<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996
Commission file number: 0-19298
RIDDELL SPORTS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2890400
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
900 Third Avenue, New York, New York, 10022
(Address of principal executive offices) (Zip code)
(212) 826-4300
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
8,067,985 Common Shares as of August 9, 1996
1
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RIDDELL SPORTS INC.
INDEX
Page
----
Form 10-Q Cover Page . . . . . . . . . . . . . . . . . . . . . 1
Form 10-Q Index . . . . . . . . . . . . . . . . . . . . . . . . 2
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . 4
Consolidated Statements of Shareholders' Equity . . . 5
Consolidated Statements of Cash Flows . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . 12
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities . . . . . . . . . . . . . . . 17
Item 3. Defaults upon Senior Securities . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
<PAGE> 3
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129,322 $ 615,081
Accounts receivable, trade, less allowance for doubtful
accounts ($802,000 and $721,000 respectively) . . . . . . . . . . . 30,005,364 14,099,028
Inventories (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . 14,934,887 14,425,882
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,734,313 6,815,009
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 343,764 358,769
------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . 50,147,650 36,313,769
Property, plant and equipment, less accumulated
depreciation ($3,517,544 and $3,374,361 respectively) . . . . . . . . 3,250,356 2,966,494
Intangibles and deferred charges, less accumulated
amortization ($9,345,209 and $8,946,585 respectively) . . . . . . . . 33,944,807 34,741,533
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,693 102,893
------------- --------------
$87,445,506 $ 74,124,689
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . $30,933,199 $ 1,141,572
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,249,061 6,304,289
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 7,448,832 9,581,548
------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . 45,631,092 17,027,409
Long-term debt, less current portion:
Shareholders and related parties . . . . . . . . . . . . . . . . . . . 1,309,834 1,309,834
Banks and other . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,154,893 22,290,398
------------- --------------
5,464,727 23,600,232
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,140,000 1,990,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,139,029 6,605,206
Contingent liabilities (Note 4)
Shareholders' equity
Preferred stock, $.01 par; authorized 5,000,000 shares; none issued
Common stock, $.01 par; authorized 40,000,000 shares; issued
and outstanding 8,067,985 shares . . . . . . . . . . . . . . . . . . 80,680 80,680
Capital in excess of par . . . . . . . . . . . . . . . . . . . . . . . 31,456,912 31,456,912
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (3,466,934) (6,635,750)
------------- --------------
28,070,658 24,901,842
------------- --------------
$87,445,506 $ 74,124,689
============= ==============
See notes to consolidated financial statements
</TABLE>
3
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<TABLE>
<CAPTIONS>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ---------------------------------
1996 1995 1996 1995
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net revenues:
Net sales . . . . . . . . . . . $20,845,384 $19,205,495 $39,881,485 $35,181,171
Royalty income . . . . . . . . 766,904 1,101,808 1,574,489 2,141,388
-------------- -------------- ------------- --------------
21,612,288 20,307,303 41,455,974 37,322,559
Cost of sales . . . . . . . . . . 11,005,559 10,823,587 21,216,051 19,317,888
-------------- -------------- ------------- --------------
Gross profit . . . . . . . . . . 10,606,729 9,483,716 20,239,923 18,004,671
Selling, general and
administrative expenses . . . . 7,210,117 6,574,183 14,201,566 12,670,109
Product liability . . . . . . . . 664,134 663,760 1,328,267 1,325,010
-------------- -------------- ------------- --------------
Income from operations . . . . . 2,732,478 2,245,773 4,710,090 4,009,552
Interest expense . . . . . . . . 764,060 769,234 1,391,274 1,390,617
-------------- -------------- ------------- --------------
Income before taxes . . . . . . . 1,968,418 1,476,539 3,318,816 2,618,935
Income taxes . . . . . . . . . . 90,000 67,000 150,000 118,000
-------------- -------------- ------------- --------------
Net income . . . . . . . . . . . $1,878,418 $1,409,539 $3,168,816 $2,500,935
============== ============== ============= ==============
Net earnings per share . . . . . $ 0.22 $ 0.17 $ 0.37 $ 0.31
============== ============== ============= ==============
See notes to consolidated financial statements
</TABLE>
4
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<TABLE>
<CAPTIONS>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Capital earnings Total
Common Stock in excess (Accumulated Shareholders'
Shares Amount of par deficit) equity
---------- --------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
For the six months ended June 30, 1995:
Balance, December 31, 1994 . . . 8,039,742 $80,397 $31,457,195 $(7,106,284) $24,431,308
Shares issued in connection with
a 1994 acquisition . . . . . . 28,243 283 (283) -0-
Net income for the period . . . 2,500,935 2,500,935
---------- --------- -------------- ------------- ---------------
Balance, June 30, 1995 . . . . . 8,067,985 $80,680 $31,456,912 $(4,605,349) $26,932,243
========== ========= ============== ============= ===============
For the six months ended June 30, 1996:
Balance, December 31, 1995 . . . 8,067,985 $80,680 $31,456,912 $(6,635,750) $24,901,842
Net income for the period . . . 3,168,816 3,168,816
---------- --------- -------------- ------------- ---------------
Balance, June 30, 1996 . . . . . 8,067,985 $80,680 $31,456,912 $(3,466,934) $28,070,658
========== ========= ============== ============= ===============
See notes to consolidated financial statements
</TABLE>
5
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<TABLE>
<CAPTIONS>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
-----------------------------------
1996 1995
--------------- -------------
<S> <C> <C>
Cash flows from investing activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $3,168,816 $2,500,935
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . 1,035,463 1,114,206
Provision for losses on accounts receivable . . . . . 234,805 150,652
Deferred taxes . . . . . . . . . . . . . . . . . . . 150,000 118,000
Changes in assets and liabilities (net
of effects from acquisitions):
(Increase) decrease in:
Accounts receivable, trade . . . . . . . . . . . (16,141,141) (16,142,239)
Inventories . . . . . . . . . . . . . . . . . . (509,005) (1,606,730)
Prepaid expenses . . . . . . . . . . . . . . . . 2,080,696 2,004,704
Other receivables . . . . . . . . . . . . . . . 15,005 2,176,290
Other assets . . . . . . . . . . . . . . . . . . 200 (17,441)
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . 944,772 (1,009,017)
Accrued liabilities . . . . . . . . . . . . . . (2,132,716) (1,982,041)
Other liabilities . . . . . . . . . . . . . . . (466,177) (655,886)
Net cash used in operating activities . . . (11,619,282) (13,348,567)
--------------- -------------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . (522,599) (341,458)
Acquisition . . . . . . . . . . . . . . . . . . . . . - (631,670)
--------------- -------------
Net cash used in investing activities . . . (522,599) (973,128)
--------------- -------------
Cash flows from financing activities:
Net borrowings under line-of-credit agreement . . . . 11,797,693 15,002,937
Principal payments on long-term debt:
Banks and other . . . . . . . . . . . . . . . . . . . (141,571) (554,094)
--------------- -------------
Net cash provided by financing activities . 11,656,122 14,448,843
--------------- -------------
Net increase in cash . . . . . . . . . . . . . . . . . . . (485,759) 127,148
Cash, beginning . . . . . . . . . . . . . . . . . . . . . . 615,081 190,325
--------------- -------------
Cash, ending . . . . . . . . . . . . . . . . . . . . . . . $ 129,322 $ 317,473
=============== =============
</TABLE>
Supplemental cash flow information:
In January 1995, in connection with an acquisition, the Company
assumed liabilities of approximately $330,000. Cash paid for interest was
$1,343,052 and $1,364,495 for the six month periods ended June 30, 1996
and 1995, respectively. Income tax payments, or refunds, were not
significant for the periods ended June 30, 1996 and 1995.
See notes to consolidated financial statements
6
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RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. These statements are unaudited, and in the
opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary for fair presentation of the Company's
consolidated financial position and the consolidated results of its operations
and cash flows at June 30, 1996 and 1995 and for the periods then ended.
Certain information and footnote disclosures made in the last Annual Report on
Form 10-K have been condensed or omitted for these interim statements.
Accordingly, these consolidated financial statements should be read in
conjunction with the December 31, 1995 Annual Report on Form 10-K. Operating
results for the six months ended June 30, 1996 are not necessarily indicative
of the results to be expected during the remainder of 1996.
Tax expense for all periods presented herein was reduced by the benefit of
net operating loss carryforwards recognized during the periods. The
recognition of these tax benefits had the effect of decreasing tax expense, and
increasing net income, for the three month periods ended June 30, 1996 and 1995
by approximately $670,000, or $0.08 per share, and $490,000, or $0.06 per
share, respectively, and for the six month periods ended June 30, 1996 and 1995
by approximately $1,130,000, or $0.13 per share, and $870,000, or $0.11 per
share, respectively.
2. Earnings per share
Earnings per share are based on the weighted average number of outstanding
common shares and the assumed exercise of dilutive common stock options and
warrants less the number of treasury shares assumed to be purchased from the
proceeds of the assumed exercise. The number of treasury shares assumed to be
purchased from the proceeds is based on the average market price of the
Company's common stock for the period in computing primary earnings per share,
and is based on the end of period market price of the Company's common stock,
if higher than the average market price, in computing fully diluted earnings
per share. For the three and six month periods ended June 30, 1996, primary
earnings per share were the same as fully diluted earnings per share after
rounding to the nearest cent. For the periods ended June 30, 1995 common stock
options or warrants were not considered dilutive. The weighted average number
of common and equivalent shares outstanding were as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
--------- ---------- --------- ---------
Primary 8,617,321 8,067,985 8,537,142 8,067,985
Fully diluted 8,617,321 8,067,985 8,607,615 8,067,985
3. Inventories
Inventories consist of the following:
June 30, December 31,
1996 1995
------------ -----------
Finished goods $6,377,249 $ 4,904,058
Work-in-process 3,350,544 4,043,217
Raw materials 5,207,094 5,478,607
------------ -----------
$14,934,887 $14,425,882
============ ===========
7
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RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Litigation matters and contingencies
Recorded assets and liabilities
In regards to the product liability and other litigation matters and
contingencies discussed below, the Company has recorded certain liabilities
and, in some cases, receivables for insurance recoveries. While these amounts
are discussed in the remaining sections of this note, a summary of these
amounts together with other items comprising the applicable balance sheet line
items is as follows:
<TABLE>
<CAPTIONS>
Other Accrued liabilities Other liabilities
Receivables (Current) (Non-Current)
-------------- ------------------ -----------------
<S> <C> <C> <C>
June 30, 1996:
Product liability matters:
Future payments on settled cases $ - $ 1,200,000 $ 1,750,000
Insurance recoveries and liabilities
related to above 250,000 600,000 -
Reserves for pending and other contingencies - 700,000 3,800,000
------------ -------------- --------------
Totals for product liability matters 250,000 2,500,000 5,550,000
Provision for proposed settlement and other costs
relating to fraudulent transfer litigation 1,900,000
Other litigation contingency reserves 100,000
Other (not related to litigation or contingencies) 150,764 2,948,832 589,029
------------ -------------- --------------
$ 400,764 $ 7,448,832 $ 6,139,029
============ ============= ==============
December 31, 1995:
Product liability matters:
Future payments on settled cases $ - $ 1,200,000 $ 1,750,000
Insurance recoveries and liabilities
related to above 250,000 600,000 -
Reserves for pending and other contingencies - 900,000 4,200,000
------------ -------------- --------------
Totals for product liability matters 250,000 2,700,000 5,950,000
Provision for proposed settlement and other costs
relating to fraudulent transfer litigation 1,900,000
Other litigation contingency reserves 100,000
Other (not related to litigation or contingencies) 108,769 4,881,548 655,206
------------ -------------- --------------
$ 358,769 $ 9,581,548 $ 6,605,206
============ ============== =============
</TABLE>
Product liability:
At June 30, 1996, a subsidiary of the Company was a defendant in 12
product liability suits relating to personal injuries allegedly related to the
use of Riddell helmets. The ultimate outcome of these claims, or potential
future claims, cannot presently be determined. The Company estimates that the
uninsured portion of future costs and expenses related to these claims, and
incurred but not reported
8
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RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
claims, will amount to $4,500,000 and, accordingly, a reserve in this amount is
included in the Consolidated Balance Sheet at June 30, 1996 as part of accrued
liabilities and other liabilities. These reserves are based on estimates of
losses and defense costs anticipated to result from such claims, from within a
range of potential outcomes, based on available information, including an
analysis of historical data such as the rate of occurrence and the settlement
amounts of past cases. However, due to the uncertainty involved with estimates
actual results have at times varied substantially from earlier estimates and
could do so in the future. Accordingly there can be no assurance that the
ultimate costs of such claims will fall within the established reserves.
The Consolidated Balance Sheets also include liabilities related to unpaid
portions of cases settled in prior periods, as well as receivables for related
insured portions of these amounts, at June 30, 1996 and December 31, 1995.
MacGregor fraudulent transfer litigation:
MacGregor Sporting Goods, Inc. (now known as M. Holdings, Inc.) ("Mac I")
filed for bankruptcy in March 1989. In 1993, Mac I's Creditors' Committee and
the bankruptcy trustee of MGS Acquisition Inc. ("MGS") filed a complaint
against the Company seeking rescission of, and/or monetary damages in excess of
$28.5 million plus interest relating to, the Company's acquisitions in 1988 and
1989 of substantially all the assets of two of Mac I's former second-tier
subsidiaries (including the football helmet division, MacGregor trademark
licensing business, and the non-football uses of the Riddell trademark) for
alleged failure to pay fair consideration at a time when Mac I was insolvent or
as a result of which Mac I became insolvent or undercapitalized.
By order in November, 1994, the complaint was dismissed as time-barred.
The court ordered the appointment of a trustee in Mac I's bankruptcy, but did
not decide whether the trustee would be time-barred if it decided to take a
similar complaint against the Company. In March 1995, the newly appointed
trustee in Mac I's bankruptcy, together with the bankruptcy trustee of MGS
(collectively the "Trustees") filed a similar complaint against the Company.
Additionally, Innovative Promotions, Inc. and certain other purported unsecured
creditors of Mac I filed a complaint under state debtor and creditor law
against the Company making similar allegations and claims as the actions
described above, seeking rescission and/or damages in excess of $22 million.
The Trustees intervened in the Innovative action as plaintiffs, purportedly to
preserve their rights in the event they lost their separate action.
In April, 1996 the Company signed an agreement with the Trustees to settle
the "fraudulent transfer" litigations described above. The proposed settlement
was subject to, among other things, approval by two bankruptcy courts. The
proposed settlement had provided for a payment of approximately $1.4 million by
the Company. However, in June 1996, in view of opposition from the Creditors'
Committee of Mac I, the Trustees withdrew a motion they had filed to approve
the proposed settlement of the actions against the Company, and the proposed
settlement agreement terminated. The Company had previously recorded a $1.9
million provision, as of December 31, 1995, for the proposed settlement as well
as anticipated costs relating to the litigation. The Company remains confident
that the fraudulent transfer cases are without merit, and intends to vigorously
defend against them. The Company
9
<PAGE> 10
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
has not adjusted the $1.9 million liability reserve for these actions as a
result of the termination of the settlement agreement, as the amount remains
within the potential range of costs of resolving the litigation. However, as
discussed above, the plaintiffs in the actions are seeking damages far in
excess of this amount and, accordingly, there can be no assurances that the
matter will ultimately be resolved at an amount within the reserve. The $1.9
million reserve is reflected in the Consolidated Balance Sheets as part of
accrued liabilities at June 30, 1996 and December 31, 1995.
Other contingencies and litigation matters:
In connection with the Company's suit against its former President,
Frederic Brooks, for alleged breaches of his consulting agreement and certain
other matters, Mr. Brooks filed counterclaims against the Company. Mr. Brooks
alleges the Company breached its indemnification obligations to him as a former
officer and director of the Company in connection with the Company's action
against Mr. Brooks, a purported class action (now settled), an action (now
settled) against Mr. Brooks brought by certain stockholders of the Company, and
the action brought by the MacGregor Bankruptcy Trustee, and seeks damages in
excess of $1.85 million plus future attorneys' fees and interest. Mr. Brooks
also seeks compensatory and punitive damages combined of at least $15 million
against the Company, two of its officers and directors and an entity controlled
by them for tortious interference with contract and prospective advantage and
prima facie tort. Mr. Brooks has impleaded the Company's "Riddell" footwear
licensee for contribution for all damages that may be assessed against him in
the Company's suit against Mr. Brooks for certain alleged breaches of his
consulting agreement relating to, among other things, alleged attempts to
disparage and take control of the Company. In connection with a settlement of
certain actions between the Company and its "Riddell" footwear licensee in
early 1994, the Company agreed to indemnify the licensee and certain of its
affiliates in the event they were so impleaded by Mr. Brooks into the Company's
suit against Mr. Brooks for breach of his consulting agreement. In March 1996,
Mr. Brooks filed a motion for summary judgement dismissing the claims against
him and requesting consulting fees of $587,230 plus interest under his
consulting agreement (which the Company has previously deposited in an escrow
type account) and legal fees in excess of $1.5 million, and the Company filed a
motion for partial summary judgement dismissing certain of Mr. Brook's claims
against it and its affiliates. The summary judgement motions have not yet been
ruled upon. The Company believes Mr. Brooks' claims against the Company are
without merit and intends to vigorously defend against them.
In 1993, certain subsidiaries and an officer of a subsidiary of the
Company were served with a complaint seeking compensatory and punitive damages
exceeding $10 million. The complaint alleges violation of privacy, unfair
competition, trademark infringement, breach of contract and other claims in
connection with the Company's sale of umpire vests. The action was dismissed
against the officer for lack of personal jurisdiction. The Company believes
this case is without merit and intends to defend vigorously against it.
In January 1995, the Company was named as a co-defendant in a complaint
which alleges wrongful death, failure to warn and other things surrounding the
death of a minor at one of the Company's facilities. The minor was involved in
a fatal accident as he trespassed on the roof of the facility after hours. The
complaint seeks unspecified monetary damages. The Company believes that it
10
<PAGE> 11
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
has meritorious defenses to this action and intends to vigorously defend
against it. The defense of the matter has been assumed by the Company's
general liability insurance carrier, subject to a reservation of rights and
certain policy limits and deductibles.
As discussed in previous reports, in a prior period the Company had
established a liability reserve which represented the minimum future cost
relating to certain of these litigation matters existing at the time, other
than the MacGregor transfer litigation and product liability claims and
including other matters since resolved. Certain other costs relating to such
litigation matters has been charged against this reserve in prior periods
reducing the balance of the reserve, which is included in accrued expenses, to
$100,000 at December 31, 1995 and June 31, 1996. While the remaining balance,
together with the $1,900,000 provision relating to the MacGregor fraudulent
transfer litigation discussed above, represents an estimate of certain minimum
costs likely to result from these litigation matters, other than product
liability claims, the Company cannot estimate the full extent of a potential
range of loss related to such litigation matters as their ultimate outcome
cannot be presently determined.
11
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Operations for the second quarter of 1996 resulted in a 33% increase in
net income to $1,878,418, or $0.22 per share, over second quarter 1995 net
income of $1,409,539, or $0.17 per share. For the first half of 1996 net
income was $3,168,816, or $0.37 per share, compared to first half 1995 net
income of $2,500,935, or $0.31 per share. Due to recent increases in the
market value of the Company's stock, per share results for the first half of
1996 reflect the dilutive impact of certain common stock options and warrants.
The dilutive options and warrants represented approximately 500,000 net common
stock equivalents during the first half of 1996, whereas no options or warrants
were considered dilutive for purposes of computing earnings per share for the
1995 periods. As discussed in the Notes to Consolidated Financial Statements,
1996 and 1995 year to date earnings benefited from lower tax expense due to net
operating loss carryforwards recognized during the periods.
The Company's overall profitability improvements are due to increased
sales volume across most of the Company's product lines which, combined with
favorable sales mix and operational efficiencies, have improved the Company's
gross margins. These gains were partially offset by a decrease in royalties
from trademark licensing. The impact of the volume and margin gains were also
offset in part by increased selling costs relating to increased salesman head
count put in place during the second half of 1995 to support direct sales and
increased promotional costs due to early incentive programs which were not in
place during the year ago period.
The effect of these factors are further described in the following
discussion of operating results by line item, together with other matters
having a significant effect on the Company's results of operations.
Revenues
Total revenues for the three months ended June 30, 1996 increased by 6% to
$21,612,288 which compares with total revenues of $20,307,303 for the three
months ended June 30, 1995. Total revenues for the six month period ended June
30, 1996 increased by 11% to $41,455,974 from $37,322,559 for the six months
ended June 30, 1995.
Net sales of the Company's sports products and services segment increased
by 9% for the second quarter to $20,845,384 from $19,205,495 for the three
months ended June 30, 1995. For the first half of 1996, net sales of this
segment increased 13% to $39,881,485 from $35,181,171 in the comparable period
of 1995. The Company experienced sales gains in most of its product lines,
including year to date overall increases in sales of athletic products, sports
collectible products and reconditioning services.
Sales of competitive athletic products increased approximately $1.7
million, or 12%, for the year to date period in comparison to the first half of
1995, and for the second quarter were relatively flat in comparison to the year
ago period. The year to date sales of these products, principally football
helmets and shoulder pads sold to schools and other institutions, reflects
increased unit volume and selected price increases to offset rising costs.
Unit volume increases have occurred as the Company gains experience under the
new method of distribution and begins to benefit from several actions taken in
recent periods
12
<PAGE> 13
to increase institutional sales. These actions, discussed in prior reports,
include increases in the number of salesmen calling on schools, more intensive
sales training, incremental field sales managers, new sales incentive programs,
and the introduction of additional athletic products. These actions also
included a new early incentive program which encouraged early orders and
deliveries accelerating some volume into the first quarter of the year, with
the result that second quarter sales of these products remained relatively
flat. The Company also benefitted from increased volume of competitive youth
products which continue to be sold by independent dealers and distributors.
The Company had experienced an anticipated decline in sales of youth products
in 1995 due to its conversion to direct sales of other athletic products as
many dealers who were no longer offered the Company's institutional product
lines stopped purchasing Riddell youth products. Sales of these products have
increased as the Company has expanded its distribution through new dealers and
distributors.
Sales of reconditioning services increased in the second quarter by
approximately 6%, or $500,000, and for the six month period increased 5%, or
$800,000, compared to the first half of 1995. This improvement was due to
increased volume as well as moderate price increases.
Sales of sports collectible products increased in the second quarter by
approximately 42%, or $1.2 million, and for the six month period increased 33%,
or $2.2 million, compared to the first half of 1995. This improvement was due
to increased volume in sales of the Company's line of miniature helmets,
including its new line of miniature hockey goalie helmets which started
shipping in late 1995. Sales of sports collectible products have been the
strongest area of growth for the Company over the past two years, and these
lines have become a significant part of the Company's business. The Company is
continuing to maintain a high level of marketing emphasis on the sports
collectible business.
Royalty income decreased by 30% to $766,904 for the three months ended
June 30, 1996 from $1,101,808 during the second quarter of 1995. For the six
months ended June 30, 1996 royalty income decreased by 26% to $1,574,489 from
$2,141,388 for the six months ended June 30, 1995. These decreases were
largely attributable to a decline in royalties from the licensing of the
Riddell trademark. The Company anticipates that Riddell licensing income will
remain significantly below 1995 levels throughout 1996 for several reasons. As
discussed in prior reports, in October 1995, the Company terminated a license
for use of the Riddell trademark on certain athletic equipment. In connection
with a restructuring of the business of its apparel licensee, the Company
agreed to reduce the minimum royalty due under the license and replaced the
prior agreement with a short term license. And finally, the Company's Riddell
footwear licensee has filed for bankruptcy as discussed in prior reports. The
licensee must continue to comply with the terms of the license, including
payment of royalties. However, the Company has agreed to allow the licensee to
offset certain amounts, which could exceed royalties otherwise due from the
licensee over the next year. Royalties from licensing of the MacGregor
trademark rights decreased 19%, or approximately $170,000, for the second
quarter, and decreased 13%, or $200,000, for the six month period, due to a
decrease in royalties from Kmart.
Gross Profit
Gross profit for the quarter ended June 30, 1996 increased $1,123,013, or
12%, compared to the quarter ended June 30, 1995. For the six month period
ended June 30, 1996 gross profits increased $2,235,252, or 12%, over the
comparable period of 1995. The increases in gross profits were related to
sales of sports products and services, further discussed below. These increases
were offset in part by the decreases in royalty income from trademark licensing
discussed above. While trademark licensing
13
<PAGE> 14
does have certain costs included in selling, general, and administrative
expenses, there are no related costs which are deducted in arriving at gross
profit. Accordingly, each incremental dollar of royalty income results in a
dollar increase in gross profit.
Gross profit attributable to sports products and services for the quarter
ended June 30, 1996 increased $1,457,917, or 17%, compared to the comparable
quarter of 1995. For the six month period ended June 30, 1996 gross profits
for this segment increased $2,802,151, or 18%, over the comparable period of
1995. Gross profit margin rates for the sports products and services segment
increased to 47.2% of sales for the second quarter from 43.6% of sales for the
second quarter of 1995. For the six month period gross profit margin rates
increased to 46.8% of sales in 1996 compared to 45.1% of sales in the
comparable 1995 period. The increase in gross margin dollars is principally
due to the sales increases discussed above. Other factors contributing to the
improvement in gross margins were changes in the sales mix, manufacturing
efficiencies due to higher volumes and selective price increases taken to
offset rising costs. Some of these factors which accounted for improved gross
margin rates are seasonal and cannot be expected to influence the second half
of the fiscal year, which includes lower unit volume of football products and
services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $635,934 or 10%
over 1995 levels for the second quarter. For the six month period ended June
30, 1996 these expenses increased $1,531,457 or 12% over comparable 1995
levels. The increases are attributable to higher levels of selling, marketing
and promotional expenses relating to the Company's sales of competitive
athletic products sold to schools and other institutions. These selling
expense increases were incurred in taking certain actions to increase sales of
competitive athletic products as discussed above under Revenues. General and
administrative expenses showed a modest decline between the periods.
Interest Expense
Interest expense has remained stable between the periods with a decrease
of under 1% for both the second quarter and six month period in comparison to
the comparable 1995 periods. This reflects a decline in interest rates, in
line with movements in the prime rate, which was offset by increases in average
indebtedness related to the level of the Company's business volume.
CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION:
The Company sells a portion of its competitive football products and
reconditioning services on dated payment terms with payments from customers
(primarily high schools and colleges in these cases) generally due the
following July to October period. Accordingly, trade receivables increase
throughout the year as sales are made on these dated payment terms. The
increase in trade receivables continues throughout an annual cycle until
reduced at the end of the cycle as the dated receivables become due. In order
to finance the resulting large receivable levels, the Company maintains a
revolving line of credit. The outstanding balance on the revolving line of
credit generally follows the seasonal receivable cycle described above,
increasing as the level of receivables increase until the fall of each year
when collections of the dated receivables are used to reduce the outstanding
balance on the line. The Company's current
14
<PAGE> 15
borrowing limits under the line of credit discussed above fluctuate throughout
the year from a low of $20,000,000 to a high of $31,750,000 at predetermined
points in time. The liability under the line has historically been reflected
on the Consolidated Balance Sheets as part of long-term debt, with only the
balance in excess of the annual borrowing limit low of $20,000,000 included in
the current portion of long-term debt. However, as discussed further below,
the line currently matures on April 30, 1997, and accordingly the entire
balance has been classified as part of the current portion of long term debt at
June 30, 1996.
Operations during recent years have resulted in periods of increased
working capital demands due to volume growth in certain product lines and other
changes in the Company's business. As discussed in prior reports the Company
has been able to obtain modifications of its loan agreement with its bank over
the past year to increase certain seasonal borrowing limits under the line of
credit, as well as other changes the Company has requested. The Company
anticipates that its capital needs will continue to increase as its business
volume grows. Accordingly, the Company is in discussions with its bank for
both an extension of its revolving line of credit beyond the current maturity
date of April 1997 and modifications to the loan agreement to increase the
amount of credit available to the Company. The Company is also considering
other sources of capital which may be available to supplement its banking
relationship in a manner which would provide additional capital for growth. No
assurances can be made that the extension and modifications to the loan
agreement, or additional financing, will be obtained.
15
<PAGE> 16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Mac I Fraudulent Transfer Action and State Law Debtor and Creditor Claim
Mac I had filed for bankruptcy protection in March 1989 in the United
States Bankruptcy Court in New Jersey. Mac I, its Creditors' Committee and the
bankruptcy trustee of MGS jointly brought an action against the Company, its
principal lender, NBD Bank and others in the New Jersey Bankruptcy Court
(OFFICIAL UNSECURED CREDITORS' COMMITTEE OF MACGREGOR SPORTING GOODS, INC. V.
RIDDELL SPORTS INC., No. 93-2214 (RG) (Bankr. D.N.J.)). By order dated
November 3, 1994 the court dismissed this complaint as time-barred. The court
also appointed a trustee in the bankruptcy of Mac I, but did not decide whether
the trustee would be time-barred if it decided to bring a similar action
against the Company and its lender. Plaintiffs in the action had sought
monetary damages and/or the rescission of the Acquisitions for, among other
things, alleged failure to pay fair consideration at a time when Mac I was
insolvent or as a result of which Mac I became insolvent or undercapitalized.
The monetary damages alleged in connection with the Acquisitions exceeded $28.5
million. In addition to seeking monetary damages and\or rescission from the
Company, the complaint sought to void the liens of NBD Bank in the property at
issue.
After the above action was dismissed, the Trustees commenced a
substantially similar action against the Company in March of 1995 entitled,
BRUCE LEVITT, BANKRUPTCY TRUSTEE FOR MACGREGOR SPORTING GOODS, INC., NOW KNOWN
AS M. HOLDINGS, INC., PAUL SWANSON, BANKRUPTCY TRUSTEE FOR MGS ACQUISITION,
INC. V. RIDDELL SPORTS INC., et al, No. 95-2261 (RG) (Bankr. D.N.J.) in the
Chapter 11 bankruptcy case of Mac I (the "Levitt Action"). The complaint seeks
monetary damages in an unspecified amount plus interest and\or rescission in
connection with the Company's Acquisitions on the grounds, among others, that
the Company allegedly failed to pay fair consideration at a time when Mac I was
insolvent and\or undercapitalized. In addition to seeking monetary damages
and\or rescission from the Company, the complaint seeks to void the liens of
NBD Bank in the property at issue. The complaint also seeks damages against the
Board of Directors of Mac I for breaches of fiduciary duties to Mac I for
failing to obtain fair consideration in connection with these transactions.
Additionally, Innovative Promotions, Inc. and certain other purported
unsecured creditors of Mac I initiated a state law debtor and creditor action
against the Company which is now pending in the New Jersey Bankruptcy Court
(INNOVATIVE PROMOTIONS, INC. ET AL. V. RIDDELL SPORTS INC. ET AL. (IN RE
MACGREGOR SPORTING GOODS, INC.), Adv. Proc. No. 94-2656(RG)). The plaintiffs
in the Innovative action seek rescission of, and/or monetary damages in excess
of $22 million exclusive of interest relating to the Company's Acquisitions for
alleged failure to pay fair consideration at a time when Mac I was insolvent,
or as a result of which Mac I became insolvent or undercapitalized. Plaintiffs
also seek judgments voiding the liens of NBD Bank with respect to the assets.
In June 1995, the Trustees in the Levitt Action (the "Trustees") intervened as
plaintiffs in the Innovative action purportedly to preserve their rights in the
event they lost the Levitt Action.
In April 1996 the Company entered into a settlement agreement with the
Trustees requiring the Company to pay an aggregate of $1.4 million and
releasing the Company and other defendants from all claims and liabilities in
the litigations. The settlement was subject to, among other things, approval
of two bankruptcy courts. On June 24, 1996 the Trustees withdrew their motion
to approve the settlement agreement in light of a Plan of Reorganization of Mac
I submitted by the Mac I Creditors' Committee
16
<PAGE> 17
in opposition to the settlement agreement. The Company notified the Trustees
that their actions breached, and caused termination of, the proposed settlement
agreement. The Creditors' Committee's Plan of Reorganization is subject to
acceptance by the creditors and court approval.
The Company remains confident that the fraudulent transfer cases are
without merit, and intends to vigorously defend against them.
Other
The Company is also a defendant in certain product liability proceedings.
See Note 4 of "Notes to Consolidated Financial Statements".
The Company is also a defendant in certain other litigation described in
Item 3 of its Form 10-K for the year ended December 31, 1995 and Part II, Item
1 of its Form 10-Q for the quarter ended March 31, 1996.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On June 27, 1996 the Company held its Annual Meeting of Stockholders. At
the Meeting the stockholders elected the following individuals to serve as
members of the Board of Directors until the next annual meeting of stockholders
or until their earlier removal or resignation:
Absten- Broker
For Against tions Non Votes
--------- -------- -------- ---------
Robert E. Nederlander 7,474,302 422,795 none none
Leonard Toboroff 7,698,113 198,984 none none
David Mauer 7,473,802 423,295 none none
Don R. Kornstein 7,698,009 199,088 none none
John McConnaughy, Jr. 7,474,300 422,797 none none
Glenn E. "Bo" Schembechler 7,474,300 422,797 none none
The Stockholders also voted to amend the Company's 1991 Stock Option Plan
to limit to 150,000 the number of shares of Common Stock available for grant of
options to any one individual in any one year. The voting for this proposition
was 7,404,804 in favor; 202,602 against; 13,796 abstentions; and 275,895 broker
non votes.
The stockholders also voted to amend the Company's 1991 Stock option Plan
to increase the number of shares of Common Stock available for grant of options
by 250,000 to 1,415,500 shares. The voting for this proposition was 7,202,427
in favor; 672,102 against; 22,568 abstentions; and 0 broker non votes.
The stockholders also voted to amend the Company's 1991 Stock Option Plan
to provide for fixed annual grants of options to purchase 7,500 shares of
Common Stock to directors (other than directors who are also the Chief
Executive Officer) and to grant an option to acquire 15,000 shares of Common
Stock to each individual (other than current directors) upon becoming a member
of the Board of Directors. The voting for this proposition was 6,821,627 in
favor; 664,970 against; 24,023 abstentions; and 386,477 broker non votes.
17
<PAGE> 18
The Stockholders also voted to amend the Company's Certificate of
Incorporation increasing the number of shares of Common Stock authorized for
issuance from 20,000,000 to 40,000,000 and increasing the number of shares of
preferred stock authorized for issuance from 1,000,000 to 5,000,000. The
voting for this proposition was 4,903,200 in favor; 638,188 against; 23,181
abstentions; and 2,332,528 broker non votes.
The stockholders also voted to ratify the appointment of Grant Thornton as
its independent certified public accounts for the year ending December 31,
1995. The voting for this proposition was 7,497,302 in favor; 16,300 against;
3,903 abstentions and 379,592 non votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index:
11 Computation of Earnings Per Share
27 Financial Data Schedule (submitted in electronic
form to SEC only)
(b) Reports on Form 8-K
The Company filed a Form 8-K dated June 25, 1996 reporting that the
Trustee in the Chapter 11 bankruptcy of MacGregor Sporting Goods, Inc.
(now known as M. Holdings Inc.) withdrew a motion to approve the
settlement of fraudulent transfer actions.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIDDELL SPORTS INC.
Date: August 9, 1996 By /s/ DAVID MAUER
------------------------
David Mauer
President and
Chief Executive Officer
Date: August 9, 1996 By /s/ LAWRENCE F. SIMON
------------------------
Lawrence F. Simon
Senior Vice President
(Principal Accounting Officer)
19
RIDDELL SPORTS INC. EXHIBIT 11
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary earnings per share:
- -----------------------------------
Weighted average common shares
outstanding during period 8,067,985 8,067,985 8,067,985 8,067,985
Common shares equivalents of dilutive
stock options based on treasury
stock method using average market
price for quarter 549,336 0 469,157 0
----------- ----------- ----------- -----------
Average common shares and equivalents 8,617,321 8,067,985 8,537,142 8,067,985
=========== =========== =========== ===========
Net income for the period $1,878,418 $1,409,539 $3,168,816 $2,500,935
=========== =========== =========== ===========
Per share amount $0.22 $0.17 $0.37 $0.31
=========== =========== =========== ===========
Fully diluted earnings per share:
- -----------------------------------
Weighted average common shares 8,067,985 8,067,985 8,067,985 8,067,985
outstanding during period
Common shares equivalents of dilutive
stock options based on treasury
stock method using quarter ending
market price which is higher than
average market price 549,336 0 539,630 0
----------- ----------- ----------- -----------
Average common shares and equivalents 8,617,321 8,067,985 8,607,615 8,067,985
=========== =========== =========== ===========
Net income for the period $1,878,418 $1,409,539 $3,168,816 $2,500,935
=========== =========== =========== ===========
Per share amount $0.22 $0.17 $0.37 $0.31
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FILED AS PART OF THE QUARTERLY REPORT
ON FORM 10-Q FOR THE FISCAL QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 129
<SECURITIES> 0
<RECEIVABLES> 30,807
<ALLOWANCES> 802
<INVENTORY> 14,935
<CURRENT-ASSETS> 50,148
<PP&E> 6,768
<DEPRECIATION> 3,518
<TOTAL-ASSETS> 87,446
<CURRENT-LIABILITIES> 45,631
<BONDS> 5,465
0
0
<COMMON> 81
<OTHER-SE> 27,990
<TOTAL-LIABILITY-AND-EQUITY> 87,446
<SALES> 39,881
<TOTAL-REVENUES> 41,456
<CGS> 21,216
<TOTAL-COSTS> 21,216
<OTHER-EXPENSES> 1,328
<LOSS-PROVISION> 230
<INTEREST-EXPENSE> 1,391
<INCOME-PRETAX> 3,319
<INCOME-TAX> 150
<INCOME-CONTINUING> 3,169
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,169
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
