2000 ANNUAL REPORT
ABOUT
HEAD
We have a rich heritage. Founded in 1950 by inventor Howard Head, today Head NV is a leading global manufacturer
and marketer of branded sports equipment serving the skiing, tennis and diving markets. We have a world-class portfolio
of premium brands, which includes Head (alpine skis, ski boots and snowboard products, tennis, racquetball and squash
racquets, athletic and outdoor footwear and apparel); Tyrolia (ski bindings); Penn (tennis balls and racquetballs) and Mares
and Dacor (diving equipment).
Our strategic focus is to target the high margin, premium segments of our markets by developing highly innovative products
sold at premium prices, a policy that we call “Superior Performance through Superior Technology.” This strategic focus has
driven our growth and enabled us to achieve the highest operating margins among our peers in the year 2000.
We have created several new segments within our product categories including the Head Cyber ski line, the EZ-on ski boots,
the Titanium and Intelligence lines of lightweight tennis and squash racquets, the Tyrolia Super Light bindings and the Mares
and Dacor H.U.B. scuba system.
We are a global company diversified in terms of both products and geography. We are one of the top suppliers of
branded sports equipment to sporting goods retailers worldwide. Head offers a broad product range through over
27,000 accounts in over 80 countries.
We hold leading market share positions in all three of our product categories: Winter Sports, Racquet Sports and Diving.
We have a Licensing division to leverage value from and increase visibility of our brands outside the product categories
covered by our product divisions.
Based on our fully integrated sales, marketing and distribution units in our major markets, as well as the strength of our
innovative new products, we have been able to increase our market share.
Our high performance products are used and endorsed by many of today’s top athletes.
Please visit our website: www.head.com
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Passion and Innovation Make the Greatest Force
Passion and Innovation Make the Greatest Force
Winter Sports Division
Our Winter Sports division includes Head alpine skis, ski boots and snowboard products,
along with Tyrolia ski bindings . We are one of only a handful of winter sports companies
that offer a full line of products, making us an important supplier to sporting goods
retailers worldwide.
We initiated and led the “carving revolution,” which revitalized the entire ski industry
and made skiing more fun and enjoyable. In Europe, which is the largest market for winter
sports, we hold the top position in bindings and leading positions in skis as well as ski boots.
2000 was a very good year, with units up 5% in bindings, 7% in skis and 16% in ski boots.
We are very excited about our product offering for the 2001/02 ski season. Some
examples are the Mad_Trix skis: two skis in one with a pre-mounted binding which
rotates 180 degrees, allowing the skier to switch mode on the slopes, our next generation
of EZ-on boots, and our new Free Flex PLUS line of bindings. In addition, we introduced
a complete line of Head snowboard products to an enthusiastic and receptive winter
sports trade.
Hannes Trinkl, the 2001 Downhill World Champion, endorses our skis and bindings.
In the US, World Free Style Ski Champion Jonny Moseley endorses our products.
Racquet Sports Division
Our Racquet Sports division includes Head tennis, squash and racquetball racquets,
footwear and accessories, and Penn tennis balls and racquetballs. Worldwide, Head is the
number two racquet brand and Penn is the number one tennis ball company worldwide.
Having both racquets and balls in our product range makes us one of the most impor-
tant suppliers to the spor ting goods trade and allows us to benefit from synergies in
sales, marketing and distribution.
We introduced all of the major tennis innovations in the last decade. With Head
Titanium Tennis, we created a whole new category of high performance super light
racquets and our Ti.S6 is the best selling tennis racquet in the world. We launched the
revolutionary line of Head Intelligence tennis racquets powered by the piezoelectric
Head intellifibers. The top of the line model, the i.S18 incorporates the breakthrough
“Chip System,” the world’s first chip powered and electronically dampened racquet,
designed to enhance power and eliminate vibration “smarter racquet—better game.” This
line has received tremendous media and racquet sports trade response globally.
2000 was an excellent year, with racquet sales up almost 20% in local currencies.
Our racquets are used and endorsed by some of the most successful athletes in the
game of tennis, like Andre Agassi, Gustavo Kuerten and Bjorn Borg. Head racquets are
the number one used racquet on the ATP Tour and Penn is the official ball used in over
80 top tennis tournaments world wide including the ATP and WTA events. Head/Penn
is now the official sponsor of the prestigious Tennis Master Series.
Brands
AND
products
2 .
Winter Sports Division
Our Winter Sports division includes Head alpine skis, ski boots and snowboard products,
along with Tyrolia ski bindings . We are one of only a handful of winter sports companies
that offer a full line of products, making us an important supplier to sporting goods
retailers worldwide.
We initiated and led the “carving revolution,” which revitalized the entire ski industry
and made skiing more fun and enjoyable. In Europe, which is the largest market for winter
sports, we hold the top position in bindings and leading positions in skis as well as ski boots.
2000 was a very good year, with units up 5% in bindings, 7% in skis and 16% in ski boots.
We are very excited about our product offering for the 2001/02 ski season. Some
examples are the Mad_Trix skis: two skis in one with a pre-mounted binding which
rotates 180 degrees, allowing the skier to switch mode on the slopes, our next generation
of EZ-on boots, and our new Free Flex PLUS line of bindings. In addition, we introduced
a complete line of Head snowboard products to an enthusiastic and receptive winter
sports trade.
Hannes Trinkl, the 2001 Downhill World Champion, endorses our skis and bindings.
In the US, World Free Style Ski Champion Jonny Moseley endorses our products.
Racquet Sports Division
Our Racquet Sports division includes Head tennis, squash and racquetball racquets,
footwear and accessories, and Penn tennis balls and racquetballs. Worldwide, Head is the
number two racquet brand and Penn is the number one tennis ball company worldwide.
Having both racquets and balls in our product range makes us one of the most impor-
tant suppliers to the sporting goods trade and allows us to benefit from synergies in
sales, marketing and distribution.
We introduced all of the major tennis innovations in the last decade. With Head
Titanium Tennis, we created a whole new category of high performance super light
racquets and our Ti.S6 is the best selling tennis racquet in the world. We launched the
revolutionary line of Head Intelligence tennis racquets powered by the piezoelectric
Head intellifibers. The top of the line model, the i.S18 incorporates the breakthrough
“Chip System,” the world’s first chip powered and electronically dampened racquet,
designed to enhance power and eliminate vibration “smarter racquet—better game.” This
line has received tremendous media and racquet sports trade response globally.
2000 was an excellent year, with racquet sales up almost 20% in local currencies.
Our racquets are used and endorsed by some of the most successful athletes in the
game of tennis, like Andre Agassi, Gustavo Kuerten and Bjorn Borg. Head racquets are
the number one used racquet on the ATP Tour and Penn is the official ball used in over
80 top tennis tournaments world wide including the ATP and WTA events. Head/Penn
is now the official sponsor of the prestigious Tennis Master Series.
Brands
AND
products
2 .
Diving Division
Our Diving division has two brands Mares and Dacor with a strong heritage among diving
enthusiasts. With Mares, we have the world’s leading diving brand.
We offer a complete range of products under each brand, making us unique in the div-
ing industry. Diving products are highly technical and we are perceived as the diving
industry’s innovation and technology leader. We have introduced many revolutionary
new products such as plastic fins, underwater guns and high performance regulators. In
late 1999, we launched the H.U.B (human underwater breathing system) which com-
bined five previously separate items, including buoyancy vest and regulator, into one
unit. The H.U.B. system was awarded “Product of the Year” at the Antibes World
Diving Festival.
In 2000, our Diving division made good progress, with sales in local currency up 4%. We
expect the diving market to continue to grow as the sport reaches new markets in
regions such as Asia, Africa and Brazil.
Most free diving records including those set by Francisco “Pipin” Ferreras and Audrey
Mestre have been set using Mares equipment. For the past three years, Mares has been
awarded “Brand of the Year” by “Divers” magazine.
Licensing Division
Our Licensing division was created to leverage the worldwide recognition of Head and
now includes all of our brands. Licensing enables us to expand our brands to other
product categories such as sportswear, sport bags, watches, eyewear, golf equipment
and accessories.
In 2000, we generated approximately $8 million of licensing revenues. Measured at
wholesale prices this would equate to $125 million of additional brand sales globally. We
believe that substantial licensing growth oppor tunities exist in new product areas and
new regions around the world. We intend to protect and maintain the premium image
of our brands by licensing only high quality goods within brand compatible product lines.
“Head,” “Head Titanium Tennis,” “Head Intelligence,” “Tyrolia,” “EZ-on,” “Penn,” “Mares,”
“Dacor,” “Cyber,” “Super Light,” “Mad_Trix,” “Free Flex PLUS,” “Blax,” “Generics” and
“Munari” are our trademarks.
3
To our Shareholders, Customers and Employees
2000 was a memorable year for Head. It was a year of record breaking
operating performance and we completed our Initial Public Offering, listing
Head N.V. on the New York and Vienna Stock Exchanges. Here are some
of the highlights:
• Revenues rose 2.5% in dollars to $398.6 million and 19% in euros
• EBIT margins rose to 9.7%
• EBITDA margins rose to 13.2%
• Net income before tax increased to $24.4 million
We commenced a share buyback program to enhance shareholder value.
We launched the Head Intelligence racquets, arguably the most innovative
product in sporting goods history.
It is with great pleasure that I write this first annual letter to our shareholders,
customers and employees. Completing our Initial Public Offering in October 2000
was a significant milestone for Head NV—a company with a rich heritage in sports
equipment. We have developed world-class brands, are a top performer in our industry
and strive for excellence in everything we do. Above all, we are committed to delivering
excellent financial performance and shareholder value.
2000 was a record year for us. Despite the unprecedented weakness of the euro against
the dollar, our revenues were up. Measured in euro currency, revenues were up 19%
over 1999.
Over the past three years, we have achieved a compound annual revenue growth of
14.4%. New products have helped boost gross profit margins each year and gross profit
has grown at compound annual rate of 17.7% since 1998.
LETTER
TO THE
SHAREHOLDERS
4 .
$
304.6
$
388.8
$
398.6
1998
2000
CAGR ’98-’00
14.4%
1999
6.0%
% increase
2.5%
27.7%
NET SALES
(in millions)
$
123
.6
$
160.3
$
17
1
.2
1998
2000
CAGR ’98-’00
17.7%
1999
40.6%
% margin
42.9%
41.2%
GROSS PROFIT
(in millions)
Johan Eliasch
Chairman and CEO Head NV
Our profitability has increased significantly over the last three years, both in margin and
absolute terms. The acquisition of Penn and the streamlining of our cost base, combined
with the increase in our sales, have resulted in a compound annual growth rate of 29.9%
and 46.0% for EBITDA and EBIT respectively since 1998. Net income (before tax and
extraordinary items) has increased at an average compound rate of 85.5% over the
same period.
While it is not realistic to expect this level of income growth indefinitely, I am optimistic
about 2001. I believe we have the products, organization and momentum to outper-
form our industry peers.
Over the past several years we have upgraded our infrastructure, streamlined our cost
base, established a licensing division to leverage our brands and solidified our capital base.
However, this is just the beginning. We are passionate sports enthusiasts driven to
achieve ever higher standards. Product innovations have been and will continue to drive
our business forward. We are very proud of our achievements. We pioneered two of
the most significant new categories of sports products in the past decade with the carving
ski and the high performance lightweight Head Titanium Tennis Series of racquets. These
breakthrough technologies helped revolutionize and reinvigorate the alpine ski and tennis
markets from recreational participants through to professionals. This spirit will continue
to drive us forward.
Being an avid sportsman, I personally test many of our new products all the way
through to the final stages of product development. I am very excited about our new
products for 2001 and beyond. Late last year we began to ship our revolutionary Head
Intelligence Tennis Series of racquets. The entire line, including the world’s first chip
powered and electronically dampened racquet, the i.S18, which we will ship this fall, has
met with tremendously positive media and trade response. In winter sports, we have
introduced to enthusiastic retailers our 2001/02 product-line: the next generation of
comfortable EZ-on ski boots, our ground-breaking Mad_Trix line of skis and the new
Free Flex PLUS line of bindings. Also, we launched a complete new line of Head snow-
board products from which we expect very strong order progress. In diving, we intro-
duced the H.U.B. diving system, which won “Product of the Year” at the Antibes World
Diving Festival.
5
$
31.1
$
42
.3
$
52.5
1998
2000
CAGR ’98-’00
29.9%
1999
10.2%
% margin
13.2%
10.9%
EBITDA
(in millions)
$
18.1
$
25.2
$38
.6
1998
2000
CAGR ’98-’00
46.0%
1999
6.0%
% margin
9.7%
6.5%
EBIT
(in millions)
(1)
INCOME BEFORE TAX
(in millions)
Note: (1) Income from continuing operations
before income taxes and extraordinary items
$
7.1
$
18.6
$
24.4
1998
2000
1999
2.3%
% margin
4.8%
CAGR ’98-’00
85.5%
NM
% growth
31.3%
162.2%
6.1%
6
Winter
Sports
36%
Licensing
2%
Diving
18%
Racquet
Sports
44%
DIVERSIFIED PRODUCT MIX
2000 Sales by Division
Europe
51%
World
5%
Asia
11%
North
America
33%
GLOBAL COMPANY
2000 Net Sales by Geography
Our global manufacturing, sales, marketing and distribution networks are among the best in the business. We are also one
of the most important global suppliers to the sporting goods trade. This means that our new product launches can be rolled
out globally and gain rapid market penetration.
Our athlete endorsement program yielded great success in 2000 and we had tremendous brand visibility and media expo-
sure. In 2000 our tennis stars like Gustavo Kuerten and Marat Safin were the number 1 and number 2 players respectively
in the ATP Champions Race. Andre Agassi and Gustavo Kuer ten started 2001 in great form by between them winning the
Australian Open and every Master Series Tournament to date this year. Each of them has already won more tournaments
this year than any other player on the tour. Our racquets are the “choice of the pros”—the number one racquet used on
the ATP Tour. In skiing and snowboarding, we sponsor some of the top athletes including 2001 Downhill World Champion
Hannes Trinkl and World Free Style Champion Jonny Moseley. Most Free Diving records have been set using our equipment,
including those set by Francisco “Pipin” Ferreras and Audrey Mestre.
Being the largest shareholder, I would like to say a few words about our investor relations program. We are working very
hard to establish Head in the equity markets and create shareholder value. We are actively meeting with research analysts,
institutional investors and speaking at various investor conferences to tell our story. We have a new investor relations page
on our website for dissemination of financial information and are holding quarterly Web Casts to announce our results and
answer questions from the market. We hope that the market will recognize the value of our shares. Also, we have under-
taken a share buy back program. So far, we have repurchased about 1.4 million shares.
Our plan for the future includes looking for growth beyond our existing business. We have successfully integrated three
acquisitions in the past two years and we have the internal resources, capital base and experience to acquire additional com-
panies if we believe that they add to shareholder value. We have strict criteria for evaluating acquisitions, including, financial
impact, brand fit and culture fit. I know that many of our shareholders are also sports enthusiasts and I have heard from
many of you who are using and enjoying our products! Please visit our website www.head.com to see our new products—
your feedback is welcome.
To paraphrase George Allen, the legendary US football coach, “winning is the science of being totally prepared.” We
are prepared!
Sincerely,
Johan Eliasch, Chairman and CEO Head NV
Head N.V. and Subsidiaries
Selected Financial Data
The following table provides our selected consolidated financial data for the periods indicated. The historical financial data for the years
ended December 31, 1996, 1997, 1998, 1999 and 2000 have been derived from our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and have been audited by
PricewaterhouseCoopers AG, our independent accountants. Historical results are not necessarily indicative of the results that may be
expected for any future period.
In October 2000, London Films was distributed to Head Spor ts Holdings N.V., an entity controlled by Johan Eliasch, our controlling share-
holder. As a result, prior years’ financial statements have been restated to present London Films as a discontinued operation.
The selected financial data should be read in conjunction with our historical consolidated financial statements, the notes thereto and
“Item 5—Operating and Financial Review and Prospects” included elsewhere in this annual report.
Year Ended December 31,
1996 1997 1998 1999 2000
Statement of Operations Data:
(in thousands, except per share data)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $342,125 $286,945 $304,504 $388,755 $398,639
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233,275 178,175 180,894 228,453 227,442
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,850 108,770 123,610 160,302 171,197
Selling and marketing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,258 73,902 75,551 95,906 97,743
General and administrative expense (excluding non-cash
compensation expense and restructuring charge) . . . . . . . . . . . . . . . . 44,058 30,074 29,911 36,910 33,488
Non-cash compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ——21 548 1,378
Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —— —1,691 —
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,466) 4,794 18,127 25,246 38,588
Interest expense
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,368) (16,455) (10,573) (14,092) (18,642)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,398 3,138 1,349 947 1,118
Foreign exchange gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,146 (73) (2,279) 4,574 7,502
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994 216 459 1,899 (4,181)
Minority interests in earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . (7) 38 2 — —
Income (loss) from continuing operations before
income taxes and extraordinar y items . . . . . . . . . . . . . . . . . . . . . . . . . (38,303) (8,342) 7,084 18,574 24,386
Income tax benefit (expense)
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (637) (360) (1,812) 35,887 1,934
Income (loss) from continuing operations before extraordinary items . . (38,940) (8,702) 5,273 54,463 26,321
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . (174) (298) 243 (60) (644)
Extraordinary gain
(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ——58,203 — 2,104
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (39,114) $ (9,000) $ 63,718 $ 54,402 $ 27,781
Pro forma earnings per share—basic
(4)
Income (loss) from continuing operations before extraordinar y items
. . $ (1.95) $ (0.44) $ 0.26 $ 2.46 $ 0.94
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.96) $ (0.45) $ 3.19 $ 2.46 $ 0.99
Pro forma earnings per share—diluted
(4)
Income (loss) from continuing operations before extraordinar y items
. . ——$ 0.26 $ 2.23 $ 0.86
Net income (loss) ——$ 3.15 $ 2.23 $ 0.91
Pro forma weighted average shares outstanding
(4)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 20,000 20,000 22,132 28,071
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ——20,232 24,370 30,679
Other Financial Data:
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,377 $ 27,650 $ 13,531 $ 28,444 $ 6,452
Cash provided by (used for) investing activities . . . . . . . . . . . . . . . . . . . . $ 4,744 $ (9,346) $ (17,824) $ (57,517) $ (17,178)
Cash provided by (used for) financing activities . . . . . . . . . . . . . . . . . . . . $ (41,087) $ (11,393) $ (27,432) $ 43,066 $ 20,073
Balance Sheet Data:
Cash
(5)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,832 $ 45,288 $ 12,860 $ 23,624 $ 15,848
Working capital
(6)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (53,885) $ (61,599) $ 29,351 $ 73,432 $151,241
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $404,958 $330,099 $344,618 $434,660 $434,304
Total debt
(7)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $322,056 $268,730 $199,335 $240,108 $114,819
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (24,075) $ (25,888) $ 38,816 $ 82,547 $229,987
(1) Interest expense for the year ended December 31, 1998 and the periods thereafter excludes capitalized future interest payments as required by SFAS No. 15. See “Item 5: Operating and Financial Review
and Prospects—Liquidity and Capital Resources—Treatment of Bank Waivers Under SFAS No. 15.”
(2) Includes for the year ended December 31, 1999 a non-cash deferred income tax benefit of $38.8 million resulting from the release of a substantial portion of a valuation allowance relating to operating
loss carryforwards.
(3) Includes for the year ended December 31, 1998 a gain of approximately $58.2 million as a result of the application of SFAS No. 15. See “Item 5: Operating and Financial Review and Prospects—Liquidity
and Capital Resources—Treatment of Bank Waivers Under SFAS No. 15.”
(4) Pro forma earnings per share and pro forma weighted average shares outstanding represent our historical amounts as adjusted to reflect the two for one split of our outstanding ordinary shares upon
the closing of the public offering in September 2000. Pro forma earnings per share and pro forma weighted average shares outstanding on a diluted basis give effect to all outstanding options and war-
rants calculated under the treasury stock method. Options and warrants have been excluded from the pro forma earnings per share calculations for the two years ended December 31, 1996 and 1997
because their effect would be anti-dilutive.
(5) Cash includes cash and cash equivalents and restricted cash.
(6) Working capital is computed as current assets, excluding restricted cash, less current liabilities.
(7) Total debt excludes capitalized future interest payments which is required by SFAS No. 15. See “Item 5: Operating and Financial Review and Prospects—Liquidity and Capital Resources—Treatment of
Bank Waivers Under SFAS No. 15.” These amounts are $8.0 million and $6.3 million respectively, as of December 31, 1998 and December 31, 1999. Due to the repayment of the restructured debt in
the fourth quar ter of 2000, all capitalized future interest payments have been released,
7
Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . 9
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . 13
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . 14
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . 15
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . 16
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
List of Significant Participation’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Listing Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Corporate Directory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Financial Review
8
9
Overview:
We are a leading global manufacturer and marketer of
branded sporting goods serving the skiing, tennis and diving
markets. We have created or acquired a portfolio of brands—
Head (alpine skis and boots, snowboard equipment, tennis
and squash racquets and athletic and outdoor footwear),
Tyrolia (ski bindings), Mares and Dacor (diving equipment) and
Penn (tennis balls and racquetball balls)– which are among the
most widely recognized names within their respective markets.
We generate revenues in our principal markets by selling
goods directly to sports retailers and, to a lesser extent, by
selling to distributors. We also receive licensing and royalty
income. As many of our goods, especially Winter Sports
goods, are shipped during a specific part of the year, we expe-
rience highly seasonal revenue streams. Following industry
practice, we begin to receive orders from our customers in
the Winter Sports division from March until June, during
which time we book approximately three quarters of our
orders for the year. We will typically begin shipment of skis,
boots and bindings in July and August with the peak shipping
period occurring in October and November. At this time, we
will begin to receive re-orders from customers, which consti-
tute the remaining quarter of our yearly orders. Re-orders are
typically shipped in December and January. Racquet Sports
and diving product revenues also experience seasonality, but
to a lesser extent than Winter Sports revenues.
The skiing market had declined until 1998 due to a shift in
consumer preference from skiing to snowboarding in the early
1990s, an absence of significant product innovation prior to
the introduction of the carving ski and the severe decline in
the Japanese market caused by economic difficulties. Since the
1998/1999 winter season we have experienced a modest
recovery in the skiing market which we believe is mainly due
to the introduction of the carving ski technology. We believe
we are well positioned in the skiing market as we are at the
forefront of the development of the carving segment. The
market for tennis equipment also has declined in recent years
as a result of reduced interest in the sport due to the presence
of fewer exciting professional stars, the increased durability
of tennis racquets and competing leisure activities, such as
alternative sports, computer games and the Internet. How-
ever, we have benefited from a significant increase in the sales
of Head Titanium Tennis racquets.
In May 1999 we acquired Penn, a manufacturer and distributor
of tennis and racquetball balls. Penn revenues also experience
seasonality, and are typically highest during the months of
January through March.
In October 1999 we acquired the Blax and Generics snow-
board equipment business. We now market these products
under the Head brand.
As a result of our recent acquisitions, our employee numbers
have increased from 2,808 in 1999 to 3,097 in 2000.
Results of Operations:
The following table sets forth certain consolidated statements
of operations data:
For the Years Ended
December 31,
1999 2000
(in thousands)
Revenues
Total revenues . . . . . . . . . . . . . . . . . . . . . . . $388,755 $398,639
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 228,453 227,442
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 160,302 171,197
Gross margin . . . . . . . . . . . . . . . . . . . . . . 41.2% 42.9%
Selling and marketing expense . . . . . . . . . . 95,906 97,743
General and administrative expense
(excluding non-cash compensation
expense and restructuring charge) . . . . 36,910 33,488
Non-cash compensation expense . . . . . . . . 548 1,378
Restructuring charge . . . . . . . . . . . . . . . . . . 1,691 —
Operating income . . . . . . . . . . . . . . . . . . 25,246 38,588
Interest expense . . . . . . . . . . . . . . . . . . . . . (14,092) (18,642)
Interest income . . . . . . . . . . . . . . . . . . . . . . 947 1,118
Foreign exchange gain (loss) . . . . . . . . . . . . 4,574 7,502
Other income (expense), net . . . . . . . . . . . 1,899 (4,181)
Income from continuing operations
before income taxes and
extraordinary items . . . . . . . . . . . . . . . . . 18,574 24,386
Income tax benefit . . . . . . . . . . . . . . . . . . . 35,887 1,934
Income (loss) from discontinued
operation (Note 3) . . . . . . . . . . . . . . . . . (60) (644)
Extraordinary gain (Note 16) . . . . . . . . . . . — 2,104
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 54,402 $ 27,781
Head N.V. and Subsidiaries
Management’s Discussion and Analysis of
Financial Statements and Results of Operations
Head N.V. and Subsidiaries
Management’s Discussion and Analysis of
Financial Statements and Results of Operations
(continued)
10
Twelve Months ended December 31, 1999
and 2000:
Total Revenues
For the twelve months ended December 31, 2000, total rev-
enues increased by $9.9 million, or 2.5%, to $398.6 million
from $388.8 million in 1999. This increase was due to the con-
solidation of Penn for twelve months in 2000 versus seven
months in 1999 and, to a lesser extent, the revenues of our
snowboard business acquired in October 1999. Net of Penn
and the snowboard business, revenues decreased by $15.0
million, or 3.9%, to $373.7 million for the twelve months
ended December 31, 2000 from $388.8 million for the com-
parable 1999 period. This development should be seen in light
of the adverse impact of currency translation adjustments
resulting from the depreciation of the euro against the US dollar.
At comparable exchange rates, total revenues for the twelve
months ended December 31, 2000 increased by $50.8 million,
or 13.2% to $436.3 million from $385.5 million in 1999. Net of
Penn and snowboard, revenues at comparable rates increased
by $25.1 million, or 6.5% to $410.6 million for the twelve months
ended December 31, 2000 from $385.5 million in 1999.
For the Years ended
December 31,
1999 2000
(in thousands)
Product category:
Winter Sports . . . . . . . . . . . . . . . . . . . . . . . . $151,360 $144,542
Racquet Sports . . . . . . . . . . . . . . . . . . . . . . . 152,825 174,010
Diving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,691 72,232
Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,879 7,855
Total Revenues . . . . . . . . . . . . . . . . . . . . . $388,755 $398,639
Winter Sports revenues for the twelve months ended
December 31, 2000 decreased by $6.8 million, or 4.5%, to
$144.5 million from $151.4 million in 1999 mainly due to the
weakness of the euro against the US dollar. At comparable
exchange rates revenues from Winter Sports increased by
$12.5 million, or 8.4%, to $161.5 million for the twelve months
ended December 31, 2000 from $149.0 million in 1999. Net
of Blax and Generics, revenues from Winter Sports increased
by $9.0 million, or 6.0%, to $158.0 million for the twelve
months 2000 from $149.0 million in 1999. This improvement
results from the increased units sales of our skis (+7%), bind-
ings (+5%)and ski boots (+16%).
Racquet Sports revenues for the twelve months ended
December 31, 2000 increased by $21.2 million, or 13.9%, to
$174.0 million from $152.8 million in 1999. Of this increase
$21.8 million resulted from the consolidation of the Penn busi-
ness. At comparable exchange rates Racquet Sports products
revenues without Penn increased by $11.7 million, or 7.7%, to
$163.9 million for the twelve months ended December 31,
2000 from $152.2 million in 1999 due primarily to a 27.4%
increase in the number of units of tennis racquets sold, offset
by declines in sales of footwear.
Diving product revenues for the twelve months ended
December 31, 2000 decreased by $4.5 million, or 5.8%, to
$72.2 million from $76.7 million in 1999. This decrease was due
to the weak euro. At comparable exchange rates revenues
from diving increased by 4.3%.
Licensing revenues for the twelve months ended December
31, 2000 remained stable.
Gross Profit
For the twelve months ended December 31, 2000, gross
profit increased by $10.9 million, or 6.8%, to $171.2 million
from $160.3 million in 1999. Gross margin increased to 42.9%
in 2000 from 41.2% in 1999. The increase in gross margin is
due to favorable currency impact as a portion of our dollar
revenues are generated from products manufactured on a
euro cost basis.
Selling and Marketing Expenses
For the twelve months ended December 31, 2000, selling and
marketing expenses increased by $1.8 million, or 1.9%, to
$97.7 million from $95.9 million in 1999. This increase was
primarily due to selling and marketing expenses attributable
to the consolidation of Penn.
General and Administrative Expenses
For the twelve months ended December 31, 2000, general
and administrative expenses decreased by $3.4 million, or
9.3%, to $33.5 million from $36.9 million in 1999. Of this
decrease, $1.2 million was attributable to the gain on the sale
11
of a building used in operations in Italy. The balance was due
to the favorable euro/dollar impact as a majority of our expenses
are in euros.
We also recorded $1.4 million and $0.5 million for the twelve
months ended December 31, 2000 and 1999, respectively, of
non-cash compensation expense due to the grant of stock
options under our existing stock option plan and the resulting
amortization of compensation expense.
Operating Income
As a result of the foregoing factors, for the twelve months
ended December 31, 2000, operating income increased by
$13.3 million to $38.6 from $25.2 million in 1999.
Interest Expense
For the twelve months ended December 31, 2000, interest
expense increased by $4.6 million, or 32.3%, to $18.6 million
from $14.1 million in 1999. The increase was due to higher
levels of debt resulting from the Penn acquisition in May 1999
and the Senior Note offering in July 1999 as a portion of the
proceeds from this offering was used to refinance debt bear-
ing lower interest rates. The increase in interest expense was
offset, to a lesser extent, by the repayment of some of our
debts following the initial public offering, which took place in
October 2000.
Interest Income
For the twelve months ended December 31, 2000, interest
income increased by $0.2 million, or 18.0%, to $ 1.1 million
from $0.9 million in 1999.
Foreign Currency Exchange
For the twelve months ended December 31, 2000, primarily due
to the weakness of the euro against the US dollar, we had a for-
eign currency exchange gain of $7.5 million, compared to $4.6
million in 1999. We operate in a multi-currency environment
and are subject to the effects of fluctuation in exchange rates.
Other Income/(Expense)
For the twelve months ended December 31, 2000, we had
other expense of $4.2 million mainly attributable to the one
time payment to Austria Tabak compared to other income of
$1.9 million in 1999 primarily attributable to a profit resulting
from the disposal of a building in Italy in 1999.
Income Tax Benefit
For the twelve months ended December 31, 2000, we had an
income tax benefit of $1.9 million, a decrease of $34.0 million
from the same period in 1999. This decrease was due to the
recognition of non-cash deferred tax asset of $38.8 million in
1999 versus $5.2 million in 2000.
Extraordinary Gain
For the twelve months ended December 31, 2000 we
reported an extraordinary gain of $2.1 million which resulted
from a release of $3.0 million (net of $1.6 million of tax) of
accrued interest expense according to FAS15 following the
repayment of our restructured long-term loans in October
2000, partially offset by the write off of $0.9 million of capital-
ized debt issuance cost in connection with the refinancing of
our US-subsidiaries in April 2000.
Net Income
As a result of the foregoing factors, for the twelve months
ended December 31, 2000, we had a net income of $27.8 mil-
lion, compared to $54.4 million in 1999.
Liquidity and Capital Resources:
For the twelve months ended December 31, 2000, cash gen-
erated from operating activities decreased to $6.5 million
from $28.4 million in 1999, which is mainly due to increased
working capital requirements. The proceeds from operating
activities, cash on hand and net drawdowns of $25.2 million
under lines of credit were used to purchase property, plant
and equipment of $17.2 million, to repay a due portion of
senior loan in March 2000 of $2.7 million and to make a dividend
payment to Head Sports Holdings N.V. (our sole shareholder
at the time) of $15.7 million.
Net proceeds from our initial public offering of $134.4 million
were used to repay $63.3 million under our lines of credit, to
repay the outstanding portion of our senior loan of $29.9 mil-
lion, to repurchase senior notes of $30.0 million and to buy back
our ordinary shares of $5.2 million under an existing resolution.
Head N.V. and Subsidiaries
Consolidated Balance Sheets
December 31,
1999 2000
(in thousands, except shares)
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,948 $ 15,848
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 676 —
Accounts receivable, net of allowance for doubtful accounts of $10,054 and $10,509 . . . . . . . . . . . . . . . 157,987 158,424
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,295 83,701
Prepaid expense and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,796 12,894
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,702 270,867
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,347 2,174
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,503 60,943
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,900 19,850
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,889 72,168
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,320 8,301
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $434,660 $434,304
Liabilities and Stockholders’ Equity:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,286 $ 34,436
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,094 41,837
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,906 41,822
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,308 1,531
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,594 119,626
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,240 71,466
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,270 13,215
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352,104 204,307
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9
Commitments and contingencies (Note 18)
Stockholders’ Equity:
Ordinary shares: 0.01 NLG and 0.20EUR par value at 1999 and 2000, respectively;
24,227,820 and 39,820,677 shares issued at 1999 and 2000, respectively . . . . . . . . . . . . . . . . . . . . . . . 64 7,067
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,221 143,999
Treasury stock, at cost; 956,300 shares at 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (5,211)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,834 75,620
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,428 8,512
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,547 229,987
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $434,660 $434,304
The accompanying notes are an integral part of the consolidated financial statements.
12
13
Head N.V. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31,
1998 1999 2000
(in thousands, except per share data)
Revenues:
Product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $298,325 $380,876 $390,784
Licensing revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,178 7,879 7,855
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304,504 388,755 398,639
Cost of sales (the year ended December 31, 1999 included $2,187
related to the step-up of inventory from acquisitions—see Note 5) . . . . . . . . . . . . . . . . . 180,894 228,453 227,442
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,610 160,302 171,197
Selling and marketing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,551 95,906 97,743
General and administrative expense (excluding non-cash
compensation expense and restructuring charge) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,911 36,910 33,488
Non-cash compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 548 1,378
Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,691 —
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,127 25,246 38,588
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,573) (14,092) (18,642)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,349 947 1,118
Foreign exchange gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,279) 4,574 7,502
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459 1,899 (4,181)
Minority interests in earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 — —
Income from continuing operations
before income taxes and extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,084 18,574 24,386
Income tax benefit (expense):
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,812) (2,929) (3,231)
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 38,816 5,165
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,812) 35,887 1,934
Income from continuing operations before extraordinary items . . . . . . . . . . . . . . . . . . . . . . . 5,273 54,463 26,321
Income (loss) from discontinued operation (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 (60) (644)
Extraordinary gain (net of income tax of $1,559 in 2000—see Note 16) . . . . . . . . . . . . . . . 58,203 — 2,104
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,718 $ 54,402 $ 27,781
Earnings per share-basic
Income from continuing operations before extraordinary items . . . . . . . . . . . . . . . . . . . . . $ 0.26 $ 2.46 $ 0.94
Income (loss) from discontinued operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.01 (0.00) (0.02)
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.91 — 0.07
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.19 2.46 0.99
Earnings per share-diluted
Income from continuing operations before extraordinary items . . . . . . . . . . . . . . . . . . . . . $ 0.26 $ 2.23 $ 0.86
Income (loss) from discontinued operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.01 (0.00) (0.02)
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.88 — 0.07
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.15 2.23 0.91
Weighted average shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 22,132 28,071
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,232 24,370 30,679
The accompanying notes are an integral part of the consolidated financial statements.
Head N.V. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Retained Accumulated
Additional Earnings Other Total
Ordinary Shares Paid-in Treasury (Accumulated Comprehensive Stockholders’
Shares Amount Capital Stock Deficit) Income Equity
(in thousands, except per share data)
Balance at December 31, 1997 . . . . . . . . 20,000,000 $ 1,010 $ 9,609 $ — $(48,247) $11,705 $ (25,923)
Capital contributions . . . . . . . . . . . . . . . . — 53 2,212 — — — 2,265
Stock-based compensation . . . . . . . . . . . — — 21 — — — 21
Transfer of capital from registered
capital to capital contribution . . . . . . . — (1,010) 1,010 — — — —
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . — — — — 63,718 — 63,718
Foreign currency translation
adjustments . . . . . . . . . . . . . . . . . . . . . — — — — — (1,266) (1,266)
Comprehensive income . . . . . . . . . . . . . . 62,452
Balance at December 31, 1998 . . . . . . . . 20,000,000 53 12,853 — 15,471 10,439 38,816
Issuance of warrants . . . . . . . . . . . . . . . . — — 1,820 — — — 1,820
Stock-based compensation . . . . . . . . . . . — — 548 — — — 548
Consideration in excess of historical
cost of assets acquired from
common control entity . . . . . . . . . . . . 4,227,820 11 — — (5,040) — (5,029)
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . — — — — 54,402 — 54,402
Foreign currency translation
adjustments . . . . . . . . . . . . . . . . . . . . . — — — — — (7,951) (7,951)
Minimum pension liability . . . . . . . . . . . . — — — — — (60) (60)
Comprehensive income . . . . . . . . . . . . . . 46,391
Balance at December 31, 1999 . . . . . . . . 24,227,820 64 15,221 — 64,834 2,428 82,547
Dividend paid . . . . . . . . . . . . . . . . . . . . . . — — — — (15,717) — (15,717)
Stock-based compensation . . . . . . . . . . . — — 1,378 — — — 1,378
Conversion to a par value
from NLG 0.01 to euro 0.20 . . . . . . . — 4,414 (4,414) — — — —
Exercise of warrants . . . . . . . . . . . . . . . . 1,009,524 4 (4) — — — —
Purchase of treasury stock . . . . . . . . . . . (956,300) — — (5,211) — — (5,211)
Issuance of ordinary shares under public
offering, net of issuance costs . . . . . . . 14,583,333 2,585 131,817 — — — 134,402
Spin-off of London Films . . . . . . . . . . . . . — — — — (1,277) 632 (645)
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . — — — — 27,781 — 27,781
Foreign currency translation
adjustments . . . . . . . . . . . . . . . . . . . . . — — — — — 5,452 5,452
Comprehensive income . . . . . . . . . . . . . . 33,233
Balance at December 31, 2000 . . . 38,864,377 $7,067 $143,999 $(5,211) $75,620 $8,512 $229,987
The accompanying notes are an integral part of the consolidated financial statements.
14
15
Head N.V. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31,
1998 1999 2000
(in thousands)
Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,718 $ 54,402 $ 27,781
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,019 17,502 16,110
Provision for leaving indemnity and pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 716 1,399 772
Gain on sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (459) (438) (1,160)
Gain on debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58,203) — (2, 104)
Gain applicable to minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) — —
Non-cash interest expense (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,820 (1,023)
Non cash compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 548 1,378
Deferred tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (38,816) (5,165)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 89 (31)
Changes in operating assets and liabilities (net of effects of acquisitions):
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,447) (18,271) (7,457)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8, 841) ( 468) (13,277)
Prepaid expense and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,648 4,704 (31)
Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 14,093 5,973 (9,341)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,531 28,444 6,452
Investing Activities:
Purchase of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,459) (24,131) (20,571)
Proceeds from sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100 5,762 3,303
Acquisition of Dacor, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1, 892) — —
Acquisition of Penn, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (40,191) —
Other acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (753) —
Maturities (purchases) of marketable securities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (288) 2,783 90
Acquisition of minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (285) (987) —
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,824) (57,517) (17,178)
Financing Activities:
Change in short-term borrowings, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,804) (16,384) (38,032)
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,810 132,362 1,789
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,131) (71,047) (61,970)
Proceeds from initial public offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,265 — 134,402
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (5,211)
Dividend paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (15,717)
Change in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,428 (1,865) 4,812
Net cash provided by (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,432) 43,066 20,073
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 2,708 (4,401) (11,446)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,017) 9,592 (2,099)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,373 8,356 17,948
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,356 $ 17,948 $ 15,848
Supplemental Cash Flow Information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,622 $ 8,485 $ 17,283
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,418 $ 1,895 $ 3,230
Spin-off of London Films . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $645
The accompanying notes are an integral part of the consolidated financial statements.
Head N.V. and Subsidiaries
Notes to the Consolidated Financial Statements
Note 1—The Company
Head N.V. (“Head” or the “Company”) was incorporated in
Rotterdam, Netherlands, on August 24, 1998. With effect
from this date, Head Holding Unternehmensbeteiligung GmbH
(“Head Holding”) merged with a wholly owned subsidiary of
the Company in a transaction treated as a merger of entities
under common control and accounted for on an “as if pooling”
basis. As such, prior to August 24, 1998 the financial statements
presented herein reflect the operations of Head Holding
Unternehmensbeteiligung GmbH and its subsidiaries.
On January 1, 1996, Head Holding Unternehmensbeteiligung
GmbH, a subsidiary of Head N.V., acquired 100% of the out-
standing shares of HTM Sport- und Freizeitgeräte AG (HTM).
The acquisition has been accounted for as a purchase and
accordingly the operating results of HTM have been included
in the Company’s consolidated financial statements since the
date of acquisition. On June 6, 2000, in order to discharge any
current or future payment obligations under the share pur-
chase agreement by which the Company acquired HTM, the
Company made a payment of ATS 52.5 million ($3.5 million)
to the former owner of HTM and amended the share purchase
agreement. The terms of the share purchase agreement may
have entitled the former owner to 15% of any profits realized
on the subsequent sale of the HTM shares. The amendment
eliminated this provision. This payment is included in other
income (expense), net in the accompanying consolidated state-
ment of operations for the year ended December 31, 2000.
On June 15, 1999, entities controlled by the Company’s prin-
cipal shareholder contributed all of the outstanding share cap-
ital of London Films Ltd. to the Company. The transaction has
been accounted for on an “as if pooling” basis and, accord-
ingly, the combined financial statements have been presented
for all periods in which common control existed. The
Company issued 4,227,820 shares against this contribution in
kind. Subsequently, the Company contributed the shares in
London Films Ltd. in kind to its Austrian subsidiary, HTM
Sport- und Freizeitgeräte AG. London Films, a company duly
established in London, U.K., owns or has the rights to over
125 feature films and television programs, which it markets on
a world-wide basis. London Films was discontinued in 2000
(see Note 3—Discontinued operations).
The Company is engaged, through its subsidiaries, in the
design, engineering, manufacturing and marketing of a line of
alpine skis, boots, bindings and snowboards, tennis and squash
racquets, tennis balls, scuba and snorkel diving equipment and
tennis, squash and trekking footwear. The Company’s prod-
ucts are marketed globally under the internationally recog-
nized brand names of Head, Tyrolia, Mares, Penn, Dacor, San
Marco, Blax and Generics.
Note 2—Summary of Significant
Accounting Policies
Basis of Presentation
The Company maintains its accounting records and publishes
its statutory financial statements in accordance with Dutch
corporate regulations and has made certain adjustments to
these records to present the accompanying financial state-
ments in conformity with generally accepted accounting prin-
ciples in the United States of America.
Consolidation Policies
The consolidated financial statements of Head include the
accounts of all majority-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash and short-term,
highly liquid investments with an original maturity of three
months or less.
Restricted Cash
Restricted cash comprises deposits pledged as collateral on
outstanding lines of credit. The amounts are collateralized
with several financial institutions.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in first-out basis.
Marketable Securities
Debt securities are classified as held-to-maturity and are
reported at amortized cost.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and
includes expenditures for new facilities and expenditures
16
17
which substantially increase the useful lives of existing facilities.
The cost of maintenance, repair and minor renewals is
expensed as incurred. When plant and equipment is retired
or otherwise disposed, the cost and related accumulated
depreciation are eliminated, and any gain or loss on disposition
is recognized in earnings. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets.
Intangible Assets
Identifiable intangible assets comprise trademarks and good-
will. Trademarks are amortized using the straight-line method
over a period of 20 to 40 years. Goodwill is amortized using
the straight-line method over a period of 15 to 30 years. The
Company periodically reviews the carrying value of its intangi-
bles based primarily upon an analysis of undiscounted cash
flows. Any impairment would be recognized when the expected
future operating cash flows derived from such intangible
assets are less than their carrying value. The impairment to be
recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
Revenue Recognition
Revenues from product sales are recognized at the time of
product shipment, which represents transfer of title to the
customer. Revenues from licensing agreements are recognized
as earned. Provisions are recorded for estimated product
returns at the time revenues are recognized. Costs associated
with product shipment and handling are classified in selling and
marketing expense in the consolidated statement of operations.
Translation of Foreign Currency
Finished goods sales to customers in Austria, Italy, Germany,
Japan, France, Switzerland, Canada, Spain and the United
States of America are generally billed in local currency. The
local currency is the functional currency in these countries.
Foreign currency (functional currency) assets and liabilities are
translated into U.S. dollars (the reporting currency) at the
exchange rate on the balance sheet date, with resulting trans-
lation adjustments recorded in other comprehensive income.
Revenue and expenses are translated at average rates pre-
vailing during the year. Foreign exchange gains and losses
arising from transactions denominated in a currency other
than the functional currency are included in income. The
effect of exchange rate changes on intercompany transac-
tions of a long-term investment nature are included in
other comprehensive income.
Financial Instruments
The Company enters into forward foreign currency contracts
principally to hedge currency fluctuations in transactions denom-
inated in foreign currencies, thereby limiting the Company’s
risk that would otherwise result from changes in exchange
rates. The Company periodically enters into forward foreign
exchange contracts to hedge firm commitments and it buys
foreign exchange options contracts to hedge anticipated trans-
actions. Gains and losses on purchased option contracts and
forward foreign exchange contracts are deferred and recorded
in the period in which the underlying sales transactions are
recognized. The Company does not utilize financial instruments
for trading or speculative purposes.
Research and Development Costs
Research and development costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred.
Stock-Based Compensation
The Company accounts for its stock option plan using the fair
value method in accordance with Statement of Financial
Accounting Standards No. 123 (“SFAS 123”), Accounting for
Stock-Based Compensation.
Debt Issuance Costs
Debt issuance costs are capitalized and amortized over the
term of the debt.
Income Taxes
The provision for income taxes is based on income recog-
nized for financial statement purposes and includes the effects
of temporary differences between such income and that rec-
ognized for tax return purposes. With the exception of Head
Holding Unternehmensbeteiligung GmbH, all of the Company’s
Austrian subsidiaries are included in a consolidated Austrian
federal income tax return. Separate provisions for income taxes
have been prepared for the Company’s other subsidiaries.
Share Split
In October 2000, the Company effected a two-for-one stock
split of its ordinary shares. All references in the consolidated
financial statements and notes thereto to numbers of shares
and per share amounts have been restated to reflect the
stock split.
Computation of Net Income per Share
Net income per share is computed under Statement of
Financial Accounting Standards No. 128, Earnings per Share.
Basic net income per share is computed by dividing the net
income for the period by the weighted average number of
ordinary shares outstanding during the period. Diluted net
income per share is computed by dividing the net income for
the period by the weighted average number of ordinary
shares and potential ordinary shares outstanding during the
period. Potential ordinary shares are composed of incremen-
tal shares issuable upon the exercise of share options and
warrants, and are included in diluted net income per share to
the extent such shares are dilutive.
The following table sets forth the computation of diluted
weighted average shares outstanding for the periods indicated:
For the Years Ended
December 31,
1998 1999 2000
(in thousands)
Weighted average shares
outstanding—basic . . . . . . . . . . . . 20,000 22,132 28,071
Dilutive effect of stock options . . . . 70 1,402 1,858
Dilutive effect of warrants . . . . . . . . 162 836 750
Weighted average shares
outstanding—diluted . . . . . . . . . . 20,232 24,370 30,679
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
of America 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.
Reclassifications
Certain reclassifications have been made in prior years’ con-
solidated financial statements to conform to classifications
used in the current year.
Recent Accounting Pronouncements
Statement of Financial Accounting Standard No. 133 ’Account-
ing for Derivative Instruments and Hedging Activities’ (“SFAS
133”), as amended by FAS 138 is effective for fiscal years
beginning after 15 June 2000, (1 January 2001 for the
Company). The standard requires that all derivative financial
instruments be recorded on the Consolidated Balance Sheet
at their fair values. Changes in fair values of derivative will be
recorded each period in earnings, other comprehensive
income, or the cumulative translation adjustment in equity
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction.
For cash-flow transactions in which the Company is hedging the
variability of cash flows related to variable-rate asset, liability,
firm commitment (for foreign currency cash flow hedging) or
a forecasted transaction, changes in the fair value of the hedging
instrument that are reported initially in other comprehensive
income will be reclassified into earnings in the periods in
which earnings are impacted by the variability of the cash
flows of the hedged items. The ineffective portions of all
hedges will be recognized in current-period earnings.
On January 1, 2001, the Company will record a transition
adjustment in its accounting records to bring the accounting
for its derivatives into compliance with SFAS 133. The Company
estimates that it will record a net-of-tax-effect-type adjust-
ment of $1.8 million in accumulated other comprehensive
income to recognize at fair value all derivative instruments
that will be designated as cash-flow hedging instruments.
At this time, Head NV plans no significant change in its risk
management strategies due to the adoption of SFAS 133.
Head N.V. and Subsidiaries
Notes to the Consolidated Financial Statements (continued)
18
19
Note 3—Discontinued Operations
In August 2000, the Company granted its parent and 100%
shareholder, Head Sports Holdings N.V., the option to receive
all outstanding shares of London Films as a shareholder distri-
bution. Head Sports Holdings N.V. is controlled by Johan
Eliasch. On October 31, 2000, London Films, with net assets
of $0.6 million, was distributed in accordance with this option.
The results of operations of London Films have been pre-
sented as a discontinued operation in the accompanying con-
solidated statements of operations for the years ended
December 31, 1998, 1999 and 2000. Revenues of London
Films were $1.2 million, $1.5 million and $0.5 million for the
years ended December 31, 1998, 1999 and 2000, respectively.
No income tax expense has been recorded on the income
from discontinued operations due to the availability of net
operating loss carryforwards.
Note 4—U.S. Sportswear Business
During 1995, the Company announced a plan to discontinue
its U.S. sportswear manufacturing and distribution business
and to enter into an agreement whereby Head Sportswear
would be manufactured under license in the U.S. Included in
operating income are the following revenues and costs
incurred in connection with the discontinuation of the U.S.
sportswear business and the establishment of a licensing
agreement (in thousands):
For the Years Ended
December 31,
1998 1999 2000
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $1,985 $— $—
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 1,378 — —
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 607 — —
Selling and marketing expenses . . . . . . . . 378 — —
General and administrative expense . . . . . 267 — —
Operating loss . . . . . . . . . . . . . . . . . . . . . . $ (38) $— $—
In March 1998, the Company entered into two U.S. sports-
wear licensing agreements. The agreements are for a term of
5 years and provide for the Company to receive minimum
royalties totaling approximately $5.5 million over the term of
the agreements.
Note 5—Acquisitions
Dacor Acquisition
On November 19, 1998, one of the Company’s subsidiaries
acquired 100% of the outstanding common stock of Dacor
Corporation, a U.S. manufacturer of diving equipment, for a
purchase price of approximately $2.3 million. The allocation of
purchase price included approximately $1.6 million of restruc-
turing and transaction costs (primarily severance and equip-
ment relocation costs associated with the shut down of Dacor’s
facility and professional fees) and inventories with a fair market
value of approximately $5.6 million (approximately $1.0 million
greater than cost which has been charged to cost of sales in
1999). The excess of purchase price over the fair value of net
assets acquired of approximately $1.8 million, was allocated to
goodwill and is being amortized over 30 years.
The acquisition has been accounted for as a purchase and,
accordingly, the operating results of Dacor have been included
in the Company’s consolidated financial statements since the
date of acquisition. Post acquisition, the business contributed a
loss of approximately $0.2 million to consolidated net income
for the year ended December 31, 1998.
Penn Acquisition
Effective May 1, 1999, one of the Company’s subsidiaries
acquired the outstanding common stock of Penn Racquet
Sports, Inc. for an aggregated purchase price of approximately
$40.6 million.
Penn manufactures and distributes tennis balls and racquetball
balls. The acquisition has been accounted for as a purchase
and, accordingly, the operating results of Penn have been
included in the Company’s consolidated financial statements
since the date of acquisition. The acquisition was funded by
borrowings under a $50.0 million revolving loan agreement.
The allocation of purchase price included trademarks of $19.1
million, which are being amortized over 20 years. The alloca-
tion of purchase price also included $1.3 million of exit costs,
employee termination and relocation costs and professional
fees and inventories with a fair market value of approximately
$7.9 million (approximately $1.2 million greater than cost
which has been charged to cost of sales in 1999). The excess
of the fair value of net assets acquired over purchase price
was proportionately allocated to non-current assets.
The following unaudited pro forma consolidated results of
operations have been prepared as if the acquisition had
occurred as of January 1, 1999. The pro forma data give effect to
actual operating results prior to the acquisition and adjustments
to revenue, cost of sales, interest expense and amortization.
For the Year Ended
December 31,
1999
(in thousand,
except per share data)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $411,185
Operating income . . . . . . . . . . . . . . . . . . . . . . . 26,806
Income from continuing operations
before income taxes and
extraordinary items . . . . . . . . . . . . . . . . . . . . 18,477
Income from continuing operations
before extraordinary items . . . . . . . . . . . . . . 53,686
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,686
Earnings per share—basic
Income from continuing operations
before extraordinary items . . . . . . . . . . . . $ 2.43
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.43
Earnings per share—diluted
Income from continuing operations
before extraordinary items . . . . . . . . . . . . $ 2.20
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.20
To fund the Penn acquisition, one of the Company’s sub-
sidiaries entered into a $50.0 million revolving loan agreement
(the “US loan agreement”). Borrowings under the loan are
secured by substantially all of the assets of the Company’s US
subsidiaries, and accrue interest at prime plus 1.5% for the first
90 days and at either prime plus 1.5% or LIBOR plus 2.75%
thereafter. In July 1999, the Company repaid all borrowings
Head N.V. and Subsidiaries
Notes to the Consolidated Financial Statements (continued)
20
21
under this agreement and reduced the available amount to
$20.0 million. In April 2000, the Company replaced the
Agreement with a $20.0 million, three-year, renewable term
Loan and Security Agreement with Fleet Capital Corporation
under similar terms.
Note 6—Accounts Receivable
Accounts receivable consist of the following (in thousands):
December 31,
1999 2000
Trade debtors . . . . . . . . . . . . . . . . . . . . . . . $149,157 $149,202
Other receivables . . . . . . . . . . . . . . . . . . . . 18,884 19,731
Allowance for doubtful accounts . . . . . . . . (10,054) (10,509)
Total Accounts receivable, net . . . . . . . . $157,987 $158.424
Note 7—Inventories
Inventories consist of the following (in thousands):
December 31,
1999 2000
Raw materials and supplies . . . . . . . . . . . . . $ 19,074 $ 21,409
Work in process . . . . . . . . . . . . . . . . . . . . . 9,379 5,573
Finished goods . . . . . . . . . . . . . . . . . . . . . . . 60,469 68,191
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,627) (11,472)
Total Inventories, net . . . . . . . . . . . . . . . $ 78,295 $ 83,701
Note 8—Marketable Securities
Marketable securities consist of the following (in thousands):
December 31,
1999 2000
Austrian government debt securities . . . . . . $ 960 $ 709
Austrian debt security funds . . . . . . . . . . . . . 1,239 1,206
Corporate debt securities . . . . . . . . . . . . . . . 326 315
Total Marketable securities . . . . . . . . . . . . $2,525 $2,230
Less: short-term portion . . . . . . . . . . . . . (178) (56)
Total long-term marketable securities . . . . $2,347 $2,174
Maturities of debt securities are as follows (in thousands):
December 31,
1999 2000
Mature within 1 year . . . . . . . . . . . . . . . . . . . . . . . $ 178 $56
Mature between one year and five years . . . . . . 1,108 968
Mature between five years and ten years . . . . . . 1,239 1,206
Mature after ten years . . . . . . . . . . . . . . . . . . . . . — —
Total Marketable securities . . . . . . . . . . . . . . . . $2,525 $2,230
Marketable securities with a maturity of less than one year are
included in other current assets in the accompanying consoli-
dated balance sheets.
As of December 31, 2000, debt securities were restricted as
to withdrawal by Austrian regulations requiring that a percent-
age of leaving indemnity plan assets are maintained in discounted
Austrian government and Austrian corporate debt securities.
Note 9—Property, Plant and Equipment
Property, plant and equipment consist of the following
(in thousands):
December 31,
1999 2000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,132 $ 4,608
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,899 19,780
Machinery and equipment . . . . . . . . . . . . . . 82,241 90,200
105,272 114,588
Less: Accumulated depreciation . . . . . . . . . . (45,768) (53,645)
Total Property, plant and equipment, net $ 59,503 $ 60,943
The useful lives used in computing depreciation are as follows:
Ye a r s
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10–48
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 2–20
Note 10—Intangible Assets
Intangible assets consist of the following (in thousands):
December 31,
1999 2000
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . $19,066 $19,066
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,528 2,528
21,594 21,594
Less: Accumulated amortization . . . . . . . . . . (694) (1,744)
Total Intangible assets, net . . . . . . . . . . . . $20,900 $19,850
Intangible assets in the amount of $ 38.7 million were reduced
as of December 31, 1999 as a result of the release of valua-
tion allowances against deferred assets (see Note 20—
Income taxes).
Note 11—Credit Risk Concentrations
Financial instruments which potentially subject the Company
to significant concentrations of credit risk consist primarily of
cash and cash equivalents, restricted cash, marketable securities
and accounts receivable. The Company places cash with high
quality financial institutions. The Company’s customers are
concentrated in the retail industry, however, concentrations of
credit risk with respect to trade accounts receivable are limited
due to the large number of customers and their dispersion
across many geographic areas. The Company generally performs
credit reviews and sometimes obtains credit insurance before
extending credit.
No customer accounted for greater than 4.0% of total revenues
during the years ended December 31, 1998, 1999 and 2000.
Note 12—Fair Value of
Financial Instruments
The carrying value of the Company’s financial instruments
approximates fair value at December 31, 1999 and 2000. The
carrying amounts reported in the consolidated balance sheet
for cash and cash equivalents, restricted cash, accounts receiv-
able, accounts payable and accrued expenses approximate fair
value due to the short maturity of these instruments. The car-
rying amounts of marketable securities approximate fair value
based on quoted market prices.
The carrying amounts of the Company’s short-term borrow-
ings and senior debt approximate fair value because the interest
rates are primarily based upon floating rates identified by
reference to market rates.
The carrying value of the Company’s senior notes and other
long-term debt approximate fair value based on current rates
being offered and quoted market prices of debt with similar terms.
The table below provides information about our forward for-
eign exchange contracts and foreign exchange option con-
tracts which we use to manage our exposures to fluctuations
in foreign currency exchange rates (in thousands):
As of December 31, 2000
Contract Carrying Fair
amount value value
Forward foreign exchange contracts . . $15,001 $(77) $1,575
Foreign exchange option contracts . . $ 2,618 $ — $ 275
The fair values of foreign currency contracts and options pre-
sented above are estimated by obtaining quoted market prices.
Head N.V. and Subsidiaries
Notes to the Consolidated Financial Statements (continued)
22
23
Note 13—Short-Term Borrowings
Short-term borrowings consist of the following (in thousands):
December 31,
1999 2000
Lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . $82,871 $39,567
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 11,035 2,255
Total Short-term borrowings . . . . . . . . . . . . $93,906 $41,822
The Company has multiple revolving lines of credit with several
banks. Interest under these lines is determined based on the
bank’s prime rates or other variable rates. As of December 31,
1999 and 2000, approximately $29.3 million and $65.3 million,
respectively, was available under the lines. Borrowings under
the lines of credit are either unsecured or secured by cash
deposits, trade accounts receivable, inventories, patents and
trademarks of the Company.
Notes payable comprise discounted promissory notes issued
by the Company’s Japanese subsidiary. The notes bear interest
at 3.0% and are for a term of less than one year.
The weighted average interest rate on outstanding short-term
borrowings was 4.2% and 4.4% as of December 31, 1999 and
2000, respectively.
Note 14—Accounts Payable
Accounts payable consist of the following (in thousands):
December 31,
1999 2000
Accounts payable—trade . . . . . . . . . . . . . . . . . $27,486 $22,390
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . 1,950 2,344
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 732 263
Fiscal authorities . . . . . . . . . . . . . . . . . . . . . . . . . 2,320 2,344
Social institutions . . . . . . . . . . . . . . . . . . . . . . . . 1,093 1,015
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,705 6,080
Total Accounts Payable . . . . . . . . . . . . . . . . . $36,286 $34,436
Note 15—Accrued Expenses and Other
Current Liabilities
Accrued expenses and other current liabilities consist of the
following (in thousands):
December 31,
1999 2000
Employee compensation and benefits . . . . . . . $ 6,720 $ 7,513
Accrued warranties and allowances . . . . . . . . . 6,761 7,618
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,843 3,030
Legal, auditing and consultant fees . . . . . . . . . . 4,489 1,697
Fiscal authorities . . . . . . . . . . . . . . . . . . . . . . . . . 3,806 1,294
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,416 3,341
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . 5,532 3,605
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,527 13,739
Total Accrued expenses and
other current liabilities . . . . . . . . . . . . . . . . . . $56,094 $41,837
Note 16—Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31,
1999 2000
Senior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,086 $—
Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . 100,460 64,206
Other long-term debt . . . . . . . . . . . . . . . . . . . 15,002 8,791
Total long-term borrowings . . . . . . . . . . . . 152,548 72,997
Less current portion . . . . . . . . . . . . . . . . . . 5,308 1,531
Long-term portion . . . . . . . . . . . . . . . . . . . $147,240 $71,466
Senior debt
As of December 31, 1999 senior debt comprised amounts
owing to a consortium of Austrian banks denominated as fol-
lows (in thousands):
December 31,
1999 2000
Deutsche Mark . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,835 $—
Swiss Franc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,857 —
Italian Lira . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,394 —
Total senior debt . . . . . . . . . . . . . . . . . . . . . . . . $37,086 $—
Amounts outstanding at December 31, 1999 accrued interest
at LIBOR plus 75 basis points (DEM 3.9%, CHF 2.6% and ITL
3.9% as of December 31, 1999). Senior debt borrowings were
secured by the Head and Tyrolia trademarks, trade accounts
receivable, inventories and patents. The weighted average
interest rate on outstanding senior debt was 3.6% as of
December 31, 1999. Senior debt borrowings were repaid in
October 2000 using proceeds from the initial public offering.
Bridge notes
On June 2, 1998, one of the Company’s subsidiaries, Head
Holding Unternehmensbeteiligung GmbH, entered into a
$15.0 million senior credit agreement (tranche A bridge note).
On December 29, 1998, the agreement was amended and
restated to include a $8.0 million tranche B bridge note. The
proceeds from the bridge notes were primarily used to repay
a portion of the Company’s indebtedness. Interest initially
accrued on outstanding borrowings at 3 month LIBOR plus 475
basis points (increasing by 50 basis points every 90 days), not to
exceed 15.0% (10.97% as of December 31, 1998). The bridge
loan and the accrued interest totaling $25.5 million was repaid
on July 15, 1999 using the proceeds from the Senior Notes.
In conjunction with the bridge note financings, the Company
issued warrants to purchase a total of 7.65% of its ordinary
shares at $0.01 per share. The warrants were placed in
escrow and were to be released to the lenders periodically in
the event that the bridge notes were not repaid by specified
dates. During the years ended December 31, 1998 and 1999,
warrants to purchase 3.00% and 1.06% of the Company’s
ordinary shares were released from escrow. The warrants
were immediately exercisable upon release and expire 10
years from the date of issuance. The Company assigned an
estimated fair value to each of the warrants at the time of
their release and recorded this value as interest expense in
the consolidated statements of operations. Because the bridge
notes were repaid out of the proceeds of the July 15, 1999
issuance of Senior Notes, warrants representing 3.59% of the
Company’s ordinary shares that remained in escrow were
cancelled. On September 28, 2000 warrants representing
4.06% of the Company’s common equity (1,009,524 ordinary
shares) were exercised as part of the initial public offering and
issued to the holders.
Head N.V. and Subsidiaries
Notes to the Consolidated Financial Statements (continued)
24
25
Senior Notes
On July 15, 1999 one of the Company’s subsidiaries, Head
Holding Unternehmensbeteiligung GmbH, issued €100.0 million
(approximately $101.7 million as at July 15, 1999) of Senior
Notes. Proceeds of the offering were used to repay existing
indebtedness (including the US loan agreement, bridge notes
and lines of credit) and for general corporate purposes.
The notes bear interest of 10.75% per annum, which is
payable semi-annually and mature in total on July 15, 2006.
Among other restrictions, the notes include certain restrictive
terms regarding investments, distributions and incurrence of
additional indebtedness by the Company.
On January 5, 2000 a registration statement for the exchange
of the original 10.75% Senior Notes (“Original Notes”) for
new 10.75% Senior Notes (“Exchange Notes”) was made
effective by the U.S. Securities Exchange Commission (SEC).
On February 9, 2000, the Exchange Offer was consummated.
In October 2000, Head Holding Unternehmensbeteiligung
GmbH, a 100% owned subsidiary of the Company, repur-
chased €30.9 million of its Senior Notes in a series of trans-
actions using part of the proceeds of the Company’s initial
public offering.
Loan and Security Agreement
In April 2000, the Company’s subsidiaries, Head USA, Inc.,
Mares America Corporation, Penn Racquet Sports, Inc. and
Dacor Corporation, entered into a $20.0 million, three-year,
renewable term Loan and Security Agreement with Fleet
Capital Corporation and other financial institutions providing
for a revolving loan facility and a letter of credit facility. The
agreement is secured by substantially all the assets of Head
USA, Inc., Mares America Corporation, Penn Racquet Sports,
Inc. and Dacor Corporation, including inventory, accounts
receivable, and the Penn trademarks and patents (collectively
the “collateral”). The amount the Company is eligible to bor-
row is based upon a percentage of certain eligible collateral
but will not exceed $20.0 million. Borrowings bear interest at
either a Base Rate or a LIBOR Rate, each as defined in the
agreement, plus an applicable margin. There are no borrow-
ings under this line as of December 31, 2000. The extinguish-
ment of the prior credit facility (see Note 5) and the write off
of deferred financing fees resulted in a loss of $0.9 million.
This is presented in the consolidated statement of operations
under extraordinary items.
Other long-term debt
Other long-term debt comprises loans outstanding with sev-
eral banks. The weighted average interest rate on outstanding
borrowings was 4.98% and 5.61% as of December 31, 1999
and 2000, respectively. Borrowings mature at various dates
through 2005.
Maturities of long-term debt
Aggregate maturities of long-term debt are as follows
(in thousands):
December 31,
2000
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,531
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,265
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,034
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,164
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,035
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,968
$72,997
Debt restructuring
On June 4, 1998, the Company entered into an agreement
with an Austrian bank whereby the bank agreed to forgive
outstanding short-term debt of approximately $6.0 million. In
accordance with the terms of the agreement, the Company
repaid remaining indebtedness of approximately $6.3 million
on June 5, 1998.
On June 8, 1998, the Company entered into an agreement
with a consortium of Austrian Banks whereby the banks
agreed to forgive outstanding senior debt, other long-term
debt and line of credit principal claims totaling approximately
$53.3 million and interest totaling approximately $13.6 million.
The debt restructuring has been accounted for in accordance
with Statement of Financial Accounting Standards No. 15
(“SFAS 15”), Accounting by Debtors and Creditors for
Troubled Debt Restructurings. In accordance with SFAS 15,
remaining indebtedness was recorded as the sum of all future
principal and interest payments and accordingly, interest
expense is no longer recognized on the restructured debt.
The Company recorded an extraordinary gain on debt
restructuring of approximately $58.2 million, net of restructur-
ing expenses. The extraordinary gain was calculated as follows
(in thousands):
Outstanding principal at restructuring . . . . . . . . . . . . . $ 185,869
Accrued interest at restructuring . . . . . . . . . . . . . . . . . 13,588
Future principal payments . . . . . . . . . . . . . . . . . . . . . . . (126,582)
Future interest payments (included in
remaining indebtedness) . . . . . . . . . . . . . . . . . . . . . . (11,055)
Debt restructuring expenses . . . . . . . . . . . . . . . . . . . . . (3,617)
$ 58,203
No income tax expense was recorded on the extraordinary
gain due to the availability of net operating loss carryforwards
for the year ended December 31, 1998.
In the fourth quarter of 2000, the Company repaid all of the
restructured debt using part of the proceeds of the Company’s
initial public offering. The gain on the extinguishment of the
restructured debt of $3.0 million, net of income tax expense
of $1.6 million has been recorded as an extraordinary item.
Note 17—Other Long-Term Liabilities
The Company funds leaving indemnities and pension liabilities
paid to employees at some Austrian and other European loca-
tions. The indemnities are based upon years of service and
compensation levels and are generally payable upon retire-
ment or dismissal in some circumstances, after a predeter-
mined number of years of service. The Company maintains
sufficient assets to meet the minimum funding requirements
set forth by the regulations in each country. Total leaving
indemnity expense was $2.9 million, $2.4 million and $0.8
million for the years ended December 31, 1998, 1999 and
2000, respectively.
Indemnity liabilities total approximately $10.5 million and $9.6
million at December 31, 1999 and 2000, respectively. The
Company assumes a weighted average annual rate of increase
in salaries of 3.0% per annum. The leaving indemnity liability
was determined using a weighted average discount rate of
6.0% in 1999 and 2000.
Note 18—Commitments and Contingencies
Operating Leases
The Company leases certain office space, warehouse facilities,
transportation and office equipment under operating leases
which expire at various dates through 2004. Rent expense
was approximately $2.5 million, $2.8 million and $2.3 million
for the years ended December 31, 1998, 1999 and 2000,
respectively. The Company also leases certain manufacturing
equipment under capital leases. Capital lease obligations are
not significant as of December 31, 1999 and 2000.
Future minimum payments under non-cancellable operating
leases with initial or remaining lease terms in excess of one
year are as follows as of December 31, 2000 (in thousands):
December 31,
2000
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,292
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,588
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,110
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662
$6,314
Litigation
From time to time the Company and its subsidiaries are
involved in legal proceedings, claims and litigation arising in the
ordinary course of business. In the opinion of management it
is not possible to reasonably estimate the outcome of current
legal proceedings, claims and litigation. However, management
believes that the resolution of these matters will not materially
affect the Company’s financial position.
In March 1998, a competitor filed suit against the Company’s
US subsidiary alleging patent infringement in connection with
the Head Titanium Tennis racket. The case was settled in
April 2000 and the accrual for the estimated settlement cost
was released.
Head N.V. and Subsidiaries
Notes to the Consolidated Financial Statements (continued)
26
27
In July 1996 the European Commission released a decision
allowing the contribution received by HTM Sport- und
Freizeitgeräte AG (HTM) from Austria Tabak (former owner)
as restructuring aid that was compatible with the European
Union’s state aid rules. In that decision, the European
Commission imposed capital contribution requirements on
HTM. The Commission’s decision was appealed by two of
HTM’s competitors. On October 6, 1999, the Court of First
Instance of the European Communities upheld the European
Commission’s decision. No appeal was filed to the decision of
the Court of First Instance within the statutory appeal period.
In connection with the Senior Notes offering in July 1999,
$18.8 million was contributed downstream as additional capital
to HTM in order to satisfy in full the remainder of the capital
contribution requirement imposed by the European Commission.
Note 19—Registered Capital
The Company is a Naamloze Vennootschap (“N.V.”), a limited
liability company under Dutch law. The registered capital of a
N.V. is in the form of shares which represent negotiable secu-
rities. The minimum registered and authorised capital require-
ment is NLG 500,000 (approximately $0.23 million) and the
minimum paid in capital requirement for a N.V. is NLG 100,000
(approximately $0.05 million).
In August 1998, Head Holding Unternehmensbeteiligung
GmbH (“Head Holding”) merged with a wholly-owned sub-
sidiary of the Company in a transaction treated as a merger of
entities under common control and accounted for on an “as if
pooling” basis. The number of shares of the Company as of
the date of the merger have been retroactively effected in the
financial statements for all periods prior to the merger.
As of February 17, 2000, Head N.V. made a dividend payment
in the aggregate amount of €16.1 million ($15.7 million) to its
sole shareholder Head Sports Holdings N.V.
In August and September 2000, our shareholders resolved to
amend our articles of association at a general meeting of
shareholders. Upon this amendment becoming effective on
October 3, our ordinary shares were split on a two for one
basis and converted to a par value of €0.20 each from NLG
0.01. At December 31, 2000 99,551,692 and 39,820,677
shares were authorized and issued, respectively.
Pursuant to existing resolutions which were approved in
August 2000, the Company is authorized to buy back 10% of
its outstanding share capital over the next fifteen months to
support the share price. Between November 12, 2000 and
December 15, 2000 the Company purchased 956,300 shares
of treasury stock at the prevailing price in the total amount of
$5.2 million.
Note 20—Income Taxes
The following table summarizes the significant differences
between the Dutch federal statutory tax rate and the
Company’s effective tax rate for financial statement purposes.
For the Years Ended
December 31,
1998 1999 2000
Dutch statutory tax rate . . . . . . . . 35.0% 35.0% 35.0%
Tax rate differential . . . . . . . . . . . . . (0.8) 31.5 (3.3)
Austrian capital credit . . . . . . . . . . (3.8) — —
Permanent differences . . . . . . . . . . 6.3 0.1 0.4
Other . . . . . . . . . . . . . . . . . . . . . . . — 1.2 1.4
Valuation allowance . . . . . . . . . . . . (11.2) (261.1) (41.5)
Effective tax rate . . . . . . . . . . . . . . 25.5% (193.1)% (7.9)%
Deferred tax assets (liabilities) consist of the following as of
December 31, 1999 and 2000 (in thousands):
December 31,
1999 2000
Short-term:
Deferred tax asset:
Tax loss carried forward . . . . . . . . . . . . . . . . . $10,371 $ 8,631
Inventory reserve . . . . . . . . . . . . . . . . . . . . . . 1,390 1,229
Other short-term liabilities . . . . . . . . . . . . . . . 1,864 1,404
Reserve for doubtful accounts . . . . . . . . . . . . 2,379 2,096
Debt restructuring . . . . . . . . . . . . . . . . . . . . . 2,158 —
Total short-term deferred tax assets . . . . 18,163 13,360
Deferred tax liabilities:
Deferred expenses . . . . . . . . . . . . . . . . . . . . . $ (2,087) $(1,638)
Other short-term receivables . . . . . . . . . . . . (205) (757)
Foreign currency exchange differences . . . . . (1,941) (149)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . — (71)
Total short-term deferred tax liability . . . . (4,233) (2,615)
Valuation allowance . . . . . . . . . . . . . . . . . . . . (6,965) (2,453)
Total short-term net deferred tax asset . . $ 6,965 $ 8,293
December 31,
1999 2000
Long-term:
Deferred tax asset:
Tax loss carried forward . . . . . . . . . . . . . . . $146,650 $107,231
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,131 461
Total long-term deferred tax assets . . . . 147,782 107,692
Deferred tax liabilities:
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,651) $ (11,977)
Other long-term receivables . . . . . . . . . . . . (752) (2,035)
Foreign currency exchange differences . . . . (10) (157)
Total long-term deferred tax liability . . . (8,413) (14,169)
Valuation allowance . . . . . . . . . . . . . . . . . . . (69,479) (21,355)
Total long-term net deferred tax asset . . $ 69,889 $ 72,168
The Company has net operating loss carryforwards of approx-
imately $393.0 million and $329.5 million, (both net of restricted
portion due to the EC decision of $53.4 million) as of December
31, 1999 and 2000, respectively. These net operating losses
are available in the following jurisdictions (in thousands):
December 31,
1999 2000
Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $331,871 $275,964
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,411 7,376
Other Europe . . . . . . . . . . . . . . . . . . . . . . . . 3,406 1,538
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,734 17,735
North America . . . . . . . . . . . . . . . . . . . . . . 21,539 26,862
$392,962 $329,476
In July 1996 the EC limited the utilization of certain net oper-
ating losses (approximately $53.4 million as of December 31,
2000). These net operating losses and any related deferred
tax asset are not included in the above amounts due to
the limitation.
In light of the Company’s recent and planned profitability, the
Company released a substantial portion of the valuation
allowance in both 1999 and 2000 relating to operating losses.
In 1999, the tax benefits were first applied to reduce other
non-current intangible assets, resulting from the date of acqui-
sition on January 1, 1996, from $38.7 million to zero. The
additional tax benefits were recognized as deferred income
tax benefit in the amount of $38.8 million and $3.6 million in
the years ended December 31,1999 and 2000, respectively.
Austria and Germany allow an unlimited carryover of net
operating losses, whereas Japan and the United States allow
5 and 15 year carryovers, respectively.
Head N.V. and Subsidiaries
Notes to the Consolidated Financial Statements (continued)
28
29
Note 21—Research and Development
Expense
The Company incurred research and development expense in
the amount of $10.1 million, $9.2 million and $9.1 million for
the years ended December 31, 1998, 1999 and 2000, respec-
tively. Research and development expense is included in cost of
sales in the accompanying consolidated statements of operations.
Note 22—Advertising Expense
The Company incurred advertising costs of $23.9 million,
$29.7 million and $30.2 million for the years ended December
31, 1998, 1999 and 2000, respectively. Advertising expense is
included in selling and marketing expense in the accompanying
consolidated statements of operations.
Note 23—Segment Information
The Company operates in one industry segment, Sporting
Goods. The activities related to the operations of London
Films Ltd. were reported as “Income (loss) from discontinued
operations” for the years ended December 31, 1998, 1999
and 2000 and the segment information for 1998 and 1999 has
been adjusted to reflect this.
The tables below show revenues from external customers
and long-lived assets by geographic region (in thousands):
For the Years Ended December 31,
1998 1999 2000
Revenues from External Customers:
Austria . . . . . . . . . . . . . . . . . . . $ 55,429 $ 68,042 $ 67,419
Italy . . . . . . . . . . . . . . . . . . . . . . 76,519 73,126 66,866
Germany . . . . . . . . . . . . . . . . . . 41,312 50,642 42,893
France . . . . . . . . . . . . . . . . . . . . 30,417 33,963 30,646
Japan . . . . . . . . . . . . . . . . . . . . . 15,566 23,449 20,809
Other (Europe) . . . . . . . . . . . . 26,388 32,605 38,518
North America . . . . . . . . . . . . 58,871 106,929 131,486
Total revenues . . . . . . . . . . . $304,504 $388,755 $398,639
December 31,
1999 2000
Long lived assets:
Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,339 $18,645
Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,035 19,021
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390 1,205
France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 273
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,821 1,619
Other (Europe) . . . . . . . . . . . . . . . . . . . . . . . . . 9,443 8,163
North America . . . . . . . . . . . . . . . . . . . . . . . . . 11,280 12,018
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $59,503 $60,943
Note 24—Related Party Transactions
The Company receives administrative services from a corpo-
ration which is ultimately owned by the majority shareholder
of the Company. Administrative expenses amounted to
approximately $0.1 million, $0.6 million and $0.2 million for
the years ended December 31, 1998, 1999 and 2000.
In 1998, the Company received consulting services from a
member of the Board of Directors of one of the Company’s
subsidiaries, HTM Sport- und Freizeitgeräte AG. In accordance
with the terms of a consulting agreement, the director
received an advisory fee of $0.02 million per month plus suc-
cess fees in certain circumstances equal to an amount to be
agreed upon between the Company and the director. The
Company included an accrual of approximately $1.0 million
for success fees to be paid in conjunction with the debt
restructuring as of December 31, 1998 which was included in
the $3.6 million of total debt restructuring expenses. The suc-
cess fee totaling approximately $1.0 million was paid in
February 1999.
Note 25—Restructuring Charge
Following the acquisition of Penn, the Company decided to
restructure its U.S. distribution subsidiary and to move the
distribution of Racquet Sports from Columbia, MD to Phoenix,
AZ and the distribution of Winter Sports from Columbia to
Boston, MA.
The restructuring charge in 1999 includes costs for the closure
of the Columbia location.
Note 26—Gain on Sale of Property
In December 2000, one of the Company’s subsidiaries sold a
part of the building used in operations for $1.7 million, result-
ing in a gain of $1.2 million. This gain is included in general and
administrative expense in the accompanying consolidated
statements of operations.
Note 27—Stock Option Plan
In November 1998, the Company adopted the Head Tyrolia
Mares Group Executive Stock Option Plan (the “Plan”). A
total of 2,424,242 options are reserved to be granted under
the terms of the Plan. The Plan provides for grants of stock
options to officers and key employees of Head N.V. and its
subsidiaries. The exercise price for all stock options granted
under the Plan was fixed at inception of the Plan and
increases at the rate of 10% per annum until the options are
exercised. Options generally are vested over a period of
4 years and are subject to the Company meeting certain earn-
ings performance targets during this period. Options vested
under the plan will not be exercisable prior to the end of the
two year lock-up period following the initial public offering.
Options have a maximum term of 10 years. As of December 31,
2000, 145,848 shares were available for grant under the Plan.
Exercise Price Less Than
Grant Date Stock Fair Value
Number of Weighted average
of shares exercise price
(in thousands, except per share data)
Outstanding at
December 31, 1998 . . . . . . . . . . 1,465,586 $0.24
Granted. . . . . . . . . . . . . . . . . . . . . . 783,620 0.24
Outstanding at
December 31, 1999 . . . . . . . . . . 2,249,306 0.24
Granted. . . . . . . . . . . . . . . . . . . . . . 29,088 0.24
Outstanding at
December 31, 2000 . . . . . . . . . . 2,278,394 $0.24
As of December 31, 2000, the weighted average remaining
contractual life of the outstanding stock options is 6.7 years,
and no options are exercisable.
The Company accounts for its stock options in accordance
with SFAS 123. Accordingly, the Company records stock-
based compensation expense based on the grant-date fair val-
ues of the stock options computed using the Black-Scholes
option pricing model. Stock-based compensation expense is
recognized over the vesting term of the options and amounted
to $0.02 million, $0.5 million and $1.4 million for the years
ended December 31, 1998, 1999 and 2000, respectively.
The weighted average grant-date fair values using the Black-
Scholes option pricing model were $0.27, $5.42 and $8.84 per
share for options granted in 1998, 1999 and 2000, respectively.
Head N.V. and Subsidiaries
Notes to the Consolidated Financial Statements (continued)
30
31
The fair values of options granted during 1998, 1999 and 2000
were estimated on the date of grant using the following
weighted average assumptions: no dividends; expected volatil-
ity of 0% (all options granted prior to IPO); expected terms of
3.5, 3.6 and 4.0 years, respectively; and risk free interest rates
of 4.70%, 5.76% and 6.63%, respectively. The Company has
also assumed that all performance targets will be achieved and
all options granted will become fully vested.
Note 28—Initial Public Offering
On October 3, 2000, Head N.V. completed its initial public
offering of ordinary shares. A total of 14,583,333 shares were
sold by Head at a price of $10.0 (€11.295) per share. The
offering resulted in net proceeds to Head of $134.4 million,
net of an underwriting discount of $7.3 million and offering
expenses of $4.1 million. Also as a part of this offering, exist-
ing shareholders sold 6,250,000 shares for net proceeds of
approximately $59.4 million, net of an underwriting discount
of $3.1 million
Of the net proceeds of the initial public offering, approxi-
mately $123.2 million was used to pay down debt, including
$59.0 million to repay the Renegotiated Austrian Loan
Agreement, $15.4 million to repay short-term loans in
Austria, $30.1 million to repay principal (€30,850) plus pre-
mium and accrued interest on the Senior Notes, $9.2 million
to repay the short-term lines of credit from Japanese banks,
and $7.4 million to repay the open lines under the Loan and
Security Agreement with Fleet Capital Corporation in the
United States, and $1.8 million to repay short-term bank bor-
rowings in Italy, and other countries. Pursuant to an existing
resolution Head N.V. repurchased 956,300 of its shares at
prevailing market prices totaling $5.2 million. The balance of
$6.0 million will be used for general corporate purposes.
32
To the Board of Directors and shareholders
of Head N.V. :
In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of operations, stock-
holders’ equity and of cash flows present fairly, in all material
respects, the financial position of Head N.V. and its sub-
sidiaries at December 31, 1999 and 2000, and the results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity
with generally accepted accounting principles in the United
States of America. These financial statements are the respon-
sibility of the Company’s management; our responsibility is to
express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards in the
United States of America, which require that we plan and per-
form 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,
assessing the accounting principles used and significant esti-
mates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
Vienna, Austria
February 21, 2001
Head N.V. and Subsidiaries
Report of Independent Accountants
33
List of Significant (Direct and Indirect) Participation’s at
December 31, 2000
Proportion of
Issued capital
Domicile held
Head Holding
Unternehmensbeteiligung GmbH . . Austria 100.0%
HTM Sport- und Freizeitgeräte AG . . Austria 100.0%
Head Sport AG . . . . . . . . . . . . . . . . . . Austria 100.0%
Head Tyrolia GmbH . . . . . . . . . . . . . . Austria 100.0%
Head Tyrolia Sports Canada Inc. . . . . Canada 100.0%
Head Sport s.r.o. . . . . . . . . . . . . . . . . Czech Republic 100.0%
OÜ HTM Sport Eesti . . . . . . . . . . . . Estonia 100.0%
Head Tyrolia Sports S.A. . . . . . . . . . . France 100.0%
Sporasub S.A. . . . . . . . . . . . . . . . . . . . France 100.0%
HTM Deutschland GmbH . . . . . . . . . Germany 100.0%
Penn Europe GmbH . . . . . . . . . . . . . . Germany 100.0%
Head Sportswear GmbH . . . . . . . . . . Germany 50.0%
Penn Racquet Sports Co. . . . . . . . . . Ireland 100.0%
Penn Racquet Sports Holding Ltd. . . Ireland 100.0%
HTM Sports S.p.A. . . . . . . . . . . . . . . . Italy 100.0%
HTM Sports Japan KK . . . . . . . . . . . . . Japan 99.6%
HTM Head Tyrolia Mares Iberica S.L. . . Spain 100.0%
HTM Sports Corp. . . . . . . . . . . . . . . Switzerland 100.0%
HTM USA Holdings Inc. . . . . . . . . . . USA 100.0%
Head USA Inc. . . . . . . . . . . . . . . . . . . USA 100.0%
Head Sports Inc. . . . . . . . . . . . . . . . . USA 100.0%
Mares America Corp. . . . . . . . . . . . . USA 100.0%
Dacor Corp. . . . . . . . . . . . . . . . . . . . . USA 100.0%
Penn Racquet Sports Inc. . . . . . . . . . USA 100.0%
Listing Details
34
Our shares are listed on the New York Stock Exchange “HED” and the Vienna Stock Exchange “HEAD.”
The chart below shows the high and low market prices of our ordinary shares each month on each exchange since our listing:
Vienna Stock
NYSE Exchange
(amounts in dollars) (amounts in euros)
High Low High Low
September, 2000 (from 9/28) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2500 7.5625 11.2000 8.5000
October, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8750 4.7500 9.7800 6.2000
November, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2500 4.2500 7.4000 5.2000
December, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0800 4.7500 7.1000 5.6800
January, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9900 5.2100 6.2600 5.6500
February, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8500 5.0000 6.4500 5.6000
March, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1300 3.8100 5.9000 4.5100
35
Shareholder Information
PRINCIPAL OFFICE
Aert van Nesstraat 45
3012 CA Rotterdam
The Netherlands
Tel: (31) 10 214 1923
Fax: (31) 10 214 1957
For additional information please visit our website at
www.head.com
TRANSFER AGENTS AND REGISTRARS
U.S. Transfer Agent and Registrar:
The Bank of New York
101 Barclay Street—22W
New York
NY 10286
USA
Tel from US: 1-888-BNY-ADR
Tel from outside US: (1) 908-769-9835/9711
European Transfer Agent:
Oesterreichische Kontrollbank AG
Am Hof 4
1010 Vienna
Austria
Tel: (43) 1 53127 352
ANNUAL MEETING
The Annual General Meeting of shareholders of the Company
will be held on Monday 28 May, 2001 at 15:00 hours local
time at the Sheraton Amsterdam Airport, Schipol Boulevard
101, 1118 BG Schipol Airport (Haarlemmermeer), The
Netherlands.
INVESTOR ENQUIRIES
Analysts, investors, media and others seeking financial and
general information, please contact:
Robert Kosian
Head of Corporate Development
71 South Audley Street
London
W1K 1JA
United Kingdom
Tel: (44) 20 7499 7800
Fax: (44) 20 7491 7725
E-mail: [email protected]
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS
This report contains forward-looking statements that are
based on the beliefs of our management, as well as assump-
tions made by, and information currently available to, our
management. The words “anticipates,” “believes,” “estimates,”
“expects,” “plans,” “intends” and similar expressions are
intended to identify these forward-looking statements, but are
not the exclusive means of identifying them. These forward-
looking statements reflect the current views of our management
and are subject to various risks, uncertainties and con-
tingencies which could cause our actual results, performance
or achievements to differ materially from those expressed in,
or implied by, these statements. These risks, uncertainties and
contingencies include, but are not limited to, the following:
• competitive pressures and trends in the sporting goods
industry;
• our ability to introduce new and innovative products;
• cyclicality and economic condition of and anticipated trends
in the industries we currently serve;
• our ability to acquire and integrate businesses;
• our ability to fund our future capital needs; and
• general economic conditions.
Actual results and events could differ materially from those
contemplated by these forward-looking statements as a result
of factors (“cautionary statements”) such as those described
above. In light of these risks and uncertainties, there can be
no assurance that the results and events contemplated by the
forward-looking statements contained in this report will in
fact transpire. You are cautioned not to place undue reliance
on these forward-looking statements. We do not undertake any
obligation to update or revise any forward-looking statements.
All subsequent written or oral forward-looking statements
attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements.
36
Head N.V. and Subsidiaries
Corporate Directory
Supervisory Board
The Supervisory Board is responsible for overseeing our Management Board and the general course of affairs of our business.
Our Supervisory Board currently has six members, whose names and details are set forth below.
Name Age Title
Christoph Henkel . . . . . . . . . . . . . . . 43 Member of the Supervisory Board
René C. Jäggi . . . . . . . . . . . . . . . . . . . 52 Chairman of the Supervisory Board
Viktor Klima . . . . . . . . . . . . . . . . . . . 53 Member of the Supervisory Board
Maurice Saatchi . . . . . . . . . . . . . . . . . 54 Member of the Supervisory Board
Michael B. Treichl . . . . . . . . . . . . . . . 50 Member of the Supervisory Board
Karel Vuursteen . . . . . . . . . . . . . . . . 59 Member of the Supervisory Board
Management Board and Executive Officers
Our amended articles of association provide for a Management Board that is charged with our management under the general
supervision of the Supervisory Board. Our Management Board currently has three members, whose names and details are
set forth below along with those of our Executive Officers.
Name Age Title
Johan Eliasch . . . . . . . . . . . . . . . . . . . 39 Chairman of the Management Board, and Chief Executive Officer
George F. Nicolai . . . . . . . . . . . . . . . 48 Member of the Management Board
Ralf Bernhart . . . . . . . . . . . . . . . . . . 49 Member of the Management Board, and Chief Financial Officer
Carlo Contini . . . . . . . . . . . . . . . . . . 62 General Manager, Ski Boots Division
Claudio Ferrantino . . . . . . . . . . . . . . 54 Executive Vice President, Diving Division
Klaus Hotter . . . . . . . . . . . . . . . . . . . 45 Executive Vice President, Ski Division
Robert Kosian . . . . . . . . . . . . . . . . . . 51 Head of Corporate Development
Georg Kröll . . . . . . . . . . . . . . . . . . . . 52 Executive Vice President, Licensing Division
Robert Marte . . . . . . . . . . . . . . . . . . 47 Executive Vice President, Racquet Sports Division
Edgar Pöllmann . . . . . . . . . . . . . . . . . 56 Executive Vice President, Bindings Division
Robert Soden . . . . . . . . . . . . . . . . . . 57 President, Head USA
Helmut Umlauft . . . . . . . . . . . . . . . . 54 Vice President, Operations, Head Division
David Haggerty . . . . . . . . . . . . . . . . 43 President, Penn Racquet Sports
Designed by Curran & Connors, Inc. / www.curran-connors.com
The Supervisory Board, Management Board and
Executive Officers of Head N.V.
Viktor Klima,
Member of
Supervisory Board
Rene C. Jaggi,
Chairman of
Supervisory Board
Karel Vuursteen,
Member of
Supervisory Board
Maurice Saatchi,
Member of
Supervisory Board
Michael B Treichl,
Member of
Supervisory Board
Christoph Henkel,
Member of
Supervisory Board
Ralf Bernhart
Member of Management
Board and CFO
Johan Eliasch,
Chairman of Management
Board and CEO
George F Nicolai
Member of
Management Board
Claudio Ferrantino
EVP, Diving Division
Klaus Hotter
EVP, Ski Division
Robert Marte
EVP, Racquet
Sports Division
Georg Kroll
EVP, Licensing Division
Carlo Contini
General Manager,
Ski Boots Division
Edgar Pollmann,
EVP, Bindings Division
Dave Haggerty
President,
Penn Racquet Sports
Robert Kosian
Head of Corporate
Development
Helmut Umlauft
VP, Operations,
Head Divisions
Robert Soden,
President Head USA
Clare Sharman
Corporate Finance
Aert van Nesstraat 45,
3012 CA Rotterdam,
The Netherlands
Telephone +31 10 214 1923
www.head.com
