TKO files Ch. 11 bankruptcy reorganization

Rumors of financial instability have culminated for TKO Sports in a filing for Chapter 11 bankruptcy reorganization in a Texas court just days before the new federal laws on bankruptcy took effect.
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Rumors of financial instability have culminated for TKO Sports in a filing for Chapter 11 bankruptcy reorganization in a Texas court just days before the new federal laws on bankruptcy took effect.

TKO Sports Group USA Ltd. quietly filed on Oct. 11 for the court protection plan to help it reorganize its finances under court oversight in the U.S. Bankruptcy Court, Southern District of Texas. Since the filing was done before the Oct. 17 effective date of the new federal law, the company will not have to face new, stricter provisions under the new law on how businesses must handle contracts, employees and goods delivered.

As of Oct. 24, only one company executive Bob Harms returned numerous messages left on both voicemail and email from SNEWS® seeking comment and background, but senior vice president Harms declined to make a statement.

"Why are you interested?" Harms asked, demanding to know where we had gotten the public court documents. "I'm not going to make a statement."

The company's website, www.tkogear.com, was shut down sometime between Oct. 21, when it was still live, and the morning of Oct. 24.

In court documents obtained by SNEWS®, the decision to file for reorganization was made at a company board meeting on Oct. 6 attended by Garry Kurtz, sole director and president; William Willson, CFO; and Edward Rothberg, counsel. At that meeting, it was decided to hire a law firm to proceed with the paperwork for the Ch. 11 filing. Kurtz was directed to oversee the process.  

"Following extensive discussions, and upon motion made, seconded and carried, the following resolutions were passed by the quorum present:… Resolved, that the Corporation, at the earliest opportunity, seek reorganization by initiating a case under the provisions of the Chapter 11 of the Bankruptcy Code…."

The court documents estimated the number of debtors as 100 to 199, to which the company owed an estimated amount of $10 million to $50 million. It also estimated its assets as $1 million to $10 million in the paperwork. In addition, the company said it estimated that funds would be available for distribution to unsecured creditors.

A list of the top 20 unsecured creditors, all trade debts, filed with the courts lists 10 of the 20 as based in Asia, including the largest debt estimated to be $453,286 to Qingdao Inred Sports Goods in Shangdong.

In addition, in financial documents obtained by SNEWS® filed by TKO accountants Deloitte & Touche in August 2005, sales for 2004 were shown to be $15.7 million up only slightly from 2003's $14.6 million. But Deloitte pointed out in the statements that losses nevertheless incurred both years "primarily as a result of plant relocation costs, foreign exchange and increased costs associated with becoming a public company."

Also, the documents point out that TKO was at that time in breach of its financial covenants relating to its bank credit facilities, which totaled approximately $5.2 million, and had agreed with its lender to pursue other sources of financing.

One TKO dealer told SNEWS® he wished TKO the best since he's known its executives for a long time. Still, said Carlos Vazquez, president of Busy Body/Gyms to Go in Florida, he wouldn't lose sleep over the filing since he could get his accessories from other vendors and it wasn't a huge percentage of his retail business.

"In the end, consumers aren't coming in and saying, 'Do you have the TKO this or the TKO that?'" Vazquez said. "Consumers actually aren't coming in and asking for any brands."

Other accessory suppliers noted that although opening up a space in the jammed category, the bankruptcy still was not good overall for business or the industry. TKO has in the past been considered one of the top accessory suppliers. In the 2003 SNEWS® Retailer Survey, TKO ran away with the No. 1 ranking as the top-selling accessory brand among specialty retailers. In the 2004 survey, it still had the No. 1 spot, but Spri Products was sneaking in closer. In the most recent survey in 2005, TKO had slipped by a fraction into second place behind Spri.

But TKO had its sights set higher than just accessories and Kurtz in its January talk with SNEWS® acknowledged flat revenues, 2004 over 2003, since it was focusing on its strategy. In January, Kurtz had estimated 25 percent growth for 2005, partly due to broader offerings to come in its steps to go beyond being merely a boxing and accessory brand (see SNEWS® story, April 25, 2005, TKO goes for industry "technical knockout"). It had recently entered new categories, including cardiovascular equipment with an October 2004 acquisition of Linex, took on e-commerce on the now-closed TKOgear website, signed licensing deals with for example Avair Fitness Equipment, and planned infomercials with its Cory Everson-branded product. It also was heading toward public trading with its entry in March 2004 onto the pre-exchange Pink Sheets (TKHL.PK).
 
All of these steps were to make 2005 "a pivotal year," Kurtz told SNEW® in a rare interview in January. "Ultimately, I don't see TKO as an accessories company only," Kurtz said at that time. "I see it in multi-facets of branding.

"I believe we'll be able to take the TKO brand and move it into the other core areas of fitness -- footwear, headwear, apparel,…" he said. "I see this as a brand that will transcend the accessories."

But perhaps an indication that things weren't going as smoothly as expected, the company announced mid-summer that it was centralizing operations and closing its Canadian manufacturing and distribution center and head office in Hamilton, Ontario, and its Florida offices in Pompano Beach. All business was as of July 1 operated out of the Houston, Texas, offices, which the company said would allow the team to work better together and to better serve customers.

According to court documents, disclosure statements, schedules and statements of financial affairs are due to the court on Oct. 26, and a Ch. 11 plan are due by Feb. 8, 2006.

SNEWS® View: Definitely this is not good for the industry. TKO is a brand that has had a lot of cache and, yes, could have perhaps had even more with the catchy name it had. Perhaps management moved too quickly, although Kurtz had said all of these moves in the last year had been planned since the company began nearly a decade ago. We're not sure if it was trying to keep up with Everlast, which has been on an unstoppable roll since it appeared in "The Contender" TV series. If TKO manages to exit from Ch. 11 reorganization, it will likely again be a leaner accessory and boxing company, but that lag in business between now and next year could mean it will lose some dealers. Playing catch-up in the accessory biz won't be easy since many retailers consider accessories a bit of a commodity with deals often closed based on a relationship.

SNEWS® and others began to wonder if something was up at the most recent Health & Fitness Business Show, when one of the company's executives was more abrasive and used more colorful language than usual. We also heard that company representatives shrugged off inquiries about financial problems at the August show, noting instead that "everybody" has financial issues. The Deloitte financial statement showed that indeed something was up and that something could have been the loss or impending loss of its lender, basically forcing it into the recent Ch. 11 filing. Good times or bad times, relationships remain vital, as do honesty and trust. We at SNEWS® trust that Kurtz and senior vice president and co-founder Mitch Carlin, who have always quietly done their business, will be looking to refocus the company and its dealings with the industry in a positive, forthright and friendly manner. We don't think the industry wants to lose TKO.

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