHL franchise. More than 80% of all players competing in the NHL today are
AHL graduates.
In our recreational skate category, our new Comfort Series of
recreational skates and our Classic Series of figure skates, introduced in
the fall of 2002, are endorsed by 2002 Olympic pairs figure skating gold
medallists Jamie Sale and David Pelletier.
5
EXTENSIVE USE OF OUR PRODUCTS IN THE NHL. Our products are the most
widely used by NHL players, which we believe highlights and reinforces the
marketplace's view of the innovative nature and high quality of our equipment
and related apparel. As of October 2003, approximately 99% of NHL players
used at least one piece of our equipment. In addition, ten of the top 17
ranked goaltenders in the NHL, as rated by The Hockey News for the 2002/2003
hockey season, used our goalie equipment. Furthermore, every NHL player uses
our apparel. We are the leading provider of helmets and other protective
equipment to NHL players. We are also the NHL's second largest provider of
other equipment, including skates, composite sticks and shafts and blades for
sticks. Many elite athletes have already switched to our CCM Vector one-piece
composite hockey stick. In addition, approximately 100 NHL players have
already adopted the new CCM Vector Pro skate since its commercial launch in
the fall of 2003. To further develop and maintain our leading market position
for our equipment and our brands, we have endorsement agreements with several
high visibility players including, among others, Martin Brodeur of the New
Jersey Devils, Joe Thornton of the Boston Bruins, Daniel Sedin and Henrik
Sedin of the Vancouver Canucks, Mark Recchi of the Philadelphia Flyers,
Roberto Luongo of the Florida Panthers, Vincent Lecavalier of the Tampa Bay
Lightning, Shane Doan of the Phoenix Coyotes, Jean-Sebastien Giguere of the
Anaheim Mighty Ducks, Tony Amonte of the Philadelphia Flyers and Jaromir Jagr
of the New York Rangers.
WORLD LEADER IN PRODUCT INNOVATION. We are an industry leader in
product innovation, and have dedicated significant resources to ensure our
future technological leadership. The majority of our products are developed
and commercialized in our three principal research and development centres
located in St-Jean, Quebec, Tammela, Finland and Malung, Sweden. The majority
of our products are developed internally through our research efforts and
continued feedback from professional and recreational players, as well as
from retail customers. We also have strong relationships with key suppliers
who assist in our development efforts. In addition, we have developed a
relationship with the University of Windsor. This relationship supports our
efforts to develop equipment performance benchmarks, as well as new materials
and equipment designs. As an example, this relationship was instrumental in
the development of our Vector one-piece composite hockey stick. In tests
performed by the University of Windsor, the Vector 110 and 120 one-piece
composite hockey stick have proven to be the leading stick for puck velocity
and durability and provides its users with unique balance properties. Some
other new product innovations introduced include our new Zero Gravity Vector
skate designed exclusively with t-blade technology, our CCM Vector Pro Skate,
our Gatekeeper Goalie pads, catch gloves and blockers, our Pro Tacks series
of protective equipment, our Performance Brand Apparel and our `Heroes of
Hockey' Vintage Jersey Series.
FULL LINE OF HOCKEY EQUIPMENT AND RELATED APPAREL. We are the only
company that offers a full line of ice and roller hockey equipment, NHL licensed
jerseys and other related apparel. Our products are sold at various price points
and range from high performance products used by professionals in the NHL and
other professional leagues worldwide, to intermediate performance products used
by youth league players, to entry-level products for the beginner. Our
comprehensive lines of products allow us to cover the full spectrum of
consumers, diversify our revenue base and optimize production capacity at our
manufacturing facilities. Further, our full line of products enhances our
relationship with our customers, who are increasingly focused on dealing with
fewer suppliers with more complete product lines.
COST-EFFICIENT MANUFACTURING PROCESSES. We continuously evaluate our
manufacturing processes and use in-house manufacturing where our proprietary
technologies and processes provide us with a competitive advantage. Through the
use of proprietary technologies and extensive automation, we believe we have
developed many of the industry's most advanced hockey equipment and related
apparel manufacturing processes. We believe that we operate the industry's most
advanced skate manufacturing facility in St-Jean, Quebec, the industry's most
automated hockey stick production facility in Cowansville, Quebec and the
industry's most efficient hockey apparel production facility in St-Hyacinthe,
Quebec.
For other product lines where we do not have a distinct competitive
manufacturing advantage, we outsource production to high quality facilities,
primarily in Asia, the Czech Republic and Mexico. Approximately 57% of our
product lines by sales are currently manufactured in-house while 43% is
outsourced. In order to maintain our leading market position and continue to be
a leader in product innovation, we will continue to make our business more
flexible and less capital intensive by outsourcing the manufacturing of our
products where it makes strategic and business sense. We believe that strategic
outsourcing of selected manufacturing processes may result in reduced costs, an
improved ability to balance our manufacturing capacity and a shorter time to
market for new products.
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EXTENSIVE MULTI-CHANNEL DISTRIBUTION RELATIONSHIPS. Our products are
sold internationally to more than 6,000 customers, consisting of specialty
retailers, sporting goods shops, mass merchandisers, teams and international
distributors. In North America, we have sales offices in Montreal, Quebec and
Branford, Connecticut. Internationally, we have sales offices in Sweden,
Finland, Norway and Germany and distributors in over 40 countries in Europe and
the Far East. Our products are sold to certain large customers by our in-house
sales force, while an extensive network of approximately 70 independent sales
representatives services other accounts. We distribute our products from
distribution centers in Canada, the United States, Finland, Sweden and Germany.
In 2003, we generated approximately 36% of our revenue in the United States,
approximately 35% in Canada, approximately 13% in Sweden, approximately 6% in
Finland and approximately 10% in Russia and other countries.
Management believes that we have an excellent relationship with our
largest customers. In 2003, we were named "Category Captain" by Wal-Mart
Canada and awarded the "Vendor of the Year" award by Play It Again Sports in
the U.S. In 2001 and 2002, we were the recipient of Canadian Tire's "Service
Recognition" award.
STRONG AND EXPERIENCED MANAGEMENT TEAM. We have a strong and
experienced management team at the corporate and operating levels. Our senior
management has an average of 17 years experience in the hockey and sporting
goods industry.
OUR GROWTH STRATEGY
Our objectives are to grow both revenues and operating margins by
accelerating the product replacement cycle through product innovation,
maintaining our overall market leadership position and becoming the undisputed
leader in each key segment of the global market for hockey equipment and related
apparel. Key elements of our growth strategy are as follows:
DRIVE GROWTH THROUGH PRODUCT INNOVATION
Since 1937, when we introduced the revolutionary Tackaberry (Tacks)
hockey skate, through the recent launch of our 745-gram Vector Zero Gravity
skate, we have a long history of being a leader in bringing technological
advancements and equipment innovations to the hockey industry. We will continue
to drive our growth through continued product innovation, which we believe
strengthens our brands and creates a more rapid equipment replacement cycle. Our
goal is to replace and/or refresh our products every second year. By continually
introducing innovative products, we are able to compete primarily on technology
and brand rather than on price, resulting in higher margins and stronger brand
differentiation.
Some of our recent product innovations include:
o CCM VECTOR ZG (ZERO GRAVITY) SKATE PRODUCTS. This new skate
product is designed exclusively with t-blade technology and the
new Vector ZG boot technology. It provides hockey players with
the lightest skate in the market at only 745 g. The t-blade
system features a thin highly polished stainless surgical steel
runner (blade) that is ultra light, super fast and offers a
consistent customizable edge. The boot features the new
Asymmetrical Externo-Skel technology which reduces mass and adds
stiffness to the outside layer of the skate for maximum support,
protection and durability.
o CCM VECTOR PRO SKATE. This skate is one of the lightest skates
launched at the start of the 2003/2004 NHL season and delivers
support that moves with the player while maximizing comfort. It
is a lightweight, well-balanced design and is only 798 g. This
allows the skater to maximize stride frequency, resulting in
maximal acceleration and top end velocity. The Externo-Skel
technology is a key element to reducing mass in the skate since
it eliminates a layer of material and adds stiffness to the
outside layer of the skate. It also delivers support, protection
and durability. The Skate Lock locks the lace at the pivot point,
positioned at the 4th eyelet, allowing players to lock-in
forefoot comfort and support, independently of the top 3 eyelets.
Players can then personally customize their support by
7
tightening the top 3 eyelets independently from the forefoot. The
end result is constant dynamic support that moves with the skater
that maximizes the power of each stride.
o CCM GATEKEEPER PRO SERIES OF GOALIE PADS, CATCH GLOVES AND
BLOCKERS. This series features an innovative concept that uses
the latest technologies with a traditional design. Designed for
pro goalies like 2003 Stanley Cup Champion and Vezina Trophy
winner Martin Brodeur and 2000 Vezina Trophy winner Olaf Kolzig,
the GATEKEEPER(TM) series was built using lightweight materials
to minimize reaction time.
o PRO TACKS SERIES OF PROTECTIVE EQUIPMENT. With input from premier
NHL players like Joe Thornton and Vincent Lecavalier, the series
was built on a classic styling platform. The Pro Tacks series
encompasses the most modern of materials and design processes and
the F-I-T-System customized features provide not only a great
fit, but the ability for each player to adjust their level of
protection. The H2O Control liner helps keep the body cool by
wicking moisture away from the skin. The end result is the
optimal combination of impact protection, lightweight design, and
personal customization. CCM also offers the same standard and
quality features of the Pro Tacks protective series to the youth
elite player.
o CCM VECTOR 120 ONE-PIECE STICK. This new one piece composite stick with
its super lightweight design features a rubberized texture that provides
a better feel and grip. An exposed Texalium Matrix blade provides a
dynamic new look and increased shot velocity. A fit system helps
identify the best shaft geometry - `C' or contoured for finesse players
preferring rounder corners or `T' for players wanting a more traditional
square shape. In addition, a variety of different shaft flexes allow
players of different sizes and strengths to choose a stick that will
allow them to optimally load the shaft for harder shots. Patented
"Impact Layer Technology" is a white thermoplastic resin layer within
the shaft's graphite laminates that provides 30% extra durability. It
works like a trampoline, allowing the delicate graphite fibers to absorb
impacts and spring back.
o PERFORMANCE BRAND APPAREL. This new line of apparel fit is for all types
of players and fans. The new line, which includes the Performance Fit
Series, Extreme Series, team Wear Series and Custom program, features
new looks and fabrics throughout.
o 2004 `HEROES OF HOCKEY' VINTAGE JERSEY SERIES. This new jersey
line features names and numbers of players of the past, on a
vintage design of their respective era. The vintage jerseys,
which have a retro look to them, are based on team logos and
designs from hockey's past. The names and numbers of players
include Orr, Gretzky, Dionne, Bossy and Roy.
EXPAND WITH NEW PRODUCT CATEGORIES
We continually seek new product categories that will allow us to
increase our current revenue base. Such initiatives include expanding into new
branded and licensed apparel markets. Examples include a CCM vintage apparel
line, lifestyle apparel products, women's replica jerseys and performance
apparel. Under our New NHL License Agreement, we also have obtained the right to
use NHL league and team logos on certain ice hockey products which we believe
will provide additional sales opportunities. In addition, there are a number of
hockey-related accessory products that we believe we can successfully bring to
market. Finally, we plan to increase revenues through the licensing of our
brands for certain other products.
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EXPAND INTERNATIONAL SALES
We believe that there exists untapped demand for our products in
international hockey markets, especially in the former Soviet Bloc countries and
in Central Europe. Consequently, we recently commenced a new distribution
relationship with a company in Russia. Russia alone has the potential to be the
third largest hockey market in the world and participation continues to
increase. Our sales of hockey sticks, CCM brand hockey skates and apparel are
increasing in Russia. Our gross sales in the former Soviet Bloc countries
increased from $1.2 million in 1998 to $8.0 million in 2003.
PURSUE STRATEGIC ACQUISITIONS
We plan to supplement our internal growth with selected strategic
acquisitions that would complement our product offering, benefit from our strong
brands or leverage our broad and diverse distribution network. As recently as
August 21, 2003, we acquired all of the issued and outstanding shares of Roger
Edwards Sport Ltd., which has established itself as a leading vintage sports
apparel brand recognized for its premium quality lifestyle apparel products and
was recently selected by the Canadian Football League as the exclusive apparel
designer for the new CFL Turf Traditions line, including vintage replica
jerseys, apparel and headwear. On January 5, 2004, we acquired Norbert Ewald
GmbH ("Ewald"), a former distributor of our products and a leading hockey
equipment distributor in Germany, in order to better service the Central
European market. This acquisition will continue to strengthen our existing
presence in the Central European hockey market. On January 16, 2004, we
purchased a 33 1/3% ownership stake in t'blade Inc., the exclusive marketer and
distributor of t'-blade products and technology in North America, based on our
belief that the T-BLADE technology is the next standard of ice skate blade
technology. While we have no other agreements regarding any material
acquisitions as of the date hereof, we continuously review opportunities as they
arise.
OUR PRODUCTS
We manufacture and market a fully integrated line of hockey equipment
and related apparel. Our hockey equipment product lines include ice hockey and
roller hockey skates, hockey sticks, protective body equipment and gloves,
helmets, pants and accessories, and goaltender equipment. Our hockey-related
apparel products include NHL licensed hockey jerseys, team uniforms and socks,
and licensed and branded activewear. We also manufacture and market recreational
and non-hockey products, including recreational skates.
HOCKEY EQUIPMENT PRODUCT LINES
ICE HOCKEY AND ROLLER HOCKEY SKATES. We manufacture and market a wide
range of ice hockey skates primarily under the CCM brand name. The tradition of
CCM skates, first introduced to the market in 1905, is interwoven throughout the
history of ice hockey and the NHL and is led by two premium lines of skates; the
Tacks series and the Vector series. The two lines offer distinct product
features and are targeted at different market segments. They are both compatible
with CCM's F-I-T System technology. We manufacture all of our high end ice
hockey skates and outsource all of our entry level ice hockey, roller hockey and
figure skates. We focus on marketing premium roller hockey skates targeted at
high price points.
HOCKEY STICKS. We believe that we are the premier manufacturer of
hockey sticks and set the industry standards for quality, innovation and
performance. We market a wide range of hockey sticks incorporating various
materials, designs and performance characteristics. Our sticks are sold under
the CCM, JOFA and KOHO brands. Led by the technologically advanced Vector
one-piece composite stick, our product line ranges from high performance
composite sticks, shafts and blades to entry-level wood constructions.
PROTECTIVE BODY EQUIPMENT AND GLOVES. We market a variety of protective
body equipment, including shoulder pads, shin guards, elbow pads and gloves
under the CCM, JOFA and KOHO brands. CCM gloves and body protective equipment
are marketed under the Tacks sub-brand. JOFA is the only brand carrying the NHL
"Center Ice" logo. Its patented JDP, ASD and Hyper X technologies make it the
protective brand of choice for 99% of NHL players.
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HELMETS. We market our helmets under the CCM and JOFA labels, which
have been two of the leading brands of helmets for over 30 years. More players
in the NHL wear our helmets than any other competitor's products. Our helmets
are certified by CSA International and the Hockey Equipment Certification
Council and prominently display the CCM and JOFA brand names.
PANTS AND ACCESSORIES. We market hockey pants under the CCM, JOFA and
KOHO labels. CCM branded pants also carry the Tacks sub-brand name. At the NHL
level, CCM pants are worn by more players than any other brand. In addition, we
market several accessories, such as carry bags and equipment for officials.
GOALTENDER EQUIPMENT. We produce a fully integrated line of goaltender
equipment. We market our goaltender facemasks, catch mitts and blockers, pants,
goaltender arm and body protectors and leg pads under the CCM and KOHO brands.
In addition, ten of the top 17 ranked goaltenders in the NHL, as rated by The
Hockey News for the 2002/2003 hockey season, used our goalie equipment.
HOCKEY-RELATED APPAREL PRODUCTS
LICENSED HOCKEY JERSEYS. We have supplied NHL teams with authentic
jerseys for over 35 years. Pursuant to our Current NHL License Agreement, we
have the exclusive right to provide authentic jerseys used by every team in
the NHL and have the exclusive right to market authentic and replica jerseys
of all 30 teams. In addition to our Current NHL License Agreement, under our
license agreement with the NHLPA, we have the right to market these jerseys
with the names and numbers of NHL players. In addition to our Current NHL
License Agreement, we also maintain agreements to provide jerseys to
professional teams in other leagues. Beginning with the 2003/2004 season, we
became the exclusive jersey supplier to all 56 CHL teams.
TEAM UNIFORMS AND SOCKS. We sell non-team identified team uniforms and
socks that are primarily used by organized leagues, amateur hockey associations
and schools. The majority of these jerseys are of replica quality and are sold
through retail channels. We also produce hockey socks for both professional and
recreational markets.
LICENSED AND BRANDED ACTIVEWEAR. We offer a high quality line of
performance apparel, outerwear, activewear, T-shirts and headwear bearing our
brands, the NHL and/or NHL teams' logos and other league and team logos. We
market these products pursuant to several license agreements with a variety of
organizations, including the NHL, major colleges and universities and USA
Hockey. We outsource the production of all of our activewear products.
RECREATIONAL SKATES
Our line of recreational skates includes traditional figure skates and
other recreational skates. Our new Comfort Series of recreational skates,
designed for women and girls who seek a product that is warmer, more comfortable
and more stylish than a traditional figure skate and our Classic Series of
recreational and figure skates were introduced in the fall of 2002. Our Comfort
Series and the figure skates in our Classic Series are endorsed by 2002 Olympic
pairs figure skating gold medallists, Jamie Sale and David Pelletier.
OTHER NON-HOCKEY PRODUCTS
In addition to our primary hockey-related equipment and apparel and
our recreational skates, we also design, manufacture and market other equipment,
including alpine skiing and equestrian helmets. In addition, we are the
exclusive distributor of Merrell footwear, a leading outdoor footwear brand, in
Finland and Sweden.
OUR BRANDS
We conducted in-depth marketing studies to gain insight into customers'
preferences of our hockey brands and provide a basis for our multiple brand
strategy. Our market research has demonstrated that our three main brands, CCM,
JOFA and KOHO, maintain distinct brand identities in the marketplace and appeal
to different consumer segments. Our multiple brand strategy allows us to respond
to the needs of the whole market and target different market segments and price
points which would otherwise be difficult with a single brand strategy. We
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differentiate each of our brands through their unique appearance and their
distinct performance and construction attributes. We position each of our brands
in the marketplace as follows:
CCM. CCM, established in 1899, is one of the industry's icon brands and
embodies the tradition and history of hockey. The CCM name represents a century
of tradition combined with state-of-the-art technology. CCM products are sold
across the full spectrum of the pricing range, covering all key retail price
points.
JOFA. The JOFA brand, established in 1926, represents precision
engineered Swedish equipment and appeals to the "technically savvy" hockey
player. JOFA products are sold at the mid to above premium point of the pricing
range.
KOHO. KOHO, established in 1964, is our "fast," "fun," "irreverent"
brand, largely geared to the "free-wheeling" type of player, with emphasis on
the youth market. The KOHO brand is focused on creating high performance hockey
tools. KOHO stick and protective products are primarily sold at the mid to low
point of the pricing range whereas goalie products are sold across the full
spectrum of the pricing range.
Working with advertising agencies, we created individual slogans and
marketing campaigns for each of the CCM, JOFA and KOHO brands that embody these
brands' unique identities and key attributes. We have introduced the slogan
"when you're born to play" to reinforce CCM's attributes of tradition and
authenticity. Consistent with JOFA's attribute of precise Swedish engineering,
we have created the slogan "smart hockey." KOHO's slogan, "a whole new game,"
reinforces the brand's irreverent quality. Our advertising campaigns are
designed to clearly communicate the distinct image of each of our main brands.
The popularity of our brands and our products are also reflected in our web site
activity (www.ccmsports.com, www.koho.com and www.jofa.com).
SALES AND MARKETING
Our sales and marketing effort is based on a strategy internally
referred to as the "Power Triangle". At the cornerstone of this strategy is our
first goal to bring innovative products to market every year. Second, we provide
validation of our new products through use by NHL and other elite player usage.
Third, we use various media to promote and reinforce our brands and make our
products known to the consumer and to the trade.
ELITE ATHLETE USAGE. We believe that we have a unique market position
when it comes to validating our products through elite athlete usage. The strong
penetration of our products in the NHL, our Current NHL License Agreement, our
New NHL License Agreement and our other major alliances and sponsorship
agreements allow us to highlight the advanced performance features of our
products and provide a high level of exposure for our brands through elite
athletes. On March 7, 2003, CCM was awarded the NHL's "All-Star Player" trophy
for excellence in sports marketing. CCM won this award for its Externo Joe
Thornton campaign, based on its "Best Use of NHL Players" and "Best NHL Partner
Activation" using NHL athletes. We intend to leverage existing relationships and
enter into new agreements and alliances to continue to promote our products.
Some key elements of our elite athlete usage strategy include:
o EXCLUSIVE NHL LICENSE AGREEMENT. We are the exclusive supplier of
hockey jerseys to every NHL team and have the exclusive worldwide right to
market authentic and replica NHL jerseys. Our jerseys are worn by every player
and "on-ice" official in the NHL.
o NHL MARQUEE PLAYER ENDORSEMENT CONTRACTS. We have endorsement
agreements with 18 high visibility NHL players that allow us to use their names
and likeness for communication purposes and require them to be available for
personal appearances.
o NHL USAGE. Our products are the most widely used by NHL players. As
of October 2003, approximately 99% of NHL players used at least one piece of our
high performance equipment and every NHL player uses our apparel. We have 16
employees who are solely dedicated to serving the needs of these players.
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o EXCLUSIVE SUPPLIER TO THE CHL. Pursuant to a new five-year agreement,
commencing with the 2003/2004 hockey season, we became the exclusive supplier of
helmets, pants, gloves, shoulder, shin and elbow protective equipment, jerseys
and socks to all teams in the CHL. The CHL is the premier junior hockey league
in the world and includes 56 teams, with a total of approximately 1,300 players.
An estimated 54% of current NHL players previously played in the CHL. Most of
the 56 teams in the CHL are in cities which do not currently have a NHL
franchise, thereby significantly extending the reach of our brands.
o SPONSORSHIP AGREEMENTS. We have sponsorship agreements with most
major hockey organizations in the world, including the International Ice Hockey
Federation, the Ice Hockey Federation of Russia, the Slovak Association of Ice
Hockey, the national teams of Finland, Sweden, Denmark, Norway and the Czech
Republic, the American Hockey League, the U.S. Hockey League, USA Hockey and the
ECHL. In addition, we are an official sponsor of the Sky Rink Youth and Adult
Hockey Program at the Chelsea Piers in New York City.
o JAMIE SALE AND DAVID PELLETIER. In our recreational skate category,
we have recently entered into an endorsement agreement with Canadian pairs
figure skating gold medallists Jamie Sale and David Pelletier to market and sell
the new Comfort Series of recreational skates and our Classic Series of figure
skates. Our Comfort Series is designed for women and girls who seek a product
that is warmer, more comfortable and more stylish than a traditional figure
skate.
To support the validation of our products through elite athlete usage
we use television, radio, internet and print advertising featuring our new
products and endorsed players to communicate our product innovation message and
increase consumer awareness of our brands. We also provide in-store advertising
materials, brochures and print materials to assist our retailers in the
communication of the features and benefits of our products to the consumer.
GLOBAL MARKETING/PRODUCT CREATION. Our marketing and product creation
effort is headed by our Vice President, Global Marketing and Product Creation,
who supervises a team of over 50 employees and is also responsible for
endorsement contracts with elite athletes. We have five category directors who
are responsible for consumer research, product development, research and
development briefs, pricing strategy and overall sales program development for
our key product categories within our three primary brands. We also have a
global marketing director who is responsible for overall creative development,
including television, print and radio ads, brand communication and league
sponsorships. Other key positions in marketing include a marketing services
manager responsible for trade and sales shows, point-of-purchase displays, logos
and graphic designs and an e-commerce coordinator responsible for our web sites.
To link our marketing organization to our sales organization, we hold monthly
strategic business unit meetings. These meetings are attended by members of each
of our research and development, purchasing and logistics teams. These sessions,
chaired by the category directors, serve as a forum to discuss new product
developments, recent research findings, current product performance and overall
sales program strategy and execution.
NORTH AMERICAN SALES. In Canada, our equipment sales organization is
comprised of a group of independent representatives that sell CCM branded
equipment and apparel and another group of independent representatives dedicated
to selling KOHO and JOFA equipment. In the U.S., independent representatives
carry all brands. Sales representatives are charged primarily with selling
equipment, products and jerseys to our smaller hockey specialty accounts.
Regional managers, in both Canada and the U.S., are charged with overseeing the
sales representative organization and also maintaining our larger accounts
across all brands.
In the U.S., our largest apparel market, we have a separate sales
force, comprised of a national sales manager, a key account manager and
independent representative organizations. Our apparel sales team possesses
extensive industry experience in athletic brand and licensed apparel. Our sales
representatives are responsible for selling apparel, including licensed jerseys
and licensed and branded activewear, to independent retailers, large sporting
goods and department stores in the U.S.
INTERNATIONAL SALES. In Sweden, Finland, Norway and Germany, we sell
our equipment and apparel directly to retailers and teams through our in-house
sales team. Outside of those countries, we sell our products through
distributors located in over 40 countries in Europe, the Far East, South
America, Central America, Africa and Australia. These distributors, in turn,
sell our products to teams and retailers. All non-European sales activities are
controlled through our Senior Vice President, European Division.
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CUSTOMERS AND DISTRIBUTION CHANNELS
We have a diversified and broad base of over 6,000 customers worldwide
and are not dependent on any single customer. Our customer base consists of
independently-owned hockey specialty retail stores, large sporting goods
retailers, department stores and other retailers. In 2003, we generated
approximately 36% of our revenue in the United States, approximately 35% in
Canada, approximately 13% in Sweden, approximately 6% in Finland and
approximately 10% in Russia and other countries. In fiscal 2003, no customer
accounted for more than 10% of our sales. We sell our hockey-related apparel,
including jerseys and licensed and branded activewear, through the same channels
as our equipment products, in addition to generating revenue from sales to
"in-stadium" concession stores. Jerseys are sold mainly through specialty retail
and "in-stadium" concession stores. Our New NHL License Agreement provides us
with better access to "in-stadium" concession stores to market our licensed
jerseys and licensed and branded activewear. We believe "in-stadium" concession
stores who purchase authentic licensed jerseys from us will increase their
orders for our licensed and branded activewear products due to purchasing
efficiencies. We have established a separate U.S. sales force that markets our
hockey-related licensed and branded activewear. We expect this sales force to
generate sales from large retailers, department stores and other retailers.
NHL AGREEMENTS
EXCLUSIVE NHL RIGHTS. We have been an NHL licensee since 1967 and have
enjoyed an exclusive license to supply authentic, replica and practice game
jerseys used "on-ice" by all NHL teams since July 2000. Our Current NHL License
Agreement with NHL Enterprises, the marketing affiliate of the NHL, expires on
June 30, 2005. However, on March 28, 2003, we entered into a New NHL License
Agreement, which extends through at least June 30, 2014.
Our Current NHL License Agreement gives us the exclusive rights to
manufacture and market authentic, replica and practice game jerseys used
"on-ice" by the 30 NHL teams, including all-star jerseys. Game jerseys are
manufactured and marketed under the CCM and KOHO brand names, while practice
jerseys are manufactured and marketed under the JOFA brand name. Pursuant to the
Current NHL License Agreement, our brand names appear above the player's name on
the outside rear neck on the jersey of all NHL players. These rights include the
right to use the names, logos, and other indicia of the NHL and the NHL member
teams on an exclusive basis in connection with the manufacture, supply and sale
of authentic, replica and practice jerseys of the 30 NHL teams. Pursuant to a
separate agreement with the NHLPA, we are entitled to market authentic and
replica game and practice jerseys identified with the names and numbers of NHL
players. We are also the exclusive supplier of "on-ice" jerseys and pants for
NHL officials under the JOFA brand name. Since the beginning of the 2000/2001
NHL season, the CCM logo appears above each player's name on every "home" NHL
jersey, the KOHO logo appears above each player's name on every "away" and
"third" NHL jersey and the JOFA label is on uniforms for all NHL officials.
The Current NHL License Agreement also grants us the exclusive right to
market T-shirts, workout wear, outerwear, polo shirts and activewear bearing NHL
logos, names and designs under the NHL's Center Ice trademark and the
non-exclusive right to use the NHL team logos on headwear.
The NHL's Center Ice apparel is worn exclusively by players and coaches
during practice and work-out and worn by the trainers of all NHL teams during
games. We market all of the foregoing products to North American and
Scandinavian retailers for resale, as well as to European and Asian
distributors. Pursuant to the Current NHL License Agreement, we are required to
pay a license fee and royalties to the NHL based on our net sales, with minimum
royalty amounts guaranteed to be paid by us each license year. In addition to
these costs, we have agreed to purchase a fixed dollar amount of marketing from
the NHL and from each of the NHL teams.
As part of the Current NHL License Agreement, we also have a license
for the exclusive use of the NHL's Center Ice trademark for our JOFA hockey
equipment. The premium products in the equipment line (helmets, sticks, gloves,
pants, shoulder, shin and elbow pads) are co-branded with the Center Ice
trademark, also referred to as "the official equipment worn by the NHL." The NHL
reserves this mark for products with overwhelming usage by NHL players. Other
JOFA products are co-branded with the NHL's shield trademark.
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In addition to extending our rights under the Current NHL License
Agreement, the New NHL Licence Agreement significantly enhances our NHL
relationship by providing us with numerous additional rights and opportunities.
Certain of our new rights include:
o the exclusive right to manufacture and market authentic vintage NHL
jerseys;
o the semi-exclusive right to manufacture and market replica vintage NHL
jerseys along with one other supplier;
o the right to define, in cooperation with the NHL, the future look of
hockey;
o the exclusive right to manufacture and market hockey socks with the
trademarks of the NHL and/or NHL teams;
o the exclusive right to manufacture and market NHL price-point jerseys
(which simulate replica jerseys), except to certain U.S. customers;
o the right to market collectable mini-jerseys;
o the right to manufacture and market skates, sticks, helmets, pants,
gloves, equipment bags, shin, shoulder, and elbow pads bearing
trademarks of the NHL and/or NHL teams;
o the right to use the NHL team logos on fan and vintage apparel,
including T-shirts, headwear, workout wear, outerwear and activewear;
and
o the exclusive right to market headwear bearing NHL team logos, names
and designs under the NHL Center Ice trademark.
Our unique alliance with the NHL solidifies our position as the premier
hockey equipment and apparel company in the world. Beyond providing long-term
stability, pricing power, and steady cash flow, it allows us to further expand
our sales in apparel and equipment through several new product categories. It
also provides a long-term platform for unparalleled exposure for our brands and
hockey equipment products.
PLATINUM SHIELD COLLECTION. The new product line combines the CCM brand
with the NHL platinum shield exclusively on those equipment and apparel products
that will be used by NHL players and coaches. In addition to the NHL authentic
jersey, the highest quality CCM skates, sticks, helmets, protective equipment,
outerwear, activewear and headwear will now include the NHL Platinum Shield
designation, as well as an NHL Platinum Shield hangtag.
NHL "ON-ICE" EQUIPMENT LICENSE. Also as part of our agreements with the
NHL, our brands are permitted to appear on equipment used by NHL players
"on-ice" during NHL games. The extensive use of our products by NHL players
significantly promotes the high visibility of our brands among consumers. All of
our products prominently display their respective brand and sub-brand logos,
resulting in significant and cost-effective exposure in arenas, on television
and in newspapers, magazines and other printed media. Our market research
indicates that NHL use of a particular brand of equipment is among the key
factors in a consumer's purchase decision. Our products enjoy widespread usage
among NHL players without paid endorsement. We have endorsement agreements with
several high visibility players including, among others, Martin Brodeur of the
New Jersey Devils, Joe Thornton of the Boston Bruins, Daniel Sedin and Henrik
Sedin of the Vancouver Canucks, Mark Recchi of the Philadelphia Flyers, Roberto
Luongo of the Florida Panthers, Vincent Lecavalier of the Tampa Bay Lightning,
Shane Doan of the Phoenix Coyotes, Jean-Sebastien Giguere of the Anaheim Mighty
Ducks, Tony Amonte of the Philadelphia Flyers and Jaromir Jagr of the New York
Rangers.
MEDIA PROMOTION. In addition to our "on-ice" exposure, as part of our
agreements with the NHL, we purchase advertising during both locally and
nationally televised hockey games in Canada and the U.S. We also have camera
visible billboards promoting our products and brands in the majority of NHL
arenas. Reinforcing the
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television and billboard campaign are full-page color advertisements placed in
game programs, trade and consumer hockey publications distributed throughout
North America on a national and regional basis, such as The Hockey News and
Hockey Business News.
RESEARCH AND DEVELOPMENT
We are an industry leader in product innovation and have dedicated
significant resources to ensure our future technological leadership. Our
research and development team, which has over 40 members, is divided into
five groups, with each group dedicated to the following categories: skates
and head and face; protective and team uniforms; goal; sticks and athletic
apparel. External university research programs are also used to help develop
our performance insights. For example, we co-developed, with the University
of Windsor, a slap shot robot that allowed us to measure the puck velocity
generated by the Vector V110 and V120 full composite stick in a standardized
manner compared to other sticks. The results generated by the slap shot robot
allowed us to demonstrate the benefits of our Vector one-piece composite
sticks, which was found to rank ahead of our competitors in puck velocity and
durability. This standardized method of evaluation is an industry first. Our
objective is to initiate additional research activities in other product
categories.
The objective of our research and development program is to maintain or
improve our leadership position in each of our key product categories. Our
product creation process is driven by the needs of the player with special
emphasis on the elite athlete. Our marketing and research and development teams
work together in order to develop and create innovative products. Firstly, our
marketing team gathers information from consumers and retailers by performing
both qualitative (through pro testing, definition of performance attributes,
focus groups and field visits) and quantitative (through retail tracking and
consumer tracking) research to determine what players need. Secondly, our
research and development team, using a combination of research approaches,
creates prototypes of our products, which are tested both in the laboratory and
in the field. Thirdly, based on the data obtained through laboratory and field
tests, the product is adjusted to ensure it meets the needs of the player in all
possible respects. Lastly, the product is taken to market.
The majority of our products are developed and commercialized in our
three research and development centres located in St-Jean, Quebec, Tammela,
Finland and Malung, Sweden. These facilities employ designers, engineers and
model makers and feature comprehensive testing equipment, woodworking, spray
painting, molding and sculpting capabilities and have creative services
departments which are responsible for packaging and catalogue design and
development.
Costs for new product research and development as well as changes to
existing products are expensed as incurred and totaled approximately $1.8
million, $1.9 million and $2.4 million (before any research and development tax
credits) for the years ended December 31, 2001, 2002 and 2003, respectively.
MANUFACTURING
Our products are either manufactured in-house at our six facilities,
four of which are located in Canada and two of which are located in Europe, or
outsourced. Approximately 57% of our product lines by sales are currently
manufactured in-house while 43% are outsourced.
We continuously evaluate our manufacturing processes and use in-house
manufacturing where our proprietary technologies and processes provide us with a
competitive advantage. Through the use of proprietary technologies and extensive
automation, we believe we have developed many of the industry's most advanced
hockey equipment and related apparel manufacturing processes. We believe that we
operate the industry's most advanced skate manufacturing facility in St-Jean,
Quebec, the industry's most automated hockey stick production facility in
Cowansville, Quebec and the industry's most efficient hockey apparel production
facility in St-Hyacinthe, Quebec.
15
For other product lines, where we do not have a distinct competitive
manufacturing advantage, we outsource production to high quality facilities,
primarily in Asia, the Czech Republic and Mexico. In order to maintain our
leading market position and continue to be a leader in product innovation, we
will continue to make our business more flexible and less capital intensive by
outsourcing the manufacturing of our products where it makes strategic and
business sense. We believe that strategic outsourcing of selected manufacturing
processes may result in reduced costs, an improved ability to balance our
manufacturing capacity and shorten the time to market for new products.
We are a vertically integrated manufacturer of hockey jerseys and socks
and make extensive use of automation. In order to maintain our high quality
standards, we knit our own jersey fabric and hockey socks and cut and assemble
the components for our jerseys. In addition, we have developed sophisticated
sewing equipment that facilitates the labour-intensive finishing process of
jersey production. We have recently implemented several initiatives that have
dramatically increased throughput and the overall efficiency of our jersey
manufacturing lines. We have outsourced a small portion of our jersey production
to meet demand. For our activewear line, we source blank jackets, fleecewear and
other apparel from third parties and, in turn, have them embellished by other
third parties with team crests and logos and our brand names.
SUPPLIERS
We have a diverse network of suppliers of raw materials, equipment,
stationary, computers and finished products. No single supplier accounted for
more than 10% of our consolidated purchases during the year ended December 31,
2003.
COMPETITION
Our principal competitors in the hockey equipment and related apparel
market are Bauer Nike Hockey Inc., a subsidiary of Nike, Inc. and Easton Sports,
Inc. with an estimated market share in 2002 of 15% and 12%, respectively. In
addition to Bauer Nike Hockey Inc., we compete with several smaller companies
that typically do not offer full product lines. Although we, Bauer Nike Hockey
Inc. and Easton Sports, Inc. together account for a significant portion of the
worldwide hockey equipment market, the remaining market is highly fragmented. We
compete on the basis of brand image, technology, quality and performance of our
products, method of distribution, price, style and intellectual property
protection.
We have exclusive license arrangements with the NHL, CHL and,
commencing in the 2004/2005 ECHL season, the exclusive supplier of authentic and
replica jerseys to 10 of the ECHL teams. In the team uniform and sock market,
our competitors include Bernard Athletic Knit & Enterprise Ltd., SP Apparel Inc.
and Kobe Sportswear Inc. In the licensed and branded activewear market, we
compete with companies such as Nike, Inc., Lee Sport, which is a division of VF
Corporation, Majestic Athletic Wear Ltd. and New Era Cap Co., Inc.
INTELLECTUAL PROPERTY
We have a permanent Intellectual Property Committee that meets
approximately once every two months to discuss new products, patents that should
be applied for, patents which are pending, potential litigation and any
inventions submitted to us by third parties. Our Intellectual Property Committee
is composed of our Director of Legal Affairs, our Vice President, Equipment
Division, our Director of Research and Development, our Vice President, Global
Marketing and Product Creation, and one of our external intellectual property
counsel.
Where management considers it beneficial, we seek protection under the
trademark, copyright and patent laws of those countries where our products are
produced or sold. As a result, we own a substantial number of patents and
trademarks, which we view as significant assets. As at December 31, 2003, we had
22 patents or pending applications for patents. As at January 31, 2004, we also
had 339 trademark registrations and 110 pending applications to register
trademarks in various countries. These registrations and applications cover
various trademarks owned and/or licensed by us, although primarily we seek to
register various trademarks in key markets where we conduct business. As at
December 31, 2003, we also had over 22 industrial design registrations.
16
We actively assess opportunities to license trademarks and copyright
works owned by third parties that we believe have lasting appeal with our
targeted customers, are consistent with our brand image, have the potential for
significant growth and are available at a reasonable price. Pursuant to our New
NHL License Agreement, we have an exclusive license to use the NHL trademark to
market authentic and replica NHL jerseys until at least 2014. See "The Business
- NHL Agreements".
PATENTS. We currently hold patents and industrial designs in multiple
countries. The patents encompass various product innovations and designs. Many
of our patents represent what have become industry standards in performance and
quality. Examples include the F-I-T System thermo-forming process that is
featured in our hockey skate line and Hyper X Joint Discharge Principle that are
featured in our protective equipment product line.
TRADEMARKS. We own a substantial number of trademarks including JOFA,
KOHO, Tacks, Heaton, Titan, Canadien and Externo. All of our trademarks are
owned by us except for the CCM trademarks which are owned by CCM Holdings (1983)
Inc., which in turn is 50% owned by us through our subsidiaries. The remaining
50% of CCM Holdings is owned by an unaffiliated Canadian bicycle company. We
have the exclusive and perpetual right to use the CCM trademark royalty free in
connection with skates, hockey equipment and hockey-related apparel.
EVENTS AND UNCERTAINTIES
The collective bargaining agreement between the NHL and the NHL
Players' Association expires September 15, 2004. The popularity of the NHL
affects the sales of our hockey equipment and hockey-related apparel. Our brands
receive significant on-ice exposure as a result of our license agreement with
the NHL. In the event of a labour dispute resulting in a work stoppage, the
popularity of the NHL could suffer and our brands will not receive any on-ice
exposure during NHL games. This, together with the absence of in-stadium sales
during a work stoppage, would significantly affect our apparel sales. In
addition, in the event of a labour dispute resulting in a work stoppage, we will
continue to have certain royalty payment obligations, although reduced, under
the New NHL License Agreement. Management has been extremely pro-active in
anticipation of a work stoppage and believes that it has taken appropriate
measures to minimize the impact on our operations and financial position. In the
event of a work stoppage, the term of our agreement with the NHL will be
extended.
We in the normal course of business are exposed to market risk from
changes in foreign currency exchange rates and interest rates (see Item 7A
Quantitative and Qualitative Disclosures About Market Risk).
SEASONALITY
Our business is seasonal. The seasonality of our business affects net
sales and borrowings under our credit agreements. Traditional quarterly
fluctuations in our business may vary in the future depending upon, among other
things, changes in order cycles and product mix.
EMPLOYEES
As of December 31, 2003, we employed 1,303 persons, of which 1,066 are
employed in Canada, 29 are employed in the United States and the balance are
employed in Europe. None of our employees in the United States are unionized,
while 268 of our employees at our St-Jean, Quebec facility, 92 of our employees
at our Malung, Sweden facility and 84 of our employees at our Tammela, Finland
facility are unionized. The collective bargaining agreement with the union in
St-Jean was renewed in 2003 and expires in 2008. The collective bargaining
agreements with the unions in Finland were renewed in March 2003 and expire in
2005. The collective bargaining agreement with the union in Malung, Sweden
expires in 2004. Our management believes that our relations with these unions
are positive. There have been no work stoppages, strikes or lockouts at our
St-Jean, Malung or Tammela sites in over 20 years.
17
ITEM 2. PROPERTIES
Our primary executive offices of our operations are located in
Montreal, Canada and we conduct our operations through 19 facilities(1): 2 in
the U.S., 8 in Canada, and 9 in Europe. We believe that our existing
manufacturing and distribution facilities have sufficient capacity to support
our business without the need for significant additional or upgraded equipment
or capital expenditures. The following table summarizes each of our principal
facilities for its operations.
APPROXIMATE
FACILITY LOCATION USE SQUARE FEET LEASE/OWN LEASE EXPIRY
---------------------------- --------------------------------------- -------------- --------- ------------
UNITED STATES
Bradford, Vermont Apparel distribution 51,670 Own --
Branford, Connecticut Sales office 1,950 Lease May 2005
CANADA
Cap de la Madeleine, Quebec Hockey apparel sewing 12,650 Lease Jan. 2005(2):
Cowansville, Quebec Hockey stick manufacturing 45,428 Own --
Granby, Quebec North American apparel distribution center 53,200 Lease Dec. 2004
Toronto, Ontario Apparel factory, warehouse and sales office 28,518 Lease July 2008
Montreal, Quebec Executive and administrative offices 23,151 Lease Feb. 2008
St-Hyacinthe, Quebec Hockey apparel cutting and sewing 72,380 Lease Jan. 2005
St-Hyacinthe, Quebec North American equipment distribution center 178,540 Lease Jan. 2005
St-Jean, Quebec Hockey equipment and skate manufacturing 137,915 Lease Nov. 2004
EUROPE
Fredrikstad, Norway Sales office 1,600 Lease Dec. 2008
Gothenbourg, Sweden Sales office 1,227 Lease Quarterly
Helsingborg, Sweden Sales office 400 Lease Quarterly
Oulu, Finland Sales office 450 Lease Quarterly
Helsinki, Finland Sales office 1,474 Lease Quarterly
Johannesh, Sweden Sales office 1,561 Lease Sept. 2007
Malung, Sweden Protective equipment factory, warehouse
and offices 145,000 Lease Sept. 2004
Munich, Germany (3) Distribution center and office 14,316 Lease Dec. 2007
Tammela, Finland Hockey stick factory (land) 325,826 Lease Dec. 2087
Tammela, Finland Hockey stick factory (warehouse and
offices) 73,114 Own --
(1) We also lease temporary space on a month to month basis in Georgia, Vermont
and Cowansville, Quebec, with an aggregate size of approximately 23,000
square feet.
(2) In January 2004, we announced the closure effective April 2004 of our
Apparel Sewing facility in Cap de la Madeleine, Quebec.
(3) On January 5, 2004, we acquired the assets of Norbert Ewald GmbH (Ewald
Sport Service).
INSURANCE
We maintain insurance policies covering risks typically encountered in
our business, including third party liability, product liability, and damages to
our information systems and other business assets. We believe that we carry
insurance in amounts and scope that are adequate for our business. No material
claim is pending as of the date hereof for which insurance coverage would not
appear to be adequate.
18
ENVIRONMENT
In 1996, Maska U.S., Inc. ("Maska"), a subsidiary of the Corporation,
and the State of Vermont entered into a consent decree whereby Maska agreed to
remediate specified hazardous materials located on one of its properties.
Remediation efforts are now believed to be in the final stages. A charge of
$600,000 was recorded by us in 2002 to provide for the balance of costs to be
incurred. Any further charges or claims that might arise with respect to this
property are expected to be covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. PRICE RANGE OF COMMON STOCK
The voting common stock, par value $.01 per share, of The Hockey
Company outstanding prior to the corporate reorganization in 2003 was quoted on
the OTC Bulletin Board under the trading symbol "THCX." The range of closing
prices of the common stock is not provided, as there had been a limited amount
of trading activity. This class of common stock was merged out of existence in
connection with our corporate reorganization in 2003. There is no market for
the currently outstanding shares of the new class of voting common stock, par
value $.01 per share, of The Hockey Company, all of which were issued to The
Hockey Company Holdings Inc. in return for proceeds from its initial public
offering. There is no market for the shares of non-voting exchangeable common
stock received in connection with the merger.
B. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of February 28, 2004, the approximate number of record holders of
our non-voting exchangeable common stock was 567 and the approximate number of
record holders of our voting common stock was one. We did not pay dividends on
our common stock and we have no current plans to pay cash dividends in the
foreseeable future. Effective November 19, 1998, one of our U.S. subsidiaries,
Maska U.S., Inc., as the borrower, and the credit parties named therein entered
into a credit agreement with the lenders referred to therein and with General
Electric Capital Corporation, as Agent and Lender for a period of three years.
Simultaneously, one of our Canadian subsidiaries, Sport Maska Inc., as the
borrower, and the credit parties named therein entered into a credit agreement
with the lenders referred to therein and General Electric Capital Canada Inc.,
as Agent and Lender for a period of three years. The GECC credit agreements were
further extended and amended on October 17, 2002 for a period of three years in
connection with the issuance in April 2002 of the 11.25% Senior Secured Note
Units due in April 2009 to reflect the repayment in full of the Caisse term
loans and to maximize the amount of loans and letters of credit under the two
credit agreements to $35.0 million and $7.0 million, respectively. The credit
agreements restrict, among other things, the ability to pay cash dividends on
the common and preferred stock. In addition, on April 3, 2002, we completed a
private offering of $125 million aggregate principal amount of 11 1/4 % Senior
Secured Note Units due April 15, 2009, each such Unit consisting of $500
principal amount of 11 1/4% Senior Secured Notes due April 15, 2009 of the
Company and $500 principal amount of 11 1/4% Senior Secured Notes due April 15,
2009 of Sport Maska Inc. Under the indenture that governs these Units and Notes,
the payment of dividends is restricted.
20
EQUITY COMPENSATION INFORMATION
Options have been granted pursuant to employment agreements and on an
"ad hoc" basis.
NUMBER OF
SECURITIES TO BE WEIGHTED AVERAGE NUMBER OF SECURITIES
ISSUED UPON EXERCISE PRICE REMAINING AVAILABLE FOR
EXERCISE OF OF OUTSTANDING FURTHER ISSUANCES UNDER
OUTSTANDING OPTION, EQUITY COMPENSATION PLANS
OPTIONS, WARRANTS WARRANTS, (EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS (a) RIGHTS (b) REFLECTED IN COLUMN (a))
------------- -------------- ---------- ------------------------
Equity compensation plans approved by security holders
Stock Options................................. -- -- --
Equity compensation plans not approved by security
holders................................................. 1,287,222 $10.53 --
Total................................................... 1,287,222 $10.53 --
C. RECENT SALES OF UNREGISTERED SECURITIES
On June 11, 2003, The Hockey Company Holdings Inc. completed its
initial public offering for the issue of 4,500,000 common shares, referred to as
the Offering. The Hockey Company Holdings Inc. participated in a reorganization
with us whereby the The Hockey Company Holdings Inc., which had incorporated
Hockey Merger Co. on February 24, 2003, and Hockey Merger Co. entered into a
merger agreement on April 2, 2003 with us and whereby, upon the closing of the
initial public offering on June 11, 2003, Hockey Merger Co. merged into us. As a
result, we issued 4,500,000 shares of a new class of voting common stock, par
value $.01 per share, to The Hockey Company Holdings Inc. for proceeds of
approximately $37.0 million (Cdn$50.4 million). In the merger, each existing
holder of common stock received one share of our non-voting exchangeable common
stock, referred to as Exchangeable Shares, for each share of common stock held.
This issuance of Exchangeable Shares was exempt from registration pursuant to
Section 3(a)(9) of the Securities Act of 1933, as amended. Each holder of an
Exchangeable Share has the right to exchange one Exchangeable Share for one
common share of The Hockey Company Holdings Inc., subject to certain adjustments
in the event, among others things, of stock splits or similar events. The
delivery of the common shares upon exercise of the put right shall be subject to
applicable U.S. securities laws. On July 11, 2003, The Hockey Company Holdings
Inc. closed on the exercise by the underwriters of their over-allotment option
in connection with the initial public offering. The underwriters purchased an
additional 429,200 common shares. As a result, we also issued 429,200 shares of
the new class of voting common stock to The Hockey Company Holdings Inc. for
proceeds of approximately $4.7 million (Cdn$6.4 million ). The issuances of the
voting common stock to The Hockey Company Holdings Inc. were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On September 8, 2003, we completed our final distribution in connection
with the Chapter 11 reorganization of The Hockey Company, formally known as SLM
International, Inc. Pursuant to the distribution, a total of 508,553
Exchangeable Shares were distributed to approximately 470 parties. The issuance
of the Exchangeable Shares was exempt from registration pursuant to Section 1145
of the United States Bankruptcy Code and the related confirmation order.
21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains selected consolidated historical financial
data derived from our audited consolidated financial statements for the five
fiscal years ended December 31, 1999, 2000, 2001, 2002 and 2003. This selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes contained elsewhere in this Form 10-K.
Certain amounts of the preceding years have been reclassified to conform to the
current year's presentation.
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ---------- ----------- ----------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
INCOME STATEMENT DATA:
Net sales....................................... $ 239,905 $ 212,693 $ 198,187 $ 194,463 $ 190,603
Cost of goods sold before restructuring and
unusual charges.............................. 132,253 119,390 117,296 116,945 109,778
Restructuring and unusual charges............... -- 1,617 1,198 -- --
----------- ----------- ---------- ----------- ----------
Gross profit.................................... 107,652 91,686 79,693 77,518 80,825
Selling, general and administrative expenses
before restructuring and unusual charges...... 73,759 64,303 61,768 65,356 58,990
Restructuring and unusual charges............... -- 496 4,495 -- --
Amortization of excess reorganization
value and goodwill............................ -- -- 4,390 4,500 4,572
----------- ----------- ---------- ----------- ----------
Operating income................................ 33,893 26,887 9,040 7,662 17,263
Other (income) expense, net..................... (852) 1,311 538 (911) (1,505)
Interest expense................................ 18,861 17,989 18,639 17,766 15,639
Foreign exchange (gain) loss.................... (11,266) 85 (1,803) (297) 1,478
Loss on early extinguishment of debt............ -- 3,265 1,091 -- --
----------- ----------- ---------- ----------- ----------
Income (loss) before income taxes............... 27,150 4,237 (9,425) (8,896) 1,651
Income taxes.................................... 10,157 2,450 3,375 1,293 5,276
----------- ----------- ---------- ----------- ----------
Net income (loss)............................... $ 16,993 $ 1,787 $ (12,800) $ (10,189) $ (3,625)
----------- ----------- ---------- ----------- ----------
----------- ----------- ---------- ----------- ----------
Basic earnings (loss) per share................. $ 1.72 $ 0.25 $ (1.81) $ (1.53) $ (0.54)
Diluted earnings (loss) per share............... $ 1.68 $ 0.25 $ (1.81) $ (1.53) $ (0.54)
BALANCE SHEET DATA (AS OF YEAR-END):
Cash and cash equivalents....................... $ 42,609 $ 19,484 $ 6,503 $ 2,423 $ 3,519
Working capital, net (1)........................ 92,758 85,558 75,685 65,443 70,952
Property, plant and equipment, net of
accumulated depreciation...................... 15,042 15,318 16,834 21,142 22,860
Total assets.................................... 291,804 222,953 199,423 195,579 209,611
Total debt, including current portion........... 123,944 124,154 114,385 103,798 108,226
Accrued dividends payable (2)................... -- 8,155 5,779 3,676 1,815
Deferred income taxes and other long-term
liabilities................................... 4,836 2,056 1,128 495 66
13% Pay-in-Kind redeemable preferred
stock (2)..................................... -- 11,715 11,571 11,333 11,096
Cash dividends declared per common
share......................................... -- -- -- -- --
Total stockholders' equity...................... 121,914 48,209 42,220 52,260 63,637
OTHER FINANCIAL DATA:
NET CASH PROVIDED (USED IN):
Operating activities.......................... $ 21,917 $ 12,002 $ (9,122) $ 5,241 $ 876
Investing activities.......................... (31,747) (1,902) (1,137) (4,799) (4,649)
Financing activities.......................... 28,701 1,402 14,397 (1,269) 4,696
Capital expenditures.......................... (1,963) (1,902) (1,478) (3,558) (4,821)
EBITDA (3) (Unaudited).......................... $ 50,913 $ 29,631 $ 19,607 $ 18,248 $ 27,319
EBITDA margin (3) (Unaudited)................... 21.2% 13.9% 9.9% 9.4% 14.3%
Restructuring and unusual charges (4)........... -- 2,520 5,693 -- --
(1) Working capital, net, is defined as current assets excluding cash and cash
equivalents less current liabilities excluding short-term debt and the
current portion of long-term debt. Working capital is not a measure of
performance or financial condition under Generally Accepted Accounting
Principles, but it is presented because it is a widely accepted indicator
of a company's liquidity. It should be noted that companies calculate
working capital, net, differently and, therefore, working capital, net, as
presented for us may not be comparable to working capital, net, reported
by other companies.
22
(2) The 13.0% Pay-in-Kind preferred stock was subject to mandatory redemption
six months after the maturity of the Notes. On June 11, 2003, all of the
13% Pay-In-Kind redeemable Preferred Stock were repurchased by us for
cancellation together with all accrued and unpaid dividends.
(3) EBITDA is defined as earnings (net income) before interest, income and
capital taxes and depreciation and amortization. EBITDA includes
restructuring charges, and other unusual items if it is reasonably likely
that they will recur within two years. This non-GAAP financial measure does
not replace the presentation of GAAP financial results, specifically EBITDA
as an alternative to cash flows as a measure of liquidity or as an
alternative to net income as a measure of operating performance, but is
provided to enhance overall understanding of the Company's current
financial performance and prospects for the future. The Company's
management believes that non-GAAP financial results provide useful
information to both management and investors regarding certain additional
financial and business trends relating to its financial condition and
results from operations. In addition, management uses certain non-GAAP
financial measures for reviewing the Company's financial results and
evaluating its financial performance. It should be noted that companies
calculate EBITDA differently and, therefore, EBITDA as presented for us may
not be comparable to EBITDA reported by other companies. We view EBITDA as
mostly an indicator of our operating performance and, therefore, the
nearest GAAP measure is net income. The following is a reconciliation of
our EBITDA to our net income:
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS OF U.S. DOLLARS)
Net income (loss) ................... $ 16,993 $ 1,787 $ (12,800) $ (10,189) $(3,625)
Income taxes ........................ 10,157 2,450 3,375 1,293 5,276
Depreciation and amortization........ 4,177 3,620 8,869 9,001 8,901
Capital taxes........................ 725 518 588 506 405
Interest............................. 18,861 17,989 18,639 17,766 15,639
Loss on early extinguishment of debt. - 3,265 1,091 - -
Other................................ - 2 (155) (129) 723
----------- ----------- ----------- ------------ ------------
EBITDA............................... $ 50,913 $29,631 $ 19,607 $ 18,248 $27,319
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
Under the terms of the Company's short and long-term debt agreements,
restructuring and other unusual or non-recurring items would be added back
to EBITDA. Included in EBITDA for the year ended December 31, 2003 is a
foreign exchange gain of $11.3 million.
(4) Restructuring and unusual charges of $2.5 million in 2002 includes $2.1
million of restructuring charges (see Restructuring Reserves), of which
$1.6 million is recorded under cost of goods sold and $0.5 million in
selling, general and administrative expenses. The balance of $0.4 million
is recorded in the Other income (expense) line and includes primarily
unusual charges of $0.3 million related to an unsuccessful acquisition bid,
and $0.6 million related to an estimated environmental remediation for one
of our properties, partially offset by a foreign exchange gain of $0.6
million which resulted from the translation of our U.S. dollar denominated
long-term debt, 50% of which is held by the Canadian subsidiary, Sport
Maska Inc.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND AND INTRODUCTION
We can trace our origins to September 1899, when the Canada Cycle and
Motor Company (CCM) was formed as a manufacturer of bicycles and motorcars. In
1905, CCM began marketing ice hockey skates for a sport barely 30 years old at
that time and in 1937 acquired the Tackaberry (later Tacks) trade name. In 1983,
CCM was amalgamated with Sport Maska Inc., a manufacturer of hockey jerseys for
the NHL since 1967. In April 1997, WS Acquisition LLC, an affiliate of
Wellspring Capital Management LLC, acquired a controlling interest. In November
1998, we acquired Sports Holdings Corp., Europe's largest manufacturer of ice,
roller and street hockey equipment and their JOFA, KOHO, Canadien, Heaton and
Titan brands. As a result, we are now the world's largest marketer, designer and
manufacturer of hockey equipment and related apparel. On June 11, 2003 we became
a subsidiary of The Hockey Company Holdings Inc., a Canadian public corporation.
Our business is seasonal. The seasonality of our business affects net sales and
borrowings under our credit agreements. Traditional quarterly fluctuations in
our business may vary in the future depending upon, among other things, changes
in order cycles and product mix.
Fiscal year 2003 was a solid year for the Company's hockey equipment
business. Revenue and margins grew in every category - sticks, skates, helmets,
protective and goalie - for a total increase of 17% in sales and 22.5% in gross
margin. The Company's biggest gains came in the stick and skate categories,
fuelled by the new Vector one-piece composite hockey sticks and growth in the
performance skate segment. These products and others targeted at elite players
allowed the Company to continue its momentum and overall leadership position in
the hockey equipment industry.
In 2003, the apparel business got off to a slow start with sales in the
first half down by 7.8% but sales in the second half rebounded up 9.4% compared
to the same periods in 2002 to finish up 4% for the year. As indicated earlier
in the year, the soft first half results were primarily a result of small market
teams advancing far into the NHL playoffs and thus affecting sales of replica
jerseys. In the second half, sales of the NHL "Vintage" series significantly
contributed to the growth in sales. The Company expects the momentum in the
"Vintage" series of jerseys and related apparel products to continue in 2004. In
2003, we also expanded our footprint in apparel business through the acquisition
of Roger Edwards Sport Ltd., a casual apparel company that operates under
several licensed properties, including the NCAA, the Canadian Football League
and Team Canada.
Although we acknowledge that there has been a great deal of discussion
about a potential NHL work stoppage in 2004, we believe that the Company is well
positioned to manage through any interruption in the NHL season, if necessary.
While sales in the apparel segment would decrease during an interruption in
play, we believe that the equipment side would be unaffected and overall the
Company's results would continue to be profitable.
From a balance sheet perspective, we have significantly reduced our
debt load through the redemption of our 13% Pay-in-Kind Preference Stock and the
generation of $21.0 million in cash from operations to finish the year with
$42.6 million in the bank.
The following discussion provides an assessment of our results of
continuing operations, financial condition and liquidity and capital resources,
and should be read in conjunction with our Consolidated Financial Statements and
Notes thereto included elsewhere herein. (All references to "Note(s)" refer to
the Notes to the Consolidated Financial Statements.) The information presented
below should be read in conjunction with the consolidated financial statements
included elsewhere in this Form 10-K.
24
RESULTS OF OPERATIONS
Our results of operations as a percentage of net sales for the periods
indicated were as follows:
2003 2002 2001
------------ ------------ ------------
%
Net sales...................................................... 100.0 100.0 100.0
Cost of goods sold before restructuring and unusual charges ... 55.1 56.1 59.2
Restructuring and unusual charges.............................. -- 0.8 0.6
------------ ------------ ------------
Gross profit................................................... 44.9 43.1 40.2
Selling, general and administrative expenses before
restructuring and unusual charges........................... 30.7 30.2 31.2
Restructuring and unusual charges.............................. -- 0.2 2.3
Amortization of excess reorganization value and
goodwill.................................................... -- -- 2.2
------------ ------------ ------------
Operating income............................................... 14.2 12.7 4.5
Other (income) expense, net.................................... (0.3) 0.6 0.3
Interest expense............................................... 7.9 8.5 9.3
Foreign exchange gain.......................................... (4.7) -- (0.9)
Loss on early extinguishment of debt........................... -- 1.5 0.6
------------ ------------ ------------
Income (loss) before income taxes.............................. 11.3 2.1 (4.8)
Income taxes................................................... 4.2 1.2 1.7
------------ ------------ ------------
Net income (loss).............................................. 7.1 0.9 (6.5)
------------ ------------ ------------
------------ ------------ ------------
EBITDA (1)..................................................... 21.2 13.9 9.9
------------ ------------ ------------
------------ ------------ ------------
(1) EBITDA is defined as earnings (net income) before interest, income and
capital taxes and depreciation and amortization. EBITDA includes
restructuring charges, and other unusual items if it is reasonably likely
that they will recur within two years. This non-GAAP financial measure does
not replace the presentation of GAAP financial results, specifically EBITDA
as an alternative to cash flows as a measure of liquidity or as an
alternative to net income as a measure of operating performance, but is
provided to enhance overall understanding of the Company's current
financial performance and prospects for the future. The Company's
management believes that non-GAAP financial results provide useful
information to both management and investors regarding certain additional
financial and business trends relating to its financial condition and
results from operations. In addition, management uses certain non-GAAP
financial measures for reviewing the Company's financial results and
evaluating its financial performance. It should be noted that companies
calculate EBITDA differently and, therefore, EBITDA as presented for us may
not be comparable to EBITDA reported by other companies. We view EBITDA as
mostly an indicator of our operating performance and, therefore, the
nearest GAAP measure is net income. The following is a reconciliation of
our EBITDA to our net income:
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------
(IN THOUSANDS OF U.S. DOLLARS)
2003 2002 2001
------------ ----------- -----------
Net income (loss) .......................... $ 16,993 $ 1,787 $ (12,800)
Income taxes ............................... 10,157 2,450 3,375
Depreciation and amortization .............. 4,177 3,620 8,869
Capital taxes............................... 725 518 588
Interest.................................... 18,861 17,989 18,639
Loss on early extinguishment of debt........ -- 3,265 1,091
Other....................................... -- 2 (155)
------------ ----------- -----------
EBITDA...................................... $ 50,913 $ 29,631 $ 19,607
------------ ----------- -----------
------------ ----------- -----------
Under the terms of the Company's short and long-term debt agreements,
restructuring and other unusual or non-recurring items would be added back to
EBITDA. Included in EBITDA for the year ended December 31, 2003 is a foreign
exchange gain of $11,266.
25
2003 COMPARED TO 2002
Net sales grew by 12.8% to $239.9 million from $212.7 million in 2002.
The equipment business grew by 17%. The growth in equipment sales was
fueled by our Stick and Skate categories, in particular our performance ice
skates and Vector one-piece composite hockey sticks. These products, as well as
the overall selection of products, are enabling us to maintain our overall
leadership position in the industry and improve market share in specific
categories.
The apparel business grew by 4% compared with a year ago, mainly as a
result of the positive foreign exchange fluctuations. The apparel business was
impacted in the first half of the year due to small market teams advancing far
into the NHL playoffs and negatively affecting sales of replica jerseys. Our
"Vintage" series line was a success story at retail and we expect the momentum
in this series of jerseys to continue in 2004.
Geographically, sales in Canada and Europe continue to demonstrate
strength while the United States economy provides greater challenge. Foreign
exchange rate fluctuations play a part in the reported results. Sales in 2003
were positively impacted by approximately $20.6 million compared with a year ago
on a constant dollar basis. Similarly, operating and other expenses are
negatively impacted, mitigating the overall impact on the Company's reported
earnings. While the Company reports in U.S. dollars, it has significant exposure
to the Canadian dollar, the Euro and the Swedish krona. Our Canadian subsidiary
is also exposed to the U.S. dollar because 50% of our long-term debt is held by
the Canadian subsidiary.
Gross profit was $107.7 million in 2003 compared to $91.7 million in
2002, an increase of 17.4%. Measured as a percentage of net sales, gross margin
increased to 44.9% in 2003 from 43.1% in 2002. The gross profit before
restructuring and unusual charge in 2002 was $93.3 million.
The gross margins for the equipment business as a percentage of sales
grew to 42.0% from 40.2% in 2002, mainly attributable to product mix.
Apparel gross margins as a % of sales increased to 51.3% from 48.9% in
2002, mainly related to an overall reduction in product costs due to overall
operational efficiencies.
Selling, general & administrative expenses increased as a percentage of
sales to 30.7% of 2003 sales from 30.2% of total 2002 sales. In dollar terms,
there was an increase to $73.8 million in 2003 from $64.3 in 2002. The increase
was principally related to the movement in exchange rates as mentioned above and
was also attributable to expenses directly related to the increased sales and
research and development expenses.
Operating income for the year ended December 31, 2003 was $33.9 million
compared to $26.9 million or $29.0 million excluding the restructuring charges,
in the year ended December 31, 2002.
As a result of the above, EBITDA, as defined earlier, increased by
$21.3 million to $50.9 million for 2003 compared to $29.6 million in the year
ended December 31, 2002. Included in the increase was approximately $13.0
million resulting from the foreign exchange translation of the 50% portion of
U.S. dollar denominated long-term debt held by our Canadian subsidiary.
Other income of $0.9 million consisted primarily of $0.5 million
related to the gain on sale of our Drummondville manufacturing facility which
had become redundant and closed in December 2002. Other expense of $1.3 million
in 2002 consisted primarily of $0.3 million related to the unsuccessful bid to
acquire the Rollerblade division from the Benetton Group and $0.6 million
related to an estimated environmental remediation for one of our properties.
Interest expense including amortization of deferred financing costs
($1.3 million and $1.4 million in 2003 and 2002, respectively) and the dividend
on the 13% Pay-In-Kind redeemable Preferred Stock ($2.0 million and $2.5 million
in 2003 and 2002, respectively) increased to $18.9 million in 2003 compared to
$18.0 million in 2002. The increase in 2003 was mainly attributable to the
movement in exchange rates and it reflects a full year of interest on the
high-yield Secured Notes which were issued in April 2002.
26
Included in foreign exchange gain of $11.3 million in 2003 was a
foreign exchange gain of approximately $13.0 million for the year ended December
31, 2003 which resulted from the translation of our U.S. dollar denominated
long-term debt, 50% of which is held by our Canadian operating company with a
functional currency of the Canadian dollar.
The loss on early extinguishment of debt of $3.3 million in 2002
consisted of the write-off of deferred financing costs as a result of the
extinguishment of the Caisse de depot et placement du Quebec ("Caisse") loan in
April 2002.
Income before income taxes was $27.2 million in 2003 compared to $4.2
million for 2002.
Our net income attributable to common stockholders for the year ended
December 31, 2003 was $17.0 million compared to $1.8 million for the year ended
December 31, 2002.
2002 COMPARED TO 2001
Net sales grew by 7.3% in 2002 to $212.7 million from $198.2 million in
2001. The increase was primarily due to higher apparel, ice skates and sticks
sales. Apparel sales were strong again with an increase of 13.1%, or $8.2
million, over 2001. Much of this improvement was a result of our strategy to get
orders for the NHL season out before opening night. Skate sales increased 4.3%,
or $2.0 million, over 2001, mainly related to our new line of recreational
skates as part of our endorsement relationship with Olympic Gold Medal skaters
Jamie Sale and David Pelletier. Stick sales increased 9.3%, or $2.7 million,
over 2001, mainly attributable to the strong demand for our CCM Vector one-piece
full composite stick.
Gross profit was $91.7 million in 2002 compared to $79.7 million in
2001, an increase of 15.1%. Measured as a percentage of net sales, gross margin
increased to 43.1% in 2002 from 40.2% in 2001. The increase was mainly
attributable to our apparel and protective categories. Apparel margins were
significantly up from 2001, which was due to a healthy product mix weighted
towards high margin licensed jerseys, as well as an overall reduction in product
costs due to efficiencies in our manufacturing processes, partially reflecting
the benefits of restructuring efforts in 2001. Protective margins were also
significantly up in 2002, due to our new Koho protective line and significant
margin improvement in our low entry level glove line. The gross profit before
restructuring and unusual charge was $93.3 million in 2002 compared to $80.9
million in 2001.
Selling, general & administrative expenses before restructuring and
unusual charges decreased as a percentage of sales to 30.2% of 2002 sales from
31.2% of total 2001 sales. In dollar terms, there was an increase to $64.3
million in 2002 from $61.8 in 2001. This increase was mainly related to
increases in NHL related expenses, selling and marketing variable expenses and
research and development expenses. Our NHL related expenses were the contractual
increase of $1.3 million through royalties paid to National Hockey League
Enterprises, LP and additional NHL team marketing expenses related to having the
right to produce and market authentic team jerseys for all 30 NHL teams. Our
selling and marketing variable expenses increased by $0.7 million related to
higher sales. Our research and development expenses increased by $0.3 million as
we continued to invest more dollars in product development.
Operating income for the year ended December 31, 2002 was $26.9 million
compared to $9.0 million in the year ended December 31, 2001. We did not
amortize any goodwill or excess reorganizational value in 2002, whereas in 2001
we recorded an amortization of $4.4 million. (See "Intangible Assets".)
In 2002 we recorded a total restructuring charge of $2.1 million
compared to $5.7 million in 2001 (See "Restructuring Reserves").
Other expense consists primarily of $0.3 million related to the
unsuccessful bid to acquire the Rollerblade division from the Benetton Group and
$0.6 million is related to an estimated environmental remediation for one of our
properties.
27
EBITDA, as defined earlier, increased by 51.0% to $29.6 million for
2002 compared to $19.6 million 2001.
Interest expense including amortization of deferred financing costs
($1.4 million and $2.7 million in 2002 and 2001, respectively) and the dividend
on the 13% Pay-In-Kind redeemable Preferred stock ($2.5 million and $2.3 million
in 2002 and 2001, respectively) decreased to $17.9 million in 2002 compared to
$18.6 million in 2001.
Included in foreign exchange loss (gain) is a foreign exchange gain of
$0.6 million for the year ended December 31, 2002 which resulted from the
translation of our U.S. dollar denominated long-term debt, 50% of which is held
by our Canadian operating company with a functional currency of the Canadian
dollar.
As a result of the extinguishment of the Caisse loan, we wrote off $3.3
million of deferred financing costs in 2002 (See "Liquidity and Capital
Resources"). In 2001, as a result of the substantive modification to the terms
of our long-term debt with Caisse which was fully repaid in 2002, we wrote off
$1.1 million of deferred financing costs.
Income before income taxes was $4.2 million in 2002 versus a loss
before income taxes of $9.4 million for 2001.
Our net income attributable to common stockholders for the year ended
December 31, 2002 was $1.8 million compared to a $12.8 million net loss for the
year ended December 31, 2001.
28
INCOME TAXES
Our 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. We and our
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.
Based on our performance in 2003 and our projected future earnings and taxable
income, we have not recorded a valuation allowance on the temporary differences
(other than net operating loss and investment tax credits as we did in 2001) and
recognized a deferred tax asset as at December 31, 2003. As a result, our
effective tax rate has changed from approximately (36%) in the year ended
December 31, 2001 to approximately 37% in the year ended December 31, 2003.
Fresh-start reporting requires us to report a provision in lieu of
income taxes when there is a taxable income and utilization of a
pre-reorganization net operating loss carry-forward. This requirement applies
despite the fact that our 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 reorganization 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 that 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 our
Consolidated Statements of Operations.
We are currently undergoing an audit by the Canada Revenue Agency for
its 1996 to 2001 taxation years, which includes transfer pricing and other
matters for which an accrual has been recorded. It is not possible at this time
to determine the amount of the final liability that may arise as a result of
this audit and the actual assessment may differ significantly from our current
estimate.
29
LIQUIDITY AND CAPITAL RESOURCES
On June 11, 2003, The Hockey Company Holdings Inc. ("THC Holdings")
completed its initial public offering for the issue of 4,500,000 common shares
(the "Offering") for proceeds of $47.2 million (Cdn$64.1 million), net of issue
fees and expenses of approximately $5.8 million (Cdn$7.8 million). On July 11,
2003, the underwriters exercised their over-allotment option, which resulted in
the issuance of an additional 429,200 common shares for proceeds of $4.6 million
(Cdn$6.4 million), net of issue fees and expenses of $0.4 million (Cdn$0.5
million). THC Holdings participated in a reorganization with us whereby THC
Holdings, which had incorporated Hockey Merger Co. ("Subco") on February 24,
2003, and Subco entered into a merger agreement on April 2, 2003 with us and
whereby Subco merged into us. In return for proceeds from The Offering, THC
Holdings received 4,929,200 shares of a new class of our voting common stock,
representing all of our outstanding voting common stock. Each existing holder of
common stock received one share of our non-voting exchangeable common stock (the
"Exchangeable Shares") for each share of common stock held. Each holder of an
Exchangeable Share has the right to exchange one Exchangeable Share for one
common share of THC Holdings, subject to certain adjustments in the event, among
others things, of stock splits or similar events. The delivery of the common
shares upon exercise of the put right shall be subject to applicable U.S.
securities laws. We have accounted for the merger as a continuity of The Hockey
Company as a transaction between related parties and, accordingly, the
consolidated financial statements of THC Holdings will be prepared using the
historical cost basis as though both THC Holdings and The Hockey Company had
been combined since inception.
On March 28, 2003, we, THC Holdings and certain of our subsidiaries
entered into a new ten-year license agreement (the "New NHL License Agreement")
with the NHL, which became effective upon pre-payment of certain royalties in
the amount of $30.0 million received in the Offering. In addition, THC Holdings
granted to the NHL an option to purchase 75,000 shares at $11.77 per share
(Cdn$16.00 per share). Under the term of the New NHL License Agreement, the
prepaid NHL royalty and the fair value of the options will be expensed over the
terms of the agreement based on the schedule of royalty payments.
In addition to the above, our anticipated financing requirements for
short-term working capital and long-term growth, future capital expenditures
and debt service are expected to be met through cash generated from our
operations and borrowings under our credit facilities. Effective November 19,
1998, one of our U.S. subsidiaries, Maska U.S., Inc., as the borrower, and
the credit parties named therein entered into a credit agreement with the
lenders referred to therein and with General Electric Capital Corporation, as
Agent and Lender for a period of three years. Simultaneously, one of our
Canadian subsidiaries, Sport Maska Inc., as the borrower, and the credit
parties named therein entered into a credit agreement with the lenders
referred to therein and General Electric Capital Canada Inc., as Agent and
Lender for a period of three years (together with General Electric Capital
Corporation, "GECC"). The GECC credit agreements are collateralized by all
accounts receivable, inventories and related assets of the borrowers and our
other North American subsidiaries, and are further collateralized by a second
lien on all of our and our North American subsidiaries' other tangible and
intangible assets. The GECC credit agreements were further extended and
amended on October 17, 2002 for a period of three years in connection with
the issuance in April 2002 of the 11.25% Senior Secured Note Units due in
2009, to reflect the repayment in full of the Caisse term loans and to
maximize the amount of loans and letters of credit under the two credit
agreements to $35.0 million and $7.0 million, respectively. Under the terms
of the Notes, such indebtedness cannot exceed $35.0 million and must be
repaid in full at least once a year. We have met the requirement for the
annual repayment in full for 2003. Total borrowings under the GECC credit
agreements as at December 31, 2003 and December 31, 2002 were nil including
borrowings under our Jofa facility (as described below) (excluding $7.0
million and $5.3 million of letters of credit outstanding, respectively). As
at December 31, 2003, borrowings under the U.S. credit agreement bear
interest at rates between U.S. prime plus 0.25% to 1.00% or LIBOR plus 1.50%
to 2.50% depending on The Hockey Company's Operating Cash Flow Ratio, as
defined in the agreement. Borrowings under the Canadian credit agreement bear
interest at rates between the Canadian prime rate plus 0.50% to 1.25%, the
U.S. prime rate plus 0.25% to 1.00% and the Canadian Bankers' Acceptance rate
or LIBOR plus 1.50% to 2.50% depending on The Hockey Company's Operating Cash
Flow Ratio, as defined in the agreement. In addition, we are charged a
monthly commitment fee at an annual rate of 1/4 to 3/8 of 1% on the unused
portion of the revolving credit facilities and certain other fees under the
credit agreements.
30
The GECC credit agreements contain customary negative and affirmative
covenants including those relating to capital expenditures, minimum interest
coverage and fixed charges coverage ratio. The GECC credit agreements restrict,
among other things, the ability to pay cash dividends and to transfer cash in
the form of advances or dividends to THC Holdings, except for the repayment of a
$10 million loan payable bearing interest at 11.25% per annum.
On November 19, 1998, in connection with the acquisition of Sports
Holdings Corp., we entered into a credit agreement with Caisse to borrow
Canadian $135.8 million for a period of two years. The loan was further extended
and amended into two facilities on March 14, 2001 (Facility 1--Canadian $90
million due September 30, 2004 and Facility 2--Canadian $45.8 million due
October 31, 2002). Each Facility bore interest equal to the Canadian prime rate
plus 5% and Facility 2 bore additional interest of 3.5% which was to be
capitalized and repaid on the maturity of Facility 2. On March 8, 2002 we
acquired an option from the lender to extend the maturity of Facility 2 plus
capitalized interest to February 28, 2003. The amended credit agreement was
terminated in connection with the issuance of the Units in April 2002.
On April 3, 2002, we completed a private offering of $125 million
aggregate principal amount of 11 1/4% Senior Secured Note Units due April 15,
2009 (the "Units"), at a price of 98.806%, each such Unit consisting of $500
principal amount of 11 1/4% Senior Secured Notes due April 15, 2009 of the
Company and $500 principal amount of 11 1/4% Senior Secured Notes due April 15,
2009 of Sport Maska Inc., our wholly-owned subsidiary. An offer to exchange all
of the outstanding Units for 11 1/4% Senior Secured Note Units due 2009 (the
"Exchange Units"), which have been registered with the United States Securities
and Exchange Commission under the Securities Act of 1933, as amended, pursuant
to a registration statement on Form S-4 filed with the Securities and Exchange
Commission on August 13, 2002, was completed on September 20, 2002. The terms of
the Exchange Units (and the underlying Exchange Notes) and those of the
outstanding Units (and underlying Notes) are identical, except that the transfer
restrictions and registration rights relating to the Units do not apply to the
Exchange Units; therefore, for purposes of this report on Form 10-K, any
reference to "Unit" refers to both Units and Exchange Units and any reference to
"Note" refers to both Notes and Exchange Notes.
The Notes are fully and unconditionally guaranteed by all of our
restricted subsidiaries, excluding the Finnish subsidiaries. The stock of the
first-tier Finnish subsidiary was pledged and the security interest in the
assets of our Swedish subsidiaries is limited to $15.0 million. Among the
financial covenants in the indenture, our ability to borrow under the revolving
credit facilities is restricted to a maximum of $35.0 million and the payments
of dividends or repurchases of stock are limited.
The Company and Sport Maska Inc. may repurchase the Units in the open
market from time to time.
The proceeds of $123.5 million from the sale of the Units were used by
us (i) to repay all outstanding secured loans under the Amended and Restated
Credit Agreement with Caisse, dated March 14, 2001, (ii) to pay down secured
indebtedness under the U.S. and Canadian credit agreements with GECC, (iii) to
pay fees and expenses for the offering and (iv) for general corporate purposes.
The Amended and Restated Credit Agreement with Caisse and any documents related
thereto were terminated and are of no further force and effect.
Jofa AB, our Swedish subsidiary, has entered into a credit agreement
with Nordea Bank in Sweden. The maximum amount of loans and letters of credit
that may be outstanding under the agreement is SEK 90 million (approximately
$12.5 million). The facility is collateralized by the assets of Jofa AB, bears
interest at a rate of STIBOR (currently 2.95 %) plus 0.90%, matures on December
31, 2004 and is renewable annually. Total borrowings were nil as at December 31,
2003 and December 31, 2002 (excluding $0.4 million and $1.6 million letters of
credit outstanding, respectively). Management believes that the credit agreement
can be renewed or refinanced upon maturity. If this agreement cannot be renewed
or financed with Nordea Bank, the Company will seek alternate sources of
financing to replace this agreement. In addition, Jofa AB entered into a
separate credit agreement with Nordea Bank in May 2000 to borrow SEK 10 million,
or approximately $1.4 million. The loan had a term of four years with annual
principal repayments of SEK 2.5 million, or approximately $0.3 million. The loan
was secured by a chattel mortgage on the assets of Jofa AB and bore an interest
rate of STIBOR plus 1.25%. The balance of this loan was repaid on March 3, 2003.
31
Effective July 10, 2001, KHF Finland Oy, our Finnish subsidiary,
entered into a credit agreement with Nordea Bank in Finland. The maximum amount
of loans and letters of credit that may be outstanding under the agreement is
EUR 2.4 million (approximately $3.0 million). The facility bears interest at a
rate of EURIBOR (2.09% at December 31, 2003) plus 0.9%. Total borrowings as at
December 31, 2003 and December 31, 2002 were nil. Management believes that the
credit agreement will be renewed or refinanced upon maturity.
There are no off-balance sheet financing arrangements.
The peak borrowings under our credit agreements for the years ended
December 31, 2003 and 2002, were as follows:
NORTH AMERICA EUROPE
----------------------------------------------- ------------------------------------------
(IN THOUSANDS OF U.S. DOLLARS)
Three months ended 2003 2002 2003 2002
---- ---- ---- ----
March 31 $ - $12,498 $ - $1,803
June 30 5,021 13,683 1,668 4,121
September 30 9,680 10,343 6,131 5,071
December 31 3,336 12,472 4,270 2,785
Cash provided by operating activities during the year ended December
31, 2003, was $21.1 million compared to $12.0 million in 2002. Net income was
$17.0 million in 2003 compared to $1.8 million in 2002. EBITDA was $50.9 million
for the year ended December 31, 2003 compared to $29.6 million in 2002.
Inventory and accounts receivable increased by $5.2 million and $4.6 million,
respectively, from December 31, 2002 to December 31, 2003. Inventory and
accounts receivable were negatively affected by the currency fluctuations as
they both improved year over year on a constant dollar basis. Cash used in
investing activities was $32.1 million compared to $1.9 in 2002, primarily due
to the $30.0 million royalty pre-payment under the New NHL License Agreement.
Cash provided by financing activities during the year ended December
31, 2003 was $29.2 million compared to $1.4 million in 2002. In 2003, proceeds
from the initial public offering of THC Holdings received by us through the
issue of shares by us to THC Holdings were partially used to finance the
repurchase of the 13% Pay-In-Kind Preferred Stock, whereas, in 2002 proceeds
from the offering of the Units, were partially used to refinance other long-term
debt and to reduce the operating line of credit.
Our cash balance as at December 31, 2003 was $42.6 million compared to
$19.5 million in 2002.
During the year ended December 31, 2003, the foreign exchange
translation adjustment was a positive $14.1 million, which was a result of the
strengthening Canadian dollar against the U.S. dollar, compared to $4.2 million
in 2002.
We follow the customary practice in the sporting goods industry of
offering extended payment terms to creditworthy customers on qualified orders.
Our working capital requirements generally peak in the second and third quarters
as we build inventory and make shipments under these extended payment terms.
CONTRACTUAL OBLIGATIONS
Certain of our subsidiaries lease office and warehouse facilities and
equipment under operating lease agreements. Certain of our subsidiaries have
also entered into agreements that 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. We also pay the NHL, CHL and
certain professional players, teams and other leagues an endorsement fee in
exchange for the promotion of our brands. Furthermore, we have repayment
obligations on our long-term debt. The following is a schedule of future minimum
payments and annual obligations under these commitments, as well as the
repayment of our 11.25% Senior Secured Note Units due 2009:
32
11.25% SENIOR
SECURED NOTE UNITS
OPERATING LEASES ROYALTIES DUE 2009 TOTAL
---------------- --------- -------- -----
(IN THOUSANDS OF U.S. DOLLARS)
2004 $3,419 $ 15,357 - $ 18,776
2005 1,086 13,397 - 14,483
2006 852 12,530 - 13,382
2007 791 12,603 - 13,394
2008 and beyond 824 81,550 125,000 207,374
------ -------- -------- --------
$6,972 $135,437 $125,000 $267,409
====== ======== ======== ========
RESTRUCTURING RESERVES
In 2001, we initiated a plan to rationalize operations and consolidate
facilities. 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 the Mount Forest, Ontario
plant, and the Paris, France sales office, and the consolidation of North
American distribution into Canada. Approximately 380 employees were affected by
this decision, of which 240 were from the apparel segment. Accordingly, reserves
of approximately $5.7 million were set up for the expected cost of the
restructuring. Of this amount, approximately $4.3 million was to cover the cost
of severance packages to affected employees, with the remainder representing
other closure costs. There were no balances outstanding as at December 31, 2003
(December 31, 2002 - $0.2 million).
In October 2002, we decided to close three of our North American
manufacturing units effective December 2002 in order to reduce excess capacity
and achieve greater operating efficiencies. Approximately 160 employees were
affected by this decision, of which approximately 50 are from the apparel
segment. Accordingly, we set up a restructuring reserve of approximately $2.1
million, of which approximately $1.3 million is to cover the cost of severance
packages to affected employees, with the remainder representing other closure
costs. There were no balances outstanding as at December 31, 2003 (December 31,
2002 - $0.9 million).
In January 2004, we announced the closure effective April 2004 of our
Apparel Sewing facility in Cap de la Madeleine, Quebec. We will centralize all
apparel operations in our Apparel factory in St-Hyacinthe, Quebec in order to
maximize the utilization of that facility. Approximately 170 employees from the
apparel segment will be affected by this decision and, accordingly, we will
incur restructuring costs of approximately $0.3 million mainly related to
severance packages to the affected employees.
EVENTS AND UNCERTAINTIES
The collective bargaining agreement between the NHL and the NHL
Players' Association expires September 15, 2004. The popularity of the NHL
affects the sales of our hockey equipment and hockey-related apparel. Our brands
receive significant on-ice exposure as a result of our license agreement with
the NHL. In the event of a labour dispute resulting in a work stoppage, the
popularity of the NHL could suffer and our brands will not receive any on-ice
exposure during NHL games. This, together with the absence of in-stadium sales
during a work stoppage, would significantly affect our apparel sales. In
addition, in the event of a labour dispute resulting in a work stoppage, we will
continue to have certain royalty payment obligations, although reduced, under
the New NHL License Agreement. Management has been extremely pro-active in
anticipation of a work stoppage and believes that it has taken appropriate
measures to minimize the impact on our operations and financial position. In the
event of a work stoppage, the term of our agreement with the NHL will be
extended.
We in the normal course of business are exposed to market risk from
changes in foreign currency exchange rates and interest rates (See Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk").
33
ACQUISITION OF DISTRIBUTOR NORBERT EWALD GMBH IN GERMANY
On January 5, 2004, we acquired the assets of Norbert Ewald GmbH (Ewald
Sport Service) for a total cost of approximately $1.3 million. Ewald, a former
distributor of our products, is a leading hockey equipment distributor in
Germany. This acquisition will continue to strengthen our existing presence in
the Central European hockey market.
T'BLADE JOINT VENTURE
On January 16, 2004, we purchased a 33 1/3% ownership stake in t'blade
Inc., the exclusive marketer and distributor of t'-blade replaceable ice skate
blade products and technology in North America, for US approximately $0.08
million (Cdn $0.1 million), as well as an advance of US$0.5 million (Cdn $0.7
million). The remaining shares are owned by Graf Canada Ltd. (33 1/3%) and
t'blade Gmbh (33 1/3%).
RELATED PARTY TRANSACTIONS
In 2003, we were charged a management fee of $0.1 million (2002 - $0.1
milion, 2001 - $0.1 million) by Wellspring Capital Management LLC, an affiliate
of the controlling shareholder, $0.2 million of which was unpaid at December 31,
2003.
RESEARCH AND DEVELOPMENT
Costs for new product research and development as well as changes to
existing products are expensed as incurred and totaled approximately $1.9
million and $2.4 million (before any research and development tax credits) for
the years ended December 31, 2002 and 2003, respectively.
INTANGIBLE ASSETS AND EXCESS REORGANIZATIONAL VALUE
We have a significant amount of intangible assets on our balance sheet.
As at December 31, 2003, (excluding $31.2 million intangible - prepaid NHL
Royalty) we had $71.2 million (2002 - $65.3 million) representing 24.4% (2002 -
29.3%) of total assets. This goodwill is comprised of two components. Upon the
acquisition of Sports Holdings Corp., we recognized $53.1 million of goodwill.
This amount, being the difference between the purchase price and the amount of
tangible net assets acquired, represents the value of the brands acquired. JOFA,
KOHO, Canadien, Titan and Heaton are world class hockey brands and management
believes that there is a significant long-term earnings potential to be realized
from these brands. Accordingly, the amortization of this goodwill was over 25
years until January 1, 2002 when we adopted the new rules on goodwill and other
intangible assets. Goodwill is no longer amortized but is subject to an annual
impairment test.
In connection with the reorganization in 1997 and fresh-start
accounting, we recognized $49.0 million of excess reorganization value, 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 the CCM brand. Management believes that significant
long-term earnings potential exists and was amortizing the excess reorganization
value over 20 years until January 1, 2002 when we adopted the new rules on
goodwill and other intangible assets. Goodwill is no longer amortized but is
subject to an annual impairment test.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities.
34
We believe that the estimates, assumptions and judgments involved in
the accounting policies below have the greatest impact on our financial
statements, so we consider these to be our critical accounting policies. Due to
inherent uncertainty, actual results could differ from the estimates we use in
applying the critical accounting policies. Certain of these critical accounting
policies affect working capital account balances, including the policies for
revenue recognition, the reserve for uncollectible accounts receivable, reserves
for inventory obsolescence and similar reserves. These policies require that we
make estimates in the preparation of our financial statements as of a given
date. However, since our business cycle is relatively short, actual results
related to these estimates are generally known within the six-month period
following the financial statement date. Thus, these policies affect only the
timing of reported amounts across two to three quarters.
The estimates described below are reviewed from time to time and are
subject to change if the circumstances warrant such change. The effect of such
change is reflected in results of operations for the period in which the change
is made.
REVENUE RECOGNITION. Revenue is recognized when products are shipped to
customers. Management believes that it has adequate reserves for returns,
discounts, rebates, and co-operative advertising relating to these revenues.
VALUATION OF ACCOUNTS RECEIVABLE. Approximately 57% of accounts
receivable are denominated in currencies other than the U.S. Dollar. The value
of these accounts is subject to gains and losses from exchange rate
fluctuations. Also in valuing these accounts management uses estimates as to
potential default rates. Should the default estimates change gains or losses
would occur. Management believes that it has adequate reserves in place.
VALUATION OF INVENTORY. The value of inventory is based partly on
management estimates regarding potential write-downs of excess or slow-moving
inventory and the estimated realizable value thereafter. Management believes
that the reserves in place for excess or slow moving inventory are adequate.
ENVIRONMENTAL PROVISION. Management has estimated the required
remediation cost for one of its properties and recorded it as an accrued
liability during the year. Actual results could differ from estimates.
PRODUCT WARRANTY. Management has estimated the costs that may be
incurred under its basic limited warranty and recorded a liability in the amount
of such costs at the time product revenue is recognized. Management periodically
assesses the adequacy of its recorded warranty liabilities and adjusts the
amounts as necessary.
INTANGIBLE ASSETS. The annual impairment test for goodwill and excess
reorganization value is based on the projected discounted cash flows method and
the EBITDA multiples approach which reflect management's assumptions and
estimates of future revenue growth rates, profit margins, selling, general and
administrative expenses, discount rates and multiples. Significant changes in
these assumptions could result in an impairment charge relating to goodwill and
excess reorganization value.
RESEARCH AND DEVELOPMENT. Costs for new product research and
development as well as changes to existing products are expensed as incurred.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONS, which is effective for fiscal years beginning
after June 15, 2002. The Statement requires legal obligations associated with
the retirement of long-lived assets to be recognized at their fair value at the
time that the obligations are incurred. Upon initial recognition of a liability,
that cost should be capitalized as part of the related long-lived asset and
allocated to expense over the useful life of the asset. We adopted Statement 143
on January 1, 2003, and its adoption did not have material impact on our
financial position or results of operations.
35
On April 30, 2002, FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS No. 4, 44, and 64, AMENDMENT OF FASB STATEMENT No. 13, AND TECHNICAL
CORRECTIONS. SFAS No. 145 rescinds SFAS No. 4, which required all gains and
losses from extinguishment of debt to be classified as an extraordinary item,
net of related income tax effect, if material in the aggregate. Due to the
rescission of SFAS No. 4, the criteria in Opinion 30 will now be used to
classify those gains and losses. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 are effective for fiscal years beginning after May 15,
2002. Any gain or loss on extinguishment of debt that was classified, as an
extraordinary item in prior periods presented that does not meet the criteria
for classification as an extraordinary item has to be reclassified. The
provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions
occurring after May 15, 2002. All other provisions of this Statement shall be
effective for financial statements issued on or after May 15, 2002. We have
adopted this Statement on January 1, 2003 upon which the loss on early
extinguishment of debt incurred in 2000 and 2001 has been reclassified in
accordance with the issued SFAS No. 145.
In July 2002, FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3 "LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION
BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED
IN A RESTRUCTURING)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at the time when the
liability is incurred. SFAS No. 146 eliminates the definition and requirement
for recognition of exit costs at the date of an entity's commitment to an exit
plan in Issue 94-3. We have adopted SFAS No. 146 on January 1, 2003 and there
were no exit or disposal activities initiated during the fiscal year ended
December 31, 2003.
In November 2002, FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS ("FIN 45"), which requires certain
guarantees to be recorded at fair value and increases the disclosure
requirements for guarantees even if the likelihood of making any payments under
the guarantee is remote. The increased disclosure requirements are effective for
fiscal years ending after December 15, 2002 and were adopted by the Company in
the consolidated financial statements for the year ended December 31, 2002. The
provision of FIN 45 relating to initial recognition and measurement are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. We adopted these provisions of FIN 45 for guarantees issued
or modified after December 31, 2002 on January 1, 2003 and no significant
transition adjustment resulted from its adoption.
In December 2002, FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE. SFAS No. 148 amends SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, INTERIM FINANCIAL REPORTING to required
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB No. 25. The provision of SFAS No. 148 is applicable for fiscal
years ending after December 15, 2002 and we have adopted this statement
prospectively in our financial statements for the year ended December 31,
2003. The adoption resulted in an expense of $26,000 in the year ended
December 31, 2003.
In January 2003, FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ACCOUNTING RESEARCH BULLETIN
NO. 51 ("FIN 46"). FIN 46 requires the consolidation of variable interest
entities ("VIE") in which an enterprise absorbs a majority of the entity's
expected losses, receives a majority of the entity's expected residual returns,
or both, as a result of ownership, contractual or other financial interests in
the entity. Currently, entities are generally consolidated by an enterprise that
has a controlling financial interest through ownership of a majority voting
interest in the entity. The provisions of FIN 46 are applicable to variable
interests in VIE's created after January 31, 2003. For variable interest
acquired before February 1, 2003, the
36
provisions of FIN 46 are applicable in the first interim period after December
15, 2003. The application of FIN 46 did not have, and is not expected to have, a
significant effect on our financial position and results of operations.
On April 30, 2003, FASB issued SFAS No. 149, AMENDMENT OF SFAS 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement is intended to
result in more consistent reporting of contracts as either freestanding
derivative instruments subject to SFAS No. 144 in its entirety or as hybrid
instruments with debt host contracts and embedded derivative features. SFAS No.
149 is effective for contracts entered into or modified after September 30, 2003
and hedging relationships designated after September 30, 2003. However, the
provisions of SFAS No. 149 that merely represent the codification of previous
Derivatives Implementation Group decisions are already effective and should
continue to be applied in accordance with their prior respective effective
dates. We will apply the recommendation of SFAS No. 149 for future contracts and
hedging relationships, if any, and believe the impact of this statement will not
significantly affect its financial position and results of operations.
On May 15, 2003, FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This
Statement establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS No. 150 is effective for all financial instruments created of
modified after May 31, 2003 and to other instruments at the beginning of the
first interim period beginning after June 15, 2003. We have applied the
recommendations of SFAS No. 150 for the year ended December 31, 2003 and have
reclassified the 13% Pay-In-Kind Preferred Stock as liabilities as at December
31, 2002.
SEASONALITY AND SELECTED QUARTERLY DATA
Sales of hockey equipment products are generally highly seasonal and in
some instances are dependent on weather conditions. This seasonality causes our
financial results to vary from quarter to quarter, with sales and earnings
usually weakest in the first and second quarters. In addition, the nature of our
business requires that in anticipation of the peak selling season for our
products, we make relatively large investments in inventory. Relatively large
investments in receivables consequently exist during and after such season.
(UNAUDITED)
2003 2002
------------------------------------------- -------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
Income Statement Data:
Net sales................. $37,779 $52,329 $81,119 $68,678 $34,161 $44,567 $72,696 $61,269
Gross profit.............. 16,708 24,422 35,752 30,770 14,924 20,233 31,927 24,602
Net income (loss)......... 1,006 3,780 7,885 4,322 (3,647) (330) 2,759 3,005
Basic earnings (loss) per
share.................. 0.14 0.46 0.65 0.36 (0.51) (0.05) 0.38 0.42
Diluted earnings (loss)
per share............... 0.14 0.45 0.64 0.35 (0.51) (0.05) 0.38 0.42
Other Financial Data:
EBITDA (1) ............... $ 7,109 $13,433 $18,311 $12,060 $ 1,388 $ 8,771 $13,137 $ 6,335
37
(1) EBITDA is defined as earnings (net income) before interest, income and
capital taxes and depreciation and amortization. EBITDA includes
restructuring charges, and other unusual items if it is reasonably likely
that they will recur within two years. This non-GAAP financial measure
does not replace the presentation of GAAP financial results, specifically
EBITDA as an alternative to cash flows as a measure of liquidity or as an
alternative to net income as a measure of operating performance, but is
provided to enhance overall understanding of the Company's current
financial performance and prospects for the future. The Company's
management believes that non-GAAP financial results provide useful
information to both management and investors regarding certain additional
financial and business trends relating to its financial condition and
results from operations. In addition, management uses certain non-GAAP
financial measures for reviewing the Company's financial results and
evaluating its financial performance. It should be noted that companies
calculate EBITDA differently and, therefore, EBITDA as presented for us
may not be comparable to EBITDA reported by other companies. We view
EBITDA as mostly an indicator of our operating performance and, therefore,
the nearest GAAP measure is net income. The following is a reconciliation
of our EBITDA to our net income:
(UNAUDITED)
2003 2002
------------------------------------------- -------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
Net Income (loss)....... $ 1,006 $ 3,780 $ 7,885 $ 4,322 $(3,647) $ (330) $ 2,759 $ 3,005
Income taxes............ 292 2,915 4,880 2,070 106 262 4,374 (2,292)
Depreciation and
amortization............ 969 1,044 1,034 1,130 916 940 946 818
Capital taxes........... 149 212 176 188 142 148 80 148
Interest................ 4,693 5,482 4,336 4,350 3,872 4,485 4,978 4,654
Loss on early
extinguishment of
debt.................. - - - - - 3,265 - -
Other................... - - - - (1) 1 - 2
EBITDA.................. $ 7,109 $ 13,433 $18,311 $ 12,060 $ 1,388 $ 8,771 $ 13,137 $ 6,335
38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We, in the normal course of doing business, are exposed to market risk
from changes in foreign currency exchange rates and interest rates. Our
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. However, fifty percent of the Notes
debt is held by a Canadian subsidiary whose functional currency is the Canadian
dollar. Included in our results is a foreign exchange gain of $11.9 million of
which approximately $13.0 million resulted from the translation of our U.S.
dollar denominated long-term debt, 50% of which is held by our Canadian
subsidiary, Sport Maska Inc. Fluctuations in the Canadian dollar, as in 2003,
against the U.S. dollar can give rise to significant volatility in net income.
We are also exposed to foreign exchange fluctuations due to significant
sales and costs in Canada, Sweden and Finland. If the average exchange rate of
the Canadian dollar, Swedish Krona and Euro were to vary by 1% versus the U.S.
dollar, the effect on sales in 2003 would have been $0.8 million, $0.4 million
and less than $0.3 million, respectively. We also have operating expenses in
each of these currencies, which would mitigate the impact of such foreign
exchange variation on cash flows from operations and net income. Further, a 1%
variation in the Canadian dollar versus the U.S. dollar would have an effect of
approximately $0.7 million on translation of our long-term debt for the entire
year given that 50% of the debt is held by the Canadian operating company.
Our European and Canadian subsidiaries each have operating credit
facilities denominated in their respective local currencies. The impact of
foreign exchange on these debt facilities is mitigated by the impact of foreign
exchange on the operating revenues generated in the local currencies of the
subsidiaries. As we hold either long-term or operating debt facilities
denominated in the currencies of our European subsidiaries, our equity
investment in those entities are hedged against foreign currency fluctuations.
We do not engage in speculative derivative activities. We are exposed to changes
in interest rates primarily as a result of our 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, we maintain the ability to borrow funds in different markets,
thereby mitigating the effect of large changes in any one market. Our operating
credit facilities have a variable interest rates and thus a 1% variation in the
interest rate on our borrowing base for the year will cause approximately $0.5
million increase or decrease in interest expense.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of the Hockey Company are
included in Item 8:
PAGE
Report of Independent Auditors.............................................................................. 41
Consolidated Balance Sheets as of December 31, 2003 and
December 31, 2002.......................................................................................... 42
Consolidated Statements of Operations for the years ended
December 31, 2003, December 31, 2002 and December 31, 2001................................................ 43
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, December 31, 2002 and December 31, 2001................................................ 44
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2003, December 31, 2002 and December 31, 2001................................................ 45
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, December 31, 2002 and December 31, 2001................................................ 46
Notes to Consolidated Financial Statements.................................................................. 47
The following Consolidated Financial Statement Schedule of the Hockey Company is included in Item 8:
Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2003, December 31, 2002 and
December 31, 2001.........................................................................................
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
40
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Stockholders
THE HOCKEY COMPANY
We have audited the accompanying consolidated balance sheets of THE HOCKEY
COMPANY as of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity, comprehensive income (loss) and
cash flows for each of the three years in the period ended December 31, 2003.
Our audits also included the financial statement schedule listed in the Index.
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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Hockey Company
at December 31, 2003 and 2002, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
In fiscal year 2003, the Company adopted Statements of Financial Accounting
Standards No 143, No 145, No 146, No 148, and No 150, as discussed in note 19a
to the consolidated financial statements. In addition, as discussed in note 19a
to the consolidated financial statements, in fiscal year 2002, the Company
adopted Statements of Financial Accounting Standards No 145.
Montreal, Canada, /s/ ERNST & YOUNG LLP
February 16, 2004 Chartered Accountants
(except for note 22d, as
to which the date is March 25, 2004)
41
THE HOCKEY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US$)
DECEMBER 31, DECEMBER 31,
2003 2002
------------------ ------------------
ASSETS (NOTES 7 AND 21)
Current Assets
Cash and cash equivalents............................................... $ 42,609 $ 19,484
Accounts receivable, net (See Note 3)................................... 61,643 56,986
Inventories (See Note 4)................................................ 49,517 44,354
Prepaid expenses and other receivables.................................. 5,144 4,802
Deferred Income taxes................................................... 7,564 8,080
------------------ ------------------
Total current assets.................................................... 166,477 133,706
Property, plant and equipment, net of accumulated depreciation
(See Note 5)............................................................ 15,042 15,318
Goodwill and excess reorganization intangible (See Note 6a)................ 71,207 65,348
Intangible - Prepaid NHL Royalty (See Note 6b)............................. 31,208 --
Other assets (See Note 6b)................................................. 7,870 8,581
------------------ ------------------
Total assets............................................................. $ 291,804 $ 222,953
------------------ ------------------
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable........................................................ $ 9,616 $ 8,312
Accrued liabilities..................................................... 14,521 14,442
Income taxes payable.................................................... 6,973 4,825
Accrued restructuring expenses (See Note 9)............................. -- 1,085
Current portion of long-term debt (See Note 7).......................... -- 288
------------------ ------------------
Total current liabilities............................................... 31,110 28,952
Long-term debt (See Note 7)................................................ 123,944 123,866
Accrued dividends payable (See Note 1B and 8).............................. -- 8,155
13% Pay-in-Kind Preferred stock (See Note 1B and 8)........................ -- 11,715
Loan payable to Parent Company (See Note 7a) 10,000 --
Deferred income taxes and other long-term liabilities (See Note 13)........ 4,836 2,056
------------------ ------------------
Total liabilities....................................................... 169,890 174,744
------------------ ------------------
Stockholders' equity (See Note 1B):........................................
New Common Stock, voting, par value $0.01 per share, 12,000,000 and nil
shares authorized, 5,469,174 and nil shares issued and outstanding at
December 31, 2003 and December 31, 2002, respectively................... 50 --
Old Common Stock, voting, par value $0.01 per share, nil and 20,000,000
shares authorized, nil and 7,040,523 shares issued and outstanding at
December 31, 2003 and December 31, 2002, respectively................... -- 70
Common Stock, non-voting, par value $0.01 per share, Exchangeable into
Common Shares of The Hockey Company Holdings Inc., 8,000,000 and nil
shares authorized, 6,506,537 and nil shares issued and outstanding at
December 31, 2003 and December 31, 2002, respectively................... 65 --
Warrants for Exchangeable Shares, 159,127 and nil issued and outstanding
at December 31, 2003 and December 31, 2002, respectively................ 1,665 --
Special Dividend Preferred Stock, par value $0.01 per share, one share and
nil shares authorized, one share and nil shares issued and outstanding
at December 31, 2003 and December 31, 2002, respectively................
Common stock purchase warrants, nil and 159,127 issued and outstanding at
December 31, 2003 and December 31, 2002, respectively................... -- 1,665
Additional paid-in capital - Exchangeable shares........................... 64,651 69,965
Additional paid-in capital - Common Stock.................................. 47,821 --
Additional paid-in capital - Stock Options (See Note 15)................... 26 --
Deficit.................................................................... (3,310) (20,303)
Accumulated other comprehensive income (loss) (See Note 20)................ 10,946 (3,188)
------------------ ------------------
Total stockholders' equity............................................... 121,914 48,209
------------------ ------------------
Total liabilities and stockholders' equity............................... $ 291,804 $ 222,953
------------------ ------------------
------------------ ------------------
The accompanying notes form an integral part of the financial statements.
42
THE HOCKEY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
2003 2002 2001
----------- ---------- -----------
Net Sales............................................................ $ 239,905 $ 212,693 $ 198,187
Cost of goods sold before restructuring and unusual charges.......... 132,253 119,390 117,296
Restructuring and unusual charges (See Note 9)....................... -- 1,617 1,198
----------- ----------- -----------
Gross profit......................................................... 107,652 91,686 79,693
Selling, general and administrative expenses before restructuring and
unusual charges................................................... 73,759 64,303 61,768
Restructuring and unusual charges (See Note 9)....................... -- 496 4,495
Amortization of excess reorganization value and goodwill............. -- -- 4,390
----------- ----------- -----------
Operating income..................................................... 33,893 26,887 9,040
Other (income) expense, net.......................................... (852) 1,311 538
Interest expense..................................................... 18,861 17,989 18,639
Foreign exchange (gain) loss......................................... (11,266) 85 (1,803)
Loss on early extinguishment of debt................................. -- 3,265 1,091
----------- ----------- -----------
Income (loss) before income taxes.................................... 27,150 4,237 (9,425)
Income taxes (See Note 13)........................................... 10,157 2,450 3,375
----------- ----------- -----------
Net income (loss).................................................... $ 16,993 $ 1,787 $ (12,800)
----------- ----------- -----------
----------- ----------- -----------
Basic income (loss) per share (See Note 14).......................... $ 1.72 $ 0.25 $ (1.81)
Diluted income (loss) per share (See Note 14)........................ 1.68 0.25 (1.81)
Adjusted income (loss) before amortization of excess reorganization
value and goodwill................................................ 16,993 1,787 (8,410)
Adjusted income (loss) per share before amortization of excess
reorganization value and goodwill................................. 1.72 0.25 (1.19)
The accompanying notes form an integral part of the financial statements.
43
THE HOCKEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
ADDITIONAL ADDITIONAL ADDITIONAL
COMMON PAID-IN PAID-IN PAID-IN ACCUMULATED
COMMON STOCK, COMMON STOCK CAPITAL CAPITAL CAPITAL RETAINED OTHER
VOTING # OF STOCK, PURCHASE EXCHANGEABLE COMMON STOCK EARNINGS COMPREHENSIVE
STOCK NON VOTING WARRANTS SHARES STOCK OPTIONS (DEFICIT) LOSS TOTAL
------- ---- ---- ---- -------- ------------ -------- -------- ---------- ---------- ---------
Balance at
December 31, 2000... 6,501 65 -- -- $1,665 $66,515 -- -- $ (9,290) $ (6,695) $ 52,260
Net loss.............. (12,800) (12,800)
Issuance of Warrants
(See Note 8)....... 3,450 3,450
Foreign currency
translation
adjustment.......... (690) (690)
------- ---- ---- ---- -------- ------------ -------- -------- --------- ---------- ---------
Balance at
December 31, 2001... 6,501 65 -- -- 5,115 66,515 -- -- (22,090) (7,385) 42,220
Net income............ 1,787 1,787
Exercise of Warrants
(See Note 8)........ 540 5 (3,450) 3,450 5
Foreign currency
translation
adjustment.......... 4,197 4,197
------- ---- ---- ---- -------- ------------ -------- -------- --------- ---------- ---------
Balance at
December 31, 2002... 7,041 70 -- -- 1,665 69,965 -- -- (20,303) (3,188) 48,209
------- ---- ---- ---- -------- ------------ -------- -------- --------- ---------- ---------
------- ---- ---- ---- -------- ------------ -------- -------- --------- ---------- ---------
Net income........... 16,993 16,993
Issuance of New
Common Stock (See
Note 1b)........... 4,929 45 42,456 42,501
Exchange of Old
Common Stock (See
Note 1b)........... (7,041) (70) 7,041 70
Exchange of New
Common Stock
(Note 8)........... 540 5 (540) (5) (5,365) 5,365
Exercise of stock
options (Note 15).. -- 6 -- 51 51
Stock compensation
(See Note 15)...... -- -- 26 26
Foreign currency
translation
adjustment......... 14,134 14,134
------- ---- ----- ---- -------- ------------ -------- -------- --------- ---------- ---------
Balance at
December 31, 2003 . 5,469 $50 6,507 $65 $1,665 $64,651 $47,821 $ 26 $(3,310) $ 10,946 $ 121,914
------- ---- ----- ---- -------- ------------ -------- -------- --------- ---------- ---------
------- ---- ----- ---- -------- ------------ -------- -------- --------- ---------- ---------
44
THE HOCKEY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31
(IN THOUSANDS OF US$)
2003 2002 2001
-------------- -------------- --------------
Net income (loss).................................... $ 16,993 $ 1,787 $(12,800)
Foreign currency translation adjustments............. 14,134 4,197 (690)
-------------- -------------- --------------
Comprehensive income (loss) for the year............. $ 31,127 $ 5,984 $(13,490)
-------------- -------------- --------------
-------------- -------------- --------------
The accompanying notes form an integral part of the financial statements.
45
THE HOCKEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(IN THOUSANDS OF US$)
2003 2002 2001
----------- ----------- -----------
OPERATING ACTIVITIES:
Net Income (loss)............................................... $ 16,993 $ 1,787 $(12,800)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Restructuring charges........................................... -- 2,113 5,693
Depreciation and amortization................................... 4,177 3,620 8,869
Amortization of deferred financing costs and debt discount...... 1,516 1,553 2,653
Deferred income taxes........................................... 2,339 (6,193) 20
Preferred stock dividends....................................... 1,211 2,376 2,103
Accretion of 13% Pay-In-Kind preferred stock.................... 784 144 238
Provision in lieu of taxes...................................... 1,295 4,551 1,360
Gain on disposal of property, plant and equipment............... (568) -- (23)
(Gain) loss on foreign exchange................................. (12,104) 379 (1,598)
Loss on early extinguishment of debt............................ -- 3,265 1,091
Stock compensation.............................................. 26 -- --
Change in operating assets and liabilities:
Accounts receivable.......................................... 1,778 (5,384) (11,736)
Inventories.................................................. 4,771 3 (3,291)
Prepaid expenses............................................. 93 1,159 2,036
Accounts payable and accrued liabilities..................... (2,379) 867 (4,070)
Income taxes payable......................................... 1,132 1,762 333
Other........................................................ -- -- --
----------- ----------- -----------
Net cash provided by (used in) operating activities........ 21,064 12,002 (9,122)
----------- ----------- -----------
INVESTING ACTIVITIES:
Prepayment of intangibles - NHL Royalty...................... (30,112) -- --
Purchases of property, plant and equipment................... (2,036) (1,902) (1,478)
Acquisition (Note 18)........................................ (1,434) -- --
Proceeds from disposal of property, plant and equipment...... 1,501 -- 341
----------- ----------- -----------
Net cash used in investing activities...................... (32,081) (1,902) (1,137)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net change in short-term borrowings.......................... -- (27,971) 16,060
Principal payments on debt................................... (465) (86,583) (245)
Proceeds from long-term debt................................. -- 123,866 677
Issuance of common stock..................................... 45 5 3,450
Increase in paid-in capital from shares issued to Parent
Company.................................................... 41,721
Exercise of stock option 51 -- --
Redemption of 13% Pay-In-Kind preferred stock
Including accrued dividends................................ (21,866) --
Loan Payable to Parent 10,000 -- --
Deferred financing costs..................................... (284) (7,915) (5,545)
----------- ----------- -----------
Net cash provided by financing activities.................. 29,202 1,402 14,397
Effect of foreign exchange rate on cash......................... 4,940 1,479 (58)
----------- ----------- -----------
Net change in cash and cash equivalents......................... 23,125 12,981 4,080
Cash and cash equivalents at beginning of year.................. 19,484 6,503 2,423
----------- ----------- -----------
Cash and cash equivalents at end of year........................ $ 42,609 $ 19,484 $ 6,503
----------- ----------- -----------
SUPPLEMENTAL INFORMATION:
Income taxes paid............................................... $ 4,785 $ 2,908 $ 2,640
Interest paid, excluding interest on 13% Pay-In-Kind
preferred stock................................................ $ 15,078 $ 11,258 $ 12,167
The accompanying notes form an integral part of the financial statements.
46
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING
PRONOUNCEMENTS
A. DESCRIPTION OF BUSINESS AND CHANGE OF CORPORATE NAME:
The Hockey Company was incorporated in September 1991 and reorganized
in April 1997. On February 9, 1999, The Hockey Company filed an amendment to
change the name of the Company from SLM International Inc. to The Hockey Company
("THC"). On June 11, 2003, The Hockey Company became a subsidiary of The Hockey
Company Holdings Inc., a Canadian public corporation (See Note 1B). The
consolidated financial statements include the accounts of THC and its wholly
owned subsidiaries (collectively, the "Company"). The Company manufactures
hockey equipment and related apparel, as well as recreational skates and other
non-hockey products. The hockey equipment and related apparel include hockey
uniforms, hockey sticks, goaltender equipment, protective equipment and hockey
skates. The Company sells its products world-wide to a diverse customer base
consisting of specialty retailers, sporting goods shops, mass merchandisers,
teams and international distributors. The Company manufactures in-house at six
highly efficient facilities, four of which are located in Canada and two in
Europe. In addition, where it makes business sense, the Company outsources the
manufacturing of certain products. The distribution facilities of the Company
are located in North America, Finland, Sweden and Germany.
Overall 34% of the Company's employees are covered by a collective
bargaining agreement. The North American, Finish and Swedish agreements expire
in 2008, 2005 and 2004 respectively.
B. INITIAL PUBLIC OFFERING - THE HOCKEY COMPANY HOLDINGS INC.:
On June 11, 2003, The Hockey Company Holdings Inc. ("THC Holdings" or
the "Parent Company") completed an initial public offering (the "Offering") and
issued 4,500,000 common shares for proceeds of approximately $47,200
(Cdn$64,140), net of issue fees and expenses of approximately $5,800
(Cdn$7,800). As a result, the Company issued 4,500,000 shares of voting common
stock, par value $0.01 per share, to THC Holdings for proceeds of $37,075
(Cdn$50,381). On July 11, 2003, THC Holdings closed on the exercise by the
underwriters of their over-allotment option in connection with the initial
public offering. The underwriters purchased an additional 429,200 common shares
for proceeds of $4,691(Cdn$6,387), net of issue fees and expenses of
approximately $352 (Cdn$481). As a result, the Company also issued 429,200
shares of voting common stock of the Company to THC Holdings for proceeds of
$4,691(Cdn$6387). THC Holdings' common shares are listed on the Toronto Stock
Exchange under the symbol "HCY".
On closing of the Offering, the Company entered into a corporate
reorganization whereby:
(i) THC Holdings incorporated Hockey Merger Co. ("Subco") on February
24, 2003, and Subco entered into a merger agreement on April 2, 2003 with the
Company. Under the terms of the merger agreement, Subco and the Company merged,
and THC Holdings, through Subco, received all of the outstanding voting common
stock of the Company, and each existing holder of common stock of the Company
received one share of non-voting exchangeable common stock of the Company (the
"Exchangeable Shares") for each share of common stock held. Each holder of an
Exchangeable Share has the right to exchange one Exchangeable Share for one
Common Share of THC Holdings, subject to certain adjustments in the event, among
others things, of stock splits or similar events. The delivery of the Common
Shares upon exercise of the Put Right is subject to applicable U.S. securities
laws. The merger has been accounted for as a continuity of interest of the
Company as a transaction between related parties; and
47
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
(ii) THC Holdings has the right to require the exchange of each
outstanding Exchangeable Share for one Common Share, subject to certain
adjustments in the event, among other things, of stock splits or similar events,
at any time after the earlier of the fifth anniversary date of the closing of
the Offering or the date on which 80% of the Exchangeable Shares outstanding on
the date of the closing of the Offering have been exchanged; and
(iii) THC Holdings has issued one special voting share for each
Exchangeable Share outstanding. Pursuant to a voting and exchange trust
agreement, a trustee holds all of the outstanding special voting shares in trust
for the benefit of the holders of the Exchangeable Shares. Each holder of an
Exchangeable Share is entitled to direct the trustee how to vote one special
voting share of THC Holdings. Unless instructed, the trustee may not vote. A
special voting share does not carry the right to receive dividends or any other
distributions from THC Holdings; and
(iv) as part of the reorganization referred to above, THC Holdings
entered into an agreement with certain principal shareholders pursuant to which
certain actions of THC Holdings will require approval of such shareholders. This
agreement terminated on September 4, 2003; and
(v) the existing stock options and common stock purchase warrants
outstanding and exercisable for common stock of the Company have been converted
to be exercisable for Exchangeable Shares; and
(vi) after the merger, the authorized capital of the Company is as
follows:
VOTING COMMON STOCK
After the reorganization, all voting common stock, par value $0.01 per
share, of the Company is held by THC Holdings.
NON-VOTING EXCHANGEABLE COMMON STOCK
Exchangeable Shares, par value $0.01 per share, rank PARI PASSU with
the voting common stock of the Company with respect to dividend rights and have
the right to economically equivalent distributions as the voting common stock on
liquidation, winding-up or dissolution but rank junior to any series of
preferred stock established by the board of directors of the Company. The
Exchangeable Shares are non-transferable, except to certain permitted
transferees and to THC Holdings in exchange for its Common Shares. The holders
of the Exchangeable Shares have the right, at any time, to require THC Holdings
to purchase any or all of the Exchangeable Shares registered in the name of such
holder (the "Put Right") in exchange for Common Shares, on a one-for-one basis,
for each Exchangeable Share presented for purchase, subject to certain
adjustments in the event, among other things, of stock splits or similar events.
The delivery of the Common Shares upon exercise of the Put Right is subject to
applicable U.S. securities laws and the Common Shares may not be delivered until
either a registration statement is filed by THC Holdings with the SEC and
declared effective by the SEC in order to register the Common Shares or a
private placement by THC Holdings is completed in accordance with U.S.
securities laws. The holder, upon exercise of the Put Right, will also receive
any declared and unpaid dividends on the Exchangeable Shares presented for
purchase. The Exchangeable Shares are also subject to a call right (the "Call
Right") of THC Holdings at the option of THC Holdings which shall be, no earlier
than the fifth anniversary date of the closing of the Offering, unless there are
fewer than 20% of the Exchangeable Shares issued as of the date of closing of
the Offering outstanding (other than Exchangeable Shares held by the Corporation
or any of its affiliates). The Exchangeable Shares have no voting rights other
than those rights received under the Voting and Exchange Trust Agreement.
SPECIAL DIVIDEND PREFERRED STOCK
Special dividend preferred stock, par value $0.01 per share, ranks PARI
PASSU with the voting common stock of the Company and the Exchangeable Shares
and ranks junior to all other series of preferred stock of the Company. The
Special Dividend Preferred Stock carries a dividend entitlement equal to the
amount of withholding and income taxes paid by the Corporation in respect of any
dividend declared on the voting common stock of the Company (plus
48
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
a gross-up to cover the withholding and income taxes levied on the dividend paid
on the Special Dividend Preferred Stock). The Special Dividend Preferred Stock
shall be automatically cancelled by the Company on a date when there are no
longer any Exchangeable Shares or any other securities convertible into
Exchangeable Shares outstanding.
PREFERRED STOCK
The Board of Directors has the authority to issue the preferred stock
in one or more series and to fix the designations, rights, privileges,
restrictions and conditions attaching to the series, including dividend rights,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series,
without further vote or action by the stockholders.
13.0% PAY-IN-KIND PREFERRED STOCK
On November 19, 1998, the Company issued 100,000 shares of 13%
Pay-in-Kind redeemable preferred stock, $0.01 par value per share, cumulative
preferred stock, together with warrants to purchase 159,127 common shares at a
purchase price of $0.01 per share, for cash consideration of $12,500. The fair
value of the warrants was determined to be $1,665 and has been recorded in
stockholder's equity. On June 11, 2003, all of the outstanding 13% Pay-in-Kind
Preferred Stock were repurchased by the Company for cancellation, together with
all accrued dividends totaling $9,366 thereon paid, with a portion of the
proceeds of the Offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Certain of the preceding years' figures have been reclassified to
conform to the presentation adopted in the current year.
B. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
C. REVENUE RECOGNITION:
Revenue is recognized when products are shipped to customers.
Additionally, the Company follows the guidance of Accounting Principles Board
("APB") Opinion no. 29, "Accounting for non-monetary transactions." This APB
provides guidance on accounting for transactions that involve primarily an
exchange of non-monetary assets, liabilities or services. Revenues include
transactions, which represent an exchange by the Company of hockey equipment and
related apparel for advertising. Revenues and expenses from these transactions
are recorded at the estimated fair value of the services of the goods delivered.
Revenue and expenses recognized from such transactions were $1,551 in 2001,
$1,725 in 2002 and $1,639 in 2003.
49
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
D. 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' equity.
The functional currencies of our non-U.S. subsidiaries, which are primarily
located in Canada, Finland and Sweden, are the respective local currencies in
each foreign country.
In addition the Company's monetary balance sheet items denominated in
foreign currencies are translated at the rate of exchange in effect at year end
and non monetary items are translated at historical exchange rates. Revenues and
expenses in foreign currencies are translated at the rate in effect on the
transaction dates or at the average rates of exchange for the period.
Translation gains or losses are included in the statement of operations.
The Company's investment in the Canadian subsidiary was effectively
hedged by the Canadian dollar denominated debt up to the investment in the
Canadian subsidiary until April 3, 2002.
E. 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 Provincial 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. As at December 31, 2003 and 2002, no single
account receivable represented more than 10% of the Company's consolidated
accounts receivable and no single customer accounted for more than 10% of the
Company's consolidated net sales for each of the years in the three year period
ended December 31, 2003.
F. CASH EQUIVALENTS:
Cash equivalents consist of 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, 2002 and 2003, the Company had cash equivalents of
$10,700 and $26,700, respectively.
G. INVENTORIES:
Inventories are stated at the lower of cost or net realizable value for
finished products and work in process, and replacement cost for raw materials
and supplies. Cost is determined using the first-in, first-out method. The
Company provides allowances for excess, obsolete and slow moving inventories.
H. RESEARCH & DEVELOPMENT EXPENSES:
Costs for new product research and development as well as changes to
existing products are expensed as incurred and totaled, $1,770, $1,921 and
$2,438 (before any Research and Development tax credits) for the years ended
December 31, 2001, 2002 and 2003, respectively.
50
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
I. PREPAID EXPENSES:
The Company expenses advertising and promotion costs incurred when the
advertising takes place. Royalty payments are deferred to the extent that the
related sales have not yet been recorded. Such costs are included in prepaid
expenses.
J. ADVERTISING AND PROMOTION COSTS:
Costs for advertising and promotion, excluding royalty and
endorsements, totaled, $9,082, $9,272 and $10,707 for the years ended December
31, 2001, 2002 and 2003, respectively.
K. FREIGHT COSTS:
Costs for freight on sales to customers included in selling, general
and administrative expenses totaled $1,545, $1,716 and $2,411 for the years
ended December 31, 2001, 2002 and 2003, respectively.
L. 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, except for office
furniture and equipment which are depreciated at a rate 20%, using the declining
balance method.
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
Accelerated methods of depreciation are used for tax reporting purposes
where available. 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.
M. 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, local taxes on all of the unremitted
earnings of its non-U.S. subsidiaries to December 31, 2003.
51
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
Fresh-start reporting requires the Company to report a provision in
lieu of income taxes when there is a 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.
N. INTANGIBLE ASSETS:
Intangible assets are recorded at cost. 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 Note 6a) and deferred financing costs (amortized
over the life of the financing). Goodwill and excess reorganization value are
not amortized but are tested annually for impairment. The Company uses
discounted projected cash flows approach or multiples of net income before
interest, income and capital taxes and depreciation and amortization approach to
assess if there has been an impairment in the value of goodwill and excess
reorganization value
Excess reorganizational value is being reduced by the realization of
deferred tax assets.
O. IMPAIRMENT OF LONG-LIVED ASSETS:
When events or circumstances indicate the carrying value of a
long-lived asset may be impaired, the Company estimates the future undiscounted
cash flows to be derived from the asset to assess whether or not a potential
impairment exists. If the carrying value exceeds the estimate of future
undiscounted cash flows, the Company then calculates an impairment as the excess
of the carrying value of the asset over the estimate of its fair market value.
P. EARNINGS PER SHARE:
Basic earnings per share is calculated using the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
per share is computed based on the weighted average number of shares of common
stock assumed to be outstanding during each year. Common stock equivalents are
included when dilutive (see Notes 8, 14 and 15).
Q. PENSION LIABILITY:
The Company provides a defined-benefit pension plan covering its senior
executives. Pension benefits are based on age, years of service and compensation
rates. Pension expense was $607 and $183 in 2002 and 2003 respectively, and the
unfunded liability amounted to $818 and $512 at December 31, 2002 and 2003
respectively, which is included in deferred income taxes and other long-term
liabilities.
In addition, the Company contributes to the retirement plans of certain
of its employees. During the year ended December 31, 2001, 2002 and 2003, the
contributions expensed amounted to $338, $308 and $333, respectively.
R. PRODUCT WARRANTY PROVISION:
The Company offers warranty for some of its products. The specific
terms and conditions of those warranties vary depending upon the product sold
and country in which the Company does business. The Company estimates the costs
that may be incurred under its basic limited warranty and records a liability in
the amount of such costs at the time product revenue is recognized. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.
52
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
Changes in the Company's product liability reserve during the period are as
follows:
2003 2002 2001
---------- ---------- ----------
Balance, at January 1.................................................... $ 1,180 $ 941 $ 864
Warranties accrued during the year....................................... 1,936 1,348 1,063
Settlements made during the year......................................... (1,931) (1,085) (965)
Changes in liability for pre-existing warranties including expirations... -- -- --
Translation adjustments.................................................. 145 (24) (21)
---------- ---------- ----------
Balance, at December 31.................................................. $ 1,330 $ 1,180 $ 941
---------- ---------- ----------
---------- ---------- ----------
S. ENVIRONMENTAL PROVISION:
The Company has an obligation for environmental remediation on one of
its properties. Management's undiscounted estimate of remediation cost in
the amount of $600 was recorded as an accrued liability during 2002 (nil in
2003). Actual results could differ from estimates.
T. STOCK COMPENSATION:
The Company records compensation expense on stock based compensation
issued to employees using the fair value method (See Note 15).
3. ACCOUNTS RECEIVABLE
Net accounts receivable include:
2003 2002
---------- ----------
Allowance for doubtful accounts............................................. $ 2,335 $ 3,079
Allowance for returns, discounts, rebates and cooperative Advertising....... 13,329 9,275
---------- ----------
$15,664 $12,354
---------- ----------
---------- ----------
Bad debt expense for the years ended December 31, 2001, 2002 and 2003
was $1,381, $1,553 and $ 1,231 respectively.
4. INVENTORIES
Inventories consist of:
2003 2002
---------- ----------
Finished products............................................................. $35,574 $33,336
Work in process............................................................... 2,143 2,188
Raw materials and supplies.................................................... 11,800 8,830
---------- ----------
$49,517 $44,354
---------- ----------
---------- ----------
Allowances for excess, obsolete and slow moving inventories were $3,284
and $3,553 at December 31, 2002 and 2003, respectively.
53
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
2003 2002
---------- ----------
Land and improvements........................................................ $ 132 $ 231
Buildings and improvements................................................... 8,648 7,795
Machinery and equipment...................................................... 21,182 17,428
Tools, dies and molds........................................................ 5,145 3,892
Office furniture and equipment............................................... 8,198 6,213
---------- ----------
43,305 35,559
Less: accumulated depreciation and amortization............................. 28,263 20,241
---------- ----------
$ 15,042 $ 15,318
---------- ----------
---------- ----------
Depreciation and amortization expense for the years ended December 31,
2001, 2002, and 2003, was $4,311, $3,620, and $4,177, respectively of which
$3,194, $2,723 and $2,986 was included in cost of sales.
6a. INTANGIBLE AND EXCESS REORGANIZATION VALUE
Net intangible and excess reorganization value consist of:
2003 2002
---------- ----------
Goodwill..................................................................... $ 50,373 $ 43,522
Excess reorganizational value................................................ 20,834 21,826
---------- ----------
$ 71,207 $ 65,348
---------- ----------
---------- ----------
Accumulated amortization for goodwill and excess reorganizational value
for the years ended December 31, 2002 and 2003 was $15,724 and $17,250
respectively. Excess reorganizational value was reduced by $1,295 for the year
ended December 31, 2003 (2002 - $4,551) by the realization of deferred tax
assets.
6b. OTHER ASSETS CONSIST OF:
2003 2002
---------- ----------
Deferred financing costs..................................................... $ 6,680 $ 7,057
Other........................................................................ 1,190 1,524
---------- ----------
$ 7,870 $ 8,581
---------- ----------
---------- ----------
Amortization expense for other assets for the year ended December 31,
2001, 2002 and 2003 was $2,821, $2,601 and $1,795 respectively.
54
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
On March 28, 2003, THC Holdings, the Company and certain of its
subsidiaries entered into a new ten-year License Agreement (the "New NHL License
Agreement") with the NHL which became effective on the pre-payment of certain
royalties in the amount of $30,112 from the Offering (including legal expenses
of $112). In addition, THC Holdings also granted to the NHL an option to
purchase 75,000 shares of the common stock of THC Holdings at $11.77 (Cdn$16.00)
per share. The fair value of the options was determined to be approximately
$735. The prepaid NHL Royalty and the fair value of the options will be expensed
over the term of the agreement based on the schedule of royalty payments.
7. REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT
A. REVOLVING CREDIT FACILITIES:
Revolving credit facilities consist of the following:
Effective November 19, 1998, two of THC'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 for a period of three years.
Simultaneously, two of THC'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 with General
Electric Capital Canada Inc., as Agent and Lender for a period of three years.
The Credit Agreements are collateralized by all accounts receivable, inventories
and related assets of the borrowers and THC's other North American subsidiaries
and are further collateralized by a second lien on all of THC's and THC's North
American subsidiaries' other tangible and intangible assets.
The credit agreements were further extended and, subsequent to the
issuance of the Units (See Note 7b), the U.S. Credit Agreement and the Canadian
Credit Agreement were amended on October 17, 2002 for a period of three years to
reflect the repayment of the Caisse term loan and to reduce the maximum amount
of loans and letters of credit available from an aggregate of $60,000 to $35,000
and $7,000 respectively. Under the term of the Units, these credit facilities
must be repaid in their entirety at least once each fiscal year. Each of the
Credit Agreements is subject to a minimum borrowing availability of $1,750 in
certain months. Total borrowings under the credit agreements as at December 31,
2003 and December 31, 2002 were nil including borrowings under our Jofa facility
(see below) as at December 31, 2003 (excluding $7,000 and $5,300 of letters of
credit outstanding, respectively.). As at December 31, 2003, borrowings under
the U.S. Credit Agreement bear interest at rates of either U.S. prime rate plus
0.25% to 1.00% or LIBOR plus 1.50% to 2.50% depending on The Hockey Company's
Operating Cash Flow Ratio, as defined in the agreement. Borrowings under the
Canadian Credit Agreement bear interest at rates between the Canadian prime rate
plus 0.50% to 1.25%, the U.S. prime rate plus 0.25% to 1.00% and the Canadian
Bankers' Acceptance rate or LIBOR plus 1.50% to 2.50% depending on The Hockey
Company'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
1/4 to 3/8 of 1% on the unused portion of the revolving credit facilities and
certain other fees under the Credit Agreements.
The Credit Agreements contain customary negative and affirmative
covenants including those relating to capital expenditures, minimum interest
coverage and fixed charges coverage ratio. The agreements restrict, among
others, the ability to pay cash dividends. Also, the credit agreements
restrict the transfer of cash in the form of loans, advances or dividends
from THC to THC Holdings except for the repayment of $10 million loan payable
bearing interest at 11.25% per annum. The interest on the loan amounted to
$0.6 million during the year ended December 31, 2003. It is the intention of
THC Holdings not to call this loan before January 1, 2005.
Jofa AB, our Swedish subsidiary, has entered into a credit agreement
with Nordea Bank in Sweden. The maximum amount of loans and letters of credit
that may be outstanding under the agreement is SEK 90 million
55
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
(approximately $12.5 million). The facility is collateralized by the assets of
Jofa AB, bears interest at a rate of STIBOR (currently 2.95 %) plus 0.90%,
matures on December 31, 2004 and is renewable annually. Total borrowings were
nil as at December 31, 2003 and December 31, 2002 (excluding $0.4 million and
$1.6 million letters of credit outstanding, respectively). Management believes
that the credit agreement can be renewed or refinanced upon maturity. If this
agreement cannot be renewed or financed with Nordea Bank, the Company will seek
alternate sources of financing to replace this agreement.
Effective July 10, 2001, KHF Finland Oy, our Finnish subsidiary,
entered into a credit agreement with Nordea Bank in Finland. The maximum amount
of loans and letters of credit that may be outstanding under the agreement is
EUR 2.4 million (approximately $3.0 million). The facility bears interest at a
rate of EURIBOR (2.09% at December 31, 2003) plus 0.9%. Total borrowings as at
December 31, 2002 and September 30, 2003 were nil. Management believes that the
credit agreement will be renewed or refinanced upon maturity.
The weighted average interest rate on short-term debt outstanding at
December 31, 2003, 2002 and 2001 was nil, nil and 6.96% respectively.
The peak borrowings under our credit agreements for the years ended
December 31, 2003 and 2002, were as follows:
NORTH AMERICA EUROPE
------------------------------------------ -------------------------------------------
(IN THOUSANDS OF U.S. DOLLARS)
Three months ended 2003 2002 2003 2002
---- ---- ---- ----
March 31 $ - $ 12,498 $ - $1,803
June 30 5,021 13,683 1,668 4,121
September 30 9,680 10,343 6,131 5,071
December 31 3,336 12,472 4,270 2,785
B. LONG-TERM DEBT:
Long-term debt at December 31 was as follows:
2003 2002
---------- ----------
11 1/4% Senior Secured Note Units............................................... $ 123,944 $ 123,666
Other long-term debt......................................................... -- 488
---------- ----------
123,944 124,154
Less: amounts contractually due within one year.............................. -- 288
---------- ----------
Total long-term debt, excluding current portion.............................. $ 123,944 $ 123,866
---------- ----------
---------- ----------
11 1/4% SENIOR SECURED NOTE UNITS
On April 3, 2002, the Company issued $125,000 11 1/4% Senior Secured
Note Units (the "Units") due April 15, 2009 at a price of 98.806%, each Unit
consisting of $0.5 principal amount of 11 1/4% Senior Secured Notes of the
Company and $0.5 principal amount of 11 1/4% Senior Secured Note of Sport Maska
Inc., a wholly owned subsidiary of the Company, through a private placement. The
effective interest rate on the Units is approximately 11.4%.
An offer to exchange all of the outstanding Units for 11 1/4% Senior
Secured Note Units due 2009 (the "Exchange Units"), which have been registered
with the United States Securities and Exchange Commission ("SEC") under the
Securities Act of 1933, as amended, pursuant to a registration statement on Form
S-4 filed with the SEC on August 13, 2002, was completed on September 20, 2002.
The terms of the Exchange Units (and the
56
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
underlying Exchange Notes) and those of the outstanding Units (and underlying
Notes) are identical, except that the transfer restrictions and registration
rights relating to the Units do not apply to the Exchange Units; therefore, for
purposes of this report on Form 10-K, any reference to "Unit" refers to both
Units and Exchange Units and any reference to "Note" refers to both Notes and
Exchange Notes. In connection with the issuance of the Units, the Amended and
Restated Credit Agreement with Caisse and any documents related thereto have
been terminated and are of no further force and effect.
THC has fully and unconditionally guaranteed the Notes of Sport Maska
Inc. on a senior secured basis. Sport Maska Inc. has fully and unconditionally
guaranteed the THC Notes. Also, certain subsidiaries of THC and Sport Maska
Inc., excluding the Finnish subsidiaries, have fully and unconditionally
guaranteed the Units on a senior secured basis. The Units and guarantees are
secured by substantially all the tangible and intangible assets of the Company,
excluding the Finnish subsidiaries, subject to the prior ranking claims by
lenders under the revolving credit facilities, and by a pledge of stock of the
first-tier Finnish subsidiary. The security interest in the assets of the
Company's Swedish subsidiaries (other than intellectual property) is limited to
$15,000.
The Units may be redeemed at any time after April 15, 2006 at the
following redemption prices (expressed as percentages of the principal amount
thereof) plus accrued and unpaid interest to the date of redemption, if redeemed
during the twelve-month period commencing on April 15 of the year set forth
below:
YEAR PERCENTAGE
---- ----------
2006 105.625%
2007 102.813%
2008 and thereafter 100.000%
In addition, up to one-third of the aggregate principal amount of the
Units may be redeemed with the net proceeds of certain public equity offerings
at any time until April, 15, 2005 at a redemption price of 111.25% of the
principal amount plus accrued and unpaid interest to the date of redemption. If
the Company undergoes a change of control, the Company and Sport Maska Inc. will
be required to jointly offer to purchase the Units from the holders at 101% of
principal amount plus accrued and unpaid interest to the date of repurchase.
The Company and Sport Maska Inc.may repurchase the Units in the open
market from time to time.
The proceeds of $123,508 were used (i) to repay all outstanding secured
loans under the Amended and Restated Credit Agreement, dated March 14, 2001,
(ii) to repay a portion of the secured indebtedness under the U.S. and Canadian
Credit Agreements, (iii) to pay fees and expenses of the offering and (iv) for
general corporate purposes. Among other financial covenants, the indenture
governing the Notes restricts the Company's ability to borrow under its
revolving credit facilities to a maximum of $35,000 and limits payments of
dividends or repurchases of stock.
SECURED LOANS - CAISSE DE DEPOT ET PLACEMENT DU QUEBEC AND NORDEA BANK
The former loan with the Caisse de depot et placement du Quebec
("Caisse") of Canadian $135.8 million was repaid in full and the amended credit
agreement was terminated in connection with the issuance of the Notes.
NORDEA BANK
In May 2000, Jofa AB, a subsidiary of the Company, entered into a loan
agreement with Nordea Bank in Sweden to borrow SEK 10,000 ($1,400). The loan is
for four years with annual principal repayments of SEK 2,500 ($288). The loan is
secured by a chattel mortgage on the assets of the subsidiary and bears an
interest rate of STIBOR plus 1.25%. The balance of $439 was repaid on March 3,
2003.
57
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
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, 2001
and 2002 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. COMMON STOCK, WARRANTS AND PREFERRED STOCK
The Company has authorized 12,000,0000 shares of voting common stock,
of which of 5,469,174 are issued and outstanding. The Company also has 8,000,000
shares of non-voting exchangeable common stock of which 6,506,537 are issued and
outstanding.
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 $0.01 per share, of the Company, at an
exercise price of $0.01 per share with a fair value of $3,450. Concurrent with
the repayment of the Caisse loan (see Note 7), Caisse exercised the warrant and
purchased the Company's common stock. On November 26, 2003, Caisse exchanged the
Company's non-voting exchangeable common stock for THC Holdings' common shares.
The Company also issued 539,974 shares of voting common stock to THC Holdings.
On April 11, 1997, in connection with a re-organization, THC's old
common stock was extinguished and the holders received a total of 300,000
five-year warrants to purchase an aggregate of 300,000 shares of common stock at
an exercise price of $16.92 per share. The warrants expired unexercised on April
11, 2002.
On November 19, 1998, the Company issued 100,000 shares of 13%
Pay-In-Kind redeemable preferred stock, $0.01 par value per share, cumulative
dividend 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. The difference between the redemption value of
the preferred stock and the recorded amount was being accreted over the term of
the preferred stock and on June 11, 2003, all of the outstanding 13% Pay-In-Kind
redeemable preferred stock was repurchased by the Company for cancellation
together with all accrued dividends totaling $9,366 with a portion of the
proceeds from the Offering (See Note 1B).
9. RESTRUCTURING CHARGES
In 2001, the Company embarked on a plan to rationalize its operations
and consolidate its facilities. 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, and our Paris, France sales office, and the consolidation of North
American distribution into Canada. Accordingly, the Company set up reserves of
approximately $5.7 million for the expected cost of the restructuring. Of this
amount, approximately $4.3 million was to cover the cost of severance packages
to affected employees, with the remainder representing other closure costs. All
of these amounts were paid as of December 31, 2003 (approximately $0.2 million
remained unpaid as at December 31, 2002).
In October 2002, the Company decided to close three of its North
American manufacturing units effective December 2002 in order to reduce excess
capacity and achieve greater operating efficiencies. Approximately 160 employees
were affected by this decision, of which approximately 50 are from the apparel
segment. Accordingly, the Company set up a restructuring reserve of
approximately $2.1 million, of which approximately $1.3 million is to cover the
cost of severance packages to affected employees, with the remainder
representing other closure costs. All of these amounts were paid as of December
31, 2003 (approximately $0.9 million remained unpaid as at December 31, 2002).
For the years ended December 31, 2001, 2002 and 2003, there were no
additions or reversals of the restructuring charges.
58
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
10. RELATED PARTY TRANSACTIONS
In 2003, the Company was charged a management fee of $100 (2002 - $100,
2001 - $100) by Wellspring Capital Management LLC, an affiliate of the
controlling shareholder, $200 of which remained unpaid at year end.
11. LEASES
Certain of our subsidiaries lease office and warehouse facilities and
equipment under operating lease agreements. Some lease agreements provide for
annual rent increases based upon certain factors including the Consumer Price
Index.
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, 2003:
2004.............................................................................. $3,419
2005.............................................................................. 1,086
2006.............................................................................. 852
2007.............................................................................. 791
2008 and beyond................................................................... 824
-----------
$6,972
-----------
-----------
Rental expense for the years ended December 31, 2001, 2002 and 2003 was
approximately $3,068, $2,750 and $3,118, respectively.
12. ROYALTIES AND ENDORSEMENTS
Certain of the Company's subsidiaries have entered into agreements that
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 also pays the NHL, 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 obligations
under these contracts.
2004.............................................................................. $ 15,357
2005.............................................................................. 13,397
2006.............................................................................. 12,530
2007.............................................................................. 12,603
2008 and beyond................................................................... 81,550
-----------
$135,437
-----------
-----------
Royalty and endorsement expenses, which are included in selling,
general and administrative expenses for the years, ended December 31, 2001, 2002
and 2003 were $11,914, $14,298 and $17,013, respectively.
59
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
13. INCOME TAXES
The components of income taxes are:
2003 2002 2001
----------- ----------- -----------
Current:.................................................. $ 6,523 $ 4,092 $ 1,995
Deferred.................................................. 2,339 (6,193) 20
Provision in Lieu of Taxes:............................... 1,295 4,551 1,360
----------- ----------- -----------
$ 10,157 $ 2,450 $ 3,375
----------- ----------- -----------
----------- ----------- -----------
The Company's effective income tax rate from continuing operations
differed from the federal statutory rate as follows:
2003 2002 2001
----------- ----------- -----------
Income taxes based on U.S. federal tax rate.............................. 34% 34% 34%
Non-U.S. and state tax rates............................................. (3%) (15%) 2%
Valuation allowance...................................................... 5% (161%) (14%)
Foreign exchange......................................................... -- 31% --
Non-taxable portion of foreign exchange gain............................. (6%) -- --
Goodwill amortization.................................................... -- -- (18%)
Deemed dividend under subpart F, net of foreign tax credit............... 5% 128% (23%)
Dividends on 13% Pay-in-Kind Preferred stock............................. 3% 20% (8%)
Other, net............................................................... (1%) 21% (9%)
----------- ----------- -----------
Effective income tax rate................................................ 37% 58% (36%)
----------- ----------- -----------
----------- ----------- -----------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2003 and
2002 are as follows:
----------- -----------
2003 2002
----------- -----------
Accounts receivable, principally due to an allowance
for doubtful accounts............................. $ 4,067 $ 3,860
Inventories, principally due to additional costs
inventoried for tax purposes....................... 285 650
Accrued interest and royalties....................... 2,355 2,355
Restructuring accruals............................... 169 464
Other, net........................................... 688 751
----------- -----------
7,564 8,080
Valuation allowance.................................. -- --
----------- -----------
Total current deferred tax assets.................... $ 7,564 $ 8,080
----------- -----------
----------- -----------
Net operating loss and foreign tax credit
carry-forwards..................................... $ 14,430 15,151
Property, plant and equipment........................ (3,956) (2,868)
Restructuring accruals............................... -- --
Unrealized foreign exchange gain..................... (1,977) --
Other, net........................................... 1,034 1,071
----------- -----------
9,531 13,354
Valuation allowance.................................. (13,856) (15,151)
----------- -----------
Total non-current deferred tax assets (liabilities).. $ (4,325) $ (1,797)
----------- -----------
----------- -----------
Realization of deferred tax assets is dependent on future earnings, the
timing and amounts of which are uncertain. Accordingly, the net operating loss
and foreign tax credit carry-forwards portion of the deferred tax assets have
been offset by a valuation allowance in 2003. The valuation allowance decreased
by $1,295 (2002- decreased by $11,358) during the year.
60
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
Fresh-start reporting requires the Company to report a provision in
lieu of income taxes when there is a 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, 2003, the Company has net operating loss carry-forwards
related to U.S. operations for income tax purposes of approximately $ 33,800
($37,700 in 2002). The carry-forward balances begin to expire in 2010 and have
been fully reserved by a valuation allowance. This valuation allowance would
reduce intangible and other assets if reversed. The Company's ability to use
remaining loss 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.
The Company has post-reorganization foreign tax credit carryover in the
amount of approximately $14,100, which will begin to expire December 31, 2005.
There are no undistributed earnings from continuing operations of
subsidiaries outside the U.S., for which no provision for U.S. taxes has been
made.
14. EARNINGS PER SHARE
2003 2002 2001
------------------------------ -------------------------- --------------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
------------- --------------- ------------- ----------- ------------- -----------
Net income (loss) attributable
to common stockholders..... $ 16,993 $ 16,993 $ 1,787 $ 1,787 $ (12,800) $ (12,800)
Weighted average common and
common equivalent shares
outstanding:...............
Common stock.................. 9,746,692 9,746,692 6,905,530 6,905,530 6,500,549 6,500,549
Common equivalent shares(a)... 159,000 365,505 293,699 293,699 585,530 585,530
Total weighted average common
and common equivalent shares
outstanding................ 9,905,692 10,112,197 7,199,229 7,199,229 7,086,079 7,086,079
Net income (loss) per common
share(b)................... $ 1.72 $ 1.68 $ 0.25 $ 0.25 $ (1.81) $ (1.81)
-------------
(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 earnings per
share when dilutive. For the years ended December 31, 2002 and 2001, 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. For the year ended December 31,
2003, the Company used the average market price of its Parent Company's
common stock to value its common stock.
(c) Options to purchase 361,110 and 1,272,222 shares of common stock were
outstanding at December 31, 2003 and 2002, 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.
61
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
15. STOCK OPTIONS
In 2003, prior to the corporate reorganization as described in Note 1B,
30,000 additional stock options exercisable for the Company's Common Stock,
voting were granted to employees at an average exercise price of $8.50 per share
and 15,000 stock options were forfeited. Subsequent to the corporate
reorganization as described in note 1B, all outstanding stock options of the
Company were converted to be exercisable for the Company's Common Stock,
non-voting.
Subsequent to the corporate reorganization, 15,000 stock options of the
Parent Company were granted to employees of the Company at an average exercise
price of $11.68 (Cdn$16.00) per share and 9,000 stock options were forfeited.
The 45,000 additional stock options were granted to employees at an
average exercise price of $9.56 per share and a weighted average fair value of
$3.73. Also, 6,000 options were exercised in 2003 for non-voting exchangeable
shares of the Company.
In 2002, 65,000 additional stock options were granted at an exercise
price of $8.50 per share and 115,000 stock options were terminated.
In 2001, 440,000 additional stock options were granted at an exercise
price of $8.50 per share and 100,000 stock options were cancelled. In addition,
the Company 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.
The exercise prices of the stock options were 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
Common Stock are as follows:
SHARES EXERCISE PRICE
--------------- --------------------
December 31, 2002........................................... 1,272,222 $8.50 - $16.00
Options Granted............................................. 45,000 $9.56
Options Forfeited........................................... 24,000 $8.50
Options Exercised........................................... 6,000 $8.50
---------------
December 31, 2003........................................... 1,287,222
---------------
---------------
The following table summarizes information about stock options
outstanding at December 31, 2003.
OUTSTANDING EXERCISABLE
--------------------------------------------- -----------------------------
AVERAGE AVERAGE
EXERCISE EXERCISE
EXERCISE PRICE RANGE SHARES AVERAGE LIFE(a) PRICE SHARES PRICE
------------------------------- ---------- ------------------- ----------- -------------- -------------
$8.50-$9.99................... 525,000 7.3 $ 8.50 382,000 $ 8.50
$10.00-11.49.................. 386,112 3.0 $10.00 386,112 $10.00
$11.50-14.99.................. 231,666 3.4 $12.91 219,666 $12.98
$15.00 and over............... 144,444 3.0 $15.50 144,444 $15.50
---------- ------------------- ----------- -------------- -------------
Total......................... 1,287,222 4.8 $10.53 1,132,222 $10.77
---------- ------------------- ----------- -------------- -------------
---------- ------------------- ----------- -------------- -------------
----------------
(a) Average contractual life remaining in years.
62
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
Prior to 2003, the Company accounted for this plan under Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, (APB
25) and related Interpretations. No stock-based employee compensation cost was
reflected in the 2002 or 2001 net income, as all options granted under those
plans had an intrinsic value of zero on the date of grant. Effective January 1,
2003, the Company adopted the fair value recognition provisions of FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (FAS 123). Under the
prospective method of adoption selected by the Company under the provisions of
FASB Statement No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND
DISCLOSURE (FAS 148), the recognition provisions will be applied to all employee
awards granted, modified, or settled after January 1, 2003.
The expense related to stock-based employee compensation included in
the determination of net income for 2003 will be less than that which would have
been recognized if the fair value method had been applied to all awards granted
after the original effective date of FAS 123. If the company had elected to
adopt the fair value recognition provisions of FAS 123 as of its original
effective date, pro forma net income and diluted net income per share would be
as follows:
YEAR ENDED DECEMBER 31
2003 2002 2001
--------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported ......................... $ 16,993 $ 1,787 $ (12,800)
ADD: Stock-based employee compensation expense included
in reported net income, net of related tax effects...... 26 -- --
----------------- ---------------- -----------------
$ 17,019 $ 1,787 $ (12,800)
DEDUCT: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects.............................. $ (402) $ (382) $ (842)
----------------- ---------------- -----------------
Pro forma net income (loss)............................. $ 16,617 $ 1,405 $ (13,642)
----------------- ---------------- -----------------
----------------- ---------------- -----------------
Earnings (loss) per share:
Basic, as reported...................................... $ 1.72 $ 0.25 $ (1.81)
Basic and, pro forma.................................... $ 1.68 $ 0.20 $ (1.93)
Diluted, as reported.................................... $ 1.68 $ 0.25 $ (1.81)
Diluted, pro forma...................................... $ 1.64 $ 0.20 $ (1.93)
--------------------------------------------------------------------------------------------------------------------
Pro forma information regarding net income and earnings per share, is
required by FAS 123, as amended by FAS 148, and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that Statement upon its initial effective date. The fair value for these
options was estimated at the date of grant using a Black-Scholes option-pricing
model with the following weighted-average assumptions for 2003, 2002 and 2001:
63
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
2003 2002 2001
-----------------------------------------------------------------------------------------------------------------
Risk-free Interest Rate.................................. 4.94% 4.85% 4.52%
Expected Dividend Yield.................................. 0 0 0
Expected Volatility...................................... 0 0 0
Expected Life............................................ 10 10 10
-----------------------------------------------------------------------------------------------------------------
16. CONTINGENCIES
The Company is currently undergoing an audit by the Canada Revenue
Agency for its 1996 to 2001 taxation years, which includes transfer pricing and
other matters. It is not possible at this time to determine the amount of the
liability that may arise as a result of this audit and the actual assessment may
differ significantly from management's current estimate.
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.
17. 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. The Company evaluates
performance based on gross profit. Segment assets include only inventory.
INFORMATION ABOUT SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
For the year ended and as at December 31, 2001:
EQUIPMENT APPAREL SEGMENT TOTALS
---------------------------------------------------------------------------------------------------------------------
Net Sales............................................. $135,160 $ 63,027 $198,187
Gross profit.......................................... 53,329 26,364 79,693
Inventory............................................. 25,750 17,115 42,865
Goodwill and Excess Reorganizational Value............ 60,549 8,701 69,250
---------------------------------------------------------------------------------------------------------------------
64
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
For the year ended and as at December 31, 2002:
EQUIPMENT APPAREL SEGMENT TOTALS
---------------------------------------------------------------------------------------------------------------------
Net Sales............................................. $141,427 $ 71,266 $212,693
Gross profit.......................................... 56,830 34,856 91,686
Inventory............................................. 29,011 15,343 44,354
Goodwill and Excess Reorganizational Value............ 58,145 7,203 65,348
---------------------------------------------------------------------------------------------------------------------
For the year ended and as at December 31, 2003:
EQUIPMENT APPAREL SEGMENT TOTALS
---------------------------------------------------------------------------------------------------------------------
Net Sales............................................. $165,792 $ 74,113 $239,905
Gross profit.......................................... 69,648 38,004 107,652
Inventory............................................. 33,304 16,213 49,517
Goodwill and Excess Reorganizational Value............ 63,400 7,807 71,207
Intangible - Prepaid NHL Royalty...................... -- 31,208 31,208
---------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS FOR THE YEARS ENDED
DECEMBER 31:
SEGMENT PROFIT OR LOSS 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------
Gross Profit....................................................... $ 107,652 $ 91,686 $ 79,693
Unallocated amounts:
Selling, general and administrative expenses..................... 73,759 64,303 61,768
Restructuring and unusual charges................................ -- 496 4,495
Amortization of excess re-organizational value and goodwill...... -- -- 4,390
Other (income) expense, net...................................... (852) 1,311 538
Interest expense................................................. 18,861 17,989 18,639
Foreign exchange (gain) loss....................................... (11,266) 85 (1,803)
Loss on early extinguishment of debt............................... -- 3,265 1,091
----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES.................................. $ 27,150 $ 4,237 $ (9,425)
----------------------------------------------------------------------------------------------------------------------
SEGMENT ASSETS 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------
Total assets for reportable segments............................... $ 151,932 $ 109,702 $ 112,115
Unallocated amounts:
Cash............................................................. 42,609 19,484 6,503
Account receivable............................................... 61,643 56,986 50,551
Prepaid expenses................................................. 5,144 4,802 4,891
Deferred Income taxes............................................ 7,564 8,080 1,718
Property, plant and equipment, net............................... 15,042 15,318 16,834
Other assets, net................................................ 7,870 8,581 6,811
----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS....................................................... $ 291,804 $ 222,953 $ 199,423
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
65
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
EOGRAPHIC INFORMATION
NET SALES (BASED ON CUSTOMER LOCATION) 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------
United States...................................................... $ 86,757 $ 90,264 $ 89,069
Canada............................................................. 84,950 67,972 62,903
Sweden............................................................. 30,393 25,287 20,593
Finland............................................................ 14,476 11,332 9,401
Russia and Other................................................... 23,329 17,838 16,221
----------------------------------------------------------------------------------------------------------------------
TOTAL NET SALES.................................................... $239,905 $212,693 $198,187
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (NET) 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------
United States...................................................... $ 1,260 $ 1,374 $ 1,499
Canada............................................................. 11,448 11,338 12,579
Sweden............................................................. 550 634 700
Finland............................................................ 1,784 1,972 2,056
----------------------------------------------------------------------------------------------------------------------
TOTAL PROPERTY PLANT AND EQUIPMENT (NET)........................... $15,042 $15,318 $16,834
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
18. ACQUISITION
On August 21, 2003, the Company, through its wholly-owned subsidiary
Sport Maska Inc., acquired all of the issued and outstanding shares of Roger
Edwards Sport Ltd. for a cash consideration of $1,071 (Cdn$1,500) (of which $71
(Cdn$100) is included in accounts payable as at December 31, 2003) and an annual
cash earn-out based on results of the division over the period of January 1,
2004 to December 31, 2006. The cumulative earn-out is not to exceed $1,071
(Cdn$1,500). The acquisition was accounted for using the purchase method and the
excess of purchase price over net book value amounted to $800 (Cdn$1,120)
relating to the apparel segment. The results of Roger Edwards Sport Ltd.'s
operations have been included in the Company's consolidated financial statements
since that date.
19A. NEW ACCOUNTING PRONOUNCEMENTS ADOPTED
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONS, which is effective for fiscal years beginning
after June 15, 2002. The Statement requires legal obligations associated with
the retirement of long-lived assets to be recognized at their fair value at the
time that the obligations are incurred. Upon initial recognition of a liability,
that cost should be capitalized as part of the related long-lived asset and
allocated to expense over the useful life of the asset. The Company adopted
Statement 143 on January 1, 2003, and its adoption did not have a material
impact on the Company's financial position or results of operations.
On April 30, 2002, FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS No. 4, 44, and 64, AMENDMENT OF FASB STATEMENT No. 13, AND TECHNICAL
CORRECTIONS. SFAS No. 145 rescinds SFAS No. 4, which required all gains and
losses from extinguishment of debt to be classified as an extraordinary item,
net of related income tax effect, if material in the aggregate. Due to the
rescission of SFAS No. 4, the criteria in Opinion 30 will now be used to
classify those gains and losses. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 are effective for fiscal years beginning after May 15,
2002. Any gain or loss on extinguishment of debt that was classified, as an
extraordinary item in prior periods presented that does not meet the criteria
for classification as an extraordinary item has to be reclassified. The
provisions of SFAS No. 145 related to SFAS No. 13 are effective
66
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
for transactions occurring after May 15, 2002. All other provisions of this
Statement shall be effective for financial statements issued on or after May 15,
2002. The Company adopted this Statement on January 1, 2003 upon which the loss
on early extinguishment of debt incurred in 2000 and 2001 has been reclassified
in accordance with the issued SFAS No. 145.
In July 2002, FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3 "LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION
BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED
IN A RESTRUCTURING". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at the time when the
liability is incurred. SFAS No. 146 eliminates the definition and requirement
for recognition of exit costs at the date of an entity's commitment to an exit
plan in Issue 94-3. The Company adopted SFAS No. 146 on January 1, 2003 and
there were no exit or disposal activities initiated during the fiscal year ended
December 31, 2003.
In December 2002, FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE. SFAS No. 148 amends SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, INTERIM FINANCIAL REPORTING to required
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB No. 25. The provision of SFAS 148 No. are applicable for fiscal
years ending after December 15, 2002 and the Company adopted this statement in
our financial statements for the year ended December 31, 2003.
In November 2002, FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS ("FIN 45"), which requires certain
guarantees to be recorded at fair value and increases the disclosure
requirements for guarantees even if the likelihood of making any payments under
the guarantee is remote. The increased disclosure requirements are effective for
fiscal years ending after December 15, 2002 were adopted by the Company in the
consolidated financial statements for the year ended December 31, 2002. The
provision of FIN 45 relating to initial recognition and measurement are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company adopted these provisions of FIN 45 for guarantees
issued or modified after December 31, 2002 on January 1, 2003 and no significant
transition adjustment resulted from its adoption.
In January 2003, FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ACCOUNTING RESEARCH BULLETIN
NO. 51 ("FIN 46"). FIN 46 requires the consolidation of variable interest
entities ("VIE") in which an enterprise absorbs a majority of the entity's
expected losses, receives a majority of the entity's expected residual returns,
or both, as a result of ownership, contractual or other financial interests in
the entity. Currently, entities are generally consolidated by an enterprise that
has a controlling financial interest through ownership of a majority voting
interest in the entity. The provisions of FIN 46 are applicable to variable
interests in VIE's created after January 31, 2003. For variable interest
acquired before February 1, 2003, the provisions of FIN 46 are applicable in the
first interim period after December 15, 2003. The application of FIN 46 did not
have, and is not expected to have, a significant effect on the Company's
financial position and result of operations.
67
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
On May 15, 2003, FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This
Statement establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS No. 150 is effective for all financial instruments created of
modified after May 31, 2003 and to other instruments at the beginning of the
first interim period beginning after June 15, 2003. The Company applied the
recommendations of SFAS No. 150 for the year ended December 31, 2003 and
reclassified the 13% Pay-In-Kind Preferred Stock as liabilities as at December
31, 2002.
19b. NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
On April 30, 2003, FASB issued SFAS No. 149, AMENDMENT OF SFAS 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement is intended to
result in more consistent reporting of contracts as either freestanding
derivative instrument subject to SFAS No. 144 in its entirety or as hybrid
instruments with debt host contracts and embedded derivative features. SFAS No.
149 is effective for contracts entered into or modified after September 30, 2003
and hedging relationships designated after September 30, 2003. However, the
provisions of SFAS No. 149 that merely represent the codification of previous
Derivatives Implementation Group decisions are already effective and should
continue to be applied in accordance with their prior respective effective
dates. The Company will apply the recommendation of SFAS No. 149 for future
contracts and hedging relationships, if any, and the Company believes the impact
of this statement will not significantly affect its financial position and
results of operations.
20. FOREIGN CURRENCY
The movement in the accumulated other comprehensive income (loss) of
$14,134, reported as a component of the stockholders' equity is explained by the
appreciation of the Canadian Dollar ("CAD"), Swedish krona ("SEK") and Euro
("EUR") in 2003. The exchange rate was 1.292 CAD for 1 USD, 7.19 SEK for 1 USD
and 0.794 EUR for 1 USD as at December 31, 2003 and 1.579 CAD for 1 USD, 8.69
SEK for 1 USD and 0.95 EUR for 1 USD as at December 31, 2002.
21. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
THC's and Sport Maska Inc.'s payment obligations under the Notes (See
Note 7b) are guaranteed by certain subsidiaries of THC's and Sport Maska Inc.'s
wholly-owned subsidiaries (the "Other Guarantors"), excluding the Finnish
subsidiaries, and a pledge of the first-tier Finnish subsidiary. Such guarantees
are full, unconditional and joint and several. The security interest in the
assets of the Company`s Swedish subsidiaries (other than intellectual property)
is limited to $15,000. Under the Company's revolving credit facilities, both
Sport Maska Inc. and Maska U.S., Inc. are restricted from paying dividends on
the common and preferred stock. The following supplemental financial information
sets forth, on an unconsolidated basis, balance sheets, statements of operations
and statements of cash flows information for THC, Sport Maska Inc., Other
Guarantors and for the Company's other subsidiaries (the "Non-Guarantor
Subsidiaries") which have been included in the eliminations column. The
supplemental financial information reflects the investments of THC, Sport Maska
Inc. and the Other Guarantors in the Other Guarantor Subsidiaries and
Non-Guarantor Subsidiaries using the equity method of accounting. The
supplemental financial information also reflects pushdown of the Company's loan
with Caisse and its replacement with the Notes.
68
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
AS AT DECEMBER 31, 2003 The Hockey Sport Maska Inc. Guarantors Other/ TOTAL
Company Eliminations
----------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 1 $ 27,933 $ 6,345 $ 8,330 $ 42,609
Accounts receivable, net - 27,409 32,485 1,749 61,643
Inventories - 35,350 11,024 3,143 49,517
Prepaid expenses - 2,425 2,582 137 5,144
Deferred income taxes and
other receivables 420 531 6,613 - 7,564
Intercompany accounts 91,227 17,318 1,415 (109,960) -
----------------------------------------------------------------------------------------
Total current assets 91,648 110,966 60,464 (96,601) 166,477
Property, plant and equipment,
net of accumulated
depreciation - 11,448 1,813 1,781 15,042
Intangible and other assets 2,056 43,126 63,516 1,587 110,285
Investments in subsidiaries 71,192 - 41,220 (112,412) -
Intercompany accounts 11,092 - 25,000 (36,092) -
----------------------------------------------------------------------------------------
Total assets $ 175,988 $ 165,540 $ 192,013 $ (241,737) $ 291,804
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities
Accounts payable and
accrued liabilities $ 1,458 $ 13,266 $ 7,881 $ 1,532 $ 24,137
Income taxes payable - 5,070 1,765 138 6,973
Current portion of long
term debt - - -
Intercompany accounts 1,181 13,462 103,680 (118,323) -
----------------------------------------------------------------------------------------
Total current liabilities 2,639 31,798 113,326 (116,653) 31,110
Long-term debt 36,939 61,940 25,065 - 123,944
Loan payable to Parent company - 10,000 - - 10,000
Deferred income taxes and other
long-term liabilities - 4,842 1,643 (1,649) 4,836
Intercompany accounts 25,000 - 11,092 (36,092) -
----------------------------------------------------------------------------------------
Total liabilities 64,578 108,580 151,126 (154,394) 169,890
----------------------------------------------------------------------------------------
Stockholders' equity
Common stock, voting 50 41,076 5,254 (46,330) 50
Common stock, non voting 65 65
Warrants for exchangeable shares 1,665 - - - 1,665
Additional paid-in capital 112,498 - 34,553 (34,553) 112,498
Retained earnings (deficit) (3,310) 14,662 (1,619) (13,043) (3,310)
Accumulated other comprehensive
income 442 1,222 2,699 6,583 10,946
----------------------------------------------------------------------------------------
Total stockholders' equity 111,410 56,960 40,887 (87,343) 121,914
----------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 175,988 $ 165,540 $ 192,013 $ (241,737) $ 291,804
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
69
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
AS AT DECEMBER 31, 2002 The Hockey Sport Maska Inc. Guarantors Other/ TOTAL
Company Eliminations
----------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ - $ 4,002 $ 7,066 $ 8,416 $ 19,484
Accounts receivable, net - 20,320 35,661 1,005 56,986
Inventories - 32,972 9,341 2,041 44,354
Prepaid expenses 811 2,113 1,676 202 4,802
Deferred income taxes and
other receivables 420 464 7,196 - 8,080
Intercompany accounts 78,377 18,534 7,799 (104,710) -
----------------------------------------------------------------------------------------
Total current assets 79,608 78,405 68,739 (93,046) 133,706
Property, plant and equipment,
net of accumulated
depreciation - 11,338 2,009 1,971 15,318
Intangible and other assets 2,056 27,285 43,617 971 73,929
Investments in subsidiaries 43,905 - 38,334 (82,239) -
Intercompany accounts 11,092 - 25,000 (36,092) -
----------------------------------------------------------------------------------------
Total assets $ 136,661 $ 117,028 $ 177,699 $ (208,435) $ 222,953
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities
Accounts payable and
accrued liabilities $ 2,191 $ 11,423 $ 8,873 $ 1,352 $ 23,839
Income taxes payable - 3,234 1,217 374 4,825
Current portion of long
term debt - - 288 - 288
Intercompany accounts 932 9,421 97,619 (107,972) -
----------------------------------------------------------------------------------------
Total current liabilities 3,123 24,078 107,997 (106,246) 28,952
Long-term debt 36,833 61,833 25,200 - 123,866
13% Pay-in-Kind preferred stock 11,715 - - - 11,715
Deferred income taxes and other
long-term liabilities 8,155 2,130 1,508 (1,582) 10,211
Intercompany accounts 25,000 - 11,092 (36,092) -
----------------------------------------------------------------------------------------
Total liabilities 84,826 88,041 145,797 (143,920) 174,744
----------------------------------------------------------------------------------------
Stockholders' equity
Common stock, voting 70 29,522 4,976 (34,498) 70
Warrants for exchangeable shares 1,665 - - - 1,665
Additional paid-in capital 69,965 - 19,344 (19,344) 69,965
Retained earnings (deficit) (20,303) 135 6,912 (7,047) (20,303)
Accumulated other comprehensive
income (loss) 438 (670) 670 (3,626) (3,188)
----------------------------------------------------------------------------------------
Total stockholders' equity 51,835 28,987 31,902 (64,515) 48,209
----------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 136,661 $ 117,028 $ 177,699 $ (208,435) $ 222,953
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
70
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
FOR THE YEAR ENDED The Hockey Sport Maska Inc. Guarantors Other/ TOTAL
DECEMBER 31, 2003 Company Eliminations
----------------------------------------------------------------------------------------
Net sales $ - $ 143,677 $ 137,113 $ (40,885) $ 239,905
Cost of goods sold - 94,920 88,344 (51,011) 132,253
----------------------------------------------------------------------------------------
Gross profit - 48,757 48,769 10,126 107,652
Selling, general and
administrative expenses 28 32,465 37,255 4,011 73,759
----------------------------------------------------------------------------------------
Operating income (loss) (28) 16,292 11,514 6,115 33,893
Other expense (income), net (1) (21,150) (499) (4,258) 25,055 (852)
Interest expense (income) 3,903 8,968 6,205 (215) 18,861
Foreign exchange (gain) loss 226 (11,886) 394 - (11,266)
----------------------------------------------------------------------------------------
Income (loss) before income taxes 16,993 19,709 9,173 (18,725) 27,150
Income taxes - 5,181 3,228 1,748 10,157
----------------------------------------------------------------------------------------
Net income (loss) $ 16,993 $ 14,528 $ 5,945 $ (20,473) $ 16,993
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
(1) Other expense (income), net for The Hockey Company and Other Guarantors
includes equity in net income (loss) of subsidiaries of $20,484 and $4,574,
respectively, offset by dividends received of $13,098 and $8,629,
respectively.
71
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
FOR THE YEAR ENDED The Hockey Sport Maska Inc. Guarantors Other/ TOTAL
DECEMBER 31, 2002 Company Eliminations
----------------------------------------------------------------------------------------
Net sales $ - $ 118,983 $ 131,312 $ (37,602) $ 212,693
Cost of goods sold before
restructuring and unusual
charges - 77,993 88,002 (46,605) 119,390
Restructuring and unusual charges - 1,617 - - 1,617
----------------------------------------------------------------------------------------
Gross profit - 39,373 43,310 9,003 91,686
Selling, general and
administrative expenses
before restructuring and
unusual charges 256 27,267 32,831 3,949 64,303
Restructuring and unusual
charges - 139 364 (7) 496
----------------------------------------------------------------------------------------
Operating income (loss) (256) 11,967 10,115 5,061 26,887
Other expense (income), net (1) (7,088) 303 (2,294) 10,390 1,311
Interest expense (income) 4,184 7,830 6,214 (239) 17,989
Foreign exchange loss - 27 58 - 85
Loss on early extinguishing of
debt, net 861 1,486 918 3,265
----------------------------------------------------------------------------------------
Income (loss) before income taxes 1,787 2,321 5,219 (5,090) 4,237
Income taxes - 1,517 (893) 1,826 2,450
----------------------------------------------------------------------------------------
Net income (loss) $ 1,787 $ 804 $ 6,112 $ (6,916) $ 1,787
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
(1) Other expense (income), net for The Hockey Company and Other Guarantors
includes equity in net income (loss) of subsidiaries of $7,136 and $3,253,
respectively.
72
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
FOR THE YEAR ENDED The Hockey Sport Maska Inc. Guarantors Other/ TOTAL
DECEMBER 31, 2001 Company Eliminations
----------------------------------------------------------------------------------------
Net sales $ - $ 122,769 $ 120,047 $(44,629) $ 198,187
Cost of goods sold before
restructuring and unusual
charges - 88,911 78,991 (50,606) 117,296
Restructuring and unusual charges - 1,198 - - 1,198
----------------------------------------------------------------------------------------
Gross profit - 32,660 41,056 5,977 79,693
Selling, general and
administrative expenses
before restructuring and
unusual charges 59 25,547 33,531 2,631 61,768
Restructuring and unusual
charges - 2,424 2,071 - 4,495
Amortization of excess
reorganization value and
goodwill - 1,253 3,345 (208) 4,390
----------------------------------------------------------------------------------------
Operating income (loss) (59) 3,436 2,109 3,554 9,040
Other expense (income), net (1) 7,570 (335) (1,727) (4,970) 538
Interest expense (income) 5,873 7,768 5,183 (185) 18,639
Foreign exchange (gain) loss (990) 92 (905) - (1,803)
Loss on early extinguishing of
debt, net 288 499 304 - 1,091
----------------------------------------------------------------------------------------
Income (loss) before income
taxes (12,800) (4,588) (746) 8,709 (9,425)
Income taxes - 176 2,256 943 3,375
----------------------------------------------------------------------------------------
Net income (loss) $ (12,800) $ (4,764) $ (3,002) $ 7,766 $ (12,800)
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
(1) Other expense (income), net for The Hockey Company and Other Guarantors
includes equity in net income (loss) of subsidiaries of $(7,506) and
$2,028, respectively.
73
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
FOR THE YEAR ENDED The Hockey Sport Maska Guarantors Other/ TOTAL
DECEMBER 31, 2003 Company Inc. Eliminations
---------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES $ (32,664) $ 17,085 $ 9,558 $ 27,085 $ 21,064
---------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Prepayment of intangibles -
NHL Royalty - (9,032) (21,080) - (30,112)
Purchases of property, plant and
equipment - (1,673) (229) (134) (2,036)
Acquisition - (1,434) - - (1,434)
Proceeds from disposal of
property, plant and equipment - 1,495 6 - 1,501
---------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES - (10,644) (21,303) (134) (32,081)
---------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Principal payments on debt - - (465) - (465)
Loan payable to Parent Company - 10,000 - - 10,000
Increase in paid-in capital from
the parent company 41,721 - 15,209 (15,209) 41,721
Exercise of stock option 51 - - - 51
Issuance of common stock 45 4,691 - (4,691) 45
Redemption of PIK including accrued
dividends (21,866) - - - (21,866)
Dividends 13,098 - (4,469) (8,629) -
Deferred financing costs (384)
--------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 32,665 14,877 10,189 (28,529) 29,202
---------------------------------------------------------------------------------
Effects of currency translation on
cash item - 2,615 835 1,490 4,940
---------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 1 23,933 (721) (88) 23,125
Cash and cash equivalents at beginning
of year - 4,000 7,066 8,418 19,484
---------------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 1 $ 27,933 $ 6,345 $ 8,330 $ 42,609
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
74
THE HOCKEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
FOR THE YEAR ENDED The Hockey Sport Maska Guarantors Other/ TOTAL
DECEMBER 31, 2002 Company Inc. Eliminations
---------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES $ (14,773) $ (137) $ 21,807 $ 5,105 $ 12,002
---------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of fixed assets - (1,401) (197) (304) (1,902)
---------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES - (1,401) (197) (304) (1,902)
---------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Short-term debt borrowings, net - (12,948) (15,023) - (27,971)
Principal payments on debt (21,853) (39,470) (25,260) - (86,583)
Proceeds from long-term debt 36,965 61,901 25,000 - 123,866
Issuance of warrants 5 - - - 5
Deferred financing costs (344) (3,923) (1,794) (1,854) (7,915)
---------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 14,773 5,560 (17,077) (1,854) 1,402
---------------------------------------------------------------------------------
Effects of currency translation on
cash item - (28) 531 976 1,479
---------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS - 3,994 5,064 3,923 12,981
Cash & cash equivalents at beginning
of year - 6 2,002 4,495 6,503
---------------------------------------------------------------------------------
Cash & cash equivalents at end of year $ - $ 4,000 $ 7,066 $ 8,418 $ 19,484
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
FOR THE YEAR ENDED The Hockey Sport Maska Guarantors Other/ TOTAL
DECEMBER 31, 2001 Company Inc. Eliminations
---------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES $ 498 $ (5,531) $ (6,412) $ 2,323 $ (9,122)
---------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of fixed assets - (1,288) (97) (93) (1,478)
Proceeds from sale of fixed assets &
other - 715 765 (1,139) 341
---------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES - (573) 668 (1,232) (1,137)
---------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Short-term debt borrowings, net - 6,957 9,103 - 16,060
Principal payments on debt - - (245) - (245)
Proceeds from long-term debt 370 307 - - 677
Issuance of warrants 3,450 - - - 3,450
Deferred financing costs (4,318) (2,060) (1,541) 2,374 (5,545)
---------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (498) 5,204 7,317 2,374 14,397
---------------------------------------------------------------------------------
Effects of currency translation on
cash item - (19) (87) 48 (58)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS - (919) 1,486 3,513 4,080
Cash & cash equivalents at beginning
of year - 925 516 982 2,423
---------------------------------------------------------------------------------
Cash & cash equivalents at end of year $ - $ 6 $ 2,002 $ 4,495 $ 6,503
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
75
22. SUBSEQUENT EVENTS
a) RESTRUCTURING
In January 2004, the Company announced the planned closure effective
April 2004 of its Apparel Sewing facility in Cap de la Madeleine, Quebec. The
Company will centralize all apparel operations in its Apparel factory in
St-Hyacinthe, Quebec in order to maximize the utilization of that facility.
Approximately 170 employees from the apparel segment were affected by this
decision; accordingly, the Company will incur restructuring costs of
approximately $0.3 million mainly related to severance packages to the affected
employees.
b) ACQUISITION OF DISTRIBUTOR NORBERT EWALD GMBH IN GERMANY
On January 5, 2004, in order to better service the Central European
market, the Company acquired the assets of Norbert Ewald GmbH ("Ewald") for a
total cost of $1.3 million. Ewald was a former distributor of the Company and a
leading hockey equipment distributor in Germany.
c) T'BLADE JOINT VENTURE
On January 16, 2004, the Company purchased a 33 1/3% ownership stake in
T-blade Inc., the exclusive marketer and distributor of t'blade replaceable ice
skate blade products and technology in North America for approximately US$0.08
million (Cdn $0.1 million) as well as an advance of US$0.5 million (Cdn $0.7
million). The remaining shares are owned by Graf Canada Ltd. (33 1/3%) and
t'blade GmbH (33 1/3%).
d) AMERICAN HOCKEY LEAGUE ("AHL") agreement.
On March 24, 2003, THC signed a sponsorship agreement with the AHL,
which will commence at the start of the 2004/2005 hockey season. The
agreement is for 10 years made up of a 4 year term plus two additional 3 year
terms at the AHL's option.
76
Schedule II
THE HOCKEY COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN THOUSANDS, OF US$)
BALANCE AT CHARGED TO BALANCE AT
DECEMBER 31, COSTS AND TRANSLATION DECEMBER 31,
DESCRIPTION 2000 EXPENSES ADJUSTMENTS DEDUCTIONS 2001
-------------------------------------- ---------------- --------------- -------------- --------------- ----------------
Allowance for doubtful accounts $ 2,022 $ 1,381 $ (55) $ (511) (A) $ 2,837
Allowance for discounts, rebates and
cooperative advertising 4,743 4,741 (190) (3,288) (B) 6,006
Allowance for excess, obsolete
and slow moving inventories 3,890 1,242 (111) (2,453) 2,568
Product warranty provision $ 864 $ 1,063 $ (21) $ (965) $ 941
-------------------------------------- ---------------- --------------- -------------- --------------- ----------------
BALANCE AT CHARGED TO BALANCE AT
DECEMBER 31, COSTS AND TRANSLATION DECEMBER 31,
DESCRIPTION 2001 EXPENSES ADJUSTMENTS DEDUCTIONS 2002
-------------------------------------- ---------------- --------------- -------------- --------------- ---------------
Allowance for doubtful accounts $ 2,837 $ 1,553 $ 24 $(1,335) $ 3,079
Allowance for discounts, rebates and
cooperative advertising 6,006 6,691 103 (4,705) 8,095
Allowance for excess, obsolete and
slow moving inventories 2,568 666 50 -- 3,284
Product warranty provision $ 941 $ 1,348 $ (24) $(1,085) $ 1,180
-------------------------------------- ---------------- --------------- -------------- --------------- ---------------
BALANCE AT CHARGED TO BALANCE AT
DECEMBER 31, COSTS AND TRANSLATION DECEMBER 31,
DESCRIPTION 2002 EXPENSES ADJUSTMENTS DEDUCTIONS 2003
-------------------------------------- ---------------- --------------- -------------- --------------- ---------------
Allowance for doubtful accounts $ 3,079 $ 1,231 $ 172 $(2,147) $ 2,335
Allowance for discounts, rebates and
cooperative advertising 8,095 10,149 1,089 (7,334) 11,999
Allowance for excess, obsolete and
slow moving inventories 3,284 429 526 (686) 3,553
Product warranty provision $ 1,180 $ 1,936 $ 145 $(1,931) $ 1,330
-------------------------------------- ---------------- --------------- -------------- --------------- ---------------
----------------------
(A) Accounts written off as non-collectible, net of recoveries
(B) Deductions taken by customers.
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9a. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures as of the end of the period covered by this report were designed and
were functioning effectively to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company
believes that a controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
No change in the Company's internal control over financial reporting
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
78
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
----------------------------------------------- ---------- -----------------------------------------------------------
Greg S. Feldman (1) 47 Chairman of the Board
Matthew H. O'Toole (1) 41 Chief Executive Officer, President and Director
Robert A. Desrosiers 54 Chief Financial Officer and Vice President, Finance and
Administration
Johnny Martinsson 60 Senior Vice President, European Division
John Pagotto 49 Vice President, Sales and Equipment Divisions
Michel Ravacley 50 Vice President, Global Operations
Len Rhodes 40 Vice President, Global Marketing and Product Creation
Raymond Riccio 36 Vice President, Apparel Division
Phil Bakes (3) 58 Director
Michel Baril (2) 49 Director
Paul M. Chute (1) (2) 49 Director
Jason B. Fortin (2) 33 Director
James C. Pendergast (1) (2) (3) 47 Director
Roger Samson (2) 62 Director
(1) MEMBER OF COMPENSATION COMMITTEE. MR.O'TOOLE REPLACED MR. PENDERGAST AS A
MEMBER OF THE COMPENSATION COMMITTEE IN JUNE 2003.
(2) MEMBER OF AUDIT COMMITTEE. MR. BARIL AND MR. CHUTE REPLACED MR. FORTIN AND
MR. PENDERGAST AS MEMBERS OF THE AUDIT COMMITTEE IN JUNE 2003.
(3) MR. BAKES AND MR. PENDERGAST RESIGNED AS DIRECTORS IN JUNE 2003 IN
CONNECTION WITH THE INITIAL PUBLIC OFFERING OF THE HOCKEY COMPANY HOLDINGS
INC.
GREG S. FELDMAN became a Director in July 1998 and Chairman of the
Board in November 2001. Mr. Feldman is co-founder and has been the Managing
Partner of Wellspring Capital Management LLC since its inception in January
1995. Wellspring is a New York based private equity firm. Mr. Feldman is a
director of six private companies controlled by Wellspring.
MATTHEW H. O'TOOLE was appointed President in January 2001, became a
Director in May 2001, and was named Chief Executive Officer, effective as of
September 2001. Mr. O'Toole is a 19-year veteran of the sporting goods industry
joining us in May 1999 as Senior Vice President, Sales and Marketing. Before
that he served one year as Vice President of Sales and Marketing for Teardrop
Golf Company. From 1994 to 1998, he served as Vice President of Sales for Tommy
Armour Golf Company (a subsidiary of US Industries).
ROBERT A. DESROSIERS became Vice President, Finance and
Administration, in May 2001, upon joining us, and Chief Financial Officer in
January 2002. Mr. Desrosiers is a Chartered Accountant and experienced finance
executive with over thirty years experience in both the public and private
sectors. For the 15 years prior to joining us, Mr. Desrosiers was Vice
President, Finance and Administration, at Bauer Nike Hockey Inc.
JOHNNY MARTINSSON became Senior Vice President, European Division, in
1998, upon joining us in connection with the acquisition of Sports Holdings
Corp. In 1997, Mr. Martinsson was appointed Senior Vice President - Europe for
Sports Holdings Corp. From 1988 until 1997 Mr. Martinsson was President of Jofa,
a division of Karhu Canada Hockey. Mr. Martinsson originally joined Jofa in 1970
as a product manager.
JOHN PAGOTTO became Vice President, Equipment Division, in July 2001,
upon joining us. Previously, Mr. Pagotto served one year as Vice President,
Brand Management, at Bauer Nike Hockey Inc. Mr. Pagotto has a 23-
79
year career in the hockey industry and, prior to joining Bauer Nike Hockey Inc.,
was Vice President and General Manager of the Karhu Hockey Division, Sports
Holdings Corp.
MICHEL RAVACLEY became Vice President, Global Operations, in June 2002
upon joining us. Previously, Mr. Ravacley served four years as Vice President,
Supply Chain and Information Technology at ALDO Group and prior to joining ALDO
Group was Partner-in-Charge of KPMG Management Consulting where, among his many
responsibilities, he managed the reengineering and implementation of supply
chain processes and information systems.
LEN RHODES became Vice President, Global Marketing, in January 2001,
having joined us in September 1999 as Director of Marketing. He was also named
Vice President, Product Creation, on August 1, 2003. Prior to that he spent 11
years at Molson Breweries in various sales and marketing positions eventually
becoming a brand manager.
RAYMOND RICCIO became Vice President, Apparel Division, in February
2002, having joined us in August 1999. Mr. Riccio previously served with Starter
Corporation for 8 years, where his experience included National Account Manager,
Regional Sales Manager and National Sales Manager of Key Accounts.
PHIL BAKES became a Director in October 1999 and resigned as a Director
in June 2003. 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. Previously, Mr. Bakes was president of Sojourn Enterprises, Inc., a Miami
advisory and merchant banking firm he founded in 1990.
MICHEL BARIL became a Director in September 2001, as a designee of
Caisse. Mr. Baril had been President and Chief Operating Officer of Bombardier
Recreational Products since February 2001 until November 2003. From May 2000
until February 2001, he was Executive Vice-President of Bombardier
Transportation, responsible for all aspects of Bombardier Transportation
operations worldwide. Between September 1998 and May 2000, he was Executive
Vice-President, Operations, of Bombardier Aerospace, overseeing all
manufacturing and procurement activities for the Canadair, de Havilland, Learjet
and Shorts entities. From June 1996 until September 1998, he was President of
the Mass Transit Division, overseeing all of the Transportation Group's
activities in Canada and the United States.
PAUL M. CHUTE became a Director in April 1997. Since January 1995, Mr.
Chute has served as a Managing Director of Phoenix Investment Partners Ltd., an
investment advisor to its affiliate, Phoenix Life Insurance Company. He was a
Managing Director of Phoenix Life Insurance Company from January 1992 to
December 1994.
JASON B. FORTIN became a Director in January 1999. Mr. Fortin is a
principal 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 in April 1997 and resigned as a
Director in June 2003. 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. From July
1986 until July 1993, he was employed by Equitable Capital Management Corp., a
subsidiary of Equitable.
ROGER SAMSON became a Director in May 2001, as a designee of Caisse.
Mr. Samson has been an independent consultant since 1999 and serves on a number
of Boards of Directors. From 1997 to 1999 he was President of Sico Coatings, an
affiliate of Sico Inc., a paint manufacturer.
BOARD OF DIRECTORS
Our Board of Directors has responsibility for establishing broad
corporate policies and for overseeing our performance, although it is not
involved in day-to-day operations. Members of the Board are kept informed of our
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 6 meetings during 2003.
80
We currently have an audit committee and a compensation committee. None
of the members of the audit committee and the compensation committee are
employees of the Company or any of our subsidiaries. The mandates of these
committees are described below.
The audit committee is responsible for (i) reviewing and approving the
financial statements of the Company and related documents, and (ii) reviewing
and inquiring into matters affecting financial reporting, the Company's system
of internal accounting and financial controls and procedures, independence of
the external auditors, and the financial and business risks or exposure of the
Company. In addition, the audit committee is responsible for recommending to the
board the external auditors to be appointed and their remuneration. All members
of the audit committee are independent. Rules promulgated by the SEC under the
Sarbanes-Oxley Act require the Company to disclose annually whether our audit
committee has one or more "audit committee financial experts," as defined by the
SEC. The board of directors has determined that there is no member of the audit
committee who qualifies as such an expert; however, the audit committee has
determined that the financial expertise of each member of the audit committee is
sufficient for the Company's needs.
The compensation committee is responsible for reviewing the adequacy
and form of compensation of all executives and employees of the Company. It is
also responsible for reviewing recommendations for the appointment of persons to
senior executive positions, considering terms of employment, succession planning
and recommending to the board awards of stock options. The compensation
committee also approves all employee benefits, including vacation policy,
benefits plans and automobile allowances granted to officers and employees of
the Company.
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.
The Company's directors and executive officers and the beneficial
holders of more than 10% of the non-voting exchangeable common stock of the
Company are required to file reports with the SEC regarding ownership, and
changes in such ownership, of such common stock. Based on its review of such
reports, the Company believes that all such filing requirements were met during
2003, except that all such filings were made late in connection with the
corporate reorganization in 2003.
CODE OF ETHICS
Our Board of Directors has adopted a code of ethics that applies to the
Chief Executive Officer and Chief Financial Officer, as required by the SEC. The
current version of such code of ethics is filed as an exhibit to this annual
report on Form 10-K.
81
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth certain information
for the year ended December 31, 2003 concerning the cash and non-cash
compensation earned by or awarded to the Chief Executive Officer and our four
other most highly compensated executive officers as of December 31, 2003 and as
of the date hereof:
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- --------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
NAME AND POSITION YEAR ($) ($) ($) (#) ($)
------------------------------- ----- ------ ----- --------------- ------- ------------
Matthew H. O'Toole............. 2003 312,795 294,975 -- -- --
President and Chief 2002 242,029 180,425 -- -- --
Executive Officer 2001 192,308 127,151 -- 150,000 --
Robert A. Desrosiers........... 2003 173,218 164,377 -- -- --
Chief Financial Officer and 2002 147,765 56,976 -- -- --
Vice President, Finance and 2001 88,119 47,470 -- 35,000 --
Administration
John Pagotto................... 2003 173,218 103,195 -- -- --
Vice President, Equipment 2002 147,765 50,646 -- -- --
Division 2001 66,568 39,558 -- 35,000 --
Raymond Riccio................. 2003 165,000 80,149
Vice President, Apparel 2002 160,000 64,000 -- 15,000 --
Division 2001 150,000 36,945 -- 10,000 --
Michel Ravacley ............... 2003 164,629 91,253
Vice President, Global 2002 83,595 27,770 -- 25,000 --
Operations 2001 -- -- -- -- --
-------------
(1) Includes all other annual compensation not properly categorized as salary
or bonus. Certain perquisites that do not exceed 10% of the named
individuals' salary and bonus are excluded.
STOCK OPTIONS
The following tables set forth certain information concerning the
granting of options to purchase shares of our common stock to each of our
executive officers 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 2003
The following table provides a summary of all options to purchase or
acquire securities of the Corporation or any of its subsidiaries made during the
most recently completed financial year to each of the Named Executive Officers.
82
OPTION GRANTS DURING 2003
MARKET VALUE
% OF TOTAL OF SECURITIES
SECURITIES OPTIONS UNDERLYING
UNDER OPTIONS GRANTED TO EXERCISE OR OPTIONS ON THE
GRANTED EMPLOYEES IN BASE PRICE DATE OF GRANT EXPIRATION
NAME AND POSITION (#) FINANCIAL YEAR ($/SECURITY) ($/SECURITY) DATE
----------------------------------- ------------- -------------- ------------ -------------- ----------
Matthew H. O'Toole................. --- --- --- --- ---
President and Chief Executive
Officer
Robert A. Desrosiers............... --- --- --- --- ---
Chief Financial Officer and
Vice President, Finance and
Administration
John Pagotto....................... --- --- --- --- ---
Vice President, Equipment
Division
Raymond Riccio..................... --- --- --- --- ---
Vice President, Apparel Division
Michel Ravacley.................... --- --- --- --- ---
Vice President, Global
Operations
OPTIONS EXERCISED IN 2003 AND VALUE OF OPTIONS AT DECEMBER 31, 2003 SHARES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT YEAR
OPTIONS HELD AT YEAR END END
(#) ($)
SHARES
ACQUIRED VALUE
ON EXERCISE RECEIVED
NAME (#) ($) EXERCISABLE NOT EXERCISABLE EXERCISABLE NOT EXERCISABLE
---------------------------- ----------- -------- ----------- --------------- ----------- ---------------
Matthew H. O'Toole -- -- 175,000 -- N/A N/A
Robert A. Desrosiers -- -- 21,000 14,000 N/A N/A
John Pagotto -- -- 21,000 14,000 N/A N/A
Raymond Riccio -- -- 15,000 10,000 N/A N/A
Michel Ravacley -- -- 10,000 15,000 N/A N/A
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 our common
stock.
EMPLOYMENT CONTRACTS
Effective January 1, 2001, and further amended on September 26, 2001 to
reflect his position as Chief Executive Officer, we entered into an employment
agreement with Matthew H. O'Toole, as President and Chief Executive Officer. Mr.
O'Toole receives annual compensation of Canadian $437,000, subject to review
annually, and is eligible to receive a bonus calculated in accordance with a
formula based on our EBITDA up to 75% of then-current salary or, if 110% above
budgeted EBITDA is achieved, a larger percentage at the discretion of our board
of directors. Mr. O'Toole has also been granted stock options to purchase
175,000 shares of our common stock at an exercise price of $8.50 per share, of
which options to purchase 25,000 shares were repriced from $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". Additionally upon a change of control,
Mr. O'Toole is entitled to a "success fee" of two times then-current base salary
less the current cash value (per share less the exercise price per share
multiplied by the number of shares vested) of all vested stock options. Upon
notice of termination of employment by us, Mr. O'Toole will be entitled to
receive as severance one year's salary.
83
Effective May 22, 2001, we entered into an employment contract with
Robert A. Desrosiers, as Vice President, Finance and Administration. He was
named Chief Financial Officer effective January 2002, with no change in
employment terms. Mr. Desrosiers receives annual compensation of Canadian
$242,000, subject to annual review. Mr. Desrosiers is also eligible to
participate in our bonus plan up to a maximum of 40% of then current salary or,
if 110% above budgeted EBITDA is achieved, a larger percentage at the discretion
of our board of directors. Mr. Desrosiers has been granted stock options to
purchase 35,000 shares of our common stock at an exercise price of $8.50 per
share. These options have a term of ten years, vest ratably over five years
commencing on December 31, 2001 and vest upon change in control and ratably upon
a termination of Mr. Desrosiers' employment without "cause". Upon notice of
termination of employment by us, Mr. Desrosiers will be entitled to receive as
severance twelve months' salary and benefits.
Effective January 1, 1999, as amended September 12, 2001, we entered
into an employment contract with Johnny Martinsson, as Senior Vice President,
European Division. He receives a base salary of SEK 1,050,000 per year, subject
to annual review. Mr. Martinsson is also eligible to participate in our bonus
plan up to a maximum of 40% of then current salary or, if 110% above budgeted
EBITDA is achieved, a larger percentage at the discretion of our board of
directors. Mr. Martinsson has been granted stock options to purchase 35,000
shares of our common stock at an exercise price of $8.50 per share, of which
options to purchase 25,000 shares were repriced from $14.00 per share in 2001.
These options have a term of ten years, vest ratably over five years commencing
on December 31, 1999 and vest upon change in control and ratably upon a
termination of Mr. Martinsson's employment without "cause". Upon notice of
termination of employment by us, Mr. Martinsson will be entitled to receive as
severance twelve months' salary and benefits.
Effective July 16, 2001, we entered into an employment agreement with
John Pagotto, as Vice President, Equipment Division. Mr. Pagotto receives annual
compensation of Canadian $242,000, subject to annual review. Mr. Pagotto is also
eligible to participate in our bonus plan up to a maximum of 40% of then current
salary or, if 110% above budgeted EBITDA is achieved, a larger percentage at the
discretion of our board of directors. Mr. Pagotto has been granted stock options
to purchase 35,000 shares of our common stock at an exercise price of $8.50 per
share. These options have a term of ten years, vest ratably over five years
commencing on December 31, 2001 and vest upon change in control and ratably upon
a termination of Mr. Pagotto's employment without "cause". Upon notice of
termination of employment by us, Mr. Pagotto will be entitled to receive as
severance twelve months' salary and benefits.
Effective June 18, 2001, we entered into an employment agreement with
Len Rhodes, as Vice President, Global Marketing. He was named Vice President,
Global marketing and Product Creation effective August 1, 2003 with no change in
employment terms. Mr. Rhodes receives annual compensation of Canadian $180,000,
subject to annual review. Mr. Rhodes is also eligible to participate in our
bonus plan up to a maximum of 40% of then current salary or, if 110% above
budgeted EBITDA is achieved, a larger percentage at the discretion of our board
of directors. Mr. Rhodes has been granted stock options to purchase 25,000
shares of our common stock at an exercise price of $8.50 per share. These
options have a term of ten years, vest ratably over five years commencing on
December 31, 2001 and vest upon change in control and ratably upon a termination
of Mr. Rhodes' employment without "cause". Upon notice of termination of
employment by us, Mr. Rhodes will be entitled to receive as severance twelve
months' salary and benefits.
Effective August 16, 1999, as amended February 28, 2001 to extend the
term to February 28, 2003 and as amended February 28, 2003 to extend the term to
February 28, 2005, we entered into an employment agreement with Raymond Riccio,
as Vice President, Apparel Division. The agreement may be renewed by us with 6
months' prior notice. Mr. Riccio receives annual compensation of $165,000,
subject to annual review. Mr. Riccio is also eligible to participate in our
bonus plan up to a maximum of 40% of then current salary or, if 110% above
budgeted EBITDA is achieved, a larger percentage at the discretion of our board
of directors. Mr. Riccio has been granted stock options to purchase 25,000
shares of our common stock at an exercise price of $8.50 per share. These
options have a term of ten years, vest rateably over five years and vest upon
change in control and rateably upon a termination of Mr. Riccio's employment
without "cause". Upon notice of termination of employment by us, Mr. Riccio will
be entitled to receive as severance twelve month's salary and benefits.
84
Effective June 10, 2002 we entered into an employment contract with
Michel Ravacley, as Vice President, Global Operations. Mr. Ravacley receives
annual compensation of Canadian $230,000, subject to annual review. Mr. Ravacley
is also eligible to participate in our bonus plan up to a maximum of 40% of then
current salary or, if 110% above budgeted EBITDA is achieved, a larger
percentage at the discretion of our board of directors. Mr. Ravacley has been
granted stock options to purchase 25,000 shares of our common stock at an
exercise price of $8.50 per share. These options have a term of ten years, vest
ratably over five years commencing on December 31, 2003 and vest upon a change
of control and ratably upon a termination of Mr. Ravacley's employment without
"cause". Upon notice of termination of employment by us, Mr. Ravacley will be
entitled to receive as severance six months' salary and benefits if within the
first twelve months of employment and twelve months' salary and benefits if
thereafter.
DEFINED BENEFIT OR ACTUARIAL PLANS
Certain of our executive officers have entered into defined benefit
supplementary retirement agreements ("SERP"). The SERP benefit equals 2% of base
earnings at retirement in excess of $54,000 times years of service. These SERPs
are unfunded. During the year ended December 31, 2003, an expense of $114,000
was recorded by us. The balance of the unfunded liability was $512,000 as at
December 31, 2003.
The following table is a summary of the estimated annual benefits
payable upon retirement under the SERP(1):
----------------------------------------------------------------------------------------------------------------------
YEARS OF SERVICE
REMUNERATION ---------------------------------------------------------------------------------------
(U.S.$) 15 20 25 30 35
------------------------------ ----------------- ---------------- ----------------- ----------------- ----------------
125,000 $ 21,167 $ 28,222 $ 35,278 $ 42,334 $ 49,389
----------------------------------------------------------------------------------------------------------------------
150,000 $ 28,667 $ 38,222 $ 47,778 $ 57,334 $ 66,889
----------------------------------------------------------------------------------------------------------------------
175,000 $ 36,167 $ 48,222 $ 60,278 $ 72,334 $ 84,389
----------------------------------------------------------------------------------------------------------------------
200,000 $ 43,667 $ 58,222 $ 72,778 $ 87,334 $101,889
----------------------------------------------------------------------------------------------------------------------
225,000 $ 51,167 $ 68,222 $ 85,278 $102,334 $119,389
----------------------------------------------------------------------------------------------------------------------
250,000 $ 58,667 $ 78,222 $ 97,778 $117,334 $136,889
----------------------------------------------------------------------------------------------------------------------
275,000 $ 66,167 $ 88,222 $110,278 $132,334 $154,389
----------------------------------------------------------------------------------------------------------------------
300,000 $ 73,667 $ 98,222 $122,778 $147,334 $171,889
----------------------------------------------------------------------------------------------------------------------
400,000 $103,667 $138,222 $172,778 $207,334 $241,889
----------------------------------------------------------------------------------------------------------------------
-------------------
(1) Pension amounts were calculated by converting base earnings into Canadian
dollars, applying the SERP formula, and reconverting the results into U.S.
dollars, based on a currency exchange rate of 1.5796.
Under the plan(s), the following Named Executive Officers have earned
the following number of credited years of service at December 31, 2003:
PLAN YEARS
----------
Matthew H. O'Toole................................. 4.55
Robert A. Desrosiers............................... 2.61
John Pagotto....................................... 2.46
Raymond Riccio..................................... N/A
Michel Ravacley.................................... 1.56
85
PERFORMANCE GRAPH
Normally, we would present a graph comparing the cumulative total
stockholder return on our common stock with that of the NASDAQ Composite Index
for U.S. companies and the Dow Jones Recreation Products Group that is comprised
of toy, entertainment, sporting goods, recreation and leisure product companies.
However, on April 11, 1997, as a result of our reorganization, all currently
outstanding shares of our common stock were converted into warrants to purchase
shares of our common stock. In addition, since April 11, 1997 there had been
extremely limited trading volume of our common stock. This class of common stock
was merged out of existence in connection with our corporate reorganization in
2003. There is no market for the currently outstanding shares of the new class
of voting common stock, par value $.01 per share, of The Hockey Company, all of
which were issued to THC Holdings in return for proceeds from its initial public
offering. There is no market for the shares of non-voting exchangeable common
stock received in connection with the merger. Therefore, a performance graph is
not presented, as it would not be meaningful.
86
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 1, 2004, with respect to (a) each
person known to be the beneficial owner of more than 5% of the outstanding
shares of our voting common stock and (b) our directors, our executive officers
and all of our executive officers and directors as a group with respect to each
class of equity securities of the Company, including our non-voting exchangeable
common stock, or Exchangeable Shares, or The Hockey Company Holdings Inc., the
parent of the Company, including its common shares, or Common Shares. (Except as
indicated in the footnotes to the table, all such shares of common stock are
owned with sole voting power and investment power.)
NO. OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED % OF CLASS
------------------------ ------------------ ----------
PRINCIPAL STOCKHOLDERS
The Hockey Company Holdings Inc. (1) 5,475,174 100%
NO. OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED % OF CLASS
------------------------ ------------------------- ----------------------------
Exchangeable Common Exchangeable Common
Shares(2) Shares Shares(3) Shares(3)
------------ ------ ------------ ----------
DIRECTORS
Michel Baril (4)........................... -- 625 -- *
Paul Chute (5)............................. -- -- -- --
Greg S. Feldman (6)........................ -- -- -- --
Jason B. Fortin (6)........................ -- -- -- --
Roger Samson (7)........................... -- -- -- --
EXECUTIVE OFFICERS
Matthew O'Toole (8) (9).................... 175,000 4,675 2.6% *
Robert A. Desrosiers (8)................... 21,000 1,550 * *
John Pagotto (8)........................... 21,000 6,250 * *
Len Rhodes (8)............................. 15,000 125 * *
Raymond Riccio (8)......................... 15,000 -- * --
Michel Ravacley (8)........................ 10,000 -- * --
Johnny Martinsson (10)..................... 35,000 -- * --
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A
GROUP (12 PERSONS)......................... 292,000 13,225 4.3% *
--------------
* Less than 1%
(1) Pursuant to the Voting and Exchange Trust Agreement, dated June 11,
2003, among the Company, The Hockey Company Holdings Inc. and
Computershare Trust Company of Canada, as Trustee, each holder of
Exchangeable Shares of the Company, other than The Hockey Company
Holdings Inc., is entitled to direct the Trustee to cast and exercise
its vote as directed by such holder, with respect to each Exchangeable
Share owned of record by such holder, on any matter subject to a vote
of holders of common shares of The Hockey Company Holdings Inc. Through
their respective ownership of the Exchangeable Shares, WS Acquisition
LLC has the right to direct the vote of 3,308,493 shares, The Equitable
Life Assurance Society of the United States has the right to direct the
vote of 1,440,570 shares, Gerald Wasserman has the right to direct the
vote of 722,222 shares (all covered by options exercisable for
Exchangeable Shares within 60 days of March 1, 2004), Phoenix Life
Insurance Company has the right to direct the vote of 570,718 shares
(including 159,127 shares covered by warrants exercisable for
Exchangeable Shares within 60 days of
87
March 1, 2004), and The Northwestern Mutual Life Insurance Company has
the right to direct the vote of 452,751 shares.
(2) This beneficial ownership consists entirely of Exchangeable Shares
covered by options exercisable within 60 days of March 1, 2004.
(3) As of March 1, 2004, there were 5,475,174 Common Shares and 6,500,537
Exchangeable Shares issued and outstanding.
(4) The address of this owner is 2050 Des Aulnes, St-Bruno, Quebec, J3V
6M7.
(5) The address of this owner is 1 American Row, Hartford, Connecticut
06115. Paul M. Chute disclaims beneficial ownership of the 570,718
Exchangeable Shares beneficially owned by Phoenix Life Insurance
Company, including 159,127 Exchangeable Shares covered by warrants
exercisable within 60 days of March 1, 2004. Mr. Chute is a Managing
Director of Phoenix Investment Partners Ltd., an affiliate of Phoenix
Life Insurance Company.
(6) The address of these owners is 620 Fifth Avenue, New York, New York
10020. Greg S. Feldman is the Managing Member of WS Acquisition LLC.
Mr. Feldman disclaims beneficial ownership of the 3,308,493
Exchangeable Shares held by WS Acquisition LLC, including 7,947
Exchangeable Shares indirectly owned through its affiliate, Wellspring
Capital Management LLC. Jason Fortin's beneficial ownership excludes
those shares. Mr. Fortin is a principal of Wellspring Capital
Management LLC, an affiliate of WS Acquisition LLC.
(7) The address of this owner is 14 Place le Marronnier, St. Lambert,
Quebec, Canada J45 1Z7.
(8) The address of these owners is c/o The Hockey Company, 3500 Boulevard
de Maisonneuve, Montreal, Quebec, Canada H3Z 3C1, unless otherwise
indicated.
(9) Matthew H. O'Toole is also a director of The Hockey Company.
(10) The address of this owner is c/o Jofa AB, S-782 22 Malung, Sweden.
88
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 2001, 2002 and 2003, we were charged a management fee of $100,000,
$100,000 and $100,000, respectively, by Wellspring Capital Management LLC, an
affiliate of the controlling stockholder.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES(1). The aggregate fees billed by Ernst & Young LLP for
professional services rendered for the audit of the Company's annual financial
statements, the reviews of the financial statements included in the Company's
quarterly reports on Form 10-Q, comfort letters to underwriters and services
normally provided by the independent auditor in connection with statutory and
regulatory filings were $303,500 for the fiscal year ended December 31, 2003,
and $382,400 for the fiscal year ended December 31, 2002.
(1) In addition, in 2003 The Hockey Company Holdings Inc. ("THC Holdings")
incurred audit fees of $375,400 for professional services rendered for the audit
of THC Holdings' annual financial statements, the reviews of the quarterly
financial statements, comfort letters to underwriters and services normally
provided by the independent auditor in connection with statutory and regulatory
filings.
AUDIT-RELATED FEES. The aggregate fees billed by Ernst & Young LLP for
assurance and related services related to the performance of the audit or review
of the Company's financial statements and not described above under "Audit Fees"
were $13,900 for the fiscal year ended December 31, 2003, and nil for the fiscal
year ended December 31, 2002. In 2003, the audit-related services included
assistance with planning the Company's compliance with Sarbanes-Oxley Act of
2002, Section 404.
TAX FEES. The aggregate fees billed by Ernst & Young LLP for
professional services rendered for tax compliance, tax advice and tax planning
were $150,900, $264,400 and $147,700, respectively, for the fiscal year ended
December 31, 2003, and $82,800, $150,812 and $105,471, respectively, for the
fiscal year ended December 31, 2002.
ALL OTHER FEES. The aggregate fees billed by Ernst & Young LLP for
products and services other than those described above were nil for the
fiscal year ended December 31, 2003, and nil for the fiscal year ended
December 31, 2002.
AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES. Effective
March 24, 2004, our Board of Directors adopted a new Audit Committee Charter
which, among other things, requires the audit committee to pre-approve the
rendering by our independent auditor of audit or permitted non-audit
services. The chairperson of the audit committee may pre-approve the
rendering of services on behalf of the audit committee, provided that the
matter is then presented to the full audit committee at the next scheduled
meeting.
89
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)Financial Statements required by Part II, Item 8 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 77
(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.
2.5 Agreement and Plan of Merger, dated April 2, 2003, among The Hockey
Company Holdings Inc., Hockey Merger Co. and the Company. Filed as
Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003 and incorporated herein by reference.
3.1 Certificate of Merger, including the Amended and Restated Certificate
of Incorporation, dated June 10, 2003. Filed as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 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.
4.1 Indenture, dated April 3, 2002, among The Hockey Company, Sport Maska
Inc., The Bank of New York, as Trustee, and the Subsidiary Guarantors
named therein, relating to Units consisting of 111/4% Senior Secured
Notes due 2009 of The Hockey Company and 111/4% Senior Secured Notes
due 2009 of Sport Maska Inc. Filed as Exhibit 4.2 to the Company's
Current Report on Form 8-K dated April 11, 2002 and incorporated herein
by reference.
90
4.2 First Supplemental Indenture, dated May 22, 2003, among the Company,
Sport Maska Inc., the Guarantors as defined therein and The Bank of New
York, as Trustee. Filed as Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 and
incorporated herein by reference.
4.3 Second Supplemental Indenture, dated May 22, 2003, among the Company,
Sport Maska Inc., the Guarantors as defined therein and The Bank of New
York, as Trustee. Filed as Exhibit 4.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 and
incorporated herein by reference.
9.1 Voting and Exchange Trust Agreement, dated June 11, 2003, among the
Company, The Hockey Company Holdings Inc. and Computershare Trust
Company of Canada. Filed as Exhibit 9.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 and
incorporated herein by reference.
10.1 Cash Option Agreement, dated January 6, 1997 between the Company and
Wellspring Associates LLC. 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 LLC. 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.
91
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.
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 as Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000 and incorporated herein by reference.
10.16 Amendment to license agreement dated October 27, 1998, among NHL
Enterprises, L.P., NHL Enterprises Canada, L.P., NHL Enterprises B.V.,
Sport Maska, Inc. and Maska U.S., Inc. Filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000 and incorporated herein by reference.
10.17 Credit Agreement, dated as of November 19, 1998, among Maska U.S.,
Inc., SHC Hockey Inc., the other Credit Parties signatory thereto,
General Electric Capital Corporation and the other Lenders signatory
thereto from time to time. Filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K dated November 19, 1998 (and filed on March
9, 1999) and incorporated herein by reference.
10.18 Credit Agreement, dated as of November 19, 1998, among Sport Maska
Inc., Tropsport Acquisitions Inc., the Company, the other Credit
Parties signatory thereto, General Electric Capital Canada Inc. and the
other Lenders signatory thereto from time to time. Filed as Exhibit
10.2 to the Company's Current Report on Form 8-K dated November 19,
1998 (and filed on March 9, 1999) and incorporated herein by reference.
10.19 Agreement, dated as of March 14, 2001, among Caisse de depot et
placement du Quebec, WS Acquisition LLC and the Company. Filed as
Exhibit 10.4 to the Company's Current Report on Form 8-K dated March
26, 2001 and incorporated herein by reference.
10.20 Registration Rights Agreement, dated as of March 14, 2001, between the
Company and Caisse de depot et placement du Quebec. Filed as Exhibit
10.5 to the Company's Current Report on Form 8-K dated March 26, 2001
and incorporated herein by reference.
10.21 Second Amendment to Credit Agreement, dated as of March 14, 2001, among
Maska U.S., Inc., as the borrower, the Credit Parties, the Lenders and
General Electric Capital Corporation, as Agent and Lender. Filed as
Exhibit 10.6 to the Company's Current Report on Form 8-K dated March
26, 2001 and incorporated herein by reference.
92
10.22 Second Amendment to Credit Agreement, dated as of March 14, 2001, among
Sport Maska Inc., as borrower, the Credit Parties, the Lenders and
General Electric Capital Canada Inc., as Agent and Lender. Filed as
Exhibit 10.7 to the Company's Current Report on Form 8-K dated March
26, 2001 and incorporated herein by reference.
10.23 Pledge and Security Agreement, dated April 3, 2002, among The Hockey
Company, Sports Holdings Corp., Maska U.S., Inc., SLM Trademark
Acquisition Corp., WAP Holdings Inc. and The Bank of New York, as
Collateral Agent. Filed as Exhibit 10.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001 and incorporated
herein by reference.
10.24 General Security Agreement, dated April 3, 2002, by Sport Maska Inc. in
favor of BNY Trust Company of Canada, as Collateral Agent. Filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K dated April
11, 2002 and incorporated herein by reference.
10.25 General Security Agreement, dated April 3, 2002, by SLM Trademark
Acquisition Canada Corp. in favor of BNY Trust Company of Canada, as
Collateral Agent. Filed as Exhibit 10.3 to the Company's Current Report
on Form 8-K dated April 11, 2002 and incorporated herein by reference.
10.26 Securities Pledge Agreement, dated April 3, 2002, by Sport Maska Inc.
in favor of BNY Trust Company of Canada, as Collateral Agent. Filed as
Exhibit 10.4 to the Company's Current Report on Form 8-K dated April
11, 2002 and incorporated herein by reference.
10.27 Securities Pledge Agreement, dated April 3, 2002, by SLM Trademark
Acquisition Canada Corp. in favor of BNY Trust Company of Canada, as
Collateral Agent. Filed as Exhibit 10.5 to the Company's Current Report
on Form 8-K dated April 11, 2002 and incorporated herein by reference.
10.28 Deed of Hypothec, dated April 3, 2002, between BNY Trust Company of
Canada, as Collateral Agent, and Sport Maska Inc. Filed as Exhibit 10.6
to the Company's Current Report on Form 8-K dated April 11, 2002 and
incorporated herein by reference.
10.29 Deed of Hypothec, dated April 3, 2002, between BNY Trust Company of
Canada, as Collateral Agent, and SLM Trademark Acquisition Canada Corp.
Filed as Exhibit 10.7 to the Company's Current Report on Form 8-K dated
April 11, 2002 and incorporated herein by reference.
10.30 Intercreditor Agreement, dated April 3, 2002, among General Electric
Capital Corporation, General Electric Capital Canada Inc., The Bank of
New York, as U.S. Collateral Agent, BNY Trust Company of Canada, as
Canadian Collateral Agent, The Bank of New York, as Trustee, The Hockey
Company, Sport Maska Inc., Sports Holdings Corp., Maska U.S., Inc., SLM
Trademark Acquisition Canada Corp., SLM Trademark Acquisition Corp. and
WAP Holdings Inc. Filed as Exhibit 10.8 to the Company's Current Report
on Form 8-K dated April 11, 2002 and incorporated herein by reference.
10.31 Third Amendment to Credit Agreement, dated April 3, 2002, among Maska
U.S., Inc., as borrower, the Credit Parties, the Lenders and General
Electric Capital Corporation, as Agent and Lender. Filed as Exhibit
10.9 to the Company's Current Report on Form 8-K dated April 11, 2002
and incorporated herein by reference.
10.32 Fourth Amendment to Credit Agreement, dated April 3, 2002, among Sport
Maska Inc., as borrower, the Credit Parties, the Lenders and General
Electric Capital Canada Inc., as Agent and Lender. Filed as Exhibit
10.10 to the Company's Current Report on Form 8-K dated April 11, 2002
and incorporated herein by reference.
93
10.33 Fourth Amendment to Credit Agreement, dated October 17, 2002, among
Maska U.S., Inc., as borrower, the Credit Parties, the Lenders and
General Electric Capital Corporation, as Agent and Lender. Filed as
Exhibit 10.33 to the Company's Annual Report on Form 10-k for the year
ended December 31, 2002 and incorporated herein by reference.
10.34 Fifth Amendment to Credit Agreement, dated October 17, 2002, among
Sport Maska Inc., as borrower, the Credit Parties, the Lenders and
General Electric Capital Canada Inc., as Agent and Lender. Filed as
Exhibit 10.34 to the Company's Annual Report on Form 10-k for the year
ended December 31, 2002 and incorporated herein by reference.
10.35 First Amendment to Pledge and Security Agreement, dated May 22, 2003,
among the Company, the Subsidiaries party thereto and The Bank of New
York, as Collateral Agent. Filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and
incorporated herein by reference.
10.36 Exchangeable Share Support Agreement, dated June 11, 2003, between the
Company and The Hockey Company Holdings Inc. Filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003 and incorporated herein by reference.
10.37 Letter Agreement, dated March 28, 2003, among NHL Enterprises, L.P.,
NHL Enterprises Canada, L.P., NHL Enterprises B.V., Sport Maska Inc.,
Maska U.S., Inc., Jofa AB, KHF Finland Oy, the Company and The Hockey
Company Holdings Inc. Filed in redacted form as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 and incorporated herein by reference.
14.1 Code of Ethics for Chief Executive Officer and Chief Financial Officer
of The Hockey Company.
21 List of the Company's subsidiaries.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, as amended.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes- Oxley Act of 2002, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. section
1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, as
amended.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. section
1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, as
amended.
(b) Reports on Form 8-K.
None.
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the [ ] day of March,
2004.
THE HOCKEY COMPANY
By: /s/ Robert A. Desrosiers
-----------------------------------
Name: Robert A. Desrosiers
Title: Chief Financial Officer and
Vice-President, Finance and Administration
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated. Each person whose signature to this Form
10-K appears below hereby appoints Robert A. Desrosiers 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/ Greg S. Feldman Chairman of the Board March 26, 2004
----------------------------------
Greg S. Feldman
/s/ Matthew H. O'Toole Chief Executive Officer, March 26, 2004
---------------------------------- President and Director
Matthew H. O'Toole
/s/ Michel Baril Director March 26, 2004
----------------------------------
Michel Baril
/s/ Paul M. Chute Director March 26, 2004
----------------------------------
Paul M. Chute
/s/ Jason B. Fortin Director March 26, 2004
----------------------------------
Jason B. Fortin
/s/ Roger Samson Director March 26, 2004
----------------------------------
Roger Samson
95