<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1997
REGISTRATION STATEMENT NO. 333-31525
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RIDDELL SPORTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3949 22-2890400
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OF INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION)
</TABLE>
------------------------
RIDDELL SPORTS INC.
900 THIRD AVENUE
27TH FLOOR
NEW YORK, NEW YORK 10022
(212) 826-4300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
------------------------
LISA J. MARRONI
RIDDELL SPORTS INC.
900 THIRD AVENUE
27TH FLOOR
NEW YORK, NEW YORK 10022
(212) 826-4300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPY TO:
SHELDON S. ADLER, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 735-3000
------------------------
<TABLE>
<CAPTION>
PRIMARY STANDARD
INDUSTRIAL I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION IDENTIFICATION
NAME OF ADDITIONAL REGISTRANTS* INCORPORATION NUMBER NUMBER
- --------------------------------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
ALL AMERICAN SPORTS CORPORATION DELAWARE 3949 34-1688715
EQUILINK LICENSING CORPORATION DELAWARE 3949 51-0342202
PROACQ CORP. DELAWARE 3949 34-1688714
RHC LICENSING CORPORATION DELAWARE 3949 51-0342201
RIDDELL, INC. ILLINOIS 3949 36-3581631
RIDMARK CORPORATION DELAWARE 3949 22-2908352
INTERNATIONAL LOGOS, INC. TENNESSEE 2389 62-1392810
VARSITY/INTROPA TOURS, INC. TENNESSEE 4724 62-1584148
VARSITY SPIRIT CORPORATION TENNESSEE 7032 62-1169661
VARSITY SPIRIT FASHIONS & SUPPLIES INC. MINNESOTA 2389 41-1459853
VARSITY USA, INC. TENNESSEE 7032 62-1601179
</TABLE>
- ------------------
* Address and telephone number of principal executive offices are same as those
of Riddell Sports Inc.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
OFFER TO EXCHANGE
10 1/2% SENIOR NOTES DUE 2007, WHICH
HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
10 1/2% SENIOR NOTES DUE 2007 OF
RIDDELL SPORTS INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON SEPTEMBER 9, 1997, UNLESS EXTENDED.
------------------------
Riddell Sports Inc., a Delaware corporation (the 'Company'), hereby offers
(the 'Exchange Offer'), upon the terms and subject to the conditions set forth
in this Prospectus and the accompanying Letter of Transmittal (the 'Letter of
Transmittal'), to exchange its outstanding 10 1/2% Senior Notes Due 2007 (the
'Old Senior Notes'), of which $115,000,000 aggregate principal amount is
outstanding as of the date hereof, for a like aggregate principal amount of its
newly issued 10 1/2% Senior Notes Due 2007, which have been registered under the
Securities Act of 1933, as amended (the 'New Senior Notes'). The New Senior
Notes are being offered hereby in order to satisfy certain obligations of the
Company and the Guarantors (as defined herein) under the Registration Rights
Agreement, dated June 19, 1997, among the Company and certain other signatories
thereto (the 'Registration Rights Agreement'). The form and terms of the New
Senior Notes will be the same as those of the Old Senior Notes except that the
New Senior Notes will have been registered under the Securities Act of 1933, as
amended (the 'Securities Act'), and consequently will not be subject to certain
transfer restrictions, registration rights and related liquidated damages
provisions applicable to the Old Senior Notes. The New Senior Notes will
evidence the same debt as the Old Senior Notes and will be entitled to the
benefits of an indenture (the 'Indenture'), dated as of June 19, 1997, by and
among the Company, the Guarantors and Marine Midland Bank, as trustee (the
'Trustee'). The Indenture provides for the issuance of both the Old Senior Notes
and the New Senior Notes. The Old Senior Notes and the New Senior Notes are
referred to herein collectively as the 'Senior Notes' and holders of the Senior
Notes are sometimes referred to herein as the 'Holders.'
The Old Senior Notes were issued on June 19, 1997 pursuant to an offering
(the 'Offering') which was exempt from registration under the Securities Act.
The Old Senior Notes were issued in connection with the acquisition (the
'Acquisition') by the Company of Varsity Spirit Corporation ('Varsity') through
the consummation of the Varsity Tender Offer (as defined herein), as a result of
which Varsity became a subsidiary of the Company.
The Senior Notes mature on July 15, 2007, unless previously redeemed.
Interest on the New Senior Notes will be payable semiannually on January 15 and
July 15, commencing January 15, 1998. The Senior Notes will be redeemable at the
option of the Company, in whole or in part, on or after July 15, 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined herein), if any thereon, to the redemption date.
In addition, at any time on or prior to July 15, 2000, the Company may redeem up
to 35% of the aggregate principal amount of the Senior Notes with the net
proceeds of one or more equity offerings of the common stock of the Company, at
a redemption price equal to 110 1/2% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
redemption; provided that at least $75.0 million aggregate principal amount of
the Senior Notes remains outstanding after such redemption. Upon a Change of
Control (as defined herein), the Company will be required to offer to repurchase
all outstanding Senior Notes at 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase.
The Old Senior Notes are, and the New Senior Notes will be, general
unsecured obligations of the Company, ranking senior in right of payment to all
existing and future Indebtedness (as defined herein) of the Company that is
subordinated to the Senior Notes and ranking pari passu in right of payment with
all current and future unsecured unsubordinated Indebtedness of the Company,
including indebtedness under the New Credit Facility (as defined herein). The
Old Senior
(Cover continued on next page)
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD SENIOR NOTES
IN THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
August 7, 1997.
<PAGE>
(Continued from previous page)
Notes are, and the New Senior Notes will be, unconditionally guaranteed on a
senior basis (the 'Subsidiary Guarantees') by each of the Company's current and
future domestic Restricted Subsidiaries (as defined herein) (the 'Guarantors'),
including Varsity. The Subsidiary Guarantees are senior unsecured obligations,
ranking senior in right of payment to all existing and future subordinated
Indebtedness of the Guarantors and ranking pari passu in right of payment with
all other existing and future senior obligations of the Guarantors. Loans, if
any, under the Company's New Credit Facility will be secured by a security
interest in substantially all of the tangible assets of the Company and will be
guaranteed by the Material Subsidiaries (as defined herein), which guarantees
will be secured by a security interest in substantially all of the tangible
assets of the Guarantors. Accordingly, the Senior Notes and the Subsidiary
Guarantees will be effectively subordinated to the loans outstanding under the
New Credit Facility and the guarantees of such loans, respectively, to the
extent of the value of the assets securing such loans and guarantees. As of
March 31, 1997, on a pro forma basis after giving effect to the Transactions (as
defined herein), including the Acquisition and the Offering and the application
of the estimated net proceeds therefrom, the Company would have had $12.7
million of senior Indebtedness outstanding other than the Senior Notes, all of
which would have been secured debt, and $7.5 million of subordinated
Indebtedness outstanding. The terms of the Indenture will permit the Company and
the Guarantors to incur additional Indebtedness, subject to certain limitations.
See 'Description of the Senior Notes.'
For each Old Senior Note accepted for exchange, the Holder of such Old
Senior Note will receive a New Senior Note having a principal amount equal to
that of the surrendered Old Senior Note. The New Senior Notes will bear interest
from the most recent date to which interest has been paid on the Old Senior
Notes, or if no interest has been paid on the Old Senior Notes, from June 19,
1997. Accordingly, if the relevant record date for interest payment occurs after
the consummation of the Exchange Offer, registered Holders of New Senior Notes
on such record date will receive interest accruing from the most recent date to
which interest has been paid or, if no interest has been paid, from June 19,
1997. If, however, the relevant record date for interest payment occurs prior to
the consummation of the Exchange Offer, registered Holders of Old Senior Notes
on such record date will receive interest accruing from the most recent date to
which interest has been paid, or if no interest has been paid, from June 19,
1997. Old Senior Notes accepted for exchange will cease to accrue interest from
and after the date of consummation of the Exchange Offer, except as set forth in
the immediately preceding sentence. Holders of Old Senior Notes whose Old Senior
Notes are accepted for exchange will not receive any payment in respect of
interest on such Old Senior Notes otherwise payable on any interest payment date
the record date for which occurs on or after consummation of the Exchange Offer.
Based on interpretations by the staff of the Securities and Exchange
Commission (the 'SEC') as set forth in no action letters issued to third
parties, the Company believes that New Senior Notes issued pursuant to the
Exchange Offer in exchange for Old Senior Notes may be offered for resale,
resold and otherwise transferred by Holders thereof (other than any such Holder
which is an 'affiliate' of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Senior Notes are
acquired in the ordinary course of such Holder's business and such Holder has no
arrangement with any person to participate in the distribution of such New
Senior Notes. However, the Company does not intend to request the SEC to
consider, and the SEC has not considered, the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the SEC would
make a similar determination with respect to the Exchange Offer as in such other
circumstances. Each Holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of such New
Senior Notes and has no arrangement or understanding to participate in a
distribution of New Senior Notes. Each broker-dealer that receives New Senior
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Senior
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an 'underwriter' within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Senior Notes received in
exchange for Old Senior Notes where such Old Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date (as defined herein), it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See 'Plan of
Distribution.'
The Company will not receive any proceeds from the Exchange Offer and will
pay all the expenses incident to the Exchange Offer. Tenders of Old Senior Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. In the event the Company terminates the Exchange Offer and does
not accept for exchange any Old Senior Notes, the Company will promptly return
the Old Senior Notes to the Holders thereof. See 'The Exchange Offer.'
There is no existing trading market for the New Senior Notes, and there can
be no assurance regarding the future development of a market for the New Senior
Notes, or the ability of Holders of the New Senior Notes to sell their New
Senior Notes or the price at which such Holders may be able to sell their New
Senior Notes. NationsBanc Capital Markets, Inc. and First Chicago Capital
Markets, Inc. (the 'Initial Purchasers') have advised the Company that they
currently intend to make a market in the New Senior Notes. The Initial
Purchasers are not obligated to do so, however, and any market-making with
respect to the New Senior Notes may be discontinued at any time without notice.
The Company does not intend to apply for listing or quotation of the New Senior
Notes on any securities exchange or to seek approval for quotation on any
automated quotation system.
2
<PAGE>
AVAILABLE INFORMATION
The Company and the Guarantors have filed with the SEC a registration
statement on Form S-4 (herein, together with all amendments and exhibits,
referred to as the 'Registration Statement') under the Securities Act with
respect to the New Senior Notes offered hereby. This Prospectus, which forms a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the SEC. For further information with respect to the Company and the New
Senior Notes offered hereby, reference is made to the Registration Statement.
Any statements made in this Prospectus concerning the provisions of certain
documents are not necessarily complete and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and in accordance
therewith files reports and other information with the SEC. The Registration
Statement, the exhibits and schedules forming a part thereof and the periodic
reports, proxy statements and other information filed in accordance with the
Exchange Act by the Company with the SEC may be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. Such
reports, proxy and information statements and other information may be found on
the SEC's site address, http://www.sec.gov. Copies of such material also can be
obtained from the Company upon request. The Company's common stock is quoted on
The Nasdaq National Market System under the symbol 'RIDL'; reports and other
information concerning Riddell can also be inspected at the offices of The
Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the SEC, for so long as any of the Notes remain
outstanding, it will furnish to the holders of the Notes and file with the SEC
(unless the SEC will not accept such a filing) (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the SEC on Forms 10-Q and 10-K if the Company were required to file such forms
pursuant to the Securities Exchange Act of 1934, as amended, including a
'Management's Discussion and Analysis of Results of Operations and Financial
Condition' and, with respect to the annual financial statements only, a report
thereon by the Company's certified independent accountants and (ii) all reports
that would be required to be filed with the SEC on Form 8-K if the Company were
required to file such reports.
3
<PAGE>
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. Such
forward-looking statements are principally contained in the sections 'Prospectus
Summary,' 'Summary Unaudited Pro Forma Financial Data,' 'The Acquisition,'
'Unaudited Pro Forma Condensed Consolidated Financial Data' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
include, without limitation, the Company's expectation and estimates as to the
Company's business operations following the Acquisition, including the
integration of Varsity's business with Riddell's and the achievement of certain
synergies related thereto, the introduction of new products, future financial
performance, including growth in net sales and earnings, cash flows from
operations, capital expenditures, the ability to refinance indebtedness, and the
sale of assets. In addition, in those and other portions of this Prospectus, the
words 'anticipates,' 'believes,' 'estimates,' 'expects,' 'plans,' 'intends' and
similar expressions, as they relate to the Company and its subsidiaries or the
Company's, Riddell's or Varsity's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in this
Prospectus. In addition to factors that may be described in this Prospectus, the
following factors, among others, could cause the actual results to differ
materially from those expressed in any forward-looking statements made by
Riddell or Varsity: (i) the outcome of certain litigation pending against the
Company; (ii) difficulties or delays in developing and introducing anticipated
new products or failure of customers to accept new product offerings; (iii) the
continuing popularity of athletic and school spirit programs in the youth,
junior high, high school and college markets; (iv) changes in consumer
preferences and the ability of the Company to adequately anticipate such
changes; (v) the highly seasonal nature of the Company's operations; (vi)
effects of and changes in general economic and business conditions; (vii)
actions by competitors, including new product offerings and marketing and
promotional successes; (viii) the ability of Varsity to secure desirable camp
locations and camper accommodations at competitive prices and to secure
desirable locations for its special events programs; (ix) claims which might be
made against the Company, including product liability claims; (x) the ability of
the Company to combine the Riddell and Varsity businesses and to realize the
expected benefits from the Acquisition; (xi) the ability of the respective sales
forces of Riddell and Varsity to cross-market each others' products; (xii) the
loss of any significant suppliers or sponsors or foreign sourcing; (xiii)
changes in business strategy or new product lines; and (xiv) performance by
licensees. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated or
expected. The Company does not intend to update these forward-looking
statements.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, appearing elsewhere in this
Prospectus. Unless the context otherwise requires, references herein to (i)
'Riddell' are to (x) Riddell Sports Inc., a Delaware corporation, and its
subsidiaries prior to giving effect to the Acquisition and (y) the Riddell Group
Division of the Company, consisting of Riddell Sports Inc. and its subsidiaries
(other than Varsity and Varsity's subsidiaries), after giving effect to the
Acquisition; (ii) 'Varsity' are to (x) Varsity Spirit Corporation, a Tennessee
corporation, and its subsidiaries prior to giving effect to the Acquisition and
(y) the Varsity Group Division of the Company, consisting of Varsity and its
subsidiaries, after giving effect to the Acquisition; and (iii) the 'Company'
are to Riddell Sports Inc. and its subsidiaries following the Acquisition,
including Varsity, or to Riddell Sports Inc., as the offeree or the obligor on
the Senior Notes. Pro forma information gives effect to the Offering and the
application of the estimated net proceeds therefrom, and the Acquisition and the
other Transactions (as defined herein) referred to herein, as if each of the
foregoing transactions had occurred on January 1, 1996, with respect to the pro
forma condensed combined statement of operations for the year ended December 31,
1996; on January 1, 1997, with respect to the pro forma condensed combined
statement of operations for the three months ended March 31, 1997; and as of
March 31, 1997 with respect to the pro forma condensed combined balance sheet at
March 31, 1997.
THE COMPANY
General
The Company is the world's leading manufacturer and reconditioner of
football protective equipment and is the nation's leading supplier of products
and services to the school spirit industry. The Company conducts its business
through two principal operating divisions: the Riddell Group Division and the
Varsity Group Division. The Company believes that the Riddell brand is one of
the best known and recognizable in all of sports. Management estimates that
Riddell football equipment is worn by more than 80% of all professional National
Football League ('NFL') players, and by more than 50% of all high school and
collegiate players. In addition to the sale of new protective athletic
equipment, Riddell is the only national reconditioner of athletic equipment.
Additionally, Riddell markets both full-size and miniature collectible helmets
and other collectible products, and licenses its Riddell(Registered) and
MacGregor(Registered) trademarks for use in athletic footwear and apparel.
Varsity designs and markets innovative cheerleader, dance team, and booster club
uniforms and accessories for sale to the school spirit industry. Varsity is also
a leading operator of high school and college cheerleader and dance team camps.
Varsity promotes its products and services, as well as the school spirit
industry, by organizing and producing various nationally televised cheerleading
and dance team championships and other special events. The Company believes that
it has one of the largest nationwide direct sales forces that focuses on the
extracurricular activities segment of the educational institutional market (the
'Institutional market'). The Company sells these products primarily to high
schools and colleges within the Institutional market. After giving effect to the
Transactions, including the Acquisition and the Offering, the Company would have
had net revenues and pro forma EBITDA of approximately $160.8 million and $18.1
million, respectively, for the year ended December 31, 1996.
Riddell
Riddell is the world's leading manufacturer of high school, college and
professional football helmets, with market share estimated at over 50%, and
believes it has a leading market share in other protective equipment, such as
shoulder pads. Riddell sells in excess of 200,000 football helmets a year, over
100,000 of which are used by high school, collegiate and professional players.
Riddell also sells shoulder pads, including a line of premium pads under the
Power(Registered) name, as well as a line of accessory pads which include thigh,
hip, rib and knee pads.
5
<PAGE>
Through its subsidiary, All American Sports Corporation ('All American'),
Riddell is the world's leading reconditioner of football helmets, shoulder pads
and other related equipment, and the only football helmet manufacturer that
provides reconditioning services to the Institutional market. Reconditioning
typically involves cleaning, sanitizing, buffing or painting, and recertifying
helmets as conforming to the National Operating Committee on Standards for
Athletic Equipment ('NOCSAE') standards. NOCSAE establishes industrywide
standards for protective athletic equipment. Riddell may also replace face
guards, interior pads and chin straps. In addition, Riddell reconditions
shoulder pads, as well as equipment for other sports, including baseball and
lacrosse helmets, catchers' masks and baseball gloves. Riddell believes its
customer relationships are strengthened by providing reconditioning services
through its Institutional market sales force to the same athletic coaches
generally responsible for athletic equipment purchases.
Riddell maintains a promotional rights agreement with the NFL's licensing
division (the 'NFL Agreement') which requires the Riddell name to appear on the
front and on the chin straps of each Riddell helmet used in NFL play. The NFL
Agreement further requires all teams in the NFL to cover any indicia of brand
identification of other manufacturers which might otherwise appear on helmets,
face masks or chin straps not manufactured by Riddell but used during league
play. The recognition resulting from the frequent appearance of the Riddell name
on helmets in televised football games as well as in photographs in newspapers
and magazines such as Sports Illustrated is viewed by management as important to
its overall sales, marketing and licensing efforts. The NFL Agreement, which
originated in 1989, expires in April 1999 and automatically extends for
unlimited successive five-year periods thereafter, provided that the quality of
Riddell's helmets and shoulder pads remains comparable to the best available
technology as reasonably determined by the NFL.
To better capitalize on Riddell's premium brand name, in 1993, David Mauer,
the former President of Mattel U.S.A., became Riddell's Chief Executive Officer
and initiated a strategic repositioning of Riddell's business, including
assembling Riddell's current management team. In October 1994, management
implemented a significant change in its Institutional distribution system by
eliminating the network of independent team dealers which historically sold
products to the Institutional market and began selling athletic equipment
directly to its Institutional customers. Riddell implemented its strategy by
utilizing the All American reconditioning sales force that had previously been
selling reconditioning services to its Institutional customers. Management
subsequently increased All American's full-time sales force from 80 in 1994 to
114 in 1996. The change to direct sales has (i) enabled Riddell to increase its
sales and profitability, (ii) facilitated the introduction and cross-selling of
Riddell's non-football-related products such as practicewear and baseball
equipment, (iii) improved control over the sales efforts to Institutions and
(iv) provided better access to detailed sales information for analysis.
In addition to repositioning its Institutional marketing effort, management
also refocused its retail collectible business. Riddell's retail collectible
business began with miniature and full size collectible football helmets
displaying NFL and college team logos. Management's strategy with respect to the
retail collectible market has been to (i) reduce production costs, (ii)
segregate products by distribution channels and (iii) accelerate new product
development. Riddell introduced several new collectible products, including
miniature hockey goalie masks displaying National Hockey League ('NHL') team
logos in 1995 and miniature baseball batter helmets displaying Major League
Baseball ('MLB') team logos in 1997. Riddell was granted a license from
Lucasfilm, Ltd. to sell half-scale Star Wars miniature collectibles in the
United States, Riddell's first non-sports collectible product. Riddell began
shipping Star Wars collectibles in the second quarter of 1997 and this license
extends through December 1998.
Under management's strategic plan, effective since 1993, Riddell's
operating performance has significantly improved. Its net revenues have
increased from $48.8 million in fiscal 1993 to $72.4 million in fiscal 1996 and
EBITDA has increased from a $3.8 million deficit to $7.9 million over that same
time period.
Varsity
Varsity is a leading provider of products and services to the school spirit
industry. Varsity designs and markets cheerleader, dance team and booster club
uniforms and accessories and is one of the nation's leading operators of youth,
junior high, high school and college cheerleader and dance team camps, clinics
and competitions. Varsity promotes its products and services, as well as the
school spirit industry, by organizing and
6
<PAGE>
producing various nationally televised cheerleading and dance team championships
and other special events. Varsity's primary market includes the approximately
37,500 Institutions located throughout the United States.
Varsity's cheerleader and dance team fashion division maintains an
excellent reputation for quality, design and on time delivery of its products.
Such products, which bear the Varsity(Trademark) label, include custom-made
cheerleader, dance team and booster club uniforms and accessories, including
sweaters, sweatshirts, jumpers, vests, skirts, warm-up suits, t-shirts, shorts,
pompons, socks, shoes, pins, jackets and gloves. Exclusive contracts are
maintained with several independent manufacturers who provide knitting, sewing,
finishing and shipping for all orders. By relying on independent manufacturers
to produce its uniforms, Varsity is able to minimize its fixed costs and retain
the flexibility necessary to adjust the manufacturing to its highly seasonal
production needs. Varsity provides its manufacturers with patterns, fabrics,
yarn and manufacturing specifications for its products. Varsity also provides
some cutting, knitting and lettering for the manufacturers at its specialized
production facility located at its Memphis headquarters. Varsity considers
itself an innovator in the design of uniforms and campwear garments and
maintains an in-house design staff to maintain its leadership in setting design
trends.
Varsity's camp division commenced operations in 1975 with 20 cheerleading
camps and 4,000 participants. Today, through its Universal Cheerleaders
Association ('UCA') division and United Spirit Association ('USA') subsidiary,
Varsity is a leading operator of cheerleader and dance camps in the U.S. Camp
enrollment has increased every year since Varsity has been in business, has
grown at a compounded annual rate of 14.6% since 1991 (excluding growth from
acquisitions) and totalled 188,000 participants in 1996. Camp sessions, which
are primarily held on college campuses in the summer, were conducted in every
state as well as in Canada and Japan in 1996. Participants in Varsity's 1996
summer camps included the cheerleading and/or dance team squads of approximately
65% of the universities comprising the Atlantic Coast, Big East, Big Ten, Big
Twelve, Pacific 10 and Southeastern collegiate athletic conferences. Varsity
instructors are typically college cheerleaders who may have previously attended
a Varsity camp, and management believes that its training of many of the top
college cheerleading squads augments its recruiting of high school and junior
high school camp participants.
Varsity promotes its products and services through active and visible
association with the following championships and television specials: the
National College Cheerleading and Dance Team Championship(Trademark) (nationally
televised for 12 consecutive years), the National High School Cheerleading
Championship(Trademark) (17 consecutive years), the National Dance Team
Championship(Trademark) (10 consecutive years) and the National All Star
Cheerleading Championship(Trademark) (2 consecutive years). In addition to
promoting cheerleading and dance team activities, these championships,
television specials and events are a revenue source to Varsity during its off-
season. In 1996, approximately 25,000 persons, including cheerleaders and their
families, participated in Varsity's special events, such as championships and
holiday parades in the U.S., London and Paris.
In December, 1994, Varsity acquired Intropa International/U.S.A., Inc.
('Intropa'), a Varsity supplier since 1988. Intropa specializes in providing
international and domestic tours for special interest, performing, youth and
educational groups including Varsity's London and Paris trips. Management
expects to expand Intropa's travel offerings through referrals from its
Institutional sales force.
Varsity's strategy has been to increase revenue and market share by (i)
expanding its school spirit product lines, (ii) strengthening its sales force,
(iii) increasing enrollment in its cheerleader and dance team camps as a vehicle
to increase participation in special events such as parades and bowl games and
cross-sell products, such as uniforms and (iv) actively promoting its business
as well as the school spirit industry, primarily through its nationally
televised cheerleading and dance team championships. Since fiscal 1987, Varsity
has significantly expanded the variety and selection of its uniforms and
accessories and increased its direct sales force to approximately 135 full-time
professional sales representatives. Varsity believes it currently has the
largest nationwide full-time direct sales force in the school spirit industry.
Varsity has experienced significant growth over the last five years.
Revenues have increased at a compounded annual growth rate of 22.1% from
approximately $41.6 million in the year ended March 31, 1993 to approximately
$88.4 million in the year ended December 31, 1996 and EBITDA has increased at a
compounded annual growth rate of 22.1% from $4.6 million to $9.8 million over
the same period.
7
<PAGE>
Market and Industry
The 1997 edition of Patterson's American Education has reported that there
are approximately 14,900 junior high schools, 19,300 high schools (of which the
Company believes over 15,000 have a football program), 1,750 junior colleges and
1,500 colleges located throughout the United States. According to the National
Federation of State High School Associations, there are more than 5,800,000
students participating in organized athletic programs at high schools located in
the United States. The level of participation in high school football has
remained relatively stable over the past 10 years with participants averaging in
excess of 900,000 per year. The Company believes that there are in excess of
1,000,000 participants in the school spirit industry.
THE ACQUISITION
On May 5, 1997, Riddell, Merger Sub (as defined herein) and Varsity entered
into a definitive merger agreement (the 'Merger Agreement'). Pursuant to the
Merger Agreement, on June 19, 1997, Merger Sub completed its cash tender offer
for all outstanding shares of common stock of Varsity (the 'Varsity Tender
Offer'). A total of 4,511,415 Varsity shares, or approximately 98.5% of
Varsity's then outstanding shares, were purchased pursuant to the Varsity Tender
Offer. Pursuant to the terms of the Merger Agreement, on July 25, 1997, Varsity
was merged with Merger Sub (the 'Merger') and became a wholly owned subsidiary
of Riddell. All remaining shares of Varsity common stock not tendered and
purchased in the Varsity Tender Offer were converted into the right to receive
$18.90 per share. Because Merger Sub owned more than 90% of the outstanding
shares, under the Tennessee Business Corporation Act, no vote was required by
the shareholders of Varsity to effect the Merger. See 'The Acquisition.' In
addition, Riddell's then existing credit agreement (the 'Former Credit
Agreement') was refinanced with the proceeds of the Offering and the New Credit
Facility, which refinancing occurred simultaneously with the Acquisition on June
19, 1997. The Company used the net proceeds from the Offering and the initial
borrowings under the New Credit Facility to finance the Acquisition, to
refinance the Former Credit Agreement, and to pay fees and expenses of the
Transactions. The Acquisition, the Merger, the Offering and the application of
the net proceeds therefrom, the refinancing of the Former Credit Agreement and
the incurrence of the initial borrowings under the New Credit Facility are
collectively referred to as the 'Transactions.'
The Company believes that the Acquisition will better position it to pursue
growth opportunities in the Institutional market. The Company regards the
Acquisition as an opportunity to achieve certain strategic objectives, including
providing the Company with the scale necessary to expand the direct marketing of
its products to include the more female dominated segment of the Institutional
market. The Acquisition will allow Riddell to benefit from Varsity's strong and
consistent growth record, providing a foundation for future growth through
product development, product line extensions and complementary acquisitions. The
Acquisition will improve Riddell's ability to serve the Institutional market by:
(i) enhancing the size and scope of its Institutional sales force; (ii)
expanding and enhancing the Company's 'unique' relationships with the
decision-makers for athletic equipment and services; (iii) accelerating new
product development and entry into new markets; (iv) facilitating the
implementation of its Institutional sales force information systems; and (v)
broadening management. Specifically, the Company believes the Acquisition will
result in the following:
o ENHANCING INSTITUTIONAL SALES FORCE. As a result of the Acquisition, the
Company's full-time sales force increased from 114 to 249. The Company
anticipates having separate sales forces for male and female sports and
activities. The combined Institutional sales force of Riddell and Varsity
will command a greater market presence than would either company's sales
force on a stand-alone basis. The Company intends to widen the focus of the
Varsity sales force from the cheerleading coach to coaches of all female
sports and activities. Historically, these coaches have been served
primarily by independent dealers. The Company expects to derive other
benefits from the Riddell and Varsity sales forces working together, such
as (i) leveraging relationships to provide referrals, or cross-leads, in
schools not currently served by both Riddell and Varsity, (ii)
cross-marketing its product lines to provide increased sales (e.g., Riddell
relationships used to sell Varsity camps, clinics, competitions and tours
and Varsity relationships used to sell Riddell's practicewear) and (iii)
improving customer service by increasing the ratio of sales representatives
to schools.
The Company intends to continue to increase the size of its sales
force, due to the competitive advantages of the direct sales strategy. By
increasing the size of its sales force, reducing the size of sales
8
<PAGE>
territories and increasing the number of products available for sale, the
Company expects that its sales people will be able to spend more time
productively in each school.
o ENHANCING UNIQUE SELLING RELATIONSHIPS. The Company sells product-related
services which strengthen relationships with its customers who make the
equipment purchasing decisions. Riddell, as a factory-direct supplier and
reconditioner, builds strong relationships through quick repair or
replacement on game-day as well as pick-up, cleaning and safety
recertification for football and baseball protective equipment at the end
of the season. No other football helmet manufacturer that services the
Institutional market provides reconditioning services. Varsity develops
strong relationships with its customers for cheerleading and dance uniforms
during the camp experience through its sponsorship of special events,
including popular holiday parades and regional and national championships,
and its group travel tour activities. In addition, Varsity offers special
training sessions and instructional manuals specifically aimed at the
coaches or other persons responsible for supervising the cheerleading and
dance team activities.
o ACCELERATING NEW PRODUCT DEVELOPMENT AND NEW MARKET ENTRY. Management
believes that the Acquisition will position the Company to expand into the
booster/fund raising market and the market for sports camps. Cheerleading
and other school activities, such as band, are often participant-funded
activities, not school-funded. Cheerleaders may sponsor fundraising
activities and sell various products to fund their activity. The Company
believes that by combining Varsity's relationship with cheerleaders and
Riddell's product development knowledge, it has the ability to become a
significant participant in the booster/fundraising market. Many of the
Company's existing products (such as mini-football and baseball batter
helmets and silk-screened t-shirts, shorts and sweatshirts) are
particularly well suited for the booster/fund raising market, and through
Riddell's expertise in molded plastic design and manufacturing, the Company
intends to develop new booster products. Management also expects that the
Company's experience in licensing its brands could be extended to licensing
Varsity's brands.
o FACILITATING IMPLEMENTATION OF SALES FORCE INFORMATION SYSTEMS. The
Company plans to expand its automated order entry processing system over
the next few years and to provide laptop computers to each sales person for
information collection and order processing. While Varsity has already
begun to automate its sales information system, Riddell has not yet done
so. Varsity's sales force uses laptop computers and Varsity has developed
its own proprietary software. Management expects that Varsity's experience
should accelerate and facilitate Riddell's automation of its order entry
processing system. Management expects that the in-field automation of sales
information will enhance its competitive advantage by providing Company
personnel with faster access to information concerning its customers and
speeding the order entry process, thereby enabling sales personnel to spend
more time selling and less time writing sales orders.
o BROADENING MANAGEMENT. The Acquisition combines two strong management
teams with diverse and complementary backgrounds. The Company operates
Riddell and Varsity as two separate divisions under a broadened management
team. Varsity's management team has been together over eight years and has
consistently produced a record of growth and profitability. Riddell's
management has significant experience in the sporting goods industry and in
managing large public corporations. In connection with the Acquisition, the
top four executives of Varsity purchased $4.4 million of newly issued
Riddell common stock.
BUSINESS STRATEGY
The Company's objective is to increase its importance as a major supplier
of products and services that serves the extracurricular activities segment of
the Institutional market. The Company will continue to focus on and increase its
sales of athletic equipment and services and maintain its leadership position as
the largest supplier of services and products to the school spirit industry. The
key components of the Company's business strategy are as follows: (i) maximize
the benefits of the Acquisition; (ii) continue to increase the size of and
expand the productivity of its Institutional sales force; (iii) broaden its
product line; (iv) pursue strategic acquisitions; and (v) improve profitability
and cash flow through revenue growth and limited fixed cost expansion.
9
<PAGE>
Riddell's common stock is quoted on The Nasdaq National Market System under
the symbol 'RIDL.' Riddell's principal executive office is located at 900 Third
Avenue, 27th Floor, New York, New York 10022. Riddell's telephone number is
(212) 826-4300.
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered....... Up to $115,000,000 aggregate principal amount of
10 1/2% Senior Notes due 2007, which have been
registered under the Securities Act. The form and
terms of the New Senior Notes will be the same as
those of the Old Senior Notes except that the New
Senior Notes will have been registered under the
Securities Act, and consequently will not be subject
to certain transfer restrictions, registration rights
and related liquidated damages provisions applicable
to the Old Senior Notes. See 'Description of the
Senior Notes--Registration Rights; Liquidated
Damages.'
The Exchange Offer....... The New Senior Notes are being offered in exchange for
a like principal amount of Old Senior Notes. The
issuance of the New Senior Notes is intended to
satisfy obligations of the Company contained in the
Registration Rights Agreement. For procedures for
tendering, see 'The Exchange Offer--Procedures for
Tendering Old Senior Notes.'
Tenders; Expiration Date;
Withdrawal............. The Exchange Offer will expire at 5:00 p.m., New York
City time, on September 9, 1997, or such later date
and time to which it is extended. The tender of Old
Senior Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date.
Any Old Senior Note not accepted for exchange for any
reason will be returned without expense to the
tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange
Offer. See 'The Exchange Offer--Terms of the Exchange
Offer; Period for Tendering Old Senior Notes' and 'The
Exchange Offer--Withdrawal Rights.'
Certain Conditions to
Exchange Offer......... The Company shall not be required to accept for
exchange, or to issue New Senior Notes in exchange
for, any Old Senior Notes and may terminate or amend
the Exchange Offer if at any time before the
acceptance of the Old Senior Notes for exchange or the
exchange of the New Senior Notes for such Old Senior
Notes certain events have occurred, which in the
reasonable judgment of the Company, make it
inadvisable to proceed with the Exchange Offer and/or
with such acceptance for exchange or with such
exchange. Such events include (i) any threatened,
instituted or pending action seeking to restrain or
prohibit the Exchange Offer, (ii) a general suspension
of trading in securities on any national securities
exchange or in the over-the-counter market, (iii) a
general banking moratorium, (iv) the commencement of a
war or armed hostilities involving the United States
and (v) a material adverse change or development
involving a prospective material adverse change in the
Company's business, properties, assets, liabilities,
financial condition, operations, results of operations
or prospects that may affect the value of the Old
Senior Notes or the New Senior Notes. In addition, the
Company will not accept for exchange any Old Senior
Notes tendered, and no New Senior Notes will be issued
in exchange for any such Old Senior Notes, at any such
time any stop
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
order shall be threatened or in effect with respect to
the Registration Statement of which the Prospectus
constitutes a part or the qualification of the
Indenture under the Trust Indenture Act of 1939. See
'The Exchange Offer--Certain Conditions to the
Exchange Offer.'
Federal Income Tax
Consequences........... The exchange pursuant to the Exchange Offer should not
result in gain or loss to the holders or the Issuer
for federal income tax purposes. See 'Certain U.S.
Federal Income Tax Considerations.'
Use of Proceeds.......... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer. See 'Use of
Proceeds.'
Exchange Agent........... Marine Midland Bank is serving as exchange agent (the
'Exchange Agent') in connection with the Exchange
Offer.
</TABLE>
CONSEQUENCES OF EXCHANGING OLD SENIOR NOTES
Holders of Old Senior Notes who do not exchange their Old Senior Notes for
New Senior Notes pursuant to the Exchange Offer will continue to be subject to
the provisions in the Indenture regarding transfer and exchange of the Old
Senior Notes and the restrictions on transfer of such Old Senior Notes as set
forth in the legend thereon as a consequence of the issuance of the Old Senior
Notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Old Senior Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register Old Senior
Notes under the Securities Act. See 'Description of the Senior
Notes--Registration Rights; Liquidated Damages.' Based on interpretations by the
staff of the SEC, as set forth in no-action letters issued to third parties, the
Company believes that New Senior Notes issued pursuant to the Exchange Offer in
exchange for Old Senior Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any holder which is an 'affiliate' of
the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Senior Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement with any
person to participate in the distribution of such New Senior Notes. However, the
Company does not intend to request the SEC to consider, and the SEC has not
considered, the Exchange Offer in the context of a no-action letter and there
can be no assurance that the staff of the SEC would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and does
not intend to engage in, a distribution of New Senior Notes and has no
arrangement or understanding to participate in a distribution of New Senior
Notes. If any holder is an affiliate of the Company, is engaged or intends to
engage in or has any arrangement or understanding with respect to the
distribution of the New Senior Notes to be acquired pursuant to the Exchange
Offer, such holder (i) could not rely on the applicable interpretations of the
staff of the SEC and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
Each broker-dealer that receives New Senior Notes for its own account in
exchange for Old Senior Notes must acknowledge that such Old Senior Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities and that it will deliver a prospectus in connection with any
resale of such New Senior Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Senior Notes received
in exchange for Old Senior Notes where such Old Senior Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See 'Plan of Distribution.' In addition,
to comply with the state securities laws, the New Senior Notes may not be
offered or sold in any state
11
<PAGE>
unless they have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.
The offer and sale of the New Senior Notes to 'qualified institutional buyers'
(as such term is defined under Rule 144A of the Securities Act) is generally
exempt from registration or qualification under the state securities laws. The
Company currently does not intend to register or qualify the sale of the New
Senior Notes in any state where an exemption from registration or qualification
is required and not available. See 'The Exchange Offer--Consequences of
Exchanging Old Senior Notes' and 'Description of the Senior Notes--Registration
Rights; Liquidated Damages.'
SUMMARY DESCRIPTION OF THE NEW SENIOR NOTES
The form and terms of the New Senior Notes will be the same as those of the
Old Senior Notes except that the New Senior Notes will have been registered
under the Securities Act, and consequently will not be subject to certain
transfer restrictions, registration rights and related liquidated damages
provisions applicable to the Old Senior Notes. See 'Description of the Senior
Notes--Registration Rights; Liquidated Damages.'
<TABLE>
<S> <C>
Securities Offered....... Up to $115.0 million aggregate principal amount of
10 1/2% Senior Notes Due 2007 of the Company, which
have been registered under the Securities Act.
Maturity Date............ July 15, 2007
Interest Payment Dates... January 15 and July 15, commencing January 15, 1998.
Ranking.................. The Old Senior Notes are, and the New Senior Notes
will be, senior unsecured obligations, ranking senior
in right of payment to all existing and future
Indebtedness (as defined herein) of the Company that
is subordinated to the Senior Notes and ranking pari
passu in right of payment with all other existing and
future senior Indebtedness of the Company. Loans under
the Company's New Credit Facility (as defined herein)
will be secured by substantially all of the assets of
the Company and accordingly, the Senior Notes will be
effectively subordinated to the loans outstanding
under the New Credit Facility to the extent of the
value of the assets securing such loans. As of March
31, 1997, on a pro forma basis after giving effect to
the Transactions, including the Acquisition and the
Offering and the application of the net proceeds
therefrom, the Company would have had $12.7 million of
senior Indebtedness outstanding other than the Senior
Notes, all of which would have been secured debt, and
$7.5 million of subordinated Indebtedness outstanding.
The terms of the indenture pursuant to which the Old
Senior Notes were, and the New Senior Notes will be,
issued (the 'Indenture') will permit the Company and
the Guarantors to incur additional Indebtedness,
subject to certain limitations. See 'Description of
the Senior Notes.'
Optional Redemption...... The Senior Notes may be redeemed at the option of the
Company, in whole or in part, on or after July 15,
2002, at the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated Damages (as
defined herein), if any, to the redemption date. In
addition, at any time on or prior to July 15, 2000,
the Company may redeem up to 35% of the aggregate
principal amount of the Senior Notes with the net
proceeds of one or more equity offerings of the common
stock of the Company, at a redemption price equal to
110 1/2% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, to
the date of redemption; provided that at least $75.0
million aggregate principal amount of
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
the Senior Notes remains outstanding immediately after
such redemption.
Guarantees............... The Old Senior Notes are, and the New Senior Notes
will be, unconditionally guaranteed (the 'Subsidiary
Guarantees') on a senior basis by each of the
Company's current and future domestic Restricted
Subsidiaries (as defined herein) (collectively, the
'Guarantors'). The Subsidiary Guarantees rank senior
in right of payment to all existing and future
subordinated Indebtedness of the Guarantors and rank
pari passu in right of payment with all other
unsubordinated Indebtedness of the Guarantors,
including the guarantees of Indebtedness under the New
Credit Facility. Any Guarantor's obligations under the
New Credit Facility, however, will be secured by a
lien on substantially all of the assets of such
Guarantor, and the Indenture restricts, but does not
prohibit, the Guarantors from incurring additional
secured indebtedness. Accordingly, such secured
Indebtedness will rank prior to the Subsidiary
Guarantees with respect to such assets. See
'Description of the Senior Notes--Subsidiary
Guarantees.'
Mandatory Redemption..... None.
Change of Control........ Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
repurchase all outstanding Senior Notes at 101% of the
principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to
the date of repurchase.
Covenants................ The Indenture restricts, among other things, the
ability of the Company and its subsidiaries to incur
additional Indebtedness, pay dividends or make certain
other restricted payments, apply net proceeds from
certain asset sales, enter into certain transactions
with affiliates, agree to certain payment restrictions
applicable to Restricted Subsidiaries (as defined
herein), sell stock of Restricted Subsidiaries,
designate subsidiaries as Restricted or Unrestricted
Subsidiaries (as defined herein), incur liens or enter
into consolidations or mergers. See 'Description of
the Senior Notes--Certain Covenants.'
Use of Proceeds.......... The Company will not receive any proceeds from the
Exchange Offer. The Company used the estimated $109.7
million net proceeds of the Offering, together with
borrowings under the New Credit Facility, to finance
the Acquisition, to refinance the Former Credit
Agreement and to pay related fees and expenses. See
'Use of Proceeds.'
</TABLE>
RISK FACTORS
For a discussion of certain matters that should be considered by Holders in
connection with the Exchange Offer, see 'Risk Factors.'
13
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following sets forth summary unaudited pro forma financial data derived
from the unaudited pro forma condensed consolidated financial data contained
elsewhere herein, as if the Acquisition and the Offering had occurred on January
1, 1997. The summary pro forma statement of operations data of the Company for
the year ended December 31, 1996 and the three months ended March 31, 1997 give
effect to, among other things, the Acquisition and the Offering, as if they had
occurred on January 1, 1996. The following unaudited pro forma condensed balance
sheet data of the Company give effect to, among other things, the Acquisition
and the Offering, as if they had occurred on March 31, 1997. Certain management
assumptions and adjustments relating to the Acquisition and the Offering are
described in the accompanying notes hereto. This pro forma information is not
necessarily indicative of the results that would have occurred had the
Acquisition and the Offering been completed on the dates indicated or the
Company's actual or future results or financial position. The summary pro forma
financial data should be read in conjunction with the information contained in
the financial statements of Riddell and Varsity and the notes thereto,
'Unaudited Pro Forma Condensed Consolidated Financial Data,' 'Selected Financial
Data of Riddell,' 'Selected Financial Data of Varsity' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations'
included elsewhere herein.
14
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND RATIO INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
OPERATING DATA:
Net revenues.................................... $160,831 $ 26,916
Cost of revenues................................ 92,426 15,881
------------ ------------
Gross profit.................................... 68,405 11,035
Selling, general and administrative expenses.... 52,949 12,981
Product liability expense....................... 2,484 625
------------ ------------
Income (loss) from operations................... 12,972 (2,571)
Interest expense, net........................... 13,927 3,431
------------ ------------
Income (loss) before taxes...................... (955) (6,002)
Income tax credits.............................. -- (2,265)
------------ ------------
Net income (loss)............................... $ (955) $ (3,737)
------------ ------------
------------ ------------
Net income (loss) per share..................... $ (0.10) $ (0.40)
Weighted average common and equivalent shares
outstanding................................... 9,595 9,236
OTHER DATA:
Depreciation and amortization................... $ 5,107 $ 1,351
EBITDA(1)....................................... 18,079 (1,220)
Capital expenditures............................ 2,967 566
Cash interest expense(2)........................ 13,213 3,235
Ratio of EBITDA to cash interest expense........ 1.4x *
Ratio of earnings to fixed charges(3)........... 0.9x *
BALANCE SHEET DATA AT MARCH 31, 1997:
Working capital................................................ $ 48,390
Total assets................................................... 187,126
Long-term debt, less current portion........................... 135,180
Shareholders' equity........................................... 29,166
</TABLE>
- ------------------
* Amounts result in a deficiency.
(1) EBITDA is the sum of income before extraordinary item and cumulative effect
of changes in accounting principles (as applicable), income taxes and
interest, depreciation and amortization expense. EBITDA is presented because
it is a widely accepted financial indicator of a company's ability to
service indebtedness. However, EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity.
(2) Cash interest expense excludes amortization of deferred financing costs, a
portion of which arises from pro forma adjustments.
(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs) whether expensed or capitalized
and one-third of rental expense, deemed representative of that portion of
rental expense estimated to be attributable to interest. Earnings would be
inadequate to cover fixed charges by approximately $6.0 million for the
three months ended March 31, 1997.
15
<PAGE>
SUMMARY FINANCIAL DATA
RIDDELL
The following table sets forth summary financial and other data of Riddell
for the fiscal years 1992 through 1996, which have been derived from
Consolidated Financial Statements of Riddell. The summary financial data as of
and for the three months ended March 31, 1996 and 1997 have been derived from
Riddell's Unaudited Condensed Consolidated Financial Statements for those
periods included elsewhere in this Prospectus and include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the results for the unaudited interim
periods. Results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the entire year. The
information presented below is qualified in its entirety by, and should be read
in conjunction with, 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Riddell--Results of Operations,' 'Selected
Financial Data of Riddell' and the Consolidated Financial Statements of Riddell
and the Condensed Consolidated Financial Statements of Riddell and related notes
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net revenues:
Net sales..................................... $52,978 $45,202 $51,567 $63,603 $69,888 $19,036 $18,001
Royalty income................................ 3,425 3,551 3,845 3,440 2,494 808 574
------- ------- ------- ------- ------- ------- -------
56,403 48,753 55,412 67,043 72,382 19,844 18,575
Cost of sales................................... 31,575 28,885 29,792 35,794 38,813 10,211 10,094
------- ------- ------- ------- ------- ------- -------
Gross profit.................................... 24,828 19,868 25,620 31,249 33,569 9,633 8,481
Selling, general and administrative expenses.... 19,215 20,436 21,087 23,332 25,369 6,991 7,207
Product liability expenses...................... 2,473 2,959 2,927 2,651 2,484 664 625
Product liability litigation loss(1)............ -- -- 4,600 -- -- -- --
Other charges(2)................................ -- 2,170 1,188 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations................... 3,140 (5,697) (4,182) 5,266 5,716 1,978 649
Interest expense................................ 1,902 2,029 2,001 2,795 2,763 628 666
------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes, extraordinary item
and cumulative effect of changes in accounting
principles(3)................................. 1,238 (7,726) (6,183) 2,471 2,953 1,350 (17)
Income taxes (credits).......................... 591 (2,245) (1,250) 100 110 60 --
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles(3)................................. $ 647 $(5,481) $(4,933) $ 2,371 $ 2,843 $ 1,290 $ (17)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
OTHER DATA:
Depreciation and amortization................... $ 1,870 $ 1,922 $ 1,883 $ 2,167 $ 2,209 $ 494 $ 554
EBITDA(4)....................................... 5,010 (3,775) (2,229) 7,433 7,925 2,472 1,203
EBITDA as a percentage of net revenues.......... 8.9% (7.7)% (4.0)% 11.1% 10.9% 12.5% 6.5%
Capital expenditures............................ $ 908 $ 702 $ 662 $ 750 $ 1,139 $ 429 $ 70
Ratio of earnings to fixed charges(5)........... 1.6x * * 1.8x 1.9x 2.8x 1.0x
BALANCE SHEET DATA AT MARCH 31, 1997:(6)
Working capital.................................................................................................. $28,295
Total assets..................................................................................................... 79,494
Long-term debt, less current portion............................................................................. 31,939
Shareholders' equity............................................................................................. 27,728
</TABLE>
- ------------------
* Amounts result in a deficiency.
(1) In 1994, a charge was recorded of $4.6 million to establish a reserve for
the full uninsured portion of a jury award granted against Riddell in a
product liability suit, and certain related costs. In 1995, Riddell settled
with the plaintiff in such case for an amount that was less than the initial
jury award. See Note 8 to the Consolidated Financial Statements of Riddell
included elsewhere in this Prospectus relating to product liability
litigation matters and contingencies.
(Footnotes continued on next page)
16
<PAGE>
SUMMARY FINANCIAL DATA (CONTINUED)
(2) In 1993, other charges consisted of the following: (i) a $1.3 million charge
to establish a reserve against litigation costs and expenses relating to a
stockholder class action suit that was subsequently settled in February 1994
and (ii) a $870,000 charge relating to the loss realized on the
discontinuance of certain foam molding operations. In 1994, other charges
consisted of certain transitional costs relating to Riddell's conversion to
an in-house Institutional sales force.
(3) In 1993, a charge was recorded for the cumulative effect on prior years of a
change in accounting principles for income taxes of $51,000 and a change in
accounting principles for contingent product liability of $214,948. An
extraordinary item in 1995 consisted of a $1.9 million provision for costs
relating to fraudulent transfer litigation.
(4) EBITDA is the sum of income before extraordinary item and cumulative effect
of changes in accounting principles (as applicable), income taxes, interest,
depreciation and amortization expense. EBITDA is presented because it is a
widely accepted financial indicator of a company's ability to service
indebtedness. However, EBITDA should not be considered as an alternative to
income from operations or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) and
should not be construed as an indication of a company's operating
performance or as a measure of liquidity.
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs) whether expensed or capitalized
and one-third of rental expense, deemed representative of that portion of
rental expense estimated to be attributable to interest. Earnings were
inadequate to cover fixed charges by approximately $7.7 million in 1993 and
approximately $6.2 million in 1994.
(6) See Note 8 to the Consolidated Financial Statements of Riddell included
elsewhere in this Prospectus relating to product liability litigation
matters and other contingent liabilities.
17
<PAGE>
SUMMARY FINANCIAL DATA (CONTINUED)
VARSITY
The following table sets forth summary financial and other data of Varsity
for the fiscal periods 1993 through 1996, which have been derived from the
historical Consolidated Financial Statements of Varsity for those periods. The
summary financial data as of and for the three months ended March 31, 1996 and
1997 have been derived from Varsity's Unaudited Condensed Consolidated Financial
Statements for those periods included elsewhere in this Prospectus and include,
in the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for the unaudited
interim periods. Results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
To aid in annual comparisons, selected unaudited consolidated financial data
have also been presented for the twelve month period ended December 31, 1994.
The information presented below is qualified in its entirety by, and should be
read in conjunction with, 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Varsity--Results of Operations,' 'Selected
Financial Data of Varsity' and the Consolidated Financial Statements of Varsity
and the Condensed Consolidated Financial Statements of Varsity and related notes
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE
MONTHS TWELVE
YEAR ENDED ENDED MONTHS YEAR ENDED THREE MONTHS
MARCH 31, DEC. ENDED DECEMBER 31, ENDED MARCH 31,
----------------- 31, DEC. 31 ------------------ ------------------
1993 1994 1994(1) 1994(2) 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:(3)
Revenues:
Uniforms and accessories............. $25,765 $31,193 $35,866 $37,635 $44,049 $49,472(5) $ 2,277 $ 2,814(5)
Camps and events..................... 15,822 18,560 23,721(4) 24,968 31,449(4) 38,977(4)(5) 4,139(4) 5,527(4)(5)
------- ------- ------- ------- ------- ------- ------- -------
41,587 49,753 59,587 62,603 75,498 88,449 6,416 8,341
Cost of revenues:
Uniforms and accessories............. 13,205 15,828 18,659 19,867 23,379 26,849 1,618 1,996
Camps and events..................... 10,873 13,094 16,826 17,696 23,114 26,764 3,094 3,791
------- ------- ------- ------- ------- ------- ------- -------
24,078 28,922 35,485 37,563 46,493 53,613 4,712 5,787
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........................... 17,509 20,831 24,102 25,040 29,005 34,836 1,704 2,554
Selling, general and administrative
expenses............................. 13,522 15,994 16,117 18,920 22,679 26,388 4,250 5,455
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)................ 3,987 4,837 7,985 6,120 6,326 8,448 (2,546) (2,901)
Other income (loss).................... 44 121 150 183 178 166 47 62
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes............. 4,031 4,958 8,135 6,303 6,504 8,614 (2,499) (2,839)
Taxes (benefit) on income.............. 1,604 1,936 3,218 2,485 2,341 3,414 (992) (1,125)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)...................... $ 2,427 $ 3,022 $ 4,917 $ 3,818 $ 4,163 $ 5,200 $(1,507) $(1,714)
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
OTHER DATA:
Depreciation and amortization.......... $ 629 $ 653 $ 577 $ 743 $ 992 $ 1,318 $ 301 $ 411
EBITDA(6).............................. 4,616 5,490 8,562 6,863 7,318 9,766 (2,245) (2,490)
EBITDA as a percentage of revenues..... 11.1% 11.0% 14.4% 11.0% 9.7% 11.0% (35.0)% (29.9)%
Capital expenditures................... $ 357 $ 938 $ 667 $ 1,192 $ 1,984 $ 1,828 $ 681 $ 496
BALANCE SHEET DATA AT MARCH 31, 1997:
Working capital.................................................................................................... $15,744
Total assets....................................................................................................... 35,299
Long-term debt, less current portion............................................................................... 480
Shareholders' equity............................................................................................... 27,976
</TABLE>
- ------------------
(1) Effective April 1, 1994, Varsity changed its fiscal year end from March 31
to December 31. Accordingly, Varsity's results of operations for fiscal 1994
do not include the three months ended March 31, which has historically
resulted in a net loss. See note (3) below.
(2) Presented for purposes of comparability with fiscal 1995 and 1996.
(Footnotes continued on next page)
18
<PAGE>
SUMMARY FINANCIAL DATA (CONTINUED)
(3) The business and results of operations of Varsity are highly seasonal. A
substantial portion of Varsity's annual revenues and all of Varsity's net
income historically have been generated in the three months ended June 30
and September 30. The three months ended March 31 and December 31 have
historically resulted in net losses. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Varsity.'
(4) Includes $2,065,000, $5,814,000, $5,814,000, $839,000 and $386,000 for the
nine months ended December 31, 1994, the twelve months ended December 31,
1995 and December 31, 1996, and the three months ended March 31, 1996 and
March 31, 1997, respectively, as a result of the December 1, 1994
acquisition of the business of Intropa.
(5) Includes $261,000 and $4,199,000 for (i) uniforms and accessories and (ii)
camps and events, respectively, for the year ended December 31, 1996, and
$62,000 and $967,000 for (i) uniforms and accessories and (ii) camps and
events, respectively, for the three months ended March 31, 1997 as a result
of the May 15, 1996 acquisition of the camp business of United Special
Events, Inc.
(6) EBITDA is the sum of income before extraordinary item and cumulative effect
of changes in accounting principles (as applicable), income taxes and
interest, depreciation and amortization expense. EBITDA is presented because
it is a widely accepted financial indicator of a company's ability to
service indebtedness. However, EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity.
19
<PAGE>
RISK FACTORS
Prospective Holders of New Senior Notes should carefully consider the
specific factors set forth below, as well as the other information included in
this Prospectus before deciding to tender their Old Senior Notes in the Exchange
Offer, although the risk factors set forth below (other than '--Consequences of
Failure to Exchange and Requirements for Transfer of New Senior Notes') are
generally applicable to the Old Senior Notes as well as the New Senior Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF NEW SENIOR
NOTES
Holders of Old Senior Notes who do not exchange their Old Senior Notes for
New Senior Notes pursuant to the Exchange Offer will continue to be subject to
the provisions in the Indenture regarding transfer and exchange of the Old
Senior Notes and the restrictions on transfer of such Old Senior Notes as set
forth in the legend thereon as a consequence of the issuance of the Old Senior
Notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Old Senior Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register Old Senior
Notes under the Securities Act. The Company currently does not intend to
register or qualify the sale of the New Senior Notes in any state where an
exemption from registration or qualification is required and not available. See
'The Exchange Offer--Consequences of Exchanging Old Senior Notes.'
SIGNIFICANT LEVERAGE AND INDEBTEDNESS SERVICE
The Company incurred substantial indebtedness in connection with the
financing of the Acquisition and will remain highly leveraged following the
Exchange Offer. As of March 31, 1997, on a pro forma basis after giving effect
to the Transactions, the Company would have had total consolidated indebtedness
of approximately $135.2 million. The Company's earnings on a pro forma basis
after giving effect to the Transactions, for the year ended December 31, 1996,
were inadequate to cover fixed charges by $1.0 million. Subject to the
restrictions in the New Credit Facility and the Indenture, the Company and its
subsidiaries may incur additional indebtedness from time to time to finance
capital expenditures and acquisitions and for other general corporate purposes.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Liquidity and Capital Resources of the Company.'
The degree to which the Company is leveraged could have important
consequences to the holders of the Senior Notes, including: (i) the possible
limitation in the future on the Company's ability to obtain additional financing
for working capital, capital expenditures, debt service requirements or other
purposes; (ii) a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of the principal of and interest on its
indebtedness, thereby reducing funds available for operations; (iii) certain of
the Company's borrowings, primarily the borrowings under the New Credit
Facility, will be at variable rates of interest which could cause the Company to
be vulnerable to increases in interest rates; (iv) the Company may be more
vulnerable to economic downturns and be more limited in its ability to withstand
competitive pressures than its competitors that are not as highly leveraged; and
(v) the Senior Notes will mature after substantially all of the Company's other
indebtedness, including all borrowings under the New Credit Facility. See
'Description of Other Indebtedness.'
The Company's ability to make scheduled payments of the principal of, or
interest on, or to refinance, its indebtedness, including the Senior Notes, will
depend on its future operating performance and cash flow, which are subject to
prevailing economic conditions, prevailing interest rate levels, and financial,
competitive, business and other factors, many of which are beyond its control,
as well as the availability of borrowings under the New Credit Facility or
successor facilities. However, based upon the current and anticipated level of
operations, the Company believes that its cash flow from operations, together
with amounts available under the New Credit Facility, will be adequate to meet
its anticipated cash requirements for the next several years for working
capital, capital expenditures, interest payments and scheduled principal
payments. There can be no assurance, however, that the Company's business will
continue to generate cash flow at or above current levels. If the Company is
unable to generate sufficient cash flow from operations in the future to service
its indebtedness, it may be required to refinance all or a portion of its
existing indebtedness, including the Senior Notes, or to obtain
20
<PAGE>
additional financing or to dispose of material assets or operations. The New
Credit Facility and the Indenture restrict the Company's ability to sell assets
and the use of proceeds therefrom. There can be no assurance that any such
refinancing or asset sales would be possible under the Company's debt
instruments existing at such time, that the proceeds which the Company could
realize from such refinancing or asset sales would be sufficient to meet the
Company's obligations then due or that any additional financing could be
obtained.
RESTRICTIVE COVENANTS AND ASSET ENCUMBRANCES
The New Credit Facility and the Indenture contain numerous restrictive
covenants which limit the discretion of the management of the Company with
respect to certain business matters. These covenants place significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to pay dividends
or make other restricted payments, to make investments, loans and guarantees and
to sell or otherwise dispose of a substantial portion of assets to, or merge or
consolidate with, another entity. The New Credit Facility also contains a number
of financial covenants that require the Company to meet certain financial ratios
and tests and provide that a Change of Control (as defined in the New Credit
Facility) constitutes an event of default. A failure to comply with the
obligations contained in the New Credit Facility or the Indenture, if not cured
or waived, could permit acceleration of the related indebtedness and
acceleration of indebtedness under other instruments that contain
cross-acceleration or cross-default provisions. In addition, the obligations of
the Company under the New Credit Facility are secured by substantially all of
the assets of the Company. In the case of an event of default under the New
Credit Facility, the lenders under the New Credit Facility would be entitled to
exercise the remedies available to a secured lender under applicable law. If the
Company were obligated to repay all or a significant portion of its
indebtedness, there can be no assurance that the Company would have sufficient
cash to do so or that the Company could successfully refinance such
indebtedness. Other indebtedness of the Company that may be incurred in the
future may contain financial or other covenants more restrictive than those
applicable to the New Credit Facility or the Senior Notes. See 'Description of
the Senior Notes--Certain Covenants' and 'Description of Other Indebtedness--The
New Credit Facility.'
SEASONALITY AND QUARTERLY FLUCTUATIONS
The business and results of operations of both Riddell and Varsity are
highly seasonal and both follow a similar annual pattern. With respect to
Riddell, orders for football products and reconditioning services are solicited
over a sales cycle that begins in the fall of each year and continues until the
start of football play at the end of the following summer. Delivery of products
and performance of reconditioning services reach a low point during the football
playing season. These activities contribute most to profitability in the first
through third quarters of each calendar year. Riddell sells most of its
competitive football products and reconditioning services on dated payment terms
with payments from customers generally due the following July or August.
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 the following
July or August, as the dated receivables become due. In order to finance the
resulting large receivable levels, Riddell requires a revolving line of credit.
The outstanding balance on the revolving line of credit generally follows the
receivable cycle described above, increasing as the level of receivables
increase until the late summer or fall of each year when collections of the
dated receivables are used to reduce the outstanding balance on the line.
Varsity's cheerleader and dance team camps are held exclusively in the
summer months. Sales of Varsity's cheerleader, dance team and booster club
uniforms and accessories primarily occur prior to the beginning of the school
year. Accordingly, a substantial portion of Varsity's annual revenues and all of
its net income is generated in the second and third quarters of each calendar
year, respectively, while the first and fourth quarters have historically
resulted in net losses. Varsity's working capital needs have generally followed
a similar pattern reaching their peak at the end of the first calendar quarter
and continuing through the second quarter. This period follows Varsity's
off-season period during which it generates only nominal revenues while
incurring expenditures in preparation for its approaching peak season. Varsity
has typically incurred seasonal borrowings during this period which it has
historically eliminated during the third quarter as it receives prepayments on
camp tuition and fees. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality.'
21
<PAGE>
DEPENDENCE ON THIRD-PARTY FOREIGN MANUFACTURING
A large portion of Riddell's merchandise sold through retail channels and
certain protective athletic equipment, such as shoulder pads, are currently
manufactured to its specifications by independent manufacturers located
throughout the world. In particular, all of Riddell's mini-helmet collectibles
are manufactured in China. Riddell has no long term contracts with its
manufacturers and competes with other companies for production capacity.
Riddell's arrangements with its non-U.S. suppliers are subject to the risks
generally associated with doing business abroad, such as changes in import
duties, tariffs, foreign governmental regulations, political unrest, foreign
currency fluctuations, disruptions or delays in shipments, changes in economic
conditions in countries in which Riddell's manufacturing sources are located and
other factors. Additionally, manufacturing in foreign countries adds weather and
time risk largely associated with transoceanic shipping. Riddell cannot predict
the effect that such factors will have on its manufacturers. If any such factors
were to render the conduct of business in a particular country undesirable or
impractical, or if Riddell's current foreign manufacturers were to cease doing
business with Riddell for any reason, Riddell's business and operating results
could be severely impacted. Riddell cannot predict whether additional United
States quotas, duties, taxes or other charges or restrictions will be imposed
upon the importation of its products in the future, or what effect any such
actions would have on its business, financial condition and results of
operations.
PRODUCT LIABILITY CLAIMS; UNCERTAINTY OF INSURANCE COVERAGE; AND PERSONAL INJURY
CLAIMS
Given the nature of the products manufactured by Riddell, particularly its
line of football helmets, Riddell has in the past and will continue in the
future to be subject to product liability claims. Currently its subsidiary,
Riddell, Inc., is a defendant in various 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, and their effect on the
Company's business, financial condition and results of operations cannot
presently be determined. Riddell estimates that the uninsured portion of future
costs and expenses related to these claims, and incurred but not reported
claims, would amount to at least $4.1 million at March 31, 1997 and,
accordingly, a reserve in this amount is included in the Consolidated Balance
Sheet of Riddell as of March 31, 1997 included elsewhere in this Prospectus 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
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. Riddell's current insurance provides a combined
aggregate of $47.5 million of insurance, considering both basic and excess
coverages subject to deductibles and per case, annual and other limitations. See
'Business--The Company--Product Liability Proceedings and Insurance.' However,
there can be no assurance that such insurance coverage will remain available
after the coverage expires in 2001, that Riddell's insurer will remain viable or
that the insured amounts will be sufficient to cover all future claims in excess
of Riddell's uninsured retention. Furthermore, future rate increases might make
such insurance uneconomical for Riddell to maintain after 2001.
Cheerleading is a vigorous athletic activity involving jumps, tumbling,
partner stunts and pyramids, with which there are associated risks of personal
injury. Varsity actively promotes safety among cheerleaders, dance team
participants and coaches and was a founding member of and is an active
participant in the American Association of Cheerleading Coaches and Advisors, an
industry trade group whose mission is to improve the quality of cheerleading and
to maintain established safety standards. During the past 17 years, Varsity has
been subject to three personal injury claims arising from its cheerleader and
dance team camps, and is presently subject to one such claim, none of which was
or is material to Varsity's operations. Varsity believes it is adequately
insured against such risks. There can be no assurance, however, that one or more
meritorious claims against Varsity for serious personal injury would not have an
adverse effect upon the Company's business, financial condition and results of
operations.
22
<PAGE>
RISK OF LOSS OF MATERIAL LICENSE AND OTHER CONTRACTUAL RELATIONSHIPS
Riddell is currently a party to several license agreements as a licensor
and has recently retained an independent licensing agent to help expand its
licensing program. Approximately 2% of the Company's consolidated revenues and
approximately 14% of the Company's EBITDA for the year ended December 31, 1996
on a pro forma basis after giving effect to the Transactions would have resulted
from its licensing activities. Royalties paid to the Company by Kmart for the
use of the MacGregor trademark constituted approximately 70% of licensing
revenues for 1996 and constituted approximately 82% of the Company's licensing
revenues from the MacGregor trademark rights for 1996. Of such royalties paid to
the Company by Kmart, 36% were derived with respect to the Company's athletic
footwear and 41% with respect to apparel. An agreement in principal has been
reached with Meldisco, a division of Footstar, Inc. pursuant to which Meldisco
will continue to sell athletic footwear bearing the MacGregor trademark in Kmart
stores under the Kmart license. Kmart has an exclusive license to use the
MacGregor trademark on certain athletic apparel (e.g., jogging suits and sweat
separates). The Company anticipates establishing a new license for the apparel
category effective when the Kmart license expires in June 1998. See
'Business--Riddell--Trademarks, Service Marks and License Agreements.' A
material decline in the royalties from the MacGregor trademark rights could have
a material adverse effect on the Company's results of operations. The
unamortized cost of the related MacGregor trademark rights and license
agreements included in intangible assets at December 31, 1996 was approximately
$14.4 million. If there were a material decline in the revenues from the
MacGregor trademark, then the carrying amount of the MacGregor trademark rights
could be deemed to have been impaired. A write-down for such impairment could
have a material adverse effect on the Company's business, financial condition
and results of operations. While the Company believes Riddell will be successful
in replacing the MacGregor license in a manner which will continue to generate
revenues sufficient to support the carrying value of the trademark rights, there
can be no assurance that it will be successful in doing so. While Riddell
believes its relationships with its other licensees and licensors are good,
there can be no assurance that such license agreements will be renewed upon
expiration or that the Company will continue to derive benefits therefrom, or
that the Company will be successful in entering into new license agreements in
the future.
In addition to the foregoing licensing agreements, the Company has formed
several strategic alliances to promote its business. Since April 1989 Riddell
has had an exclusive promotional rights agreement with the NFL pursuant to which
the Riddell brand is the only name that can be displayed on helmets used in NFL
play. Riddell's agreement with the NFL expires in April 1999 and automatically
extends for unlimited successive five-year periods thereafter, provided that the
quality of Riddell's helmets and shoulder pads remain comparable to the best
available technology as reasonably determined by the NFL. See
'Business--Riddell--General.' Since 1989, Varsity has organized and produced
various national cheerleading and dance team championships for exclusive
broadcast on the ESPN, Inc. ('ESPN') cable channel. Varsity's current agreement
with ESPN expires after the 1998 season. In 1996, Varsity entered into several
agreements with Walt Disney Attractions, Inc. ('Walt Disney Attractions')
pursuant to which its national cheerleading and dance team championships through
1999 will be held at Walt Disney World(Registered) Resort in Florida. While the
Company believes that it will be successful in renewing or replacing the
agreements with the NFL, ESPN and Walt Disney Attractions in a manner which will
continue to promote the Company's products and services, there can be no
assurance that it will be successful in doing so or that it will be able to do
so on economically favorable terms. Although the Company believes that the
failure to renew any one of the agreements with the NFL, ESPN and Walt Disney
Attractions would not have a material effect on the Company, there can be no
assurance that the loss of all or any combination of such agreements would not
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION AND MARKET SHARE DATA
In its Institutional athletic products business, Riddell competes with
several larger national companies, such as Rawlings Sporting Goods Company,
Inc., Diamond Sports Co., Wilson Sporting Goods Company, and in its practicewear
business, with national companies such as Champion Products, Inc. and Russell
Athletic, Inc. While none of such national competitors manufacture football
helmets, some of Riddell's competitors offer a broad line of sports equipment
and are significantly larger and have substantially greater financial and other
resources at their disposal than Riddell. Riddell also competes with numerous
smaller manufacturers and suppliers of sporting goods, services and
collectibles. In particular, the protective equipment reconditioning and the
sports collectibles industries are highly fragmented. In late 1994, in response
to Riddell's move to direct sales, AHI, Riddell's
23
<PAGE>
primary competitor in new football equipment, cancelled the designation of All
American (Riddell's reconditioning subsidiary) as an authorized reconditioner of
AIR(Registered) helmets and refused to sell parts for their helmets to All
American. This move has had no measurable impact on Riddell's ability to
recondition AIR helmets and no significant volume was lost in 1995 or 1996.
Although Riddell will continue to source parts from outside suppliers that meet
or exceed AHI's standards and to recertify all AIR helmets to NOCSAE standards
as it had before, AHI's actions could have some limited impact on the
reconditioning volume of All American in future years. See
'Business--Riddell--Marketing and Promotion.'
Varsity is one of two major national companies that designs and markets
cheerleader, dance team and booster club uniforms and accessories and is one of
two major national operators of camps. While Varsity's only national competitor
is National Spirit Group Limited ('NSG'), it also competes with other smaller
national and regional competitors that serve the uniform and accessories market
or that operate cheerleader and dance team camps and clinics. Competitive
pressure could have a material adverse effect on the Company's business,
financial condition and results of operations.
The market share and other market data contained in this Prospectus are
based on independent industry publications and the good faith belief of the
Company's management. However, market share data cannot always be verified with
complete certainty due to the unavailability of raw data in certain
circumstances and the voluntary nature of the data gathering process, and
estimates may be incorrect, possibly to a material degree. In particular, the
Company is not aware of the availability of reliable statistics with respect to
the actual size of the high school football helmet market. Management's
estimates with respect to this market are based only on the limited data in the
public domain and the Company's participation in the football helmet industry
which contains only one major competitor, a private company that does not reveal
distribution information with respect to the high school market. Accordingly, no
assurance can be given as to the accuracy of management's estimates.
Management's estimates with respect to the collegiate market are based on the
Company's market share data with respect to NCAA teams. Prospective Holders of
the New Senior Notes should not place undue emphasis on the market share data
and predictions of future trends contained in this Prospectus, as there can be
no assurance that such data or predictions are accurate in all material
respects.
REGULATION
At present, no national governing body regulates cheerleading and dance
team activities at the collegiate level. Although voluntary guidelines relating
to safety and sportsmanship have been issued by the NCAA and some of the
athletic conferences, to date cheerleading and dance teams generally are free
from rules and restrictions similar to those imposed on other competitive
athletics at the college level. However, if rules limiting off-season training
are applied to cheerleading and/or dance teams (similar to rules imposed by the
NCAA on other sports), it is likely that Varsity would be unable to offer a
significant number of its camps either because participants would be prohibited
from participating during the summer or because suitable sites would not be
available. Although the Company is not aware of any school officially adopting
these activities as a competitive sport, recognition of cheerleading and/or
dance teams as 'sports' would increase the possibility that these activities may
become regulated. If Varsity were restricted from providing its training
programs to colleges and high schools, or if cheerleaders and dance teams were
restricted from training during the off-season, such regulations would likely
have a material adverse effect on Varsity's business, financial condition and
results of operations. However, the Company currently does not believe that any
regulation of collegiate cheerleading or dance teams as a 'sport' is forthcoming
in the foreseeable future, and in the event any rules are proposed to be adopted
by athletic associations, the Company expects to participate in the formulation
of such rules to the extent permissible.
At the high school level, some state athletic associations have classified
cheerleading as a sport and have in some cases imposed certain restrictions on
off-season practices and out-of-state travel to competitions. However, in all
cases to date, Varsity has been able to work with these state athletic
associations to designate acceptable times for the cheerleaders within these
states to attend camps. Varsity has also signed agreements with several state
associations to assist with sponsoring and execution of official competitions
with these states. To date, state regulations have not had a material effect on
Varsity's ability to conduct its normal business activities within those states.
24
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's executive officers and certain other key employees of Riddell
and Varsity have been primarily responsible for the development and expansion of
their respective business, and the loss of the services of one or more of these
individuals could have an adverse effect on the Company. The Acquisition
combined two separate management teams under the ownership of one company. The
Company's future success will be dependent in part upon its continued ability to
recruit, motivate and retain qualified personnel, as well as the successful
integration of the two management teams. There can be no assurance that the
Company will be successful in this regard. The Company has employment and
non-competition agreements with certain key personnel. See 'Management.'
RISKS RELATING TO BENEFITS OF THE ACQUISITION
Management expects certain economic benefits to result from the
Acquisition, such as those described under 'Business--General--The Acquisition.'
Some of the anticipated benefits include the potential introduction of new
products such as booster products and new types of sports camps. There can be no
assurance that the Company will be able to successfully launch any of these
products which may involve new business areas for the Company. There can be no
assurance that following the Acquisition the Company will achieve the economic
benefits that management expects. Realization of such economic benefits from the
Acquisition could also be affected by a number of factors beyond the Company's
control, such as general economic conditions, increased operating costs, the
response of the Company's customers or competitors, and regulatory developments.
INABILITY TO PURCHASE SENIOR NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control as defined in the Indenture, the Company will be
required to offer to repurchase all outstanding Senior Notes at 101% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of repurchase. However, there can be no assurance
that sufficient funds will be available at the time of any Change of Control to
make any required repurchases of Senior Notes tendered, or that restrictions in
the New Credit Facility or under the Company's debt instruments existing at such
time will allow the Company to make such required repurchases. Notwithstanding
these provisions, the Company could enter into certain transactions, including
certain recapitalization, that would not constitute a Change of Control but
would increase the amount of debt outstanding at such time. See 'Description of
the Senior Notes--Repurchase at the Option of Holders--Change of Control.'
RANKING AND FRAUDULENT CONVEYANCE CONSIDERATIONS
Following the Acquisition, the Company continues to be a holding company
whose business is conducted through its subsidiaries. As a result, the Company's
ability to make scheduled payments of principal and interest on its
indebtedness, including the Senior Notes, will depend on the future operating
performance and cash flows of its subsidiaries and on the ability of the
Company's subsidiaries to pay dividends or make loans to the Company. The
ability of the Company's subsidiaries to pay such dividends or make payments on
intercompany indebtedness will be subject to applicable state laws.
The Senior Notes and the Subsidiary Guarantees will be effectively
subordinated to the loans outstanding under the New Credit Facility and the
guarantees of such loans to the extent of the value of the assets securing such
loans and guarantees. In addition, claims of creditors of the Company's
subsidiaries, including trade creditors, will generally have priority as to the
assets of the subsidiaries over the claims and equity interests of the Company,
and indirectly, the holders of indebtedness of the Company. Holders of the
Senior Notes have a direct claim on the assets of the Guarantors pursuant to the
Subsidiary Guarantees. However, each Guarantor's guarantee of the obligations of
the Company under the Senior Notes may be subject to review under relevant
federal and state fraudulent conveyance statutes (the 'Fraudulent Conveyance
Statutes') in a bankruptcy, reorganization or rehabilitation case or similar
proceeding or a lawsuit by or on behalf of unpaid creditors of such Guarantors.
If a court were to find under relevant Fraudulent Conveyance Statutes that, at
the time the Senior Notes were issued, (a) a Guarantor guaranteed the Senior
Notes with the intent of hindering, delaying or defrauding current or future
creditors or (b)(i) a Guarantor received less than reasonably equivalent value
or fair consideration for guaranteeing the Senior Notes and (ii)(A) was
insolvent or was rendered insolvent by reason of such Subsidiary Guarantee, (B)
was engaged, or about to engage, in a business or transaction for which its
assets
25
<PAGE>
constituted unreasonably small capital, (C) intended to incur, or believed that
it would incur, obligations beyond its ability to pay as such obligations
matured (as all of the foregoing terms are defined in or interpreted under such
Fraudulent Conveyance Statutes) or (D) was a defendant in an action for money
damages, or had a judgment for money damages docketed against it (if, in either
case, after final judgment, the judgment is unsatisfied), such court could avoid
or subordinate such guarantee of the Senior Notes to presently existing and
future indebtedness of such Guarantor and take other action detrimental to the
holders of the Senior Notes, including, under certain circumstances,
invalidating such guarantee of the Senior Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the federal or state law that is being applied in any such
proceeding. Generally, however, a Subsidiary Guarantor would be considered
insolvent if either (i) the fair market value (or fair saleable value) of its
assets is less than the amount required to pay the probable liability on its
total existing indebtedness and liabilities (including contingent liabilities)
as they become absolute and mature or (ii) it is incurring obligations beyond
its ability to pay as such obligations mature or become due.
The Boards of Directors and management of each of Riddell and Varsity
believe that at the time of issuance of the Senior Notes and the guarantees of
the Senior Notes, each Guarantor (i) will be (a) neither insolvent nor rendered
insolvent thereby, (b) in possession of sufficient capital to meet its
obligations as the same mature or become due and to operate its business
effectively and (c) incurring obligations within its ability to pay as the same
mature or become due and (ii) will have sufficient assets to satisfy any
probable judgment against it in any pending action. There can be no assurance,
however, that such beliefs will prove to be correct or that a court passing on
such questions would reach the same conclusions.
LACK OF PUBLIC MARKET FOR THE SENIOR NOTES
The New Senior Notes are being offered to the holders of the Old Senior
Notes. The Old Senior Notes were issued on June 19, 1997 to a small number of
institutional investors and institutional accredited investors and are eligible
for trading in the Private Offerings, Resales and Trading through Automated
Linkages (PORTAL) Market, the National Association of Securities Dealers'
screen-based, automated market for trading of securities eligible for resale
under Rule 144A. To the extent that Old Senior Notes are tendered and accepted
in the Exchange Offer, the trading market for the remaining untendered Old
Senior Notes could be adversely affected. There is no existing trading market
for the New Senior Notes, and there can be no assurance regarding the future
development of a market for the New Senior Notes, or the ability of holders of
the New Senior Notes to sell their New Senior Notes or the price at which such
holders may be able to sell their New Senior Notes. Although the Initial
Purchasers have informed the Company that they currently intend to make a market
in the New Senior Notes, they are not obligated to do so and any such market
making may be discontinued at any time without notice. As a result, the market
price of the New Senior Notes could be adversely affected. The Company does not
intend to apply for listing or quotation of the New Senior Notes on any
securities exchange or stock market.
26
<PAGE>
THE ACQUISITION
On May 5, 1997, Riddell, Cheer Acquisition Corp., a wholly owned subsidiary
of Riddell and a Tennessee corporation ('Merger Sub' or 'Cheer'), and Varsity
entered into the Merger Agreement. Pursuant to the Merger Agreement, Merger Sub
offered to purchase in the Varsity Tender Offer all outstanding shares of Common
Stock, par value $0.01 per share, of Varsity (the 'Shares') at $18.90 per share,
net to the seller in cash. Pursuant to a shareholders agreement (the
'Shareholders Agreement'), dated as of May 5, 1997, by and among Riddell, Merger
Sub and certain shareholders of Varsity, such shareholders tendered 1,738,530
Shares representing approximately 38% of the outstanding Shares of Varsity in
accordance with the terms and conditions of the Varsity Tender Offer. On June
19, 1997, Merger Sub completed the Varsity Tender Offer and purchased a total of
4,511,415 Varsity shares, or approximately 98.5% of Varsity's then outstanding
shares. In addition, each outstanding option to purchase Shares of Varsity
Common Stock was surrendered and cancelled in exchange for a cash payment equal
to the number of Shares underlying such option, multiplied by $18.90, less the
aggregate exercise price of such option.
Pursuant to stock purchase agreements (the 'Stock Purchase Agreements'),
dated as of May 5, 1997, by and among Riddell, Merger Sub and certain
shareholders of Varsity (the 'Shareholders'), within five business days
following the consummation of the Offer, the Shareholders purchased
approximately 986,000 shares of Riddell common stock for approximately $4.4
million, representing approximately 10.9% of Riddell's shares then outstanding
after giving effect to such purchase. Pursuant to the Merger Agreement on July
25, 1997, Merger Sub was merged with and into Varsity (the 'Merger') with
Varsity surviving the Merger as a wholly owned subsidiary of the Company (the
'Surviving Corporation'). Under the Tennessee Business Corporation Act (the
'TBCA'), because Merger Sub acquired in excess of 90% of each class and series
of outstanding voting shares of Varsity in the Varsity Tender Offer, the Merger
Agreement and the transactions contemplated thereby were consummated without a
vote of Varsity shareholders. Upon consummation of the Merger, each Share then
outstanding (other than Shares held in the treasury of Varsity, Shares held by
the Company, Merger Sub or any other wholly owned subsidiary of the Company) was
converted into the right to receive $18.90 in cash.
27
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The net
proceeds to the Company from the issuance of the Old Senior Notes of
approximately $109.7 million (after deducting the discounts to Initial
Purchasers and estimated fees and expenses of the Offering), together with
borrowings under the New Credit Facility, were used to finance the Acquisition,
to refinance the Former Credit Agreement and other indebtedness and to pay
related fees and expenses. The Former Credit Agreement would have expired by its
terms on April 30, 1998 and all outstanding borrowings thereunder bore interest
at the prime rate (8.5% at April 30, 1997).
The approximate sources and uses of funds in connection with the
Transactions are presented in the following table, assuming the Transactions
occurred as of March 31, 1997 (dollars in millions):
<TABLE>
<S> <C>
Sources of Funds:
Senior Notes.............................................. $115.0
New Credit Facility....................................... 12.7
Common shares of Riddell to be purchased by certain
Varsity shareholders................................... 4.4
Cash...................................................... 1.0
------
Total sources.......................................... $133.1
------
------
Uses of Funds:
Cash merger consideration and related costs............... $ 98.8
Refinancing of Former Credit Agreement and other
indebtedness and paying related costs.................. 29.0
Fees and expenses of the Offering......................... 5.3
------
Total uses............................................. $133.1
------
------
</TABLE>
28
<PAGE>
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of
Riddell at March 31, 1997 and (ii) such consolidated capitalization as adjusted
to give effect to the Transactions and the application of the estimated net
proceeds therefrom. This table should be read in conjunction with the 'Unaudited
Pro Forma Condensed Consolidated Financial Data' and the Consolidated Financial
Statements of each of Riddell and Varsity, including the notes thereto, and the
other information contained in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------
PRO FORMA FOR
HISTORICAL(1) THE TRANSACTIONS
------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current
maturities):
Former Credit Agreement
Term loans............................. $ 5,000 $ --
Revolving credit facility.............. 22,021 --
New Credit Facility(2).................... -- 12,680
10 1/2% Senior Notes Due 2007............. -- 115,000
Convertible subordinated note............. 7,500 7,500
Subordinated note payable................. 439 --
Note payable.............................. 155 --
------------- ----------------
Total long-term debt................... 35,115 135,180
Shareholders' equity........................ 27,728 29,166
------------- ----------------
Total capitalization................... $62,843 $164,346
------------- ----------------
------------- ----------------
</TABLE>
- ------------------
(1) The historical amounts shown above exclude long-term debt of Varsity. At
March 31, 1997, Varsity's long-term debt consisted solely of a $0.6 million
convertible note which is assumed to be converted and acquired as part of
the Transactions.
(2) The New Credit Facility consists of a five year revolving credit and working
capital facility in a maximum amount not to exceed $40.0 million through
September 30, 1997 and $35.0 million thereafter with amounts borrowed
thereunder subject to a borrowing base of inventory and accounts receivable.
See 'Description of Other Indebtedness--The New Credit Facility.'
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
INTRODUCTION
The accompanying Unaudited Pro Forma Condensed Consolidated Balance Sheet
and Unaudited Pro Forma Condensed Consolidated Statements of Operations have
been prepared reflecting: (i) the Acquisition, which will be accounted for under
the purchase method of accounting; (ii) the Offering of the Senior Notes; and
(iii) the New Credit Facility.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet presents the
pro forma financial condition of the Company as if the Acquisition and Offering
had occurred as of March 31, 1997. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations for the fiscal year ended December 31,
1996 and the three months ended March 31, 1997 include the results of Riddell's
and Varsity's operations and give effect to the Acquisition and Offering as if
they had occurred on January 1, 1996.
In accordance with the purchase method of accounting, the excess of the
purchase price over fair values of the net identifiable assets and liabilities
acquired is recorded as goodwill. The carrying values of Varsity's net assets
are assumed to equal their fair values for purposes of these pro forma financial
statements, unless indicated otherwise in the Notes to Unaudited Pro Forma
Condensed Consolidated Balance Sheet. These values and the resulting allocation
of the purchase price are subject to revision following the results of any
appraisals after consummation of the Acquisition. However, management does not
believe that the results of any such appraisals will yield materially different
values from the carrying values.
The unaudited pro forma financial data is presented for informational
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred had the Acquisition and Offering
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or financial position. The unaudited pro forma
condensed consolidated financial data should be read in conjunction with the
financial statements of Riddell and Varsity and the related notes thereto
included elsewhere herein.
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
----------------- -----------------------------
RIDDELL VARSITY ACQUISITION(A) OFFERING(B) PRO FORMA
------- ------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............ $ 304 $ 2,077 $ (5,127)(1) $ 93,371 $ 1,131
(90,932)(2)
4,438(3)
(3,000)(4)
Accounts receivable, trade, less
allowance for doubtful accounts... 21,142 4,347 25,489
Inventories.......................... 14,620 8,642 23,262
Other current assets................. 6,297 7,122 2,030(1) 15,449
------- ------- -------------- ----------- ---------
Total current assets................... 42,363 22,188 (92,591) 93,371 65,331
Property and equipment, less
accumulated depreciation............. 3,421 4,167 7,588
Intangible assets and deferred charges,
less accumulated amortization........ 33,645 7,856 65,453(2) 6,100 113,054
Other assets........................... 65 1,088 1,153
------- ------- -------------- ----------- ---------
Total assets........................... $79,494 $35,299 $ (27,138) $ 99,471 $187,126
------- ------- -------------- ----------- ---------
------- ------- -------------- ----------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt.... $ 3,176 $ 120 $ (120)(1) $ (3,176) $ --
Accounts payable..................... 4,049 3,589 7,638
Accrued liabilities.................. 6,843 493 (275) 7,061
Customer deposits.................... -- 2,242 2,242
------- ------- -------------- ----------- ---------
Total current liabilities.............. 14,068 6,444 (120) (3,451) 16,941
Long-term debt, less current portion... 31,939 480 (480)(1) 103,241 135,180
Deferred taxes......................... 1,820 399 2,219
Other liabilities...................... 3,939 -- (319) 3,620
Shareholders' equity:
Common stock......................... 81 47 (47)(2) 93
12(3)
Capital in excess of par and
additional paid in capital........ 31,457 11,641 600(1) 35,883
(12,241)(2)
4,426(3)
Retained earnings (accumulated
deficit).......................... (3,810) 16,288 (3,097)(1) (6,810)
(13,191)(2)
(3,000)(4)
------- ------- -------------- ----------- ---------
Total shareholders' equity............. 27,728 27,976 (26,538) 29,166
------- ------- -------------- ----------- ---------
Total liabilities and shareholders'
equity............................... $79,494 $35,299 $ (27,138) $ 99,471 $187,126
------- ------- -------------- ----------- ---------
------- ------- -------------- ----------- ---------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance
Sheet.
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
NOTE A. PRO FORMA ADJUSTMENTS--ACQUISITION
(1) To record option termination payments of approximately $4,877,000 and
certain bonus payments of $250,000 made by Varsity, immediately prior
to the Acquisition, net of the effect of tax benefits of $2,030,000,
and to reflect the call of outstanding debt of $600,000 and subsequent
conversion thereof into 40,080 Varsity shares.
(2) To reflect the acquisition of Varsity and the allocation of the
purchase price based upon preliminary estimates of fair values of the
assets acquired and the liabilities assumed, as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Components of purchase price:
Purchase of outstanding shares (at
$18.90 per share).................. $ 87,002
Estimated Acquisition related costs... 3,930
--------------
Total purchase price.................... 90,932
Allocation of purchase price:
Historical book value of net assets
acquired........................... (25,479)
--------------
65,453
Net book value of goodwill acquired... 7,856
--------------
Excess of purchase price over book value
of net assets purchased (goodwill).... $ 73,309
--------------
--------------
</TABLE>
(3) To reflect purchase of Riddell common stock by certain Varsity
shareholders for $4,438,000.
(4) To reflect payment by Riddell of $3,000,000 to secure stand-by bridge
financing commitment.
NOTE B. PRO FORMA ADJUSTMENTS--OFFERING
To reflect financing transactions related to the Acquisition, as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Issuance of Senior Notes................ $115,000
Initial borrowings on New Credit
Facility.............................. 12,680
--------------
127,680
Riddell debt to be refinanced, including
accrued interest...................... (28,209)
Debt issuance costs:
Old Senior Notes...................... (5,290)
New Credit Facility................... (810)
--------------
Net cash received....................... $ 93,371
--------------
--------------
</TABLE>
32
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
------------------------ ------------------------
RIDDELL VARSITY ACQUISITION OFFERING PRO FORMA
------------- ------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net revenues................................... $72,382 $88,449 $ $ $160,831
Cost of revenues............................... 38,813 53,613 92,426
------------- ------- ---------
Gross profit................................... 33,569 34,836 68,405
Selling, general and administrative expenses... 25,369 26,388 1,580(1) 52,949
150(2)
(443)(3)
(95)(4)
Product liability expense...................... 2,484 -- 2,484
------------- ------- ----------- ---------
Income from operations......................... 5,716 8,448 (1,192) 12,972
Interest expense (income), net................. 2,763 (166) 11,330(6) 13,927
------------- ------- ----------- -------- ---------
Income (loss) before taxes..................... 2,953 8,614 (1,192) (11,330) (955)
Income taxes................................... 110 3,414 (154)(5) (3,370)(5) --
------------- ------- ----------- -------- ---------
Net income (loss) from continuing operations... $ 2,843 $ 5,200 $(1,038) $ (7,960) $ (955)
------------- ------- ----------- -------- ---------
------------- ------- ----------- -------- ---------
Net income (loss) from continuing operations
per share.................................... $ 0.34 $ (0.10)
------------- ---------
------------- ---------
Weighted average common and equivalent shares
outstanding.................................. 8,427 986(7) 9,413
OTHER DATA:
Depreciation and amortization.................. $ 2,209 $ 1,318 $ 1,580 $ 5,107
EBITDA (8)..................................... 7,925 9,766 388 18,079
Capital expenditures........................... 1,139 1,828 2,967
Cash interest expense (9)............................................................................. 13,213
Ratio of earnings to fixed charges.................................................................... 0.9x
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements
of Operations.
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
------------------ -------------------------------------------
RIDDELL VARSITY ACQUISITION OFFERING PRO FORMA
------- ------- ------------------------ --------------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net revenues........................... $18,575 $ 8,341 $ $ $ 26,916
Cost of revenues....................... 10,094 5,787 15,881
------- ------- ---------
Gross profit........................... 8,481 2,554 11,035
Selling, general and administrative
expenses............................. 7,207 5,455 386(1) 12,981
38(2)
(88)(3)
(17)(4)
Product liability expense.............. 625 -- 625
------- ------- ----------- ---------
Income (loss) from operations.......... 649 (2,901) (319) (2,571)
Interest expense (income), net......... 666 (62) 2,827(6) 3,431
------- ------- ----------- --------------- ---------
Loss before taxes...................... (17) (2,839) (319) (2,827) (6,002)
Income taxes (credits)................. -- (1,125) (27)(5) (1,113)(5) (2,265)
------- ------- ----------- --------------- ---------
Net loss............................... $ (17) $(1,714) $ (292) $ (1,714) $ (3,737)
------- ------- ----------- --------------- ---------
------- ------- ----------- --------------- ---------
Net loss per share..................... $ (0.00) $ (0.41)
------- ---------
------- ---------
Weighted average common and equivalent
shares outstanding................... 8,068 986(7) 9,054
OTHER DATA:
Depreciation and amortization.......... $ 554 $ 411 $ 386 $ 1,351
EBITDA (8)............................. 1,203 (2,490) 67 (1,220)
Capital expenditures................... 70 496 566
Cash interest expense (9).................................................................................. 3,235
Ratio of earnings to fixed charges (10).................................................................... *
</TABLE>
- ------------------
* Amount results in a deficiency.
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements
of Operations.
34
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(1) Reflects the amortization expense arising from the Acquisition for goodwill
(as determined in the Pro Forma Balance Sheet) of $73,309 over 40 years,
less amortization expense included in Varsity's historical results for the
periods, for a net adjustment of $1,580 and $386 for the year ended December
31, 1996 and the three months ended March 31, 1997, respectively.
(2) Varsity salary increase pursuant to contract entered into in conjunction
with the Acquisition.
(3) Adjustment to eliminate costs incurred by Varsity to maintain its status as
a separate public corporation including costs for maintaining a separate
board of directors, costs related to issuance of annual and quarterly
reports, and other costs related to maintaining Nasdaq listings and
shareholder records.
(4) Adjustments to reflect cost reductions for certain freight and travel
expenses incurred by Varsity or Riddell which would not have been incurred
had these expenses been administered under programs which existed during the
years within the other company.
(5) Reflects income tax effect of the pro forma adjustments.
(6) Reflects the increase in interest expense arising from the transaction due
to debt incurred to finance the purchase and net debt refinanced in
conjunction with the transaction, determined as follows:
<TABLE>
<S> <C>
Total purchase price and related costs............... $ 90,932
Option termination payments.......................... 4,877
Financing costs, including bridge costs.............. 9,100
Less proceeds generated from sale of Riddell stock... (4,438)
--------
100,471
Senior Notes......................................... 115,000
--------
Funds, from Offering, available to refinance existing
debt............................................... $ 14,529
--------
--------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
-------------------- -----------------
<S> <C> <C>
Incremental Interest Expense:
Interest expense on the Senior Notes and net interest
expense on the New Credit Facility for incremental
borrowings and debt refinanced, computed using
historical rates and balances, but under revised
borrowing terms, including commitment fees, with an
estimated weighted average interest rate of 10.25%
and 10.40%, for the period ended December 31, 1996
and March 31, 1997, respectively..................... $ 13,038 $ 3,139
Less historical net interest expense of existing debt
refinanced net of funds historically invested by
Varsity.............................................. (2,399) (485)
Amortization of debt issue costs:
Senior Notes (over 10 years)......................... 529 132
New Credit Facility costs (over 5 years)............. 162 41
---------- -------
Incremental interest expense........................... $ 11,330 $ 2,827
---------- -------
---------- -------
</TABLE>
A 1/8% increase in the assumed weighted average interest rates would increase
pro forma interest expense by $158 and $37, respectively.
35
<PAGE>
(7) Reflects purchase of approximately 986,000 common shares by certain members
of Varsity management. The Riddell stock options to be issued to Varsity
employees have been excluded from equivalent shares as the effect would be
anti-dilutive.
(8) EBITDA is the sum of income before extraordinary item and cumulative effect
of changes in accounting principles (as applicable), income taxes and
interest, depreciation and amortization expense. EBITDA is presented because
it is a widely accepted financial indicator of a company's ability to
service indebtedness. However, EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity.
(9) Cash interest expense excludes amortization of deferred financing costs of
$706 and $197 (of which $691 and $173 arise from the Transactions) for the
year ended December 31, 1996 and the three month period ended March 31,
1997, respectively.
(10) Earnings would be insufficient to cover fixed charges by approximately $6.0
million for the three months ended March 31, 1997.
36
<PAGE>
SELECTED FINANCIAL DATA OF RIDDELL
The balance sheet data presented below as of December 31, 1992, 1993, 1994,
1995 and 1996 and the statement of operations data presented below for the years
ended December 31, 1992, 1993, 1994, 1995 and 1996 have been derived from
Riddell's audited Consolidated Financial Statements for those years. The summary
financial data as of and for the three months ended March 31, 1996 and 1997 have
been derived from Riddell's Unaudited Condensed Consolidated Financial
Statements for those periods included elsewhere in this Prospectus and include,
in the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for the unaudited
interim periods. Results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
The information presented below is qualified in its entirety by, and should be
read in conjunction with, 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Riddell--Results of Operations' and the
Consolidated Financial Statements of Riddell and the Condensed Consolidated
Financial Statements of Riddell and related notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net revenues:
Net sales....................................... $52,978 $45,202 $51,567 $63,603 $69,888 $19,036 $18,001
Royalty income.................................. 3,425 3,551 3,845 3,440 2,494 808 574
------- ------- ------- ------- ------- ------- -------
56,403 48,753 55,412 67,043 72,382 19,844 18,575
Cost of sales..................................... 31,575 28,885 29,792 35,794 38,813 10,211 10,094
------- ------- ------- ------- ------- ------- -------
Gross profit...................................... 24,828 19,868 25,620 31,249 33,569 9,633 8,481
Selling, general and administrative expenses ..... 19,215 20,436 21,087 23,332 25,369 6,991 7,207
Product liability expenses........................ 2,473 2,959 2,927 2,651 2,484 664 625
Product liability litigation loss(1).............. -- -- 4,600 -- -- -- --
Other charges(2).................................. -- 2,170 1,188 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations..................... 3,140 (5,697) (4,182) 5,266 5,716 1,978 649
Interest expense.................................. 1,902 2,029 2,001 2,795 2,763 628 666
------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes, extraordinary item and
cumulative effect of changes in accounting
principles(3)................................... 1,238 (7,726) (6,183) 2,471 2,953 1,350 (17)
Income taxes (credits)............................ 591 (2,245) (1,250) 100 110 60 --
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles(3)................................... $ 647 $(5,481) $(4,933) $ 2,371 $ 2,843 $ 1,290 $ (17)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Earnings (loss) per share before extraordinary
item and cumulative effect of changes in
accounting principles(7)........................ $ 0.08 $ (0.69) $ (0.62) $ 0.29 $ 0.34 $ 0.15 $ 0.00
OTHER DATA:
Depreciation and amortization..................... $ 1,870 $ 1,922 $ 1,883 $ 2,167 $ 2,209 $ 494 $ 554
EBITDA(4)......................................... 5,010 (3,775) (2,229) 7,433 7,925 2,472 1,203
EBITDA as a percentage of net revenues............ 8.9% (7.7)% (4.0)% 11.1% 10.9% 12.5% 6.5%
Capital expenditures.............................. $ 908 $ 702 $ 662 $ 750 $ 1,139 $ 429 $ 70
Ratio of earnings to fixed charges(5)............. 1.6x * * 1.8x 1.9x 2.8x 1.0x
BALANCE SHEET DATA:(6)
Working capital................................... $18,221 $13,231 $11,036 $19,286 $25,957 $22,491 $28,295
Total assets...................................... 69,982 60,656 72,252 74,124 76,361 79,404 79,494
Long-term debt, less current portion.............. 17,332 17,442 20,168 23,600 29,984 25,464 31,939
Shareholders' equity.............................. 34,306 29,459 24,431 24,902 27,745 26,192 27,728
</TABLE>
(Footnotes on next page)
37
<PAGE>
SELECTED FINANCIAL DATA OF RIDDELL (CONTINUED)
- ------------------------
* Amounts result in a deficiency.
(1) In 1994, a charge was recorded of $4.6 million to establish a reserve for
the full uninsured portion of a jury award granted against Riddell in a
product liability suit, and certain related costs. In 1995, Riddell settled
with the plaintiff in such case for an amount that was less than the initial
jury award. See Note 8 to the Consolidated Financial Statements of Riddell
included elsewhere in this Prospectus relating to product liability
litigation matters and contingencies.
(2) In 1993, other charges consisted of the following: (i) a $1.3 million charge
to establish a reserve against litigation costs and expenses relating to a
stockholder class action suit that was subsequently settled in February 1994
and (ii) a $870,000 charge relating to the loss realized on the
discontinuance of certain foam molding operations. In 1994, other charges
consisted of certain transitional costs relating to Riddell's conversion to
an in-house Institutional sales force.
(3) In 1993, a charge was recorded for the cumulative effect on prior years of a
change in accounting principles for income taxes of $51,000 and a change in
accounting principles for contingent product liability of $214,948. An
extraordinary item in 1995 consisted of a $1.9 million provision for costs
relating to fraudulent transfer litigation.
(4) EBITDA is the sum of income before extraordinary item and cumulative effect
of changes in accounting principles (as applicable), income taxes, interest,
depreciation and amortization expense. EBITDA is presented because it is a
widely accepted financial indicator of a company's ability to service
indebtedness. However, EBITDA should not be considered as an alternative to
income from operations or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) and
should not be construed as an indication of a company's operating
performance or as a measure of liquidity.
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs) whether expensed or capitalized
and one-third of rental expense, deemed representative of that portion of
rental expense estimated to be attributable to interest. Earnings were
inadequate to cover fixed charges by approximately $7.7 million in 1993 and
approximately $6.2 million in 1994.
(6) See Note 8 to the Consolidated Financial Statements of Riddell included
elsewhere in this Prospectus relating to product liability litigation
matters and other contingent liabilities.
(7) Computed based on weighted average number of common and common equivalent
shares outstanding of 7,890,207, 7,890,207, 7,973,982, 8,067,985, and
8,427,633 in 1992, 1993, 1994, 1995 and 1996, respectively and 8,456,962 and
8,067,985 for the three months ended March 31, 1997 and 1996, respectively.
No cash dividends per share were paid during the periods presented. Since
its inception, Riddell has not declared or paid, and does not currently
intend to declare or pay, cash dividends on shares of its common stock.
38
<PAGE>
SELECTED FINANCIAL DATA OF VARSITY
The balance sheet data presented below as of March 31, 1993, 1994, and
December 31, 1994, 1995 and 1996 and the statement of operations data presented
below for the fiscal years 1993 through 1996 and the nine months ended December
31, 1994 have been derived from the historical Consolidated Financial Statements
of Varsity. The summary financial data as of and for the three months ended
March 31, 1996 and 1997 have been derived from Varsity's Unaudited Condensed
Consolidated Financial Statements for those periods included elsewhere in this
Prospectus and include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results for the unaudited interim periods. Results for the three months
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the entire year. To aid in annual comparisons, selected unaudited
consolidated financial data have also been presented for the twelve month period
ended December 31, 1994. The information presented below is qualified in its
entirety by, and should be read in conjunction with, 'Management's Discussion
and Analysis of Financial Condition and Results of Operations--Varsity--Results
of Operations' and the Consolidated Financial Statements of Varsity and the
Condensed Consolidated Financial Statements of Varsity and related notes
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE TWELVE
YEAR ENDED MONTHS MONTHS YEAR ENDED THREE MONTHS
MARCH 31, ENDED ENDED DECEMBER 31, ENDED MARCH 31,
----------------- DEC. 31, DEC. 31 ------------------ ------------------
1993 1994 1994(1) 1994(2) 1995 1996 1996 1997
------- ------- -------- -------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:(3)
Revenues:
Uniforms and accessories.......... $25,765 $31,193 $35,866 $37,635 $44,049 $49,472(5) $ 2,277 $ 2,814(5)
Camps and events.................. 15,822 18,560 23,721(4) 24,968 31,449(4) 38,977(4)(5) 4,139(4) 5,527(4)(5)
------- ------- -------- -------- ------- ------- ------- -------
41,587 49,753 59,587 62,603 75,498 88,449 6,416 8,341
Cost of revenues:
Uniforms and accessories.......... 13,205 15,828 18,659 19,867 23,379 26,849 1,618 1,996
Camps and events.................. 10,873 13,094 16,826 17,696 23,114 26,764 3,094 3,791
------- ------- -------- -------- ------- ------- ------- -------
24,078 28,922 35,485 37,563 46,493 53,613 4,712 5,787
------- ------- -------- -------- ------- ------- ------- -------
Gross profit........................ 17,509 20,831 24,102 25,040 29,005 34,836 1,704 2,554
Selling, general and administrative
expenses.......................... 13,522 15,994 16,117 18,920 22,679 26,388 4,250 5,455
------- ------- -------- -------- ------- ------- ------- -------
Operating income (loss)............. 3,987 4,837 7,985 6,120 6,326 8,448 (2,546) (2,901)
Other income (expense).............. 44 121 150 183 178 166 47 62
------- ------- -------- -------- ------- ------- ------- -------
Income (loss) before taxes.......... 4,031 4,958 8,135 6,303 6,504 8,614 (2,499) (2,839)
Taxes (benefit) on income........... 1,604 1,936 3,218 2,485 2,341 3,414 (992) (1,125)
------- ------- -------- -------- ------- ------- ------- -------
Net income (loss)................... $ 2,427 $ 3,022 $ 4,917 $ 3,818 $ 4,163 $ 5,200 $(1,507) $(1,714)
------- ------- -------- -------- ------- ------- ------- -------
------- ------- -------- -------- ------- ------- ------- -------
OTHER DATA:
Depreciation and amortization....... $ 629 $ 653 $ 577 $ 743 $ 992 $ 1,318 $ 301 $ 411
EBITDA(6)........................... 4,616 5,490 8,562 6,863 7,318 9,766 (2,245) (2,490)
EBITDA as a percentage of revenues.. 11.1% 11.0% 14.4% 11.0% 9.7% 11.0% (35.0)% (29.9)%
Capital expenditures................ $ 357 $ 938 $ 667 $ 1,192 $ 1,984 $ 1,828 $ 681 $ 496
BALANCE SHEET DATA:
Working capital..................... $ 5,825 $ 8,611 $12,413 $12,413 $15,212 $18,006 $13,237 $15,744
Total assets........................ 16,045 18,701 24,870 24,870 29,243 37,791 28,825 35,299
Long-term debt, less current
portion........................... -- -- -- -- -- 480 -- 480
Shareholders' equity................ 12,678 15,736 20,741 20,741 24,794 29,897 23,225 27,976
</TABLE>
- ------------------
(1) Effective April 1, 1994, Varsity changed its fiscal year end from March 31
to December 31. Accordingly, Varsity's results of operations for fiscal 1994
do not include the three months ended March 31, which has historically
resulted in a net loss. See note (3) below.
(2) Presented for purposes of comparability with fiscal 1995 and 1996.
(Footnotes continued on next page)
39
<PAGE>
SELECTED FINANCIAL DATA OF VARSITY (CONTINUED)
(3) The business and results of operations of Varsity are highly seasonal. A
substantial portion of Varsity's annual revenues and all of Varsity's net
income historically have been generated in the three months ended June 30
and September 30. The three months ended March 31 and December 31 have
historically resulted in net losses. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Varsity.'
(4) Includes $2,065,000, $5,814,000, $5,814,000, $839,000 and $386,000 for the
nine months ended December 31, 1994, the twelve months ended December 31,
1995 and December 31, 1996, and the three months ended March 31, 1996 and
March 31, 1997, respectively, as a result of the December 1, 1994
acquisition of the business of Intropa.
(5) Includes $261,000 and $4,199,000 for (i) uniforms and accessories and (ii)
camps and events, respectively, for the year ended December 31, 1996, and
$62,000 and $967,000 for (i) uniforms and accessories and (ii) camps and
events, respectively, for the three months ended March 31, 1997 as a result
of the May 15, 1996 acquisition of the camp business of United Special
Events, Inc.
(6) EBITDA is the sum of income before extraordinary item and cumulative effect
of changes in accounting principles (as applicable), income taxes and
interest, depreciation and amortization expense. EBITDA is presented because
it is a widely accepted financial indicator of a company's ability to
service indebtedness. However, EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following should be read in conjunction with 'Unaudited Pro Forma
Condensed Combined Financial Data' and the Consolidated Financial Statements of
each of Riddell and Varsity and the related notes thereto included elsewhere in
this Prospectus. Following the Acquisition, the Company conducts its business
through two distinct operating divisions: the Riddell Group Division, consisting
of Riddell and its subsidiaries (other than Varsity and its subsidiaries), and
the Varsity Group Division, consisting of Varsity and its subsidiaries. Each of
the divisions continues to maintain its own sales, marketing, financial,
accounting and operating personnel. As a result, the Company does not anticipate
significant cost savings as a result of the Acquisition, other than the
elimination of certain costs incurred by Varsity to comply with its public
reporting obligations, the elimination of certain travel agent commissions paid
by Riddell to third parties for services to be provided by a subsidiary of
Varsity following the Acquisition and the reduction of certain freight costs
incurred by Varsity which would not have been incurred under programs
administered by Riddell.
The Company incurred certain non-recurring costs and expenses relating to
the Transactions which will be charged to earnings during the period in which
the Transactions occurred. These costs and expenses include, but are not limited
to, payments by Varsity to terminate outstanding employee stock options
estimated at $4.9 million, payments on change in control provisions contained in
certain Varsity employees' contracts estimated at $0.3 million and costs of
bridge loan commitments of $3.0 million.
SEASONALITY
The Company's businesses are highly seasonal. Riddell's operations in
recent years have been most profitable in the first through third quarters of
each calendar year, with offsetting losses occurring in the fourth quarter.
Varsity's net income has historically been generated in the second and third
quarters of the calendar year while its first and fourth quarters have resulted
in net losses. See 'Business--The Company--Seasonality and Backlog' for further
discussion of the causes of these seasonal patterns. These seasonal patterns
have been heightened by a decrease in Riddell's sales of sports collectible
products sold to retailers during the first quarter of 1997 which resulted in a
near break even loss for Riddell in the period. Riddell believes that the
decline was due to a change in the seasonal pattern in the sale of these
products due to differences in the timing of the product introductions and
deliveries which had shifted sales of these products into the first quarter
during the previous two years. See '--Riddell--Results of Operations--Three
Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996.'
The following table sets forth certain unaudited operating results of
Riddell and Varsity on a pro forma basis for each of the four consecutive
quarters in the period ending December 31, 1996, after giving effect to the
Transactions as if they had occurred on January 1, 1996. This information should
be read in conjunction with 'Unaudited Pro Forma Condensed Combined Financial
Data' and the Consolidated Financial Statements and the related notes thereto of
Riddell and Varsity included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Total revenues............... $26,260 $51,265 $57,779 $25,527
Operating income (loss)...... (880) 7,173 8,178 (1,499)
Net income (loss) from
continuing operations...... (2,486) 2,464 2,803 (3,736)
</TABLE>
Riddell 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
41
<PAGE>
receivable levels, Riddell has maintained 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.
Varsity's working capital needs have generally followed a similar pattern
reaching their peak at the end of the first calendar quarter and continuing
through the second quarter. This period follows Varsity's off-season period
during which it generates only nominal revenues while incurring expenditures in
preparation for its approaching business season. Varsity has typically incurred
seasonal borrowings during this period which it has historically eliminated
during the third quarter as it receives prepayments on camp tuition and fees.
After the Acquisition, the Company will use the New Credit Facility to
finance these seasonal working capital needs.
RIDDELL
RESULTS OF OPERATIONS
The following table sets forth statement of operations data of Riddell as a
percentage of total net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 31,
----------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues:
Net sales.................................... 93.1% 94.9% 96.6% 95.9% 96.9%
Royalty income............................... 6.9 5.1 3.4 4.1 3.1
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of sales.................................. 53.8 53.4 53.6 51.5 54.3
----- ----- ----- ----- -----
Gross profit................................... 46.2 46.6 46.4 48.5 45.7
Selling, general and administrative expenses... 38.1 34.8 35.0 35.2 38.8
Product liability expenses..................... 5.3 4.0 3.4 3.3 3.4
Product liability litigation loss.............. 8.3 -- -- -- --
Other charges.................................. 2.1 -- -- -- --
----- ----- ----- ----- -----
Income (loss) from operations.................. (7.6) 7.9 7.8 10.0 3.5
Interest expense............................... 3.6 4.2 3.8 3.2 3.6
Income taxes (credits)......................... (2.3) 0.1 0.2 0.3 --
----- ----- ----- ----- -----
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles................................... (8.9)% 3.5% 3.9% 6.5% (0.1)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Overview. Operations for the first quarter of 1997 resulted in a net loss
of $17,119, or $0.00 per share, compared to first quarter 1996 net income of
approximately $1.3 million or $0.15 per share. Total revenues for the three
months ended March 31, 1997 decreased by 6% to approximately $18.6 million from
approximately $19.8 million for the three months ended March 31, 1996.
Riddell realized gains in the sale of athletic products and services sold
directly to its Institutional customers of approximately 15% as further
discussed below. However, these gains were offset primarily by a decline in
sales of sports collectible products sold to retailers. In summary, the overall
decrease in profitability for the quarter was a result of the quarter's decline
in sales while related selling and marketing expenses continued at comparatively
fixed levels coupled with an increase in certain other expenses.
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 Riddell's results of operations.
42
<PAGE>
Revenues. Net sales of Riddell's sports products and services segment
(which comprises all revenues other than trademark licensing royalties)
decreased by 5% to approximately $18.0 million for the three months ended March
31, 1997 from approximately $19.0 million during the comparable period of 1996.
Within this segment Riddell achieved gains in sales of competitive products and
services sold directly to schools and other Institutional customers. This gain
was offset by a decline in sales of sports collectible products sold to
retailers. Riddell also experienced a decrease in sales of other product lines
including competitive youth football products sold through recreational dealers
and products sold internationally.
Sales of competitive athletic products and services sold to schools and
other Institutions increased approximately $1.9 million or 15% in comparison to
the first quarter of 1996. Sales of reconditioning services, which increased 7%
over the first quarter of 1996, accounted for approximately $0.5 million of this
gain. This improvement reflects increased unit volume as well as moderate price
increases. Riddell benefitted from a volume increase in its core football helmet
and shoulder pad products. This has occurred as Riddell gains additional
experience marketing these items direct to Institutional customers (a change
adopted at the end of 1994 as discussed elsewhere in this Prospectus) and
continues to place emphasis on expanding sales of these products. Riddell
benefitted from initial sales of its newly introduced line of athletic practice
clothing and experienced strong growth in its line of baseball products
introduced last year. Sales of baseball products to Institutions have increased
as Riddell gains experience in selling the products and the products themselves
gain acceptance in the field.
Sales of sports collectible products sold to retailers for the first
quarter of 1997 decreased by approximately 42% or approximately $1.9 million, in
comparison to the first quarter of 1996. Riddell believes that the decline is
principally due to the trade adjusting its inventory intake based on Riddell's
improved order fulfillment record and to the timing of product introductions. In
the prior period, customers stockpiled inventory because of product shortages in
the preceding Christmas selling season. This led retailers to take inventory
early to ensure availability for later in the year. During 1996, Riddell
demonstrated sufficient order fulfillment capability which allows retailers to
postpone orders and to match inventory receipt more closely with consumer
demand.
In the first quarter of 1996, Riddell also benefitted from sales of sports
collectible products which were in their introductory phase, such as Riddell's
miniature hockey goalie mask. In contrast, Riddell had no new products shipping
in volume during the first quarter of 1997. While Riddell has several new
collectible products slated for 1997 introduction, these will not be available
for shipment in volume until the second and third quarter of the year. These new
products include a line of miniature baseball helmets bearing major league
baseball logos, and a line of miniature collectibles based on the Star Wars
Trilogy(Registered) which is the first line of retail collectible products sold
by Riddell that is not associated with sports.
Royalty income from trademark licensing decreased by approximately $0.2
million or 30%, to approximately $0.6 million for the three months ended March
31, 1997 from approximately $0.9 million during the comparable period of 1996.
This decrease was primarily attributable to a decline in royalties from the
licensing of the MacGregor trademark which decreased by 26%, or approximately
$0.2 million. MacGregor licensing income decreased principally due to a decline
in royalties from Kmart. Additionally, as discussed elsewhere in this
Prospectus, licenses which had accounted for approximately $80,000 of royalties
in the first quarter of 1996 expired at the end of 1996. Royalties from the
licensing of the Riddell trademark decreased 53%, or approximately $40,000. The
decrease results from a decline in royalties realized from Riddell's licensee
for the Riddell trademark on athletic footwear. The Riddell footwear licensee
remains in bankruptcy proceedings as discussed elsewhere in this Prospectus. The
licensee must continue to comply with the terms of the license, including
payment of royalties. On June 20, 1997, the Company entered into the Settlement
Agreement, the finalization of which is conditioned upon, among other things,
obtaining the approval of three bankruptcy courts. The Settlement Agreement
requires the Company, among other things, to assign to the Levitt Trustees (or
any successor trustee or other person approved by the New Jersey Bankruptcy
Court) and to Brooks up to $3.0 million of royalties from the 'Riddell' footwear
license, to the extent such royalties are paid under this or any footwear
license replacing the current footwear license. See 'Business--The
Company--Legal Proceedings--Memorandum of Understanding and Settlement
Agreement.'
Gross Profit. Gross profit decreased by 12%, to approximately $8.5 million
for the three months ended March 31, 1997 from approximately $9.6 million during
the comparable period in 1996. The decline includes a
43
<PAGE>
decrease in gross profits from sports products and services as well as the
decline in royalty income from trademark licensing discussed above. While
trademark licensing 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 increase or decrease in royalty
income results in an equal change in gross profit.
Gross profit attributable to the sports products and services segment
decreased by 10%, to approximately $7.9 million for the three months ended March
31, 1997 from approximately $8.8 million during the comparable period in 1996.
Gross profit margin rates for the segment decreased to 43.9% of sales for the
three months ended March 31, 1997 compared to 46.4% of sales for the three
months ended March 31, 1996. The decrease in gross profits and gross margin
rates is principally due to the overall decline in sales discussed above, which
impacted gross margin rates through decreased efficiencies arising from lower
utilization of fixed cost operations. Margins were also negatively impacted by
increased reconditioning costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $7.2 million for the three
months ended March 31, 1997 from approximately $7.0 million for the three months
ended March 31, 1996. The increase is principally due to an increase in
litigation related legal expenses of approximately $0.4 million. Additionally,
overall selling and marketing expenses remained relatively constant despite the
decrease in sales discussed above due to the fixed nature of a large portion of
these costs. An increase in promotional and other variable selling expenses
incurred to generate the increase in sales of competitive athletic products
offset any reduction in variable expenses related to the decrease in sales of
sports collectible products. Legal expenses are anticipated to remain at high
levels through the remainder of the year.
Interest Expense. Interest expense increased 6%, or $38,753, to
approximately $0.7 million for the first quarter of 1997. This increase reflects
an increase in average debt levels offset in part by a decline in average
interest rates. Debt increased due to increases in working capital and overall
decreases in non-interest bearing liabilities. Average interest rates declined
principally due to the November 1996 sale of $7.5 million of 4.1% Convertible
Subordinated Notes. As discussed elsewhere in this Prospectus, the proceeds of
the sale of these notes were used, in part, to repay indebtedness which carried
a higher interest rate.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Overview. Operations for the year ended December 31, 1996, resulted in a
20% increase in net income before an extraordinary item to approximately $2.8
million, or $0.34 per share, in comparison to 1995 earnings of approximately
$2.4 million or $0.29 per share. Tax expense for both 1996 and 1995 was reduced
by the benefit of net operating loss carryforwards recognized during the years.
The recognition of these tax benefits had the effect of decreasing tax expense
approximately $1.2 million, or $0.14 per share, in 1996 and approximately $0.9
million, or $0.11 per share, in 1995. Riddell anticipates that any remaining
unrecognized net operating loss benefit for financial reporting purposes would
be phased out upon the generation of approximately $2.0 million in future income
before tax.
An extraordinary item in 1995 consisted of a $1.9 million charge to
establish a provision for costs related to certain fraudulent transfer
litigation. At the time the provision was established, a settlement had been
agreed to between the parties. However, as described in 'Business--The
Company--Legal Proceedings,' the proposed settlement never materialized and the
litigation remains ongoing.
In 1996, Riddell benefitted from increased sales volume over most of its
product lines which, combined with a favorable sales mix, improved Riddell's
gross margins from sales of sports products and services. These gains were
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
resulting from increased promotional expenses and higher commissions.
These factors are further described in the following discussion of
operating results by line item, together with other matters having a significant
effect on Riddell's results of operations.
Net Sales. Net sales of Riddell's sports products and services segment
(which includes the manufacture, sale and reconditioning of football helmets,
other athletic products and sports collectible products) increased 10% to
approximately $69.9 million in 1996 from approximately $63.6 million in 1995.
Riddell experienced sales gains in most of its product lines, including overall
increases in sales of athletic products, sports collectible products and
reconditioning services.
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<PAGE>
Sales of competitive athletic products increased 8% to approximately $27.3
million in 1996 from approximately $25.3 million in 1995. Sales of these
products, principally football helmets and shoulder pads sold to schools and
other Institutions, reflects increased volume and selected price increases to
offset rising costs. Unit volume increases have occurred as Riddell has gained
experience in direct distribution of Institutional products, a change that has
been implemented over the past two years. Riddell is also benefitting from other
actions taken in recent periods to increase Institutional sales. These actions
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. Riddell also benefitted
from an increase in the volume of competitive youth products which continue to
be sold by independent dealers and distributors to youth recreational groups
such as Pop Warner rather than to elementary schools. Riddell experienced an
anticipated decline in sales of these products in 1995 as many dealers stopped
purchasing Riddell youth products when they were no longer offered Riddell's
Institutional product lines. Sales of youth products have increased as Riddell
has expanded its distribution through new dealers and distributors.
Riddell believes that it will be able to further increase sales of athletic
products sold to Institutions as it continues to gain experience in direct sales
of its traditional product lines as well as newer lines of products such as
baseball equipment. Riddell also anticipates it can expand sales in this area
through the introduction of additional products such as its new line of athletic
practice clothing introduced late in 1996 for the 1997 season. However, there
can be no assurance that such sales increases will materialize.
Sales of reconditioning services increased 3% to approximately $21.7
million in 1996 from approximately $21.0 million in 1995. This improvement was
principally due to moderate price increases.
Sales of sports collectible products increased approximately 20% to
approximately $20.8 million in 1996 from approximately $17.3 million in 1995.
This improvement was due to increased volume in sales of Riddell's line of
miniature helmets, including miniature hockey goalie masks, which Riddell
started shipping in late 1995. Sales of consumer products have been the
strongest area of growth for Riddell in recent periods. Riddell is continuing to
place a high level of marketing emphasis on the retail collectible business and
has recently introduced two new product lines which will begin shipping in 1997.
These include miniature baseball helmets and miniature collectibles based on the
Star Wars Trilogy, Riddell's first line of retail collectible products not
associated with sports.
Royalty Income. Royalty income decreased 27% to approximately $2.5 million
in 1996 from approximately $3.4 million in 1995. MacGregor licensing royalties
decreased 20% in 1996 to approximately $2.1 million from approximately $2.7
million in 1995 due a to decline in royalties from Kmart and the inclusion in
1995 of certain non-recurring royalties. Royalties from other MacGregor
licensees remained stable at minimum contractual levels. Royalty income for 1996
included approximately $0.3 million in royalties from licenses which expired at
the end of 1996. The larger of these two licenses was with Thom McAn which had
licensed the MacGregor trademark for athletic shoes but has withdrawn from the
athletic shoe market in recent years. See '--MacGregor Trademark' and
'Business--Riddell--Trademarks, Service Marks and License Agreements.'
Royalties from the licensing of the Riddell trademark decreased 52% to
approximately $0.4 million in 1996 from approximately $0.8 million in 1995. The
decline was principally due to two previously announced events which took place
near the end of 1995. First, Riddell terminated a license for certain athletic
equipment due to the licensee's failure to pay royalties. Secondly, Riddell
revised the terms of a license for Riddell branded leisure apparel in
conjunction with the related licensee's restructuring of its product lines. The
revised leisure apparel license called for a lower level of minimum royalties
than those paid in 1995. Riddell also saw a decrease in royalties received from
its Riddell athletic footwear licensee as the licensee offset certain amounts
against royalties due Riddell in 1996. While the Riddell footwear licensee has
resumed payment of royalties to Riddell, the licensee remains in bankruptcy
proceedings. Although this licensee must continue to comply with the terms of
the license, including payment of royalties, in view of the contested bankruptcy
of the licensee, there can be no assurance that royalties will be received in
the long term from this licensee. See '--MacGregor Trademark' and
'Business--Riddell--Trademarks, Service Marks and License Agreements.'
Gross Profit. Gross profit attributable to the sports products and
services segment increased 12% to approximately $31.1 million in 1996 from
approximately $27.8 million in 1995. Gross profit margin rates for the
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<PAGE>
segment increased to 44.5% of sales in 1996 from 43.7% of sales for 1995. The
increase in gross profit is principally due to sales increases discussed above.
Other factors contributing to the improvement in gross margins were changes to
the sales mix, efficiencies due to higher volumes and selective price increases
taken to offset rising costs.
While trademark licensing does have certain costs including selling,
general and administrative expenses, there are no costs which are deducted in
arriving at gross profit. Accordingly, each incremental dollar of royalty income
results in a dollar increase in gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 9% to approximately $25.4 million in 1996 from
approximately $23.3 million in 1995. These increases are attributable to higher
levels of selling, marketing and promotional expenses relating to Riddell'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. These
increases in selling expenses were offset in part by a modest decline in
administrative expenses with the end result that overall selling, general and
administrative expenses remained relatively stable as a percentage of revenues,
increasing to 35.0% of revenues in 1996 from 34.8% of revenues in 1995. In 1996,
Riddell charged $0.5 million of legal expenses relating to the Mac I fraudulent
transfer action against a reserve established for the matter in 1995. See
'Business--The Company--Legal Proceedings.' Had this reserve not existed, these
amounts would have been charged against selling, general and administrative
expenses in 1996.
Product Liability Expenses. Product liability expenses showed a moderate
decrease in 1996. See 'Business--The Company--Product Liability Proceedings and
Insurance.'
Interest Expense. Interest expense was relatively stable at approximately
$2.8 million between the two years with an overall decrease of approximately 1%.
An overall decrease in average interest rates was offset, in part, by increases
in average indebtedness relating to increased levels of overall business volume.
A substantial portion of Riddell's borrowings are based on its bank's prime
rate, which averaged 8.27% in 1996, a 6% decrease from an average rate of 8.83%
in 1995. Average interest rates also decreased as a result of Riddell's issuance
of a $7.5 million, 4.1% convertible subordinated note in November 1996. The
majority of the proceeds of this note were used to repay indebtedness which
carried higher interest rates.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Overview. Operations for the year ended December 31, 1995, resulted in a
significant improvement over 1994 operating results. Earnings before an
extraordinary item, for the year were approximately $2.4 million, or $0.29 per
share. This compares to a loss of approximately $4.9 million, or $0.62 per
share, for fiscal 1994. The 1994 operations generated net losses due, in large
part, to approximately $6.5 million of pre-tax charges including: (1) a $4.6
million charge for a product liability verdict (subsequently settled) and (2)
approximately $1.9 million of non-recurring costs relating to Riddell's
transition to direct sales of athletic equipment used by schools and other
Institutions, including a special transitional sales return program for
discontinued dealers. The 1995 income reflects lower than normal tax expense due
to the benefit of a net operating loss carry forward which was recognized during
the year. The recognition of this tax benefit had the effect of decreasing tax
expense approximately $0.9 million, or $0.11 per share, for 1995.
An extraordinary item in 1995 consisted of a $1.9 million charge to
establish a provision for costs related to certain fraudulent transfer
litigation. This provision had been recorded in light of a settlement which had
been proposed at the time, but which subsequently failed to materialize. See
'Business--The Company--Legal Proceedings.'
Excluding the effect of the approximately $6.5 million in pre-tax charges
for 1994 discussed above, operating income before interest and taxes for 1995
increased approximately 130% to approximately $5.3 million in 1995 from
approximately $2.3 million in 1994.
Operations for the 1995 and 1994 periods must be viewed in the context of
changes that were occurring at the time in Riddell's method of distributing
competitive athletic equipment used by schools and other Institutions and by
Riddell's increased emphasis on the marketing of sports collectible products. In
October 1994 Riddell announced a significant change in its method of
distributing Institutional products. Sales of these products,
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<PAGE>
principally football helmets, shoulder pads and related accessories, had
historically been made to independent team sports dealers for resale to schools
and other Institutions. At the end of 1994 Riddell started marketing these
products to schools and other Institutions on a factory direct basis. While the
unit volume of certain products declined in 1995, as was anticipated given the
magnitude of this difficult change, overall margins on competitive products
increased.
Riddell benefitted from substantial increases in sales of collectible
sports products which continue to be the strongest area of growth for Riddell.
Profits from these sales were the leading contributor to the increase in
operating profitability. Riddell also benefitted from certain managed expense
reductions.
The effects of these factors are described in the following discussion of
operating results by line item, together with other matters having a significant
effect on Riddell's results of operations.
Net Sales. Net sales of Riddell's sports products and services segment
increased 23% to approximately $63.6 million in 1995 from approximately $51.6
million in 1994. Sales of competitive athletic products were stable in
comparison to 1994 levels with an increase of less than 1% after adjusting to
eliminate the effect of a special transitional return program for discontinued
dealers, which had decreased 1994 sales by $1.4 million. As a result of the
change to direct sales, the selling prices of these products increased due to
Riddell's ability to capture a portion of the former dealers' markup to
Institutional customers. The increases were offset by a decline in the unit
volume of these competitive athletic products. Riddell anticipated the potential
of a decline in new equipment volume due to the complexity of converting its
Institutional sales organization to a factory direct basis.
Sales of sports collectible products nearly doubled in 1995 increasing
approximately 94% from approximately $8.9 million in 1994 to approximately $17.3
million in 1995. Sales of these consumer products, which had also increased more
than 80% between 1993 and 1994, have been the strongest area of growth for
Riddell in recent periods due to an overall increase in marketing focus,
including the introduction of a new line of miniature football helmets in 1994.
Sales of reconditioning services increased 12% to approximately $21.0
million in 1995 from approximately $18.8 million in 1994. The year-to-date
increase in reconditioning sales was principally due to increased volume from
Riddell's acquisition of Raleigh Athletic Equipment Corporation in January 1995.
Royalty Income. Royalty income decreased 11% to approximately $3.4 million
in 1995 from approximately $3.8 million in 1994. MacGregor licensing royalties
increased 4% to approximately $2.7 million in 1995 from approximately $2.6
million in 1994 due to increased royalties from Kmart and certain non-recurring
royalties. Royalties from other MacGregor licensees remained stable at minimum
contractual levels (licensees generally pay Riddell the higher of royalties
based on a percentage of their related business volume or an annual minimum
guaranteed royalty).
The increase in MacGregor royalties was offset by a decline in royalties
from the licensing of the Riddell trademark. Riddell royalties decreased 40% to
approximately $0.8 million in 1995 from approximately $1.3 million in 1994. In
addition to current royalties, Riddell licensing income for 1994 had included
approximately $0.5 million received from its Riddell athletic footwear licensee
at the time certain litigation between the licensee and Riddell was settled.
Royalties from the Riddell athletic footwear licensee were approximately $0.3
million for 1995.
Gross Profit. Gross profit attributable to the sports products and
services segment increased 28% to approximately $27.8 million in 1995 from
approximately $21.8 million in 1994. Gross profit margin rates for the segment
increased to 43.7% of sales in 1995 from 42.2% of sales for 1994. The increase
in gross margin rates reflects a number of factors. First, Riddell experienced
increased margins on competitive protective athletic products sold to schools
and other Institutions due to Riddell's ability to capture a portion of the
former dealers' markup to Institutional customers as a result of the change to
direct sales. However, this increase was offset somewhat by the effect of the
unit volume decreases of these products discussed above. These volume decreases
resulted in higher unit costs since fixed manufacturing and distribution
overhead costs do not vary with lower volume. Margin rates were also favorably
impacted by increases in sales of sports collectible products, as the increases
were in product lines which carry margins higher than the average for other
products.
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<PAGE>
While trademark licensing does have certain costs including selling,
general and administrative expenses, there are no costs which are deducted in
arriving at gross profit. Accordingly, each incremental dollar of royalty income
results in a dollar increase in gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 11% to approximately $23.3 million in 1995
from approximately $21.1 million in 1994. These increases are attributable to
increased selling and marketing expenses relating to both Riddell's change to
Institutional sales for competitive products sold to schools and other
Institutions and Riddell's increased efforts in the marketing and sales of
sports collectible products. These increases also include related costs
associated with operations acquired during the past year. The increased selling
and marketing expenses were offset by managed reductions in administrative
expenses of approximately $0.5 million. As a result of these reductions and
sales volume increases, overall selling, general and administrative expenses
decreased as a percentage of revenues from 38.1% of revenues in 1994 to 34.8% of
revenues in 1995, despite the increased marketing efforts. Legal expenses
relating to non-operating litigation matters remained relatively constant in
relation to 1994 levels.
Product Liability Expenses. Product liability expenses decreased 65% to
approximately $2.7 million in 1995 from approximately $7.5 million in 1994, as
1994 expense included the effects of a $1.5 million adjustment to product
liability reserves taken in the fourth quarter, and the effects of a $4.6
million charge (reported as a separate item in Riddell's Consolidated Statement
of Operations for the year ended December 31, 1994). Product liability expense
for 1995 was impacted by the cost of an insurance program implemented at the end
of 1994, which exceeded that expense in the prior year by approximately $1.0
million. See 'Business--The Company--Product Liability Proceedings and
Insurance.'
Interest Expense. Interest expense increased 40% in 1995 to approximately
$2.8 million from approximately $2.0 million in 1994. The increase was due to an
increases in average interest rates and average indebtedness during the year. A
substantial portion of Riddell's borrowings are based on its bank's prime rate.
The average prime rate for 1995 was 8.83%, a 24% increase over the average prime
rate of 7.14% in 1994. The prime rate was 8.5% at December 31, 1995. Average
indebtedness increased due to increased working capital demands.
MACGREGOR TRADEMARK
Riddell acquired certain rights to the MacGregor trademark and related
license agreements as part of an acquisition in 1988 at an allocated cost of
approximately $20.1 million. Riddell is amortizing the trademark rights over a
period of forty years, and the license agreements over their terms. The
unamortized cost of these assets included in intangible assets at December 31,
1996 was approximately $14.4 million. See Note 4 to the Consolidated Financial
Statements of Riddell included elsewhere in this Prospectus. Riddell considers
licensing revenues derived from the MacGregor trademark rights to be a material
part of its business. A material decline in the royalties from the MacGregor
trademark rights could have a material adverse effect on Riddell's results of
operations. Furthermore, if there were a material decline in the revenues from
the MacGregor trademark, then the carrying amount of the MacGregor trademark
rights could be deemed to have been impaired. A write-down for such impairment
could have a material adverse effect on Riddell's financial position and results
of operations. As disclosed in 'Business--Riddell--Trademarks, Service Marks and
License Agreements,' Riddell and Meldisco recently reached an agreement in
principal, subject to negotiation and execution of final documentation, that
Meldisco will continue to sell athletic footwear bearing the MacGregor trademark
at Kmart stores pursuant to a license expected to be effective when the Kmart
license expires in 1998. Kmart has an exclusive license to use the MacGregor
trademark on certain athletic apparel (e.g., jogging suits and sweat separates),
athletic bags and knapsacks and a non-exclusive license on other products such
as athletic socks. Riddell plans to establish a new license for the apparel
category effective when the Kmart license expires in 1998. While Riddell
believes it will be successful in renewing or replacing the license in a manner
which will continue to generate revenues sufficient to support the carrying
value of the trademark rights, there can be no assurance that it will be
successful in doing so.
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<PAGE>
VARSITY
GENERAL
Over the past three years, Varsity's revenues and net income have grown
substantially. Revenues have grown from approximately $62.6 million in the
twelve-month period ended December 31, 1994 to approximately $88.4 million in
the twelve months ended December 31, 1996, and net income has grown from
approximately $3.8 million in the twelve months ended December 31, 1994 to
approximately $5.2 million in the twelve months ended December 31, 1996. This
growth is due to Varsity's strategy of expanding its school spirit product lines
and sales force, increasing enrollment in its cheerleader and dance team camp
sessions increasing participation in special events such as parades and bowl
games and visibly promoting its business, as well as the school spirit industry,
primarily through nationally televised cheerleading and dance team
championships. In addition, in December 1994, Varsity acquired the group tour
business of Intropa International/USA, Inc., with whom Varsity had worked in the
past in promoting its international and domestic travel events, further
contributing to revenue growth from Varsity's special events. In May 1996,
through its subsidiary, Varsity USA, Inc. ('USA'), Varsity purchased the camp
business of United Special Events, Inc., a California-based company with a
strong position in the western region of the United States, which complemented
Varsity's existing camp operations. Varsity plans to increase its revenues and
market penetration in the future by continuing to implement its growth strategy
(primarily focusing on the youth, junior high, high school, and junior college
markets) and by utilizing its reputation for quality, design, and on-time
delivery of its cheerleading and dance uniforms and for professional instruction
and supervision at its cheerleader and dance team camps and special events.
Varsity is also analyzing new growth opportunities in the school spirit and
cheerleading industries.
Effective April 1994, Varsity changed its fiscal year end from March 31 to
December 31. Therefore, the fiscal period ended December 31, 1994 consists of a
nine-month period as compared to the twelve-month period ended December 31,
1995. Accordingly, a discussion of significant changes between the twelve-month
periods ended December 31, 1995 and 1994, has also been included herein. Each of
these discussions should be read with the discussion set forth above under
'--Seasonality.'
RESULTS OF OPERATIONS
The following table sets forth statement of income data of Varsity as a
percentage of total net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MOS.
NINE MOS. TWELVE MOS. YEAR ENDED ENDED
ENDED ENDED DEC. DECEMBER 31, MARCH 31,
DEC. 31, 31, -------------- --------------
1994 1994 1995 1996 1996 1997
--------- ----------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Uniforms and accessories..................... 60.2% 60.1% 58.3% 55.9% 35.5% 33.7%
Camps and events............................. 39.8 39.9 41.7 44.1 64.5 66.3
----- ----- ----- ----- ----- -----
Total........................................ 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Cost of revenues:
Uniforms and accessories..................... 31.3 31.7 31.0 30.3 25.2 23.9
Camps and events............................. 28.2 28.3 30.6 30.3 48.2 45.5
----- ----- ----- ----- ----- -----
Gross profit................................... 40.5 40.0 38.4 39.4 26.6 30.6
Selling, general and administrative expenses... 27.1 30.2 30.0 29.8 66.2 65.4
----- ----- ----- ----- ----- -----
Operating income (loss)........................ 13.4 9.8 8.4 9.6 (39.6) (34.8)
Other income (expense)......................... 0.3 0.3 0.2 0.1 0.7 0.7
----- ----- ----- ----- ----- -----
Income (loss) before taxes on income........... 13.7 10.1 8.6 9.7 (39.0) (34.1)
Taxes (benefit) on income...................... 5.4 4.0 3.1 3.9 (15.5) (13.5)
----- ----- ----- ----- ----- -----
Net income (loss).............................. 8.3% 6.1% 5.5% 5.8% (23.5)% (20.5)%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
49
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THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Revenues. Total revenues increased 30.0% to approximately $8.3 million in
the three months ended March 31, 1997 from approximately $6.4 million in the
three months ended March 31, 1996.
Revenues from the sale of uniforms and accessories increased by 23.6% to
approximately $2.8 million in the three months ended March 31, 1997 from
approximately $2.3 million in the three months ended March 31, 1996. This
increase was primarily attributable to a strong increase in campwear and
accessories sales at Varsity's annual championship events for college
cheerleading and dance, high school cheerleading, high school dance and All
Stars (as hereinafter defined).
Camp and event revenues increased by 33.5%, to approximately $5.5 million
in the three months ended March 31, 1997, from approximately $4.1 million in the
three months ended March 31, 1996. This increase was primarily attributable to
approximately $1.0 million of additional championships and special events
revenues associated with the USA camp business acquired in May 1996, combined
with a current period increase in the number of participants at each of the
college cheerleading and dance, high school dance and the All Star
championships.
Gross Profit. Gross profit increased by 49.9% to approximately $2.6
million in the three months ended March 31, 1997 from approximately $1.7 million
in the three months ended March 31, 1996.
Gross profit from the sale of uniforms and accessories as a percentage of
such sales increased to 29.1% in the three months ended March 31, 1997 from
28.9% in the three months ended March 31, 1996. This increase is primarily due
to the increase in campwear and accessories sales at Varsity's national
championships, which have slightly higher margins than the Varsity's other
purchased product lines.
Gross profit margins associated with camps and special events as a
percentage of such sales increased to 31.4% in the three months ended March 31,
1997 from 25.2% for the three month period ended March 31, 1996. The gross
profit margins were positively impacted by the higher gross profit margins
realized by the championships and special events associated with the recently
acquired USA camp business, as compared to Varsity's other such events. Further,
economies of scale were realized by spreading Varsity's related fixed costs over
a larger revenue base.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses in the three months ended March 31, 1997 were
approximately $5.5 million as compared to approximately $4.3 million in the
three months ended March 31, 1996. Selling, general and administrative expenses
as a percentage of sales decreased to 65.4% for the three months ended March 31,
1997 from 66.2% in the three months ended March 31, 1996, primarily due to the
economies of scale realized by spreading all of Varsity's administrative costs
over a greater revenue base. The increase of approximately $1.2 million in
selling, general and administrative expenses was primarily due to increases of
approximately $0.7 million in payroll and personnel costs, including
approximately $63,000 in additional selling commissions and related expenses,
and approximately $0.2 million attributable to USA personnel. There were also
increases of approximately $0.3 million of operating costs (excluding payroll)
incurred by USA, and approximately $65,000 associated with equipment repairs.
Additional depreciation expense of approximately $76,000, primarily relating to
recent acquisitions of computer equipment and software, also contributed to the
increase.
Net Loss. The net loss increased 13.7% to approximately $1.7 million for
the three months ended March 31, 1997 as compared to approximately $1.5 million
in the same period last year. The increase in the loss is primarily attributable
to an increase of approximately $1.2 million in operating costs, partially
offset by an increase of approximately $0.9 million in gross profit. The net
loss per share for the period was $0.36 as compared to $0.32 for the same period
last year.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues increased 17.1% to approximately $88.4 million in
the year ended December 31, 1996 from approximately $75.5 million in the year
ended December 31, 1995.
Revenues from the sale of uniforms and accessories increased 12.3% to
approximately $49.5 million in the year ended December 31, 1996 from
approximately $44.0 million in the year ended December 31, 1995. The
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<PAGE>
increase was primarily attributable to a strong increase in shoe and accessory
sales combined with an 8.5% sales growth in other product lines. Other factors
contributing to the sales increase include a combination of expansion within
existing product lines and the introduction of new designs, and, to a much
lesser extent, a small price increase on certain items. In addition, Varsity
increased its inventory levels in an effort to service greater anticipated
demand. The increased availability of inventory further contributed to the sales
volume increases by improving on-time delivery.
Camp and event revenues increased approximately $7.5 million, or 23.9%, to
approximately $39.0 million in the year ended December 31, 1996 from
approximately $31.5 million in the year ended December 31, 1995. This increase
was primarily attributable to approximately $4.2 million of 1996 revenues
associated with the USA camp business acquired in May 1996, combined with higher
incremental revenues derived from a 21.4% increase in camp participants (or 7.1%
exclusive of USA participants), and a 3.7% increase in the average gross tuition
per camp participant during the 1996 summer season.
The revenue increase was also attributable to an increase in the number of
participants in the 1996 National High School Dance and Cheerleading
Championships as compared to the same events held in 1995 and to two new Company
sponsored championships, the All Star Championship in March 1996 and the
National Jumprope Championship in June 1996.
Gross Profit. Gross profit increased 20.1% to approximately $34.8 million
in the year ended December 31, 1996 from approximately $29.0 million in the year
ended December 31, 1995. Gross profit as a percentage of total revenues
increased to 39.4% in the year ended December 31, 1996 from 38.4% in the year
ended December 31, 1995.
Gross profit from sales of uniforms and accessories as a percentage of such
sales decreased to 45.7% in the year ended December 31, 1996 from 46.9% in the
year ended December 31, 1995. A significant portion of the overall sales
increase related to the purchased product lines, such as shoes and accessories,
which have lower margins than custom manufactured goods, such as uniforms.
Specifically, 46.4% of the revenues from merchandise was attributable to the
sale of uniforms and 53.6% to the sale of accessories in the year ended December
31, 1996, compared with 47.7% of such revenue attributable to uniforms, and
52.3% to accessories in the year ended December 31, 1995. Varsity expects this
shift in mix to continue for the foreseeable future.
Gross profit margins associated with camps and special events increased to
31.3% in the year ended December 31, 1996 from 26.5% in the year ended December
31, 1995. This increase was primarily due to more efficient staffing at summer
camps, resulting in savings in instructor payroll, travel and training costs.
The increase is also attributable to economies of scale realized from spreading
certain administrative costs over a larger number of camp participants and to
decreased travel costs associated with Varsity's group tour business. The gross
profit margins were negatively impacted in 1996 by the lower gross profit
margins realized by the camp business acquired in May 1996 by USA, as compared
to Varsity's other camp business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.4% to approximately $26.4 million in 1996
from approximately $22.7 million in 1995. Selling, general and administrative
expenses as a percentage of sales decreased to 29.8% for the year ended December
31, 1996 from 30.0% for the year ended December 31, 1995, primarily due to the
economies of scale realized by spreading all of Varsity's fixed administrative
costs over a greater revenue base. The increase of $3.7 million in selling,
general and administrative was partially due to increases of approximately $2.8
million in payroll and personnel costs, including approximately $0.7 million in
additional selling commission and related expenses, approximately $0.3 million
in additional consulting fees, partially associated with the additional
championships and approximately $0.5 million attributable to USA personnel.
There were also increases of approximately $0.4 million of operating costs
(excluding payroll) incurred by USA, approximately $0.1 million of additional
costs associated with the publication and distribution of annual catalogs and
brochures, and approximately $0.3 million in additional telephone expenses.
Additional depreciation expense of approximately $0.3 million, primarily related
to recent acquisitions of computer equipment and software, contributed to the
increase.
Income Taxes. As a result of the above, income before income taxes
increased 32.4% to approximately $8.6 million for the year ended December 31,
1996 from approximately $6.5 million for the year ended December 31, 1995. The
effective income tax rate was 39.6% for the year ended December 31, 1996
compared
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with 36.0% for the year ended December 31, 1995. The increase in the effective
tax rate primarily results from the favorable settlement of a tax matter in the
year ended December 31, 1995.
Net Income. Net income increased 25.0% to approximately $5.2 million in
the year ended December 31, 1996 from approximately $4.2 million in the year
ended December 31, 1995 and net income per share increased by 23.6% to $1.10 per
share in the year ended December 31, 1996 from $0.89 per share in the year ended
December 31, 1995. The weighted average common shares and equivalent shares
increased to 4,734,000 in the year ended December 31, 1996 from 4,679,000 in the
year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1994
Revenues. Total revenues increased 26.7% to approximately $75.5 million in
the year ended December 31, 1995 from approximately $59.6 million in the nine
months ended December 31, 1994 ('short period').
Revenues from the sale of uniforms and accessories increased 22.8% to
approximately $44.0 million in 1995 from approximately $35.9 million in the
short period. The increase in uniform and accessory revenues was due to a
combination of new designs and expansion within existing product lines,
increased unit sales, and, to a much lesser extent, a small price increase on
certain items. Varsity also continued its early order sales incentive program
(first implemented in March 1994 and made available to all customers who
submitted orders prior to April 15), resulting in an increased response over the
prior year. In addition, Varsity increased its inventory levels in an effort to
service greater anticipated demand. The increased availability of inventory
further contributed to the sales volume increase by improving on-time delivery.
Camp and event revenues increased 32.6% to approximately $31.4 million in
1995 from approximately $23.7 million in the short period. This increase was due
to (1) incremental revenues of approximately $3.8 million recognized from the
group travel business of Intropa, which was acquired by Varsity in December,
1994, and (2) higher revenues derived from a combination of a 13.9% increase in
camp participants, to approximately 156,000 in the 1995 summer season from
approximately 137,000 in the 1994 summer season and an increase of 1.8% in gross
tuition per camp participant during the 1995 summer season. In addition,
calendar 1995 included revenues from the National Dance Team Championship held
in February, which were not included in the short period. These increases were
partially offset by decreases in participation in certain of Varsity-sponsored
holiday parade and bowl game performances in the last quarter of 1995, as
compared to record participation that it experienced at certain of these events
in the prior period.
Gross Profit. Gross profit increased 20.3% to approximately $29.0 million
in 1995 from approximately $24.1 million in the short period. Gross profit as a
percentage of total revenues decreased to 38.4% in calendar 1995 from 40.5% in
the short period.
Gross profit from sales of uniforms and accessories as a percentage of such
sales decreased to 46.9% in 1995 from 48.0% in the short period. The percentage
decrease was partially attributable to increases in overhead, including
additional facilities and warehouse space required to service increased sales
volumes. A portion of the remaining decrease was attributable to a shift in the
mix of products sold between uniforms, which have higher margins, and
accessories, which have lower margins. Specifically, 47.7% of the revenues from
merchandise were attributable to the sale of uniforms and 52.3% to the sale of
accessories in 1995, compared to 49.1% of such revenue attributable to uniforms
and 50.9% to accessories in the short period. Varsity expects this shift in mix
to continue in the future.
Gross profit margins associated with camps and special events decreased to
26.5% in 1995 from 29.1% in the short period. This percentage decrease was
partially attributable to greater than anticipated increases in instructor
payroll, travel, and training costs, which resulted from the 1995
regionalization of certain administrative functions in the summer camp program.
In addition, the gross margin generated by Intropa has historically been and is
expected to continue to be lower than the margin generated by Varsity in its
camps and other special events. Finally, Varsity incurred additional student
housing costs resulting from camp closings due to Hurricane Erin in the
Southeast and intense summer heat in the Midwest and Northeast. In certain
instances, Varsity was also required to pay guaranteed student housing costs
resulting from last-minute cancellations of camp reservations in excess of
cancellation fees received from the camp participants. These decreases were
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partially offset by improved margins earned on certain of the company-sponsored
1995 holiday parade and bowl game performances.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses in 1995 increased 40.7% to approximately $22.7 million,
or 30.0% of revenues in 1995, from approximately $16.1 million, or 27.1% of
revenues in the short period. This increase as a percentage of revenues
primarily reflects that the short period figures do not include the months of
January, February, and March, during which revenues are generally nominal and
during which considerable fixed selling, general, and administrative expenses
are incurred. The increase of approximately $6.6 million in selling, general,
and administrative expenses was partially due to an increase of approximately
$2.4 million in payroll and personnel costs, including approximately $1.3
million in increased selling commissions, sales representative training, and
other expenses which are impacted by increased sales volume, as well as
approximately $0.5 million in payroll costs attributable to Intropa personnel.
Varsity's results also include increases of approximately $0.7 million
attributable to additional fixed costs (including rent, depreciation, and
insurance) relating to the expansion of office and storage space, approximately
$0.3 million associated with the publication and distribution of annual catalogs
and brochures, and approximately $0.5 million of operating costs (excluding
payroll) incurred by Intropa. Postage/express mail and travel increased
approximately $0.4 million and approximately $0.3 million, respectively,
relating to an increased revenue and customer base.
Income Taxes. As a result of the above, income before income taxes
decreased 20.0% to approximately $6.5 million in 1995 from approximately $8.1
million in the short period. The effective income tax rate was 36.0% in 1995
compared to 39.6% in the short period. The decrease in the effective tax rate
primarily results from the favorable conclusion of an income tax examination and
a corresponding reversal reduction in the related tax accrual liability
recognized in the short period.
Net Income. Net income decreased 15.3% to approximately $4.2 million from
approximately $4.9 million in the short period and net income per share
decreased 16.8% to $.89 per share in 1995 from $1.07 per share in the short
period. The weighted average common shares and equivalent shares outstanding
increased to 4,679,000 in 1995 from 4,587,000 in the short period.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994 (UNAUDITED)
Revenues. Total revenues increased 20.6% to approximately $75.5 million in
the year ended December 31, 1995 from approximately $62.6 million in the year
ended December 31, 1994.
Revenues from the sale of uniforms and accessories increased 17.0% to
approximately $44.0 million in 1995 from approximately $37.6 million in 1994.
The increase in uniform and accessory revenues was due to a combination of new
designs and expansion within existing product lines, increased unit sales, and,
to a much lesser extent, a small price increase on certain items. Varsity also
continued its early order sales incentive program (first implemented in March,
1994 and made available to all customers who submitted orders prior to April
15), resulting in an increased response over the prior year. In addition,
Varsity has increased its inventory levels in an effort to service greater
anticipated demand. The increased availability of inventory has further
contributed to the sales volume increase by improving on-time delivery.
Camp and event revenues increased 26.0% to approximately $31.4 million in
1995 from approximately $25.0 million in 1994. The increase was due to (i)
incremental revenues of approximately $3.8 million recognized from the group
travel business of Intropa, which was acquired by Varsity in December, 1994, and
(ii) higher incremental revenues derived from a combination of a 13.9% increase
in camp participants, to approximately 156,000 in the 1995 summer season from
approximately 137,000 in the 1994 summer season, and (iii) an increase of 1.8%
in gross tuition per camp participant during the 1995 summer season. These
increases were partially offset by decreases in participation in certain of
Varsity-sponsored holiday parade and bowl game performances in the last quarter
of 1995, as compared to record participation that it had at certain of these
events in the prior year.
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Gross Profit. Gross profit increased 15.8% to approximately $29.0 million
in 1995 from approximately $25.0 million in 1994. Gross profit as a percentage
of total revenues decreased to 38.4% in 1995 from 40.0% in 1994.
Gross profit from sales of uniforms and accessories as a percentage of such
sales decreased to 46.9% in 1995 from 47.2% in 1994. The percentage decrease was
partially attributable to increases in overhead, resulting from additional
facilities and warehouse space required to service increased sales volumes. A
portion of the remaining decrease was attributable to a shift in the mix of
products sold between uniforms, which have higher margins, and accessories,
which have lower margins. Specifically, 47.7% of the revenues from merchandise
were attributable to the sale of uniforms and 52.3% to the sale of accessories
in 1995, compared to 49.1% of such revenue attributable to uniforms and 50.9% to
accessories in 1994. Varsity expects this shift in mix to continue in the
future.
Gross profit margins associated with camps and special events decreased to
26.5% in 1995 from 29.1% in 1994. This percentage decrease was partially
attributable to greater than anticipated increases in instructor payroll,
travel, and training costs, resulting from the 1995 regionalization of certain
administrative functions in the summer camp program. In addition, the gross
margin generated by Intropa has historically been and is expected to continue to
be lower than the margin generated by Varsity in its camps and other special
events. Finally, Varsity incurred additional housing costs resulting from camp
closings due to Hurricane Erin in the Southeast and intense summer heat in the
Midwest and Northeast. In certain instances, Varsity was also required to pay
guaranteed student housing costs resulting from last-minute cancellations of
camp reservations in excess of cancellation fees received from the camp
participants. These decreases were partially offset by improved margins earned
on certain of the 1995 Varsity-sponsored holiday parade and bowl game
performances.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses in 1995 increased 19.9% to approximately $22.7 million,
or 30.0% of revenues, from approximately $18.9 million, or 30.2% of revenues in
1994. The increase of approximately $3.8 million in selling, general, and
administrative expenses was partially due to an increase of approximately $1.7
million in payroll and personnel costs, including approximately $0.9 million in
increased selling commissions, sales representative training, and other related
selling expenses which are impacted by increased sales volume, as well as
approximately $0.5 million in payroll costs attributable to Intropa personnel.
Varsity incurred increases of approximately $0.3 million attributable to
additional fixed costs (including rent, depreciation, and insurance) relating to
the expansion of office and storage space, approximately $0.3 million associated
with the publication and distribution of annual catalogs and brochures, and
approximately $0.5 million of operating costs (excluding payroll) incurred by
Intropa. Postage/express mail and travel increased approximately $0.3 million
and approximately $0.2 million, respectively, relating to an increased revenue
and customer base.
Income Taxes. As a result of the above, income before income taxes
increased 3.2% to approximately $6.5 million in 1995 from approximately $6.3
million in 1994. The effective income tax rate was 36.0% in 1995 compared to
39.4% in 1994. The decrease in the effective tax rate primarily results from the
favorable conclusion of an income tax examination.
Net Income. Net income increased 9.0% to approximately $4.2 million from
approximately $3.8 million in 1994 and net income per share increased by 7.2% to
$.89 per share in 1995 from $.83 per share in 1994. The weighted average common
shares and equivalent shares outstanding increased to 4,679,000 in 1995 from
4,587,000 in 1994.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 128, 'Earnings Per Share' ('SFAS 128'), which
simplifies the standards for computing earnings per share ('EPS') previously
found in Accounting Principles Board Opinion No. 15, 'Earnings Per Share' as the
presentation of primary and fully-diluted EPS is replaced with Basic and Diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. SFAS 128 is effective for financial
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statements issued for periods ending after December 15, 1997, and applies to
entities with publicly held common stock or potential common stock. The Company
will adopt SFAS 128 in financial statements issued for the year ending December
31, 1997. The effect of adopting this new standard has not been determined.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Acquisition will have a significant impact on the Company's financial
condition. At March 31, 1997, Riddell had total consolidated indebtedness of
$35.1 million and Varsity had total consolidated indebtedness of $0.6 million.
On a pro forma basis, after giving effect to the Transactions, the Company's
total consolidated indebtedness would have been $135.2 million at that date.
After giving effect to the Offering and anticipated borrowings under the
New Credit Facility, interest payments on the Senior Notes and interest and
principal payments under the New Credit Facility will significantly increase the
interest charges of the Company. The Senior Notes will require semi-annual
interest payments commencing in January 1998. Borrowings under the New Credit
Facility bear interest at a variable rate. The New Credit Facility consists of a
five year revolving credit and working capital facility in a maximum amount not
to exceed $40.0 million through September 30, 1997 and $35.0 million thereafter
with amounts borrowed thereunder to be subject to a borrowing base of inventory
and accounts receivable. See 'The Acquisition' and 'Description of Other
Indebtedness--The New Credit Facility.'
In addition to its debt service obligations, the Company requires liquidity
for working capital and capital expenditures. The Company experiences seasonal
changes in its working capital as discussed under '--Seasonality' above. In
1996, combined capital expenditures were approximately $3.0 million which the
Company believes is representative of amounts to be expected in 1997.
The Company's primary sources of liquidity are cash flows from operations
and borrowings under the New Credit Facility. Immediately after consummation of
the Transactions, approximately $27.3 million will be available to the Company
from borrowings under the New Credit Facility, subject to inventory and accounts
receivable levels on a pro forma basis at March 31, 1997, after giving effect to
the Transactions. The Company anticipates that its working capital requirements,
capital expenditures and debt service requirements for fiscal 1997 will be
satisfied through a combination of cash flow from operations and funds available
under the New Credit Facility.
55
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD SENIOR NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Senior Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term 'Expiration Date' means 5:00 p.m., New
York City time, on September 9, 1997; provided, however, that if the Company, in
its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term 'Expiration Date' means the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $115,000,000 aggregate principal amount
of the Old Senior Notes were outstanding. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about August 7, 1997, to all
holders of Old Senior Notes known to the Company. The Company's obligation to
accept Old Senior Notes for exchange pursuant to the Exchange Offer is subject
to certain conditions as set forth below under '--Certain Conditions to the
Exchange Offer.'
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Senior Notes, by giving oral or
written notice of such extension to the holders thereof as described below.
During any such extension, all Old Senior Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Company.
Any Old Senior Notes not accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as promptly as practicable after
the expiration or termination of the Exchange Offer.
Old Senior Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Senior Notes not therefore
accepted for exchange, upon the occurrence of any of the events specified below
under '--Certain Conditions to the Exchange Offer.' The Company will give oral
or written notice of any extension, amendment, non-acceptance or termination to
the holders of the Old Senior Notes as promptly as practicable, such notice in
the case of any extension to be issued by means of a press release or other
public announcement no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD SENIOR NOTES
The tender to the Company of Old Senior Notes by a Holder thereof as set
forth below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a Holder who wishes to tender
Old Senior Notes for exchange pursuant to the Exchange Offer must transmit
either (i) a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to Marine
Midland Bank, as Exchange Agent, at the address set forth below under
'--Exchange Agent' on or prior to the Expiration Date, or (ii) if such Old
Senior Notes are tendered pursuant to the procedures for book-entry transfer set
forth below, a holder tendering Old Senior Notes may transmit an Agent's Message
(as defined herein) to the Exchange Agent in lieu of the Letter of Transmittal,
in either case on or prior to the Expiration Date. In addition, either (i)
certificates for such Old Senior Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry
transfer (a 'Book-Entry Confirmation') of such Old Senior Notes, if such
procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the 'Book-Entry Transfer Facility') pursuant to the procedure for
book-entry transfer described below, along with the Letter of Transmittal or an
Agent's Message, as the case may be, must be received by the Exchange Agent
prior to the Expiration Date, or (iii) the holder must comply with the
guaranteed delivery procedures described below. The term 'Agent's Message' means
a message, transmitted to the Book-Entry Transfer Facility and received by the
Exchange Agent and forming a part of the Book-Entry Confirmation, which states
that the Book-Entry Transfer Facility has received an express acknowledgement
from the tendering Participant (as defined herein) that such Participant has
received and agrees to be bound by the Letter of Transmittal and the Company may
enforce the
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Letter of Transmittal against such Participant. THE METHOD OF DELIVERY OF OLD
SENIOR NOTES, LETTERS OF TRANSMITTAL OR AGENT'S MESSAGE AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD SENIOR NOTES SHOULD BE
SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Senior Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered holder of the Old
Senior Notes who has not completed the box entitled 'Special Issuance
Instructions' or 'Special Delivery Instructions' on the Letter of Transmittal or
(ii) for the account of an Eligible Institution (as defined herein). In the
event that signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guarantees must be by a
firm which is a member of a registered national securities exchange or a member
of the National Association of Securities Dealers, Inc. or by a commercial bank
or trust company having an office or correspondent in the United States
(collectively, 'Eligible Institutions'). If Old Senior Notes are registered in
the name of a person other than a signer of the Letter of Transmittal, the Old
Senior Notes surrendered for exchange must be endorsed by, or be accompanied by
a written instrument or instruments of transfer or exchange, in satisfactory
form as determined by the Company in its sole discretion, duly executed by, the
registered Holder with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Senior Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Old Senior Notes not properly tendered or to not
accept any particular Old Senior Notes which acceptance might, in the judgment
of the Company or its counsel, be unlawful. The Company also reserves the
absolute right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Old Senior Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Senior Notes in the Exchange Offer). The interpretation
of the terms and conditions of the Exchange Offer as to any particular Old
Senior Notes either before or after the Expiration Date (including the Letter of
Transmittal and the instructions thereto) by the Company shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Senior Notes for exchange must be cured within
such reasonable period of time as the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Senior Notes for exchange, nor shall any of them incur any liability for failure
to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Senior Notes, such Old Senior Notes must
be endorsed or accompanied by appropriate powers of attorney, in either case
signed exactly as the name or names of the registered holder or holders that
appear on the Old Senior Notes.
If the Letter of Transmittal or any Old Senior Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each Holder will represent to the Company that, among other
things, the New Senior Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Senior Notes, whether or not such person is the holder, and that neither the
holder nor such other person has any arrangement or understanding with any
person to participate in the distribution of the New Senior Notes. In the case
of a Holder that is not a broker-dealer, each such holder, by tendering, will
also represent to the Company that such holder is not engaged in, or does not
intend to engage in, a distribution of the New Senior Notes. If any Holder or
any such other person is an 'affiliate,' as defined under Rule 405 of the
Securities Act, of the Company, or is engaged in or intends to engage in or has
an arrangement or understanding with any person to participate in a distribution
of such New Senior Notes to be acquired pursuant to the Exchange Offer, such
Holder or any such other person (i) could not rely on the applicable
interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
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connection with any resale transaction. Each broker-dealer that receives New
Senior Notes for its own account in exchange for Old Senior Notes, where such
Old Senior Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Senior
Notes. See 'Plan of Distribution.' The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
ACCEPTANCE OF OLD SENIOR NOTES FOR EXCHANGE; DELIVERY OF NEW SENIOR NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Senior
Notes properly tendered and will issue the New Senior Notes promptly after
acceptance of the Old Senior Notes. See '--Certain Conditions to the Exchange
Offer.' For purposes of the Exchange Offer, the Company shall be deemed to have
accepted properly tendered Old Senior Notes for exchange when, as and if the
Company has given oral or written notice thereof to the Exchange Agent, with
written confirmation of any oral notice to be given promptly thereafter.
For each Old Senior Note accepted for exchange, the holder of such Old
Senior Note will receive a New Senior Note having a principal amount equal to
that of the surrendered Old Senior Note. The New Senior Notes will bear interest
from the most recent date to which interest has been paid on the Old Senior
Notes, or if no interest has been paid on the Old Senior Notes, from June 19,
1997. Accordingly, if the relevant record date for interest payment occurs after
the consummation of the Exchange Offer, registered Holders of New Senior Notes
on such record date will receive interest accruing from the most recent date to
which interest has been paid or, if no interest has been paid from June 19,
1997. If, however, the relevant record date for interest payment occurs prior to
the consummation of the Exchange Offer, registered Holders of Old Senior Notes
on such record date will receive interest accruing from the most recent date to
which interest has been paid, or if no interest has been paid, from June 19,
1997. Old Senior Notes accepted for exchange will cease to accrue interest from
and after the date of consummation of the Exchange Offer, except as set forth in
the immediately preceding sentence. Holders of Old Senior Notes whose Old Senior
Notes are accepted for exchange will not receive any payment in respect of
interest on such Old Senior Notes otherwise payable on any interest payment date
the record date for which occurs on or after consummation of the Exchange Offer.
If the Exchange Offer is not consummated within the time period set forth herein
under the heading 'Description of the Senior Notes--Registration Rights;
Liquidation Rights,' special interest in the form of Liquidated Damages will
accrue and be payable on the Old Senior Notes until the Exchange Offer is
consummated.
In all cases, issuance of New Senior Notes for Old Senior Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old Senior Notes
or a timely Book-Entry Confirmation of such Old Senior Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed Letter of Transmittal and all other required documents or, in the
case of a Book-Entry Confirmation, an Agent's Message in lieu thereof. If any
tendered Old Senior Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Senior Notes are submitted for a
greater principal amount than the holder desired to exchange, such unaccepted or
non-exchanged Old Senior Notes will be resumed without expense to the tendering
holder thereof (or, in the case of Old Senior Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry procedures described below, such non-exchanged Old
Senior Notes will be credited to an account maintained with such Book-Entry
Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Senior Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Senior Notes by causing
the Book-Entry Transfer Facility to transfer such Old Senior Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Senior Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof,
with any required signature guarantees, or an Agent's Message in lieu of a
Letter of Transmittal, and any
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other required documents, must, in any case, be transmitted to and received by
the Exchange Agent at one of the addresses set forth below under '--Exchange
Agent' on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Senior Notes desires to tender Old Senior
Notes held by such holder and such Old Senior Notes are not immediately
available, or time will not permit such holder's Old Senior Notes or other
required documents to reach the Exchange Agent before the Expiration Date, or
the procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if (i) the tender is made through an Eligible
Institution, (ii) prior to the Expiration Date, the Exchange Agent received from
such Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Issuer (by telegram, telex, facsimile
transmission, mail or hand delivery), setting forth the name and address of the
holder of Old Senior Notes and the amount of Old Senior Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ('NYSE') trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Senior Notes, in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, and any other documents required by the Letter of Transmittal will
be deposited by the Eligible Institution with the Exchange Agent, and (iii) the
certificates for all physically tendered Old Senior Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the Exchange
Agent within three NYSE trading days after the date of execution of the Notice
of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Senior Notes may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
'--Exchange Agent.' Any such notice of withdrawal must specify the name of the
person having tendered the Old Senior Notes to be withdrawn, identify the Old
Senior Notes to be withdrawn (including the principal amount of such Old Senior
Notes), and (where certificates for Old Senior Notes have been transmitted)
specify the name in which such Old Senior Notes are registered, if different
from that of the withdrawing holder. If certificates for Old Senior Notes have
been delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates the withdrawing holder must also submit the serial
numbers of the particular certificates to be withdrawn and signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Old Senior Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Senior Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Old Senior Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any Old Senior
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Senior Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Old Senior Notes will be
credited to an account maintained with such Book-Entry Transfer Facility for the
Old Senior Notes) as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Old Senior Notes may be
retendered by following one of the procedures described under '--Procedures for
Tendering Old Senior Notes' above at any time on or prior to the Expiration
Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Senior Notes in
exchange for, any Old Senior Notes and may terminate or amend the Exchange
Offer, if at any time before the acceptance of such Old Senior Notes for
exchange or the exchange of the New Senior Notes for such Old Senior Notes, any
of the following events shall occur:
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(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order of decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Senior Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the reasonable judgment of
the Company might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or, in the reasonable judgment of
the Company, might result in the holders of New Senior Notes having
obligations with respect to resales and transfers of New Senior Notes which
are greater than those described in the interpretation of the SEC referred
to on the cover page of this Prospectus, or would otherwise make it
inadvisable to proceed with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company and its subsidiaries taken as a whole that, in the
reasonable judgment of the Company, is or may be adverse to the Company, or
the Company shall have become aware of facts that, in the reasonable
judgment of the Company, have or may have adverse significance with respect
to the value of the Old Senior Notes or the New Senior Notes;
which in the reasonable judgment of the Company in any case, and regardless of
the circumstances (including any action by the Company) giving rise to any event
described above, makes it inadvisable to proceed with the Exchange Offer and/or
with such acceptance for exchange or with such exchange.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Senior Notes
tendered, and no New Senior Notes will be issued in exchange for any such Old
Senior Notes, if at such time any stop order shall be threatened or in effect
with respect to the Registration Statement of which this Prospectus constitutes
a part or the qualification of the Indenture under the Trust Indenture Act of
1939 (the 'TIA').
EXCHANGE AGENT
Marine Midland Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below. Questions and requests
for assistance, requests for additional copies of this Prospectus or of the
Letter of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
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Delivery To: Marine Midland Bank, Exchange Agent
<TABLE>
<S> <C>
By Facsimile: By Mail, Overnight Courier or Hand:
(212) 658-2292 Marine Midland Bank
Confirm by Telephone: 140 Broadway, Level A
(212) 658-5931 New York, New York 10005-1180
Attn: Corporate Trust Operations
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$200,000.
TRANSFER TAXES
Holders who tender their Old Senior Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Company to register New Senior Notes in the name of, or request
that Old Senior Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon.
ACCOUNTING TREATMENT
The New Senior Notes will be recorded at the same carrying value as the Old
Senior Notes, which is face value, as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Exchange Offer and the
unamortized expenses related to the issuance of the Old Senior Notes will be
amortized over the term of the New Senior Notes.
CONSEQUENCES OF EXCHANGING OLD SENIOR NOTES
Holders of Old Senior Notes who do not exchange their Old Senior Notes for
New Senior Notes pursuant to the Exchange Offer will continue to be subject to
the provisions in the Indenture regarding transfer and exchange of the Old
Senior Notes and the restrictions on transfer of such Old Senior Notes as set
forth in the legend thereon as a consequence of the issuance of the Old Senior
Notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Old Senior Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register Old Senior
Notes under the Securities Act. See 'Description of the Senior
Notes--Registration Rights; Liquidated Damages.' Based on interpretations by the
staff of the SEC, as set forth in no-action letters issued to third parties, the
Company believes that New Senior Notes issued pursuant to the Exchange Offer in
exchange for Old Senior Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
'affiliate' of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Senior Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
or understanding with any person to participate in the distribution of such New
Senior Notes. However, the Company does not intend to request the SEC to
consider, and the SEC has not considered, the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the SEC would
make a similar determination with respect to the Exchange Offer as in such other
circumstances. Each Holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of New
Senior Notes and has no arrangement or understanding to participate in a
distribution of New Senior Notes. If any Holder is an affiliate of the Company,
is engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Senior Notes to be acquired pursuant
to the Exchange Offer, such Holder (i) could not rely on the applicable
interpretations of the staff of the SEC and (ii) must comply with the
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registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Senior Notes for its own account in exchange for Old Senior Notes, where such
Old Senior Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Senior
Notes. See 'Plan of Distribution.' In addition, to comply with state securities
laws, the New Senior Notes may not be offered or sold in any state unless they
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with. The offer and
sale of the New Senior Notes to 'qualified institutional buyers' (as such term
is defined under Rule 144A of the Securities Act) is generally exempt from
registration or qualifcation under the state securities laws. The Company
currently does not intend to register or qualify the sale of the New Senior
Notes in any state where an exemption from registration or qualification is
required and not available.
BUSINESS
GENERAL
OVERVIEW
The Company is the world's leading manufacturer and reconditioner of
football protective equipment and is the nation's leading supplier of products
and services to the school spirit industry. The Company conducts its business
through two principal operating divisions: the Riddell Group Division and the
Varsity Group Division. The Company believes that the Riddell brand is one of
the best known and recognizable in all of sports. Management estimates that
Riddell football equipment is worn by more than 80% of all professional NFL
players, and by more than 50% of all high school and collegiate players. In
addition to the sale of new protective athletic equipment, Riddell is the only
national reconditioner of athletic equipment. Additionally, Riddell markets both
full-size and miniature collectible helmets and other collectible products, and
licenses its Riddell(Registered) and MacGregor(Registered) trademarks for use in
athletic footwear and apparel. Varsity designs and markets innovative
cheerleader, dance team, and booster club uniforms and accessories for sale to
the school spirit industry. Varsity is also a leading operator of high school
and college cheerleader and dance team camps. Varsity promotes its products and
services, as well as the school spirit industry, by organizing and producing
various nationally televised cheerleading and dance team championships and other
special events. The Company believes that it has one of the largest nationwide
direct sales forces that focuses on the extracurricular activities segment of
the educational Institutional market. After giving effect to the Transactions,
including the Acquisition and the Offering, the Company would have had net
revenues and pro forma EBITDA of approximately $160.8 million and $18.1 million,
respectively, for the year ended December 31, 1996.
EDUCATIONAL ATHLETIC MARKET
The 1997 edition of Patterson's American Education has reported that there
are approximately 14,900 junior high schools, 19,300 high schools (of which the
Company believes over 15,000 have a football program), 1,750 junior colleges and
1,500 colleges located throughout the United States. According to the National
Federation of State High School Associations, there are more than 5,800,000
students participating in organized athletic programs at high schools located in
the United States. The level of participation in high school football has
remained relatively stable over the past 10 years with participants averaging in
excess of 900,000 per year. The Company believes that there are in excess of
1,000,000 participants in the school spirit industry.
THE ACQUISITION
On May 5, 1997, Riddell, Merger Sub and Varsity entered into the Merger
Agreement. Pursuant to the Merger Agreement, on June 19, 1997, Merger Sub
completed its cash tender offer for all outstanding shares of common stock of
Varsity (the 'Varsity Tender Offer'). A total of 4,511,415 Varsity shares, or
approximately 98.5% of Varsity's then outstanding shares, were purchased
pursuant to the Varsity Tender Offer. Pursuant to the terms of the Merger
Agreement, on July 25, 1997, Varsity was merged with Merger Sub and became a
wholly owned subsidiary of the Company. All remaining shares of Varsity common
stock not tendered and purchased in the Varsity Tender Offer were converted into
the right to receive $18.90 per share. Because Merger Sub owned more than 90% of
the outstanding shares, under the TBCA, no vote was required by the shareholders
of Varsity to effect the Merger. Riddell's Former Credit Agreement was
refinanced with the proceeds of the Offering and the New Credit Facility, which
refinancing will occur simultaneously with the Acquisition. The Company used
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the net proceeds from the Offering and the initial borrowings under the New
Credit Facility to finance the Acquisition, to refinance the Former Credit
Agreement, and to pay fees and expenses of the Transactions.
The Company believes that the Acquisition will better position it to pursue
growth opportunities in the Institutional market. The Company regards the
Acquisition as an opportunity to achieve certain strategic objectives, including
providing the Company with the scale necessary to expand the direct marketing of
its products to include the more female dominated segment of the Institutional
market. The Acquisition will allow Riddell to benefit from Varsity's strong and
consistent growth record, providing a foundation for future growth through
product development, product line extensions and complementary acquisitions. The
Acquisition will improve Riddell's ability to serve the Institutional market by:
(i) enhancing the size and scope of the Institutional sales force; (ii)
expanding and enhancing the Company's 'unique' relationships with the
decision-makers for athletic equipment and services; (iii) accelerating new
product development and entry into new markets; (iv) facilitating the
implementation of its Institutional sales force information systems; and (v)
broadening management. Specifically, the Company believes that it will derive
the following benefits from the Acquisition:
o ENHANCING INSTITUTIONAL SALES FORCE. As a result of the Acquisition, the
Company's full-time sales force increased from 114 to 249. The Company
anticipates having separate sales forces for male and female sports and
activities. The combined Institutional sales force of Riddell and Varsity
will command a greater market presence than would either company's sales
force on a stand-alone basis. The Company intends to widen the focus of the
Varsity sales force from the cheerleading coach to coaches of all female
sports and activities. Historically, these coaches have been served
primarily by independent dealers. The Company expects to derive other
benefits from the Riddell and Varsity sales forces working together, such
as (i) leveraging relationships to provide referrals, or cross-leads, in
schools not currently served by both Riddell and Varsity, (ii)
cross-marketing its product lines to provide increased sales (e.g., Riddell
relationships used to sell Varsity camps, clinics, competitions and tours
and Varsity relationships used to sell Riddell's practicewear) and (iii)
improving customer service by increasing the ratio of sales representatives
to schools.
The Company intends to continue to increase the size of its sales
force, due to the competitive advantages of the direct sales strategy. By
increasing the size of its sales force, reducing the size of sales
territories, and increasing the number of products available for sale, the
Company expects that its sales people will be able to spend more time
productively in each school.
o ENHANCING UNIQUE SELLING RELATIONSHIPS. The Company sells product-related
services which strengthen relationships with its customers who make the
equipment purchasing decisions. Riddell, as a factory-direct supplier and
reconditioner, builds strong relationships through quick repair or
replacement on game-day as well as pick-up, cleaning and safety
recertification for football and baseball protective equipment at the end
of the season. No other football helmet manufacturer that services the
Institutional market provides reconditioning services. Varsity develops
strong relationships with its customers for cheerleading and dance uniforms
during the camp experience through its sponsorship of special events,
including popular holiday parades and regional and national championships,
and its group travel tour activities. In addition, Varsity offers special
training sessions and instructional manuals specifically aimed at the
coaches or other persons responsible for supervising the cheerleading and
dance team activities.
o ACCELERATING NEW PRODUCT DEVELOPMENT AND NEW MARKET ENTRY. Management
believes that the Acquisition will position the Company to expand into the
booster/fund raising market, the broader market for sports camps.
Cheerleading and other school activities, such as band, are often
participant-funded activities, not school-funded. Cheerleaders may sponsor
fundraising activities and sell various products to fund their activity.
The Company believes that by combining Varsity's relationship with
cheerleaders and Riddell's product development knowledge, it has the
ability to become a significant participant in the booster/fundraising
market. Many of the Company's existing products (such as mini-football and
baseball batter helmets and silk-screened t-shirts, shorts and sweatshirts)
are particularly well suited for the booster/fund raising market, and
through Riddell's expertise in molded plastic design and manufacturing, the
Company intends to develop new booster products. Management also expects
that the Company's experience in licensing its brands could be extended to
licensing Varsity's brands.
o FACILITATING IMPLEMENTATION OF SALES FORCE INFORMATION SYSTEMS. The
Company plans to expand its automated order entry processing system over
the next few years and to provide laptop computers to each
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sales person for information collection and order processing. While Varsity
has already begun to automate its sales information system, Riddell has not
yet done so. Varsity's sales force uses laptop computers and Varsity has
developed its own proprietary software. Management expects that Varsity's
experience should accelerate and facilitate Riddell's automation of its
order entry processing system. Management expects that the in-field
automation of sales information will enhance its competitive advantage by
providing Company personnel with faster access to information concerning
its customers and speeding the order entry process, thereby enabling sales
personnel to spend more time selling and less time writing sales orders.
o BROADENING MANAGEMENT. The Acquisition combines two strong management
teams with diverse and complementary backgrounds. The Company operates
Riddell and Varsity as two separate divisions under a broadened management
team. Varsity's management team has been together over eight years and has
consistently produced a record of growth and profitability. Riddell's
management has significant experience in the sporting goods industry and in
managing large public corporations. In connection with the Acquisition, the
top four executives of Varsity purchased $4.4 million of newly issued
Riddell common stock.
RIDDELL
GENERAL
Riddell is the world's leading manufacturer of high school, college and
professional football helmets, with market share estimated at over 50%, and
believes it has a leading market share in other protective equipment, such as
shoulder pads. Riddell sells these products primarily to high schools, colleges
and other Institutions. The Company sells in excess of 200,000 football helmets
a year, over 100,000 of which are used by high school, collegiate and
professional players. Riddell also sells shoulder pads, including a line of
premium pads under the Power(Registered) name, as well as a line of accessory
pads which include thigh, hip, rib and knee pads.
Through its subsidiary, All American, Riddell is the world's leading
reconditioner of football helmets, shoulder pads and other related equipment,
and the only football helmet manufacturer that provides reconditioning services
to the Institutional market. Reconditioning typically involves cleaning,
sanitizing, buffing or painting, and recertifying helmets as conforming to
NOCSAE standards. NOCSAE establishes industrywide standards for protective
athletic equipment. Riddell may also replace face guards, interior pads and chin
straps. In addition, Riddell reconditions shoulder pads, as well as equipment
for other sports, including baseball and lacrosse helmets, catchers' masks and
baseball gloves. Riddell believes its customer relationships are strengthened by
providing reconditioning services through its Institutional market sales force
to the same athletic coaches generally responsible for athletic equipment
purchases.
Riddell maintains a promotional rights agreement with the NFL's licensing
division which requires the Riddell name to appear on the front and on the chin
straps of each Riddell helmet used in NFL play. The NFL Agreement further
requires all teams in the NFL to cover any indicia of brand identification of
other manufacturers which might otherwise appear on helmets, face masks or chin
straps not manufactured by Riddell but used during league play. The recognition
resulting from the frequent appearance of the Riddell name on helmets in
televised football games as well as in photographs in newspapers and magazines
such as Sports Illustrated is viewed by management as important to its overall
sales, marketing and licensing efforts. The NFL Agreement, which originated in
1989, expires in April 1999 and automatically extends for unlimited successive
five-year periods thereafter, provided that the quality of Riddell's helmets and
shoulder pads remains comparable to the best available technology as reasonably
determined by the NFL.
To better capitalize on Riddell's premium brand name, in 1993, David Mauer,
the former President of Mattel U.S.A., became Riddell's Chief Executive Officer
and initiated a strategic repositioning of Riddell's business, including
assembling Riddell's current management team. In October 1994, management
implemented a significant change in its Institutional distribution system by
eliminating the network of independent team dealers which historically sold
products to the Institutional market and began selling athletic equipment
directly to its Institutional customers. Riddell implemented its strategy by
utilizing the All American reconditioning sales force that had previously been
selling reconditioning services to its Institutional customers. Management
subsequently increased All American's full-time sales force from 80 in 1994 to
114 in 1996. The change to direct sales has (i) enabled Riddell to increase its
sales and profitability, (ii) facilitated the introduction and cross-selling of
Riddell's non-football-related products such as practicewear and baseball
equipment, (iii) improved control over the sales efforts to Institutions and
(iv) provided better access to detailed sales information for analysis.
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In addition to repositioning its Institutional marketing effort, management
also refocused its retail collectible business. Riddell's retail collectible
business began with miniature and full-size collectible football helmets
displaying NFL and college team logos. Management's strategy with respect to the
retail collectible market has been to (i) reduce production costs, (ii)
segregate products by distribution channels and (iii) accelerate new product
development. Riddell introduced several new collectible products, including
miniature hockey goalie masks displaying NHL team logos in 1995 and miniature
baseball batter helmets displaying MLB team logos in 1997. Riddell was granted a
license from Lucasfilm, Ltd. to sell half-scale Star Wars miniature collectibles
in the United States, Riddell's first non-sports collectible product. Riddell
began shipping Star Wars collectibles in the second quarter of 1997 and this
license extends through December 1998.
Under management's strategic plan, effective since 1993, of (i) eliminating
Riddell's network of independent team dealers and selling its new athletic
equipment directly to its Institutional customers through its in-house
reconditioning services sales force; (ii) introducing new products to
Institutional customers such as baseball and practicewear; and (iii) focusing on
new retail product development, including miniature collectibles, Riddell's
operating performance has significantly improved. Its net revenues have
increased from $48.8 million in fiscal 1992 to $72.4 million in fiscal 1996 and
EBITDA has increased from a $3.8 million deficit to $7.9 million over that same
period.
Riddell is a holding company that operates through various wholly owned
subsidiaries. Riddell's subsidiaries include Riddell, Inc., which manufactures
or sources new sports products for both Institutional and retail customers, All
American, which maintains an Institutional sales force that sells reconditioning
services and new athletic products directly to schools and other Institutions,
RHC Licensing Corporation ('RHC') and Ridmark Corporation ('Ridmark'), each of
which licenses the Riddell trademark, Equilink Licensing Corp. ('Equilink'),
which licenses the MacGregor trademark and Proacq. Corp. ('Proacq'), which
licenses Riddell's Maxpro(Registered) trademark.
Riddell was organized in April 1988 to acquire substantially all of the
assets and businesses of two subsidiaries of MacGregor Sporting Goods, Inc. The
businesses of the two former second tier subsidiaries consisted of manufacturing
and selling Riddell football helmets and other protective products and the
licensing of the MacGregor trademark. In September 1991, Riddell acquired
certain assets and liabilities of the protective equipment operations (the
'Protective Equipment Division') of BSN Corp., now known as Aurora Electronics
Inc. The Protective Equipment Division consisted of BSN's reconditioner of
protective sports equipment and certain other businesses.
INDUSTRY SEGMENTS
Riddell has historically operated primarily in two segments of the sporting
goods industry: sports products and services (including sales of athletic
products, reconditioning of athletic equipment and sales of sports collectible
products) and trademark licensing.
SPORTS PRODUCTS AND SERVICES
Athletic Products and Reconditioning
Original Line of Athletic Products: Riddell is the world's leading
manufacturer of football helmets, which it sells under the Riddell brand. For
the years ended December 31, 1994, 1995, and 1996 sales of football helmets for
competitive use constituted approximately 25%, 20% and 21% respectively, of
Riddell's consolidated revenues and 9% of the Company's 1996 pro forma
consolidated revenues.
Riddell football helmets are worn by football players throughout the world,
including players on all NFL teams, certain other professional leagues and on
most teams in the NCAA. High school teams, however, have historically been the
largest market segment for Riddell football helmets. Riddell offers several
types of varsity and youth helmets which are different in their configurations
and types of padding and other fitting features. Riddell helmets are known for
their quality and performance and meet the standards of NOCSAE, which sets the
standards for the industry.
Riddell also believes it has a leading market share position in the
shoulder pad market. The Company sells a professional and collegiate line of
shoulder pads under the Power(Registered) name and several other lines of
shoulder pads used mostly by high school and college players. Football shoulder
pad sales for the years ended December 31, 1994, 1995 and 1996 constituted
approximately 11%, 9% and 9% respectively, of Riddell's consolidated revenues
and 4% of the Company's 1996 pro forma consolidated revenues. Riddell also sells
accessory pads, including thigh, hip, rib and knee pads.
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Expanded Line of Athletic Products: Riddell recently began increasing the
categories of athletic products it sells to the Institutional market. In 1996
Riddell introduced a line of baseball and softball athletic products designed
for high school and college players, marketed under the ProEDGE(Trademark)
brand. This new line includes baseballs and softballs, protective baseball
equipment such as chest protectors, leg guards and catchers' masks and certain
other products including bases, bags and field equipment. In late 1995, Riddell
introduced a newly redesigned line of professional and youth batting helmets,
including the first batting helmet designed specifically for women's softball.
The new baseball product line includes professional quality models that are
similar to the best quality products available from Riddell's competitors.
Riddell's helmets meet the standards set by NOCSAE.
Late in 1996 Riddell further expanded its line of Institutional products to
include practicewear such as t-shirts, shorts, fleece warm-ups and other basic
athletic clothing. Practicewear is the first broad line of products sold by
Riddell to the Institutional market that are used by both male and female
athletes. Riddell offers customized silkscreen printing as an option for its
practicewear line. Riddell believes its practicewear is comparable to the
highest quality products available from its competitors.
Reconditioning: Riddell's subsidiary, All American, is the leading
reconditioner of football helmets, shoulder pads and related equipment with over
50% of the reconditioning market. Reconditioning typically involves the
cleaning, sanitizing, buffing or painting, and recertifying of helmets as
conforming to NOCSAE standards. Riddell may also replace face guards, interior
pads and chin straps. Riddell also reconditions shoulder pads, as well as
equipment for other sports, including baseball and lacrosse helmets, catchers'
masks and baseball gloves. Riddell believes that providing reconditioning
services, which are sold by its Institutional sales force to the same athletic
coaches responsible for equipment purchases, strengthens its customer
relationships. Riddell's reconditioning customers are primarily high schools,
colleges and youth recreational groups. Reconditioning constituted 34%, 31% and
30% of Riddell's consolidated revenues in the years ended December 31, 1994,
1995 and 1996, respectively. Riddell is the only national reconditioner of
football helmets, shoulder pads and related equipment. Competition is fragmented
with approximately 30 other smaller companies providing reconditioning services.
Sports Collectible Products
Riddell's sports collectible products are sold to consumers through the
retail market channel. Sales of these products have been the strongest area of
growth for Riddell in recent years, and Riddell intends to continue to focus on
the sale of these and other retail products in the future. For the years ended
December 31, 1994, 1995 and 1996 sales of sports collectible products have
constituted approximately 16%, 26% and 29% of Riddell's consolidated revenues
and 13% of the Company's 1996 pro forma consolidated revenues.
The sports collectible product line consists primarily of authentic and
replica football helmets of professional and college teams. These helmets are
offered in various miniature and full size models bearing the colors and logos
of NFL and other professional or collegiate teams. Riddell's full size authentic
football helmets are the same helmets used by players on these teams.
Nonauthentic helmets are not constructed with the same material as authentic
helmets, and are therefore less expensive. Riddell recently expanded its line of
collectible items to include a new line of smaller, less expensive miniature
football helmets tailored for the mass market, miniature hockey goalie masks
bearing NHL team logos and miniature baseball batters helmets bearing MLB logos,
among other products.
In connection with the sale of Riddell's collectible helmets, NFL
Properties has granted Riddell a license to use the names, symbols, emblems,
designs and colors of the member clubs of the NFL and the 'League Marks' (i.e.,
'National Football League,' 'NFL,' 'NFC,' 'AFC,' 'Super Bowl,' 'Pro Bowl,' the
'NFL Shield' design and other insignia adopted by the NFL) on authentic and
replica football helmets sold for display purposes. The term of the license is
concurrent with the term of the NFL Agreement. See '--Marketing and Promotion.'
The NFL Agreement has a term expiring April 1999 and automatically extending for
unlimited successive five-year periods thereafter unless, in general, Riddell
helmets fail to continue to meet certain quality standards.
In addition, Riddell has license agreements for other collectible products
from organizations such as the NHL, MLB and Lucasfilm, Ltd. which, late in 1996
granted Riddell a license through December 1998 to sell half-scale Star
Wars(Registered) miniature collectibles in the United States. Riddell has
introduced three Star Wars miniature collectible products thus far in 1997, and
has plans to introduce additional products, based upon Darth Vader, C-3PO and
other characters. Riddell has completed the design of, and has commenced
marketing, these products. Riddell began shipping its new Star Wars collectible
products in the second quarter of 1997.
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Riddell's goal is to continue to develop new collectible products for sale
to appropriate retail channels in the United States and certain international
markets, and, when appropriate, to seek licenses allowing Riddell to display
well-known logos on these products. There can be no assurance that Riddell will
successfully develop and market any new products.
Under a stock purchase agreement, dated July 13, 1994, entered into in
connection with the acquisition of the miniature helmet business of SharCo
Corporation (a former wholly owned subsidiary, which has been merged into
Riddell), the Company is required to pay certain former shareholders and
employees of SharCo a percentage of net sales of certain miniature helmets and
other products through September 30, 2001 as well as certain fixed payments. The
fixed payments totalled approximately $926,000 during the period January 5, 1995
through January 5, 1997, with the last fixed payments totalling approximately
$289,000 to be made on January 5, 1998. The Company was required to pay to
certain shareholders and employees a total of 5.0% of net sales of these
products from June 15, 1994 through September 30, 1996 and is required to pay a
total of 6.0% of such net sales from October 1, 1996 through September 30, 2001.
TRADEMARK LICENSING
Riddell licenses its Riddell and MacGregor trademarks in various
categories, primarily including athletic products, clothing and footwear. For
the years ended 1994, 1995 and 1996, Riddell's revenues from licenses of its
trademarks constituted approximately 7%, 5% and 3% of consolidated revenues,
respectively and 2% of the Company's 1996 pro forma consolidated revenues. See
'--Trademarks, Service Marks and License Agreements' for a discussion of
Riddell's principal license agreements and its licensing program.
MARKETING AND PROMOTION
General
Since April 1989, Riddell has been a party to the NFL Agreement. The NFL
Agreement requires the Riddell name to appear on the front immediately above the
center front forehead and on the chin straps of each Riddell helmet used in NFL
play and, further, requires all teams in the NFL to cover any indicia of brand
identification of other manufacturers which might otherwise appear on helmets,
face masks or chin straps not manufactured by Riddell used during league play.
The NFL Agreement has a term expiring in April 1999 and automatically
extends for unlimited successive five year periods thereafter, provided that the
quality of Riddell's helmets and shoulder pads remains comparable to the best
available technology as reasonably determined by the NFL. Riddell agrees to
supply specified quantities of Riddell helmets, shoulder pads and related
equipment, either at no cost or at reduced cost to each NFL team with a
requisite percentage of its roster using the Riddell helmet. For the 1996/97
professional football season, Riddell believes that more than 80% of NFL players
used Riddell helmets. Riddell also has supply agreements with certain other
professional leagues.
Riddell utilizes a variety of promotional techniques to build brand
awareness. The NFL Agreement provides Riddell with a unique marketing and
promotional tool. The recognition resulting from the frequent appearance of the
Riddell name on helmets in televised football games as well as in photographs in
newspapers and magazines such as Sports Illustrated is viewed by management as
important to its overall sales, marketing and licensing efforts. Riddell
believes that this arrangement increases sales of products by Riddell and its
Riddell brand licensees through enhanced visibility of the Riddell name and
improves licensing opportunities.
Sports Products and Services
Athletic Products and Reconditioning: Riddell's athletic products and
equipment reconditioning services are sold directly to schools and other
Institutions through a direct sales force of approximately 114 salespeople.
Prior to October 1994, sales of protective athletic equipment to Institutional
customers had historically been made through independent team sports dealers who
in turn sold to schools and other Institutions. Riddell now markets products to
these Institutional customers on a factory-direct basis utilizing the sales
force of All American, which previously sold only Riddell's reconditioning
services.
Riddell's youth football products are marketed to youth recreational
groups, such as Pop Warner, rather than to elementary schools. Accordingly,
Riddell's youth football products are sold through retail stores, independent
team sports dealers and other distributors.
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To further reinforce and support Riddell's brand recognition, Riddell
conducts a variety of marketing and promotional events in support of its line of
athletic products. Riddell participates in coaches' clinics and equipment shows
throughout the year. At these events, Riddell's entire athletic products line is
displayed and promoted along with Riddell's reconditioning services.
Sports Collectible Products: Riddell's replica and collectible products are
sold primarily to retail and specialty sporting goods stores through
approximately 40 independent sales representatives who are paid commissions.
Riddell has in recent years hired additional retail staff to develop and market
retail products. Riddell strategically targets channels of trade that it
determines to be most appropriate for the type and price of each retail product.
Riddell believes sales of retail products will increase along with new product
introductions and heightened marketing, but cannot assure it will attain any
such increase.
In support of its sports collectible products, Riddell has initiated
various advertising and public relations efforts. Riddell is a sponsor of the
'NFL Experience,' an event conducted each year during the week of the Super Bowl
at which the public can experience various aspects of playing football and the
businesses which supply football products. This event reaches a significant
number of consumers. The retail collectible line has appeared on QVC and the
Home Shopping Network, generating national awareness. Riddell advertises in
publications targeted toward the sports collectible industry as well as other
licensed products retailers. Riddell also provides incentives to retail outlets
to advertise and display Riddell products during promotional periods, and
participates in various national sporting goods shows, where it promotes these
products.
Licensing
Through its licensing subsidiaries, Riddell has granted certain third
parties the right to use the Riddell and MacGregor trademarks in connection with
the sale of athletic shoes, clothing and other products. Riddell is seeking to
further capitalize upon television and media exposure of the Riddell name on
helmets worn during NFL games. In 1996, Riddell hired an independent licensing
agent to help expand its licensing program for both the Riddell and MacGregor
marks and to administer Riddell's trademark programs. Also, Riddell is actively
considering proposals for new license agreements for certain categories of the
MacGregor and Riddell trademarks. There can be no assurance that any new
licenses will be entered into or, if executed, that any such agreements will be
successful.
PRODUCTION
Sports Products and Services
Protective Helmets: Riddell engineers, manufactures and packages all of its
protective football and baseball helmets at its plant in Chicago, Illinois.
Helmet shells are manufactured entirely by Riddell using a custom grade of
plastic resin and precision injection molding techniques.
Shoulder Pads: Production of Power shoulder pads has recently been shifted
to a single source in Canada. Riddell has a facility in Pennsylvania which
customizes shoulder pads upon request. All of Riddell's other shoulder pads are
imported as finished products from sources in the Far East.
Other Athletic Products: Riddell purchases its baseball products from
suppliers in the Far East. Riddell sources its practicewear from four domestic
suppliers. Riddell believes alternative sources for these products are readily
available. Riddell's Elk Grove, Illinois facility has a screen printing
operation which can customize the practicewear with almost any logo, team name
or other design that the customer requests.
Reconditioning: Riddell's reconditioning services include the sanitizing,
buffing or painting, replacing certain parts and recertifying of athletic
equipment as conforming to NOCSAE standards. These services are performed at
Riddell's reconditioning facilities strategically located throughout the United
States and Canada. In late 1994, in response to Riddell's move to direct sales,
Riddell's primary competitor in new football equipment, Schutt Sports Group
('Schutt'), manufacturer of the AIR helmet, canceled Riddell's reconditioning
subsidiary's designation as an authorized reconditioner of AIR helmets and
refused to sell parts for their helmets to this entity. This move has had no
measurable impact on Riddell's ability to recondition AIR helmets and no
significant volume has been lost in 1996. Riddell will source parts from outside
suppliers and will recertify all AIR helmets to NOCSAE standards as it had
before. It is possible that Schutt's action could have some limited impact on
Riddell's reconditioning volume in future years. See 'Risk Factors--Competition
and Market Share Data.' As a policy, Riddell does not recondition helmets over
10 years old.
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Collectible Products: Riddell engineers, manufactures and packages its full
size collectible helmets at its plant in Chicago, Illinois in a process similar
to that used for protective helmets. Riddell purchases its miniature helmets and
other collectible products from two sources in China. Riddell believes that
alternative sources for these products are readily available. See, however,
'Risk Factors--Dependence on Third-Party Foreign Manufacturing.'
Quality Testing
All protective products manufactured by Riddell are subjected to at least
four separate quality control procedures. Quality control inspections for
helmets are conducted when the product is molded, when liners are inserted, when
face guards are attached and when the product is finished. Samples of all models
produced are tested in accordance with NOCSAE standards. Riddell continually
monitors its sourced products to check that they meet the Company's quality
standards.
Warranty
All varsity protective football helmet shells are covered by a five year
warranty. Youth football helmet shells are covered by a three year warranty.
Helmet liners, protective padding and shoulder pads are covered by a one year
warranty. The rate of product returns for warranty claims has averaged
approximately 0.2% annually over the last 3 years.
Research and engineering studies conducted by Riddell and its suppliers
indicate that certain physical properties of the plastics used in football
helmets deteriorate over time. While Riddell recommends that football helmets
not be used for more than five years, its policy is to refuse to recondition
helmets that are more than ten years old.
RAW MATERIALS
Principal raw materials purchased by Riddell for use in its products
include various custom and standard grades of plastic and foam, metal fasteners,
paints and cardboard. Similar materials are used in most purchased components
and finished products along with steel wire used in purchased face guard
components. Riddell has not experienced and does not expect in the near future
to experience shortages in raw materials.
PRODUCT DESIGN AND ENGINEERING
The activities of Riddell's engineering staff relate principally to the
design, development and improvement of its helmets and padding and to the
testing of raw materials which are used in, or could be used to improve, Riddell
products and, to a lesser extent, to the development of new products. Riddell
has seven employees devoted principally to design, development and quality.
Riddell has several patents and patents pending that are applicable to its
protective padding products. See '--Patents and Trade Secrets.' Riddell has
retained a design company to assist it in developing new retail collectible
products on terms that Riddell believes are customary in the industry, and from
time to time works with other design companies.
COMPETITION
Sports Products and Services
Athletic Products: Riddell's principal competitor in the football helmet
market is Schutt, manufacturer of the AIR helmet. Riddell competes principally
with Bike Athletic Co., Inc., Douglas, Inc., Gear 2000, Inc. and Rawlings
Sporting Goods Company, Inc. ('Rawlings') in the football shoulder pad business.
Riddell competes with Diamond Sports Co., Rawlings, Wilson Sporting Goods
Company and other companies for baseball and softball products. Riddell competes
with Champion Products, Inc., Russell Athletic, Inc., and other companies for
practicewear. Some of Riddell's competitors in the athletic products business
are substantially larger and have greater financial and other resources than
Riddell.
Riddell believes it competes in the football market on the basis of
quality, price, reliability, service, comfort and ease of maintenance. With
respect to football and other athletic products, Riddell believes that its
direct sales force provides a competitive advantage in terms of its ability to
provide superior products and customer services and a significant price
advantage due to the elimination of independent dealers. Riddell believes it has
the only national direct sales force for Institutional athletic products and
services which management believes gives Riddell a competitive advantage and
would be difficult to duplicate.
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Reconditioning: The protective equipment reconditioning industry is highly
fragmented. Management believes that Riddell serves approximately 50% of the
reconditioning market and that it has approximately 30 regional competitors.
Riddell is the only national supplier of reconditioning services. Reconditioners
compete on the basis of quality, pricing, reputation, convenience and customer
loyalty.
Retail Collectible Products: Riddell believes that its sales of sports
collectible products compete with a large number and wide array of manufacturers
and sellers of sports and other collectible and memorabilia products, some of
which have greater resources than Riddell. Among its competitors in this large
marketplace are sellers of products such as autographed photographs and uniforms
and other memorabilia and manufacturers of clothing, such as caps and jackets.
Licensing
Competition in the licensing of sports equipment, apparel and footwear is
very substantial. The Riddell and MacGregor brands compete with numerous
companies having significant brand recognition, many of which have greater
financial, distribution, marketing and other resources than Riddell. Competing
brands include Adidas(Registered), Champion(Registered), Converse(Registered),
Nike(Registered), Rawlings(Registered), Reebok(Registered), Russell(Registered)
and Wilson(Registered). Brand recognition and reputation for quality are
important competitive factors in Riddell's licensing business.
PATENTS AND TRADE SECRETS
Certain of Riddell's football helmet liner systems are protected by patents
and trade secrets, including a patent on its inflatable liner expiring 2010.
Other patents on these liners expire 1998 and 2008. Riddell also has patents
expiring in 2006, 2007 and 2008 on various components of its shoulder pads which
increase the impact area of contact and permit better absorption of the related
shock. While management believes certain of these patents are material to the
success of Riddell's products, based on currently competing technology, it also
believes that experience, reputation, brand recognition and its distribution
network are more significant to its business.
TRADEMARKS, SERVICE MARKS AND LICENSE AGREEMENTS
General
Riddell considers the MacGregor, Riddell, ProEdge and Power trademarks to
be material to its business. All of Riddell's football helmets are marketed
under the Riddell name. Riddell's football shoulder pads are sold under the
Riddell and Power trademarks. Riddell markets footballs and certain baseball
equipment, other than helmets, under the ProEdge trademark. Riddell's
reconditioning services are conducted under the name Riddell/All American.
Riddell licenses the Riddell trademark for certain types of athletic
clothing and for athletic footwear. It licenses the MacGregor trademark
primarily for sales of athletic footwear and certain clothing.
Riddell Trademark and Licensing
Riddell owns all domestic rights to the Riddell trademark. The Riddell
trademark is registered in the United States Patent and Trademark Office and
with the trademark registration offices in certain foreign countries, and
registration is being sought in other major foreign markets. Trademark
registrations generally have terms of 10 years, renewable for successive ten
year periods.
In 1992, Riddell granted a license to Signal Apparel Company ('Signal') to
use the Riddell trademark on certain athletic apparel. In May 1996, in
connection with Signal's restructuring of certain of its product lines, Riddell
replaced the original license with a short term license agreement granting
Signal the rights to use the Riddell trademark on certain types of athletic
clothing which also bear the mark of the NFL Properties, Inc. or one of its
member teams. The license is renewable at the option of Riddell and requires a
lower minimum royalty than the original license entered into in 1992.
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Late in 1995, Riddell's licensee for the Riddell trademark on footwear
filed for protection under Chapter 11 of the U.S. Bankruptcy Code in Delaware.
Under the terms of a settlement agreement (the 'Settlement Agreement'), settling
an action commenced against the Company in March 1995 by the trustee for
MacGregor Sporting Goods, Inc. ('Mac I'), which filed for bankruptcy protection
in March 1989, and the trustee for MGS Acquisition, Inc., the Company has waived
its objections to the reorganization of, and has entered into a new licensing
agreement with, its existing 'Riddell' footwear licensee on substantially the
same terms as the previous license. In addition, the Settlement Agreement
requires the Company, among other things, to assign to the Levitt Trustee (as
defined herein) (or any successor trustee or other person approved by the New
Jersey Bankruptcy Court) and to Brooks (as defined herein) up to $3.0 million of
royalties, to the extent such royalties are paid under any 'Riddell' footwear
license. See '--The Company--Legal Proceedings--Terms of the Settlement
Agreement.'
MacGregor Trademark and Licensing
Riddell owns 50% of the stock of MacMark Corporation which owns the
MacGregor trademark for sports apparel, footwear and equipment. The MacGregor
trademark is registered in the United States Patent and Trademark Office, and
registration is being sought in major foreign markets. The remaining 50% of the
stock of MacMark is owned by Hutch Sports USA, Inc. ('Hutch'), a subsidiary of
RDM Sports Group, Inc.
Riddell has a perpetual, exclusive, royalty-free license from MacMark to
use (and to sublicense others to use) the MacGregor trademark in connection with
the manufacture and sale of certain products. The MacMark license allows Riddell
to use (and sublicense others to use) the MacGregor trademark for all products
other than products which MacMark has licensed to Hutch and SSG, as discussed
below.
Hutch has, subject to certain conditions, a perpetual, exclusive and
royalty-free license from MacMark to use (and, with the consent of MacMark and
Riddell, to sublicense others to use) the MacGregor trademark principally for
sports equipment products used in certain major classes of sports, such as
baseball, soccer and basketball, for sale to retail stores only. MacMark has
also granted to Sports Supply Group, Inc. ('SSG') a license to use the MacGregor
trademark for sales of the same classes of goods as it licenses to Hutch, but
restricts SSG to selling these goods only to the Institutional team sports
market.
MacMark and its licensees (including Riddell) are bound by a settlement
agreement entered into in 1981 with a company that owns trademark rights in the
similar trademark, McGregor. Under this agreement, the parties have agreed on
certain restrictions in the use of their respective trademarks. Additionally,
under a separate agreement, Riddell is precluded from using the MacGregor
trademark in connection with the sale of products used in the sport of golf.
Accordingly, Riddell's use of the MacGregor trademark generally is limited to
sporting goods, certain apparel and athletic footwear, but specifically
excluding any of these products that MacMark has licensed to Hutch and products
used in connection with the sport of golf.
Riddell has in turn entered into sublicense agreements for the MacGregor
trademark with Kmart for products including shoes, athletic socks and athletic
apparel. Meldisco, now a division of Footstar, Inc., has historically sold
MacGregor footwear under the Kmart license in Kmart stores. Riddell and Meldisco
recently reached an agreement in principal, subject to negotiation and execution
of final documentation, that Meldisco will continue to sell athletic footwear
bearing the MacGregor trademark at Kmart stores pursuant to a license expected
to be effective when the Kmart license expires in 1998. Kmart has an exclusive
license to use the MacGregor trademark on certain athletic apparel (e.g.,
jogging suits and sweat separates), athletic bags and knapsacks and a
non-exclusive license on other products such as athletic socks. Riddell plans to
establish a new license for the apparel category effective when the Kmart
license expires in 1998. Riddell believes there are long term benefits to
broadening the distribution of MacGregor apparel. However, there can be no
assurance that Riddell will be successful in its efforts to establish a new
apparel license. Royalties from sales of athletic clothing bearing the MacGregor
trademark at Kmart stores constituted 1% of Riddell's total revenues and 29% of
Riddell's total licensing revenues in 1996. No decision has been made with
respect to licensing the use of the MacGregor trademark after June 1998 on
socks, athletic bags or knapsacks currently marketed by Kmart.
Riddell is exploring additional opportunities for licensing the MacGregor
trademark, and in this connection has retained an independent Licensing Agent.
See '--Marketing and Promotion--Licensing.'
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VARSITY
GENERAL
Varsity is a leading provider of products and services to the school spirit
industry. Varsity designs and markets cheerleader, dance team and booster club
uniforms and accessories and is one of the nation's leading operators of youth,
junior high, high school and college cheerleader and dance team camps, clinics
and competitions. Varsity promotes its products and services, as well as the
school spirit industry, by organizing and producing various nationally televised
cheerleading and dance team championships and other special events. Varsity's
primary market includes the approximately 37,500 Institutions located throughout
the United States.
Varsity's cheerleader and dance team fashion division maintains an
excellent reputation for quality, design and on time delivery of its products.
Such products, which bear the Varsity(Trademark) label, include custom-made
cheerleader, dance team and booster club uniforms and accessories, including
sweaters, sweatshirts, jumpers, vests, skirts, warm-up suits, t-shirts, shorts,
pompons, socks, shoes, pins, jackets and gloves. Exclusive contracts are
maintained with several independent manufacturers who provide knitting, sewing,
finishing and shipping for all orders. By relying on independent manufacturers
to produce its uniforms, Varsity is able to minimize its fixed costs and retain
the flexibility necessary to adjust the manufacturing to its highly seasonal
production needs. Varsity monitors its contractors closely for quality control
and financial performance. Varsity provides its manufacturers with patterns,
fabrics, yarn and manufacturing specifications for its products. Varsity also
provides some cutting, knitting and lettering for the manufacturers at its
specialized production facility located at its Memphis headquarters. Varsity
considers itself an innovator in the design of uniforms and campwear garments
and maintains an in-house design staff to maintain its leadership in setting
design trends.
Varsity's camp division commenced operations in 1975 with 20 cheerleading
camps and 4,000 participants. Today, through its UCA division and USA
subsidiary, Varsity is a leading operator of cheerleader and dance camps in the
U.S. Camp enrollment has increased every year since Varsity has been in
business, has grown at a compounded annual rate of 14.6% since 1991 (excluding
growth from acquisitions) and totalled 188,000 participants in 1996. Camp
sessions, which are primarily held on college campuses in the summer, were
conducted in every state as well as in Canada and Japan in 1996. Participants in
Varsity's 1996 summer camps included the cheerleading and/or dance team squads
of approximately 65% of the universities comprising the Atlantic Coast, Big
East, Big Ten, Big Twelve, Pacific 10 and Southeastern collegiate athletic
conferences. Varsity instructors are typically college cheerleaders who may have
previously attended a Varsity camp, and management believes that its training of
many of the top college cheerleading squads augments its recruiting of high
school and junior high school camp participants.
Varsity promotes its products and services through active and visible
association with the following championships and television specials: the
National College Cheerleading and Dance Team Championship(Trademark) (nationally
televised for 12 consecutive years), the National High School Cheerleading
Championship(Trademark) (17 consecutive years), the National Dance Team
Championship(Trademark) (10 consecutive years) and the National All Star
Cheerleading Championship(Trademark) (2 consecutive years). In addition to
promoting cheerleading and dance team activities, these championships,
television specials and events are a revenue source to Varsity during its off-
season. In 1996, approximately 25,000 persons, including cheerleaders and their
families, participated in Varsity's special events, such as championships and
holiday parades in the U.S., London and Paris.
In December, 1994, Varsity acquired Intropa, a Varsity supplier since 1988.
Intropa specializes in providing international and domestic tours for special
interest, performing, youth and educational groups including Varsity's London
and Paris trips. Management expects to expand Intropa's travel offerings through
referrals from its Institutional sales force.
Varsity's strategy has been to increase revenue and market share by (i)
expanding its school spirit product lines, (ii) strengthening its sales force,
(iii) increasing enrollment in its cheerleader and dance team camps as a vehicle
to increase participation in special events such as parades and bowl games and
cross-sell products, such as uniforms and (iv) actively promoting its business
as well as the school spirit industry, primarily through its nationally
televised cheerleading and dance team championships. Since fiscal 1987, Varsity
has significantly
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expanded the variety and selection of its uniforms and accessories and increased
its direct sales force to approximately 135 full-time professional sales
representatives. Varsity believes it currently has the largest nationwide
full-time direct sales force in the school spirit industry.
Varsity has experienced significant growth over the last five years.
Revenues have increased at a compounded annual growth rate of 22.3% from
approximately $41.6 million in the year ended March 31, 1993 to approximately
$88.4 million in the year ended December 31, 1996 and EBITDA has increased at a
compounded annual growth rate of 22.1% from $4.6 million to $9.8 million over
the same period.
MARKET AND SCHOOL SPIRIT INDUSTRY
The market for school spirit products and services has evolved and grown
with the development of high school and college athletic programs. The 1997
edition of Patterson's American Education has reported that there are
approximately 14,900 junior high schools, 19,300 high schools, 1,750 junior
colleges and 1,500 colleges located throughout the United States. According to
the National Federation of State High School Associations, there are more than
5,800,000 students participating in organized athletic programs at high schools
located in the United States and, according to the National Collegiate Athletic
Association, there are approximately 260,000 students participating in organized
athletic programs at NCAA universities and colleges. Since commencing operations
in 1974, Varsity has focused primarily on the school spirit market segment
consisting of cheerleader and dance team camps and cheerleader uniforms and
accessories and special events.
Varsity believes the school spirit industry, and, in particular, the market
for cheerleader and dance team camps, clinics, uniforms and accessories, is
expanding. This expansion is primarily attributable to the following factors:
o Multiple Squads. Many high schools and junior high schools have
formed multiple cheerleader squads, which follows a trend set by
many colleges and universities. Separate squads are often organized
for each major sports program, such as football and basketball. In
addition, some schools have formed separate squads for other men's
sports and for women's sports.
o Younger Participants. Participation in cheerleading is increasing
among younger students, and formal squads are being organized at
junior high school and even elementary school levels.
o New Market. New non-school related teams are being formed. These
teams (typically called 'All Stars') are organized by private gyms
and function strictly to compete and to perform at local special
events.
o Dance and Pompon Teams. In addition to traditional cheerleader
squads, dance and pompon squads are becoming increasingly popular.
o Focus on Fashion and Competitions. A trend has developed among
cheerleaders and dance teams to purchase and wear different uniforms
for various athletic events and to participate in cheerleading and
dance team competition.
o Increase in Students. According to the U.S. National Center for
Education Statistics, the number of students attending high school
in the United States is increasing and is expected to increase over
the next five years.
o Increased Exposure. Increased national media exposure, including
television broadcasts of sporting events and cheerleading and dance
team competitions, has heightened the interest in and awareness of
cheerleader and dance team activities.
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VARSITY CHEERLEADER UNIFORMS AND ACCESSORIES
Through its subsidiary, Varsity Spirit Fashions & Supplies, Inc. ('Varsity
Fashions'), Varsity designs and markets cheerleader, dance team and booster club
uniforms and accessories, including sweaters, sweatshirts, jumpers, vests,
skirts, warm-up suits, t-shirts, shorts, pompons, socks, jackets, pins and
gloves. Varsity believes it is the industry leader in cheerleader and dance team
uniform fashion and that it has an excellent reputation for quality, design and
on-time delivery of its products. Varsity considers itself an innovator in the
design of uniforms and campwear garments and maintains an in-house design staff
to maintain its leadership in setting design trends. Varsity Fashions employs
two full-time fashion designers, both of whom are former college cheerleaders
and one of whom was trained at the Fashion Institute of Technology in New York
City. Varsity Fashions also utilizes specialized computer software to create its
new fashion designs and patterns.
Cheerleading and dance team uniforms designed and marketed by Varsity
Fashions are made to order. During 1996, Varsity Fashions contracted for its
production requirements with seven independent garment manufacturers utilizing
ten manufacturing facilities. Varsity Fashions has exclusive contracts with
these manufacturers, under which the manufacturers provide knitting, cutting,
sewing, finishing and shipping for all orders. Varsity Fashions provides these
manufacturers with patterns, fabrics, yarn and manufacturing specifications and
quality control supervision. Varsity Fashions also provides some cutting,
knitting and lettering for the manufacturers at its specialized production
facility located at Varsity's Memphis headquarters. The use of independent
manufacturing facilities to fulfill the Varsity's production needs affords
Varsity flexibility to adjust its production output to meet its highly seasonal
selling cycle. The use of independent manufacturers also reduces Varsity's fixed
costs, which Varsity believes is beneficial in a highly seasonal business.
Varsity believes that the loss or termination of its relationship with any
single independent manufacturer would not have a material adverse effect on
Varsity.
Varsity Fashions purchases from various suppliers many of the cheerleading
accessories that it markets, including shoes, pompons and campwear. Varsity
Fashions purchases products from Nike, Capezio and Converse, among others.
Varsity Fashions has expanded the variety and number of accessories it markets,
which has contributed to the increase in merchandise sales revenue experienced
by Varsity Fashions in the past five fiscal years. Varsity believes that the
loss or termination of its relationship with any single supplier would not have
a material adverse effect on Varsity.
Varsity markets its uniforms, accessories and other merchandise through
sales representatives and, to a lesser extent, through its direct mail catalog
and telemarketing programs. As of March 31, 1997 Varsity had approximately 135
full-time sales representatives operating in a total of 50 states. Varsity
representatives are employed directly by Varsity or are representatives of one
marketing firm with which Varsity has contracted for marketing services. These
sales representatives, who typically cover one or more major metropolitan areas
on an exclusive basis, call on substantially all of the junior high, high school
and college accounts within their respective territories. The sales
representatives are typically compensated on a percentage of sales basis.
Varsity closely and continuously monitors the performance of its sales
representatives and periodically meets with the representatives to discuss and
review sales goals.
VARSITY CHEERLEADER AND DANCE TEAM CAMPS
Varsity operates cheerleader and dance team camps in the United States.
During the 1996 summer camp season, approximately 188,000 participants
(consisting of students and their coaches) attended UCA and USA camps, including
over 6,300 participants representing colleges and junior colleges. During the
summer of 1996, cheerleading and/or dance team squads from approximately 65% of
the universities comprising the Atlantic Coast, Big East, Big Ten, Big Twelve,
Pacific 10 and Southeastern collegiate athletic conferences attended Varsity
camps. On May 15, 1996, Varsity acquired the camp business of United Spirit
Association from United Special Events, Inc. This business consists of
instructional spirit camps and clinics primarily in the western United States.
Varsity camp sessions for high school and junior high school students are
held primarily in June and July, while camp sessions for college cheerleaders
and dance team participants are held primarily in August. Mascot training
clinics are also provided at certain of Varsity's cheerleader and dance team
camps.
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The following map depicts Varsity camp locations throughout the continental
U.S. during 1996.
[Map of camp locations in continental U.S.]
A significant majority of Varsity cheerleader and dance team camps are
conducted on college or junior college campuses. The camps generally are
conducted over a four day period and are attended by resident and commuting
students. Varsity generally markets the camp, establishes registration fees,
registers students, collects the registration fees, provides instruction and
performs all related administrative services. Varsity contracts with the
colleges and universities for provision of housing, food and conference
facilities. During the summer of 1996, resident fees for high school cheerleader
and dance team camps sponsored by Varsity ranged from $70 to $236, with commuter
fees ranging from $40 to $139. In addition to registration fees, Varsity also
generates revenues at cheerleading and dance team camps through the sale of
t-shirts, shorts, caps, patches and various other accessories.
The staff of a Varsity summer camp includes instructors, administrators and
trainers. On average, one instructor is provided for every 23 students, which
Varsity believes is the most favorable instructor to student ratio among the
major operators of cheerleader and dance team camps. Camp administration staff,
including administrators and trainers, are provided at the ratio of
approximately one to 75 students. Varsity's instructors, all of whom are
required to complete an intensive training session prior to each summer season,
typically are college or former high school cheerleaders who also have attended
Varsity camps in the past.
Varsity also operates two cheerleading practice facilities located in
Dallas, Texas and Decatur, Georgia. These gyms are year round facilities at
which cheerleaders and other spirit group participants can enroll in
instructional and recreational programs offered by Varsity.
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SPECIAL EVENTS
Varsity promotes its products and services, as well as the school spirit
industry, through active and visible association with the following
championships and television specials:
o National High School Cheerleading Championship(Trademark)
o National Dance Team Championship(Trademark)
o National College Cheerleading and Dance Team Championship(Trademark)
o National All Star Cheerleading Championship(Trademark)
These championships and specials have been regularly televised on the ESPN
television networks in recent years and have been sponsored by various companies
and products, including Nike, Unilever, Capezio, the Walt Disney World Resort,
Johnson & Johnson, Pepsi Cola and Wal-Mart.
Varsity also conducts and promotes special cheerleading events, such as
parades and half-time shows at college football bowl games. In 1996,
approximately 25,000 persons, including cheerleaders and their families,
participated in Varsity's special events, such as championships and holiday
parades in the U.S., London and Paris. For example, in 1990 Varsity began its
annual involvement with the Lord Mayor of Westminster's New Year's Day Parade
held in London, England, and registered over 1,490 participants for this parade
in 1997. Varsity also registered over 380 participants for the 1997 parade held
in Paris, France, over 710 participants for the 1996 Thanksgiving Day Parade
held in Walt Disney World(Registered) Resort, Florida, over 1,050 participants
for the 1996 Macy's Thanksgiving Day Parade held in New York, over 740
participants for the half-time show at the 1997 Outback Bowl Game held in Tampa,
Florida and over 540 participants for the Christmas Parade held in Hollywood,
California.
These championships, television specials and events are a revenue source to
Varsity during its off-season and promote consumer awareness of
Varsity(Trademark) and Universal Cheerleaders Association(Trademark) products
and services, as well as cheerleader and dance team activities in general.
MARKETING PROGRAMS
Varsity believes that the marketing talents of its personnel are
fundamental to its past and future growth. Varsity's marketing programs include
certain activities described below.
Varsity markets its uniforms and accessories under the Varsity trademark.
The distinctive Varsity logo patch appears on the front of all uniforms
manufactured by or for Varsity. Varsity annually mails to schools and school
spirit advisors and coaches over 150,000 Varsity catalogs containing color
photographs and descriptions of Varsity's uniforms and accessories. Varsity
supplements its direct and catalog sales efforts with a telemarketing sales
force of 12 full and part-time employees operating from its Memphis
headquarters.
Varsity annually publishes several newsletters which are directed toward
cheerleaders and school spirit advisors. Varsity also annually distributes, in
certain targeted areas, a professionally produced video tape containing
highlights of Varsity's cheerleader and dance team camps and special events.
Varsity distributes each year by direct mail over 178,000 four-color promotional
brochures describing Varsity's cheerleader and dance team camps to schools,
school principals, head cheerleaders, coaches, dance team captains and school
spirit advisors.
Varsity has developed various cross-marketing programs to promote both its
cheerleader and dance team camps and its uniforms and accessories. Specifically,
Varsity's sales force of approximately 135 full-time representatives also
promote Varsity's cheerleader and dance team camps. Similarly, the more than
1,525 instructors at Varsity's cheerleader and dance team camps promote sales of
Varsity's merchandise.
OTHER OPERATIONS
Varsity, through a wholly owned subsidiary, Varsity/Intropa Tours, Inc.
('Varsity/Intropa'), operates a tour company that specializes in organizing
tours primarily for cheerleaders, bands, choirs and orchestra, dance and theater
groups and other school affiliated or performing groups. Most tours are planned
around a performance event. Therefore, the revenues from this business are
seasonal. Prices are negotiated on a tour-by-tour basis and
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fluctuate based on factors such as the availability of discounts on air fares
and the exchange rates, in the case of international tours. The tours are
marketed to targeted existing groups via direct mailings, conventions, trade
magazines, advertisements, and, more importantly, repeat business and referrals.
Last year, Intropa handled the travel and concert arrangements for over 5,000
persons, excluding cheerleaders, who toured the continental United States,
Hawaii, Canada, Europe and Israel.
TRAINING
Varsity emphasizes the training of its Varsity instructors and believes it
has the premier instructor training program in its industry. Prior to the
commencement of the camps, the instructors participate in an intensive six-day
training session where they are taught new cheerleading and dance material, as
well as up-to-date teaching and safety techniques. Varsity hires its instructors
by utilizing applications given to talented camp participants, supervisor
evaluations and numerous nationwide tryouts. As a result of this process,
Varsity believes it hires the most qualified and talented instructors available.
Varsity believe it is the industry leader in the promotion of safety among
cheerleaders and dance team participants and coaches. Varsity was a founding
member of and is an active participant in the American Association of
Cheerleading Coaches and Advisors ('AACCA'), an industry trade group whose
mission is to improve the quality of cheerleading and to maintain established
safety standards. In 1990, AACCA published comprehensive certification and
safety guidelines for cheerleading coaches, which guidelines were edited by Dr.
Gerald George, a nationally recognized expert on sports safety and training. An
updated version of that manual is scheduled to be released during 1997. Varsity
follows the AACCA safety guidelines in the training of its professional
instructional staff and in the conduct of its cheerleader and dance team camps
and competitions.
COMPETITION
Varsity is one of two major companies that designs and markets cheerleader,
dance team and booster club uniforms and accessories on a national basis. In
addition to Varsity and its major national competitor, NSG, there are other
smaller national and regional competitors serving the uniform and accessories
market in the United States. Varsity believes that the principal factors
governing the selection of cheerleader and dance team uniforms and accessories
are the quality, variety, design, delivery, service and, to a lesser extent,
price of the merchandise.
Varsity is also one of two companies that annually operate a significant
number of cheerleader and dance team camps in the United States (the other being
NSG). There are also many other companies and schools that operate camps and
clinics on a regional basis. Varsity believes the principal factors governing
the selection of a cheerleader or dance team camp or clinic are the reputation
of the camp operator for providing quality instruction and supervision,
accessibility of camp locations, timing of the camps and the tuition charged for
camp participation.
TRADEMARKS AND SERVICE MARKS
Varsity has registered various trademarks with the U.S. Patent and
Trademark Office, including the following: the Universal Cheerleaders
Association logo, the Varsity logo, the United Spirit Association logo, the
National High School Cheerleading Championship logo, the Universal Dance
Association logo, Universal Dance Camps, Varsity Spirit Fashions and The
National Dance Team Championship. Varsity believes that these trademarks have
significant value and are important to its marketing efforts.
THE COMPANY
SEASONALITY AND BACKLOG
Riddell has historically experienced and expects to continue to experience
seasonal fluctuations in its sales and profitability. The move to direct
Institutional sales has shifted peak sales of Riddell's competitive products to
a later point in the year than that experienced prior to going direct.
Orders for competitive football products and reconditioning services are
solicited over a sales cycle that begins in the fall of each year and continues
until the start of football play at the end of the following summer. Delivery of
competitive football products and performance of reconditioning services reach a
low point during
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the football playing season. These activities contribute most to profitability
in the first through third quarters of each calendar year.
Riddell's sports collectible products are sold to retailers throughout the
year. However, sales are at their peak during the third and fourth quarters as
retailers build inventory in anticipation of both the football and the holiday
shopping seasons. Volume shipment of newly introduced products in the early part
of both 1995 and 1996 moderated this seasonality. However, shipment of new
products planned for 1997 introduction are anticipated to impact later points of
the year with a resulting shift in revenues and profitability towards the second
half of 1997.
Due in large part to the lull in sales of competitive football products and
services during the football season, Riddell has normally experienced operating
losses during the fourth quarter of recent years. While the growth of the
collectible business and other products has softened this seasonality and should
continue to do so, Riddell anticipates that the overall pattern of lower fourth
quarter profitability will continue due to the significance of Riddell's sales
of football products and services.
Backlog for all of Riddell's products and services at April 30, 1997 was
approximately $17.2 million, a 12% decrease from the April 30, 1996 backlog of
approximately $19.5 million. The decrease is principally due to changes in
Riddell's procedures and policies for solicitation and acceptance of certain
classes of orders for sports collectible products. In early 1996 certain
retailers placed large orders for sports collectible products which they later
reduced by a material amount. These orders were for collectible products which,
at the time, had recently been introduced by Riddell and were new to these
retailers.
Varsity's business and the results of its operations are highly seasonal.
Varsity's cheerleader and dance team camps are held exclusively in the summer
months, and sales of uniforms and accessories occur primarily in the six months
prior to the beginning of the school year. A substantial portion of Varsity's
annual revenues and all of Varsity's net income are generated in the second and
third quarters of the calendar year, while the first and fourth quarters have
historically resulted in net losses. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Seasonality.'
GOVERNMENTAL REGULATION
Riddell's products and accessories are subject to the Federal Consumer
Product Safety Act, which empowers the Consumer Product Safety Commission (the
'CPSC') to protect consumers from hazardous sporting goods and other articles.
The CPSC has the authority to exclude from the market certain articles which are
found to be hazardous and can require a manufacturer to repurchase such goods.
The CPSC's determination is subject to court review. Similar laws exist in some
states and cities in the United States, Canada and Europe. Riddell maintains a
quality control program for its protective equipment operations and retail
products that is designed to ensure compliance with applicable laws. To date,
none of these products has been deemed to be hazardous by any governmental
agency.
At present, no national governing body regulates cheerleading and dance
team activities at the collegiate level. Although voluntary guidelines relating
to safety and sportsmanship have been issued by the NCAA and some of the
athletic conferences, to date cheerleading and dance teams generally are free
from rules and restrictions similar to those imposed on other competitive
athletics at the college level. However, if rules limiting off-season training
are applied to cheerleading and/or dance teams (similar to rules imposed by the
NCAA on other sports), it is likely that Varsity would be unable to offer a
significant number of its camps either because participants would be prohibited
from participating during the summer or because suitable sites would not be
available. Although the Company is not aware of any school officially adopting
these activities as a competitive sport, recognition of cheerleading and/or
dance teams as 'sports' would increase the possibility that these activities may
become regulated. If Varsity were restricted from providing its training
programs to colleges and high schools, or if cheerleaders and dance teams were
restricted from training during the off-season, such regulations would likely
have a material adverse effect on Varsity's business and operations. However,
the Company currently does not believe that any regulation of collegiate
cheerleading or dance teams as a 'sport' is forthcoming in the foreseeable
future, and in the event any rules are proposed to be adopted by athletic as
sociations, the Company expects to participate in the formulation of such rules
to the extent permissible.
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At the high school level, some state athletic associations have classified
cheerleading as a sport and in some cases have imposed certain restrictions on
off-season practices and out-of-state travel to competitions. However, in all
cases to date, Varsity has been able to work with these state athletic
associations to designate acceptable times for the cheerleaders within these
states to attend camps. Varsity has also signed agreements with several state
associations to assist with sponsoring and execution of official competitions
with these states. To date, state regulations have not had a material effect on
Varsity's ability to conduct its normal business activities within those states.
Each of Riddell's and Varsity's operations at all of its facilities are
subject to regulation by the Occupational Safety and Health Agency and various
other regulatory agencies.
The Company's operations are also subject to environmental regulations and
controls. While some of the raw materials used by Riddell may be potentially
hazardous, it has not received any material environmental citations or
violations and has not been required to spend significant amounts to comply with
applicable law.
EMPLOYEES
At March 31, 1997, Riddell had 613 employees. The employees are engaged as
follows: 7 in product design, engineering and testing, 112 in manufacturing, 312
in reconditioning, 141 in sales and marketing and 41 in administration.
Approximately 40 of Riddell's employees are represented by the Chicago and
Central States Joint Board, Amalgamated Clothing and Textile Workers Union,
under a collective bargaining agreement which will expire in January 1999.
Approximately 33 of Riddell's employees are represented by the Local #500A
United Food and Commercial Workers Union (AFL-CIO) under a collective bargaining
agreement that expires in January 2000. Riddell believes that relations with its
employees are satisfactory.
At March 31, 1997, Varsity employed 401 full-time employees and 214
part-time employees. In addition, during the summer of 1996, Varsity employed
approximately 1,670 summer camp instructors, trainers and administrators. None
of Varsity's employees is covered by a collective bargaining agreement. Varsity
considers its relationship with its employees to be satisfactory.
PRODUCT LIABILITY PROCEEDINGS AND INSURANCE
As part of its ongoing business, Riddell is routinely a defendant in
various product liability suits relating to personal injuries allegedly related
to the use of Riddell helmets.
Insurance
Riddell maintains product liability insurance under a policy bound in
December 1994. In October 1996 the policy term was extended until December 2001
and certain coverage limits were increased. The policy is an occurrence-based
policy generally covering claims relating to injuries occurring prior to
December 2001 even if such claims are filed after the end of the policy period.
The insurance program provides certain basic and excess coverage on product
liability claims.
The basic insurance coverage under the policy ('Basic Coverage') provides
coverage against claims currently pending against Riddell and future claims
relating to any injuries occurring prior to December 13, 2001. There is an
aggregate coverage limit of $7.5 million for the Basic Coverage, and the policy
is also subject to certain annual aggregate sub-limits. The Basic Coverage
covers up to $2.25 million per claim in excess of an uninsured retention
(deductible) of $750,000 per occurrence. Until such time as the premiums for the
entire policy have been paid, the Basic Coverage is also limited to 110% of the
premiums paid or which have been guaranteed by a letter of credit.
The insurance program also provides for additional coverage ('Excess
Coverage') of up to $20.0 million per occurrence, in excess of the first $3.0
million of each claim. The Basic Coverage, to the extent available, covers the
initial $3.0 million layer. The Excess Coverage applies to 10 of the 11 claims
pending against Riddell at December 31, 1996 and will apply to any future claims
which relate to injuries occurring prior to December 13, 2001. Claims covered by
the Excess Coverage are subject to one of two separate $20.0 million aggregate
policy limits, depending on the date of the related injury and the date the
claim is filed against Riddell. The first $20.0 million aggregate limit applies
to claims filed before October 4, 1996 for injuries occurring after January 1,
1985 and prior to December 13, 1994 together with any future claims for injuries
occurring before October 4, 1996. The second separate $20.0 million aggregate
limit applies to claims filed before October 4, 1996 for injuries occurring
after December 13, 1994 together with any future claims for injuries occurring
after
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October 4, 1996 and before December 13, 2001. The Excess Coverage is also
limited to certain ratios of paid premiums until such time as the premiums due
under the policy for the entire policy period have been paid. However, this
latter limitation can be eliminated at any time by prepaying the future premiums
due during the remainder of the policy, or by guaranteeing the future premiums
with a letter of credit.
The amount of insurance available under the Excess Coverage discussed above
includes an expansion of coverage obtained in October 1996. Prior to October
1996, the per case limits and two separate aggregate limits under the Excess
Coverage were each $10.0 million as opposed to the $20.0 million amounts
discussed above. The maximum possible payout under the entire policy, combining
the aggregate limit for the Basic Coverage and the two separate aggregate limits
under the Excess Coverage, is currently $47.5 million whereas prior to the
policy expansion this amount would have been $27.5 million. The annual cost of
this product liability insurance coverage for 1995 and 1996 exceeded the cost of
insurance incurred in years prior to 1995 by approximately $1.0 million. The
increase in cost for this expansion of coverage was offset by the benefit of
spreading Basic Coverage policy premiums over two additional years, on a
prospective basis, with the extension of the original policy period from five to
seven years. This has resulted in a net decrease in the annual cost of the
policy for the remaining five years of the policy period. Riddell believes that
the new additional product liability coverage provides a substantial increase in
coverage against future claims.
At the time the new policy was bound there were several preexisting claims
pending against Riddell. The policy provides only limited coverage for these
preexisting claims (only one of which was still pending at April 30, 1997).
Accordingly, in 1994 Riddell entered into an effort to settle several claims
that it believed, considering the substantially reduced level of available
insurance, represented the greatest potential risk to Riddell. Riddell was
successful in carrying out this settlement effort, and in early 1995 settled
certain claims for an aggregate amount of $2.1 million. However, because of the
risks associated with these claims, and given the reduced level of available
insurance, the amount of these settlements was substantially above historical
levels for settlements of similar claims. Accordingly, these settlements,
together with revaluations of reserves for remaining claims, resulted in an
increase in product liability expense for the year ended December 31, 1994 of
approximately $1.5 million.
Riddell's product liability insurance carrier is a division of American
International Group, Inc. which has been rated A++ XV by A.M. Best Property and
Casualty Insurance Ratings Company. There is no certainty that coverage will
remain available to Riddell after 2001, that Riddell's insurer will remain
viable, or that the insured amounts will be sufficient to cover all future
claims in excess of Riddell's uninsured retention. Furthermore, future rate
increases might make such insurance uneconomical for Riddell to maintain after
2001.
Each of Riddell and Varsity carries general liability insurance with
coverage limits which the Company believes will be adequate for its business.
Product Liability Proceedings
A subsidiary of Riddell has historically been a defendant in product
liability suits relating to personal injuries allegedly related to the use of
Riddell football helmets. These claims, and related issues, have had a material
impact on Riddell's operating results and financial position. As of June 6,
1997, seven such cases were pending against Riddell. Riddell has established
reserves for pending product liability claims and determines its reserves based
on estimates of losses and defense and settlement costs which it anticipates
would result from such claims based on information available at the time the
financial statements are issued. Due to the uncertainty involved with estimates,
as demonstrated by the events discussed below, 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 these claims
or potential future claims will fall within the established reserves. See Note 8
to the Consolidated Financial Statements of Riddell included elsewhere in this
Prospectus.
In 1994, a jury returned a verdict against Riddell for damages amounting to
approximately $8.0 million in one of these suits. Although Riddell believes that
it was not responsible in the case, and had been in the process of appealing the
verdict, Riddell settled with the plaintiff in late 1995 for an amount that was
less than what was previously awarded. Riddell had taken a charge of $4.6
million before taxes in 1994 to establish a reserve for the full uninsured
portion of the initial award, as well as current and future premiums then due
under a $5.0 million product liability insurance policy (which had a term
running through June 1997) which would be exhausted by payment of the verdict.
As the amount of the settlement was less than the initial award, the settlement
had no
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effect on 1995 income. In 1995, the excess of the reserve over amounts due under
the settlement was added to general reserves established for other product
liability claims as described in Note 8 to the Consolidated Financial Statements
of Riddell. The Consolidated Balance Sheets reflect certain liabilities relating
to this, and other product liability matters, as well as receivables for insured
portions of certain losses, as further described in Note 8 to the Consolidated
Financial Statements of Riddell included elsewhere in this Prospectus. The
settlement does not affect coverage available under Riddell's current product
liability insurance policy.
In September 1991, Riddell acquired the assets of subsidiaries of BSN Corp.
(known now as Aurora Electronics, Inc. ('Aurora')), and Aurora has indemnified
Riddell for any losses it may incur in connection with any product liability
claims asserted prior to September 23, 1994. Upon completing the 1991
acquisition, Riddell immediately discontinued the Maxpro football helmet
business formerly conducted by Aurora. As of April 30, 1997, there were no
product liability claims with respect to Aurora products pending against
Riddell. Some states impose liability for product liability claims on successors
that continue the business of manufacturing or distributing the same products.
The laws of successor liability, which vary from state to state, may result in
Riddell being found liable on some or all of any future claims.
Properties
Riddell has 14 locations, 10 of which are used in its reconditioning
operations. Riddell owns its principal football helmet manufacturing facility
located in Chicago, Illinois. In 1995 Riddell closed a facility that
manufactured certain sports collectible products. In February 1994, Riddell sold
its foam product manufacturing plant in Wauseon, Ohio. Varsity leases its
facilities throughout the U.S. The Company believes its properties, machinery
and equipment are adequate for its current requirements.
Set forth below is certain information regarding the Company's principal
properties:
<TABLE>
<CAPTION>
LEASE
SQUARE EXPIRATION
LOCATION PRINCIPAL USE FOOTAGE DATE
- ---------------------------- ------------------------- ------- --------------
<S> <C> <C> <C>
New York, New York Corporate headquarters 3,800 September 1999
Chicago, Illinois Headquarters of Riddell, 95,000 Owned
Inc. and helmet
manufacturing
Elk Grove Village, Illinois Warehouse and 83,000 March 2000
distribution center
Elyria, Ohio Headquarters for All 39,000 May 2000
American Sports Corp.
reconditioning operations
and customer service
San Antonio, Texas(1) Reconditioning 27,000 October 1998
Stroudsburg, Pennsylvania Reconditioning and 44,000 October 1998
shoulder pad customizing
Belton, Missouri Reconditioning 6,600 January 1999
Buffalo, New York(2) Warehouse 6,400 Month-to-month
Burgettestown, Pennsylvania Reconditioning 17,000 September 2013
Franklin Park, Illinois Reconditioning 16,000 June 2000
Fort Valley, Georgia(2) Reconditioning 15,000 October 1997
Ft. Erie, Ontario, Canada(2) Reconditioning 5,000 September 1997
New Rochelle, New York Reconditioning 23,000 January 2000
Union City, California(3) Reconditioning 23,000 September 1997
Memphis, Tennessee(4) Office/Warehouse/Production 63,700 October 1997
Memphis, Tennessee Warehouse 21,500 October 1997
Sunnyvale, California Office/Warehouse 10,030 November 2000
Decatur, Georgia Sport Gym 12,000 July 1998
Carrollton, Texas Sport Gym 11,050 January 2000
Bellaire, Texas Office 2,984 November 1997
</TABLE>
- ------------------
(1) Lease is subject to renewal by Riddell for three years.
(2) Riddell is currently negotiating a renewal lease for this property.
(Footnotes continued on next page)
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(Footnotes continued from previous page)
(3) Riddell has entered into a lease for an alternate facility.
(4) This facility is subject to renewal at tenant's option. Varsity is currently
evaluating whether to renew this lease or find alternate facilities.
LEGAL PROCEEDINGS
Riddell and its subsidiaries from time to time become involved in various
claims and lawsuits incidental to their businesses including without limitation,
employment related and product liability litigation. See '--Product Liability
Proceedings and Insurance.' Varsity is not a party to any litigation that is
expected to have a material adverse effect on its business.
Mac I Fraudulent Transfer Action and State Law Debtor and Creditor Claim
On August 5, 1997, the Company settled an action commenced against it in
March 1995 by the trustee for MacGregor Sporting Goods, Inc. ('Mac I') and the
trustee for MGS Acquisition, Inc. (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.) (the 'Levitt Action')). The settlement agreement
(the 'Settlement Agreement') was approved by order of the New Jersey Bankruptcy
Court (the 'Mac Order'), which also dismissed the action with prejudice. The
action sought monetary damages and/or the rescission of Riddell's acquisitions
(the 'MacGregor Acquisitions') in 1988 and 1989 of substantially all the assets
and businesses of two former, second-tier subsidiaries of Mac I, including,
among other things, the football protective division, the MacGregor licensing
business and the nonfootball uses of the Riddell trademark for, among other
claims, 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 complaint sought monetary damages in an unspecified amount plus
interest and/or rescission in connection with the MacGregor Acquisitions. In
addition to seeking monetary damages and/or rescission from Riddell, the
complaint sought to void the liens of NBD Bank in the property at issue. The
complaint also sought damages against Frederic H. Brooks ('Brooks'), a former
President of Riddell, for breaches of fiduciary duties to Mac I for failing to
obtain fair consideration in connection with these transactions.
The terms of the Settlement Agreement are described below under, '--Terms
of the Settlement Agreement.'
The Settlement Agreement also settles, and the Mac Order dismisses with
prejudice, the claims made against Riddell in a state law debtor and creditor
action initiated against Riddell by Innovative Promotions, Inc. and certain
other purported unsecured creditors of Mac I based on substantially the same
claims as were made in the Trustees' (as defined herein) actions in the New
Jersey Bankruptcy Court. This action was removed to 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 'Innovative
Action'). The plaintiffs in the Innovative Action sought rescission of, and/or
monetary damages in excess of $22 million exclusive of interest relating to the
MacGregor 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 sought judgments voiding the liens of NBD Bank
with respect to the assets. In June 1995, the trustee in the Levitt action (the
'Levitt Trustee,' and together with the trustees in the Mac I and MGS
Aquisition, Inc. bankruptcy proceedings, the 'Trustees') intervened as
plaintiffs in the Innovative Action purportedly to preserve their rights in the
event they lost the Levitt Action.
The Settlement Agreement also settles, and the Mac Order dismisses with
prejudice, certain claims brought against Riddell by Brooks in the Levitt
Action. See '--Terms of the Settlement Agreement.'
Employee Litigation
From time to time Riddell is party to employee litigation claims including,
without limitation, workers compensation and wrongful termination claims. In
June 1995, a subsidiary of the Company was served with a complaint entitled,
Beverly A. Eichler v. Riddell, Inc. (D. Ct, N.D. III., E. Div.), No. 95-C-3782.
The complaint, brought by a former employee of one of Riddell's subsidiaries who
was terminated in December 1993, alleged sex and age discrimination and sought
past and future wages and punitive damages in an undisclosed amount. In early
1997, a jury awarded Ms. Eichler damages in the amount of $59,000 and the court
assessed front-pay
82
<PAGE>
damages of $420,000. Plaintiff filed a motion for her attorneys' fees and
expenses in the amount of $386,000. In July 1997, the Company settled this
action for less than the total of (i) damages previously awarded and assessed
and (ii) plaintiff's attorneys' fees and expenses.
The Settlement Agreement also settles counterclaims and other claims
against Riddell, two of its officers and directors and Riddell's footwear
licensee arising out of an action captioned Riddell Sports Inc. v. Frederic H.
Brooks (D.C., SDNY), 92 Civ. 7851 (JGK) (the 'Brooks Action'). Brooks generally
alleged that Riddell breached its indemnification obligations to him as a former
officer and director of Riddell and sought damages in excess of $3.9 million,
plus future attorneys' fees and interest. Brooks also sought compensatory and
punitive damages combined of at least $15 million for alleged tortious
interference with prospective advantage, prima facie tort and other claims
against Riddell, two of its officers and directors and an entity controlled by
them. Riddell had agreed to indemnify its footwear licensee and certain of its
affiliates in connection with Brooks' claims against them.
Terms of the Settlement Agreement
On June 20, 1997, the Company entered into the Settlement Agreement for the
proposed settlement of, among others, the Levitt Action, the Innovative Action
as well as the counterclaims asserted against Riddell and its affiliates and two
directors in the Brooks action.
On July 24, 1997, the New Jersey Bankruptcy Court approved the Settlement
Agreement. Generally, the Settlement Agreement releases Riddell and its
affiliates from all claims in these actions and requires Riddell to pay an
aggregate of $2.3 million of which Riddell previously reserved $1.4 million and
of which Riddell previously escrowed and expensed approximately $0.7 million.
Pursuant to the Settlement Agreement, the Company will assign to the Levitt
Trustees (or any successor trustee or other person approved by the New Jersey
Bankruptcy Court) and to Brooks royalties, to the extent paid, of up to $3.0
million, on a present value basis, generally over ten years from its present or
any future 'Riddell' footwear licensee. The Settlement Agreement provides that,
subject to certain conditions, Riddell will enter into a new license agreement
with its current footwear licensee on substantially the same terms as its
existing license. See '--Riddell--Trademarks, Service Marks and License
Agreements.'
83
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and positions of each of the
individuals that serve as directors and executive officers of the Company. All
directors will hold office until the next annual meeting of stockholders of the
Company and until their successors are duly elected and qualified, and all
executive officers will hold office at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- -------------------------- --- -----------------------------------------------
<S> <C> <C>
Robert E. Nederlander 64 Chairman of the Board
David M. Mauer 48 Director, President and Chief Executive Officer
Jeffrey G. Webb* 47 Vice Chairman of the Board of the Company and
President and Chief Operating Officer of the
Varsity Group Division
Leonard Toboroff 65 Director and Vice President
Don R. Kornstein 45 Director
John McConnaughy, Jr. 68 Director
Glenn E. 'Bo' Schembechler 68 Director
Dan Cougill 44 President and Chief Operating Officer of the
Riddell Group Division
David Groelinger 47 Executive Vice President and Chief Financial
Officer
</TABLE>
- ------------------
* Pursuant to the Merger Agreement, Mr. Webb has the right to designate an
additional director to serve on the Board.
Robert E. Nederlander has been Chairman of the Board of the Company since
the Acquisition. Prior thereto, Mr. Nerderlander served as Chairman of the Board
of Riddell from May 1988 until the Acquisition and was Riddell's Chief Executive
Officer from May 1988 through May 1, 1993. From February until June 1992, Mr.
Nederlander was also Riddell's interim President and Chief Operating Officer.
Mr. Nederlander has been President and Director since November 1981 of the
Nederlander Organization, Inc., owner and operator of one of the world's largest
chains of live theaters. He served as the Managing General Partner of the New
York Yankees from August 1990 until December 1991, and has been a limited
partner since 1973. Mr. Nederlander has been President since October 1985 of the
Nederlander Television and Film Productions, Inc., Chairman of the Board since
January 1988 of Mego Financial Corporation and Vice President of the Board since
February 1988 to early 1993 of Vacation Spa Reports, Inc. (an affiliate of Mego
Financial Corporation). Mr. Nederlander became a director of Mego Mortgage
Corporation in September 1996. Mr. Nederlander became Chairman of the Board of
Allis-Chalmers Corp. in May 1989; from 1993 through October 1996, he was Vice
Chairman and, thereafter, he remained solely a director. In 1995, Mr.
Nederlander became a director of HFS Incorporated. In October 1996, Mr.
Nederlander became a director of New Communications, Inc., a publisher of
community-oriented free circulation newspapers. Mr. Nederlander was a senior
partner in the law firm of Nederlander, Dodge and Rollins in Detroit, Michigan,
between 1960 and 1989.
David M. Mauer has been President, Chief Executive Officer and a Director
of the Company since the Acquisition. Prior thereto, Mr. Mauer served as
Riddell's Chief Executive Officer from April 1993 until the Acquisition, when he
succeeded Mr. Nederlander. Mr. Mauer was a member of the Board of Directors of
Riddell from September 1993 until the Acquisition. Mr. Mauer was President of
Mattel U.S.A. from late 1990 through the beginning of 1993 and was President of
Tonka U.S.A. Toy Group from 1988 until 1990. In 1995, Mr. Mauer was elected a
member of the Board of Directors of The Topps Company, Inc.
Jeffrey G. Webb has been the Chairman of the Board, President and Chief
Executive Officer of Varsity since its formation in 1974. Mr. Webb has been the
Vice Chairman of the Board of the Company and the President and Chief Operating
Officer of the Varsity Group Division since the Merger.
84
<PAGE>
Leonard Toboroff has been Vice President and a Director of the Company
since the Acquisition. Prior thereto, Mr. Toboroff served as a member of the
Board of Directors and a Vice President of Riddell from April 1988 until the
Acquisition. Since May 1989, Mr. Toboroff has been a Vice President and Vice
Chairman of the Board of Allis-Chalmers Corp. Mr. Toboroff has been a practicing
attorney since 1961 and from January 1, 1988 to December 31, 1990, was counsel
to Summit Solomon & Feldesman in New York City, which was counsel to Riddell
from April 1988 though February 1993. He has been a Director since August 1987
and was Chairman and Chief Executive Officer from December 1987 to May 1988 of
Ameriscribe Corp. Mr. Toboroff was Chairman and Chief Executive from May through
July 1982, and then was Vice Chairman from July 1982 through September 1988 of
American Bakeries Company. Mr. Toboroff has been a director of Banner Aerospace,
Inc., a supplier of aircraft parts since September 1992. He has been a director
of Engex, Inc. and director of Saratoga Springs Beverage Co. since 1993. In
1995, Mr. Toboroff became a director of Xplor Corporation.
Don R. Kornstein has been a Director of the Company since the Acquisition.
Prior thereto, Mr. Kornstein served as a member of the Board of Directors of
Riddell from April 1995 until the Acquisition. Mr. Kornstein has been a member
of the Board of Directors, Chief Executive Officer and President of Jackpot
Enterprises, Inc. since September 1994. Mr. Kornstein was a Senior Managing
Director at Bear, Stearns & Co. Inc. for 17 years through September 1994.
John McConnaughy, Jr. has been a Director of the Company since the
Acquisition. Prior thereto, Mr. McConnaughy served as a member of the Board of
Directors of Riddell from September 1989 until the Acquisition. Mr. McConnaughy
has been Chairman and Chief Executive Officer of JEMC Corp. since 1988. From
1969 to 1986, Mr. McConnaughy served as Chairman and Chief Executive Officer of
Peabody International Corp. ('Peabody'). From 1981 to 1992, he served as
Chairman and Chief Executive Officer of GEO International Corp., after which it
was spun off from Peabody in 1981. Mr. McConnaughy is a Director of DeVlieg
Bullard Inc., Mego Financial Corporation, Transact International, Inc., Levcor
International, Inc., and Wave Systems, Inc. GEO International Inc. filed a
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in
October 1993.
Glenn E. 'Bo' Schembechler has been a Director of the Company since the
Acquisition. Prior thereto, Mr. Schembechler served as a member of the Board of
Directors of Riddell from September 1991 until the Acquisition. Mr. Schembechler
was President of the Detroit Tigers from January 1990 through August 1992 and a
member of the Detroit Tigers Board of Directors from 1989 through 1990. He is
also Director of Midland Company. From 1968 through 1989, Mr. Schembechler was
head football coach of the University of Michigan and served as its Athletic
Director in 1988 and 1989.
Dan Cougill has been President and Chief Operating Officer of the Company's
Riddell Group Division since the Acquisition. Prior thereto, Mr. Cougill was
President and Chief Operating Officer of Riddell from June, 1995 until the
Acquisition and of its subsidiary, Riddell, Inc. from February, 1994 until the
Acquisition. Prior to his appointment, Mr. Cougill was previously employed in
various capacities by Wilson Sporting Goods since 1977 and was Vice President of
Wilson Sporting Goods and the General Manager of its Team Sports Division prior
to joining Riddell.
David Groelinger has been Executive Vice President and Chief Financial
Officer of the Company since the Acquisition. Prior thereto, Mr. Groelinger was
Riddell's Chief Financial Officer from March 1996 and Executive Vice President
from June 1996 until the Acquisition. From 1994 to 1995, he was a member of the
Board of Directors, Executive Vice President and Chief Financial Officer of
Regency Holdings (Cayman) Inc., which owned and operated a major international
cruise line. Prior to 1994, Mr. Groelinger served in various senior financial
capacities during his twelve years at Chiquita Brands International, Inc. In
1990, he was promoted to Vice President reporting to Chiquita's President and
Chief Operating Officer. Regency Holdings (Cayman) Inc. filed a petition to
reorganize under Chapter 11 of the United States Bankruptcy Code in November
1995.
COMPENSATION OF DIRECTORS
Directors who are not officers of Riddell received fees in 1996 of $15,000
per annum. Directors who are members of the Audit and Compensation Committees of
the Board (Messrs. McConnaughy, Kornstein and Schembechler) are also each paid
an aggregate additional amount of $5,000 per annum for their Committee
memberships. In 1996, the Company paid Mr. McConnaughy consulting fees of
$75,000; Mr. McConnaughy
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<PAGE>
waived his directors' fees in 1996. In 1996, Mr. Schembechler was paid fees of
$20,000 for services rendered in connection with a series of promotional
football clinics sponsored by the Company in addition to his director's fees.
During 1996, directors other than Mr. Mauer were granted options to
purchase 7,500 shares of the Company's Common Stock at an exercise price of
$4.75 per share. Mr. Mauer was granted an option in 1996 to acquire 50,000
shares of Common Stock at an exercise price of $4.50 per share.
Riddell has agreed to indemnify each director against certain claims and
expenses for which the director might be held liable in connection with services
on the Board. In addition, the Company maintains an insurance policy insuring
its directors and officers against such liabilities.
During the calendar year ended December 31, 1996, there were 6 meetings of
the Board of Directors of Riddell, and all members attended each meeting. There
was one meeting of each of the Audit, Compensation and Executive Committees,
attended by all members in each case. Additionally, there was one Action by
Unanimous Written Consent of the Compensation Committee in 1996.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth the cash compensation paid to or accrued for
Riddell's Chief Executive Officer and its four most highly paid executive
officers in 1996 for services rendered in all capacities to the Company and its
subsidiaries during the fiscal years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(2) COMPENSATION(4)
- ------------------------------- ---- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
David M. Mauer ................ 1996 $500,000 -- -- 50,000 $ 4,620
Chief Executive Officer 1995 457,500 $170,000 -- 50,000 4,620
1994 420,000 120,000 -- 100,000(3) 1,100
Robert E. Nederlander ......... 1996 $180,656 -- -- 7,500 --
Chairman of the Board 1995 173,355 -- -- 15,000 --
1994 166,565 -- -- 15,000 --
Leonard Toboroff .............. 1996 $180,656 -- -- 7,500 $13,614
Vice President 1995 173,355 -- -- 15,000 11,647
1994 166,565 -- -- 15,000 1,422
Dan Cougill ................... 1996 $230,000 -- -- 15,000 $ 4,750
President and Chief Operating 1995 206,923 $ 60,000 -- 15,000 4,322
Officer 1994 180,000 110,000 -- 75,000 --
David Groelinger .............. 1996 $143,308(5) $ 25,000(6) -- 65,000 --
Chief Financial Officer and
Executive Vice President
</TABLE>
- ------------------
(1) Perquisites and other personal benefits paid in 1996 for the named executive
officers aggregated less than the lesser of $50,000 and 10% of the total
annual salary and bonus set forth in the columns entitled, 'Salary' and
'Bonus' for each named executive officer and, accordingly, are omitted from
the table as permitted by the rules of the Commission.
(2) These options were issued under Riddell's 1991 Stock Option Plan.
(Footnotes continued on next page)
86
<PAGE>
(Footnotes continued from previous page)
(3) In 1994 Riddell canceled an option previously granted to Mr. Mauer to
acquire 100,000 shares of Common Stock and in its place issued an option to
acquire an equal number of shares at a lower exercise price per share.
(4) Represents Riddell's contribution to its 401K Plan on behalf of the
employee, and in the case of Mr. Toboroff, includes the dollar value of
approximately $9,000 and $7,000 of insurance premiums paid on behalf of Mr.
Toboroff for 1996 and 1995, respectively under an Indeterminate Premium One
Year Term Life Policy pursuant to which he will receive the cash surrender
value.
(5) Based on an annual salary of $180,000 pursuant to an employment agreement
between Riddell and Mr. Groelinger. See '--Employment Agreements.'
(6) Paid pursuant to the employment agreement between Riddell and Mr.
Groelinger. See '--Employment Agreements.'
STOCK OPTIONS GRANTED IN 1996
The following table sets forth information concerning individual grants of
stock options made during 1996 to each executive officer listed below pursuant
to the Riddell's 1991 Stock Option Plan.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS GRANTED EXERCISE STOCK PRICE
UNDERLYING TO EMPLOYEES IN PRICE EXPIRATION APPRECIATION FOR
NAME OPTIONS GRANTED FISCAL YEAR PER SHARE DATE OPTION TERM(5)
- ------------------------ --------------- --------------- --------- ---------- -------------------
5% 10%
-------- --------
<S> <C> <C> <C> <C> <C> <C>
David M. Mauer.......... 50,000(1) 21% $4.50 7/16/06 $141,501 $358,592
Dan Cougill............. 15,000(2) 6 4.31 12/17/06 40,682 103,095
David Groelinger........ 65,000(3) 27 4.63 3/7/06 189,061 479,119
Robert Nederlander...... 7,500(4) 3 4.75 6/27/06 22,404 56,777
Leonard Toboroff........ 7,500(4) 3 4.75 6/27/06 22,404 56,777
</TABLE>
- ------------------
(1) This option expires July 16, 2006, vests as to 25% of the underlying shares
on each of the first, second, third and fourth anniversaries of the date of
grant. The option is canceled upon a termination of employment for cause. In
the event Mr. Mauer's employment is terminated by Riddell, generally, other
than for cause, this stock option becomes fully exercisable for 90 days.
(2) Mr. Cougill's option vests as to 25% of the underlying shares on each of the
first, second, third and fourth anniversaries of the date of grant and
expires December 17, 2006. The option is canceled upon a termination of
employment for cause. In the event Mr. Cougill's employment is terminated by
Riddell, generally, other than for cause, the option becomes fully
exercisable for 90 days.
(3) Mr. Groelinger's option vests as to 25% of the underlying shares on each of
the first, second, third and fourth anniversaries of the date of grant and
expires March 7, 2006. The option is canceled upon a termination of
employment for cause. In the event Mr. Groelinger's employment is terminated
by Riddell, generally, other than for cause, the option becomes fully
exercisable for 90 days.
(4) Messrs. Nederlander and Toboroff were granted options together with the
other members of Riddell's Board of Directors (other than Mr. Mauer) in 1996
under Riddell's 1991 Stock Option Plan. The options are fully exercisable
commencing June 27, 1997 through June 27, 2006. Each option is canceled upon
a termination of employment for cause. In the event the individual's Board
membership terminates, generally, other than for cause, each stock option
becomes fully exercisable for 90 days.
(5) Based upon the per share market price on the date of grant and an annual
appreciation of such market price at the rate stated in the table through
the expiration date of such options. Gains, if any, are dependent upon the
(Footnotes continued on next page)
87
<PAGE>
(Footnotes continued from previous page)
actual performance of the Common Stock, as well as the continued employment
of the executive officers through the vesting period. The potential
realizable values indicated have not taken into account amounts required to
be paid as income tax under the Internal Revenue Code and any applicable
state laws.
STOCK OPTIONS HELD AT END OF 1996
The following table indicates the total number of exercisable and
unexercisable stock options held by each executive officer listed below on
December 31, 1996. No options to purchase Riddell's Common Stock were exercised
during 1996. On December 31, 1996, the last sales price of the Common Stock on
NASDAQ was $4.63 per share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David M. Mauer.......... 230,000 170,000 $ 268,950 $98,050
Dan Cougill............. 78,750 26,250 159,375 18,750
David Groelinger........ -- 65,000 -- --
Robert E. Nederlander... 71,000 7,500 69,375 --
Leonard Toboroff........ 71,000 7,500 69,375 --
</TABLE>
EMPLOYMENT AGREEMENTS
In June 1992, Riddell entered into an employment agreement with each of
Messrs. Nederlander and Toboroff. Each agreement continues until terminated by
Riddell, with termination being effective three years after Riddell delivers
notice of termination or, if earlier, upon the death or disability of the
employee. The agreements are immediately terminable by Riddell for Cause (as
defined therein). Bonuses are discretionary with the Board. Each agreement
provides a base salary of $162,500 which may be increased in the discretion of
the Board, provided that, in any event, each year the salaries are increased at
least by the percentage increase in the Consumer Price Index. The current salary
of Messrs. Nederlander and Toboroff is $194,135. Each agreement provides that in
the event the Company terminates the employee's employment, generally, other
than for Cause, the employee will receive his full salary through the end of the
term of his agreement and annual bonuses for the remainder of the term equal to
the average of the annual bonuses awarded to the employee prior to termination.
Each agreement acknowledges that the employee will devote time and provide
services to entities other than the Company.
In April 1993, Riddell entered into an employment agreement with Mr. Mauer.
The agreement, as amended in 1994, provides an annual base salary in such amount
in excess of $400,000 as the Board of Directors may determine from time to time.
The agreement provides for years after 1993 that the Board of Directors and Mr.
Mauer establish target bonuses based upon measures to be agreed upon before the
beginning of each calendar year, and that Mr. Mauer's bonus will be a
percentage, not to exceed 100%, of his base salary based upon the percent of the
targets achieved. The agreement continues until terminated by Riddell, with
termination effective three years after Riddell delivers notice of termination
or, if earlier, until Mr. Mauer's death or disability. The agreement is
immediately terminable for Cause (as defined therein). Pursuant to his
employment agreement, Mr. Mauer was granted an option for ten years to acquire
300,000 shares of the Company's Common Stock at an average price of $3.63 per
share. In the event Mr. Mauer's employment is terminated, generally, other than
for Cause, Mr. Mauer will receive his salary for a period of three years plus a
pro rata portion of the bonus earned through the date of termination, and his
options become fully exercisable for one year.
Riddell entered into an employment agreement with Mr. Cougill as of
February 1, 1994, providing for a $50,000 signing bonus, an annual salary of
$200,000 per annum and minimum bonus of $50,000 for 1994. Pursuant to his
employment agreement, Mr. Cougill was granted an Option for five years to
purchase 75,000 shares of the Company's Common Stock at $2.56 per share. In the
event Mr. Cougill's employment is terminated
88
<PAGE>
by the Company, generally, other than for Cause (as defined therein), Mr.
Cougill will receive his full salary for a period of one year plus the pro rata
portion of his bonus earned through the date of termination by the Company, and
his options become exercisable in full for one year. The agreement is
immediately terminable for Cause and, unless renewed, expires in May 1998.
Riddell entered into a two year employment agreement with Mr. Groelinger
effective March 1996 in connection with his joining Riddell as Chief Financial
Officer. The agreement provides for an annual base salary of $180,000 and a
guaranteed minimum bonus for 1996 of $25,000. Thereafter, bonuses will be a
percentage of his salary, with a target of 40%. Pursuant to his employment
agreement, Mr. Groelinger was granted a ten year option to purchase 65,000
shares of the Company's Common Stock at an exercise price of $4.63 per share.
The agreement is immediately terminable for Cause (as defined therein). The
agreement provides generally that if Mr. Groelinger's employment is terminated
other than for Cause, he will be paid no less than one year's salary (two years'
salary in the event termination arises in connection with a Change of Control
(as defined therein)) plus a pro rata portion of his bonus through the date of
termination, and his stock options become immediately exercisable for one year
to the extent then vested.
In addition, in connection with the Transactions, the Company has entered
into an employment agreement with Mr. Webb on May 5, 1997 which will become
effective after the Merger is consummated. Under the terms of such agreement,
which has a three-year term, Mr. Webb will serve as Vice Chairman of the Board
of Directors of the Company, as well as President and Chief Operating Officer of
the Varsity Group Division. Mr. Webb will be entitled to a base salary of no
less than $375,000 per year and will be eligible to participate in those bonus
arrangements which are made available to other senior officers of the Company at
a target level of 40% of his base salary. Pursuant to his employment agreement,
Mr. Webb will receive options to purchase 50,000 shares of common stock of the
Company and 'special options' to purchase an additional 347,760 shares. The per
share exercise price of the 50,000 options shall be equal to the average closing
price of a share of the Company's Common Stock over the ten consecutive trading
days ending on the date immediately prior to the date of grant. The per share
exercise price of the 347,760 special options will be $3.80. Upon termination of
Mr. Webb's employment (i) by the Company without Cause (as defined therein),
(ii) by Mr. Webb with Good Reason (as defined therein, including a material
adverse alteration in his status or responsibilities and relocation more than 50
miles from Memphis, Tennessee), or (iii) following a Change in Control (as
defined therein), Mr. Webb will receive continued payments of base salary for
the longer of the remainder of the term and one year (two years in case of
termination following a Change in Control), as well as certain benefits. Mr.
Webb is subject to a noncompetition covenant generally for a period of two years
following the termination of his employment for any reason. Pursuant to his
employment agreement, Mr. Webb agreed to become a party to the Stockholders
Agreement.
The stock options granted to Messrs. Mauer, Webb, Cougill and Groelinger in
connection with their employment agreements become immediately exercisable in
the event of a change of control (as defined in their respective employment
agreements).
89
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of July 11, 1997
regarding the ownership of the capital stock of the Company with respect to (i)
each person known by the Company to own beneficially more than 5% of the
outstanding shares of any class of its voting capital stock, (ii) each of the
Company's directors, (iii) each of the executive officers of the Company and
(iv) all directors and executive officers as a group. Except as otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
-------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
- -------------------------------------------------- --------- ------
<S> <C> <C>
M.L.C. Partners Limited Partnership(1) ........... 830,281 9.1%
c/o Robert Nederlander
810 Seventh Avenue
New York, NY 10019
Robert E. Nederlander(2) ......................... 5,260,387 51.9%
810 Seventh Avenue
New York, NY 10019
David M. Mauer(3) ................................ 361,525 3.9%
Riddell Sports Inc.
900 Third Avenue/27th Fl.
New York, NY 10022
Jeffrey G. Webb(4) ............................... 1,109,887 11.8%
Varsity Spirit Corporation
2525 Horizon Lake Drive
Memphis, TN 38133
Leonard Toboroff(5) .............................. 1,342,003 14.7%
Riddell Sports Inc.
900 Third Avenue/27th Fl.
New York, NY 10022
Don R. Kornstein(6) .............................. 35,000 *
Riddell Sports Inc.
900 Third Avenue/27th Fl.
New York, NY 10022
John McConnaughy, Jr.(7) ......................... 714,308 7.8%
300 Atlantic Street
Stamford, CT 06901
Glenn E. 'Bo' Schembechler(6) .................... 37,500 *
870 Arlington
Ann Arbor, MI 48104
Dan Cougill(8) ................................... 88,927 1.0%
Riddell, Inc.
3670 N. Milwaukee Avenue
Chicago, IL 60641
David Groelinger(9) .............................. 19,750 *
Riddell Sports Inc.
900 Third Avenue/27th Fl.
New York, NY 10022
All executive officers and directors listed above,
as a group(10).................................. 5,352,637 52.8%
Angelo, Gordon & Co., L.P.(11) ................... 1,395,000 13.4%
245 Park Avenue
New York, NY 10167
</TABLE>
- ------------------
* Less than 1%
(Footnotes continued on next page)
90
<PAGE>
(Footnotes continued from previous page)
(1) Includes 43,750 shares underlying a warrant (the 'Warrant') which are
currently exercisable. M.L.C. Partners Limited Partnership ('MLC') is the
direct beneficial owner of all shares, which (other than shares underlying
the Warrant) are subject to a voting trust (the 'Voting Trust') pursuant to
which Robert Nederlander is voting trustee (the 'Voting Trustee') and has
the sole voting power. Mr. Nederlander, as controlling stockholder of the
corporation which is the general partner of MLC, may be deemed to
beneficially own these shares. Mr. McConnaughy is the sole owner of a
corporation that is a limited partner in MLC. A corporation controlled by
Mr. Nederlander is also a limited partner in MLC.
(2) Of the 5,260,387 shares beneficially owned by Mr. Nederlander: (i)
1,643,737 shares are owned by Mr. Nederlander directly or through entities
controlled by him having dispositive power over these shares (105,989 of
these 1,643,737 shares underlie options granted under the Company's 1991
Stock Option Plan or the Warrant which are exercisable within 60 days of
July 11, 1997, 830,281 of such 1,643,737 shares are owned by MLC and
983,123 of such 1,643,737 shares are subject to the Voting Trust) and (ii)
an additional 3,616,650 shares are beneficially owned by Mr. Nederlander as
Voting Trustee under the Voting Trust and pursuant to a shareholders
agreement (the 'Principal Shareholders Agreement') dated as of August 1995,
as amended, pursuant to which, generally, the parties thereto agree to vote
the outstanding shares of the Company's Common Stock owned by them directly
and beneficially in the same manner that Mr. Nederlander votes the shares
of stock in the Voting Trust with respect to which he is Voting Trustee.
Under Rule 13d-3 of the Securities Exchange Act of 1934, as amended, Mr.
Nederlander is deemed to beneficially own the shares of stock subject to
the Voting Trust and the Principal Shareholders Agreement and owned by MLC.
(3) The 361,525 shares of Common Stock beneficially owned by Mr. Mauer are
subject to the Principal Shareholders Agreement and 305,259 of these shares
are issuable in connection with options granted under the Company's 1991
Stock Option Plan and the Warrant that are exercisable within 60 days of
July 11, 1997.
(4) The 1,109,887 shares of Common Stock beneficially owned by Mr. Webb are
subject to the Principal Shareholders Agreement and 347,760 of these shares
underlie an option the Company has agreed to grant upon consummation of the
Merger and which will be fully exercisable on the date of grant.
(5) The 1,342,003 shares of Common Stock beneficially owned by Mr. Toboroff are
subject to the Principal Shareholders Agreement and 91,038 of these shares
underlie options granted under the Company's 1991 Stock Option Plan and the
Warrant that are exercisable within 60 days of July 11, 1997.
(6) Represents shares underlying an option granted under the Company's 1991
Stock Option Plan that are exercisable within 60 days of July 11, 1997.
(7) Of the 714,308 shares of Common Stock beneficially owned by Mr.
McConnaughy: (i) 147,444 are subject to the Voting Trust, (ii) 566,864 are
subject to the Principal Shareholders Agreement and (iii) 62,239 shares
underlie options granted under the Company's 1991 Stock Option Plan and the
Warrant that are exercisable within 60 days of July 11, 1997.
(8) The 88,927 shares of Common Stock beneficially owned by Mr. Cougill are
subject to the Principal Shareholders Agreement and 79,225 of these shares
underlie options granted under the Company's 1991 Stock Option Plan and the
Warrant that are exercisable within 60 days of July 11, 1997.
(9) Includes 16,250 shares underlying that portion of an option to acquire an
aggregate of 65,000 shares that is exercisable within 60 days of July 11,
1997.
(10) Includes the 830,281 shares owned by MLC.
(11) Based on a Schedule 13G filed February 13, 1997, Angelo, Gordon & Co., L.P.
may be deemed to be the beneficial owner of 1,395,000 shares as a result of
voting and dispositive powers it holds with respect to $1,000,000 principal
amount of the Company's 4.1% Convertible Subordinated Note due November 1,
2004 (the 'Convertible Note') convertible at $5.3763 per share into 186,000
shares of the Company's Common Stock held for its own account and
$6,500,000 principal amount of the Convertible Note convertible into
1,209,000 shares of Common Stock which it holds for the account of private
investment funds for which it acts as general partner and/or investment
advisor or investment manager.
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CERTAIN TRANSACTIONS
In September 1988, Riddell issued a subordinated secured term note (the
'Subordinated Note') in the original principal amount of $2.0 million to M.L.C.
Partners Limited Partnership ('MLC') in connection with a recapitalization. In
the recapitalization, Riddell issued Common Stock in exchange for (i) Class A
Common Stock of Riddell owned by MLC (which had a preferential right to receive
$4.0 million before any dividends or distributions were to be made to any other
stockholders), (ii) Class B Common Stock owned by Mac I (from certain
subsidiaries of which Riddell acquired its initial businesses in April 1988 for
certain cash consideration, Class B Common Stock, long term notes and assumed
liabilities) and (iii) Class B Common Stock owned by Mr. Frederic Brooks (the
Company's President and Chief Operating Officer until February 1992). Originally
due in 1993, the Subordinated Note was extended until January 1998, subject to
mandatory prepayments relating to cash flow measurement and changes in
capitalization. The outstanding balance of the Subordinated Note was repaid in
accordance with its terms in November 1996. The Subordinated Note bore interest
at 10% per annum, was secured by a lien on substantially all of the assets of
Riddell and was subordinated to Riddell's indebtedness to NBD Bank.
In 1994, Riddell granted MLC a warrant to purchase 150,000 shares of its
Common Stock in consideration for the extension of the Subordinated Note. In
August 1995, certain of the original partners withdrew from MLC, and in
connection with the restructuring of MLC, Messrs. Cougill, Mauer, McConnaughy,
Nederlander and Toboroff or entities controlled by them acquired interests in
the warrant.
In May 1991, Messrs. Nederlander, Toboroff, Epstein, McConnaughy and Brooks
(the 'Investors') acquired from a party not affiliated with Riddell a promissory
note with an aggregate principal amount of $439,000. The note was originally
issued in April 1988 to Mac I in connection with the acquisition described
above. The unaffiliated seller had acquired substantially all of the assets of
Mac I's successor, MacGregor Sports Inc., in a sale authorized during the
successor's bankruptcy proceedings. In August 1995, Mr. Epstein transferred his
interest in the note to Messrs. Cougill, Mauer, McConnaughy, Nederlander and
Toboroff in connection with the restructuring of MLC. The note was paid in full
in June 1997 in connection with the refinancing relating to the New Credit
Facility. The note was due in April 1998, bore simple interest at the rate of 8%
per annum and was unsecured.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation of the Company contains provisions
eliminating the personal liability of directors for monetary damages for
breaches of their duty of care, except in certain prescribed circumstances. The
Bylaws of the Company also provides that directors and officers will be
indemnified to the fullest extent authorized by law, as it now exists or may in
the future be amended, against all expenses and liabilities reasonably incurred
in connection with service for or on behalf of the Company. The Bylaws of the
Company provide that the right of directors and officers to indemnification is
not exclusive of any other right now possessed or hereinafter acquired under any
statute, agreement or otherwise.
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DESCRIPTION OF THE SENIOR NOTES
GENERAL
The New Notes will be issued pursuant to an Indenture (the 'Indenture')
between the Company, the Guarantors and Marine Midland Bank, as trustee (the
'Trustee'), a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus forms a part. The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (the 'Trust Indenture Act'). The Notes are subject
to all such terms, and Holders of Notes are referred to the Indenture and the
Trust Indenture Act for a statement thereof. The following summary of the
material provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. The definitions of certain
terms used in the following summary are set forth below under '--Certain
Definitions.' The form and terms of the New Senior Notes will be the same as
those of the Old Senior Notes except that the New Senior Notes will have been
registered under the Securities Act, and consequently will not be subject to
certain transfer restrictions, registration rights and related Liquidated
Damages provisions applicable to the Old Senior Notes. See '--Registration
Rights; Liquidated Damages' below. As of the date of this Prospectus, all of the
Company's Subsidiaries are Restricted Subsidiaries; however, under certain
circumstances, the Company will be able to designate Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many
of the restrictive covenants set forth in the Indenture and will not be required
to provide Subsidiary Guarantees. For purposes of this summary, the term
'Company' refers only to Riddell Sports Inc. and not to any of its Subsidiaries.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Senior Notes. As of
the date of this Prospectus, all of the Company's Subsidiaries will be
Guarantors.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are limited in aggregate principal amount to $115.0
million and mature on July 15, 2007. The Indenture provides for the issuance of
up to $25.0 million aggregate principal amount of additional Senior Notes having
identical terms and conditions to the Old Senior Notes (the 'Additional Senior
Notes'), subject to compliance with the covenants contained in the Indenture.
Any Additional Senior Notes will be part of the same issue as the Senior Notes
and will vote on all matters with the Senior Notes. For purposes of this
'Description of the Senior Notes' references to the Senior Notes do not include
Additional Senior Notes. Interest on the Senior Notes accrues at the rate of
10 1/2% per annum and will be payable semi-annually in arrears on January 15 and
July 15, commencing on January 15, 1998, to Holders of record on the immediately
preceding January 1 and July 1, respectively. Interest on the Senior Notes
accrues from the most recent date to which interest has been paid or, if no
interest has been paid, from June 19, 1997. Interest is computed on the basis of
a 360-day year comprised of twelve 30-day months. Principal, premium, if any,
and interest and Liquidated Damages, if any, on the Senior Notes will be payable
at the office or agency of the Company maintained for such purpose within the
City and State of New York or, at the option of the Company, payment of interest
and Liquidated Damages, if any, may be made by check mailed to the Holders of
the Senior Notes at their respective addresses set forth in the register of
Holders of Senior Notes; provided that all payments of principal, premium,
interest and Liquidated Damages with respect to Senior Notes the Holders of
which have given wire transfer instructions to the Company will be required to
be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Senior Notes will be issued in denominations of
$1,000 and integral multiples thereof.
RANKING
The Old Senior Notes are, and the New Senior Notes will be, general
unsecured obligations of the Company, ranking senior in right of payment to all
existing and future Indebtedness of the Company that is subordinated to the
Senior Notes and ranking pari passu in right of payment with all current and
future unsecured unsubordinated Indebtedness of the Company. All borrowings
under the New Credit Facility are secured by a Lien on substantially all of the
assets of the Company and its Subsidiaries and the Indenture restricts, but does
not
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prohibit, the Company and its Subsidiaries from incurring certain other
indebtedness and which can be secured with Liens on the assets of the Company
and its Subsidiaries. Consequently, the obligations of the Company under the
Senior Notes are effectively subordinated to its obligations under the New
Credit Facility and such other indebtedness to the extent of such assets. As of
March 31, 1997 on a pro forma basis after giving effect to the Acquisition, the
Company and its Subsidiaries would have had approximately $27.2 million
principal amount of secured indebtedness and $12.8 million would have been
available to be borrowed under the revolving portion of the New Credit Facility.
See 'Risk Factors--Ranking and Fraudulent Conveyance Considerations.' The
Company's obligations under the Indenture and the Senior Notes are guaranteed on
a senior, unsecured basis by each of the Guarantors. See '--Subsidiary
Guarantees.'
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Notes are jointly and
severally guaranteed on a senior unsecured basis (the 'Subsidiary Guarantees')
by the Guarantors. All of the Company's Subsidiaries, including Riddell, Inc.
and Varsity, are Restricted Subsidiaries and Guarantors of the Senior Notes. The
obligations of each Guarantor under its Subsidiary Guarantee are limited so as
not to constitute a fraudulent conveyance under applicable law. See, however,
'Risk Factors--Ranking and Fraudulent Conveyance Considerations.'
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than a
Guarantor or the Company) assumes all the obligations of such Guarantor,
pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the Senior Notes, the Indenture and the
Subsidiary Guarantee and (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of merger, consolidation or otherwise, of all of the capital stock of such
Guarantor) or the corporation acquiring the property (in the event of a sale or
other disposition of all or substantially all of the assets of such Guarantor)
will be released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See '--Repurchase at
the Option of Holders--Asset Sales.'
OPTIONAL REDEMPTION
The Senior Notes will not be redeemable at the Company's option prior to
July 15, 2002. Thereafter, the Senior Notes will be subject to redemption at any
time at the option of the Company, in whole or in part, upon not less than 30
nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on July 15 of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------- ----------
<S> <C>
2002.................. 105.25%
2003.................. 103.50%
2004.................. 101.75%
2005 and thereafter... 100.00%
</TABLE>
Notwithstanding the foregoing, at any time on or before July 15, 2000, the
Company may (but shall not have the obligation to) redeem, on one or more
occasions, up to 35% of the aggregate principal amount of the Senior Notes at a
redemption price equal to 110 1/2% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages thereon, if any, to the redemption
date, with the net cash proceeds of one or more Equity Offerings; provided that
at least $75.0 million aggregate principal amount of Senior Notes remain
outstanding immediately after the occurrence of such redemption; and provided
further, that such redemption shall occur within 45 days of the date of the
closing of such Equity Offering.
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SELECTION AND NOTICE
If less than all of the Senior Notes are to be redeemed or purchased in an
offer to purchase at any time, selection of Senior Notes for redemption or
purchase will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Senior Notes are
listed, or, if the Senior Notes are not so listed, on a pro rata basis; provided
that no Senior Notes of $1,000 or less shall be redeemed or purchased in part.
Notices of redemption may not be conditional. Notices of redemption or purchase
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date or purchase date to each Holder of Senior Notes to be
redeemed or purchased at its registered address. If any Senior Note is to be
redeemed or purchased in part only, the notice of redemption or purchase that
relates to such Senior Note shall state the portion of the principal amount
thereof to be redeemed or purchased. A new Senior Note in principal amount equal
to the unredeemed or unpurchased portion thereof will be issued in the name of
the Holder thereof upon cancellation of the original Senior Note. On and after
the redemption or purchase date, interest ceases to accrue on Senior Notes or
portions of them called for redemption or purchase.
MANDATORY REDEMPTION
Except as set forth below under '--Repurchase at the Option of Holders,'
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Senior Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Senior Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's Senior Notes
pursuant to the offer described below (the 'Change of Control Offer') at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the
date of purchase (the 'Change of Control Payment'). Within 30 days following any
Change of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Senior Notes on the date specified in such notice, which date
shall be no earlier than 30 days and no later than 60 days from the date such
notice is mailed (the 'Change of Control Payment Date'), pursuant to the
procedures required by the Indenture and described in such notice. The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Senior Notes
as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Senior Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all Senior
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the Senior Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Senior Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each Holder of Senior Notes so tendered the Change of Control Payment for such
Senior Notes, and the Trustee will promptly authenticate and mail (or cause to
be transferred by book entry) to each Holder a new Senior Note equal in
principal amount to any unpurchased portion of the Senior Notes surrendered, if
any; provided that each such new Senior Note will be in a principal amount of
$1,000 or an integral multiple thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Senior Notes to require that the
Company repurchase or redeem the Senior Notes in the event of a takeover,
recapitalization or similar transaction.
The Company's other senior Indebtedness, including the New Credit Facility,
contains prohibitions of certain events that would constitute a Change of
Control. In addition, the exercise by the Holders of Senior Notes of their right
to require the Company to repurchase the Notes could cause a default under such
other senior
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indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchases on the Company. Finally, the Company's
ability to pay cash to the Holders of Senior Notes upon a repurchase may be
limited by the Company's then existing financial resources. See 'Risk
Factors--Inability to Purchase Senior Notes upon a Change of Control.'
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Senior Notes validly tendered and not withdrawn under such Change
of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of 'all or substantially all'
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase 'substantially
all,' there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Senior Notes to require the Company
to repurchase such Senior Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) for any Asset Sale
other than an Asset Sale of Unrestricted Margin Stock, at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents; provided that the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet), of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Senior Notes or any guarantee thereof) that are assumed by the transferee of
any such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability and (y) any
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale
other than an Asset Sale of Unrestricted Margin Stock, the Company may apply
such Net Proceeds, at its option, (a) to permanently reduce Indebtedness under
the Credit Facilities (and correspondingly reduce commitments thereunder) or to
permanently reduce other Senior Indebtedness of the Company or any Guarantor or
(b) to the acquisition of a controlling interest in a Permitted Business, the
making of a capital expenditure or the acquisition of other long-term assets
(collectively 'Replacement Assets'). Pending the final application of any such
Net Proceeds, the Company may temporarily reduce revolving credit Indebtedness
or otherwise invest such Net Proceeds in any manner that is not prohibited by
the Indenture. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph will be deemed to
constitute 'Excess Proceeds.' When the aggregate amount of Excess Proceeds
exceeds $5.0 million, the Company will be required to make an offer to all
Holders of Senior Notes and Additional Senior Notes (an 'Asset Sale Offer') to
purchase the maximum principal amount of Senior Notes and Additional Senior
Notes that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the date of purchase,
in accordance with the procedures set forth in the Indenture. To the extent that
the aggregate amount of Senior Notes and Additional Senior Notes tendered
pursuant to an Asset Sale Offer is less than or equal to the Excess Proceeds,
the Company may use any remaining Excess Proceeds for general corporate
purposes. If the aggregate principal amount of Senior Notes and Additional
Senior Notes surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Senior Notes and Additional Senior Notes
to be purchased on a pro rata basis. Upon completion of such offer to purchase,
the amount of Excess Proceeds shall be reset at zero.
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CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's or
any of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company), provided that each Restricted Subsidiary of
the Company will be permitted to declare and pay dividends to the holders of
such Restricted Subsidiary's common Equity Interests on a pro rata basis; (ii)
purchase, redeem or otherwise acquire or retire for value (including, without
limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company, any Restricted Subsidiary of the
Company or any Affiliate of the Company (other than any such Equity Interests
owned by the Company or any Restricted Subsidiary of the Company); (iii) make
any payment on or with respect to, or purchase, redeem, defease or otherwise
acquire or retire for value, any Indebtedness that is subordinated to the Senior
Notes, except (x) a payment of interest or principal at Stated Maturity or (y)
pursuant to a change of control provision applicable to such subordinated
Indebtedness, provided that the Company has complied with the terms described
above under the caption '--Repurchase at the Option of Holders--Change of
Control' and has paid, or has made adequate provision in the reasonable judgment
of the Board of Directors for the payment of, the Senior Notes that have been or
may be tendered in response to a Change of Control Offer; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as 'Restricted Payments'),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption '--Incurrence of
Indebtedness and Issuance of Preferred Stock'; and
(c) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (including all Restricted
Payments permitted by the next succeeding paragraph but excluding
Restricted Payments permitted by clauses (ii), (iii) and (vi) of the next
succeeding paragraph), is less than the sum of (i) 50% of the Consolidated
Net Income of the Company for the period (taken as one accounting period)
from the beginning of the first fiscal quarter commencing after the date of
the Indenture to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds received by the Company from the issue or sale
since the date of the Indenture of Equity Interests of the Company (other
than Disqualified Stock) or of Disqualified Stock or debt securities of the
Company that have been converted into such Equity Interests (other than
Equity Interests (or Disqualified Stock or convertible debt securities)
sold to a Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock), plus (iii) to the extent that any Restricted Investment that was
made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition,
if any) and (B) the initial amount of such Restricted Investment and (C)
the amount resulting from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (in each case, such amount to be valued as provided
in the second succeeding paragraph) not to exceed the amount of Investments
previously made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary and which was treated as a Restricted Payment under
the Indenture.
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The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Company
in exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Restricted Subsidiary of the Company) of, other Equity
Interests of the Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption,
repurchase or other acquisition of pari passu or subordinated Indebtedness with
the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness;
(iv) the repurchase, redemption or other acquisition or retirement for value of
any Equity Interests of the Company or any Restricted Subsidiary of the Company
held by any member of the Company's (or any of its Restricted Subsidiaries')
management, employees or consultants pursuant to any management, employee or
consultant equity subscription agreement or stock option agreement; provided
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $500,000 in any twelve-month period
and no Default or Event of Default shall have occurred and be continuing
immediately after such transaction; (v) cash payments in lieu of fractional
shares issuable as dividends on preferred securities of the Company or any of
its Restricted Subsidiaries; provided that such cash payments shall not exceed
$50,000 in the aggregate in any twelve-month period and no Default or Event of
Default shall have occurred and be continuing immediately after such
transaction; and (vi) payments pursuant to the Varsity Merger Documents.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default; provided
that in no event shall the business currently operated by Riddell, Inc. and
Varsity be transferred to or held by an Unrestricted Subsidiary. For purposes of
making such determination, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the greatest of (x) the
net book value of such Investments at the time of such designation and (y) the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary. Any such designation by the Board of Directors shall
be evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the provisions of this covenant. If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption '--Incurrence of Indebtedness and
Issuance of Preferred Stock,' the Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described under the caption '--Incurrence of Indebtedness and
Issuance of Preferred Stock,' calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period,
and (ii) no Default or Event of Default would be in existence following such
designation.
In computing the Consolidated Net Income of the Company under the foregoing
clause (c)(i), (i) the Company may use audited financial statements for the
portions of the relevant period for which audited financial statements are
available on the date of determination and unaudited financial statements and
other current financial data based on the books and records of the Company for
the remaining portion of such period and (ii) the Company will be permitted to
rely in good faith on the financial statements and other financial data derived
from its books and records that are available on the date of determination. If
the Company makes a Restricted Payment that, at the time of the making of such
Restricted Payment, would in the good faith determination of the Company be
permitted under the requirements of the Indenture, such Restricted Payment
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will be deemed to have been made in compliance with the Indenture
notwithstanding any subsequent adjustments made in good faith to the Company's
financial statements affecting Consolidated Net Income of the Company for any
period.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
of Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $5.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant '--Restricted
Payments' were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, 'incur') any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock
(except that a Subsidiary of the Company may issue preferred stock to the
Company or to any Guarantor); provided, however, that the Company or the
Guarantors may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.0 to 1, if such incurrence or issuance is on or prior to September 30,
1999, or 2.25 to 1, if such incurrence or issuance is after September 30, 1999,
in each case, determined on a pro forma basis (including a pro forma application
of the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may be, at the
beginning of such four-quarter period.
The Indenture also provides that the Company will not incur any
Indebtedness that is contractually subordinated to any other Indebtedness of the
Company unless such Indebtedness is also contractually subordinated to the
Senior Notes on substantially identical terms; provided, however, that no
Indebtedness of the Company shall be deemed to be contractually subordinated to
any other Indebtedness of the Company solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
'Permitted Debt'):
(i) the incurrence by the Company and the Guarantors of Indebtedness
(including letters of credit) pursuant to the Credit Facilities (with
letters of credit being deemed to have a principal amount equal to the
maximum potential liability of the Company and the Guarantors thereunder)
outstanding under all Credit Facilities after giving effect to such
incurrence, including all Permitted Refinancing Indebtedness incurred to
refinance or replace any Indebtedness incurred pursuant to this clause (i),
does not exceed the greater of (a) $40.0 million or (b) the amount of the
Borrowing Base minus Indebtedness incurred pursuant to clause (iv) of this
covenant;
(ii) the incurrence by the Company and the Guarantors of the Existing
Indebtedness;
(iii) the incurrence by the Company and the Guarantors of Indebtedness
represented by the Senior Notes (other than any Additional Senior Notes)
and the Subsidiary Guarantees;
(iv) the incurrence by the Company or any of the Guarantors of
Indebtedness in an aggregate principal amount not to exceed $3.0 million at
any time outstanding (x) incurred in connection with the settlement of, or
the payment of any judgment with respect to, any outstanding litigation in
existence as of the date of the Indenture, which may include the payment of
legal fees and expenses relating to such litigation, or (y) represented by
Capital Lease Obligations, mortgage financings or purchase money
obligations, in each
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case incurred for the purpose of financing all or any part of the purchase
price or cost of construction or improvement of property, plant or
equipment used in the business of the Company or such Guarantor; provided,
however, that any indebtedness incurred pursuant to clause (x) shall have
been incurred no later than 18 months after the date of the Indenture.
(v) the incurrence by the Company or any of the Guarantors of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness that was
permitted by the Indenture to be incurred;
(vi) the incurrence by the Company or any of the Guarantors of
intercompany Indebtedness between or among the Company and any of the
Guarantors; provided, however, that (A) any subsequent issuance or transfer
of Equity Interests that results in any such Indebtedness being held by a
Person other than the Company or a Guarantor and (B) any sale or other
transfer of any such Indebtedness to a Person that is not either the
Company or a Guarantor shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Guarantor, as the
case may be;
(vii) the incurrence by the Company or any of the Guarantors of
Hedging Obligations that are incurred for the purpose of fixing or hedging
currency exchange risk or interest rate risk with respect to any floating
rate Indebtedness that is permitted by the terms of this Indenture to be
outstanding;
(viii) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company;
(ix) Indebtedness incurred in respect of performance, surety and
similar bonds provided by the Company in the ordinary course of business,
and refinancings thereof;
(x) Indebtedness arising from guarantees of Indebtedness of the
Company or any Subsidiary or other agreements of the Company or a
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or Subsidiary, other than
guarantees of Indebtedness incurred by any person acquiring all or any
portion of such business, assets or Subsidiary for the purpose of financing
such acquisition, provided that the maximum aggregate liability in respect
of all such Indebtedness shall at no time exceed the gross proceeds
actually received by the Company and its Subsidiaries in connection with
such disposition;
(xi) the guarantee by any of the Guarantors of Indebtedness of the
Company or another Guarantor that was permitted to be incurred under the
Indenture; and
(xii) the incurrence by the Company or any of its Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, not to exceed $10.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiv) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest and the accretion of accreted
value will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
Liens
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien on any
asset now owned or hereafter acquired, or any income or profits therefrom or
assign or convey any right to receive income therefrom, except Permitted Liens.
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Dividend and other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the New Credit
Facility as in effect as of the date of the Indenture, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the New Credit
Facility as in effect on the date of the Indenture, (c) the Indenture and the
Senior Notes, (d) applicable law, (e) any instrument governing Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (f) by reason of customary non-assignment provisions in leases,
licenses, encumbrances, contracts or similar assets entered into or acquired in
the ordinary course of business and consistent with past practices, (g) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (h) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced or (i) restrictions contained in
agreements for the sale or disposition of assets or of all of the capital stock
of Subsidiaries that are otherwise in compliance with the terms of the Indenture
to the extent such agreements contain restrictions with respect to assets or the
Subsidiary sold or disposed of thereunder.
Merger, Consolidation or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Senior Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; and (iv) except in
the case of a merger of the Company with or into a Wholly Owned Restricted
Subsidiary of the Company, the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
'--Incurrence of Indebtedness and Issuance of Preferred Stock.'
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Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an 'Affiliate Transaction'),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $500,000, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing; provided that (w) any employment agreement entered into by the Company
or any of its Restricted Subsidiaries consistent with the past practice of the
Company or such Restricted Subsidiary, or any employee benefit plan available to
employees or senior executives of the Company or any Restricted Subsidiary
generally, in each case in the ordinary course of business, (x) transactions
between or among the Company and/or its Restricted Subsidiaries, (y) dividends,
distributions, Restricted Payments and Investments that are permitted by the
provisions of the Indenture described above under the caption '--Restricted
Payments' and (z) any transactions pursuant to the Varsity Merger Documents, in
each case, shall not be deemed Affiliate Transactions.
Limitation on Issuances and Sales of Capital Stock of Wholly Owned Restricted
Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Restricted Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Capital Stock of any Restricted Subsidiary of the
Company to any Person (other than the Company or a Wholly Owned Restricted
Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease or
other disposition is of all the Capital Stock of such Restricted Subsidiary and
(b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other
disposition are applied in accordance with the covenant described above under
the caption '--Repurchase at the Option of Holders--Asset Sales,' and (ii) will
not permit any Restricted Subsidiary of the Company to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to the Company or a
Guarantor.
Lines of Business
The Indenture provides that the Company will, and will cause the Guarantors
to, engage only in Permitted Businesses.
Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Senior Notes for or
as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Senior Notes unless such consideration is
offered to be paid or is paid to all Holders of the Senior Notes that consent,
waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Subsidiaries shall
acquire or create another Subsidiary after the date of the Indenture, then such
newly acquired or created Subsidiary shall execute a Subsidiary Guarantee and
deliver an opinion of counsel, in accordance with the terms of the Indenture,
except for (i) all Subsidiaries that have properly been designated as
Unrestricted Subsidiaries in accordance with the
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Indenture for so long as they continue to constitute Unrestricted Subsidiaries
and (ii) all Subsidiaries organized outside of the United States and its
territories.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the 'Commission'), so
long as any Senior Notes are outstanding, the Company will furnish to the
Holders of Senior Notes (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such Forms, including a
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' that describes the financial condition and results of operations of
the Company and its consolidated Subsidiaries (showing in reasonable detail,
either on the face of the financial statements or in the footnotes thereto and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial condition and results of operations of the Company and
its Restricted Subsidiaries separate from the financial condition and results of
operations of the Unrestricted Subsidiaries of the Company) and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, at any time after the Company files the Exchange Offer
Registration Statement, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company and
the Guarantors have agreed that, for so long as any Senior Notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Senior Notes; (ii) default in payment
when due of the principal of or premium, if any, on the Senior Notes; (iii)
failure by the Company to comply with the provisions described under the
captions '--Repurchase at the Option of Holders--Change of Control,'
'--Repurchase at the Option of Holders--Asset Sales,' '--Certain
Covenants--Restricted Payments' or '--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock'; (iv) failure by the Company for
60 days after notice from the Trustee or the Holders of at least 25% of the
Senior Notes and Additional Senior Notes, if any (voting as a single class) then
outstanding to comply with any of its other agreements in the Indenture or the
Senior Notes; (v) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or
is created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such Indebtedness
prior to the expiration of the grace period provided in such Indebtedness on the
date of such default (a 'Payment Default') or (b) results in the acceleration of
such Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $5.0 million or more; (vi) failure
by the Company or any of its Restricted Subsidiaries to pay final judgments
aggregating in excess of $5.0 million, which judgments are not paid, discharged
or stayed for a period of 60 days; (vii) except as permitted by the Indenture,
any Subsidiary Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall
deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii)
certain events of bankruptcy or insolvency with respect to the Company or any of
its Significant Restricted Subsidiaries.
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If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Senior Notes
and Additional Senior Notes, if any (voting as a single class) may declare all
the Senior Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Guarantor
constituting a Significant Restricted Subsidiary, all outstanding Senior Notes
will become due and payable without further action or notice. Holders of the
Senior Notes may not enforce the Indenture or the Senior Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Senior Notes may direct the Trustee
in its exercise of any trust or power. The Trustee may withhold from Holders of
the Senior Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest) if
it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Senior Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Senior Notes. If an Event of Default occurs prior
to July 15, 2002 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Senior Notes prior to July 15, 2002, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Senior Notes.
The Holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Senior Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the Senior Notes.
The Company is required to deliver to the Trustee annually an officer's
certificate regarding compliance with the Indenture, and the Company is required
upon becoming aware of any Default or Event of Default, to deliver to the
Trustee an officer's certificate specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of the
Company or the Guarantors under the Senior Notes, the Indenture or the
Subsidiary Guarantees or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Senior Notes by accepting a
Senior Note waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the Senior Notes. Such waiver may not
be effective to waive liabilities under the federal securities laws and it is
the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Notes ('Legal
Defeasance') except for (i) the rights of Holders of outstanding Senior Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Senior Notes when such payments are due from the
trust referred to below, (ii) the Company's obligations with respect to the
Senior Notes concerning issuing temporary Senior Notes, registration of Senior
Notes, mutilated, destroyed, lost or stolen Senior Notes and the maintenance of
an office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company released with respect to
certain covenants that are described in the Indenture ('Covenant Defeasance')
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Senior Notes. In the event
Covenant Defeasance occurs, certain events (not including non-
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payment, bankruptcy, receivership, rehabilitation and insolvency events)
described under '--Events of Default and Remedies' will no longer constitute an
Event of Default with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding Senior Notes on the stated maturity or on
the applicable redemption date, as the case may be, and the Company must specify
whether the Senior Notes are being defeased to maturity or to a particular
redemption date; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of the outstanding Senior
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such Legal Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Senior Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Senior Notes over the other creditors of the Company with the intent of
defeating, hindering, delaying or defrauding creditors of the Company or others;
and (viii) the Company must deliver to the Trustee an Officers' Certificate and
an opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Senior Note selected for redemption. Also, the Company is not required to
transfer or exchange any Senior Note for a period of 15 days before a selection
of Senior Notes to be redeemed.
The registered Holder of a Senior Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Company and
the Trustee may amend or supplement the Indenture, the Subsidiary Guarantees or
the Senior Notes with the consent of the Holders of at least a majority in
principal amount of the Senior Notes and Additional Senior Notes then
outstanding, voting as a single class, (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Senior Notes), and any existing default or compliance with any provision of
the Indenture, the Subsidiary Guarantees or the Senior Notes may be waived with
the consent of the Holders of a majority in
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principal amount of the then outstanding Senior Notes and Additional Senior
Notes, voting as a single class, (including consents obtained in connection with
a tender offer or exchange offer for Senior Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting Holder): (i) reduce
the principal amount of Senior Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Senior Note or alter the provisions with respect to the redemption of the
Senior Notes (other than provisions relating to the covenants described above
under the caption '--Repurchase at the Option of Holders'), (iii) reduce the
rate of or change the time for payment of interest on any Senior Note, (iv)
waive a Default or Event of Default in the payment of principal of or premium,
if any, or interest on the Senior Notes (except a rescission of acceleration of
the Senior Notes by the Holders of at least a majority in aggregate principal
amount of the Senior Notes and a waiver of the payment default that resulted
from such acceleration), (v) make any Senior Note payable in money other than
that stated in the Senior Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Senior Notes to receive payments of principal of or premium, if any, or interest
on the Senior Notes, (vii) waive a redemption payment with respect to any Senior
Note (other than a payment required by one of the covenants described above
under the caption '--Repurchase at the Option of Holders'), (viii) release any
Guarantor from any of its obligations under its Subsidiary Guarantee or the
Indenture, except in accordance with the terms of the Indenture, or (ix) make
any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Notes, the Company, the Guarantors and the Trustee may amend or supplement the
Indenture, the Subsidiary Guarantees or the Senior Notes to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Senior Notes in addition
to or in place of certificated Senior Notes, to provide for the assumption of
the Company's or a Guarantor's obligations to Holders of Senior Notes in the
case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of Senior Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act or to issue
Additional Senior Notes in accordance with the limitations set forth in the
Indenture on the Issuance Date.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding
Senior Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Senior Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The Old Senior Notes were offered and sold (i) to 'qualified institutional
buyers' in reliance on Rule 144A under the Securities Act, (ii) to institutional
'accredited investors' as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, who are not also Qualified Institutional Buyers and (iii) in
reliance on Regulation S under the Securities Act, and in each case are
represented by a separate note in registered, global form without interest
coupons (respectively, the '144A Global Note,' 'IAI Global Note' and 'Regulation
S Global Note' and, collectively, the 'Restricted Global Notes'). Except as
described below under '--Certificated Securities,' the New Senior Notes will be
represented by a separate note in registered, global form without interest
coupons
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(the 'Unrestricted Global Note' and, collectively with the Restricted Global
Notes, the 'Global Notes'). Each Global Note will be issued in a denomination
equal to the outstanding principal amount of the Senior Notes represented
thereby. The Restricted Global Notes were, and the Unrestricted Global Notes
will be, deposited with, or on behalf of, The Depository Trust Company (the
'Depositary') and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the 'Global Note Holder'),
in each case for credit to an account of a direct or indirect participant as
described below.
Senior Notes that are issued as described below under '--Certificated
Securities' will be issued in the form of registered definitive certificates
(the 'Certificated Securities'). Upon the transfer of Certificated Securities,
such Certificated Securities may, unless all Global Notes have previously been
exchanged for Certificated Securities, be exchanged for an interest in a Global
Note representing the principal amount of Senior Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the 'Participants'
or the 'Depositary's Participants') and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
'Indirect Participants' or the 'Depositary's Indirect Participants') that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only thorough the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the Initial Purchaser with portions of
the principal amount of the Global Notes and (ii) ownership of the Senior Notes
evidenced by the Global Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some jurisdictions require
that certain persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer Senior Notes evidenced by
the Global Notes will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Senior
Notes, the Global Note Holder will be considered the sole Holder under the
Indenture of any Senior Notes evidenced by the Global Note. Beneficial owners of
Senior Notes evidenced by the Global Notes will not be considered the owners or
Holders thereof under the Indenture for any purpose, including with respect to
the giving of any directions, instructions or approvals to the Trustee
thereunder. Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records of the Depositary or for maintaining,
supervising or reviewing any records of the Depositary relating to the Senior
Notes.
Payments in respect of the principal of, premium, if any, and interest and
Liquidated Damages, if any, on any Senior Notes registered in the name of the
Global Note Holder on the applicable record date will be payable by the Trustee
to or at the direction of the Global Note Holder in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee may treat the persons in whose names Senior Notes,
including the Global Notes, are registered as the owners thereof for the purpose
of receiving such payments. Consequently, neither the Company nor the Trustee
has or will have any responsibility or liability for the payment of such amounts
to beneficial owners of Senior Notes. The Company believes, however, that it is
currently the policy of the Depositary to immediately credit the accounts of the
relevant Participants with such payments, in amounts proportionate to their
respective holdings of beneficial interests in the relevant security as shown on
the records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Senior Notes will
be governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
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Certificated Securities
Subject to certain conditions contained in the Indenture, any person having
a beneficial interest in the Global Notes may, upon request to the Trustee,
exchange such beneficial interest for Senior Notes in the form of Certificated
Securities. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof). In addition, if (i) the
Company notifies the Trustee in writing that the Depositary is no longer willing
or able to act as a depositary and the Company is unable to locate a qualified
successor within 90 days or (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Senior Notes in the
form of Certificated Securities under the Indenture, then, upon surrender by the
Global Note Holder of the Global Notes, Senior Notes in such form will be issued
to each person that the Global Note Holder and the Depositary identify as being
the beneficial owner of the related Senior Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Senior Notes and the Company and the Trustee may conclusively rely on, and will
be protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Senior Notes
represented by the Global Notes (including principal, premium, if any, and
interest and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Note Holder. With
respect to Certificated Securities, the Company will make all payments of
principal, premium, if any, and interest and Liquidated Damages, if any, by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof or, if no such account is specified, by mailing a check to each such
Holder's registered address. The Senior Notes represented by the Global Notes
are expected to trade in the Depositary's Same-Day Funds Settlement System, and
any permitted secondary market trading activity in such Senior Notes will,
therefore, be required by the Depositary to be settled in immediately available
funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Holders of the New Senior Notes are not entitled to any registration
rights with respect to the New Senior Notes. The Company, the Guarantors and the
Initial Purchasers have entered into the Registration Rights Agreement, dated as
of June 19, 1997. Pursuant to the Registration Rights Agreement, the Company
agreed to file with the Commission the Exchange Offer Registration Statement on
the appropriate form under the Securities Act with respect to the New Notes. The
Registration Statement of which this Prospectus forms a part constitutes the
Exchange Offer Registration Statement. If (i) the Company is not required to
file the Exchange Offer Registration Statement or permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law or
SEC policy or (ii) any Holder of Transfer Restricted Securities notifies the
Company within the specified time period that (A) it is prohibited by law or
Commission policy from participating in the Exchange Offer or (B) that it may
not resell the New Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the Exchange
Offer Registration Statement is not appropriate or available for such resales or
(C) that it is a broker-dealer and owns Senior Notes acquired directly from the
Company or an affiliate of the Company, the Company will file with the
Commission a Shelf Registration Statement to cover resales of the Senior Notes
by the Holders thereof who satisfy certain conditions relating to the provision
of information in connection with the Shelf Registration Statement. The Company
will use its best efforts to cause the applicable registration statement to be
declared effective as promptly as possible by the Commission. For purposes of
the foregoing, 'Transfer Restricted Securities' means each Senior Note until (i)
the date on which an Old Senior Note has been exchanged by a person other than a
broker-dealer for a New Senior Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Old Senior Note for a
New Senior Note, the date on which such New Senior Note is sold to a purchaser
who receives from such broker-dealer on or prior to the date of such sale a copy
of the prospectus contained in the Exchange Offer Registration Statement, (iii)
the date on which such Senior Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf
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Registration Statement or (iv) the date on which such Senior Note is distributed
to the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company use its
best efforts to have the Registration Statement, of which this Prospectus forms
a part, declared effective by the Commission on or prior to October 17, 1997,
(ii) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Company will commence the Exchange Offer and use its best
efforts to issue on or prior to 30 business days after the date on which the
Exchange Offer Registration Statement was declared effective by the Commission,
New Senior Notes in exchange for all Senior Notes tendered prior thereto in the
Exchange Offer and (iii) if obligated to file the Shelf Registration Statement,
the Company will use its best efforts to file the Shelf Registration Statement
with the Commission on or prior to 30 days after such filing obligation arises
(and in any event within 150 days after June 19, 1997) and to cause the Shelf
Registration to be declared effective by the SEC on or prior to 60 days after
such obligation arises. If (a) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the SEC on or prior to the date specified for such
effectiveness (the 'Effectiveness Target Date'), or (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a 'Registration Default'), then the Company will pay
Liquidated Damages to each Holder of Senior Notes, with respect to the first
90-day period immediately following the occurrence of such Registration Default
in an amount equal to $0.05 per week per $1,000 principal amount of Senior Notes
held by such Holder. The amount of the Liquidated Damages will increase by an
additional $0.05 per week per $1,000 principal amount of Senior Notes with
respect to each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum amount of Liquidated Damages of $0.50 per week per
$1,000 principal amount of Senior Notes. All accrued Liquidated Damages will be
paid by the Company on each Damages Payment Date to the Global Note Holder by
wire transfer of immediately available funds or by federal funds check and to
Holders of Certificated Securities by wire transfer to the accounts specified by
them or by mailing checks to their registered addresses if no such accounts have
been specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Senior Notes to be included in a Shelf Registration Statement
will be required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights Agreement
in order to have their Senior Notes included in the Shelf Registration Statement
and benefit from the provisions regarding Liquidated Damages set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus constitutes a part.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
'Acquired Debt' means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
'Affiliate' of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
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'control' (including, with correlative meanings, the terms 'controlling,'
'controlled by' and 'under common control with'), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of a
Person shall be deemed to be control.
'Asset Sale' means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory or other current assets in the ordinary
course of business consistent with past practices (provided that transactions
governed by the provisions of the Indenture described above under the caption
'--Repurchase at the Option of Holders--Change of Control' and/or the provisions
described above under the caption '--Certain Covenants--Merger, Consolidation or
Sale of Assets' will be governed by such provisions and not by the provisions of
the Asset Sale covenant), and (ii) the issue or sale by the Company or any of
its Subsidiaries of Equity Interests of any of the Company's Subsidiaries, in
the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions that have a fair market value (as determined in
good faith by the Board of Directors) in excess of $1.0 million. Notwithstanding
the foregoing: (i) a transfer of assets by the Company to a Guarantor or by a
Guarantor to the Company or to another Guarantor, (ii) an issuance of Equity
Interests by a Guarantor to the Company or to another Guarantor, (iii) a
dividend, distribution, Restricted Payment or Investment that is permitted by
the covenant described above under the caption '--Certain Covenants--Restricted
Payments' and (iv) the transfer of any royalty payment by the Company or any
Subsidiary as contemplated by the MOU, and as modified by the terms of any
definitive settlement agreement negotiated thereunder (provided that aggregate
payouts under the MOU are not materially more expensive to the Company than the
terms of the MOU), will not be deemed to be Asset Sales.
'Borrowing Base' means, as of any date, an amount equal to the sum of (a)
85% of the face amount of all accounts receivable owned by the Company and its
Restricted Subsidiaries as of such date that are not more than 90 days past due,
and (b) 60% of the book value of all inventory owned by the Company and its
Subsidiaries as of such date, all calculated on a consolidated basis and in
accordance with GAAP. To the extent that information is not available as to the
amount of accounts receivable or inventory or trade payables as of a specific
date, the Company may utilize the most recent available information provided to
the lenders under the Credit Facilities for purposes of calculating the
Borrowing Base.
'Capital Lease Obligation' means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
'Capital Stock' means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
'Cash Equivalents' means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the full faith and credit of the
United States government or any agency or instrumentality thereof having
maturities of not more than six months from the date of acquisition, (iii)
certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any lender party to the New Credit Facility or with any domestic commercial
bank having capital and surplus in excess of $500.0 million and a Keefe Bank
Watch Rating of 'B' or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clauses
(ii) and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above and (v) commercial paper of a
domestic issuer having a rating of at least A-1 by Standard and Poor's Rating
Group ('S&P') or P-1 by Moody's Investors Service, Inc. ('Moody's') maturing
within six months after the date of acquisition.
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'Change of Control' means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any 'person' (as such term is used in Section 13(d)(3) of
the Exchange Act) other than the Principals or their Related Parties, (ii) the
adoption of a plan relating to the liquidation or dissolution of the Company,
(iii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any person (as defined
above), other than the Principals and their Related Parties, becomes the
beneficial owner (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act) directly or indirectly, of 35% or more of the Voting Stock of the Company,
(iv) the first day on which a majority of the members of the Board of Directors
of the Company are not Continuing Directors or (v) the Company consolidates
with, or merges with or into, any Person or sells, assigns, conveys, transfers,
leases or otherwise disposes of all or substantially all of its assets to any
Person, or any Person consolidates with, or merges with or into, the Company, in
any such event pursuant to a transaction in which any of the outstanding Voting
Stock of the Company is converted into or exchanged for cash, securities or
other property, other than any such transaction where the Voting Stock of the
Company outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding shares of such
Voting Stock of such surviving or transferee Person (immediately after giving
effect to such issuance).
'Consolidated Cash Flow' means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest of such Person and its Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, net
payments (if any) pursuant to Hedging Obligations and any deferred financing
fees incurred, and other financing fees expensed, in connection with the
acquisition of Varsity), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, plus (v) any other fees or expenses
expensed in connection with the acquisition of Varsity, in each case, without
duplications and on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and other non-cash charges of,
a Subsidiary of a Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
'Consolidated Net Income' means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar distributions
by that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has not
been obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute,
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rule or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded and (v) the Net Income (but not loss) of any Unrestricted
Subsidiary shall be excluded, whether or not distributed to the Company or one
of its Subsidiaries.
'Continuing Directors' means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
'Credit Facilities' means, with respect to the Company, one or more debt
facilities (including, without limitation, the New Credit Facility) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including through
the sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time. Indebtedness under Credit Facilities
outstanding on the date on which Old Senior Notes are first issued and
authenticated under the Indenture shall be deemed to have been incurred on such
date in reliance on the exception provided by clause (i) of the definition of
Permitted Debt.
'Default' means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
'Disqualified Stock' means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Senior Notes mature; provided,
however, that a class of Capital Stock shall not be Disqualified Stock hereunder
solely as the result of any maturity or redemption that is conditioned upon, and
subject to, compliance with the covenant under the caption 'Restricted
Payments.'
'Equity Interests' means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
'Equity Offering' means a public or private offering of Capital Stock
(other than Disqualified Stock) of the Company.
'Existing Indebtedness' means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
'Fixed Charges' means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations but excluding amortization of debt issuance costs and
excluding any deferred financing fees incurred, and other financing fees
expensed, in connection with the acquisition of Varsity) and (ii) the
consolidated interest of such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the product of (a) all cash dividend payments on any series of
preferred stock of such Person or any of its Restricted Subsidiaries, other than
dividend payments on Equity Interests payable solely in Equity Interests (other
than Disqualified Stock) of the Company, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person and its Restricted
Subsidiaries, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
'Fixed Charge Coverage Ratio' means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted
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Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than
revolving credit borrowings) or issues preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation of
the Fixed Charge Coverage Ratio is made (the 'Calculation Date'), then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated without giving effect to
clause (iii) of the proviso set forth in the definition of Consolidated Net
Income, and (ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, and (iii) the
Fixed Charges attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
'GAAP' means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect as of the date of the Indenture.
'Guarantee' means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
'Guarantors' means each Subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture, and its respective successors
and assigns.
'Hedging Obligations' means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or the value of foreign currencies purchased or received by the Company in
the ordinary course of business.
'Indebtedness' means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, in each
case, except any amount that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP, as well as all indebtedness of
others secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be (i) the
accreted value thereof, in the case of any Indebtedness that does not require
current payments of interest, and (ii) the principal amount thereof, together
with any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness.
'Investments' means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Subsidiary of the Company sells or otherwise disposes of
any Equity Interests of any direct or indirect Restricted Subsidiary of the
Company such that, after giving effect to any such sale or disposition, such
Person is no longer a Restricted
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Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Restricted Subsidiary not sold or disposed
of in an amount determined as provided in the final paragraph of the covenant
described above under the caption '--Certain Covenants--Restricted Payments.'
'Lien' means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
'MOU' means the Memorandum of Understanding entered into as of the 3rd day
of June, 1997, by and among the Company, RHC, Riddell, Inc., Equilink, Ridmark,
MacMark, NBD Bank N.A., MLC Partners Limited Partnership, Robert Nederlander,
Leonard Toboroff, John McConnaughy, Jr., Frederic H. Brooks, Connecticut
Economics Corporation, Robert Weisman, Bruce H. Levitt, as Bankruptcy Trustee of
M Holdings Corporation, Paul Swanson, as Bankruptcy Trustee of MGS Acquisition,
Inc., Official Unsecured Creditors Committee of MacGregor Sporting Goods, Inc.,
and MacGregor Sports, Inc., Official Unsecured Creditors' Committee of MacGregor
Sporting Goods, Inc., M Holdings Corporation, f/k/a MacGregor Sporting Goods,
Inc., Innovative Promotions, Inc., Ernest Wood, Jr., Harry Wood, Pursuit
Athletic Footwear, Inc., and Riddell Athletic Footwear, Inc. in the form set
forth on a schedule to the New Credit Facility.
'Net Income' means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
'Net Proceeds' means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Indebtedness under the Credit Facilities) secured by a Lien on the
asset or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
'New Credit Facility' means that certain credit facility, dated as of June
19, 1997, by and among the Company and NationsBank, N.A. and NBD Bank, as agents
and lenders, providing for up to $40.0 million of revolving credit borrowings,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
extended, modified, renewed, refunded, replaced or refinanced from time to time.
'Non-Recourse Debt' means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
'Obligations' means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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'Permitted Businesses' means (i) the lines of businesses that the Company
or any of the Guarantors were engaged in on the date of the Indenture or that
are contemplated by the final confidential Offering Memorandum dated June 13,
1997 relating to the Offering of the Old Senior Notes, (ii) the businesses
engaged in by any acquired businesses, provided that a substantial portion of
their business at the time of acquisition was related or ancillary to the
Company's then existing lines of business, (iii) extensions of the businesses
referred to in clauses (i) and (ii), including, without limitation, new products
and services to its markets or new distribution channels, (iv) any other lines
of business or activities that are related or ancillary to the businesses
referred to in clauses (i)-(iii), and (v) unrelated lines of business that
individually are not material to the Company and the Guarantors taken as a
whole.
'Permitted Investments' means (a) any Investment in the Company or in a
Guarantor, (b) any continuing 50% equity Investment in MacMark Corporation by
the Company or any Guarantor; (c) any Investment in Cash Equivalents; (d) any
Investment by the Company or any Guarantor in a Person, if as a result of such
Investment (i) such Person becomes a Guarantor or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Guarantor; (e) any
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption '--Repurchase at the Option of Holders--Asset
Sales'; (f) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company; and (g) other
Investments in any Person having an aggregate fair market value (measured on the
date each such Investment was made and without giving effect to subsequent
changes in value), when taken together with all other Investments made pursuant
to this clause (g) that are at the time outstanding, not to exceed $5.0 million.
'Permitted Liens' means (i) Liens on assets of the Company and its
Subsidiaries securing Indebtedness under the Credit Facilities that was
permitted by the terms of the Indenture to be incurred; provided that such Liens
will be permitted only to the extent they cover assets securing such
Indebtedness as of the date of the Indenture; (ii) Liens in favor of the
Company; (iii) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company or any Subsidiary of the Company;
provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Company or such Subsidiary; (iv)
Liens on property existing at the time of acquisition thereof by the Company or
any Subsidiary of the Company, provided that such Liens were in existence prior
to the contemplation of such acquisition; (v) Liens to secure the performance of
statutory or regulatory obligations, leases, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (iv) of the third paragraph of the covenant
entitled '--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock' covering only the assets acquired with such Indebtedness; (vii)
Liens existing on the date of the Indenture; (viii) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (ix)
Liens incurred in the ordinary course of business of the Company or any
Subsidiary of the Company with respect to obligations that do not exceed $2.5
million at any one time outstanding and that (a) are not incurred in connection
with the borrowing of money or the obtaining of advances or credit (other than
trade credit in the ordinary course of business) and (b) do not in the aggregate
materially detract from the value of the property or materially impair the use
thereof in the operation of business by the Company or such Subsidiary; (x)
Liens on assets of any Guarantor to secure senior Indebtedness of such Guarantor
that is permitted to be incurred pursuant to the terms of Indenture; (xi) Liens
on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of
Unrestricted Subsidiaries; and (xii) Liens on Unrestricted Margin Stock.
'Permitted Refinancing Indebtedness' means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith including
premiums paid, if any, to the holders thereof); (ii) such Permitted Refinancing
Indebtedness has a final maturity date at or later than the final maturity date
of, and has a Weighted Average Life to Maturity equal to or greater than the
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Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Senior Notes, such Permitted Refinancing
Indebtedness has a final maturity date at or later than the final maturity date
of, and is subordinated in right of payment to, the Senior Notes on terms at
least as favorable to the Holders of Senior Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
'Principals' means Robert E. Nederlander, Leonard Toboroff, John
McConnaughy, Jr., David Mauer, Dan Cougill or Jeffrey G. Webb.
'Related Party' with respect to any Principal means (A) any spouse or
former spouse or immediate family member of such Principal, (B) the estate or
any heir of such Principal, (C) any Subsidiary of any of the Principals or any
other Related Party or (D) any trust, the beneficiaries of whom are Principals
or Related Parties.
'Restricted Investment' means an Investment other than a Permitted
Investment.
'Restricted Subsidiary' of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
'Senior Indebtedness' means any Indebtedness which by its terms is not
expressly subordinated in right of payment to the Senior Notes.
'Significant Restricted Subsidiary' means a subsidiary, including its
subsidiaries, which meets any of the following conditions:
(1) The Company's and its other subsidiaries' investments in and
advances to the subsidiary exceed 10 percent of the total assets of the
Company and its subsidiaries consolidated as of the end of the most
recently completed fiscal year (for a proposed business combination to be
accounted for as a pooling of interests, this condition is also met when
the number of common shares exchanged or to be exchanged by the registrant
exceeds 10 percent of its total common shares outstanding at the date the
combination is initiated); or
(2) The Company's and its other subsidiaries' proportionate share of
the total assets (after intercompany eliminations) of the subsidiary
exceeds 10 percent of the total assets of the Company and its subsidiaries
consolidated as of the end of the most recently completed fiscal year; or
(3) The Company's and its other subsidiaries' equity in the income
from continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principle of the subsidiary
exceeds 10 percent of such income of the Company and its subsidiaries
consolidated for the most recently completed fiscal year.
For purposes of this definition under the Indenture, a 'significant subsidiary'
will be determined in accordance with the Computational Note Article 1, Rule
1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is
in effect on the date hereof.
'Stated Maturity' means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
'Subsidiary' means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
'Unrestricted Margin Stock' means the capital stock of Varsity that
constitutes 'margin stock' (as defined in Regulation G of the Board of Governors
of the Federal Reserve System as from time to time in effect), if, and to the
extent that the value of such margin stock exceeds 25% of the total assets of
the Company and its Subsidiaries, subject to the restrictions contained in the
provisions of the Indenture described under the captions
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'Certain Covenants--Asset Sales' and 'Certain Covenants--Liens'; provided that
it is understood that upon completion of the merger pursuant to the Varsity
Merger Documents there shall be no Unrestricted Margin Stock outstanding.
'Unrestricted Subsidiary' means any Subsidiary (other than Riddell, Inc. or
Varsity or any successor to either of them) that is designated by the Board of
Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only
to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company (as determined in good faith by the Board of Directors); (c) is a Person
with respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; (d) has
not guaranteed or otherwise directly or indirectly provided credit support for
any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e)
has at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries.
'Varsity Merger Documents' means the Agreement and Plan of Merger by and
among Riddell Sports Inc., Cheer Acquisition Corp. and Varsity Spirit
Corporation, dated as of May 5, 1997, and the several Stock Purchase Agreements,
dated as of May 5, 1997, between Riddell Sports Inc. and certain employees of
Varsity Spirit Corporation, in each case as amended from to time.
'Voting Stock' means, with respect to any Person, the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
'Weighted Average Life to Maturity' means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
'Wholly Owned Restricted Subsidiary' of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
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DESCRIPTION OF OTHER INDEBTEDNESS
THE NEW CREDIT FACILITY
Riddell has entered into a credit agreement dated as of June 19, 1997 (the
'New Credit Facility') with Riddell, Inc., Equilink Licensing Corporation
('Equilink'), RHC Licensing Corporation ('RHC'), Ridmark Corporation
('Ridmark'), All American Sports Corporation ('AASC'), Varsity, Cheer, Varsity
Spirit Fashions & Supplies, Inc. ('VSFS'), International Logos, Inc. ('Logos'),
Varsity/Intropa Tours, Inc. ('Intropa'), Varsity U.S.A., Inc. ('USA' and
together with Riddell, Inc., Equilink, RHC, Ridmark, AASC, Varsity, Cheer, VSFS,
Logos, and Intropa, collectively, the 'Material Subsidiaries'), NBD Bank and
NationsBank, N.A. (together, the 'Bank Lenders'). The Bank Lenders provide for
the New Credit Facility on a senior secured basis, including a sublimit for the
issuance of standby and trade letters of credit line (the 'Letters of Credit').
Riddell paid certain fees to the Bank Lenders for their own account in
extending the New Credit Facility as follows: (i) an upfront fee of $525,000 and
(ii) an agent's administrative fee, payable to NBD Bank (the 'Administrative
Agent'), in the amount of $10,000. The upfront fee and the administrative fee
were paid on the date of the closing of the New Credit Facility. Riddell will
pay a commitment fee of up to 0.5% per annum of the unused portion of the
commitment under the New Credit Facility, accruing from the date of acceptance
of the Bank Commitment Letter dated May 5, 1997 among Riddell and the Bank
Lenders, and thereafter Riddell will pay a commitment fee with the same terms
quarterly in arrears. The administrative fee is payable annually.
Pursuant to its terms and conditions, the New Credit Facility provides for
a five year revolving credit and working capital facility available to Riddell
in a maximum principal amount (the 'Revolving Commitment Amount') not to exceed
$40.0 million through September 30, 1997 and $35.0 million thereafter,
outstanding at any time, a portion of which may be used for the issuance of
Letters of Credit.
The Material Subsidiaries unconditionally guarantee the obligations arising
under the New Credit Facility. The New Credit Facility, and the guarantee
obligations in respect thereof, are secured by a security interest in
substantially all of the tangible assets of the Company and the Material
Subsidiaries. Additionally, Riddell and the Material Subsidiaries granted a
negative pledge on substantially all of their unencumbered assets in favor of
the Bank Lenders.
Borrowings outstanding under the New Credit Facility are required to be
prepaid in the event and to the extent that the outstanding principal amount
exceeds the Revolving Commitment Amount. The New Credit Facility requires that
Riddell deliver to the Bank Lenders a borrowing base certificate twice a month.
An event of default exists under the New Credit Facility if utilizations, as of
the date of each borrowing base certificate, exceed a certain percentage of the
value of each of the eligible inventory, accounts receivable and work in process
(the 'Borrowing Base') as determined on two consecutive borrowing base
certificates delivered by Riddell. Voluntary reduction or prepayment of the New
Credit Facility is permitted without penalty subject to reimbursement of the
Bank Lenders' breakage costs with respect to LIBOR (as defined herein) based
borrowings. Indebtedness outstanding under the New Credit Facility will bear an
initial interest rate for the first year of the New Credit Facility, computed on
a per annum basis, equal to either the Alternate Base Rate (as defined below)
plus .75% or the London Interbank Offered Rate ('LIBOR') plus 2.25%. Riddell has
the option of selecting the type of the borrowing and the length of the interest
period applicable thereto. Following the first year of the New Credit Facility,
the LIBOR and Alternate Base Rate margins will be subject to performance pricing
adjustments based upon the ratio (the 'Leverage Ratio') of Riddell's total
funded debt to EBITDA (as such terms are defined in the New Credit Facility).
The Leverage Ratio will be computed quarterly in arrears on a rolling four
quarter basis. If the Leverage Ratio (i) equals or exceeds 5.0x, the margin on
LIBOR loans shall be 2.50% and the margin on Alternate Base Rate loans shall be
1.0%, (ii) equals or exceeds 4.5x but less than 5.0x, the margin on LIBOR loans
shall be 2.25% and the margin on Alternate Base Rate loans shall be .75%, (iii)
equals or exceeds 4.0x but is less than 4.5x, the margin on LIBOR loans shall be
2.00% and the margin on Alternate Base Rate loans shall be .50%, (iv) equals or
exceeds 3.5x but is less than 4.0x, the margin on LIBOR loans shall be 1.75% and
the margin on Alternate Base Rate loans shall be .25% and (v) is less than 3.5x,
the margin on LIBOR loans shall be 1.50% and the margin on Alternate Base Rate
based loans shall be 0%.
'Alternate Base Rate' means the higher of (i) the Administrative Agent's
prime rate and (ii) the Federal Funds rate plus .50%.
118
<PAGE>
Fees payable in respect of standby letters of credit are in an amount equal
to the appropriate applicable percentages corresponding to the Leverage Ratio in
effect at such time of drawing under the New Credit Facility on the average
daily maximum amount available to be drawn under each such Letter of Credit from
the date of issuance to the date of expiration due quarterly in arrears. The
Administrative Agent will be paid a per annum fee of .25% on the outstanding
amount of all standby letters of credit, due quarterly in arrears. Additionally,
Riddell will pay the Administrative Agent its customary letter of credit charges
as in effect from time to time.
The New Credit Facility contains certain representations and warranties,
negative and affirmative covenants, conditions and events of default which are
customarily required for similar financings. Representations and warranties
apply to Riddell and the Material Subsidiaries. Such covenants include, among
other things, restrictions and limitations on dividends and stock redemptions,
capital expenditures, leases, incurrences of debt, transactions with affiliates,
investments and acquisitions, and mergers, consolidations and asset sales.
Furthermore, the Company is required to maintain compliance with certain
financial covenants including, but not limited to, the Leverage Ratio, a
coverage ratio, a minimum net worth ratio and a minimum net income test for the
fiscal quarters ended June 30, 1997 and September 30, 1997.
Events of default under the New Credit Facility include, among other
things, (i) failure to pay principal, interest, fees or other amounts when due;
(ii) violation of covenants; (iii) failure of any representation or warranty
made by Riddell or the Material Subsidiaries to the Bank Lenders to be true in
all material aspects; (iv) cross default and cross acceleration with certain
other indebtedness; (v) Change of Control (as defined in the New Credit
Facility); (vi) bankruptcy or other insolvency proceedings; (vii) certain
material judgments; (viii) certain ERISA events; and (ix) the invalidity of the
guarantees given by the Material Subsidiaries or of the security interests
granted to the Bank Lenders, in certain cases with appropriate grace periods.
The foregoing summary of the New Credit Facility is qualified in its
entirety by reference to such agreement, a copy of which has been filed with the
SEC as an exhibit to the Registration Statement of which this Prospectus forms a
part.
CONVERTIBLE NOTE
In November 1996, the Company completed the private placement of its 4.1%
Convertible Subordinated Note due November 1, 2004 (the 'Convertible Note') in
the principal amount of $7.5 million pursuant to an exemption from registration
under Section 4(2) of the Securities Act. The Convertible Note was purchased by
Silver Oak Capital L.L.C., an affiliate of Angelo, Gordon & Co. A portion of the
proceeds from the sale of the Convertible Note was used to repay the remaining
$870,834 balance of a subordinated term note due to a stockholder in accordance
with its terms. Contemporaneously with the issuance of the Convertible Note, the
Company amended its loan agreement with its senior lender, NBD Bank, to, among
other things, extend the term of its revolving line of credit from April 1997 to
April 1998, and to defer a $1.0 million principal payment due on the term loan
from December 1996 to December 1998.
The Convertible Note is convertible at $5.3763 a share into 1,395,000
shares of the Company's Common Stock (subject to an antidilution adjustment),
constituting approximately 13% of the outstanding shares of the Company's Common
Stock outstanding on May 17, 1997 on a pro forma basis after giving effect to
conversion of the Convertible Note and the Acquisition but without regard to the
exercise of any outstanding options or warrants to buy the Company's Common
Stock.
The Company's obligations to pay principal and interest on the Convertible
Note are guaranteed on a subordinated basis by the Company's subsidiaries,
including Varsity following the Acquisition. The Senior Notes and the Subsidiary
Guarantees will rank senior in right of payment to the respective obligations of
the Company and its subsidiaries under the Convertible Note and the guarantees
thereof.
The Convertible Note is required to prepay 25% of the then outstanding
principal amount at a redemption price of 100% on November 1, 2002 and 33.33% of
the then outstanding principal amount at a redemption price of 100% on November
1, 2003. The Convertible Note may be redeemed at the option of the Company, in
whole or in part, at any time at a redemption price of (a) 102.25% of the
principal amount if redeemed during the 12-month period ending November 1, 2001,
(b) at 101.5% of the principal amount if redeemed during the 12-month period
ending November 1, 2002, (c) at 100.75% of the principal amount if redeemed
during the
119
<PAGE>
12-month period ending November 1, 2003 and (d) at 100% if redeemed during the
12-month period ending November 1, 2004. Further, upon a change of control of
the Company, the holder of the Convertible Note will have the right to require
the Company to repurchase all or a portion of such holder's Convertible Note at
a repurchase price of 101% of the principal amount plus any accrued and unpaid
interest.
The note purchase agreement pursuant to which the Convertible Note was
issued requires future subsidiaries of the Company to guaranty the Convertible
Note on a subordinated basis and contains customary events of default. Further,
such note purchase agreement contains restrictive covenants that limit, among
other things, (i) transactions with affiliates, (ii) mergers, consolidation and
transfers of substantially all of the Company's assets and (iii) the granting of
certain stock options. The foregoing limitations, however, are subject to a
number of important qualifications.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of Old Senior Notes for New Senior Notes pursuant to the
Exchange Offer will not be considered a taxable exchange for federal income tax
purposes because the New Senior Notes will not differ materially in kind or
extent from the Old Senior Notes and because the exchange will occur by
operation of the terms of the Old Senior Notes. Accordingly, such exchange will
have no federal income tax consequences to Holders of Old Senior Notes. A
Holder's adjused tax basis and holding period in a New Senior Note will be the
same as such Holder's adjusted tax basis and holding period, respectively, in
the Old Senior Note exchanged therefor.
Holders considering the exchange of Old Senior Notes for New Senior Notes
should consult their own tax advisors concerning the United States federal
income tax consequences in light of their particular situations as well as any
consequences arising under state, local and foreign income tax and other tax
law.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Senior Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Senior Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Senior Notes received in
exchange for Old Senior Notes where such Old Senior Notes were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that for a period of 180 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until November 5, 1997, all
dealers effecting transactions in the New Senior Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of New Senior Notes
by broker-dealers. New Senior Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Senior Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Senior Notes. Any
broker-dealer that resells New Senior Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Senior Notes may be deemed to be an
'underwriter' within the meaning of the Securities Act and any profit on any
such resale of New Senior Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of the Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such document
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the
120
<PAGE>
Senior Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the New Senior Notes
will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York.
EXPERTS
The consolidated financial statements of Riddell as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31, 1996
included in this Prospectus have been audited by Grant Thornton LLP, independent
certified public accountants, as stated in their report appearing herein.
The financial statements of Varsity as of December 31, 1995 and 1996 and
for the nine months ended December 31, 1994 and the two years ended December 31,
1995 and 1996, included in this Prospectus, have been audited by BDO Seidman,
LLP, independent certified public accountants, as stated in their report
appearing herein.
121
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RIDDELL SPORTS INC.
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 1997 and December 31,
1996................................................................... F-2
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996.......................................... F-3
Condensed Consolidated Statements of Shareholders' Equity for the three
months ended March 31, 1996 and 1997................................... F-4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996.......................................... F-5
Notes to Condensed Consolidated Financial Statements..................... F-6
Audited Consolidated Financial Statements:
Report of Independent Certified Public Accountants....................... F-10
Consolidated Balance Sheets at December 31, 1995 and 1996................ F-11
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996.................................................... F-12
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1995 and 1996....................................... F-13
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996.................................................... F-14
Notes to Consolidated Financial Statements............................... F-15
VARSITY SPIRIT CORPORATION
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 1997, December 31,
1996 and March 31, 1996................................................ F-29
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996.......................................... F-30
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996.......................................... F-31
Condensed Consolidated Statements of Shareholders' Equity for the three
months ended March 31, 1997 and 1996................................... F-32
Notes to Condensed Consolidated Financial Statements..................... F-33
Audited Consolidated Financial Statements:
Report of Independent Certified Public Accountants....................... F-36
Consolidated Balance Sheets at December 31, 1995 and 1996................ F-37
Consolidated Statements of Income for the nine months ended December 31,
1994 and the years ended December 31, 1995 and 1996.................... F-38
Consolidated Statements of Shareholders' Equity for the nine months ended
December 31, 1994 and the years ended December 31, 1995 and 1996....... F-39
Consolidated Statements of Cash Flows for the nine months ended December
31, 1994 and the years ended December 31, 1995 and 1996................ F-40
Notes to Consolidated Financial Statements............................... F-41
</TABLE>
F-1
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................... $ 304,443 $ 356,670
Accounts receivable, trade, less allowance for
doubtful accounts ($564,000 and $513,000
respectively).............................. 21,142,165 15,144,943
Inventories (Note 3).......................... 14,620,416 16,406,168
Prepaid expenses.............................. 6,050,108 6,654,962
Other receivables............................. 245,978 159,747
----------- ------------
Total current assets............................ 42,363,110 38,722,490
Property, plant and equipment, less accumulated
depreciation ($3,975,095 and $3,819,343,
respectively)................................. 3,421,036 3,506,853
Intangibles and deferred charges, less
accumulated amortization ($10,580,177 and
$10,158,671, respectively).................... 33,645,022 34,066,528
Other assets.................................... 65,158 65,158
----------- ------------
$79,494,326 $ 76,361,029
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............. $ 3,175,893 $ 1,158,198
Accounts payable.............................. 4,048,960 4,866,962
Accrued liabilities........................... 6,843,665 6,739,980
----------- ------------
Total current liabilities....................... 14,068,518 12,765,140
Long-term debt, less current portion:
Shareholders and related parties.............. 439,000 439,000
Banks and other............................... 31,500,000 29,544,892
----------- ------------
31,939,000 29,983,892
Deferred taxes.................................. 1,820,000 1,820,000
Other liabilities............................... 3,938,909 4,046,979
Contingent liabilities (Note 4)
Shareholders' equity
Preferred stock, $.01 par; authorized
1,000,000 shares; none issued
Common stock, $.01 par; authorized 20,000,000
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........................... (3,809,693) (3,792,574)
----------- ------------
27,727,899 27,745,018
----------- ------------
$79,494,326 $ 76,361,029
----------- ------------
----------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net revenues:
Net sales..................................... $18,000,706 $19,036,101
Royalty income................................ 574,197 807,585
----------- -----------
18,574,903 19,843,686
Cost of sales................................... 10,094,012 10,210,492
----------- -----------
Gross profit.................................... 8,480,891 9,633,194
Selling, general and administrative expenses.... 7,207,043 6,991,449
Product liability expense....................... 625,000 664,133
----------- -----------
Income from operations.......................... 648,848 1,977,612
Interest expense................................ 665,967 627,214
----------- -----------
Income (loss) before taxes...................... (17,119) 1,350,398
Income taxes.................................... -- 60,000
----------- -----------
Net income (loss)............................... $ (17,119) $ 1,290,398
----------- -----------
----------- -----------
Net earnings (loss) per share................... $ 0.00 $ 0.15
----------- -----------
----------- -----------
Weighted average number of common and
common equivalent shares outstanding.......... 8,067,985 8,456,962
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK CAPITAL IN EARNINGS TOTAL
-------------------- EXCESS OF (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAR DEFICIT) EQUITY
--------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED
MARCH 31, 1996:
Balance, January 1, 1996... 8,067,985 $80,680 $31,456,912 ($ 6,635,750) $ 24,901,842
Net income for the
period................ 1,290,398 1,290,398
--------- ------- ----------- ------------ -------------
Balance, March 31, 1996.... 8,067,985 $80,680 $31,456,912 ($ 5,345,352) $ 26,192,240
--------- ------- ----------- ------------ -------------
--------- ------- ----------- ------------ -------------
FOR THE THREE MONTHS ENDED
MARCH 31, 1997:
Balance, January 1, 1997... 8,067,985 $80,680 $31,456,912 ($ 3,792,574) $ 27,745,018
Net loss for the
period................ (17,119) (17,119)
--------- ------- ----------- ------------ -------------
Balance, March 31, 1997.... 8,067,985 $80,680 $31,456,912 ($ 3,809,693) $ 27,727,899
--------- ------- ----------- ------------ -------------
--------- ------- ----------- ------------ -------------
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ (17,119) $ 1,290,398
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization.............. 577,258 493,656
Provision for losses on accounts
receivable................................ 82,366 153,651
Deferred taxes............................. -- 60,000
Changes in assets and liabilities (net of
effects from acquisitions):
(Increase) decrease in:
Accounts receivable, trade............ (6,079,588) (6,470,098)
Inventories........................... 1,785,752 (355,715)
Prepaid expenses...................... 604,854 924,919
Other receivables..................... (86,231) 30,933
Other assets.......................... -- 200
Increase (decrease) in:
Accounts payable...................... (818,002) (128,787)
Accrued liabilities................... 103,685 (1,760,193)
Other liabilities..................... (108,070) (75,055)
----------- -----------
Net cash used in operating
activities...................... (3,955,095) (5,836,091)
----------- -----------
Cash flows from investing activities:
Capital expenditures.......................... (69,935) (428,855)
----------- -----------
Net cash used in investing
activities...................... (69,935) (428,855)
----------- -----------
Cash flows from financing activities:
Net borrowings under line-of-credit
agreement.................................. 4,131,000 6,034,693
Principal payments on long-term debt, banks
and other.................................. (158,197) (141,571)
Net cash provided by financing
activities...................... 3,972,803 5,893,122
----------- -----------
Net increase in cash............................ (52,227) (371,824)
Cash, beginning................................. 356,670 615,081
----------- -----------
Cash, ending.................................... $ 304,443 $ 243,257
----------- -----------
----------- -----------
</TABLE>
Supplemental cash flow information:
Cash paid for interest was $585,268 and $618,211 for the three month
periods ended March 31, 1997 and 1996, respectively. Income tax payments, or
refunds, were not significant for the periods ended March 31, 1997 and 1996.
See notes to condensed consolidated financial statements.
F-5
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 March 31, 1997 and 1996 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, 1996 Annual Report on Form 10-K. Operating
results for the three months ended March 31, 1997 are not necessarily indicative
of the results to be expected during the remainder of 1997.
Tax expense for the period ended March 31, 1996 was reduced by the benefit
of net operating loss carryforwards recognized during the period. The
recognition of this tax benefit had the effect of decreasing tax expense, and
increasing net income, by approximately $460,000, or $0.05 per share, for the
three month period ended March 31, 1996.
NOTE 2--EARNINGS PER SHARE
For the period ended March 31, 1996, earnings per share were 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 month period ended
March 31, 1996, fully diluted earnings per share have not been presented as the
results are approximately the same as primary earnings per share after rounding
to the nearest cent.
For the period ended March 31, 1997, earnings per share were based on the
weighted average number of shares outstanding. Earnings per share were not
adjusted for the assumed exercise of common stock options and warrants or the
assumed conversion of the Convertible Subordinated Notes issued in November
1996, as the effect of these items would not have been dilutive for the period.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 128 'Earnings Per Share' ('SFAS 128'). This
statement simplifies the standards for computing earnings per share, replacing
current presentations with a dual presentation of basic and diluted earnings per
share. Basic earnings per share excludes dilution while diluted earnings per
share is computed similarly to fully diluted earnings per share. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997. If the provisions of SFAS 128 had been applied to the periods presented in
this report, basic earnings per share for the three month periods ended March
31, 1996 and 1995 would have been $0.00 and $0.16, respectively, and diluted
earnings per share would have been $0.00 and $0.15, respectively.
NOTE 3--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ---------------
<S> <C> <C>
Finished goods .... $ 5,284,318 $ 6,712,249
Work-in-process .... 3,664,052 4,345,056
Raw materials ..... 5,672,046 5,348,863
------------ ---------------
$ 14,620,416 $16,406,168
------------ ---------------
------------ ---------------
</TABLE>
F-6
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 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.
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>
<CAPTION>
ACCRUED
LIABILITIES OTHER LIABILITIES
(CURRENT) (NON-CURRENT)
---------- -----------------
<S> <C> <C>
March 31, 1997:
Product liability matters:
Future payments on settled cases ....... $1,750,000 $ --
Reserves for pending and other
contingencies ........................ 600,000 3,500,000
---------- -----------------
Totals for product liability
matters ........................... 2,350,000 3,500,000
Provision for proposed settlement and other
costs relating to fraudulent transfer
litigation ............................. 1,400,000 --
Other litigation contingency reserves ..... 700,000 --
Other (not related to litigation or
contingencies) ......................... 2,393,665 438,909
---------- -----------------
$6,843,665 $ 3,938,909
---------- -----------------
---------- -----------------
December 31, 1996:
Product liability matters:
Future payments on settled cases ....... $1,750,000 $ --
Reserves for pending and other
contingencies ........................ 500,000 3,500,000
---------- -----------------
Totals for product liability
matters ........................... 2,250,000 3,500,000
Provision for proposed settlement and other
costs relating to fraudulent transfer
litigation ............................. 1,400,000 --
Other litigation contingency reserves ..... 400,000 --
Other (not related to litigation or
contingencies) ......................... 2,689,980 546,979
---------- -----------------
$6,739,980 $ 4,046,979
---------- -----------------
---------- -----------------
</TABLE>
Product liability
At March 31, 1997, a subsidiary of the Company was a defendant in 9 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 claims, will amount to at least $4,100,000 and, accordingly, a
reserve in this amount is included in the Consolidated Balance Sheet at March
31, 1997 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 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 at March 31, 1997 and December 31,
1996.
F-7
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LITIGATION MATTERS AND CONTINGENCIES--(CONTINUED)
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) (the
'Acquisition') 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. In October 1996 a former employee of the
Company filed a counterclaim against the Company and several subsidiaries in the
Mac I bankruptcy, seeking indemnity and contribution in an indeterminate amount
from the Company in connection with a suit by the Mac I trustee against such
former employee.
The Company had previously recorded a provision for the proposed settlement
as well as anticipated costs relating to the litigation. The Company has charged
certain litigation costs against the liability reserve reducing the balance to
$1,400,000 at December 31, 1996. The Company has not otherwise adjusted the
liability reserve for these actions as a result of the termination of the
settlement agreement, as the balance 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 reserve is reflected in the Consolidated Balance Sheets
as part of accrued liabilities at March 31, 1997 and December 31, 1996. The
Company remains confident that the fraudulent transfer cases are without merit,
and intends to vigorously defend against them.
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 Mac I trustee, and seeks damages in excess of $3.3
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
F-8
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LITIGATION MATTERS AND CONTINGENCIES--(CONTINUED)
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. Mr. Brooks' claims
against the Company also seek consulting fees of $580,000 plus interest under
his consulting agreement (which the Company has previously deposited in an
escrow type account), consulting fees with the Company's 'Riddell' footwear
licensee exceeding $850,000 and attorney's fees exceeding $1.5 million through
April 1996, plus interest. The Company believes Mr. Brooks' claims against the
Company are without merit and intends to vigorously defend against them.
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 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.
Additionally, the Company has certain other claims or potential claims
against it that may arise in the normal course of business, including claims
relating to employee terminations. The Company has recorded provisions for
certain of these claims and certain of the 'other' litigation matters discussed
above. Reserves for such claims amounted to $700,000 at March 31, 1997 and
$400,000 at December 31, 1996. While these amounts, together with the remaining
$1,400,000 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. Accordingly, there can be no assurance that such claims will be
resolved within such reserves.
NOTE 5--RECENT DEVELOPMENTS
On May 5, 1997 the Company and its newly formed merger subsidiary entered
into an Agreement and Plan of Merger with Varsity Spirit Corporation
('Varsity'), a supplier of cheerleader and dance team uniforms and operator of
cheerleader camps, dance camps and travel tours throughout the United States.
The Merger Agreement calls for purchase of all of Varsity's outstanding shares
at $18.90 per share or approximately $91 million plus other related payments,
costs and expenses (total costs and expenses of the acquisition and the related
financing discussed below are anticipated to approximate $13 million) of
approximately $4 million. The Company commenced a tender offer on May 12, 1997
which expires in June 1997, unless extended.
The Company intends to fund the acquisition and costs and working capital
needs by means of proceeds of borrowings under a $35 million revolving loan
facility to be provided by a bank group to be led by NationsBanc, N.A. and NBD
Bank and proceeds to be obtained from the issuance of $100 million of senior
notes of the Company to be placed through a private placement pursuant to Rule
144A of the Securities Act of 1933, as amended. To the extent the senior notes
are not sold prior to the purchase of the Varsity shares as contemplated, the
transaction will be financed by a bridge loan among NationsBridge L.L.C. and
NBD. The Company has entered into commitment letters with the various
prospective lenders with respect to the revolving loan facility and bridge loan.
Pursuant to related stock purchase agreements, certain executive officers
of Varsity who are also Varsity shareholders will purchase from the Company
shares of its Common Stock in an aggregate amount approximating $4.4 million.
The various agreements contemplate the grant of options to executive officers
and other employees of Varsity to acquire an aggregate of 950,000 shares of
common stock.
F-9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Riddell Sports Inc.
We have audited the accompanying consolidated balance sheets of Riddell Sports
Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statement of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the management of Riddell
Sports Inc. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Riddell Sports
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Chicago, Illinois
March 14, 1997
F-10
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS (NOTE 5)
Current assets:
Cash.......................................... $ 356,670 $ 615,081
Accounts receivable, trade, less allowance for
doubtful accounts ($513,000 and $620,000
respectively).............................. 15,144,943 14,099,028
Inventories (Note 2).......................... 16,406,168 14,425,882
Prepaid expenses (Note 9)..................... 6,654,962 6,815,009
Other receivables (Note 8).................... 159,747 358,769
----------- -----------
Total current assets....................... 38,722,490 36,313,769
Property and equipment, less accumulated
depreciation (Note 3)......................... 3,506,853 2,966,494
Intangible assets and deferred charges, less
accumulated amortization (Note 4)............. 34,066,528 34,741,533
Other assets.................................... 65,158 102,893
----------- -----------
$76,361,029 $74,124,689
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 5).... $ 1,158,198 $ 1,141,572
Accounts payable.............................. 4,866,962 6,304,289
Accrued liabilities (Notes 8 and 10).......... 6,739,980 9,581,548
----------- -----------
Total current liabilities.................. 12,765,140 17,027,409
Long-term debt, less current portion (Note 5):
Shareholders and related parties.............. 439,000 1,309,834
Banks and other............................... 29,544,892 22,290,398
----------- -----------
29,983,892 23,600,232
Deferred taxes (Note 9)......................... 1,820,000 1,990,000
Other liabilities (Notes 8 and 10).............. 4,046,979 6,605,206
Commitments and contingent liabilities (Notes 7
and 8)........................................ -- --
Shareholders' equity (Note 6):
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........................... (3,792,574) (6,635,750)
----------- -----------
27,745,018 24,901,842
----------- -----------
$76,361,029 $74,124,689
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NET REVENUES:
Net sales...................... $69,888,094 $63,603,210 $51,567,065
Royalty income................. 2,494,266 3,439,828 3,845,044
----------- ----------- -----------
72,382,360 67,043,038 55,412,109
Cost of sales.................... 38,813,062 35,793,624 29,791,947
----------- ----------- -----------
Gross profit..................... 33,569,298 31,249,414 25,620,162
Selling, general and
administrative expenses........ 25,369,690 23,332,570 21,087,423
Product liability expense........ 2,483,906 2,651,249 2,926,961
Product liability litigation
loss........................... -- -- 4,600,000
Other charges.................... -- -- 1,188,066
----------- ----------- -----------
Income (loss) from operations.... 5,715,702 5,265,595 (4,182,288)
Interest expense................. 2,762,526 2,795,061 2,000,659
----------- ----------- -----------
Income (loss) before taxes and
extraordinary item............. 2,953,176 2,470,534 (6,182,947)
Income taxes (credits)........... 110,000 100,000 (1,250,000)
----------- ----------- -----------
Income (loss) before
extraordinary item............. 2,843,176 2,370,534 (4,932,947)
Extraordinary item, provision for
costs relating to fraudulent
transfer litigation............ -- (1,900,000) --
----------- ----------- -----------
Net income (loss)................ $ 2,843,176 $ 470,534 $(4,932,947)
----------- ----------- -----------
----------- ----------- -----------
EARNINGS (LOSS) PER SHARE:
Income (loss) before
extraordinary item.......... $ 0.34 $ 0.29 $ (0.62)
Extraordinary item, provision
for costs relating to
fraudulent transfer
litigation.................. -- (0.23) --
----------- ----------- -----------
Net income (loss).............. $ 0.34 $ 0.06 $ (0.62)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of
common and common equivalent
shares outstanding.......... 8,427,633 8,067,985 7,973,982
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK CAPITAL EARNINGS TOTAL
------------------- IN EXCESS (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT OF PAR DEFICIT) EQUITY
--------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994..... 7,890,207 $78,902 $31,553,690 $ (2,173,337) $ 29,459,255
Issuance of common stock in
connection with an
acquisition............. 149,535 1,495 398,505 -- 400,000
Net loss for the year...... -- -- -- (4,932,947) (4,932,947)
Other Adjustments.......... -- -- (495,000) -- (495,000)
--------- ------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1994... 8,039,742 80,397 31,457,195 (7,106,284) 24,431,308
Issuance of common stock in
connection with an
acquisition............. 28,243 283 (283) -- --
Net income for the year.... -- -- -- 470,534 470,534
--------- ------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1995... 8,067,985 80,680 31,456,912 (6,635,750) 24,901,842
Net income for the year.... -- -- -- 2,843,176 2,843,176
--------- ------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1996... 8,067,985 $80,680 $31,456,912 $ (3,792,574) $ 27,745,018
--------- ------- ----------- ------------ -------------
--------- ------- ----------- ------------ -------------
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).............. $ 2,843,176 $ 470,534 $(4,932,947)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........... 2,208,613 2,167,495 1,882,608
Provision for losses on
accounts receivable.... 436,130 392,956 898,792
Deferred taxes............ -- -- (1,250,000)
Changes in assets and
liabilities (net of
effects from
acquisitions):
(Increase) decrease in:
Accounts receivable,
trade................ (1,482,045) (3,759,050) (2,233,810)
Inventories............ (1,980,286) (2,262,551) (1,605,521)
Prepaid expenses....... (9,953) (717,050) (1,356,298)
Other receivables...... 199,022 5,464,234 (5,426,913)
Other assets........... 37,735 5,631 21,277
Increase (decrease) in:
Accounts payable....... (1,437,327) (409,940) 2,720,149
Accrued liabilities.... (2,841,568) (6,467,387) 10,548,903
Other liabilities...... (2,558,227) 2,912,064 934,276
----------- ----------- -----------
Net cash provided by
(used in)
operating
activities........ (4,584,730) (2,203,064) 200,516
----------- ----------- -----------
CASH FLOWS FROM INVESTMENT
ACTIVITIES:
Capital expenditures........... (1,138,786) (750,188) (662,395)
Sale of assets (foam molding
operations)................. -- -- 1,000,000
Acquisitions................... -- (641,669) (750,440)
Contingent 'earn-out' payments
on prior acquisitions....... (174,377) -- --
----------- ----------- -----------
Net cash used in investing
activities................ (1,313,163) (1,391,857) (412,835)
----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings under
line-of-credit agreement.... (87,307) 602,937 2,521,511
Proceeds from issuance of
long-term debt.............. 7,500,000 5,000,000 --
Debt issue costs............... (760,804) -- --
Principal payments on long-term
debt:
Shareholders................ (870,834) (1,029,166) (100,000)
Banks and other............. (141,573) (554,094) (2,400,000)
----------- ----------- -----------
Net cash provided by
financing activities... 5,639,482 4,019,677 21,511
----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH........................... (258,411) 424,756 (190,808)
CASH, BEGINNING.................. 615,081 190,325 381,133
----------- ----------- -----------
CASH, ENDING..................... $ 356,670 $ 615,081 $ 190,325
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include
the accounts of Riddell Sports Inc. and its wholly-owned subsidiaries (the
'Company'). All significant intercompany accounts and transactions have been
eliminated.
Inventories: Inventories are stated at the lower of cost (determined in a
first-in, first-out basis) or market, and include material, labor and factory
overhead.
Property and equipment: Property and equipment are stated at cost.
Depreciation is being computed using the straight-line method over the estimated
useful lives (principally 30 years for buildings and improvements and 3 to 7
years for machinery and equipment) of the related assets.
Intangible assets and deferred charges: Amortization of the cost of
license agreements acquired is based on the estimated future revenues over the
terms of those agreements. Debt issue costs are amortized to interest expense
over the term of the related debt. Other intangibles and deferred charges are
being amortized by the straight-line method over their respective estimated
lives.
On an ongoing basis, management reviews the valuation of goodwill and other
intangible assets to determine if there has been impairment by comparing the
related assets' carrying value to the undiscounted estimated future cash flows
and/or operating income from related operations.
Income taxes: Deferred tax liabilities and assets are recognized for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities (excluding non-deductible goodwill) using enacted tax
rates in effect for the years in which the differences are expected to become
recoverable or payable.
Revenues: Sales are generally recorded by the Company when products are
shipped. Royalty income is generally recorded by the Company when earned based
upon contracts with licensees. These contracts provide for royalties based upon
the licensee's sales or purchases of covered products, subject to minimum
amounts of royalties, for a given time period.
Estimates: In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates. Estimates relating to contingent liabilities
are further discussed in Note 8.
Concentration of credit risk: In 1996, the Company earned approximately
60% of its revenues from sales directly to schools and other institutions. The
Company maintains reserves for potential losses on receivables from these
institutions, as well as receivables from other customers, and such losses have
not exceeded managements expectations.
Earnings (loss) per share: In 1996, earnings per share were based on the
weighted average number of common shares outstanding and common equivalent
shares based on 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. For purposes of computing primary earnings per
share, 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. For purposes of computing fully diluted earnings per share, the number
of treasury shares assumed to be purchased from the proceeds is based on the
higher of end of period market price or the average market price of the
Company's common stock for the period. Earnings per share for 1996 were not
adjusted for the effect of common equivalent shares related to the Convertible
Subordinated Note issued in November 1996, as the effect of an assumed
conversion of this note would not have been dilutive for the period. Fully
diluted earnings per share for 1996 have not been presented as the results are
approximately the same as primary earnings per share after rounding to the
nearest cent.
F-15
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
For 1995 and 1994 earnings per share were based on the weighted average
number of common shares outstanding. No effect was given to common stock options
or warrants as no material dilutive effect would have resulted from the exercise
of these items in these periods.
Other charges: Other charges included in operating results for the year
ended December 31, 1994, consist of certain transitional costs relating to the
Company's change in its method of distributing protective athletic equipment
sold to schools and other institutions. In October 1994, the Company announced
that it would begin selling such goods on a factory direct basis using its
existing sales force, which, before the change, was utilized principally for
selling reconditioning services. Sales of these goods, principally football
helmets, shoulder pads and related accessories, destined for consumption by
institutional sports teams, had historically been made to independent dealers
who in turn sold the products to schools and other institutions. The costs
relating to the transition, which have been segregated as 'other charges',
consist primarily of costs to settle certain obligations that related to the
former method of distribution, related legal expenses and estimated costs
relating to the collection of receivables from certain discontinued team
dealers. Additional costs relating to goods returned by discontinued dealers,
under a special transition program, are included as a reduction of sales and
gross margins for 1994. The costs of these returns included a reduction of sales
of approximately $1,400,000 with a related reduction in gross margins of
approximately $675,000. Other transitional costs of a recurring nature, such as
marketing expenses, have not been segregated.
Extraordinary item: For the year ended December 31, 1995 the Company
recorded a charge to establish a provision for costs related to certain
fraudulent transfer litigation as further described in Note 8. This charge has
been classified as an extraordinary item due to the unusual and infrequent
nature of the related litigation claim.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Finished goods................... $ 6,712,249 $ 4,904,058
Work-in-process.................. 4,345,056 4,043,217
Raw materials.................... 5,348,863 5,478,607
----------- -----------
$16,406,168 $14,425,882
----------- -----------
----------- -----------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land............................. $ 207,000 $ 207,000
Building and improvements........ 1,102,241 1,038,699
Machinery and equipment.......... 6,016,955 4,999,602
----------- -----------
7,326,196 6,245,301
Less accumulated depreciation.... 3,819,343 3,278,807
----------- -----------
$ 3,506,853 $ 2,966,494
----------- -----------
----------- -----------
</TABLE>
Depreciation expense relating to all property and equipment amounted to
$598,427, $596,307, and $580,639 for the years ended December 31, 1996, 1995 and
1994, respectively.
F-16
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INTANGIBLE ASSETS AND DEFERRED CHARGES
Intangible assets and deferred charges consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
LIVES --------------------------
IN YEARS 1996 1995
--------- ----------- -----------
<S> <C> <C> <C>
MacGregor trademark rights....... 40 $18,040,000 $18,040,000
MacGregor license agreements..... 8 2,030,000 2,030,000
Trademarks....................... 40 3,250,116 3,250,116
Goodwill......................... 40 16,371,125 16,196,748
Debt issue costs................. 8 760,804 --
Other............................ 7 to 10 3,773,154 3,773,154
----------- -----------
44,225,199 43,290,018
Less accumulated amortization.... 10,158,671 8,548,485
----------- -----------
$34,066,528 $34,741,533
----------- -----------
----------- -----------
</TABLE>
5. LONG TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revolving line of credit, bank, at the bank's
prime rate, the prime rate was 8.25% at December
31, 1996. The available line of credit
fluctuates throughout each year from a low of
$20,000,000 from November 1 to December 31, to
$25,000,000 from January 1 to March 31, to
$31,500,000 from April 1 to October 31. The
outstanding balance, if any, matures on April
30, 1998. Collateralized by a first lien on
substantially all assets of the Company. The
loan agreement contains covenants that require
the Company to maintain specified levels of
working capital and net worth and restricts the
payment of dividends to the Company's
shareholders to 60% of net income............... $17,890,000 $17,977,307
Term loans payable, bank, interest at 1/2% over
prime, cross collateralized with, and governed
by the same loan agreement as, the revolving
line of credit discussed above. Interest payable
quarterly, principal of $1,000,000 due in
December 1997 with the remaining balance due in
December 1998................................... 5,000,000 5,000,000
Convertible subordinated note payable, interest at
4.1%, 25% and 33% of the then outstanding
principal is due on November 1, 2002 and 2003,
respectively, with the remaining balance due
November 1, 2004. Interest is payable semi
annually. The note is convertible at $6.00 a
share into 1,250,000 shares of the Company's
Common Stock, subject to antidilution
adjustments. The note is subordinated in right
to prior payment in full of Senior Indebtedness,
which is generally defined in the governing
agreements to include debt under the revolving
line of credit and term loans payable to a bank,
described above, and any refinancing, renewal or
replacement thereof as well as certain other
debt............................................ 7,500,000 --
Subordinated term note, shareholder, interest at
10% per annum. Repaid, according to terms, in
November 1996, out of a portion of the proceeds
from the issuance of the $7,500,000 convertible
subordinated note described above............... -- 870,834
</TABLE>
F-17
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG TERM DEBT--(CONTINUED)
<TABLE>
<S> <C> <C>
Subordinated note payable, shareholders, interest
at 8% per annum, interest not payable until
maturity, due April 18, 1998.................... 439,000 439,000
Notes payable, discounted at 6.5% per annum,
remaining payments, which include imputed
interest, of $178,605 in January 1997 and
$164,961 at maturity in January 1998............ 313,090 454,663
----------- -----------
31,142,090 24,741,804
Less current portion.............................. 1,158,198 1,141,572
----------- -----------
$29,983,892 $23,600,232
----------- -----------
----------- -----------
</TABLE>
In February 1996, certain shareholders of the Company provided the
Company's bank with limited guaranties, aggregating $2,000,000, of the term loan
and revolving line of credit. This group of shareholders, all of whom were
directors of the Company, included the Company's Chairman, CEO and a Vice
President. These guarantees were provided in conjunction with certain
modifications of the loans obtained in December 1995. The guarantees were
released by the bank, and terminated, in November 1996.
The aggregate maturities of long-term debt for the periods after December
31, 1996, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
<S> <C>
1997..................... $ 1,158,198
1998..................... 22,483,892
2002..................... 1,875,000
2003..................... 1,875,000
2004..................... 3,750,000
-----------
$31,142,090
-----------
-----------
</TABLE>
6. SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS
During 1994, an adjustment was recorded reducing capital in excess of par
and intangible assets by $495,000. This adjustment reduces the value ascribed to
120,000 shares of the Company's common stock issued in October 1993 at the time
certain purchase price adjustments relating to a 1991 acquisition were resolved.
The transaction was initially recorded during the fourth quarter of 1993 based
on the market value of the shares at the time of the acquisition in 1991 ($7.50
per share). The adjustment reduces this valuation to an amount based on the
market value of the shares at the time of issuance in 1993 ($3.375 per share).
Warrants: In 1994, in consideration of an extension of the maturity date
of its the revolving line of credit and other financing matters, the Company
issued warrants to its lender to purchase 172,152 shares of common stock of the
Company exercisable through October 1999 at an exercise price that is currently
$3.37 per share and that increases 5% annually. Warrants to purchase 119,895
shares, previously issued to this lender, expired in 1994. In January 1994, in
consideration of an extension of the maturity date of a $2,000,000 note due to a
shareholder negotiated in 1993, the Company issued warrants to the shareholder
to purchase 150,000 shares of common stock exercisable through 1998 at an
exercise price that is currently $2.69 per share and that increases 5% annually.
Stock option plans: The 1991 Stock Option Plan, as amended in 1996,
provides for the granting of options to key employees, directors, advisors and
independent consultants to the Company for the purchase of up to 1,415,500
shares of the Company's common stock. Options may be granted at an option price
of no less than 85% of the market price of the Company's common stock on the
date of grant and may be exercisable between one and ten years from the date of
grant. Options granted through December 31, 1996 generally have been designated
as non-qualified stock options, have had option prices equal to market values on
the date of grant,
F-18
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS--(CONTINUED)
have had terms of five or ten years, and have had vesting periods of one or four
years. Information relating to stock option transactions over the past three
years is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
PRICE PRICE
NUMBER PER NUMBER PER
OUTSTANDING SHARE EXERCISABLE SHARE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1993... 840,300 $ 5.28 259,500 $ 8.70
Granted.................... 265,000 2.70
Canceled................... (69,750) 6.33
-----------
Balance, December 31, 1994... 1,035,550 4.36 321,638 7.12
Granted.................... 177,000 2.20
Canceled................... (180,500) 4.22
-----------
Balance, December 31, 1995... 1,032,050 4.02 485,775 5.21
Granted.................... 239,500 4.57
Canceled................... (85,500) 7.67
-----------
Balance, December 31, 1996... 1,186,050 3.87 712,913 3.79
-----------
-----------
</TABLE>
Further information about stock options outstanding at December 31, 1996 is
summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
RANGE OF AVERAGE PRICE PRICE
EXERCISE NUMBER REMAINING PER NUMBER PER
PRICES OUTSTANDING CONTRACTUAL LIFE SHARE EXERCISABLE SHARE
- -------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.80--$2.49 271,550 2.7 years $ 2.21 232,413 $ 2.18
$2.50--$3.99 370,000 3.5 years 3.00 259,375 2.92
$4.00--$5.38 462,500 7.5 years 4.30 139,125 4.03
$10.75--$10.75 82,000 0.4 years 10.75 82,000 10.75
</TABLE>
At December 31, 1996 there were 229,450 shares available for future option
grants.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, 'Accounting for Stock-Based Compensation' (SFAS 123), the
Company has elected to continue to account for stock-based compensation under
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees' (APB
25). Under APB 25, generally, no cost is recorded for stock options issued to
employees unless the option price is below market at the time options are
granted. The following pro forma net income and earnings per share are presented
for informational purposes and have been computed using the fair value method of
accounting for stock-based compensation as set forth in SFAS 123:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Pro forma net income............ $2,668,624 $407,567
Pro forma earnings per share.... 0.32 0.05
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The pro forma results include expense related to the
fair value of stock options estimated at the date of grant using the
Black-Scholes option pricing model and the following weighted average
assumptions for the years ended December 31, 1996 and 1995, respectively:
risk-free interest rates of 6.6% and 6.1%; expected volatility of 38.4% and
38.1%; expected option life of 6.9 years and 4.5 years, and no dividend
payments. The weighted average estimated fair value of options granted during
1996 and 1995 was $2.40 and $0.93 per share, respectively.
F-19
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS
Leases: The Company leases various facilities and equipment under
operating leases. Rent expense amounted to approximately $1,451,000, $1,331,000
and $998,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum rental payments for all non-cancelable lease agreements for
periods after December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
<S> <C>
1997..................... $1,331,000
1998..................... 1,136,000
1999..................... 827,000
2000..................... 242,000
2001..................... 2,000
Later years.............. 12,000
----------
Total minimum payments
required............... $3,550,000
----------
----------
</TABLE>
Employee benefits: The Company has two noncontributory defined benefit
pension plans that cover, or have covered, certain employee groups. These plans
consist of a 'Union Plan' covering certain unionized employees and a 'Non-Union
Plan' that covered other employees of certain subsidiaries. The Non-Union Plan
was amended in 1994 to provide that no benefits would accrue under the plan on
or after December 31, 1994. The Company funds pension costs based on minimum
amounts required by the plans. Expense relating to the Non-Union Plan was
$50,000 (net of a curtailment gain of $47,000) for the year ended December 31,
1994. Pension expense for the Union Plan has been less than $30,000 during each
of the years ended December 31, 1996, 1995 and 1994.
Effective August 1, 1994, the Company established a defined contribution
plan covering substantially all of its employees, other than those covered by
the Union Plan. Company contributions to this plan are based on a percentage of
employee contributions and are funded and charged to expense as incurred.
Expense related to the plan amounted to $307,000, $220,000 and $103,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
8. 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>
<CAPTION>
ACCRUED OTHER
OTHER LIABILITIES LIABILITIES
RECEIVABLES (CURRENT) (NON-CURRENT)
----------- ----------- -------------
<S> <C> <C> <C>
December 31, 1996:
Product liability matters:
Future payments on settled cases........... $ -- $ 1,750,000 $ --
Reserves for pending and other
contingencies............................ -- 500,000 3,500,000
----------- ----------- -------------
Totals for product liability
matters............................. 2,250,000 3,500,000
Provision for proposed settlement and other
costs relating to fraudulent transfer
litigation................................. -- 1,400,000
Other litigation contingency reserves......... -- 400,000 --
Other (not related to litigation or
contingencies)............................. 159,747 2,689,980 546,979
----------- ----------- -------------
$ 159,747 $ 6,739,980 $ 4,046,979
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
F-20
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LITIGATION MATTERS AND CONTINGENCIES--(CONTINUED)
<TABLE>
<CAPTION>
ACCRUED OTHER
OTHER LIABILITIES LIABILITIES
RECEIVABLES (CURRENT) (NON-CURRENT)
----------- ----------- -------------
<S> <C> <C> <C>
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 litigation matters and contingencies:
At December 31, 1996, the Company was a defendant in 11 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 claims, will amount to at least $4,000,000 and, accordingly, a reserve
in this amount is included in the Consolidated Balance Sheet at December 31,
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 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, as demonstrated by the
matter described below, 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.
In 1994, a jury returned a verdict against the Company for damages
amounting to approximately $8,000,000 in one of these suits. Although the
Company believes that it was not responsible in the case, and had been in the
process of appealing the verdict, the Company settled with the plaintiff in late
1995 for an amount that was less than what was previously awarded. The Company
had taken a charge of $4,600,000 before taxes in 1994 to establish a reserve for
the full uninsured portion of the initial award, as well as current and future
premiums then due under a $5,000,000 product liability insurance policy (which
had a term running through June 1997) which would be exhausted by payment of the
verdict. As the amount of the settlement was less than the initial award, the
settlement had no effect on 1995 income. The excess of the reserve over amounts
due under the settlement was added to general reserves for other product
liability claims (discussed in the preceding paragraph), during 1995, to provide
increased reserves against these other claims. The December 31, 1996 and 1995
Consolidated Balance Sheets include certain liabilities related to this matter,
as well as related insurance receivables at December 31, 1995, as shown in the
preceding table.
The Company maintains additional product liability coverage under a policy
bound in December 1994 (the '1994 Policy'). The 1994 Policy replaced and
expanded on coverage that had been available under a pre-existing policy which
was exhausted by the 1995 settlement described above. The settlement did not
affect coverage available under the 1994 Policy. In late 1996 the Company
extended the term of the 1994 Policy through December 2001 and certain coverage
limits were increased. The 1994 Policy is an occurrence-based policy which
covers injuries occurring prior to December 2001. The policy also covers other
claims which were
F-21
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LITIGATION MATTERS AND CONTINGENCIES--(CONTINUED)
pending against the Company at the time the policy was bound in December 1994 as
well as potential claims for injuries which had occurred prior to the policy
date, but had not yet been reported. This additional coverage contains two
components: 'basic' and 'excess' coverage. The basic coverage insures all
covered claims up to $2,250,000 in excess of an uninsured retention (deductible)
of $750,000 per occurrence. The basic coverage is subject to an aggregate policy
limit of $7,500,000 and certain annual aggregate sub-limits. However, until the
premiums for the entire policy period have been paid, the basic coverage is also
limited to 110% of premiums paid. The excess coverage provides for insurance of
up to $20,000,000 per occurrence, in excess of the first $3,000,000 of each
claim. (The first $3,000,000 of each claim would fall under the basic coverage,
to the extent available, and the uninsured retention.) Claims covered by the
excess coverage are subject to one of two separate $20,000,000 aggregate policy
limits, depending on the date of the related injury and the date the claim is
filed against the Company. The first $20,000,000 aggregate limit applies to
claims filed before October 4, 1996 for injuries occurring after January 1, 1985
and prior to December 13, 1994 together with any future claims for injuries
occurring before October 4, 1996. The second $20,000,000 aggregate limit applies
to claims filed before October 4, 1996 for injuries occurring after December 13,
1994 together with any future claims for injuries occurring between October 4,
1996 and December 2001. The excess coverage is also limited to certain ratios of
paid premiums until all premiums due for the entire policy period have been
paid. However, this latter limitation can be eliminated at any time by prepaying
the future premiums due during the remainder of the policy. The Company believes
that this new insurance program provides a substantial increase in coverage, and
protection, against future claims that may be asserted against the
Company--especially considering the coverage provided under the excess component
of the policy. The excess policy does not cover any claims that were asserted
prior to the inception of the policy, one of which was still pending at December
31, 1996.
At the time the additional product liability coverage was bound, in
December 1994, the Company had several claims pending against it. As discussed
above, the new policy provides only the limited coverage under its basic
component for these preexisting claims. Accordingly, the Company entered into an
effort to settle several claims that it believed, considering the substantially
reduced level of available insurance, presented the greatest potential risk to
the Company. The Company was successful in carrying out this settlement effort,
and in early 1995 settled certain claims for an aggregate amount of $2,100,000.
However, because of the risks associated with these claims, given the reduced
level of available insurance, the amount of these settlements was substantially
above historical levels for settlements of similar claims and exceeded reserves
applicable to the claims. Accordingly, these settlements, together with
revaluations of reserves for remaining claims, resulted in an increase in
product liability expense for the year ended December 31, 1994 of approximately
$1,500,000.
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) (the
'Acquisition') 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
F-22
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LITIGATION MATTERS AND CONTINGENCIES--(CONTINUED)
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. In October 1996 a former employee of the
Company filed a counterclaim against the Company and several subsidiaries in the
Mac I bankruptcy, seeking indemnity and contribution in an indeterminate amount
from the Company in connection with a suit by the Mac I trustee against such
former employee.
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 has charged certain litigation costs
against the liability reserve reducing the balance to $1,400,000 at December 31,
1996. The Company has not otherwise adjusted the liability reserve for these
actions as a result of the termination of the settlement agreement, as the
balance 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
reserve is reflected in the Consolidated Balance Sheets as part of accrued
liabilities at December 31, 1996 and 1995. The Company remains confident that
the fraudulent transfer cases are without merit, and intends to vigorously
defend against them.
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 Mac I trustee, and seeks damages in excess of $3.3
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. Mr. Brooks' claims against the Company also seek
consulting fees of $580,000 plus interest under his consulting agreement (which
the Company has previously deposited in an escrow type account), consulting fees
with the Company's 'Riddell' footwear licensee exceeding $850,000 and attorney's
fees exceeding $1.5 million through April 1996, plus interest. The Company
believes Mr. Brooks' claims against the Company are without merit and intends to
vigorously defend against them.
F-23
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LITIGATION MATTERS AND CONTINGENCIES--(CONTINUED)
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 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.
Additionally, the Company has certain other claims or potential claims
against it that may arise in the normal course of business, including claims
relating to employee terminations. The Company has recorded provisions for
certain of these claims and certain of the 'other' litigation matters discussed
above. Reserves for such claims amounted to $400,000 at December 31, 1996 and
$100,000 at December 31, 1995. While these amounts, together with the remaining
$1,400,000 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. Accordingly, there can be no assurance that such claims will be
resolved within such reserves.
9. INCOME TAXES
Income taxes (credits) on income (loss), before extraordinary items, for
the years ended December 31, 1996, 1995 and 1994 is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- -------- -----------
<S> <C> <C> <C>
Current tax expense (credit):
Federal..................... $ 50,000 $ 40,000 $ --
State....................... 60,000 60,000 --
-------- -------- -----------
110,000 100,000 --
-------- -------- -----------
Deferred tax expense (credit):
Federal..................... -- -- (1,010,000)
State....................... -- -- (240,000)
-------- -------- -----------
-- -- (1,250,000)
-------- -------- -----------
$110,000 $100,000 $(1,250,000)
-------- -------- -----------
-------- -------- -----------
</TABLE>
For the years ended December 31, 1996 and 1995, tax expense was reduced by
offsetting tax benefits of approximately $1,200,000 and $900,000, respectively,
of net operating loss carryforwards which were not recognized in prior years.
F-24
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
Significant components of deferred income tax assets and liabilities at
December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Deferred income tax assets:
Accrued expenses and
reserves................ $ 3,509,000 $ 5,029,000 $ 2,527,000
Inventory.................. 492,000 711,000 971,000
Intangible assets.......... 26,000 28,000 25,000
Net operating loss, and
credit, carryforwards... 3,689,000 2,904,000 5,659,000
Other...................... 36,000 35,000 27,000
----------- ----------- -----------
7,752,000 8,707,000 9,209,000
Valuation allowances....... (1,386,000) (2,539,000) (3,452,000)
----------- ----------- -----------
Total deferred income tax
assets.................. 6,366,000 6,168,000 5,757,000
----------- ----------- -----------
Deferred income tax
liabilities:
Intangible assets and
deductible goodwill..... 6,014,000 5,770,000 5,503,000
Prepaid expenses........... 266,000 350,000 189,000
Other...................... 86,000 48,000 65,000
----------- ----------- -----------
Total deferred income tax
liabilities............. 6,366,000 6,168,000 5,757,000
----------- ----------- -----------
Total net deferred income tax
liability.................. $ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The valuation allowance has been established based on the assumption that
the net deferred income tax asset will not be realized.
The net current and non-current components of the deferred income taxes
were recognized in the balance sheet at December 31, 1996, 1995 and 1994 as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net current assets, included
with prepaid expenses....... $1,820,000 $1,990,000 $1,408,000
Net non-current deferred tax
liabilities................. 1,820,000 1,990,000 1,408,000
---------- ---------- ----------
$ -- $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A reconciliation of effective tax rates to federal statutory tax rates is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory Federal tax rate......... 34.0% 34.0% (34.0%)
Differences resulting from:
Effective state tax rate, net of
federal tax benefit.............. 3.1 1.6 (3.3)
Amortization not deductible for
tax purposes.................. 5.8 6.7 1.2
Losses with no current benefit... -- -- 15.2
Benefit of prior periods net
operating losses not
previously recognized......... (40.2) (38.1) --
Other differences................ 1.0 (0.2) 0.7
----- ----- -----
3.7% 4.0% (20.2%)
----- ----- -----
----- ----- -----
</TABLE>
During 1994, the Company entered into a settlement agreement with the
Internal Revenue Service relating to an examination of the Company's federal
income tax returns for the years 1988 to 1990. The service had proposed certain
adjustments relating to the allocation, for tax purposes, of an acquisition in
1988 and the deductibility of amortization relating to certain intangible assets
acquired in that acquisition. The effect of the
F-25
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
settlement was to reduce net operating loss carryforwards available to the
Company for tax purposes, and to adjust future tax amortization deductions
available to the Company, by an aggregate of approximately $3.2 million. The
Company has recorded the effect of the settlement, in 1994, by an adjustment
increasing its liability for deferred income taxes by $1,250,000 with a
corresponding increase in goodwill. The effect of the settlement on taxes
currently payable is not material.
At December 31, 1996 the Company had estimated net operating loss
carryforwards for federal income tax purposes of approximately $8,900,000
expiring in the years 2008 to 2011.
10. RELATED PARTY TRANSACTIONS
Interest expense includes interest on debt due shareholders and related
parties of $111,420, $197,526 and $229,107 for the years ended December 31,
1996, 1995 and 1994, respectively. In 1996 the Company paid consulting fees of
$75,000 to one director and paid another director $20,000 for services in
connection with a series of promotional football clinics sponsored by the
Company. Accrued liabilities include accrued interest due a shareholder of
$7,368 at December 31, 1995. Other liabilities (non-current), include accrued
interest due to shareholders of $310,129 and $274,423 at December 31, 1996 and
1995, respectively. In 1995, $1,029,166 of principal payments were made in
advance of their maturity on long-term debt due to a shareholder.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest were $2,661,710, $2,741,654, and $2,002,172, for
the years ended December 31, 1996, 1995 and 1994, respectively. Income tax
payments, or refunds, were not significant for 1996, 1995 or 1994.
In 1994, the value ascribed to certain stock issued the prior year, in
connection with an earlier acquisition, was adjusted from $900,000 to $405,000.
In July 1994, in connection with an acquisition, the Company incurred
liabilities of $1,450,000 and issued common stock valued at $400,000.
In January 1995, in connection with an acquisition, the Company incurred
liabilities of $765,000.
12. ACQUISITION AND DIVESTITURE
In January 1995, the Company acquired the business and operating assets of
Raleigh Athletic Equipment Corporation, a reconditioner of athletic equipment,
for a purchase price, including costs of the transaction and liabilities
assumed, of approximately $1,400,000. The transaction was accounted for as a
purchase, and, accordingly, the results of Raleigh Athletic Equipment
Corporation are included in the consolidated financial statements from the date
of acquisition and the net assets acquired have been recorded at their fair
values. The results of Raleigh Athletic Equipment Corporation prior to the date
of the acquisition are not material to the Company's consolidated financial
statements.
In July 1994, the Company acquired SharCo Corporation, a manufacturer of
sports collectible products, for a purchase price, including costs of the
transaction, of approximately $2,600,000. The transaction was accounted for as a
purchase, and, accordingly, the results of SharCo Corporation are included in
the consolidated financial statements from the date of acquisition and the net
assets acquired have been recorded at their fair values. The results of SharCo
Corporation prior to the date of the acquisition are not material to the
Company's consolidated financial statements.
In February 1994, the Company sold certain foam molding operations operated
by the Company's Ohio Cellular Products Corporation subsidiary ('OCP') in a
stock sale for a gross sales price of $1,000,000 cash and certain contingent
consideration. The Company had announced its intention to sell the operation in
1993, and operating results for the year ended December 31, 1993 were charged
with a provision to provide for a loss on disposition, including operating
losses for the period subsequent to December 31, 1993 and through the date of
F-26
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. ACQUISITION AND DIVESTITURE--(CONTINUED)
the sale. Accordingly, the effect of the sale and related 1994 operations
through the date of sale, were not material to 1994 operating results.
13. SEGMENT INFORMATION
The Company operates in two segments of the sporting goods industry: sports
products and services (which includes the manufacture, sale and reconditioning
of football helmets, other athletic products and sports collectible products)
and trademark licensing of the Riddell and MacGregor trademarks for use on other
products including athletic footwear, apparel and sports equipment.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Revenues:
Sports products and
services................ $69,888,094 $63,603,210 $51,567,065
Trademark licensing........ 2,494,266 3,439,828 3,845,044
----------- ----------- -----------
$72,382,360 $67,043,038 $55,412,109
----------- ----------- -----------
----------- ----------- -----------
Income (loss) from
Operations:
Sports products and
services................ $ 7,929,943 $ 7,184,487 $(2,694,568)
Trademark licensing........ 1,536,204 2,263,497 2,823,336
Corporate and
unallocated............. (3,750,445) (4,182,389) (4,311,056)
----------- ----------- -----------
$ 5,715,702 $ 5,265,595 $(4,182,288)
----------- ----------- -----------
----------- ----------- -----------
Depreciation and
Amortization:
Sports products and
services................ $ 1,483,601 $ 1,459,142 $ 1,180,804
Trademark licensing........ 702,095 700,895 694,346
Corporate and
unallocated............. 22,917 7,458 7,458
----------- ----------- -----------
$ 2,208,613 $ 2,167,495 $ 1,882,608
----------- ----------- -----------
----------- ----------- -----------
Capital Expenditures:
Sports products and
services................ $ 1,138,786 $ 750,188 $ 662,395
----------- ----------- -----------
----------- ----------- -----------
Identifiable assets:
Sports products and
services................ $54,374,016 $51,478,083 $49,378,285
Trademark licensing........ 18,983,249 19,760,209 20,230,728
Corporate and
unallocated............. 3,003,764 2,886,397 2,643,301
----------- ----------- -----------
$76,361,029 $74,124,689 $72,252,314
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-27
<PAGE>
[This page intentionally left blank]
F-28
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
-------------- ----------------- --------------
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current:
Cash and cash equivalents....................... $ 2,077 $ 9,360 $ 842
Accounts receivable, less allowance of $220,
$220, and $170 for possible losses........... 3,681 6,897 3,184
Inventories (Note 4)............................ 8,642 5,419 7,849
Prepaid expenses (Note 5)....................... 5,426 2,616 4,690
Deferred sales (Note 6)......................... 666 265 652
Refundable income taxes......................... 1,440 238 1,239
Deferred tax benefit............................ 256 259 207
-------------- ----------------- --------------
Total Current Assets.............................. 22,188 25,054 18,663
Property and equipment, less accumulated
depreciation.................................... 4,167 4,010 3,556
Goodwill and other assets......................... 8,944 8,727 6,606
-------------- ----------------- --------------
$ 35,299 $37,791 $ 28,825
-------------- ----------------- --------------
-------------- ----------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................ $ 3,589 $ 1,993 $ 3,263
Accruals:
Compensation and payroll taxes............... 330 849 307
Income taxes................................. -- 117 --
Other........................................ 163 156 76
Customer deposits................................. 2,242 3,813 1,780
Current maturities of long-term debt.............. 120 120 --
-------------- ----------------- --------------
Total Current Liabilities......................... 6,444 7,048 5,426
Deferred income taxes............................. 399 366 174
Long-term debt.................................... 480 480 --
-------------- ----------------- --------------
Total Liabilities................................. 7,323 7,894 5,600
Contingencies (Note 12)...........................
Shareholders' Equity:
Preferred stock................................. -- -- --
Common stock.................................... 47 47 47
Additional paid-in-capital...................... 14,187 14,144 13,639
Excess of purchase price over predecessor
basis........................................ (2,517) (2,517) (2,517)
Retained earnings............................... 16,288 18,253 12,090
-------------- ----------------- --------------
28,005 29,927 23,259
Treasury stock, at cost........................... (29) (30) (34)
-------------- ----------------- --------------
Total Shareholders' Equity........................ 27,976 29,897 23,225
-------------- ----------------- --------------
$ 35,299 $37,791 $ 28,825
-------------- ----------------- --------------
-------------- ----------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited).
F-29
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1997 1996
------- -------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Uniforms and accessories........................ $ 2,814 $ 2,277
Camps and events................................ 5,527 4,139
------- -------
8,341 6,416
------- -------
COSTS OF REVENUES:
Uniforms and accessories........................ 1,996 1,618
Camps and events................................ 3,791 3,094
------- -------
5,787 4,712
------- -------
Gross profit.................................... 2,554 1,704
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES..... 5,455 4,250
------- -------
Operating loss.................................. (2,901) (2,546)
OTHER INCOME 62 47
------- -------
Loss before taxes on income..................... (2,839) (2,499)
TAXES ON INCOME (benefit) (Note 8)................ (1,125) (992)
------- -------
NET LOSS.......................................... $(1,714) $(1,507)
------- -------
------- -------
NET LOSS PER SHARE................................ $ (0.36) $ (0.32)
------- -------
------- -------
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENT
SHARES OUTSTANDING (Notes 9 and 10)............. 4,732 4,705
------- -------
------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited).
F-30
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(1,714) $(1,507)
Deferred income taxes.............................. 36 (31)
Depreciation....................................... 339 252
Amortization....................................... 72 49
Change in operating assets and liabilities:
Accounts receivable............................. 2,815 2,814
Inventories..................................... (3,223) (2,923)
Prepaid expenses................................ (2,810) (2,418)
Refundable income taxes......................... (1,193) (821)
Other assets.................................... (289) (26)
Accounts payable................................ 1,596 1,585
Accruals........................................ (629) (149)
Customer deposits............................... (1,571) (285)
------- ---------
Net cash used by operating activities........... (6,571) (3,460)
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................. (496) (681)
------- ---------
Net cash used by investing activities........... (496) (681)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid..................................... (251) (180)
Proceeds from issuance of common stock............. 35 83
------- ---------
Net cash used by financing activities........... (216) (97)
------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (Note 11)...... (7,283) (4,238)
CASH AND CASH EQUIVALENTS, beginning of period....... 9,360 5,080
------- ---------
CASH AND CASH EQUIVALENTS, end of period............. $ 2,077 $ 842
------- ---------
------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited).
F-31
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
EXCESS OF
PURCHASE
COMMON STOCK ADDITIONAL PRICE OVER
---------------- PAID-IN PREDECESSOR RETAINED TREASURY
SHARES AMOUNT CAPITAL BASIS EARNINGS STOCK TOTAL
------ ------ ---------- ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996....... 4,736 $ 47 $ 14,144 $(2,517) $ 18,253 $(30) $29,897
Net loss for the period........... -- -- -- -- (1,714) -- (1,714)
Issuance of common stock upon
exercise of stock options....... 4 -- 34 -- -- 1 35
Tax benefit related to exercise of
stock options (Note 11)......... -- -- 9 -- -- -- 9
Cash dividends ($.055 per share).. -- -- -- -- (251) -- (251)
------ ------ ---------- ----------- -------- -------- -------
BALANCES, MARCH 31, 1997.......... 4,740 $ 47 $ 14,187 $(2,517) $ 16,288 $(29) $27,976
------ ------ ---------- ----------- -------- -------- -------
------ ------ ---------- ----------- -------- -------- -------
BALANCES, DECEMBER 31, 1995....... 4,710 $ 47 $ 13,523 $(2,517) $ 13,777 $(36) $24,794
Net loss for the period........... -- -- -- -- (1,507) -- (1,507)
Issuance of common stock upon
exercise of stock options....... -- -- 81 -- -- 2 83
Tax benefit related to exercise of
stock options (Note 11)......... -- -- 35 -- -- -- 35
Cash dividends ($.04 per share)... -- -- -- -- (180) -- (180)
------ ------ ---------- ----------- -------- -------- -------
BALANCES, MARCH 31, 1996.......... 4,710 $ 47 $ 13,639 $(2,517) $ 12,090 $(34) $23,225
------ ------ ---------- ----------- -------- -------- -------
------ ------ ---------- ----------- -------- -------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited).
F-32
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: The interim statements have been prepared pursuant to the requirements
for reporting on Form 10-Q. The December 31, 1996 balance sheet
presented was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting
principles. The interim financial statements and notes thereto should
be read in conjunction with the Company's latest Annual Report on Form
10-K. In the opinion of management, the interim financial statements
reflect all adjustments necessary for a fair presentation of financial
position and operating results for the interim periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make
estimates and assumptions that effect the reported amounts of 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.
NOTE 2: The results of operations for the three months ended March 31, 1997
and 1996 are not necessarily indicative of results to be expected for
the full year.
NOTE 3: The consolidated financial statements include the accounts of Varsity
Spirit Corporation and its subsidiaries. All material intercompany
accounts and transactions are eliminated.
NOTE 4: Inventories are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Finished Goods.... $ 6,544 $3,608 $ 5,980
Raw Materials..... 2,098 1,811 1,869
----------- ------------ -----------
$ 8,642 $5,419 $ 7,849
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method.
NOTE 5: Prepaid expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Deferred costs:
Catalog and brochures....... $ 1,325 $ 330 $ 1,082
Camps, clinics and
championships............ 888 612 894
Supplies and samples.......... 603 414 616
Commissions................... 1,406 450 995
Prepaid tour costs............ 346 207 284
Insurance..................... 170 218 280
Other......................... 688 385 539
----------- ------------ -----------
$ 5,426 $2,616 $ 4,690
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
NOTE 6: Deferred sales consist of shipped uniform and accessory finished goods
that have not been invoiced. It is the policy of the Company to
reflect the sale in the financial statements during the month in which
the finished goods are shipped to the customer, but not to invoice the
sale until the customer's entire order has been shipped.
F-33
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7: The Company has a $9,000,000 bank line of credit which expires on June
30, 1997. No balances were outstanding under the agreement as of March
31, 1997, December 31, 1996, or March 31, 1996. The agreement requires
that the Company maintain certain financial ratios and maintain a
minimum tangible net worth. The line bears interest at the lower of
prime or LIBOR plus 1%.
NOTE 8: Income taxes have been provided based on the estimated annual
effective tax rates for the periods.
NOTE 9: For the three months ended March 31, 1997 and 1996, net income per
share calculations are based upon weighted average common and
equivalent shares outstanding totaling 4,732,000 and 4,705,000,
respectively.
NOTE 10: In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, 'Earnings per
Share' ('SFAS 128'). This statement simplifies the standards for
computing earnings per share ('EPS') previously found in APB Opinion
No. 15, 'Earnings per Share' as the presentation of primary and
fully-diluted EPS is replaced with Basic and Diluted EPS. Basic EPS
excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of
the entity.
SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, and applies to entities with
publicly-held common stock or potential common stock. The Company
will adopt SFAS 128 in the financial statements issued for the
year ended December 31, 1997. If the provisions of SFAS 128 had
been applied to the three months ended March 31, 1997, estimated
Basic EPS and Diluted EPS would have been $(0.38) and $(0.36),
respectively.
NOTE 11: Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
1997 1996
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Cash paid for:.......
Income taxes....... $158 $ 27
Interest........... $ -- $ --
</TABLE>
Non-cash financing activities:
During the three month periods ended March 31, 1997 and 1996,
additional paid-in-capital was increased by a reduction in income
taxes payable of $9,000 and $35,000, respectively, arising from the
exercise of stock options.
NOTE 12: On May 5, 1997, the Company, Riddell Sports, Inc., a Delaware
corporation ('Riddell'), and Cheer Acquisition Corporation, a
Tennessee corporation and a wholly owned subsidiary of Riddell ( the
'Merger Sub'), entered into an Agreement and Plan of Merger (the
'Merger Agreement') pursuant to which Merger Sub will offer to
purchase all outstanding shares of common stock, par value $0.01 per
share, of the Company (the 'Shares') at $18.90 per share, net to the
seller in cash (the 'Offer Price'). In addition to various conditions,
the offer is subject to the receipt of tenders of a majority of the
outstanding shares on a fully-diluted basis. Pursuant to the Merger
Agreement, as soon as practicable after the completion of the offer
and satisfaction or waiver of all conditions, the Merger Sub will be
merged with and into the Company (the 'Merger') with the Company
surviving the Merger as a wholly owned subsidiary of Riddell ( the
'Surviving Corporation'). At the time at which the Merger is
consummated (the 'Effective Time'), each Share then outstanding (other
than Shares held in treasury of the Company, Shares held by Riddell,
the Merger Sub or any
F-34
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
other wholly owned subsidiary of Riddell and Shares held by the
stockholders of the Company who exercise their dissenters' rights, if
any, under the Tennessee Business Corporation Act) will be converted
into the right to receive the Offer Price in cash.
In connection with the Merger Agreement, the Company has agreed to
prepay in full the Term Note issued to United Special Events, Inc.
('USE') in connection with the purchase by the Company's wholly owned
subsidiary, Varsity USA, Inc. of the spirit camp business of USE.
Under the terms of the Term Note, USE has the right to convert the
entire $600,000 principal amount of the Term Note into shares of
Common Stock of the Company at a conversion price of $14.97.
Additionally, the Company has agreed to terminate, immediately prior
to the Merger, outstanding options under its stock option plans,
resulting in option termination payments totalling approximately
$4,877,000.
F-35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Varsity Spirit Corporation
Memphis, Tennessee
We have audited the accompanying consolidated balance sheets of Varsity Spirit
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years ended December 31, 1996 and 1995 and the nine-month period ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Varsity Spirit
Corporation and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years ended December 31,
1996 and 1995 and the nine-month period ended December 31, 1994, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Memphis, Tennessee
February 12, 1997
F-36
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents............................ $ 5,080 $ 9,360
Accounts receivable, less allowance of $170 and $220
for possible losses............................... 6,650 7,162
Inventories (Note 2)................................. 4,926 5,419
Prepaid expenses (Note 3)............................ 2,272 2,616
Refundable income taxes.............................. 383 238
Deferred tax benefit (Note 8)........................ 176 259
------------ ------------
Total Current Assets................................... 19,487 25,054
Property and Equipment, less accumulated depreciation
(Note 4)............................................. 3,127 4,010
Goodwill, less accumulated amortization of $972 and
$1,193 (Note 1)...................................... 5,929 7,928
Other Assets........................................... 700 799
------------ ------------
$ 29,243 $ 37,791
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 1,678 $ 1,993
Accruals:
Compensation and payroll taxes.................... 266 849
Income taxes (Note 8)............................. 167 117
Other............................................. 99 156
Customer deposits.................................... 2,065 3,813
Current maturities of long-term debt (Note 6)........ -- 120
------------ ------------
Total Current Liabilities.............................. 4,275 7,048
Deferred Income Taxes (Note 8)......................... 174 366
Long-term Debt (Notes 1 and 6)......................... -- 480
------------ ------------
Total Liabilities...................................... 4,449 7,894
------------ ------------
Commitments and Contingencies (Notes 7 and 10)
Shareholders' Equity (Notes 7 and 11)
Preferred stock, $.01 par value--shares authorized
5,000,000; none issued............................ -- --
Common stock, $.01 par value--shares authorized
10,000,000; shares issued 4,710,386 and
4,735,961......................................... 47 47
Additional paid-in capital........................... 13,523 14,144
Excess of purchase price over predecessor basis...... (2,517) (2,517)
Retained earnings.................................... 13,777 18,253
------------ ------------
24,830 29,927
Treasury stock, at cost, 215,504 and 179,378 shares.... (36) (30)
------------ ------------
Total Shareholders' Equity............................. 24,794 29,897
------------ ------------
$ 29,243 $ 37,791
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED DECEMBER 31,
DECEMBER 31, ------------------
1994 1995 1996
----------------- ------- -------
<S> <C> <C> <C>
REVENUES:
Uniforms and accessories...................... $35,866 $44,049 $49,472
Camps and events.............................. 23,721 31,449 38,977
----------------- ------- -------
59,587 75,498 88,449
----------------- ------- -------
COSTS OF REVENUES:
Uniforms and accessories...................... 18,659 23,379 26,849
Camps and events.............................. 16,826 23,114 26,764
----------------- ------- -------
35,485 46,493 53,613
----------------- ------- -------
Gross profit............................... 24,102 29,005 34,836
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 16,117 22,679 26,388
----------------- ------- -------
Operating income........................... 7,985 6,326 8,448
----------------- ------- -------
OTHER
Interest income--net.......................... 150 178 166
----------------- ------- -------
Income before taxes on income.............. 8,135 6,504 8,614
TAXES ON INCOME (Note 8)........................ 3,218 2,341 3,414
----------------- ------- -------
NET INCOME...................................... $ 4,917 $ 4,163 $ 5,200
----------------- ------- -------
----------------- ------- -------
WEIGHTED AVERAGE COMMON SHARES AND
EQUIVALENT SHARES OUTSTANDING (Note 7)........ 4,587 4,679 4,734
----------------- ------- -------
----------------- ------- -------
NET INCOME PER SHARE (Note 7)................... $ 1.07 $ 0.89 $ 1.10
----------------- ------- -------
----------------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
EXCESS OF
PURCHASE
COMMON STOCK ADDITIONAL PRICE OVER
-------------- PAID-IN PREDECESSOR RETAINED TREASURY
SHARES AMOUNT CAPITAL BASIS EARNINGS STOCK TOTAL
------ ------ ---------- ------------ --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, MARCH 31, 1994........... 4,699 $ 47 $ 13,016 $ (2,517) $ 5,234 $(44) $15,736
Net income for the period........ -- -- -- -- 4,917 -- 4,917
Issuance of common stock upon
exercise of stock options...... -- -- 62 -- -- 2 64
Tax benefit related to exercise
of stock options............... -- -- 24 -- -- -- 24
------ ------ ---------- ------------ --------- -------- -------
BALANCES, DECEMBER 31, 1994........ 4,699 47 13,102 (2,517) 10,151 (42) 20,741
Net income for the period........ -- -- -- -- 4,163 -- 4,163
Issuance of common stock upon
exercise of stock options...... 11 -- 279 -- -- 6 285
Tax benefit related to exercise
of stock options............... -- -- 142 -- -- -- 142
Cash dividends ($.12 per
share)......................... -- -- -- -- (537) -- (537)
------ ------ ---------- ------------ --------- -------- -------
BALANCES, DECEMBER 31, 1995........ 4,710 47 13,523 (2,517) 13,777 (36) 24,794
Net income for the period........ -- -- -- -- 5,200 -- 5,200
Issuance of common stock upon
exercise of stock options...... 26 -- 453 -- -- 6 459
Tax benefit related to exercise
of stock options............... -- -- 168 -- -- -- 168
Cash dividends ($.16 per
share)......................... -- -- -- -- (724) -- (724)
------ ------ ---------- ------------ --------- -------- -------
BALANCES, DECEMBER 31, 1996........ 4,736 $ 47 $ 14,144 $ (2,517) $18,253 $(30) $29,897
------ ------ ---------- ------------ --------- -------- -------
------ ------ ---------- ------------ --------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
NINE MONTHS ENDED ------------------
DECEMBER 31, 1994 1995 1996
----------------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 4,917 $ 4,163 $ 5,200
Deferred income taxes........................... (15) 21 109
Depreciation and amortization................... 577 992 1,318
Changes in operating assets and liabilities, net
of effect of
businesses acquired (Note 1)
Accounts receivable.......................... (3,073) (1,544) (482)
Inventories.................................. 61 (1,039) (242)
Prepaid expenses............................. 3,778 (859) (209)
Refundable income taxes...................... -- (383) 145
Accounts payable............................. (193) 210 62
Accruals..................................... 100 (695) 741
Customer deposits............................ (3,103) 890 1,650
-------- ------- -------
Net cash provided by operating
activities.............................. 3,049 1,756 8,292
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of USE (Note 1)..................... -- -- (1,926)
Net cash received upon acquisition of Intropa
(Note 1)..................................... 764 -- --
Purchase of property and equipment.............. (667) (1,984) (1,828)
Decrease (increase) in other assets............. 19 (319) 7
-------- ------- -------
Net cash provided (used) by investing
activities.............................. 116 (2,303) (3,747)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.......... 64 286 459
Cash dividends.................................. -- (537) (724)
-------- ------- -------
Net cash provided (used) by financing
activities.............................. 64 (252) (265)
-------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (Note 9)............................ 3,229 (799) 4,280
CASH AND CASH EQUIVALENTS, at beginning of
period.......................................... 2,650 5,879 5,080
-------- ------- -------
CASH AND CASH EQUIVALENTS, at end of period....... $ 5,879 $ 5,080 $ 9,360
-------- ------- -------
-------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF ACCOUNTING POLICIES
Business
Varsity Spirit Corporation (the 'Company') is involved in the business of
organizing, administering, and producing instructional camps, clinics, and
special events predominantly in the United States for spirit groups associated
with secondary schools, colleges, and universities through its divisions,
Universal Cheerleaders Association ('UCA'), Universal Dance Association ('UDA'),
Varsity Sports Gyms ('VSG') and Varsity Deutschland ('VSD') and its wholly-owned
subsidiary, Varsity USA, Inc. ('USA'), which acquired the camp business assets
of United Special Events, Inc., on May 15, 1996. Instructional camps and clinics
include large residential camps and smaller private individual squad level
camps. Its wholly-owned subsidiary, Varsity Spirit Fashions & Supplies, Inc.
('Varsity'), designs and markets cheerleader uniforms and accessories to spirit
groups associated with secondary schools, colleges and universities primarily in
the United States. The selling cycle of the Company is highly seasonal.
Varsity/Intropa Tours, Inc. ('Intropa'), a wholly-owned subsidiary acquired
December 1, 1994, organizes group performance tours, primarily in Europe, for
cheerleaders, bands, orchestras and choirs.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions are
eliminated.
Business Acquisitions
Effective May 15, 1996, the Company's subsidiary, USA, acquired certain of
the assets of United Special Events, Inc. ('USE'), a company which specializes
in organizing, administering, and producing instructional camps, clinics, and
special events, predominately in the western United States, for spirit groups
associated with secondary schools, colleges, and universities. The purchase
price was approximately $1.95 million, of which $1.35 million was paid at
closing and the $600,000 balance was financed by a five-year unsecured
convertible promissory note, bearing interest at 8%. The acquisition was
accounted for using the purchase method. The purchase price and liabilities
assumed were allocated to assets acquired based on their estimated fair values,
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Purchase price, including out of pocket
expenses of $88....................... $2,038
Current liabilities assumed............. 369
Bank debt retired at closing............ 644
Current assets.......................... (530)
Fixed assets............................ (120)
Covenant not to compete................. (120)
-------
Goodwill................................ $2,281
-------
-------
</TABLE>
The USA operations since the date of acquisition have been included in the
Company's consolidated results of operations. The operating results would not
have been materially different, if the acquisition had occurred on January 1,
1996.
Effective December 1, 1994, a subsidiary acquired certain of the assets of
Intropa International U.S.A., Inc. ('Intropa'), a tour company which specializes
in performance tours for cheerleaders, bands, orchestras and choruses. Total
cash consideration was approximately $1.25 million, of which $961,000 was paid
at closing. $240,000 of the balance was included in accounts payable at December
31, 1994 and was paid 120 days after the closing date. The acquisition was
accounted for using the purchase method.
The Intropa operations since the date of acquisition have been included in
the Company's consolidated results of operations.
F-41
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles ('GAAP') 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.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade receivables, other
current assets, accounts payable and accruals meeting the definition of a
financial instrument approximate fair value.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Samples
The Company provides samples of merchandise carried in the catalogs to its
sales representatives. All costs related to samples used in the sale of the
Company's uniforms and accessories are amortized ratably over three years.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed using
the straight-line and accelerated methods for financial reporting purposes over
the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Computer equipment.......... 5
Computer software........... 3
Machinery and equipment..... 5-7
Furniture and fixtures...... 5
Leasehold improvements...... 2-6
Vehicles.................... 3-5
</TABLE>
For income tax purposes, depreciation is computed using primarily
accelerated methods.
Goodwill
Goodwill, stated at cost less accumulated amortization, represents the
purchase cost allocated to the earning capacity of acquired companies, and is
amortized over periods from 35 to 40 years on the straight-line basis. The
Company continually evaluates the market coverage and earning capacity of its
acquirees to determine if the unamortized goodwill can be recovered from their
undiscounted future cash flows over the remaining amortization period. Should
this evaluation indicate that goodwill will not be recoverable, the Company's
carrying value of the goodwill will be reduced by the estimated shortfall of
undiscounted cash flows.
Catalog Costs
Cost of producing catalogs are deferred and amortized over the selling
season for uniforms and accessories.
Revenue Recognition
Revenue is recognized on sales of uniforms at the time of shipment and on
camps, clinics, special events and tours on the start date of the respective
activity. Expenses incurred and payments received that are associated with the
camps, clinics, events or tours are deferred until the revenue is recognized.
F-42
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
Taxes on Income
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, 'Accounting for Income
Taxes' ('FAS 109').
Net Income Per Share
Net income per share is computed based on the weighted average number of
common shares outstanding during each period, after giving effect to the
exercise of dilutive options (see Note 7) and assuming the repurchase, at fair
market value of shares using the proceeds from such exercise.
Stock Options
Stock options are granted to certain officers, employees, directors and
consultants generally at the prevailing market price on the date of the grant.
The Company makes no charge to earnings with respect to stock options, except
where the option price is less than the market price at date of grant. Proceeds
from the sale of unissued common stock under these options are credited to
common stock and additional paid-in capital at the time the options are
exercised. If treasury stock is issued, the Company's treasury stock is reduced
by the cost of the treasury shares reissued and additional paid-in capital is
increased for the excess of the option price over the cost of the treasury
stock.
Statement of Financial Accounting Standards No. 123, 'Accounting for
Stock-Based Compensation' ('SFAS No. 123') issued by the Financial Accounting
Standards Board is effective for transactions entered into in fiscal years that
begin after December 15, 1995. As allowed under the provisions of SFAS No. 123,
the Company will continue to measure compensation cost for employee stock-based
compensation plans using the intrinsic value based method of accounting
prescribed by the Accounting Principles Board Opinion No. 25, 'Accounting for
Stock Issued to Employees,' and has made pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied (see Note 7).
Employee Benefits
The Company provides a defined contribution retirement plan for
substantially all of its full-time employees which meets the requirements of
Section 401(k) of the Internal Revenue Code. The Company's policy is to fund the
retirement plan costs accrued.
Fiscal Year End
Effective April 1, 1994, the Company's Board of Directors approved a change
in the Company's fiscal year from March 31 to December 31.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 128, 'Earnings Per Share' ('SFAS 128'). This statement
simplifies the standards for computing EPS previously found in APB Opinion No.
15, 'Earnings Per Share' as the presentation of primary and fully-diluted EPS is
replaced with Basic and Diluted EPS. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, and applies to entities with publicly-held common stock
or potential common stock. The Company will adopt SFAS 128 in financial
statements issued for the year ending December 31, 1997. If the provisions of
SFAS 128 had been applied to the year ended December 31, 1996, estimated Basic
EPS and Diluted EPS would have been $1.15 and $1.10, respectively.
F-43
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Finished products.... $3,217 $3,608
Raw materials........ 1,709 1,811
------ ------
Inventories.......... $4,926 $5,419
------ ------
------ ------
</TABLE>
NOTE 3--PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred costs:
Catalogs............................... $ 250 $ 330
Camps, clinics and championships....... 575 612
Prepaid insurance........................ 413 218
Supplies and samples..................... 342 414
Prepaid commissions...................... 164 450
Prepaid tour costs....................... 339 207
Other.................................... 189 385
------ ------
Prepaid expenses......................... $2,272 $2,616
------ ------
------ ------
</TABLE>
Deferred catalog costs consist of the Company's expenses associated with
planning, processing, and distributing the Company's uniform and accessory,
danceware and youth catalogs to schools and universities throughout the United
States. The catalogs are mailed in the Company's first quarter of the following
year and the costs of the catalogs are amortized over the Company's selling
season for uniforms and accessories.
Deferred camps and clinics costs are costs incurred in connection with the
organization of the Company's summer cheerleader camp and clinic programs for
the following summer season. These costs are amortized during June, July and
August, which are the months in which the cheerleading camps and clinics are
held.
Deferred championship costs comprise costs associated with organizing and
producing the National Dance Team, High School and College Cheerleading
Championships sponsored by the Company. These costs and associated revenues are
recognized in the month the event occurs.
Direct costs related to organizing, scheduling and arranging upcoming group
tours are recorded as prepaid tour costs and the costs and revenues associated
with the tour are recognized when the tour begins.
F-44
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment and software.... $ 2,735 $ 4,013
Machinery and equipment............ 1,786 1,999
Furniture and fixtures............. 1,347 1,665
Leasehold improvements............. 278 414
Vehicles........................... 68 69
------- -------
6,214 8,160
Less accumulated depreciation...... (3,087) (4,150)
------- -------
Net property and equipment......... $ 3,127 $ 4,010
------- -------
------- -------
</TABLE>
Depreciation expense charged to operations was $793,000 and $1,065,000,
respectively, for each of the years ended December 31, 1995 and 1996 and
$444,000 for the nine months ended December 31, 1994.
NOTE 5--REVOLVING CREDIT AGREEMENT
The Company has a revolving credit agreement with a bank which is available
through June 30, 1997, and provides for maximum borrowings of $9,000,000. Under
the agreement, outstanding borrowings bear interest at the lower of prime (8.25%
at December 31, 1996) or LIBOR plus 1% (6.53% at December 31, 1996). The line of
credit is unsecured, but the Company has agreed not to subordinate any
additional assets except in the ordinary course of business without the bank's
approval. The line of credit also requires that the Company maintain certain
financial ratios and meet a minimum tangible net worth. There were no amounts
outstanding under this revolving line of credit agreement at December 31, 1995
or 1996.
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Promissory note bearing interest at 8%,
payable in annual installments of
$120,000, plus interest, through May
2001.................................. $ 600
Current portion......................... (120)
--------------
Long-term debt.......................... $ 480
--------------
--------------
</TABLE>
On any payment date, the holder of the note shall be entitled, at their
discretion, to convert not less than 75% of any installment of unpaid principal
amount of the note into shares of the Company's common stock based upon a
conversion price of $14.97 per share.
Management believes the carrying value of the Company's long-term debt
approximates fair value based on the current rates offered to the Company.
NOTE 7--COMMON STOCK
On January 31, 1995, the Company's Board of Directors authorized a
three-for-two stock split to be effected in the form of a 50% stock dividend to
be distributed on February 24, 1995 to shareholders of record on February 14,
1995. Shareholders' equity has been restated to give retroactive recognition to
the stock split for all periods presented by reclassifying from retained
earnings to common stock the par value of the additional shares
F-45
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--COMMON STOCK--(CONTINUED)
arising from the split. In addition, all references in the financial statements
to number of shares, per share amounts and stock option data of the Company's
common stock have been restated.
The Company maintains two stock option plans, the 1989 Stock Option Plan
and the 1991 Stock Option Plan. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion 25, Accounting for Stock Issued to Employees, and related
Interpretations. Under APB Opinion 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation cost is recognized. Under the 1989 plan,
270,000 options were granted to certain employees at an initial exercise price
of $5.00 per share. The options vested in three equal annual installments ending
April 1, 1995 and expire ten years from date of grant. The Company acquired the
shares to cover the exercise of the 1989 options from its two largest
stockholders for $.17 per share. In November 1991, the 1989 plan was amended to
provide that cancelled options would become available for additional grants at
an exercise price equal to fair market value of the shares at the date of such
grants.
The 1991 plan, as amended, provides options to acquire 600,000 shares that
may be granted to officers, directors and key employees at an exercise price
equal to fair market value at date of grant (110% of fair market value for
options issued to holders of more than 10% of Company stock). Options may be
exercised for a term determined by the Board of not less than one year or more
than ten years from the date of grant.
At December 31, 1996, 21,049 options are available for grant under the 1989
plan, and 159,408 options remain available for grants under the 1991 plan, as
amended.
SFAS No. 123, 'Accounting for Stock-Based Compensation' requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in SFAS
123. The Company estimates the fair value of each stock option on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the years ended December 31,
1995 and 1996, respectively; dividend yield of 1.8597% for both years; expected
volatility of 40.59% for both years; risk-free interest rates of 6.5% for both
years; and expected option lives of 7 years for both years.
Under the accounting provisions of SFAS No. 123, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
(IN THOUSANDS
EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net income--as reported............... $ 4,163 $ 5,200
Net income--pro forma................. $ 4,012 $ 4,867
Earnings per share--as reported....... $ 0.89 $ 1.10
Earnings per share--pro forma......... $ 0.86 $ 1.03
------- -------
------- -------
</TABLE>
F-46
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--COMMON STOCK--(CONTINUED)
Information regarding the status of the Company's two fixed stock option
plans as of December 31, 1994, 1995 and 1996 and changes during the nine months
ended December 31, 1994 and the years ending December 31, 1995 and 1996 is
presented below:
<TABLE>
<CAPTION>
1995 1996
--------------------- ---------------------
WEIGHTED- WEIGHTED-
1994 AVERAGE AVERAGE
-------- EXERCISE EXERCISE
SHARES SHARES PRICE SHARES PRICE
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of period..... 373,055 353,533 $ 6.40 457,508 $ 8.35
Options granted.............................. -- 162,475 11.96 179,890 14.63
Options exercised............................ (12,224) (47,878) 5.97 (61,701) 7.44
Options cancelled............................ (7,298) (10,622) 9.23 (7,251) 12.71
-------- -------- --------- -------- ---------
Options outstanding, end of period........... 353,533 457,508 $ 8.35 568,446 $ 10.36
Option price range at end of period.......... $5.00 to $5.00 to $5.00 to
$9.50 $13.50 $15.95
Option price range for exercised shares...... $5.00 to $5.00 to $5.00 to
$8.67 $9.34 $9.34
Options available for grant at end of
period..................................... 204,949 203,096 180,457
-------- -------- --------- -------- ---------
Weighted-average fair value of options,
granted during the period.................. $ 5.82 $ 7.14
--------- ---------
--------- ---------
</TABLE>
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS
WEIGHTED- -------------------------
AVERAGE WEIGHTED- WEIGHTED-
EXERCISABLE REMAINING AVERAGE AVERAGE
- ----------------------- NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$5.00- 8.67.... 226,206 5.3 years $6.07 226,206 $6.07
9.50- 9.54.... 20,475 6.5 years 9.53 20,475 9.53
11.83-13.01.... 145,775 8.0 years 11.98 48,592 11.98
14.50-15.95.... 175,990 9.2 years 14.64 N/A
----------- --------- ----------- ---------
$5.00-15.95.... 568,446 295,273
----------- -----------
----------- -----------
</TABLE>
F-47
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--TAXES ON INCOME
Under FAS 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Taxes on income in the consolidated statements of income are made up of the
following components:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED DECEMBER 31,
DECEMBER 31, ----------------
1994 1995 1996
------------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...... $2,763 $1,950 $2,802
State........ 470 370 499
------- ------ ------
3,233 2,320 3,301
------- ------ ------
Deferred:
Federal...... (13) 19 96
State (2) 2 17
------- ------ ------
(15) 21 113
------- ------ ------
Taxes on
income....... $3,218 $2,341 $3,414
------- ------ ------
------- ------ ------
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Inventory........................ $ 109 $ 172
Bad debt allowance............... 67 87
----- -----
Total deferred tax assets.......... 176 259
Deferred tax liabilities:
Property and equipment........... (174) (329)
Goodwill and other assets........ -- (37)
----- -----
Total deferred tax liabilities..... (174) (366)
----- -----
Net deferred tax asset
(liability)...................... $ 2 $(107)
----- -----
----- -----
</TABLE>
The effective tax rate on income was different from the federal statutory
tax rate. The following summary reconciles taxes at the federal statutory tax
rate with the effective rate:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED DECEMBER 31,
DECEMBER 31, -------------
1994 1995 1996
------------------ ---- ----
<S> <C> <C> <C>
Taxes on income at federal
statutory rate................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income taxes, net of
federal tax benefit........... 3.8 3.8 3.9
Amortization of goodwill......... .5 .7 .6
Non-deductible meals and
entertainment................. 1.3 1.9 1.7
Other items...................... -- (4.4) (.6)
----- ---- ----
Taxes on income at effective
rate............................. 39.6% 36.0% 39.6%
----- ---- ----
----- ---- ----
</TABLE>
F-48
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the consolidated statements of cash flows, the Company
considers cash on hand and in checking, savings and money market accounts to be
cash equivalents.
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED DECEMBER 31,
DECEMBER 31, -----------------
1994 1995 1996
----------------------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for:
Income taxes........... $ 3,186 $2,826 $3,035
Interest............... $ 1 $ 28 $ 27
------- ------ ------
------- ------ ------
</TABLE>
Non-cash investing and financing activities:
During the years ended December 31, 1996 and 1995, and the nine-month
period ended December 31, 1994, additional paid-in capital was increased by a
reduction in income taxes payable of $168,000, $142,000, and $24,000,
respectively, arising from the exercise of stock options.
In May 1996, the Company purchased certain assets of United Special Events,
Inc. for cash consideration of approximately $1.95 million. In conjunction with
the acquisition, liabilities were assumed as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired..................... $3,051
Cash paid to seller and transaction costs......... (2,082)
Deferred consideration (Note 6)................... (600)
-------
Liabilities assumed............................... $ 369
-------
-------
</TABLE>
In December 1994, the Company purchased all of the assets of
Varsity/Intropa Tours for cash consideration of approximately $1.25 million. In
conjunction with the acquisition, liabilities were assumed as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired..................... $5,394
Cash paid to the seller and transactions costs.... (1,018)
Deferred consideration............................ (292)
-------
Liabilities assumed............................... $4,084
-------
-------
</TABLE>
NOTE 10--COMMITMENTS AND CONTINGENCIES
A. Leases
The Company's office facilities and warehouse space are leased under
noncancellable operating leases which expire at various times from October 1997
through November 2000. Rent expense for the years ended December 31, 1996 and
1995, and the nine-month period ended December 31, 1994 was $739,000, $684,000,
and $388,000, respectively.
F-49
<PAGE>
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
As of December 31, 1996, future net minimum rental payments required under
operating leases that have initial or remaining noncancellable terms in excess
of one year are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------ --------------
<S> <C>
1997.................... $591
1998.................... 155
1999.................... 142
2000.................... 89
------
Total minimum lease
payments.............. $977
------
------
</TABLE>
B. Concentration of Credit Risk
The Company earns substantially all of its revenues from sales to and
events and activities sponsored primarily by secondary schools, colleges and
universities throughout the United States. The Company generally requires
deposits for mail order sales of merchandise and for camp registrations. The
Company maintains reserves for potential losses and such losses have not
exceeded management's expectations.
C. Litigation
The Company is involved in various legal matters in the ordinary course of
its business. None of these matters are expected to have a material adverse
effect on the Company's consolidated financial statements.
D. Supplier Agreements
The Company has multi-year agreements with independent manufacturers to
produce its uniforms under which garment prices and production levels are
negotiated annually.
E. Retirement Plan
Effective January 1, 1993, the Company adopted a tax-qualified employee
benefit plan which meets the criteria of Section 401(k) of the Internal Revenue
Code. Under the Plan, participants may elect to defer from 2% to 15% of their
compensation and the Company may make discretionary contributions, as determined
annually by the Company's management, of up to 1.25% of the employees'
compensation. Each participant is fully vested at all times in their respective
contribution. Participants become fully vested in contributions made by the
Company on a graduated scale over a seven-year period. Operations were charged
with $35,000 related to this plan in the nine-month period ended December 31,
1994, $25,000 for the year ended December 31, 1995 and $27,500 for the year
ended December 31, 1996.
NOTE 11--SUBSEQUENT EVENT
On February 13, 1997, the Company's Board of Directors declared a $.055 per
share cash dividend to be paid on March 6, 1997, to shareholders of record as of
February 24, 1997.
F-50
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information............................................ 3
Special Cautionary Notice Regarding Forward-Looking Statements... 4
Prospectus Summary............................................... 5
Risk Factors..................................................... 20
The Acquisition.................................................. 27
Use of Proceeds.................................................. 28
Capitalization................................................... 29
Unaudited Pro Forma Condensed Consolidated Financial Data........ 30
Selected Financial Data of Riddell............................... 37
Selected Financial Data of Varsity............................... 39
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 41
The Exchange Offer............................................... 56
Business......................................................... 62
Management....................................................... 84
Principal Stockholders........................................... 90
Certain Transactions............................................. 92
Description of the Senior Notes.................................. 93
Description of Other Indebtedness................................ 118
United States Federal Income Tax Consequences of the Exchange
Offer.......................................................... 120
Plan of Distribution............................................. 120
Legal Matters.................................................... 121
Experts.......................................................... 121
Index to Financial Statements.................................... F-1
</TABLE>
UNTIL NOVEMBER 5, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW SENIOR NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
------------------------------------------------------
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------------------------------------------------------
RIDDELL SPORTS INC.
$115,000,000
10 1/2% SENIOR NOTES DUE 2007
------------------------
PROSPECTUS
------------------------
AUGUST 7, 1997
------------------------------------------------------
------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) Riddell Sports Inc., All American Sports Corporation, Proacq Corp.,
Ridmark Corporation, Equilink Licensing Corporation and RHC Licensing
Corporation
Section 145 of the Delaware General Corporation Law provides generally that
a person sued as a director, officer, employee or agent of a corporation may be
indemnified by the corporation in nonderivative suits for expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement if such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. In the case of criminal
actions and proceedings, such person must have had no reasonable cause to
believe his conduct was unlawful. Indemnification of expenses is authorized in
stockholder derivative suits where such person acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation and so long as he had not been found liable for negligence or
misconduct in the performance of his duty to the corporation. Even in this
latter instance, the court may determine that in view of all the circumstances
such person is entitled to indemnification for such expenses as the court deems
proper. A person sued as a director, officer, employee or agent of a corporation
who has been successful in defense of the action must be indemnified by the
corporation against expenses.
In addition to the indemnification provided as described below, the Company
is a party to employment agreements with each of Messrs. Nederlander, Toboroff,
and Mauer (executive officers and directors of the Company); and Messrs. Cougill
(an executive officer of Riddell, Inc., a wholly owned subsidiary of the
Company) and Gleisner (President of All American Sports Corporation, a wholly
owned subsidiary of the Company) indemnifying such individual against liability
arising out of his actions or the performance of his duties within the scope of
his employment not taken in bad faith. In addition, the employment agreements
entered into by the Company and Messrs. Nederlander, Toboroff and Mauer provide
that the Company shall assume primarily responsibility for legal fees incurred
by such officer in any action as to which such officer is entitled to have his
legal fees paid for by the Company, and that the Company shall pay such fees
directly to counsel rather than reimburse such officer.
(i) Riddell Sports Inc., All American Sports Corporation, Proacq Corp. and
Ridmark Corporation
The Certificates of Incorporation, as amended, of Riddell Sports, Inc., All
American Sports Corporation, Proacq Corp. and Ridmark Corporation each contain
the indemnification provisions set forth below:
'NINTH: The personal liability of the directors of the corporation is
hereby eliminated to the fullest extent permitted by paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of the State
of Delaware, as the same may be amended and supplemented.'
'TENTH: The corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any and
all expenses, liabilities or other matters referred to in or covered by
said section, and the indemnification provided for herein shall not be
deemed exclusive of any other rights to which those indemnified may be
entitled under any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as
to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director, officer, employee or agent
and shall inure to the benefit of the heirs, executors and administrators
of such a person.'
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<PAGE>
(ii) Equilink Licensing Corporation and RHC Licensing Corporation
The Certificates of Incorporation, as amended, of Equilink Licensing
Corporation and RHC Licensing Corporation each contain the indemnification
provisions set forth below:
'EIGHTH: The personal liability of a director to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director is hereby eliminated, provided that this Article shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware, or (iv) for any transaction from
which the director derived an improper personal benefit.'
'NINTH: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any and
all of the expenses, liabilities, or other matters referred to in or
covered by said section, and the indemnification provided for herein shall
not be deemed exclusive of any other rights to which those indemnified may
be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise both as to action in his official
capacity and as to action in another capacity while holding such office,
and shall continue as to a person who has ceased to be director, officer,
employee, or agent and shall inure to the benefit of the heirs, executors,
and administrators of such a person.'
(b) Riddell, Inc.
Section 5/8.75 of the Illinois Business Corporation Act of 1983 provides
generally that a person sued as a director, officer, employee or agent of a
corporation may be indemnified by the corporation in nonderivative suits for
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation. In
the case of criminal actions and proceedings, such person must have had no
reasonable cause to believe his conduct was unlawful. Indemnification of
expenses is authorized in stockholder derivative suits where such person acted
in good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation and so long as he had not been found liable to
the corporation. Even in this latter instance, the court may determine that in
view of all the circumstances such person is entitled to indemnification for
such expenses as the court deems proper. A person sued as a director, officer,
employee or agent of a corporation who has been successful in defense of the
action must be indemnified by the corporation against expenses.
The By-Laws of Riddell, Inc. (formerly known as EN&T Associates Inc.)
contain the indemnification provisions set forth below:
'ARTICLE IV INDEMNIFICATION
The corporation shall, to the fullest extent permitted by the
provisions of the Business Corporation Act of 1983, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have
power to indemnify under said provisions from and against any and all of
the expenses, liabilities, or other matters referred to in or covered by
said provisions, and the indemnification provided for herein shall not be
deemed exclusive of any other rights to which those seeking indemnification
may be entitled under any By-Law, agreement, vote of shareholders or
disinterested directors, or otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent, and shall inure to the benefit of the heirs,
executors, and administrators of such a person.'
(c) Cheer Acquisition Corp., International Logos, Inc., Varsity/Intropa
Tours, Inc., Varsity Spirit Corporation and Varsity USA, Inc.
The Tennessee For-Profit Business Corporations Law set forth in Part 5 of
Section 48-18 of the Tennessee Code provides generally that a corporation may
indemnify a director made a party to a proceeding based on his role as a
director if the director's conduct was in good faith and the director reasonably
believed that his conduct was in, or not opposed to, the best interests of the
corporation. In the case of criminal actions and proceedings, such person must
have had no reasonable cause to believe his conduct was unlawful. A director may
not be indemnified if he has been found liable to the corporation. Unless
limited by its charter, a corporation shall indemnify a director or officer who
was wholly successful, on the merits or otherwise, in the defense of any
II-2
<PAGE>
proceeding to which the director was a party because the director is or was a
director of the corporation against reasonable expenses incurred by the director
in connection with the proceeding ('Mandatory Indemnification'). A director or
officer may be entitled court-ordered indemnification if the court determines he
is entitled to Mandatory Indemnification or believes he is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances (limited
to reasonable expenses incurred). A corporation may advance reasonable expenses
to a director or officer in certain circumstances. A corporation may also
indemnify and advance expenses to an officer who is not a director to the
extent, consistent with public policy, that may be provided by its charter,
bylaws, general or specific action of its board of directors or contract.
(i) Cheer Acquisition Corp.
The Charter of Cheer Acquisition Corp. provides that '8. Indemnification.
The corporation shall have the power to indemnify its directors to the fullest
extent permitted by law.' Cheer Acquisition Corp.'s By-Laws contain the
indemnification provisions set forth below:
'ARTICLE IX--INDEMNIFICATION
Section 1. Authority to Indemnify. The corporation may indemnify any
person who was or is a party or is threatened to be made a defendant or
respondent to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative and
whether formal or informal, by reason of the fact that he is or was a
director of the corporation or is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise, against judgments, settlements, penalties, fines
(including an excise tax assessed with respect to an employee benefit
plan), or reasonable expenses (including counsel fees), incurred with
respect to a proceeding if (a) he conducted himself in good faith and (b)
he reasonably believed (i) in the case of conduct in his official capacity
with the corporation, that his conduct was in its best interests; and (ii)
in all other cases, that his conduct was at least not opposed to its best
interests; and (c) with respect to any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. A director's conduct
with respect to an employee benefit plan for a purpose he reasonably
believed to be in the interests of the participants in and beneficiaries of
the plan is conduct that satisfies the requirement of (b)(ii). The
termination of a proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not meet the standard of conduct
described in this section.
Section 2. Mandatory Indemnification. The corporation shall
indemnify any director if he was wholly successful, on the merits or
otherwise, in the defense of any proceeding to which he was a party because
he is or was a director of the corporation against reasonable expenses
incurred by him in connection with the proceeding.
Section 3. Other Determination of Rights. No indemnification under
Section 1 hereof (unless ordered by a court) shall be made by the
corporation unless authorized in the specific case upon a determination
that indemnification of the director is proper in the circumstances because
he has met the applicable standard of conduct set forth in Section 1
hereof. Such determination shall be made.
(a) by a majority vote of a quorum of directors who are not at that
time parties to the proceeding;
(b) if such a quorum is not obtainable by a majority vote of a
committee duly designated by the board of directors (in which
designation directors who are parties may participate), consisting
solely of two or more directors who are not at that time parties to the
proceeding;
(c) by independent special legal counsel (compensated by the
corporation) in a written opinion, selected by the board of directors or
committee in the manner described in subsections (a) or (b); provided
however that if the requirements of neither (a) nor (b) can be met, then
by a majority vote of the full board of directors; or
(d) by the shareholders, but shares owned by or voted under the
control of directors who are at the time parties to the proceeding may
not be voted in the determination.
Section 4. Advances of Expenses. Expenses incurred by a director who
is a party or threatened to be made a defendant or respondent to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal,
may be paid by the corporation in advance of the final disposition of such
action, suit, or proceeding as determined and
II-3
<PAGE>
authorized in the manner specified in Section 3 of this article, upon (a)
the receipt of a written affirmation by the director of his good faith
belief that he has met the required standard of conduct; (b) the receipt of
an undertaking by or on behalf of the director, constituting such
director's unlimited general obligation, to repay such amount if it is
ultimately determined that he is not entitled to indemnification by the
corporation, and (c) a determination is made that the facts then known to
those making the determination would not preclude indemnification under
this article.
Section 5. Nonexclusiveness; Heirs. The indemnification provided by
this article shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled a matter of law or under the
charter, these bylaws, any agreement, any insurance purchased by the
corporation, or otherwise, both as to action in his official capacity and
as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be director, trustee, officer, or
employee and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
Section 6. Purchase of Insurance. The corporation may purchase and
maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, partner, trustee, or
employee of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this article
or of the Tennessee Business Corporation Act.'
(ii) International Logos, Inc.
The By-Laws of International Logos, Inc. contain the indemnification
provisions set forth below:
'6. Indemnification of Directors. The corporation shall indemnify
any and all persons who may serve or who have served at any time as
Directors or officers, or who at the request of the Board of Directors of
the corporation may serve or at any time have served as Directors or
officers of another corporation in which the corporation at such time owned
or may own shares of stock or of which it was or may be a creditor, and
their respective heirs, administrators, successors and assigns, against any
and all expenses, including amounts paid in settlement (before or after
suit is commenced), actually and necessarily incurred by such persons in
connection with the defense or settlement of any claim, action, suit or
proceeding in which they, or any of them, are made parties, or a party, or
which may be asserted against them or any of them, by reason of being or
having been Directors or officers or a Director or officer of the
corporation, or of such other corporation, except in relation to matters as
to which any such Director or officer or former Director or officer or
person shall be adjudged in any action, suit or proceeding to be guilty of
willful misfeasance of malfeasance in the performance of his duty. Such
indemnification shall be in addition to any rights to which those
indemnified may be entitled under any law, bylaw, agreement, vote of
stockholders or otherwise.'
(iii) Varsity Spirit Corporation
The Amended and Restated Charter of Varsity Spirit Corporation contains the
indemnification provisions set forth below:
'ELEVENTH. A. RIGHT TO INDEMNIFICATION. Each person who was or is a
director of the Company and who was or is made a party or is threatened to
be made a party to or is otherwise involved (including, without limitation,
as a witness) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a 'proceeding'), by reason of
the fact that he or she is or was a director or officer of the Company or
is or was serving at the request of the Company as a director, officer,
partner, trustee, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (hereinafter an 'Indemnified
Director'), whether the basis of such proceeding is alleged action in an
official capacity as a director or officer or in any other capacity while
serving as a director or officer, shall be indemnified and held harmless by
the Company to the fullest extent permitted by the Tennessee Business
Corporation Act, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than such law
permitted the Company to provide prior to such amendment), against all
liability, all reasonable expense and all loss (including, without
limitation, judgments, fines, reasonable attorneys' fees, ERISA excise
taxes or penalties
II-4
<PAGE>
and amounts paid in settlement) incurred or suffered by such Indemnified
Director in connection therewith and such indemnification shall continue as
to an Indemnified Director who has ceased to be a director and shall inure
to the benefit of the Indemnified Director's heirs, executors and
administrators. Each person who was or is an officer of the Company and not
a director of the Company and who was or is made a party or is threatened
to be made a party to or is otherwise involved (including, without
limitation, as a witness) in any proceeding, by reason of the fact that he
or she is or was an officer of the Company or is or was serving at the
request of the Company as a director, officer, partner, trustee, employee
or agent of another corporation or of a partnership, joint venture, trust
or other enterprise, including service with respect to an employee benefit
plan (hereinafter an 'Indemnified officer'), whether the basis of such
proceeding is alleged action in an official capacity as an officer or in
any other capacity while serving as an officer, shall be indemnified and
held harmless by the Company against all liability, all reasonable expense
and all loss (including, without limitation, judgments, fines, reasonable
attorneys' fees, ERISA excise taxes or penalties and amounts paid in
settlement) incurred or suffered by such Indemnified Officer to the same
extent and under the same conditions that the Company must indemnify an
Indemnified Director pursuant to the immediately preceding sentence and to
such further extent as is not contrary to public policy and such
indemnification shall continue as to an Indemnified Officer who has ceased
to be an officer and shall inure to the benefit of the Indemnified
Officer's heirs, executors and administrators. Notwithstanding the
foregoing and except as provided in Paragraph B of this Article Eleventh
with respect to proceedings to enforce rights to indemnification, the
Company shall indemnify any Indemnified Director or Indemnified Officer in
connection with a proceeding (or part thereof) initiated by such
Indemnified Director or Indemnified Officer only if such proceeding (or
part thereof) was authorized by the Board of Directors of the Company. As
hereinafter used in this Article Eleventh, the term 'indemnitee' means any
Indemnified Director or Indemnified Officer. Any person who is or was a
director or officer of a subsidiary of the Company shall be deemed to be
serving in such capacity at the request of the Company for purposes of this
Article Eleventh. The right to indemnification conferred in this Article
shall include the right to be paid by the Company the expenses incurred in
defending any such proceeding in advance of its final deposition
(thereinafter an 'advancement of expenses'); provided, however, that, if
the Tennessee Business Corporation Act requires, an advancement of expenses
incurred by an indemnitee who at the time of receiving such advance is a
director of the Company shall be made only upon: (i) delivery to the
Company of an undertaking (hereinafter an 'undertaking'), by or on behalf
of such indemnitee, to repay all amounts so advanced if it shall ultimately
be determined by final judicial decision from which there is no further
right to appeal (hereinafter a 'final adjudication') that such indemnitee
is not entitled to be indemnified for such expenses under this Article or
otherwise, (ii) delivery to the Company of a written affirmation of the
indemnitee's good faith belief that he or she has met the standard of
conduct that makes indemnification by the Company permissible under the
Tennessee Business Corporation Act; and (iii) a determination that the
facts then known to those making the determination would not preclude
indemnification under the Tennessee Business Corporation Act. The right to
indemnification and advancement of expenses conferred in this Paragraph A
shall be a contract right.
B. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Paragraph A
of this Article Eleventh is not paid in full by the Company within sixty
days after a written claim has been received by the Company (except in the
case of a claim for an advancement of expenses, in which case the
applicable period shall be twenty days), the indemnitee may at any time
thereafter bring suit against the Company to recover the unpaid amount of
the claim. If successful in whole or in part in any such suit or in a suit
brought by the Company to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee also shall be entitled to be
paid the expense of prosecuting or defending such suit. In (i) any suit
brought by the indemnitee to enforce a right to indemnification hereunder
(other than a suit to enforce a right to an advancement of expenses brought
by an indemnitee who will not be a director of the Company at the time such
advance is made) it shall be a defense that, and in (ii) any suit by the
Company to recover an advancement of expenses pursuant to the terms of an
undertaking the Company shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met the standard that makes
it permissible hereunder or under the Tennessee Business Corporation Act
(the 'applicable standard') for the Company to indemnify the indemnitee for
the amount claimed. Neither the failure of the Company (including its Board
of Directors, a committee of the Board of Directors, independent legal
counsel or its
II-5
<PAGE>
shareholders) to have made a determination prior to the commencement of
such suit that indemnification of the indemnitee is proper in the
circumstances because the indemnitee has met the applicable standard, nor
an actual determination by the Company (including its Board of Directors, a
committee of the Board of Directors, independent legal counsel or its
shareholders) that the indemnitee has not met the applicable standard,
shall create a presumption that the indemnitee has not met the applicable
standard or, in the case of such a suit brought by the indemnitee, shall be
a defense to such suit. In any suit brought by the indemnitee to enforce a
right to indemnification or to an advancement of expenses hereunder, or by
the Company to recover an advancement of expenses pursuant to the terms of
an undertaking, the burden of proving that the indemnitee is not entitled
to be indemnified or to such advancement of expenses under this Article
eleventh or otherwise shall be on the Company.
C. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to
the advancement of expenses conferred in this Article Eleventh shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, this Amended and Restated Charter, any By-Law, any
agreement, any vote of shareholders or disinterested directors or
otherwise.
D. INSURANCE. The Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Company
or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Company would have the power to indemnify such person against such expense,
liability or loss under the Tennessee Business Corporation Act.
E. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Company may, to the
extent authorized from time to time by the Board of Directors, grant rights
to indemnification and to the advancement of expenses to any employee or
agent of the Company and to any person serving at the request of the
Company as an agent or employee of another corporation or of a joint
venture, trust or other enterprise to the fullest extent of the provisions
of this Article Eleventh with respect to the indemnification and
advancement of expenses of either directors or officers of the Company.
F. REPEAL OR MODIFICATION. Any repeal or modification of any
provision of this Article Eleventh shall not adversely affect any rights to
indemnification and to advancement of expenses that any person may have at
the time of such repeal or modification with respect to any acts or
omissions occurring prior to such repeal or modification.
G. SEVERABILITY. In case any one or more of the provisions of this
Article Eleventh, or any application thereof, shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions in this Article Eleventh, and any other
application thereof, shall not in any way be affected or impaired thereby.'
(iv) Varsity/Intropa Tours, Inc. and Varsity USA, Inc.
The By-Laws of Varsity/Intropa Tours, Inc. and Varsity USA, Inc. each
contain the indemnification provisions set forth below:
'ARTICLE 7.
INDEMNIFICATION BY CORPORATION
Section 7.1. Indemnification of Directors and Officers. The
corporation shall, to the fullest extent to which it is empowered to do so
and in accordance with the procedures required by the Tennessee Business
Corporation Act or any other applicable laws, as may from time to time be
in effect, indemnify any person who was or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact
that he or she is or was a director or officer of the corporation, or is or
was serving at the request of the corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise,
against all expenses, including attorneys' fees, judgments, fines and
amounts incurred by him or her in connection with such action, suit or
proceeding.
Section 7.2. Contract with the Corporation. The provisions of
Section 7.1 of this Article shall be deemed to be a contract between the
corporation and each director or officer who serves in any such capacity at
any time while said Section 7.1 and the relevant provisions of the
Tennessee Business Corporation Act or other applicable laws, if any, are in
effect, and any repeal or modification of any such
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<PAGE>
law or of said Section 7.1 shall not affect any state of facts then or
theretofore existing or any action, suit or proceeding theretofore existing
or thereafter brought or threatened based in whole or in part upon any such
state of facts. In the event a person entitled to indemnification under
this Article claims indemnification, the corporation shall take all
required action to bring about a prompt and good faith determination of
such person's right to indemnification hereunder.
Section 7.3. Indemnification of Employees and Agents. Persons who
are not covered by the foregoing provisions of this Article and who are or
were employees or agents of the corporation, or are or were serving at the
request of the corporation as employees or agents of another corporation,
joint venture, partnership, trust or other enterprise, may be indemnified
to the extent the corporation is empowered to do so by the Tennessee
Business Corporation Act or any other applicable laws, when and as
authorized at any time from time to time by the board of directors in its
sole discretion.
Section 7.4. Advance of Expenses. Expenses incurred in defending a
civil or criminal action, suit or proceeding may be paid by the corporation
in advance of the final disposition of such action, suit or proceeding upon
receipt of a written agreement by or on behalf of a director and an officer
to undertake to repay such amount, unless it shall ultimately be determined
that he or she is entitled to be indemnified by the corporation as
authorized in this article. The provisions of this Section shall apply to
employees or agents when the board of directors has authorized such
indemnification under the provision of Section 7.3 hereof.
Section 7.5. Other Rights of Indemnification. The indemnification
provided or permitted by this Article shall not be deemed exclusive of any
other rights to which those seeking indemnification may be entitled by law,
agreement or otherwise, and shall continue as to a person who ceased to be
a director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such person.
Section 7.6 Liability Insurance. The corporation shall have the
power to purchase and maintain, on behalf of any person who is or was a
director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, insurance against any liability asserted against such person
and incurred by such person in any such capacity, or arising out of such
person's status as such whether or not the corporation would have the power
to indemnify such person against such liability under the provisions of
this Article.
Section 7.7 Report to Shareholders. If the corporation has paid
indemnity or has advanced expenses to a director, officer, employee, or
agent, the corporation shall report the indemnification or advance in
writing to the shareholders with or before the notice of the next
shareholders' meeting.'
(d) Varsity Spirit Fashions & Supplies Inc.
Section 302A.521 of the Minnesota Statutes provides generally that a person
sued as a director, officer or employee of a corporation may be indemnified by
the corporation in suits for reasonable expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement if such person: (i) has not been
indemnified by another organization for the same, (ii) acted in good faith,
(iii) received no improper personal benefit, (iv) in the case of criminal
proceeding, had no reasonable cause to believe his conduct was unlawful and (v)
reasonably believed his conduct to be in or not opposed to the best interests of
the corporation.
The By-Laws of Varsity Spirit Fashions & Supplies, Inc. contain the
indemnification provisions set forth below:
'ARTICLE 5
INDEMNIFICATION
5.1) The corporation shall indemnify such persons, for such expenses
and liabilities, in such manner, under such circumstances, and to such
extent, as permitted by Minnesota Statutes, Section 302A.521, as now
enacted or hereafter amended.'
II-7
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<S> <C>
2.1 Asset Purchase Agreement, dated as of April 11, 1988, among Riddellink
Holding Corporation, EN&T Associates, Inc., Netlink Inc., Riddell,
Inc. (predecessor corporation), Equilink Licensing Corp., MacGregor
Sporting Goods, Inc., as amended on April 18, 1988 (the formal
trademark assignments and license agreements implementing this
agreement are omitted)(2) and Amendment thereto, dated March 1992.(3)
2.2 Agreement and Plan of Merger, dated as of May 5, 1997, by and among
Riddell Sports Inc., Cheer Acquisition Corp. and Varsity Spirit
Corporation.(22)
2.3 Asset Purchase Agreement dated as of December 1, 1994 by and between
Intropa International U.S.A., Inc., Elisabeth Polsterer and
Varsity/Intropa Tours, Inc.(27)
2.4 Asset Purchase Agreement dated as of May 15, 1996 by and between
United Special Events, Inc., Michael Olmstead and Varsity USA,
Inc.(26)
3.1 Amended and Restated Articles of Incorporation of Riddell Sports
Inc.(20)
3.2 First Amended and Restated Bylaws of Riddell Sports Inc.(18)
3.3 Certificate of Incorporation of All American Sports Corporation
(formerly known as Ameracq Corp).*
3.4 Bylaws of All American Sports Corporation (formerly known as Ameracq
Corp).*
3.5 Certificate of Incorporation of Cheer Acquisition Corp., as amended,
by the Articles of Merger of Cheer Acquisition Corp. into Varsity
Spirit Corporation.(1)
3.6 Bylaws of Cheer Acquisition Corp.*
3.7 Certificate of Incorporation of Equilink Licensing Corporation.*
3.8 Bylaws of Equilink Licensing Corporation.*
3.9 Certificate of Incorporation of Proacq Corp.*
3.10 Bylaws of Proacq Corp.*
3.11 Certificate of Incorporation of RHC Licensing Corporation.*
3.12 Bylaws of RHC Licensing Corporation.*
3.13 Amended and Restated Articles of Incorporation of Riddell, Inc.
(formerly known as EN&T Associates Inc.).*
3.14 Bylaws of Riddell, Inc. (formerly known as EN&T Associates Inc.).*
3.15 Amended and Restated Articles of Incorporation of Ridmark
Corporation.*
3.16 Bylaws of Ridmark Corporation.*
3.17 Amended and Restated Charter of Varsity Spirit Corporation.(25)
3.18 Bylaws of Varsity Spirit Corporation.(25)
3.19 Charter of International Logos, Inc.*
3.20 Bylaws of International Logos, Inc.*
3.21 Charter of Varsity/Intropa Tours, Inc.*
3.22 Bylaws of Varsity/Intropa Tours, Inc.*
3.23 Amended and Restated Charter of Varsity Spirit Fashions & Supplies,
Inc.*
3.24 Bylaws of Varsity Spirit Fashions & Supplies, Inc.*
3.25 Amended and Restated Charter of Varsity USA, Inc.*
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<S> <C>
3.26 Bylaws of Varsity USA, Inc.*
4.1 Indenture, dated as of June 19, 1997, between Riddell, certain
subsidiaries of Riddell, as Guarantors, and Marine Midland Bank, as
Trustee.(23)
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding validity
of New Senior Notes offered hereby.(1)
9.1 Voting Trust Agreement dated May 1991.(2)
10.1 Settlement Agreement, dated April 9, 1981, among MacGregor-Doniger
Inc., Brunswick Corporation and The Equilink Corporation.(2)
10.2 1997 Stock Option Plan.(22)
10.3 License Agreement, dated as of April 18, 1988, among MacMark
Corporation, Netlink, Inc. and MacGregor Sporting Goods, Inc.(2) as
amended July 30, 1992(16) and November , 1992.(16)
10.4 Agreement, made January 23, 1989, between Equilink Licensing Corp. and
Kmart Corporation, with supplemental agreements dated November 16,
1989, August 30, 1990(2), and June 30, 1994(12).
10.5 Lease, dated November 12, 1993, between the International Brotherhood
of Painters and Allied Trade Union and Industry Pension Fund and
Riddell, Inc., of the premises at 2050 Lively Blvd., Elk Grove
Village, Illinois(16); and amendment dated March 20, 1995(16); and
Amendment dated September 19, 1996.(21)
10.6 Lease Agreement, dated November 2, 1984 by and between ADI Real Estate
Joint Venture No. 2 (predecessor to The School Employees Retirement
Board of Ohio) and Alamo Athletics Inc. (predecessor to All American
Sports Corporation), and Amendments thereto, dated January 30, 1986,
May 11, 1989, August 18, 1989, December 14, 1989, January 10, 1990 of
the premises at 6846 Alamo Downs Parkway, San Antonio, Texas.(3)
10.7 Lease Agreement, dated as of September 1, 1988 by and between Exeter
Management Corporation and All American of the premises at Langeloth,
Pennsylvania (Burgettstown property).(3)
10.8 Lease Agreement, dated April 1991, by and between Stroudsburg Park
Associates and All American Corp. of the premises at 140 Second
Street, Stroudsburg, Pennsylvania(3); as amended March 31, 1995.(18)
10.9 Lease, dated as of September 1, 1968, by and between Munro M. Grant
and the All American Company and Extension and Amendment of Lease,
dated July 11, 1989, of premises at 1320 Taylor Street, Elyria,
Ohio.(3)
10.10 Industrial Real Estate Lease, dated March 4, 1989, between Riverview
Industrial Buildings and All American Corp. and Addendum to the Lease,
dated July 3, 1989, of premises at 1920 Riverview Drive, San
Bernadino, California.(3)
10.11 Lease dated December 12, 1991, between O'Shanter Resources Inc. and
All American Sports, Inc., of premises at 1270 Niagra Street, Buffalo,
New York.(3)
10.12 Lease, dated May 5, 1986, by and between Paul Goldstein, Nathan
Hoffenberg, All American and Medalist Industries, of premises at 3305
and 3307 Scott Street and 9900 Franklin Avenue, Franklin Park,
Illinois(3); amendment dated January 30, 1997.(21)
10.13 Lease, dated October 28, 1987, as amended and extended by letter dated
October 31, 1991, by and between GABT Developments Ltd. and Marcan
Ltd. (a division of All American), of premises at 600 Industrial
Drive, Fort Erie, Ontario(3); amendment dated February 6, 1997(21).
10.14 Consulting Agreement, dated February 16, 1990, between Frederic Brooks
and Woodco Sports, Inc.(2) as amended on February 15, 1994(9).
10.15 NFL Promotional Rights Agreement, dated June 1, 1990, and General
Retail Licensing agreement, dated March 15, 1990 and referred to in
the NFL Promotional Rights Agreement, each between
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<S> <C>
Riddell Inc. and National Football League Properties, Inc.(2); as
supplemented January 20, 1994(9) and July 3, 1997 (License Nos. R03155
and R00705)(1).
10.16 1991 Stock Option Plan(2) as amended by amendments described in
Riddell Sports Inc.'s proxy materials for its annual stockholders
meetings held on August 20, 1992, September 30, 1993, June 27, 1996
and June 24, 1997.
10.17 License Agreement dated May 9, 1991 between MacMark Corporation and
MacGregor Sports Products, Inc.(2); amendment dated February ,
1992(3), amendment dated July 30, 1992, amendment dated November 1,
1992(7) and Memorandum of Understanding dated July 29, 1996(21).
10.18 Perpetual License and Trademark Maintenance Agreements among MacMark
Corporation, Equilink Licensing Corporation and BSN Corp. each dated
February 19, 1992(3) and amendment dated November 1, 1992(7).
10.19 Master Agreement by and among MacGregor Sports Products, Inc., BSN
Corp. and MacMark Corporation dated February 19, 1992(3); amendment
No. 1 dated November 1, 1992.(16)
10.20 License Agreement between Equilink Licensing Corporation and MacGregor
Sports Products, Inc. dated May 9, 1991; Amendment thereto dated
December 3, 1991(3) and Amendment dated July 30, 1992(5); Memorandum
of Understanding dated July 29, 1996(21).
10.21 Agreement, dated April 1, 1995, between Riddell, Inc. and the
Amalgamated Clothing Textile Workers Union AFL-CIO.(18)
10.22 Consulting Agreement, dated April 15, 1992, between Riddell Sports
Inc. and Frederic M. Brooks.(4)
10.23 Employment Agreement, dated June 22, 1992, between Riddell Sports Inc.
and Robert F. Nederlander(5); amended July 27, 1994(12).
10.24 Employment Agreement, dated June 22, 1992, between Riddell Sports Inc.
and Leonard Toboroff(5); amended July 21, 1994.(12)
10.25 Consulting Agreement, dated July 29, 1992, between Riddell Sports Inc.
and Donald Engel.(6)
10.26 Lease, dated September 10, 1992, and Amendment, dated October 22,
1992, and Amendment, dated October 22, 1992, between All American
Sports Corporation and Ronald K. Howell d/b/a Lakewood Land and Cattle
Company of Premises at 2831 Faber Street, Union City, California
94587.(6)
10.27 Lease Addendum letter, dated February 13, 1992, between All American
Sports Corporation and Paul Goldstein and Nathan Hoffenberg extending
lease of premises at Franklin Park, Illinois.(6)
10.28 License Agreement, dated October 1, 1992, between All American Sports
Corporation and NOCSAE.(7)
10.29 Employment Agreement, dated March 19, 1993, commencing March 25, 1993
between David Mauer and Riddell Sports Inc.(7), as amended January 17,
1994(9); November 1, 1994(14); November 28, 1994(16).
10.30 Warrant to purchase 150,000 shares of Riddell Sports Inc.'s Common
Stock in favor of M.L.C. Partners Limited Partnership, dated January
26, 1994.(8)
10.31 License Agreement, dated as of February 15, 1994, among RHC Licensing
Corporation, Pursuit Athletic Footwear, Inc., Silver Eagle Holdings,
Ltd., Save Power Limited, Extravest Holdings Limited, Riddell Athletic
Footwear, Inc. and Ridmark Corporation (confidential treatment).(10)
10.32 Settlement agreement, dated February 15, 1994, among Riddell, Inc.,
Riddell Sports Inc., RHC Licensing Corporation, Ridmark Corporation,
Pursuit Athletic Footwear, Inc., Riddell Athletic Footwear, Inc.,
Ernie Wood, Harry Wood, Silver Eagle Holdings, Ltd., Save Power,
Limited, Extravest Holdings Limited, Frederic Brooks, Donald Engel,
Alan Tessler, Alan Hirschfield, Jeffrey
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<S> <C>
Steiner, Robert Nederlander, Leonard Toboroff, Jeffrey Epstein, John
McConnaughy, Connecticut Economics Corporation, Stephen Tannen, Woodco
Sports, Inc., Arthur Tse, Silver Top Limited, Billion Nominees,
Limited, Weston Holdings Limited.(9)
10.33 Employment Agreement, dated as of February 1, 1994, between Riddell,
Inc., and Dan Cougill(11), as amended February 1, 1995.(17)
10.34 Stipulation of Settlement, David Halperin v. Riddell Sports Inc.,
dated October 28, 1994.(13)
10.35 Warrant to Purchase Common Stock in favor of NBD Bank N.A., dated
February 10, 1995.(15)
10.36 Employment Agreement, dated as of March 7, 1996, between Riddell
Sports Inc. and David Groelinger.(19)
10.37 Note Purchase Agreement, dated October 30, 1996, between Riddell
Sports Inc. and Silver Oak Capital, L.L.C., as amended by letter
agreement dated May 2, 1997.(20)
10.38 Subordinated Guaranty, dated November 8, 1996, among Riddell, Inc.,
Equilink Licensing Corporation, and RHC Corporation, All American
Sports Corporation, Ridmark Corporation, Proacq Corp. and SharCo
Corporation.(20)
10.39 Registration Rights Agreement, dated November 8, 1996 between Riddell
Sports Inc. and Silver Oak Capital L.L.C.(20)
10.40 Shareholders Agreement, dated as of May 5, 1997, between Riddell
Sports Inc., Cheer Acquisition Corp. and certain shareholders of
Varsity Spirit Corporation.(31)
10.41 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc., Cheer Acquisition Corp. and Jeffrey G. Webb(31)
10.42 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and Gregory C. Webb(31)
10.43 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and W. Kline Boyd(31)
10.44 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and J. Kristyn Shepherd(31)
10.45 Employment Agreement, dated as of May 5, 1997, between Riddell Sports
Inc. and Jeffrey G. Webb(31)
10.46 Employment Agreement, dated as of May 5, 1997, between Riddell Sports
Inc. and Gregory C. Webb(31)
10.47 Employment Agreement, dated as of May 5, 1997, between Riddell Sports
Inc. and W. Kline Boyd(31)
10.48 Employment Agreement, dated as of May 5, 1997, between Riddell Sports
Inc. and J. Kristyn Shepherd(31)
10.49 Registration Rights Agreement, dated as of June 19, 1997, between
Riddell, as Issuer, certain subsidiaries of Riddell, as Guarantors,
and NationsBanc Capital Markets, Inc. and First Chicago Capital
Markets, Inc., as Purchasers.(23)
10.50 Credit Agreement among Riddell, as Borrower, the subsidiaries of
Riddell, as Guarantors, and the Lenders identified therein, and NBD
Bank, as Administrative Agent, and NationsBank, N.A., as Documentation
Agent, dated as of June 19, 1997.(23)
10.51 Employment Agreement, dated September 29, 1989, between Varsity Spirit
Corporation and W. Kline Boyd(24)
10.52 Employment Agreement, dated September 29, 1989, between Varsity Spirit
Corporation and Robert Dunseath.(24)
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<S> <C>
10.53 Employment Agreement, dated September 29, 1989, between Varsity Spirit
Corporation and Kris Shepherd.(24)
10.54 Employment Agreement, dated September 29, 1989, between Varsity Spirit
Corporation and Kraig Tallman.(24)
10.55 Employment Agreement, dated September 29, 1989, between Varsity Spirit
Corporation and Gregory Webb.(24)
10.56 Employment Agreement, dated September 29, 1989 between Varsity Spirit
Corporation and Jeffrey Webb.(24)
10.57 1989 Non-Qualified Stock Option Plan of Varsity Spirit
Corporation.(24)
10.58 1991 Stock Option Plan of Varsity Spirit Corporation.(25)
10.59 Sales Representative Agreement between Varsity Spirit Fashions &
Supplies, Inc. and Stuart Educational Products, Inc., along with
Security Agreement between Varsity Spirit Fashions & Supplies, Inc.
and Gary Stuart and Patti Stuart, both individually and collectively
doing business as Stuart Educational Products.(24)
10.60 Programming Agreement between Universal Cheerleaders Association and
ESPN, Inc.(24)
10.61 Varsity Spirit Corporation 401(k) Profit Sharing Plan.(26)
10.62 Employment Agreement, dated December 1, 1994, between Varsity Spirit
Corporation and Deana Roberts.(27)
10.63 Service Agreement dated as of May 15, 1996 between Varsity Spirit
Corporation and Michael Olmstead.(28)
10.64 Form of Loan Agreement dated as of July 1, 1996 between Varsity Spirit
Corporation and NationsBank of Tennessee, N.A.(29)
10.65 Employment Agreement, dated February 28, 1997, between Varsity Spirit
Corporation and John M. Nichols.(30)
10.66 Employment Agreement between Varsity Spirit Corporation and Richard R.
Bowers.(30)
10.67 Amendment to the Employment Agreement, dated June 4, 1996, between
Varsity Spirit Corporation and Jeffrey Webb.(30)
10.68 Amendment to the Employment Agreement, dated June 4, 1996, between
Varsity Spirit Corporation and Gregory Webb.(30)
10.69 Amendment to the Employment Agreement, dated June 4, 1996, between
Varsity Spirit Corporation and J. Kristen Shepard.(30)
10.70 Amendment to the Employment Agreement, dated June 4, 1996, between
Varsity Spirit Corporation and W. Kline Boyd.(30)
10.71 Amendment to the Employment Agreement, dated June 4, 1996, between
Varsity Spirit Corporation and Kraig Tallman.(30)
10.72 Amendment No. 1 to 1991 Stock Option Plan of Varsity Spirit
Corporation.(30)
10.73 Amendment No. 2 to 1991 Stock Option Plan of Varsity Spirit
Corporation.(30)
10.74 Settlement Agreement, dated June 20, 1997, by and among Riddell Sports
Inc., RHC Licensing Corporation, Riddell, Inc., Equilink Licensing
Corporation, Ridmark Corporation, Macmark Corporation, NBD Bank, f/k/a
NBD Bank, N.A., MLC Partners Limited Partnership, Robert E.
Nederlander, Leonard Toboroff, John McConnaughy, Jr., Lisa J. Marroni,
Frederic H. Brooks, Connecticut Economics Corporation, Robert Weisman,
Bruce H. Levitt, as Bankruptcy Trustee of M Holdings Corporation, Paul
Swanson, as Bankruptcy Trustee of MGS Acquisition, Inc. and MacGregor
Sports, Inc., Official Unsecured Creditors' Committee of MacGregor
Sporting Goods, Inc., M Holdings Corporation, f/k/a MacGregor Sporting
Goods Inc., Innovative Promotions, Inc.,
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<S> <C>
Ernest Wood, Jr., Harry Wood, Pursuit Athletic Footwear, Inc., and
Riddell Athletic Footwear, Inc.*
11.1 Statement regarding per share earnings of Riddell Sports Inc. for the
twelve months ended December 31, 1996, 1995 and 1994.*
11.2 Statement regarding per share earnings of Riddell Sports Inc. for the
three months ended March 31, 1997 and 1996.*
12.1 Statement regarding the computation of earnings to fixed charges for
Riddell Sports Inc.*
21.1 List of subsidiaries.*
23.1 Consent of Grant Thornton LLP regarding Riddell Sports Inc.(1)
23.2 Consent of BDO Seidman, LLP regarding Varsity Spirit Corporation.(1)
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5.1 hereto).
24.1 Powers of Attorney.*
25.1 Statement of Eligibility and Qualification on Form T-1 of trustee
under the Indenture relating to the Senior Notes.*
99.1 Form of Letter of Transmittal.(1)
99.2 Form of Notice of Guaranteed Delivery.(1)
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees.(1)
99.4 Form of Letter to Clients.(1)
</TABLE>
- ------------------
* Filed previously.
(1) Filed herewith.
(2) Incorporated by reference to Riddell Sports Inc.'s Registration Statement
on Form S-1 (Commission File No. 33-40488) effective June 27, 1991
(including all pre-effective amendments to the Registration Statement).
(3) Incorporated by reference to Riddell Sports Inc.'s Form 10-K report
(Commission File No. 0-19298) for the year ended December 31, 1991.
(4) Incorporated by reference to Riddell Sports Inc.'s Registration Statement
on Form S-1 (Commission File No. 33-40488) effective June 17, 1992
(including all pre-effective amendments to the Registration Statement).
(5) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q report
(Commission File No. 0-19298) for the quarter ended June 30, 1992.
(6) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q report
(Commission File No. 0-19298) for the quarter ended September 30, 1992.
(7) Incorporated by reference to Riddell Sports Inc.'s Form 10-K report
(Commission File No. 0-19298) filed on March 30, 1993.
(8) Incorporated by reference to Riddell Sports Inc.'s Post Effective Amendment
No. 2 to Form S-1 Registration Statement (Commission File No. 33-47884)
filed on January 28, 1994.
(9) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year
ended December 31, 1993.
(10) Incorporated by reference to Riddell Sports Inc.'s Form 10-K/A constituting
Amendment No. 1 to Form 10-K for the year ended December 31, 1993, filed
June 21, 1994.
(Footnotes continued on next page)
II-13
<PAGE>
(Footnotes continued from previous page)
(11) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for the
quarter ended March 31, 1994.
(12) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for the
quarter ended June 30, 1994.
(13) Incorporated by reference to Riddell Sports Inc.'s Form 8-K filed July 3,
1994.
(14) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for the
quarter ended September 30, 1994.
(15) Incorporated by reference to Riddell Sports Inc.'s Form 8-K filed January
11, 1995.
(16) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year
ended December 31, 1994.
(17) Incorporated by reference to Riddell Sports Inc.'s Form 8-K dated June 23,
1995.
(18) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year
ended December 31, 1995, dated November 11, 1996.
(19) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q dated May 14,
1996.
(20) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q dated November
11, 1996.
(21) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year
ended December 31, 1996.
(22) Incorporated by reference to Riddell Sports Inc.'s Proxy Statement filed
June 6, 1997.
(23) Incorporated by reference to Riddell Sports Inc.'s Form 8-K dated June 19,
1997.
(24) Incorporated by reference to the Varsity Spirit Corporation's Registration
Statement on Form S-1 (Registration Statement No. 33-44431) filed on
December 10, 1991.
(25) Incorporated by reference to the Varsity Spirit Corporation's Amendment No.
1 to Registration Statement on Form S-1 (Registration Statement No.
33-44431) filed on January 21, 1992.
(26) Incorporated by reference to the Varsity Spirit Corporation's Annual Report
on Form 10-K for the year ended March 31, 1993 (File No. 0-19790).
(27) Incorporated by reference to the Varsity Spirit Corporation's Transition
Report on Form 10-K for the transition period April 1, 1994 to December 31,
1994 (File No. 0-19790).
(28) Incorporated by reference to the Varsity Spirit Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 0-19790).
(29) Incorporated by reference to the Varsity Spirit Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996 (File No.
0-19790).
(30) Incorporated by reference to the Varsity Spirit Corporation's Annual Report
on Form 10-K for the year ended December 31, 1996 (File No. 0-19790).
(31) Incorporated by reference to Varsity Spirit Corporation Schedule 13D filed
June 25, 1997.
(b) Financial Statement Schedules:
Schedule II--Riddell Sports Inc. and Subsidiaries Valuation and
Qualifying Accounts
II-14
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof), which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the 'Calculation of
Registration Fee' table in the effective registration statement.
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person of the registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
RIDDELL SPORTS INC.
By: /s/ DAVID M. MAUER
-----------------------------------
David M. Mauer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ DAVID M. MAUER Chief Executive Officer, August 6, 1997
- --------------------------- President and Director
David M. Mauer
* Chairman of the Board August 6, 1997
- ---------------------------
Robert Nederlander
/s/ Jeffrey Webb Vice Chairman and President and August 6, 1997
- --------------------------- Chief Operating Officer of the
Jeffrey Webb Varsity Spirit Group
* Vice President and Director August 6, 1997
- ---------------------------
Leonard Toboroff
/s/ DAVID GROELINGER Executive Vice President August 6, 1997
- --------------------------- and Chief Financial Officer
David Groelinger (Principal Financial Officer)
/s/ LAWRENCE SIMON Senior Vice President August 6, 1997
- --------------------------- (Principal Accounting Officer)
Lawrence Simon
* Director August 6, 1997
- ---------------------------
Don Kornstein
* Director August 6, 1997
- ---------------------------
John McConnaughy, Jr.
* Director August 6, 1997
- ---------------------------
Glenn E. Schembechler
* President and Chief Operating August 6, 1997
- --------------------------- Officer of the Riddell Group Division
Dan Cougill
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the directors and
officers of the Registrant indicated above by asterisks, pursuant to powers of
attorney duly executed by such directors and officers and filed as exhibits to
the Registration Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
ALL AMERICAN SPORTS CORPORATION
By: /s/ DAVID M. MAUER
----------------------------------
David M. Mauer
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ DAVID M. MAUER Chairman of the Board August 6, 1997
- ---------------------------
David M. Mauer
/S/ DAN COUGILL Chief Executive Officer August 6, 1997
- ---------------------------
Dan Cougill
* President and Chief Operating August 6, 1997
- --------------------------- Officer
Donald Gleisner
/s/ DAVID GROELINGER Senior Vice President August 6, 1997
- --------------------------- (Principal Financial Officer)
David Groelinger
/s/ LAWRENCE SIMON Vice President and Treasurer August 6, 1997
- --------------------------- (Principal Accounting Officer)
Lawrence Simon
* Director August 6, 1997
- ---------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the director and
officer of the Registrant indicated above by asterisks, pursuant to powers of
attorney duly executed by such director and officer and filed as exhibits to
the Registration Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
EQUILINK LICENSING CORPORATION
By: /s/ DAVID M. MAUER
----------------------------------
David M. Mauer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ DAVID M. MAUER Chairman of the Board, Chief August 6, 1997
- --------------------------- Executive Officer and President
David M. Mauer
/s/ DAVID GROELINGER Senior Vice President August 6, 1997
- --------------------------- (Principal Financial Officer)
David Groelinger
/s/ LAWRENCE SIMON Vice President/Treasurer August 6, 1997
- --------------------------- (Principal Accounting Officer)
Lawrence Simon
* Director August 6, 1997
- ---------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the director of the
Registrant indicated above by an asterisk, pursuant to a power of attorney
duly executed by such director and filed as an exhibit to the Registration
Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
INTERNATIONAL LOGOS, INC.
By: /s/ DAVID M. MAUER
----------------------------------
David M. Mauer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ DAVID M. MAUER Chief Executive Officer and August 6, 1997
- --------------------------- Director
David M. Mauer
* President and Director August 6, 1997
- ---------------------------
Jeffrey G. Webb
/s/ DAVID GROELINGER Senior Vice President August 6, 1997
- --------------------------- (Principal Financial Officer)
David Groelinger
/s/ JOHN M. NICHOLS Senior Vice President and August 6, 1997
- --------------------------- Treasurer (Principal Accounting
John M. Nichols Officer)
* Director August 6, 1997
- ---------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1, to the Registration Statement on behalf of the directors and
officer of the Registrant indicated above by asterisks, pursuant to powers of
attorney duly executed by such directors and officer and filed as exhibits to
the Registration Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
PROACQ CORP.
By: /s/ DAVID M. MAUER
----------------------------------
David M. Mauer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/DAVID M. MAUER Chairman of the Board and August 6, 1997
- --------------------------- Chief Executive Officer
David M. Mauer
* President August 6, 1997
- ---------------------------
Donald Gleisner
/s/DAVID GROELINGER Senior Vice President August 6, 1997
- --------------------------- (Principal Financial Officer)
David Groelinger
/s/LAWRENCE SIMON Vice President and Treasurer August 6, 1997
- --------------------------- (Principal Accounting Officer)
Lawrence Simon
* Director August 6, 1997
- ---------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the director and
officer of the Registrant indicated above by asterisks, pursuant to powers of
attorney duly executed by such director and officer and filed as exhibits to
the Registration Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
RHC LICENSING CORPORATION
By: /s/ DAVID M. MAUER
-----------------------------------
David M. Mauer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ DAVID M. MAUER Chairman of the Board, Chief August 6, 1997
- --------------------------- Executive Officer and President
David M. Mauer
/s/ DAVID GROELINGER Senior Vice President August 6, 1997
- --------------------------- (Principal Financial Officer)
David Groelinger
/s/ LAWRENCE SIMON Vice President and Treasurer August 6, 1997
- --------------------------- (Principal Accounting Officer)
Lawrence Simon
* Director August 6, 1997
- ---------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the director of the
Registrant indicated above by an asterisk, pursuant to a power of attorney
duly executed by such director and filed as an exhibit to the Registration
Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
RIDDELL, INC.
By: /s/ DAVID M. MAUER
----------------------------------
David M. Mauer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ DAVID M. MAUER Chairman of the Board and Chief August 6, 1997
- --------------------------- Executive Officer
David M. Mauer
* President and Chief Operating August 6, 1997
- --------------------------- Officer
Dan Cougill
/s/ DAVID GROELINGER Vice President (Principal Financial August 6, 1997
- --------------------------- Officer)
David Groelinger
/s/ LAWRENCE SIMON Vice President and Treasurer August 6, 1997
- --------------------------- (Principal Accounting Officer)
Lawrence Simon
* Director August 6, 1997
- ---------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the director and
officer of the Registrant indicated above by asterisks, pursuant to powers of
attorney duly executed by such director and officer and filed as exhibits to
the Registration Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
RIDMARK CORPORATION
By: /s/ DAVID M. MAUER
------------------------------------
David M. Mauer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ DAVID M. MAUER Chairman of the Board, Chief August 6, 1997
- --------------------------- Executive Officer and President
David M. Mauer
/s/ DAVID GROELINGER Senior Vice President August 6, 1997
- --------------------------- (Principal Financial Officer)
David Groelinger
/s/ LAWRENCE SIMON Vice President and Treasurer August 6, 1997
- --------------------------- (Principal Accounting Officer)
Lawrence Simon
* Director August 6, 1997
- ---------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the director of the
Registrant indicated above by an asterisk, pursuant to a power of attorney
duly executed by such director and filed as an exhibit to the Registration
Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
VARSITY/INTROPA TOURS, INC.
By: /s/ DAVID M. MAUER
----------------------------------
David M. Mauer
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ JEFFREY G. WEBB President and Director August 6, 1997
- --------------------------
Jeffrey G. Webb
/s/ DAVID M. MAUER Senior Vice President and Director August 6, 1997
- --------------------------
David M. Mauer
/s/ DAVID GROELINGER Senior Vice President August 6, 1997
- -------------------------- (Principal Financial Officer)
David Groelinger
/s/ JOHN M. NICHOLS Senior Vice President and Treasurer August 6, 1997
- -------------------------- (Principal Accounting Officer)
John M. Nichols
* Director August 6, 1997
- --------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the director of the
Registrant indicated above by an asterisk, pursuant to a power of attorney
duly executed by such director and filed as an exhibit to the Registration
Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
VARSITY SPIRIT CORPORATION
By: /s/ DAVID M. MAUER
----------------------------------
David M. Mauer
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ JEFFREY G. WEBB Chief Executive Officer and August 6, 1997
- --------------------------- President
Jeffrey G. Webb
/s/ DAVID M. MAUER Senior Vice President and Director August 6, 1997
- ---------------------------
David M. Mauer
/s/ JOHN M. NICHOLS Senior Vice President, Finance and August 6, 1997
- --------------------------- Treasurer (Principal Accounting
John M. Nichols Officer)
/s/ DAVID GROELINGER Senior Vice President and Director August 6, 1997
- --------------------------- (Principal Financial Officer)
David Groelinger
* Director August 6, 1997
- ---------------------------
Alan D. Gordon
* Director August 6, 1997
- ---------------------------
Lisa Marroni
* Director August 6, 1997
- ---------------------------
Robert E. Nederlander
* Director August 6, 1997
- ---------------------------
Randall S. Sturges
* Director August 6, 1997
- ---------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the directors and
officers of the Registrant indicated above by asterisks, pursuant to powers of
attorney duly executed by such directors and officers and filed as exhibits to
the Registration Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
VARSITY SPIRIT FASHIONS & SUPPLIES,
INC.
BY: /S/ DAVID M. MAUER
----------------------------------
David M. Mauer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/S/ DAVID M. MAUER Chief Executive Officer and Director August 6, 1997
- ---------------------------
David M. Mauer
* President and Director August 6, 1997
- ---------------------------
Jeffrey G. Webb
/s/ DAVID GROELINGER Senior Vice President August 6, 1997
- --------------------------- (Principal Financial Officer)
David Groelinger
/s/ JOHN M. NICHOLS Senior Vice President and Treasurer August 6, 1997
- --------------------------- (Principal Accounting Officer)
John M. Nichols
* Director August 6, 1997
- ---------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the directors and
officer of the Registrant indicated above by an asterisk, pursuant to powers
of attorney duly executed by such directors and officer and filed as an
exhibits to the Registration Statement.
By: /s/ David Groelinger
----------------------------------
David Groelinger
Attorney-in-Fact
II-26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of New York,
state of New York, on August 6, 1997.
VARSITY USA, INC.
By: /s/ DAVID M. MAUER
----------------------------------
David M. Mauer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------------ --------------
<C> <S> <C>
/s/ DAVID M. MAUER Chief Executive Officer and Director August 6, 1997
- ------------------------------------------
David M. Mauer
* President and Director August 6, 1997
- ------------------------------------------
Jeffrey G. Webb
/s/ DAVID GROELINGER Senior Vice President August 6, 1997
- ------------------------------------------ (Principal Financial Officer)
David Groelinger
/s/ JOHN M. NICHOLS Senior Vice President and Treasurer August 6, 1997
- ------------------------------------------ (Principal Accounting Officer)
John M. Nichols
* Director August 6, 1997
- ------------------------------------------
Leonard Toboroff
</TABLE>
* David Groelinger, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the directors and
officer of the Registrant indicated above by asterisks, pursuant to powers of
attorney duly executed by such directors and officer and filed as exhibits to
the Registration Statement.
By: /s/ DAVID GROELINGER
----------------------------------
David Groelinger
Attorney-in-Fact
II-27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE
Board of Directors
Riddell Sports Inc.
In connection with our audit of the consolidated financial statements of
Riddell Sports Inc. and Subsidiaries referred to in our report dated March 14,
1997, which is included on page F-2 of this Form 10-K, we have also audited
Schedule II for each of the three years in the period ended December 31, 1996.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Chicago, Illinois
March 14, 1997
S-1
<PAGE>
SCHEDULE II
RIDDELL SPORTS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
COL. A COL B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------
ADDITIONS
------------------------
(2)
BALANCE AT (1) CHARGED TO
BEGINNING CHARGED TO OTHER BALANCE AT
OF COSTS AND ACCOUNTS- END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE DEDUCTIONS PERIOD
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts:
Included in current
assets................ $ 1,183,400 $896,240 $ 109,640(a) $1,970,000
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts:
Included in current
assets................ $ 1,970,000 $392,956 $1,742,956(a) $ 620,000
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts:
Included in current
assets................ $ 620,000 $436,130 $ 543,130(a) $ 513,000
</TABLE>
- ------------------
Note: (a) Accounts written off net of recoveries
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ---------------------------------------------------------------------- -----
<S> <C> <C>
2.1 Asset Purchase Agreement, dated as of April 11, 1988, among Riddellink
Holding Corporation, EN&T Associates, Inc., Netlink Inc., Riddell,
Inc. (predecessor corporation), Equilink Licensing Corp., MacGregor
Sporting Goods, Inc., as amended on April 18, 1988 (the formal
trademark assignments and license agreements implementing this
agreement are omitted)(2) and Amendment thereto, dated March 1992.(3)
2.2 Agreement and Plan of Merger, dated as of May 5, 1997, by and among
Riddell Sports Inc., Cheer Acquisition Corp. and Varsity Spirit
Corporation.(22)
2.3 Asset Purchase Agreement dated as of December 1, 1994 by and between
Intropa International U.S.A., Inc., Elisabeth Polsterer and
Varsity/Intropa Tours, Inc.(27)
2.4 Asset Purchase Agreement dated as of May 15, 1996 by and between
United Special Events, Inc., Michael Olmstead and Varsity USA,
Inc.(26)
3.1 Amended and Restated Articles of Incorporation of Riddell Sports
Inc.(20)
3.2 First Amended and Restated Bylaws of Riddell Sports Inc.(18)
3.3 Certificate of Incorporation of All American Sports Corporation
(formerly known as Ameracq Corp).*
3.4 Bylaws of All American Sports Corporation (formerly known as Ameracq
Corp).*
3.5 Certificate of Incorporation of Cheer Acquisition Corp.*, as amended,
by the Articles of Merger of Cheer Acquisition Corp. into Varsity
Spirit Corporation.(1)
3.6 Bylaws of Cheer Acquisition Corp.*
3.7 Certificate of Incorporation of Equilink Licensing Corporation.*
3.8 Bylaws of Equilink Licensing Corporation.*
3.9 Certificate of Incorporation of Proacq Corp.*
3.10 Bylaws of Proacq Corp.*
3.11 Certificate of Incorporation of RHC Licensing Corporation.*
3.12 Bylaws of RHC Licensing Corporation.*
3.13 Amended and Restated Articles of Incorporation of Riddell, Inc.
(formerly known as EN&T Associates Inc.).*
3.14 Bylaws of Riddell, Inc. (formerly known as EN&T Associates Inc.).*
3.15 Amended and Restated Articles of Incorporation of Ridmark
Corporation.*
3.16 Bylaws of Ridmark Corporation.*
3.17 Amended and Restated Charter of Varsity Spirit Corporation.(25)
3.18 Bylaws of Varsity Spirit Corporation.(25)
3.19 Charter of International Logos, Inc.*
3.20 Bylaws of International Logos, Inc.*
3.21 Charter of Varsity/Intropa Tours, Inc.*
3.22 Bylaws of Varsity/Intropa Tours, Inc.*
3.23 Amended and Restated Charter of Varsity Spirit Fashions & Supplies,
Inc.*
3.24 Bylaws of Varsity Spirit Fashions & Supplies, Inc.*
3.25 Amended and Restated Charter of Varsity USA, Inc.*
3.26 Bylaws of Varsity USA, Inc.*
4.1 Indenture, dated as of June 19, 1997, between Riddell, certain
subsidiaries of Riddell, as Guarantors, and Marine Midland Bank, as
Trustee.(23)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ---------------------------------------------------------------------- -----
<S> <C> <C>
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding validity
of New Senior Notes offered hereby.(1)
9.1 Voting Trust Agreement dated May 1991.(2)
10.1 Settlement Agreement, dated April 9, 1981, among MacGregor-Doniger
Inc., Brunswick Corporation and The Equilink Corporation.(2)
10.2 1997 Stock Option Plan.(22)
10.3 License Agreement, dated as of April 18, 1988, among MacMark
Corporation, Netlink, Inc. and MacGregor Sporting Goods, Inc.(2) as
amended July 30, 1992(16) and November , 1992.(16)
10.4 Agreement, made January 23, 1989, between Equilink Licensing Corp. and
Kmart Corporation, with supplemental agreements dated November 16,
1989, August 30, 1990(2), and June 30, 1994(12).
10.5 Lease, dated November 12, 1993, between the International Brotherhood
of Painters and Allied Trade Union and Industry Pension Fund and
Riddell, Inc., of the premises at 2050 Lively Blvd., Elk Grove
Village, Illinois(16); and amendment dated March 20, 1995(16); and
Amendment dated September 19, 1996.(21)
10.6 Lease Agreement, dated November 2, 1984 by and between ADI Real Estate
Joint Venture No. 2 (predecessor to The School Employees Retirement
Board of Ohio) and Alamo Athletics Inc. (predecessor to All American
Sports Corporation), and Amendments thereto, dated January 30, 1986,
May 11, 1989, August 18, 1989, December 14, 1989, January 10, 1990 of
the premises at 6846 Alamo Downs Parkway, San Antonio, Texas.(3)
10.7 Lease Agreement, dated as of September 1, 1988 by and between Exeter
Management Corporation and All American of the premises at Langeloth,
Pennsylvania (Burgettstown property).(3)
10.8 Lease Agreement, dated April 1991, by and between Stroudsburg Park
Associates and All American Corp. of the premises at 140 Second
Street, Stroudsburg, Pennsylvania(3); as amended March 31, 1995.(18)
10.9 Lease, dated as of September 1, 1968, by and between Munro M. Grant
and the All American Company and Extension and Amendment of Lease,
dated July 11, 1989, of premises at 1320 Taylor Street, Elyria,
Ohio.(3)
10.10 Industrial Real Estate Lease, dated March 4, 1989, between Riverview
Industrial Buildings and All American Corp. and Addendum to the Lease,
dated July 3, 1989, of premises at 1920 Riverview Drive, San
Bernadino, California.(3)
10.11 Lease dated December 12, 1991, between O'Shanter Resources Inc. and
All American Sports, Inc., of premises at 1270 Niagra Street, Buffalo,
New York.(3)
10.12 Lease, dated May 5, 1986, by and between Paul Goldstein, Nathan
Hoffenberg, All American and Medalist Industries, of premises at 3305
and 3307 Scott Street and 9900 Franklin Avenue, Franklin Park,
Illinois(3); amendment dated January 30, 1997.(21)
10.13 Lease, dated October 28, 1987, as amended and extended by letter dated
October 31, 1991, by and between GABT Developments Ltd. and Marcan
Ltd. (a division of All American), of premises at 600 Industrial
Drive, Fort Erie, Ontario(3); amendment dated February 6, 1997(21).
10.14 Consulting Agreement, dated February 16, 1990, between Frederic Brooks
and Woodco Sports, Inc.(2) as amended on February 15, 1994(9).
10.15 NFL Promotional Rights Agreement, dated June 1, 1990, and General
Retail Licensing agreement, dated March 15, 1990 and referred to in
the NFL Promotional Rights Agreement, each between Riddell Inc. and
National Football League Properties, Inc.(2); as supplemented January
20, 1994(9) and July 3, 1997 (License Nos. R03155 and R00705)(1).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
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10.16 1991 Stock Option Plan(2) as amended by amendments described in
Riddell Sports Inc.'s proxy materials for its annual stockholders
meetings held on August 20, 1992, September 30, 1993, June 27, 1996
and June 24, 1997.
10.17 License Agreement dated May 9, 1991 between MacMark Corporation and
MacGregor Sports Products, Inc.(2); amendment dated February ,
1992(3), amendment dated July 30, 1992, amendment dated November 1,
1992(7) and Memorandum of Understanding dated July 29, 1996(21).
10.18 Perpetual License and Trademark Maintenance Agreements among MacMark
Corporation, Equilink Licensing Corporation and BSN Corp. each dated
February 19, 1992(3) and amendment dated November 1, 1992(7).
10.19 Master Agreement by and among MacGregor Sports Products, Inc., BSN
Corp. and MacMark Corporation dated February 19, 1992(3); amendment
No. 1 dated November 1, 1992.(16)
10.20 License Agreement between Equilink Licensing Corporation and MacGregor
Sports Products, Inc. dated May 9, 1991; Amendment thereto dated
December 3, 1991(3) and Amendment dated July 30, 1992(5); Memorandum
of Understanding dated July 29, 1996(21).
10.21 Agreement, dated April 1, 1995, between Riddell, Inc. and the
Amalgamated Clothing Textile Workers Union AFL-CIO.(18)
10.22 Consulting Agreement, dated April 15, 1992, between Riddell Sports
Inc. and Frederic M. Brooks.(4)
10.23 Employment Agreement, dated June 22, 1992, between Riddell Sports Inc.
and Robert F. Nederlander(5); amended July 27, 1994(12).
10.24 Employment Agreement, dated June 22, 1992, between Riddell Sports Inc.
and Leonard Toboroff(5); amended July 21, 1994.(12)
10.25 Consulting Agreement, dated July 29, 1992, between Riddell Sports Inc.
and Donald Engel.(6)
10.26 Lease, dated September 10, 1992, and Amendment, dated October 22,
1992, and Amendment, dated October 22, 1992, between All American
Sports Corporation and Ronald K. Howell d/b/a Lakewood Land and Cattle
Company of Premises at 2831 Faber Street, Union City, California
94587.(6)
10.27 Lease Addendum letter, dated February 13, 1992, between All American
Sports Corporation and Paul Goldstein and Nathan Hoffenberg extending
lease of premises at Franklin Park, Illinois.(6)
10.28 License Agreement, dated October 1, 1992, between All American Sports
Corporation and NOCSAE.(7)
10.29 Employment Agreement, dated March 19, 1993, commencing March 25, 1993
between David Mauer and Riddell Sports Inc.(7), as amended January 17,
1994(9); November 1, 1994(14); November 28, 1994(16).
10.30 Warrant to purchase 150,000 shares of Riddell Sports Inc.'s Common
Stock in favor of M.L.C. Partners Limited Partnership, dated January
26, 1994.(8)
10.31 License Agreement, dated as of February 15, 1994, among RHC Licensing
Corporation, Pursuit Athletic Footwear, Inc., Silver Eagle Holdings,
Ltd., Save Power Limited, Extravest Holdings Limited, Riddell Athletic
Footwear, Inc. and Ridmark Corporation (confidential treatment).(10)
10.32 Settlement agreement, dated February 15, 1994, among Riddell, Inc.,
Riddell Sports Inc., RHC Licensing Corporation, Ridmark Corporation,
Pursuit Athletic Footwear, Inc., Riddell Athletic Footwear, Inc.,
Ernie Wood, Harry Wood, Silver Eagle Holdings, Ltd., Save Power,
Limited, Extravest Holdings Limited, Frederic Brooks, Donald Engel,
Alan Tessler, Alan
</TABLE>
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<TABLE>
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<S> <C> <C>
Hirschfield, Jeffrey Steiner, Robert Nederlander, Leonard Toboroff,
Jeffrey Epstein, John McConnaughy, Connecticut Economics Corporation,
Stephen Tannen, Woodco Sports, Inc., Arthur Tse, Silver Top Limited,
Billion Nominees, Limited, Weston Holdings Limited.(9)
10.33 Employment Agreement, dated as of February 1, 1994, between Riddell,
Inc., and Dan Cougill(11), as amended February 1, 1995.(17)
10.34 Stipulation of Settlement, David Halperin v. Riddell Sports Inc.,
dated October 28, 1994.(13)
10.35 Warrant to Purchase Common Stock in favor of NBD Bank N.A., dated
February 10, 1995.(15)
10.36 Employment Agreement, dated as of March 7, 1996, between Riddell
Sports Inc. and David Groelinger.(19)
10.37 Note Purchase Agreement, dated October 30, 1996, between Riddell
Sports Inc. and Silver Oak Capital, L.L.C., as amended by letter
agreement dated May 2, 1997.(20)
10.38 Subordinated Guaranty, dated November 8, 1996, among Riddell, Inc.,
Equilink Licensing Corporation, and RHC Corporation, All American
Sports Corporation, Ridmark Corporation, Proacq Corp. and SharCo
Corporation.(20)
10.39 Registration Rights Agreement, dated November 8, 1996 between Riddell
Sports Inc. and Silver Oak Capital L.L.C.(20)
10.40 Shareholders Agreement, dated as of May 5, 1997, between Riddell
Sports Inc., Cheer Acquisition Corp. and certain shareholders of
Varsity Spirit Corporation.(31)
10.41 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc., Cheer Acquisition Corp. and Jeffrey G. Webb(31)
10.42 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and Gregory C. Webb(31)
10.43 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and W. Kline Boyd(31)
10.44 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and J. Kristyn Shepherd(31)
10.45 Employment Agreement, dated as of May 5, 1997, between Riddell Sports
Inc. and Jeffrey G. Webb(31)
10.46 Employment Agreement, dated as of May 5, 1997, between Riddell Sports
Inc. and Gregory C. Webb(31)
10.47 Employment Agreement, dated as of May 5, 1997, between Riddell Sports
Inc. and W. Kline Boyd(31)
10.48 Employment Agreement, dated as of May 5, 1997, between Riddell Sports
Inc. and J. Kristyn Shepherd(31)
10.49 Registration Rights Agreement, dated as of June 19, 1997, between
Riddell, as Issuer, certain subsidiaries of Riddell, as Guarantors,
and NationsBanc Capital Markets, Inc. and First Chicago Capital
Markets, Inc., as Purchasers.(23)
10.50 Credit Agreement among Riddell, as Borrower, the subsidiaries of
Riddell, as Guarantors, and the Lenders identified therein, and NBD
Bank, as Administrative Agent, and NationsBank, N.A., as Documentation
Agent, dated as of June 19, 1997.(23)
10.51 Employment Agreement, dated September 29, 1989, between Varsity Spirit
Corporation and W. Kline Boyd(24)
10.52 Employment Agreement, dated September 29, 1989, between Varsity Spirit
Corporation and Robert Dunseath.(24)
10.53 Employment Agreement, dated September 29, 1989, between Varsity Spirit
Corporation and Kris Shepherd.(24)
</TABLE>
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<TABLE>
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10.54 Employment Agreement, dated September 29, 1989, between Varsity Spirit
Corporation and Kraig Tallman.(24)
10.55 Employment Agreement, dated September 29, 1989, between Varsity Spirit
Corporation and Gregory Webb.(24)
10.56 Employment Agreement, dated September 29, 1989 between Varsity Spirit
Corporation and Jeffrey Webb.(24)
10.57 1989 Non-Qualified Stock Option Plan of Varsity Spirit
Corporation.(24)
10.58 1991 Stock Option Plan of Varsity Spirit Corporation.(25)
10.59 Sales Representative Agreement between Varsity Spirit Fashions &
Supplies, Inc. and Stuart Educational Products, Inc., along with
Security Agreement between Varsity Spirit Fashions & Supplies, Inc.
and Gary Stuart and Patti Stuart, both individually and collectively
doing business as Stuart Educational Products.(24)
10.60 Programming Agreement between Universal Cheerleaders Association and
ESPN, Inc.(24)
10.61 Varsity Spirit Corporation 401(k) Profit Sharing Plan.(26)
10.62 Employment Agreement, dated December 1, 1994, between Varsity Spirit
Corporation and Deana Roberts.(27)
10.63 Service Agreement dated as of May 15, 1996 between Varsity Spirit
Corporation and Michael Olmstead.(28)
10.64 Form of Loan Agreement dated as of July 1, 1996 between Varsity Spirit
Corporation and NationsBank of Tennessee, N.A.(29)
10.65 Employment Agreement, dated February 28, 1997, between Varsity Spirit
Corporation and John M. Nichols.(30)
10.66 Employment Agreement between Varsity Spirit Corporation and Richard R.
Bowers.(30)
10.67 Amendment to the Employment Agreement, dated June 4, 1996, between
Varsity Spirit Corporation and Jeffrey Webb.(30)
10.68 Amendment to the Employment Agreement, dated June 4, 1996, between
Varsity Spirit Corporation and Gregory Webb.(30)
10.69 Amendment to the Employment Agreement, dated June 4, 1996, between
Varsity Spirit Corporation and J. Kristen Shepard.(30)
10.70 Amendment to the Employment Agreement, dated June 4, 1996, between
Varsity Spirit Corporation and W. Kline Boyd.(30)
10.71 Amendment to the Employment Agreement, dated June 4, 1996, between
Varsity Spirit Corporation and Kraig Tallman.(30)
10.72 Amendment No. 1 to 1991 Stock Option Plan of Varsity Spirit
Corporation.(30)
10.73 Amendment No. 2 to 1991 Stock Option Plan of Varsity Spirit
Corporation.(30)
10.74 Settlement Agreement, dated June 20, 1997, by and among Riddell Sports
Inc., RHC Licensing Corporation, Riddell, Inc., Equilink Licensing
Corporation, Ridmark Corporation, Macmark Corporation, NBD Bank, f/k/a
NBD Bank, N.A., MLC Partners Limited Partnership, Robert E.
Nederlander, Leonard Toboroff, John McConnaughy, Jr., Lisa J. Marroni,
Frederic H. Brooks, Connecticut Economics Corporation, Robert Weisman,
Bruce H. Levitt, as Bankruptcy Trustee of M Holdings Corporation, Paul
Swanson, as Bankruptcy Trustee of MGS Acquisition, Inc. and MacGregor
Sports, Inc., Official Unsecured Creditors' Committee of MacGregor
Sporting Goods, Inc., M Holdings Corporation, f/k/a MacGregor Sporting
Goods Inc., Innovative Promotions, Inc., Ernest Wood, Jr., Harry Wood,
Pursuit Athletic Footwear, Inc., and Riddell Athletic Footwear, Inc.*
11.1 Statement regarding per share earnings of Riddell Sports Inc. for the
twelve months ended December 31, 1996, 1995 and 1994.*
</TABLE>
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<TABLE>
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NUMBER DESCRIPTION PAGE
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11.2 Statement regarding per share earnings of Riddell Sports Inc. for the
three months ended March 31, 1997 and 1996.*
12.1 Statement regarding the computation of earnings to fixed charges for
Riddell Sports Inc.*
21.1 List of subsidiaries.*
23.1 Consent of Grant Thornton LLP regarding Riddell Sports Inc.(1)
23.2 Consent of BDO Seidman, LLP regarding Varsity Spirit Corporation.(1)
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5.1 hereto).
24.1 Powers of Attorney (included on signature pages hereof).
25.1 Statement of Eligibility and Qualification on Form T-1 of trustee
under the Indenture relating to the Senior Notes.*
99.1 Form of Letter of Transmittal.(1)
99.2 Form of Notice of Guaranteed Delivery.(1)
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees.(1)
99.4 Form of Letter to Clients.(1)
</TABLE>
- ------------------
* Filed previously.
(1) Filed herewith.
(2) Incorporated by reference to Riddell Sports Inc.'s Registration Statement
on Form S-1 (Commission File No. 33-40488) effective June 27, 1991
(including all pre-effective amendments to the Registration Statement).
(3) Incorporated by reference to Riddell Sports Inc.'s Form 10-K report
(Commission File No. 0-19298) for the year ended December 31, 1991.
(4) Incorporated by reference to Riddell Sports Inc.'s Registration Statement
on Form S-1 (Commission File No. 33-40488) effective June 17, 1992
(including all pre-effective amendments to the Registration Statement).
(5) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q report
(Commission File No. 0-19298) for the quarter ended June 30, 1992.
(6) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q report
(Commission File No. 0-19298) for the quarter ended September 30, 1992.
(7) Incorporated by reference to Riddell Sports Inc.'s Form 10-K report
(Commission File No. 0-19298) filed on March 30, 1993.
(8) Incorporated by reference to Riddell Sports Inc.'s Post Effective Amendment
No. 2 to Form S-1 Registration Statement (Commission File No. 33-47884)
filed on January 28, 1994.
(9) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year
ended December 31, 1993.
(10) Incorporated by reference to Riddell Sports Inc.'s Form 10-K/A constituting
Amendment No. 1 to Form 10-K for the year ended December 31, 1993, filed
June 21, 1994.
(11) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for the
quarter ended March 31, 1994.
(12) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for the
quarter ended June 30, 1994.
(13) Incorporated by reference to Riddell Sports Inc.'s Form 8-K filed July 3,
1994.
(14) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for the
quarter ended September 30, 1994.
(Footnotes continued on next page)
<PAGE>
(Footnotes continued from previous page)
(15) Incorporated by reference to Riddell Sports Inc.'s Form 8-K filed January
11, 1995.
(16) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year
ended December 31, 1994.
(17) Incorporated by reference to Riddell Sports Inc.'s Form 8-K dated June 23,
1995.
(18) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year
ended December 31, 1995, dated November 11, 1996.
(19) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q dated May 14,
1996.
(20) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q dated November
11, 1996.
(21) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year
ended December 31, 1996.
(22) Incorporated by reference to Riddell Sports Inc.'s Proxy Statement filed
June 6, 1997.
(23) Incorporated by reference to Riddell Sports Inc.'s Form 8-K dated June 19,
1997.
(24) Incorporated by reference to the Varsity Spirit Corporation's Registration
Statement on Form S-1 (Registration Statement No. 33-44431) filed on
December 10, 1991.
(25) Incorporated by reference to the Varsity Spirit Corporation's Amendment No.
1 to Registration Statement on Form S-1 (Registration Statement No.
33-44431) filed on January 21, 1992.
(26) Incorporated by reference to the Varsity Spirit Corporation's Annual Report
on Form 10-K for the year ended March 31, 1993 (File No. 0-19790).
(27) Incorporated by reference to the Varsity Spirit Corporation's Transition
Report on Form 10-K for the transition period April 1, 1994 to December 31,
1994 (File No. 0-19790).
(28) Incorporated by reference to the Varsity Spirit Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 0-19790).
(29) Incorporated by reference to the Varsity Spirit Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996 (File No.
0-19790).
(30) Incorporated by reference to the Varsity Spirit Corporation's Annual Report
on Form 10-K for the year ended December 31, 1996 (File No. 0-19790).
(31) Incorporated by reference to Varsity Spirit Corporation Schedule 13D filed
June 25, 1997.
<PAGE>
CHARTER OF
CHEER ACQUISITION CORP.
Under Section 48-12-102 of the Tennessee
Business Corporation Act
1. Name. The name of the corporation is Cheer Acquisition Corp..
2. Profit. The corporation is for profit.
3. Shares. The aggregate number of shares which the corporation shall have
authority to issue is 1,000 shares of stock, all of the same class.
4. Registered Office. The street address of the corporation's initial
registered office is 1000 Volunteer Building, 832 Georgia Avenue, Chattanooga,
Tennessee 37402, located in Hamilton County, Tennessee. The name of its initial
registered agent at such address is Hugh F. Sharber.
5. Principal Office. The corporation's principal office is 900 Third
Avenue, New York, New York 10022.
6. Incorporator. The incorporator is Hugh F. Sharber, 1000 Volunteer
Building, 832 Georgia Avenue, Chattanooga, Tennessee 37402.
7. Director's Liability. A director of the corporation shall not be
personally liable to the corporation or its shareholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its shareholders;
{ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or (iii) for a violation of Section
48-18-304 of the Tennessee Code Annotated. If the Tennessee Business Corporation
Act is hereafter amended to authorize the further elimination or limitation of
the liability of directors, then the liability of a director of the corporation,
in addition to the limitation on personal liability provided herein, shall be
limited to the fullest extent permitted by the amended Tennessee Business
Corporation Act.
8. Indemnification. The corporation shall have the power to indemnify its
directors to the fullest extent permitted by law.
<PAGE>
Dated this 11th day of April, 1997.
/s/ Hugh F. Sharber
----------------------------------
Hugh F. Sharber, Incorporator
<PAGE>
ARTICLES OF MERGER
OF
CHEER ACQUISITION CORP.
INTO
VARSITY SPIRIT CORPORATION
--------------------------------------------------
Pursuant to Section 48-21-105 of the Business
Corporation Act of the State of Tennessee
--------------------------------------------------
Varsity Spirit Corporation, a Tennessee corporation (the
"Company"), does hereby certify to the following facts relating to the merger of
Cheer Acquisition Corp., a Tennessee corporation (the "Purchaser") and a
wholly-owned subsidiary of Riddell Sports Inc., a Delaware corporation
("Parent"), into the Company (the "Merger"):
FIRST: The names and states of incorporation
of the constituent corporations to the Merger are as follows:
Name State
- ---- -----
Cheer Acquisition Corp. Tennessee
Varsity Spirit Corporation Tennessee
Purchaser owns approximately 98.6% of the outstanding Company voting shares. The
Company shall be the successor or the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Entity") and shall continue
to be governed by the laws of the State of Tennessee.
SECOND: An Agreement and Plan of Merger, dated
as of May 5, 1997, by and among Parent, the Purchaser and
the Company (the "Agreement"), has been approved, adopt-
<PAGE>
ed, certified, executed and acknowledged as of such date by each of the boards
of directors of the constituent corporations in accordance with Section
48-21-105 of the Business Corporation Act of the State of Tennessee (the
"TBCA"). Pursuant to TBCA Section 48-21-105, approval of the Agreement by the
shareholders of each of the constituent corporations is not required.
THIRD: A copy of the Agreement was mailed to each shareholder
of the Company on or about June 23, 1997 in accordance with Section 48-21-105(c)
and (d) of the TBCA, which was more than one month before these Articles of
Merger were delivered to the Secretary of State for filing.
FOURTH: The Merger shall take effect upon the date of filing
of these Articles of Merger with the Secretary of State of the State of
Tennessee (the "Effective Time").
FIFTH: As of the Effective Time and without any action on the
part of the holders of any shares of Common Stock, par value $.01 per share (the
"Shares") of the Company, or the holder of shares of Common Stock, par value
$.01 per share (the "Purchaser Common Stock") of the Purchaser, the Shares and
the Purchaser Common Stock shall be converted in and on the following manner and
basis:
(a) Purchaser Common Stock. Each issued and outstanding share of
Purchaser Common Stock shall be converted into and become one fully paid and
nonassessable share of common stock of the Surviving Entity.
(b) Cancellation of Company Treasury Stock and Purchaser-Owned and
Parent-Owned Shares. All Shares that are owned by the Company as treasury stock
and any Shares owned by Parent, the Purchaser or any other wholly-owned
subsidiary of Parent shall be cancelled and retired and shall cease to exist and
no consideration shall be delivered in exchange therefor.
(c) Exchange of Shares. Each issued and outstanding Share and Shares,
if any, subject to outstanding options then outstanding not theretofore
cancelled as provided in Section 2.4 of the Agreement (other than Shares to be
cancelled in accordance with Section 2.1(b)
2
<PAGE>
of the Agreement and any Shares which are held by stockholders exercising
dissenters' rights pursuant to Chapter 23 of the TBCA) shall be converted into
the right to receive $18.90 per Share, net to the surrendering holder in cash,
without interest thereon.
SIXTH: An executed copy of the Agreement is on file at the
principal place of business of the Surviving Entity, 2525 Horizon Lake Drive,
Memphis, Tennessee 38133. A copy of the Agreement will be furnished upon
request and without cost to any stockholder of either constituent corporation.
IN WITNESS WHEREOF, each of Varsity Spirit Corporation and
Cheer Acquisition Corp. has caused these Articles of Merger to be executed in
its corporate name this 25th day of July, 1997.
VARSITY SPIRIT CORPORATION
By: /s/ Lisa Marroni
----------------------
Name: Lisa Marroni
Title: Senior Vice President
CHEER ACQUISITION CORP.
By: /s/ Lisa Marroni
----------------------
Name: Lisa Marroni
Title: Vice President and
Secretary
3
<PAGE>
August 7, 1997
Riddell Sports Inc.
919 Third Avenue
New York, New York 10022
Re: Exchange Offer for $115,000,000
10 1/2% Senior Notes Due 2007 of
Riddell Sports Inc. -- Registration
Statement on Form S-4
Ladies and Gentlemen:
We have acted as special counsel to Riddell Sports Inc., a Delaware
corporation (the "Company"), in connection with the public offering of
$115,000,000 aggregate principal amount of the Company's 10 1/2% Senior Notes
Due 2007 (the "Notes"), which are to be guaranteed on a senior unsecured basis
pursuant to guarantees (the "Guarantees" and, together with the Notes, the
"Securities") by each of All American Sports Corporation, a Delaware corporation
("All American"), Equilink Licensing Corporation, a Delaware corporation
("Equilink"), Proacq Corp., a Delaware corporation ("Proacq"), RHC Licensing
Corporation, a Delaware corporation ("RHC"), Ridmark Corporation, a Delaware
corporation (collectively with All American, Equilink, Proacq and RHC, the
"Delaware Subsidiaries"), Riddell, Inc., an Illinois corporation ("Riddell,
Inc."), International Logos, Inc., a Tennessee corporation ("Logos"), Varsity/
Intropa Tours, Inc., a Tennessee corporation ("Intropa"), Varsity Spirit
Corporation, a Tennessee corporation ("Varsity"), Varsity USA, Inc., a Tennessee
corporation (collectively, with Logos, Intropa and Varsity, the "Tennessee
Subsidiaries"), and
<PAGE>
Riddell Sports Inc.
August 7, 1997
Page 2
Varsity Spirit Fashions and Supplies Inc., a Minnesota corporation ("Fashions"
and collectively with the Delaware Subsidiaries, Riddell Inc. and the Tennessee
Subsidiaries, the "Guarantors"). The Notes are to be issued pursuant to an
exchange offer (the "Exchange Offer") in exchange for a like principal amount of
the issued and outstanding 10 1/2% Senior Notes Due 2007 of the Company (the
"Old Senior Notes"), and are to be governed by an Indenture dated as of June 19,
1997 (the "Indenture"), by and among the Company, the Guarantors, Cheer
Acquisition Corp., a Tennessee corporation subsequently merged into Varsity
("Cheer"), and Marine Midland Bank, as Trustee (the "Trustee").
This opinion is being furnished in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the
"Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement on Form S-4 (File No. 333-31525 and Nos. 333-31525-01 to 12) relating
to the Exchange Offer as filed with the Securities and Exchange Commission (the
"Commission") on July 18, 1997 under the Act and Amendment No. 1 thereto to be
filed with the Commission on the date hereof (such Registration Statement, as so
amended, being hereinafter referred to as the "Registration Statement"); (ii) an
executed copy of the Registration Rights Agreement dated June 19, 1997 (the
"Registration Rights Agreement"), by and among the Company, Cheer, the
Guarantors, NationsBanc Capital Markets, Inc. and First Chicago Capital Markets,
Inc.; (iii) an executed copy of the Indenture; (iv) the Certificates of
Incorporation of the Company and each of the Delaware Subsidiaries, as amended
to date; (v) the By-Laws of the Company and each of the Delaware Subsidiaries,
as amended to date; (vi) certain resolutions adopted by the Board of Directors
of the Company and a Special Committee of the Board of Directors of the Company,
relating to, among other things, the Exchange Offer, the issuance of the Old
Senior Notes and the Securities, the Indenture and related matters; (vii)
certain resolutions adopted by the Boards of Directors of each of the Delaware
Subsidiaries relating to, among other things, the issuance of the Guarantees by
the
<PAGE>
Riddell Sports Inc.
August 7, 1997
Page 3
Delaware Subsidiaries; (viii) the Form T-1 of the Trustee filed as an exhibit to
the Registration Statement; (ix) the form of the Notes (including the form of
Guarantees) included as an exhibit to the Indenture; and (x) the Certificate of
Ownership and Merger merging Cheer into Varsity with Varsity as the surviving
corporation. We have also examined originals or copies, certified or otherwise
identified to our satisfaction, of such records of the Company and the
Guarantors and such agreements, certificates of public officials, certificates
of officers or other representatives of the Company, the Guarantors and others,
and such other documents, certificates and records as we have deemed necessary
or appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company and the Delaware Subsidiaries, we have assumed that such parties had or
will have the power, corporate or other, to enter into and perform all
obligations thereunder and have also assumed the due authorization by all
requisite action, corporate or other, and execution and delivery by such parties
of such documents and the validity and binding effect of such documents on such
parties.
We have assumed that the execution and delivery by the Company and the
Guarantors of the Securities and the Indenture and the performance by the
Company and the Guarantors of their respective obligations thereunder do not and
will not violate or constitute a default under (i) any agreement or instrument
to which the Company, the Guarantors or any of their properties is subject
(except that we do not make the assumptions set forth in this clause (i) with
respect to the Certificates of Incorporation or By-laws of each of the Company
and the Delaware Subsidiaries), (ii) any law, rule or regulation to which the
Company and the Guarantors are subject (except that we do not make the
assumption set forth in this clause
<PAGE>
Riddell Sports Inc.
August 7, 1997
Page 4
(ii) with respect to the General Corporation Law of the State of Delaware and
those laws, rules and regulations (other than securities and antifraud laws) of
the State of New York that, in our experience, are normally applicable to
transactions of the type provided for by the Indenture and the Securities (it
being understood that we have made no special investigation with respect to any
other laws, rules or regulations), (iii) any judicial or regulatory order or
decree of any governmental authority, or (iv) any consent, approval, license,
authorization or validation of, or filing, recording or registration with any
governmental authority. As to any facts material to the opinions expressed
herein which we have not independently established or verified, we have relied
upon statements and representations of officers and other representatives of the
Company, the Guarantors and others.
Members of our firm are admitted to the bar in the State of New York, and
we do not express any opinion as to the laws of any other jurisdiction other
than the General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing and the limitations,
qualifications, exceptions and assumptions set forth herein, we are of the
opinion that when (i) the Registration Statement becomes effective and the
Indenture has been qualified under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), and (ii) the Notes have been duly executed by the
Company and authenticated by the Trustee in accordance with the provisions of
the Indenture and have been delivered upon consummation of the Exchange Offer
against receipt of Old Senior Notes surrendered in exchange therefor in
accordance with the terms of the Exchange Offer, the Notes will be valid and
binding obligations of the Company, entitled to the benefits of the Indenture
and enforceable against the Company in accordance with their terms, and the
Guarantees will constitute valid and binding obligations of the Guarantors
entitled to the benefits of the Indenture, enforceable against the Guarantors,
in each case, except to the extent that the enforcement thereof may be limited
by (1) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance
or similar laws now or hereafter in effect relating to creditors' rights
<PAGE>
Riddell Sports Inc.
August 7, 1997
Page 5
generally and (2) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity).
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We also consent to the reference to our
firm under the caption "Legal Matters" in the Registration Statement. In giving
this consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
/s/ SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP
<PAGE>
[Logo] National Football League Properties, Inc. [Logo]
280 Park Avenue, New York, New York 10017
Area Code (212) 838-0660 FAX (212)681-7599
TERM SHEET
Licensee: Riddell, Inc. Date: May 23, 1995
Address: 3670 N. Milwaukee Ave. No: 641-149-1400
Chicago, IL 60641
The following terms are made part of and are subject to all definitions, terms
and conditions set forth in License No. R03155
MARKETING PROGRAM: NFL Pro Line
TERM: April 1, 1995 - March 31, 1998
TERRITORY: The United States
LICENSED PRODUCTS: NFL PRO LINE HELMETS
FISCAL YEAR LICENSED PRODUCT ROYALTY%
- ----------- ---------------- --------
YEAR I 04/01/95 - 03/31/96 P08389/A100 PRO LINE HELMETS 9.00
YEAR II 04/01/96 - 03/31/97 P08389/A100 PRO LINE HELMETS 9.00
YEAR III 04/01/97 - 03/31/98 P08389/A100 PRO LINE HELMETS 9.00
FISCAL YEAR MINIMUM GUARANTEE ADVANCE
- ----------- ----------------- -------
YEAR I 04/01/95 - 03/31/96 $250,000 $62,500
YEAR II 04/01/96 - 03/31/97 $275,000 $68,750
YEAR III 04/01/97 - 03/31/98 $250,000 $65,000
AUTHORIZED BRANDS FOR
LICENSED PRODUCT(S): Riddell, Riddell and design, R and design
LICENSED MARK(S) FOR
LICENSED PRODUCT(S): Marketing Program logo, Club Marks, and the
following League Marks: "National Football
League", "NFL", "National Football Conference",
"American Football Conference", "NFC", "AFC", and
the NFL Shield design.
DISTRIBUTION CHANNELS FOR
LICENSED PRODUCT(S): Department Stores, Direct Retailers, Fan Shops,
Sporting Goods Stores, Footwear Specialty Stores
PROMOTIONAL PRODUCTS:
FISCAL YEAR LICENSED PRODUCTS NUMBER OF UNITS
- ----------- ----------------- ---------------
YEAR I PRO LINE HELMETS 30
YEAR II PRO LINE HELMETS 30
YEAR III PRO LINE HELMETS 30
BROADCAST EXPOSURE FEE:
FISCAL YEAR AMOUNT PAYMENT DUE DATE(S)
- ----------- ------ -------------------
YEAR I $100,000 To be paid in two (2) equal installments on
or before 06/01/95 and 09/01/95.
YEAR II $110,000 To be paid in two (2) equal installments on
or before 06/01/96 and 09/01/96.
YEAR III $125,000 To be paid in two (2) equal installments on
or before 06/01/97 and 09/01/98.
<PAGE>
ASSIGNED MEMBER CLUBS:
FISCAL YEAR MEMBER CLUB EXPOSURE PRODUCTS
- ----------- ----------- -----------------
YEAR I All Member Clubs Helmets
YEAR II All Member Clubs Helmets
YEAR III All Member Clubs Helmets
SPONSORSHIPS:
FISCAL YEAR EVENT SPONSORSHIP FEE PAYMENT DUE DATE(S)
- ----------- ----- --------------- -------------------
YEAR I NFL EXPERIENCE $50,000 To be determined by NFLP
YEAR II NFL EXPERIENCE $50,000 To be determined by NFLP
YEAR III N/A N/A N/A
ADVERTISEMENTS: N/A
COOPERATIVE FUND: N/A
ADDITIONAL TERMS:
YEARS I AND II (only):
- ---------------------
If, in connection with its sponsorship of the NFL Experience, Riddell sets up
the "History of the Helmet" display at the NFL Experience, Licensee's
sponsorship fee will be reduced to twenty five thousand dollars ($25,000).
<PAGE>
National Football League Properties, Inc.
[LOGO] 280 Park Avenue, New York, New York 10017
Area Code (212) 838-0660 FAX (212) 681-7599
Retail Licensing Agreement
Licensee: Riddell, Inc. Date: May 23, 1995
Address: 3670 N. Milwaukee Ave. No.: 641-149-1400
Chicago, IL 60641 Lic. No.: RO3155
National Football League Properties, Inc. ("NFLP") has the exclusive right to
license for commercial purposes the trademarks of the National Football League
("NFL") and the thirty professional football teams that comprise the NFL
("Member Clubs"). Licensee, whose name and address are set forth above, desires
to use certain of these trademarks in accordance with the terms and conditions
of this agreement ("License"). In consideration of the mutual premises,
covenants and undertakings contained in this License, the parties to this
License agree as follows:
1. Definitions
As used in this License, the terms listed on the attached Term Sheet and
elsewhere in this License have the following meanings:
a. "Advance Royalty Payment": The amount to be credited to Royalty payments due
for the corresponding Fiscal Year payable to NFLP upon the execution of
this License for Fiscal Year I and on or before April 15 for each
successive Fiscal Year.
b. "Broadcast Exposure Fee": The amount Licensee shall pay to NFLP for on-field
exposure rights for the Exposure Products.
c. "Advertisements": Advertising space in designated NFLP publications to be
purchased by Licensee in accordance with this License.
d. "Affiliate": Any person or entity in which Licensee or any owner, majority
shareholder, officer or director of Licensee has any direct or indirect
beneficial or ownership interest or is a joint venture partner.
e. "Assigned Member Clubs": The Member Clubs for which Licensee shall have
on-field exposure rights for the Exposure Products in accordance with the
terms of Paragraph 18.
f. "Authorized Brands": The only brand names Licensee may use in association
with the Licensed Products.
g. "Club Marks": The full team names, nicknames, helmet designs, uniform
designs, logos, slogans, and other identifying symbols and indicia adopted
for commercial purposes by the Member Clubs.
h. "Cooperative Fund": The amount payable to NFLP during each Fiscal Year for
use by NFLP in connection with the designated Cooperative Program.
i. "Distribution Channels": The channels of trade in the Territory in which
Licensee may distribute for sale or sell each Licensed Product as defined
in Exhibit I attached to this License and/or the attached Term Sheet.
j. "Exposure Products": The Licensed Products for which Licensee shall have
on-field exposure rights for the Assigned Member Clubs.
k. "Fiscal Year": The period beginning on April 1 of any year and ending on
March 31 of the following year except for Fiscal Year I, which will begin
on the date this License is fully-executed and will end on March 31 of the
following year.
l. "League Marks": "National Football League", "NFL", "National Football
Conference", "American Football Conference", "NFC", "AFC", "Super Bowl",
"Pro Bowl", the NFL Shield design, and other identifying symbols and
indicia adopted for commercial purposes by the NFL.
m. "Licensed Marks": The trademarks for which Licensee is granted certain
limited, exclusive rights under this License as set forth in Paragraph 2
below.
n. "Licensed Products": All products for which Licensee may use the Licensed
Marks in association with the Authorized Brands. This license will refer
to each distinct type of product as a "Licensed Product" since more than
one product may be licensed (e.g. T-shirts and jackets would each be a
Licensed Product).
o. "Marketing Program": The program established by NFLP in connection with
which Licensee may use the Licensed Marks as authorized under this License.
Licensee shall abide by all rules, guidelines and policies established by
NFLP for such Marketing Program, which are deemed part of this License.
p. "Member Club Marketing Commitment": The amount Licensee shall pay to NFLP in
exchange for Member Club controlled advertising and promotional inventory
from each Assigned Member Club in such Member Club's local marketing area.
q. "Minimum Royalty Guarantee": The minimum amount of Royalty payments payable
to NFLP on or before the 15th day following the end of each Fiscal Year.
r. "Net Sales": Gross sales of all Licensed Products sold or distributed for
sale at Licensee's invoiced selling price less sales derived from returns
received and credited only. Licensee shall not credit any return at a rate
greater than the original invoiced selling price for such Licensed
Products. There shall be no other deductions allowed including, without
limitation, deductions for manufacturing costs, selling costs,
distribution costs, advertising and promotional costs, quantity discounts,
freight, non-collected or uncollectable accounts, commissions, taxes,
cash discounts, close out sales, distress sales, sales to employees, or
any other costs. For purposes of this Agreement, Net Sales and all other
referenced sales occur when Licensee invoices or ships any Licensed
Product, whichever is earlier. If Net Sales are made to an Affiliate, the
dollar amount gross sales will be the greater of Licensee's regular price
to unaffiliated accounts or the Affiliate's gross sales price to an
unaffiliated account.
s. "NFL Marks": All League Marks and Club Marks, collectively.
t. "Premiums": Any products, including the Licensed Products, bearing the NFL
Marks or other indicia of the NFL or its Member Clubs that Licensee sells
or gives away for the purposes of promoting, publicizing or increasing the
sale of its own products or services other than the Licensed Products, or
that Licensee sells or gives away to any other party whom Licensee knows
or should reasonably know intends to use such products for the purposes
of promoting, publicizing or increasing the sale of any other party's
products or services. Promotions include, without limitation, combination
sales, incentives for sales force, and trade or consumer promotions.
u. "Promotional Products": The quantity of each Licensed Product that Licensee
shall provide to NFLP at no cost during each Fiscal Year for use in
connection with NFLP's Promotional Programs, as defined in Paragraph 5 of
this License.
v. "Royalty": The amount of Net Sales Licensee shall pay to NFLP for all sales
of the Licensed Products. Licensee shall calculate all Royalty payments
according to Net Sales based on Licensee's normal domestic wholesale
warehouse price. NFLP reserves the right to increase the rate of the
Royalty during the Term, provided that it gives Licensee at least six (6)
months written notice before such increase takes effect.
w. "Sponsorship": The designated events for which Licensee will participate as
a sponsor during each Fiscal Year of the Term subject to the execution of
an NFLP Sponsorship Agreement.
x. "Style": A distinct prototype of a Licensed Product that differs from any
other prototype of that same Licensed Product in any form or manner with
respect to design, material, pattern, size, shape, Licensed Marks, or any
other distinguishing characteristic involving the specifications for the
<PAGE>
production of all or any portion of that Licensed Product (e.g. T-shirts
bearing the San Francisco 49ers logo and T-shirts bearing the San Diego
Chargers logo would each be a Style of Licensed Product).
y. "Term": The time period for which this License shall be effective.
z. "Territory": The geographic area in which Licensee shall have the right to
sell the Licensed Products.
aa. "Unit": A single Licensed Product (e.g. one T-shirt and one jacket would
each be a Unit).
2. Grant of License
Subject to all of the terms and conditions of this License, NFLP grants
Licensee the exclusive right, except for license agreements between NFLP and
third party licensees preexisting that General Retail Licensing Agreement
dated March 15, 1990 (No. 625-149-1400, License No. R00705) (i.e., Hutch),
to use the Licensed Marks in connection with the manufacture, distribution,
sale, and advertising of the Licensed Products under the Authorized Brand
in the Distribution Channels in the Territory in accordance with all
policies, rules and regulations of the Marketing Program and NFLP, which
are deemed part of this License. Licensee shall have no right to sell or
distribute any Premiums unless Licensee receives a separate Premium License
from NFLP and pays NFLP the applicable Royalty under such Premium License.
Licensee shall not use the Licensed Products as Premiums or permit the use
of the Licensed Products as Premiums by any party whom Licensee knows or
should reasonably know intends to use the Licensed Products as Premiums.
3. Terms of Payment
a. Licensee shall pay NFLP the Royalty on all sales of the Licensed Products.
Regardless of whether any sales occur during any Fiscal Year, Licensee shall
also pay NFLP the applicable Advance Royalty Payment and Minimum Royalty
Guarantee for each Fiscal Year during the Term Advance Royalty Payments and
any payments made to satisfy the Minimum Royalty Guarantee are not
refundable. Licensee may credit the Advance Royalty Payment and Royalty
payments made to NFLP during each Fiscal Year to the Minimum Royalty
Guarantee for the corresponding Fiscal Year only. Licensee may not credit
such amounts to the Advance Royalty Payment, Minimum Royalty Guarantee or
any other payment required under this License for any other Fiscal Year. If
NFLP terminates this License, for the Fiscal Year in which termination
occurs ("Termination Fiscal Year") Licensee shall pay NFLP the Royalty on
all sales of the Licensed Products made during the Termination Fiscal Year
or a pro rated portion of the Minimum Royalty Guarantee owed in excess of
the Advance Royalty Payment ("Termination Guarantee"), whichever is
greater. For purposes of this paragraph the pro rated Minimum Royalty
Guarantee will be calculated as follows:
Termination Guarantee x No. of Days Completed in Termination Fiscal Year
--------------------- ------------------------------------------------
1 365
b. On or before the 15th day of each month, Licensee shall make all Royalty
payments to NFLP due on sales of the Licensed Products during the preceding
calendar month. Simultaneously with the Royalty payment, Licensee shall
furnish full and accurate statements of the Net Sales of each Licensed
Product sold and distributed during such calendar month on forms provided
by NFLP. The statements will include the quantity and description of each
Licensed Product itemized by Member Club if applicable, the gross sales
price, itemized deductions from the gross sales price, any returns made
during the preceding month, and the resulting Net Sales on which Licensee
calculated the Royalty amount. Licensee shall furnish such statements for
each Licensed Product regardless of whether it sold any such Licensed
Product during the preceding month. NFLP's receipt or acceptance of any
statement or Royalty payment or the cashing of a Royalty check will not
preclude NFLP from questioning the correctness of such statements or
payments at any time. Upon discovery of any verifiable inconsistency or
mistake in such statements or payments, Licensee shall immediately rectify
such inconsistency or mistake.
c. Licensee shall pay NFLP all other amounts listed on the Term Sheet attached
to this License in accordance with the dates provided in such Term Sheet.
d. Licensee shall pay NFLP an additional charge of one and one-half percent
(1.5%) per month on any payment due under this License that remains unpaid
fifteen (15) days after such payment becomes due.
4. Quality Control
a. Prior to making any use of any Style of any Licensed Product, Licensee shall
submit to NFLP for its approval at Licensee's sole cost and expense at the
following applicable stages: (i) finished artwork or final proofs; (ii)
pre-production samples or strike-offs for such proposed Style; and (iii) a
sample Unit of the finished version of such Style together with all
packaging, cartons, containers, hangtags and wrapping materials related to
such Unit ("Related Materials"). For Styles that differ solely with respect
to the Licensd Marks, Licensee may submit a sample Unit of one Style along
with artwork of the Styles bearing the other Licensed Marks for approval
purposes unless NFLP requests a sample Unit of each such Style. NFLP shall
use its best efforts to promptly evaluate all such submissions and provide
Licensee, if applicable, with quality standards and specifications for the
finished Units of each Style. Upon approval of the finished version of a
sample Unit of a Style, NFLP shall execute a Product Approval Form that will
contain any applicable quality standards and specifications. License shall
not manufacture, sell, distribute or advertise any Style of a Licensed
Product unless NFLP has executed a Product Approval Form for such Style.
b. All Product Approval Forms are effective for one Fiscal Year only and
Licensee must resubmit to NFLP each Style of each Licensed Product
previously approved by NFLP for quality control approval within thirty (30)
days after the start of each successive Fiscal Year. From time to time, NFLP
may request additional sample Units of any Style of any Licensed Product to
confirm continued compliance with NFLP's quality control guidelines and any
applicable quality standards and specifications. NFLP shall have the right
to withdraw its approval of any Style of any Licensed Product if, in NFLP's
sole judgment, such sample Units cease to conform to such guidelines,
standards or specifications or otherwise deviate in quality from the
previously approved sample Units. Upon notice by NFLP to Licensee that the
Product Approval Form for a Style of a Licensed Product has been withdrawn,
Licensee shall immediately cease to manufacture, distribute, sell or
advertise any further Units of such Style until such time as a new Product
Approval Form has been executed and delivered by NFLP.
c. Licensee shall not make any modification to any Style for which NFLP has
issued a Product Approval Form or depart from any applicable quality
standards and specifications for any Style unless NFLP has approved such
modification for such Style and issues a new Product Approval Form. Licensee
acknowledges that the manufacture, use, sale, distribution, or advertising
of any Style that deviates from the Style approved by NFLP will constitute
a material breach of this License. Upon such breach, NFLP may terminate
this License immediately.
d. No distribution or sale of irregulars or seconds is permitted except when
Licensee receives prior written approval from NFLP.
5. Advertising and Promotional Materials
a. Licensee will not use the Licensed Marks or any reproduction of them,
including without limitation, Photographs or Computer Art, as defined in
Paragraph 10a, in any advertising, promotion, publicity or display materials
(collectively "Promotional Materials") without receiving NFLP's prior
written approval executed on a Promotional Approval Form supplied to
Licensee by NFLP. Licensee may use such approved Promotional Materials only
in conjunction with the Styles of Licensed Products that NFLP has approved.
Licensee shall submit to NFLP all Promotional Materials at the following
applicable stages appropriate to the medium used: (i) conceptual stage,
pre-production art or rough cuts; (ii) layout, storyboard and script; (iii)
finished materials; and (iv) at any other time as reasonably requested by
NFLP. NFLP shall use best efforts to evaluate all such Promotional
Materials' submissions within ten (10) business days of their receipt by
NFLP. NFLP shall execute a Promotional Approval
<PAGE>
Form for all Promotional Materials that it approves. Licensee shall notify
its retailers and/or Third Party Distributors that NFLP must approve all
Promotional Materials involving or using in any form or manner the Licensed
Marks. Licensee shall use best efforts to ensure that its retailers and/or
Third Party Distributors do not publish, display or otherwise distribute
such Promotional Materials without NFLP's prior written approval.
b. NFLP has the exclusive right, in its sole discretion, to approve or
disapprove any Promotional Materials' submissions. Licensee acknowledges
that NFLP may disapprove Promotional Materials that, in NFLP's opinion,
reflect unfavorably upon NFLP, the NFL or its Member Clubs including,
without limitation, materials involving gambling, lotteries or other games
inconsistent with the image of the NFL, the Member Clubs, or the Licensed
Products.
c. NFLP may withdraw its approval of any Promotional Materials if: (i) the
Promotional Materials have been altered without the prior written approval
of NFLP; (ii) the Style and/or the Licensed Product promoted in the
Promotional Materials ceases to be approved under this License; or (iii) an
event occurs that, in NFLP's opinion, causes NFLP's relationship with
Licensee or any Licensed Product to adversely reflect upon the professional
or business reputation of the NFL, its Member Clubs or NFLP.
d. Licensee represents that NFLP has the right to conduct promotions and
special events in its sole discretion and to print catalogs, sales sheets
and brochures involving representative merchandise from NFLP's licensees
("Promotional Programs"). Licensee shall supply within ten (10) business
days of any request by NFLP, at no charge to NFLP, all or any portion of the
Promotional Products required by NFLP for use, in NFLP's sole discretion, in
such Promotional Programs.
e. Licensee shall pay NFLP the designated amounts for the Advertisements,
Sponsorship, and Cooperative Fund, if applicable, on or before the
corresponding dates listed on the Term Sheet attached to this License. NFLP
shall use such payments in a manner determined by NFLP in its sole
discretion.
f. During each Fiscal Year of the Term in which NFLP publishes the NFL
Merchandise Catalogue, Licensee shall purchase a full-page advertisement in
such catalogue at the rate established in NFLP's then-existing rate card.
Licensee shall make such payment within fifteen (15) days from receiving an
invoice from NFLP.
6. Distribution Requirements
Licensee shall distribute for sale and sell each Licensed Product only in
the authorized Distribution Channels. Prior to distribution of any Licensed
Product, Licensee shall submit to NFLP a list of its retail accounts for the
Licensed Products for the purpose of determining which accounts fall within
the Distribution Channels. NFLP shall determine, in its sole discretion,
whether such retail accounts fall within the Distribution Channels and
shall provide Licensee with a list of the approved retail accounts.
Licensee shall manufacture, distribute, sell and maintain inventory of
sufficient quantities of each Style of each Licensed Product to meet the
reasonable market demand in the Distribution Channels. Licensee shall not
sell Licensed Products to any third party that Licensee knows or should
reasonably know intends to sell the Licensed Products outside of the
authorized Distribution Channels. If Licensee sells or distributes for sale
other merchandise that does not bear the Licensed Marks but is of the same
grade and quality as the Licensed Products, Licensee shall not discriminate
in the granting of commissions and discounts to salespersons, dealers and
distributors for the sale of the Licensed Products. If the Licensed Marks
are Club Marks, Licensee acknowledges that it shall manufacture, distribute
and sell a commercially significant quantity of Units bearing the trademarks
of each Member Club individually in each Style.
7. Authorized Brands
Licensee shall only use the Authorized Brands, if applicable, in connection
with the manufacture, distribution, sale, and advertising of each Licensed
Product. NFLP shall have the right, in its sole discretion, to remove or
change any of the Authorized Brands, if applicable, during the Term.
Licensee must receive the prior written approval of NFLP to use any other
trademarks on the Licensed Products.
8. NFLP's Purchase of Licensed Products
In addition to the Promotional Products provided at no cost by Licensee,
NFLP, the NFL and its Member Clubs shall have the right to purchase any of
the Licensed Products in any quantity at the minimum wholesale price,
excluding Royalty payments, that Licensee charges to its best customer,
provided that NFLP will not require Licensee to pay a Royalty on such sales.
9. Third Party Relationships
a. Licensee shall not assign, sublicense, transfer or otherwise encumber any
of its rights under this License to any Affiliate or other third party
without NFLP's prior written consent. If Licensee assigns,
sublicenses, transfers or encumbers any portion of this License without
such consent, NFLP shall have the right to terminate this License
immediately.
b. Licensee must receive NFLP's prior written consent to use a domestic or
foreign third party distributor of any Licensed Product ("Third Party
Distributor") or domestic or foreign third party manufacturer of any
Licensed Product or any portion of any Licensed Product, including patches,
labels and emblems made by any party that is not already a licensee of NFLP
("Third Party Manufacturer"). NFLP shall have the right to approve or
disapprove any Third Party Distributor or Third Party Manufacturer in its
sole discretion. In the case of a Third Party Manufacturer, NFLP's approval
of such Third Party Manufacturer, if granted, will be contingent on the
execution of an agreement between NFLP and the approved Third Party
Manufacturer. Notwithstanding such agreement, Licensee shall at all times
remain primarily obligated to NFLP under this License and shall take all
necessary efforts to ensure that such Third Party Manufacturer uses the
Licensed Marks only to manufacture the designated Licensed Product and for
no other purpose including, without limitation, promoting or selling the
Licensed Product. If such Third Party Manufacturer has made an unauthorized
use of the Licensed Marks, Licensee shall fully cooperate with NFLP to
ensure that such unauthorized use ceases promptly. Licensee shall be
primarily obligated to ensure that each Licensed Product produced by such
Third Party Manufacturer complies with the requirements of Paragraph 4 of
this License.
c. Licensee shall not make any payments to any Member Club or to any
shareholder, officer, director, employee, agent or representative of any
Member Club, or to any employee, agent or representative of the NFL or its
affiliates in such person's individual capacity, in connection with the use
of any Licensed Marks under this License or otherwise as a direct result of
sales of any Licensed Product. Licensee shall disclose to NFLP all existing
agreements or agreements being negotiated by Licensee or its agent between
Licensee and any Member Club or any shareholder, officer, director,
employee, agent or representative of any Member Club, or any employee, agent
or representative of the NFL or any of its affiliates in such person's
individual capacity.
d. In the event that NFLP consents to any third party relationship under this
Paragraph 9 or otherwise under this License, Licensee acknowledges that
such approval will be contingent on the execution of an appropriate form or
agreement supplied by NFLP.
10. Computer Artwork and Photographs
a. Subject to the requirements of Paragraph 4, if Licensee wishes to use
computer artwork incorporating graphic depictions of the Licensed Marks
("Computer Art") or photographs owned and/or controlled by NFLP
("Photographs"), Licensee shall request such Computer Art or Photographs in
a Use Application provided to Licensee by NFLP. If NFLP, in its sole
discretion, approves such application, NFLP shall provide Licensee with
Computer Art or Photographs at a rate established by NFLP in its sole
discretion provided that, in the case of Photographs, Licensee must first
sign NFLP's standard Photo Use Agreement. Licensee shall make any payment
for the Computer Art or Photographs within thirty (30) days of receiving an
invoice from NFLP. Licensee shall only use the Computer Art or Photographs
in accordance with the terms and conditions of this
<PAGE>
License including, without limitation, Paragraph 11, and, in the case of
Photographs, the Photo Use Agreement. The terms of the executed Photo Use
Agreement will govern in the event of any conflict between the terms of
this License and the terms of the Photo Use Agreement.
b. Licensee shall not make copies of the Computer Art or Photographs without
the express written approval of NFLP and shall not use the Computer Art
or Photographs for any purpose other than the purpose set forth in
Licensee's Use Application. Licensee shall not provide the Computer Art or
Photographs to any other party including a manufacturer, unless NFLP
approves such party in accordance with Paragraph 9 of this License. Licensee
shall take all steps necessary to prevent the unauthorized copying or use of
the Computer Art or Photographs by third parties.
c. Upon the expiration or termination of this License, Licensee shall
immediately deliver to NFLP all Computer Art and Photographs provided by
NFLP and all copies and duplications of such Computer Art or Photographs and
all related materials.
d. Licensee acknowledges that it has no right, title or interest in or to any
of the Photographs, including, without limitation, copyrights in the
Photographs. Licensee represents that it will not assert any rights in or to
the Photographs during the Term of thereafter.
11. Protection of Rights
a. Licensee acknowledges that, as between NFLP and Licensee, NFLP exclusively
owns the NFL Marks and all copyrights, trademarks and other proprietary
rights in and to them. Licensee further acknowledges that NFLP shall own
worldwide in perpetuity: (i) all artwork produced under this License bearing
the NFL Marks ("Artwork") and all copyrights and other proprietary rights
in such Artwork; (ii) all secondary marks and/or promotional concepts
("Secondary Marks") developed for use and used in connection with any
Licensed Product and all copyrights and other proprietary rights in such
Secondary Marks; (iii) all derivative works based on any of the NFL Marks,
Secondary Marks, Computer Art, or Artwork ("Derivative Works") and all
copyrights and other proprietary rights in such Derivative Works; and (iv)
all Computer Art and all copyrights and other proprietary rights in such
Computer Art as well as duplicates and copies of it. Licensee's use of the
Licensed Marks, Computer Art, Artwork, Secondary Marks and Derivative Works
is for NFLP's benefit and Licensee will not acquire any rights in any of
them by such use. Licensee acknowledges that NFLP will have the right to
terminate this License if Licensee asserts any rights in or to any of the
NFL Marks, Computer Art, Artwork, Secondary Marks and Derivative Works other
than those granted under this License. Licensee shall not attack the
trademarks, copyrights or other proprietary rights of NFLP, the NFL, or its
Member Clubs during the Term or thereafter.
b. Any Artwork, Computer Art, Secondary Marks, Derivative Works or other
materials created by Licensee or its agents in connection with this
Agreement shall be performed as a "work made for hire" for NFLP. Licensee
irrevocably assigns and transfers to NFLP all right, title and interest,
including all copyrights and extensions and renewals thereof, in and to the
Artwork, the Secondary Marks, the Derivative Works, the Computer Art, and
all related proprietary rights (collectively the "Proprietary Materials").
At the request of NFLP, Licensee shall execute all documents confirming
NFLP's rights in and to the NFL Marks and Proprietary Materials including
an assignment of copyright in form and substance satisfactory to NFLP.
Licensee shall cause each third party who makes or contributes to the
creation of the Proprietary Materials to agree that all rights, including
the copyrights, in his or her work shall be owned by NFLP whether as a
"work made for hire" or by assignment, as appropriate.
c. Licensee shall only display or use the Licensed Marks in the form and manner
that NFLP has specifically approved in writing. Licensee shall cause to be
irremovably and legibly printed or affixed in a clearly visible location
approved by NFLP on every Unit of each Licensed Product, and all Related
Materials, Proprietary Materials, and Promotional Materials the following:
(i) Trademark Notices as directed and specified by NFLP, including a
legend indicating that the NFL Marks are trademarks of the NFL or the
Member Clubs, and are being used by Licensee under License from NFLP;
(ii) Copyright Notices as directed and specified by NFLP;
(iii) The Marketing Program symbol;
(iv) Hangtags, inserts, holograms, and other identifying material required
by NFLP;
(v) A permanent label displaying Licensee's name and the Authorized
Brand;
(vi) Licensee's name, trade name and address; and
(vii) All other notices required by NFLP to protect the interests of NFLP,
the NFL, and its Member Clubs.
d. Licensee will not use any Trademark or Copyright Notices on the Licensed
Products, Related Materials, Proprietary Materials, and Promotional
Materials that conflict with, negate or cause confusion with any notices
required under this Paragraph 11. Licensee represents that, except for the
Authorized Brands, if applicable, or as otherwise authorized in writing by
NFLP, it will not associate other licensed properties, names, symbols, or
designs with the Licensed Marks on any of the Licensed Products, Related
Materials, Promotional Materials, and Proprietary Materials. Licensee will
not use the Licensed Marks or NFL Marks on any business sign, business card,
invoice, sales sheet, brochure, catalog, or other form, or as part of the
name of Licensee's business except as authorized by NFLP in writing prior to
such usage.
e. NFLP shall have the right to secure trademark and/or copyright registrations
for the NFL Marks. Upon request by NFLP, in addition to any other quantity
of Licensed Products that Licensee must submit to NFLP under this License,
Licensee shall deliver to NFLP, free of cost, twelve (12) Units of each
Licensed Product with their Related Materials for such registration purposes
provided that Licensee shall not owe any Royalty for such Units. Licensee
shall provide NFLP with the date of first use of each Licensed Product in
interstate and intrastate commerce. NFLP shall have the right to secure
trademark and/or copyright registrations in NFLP's name for any Proprietary
Materials created by Licensee or its agents for use in connection with any
Licensed Product. By execution of this License, Licensee appoints NFLP as
Licensee's attorney-in-fact coupled with an irrevocable interest to execute,
acknowledge, deliver and record all registrations and all documents referred
to in this Paragraph 11.
f. Licensee shall assist NFLP, at NFLP's expense, in the procurement,
protection, and maintenance of NFLP's rights in and to the NFL Marks and the
Proprietary Materials. NFLP may, in its sole discretion, commence or
prosecute and control the disposition of any claims or suits relative to
the imitation, infringement and/or unauthorized use of the NFL Marks or the
Proprietary Materials either in its own name, or in the name of Licensee, or
join Licensee as a party in the prosecution of such claims or suits.
Licensee shall cooperate fully with and provide full assistance to NFLP in
connection with any such claims or suits. Licensee shall promptly notify
NFLP in writing of any infringement, imitations, or unauthorized use
of the NFL Marks or Proprietary Materials by others. NFLP shall, in its sole
discretion, determine whether to take action and the type of action, if any,
to take against such infringement. Licensee shall not institute any suit or
take any action on account of such infringements, imitations or unauthorized
uses unless it receives NFLP's prior written consent. NFLP will receive the
full amount of any settlement made or damages awarded in connection with any
action taken against such infringement.
12. Indemnification and Insurance
a. During the Term and thereafter, Licensee shall be solely responsible for,
defend, indemnify and hold harmless NFLP, the NFL, its Member Clubs and
their respective affiliates, shareholders, officers, directors, agents and
employees for, from and against any claims, demands, causes of action,
damages, costs and expenses, including reasonable attorneys' fees,
judgments, and settlements arising out of or in connection with: (i)
Licensee's breach of any of its representations, warranties, covenants or
obligations contained in this License; (ii) Licensee's use of the Licensed
Marks except as provided in subparagraph (c) below; (iii) Licensee's
noncompliance with any applicable federal, state, or local laws or
regulations; or (iv) the manufacture, distribution, sale, advertising or use
of any Licensed Product.
b. Licensee shall obtain and maintain at its own expense from a licensed and
admitted insurance carrier with a rating not less than A from Best, a
product liability insurance policy that will provide coverage of three
million dollars ($3,000,000) for personal injuries arising out of each
occurrence and one million dollars ($1,000,000) for property damage arising
out of each occurrence and an advertising liability insurance policy that
will provide coverage of three million dollars ($3,000,000) for each
occurrence. Licensee shall ensure that such policies: (i) will list the NFL,
its Member Clubs, NFLP, and their respective affiliates, shareholders,
officers, directors, agents, and employees as additional insureds; and (ii)
will each provide that they can not be canceled without at least thirty (30)
days written notice to NFLP. Simultaneously with the execution of this
<PAGE>
License, Licensee shall submit to NFLP the fully paid policies or
certificates of insurance. Compliance with this subparagraph (b) will not
relieve Licensee of its other obligations under this Paragraph 12. The
insurance coverage required under this License is not cumulative and will
not extend to any other License or Agreement between Licensee and NFLP
unless otherwise authorized by NFLP in writing.
c. During the Term and thereafter, NFLP shall indemnify and hold harmless
Licensee, its officers, directors, agents and employees for, from and
against any claims, demands, causes of action, damages, and reasonable
attorneys' fees for trademark infringement arising out of the use of the
Licensed Marks as strictly authorized under this License, provided that NFLP
is given immediate notice of and shall have the option to undertake and
conduct the defense of any such claim, demand or cause of action and further
provided that Licensee shall cooperate in the defense of such claim as
reasonably required by NFLP.
13. Financial Information
a. Upon request by NFLP, Licensee shall furnish NFLP within sixty (60) days of
such request a detailed statement by an independent certified public
accountant showing the number and description of the Licensed Products sold
during the Term including an itemization of each Licensed Product by number
of Units sold, Member Club, if applicable, the gross sales price,
itemized deductions from the gross sales price, any returns made, and the
resulting Net Sales on which Licensee calculated the Royalty amount.
b. Within ninety (90) days after the last day of Licensee's fiscal year,
Licensee shall provide NFLP with all pertinent information pertaining to
Licensee's financial condition involving ownership, credit, financial and
other information about Licensee's business including, without limitation,
fiscal year-end financial statements and operating statements certified by
Licensee's chief financial officer as accurate and complete and as
constituting a fair presentation of Licensee's financial condition. Licensee
shall provide NFLP with full and free access to inspect and copy all
business records pertaining to Licensee's financial condition.
c. On or before the 30th day following the end of each calendar quarter,
Licensee shall provide NFLP with Licensee's Fiscal Year projections for
sales and income for the Licensed Products. Upon request by NFLP, Licensee
shall provide NFLP with a list ranking its sales by retailer and/or Third
Party Distributors for its top twenty-five (25) retail accounts or by retail
accounts comprising seventy-five percent (75%) of its Net Sales, whichever
is greater, and itemizing for each such retailer and/or Third Party
Distributors a description and the number of Units of each Licensed Product
sold.
d. Licensee shall notify NFLP in writing of any adverse material change in
Licensee's financial condition that will likely affect its performance under
this License at the time such material change occurs.
14. Audits and Inspections
a. During the Term and for at least three (3) full Fiscal Years after the
expiration or termination of the License, Licensee shall keep, maintain and
preserve complete and accurate books of account and records covering all
transactions relating to this License, including, without limitation,
invoices, correspondence, inventory accounting, banking and financial
records ("Records"). Licensee shall designate a symbol or number that will
be used exclusively on Records relating to the Licensed Products and with
no other articles that Licensee manufactures, distributes or sells. Licensee
shall ensure that all invoices for the sale of Licensed Products to its
retailers and/or Third Party Distributors will include the quantity and
description of each Licensed Product itemized by Marketing Program, Style
and Member Club, if applicable.
b. During the Term and for at least three (3) full Fiscal Years after the
expiration or termination of the License, NFLP and its duly authorized
representatives will have the right during reasonable business hours to
inspect and audit all Records and conduct a physical examination of
Licensee's premises including its warehouses and manufacturing facilities
and those of Third Party Distributors and Third Party Manufacturers. NFLP
shall provide Licensee with no less than five (5) business days' written
notice prior to such inspection, audit or examination; provided however, if
compelling circumstances exist, as determined by NFLP in the exercise of its
reasonable business judgment, NFLP may conduct an immediate inspection,
audit or examination with no prior notice to Licensee. Licensee represents
that it will fully cooperate with the inspection, audit or examination and
will not cause or permit any interference with NFLP or its representatives
during any inspection, audit or examination. During an inspection, audit or
examination, NFLP shall have the right to make copies or extracts of
Licensee's Records.
c. Licensee shall pay NFLP for the cost of any audit that discloses a payment
deficiency of more than two percent (2%) between the amount due to NFLP
pursuant to the audit and the amount Licensee actually paid or reported to
NFLP. Licensee shall pay NFLP any deficiency amount together with interest
on the deficiency amount pursuant to the provisions in Paragraph 3d of this
License. Licensee shall pay such amounts within ten (10) days of invoicing
by NFLP.
15. Termination
Without prejudice to any other rights it may have in law, equity or
otherwise, NFLP shall have the right to immediately terminate this License
upon written notice to Licensee at any time if:
a. Licensee fails to generate Net Sales during any Fiscal Year satisfying the
corresponding Minimum Royalty Guarantee;
b. Licensee fails to deliver to NFLP or to maintain in full force and effect
the insurance coverage referred to in Paragraph 12b of this License;
c. Licensee fails to make available its premises, Records or other business
information to NFLP or its representatives or fails to provide full and
complete information as required in Paragraphs 13 and 14 of this License.
d. Licensee manufactures, sells, distributes, advertises or uses any Style of
any Licensed Product, or any Promotional Materials, or Proprietary Materials
without the prior written approval of NFLP as required in this License, or
after such written approval has been withdrawn by NFLP or has expired;
e. Licensee distributes or sells any Licensed Product outside the Territory or
sells any Licensed Product to a third party that Licensee knows or should
reasonably know intends to sell such Licensed Product outside the Territory;
f. Licensee distributes any Licensed Product outside the corresponding
Distribution Channels, or sells any Licensed Product to any third party that
Licensee knows or should reasonably know intends to sell such Licensed
Product outside the corresponding Distribution Channels;
g. Licensee fails to obtain NFLP's written approval prior to assigning,
sublicensing, transferring, or otherwise encumbering the License or prior to
using a Third Party Manufacturer or Third Party Distributor, or any approved
Third Party Manufacturer or Third Party Distributor engages in conduct that
would entitle NFLP to terminate the License if Licensee had engaged in such
conduct;
h. Licensee makes a material misrepresentation or omission in its license
application form;
i. Licensee fails to make any payment or deliver any statement required under
this License and fails to correct such default within ten (10) days of
written notice of such default;
k. Licensee makes or agrees to make a payment to any Member Club or any
shareholder, officer, director, employee, agent, or representative of a
Member Club, or to any agent, representative or employee of the NFL or its
affiliates in such person's individual capacity, in connection with the use
of any Licensed Marks under this License or otherwise as a direct result of
the sales of any Licensed Product, or Licensee fails to disclose to NFLP any
existing agreement or agreement being negotiated by Licensee or Licensee's
agent between Licensee and a Member Club or any shareholder, officer,
director, employee, agent, or representative of a Member Club, or any agent,
representative or employee of the NFL or its affiliates in such person's
individual capacity;
l. Licensee disparages NFLP, the NFL, any of its Member Clubs, or any of their
respective shareholders, officers, directors and employees as determined by
NFLP in its sole discretion, or otherwise engages in conduct that NFLP deems
detrimental to the NFL or any of its Member Clubs;
m. Licensee fails, in any way, to comply with the requirements of Paragraph 18;
or
n. Licensee fails to comply with any other material term or condition of this
License.
<PAGE>
16. Goodwill and Reputation
Licensee recognizes the great value of the goodwill associated with the NFL
Marks and acknowledges that such goodwill belongs to the Member Clubs and
the NFL, and that such NFL Marks have secondary meaning in the minds of the
public. The nature of the business of NFLP, the NFL, and its Member Clubs,
requires public respect for and trust in the reputation and integrity of the
NFL and its Member Clubs. NFLP may, at its sole option, terminate this
License or withdraw some or all Product Approval Forms or Promotional
Approval Forms by written notice to Licensee if any unanticipated factor,
development or event causes NFLP's continued association with any one or
more Licensed Product or Licensee to adversely reflect upon NFLP, the NFL or
its Member as determined by NFLP in its sole discretion. In the event of
such termination, Licensee shall pay to NFLP the Royalty on all sales of the
Licensed Products made during the Termination Fiscal Year or the Termination
Guarantee as defined in Paragraph 3a, whichever is greater, and all other
amounts due to NFLP. Upon receipt of such payment, NFLP will reimburse
Licensee for its salvage expenses or, in the case of unsalvageable Licensed
Products, Licensee's manufacturing costs if NFLP does not permit Licensee to
distribute the remaining inventory of Licensed Products.
17. Effect of Expiration or Termination of the License
a. Sixty (60) days before the expiration of this License, Licensee will furnish
to NFLP a statement showing the number of Units and description of such
Units for each Style of each Licensed Product, Promotional Materials, and
Proprietary Materials on hand or in process in Licensee's inventory. If this
License is terminated by NFLP, Licensee shall furnish such statement within
ten (10) days after notice of termination is given by NFLP.
b. After expiration or termination of this License for whatever reason, all
rights granted under this Licensee will revert to NFLP and Licensee shall
refrain from further use of, simulation of or reference to any and all of
the NFL Marks except as provided in this paragraph. Except for termination
of this License by NFLP, Licensee will have ninety (90) days to dispose of
the Licensed Products ("Sell-Off Period") that are on hand or in process at
the time of such expiration, provided all statements and payments then due
to NFLP are first made and such sell-off occurs at Licensee's regular
selling price and within the Distribution Channels. During the Sell-Off
Period, Licensee shall submit all payments and statements required under
this License in accordance with the terms and conditions of the License.
c. If Licensee has remaining inventory of the Licensed Products upon the
termination of this License or after the Sell-Off Period, if applicable,
NFLP may, at its option: (i) purchase such inventory at Licensee's cost;
(ii) require Licensee to deliver such inventory to NFLP for destruction at
Licensee's expense; or (iii) require Licensee to destroy such inventory at
Licensee's expense and furnish NFLP with an affidavit signed by an officer
of Licensee attesting to such destruction. NFLP will have the right at any
time before expiration or termination of this License and during the
Sell-Off Period to conduct a physical inventory to, among other things,
verify the quantity and Style of the Licensed Products in Licensee's
inventory. If Licensee refuses to permit such physical examination of the
inventory or fails to provide NFLP with the statement required in
subparagraph a above, Licensee will forfeit its right to any Sell-Off
Period.
d. Upon the termination of this License or immediately after the Sell-Off
Period, Licensee shall deliver to NFLP all Proprietary Materials and
all related materials, including software, created or used by Licensee in
connection with this License and shall, at NFLP's option, destroy or sell
to NFLP at Licensee's cost, any molds, plates and other items used to
reproduce the Licensed Marks.
18. On-Field Product Exposure
a. Licensee acknowledges that in furtherance of the NFL's policy of control of
game operations, NFLP shall approve any and all visible items worn or used
on-field, including the sidelines, during all pre-season, regular season and
post-season NFL games. Except as otherwise authorized in writing by NFLP or
as otherwise provided in this License, Licensee shall not during the Term or
thereafter agree, contractually or otherwise, with any Member Club, NFL
player, coach, or other Member Club employee, for any individual to wear,
use or promote any commercially identified product on-field, including the
sidelines, during any NFL game.
b. Licensee acknowledges that in furtherance of the NFL's policy of control of
game operations, there are specific rules and regulations regarding the size
of a manufacturer's logo or other commercial identification that may appear
on visible merchandise worn or used on-field, including the sidelines,
during any NFL game. Licensee agrees that it will strictly adhere to the
standards set forth in any and all such rules and regulations with regard
to any of the products that NFLP may, in its sole discretion, authorize
Licensee to have worn or used on-field, including the sidelines, by NFL
players, coaches, or any other Member Club employees during any NFL game.
c. Licensee represents that it has received a copy of and is familiar with
NFLP's NFL Pro Line Policy, which is deemed part of this License. Any breach
by Licensee of any terms and conditions set forth in the NFL Pro Line Policy
shall be considered a material breach of this License. During each Fiscal
Year of the Term, NFLP shall assign on-field and sideline exposure rights
for the Exposure Products to Licensee with the Assigned Member Clubs listed
on the Term Sheet. Licensee acknowledges that NFLP may, in its sole
discretion, assign on a yearly basis on-field and sideline exposure rights
for the remaining Member Clubs to any other NFL Pro Line licensees. Licensee
further acknowledges that NFLP may, in its sole discretion, reassign any of
the Assigned Member Clubs to another NFL Pro Line licensee at any time.
d. During each Fiscal Year of the Term, Licensee shall pay NFLP the Broadcast
Exposure Fee set forth in the Term Sheet attached to this License in
accordance with the payment due dates listed on such sheet. NFLP shall use
such payments in a manner determined by NFLP in its sole discretion.
e. Nothwithstanding any provision of this License to the contrary, the
placement, size, style and other characteristics of the Authorized Brands
currently appearing on the Licensed Products that have received NFLP's
quality control approval in accordance with the terms of Paragraph 4 of this
License are deemed approved and authorized by NFLP.
19. Players and Coaches
Licensee acknowledges that this License does not grant Licensee any rights
with respect to the name, likeness, signature, or other attributes of any
player, coach, or other employee of the NFL. Licensee shall be responsible
for securing whatever rights may be required for the use of such names,
likeness, signatures, or other attributes. Licensee represents that it will
not exercise the rights granted in this License in any manner that will
imply that Licensee has obtained any such rights without separate written
authorization from the appropriate player, coach, or employee.
20. NFL Films
Licensee understands and acknowledges that this License does not grant
Licensee any rights with respect to film or videotape footage of NFL game
action and that Licensee must obtain such footage directly from NFL Films,
Inc. ("NFL Films") on terms and conditions to be mutually agreed upon by
Licensee and NFL Films. If Licensee desires to use such footage in
connection with this License, NFLP must approve the proposed usage and
subject matter of such footage in writing prior to its usage.
21. Information Transmission
If NFLP obtains the capacity to receive computer transmissions of any or all
information required from Licensee under this License during the Term,
Licensee shall begin to provide such information by such computer
transmission as soon as practicably possible.
<PAGE>
22. Notices
The parties to this License shall send all notices and statements
required under this License to the respective addresses of the parties
set forth above unless notification of a change of address is given in
writing. Licensee shall direct all notices to NFLP to the Vice President
of the Retail Licensing Department with a copy to the General Counsel of
NFLP. All notices required under this License must be in writing, must
be sent by registered or certified mail, facsimile, or a private
overnight delivery service generally accepted in the industry that
provides evidence of delivery, and shall be deemed to have been given at
the time they are sent.
23. Relationship of Parties
The parties to this License are not partners, joint venturers, or agents
and nothing in this License shall be construed to place them in any such
relationship. Neither party will have the power to obligate or bind the
other in any manner whatsoever. NFLP, the NFL, and its Member Clubs in no
way endorse, certify or guarantee the quality of the Licensed Products.
24. Governing Law and Disputes
This License and any dispute arising under it shall be governed by and
construed in accordance with the laws of the State of New York without
regard to conflict of law principles. All disputes pertaining to this
License shall be decided by a state or federal court located in the City
of New York and Licensee consents to personal jurisdiction in such
courts.
25. Waiver
Neither party to this License can waive or modify any provision of this
License unless such waiver or modification is in a writing signed by
both parties. Licensee acknowledges that NFLP's prior forbearance of any
requirement of this License will not prevent NFLP from subsequently
requiring full and complete compliance with such requirement or from
exercising its rights under this License.
26. Confidentiality
The parties to this License acknowledge that the terms of this License
are confidential and each warrant that neither shall disclose such terms
to any third party other than the disclosing party's accountants, agents
or attorneys or as required by law, without the other party's prior
written consent.
27. Severability
If any paragraph or clause of this License is illegal or invalid or void
for any reason, the remaining paragraphs and clauses of the License will
remain in full force and effect.
28. Release
In consideration of the rights granted under this License, Licensee
releases NFLP, the NFL, its Member Clubs and each of their respective
affiliates, shareholders, officers, directors, agents and employees from
any claims, demands, losses, expenses or damages, whether known or
unknown, arising out of or in connection with or in any manner related to
the manufacture, distribution or sale of products bearing the Licensed
Marks.
29. Execution
Licensee will make an offer to enter into this License by having a duly
authorized officer or representative sign below and return the License
with a check payable to NFLP for the Advance Royalty Payment required
for Fiscal Year I. An acceptance of the offer will occur and a binding
agreement will exist only after an authorized officer or duly authorized
representative of NFLP signs this License and delivers a fully-executed
copy to Licensee. Licensee acknowledges that this Licensee will be deemed
to have been executed in New York City.
30. Reservation of Rights
By entering into this License, neither NFLP nor Licensee is waiving any of
its respective rights as of the date hereof with regard to the
renewability and/or exclusivity of this License or any of the rights
granted hereunder, nor as to any other rights afforded by the Promotional
Rights Agreement dated June 1, 1990, and each of NFLP and Licensee hereby
expressly reserves all such rights, any other provision of this License
notwithstanding. None of the language or provisions contained in this
License shall be construed or interpreted to in any way limit such rights.
Licensee: Riddell, Inc.
By: /s/ David Mauer Date:
(Signature of officer, partner --------------------
or individual duly authorized to sign)
TITLE: Chief Executive Officer
---------------------------------
NATIONAL FOOTBALL LEAGUE PROPERTIES, INC.
By: /s/ J.M. Connelly Date: 7-3-97
(Signature of officer, partner
or individual duly authorized to sign)
TITLE: Sr. V.P.
<PAGE>
EXHIBIT I
DISTRIBUTION CHANNELS
The following definitions shall apply to this License:
1. Department Store: A retail store that operates several departments
carrying higher-priced brands of apparel and non-apparel. Examples
include, without limitation, Macy's, Dillards, Nordstrom, Woodward and
Lothrop, JC Penney, Boscov's, Sears, May Co., Federated Group, Carson
Pirie Scott, Dayton Hudson, Bon Ton, Belks, Strawbridge & Clothier,
Jacobson and Bloomingdales.
2. Direct Retailer: An organization, including Licensee, that markets
products directly to consumers without using retail space through the
mediums of television, computer on-line, or catalog. NFLP, in its sole
discretion, may grant Licensee the right to distribute Licensed Products
in all three such mediums or may limit Licensee to one or two such
mediums.
3. Discount Store: A retail store that operates several departments
carrying lower-priced brands of apparel and non-apparel with limited
service. Examples include, without limitation, Wal-Mart, Kmart, Bradlees,
Roses, Hills, Caldor, Venture, Target, Shopko, and Ames.
4. Distributors: Defined as Third Party Distributors in Paragraph 9b of
the License.
5. Drug Store: A retail store that carries as its primary retail items
pharmaceuticals, health and beauty aids, and convenience items.
Examples include, without limitation, OSCO, Walgreen, and Eckert.
6. Fan Shop: A retail store that carries as its primary retail item
licensed products of the NFL, National Basketball Association, National
Hockey League, Major League Baseball, and the National Collegiate
Athletic Association. Examples include, without limitation, Pro Image,
Team Spirit and Stadium Stuff.
7. Footwear Specialty Store: A retail store that carries as its primary
retail item athletic footwear and also carries, in limited quantities,
licensed apparel and headwear. Examples include, without limitation, Foot
Locker, FootAction, and Athletes Foot.
8. Grocery Store. A retail store that carries as its primary retail items
food and household products. Examples include, without limitation, A & P,
Shop Rite, Vons, Jewel, and Food Town.
9. Sporting Goods Store: A retail store that carries as its primary
retail items licensed apparel, athletic footwear and sporting goods
equipment. Examples include, without limitation, Champ's, Herman's,
Koenig's, The Sports Authority, Sportmart, Gart Brothers, and Modells.
<PAGE>
[Logo] National Football League Properties, Inc.
280 Park Avenue, New York, New York 10017
Area Code (212) 450-2000 FAX (212)681-7599
LICENSING AGREEMENT TERM SHEET
Licensee: Riddell, Inc. Date: August 14, 1995
Address: 3670 N. Milwaukee Avenue No.: 655-149-1400
Chicago, IL 60641
The following terms are made part of and are subject to all definitions, terms
and conditions set forth in License No. R00705
MARKETING PROGRAM: Play Football
TERM: April 1, 1995 - March 31, 1998
TERRITORY: The United States
LICENSED PRODUCTS: COMPETITIVE QUALITY YOUTH HELMETS, REPLICA HELMETS
(INCLUDING BUT NOT LIMITED TO FULL SIZE REPLICA HELMETS, MINI REPLICA
HELMETS, MINI AUTHENTIC HELMETS, MICRO HELMETS, AND TWO-INCH MINI HELMETS);
BICYCLE HELMETS; NFL/QBC BOP BAG; NOVELTY ITEMS (INCLUDING BUT NOT LIMITED TO
WINDOW DECALS, PLACQUES, DESK SETS)
FISCAL YEAR LICENSED PRODUCT ROYALTY%
- ----------- ---------------- --------
YEAR I 04/01/95 - 03/31/96 P03154/H300 FULL SIZE REPLICA HELMETS 9.00
P03155/H300 YOUTH HELMETS 9.00
P06968/G900 MINI HELMETS REPLICA 9.00
P07019/H300 BICYCLE HELMETS 9.00
P08155/G000 NOVELTY ITEMS 9.00
P08866/J000 NFL/QBC BOP BAG 9.00
P09691/G900 MINI HELMETS AUTHENTIC 9.00
P09692/G900 MICRO HELMETS 9.00
YEAR II 04/01/96 - 03/31/97 P03154/H300 FULL SIZE REPLICA HELMETS 9.00
P03155/H300 YOUTH HELMETS 9.00
P06968/G900 MINI HELMETS REPLICA 9.00
P07019/H300 BICYCLE HELMETS 9.00
P08155/G000 NOVELTY ITEMS 9.00
P08866/J000 NFL/QBC BOP BAG 9.00
P09691/G900 MINI HELMETS AUTHENTIC 9.00
P09692/G900 MICRO HELMETS 9.00
YEAR III 04/01/97 - 03/31/98 P03154/H300 FULL SIZE REPLICA HELMETS 10.00
P03155/H300 YOUTH HELMETS 10.00
P06968/G900 MINI HELMETS REPLICA 10.00
P07019/H300 BICYCLE HELMETS 10.00
P08155/G000 NOVELTY ITEMS 10.00
P09691/G900 MINI HELMETS AUTHENTIC 10.00
P09692/G900 MICRO HELMETS 10.00
30035 TWO-INCH MINI HELMETS 10.00
FISCAL YEAR MINIMUM GUARANTEE ADVANCE
- ----------- ----------------- -------
YEAR I 04/01/95 - 03/31/96 $300,000 $ 75,000
YEAR II 04/01/96 - 03/31/97 $350,000 $ 87,500
YEAR III 04/01/97 - 03/31/98 $500,000 $100,000
AUTHORIZED BRANDS FOR
LICENSED PRODUCTS(S): Riddell, Sharco, Lil Riddell and design, R and
design and Riddell and design
LICENSED MARK(S) FOR
LICENSED PRODUCTS(S): Marketing Program logo, Club Marks, and the
following League Marks: "National Football
League", "NFL", National Football Conference",
"American Football Conference", "NFC", "AFC".
DISTRIBUTION CHANNELS FOR
LICENSED PRODUCT(S): Department Stores, Direct Retailers, Discount
Stores, Distributors, Drug Stores, Fan Shops,
Footwear Specialty Stores, Grocery Stores,
Sporting Goods Stores
<PAGE>
PROMOTIONAL PRODUCTS:
FISCAL YEAR LICENSED PRODUCTS
- ----------- -----------------
YEAR I As reasonably required by NFLP.
YEAR II As reasonably required by NFLP.
YEAR III As reasonably required by NFLP.
COOPERATIVE FUND: N/A
ADVERTISEMENTS: N/A
SPONSORSHIPS: N/A
<PAGE>
National Football League Properties, Inc.
[NFL LOGO] 280 Park Avenue, New York, New York 10017
Area Code (212) 838-0660 FAX (212) 681-7599
Retail Licensing Agreement
Licensee: Riddell, Inc. Date: August 14, 1995
Address: 3670 N. Milwaukee Avenue No.: 655-149-1400
Chicago, IL 60641 Lic. No.: R00705
National Football League Properties, Inc. ("NFLP") has the exclusive right to
license for commercial purposes the trademarks of the National Football League
("NFL") and the thirty professional football teams that comprise the NFL
("Member Clubs"). Licensee, whose name and address are set forth above, desires
to use certain of these trademarks in accordance with the terms and conditions
of this agreement ("License"). In consideration of the mutual premises,
covenants and undertakings contained in this License, the parties to this
License agree as follows:
1. Definitions
As used in this License, the terms listed on the attached Term Sheet and
elsewhere in this License have the following meanings:
a. "Advance Royalty Payment": The amount to be credited to Royalty payments due
for the corresponding Fiscal Year payable to NFLP upon the execution of this
License for Fiscal Year I and on or before April 15 for each successive
Fiscal Year.
b. "Advertisements": Advertising space in designated NFLP publications to be
purchased by Licensee in accordance with this License.
c. "Affiliate:" Any person or entity in which Licensee or any owner, majority
shareholder, officer or director of Licensee has any direct or indirect
beneficial or ownership interest or is a joint venture partner.
d. "Authorized Brands": The only brand names Licensee may use in association
with the Licensed Products.
e. "Club Marks": The full team names, nicknames, helmet designs, uniform
designs, logos, slogans, and other identifying symbols and indicia adopted
for commercial purposes by the Member Clubs.
f. "Cooperative Fund": The amount payable to NFLP during each Fiscal Year for
use by NFLP in connection with the designated Cooperative Program.
g. "Distribution Channels:" The channels of trade in the Territory in which
Licensee may distribute for sale or sell each Licensed Product as defined in
Exhibit I attached to this License and/or the attached Term Sheet.
h. "Fiscal Year": The period beginning on April 1 of any year and ending on
March 31 of the following year except for Fiscal Year I, which will begin on
the date this License is fully-executed and will end on March 31 of the
following year.
i. "League Marks": "National Football League", "NFL", "National Football
Conference", "American Football Conference", "NFC", "AFC", "Super Bowl", "Pro
Bowl", the NFL Shield design, and other identifying symbols and indicia
adopted for commercial purposes by the NFL.
j. "Licensed Marks": The trademarks for which Licensee is granted certain
limited, exclusive rights with respect to Replica Helmets only and
non-exclusive rights for the remainder of the Licensed Products.
k. "Licensed Products:" All products for which Licensee may use the Licensed
Marks in association with the Authorized Brands. This license will refer to
each distinct type of product as a "Licensed Product" since more than one
product may be licensed (e.g. T-shirts and jackets would each be a Licensed
Product).
l. "Marketing Program": The program established by NFLP in connection with which
Licensee may use the Licensed Marks as authorized under this License.
Licensee shall abide by all rules, guidelines and policies established by
NFLP for such Marketing Program, which are deemed part of this License.
m. "Minimum Royalty Guarantee": The minimum amount of Royalty payments payable
to NFLP on or before the 15th day following the end of each Fiscal Year.
n. "Net Sales": Gross sales of all Licensed Products sold or distributed for
sale at Licensee's invoiced selling price less sales derived from returns
received and credited only. Licensee shall not credit any return at a rate
greater than the original invoiced selling price for such Licensed Products.
There shall be no other deductions allowed including, without limitation,
deductions for manufacturing costs, selling costs, distribution costs,
advertising and promotional costs, quantity discounts, freight, non-collected
or uncollectable accounts, commissions, taxes, cash discounts, close out
sales, distress sales, sales to employeees, or any other costs. For purposes
of this Agreement, Net Sales and all other referenced sales occur when
Licensee invoices or ships any Licensed Product, whichever is earlier. If Net
sales are made to an Affiliate, the dollar amount of gross sales will be the
greater of Licensee's regular price to unaffiliated accounts or the
Affiliate's gross sales price to an unaffiliated account.
o. "NFL Marks": All League Marks and Club Marks, collectively.
p. "Premiums": Any products, including the Licensed Products, bearing the NFL
Marks or other indicia of the NFL or its Member Clubs that Licensee sells or
gives away for the purposes of promoting, publicizing or increasing the sale
of its own products or services other than the Licensed Products, or that
Licensee sells or gives away to any other party whom Licensee knows or should
reasonably know intends to use such products for the purposes of promoting,
publicizing or increasing the sale of any other party's products or services.
Promotions include, without limitation, combination sales, incentives for
sales force, and trade or consumer promotions.
q. "Promotional Products": The quantity of each Licensed Product that Licensee
shall provide to NFLP at no cost during each Fiscal Year for use in
connection with NFLP's Promotional Programs, as defined in Paragraph 5 of
this License.
r. "Royalty": The amount of Net Sales Licensee shall pay to NFLP for all sales
of the Licensed Products. Licensee shall calculate all Royalty payments
according to Net Sales based on Licensee's normal domestic wholesale
warehouse price. NFLP reserves the right to increase the rate of the Royalty
during the Term, provided that it gives Licensee at least six (6) months
written notice before such increase takes effect.
s. "Sponsorhip": The designated events for which Licensee will participate as a
sponsor during each Fiscal Year of the Term subject to the execution of an
NFLP Sponsorship Agreement.
t. "Style": A distinct prototype of a Licensed Product that differs from any
other prototype of that same Licensed Product in any form or manner with
respect to design, material, pattern, size, shape. Licensed Marks, or any
other distinguishing characteristic involving the specifications for the
production of all or any portion of that Licensed Product (e.g. T-shirts
bearing the San Francisco 49ers logo and T-shirts bearing the San Diego
Chargers logo would each be a Style of Licensed Product).
u. "Term": The time period for which this License shall be effective.
v. "Territory": The geographic area in which Licensee shall have the right to
sell the Licensed Products.
w. "Unit": A single Licensed Product (e.g. one T-shirt and one jacket would each
be a Unit).
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2. Grant of License
Subject to all of the terms and conditions of this License, NFLP grants
Licensee the non-exclusive right to use the Licensed Marks in connection with
the manufacture, distribution, sale, and advertising of the Licensed Products
under the Authorized Brand in the Distribution Channels in the Territory in
accordance with all policies, rules and regulations of the Marketing Program
and NFLP, which are deemed part of this License except that Licensee shall
have the exclusive right to use the Licensed Marks in connection with the
manufacture, distribution, sale, and advertising of all Replica Helmets,
except for agreements between NFLP and third party licensees preexisting that
General Retail Licensing Agreement dated March 15, 1990 (No. 625-149-1400,
License No. R00705) (i.e., Hutch). Licensee shall have no right to sell or
distribute any Premiums unless Licensee receives a separate Premium Licensee
fron NFLP and pays NFLP the applicable Royalty under such Premium License.
Licensee shall not use the Licensed Products as Premiums or permit the use of
the Licensed Products as Premiums by any party whom Licensee knows or should
reasonably know intends to use the Licensed Products as Premiums.
3. Terms of Payment
Licensee shall pay NFLP the Royalty on all sales of the Licensed Products.
Regardless of whether any sales occur during any Fiscal Year, Licensee shall
also pay NFLP the applicable Advance Royalty Payment and Minimum Royalty
Guarantee for each Fiscal Year during the Term. Advance Royalty Payments and
any payments made to satisfy the Minimum Royalty Guarantee are not
refundable. Licensee may credit the Advance Royalty Payment and Royalty
payments made to NFLP during each Fiscal Year to the Minimum Royalty
Guarantee for the corresponding Fiscal Year only. Licensee may not credit
such amounts to the Advance Royalty Payment, Minimum Royalty Guarantee or any
other payment required under this License for any other Fiscal Year. If NFLP
terminates this License, for the Fiscal Year in which termination occurs
("Termination Fiscal Year") Licensee shall pay NFLP the Royalty on all sales
of the Licensed Products made during the Termination Fiscal Year or a pro
rated portion of the Minimum Royalty Guarantee owed in excess of the Advance
Royalty Payment ("Termination Guarantee"), whichever is greater. For purposes
of this paragraph the pro rated Minimum Royalty Guarantee will be calculated
as follows:
Termination Guarantee x No. of Days Completed in Termination Fiscal Year
--------------------- ------------------------------------------------
1 365
b. On or before the 15th day of each month, Licensee shall make all Royalty
payments to NFLP due on sales of the Licensed Products during the preceding
calendar month. Simultaneously with the Royalty payment, Licensee shall
furnish full and accurate statements of the Net Sales of each Licensed
Product sold and distributed during such calendar month on forms provided by
NFLP. The statements will include the quantity and description of each
Licensed Product itemized by Member Club if applicable, the gross sales
price, itemized deductions from the gross sales price, any returns made
during the preceding month, and the resulting Net Sales on which Licensee
calculated the Royalty amount. Licensee shall furnish such statements for
each Licensed Product regardless of whether it sold any such Licensed Product
during the preceding month. NFLP's receipt or acceptance of any statement or
Royalty payment or the cashing of a Royalty check will not preclude NFLP from
questioning the correctness of such statements or payments at any time. Upon
discovery of any verifiable inconsistency or mistake in such statements or
payments, Licensee shall immediately rectify such inconsistency or mistake.
c. Licensee shall pay NFLP all other amounts listed on the Term Sheet attached
to this License in accordance with the dates provided in such Term Sheet.
d. Licensee shall pay NFLP an additional charge of one and one-half percent
(1.5%) per month on any payment due under this License that remains unpaid
fifteen (15) days after such payment becomes due.
4. Quality Control
Prior to making any use of any Style of any Licensed Product, Licensee shall
submit to NFLP for its approval at Licensee's sole cost and expense at the
following applicable stages: (i) finished artwork or final proofs; (ii)
pre-production samples or strike-offs for such proposed Style; and (iii) a
sample Unit of the finished version of such Style together with all
packaging, cartons, containers, hangtags and wrapping materials related to
such Unit ("Related Materials"). For Styles that differ solely with respect
to the Licensed Marks, Licensee may submit a sample Unit of one Style along
with artwork of the Styles bearing the other Licensed Marks for approval
purposes unless NFLP requests a sample Unit of each such Style. NFLP shall
use its best efforts to promptly evaluate all such submissions and provide
Licensee, if applicable, with quality standards and specifications for the
finished Units of each Style. Upon approval of the finished version of a
sample Unit of a Style, NFLP shall execute a Product Approval Form that will
contain any applicable quality standards and specifications. License shall
not manufacture, sell, distribute or advertise any Style of a Licensed
Product unless NFLP has executed a Product Approval Form for such Style.
b. All Product Approval Forms are effective for one Fiscal Year only and
Licensee must resubmit to NFLP each Style of each Licensed Product previously
approved by NFLP for quality control approval within thirty (30) days after
the start of each successive Fiscal Year. From time to time, NFLP may request
additional sample Units of any Style of any Licensed Product to confirm
continued compliance with NFLP's quality control guidelines and any
applicable quality standards and specifications. NFLP shall have the right to
withdraw its approval of any Style of any Licensed Product if, in NFLP's sole
judgment, such sample Units cease to conform to such guidelines, standards or
specifications or otherwise deviate in quality from the previously approved
sample Units. Upon notice by NFLP to Licensee that the Product Approval Form
for a Style of a Licensed Product has been withdrawn, Licensee shall
immediately cease to manufacture, distribute, sell or advertise any further
Units of such Style until such time as a new Product Approval Form has been
executed and delivered by NFLP.
c. Licensee shall not make any modification to any Style for which NFLP has
issued a Product Approval Form or depart from any applicable quality
standards and specifications for any Style unless NFLP has approved such
modification for such Style and issues a new Product Approval Form. Licensee
acknowledges that the manufacture, use, sale, distribution, or advertising of
any Style that deviates from the Style approved by NFLP will constitute a
material breach of this License. Upon such breach, NFLP may terminate this
License immediately.
d. No distribution or sale of irregulars or seconds is permitted except when
Licensee receives prior written approval from NFLP.
5. Advertising and Promotional Materials
a. Licensee will not use the Licensed Marks or any reproduction of them,
including without limitation, Photographs or Computer Art, as defined in
Paragraph 10a, in any advertising, promotion, publicity or display materials
(collectively "Promotional Materials") without receiving NFLP's prior written
approval executed on a Promotional Approval Form supplied to Licensee by
NFLP. Licensee may use such approved Promotional Materials only in
conjunction with the Styles of Licensed Products that NFLP has approved.
Licensee shall submit to NFLP all Promotional Materials at the following
applicable stages appropriate to the medium used: (i) conceptual stage,
pre-production art or rough cuts; (ii) layout, storyboard and script; (iii)
finished materials; and (iv) at any other time as reasonably requested by
NFLP. NFLP shall use best efforts to evaluate all such Promotional Materials'
submissions within ten (10) business days of their receipt by NFLP. NFLP
shall execute a Promotional Approval Form for all Promotional Materials that
it approves. Licensee shall notify its retailers and/or Third Party
Distributors that NFLP must approve all Promotional Materials involving or
using in any form or manner the Licensed Marks. Licensee shall use best
efforts to ensure that its retailers and/or Third Party Distributors do not
publish, display or otherwise distribute such Promotional Materials without
NFLP's prior written approval.
b. NFLP has the exclusive right, in its sole discretion, to approve or
disapprove any Promotional Materials' submissions. Licensee acknowledges that
NFLP may disapprove Promotional Materials that, in NFLP's opinion, reflect
unfavorably upon NFLP, the NFL or its Member Clubs including,
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without limitation, materials involving gambling, lotteries or other games
inconsistent with the image of the NFL, the Member Clubs, or the Licensed
Products.
c. NFLP may withdraw its approval of any Promotional Materials if: (i)
the Promotional Materials have been altered without the prior written
approval of NFLP; (ii) the Style and/or the Licensed Product promoted in
the Promotional Materials ceases to be approved under this License;
or (iii) an event occurs that, in NFLP's opinion, causes NFLP's
relationship with Licensee or any Licensed Product to adversely reflect
upon the professional or business reputation of the NFL, its Member Clubs
or NFLP.
d. Licensee represents that NFLP has the right to conduct promotions
and special events in its sole discretion and to print catalogs, sales
sheets and brochures involving representative merchandise from NFLP's
licensees ("Promotional Programs"). Licensee shall supply within ten
(10) business days of any request by NFLP, at no charge to NFLP, all or
any portion of the quantity of Promotional Products specified on the
Term Sheet required by NFLP for use, in NFLP's sole discretion, in such
Promotional Programs.
e. Licensee shall pay NFLP the designated amounts for the Advertisements,
Sponsorship, and Cooperative Fund, if applicable, on or before the
corresponding dates listed on the Term Sheet attached to this License. NFLP
shall use such payments in a manner determined by NFLP in its sole
discretion.
f. During each Fiscal Year of the Term in which NFLP publishes the NFL
Merchandise Catalogue, Licensee shall purchase a full-page
advertisement in such catalogue at the rate established in NFLP's
then-existing rate card. Licensee shall make such payment within fifteen
(15) days from receiving an invoice from NFLP.
6. Distribution Requirements
Licensee shall distribute for sale and sell each Licensed Product
only in the authorized Distribution Channels. Prior to distribution of
any Licensed Product, Licensee shall submit to NFLP a list of its retail
accounts for the Licensed Products for the purpose of determining which
accounts fall within the Distribution Channels. NFLP shall determine, in
its sole discretion, whether such retail accounts fall within the
Distribution Channels and shall provide Licensee with a list of the
approved retail accounts. Licensee shall manufacture, distribute, sell
and maintain inventory of sufficient quantities of each Style of each
Licensed Product to meet the reasonable market demand in the Distribution
Channels. Licensee shall not sell Licensed Products to any third party that
Licensee knows or should reasonably know intends to sell the Licensed
Products outside of the authorized Distribution Channels. If Licensee sells
or distributes for sale other merchandise that does not bear the Licensed
Marks but is of the same grade and quality as the Licensed Products,
Licensee shall not discriminate in the granting of commissions and discounts
to salespersons, dealers and distributors for the sale of the Licensed
Products. If the Licensed Marks are Club Marks, Licensee acknowledges that
it shall manufacture, distribute and sell a commercially significant
quantity of Units bearing the trademarks of each Member Club individually in
each Style.
7. Authorized Brands
Licensee shall only use the Authorized Brands, if applicable, in
connection with the manufacture, distribution, sale, and advertising of
each Licensed Product. NFLP shall have the right, in its sole
discretion, to remove or change any of the Authorized Brands, if
applicable, during the Term. Licensee must receive the prior written
approval of NFLP to use any other trademarks on the Licensed Products.
8. NFLP's Purchase of Licensed Products
In addition to the Promotional Products provided at no cost by
Licensee, NFLP, the NFL and its Member Clubs shall have the right to
purchase any of the Licensed Products in any quantity at the minimum
wholesale price, excluding Royalty payments, that Licensee charges to
its best customer, provided that NFLP will not require Licensee to pay a
Royalty on such sales.
9. Third Party Relationships
a. Licensee shall not assign, sublicense, transfer or otherwise
encumber any of its rights under this License to any Affiliate or other
third party without NFLP's prior written consent. If Licensee assigns,
sublicenses, transfers or encumbers any portion of this License without
such consent, NFLP shall have the right to terminate this License
immediately.
b. Licensee must receive NFLP's prior written consent to use a domestic
or foreign third party distributor of any Licensed Product ("Third Party
Distributor") or domestic or foreign third party manufacturer of any
Licensed Product or any portion of any Licensed Product, including
patches, labels and emblems made by any party that is not already a
licensee of NFLP ("Third Party Manufacturer"). NFLP consents to
Licensee's use of Smile Industries as a manufacturer of mini-helmets
upon the execution of the Manufacturer's Agreement attached as Exhibit 2
to this License. NFLP shall have the right to approve or disapprove any
Third Party Distributor or Third Party Manufacturer in its sole
discretion. In the case of a Third Party Manufacturer, NFLP's approval of
such Third Party Manufacturer, if granted, will be contingent on the
execution of an agreement between NFLP and the approved Third Party
Manufacturer. Notwithstanding such agreement, Licensee shall at all
times remain primarily obligated to NFLP under this License and shall
take all necessary efforts to ensure that such Third Party Manufacturer
uses the Licensed Marks only to manufacture the designated Licensed
Product and for no other purpose including, without limitation,
promoting or selling the Licensed Product. If such Third Party
Manufacturer has made an unauthorized use of the Licensed Marks,
Licensee shall fully cooperate with NFLP to ensure that such unauthorized
use ceases promptly. Licensee shall be primarily obligated to ensure
that each Licensed Product produced by such Third Party Manufacturer
complies with the requirements of Paragraph 4 of this License.
c. Licensee shall not make any payments to any Member Club or to any
shareholder, officer, director, employee, agent or representative of any
Member Club, or to any employee, agent or representative of the NFL or
its affiliates in such person's individual capacity, in connection with
the use of any Licensed Marks under this License or otherwise as a
direct result of sales of any Licensed Product. Licensee shall disclose
to NFLP all existing agreements or agreements being negotiated by
Licensee or its agent between Licensee and any Member Club or any
shareholder, officer, director, employee, agent or representative of any
Member Club, or any employee, agent or representative of the NFL or any
of its affiliates in such person's individual capacity.
d. In the event that NFLP consents to any third party relationship
under this Paragraph 9 or otherwise under this License, Licensee
acknowledges that such approval will be contingent on the execution of
an appropriate form or agreement supplied by NFLP.
10. Computer Artwork and Photographs
a. Subject to the requirements of Paragraph 4, if Licensee wishes to
use computer artwork incorporating graphic depictions of the Licensed
Marks ("Computer Art") or photographs owned and/or controlled by NFLP
("Photographs"), Licensee shall request such Computer Art or Photographs
in a Use Application provided to Licensee by NFLP. If NFLP, in its sole
discretion, approves such application, NFLP shall provide Licensee with
Computer Art or Photographs at a rate established by NFLP in its sole
discretion provided that, in the case of Photographs, Licensee must
first sign NFLP's standard Photo Use Agreement. Licensee shall make any
payment for the Computer Art or Photographs within thirty (30) days of
receiving an invoice from NFLP. Licensee shall only use the Computer Art
or Photographs in accordance with the terms and conditions of this
License including, without limitation, Paragraph 11, and, in the case of
Photographs, the Photo Use Agreement. The terms of the executed Photo
Use Agreement will govern in the event of any conflict between the terms
of this License and the terms of the Photo Use Agreement.
b. Licensee shall not make copies of the Computer Art or Photographs without
the express written approval of NFLP and shall not use the Computer Art or
Photographs for any purpose other than the purpose set forth in Licensee's
Use Application. Licensee shall not provide the Computer Art or
<PAGE>
Photographs to any other party including a manufacturer, unless NFLP
approves such party in accordance with Paragraph 9 of this License. Licensee
shall take all steps necessary to prevent the unauthorized copying or use of
the Computer Art or Photographs by third parties.
c. Upon the expiration or termination of this License, Licensee shall
immediately deliver to NFLP all Computer Art and Photographs provided by
NFLP and all copies and duplications of such Computer Art or Photographs
and all related materials.
d. Licensee acknowledges that it has no right, title or interest in or
to any of the Photographs, including, without limitation, copyrights in
the Photographs. Licensee represents that it will not assert any rights
in or to the Photographs during the Term or thereafter.
11. Protection of Rights
a. Licensee acknowledges that, as between NFLP and Licensee, NFLP
exclusively owns the NFL Marks and all copyrights, trademarks and other
proprietary rights in and to them. Licensee further acknowledges that NFLP
shall own worldwide in perpetuity: (i) all artwork produced under this
License bearing the NFL Marks ("Artwork") and all copyrights and other
proprietary rights in such Artwork; (ii) all secondary marks and/or
promotional concepts ("Secondary Marks") developed for use and used in
connection with any Licensed Product and all copyrights and other
proprietary rights in such Secondary Marks; (iii) all derivative works
based on any of the NFL Marks, Secondary Marks, Computer Art, or Artwork
("Derivative Works") and all copyrights and other proprietary rights in such
Derivative Works; and (iv) all Computer Art and all copyrights and other
proprietary rights in such Computer Art as well as duplicates and copies of
it. Licensee's use of the Licensed Marks, Computer Art, Artwork, Secondary
Marks and Derivative Works is for NFLP's benefit and Licensee will not
acquire any rights in any of them by such use. Licensee acknowledges that
NFLP will have the right to terminate this License if Licensee asserts any
rights in or to any of the NFL Marks, Computer Art, Artwork, Secondary Marks
and Derivative Works other than those granted under this License. Licensee
shall not attack the trademarks, copyrights or other proprietary rights of
NFLP, the NFL, or its Member Clubs during the Term or thereafter.
b. Any Artwork, Computer Art, Secondary Marks, Derivative Works or other
materials created by Licensee or its agents in connection with this
Agreement shall be performed as a "work made for hire" for NFLP. Licensee
irrevocably assigns and transfers to NFLP all right, title and interest,
including all copyrights and extensions and renewals thereof, in and to the
Artwork, the Secondary Marks, the Derivative Works, the Computer Art, and
all related proprietary rights (collectively the "Proprietary Materials").
At the request of NFLP, Licensee shall execute all documents confirming
NFLP's rights in and to the NFL Marks and Proprietary Materials including
an assignment of copyright in form and substance satisfactory to NFLP.
Licensee shall cause each third party who makes or contributes to the
creation of the Proprietary Materials to agree that all rights, including
the copyrights, in his or her work shall be owned by NFLP whether as a "work
made for hire" or by assignment, as appropriate.
c. Licensee shall only display or use the Licensed Marks in the form and manner
that NFLP has specifically approved in writing. Licensee shall cause to be
irremovably and legibly printed or affixed in a clearly visible location
approved by NFLP on every Unit of each Licensed Product, and all Related
Materials, Proprietary Materials, and Promotional Materials the following:
(i) Trademark Notices as directed and specified by NFLP, including a
legend indicating that the NFL Marks are trademarks of the NFL or
the Member Clubs, and are being used by Licensee under License
from NFLP;
(ii) Copyright Notices as directed and specified by NFLP;
(iii) The Marketing Program symbol;
(iv) Hangtags, inserts, holograms, and other identifying material
required by NFLP;
(v) A permanent label displaying Licensee's name and the Authorized
Brand;
(vi) Licensee's name, trade name and address; and
(vii) All other notices required by NFLP to protect the interests of
NFLP, the NFL, and its Member Clubs.
d. Licensee will not use any Trademark or Copyright Notices on the Licensed
Products, Related Materials, Proprietary Materials, and Promotional
Materials that conflict with, negate or cause confusion with any notices
required under this Paragraph 11. Licensee represents that, except for the
Authorized Brands, if applicable, or as otherwise authorized in writing by
NFLP, it will not associate other licensed properties, names, symbols, or
designs with the Licensed Marks on any of the Licensed Products, Related
Materials, Promotional Materials, and Proprietary Materials. Licensee will
not use the Licensed Marks or NFL Marks on any business sign, business card,
invoice, sales sheet, brochure, catalog, or other form, or as part of the
name of Licensee's business except as authorized by NFLP in writing prior to
such usage.
e. NFLP shall have the right to secure trademark and/or copyright registrations
for the NFL Marks. Upon request by NFLP, in addition to any other quantity
of Licensed Products that Licensee must submit to NFLP under this License,
Licensee shall deliver to NFLP, free of cost, twelve (12) Units of each
Licensed Product with their Related Materials for such registration purposes
provided that Licensee shall not owe any Royalty for such Units. Licensee
shall provide NFLP with the date of first use of each Licensed Product in
interstate and intrastate commerce. NFLP shall have the right to secure
trademark and/or copyright registrations in NFLP's name for any Proprietary
Materials created by Licensee or its agents for use in connection with any
Licensed Product. By execution of this License, Licensee appoints NFLP as
Licensee's attorney-in-fact coupled with an irrevocable interest to execute,
acknowledge, deliver and record all registrations and all documents referred
to in this Paragraph 11.
f. Licensee shall assist NFLP, at NFLP's expense, in the procurement,
protection, and maintenance of NFLP's rights in and to the NFL Marks and the
Proprietary Materials. NFLP may, in its sole discretion, commence or
prosecute and control the disposition of any claims or suits relative to the
imitation, infringement and/or unauthorized use of the NFL Marks or the
Proprietary Materials either in its own name, or in the name of Licensee, or
join Licensee as a party in the prosecution of such claims or suits.
Licensee shall cooperate fully with and provide full assistance to NFLP in
connection with any such claims or suits. Licensee shall promptly notify
NFLP in writing of any infringement, imitations, or unauthorized use of the
NFL Marks or Proprietary Materials by others. NFLP shall, in its sole
discretion, determine whether to take action and the type of action, if any,
to take against such infringement. Licensee shall not institute any suit or
take any action on account of such infringements, imitations or unauthorized
uses unless it receives NFLP's prior written consent. NFLP will receive the
full amount of any settlement made or damages awarded in connection with any
action taken against such infringement.
12. Indemnification and Insurance
a. During the Term and thereafter, Licensee shall be solely responsible for,
defend, indemnify and hold harmless NFLP, the NFL, its Member Clubs, and
each of their respective affiliates, shareholders, officers, directors,
agents and employees for, from and against any claims, demands, causes
of action, damages, costs and expenses, including reasonable attorneys'
fees, judgments, and settlements arising out of or in connection with:
(i) Licensee's breach of any of its representations, warranties,
covenants or obligations contained in this License; (ii) Licensee's use of
the Licensed Marks except as provided in subparagraph (c) below;
(iii) Licensee's noncompliance with any applicable federal, state, or local
laws or regulations; or (iv) the manufacture, distribution, sale,
advertising or use of any Licensed Product.
b. Licensee shall obtain and maintain at its own expense from a licensed and
admitted insurance carrier with a rating not less than A from Best, a
product liability insurance policy that will provide coverage of three
million dollars ($3,000,000) for personal injuries arising out of each
occurrence and one million dollars ($1,000,000) for property damage arising
out of each occurrence and an advertising liability insurance policy that
will provide coverage of three million dollars ($3,000,000) for each
occurrence. Licensee shall ensure that such policies: (i) will list the NFL,
its Member Clubs, NFLP, and each of their respective affiliates,
shareholders, officers, directors, agents, and employees as additional
insureds; and (ii) will each provide that they can not be canceled without
at least thirty (30) days written notice to NFLP. Simultaneously with the
execution of this License, Licensee shall submit to NFLP the fully paid
policies or certificates of insurance. Compliance with this subparagraph (b)
will not relieve Licensee of its other obligations under this Paragraph 12.
The insurance coverage required under this License is not cumulative and
will not extend to any other License or Agreement between Licensee and NFLP
unless otherwise authorized by NFLP in writing.
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c. During the Term and thereafter, NFLP shall indemnify and hold harmless
Licensee, its officers, directors, agents and employees for, from and
against any claims, demands, causes of action, damages, and reasonable
attorneys' fees for trademark infringement arising out of the use of the
Licensed Marks as strictly authorized under this License, provided that NFLP
is given immediate notice and shall have the option to undertake and conduct
the defense of any such claim, demand or cause of action and further
provided that Licensee shall cooperate in the defense of such claim as
reasonably required by NFLP.
13. Financial Information
a. Upon request by NFLP, Licensee shall furnish NFLP within sixty (60) days of
such request a detailed statement by an independent certified public
accountant showing the number and description of the Licensed Products sold
during the Term including an itemization of each Licensed Product by number
of Units sold, Member Club, if applicable, the gross sales price, itemized
deductions from the gross sales price, any returns made, and the resulting
Net Sales on which Licensee calculated the Royalty Amount.
b. Within ninety (90) days after the last day of Licensee's fiscal year,
Licensee shall provide NFLP with all pertinent information pertaining to
Licensee's financial condition involving ownership, credit, financial and
other information about Licensee's business including, without limitation,
fiscal year-end financial statements and operating statements certified by
Licensee's chief financial officer as accurate and complete and as
constituting a fair presentation of Licensee's financial condition. Licensee
shall provide NFLP with full and free access to inspect and copy all
business records pertaining to Licensee's financial condition.
c. On or before the 30th day following the end of each calendar quarter,
Licensee shall provide NFLP with Licensee's Fiscal Year projections for
sales and income for the Licensed Products. Upon request by NFLP, Licensee
shall provide NFLP with a list ranking its sales by retailer and/or Third
Party Distributors for its top twenty-five (25) retail accounts comprising
seventy-five percent (75%) of its Net Sales, whichever is greater, and
itemizing for each such retailer and/or Third Party Distributors a
description and the number of Units of each Licensed Product sold.
d. Licensee shall notify NFLP in writing of any adverse material change in
Licensee's financial condition that will likely affect its performance under
this License at the time such material change occurs.
14. Audits and Inspections
a. During the Term and for at least three (3) full Fiscal Years after the
expiration or termination of the License, Licensee shall keep, maintain and
preserve complete and accurate books of account and records covering all
transactions relating to this License, including, without limitation,
invoices, correspondence, inventory accounting, banking and financial
records ("Records"). Licensee shall designate a symbol or number that will
be used exclusively on Records relating to the Licensed Products and with no
other articles that Licensee manufactures, distributes or sells. Licensee
shall ensure that all invoices for the sale of Licensed Products to its
retailers and/or Third Party Distributors will include the quantity and
description of each Licensed Product itemized by Marketing Program, Style
and Member Club, if applicable.
b. During the Term and for at least three (3) full Fiscal Years after the
expiration or termination of the License, NFLP and its duly authorized
representatives will have the right during reasonable business hours to
inspect and audit all Records and conduct a physical examination of
Licensee's premises including its warehouses and manufacturing facilities
and those of Third Party Distributors and Third Party Manufacturers.
NFLP shall provide Licensee with no less than five (5) business days'
written notice prior to such inspection, audit or examination, provided
however, if compelling circumstances exist, as determined by NFLP in the
exercise of its reasonable business judgment, NFLP may conduct an immediate
inspection, audit or examination with no prior notice to Licensee. Licensee
represents that it will fully cooperate with the inspection, audit or
examination and will not cause or permit any interference with NFLP or its
representatives during any inspection, audit or examination. During an
inspection, audit or examination, NFLP shall have the right to make copies
or extracts of Licensee's Records.
c. Licensee shall pay NFLP for the cost of any audit that discloses a payment
deficiency of more than two percent (2%) between the amount due to NFLP
pursuant to the audit and the amount Licensee actually paid or reported to
NFLP. Licensee shall pay NFLP any deficiency amount together with interest
on the deficiency amount pursuant to the provisions in Paragraph 3d of this
License. Licensee shall pay such amounts within ten (10) days of invoicing
by NFLP.
15. Termination
Without prejudice to any other rights it may have in law, equity or
otherwise, NFLP shall have the right to immediately terminate this License
upon written notice to Licensee at any time if:
a. Licensee fails to generate Net Sales during any Fiscal Year satisfying the
corresponding Minimum Royalty Guarantee;
b. Licensee fails to deliver to NFLP or to maintain in full force and effect
the insurance coverage referred to in Paragraph 12b of this License;
c. Licensee fails to make available its premises, Records or other business
information to NFLP or its representatives or fails to provide full and
complete information as required in Paragraphs 13 and 14 of this License;
d. Licensee manufactures, sells, distributes, advertises or uses any Style of
any Licensed Product, or any Promotional Materials, or Proprietary Materials
without the prior written approval of NFLP as required in this License, or
after such written approval has been withdrawn by NFLP or has expired;
e. Licensee distributes or sells any Licensed Product outside the Territory or
sells any Licensed Product to a third party that Licensee knows or should
reasonably know intends to sell such Licensed Product outside the Territory;
f. Licensee distributes any Licensed Product outside the corresponding
Distribution Channels, or sells any Licensed Product to any third party that
Licensee knows or should reasonably know intends to sell such Licensed
Product outside the corresponding Distribution Channels;
g. Licensee fails to obtain NFLP's written approval prior to assigning,
sublicensing, transferring, or otherwise encumbering the License or prior to
using a Third Party Manufacturer or Third Party Distributor, or any
approved Third Party Manufacturer or Third Party Distributor engages in
conduct that would entitle NFLP to terminate the License if Licensee had
engaged in such conduct;
h. Licensee makes a material misrepresentation or omission in its license
application form;
i. Licensee fails to make any payment or deliver any statement required under
this License and fails to correct such default within ten (10) days of
written notice of such default;
j. Licensee makes or agrees to make a payment to any Member Club or any
shareholder, officer, director, employee, agent, or representative of a
Member Club, or to any agent, representative or employee of the NFL or its
affiliates in such person's individual capacity, in connection with the use
of any Licensed Marks under this License or otherwise as a direct result of
the sales of any Licensed Product, or Licensee fails to disclose to NFLP any
existing agreement or agreement being negotiated by Licensee or Licensee's
agent between Licensee and a Member Club or any shareholder, officer,
director, employee, agent, or representative of a Member Club, or any agent,
representative or employee of the NFL or its affiliates in such person's
individual capacity;
k. Licensee disparages NFLP, the NFL, any of its Member Clubs, or any of their
respective shareholders, officers, directors and employees as determined by
NFLP in its sole discretion, or otherwise engages in conduct that NFLP
deems detrimental to the NFL or any of its Member Clubs or any shareholder,
officer, director, employee, agent, or representative of a Member Club;
l. Licensee fails, in any way, to comply with the requirements of Paragraph 18;
or
m. Licensee fails to comply with any other material term or condition of this
License.
<PAGE>
16. Goodwill and Reputation
Licensee recognizes the great value of the goodwill associated with the NFL
Marks and acknowledges that such goodwill belongs to the Member Clubs and
the NFL, and that such NFL Marks have secondary meaning in the minds of the
public. The nature of the business of NFLP, the NFL and its Member Clubs,
requires public respect for and trust in the reputation and integrity of the
NFL and its Member Clubs. NFLP may, at its sole option, terminate this
License or withdraw some or all Product Approval Forms or Promotional
Approval Forms by written notice to Licensee if any unanticipated factor,
development or event causes NFLP's continued association with any one or
more Licensed Product or Licensee to adversely reflect upon NFLP, the NFL or
its Member Clubs as determined by NFLP in its sole discretion. In the event
of such termination, Licensee shall pay to NFLP the Royalty on all sales of
the Licensed Products made during the Termination Fiscal Year or the
Termination Guarantee as defined in Paragraph 3a, whichever is greater, and
all other amounts due to NFLP. Upon receipt of such payment, NFLP will
reimburse Licensee for its salvage expenses or, in the case of unsalvageable
Licensed Products, Licensee's manufacturing costs if NFLP does not permit
Licensee to distribute the remaining inventory of Licensed Products.
17. Effect of Expiration or Termination of the License
a. Sixty (60) days before the expiration of this License, Licensee will furnish
to NFLP a statement showing the number of Units and description of such
Units for each Style of each Licensed Product, Promotional Materials, and
Proprietary Materials on hand or in process in Licensee's inventory. If
this License is terminated by NFLP, Licensee shall furnish such statement
within ten (10) days after notice of termination is given by NFLP.
b. After expiration or termination of this License for whatever reason, all
rights granted under this Licensee will revert to NFLP and Licensee shall
refrain from further use of, simulation of or reference to any and all of
the NFL Marks except as provided in this paragraph. Except for termination
of this License by NFLP, Licensee will have ninety (90) days to dispose of
the Licensed Products ("Sell-Off Period") that are on hand or in process at
the time of such expiration, provided all statements and payments then due
to NFLP are first made and such Sell-Off occurs at Licensee's regular
selling price and within the Distribution Channels. During the Sell-Off
Period, Licensee shall submit all payments and statements required under
this License in accordance with the terms and conditions of the License.
c. If Licensee has remaining inventory of the Licensed Products upon the
termination of this License or after the Sell-Off Period, if applicable,
NFLP may, at its option: (i) purchase such inventory at Licensee's cost;
(ii) require Licensee to deliver such inventory to NFLP for destruction at
Licensee's expense; or (iii) require Licensee to destroy such inventory at
Licensee's expense and furnish NFLP with an affidavit signed by an officer
of Licensee attesting to such destruction. NFLP will have the right at any
time before expiration or termination of this License and during the
Sell-Off Period to conduct a physical inventory to, among other things,
verify the quantity and Style of the Licensed Products in Licensee's
inventory. If Licensee refuses to permit such physical examination of the
inventory or fails to provide NFLP with the statement required in
subparagraph a above, Licensee will forfeit its right to any Sell-Off
Period.
d. Upon the termination of this License or immediately after the Sell-Off
Period, Licensee shall deliver to NFLP all Proprietary Materials and all
related materials, including software, created or used by Licensee in
connection with this License and shall, at NFLP's option, destroy or sell to
NFLP at Licensee's cost, any molds, plates and other items used to reproduce
the Licensed Marks.
18. On-Field Product Exposure
a. Licensee acknowledges that in furtherance of the NFL's policy of control of
game operations, NFLP shall approve any and all visible items worn or used
on-field, including the sidelines, during all pre-season, regular season and
post-season NFL games. Except as otherwise authorized in writing by NFLP or
as otherwise provided in this License, Licensee shall not during the Term or
thereafter agree, contractually or otherwise, with any Member Club, NFL
player, coach, or other Member Club employee, for any individual to wear,
use or promote any commercially identified product on-field, including the
sidelines, during any NFL game. Notwithstanding any provision of this
License to the contrary, the placement, size, style and other
characteristics of the Authorized Brands currently appearing on the Licensed
Products that have received NFLP's quality control approval in accorance
with the terms of Paragraph 4 of this License are deemed approved and
authorized by NFLP.
19. Players and Coaches
Licensee acknowledges that this License does not grant Licensee any rights
with respect to the name, likeness, signature, or other attributes of any
player, coach, or other employee of the NFL. Licensee shall be responsible
for securing whatever rights may be required for the use of such names,
likeness, signatures, or other attributes. Licensee represents that it will
not exercise the rights granted in this License in any manner that will
imply that Licensee has obtained any such rights without separate written
authorization from the appropriate player, coach, or employee.
20. NFL Films
Licensee understands and acknowledges that this License does not grant
Licensee any rights with respect to film or videotape footage of NFL game
action and that Licensee must obtain such footage directly from NFL Films,
Inc. ("NFL Films") on terms and conditions to be mutually agreed upon by
Licensee and NFL Films. If Licensee desires to use such footage in
connection with this License, NFLP must approve the proposed usage and
subject matter of such footage in writing prior to its usage.
21. Information Transmission
If NFLP obtains the capacity to receive computer transmissions of any or all
information required from Licensee under this License during the Term,
Licensee shall begin to provide such information by such computer
transmission as soon as practicably possible.
22. Notices
The parties to this License shall send all notices and statements required
under this License to the respective addresses of the parties set forth
above unless notification of a change of address is given in writing.
Licensee shall direct all notices to NFLP to the Vice President of the
Retail Licensing Department with a copy to the General Counsel of NFLP. All
notices required under this License must be in writing, must be sent by
registered or certified mail, facsimile, or a private overnight delivery
service generally accepted in the industry that provides evidence of
delivery, and shall be deemed to have been given at the time they are sent.
23. Relationship of Parties
The parties to this License are not partners, joint venturers, or agents and
nothing in this License shall be construed to place them in any such
relationship. Neither party will have the power to obligate or bind the
other in any manner whatsoever. NFLP, the NFL, and its Member Clubs in no
way endorse, certify or guarantee the quality of the Licensed Products.
24. Governing Law and Disputes
This License and any dispute arising under it shall be governed by and
construed in accordance with the laws of the State of New York without
regard to conflict of law principles. All disputes pertaining to this
License shall be decided by a state or federal court located in the City of
New York and Licensee consents to personal jurisdiction in such courts.
<PAGE>
25. Waiver
Neither party to this License can waive or modify any provision of
this License unless such waiver or modification is in a writing signed by
both parties. Licensee acknowledges that NFLP's prior forbearance of any
requirement of this License will not prevent NFLP from subsequently
requiring full and complete compliance with such requirement or from
exercising its rights under this License.
26. Confidentiality
The parties to this License acknowledge that the terms of this
License are confidential and each warrant that neither shall disclose
such terms to any third party other than the disclosing party's
accountants, agents or attorneys or as required by law, without the other
party's prior written consent.
27. Severability
If any paragraph or clause of this License is illegal or invalid or
void for any reason, the remaining paragraphs and clauses of the License
will remain in full force and effect.
28. Release
In consideration of the rights granted under this License, Licensee
releases NFLP, the NFL, its Member Clubs and each of their respective
affiliates, shareholders, officers, directors, agents and employees from
any claims, demands, losses, expenses or damages, whether known or
unknown, arising out of or in connection with or in any manner related to
the manufacture, distribution or sale of products bearing the Licensed
Marks.
29. Execution
Licensee will make an offer to enter into this License by having a
duly authorized officer or representative sign below and return the
License with a check payable to NFLP for the Advance Royalty Payment
required for Fiscal Year I. An acceptance of the offer will occur and a
binding agreement will exist only after an authorized officer or duly
authorized representative of NFLP signs this License and delivers a
fully-executed copy to Licensee. Licensee acknowledges that this Licensee
will be deemed to have been executed in New York City.
30. Reservation of Rights
By entering into this License, neither NFLP nor Licensee is waiving
any of its respective rights as of the date hereof with regard to the
renewability and/or exclusivity of this License or any of the rights
granted hereunder, nor as to any other rights afforded by the Promotional
Rights Agreement dated June 1, 1990, and each of NFLP and Licensee hereby
expressly reserves all such rights, any other provision of this License
notwithstanding. None of the language or provisions contained in this
License shall be construed or interpreted to in any way limit such
rights.
Licensee: Riddell, Inc.
By: /s/ David Mauer Date:
(Signature of officer, partner --------------------------
or individual duly authorized
to sign)
TITLE: Chief Executive Officer
---------------------------------
NATIONAL FOOTBALL LEAGUE PROPERTIES, INC.
By: /s/ J.M. Connelly Date: 7-3-97
(Signature of officer, partner
or individual duly authorized
to sign)
TITLE: Sr. V.P.
<PAGE>
EXHIBIT I
DISTRIBUTION CHANNELS
The following definitions shall apply to this License:
1. Department Store: A retail store that operates several departments
carrying higher-priced brands of apparel and non-apparel. Examples
include, without limitation, Macy's, Dillards, Nordstrom, Woodward and
Lothrop, JC Penney, Boscov's, Sears, May Co., Federated Group, Carson
Pirie Scott, Dayton Hudson, Bon Ton, Belks, Strawbridge & Clothier,
Jacobson and Bloomingdales.
2. Direct Retailer: An organization, including Licensee, that markets
products directly to consumers without using retail space through the
mediums of television, computer on-line, or catalog. NFLP, in its sole
discretion, may grant Licensee the right to distribute Licensed Products
in all three such mediums or may limit Licensee to one or two such
mediums.
3. Discount Store: A retail store that operates several departments
carrying lower-priced brands of apparel and non-apparel with limited
service. Examples include, without limitation, Wal-Mart, Kmart, Bradlees,
Roses, Hills, Caldor, Venture, Target, Shopko, and Ames.
4. Distributors: Defined as Third Party Distributors in Paragraph 9b of
the License.
5. Drug Store: A retail store that carries as its primary retail items
pharmaceuticals, health and beauty aids, and convenience items. Examples
include, without limitation, OSCO, Walgreen, and Eckert.
6. Fan Shop: A retail store that carries as its primary retail item
licensed products of the NFL, National Basketball Association, National
Hockey League, Major League Baseball, and the National Collegiate
Athletic Association. Examples include, without limitation, Pro Image,
Team Spirit and Stadium Stuff.
7. Footwear Specialty Store: A retail store that carries as its primary
retail item athletic footwear and also carries, in limited quantities,
licensed apparel and headwear. Examples include, without limitation, Foot
Locker, FootAction, and Athletes Foot.
8. Grocery Store: A retail store that carries as its primary retail items
food and household products. Examples include, without limitation, A & P,
Shop Rite, Vons, Jewel, and Food Town.
9. Sporting Goods Store: A retail store that carries as its primary retail
items licensed apparel, athletic footwear and sporting goods equipment.
Examples include, without limitation, Champ's, Herman's, Koenig's, The
Sports Authority, Sportmart, Gart Brothers, and Modells.
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Riddell Sports, Inc.
We have issued our reports dated March 14, 1997, accompanying the financial
statements and schedule of Riddell Sports, Inc., contained in the Registration
Statement, as amended, and Prospectus on Form S-4. We consent to the use of the
aforementioned reports in the Registration Statement, as amended, and
Prospectus, and to the use of our name as it appears under the caption
"Experts".
GRANT THORNTON LLP
Chicago, Illinois
August 6, 1997
<PAGE>
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Riddell Sports Inc.
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement, as amended, of our report dated February 12, 1997,
relating to the consolidated financial statements of Varsity Spirit Corporation
which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Memphis, Tennessee
August 6, 1997
<PAGE>
LETTER OF TRANSMITTAL
RIDDELL SPORTS
OFFER TO EXCHANGE
10 1/2% SENIOR NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED FOR ANY AND ALL OUTSTANDING
10 1/2% SENIOR NOTES DUE 2007,
PURSUANT TO THE PROSPECTUS, DATED AUGUST 7, 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON
SEPTEMBER 9, 1997, UNLESS EXTENDED (THE 'EXPIRATION DATE').
TENDERS MAY BE WITHDRAWN PRIOR TO 5.00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
Delivery To: Marine Midland Bank, Exchange Agent
<TABLE>
<S> <C>
By Mail, Overnight Courier or Hand: By Facsimile in New York:
Marine Midland Bank (212) 658-2292
140 Broadway, Level A
New York, New York 10005-1180 Confirm by Telephone:
Attention: Corporate Trust Operations (212) 658-5931
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated August 7, 1997 (the 'Prospectus'), of Riddell Sports Inc., a
Delaware corporation (the 'Company'), and this Letter of Transmittal (the
'Letter'), which together constitute the Company's offer (the 'Exchange Offer')
to exchange an aggregate principal amount of up to $115,000,000 of its 10 1/2%
Senior Notes due 2007, which have been registered under the Securities Act of
1933, as amended (the 'New Senior Notes'), of the Company for a like principal
amount of the issued and outstanding 10 1/2% Senior Notes due 2007 (the 'Old
Senior Notes') of the Company from the holders thereof.
For each Old Senior Note accepted for exchange, the holder of such Old
Senior Note will receive a New Senior Note having a principal amount equal to
that of the surrendered Old Senior Note. The New Senior Notes will bear interest
from the most recent date to which interest has been paid on the Old Senior
Notes or, if no interest has been paid on the Old Senior Notes, from June 19,
1997. Accordingly, if the relevant record date for interest payment occurs after
the consummation of the Exchange Offer registered holders of New Senior Notes on
such record date will receive interest accruing from the most recent date to
which interest has been paid or, if no interest has been paid, from June 19,
1997. If, however, the relevant record date for interest payment occurs prior to
the consummation of the Exchange Offer registered holders of Old Senior Notes on
such record date will receive interest accruing from the most recent date to
which interest has been paid or, if no interest has been paid, from June 19,
1997. Old Senior Notes accepted for exchange will cease to accrue interest from
and after the date of consummation of the Exchange Offer, except as set forth in
the immediately preceding sentence. Holders of Old Senior Notes whose Old Senior
Notes are accepted for exchange will not receive any payment in respect of
interest on such Old Senior Notes otherwise payable on any interest payment date
the record date for which occurs on or after consummation of the Exchange Offer.
This Letter is to be completed by a holder of Old Senior Notes either if
certificates are to be forwarded herewith or if a tender of certificates for Old
Senior Notes, if available, is to be made by book-entry transfer to the account
maintained by the Exchange Agent at The Depository Trust Company (the
'Book-Entry Transfer Facility') pursuant to the procedures set forth in 'The
Exchange Offer--Book-Entry Transfer' section of the Prospectus and an Agent's
Message (as defined herein) is not delivered. Holders of Old Senior Notes whose
certificates are not immediately available, or who are unable to deliver their
certificates or confirmation of the book-entry tender of their Old Senior Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility (a
'Book-Entry Confirmation') and all other documents required by this Letter to
the Exchange Agent on or prior to the Expiration Date, must tender their Old
Senior Notes according to the guaranteed delivery procedures set forth in 'The
Exchange Offer--Guaranteed Delivery Procedures' section of the Prospectus. See
Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does
not constitute delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
<PAGE>
List below the Old Senior Notes to which this Letter relates. If the space
provided below is inadequate, the certificate numbers and principal amount of
Old Senior Notes should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD SENIOR NOTES 1 2 3
- -----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL
AMOUNT OF PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE OLD SENIOR AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* NOTE(S) TENDERED**
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
------------- ------------- ----------------
------------- ------------- ----------------
------------- ------------- ----------------
------------- ------------- ----------------
------------- ------------- ----------------
TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
*NEED NOT BE COMPLETED IF OLD SENIOR NOTES ARE BEING TENDERED BY
BOOK-ENTRY TRANSFER.
**UNLESS OTHERWISE INDICATED IN THIS COLUMN, A HOLDER WILL BE DEEMED TO HAVE
TENDERED ALL OF THE OLD SENIOR NOTES REPRESENTED BY THE OLD SENIOR NOTES
INDICATED IN COLUMN 2. SEE INSTRUCTION 2. OLD SENIOR NOTES TENDERED HEREBY
MUST BE IN DENOMINATIONS OF PRINCIPAL AMOUNT OF $1,000 AND ANY INTEGRAL
MULTIPLE THEREOF. SEE INSTRUCTION 1.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/ / CHECK HERE IF TENDERED OLD SENIOR NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-
ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
Account Number ___________ Transaction Code Number ___________
By crediting Old Senior Notes to the Exchange Agent's Account at the
Book-Entry Transfer Facility in accordance with the Book-Entry Transfer
Facility's Automated Tender Offer Program ('ATOP') and by complying with
applicable ATOP procedures with respect to the Exchange Offer, including
transmitting an Agent's Message to the Exchange Agent in which the Holder of
Old Senior Notes acknowledges and agrees to be bound by the terms of this
Letter, the participant in ATOP confirms on behalf of itself and the
beneficial owners of such Old Senior Notes all provisions of this Letter
applicable to it and such beneficial owners as if it had completed the
information required herein and executed and transmitted this Letter to the
Exchange Agent.
/ / CHECK HERE IF TENDERED OLD SENIOR NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s) ____________________________________________
Widow Ticket Number (if any) _______________________________________________
Date of Execution of Notice of Guaranteed Delivery _________________________
Date of Institution which guaranteed delivery ______________________________
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number ___________ Transaction Code Number ___________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
___________________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of the
New Senior Notes. If the undersigned is a broker-dealer that will receive New
Senior Notes for its own account in exchange for Old Senior Notes, it represents
that the Old Senior Notes to be exchanged for New Senior Notes were acquired by
it as a result of market-making or other trading activities and acknowledges
that it will deliver a prospectus meeting the requirements of the Securities Act
of 1933, as amended, in connection with any resale of such New Senior Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an 'underwriter' within the meaning of
the Securities Act of 1933, as amended.
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Senior Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Senior Notes tendered hereby, the undersigned hereby sells,
assigns and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Senior Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Senior
Notes tendered hereby and that the Company will acquire good and unencumbered
title thereto, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim when the same are accepted by
the Company. The undersigned hereby further represents that any New Senior Notes
acquired in exchange for Old Senior Notes tendered hereby will have been
acquired in the ordinary course of business of the person receiving such New
Senior Notes, whether or not such person is the undersigned, that neither the
holder of such Old Senior Notes nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Senior Notes and that neither the holder of such Old Senior Notes nor any such
other person is an 'affiliate,' as defined in Rule 405 under the Securities Act
of 1933, as amended (the 'Securities Act'), of the Company.
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on interpretations by the staff of the Securities and Exchange
Commission (the 'SEC'), as set forth in no-action letters issued to third
parties, that the New Senior Notes issued in exchange for the Old Senior Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
'affiliate' of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Senior Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangement with any person to participate in the distribution of such New
Senior Notes. However, the Company does not intend to request the SEC to
consider, and the SEC has not considered the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the SEC would
make a similar determination with respect to the Exchange Offer as in other
circumstances. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of New Senior Notes and has no arrangement or understanding to
participate in a distribution of New Senior Notes. If any holder is an affiliate
of the Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the New Senior Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. If the undersigned is a broker-dealer
that will receive New Senior Notes for its own account in exchange for Old
Senior Notes, it represents that the Old Senior Notes to be exchanged for the
New Senior Notes were acquired by it as a result of market-making or other
trading activities and acknowledges that it will deliver a prospectus in
connection with any resale of such New Senior Notes; however, by so
acknowledging and by delivering a prospectus, the undersigned will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Senior Notes tendered hereby. All
authority conferred or agreed to be conferred in this Letter and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in 'The Exchange
Offer--Withdrawal Rights' section of the Prospectus.
Unless otherwise indicated herein in the box entitled 'Special Issuance
Instructions' below, please deliver the New Senior Notes (and, if applicable,
substitute certificates representing Old Senior Notes for any Old Senior Notes
not exchanged) in the name of the undersigned or, in the case of a book-entry
delivery of Old Senior Notes, please credit the account indicated above
maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise
indicated under the box entitled 'Special Delivery Instructions' below, please
send the New Senior Notes (and, if applicable, substitute certificates
representing Old Senior Notes for any Old Senior Notes not exchanged) to the
undersigned at the address shown above in the box entitled 'Description of Old
Senior Notes.'
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED 'DESCRIPTION OF OLD SENIOR
NOTES' ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD
SENIOR NOTES AS SET FORTH IN SUCH BOX ABOVE.
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Senior Notes not exchanged
and/or New Senior Notes are to be issued in the name of and sent to someone
other than the person or persons whose signature(s) appear(s) on this Letter
above, or if Old Senior Notes delivered by book-entry transfer which are not
accepted for exchange are to be returned by credit to an account maintained at
the Book-Entry Transfer Facility other than the account indicated above.
Issue: New Senior Notes and/or Old Senior Notes to:
Name(s) .............................................
(PLEASE TYPE OR PRINT)
.....................................................
(PLEASE TYPE OR PRINT)
Address .............................................
.....................................................
(ZIP CODE)
(COMPLETE SUBSTITUTE FORM W-9)
/ / Credit unexchanged Old Senior Notes delivered by
book-entry transfer to the Book-Entry Transfer
Facility account set forth below.
.................................................
(Book-Entry Transfer Facility
Account Number, if applicable)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Senior Notes not exchanged
and/or New Senior Notes are to be sent to someone other than the person or
persons whose signature(s) appear(s) on this Letter above or to such person or
persons at an address other than shown in the box entitled 'Description of Old
Senior Notes' on this Letter above.
Mail: New Senior Notes and/or Old Senior Notes to:
Name(s) .............................................
(PLEASE TYPE OR PRINT)
.....................................................
(PLEASE TYPE OR PRINT)
Address .............................................
.....................................................
(ZIP CODE)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF OR AN AGENT'S MESSAGE IN LIEU
HEREOF (TOGETHER WITH THE CERTIFICATES FOR OLD SENIOR NOTES OR A BOOK-ENTRY
CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED
DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9 on reverse side)
Dated: ................................................................. , 1997
x ................................ ................................ , 1997
x ................................ ................................ , 1997
Signature(s) of Owner Date
Area Code and Telephone Number ............................
If a holder is tendering any Old Senior Notes, this Letter must be signed
by the registered holder(s) as the name(s) appear(s) on the certificate(s) for
the Old Senior Notes or by any person(s) authorized to become registered
holder(s) by endorsements and documents transmitted herewith. If signature is by
a trustee, executor, administrator, guardian, officer or other person acting in
a fiduciary or representative capacity, please set forth full title. See
Instruction 3.
Name(s): .....................................................................
..............................................................................
(Please Type or Print)
Capacity: ....................................................................
Address: .....................................................................
..............................................................................
(Including Zip Code)
SIGNATURE GUARANTEE
(If required by Instruction 3)
Signature(s) Guaranteed by
an Eligible Institution: .....................................................
(Authorized Signature)
..............................................................................
(Title)
..............................................................................
(Name and Firm)
Dated: .................................................................., 1996
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER TO EXCHANGE
10 1/2% SENIOR NOTES DUE 2007 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OUTSTANDING
10 1/2% SENIOR NOTES DUE 2007 OF RIDDELL SPORTS INC.
1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES.
This letter is to be completed by noteholders either if certificates are to
be forwarded herewith or if tenders are to be made pursuant to the procedures
for delivery by book-entry transfer set forth in 'The Exchange Offer--Book-Entry
Transfer' section of the Prospectus and an Agent's Message is not delivered.
Certificates for all physically tendered Old Senior Notes, or Book-Entry
Confirmation, as the case may be, as well as a properly completed and duly
executed Letter (or manually signed facsimile hereof) and any other documents
required by this Letter, must be received by the Exchange Agent at the address
set forth herein on or prior to the Expiration Date, or the tendering holder
must comply with the guaranteed delivery procedures set forth below. Old Senior
Notes tendered hereby must be in denominations of principal amount of $1,000 and
any integral multiple thereof. The term 'Agent's Message' means a message,
transmitted to the Book-Entry Transfer Facility and received by the Exchange
Agent and forming a part of the Book-Entry Confirmation, which states that the
Book-Entry Transfer Facility has received an express acknowledgement from the
tendering Participant that such Participant has received and agrees to be bound
by this Letter and that the Company may enforce this Letter against such
Participant.
Noteholders whose certificates for Old Senior Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Old Senior Notes pursuant to the guaranteed delivery procedures set
forth in 'The Exchange Offer--Guaranteed Delivery Procedures' section of the
Prospectus. Pursuant to such procedures, (i) such tender must be made through an
Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent must
receive from such Eligible Institution a properly completed and duly executed
Letter (or a facsimile thereof or an Agent's Message in lieu hereof) and Notice
of Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Old Senior Notes and the amount of Old
Senior Notes tendered, stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange ('NYSE') trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Senior Notes, or a Book-Entry
Confirmation, and any other documents required by the Letter will be deposited
by the Eligible Institution with the Exchange Agent, and (iii) the certificates
for all physically tendered Old Senior Notes, in proper form for transfer, or
Book-Entry Confirmation, as the case may be, and all other documents required by
this Letter, are received by the Exchange Agent within three NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
The method of delivery of this Letter, the Old Senior Notes and all other
required documents is at the election and risk of the tendering holders, but the
delivery will be deemed made only when actually received or confirmed by the
Exchange Agent. If Old Senior Notes are sent by mail, it is suggested that the
mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
See 'The Exchange Offer' section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO NOTEHOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER).
If less than all of the Old Senior Notes evidenced by a submitted
certificate are to be tendered, the tendering holder(s) should fill in the
aggregate principal amount of Old Senior Notes to be tendered in the box above
entitled 'Description of Old Senior Notes--Principal Amount Tendered.' A
reissued certificate representing the balance of nontendered Old Senior Notes
will be sent to such tendering holder, unless otherwise provided in the
appropriate box on this Letter, promptly after the Expiration Date. ALL OF THE
OLD SENIOR NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN
TENDERED UNLESS OTHERWISE INDICATED.
3. SIGNATURES ON THIS LETTER, BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES.
If this Letter is signed by the registered holder of the Old Senior Notes
tendered hereby, the signature must correspond exactly with the name as written
on the face of the certificates without any change whatsoever.
If any tendered Old Senior Notes are owned of record by two or more joint
owners, all of such owners must sign this Letter.
<PAGE>
If any tendered Old Senior Notes are registered in different names on
several certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter as there are different registrations of
certificates.
When this Letter is signed by the registered holder or holders of the Old
Senior Notes specified herein and tendered hereby, no endorsements of
certificates or separate bond powers are required. If, however, the New Senior
Notes are to be issued, or any untendered Old Senior Notes are to be reissued,
to a person other than the registered holder, then endorsements of any
certificates transmitted hereby or separate bond powers are required. Signatures
on such certificate(s) must be guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder or
holders of any certificate(s) specified herein, such certificate(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered holder or holders appear(s) on
the certificate(s) and signatures on such certificate(s) must be guaranteed by
an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
ENDORSEMENTS ON CERTIFICATES FOR OLD SENIOR NOTES OR SIGNATURES ON BOND
POWERS REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A
MEMBER OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY
HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN 'ELIGIBLE
INSTITUTION').
SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE
INSTITUTION, PROVIDED THE OLD SENIOR NOTES ARE TENDERED: (I) BY A REGISTERED
HOLDER OF OLD SENIOR NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER,
INCLUDES ANY PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME
APPEARS ON A SECURITY POSITION LISTING AS THE HOLDERS OF SUCH OLD SENIOR NOTES)
WHO HAS NOT COMPLETED THE BOX ENTITLED 'SPECIAL ISSUANCE INSTRUCTIONS' OR
'SPECIAL DELIVERY INSTRUCTIONS' ON THIS LETTER, OR (II) FOR THE ACCOUNT OF AN
ELIGIBLE INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Senior Notes should indicate in the applicable box
the name and address to which New Notes issued pursuant to the Exchange Offer
and/or substitute certificates evidencing Old Senior Notes not exchanged are to
be issued or sent, if different from the name or address of the person signing
this Letter. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. Holders tendering Old Senior Notes by book-entry transfer may request
that Old Senior Notes not exchanged be credited to such account maintained at
the Book-Entry Transfer Facility as such noteholder may designate hereon. If no
such instructions are given, such Old Senior Notes not exchanged will be
returned to the name or address of the person signing this Letter.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose Old
Senior Notes are accepted for exchange must provide the Company (as payor) with
such holder's correct Taxpayer Identification Number ('TIN') on Substitute Form
W-9 below, which in the case of a tendering holder who is an individual, is his
or her social security number. If the Company is not provided with the current
TIN or an adequate basis for an exemption, such tendering holder may be subject
to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery
to such tendering holder of New Senior Notes may be subject to backup
withholding in an amount equal to 31% of all reportable payments made after the
exchange. If withholding results in an overpayment of taxes, a refund may be
obtained.
Exempt holders of Old Senior Notes (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. See the enclosed Guidelines of
Certification of Taxpayer Identification Number on Substitute Form W-9 (the 'W-9
Guidelines') for additional instructions.
To prevent backup withholding, each tendering holder of Old Senior Notes
must provide its correct TIN by completing the Substitute Form W-9 set forth
below, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN) and that (i) the holder is exempt from backup withholding, or
(ii) the holder has not been notified by the Internal Revenue Service that such
holder is subject to backup withholding as a result of a failure to report all
interest or dividends or (iii) the Internal Revenue Service has notified the
holder that such holder is no longer subject to backup withholding. If the
tendering holder of Old Senior Notes is a nonresident alien or foreign entity
not subject to backup withholding, such holder must give the Company a completed
Form W-8, Certificate of Foreign Status. These forms may be obtained from the
Exchange Agent. If the Old Senior Notes are in more than one name or are not in
the name of the actual owner, such holder should consult the
<PAGE>
W-9 Guidelines for information on which TIN to report. If such holder does not
have a TIN, such holder should consult the W-9 Guidelines for instructions on
applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write
'applied for' in lieu of its TIN. Note: Checking this box and writing 'applied
for' on the form means that such holder has already applied for a TIN or that
such holder intends to apply for one in the near future. If such holder does not
provide its TIN to the Company within 60 days, backup withholding will begin and
continue until such holder furnishes its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Senior Notes to it or its order pursuant to the Exchange Offer. If
however, New Senior Notes and/or substitute Old Senior Notes not exchanged are
to be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Old Senior Notes tendered hereby, or if
tendered Old Senior Notes are registered in the name of any person other than
the person signing this Letter, or if a transfer tax is imposed for any reason
other than the transfer of Old Senior Notes to the Company or its order pursuant
to the Exchange Offer, the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted herewith, the amount of such transfer taxes will be billed
directly to such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD SENIOR NOTES SPECIFIED IN THIS
LETTER.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Senior Notes, by execution of this
Letter, shall waive any right to receive notice of the acceptance of their Old
Senior Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Senior Notes nor shall any of them incur any liability for failure to give any
such notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD SENIOR NOTES.
Any holder whose Old Senior Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
11. INCORPORATION OF LETTER OF TRANSMITTAL
This Letter shall be deemed to be incorporated in and acknowledged and
accepted by any tender through the Book-Entry Transfer Facility's ATOP
procedures by any Participant on behalf of itself and the beneficial owners of
any Old Senior Notes so tendered.
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: MARINE MIDLAND BANK
<TABLE>
<S> <C>
SUBSTITUTE PART 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT
FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING TIN:_______________________________
DEPARTMENT OF THE TREASURY BELOW. SOCIAL SECURITY NUMBER OR
INTERNAL REVENUE SERVICE EMPLOYER IDENTIFICATION NUMBER
PART 2--TIN APPLIED FOR / /
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
PAYOR'S REQUEST FOR (1) the number shown on this form is my correct Taxpayer Identification Number (or I am
TAXPAYER waiting for a number to be issued to me).
IDENTIFICATION NUMBER (2) I am not subject to backup withholding either because: (a) I am exempt from backup
('TIN') AND withholding, or (b) I have not been notified by the Internal Revenue Service (the 'IRS')
CERTIFICATION that I am subject to backup withholding as a result of a failure to report all interest
or dividends, or (c) the IRS has notified me that I am no longer subject to backup
withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE .................................... DATE ....................................
</TABLE>
You must cross out item (2) of the above certification if you have been notified
by the IRS that you are subject to backup withholding because of underreporting
of interest or dividends on your tax return and you have not been notified by
the IRS that you are no longer subject to backup withholding.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATLON NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of the exchange, 31 percent
of all reportable payments made to me thereafter will be withheld until I
provide a number.
_________________________________ _________________________________
SIGNATURE DATE
<PAGE>
NOTICE OF GUARANTEED DELIVERY FOR
RIDDELL SPORTS INC.
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of Riddell Sports Inc. (the 'Company') made pursuant to the
Prospectus, dated August 7, 1997 (the 'Prospectus'), if certificates for the
outstanding 10 1/2% Senior Notes Due 2007 of the Company (the 'Old Senior
Notes') are not immediately available or if the procedure for book-entry
transfer cannot be completed on a timely basis or time will not permit all
required documents to reach the Company prior to 5:00 p.m., New York City time,
on the Expiration Date of the Exchange Offer. Such form may be delivered or
transmitted by telegram, telex, facsimile transmission, mail or hand delivery to
Marine Midland Bank (the 'Exchange Agent') as set forth below. In addition, in
order to utilize the guaranteed delivery procedure to tender Old Senior Notes
pursuant to the Exchange Offer, a completed, signed and dated Letter of
Transmittal (or facsimile thereof) must also be received by the Exchange Agent
prior to 5:00 p.m., New York City time, on the Expiration Date. Capitalized
terms not defined herein are defined in the Prospectus.
Delivery To:
MARINE MIDLAND BANK,
Exchange Agent
By Mail, Overnight Courier or Hand: By Facsimile:
Marine Midland Bank (212) 658-2292
140 Broadway, Level A
New York, New York 10005-1180 Confirm by Telephone:
Attn: Corporate Trust Operations (212) 658-5931
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Old Senior Notes set forth below, pursuant to
the guaranteed delivery procedure described in 'The Exchange Offer--Guaranteed
Delivery Procedures' section of the Prospectus.
<TABLE>
<S> <C>
Principal Amount of Old Senior Notes
Tendered:*
$____________________________________________________
Certificate Nos. (if available):
If Old Senior Notes will be delivered by book-entry
_________________________________________________________ transfer to The Depository Trust Company, provide
account number.
Total Principal Amount Represented by
Old Senior Notes Certificate(s):
$_____________________________________________________ Account Number______________________________________
</TABLE>
- ---------------
*Must be in denominations of principal amount of $1,000 and any integral
multiple thereof.
<PAGE>
- --------------------------------------------------------------------------------
AN AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS
AND ASSIGNS OF THE UNDERSIGNED.
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
X _________________________________________ __________
X _________________________________________ __________
Signature(s) of Owner(s) Date
or Authorized Signatory
Area Code and Telephone Number: __________________________________
Must be signed by the holder(s) of Old Senior Notes as their name(s)
appear(s) on certificates for Old Senior Notes or on a security position
listing, or by person(s) authorized to become registered holder(s) by
endorsement and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s): ___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
Capacity: ___________________________________________________________________
Address(es): ___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
GUARANTEE
The undersigned, a member of a registered national securities exchange, or
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States, hereby guarantees that the certificates representing the principal
amount of Old Senior Notes tendered hereby in proper form for transfer, or
timely confirmation of the book-entry transfer of such Old Senior Notes into the
Exchange Agent's account at The Depository Trust Company pursuant to the
procedures set forth in 'The Exchange Offer--Guaranteed Delivery Procedures'
section of the Prospectus, together with a properly completed and duly executed
Letter of Transmittal (or a manually signed facsimile thereof) with any required
signature guarantee and any other documents required by the Letter of
Transmittal, will be received by the Exchange Agent at the address set forth
above, no later than three New York Stock Exchange trading days after the date
of execution hereof.
______________________________________ ___________________________________
Name of Firm Authorized Signature
______________________________________ ___________________________________
Address Title
______________________________________ Name:______________________________
Zip Code (Please Type or Print)
Area Code and Tel. No.________________ Dated:_____________________________
NOTE: DO NOT SEND CERTIFICATES FOR OLD SENIOR NOTES WITH THIS FORM. CERTIFICATES
FOR OLD SENIOR NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
<PAGE>
RIDDELL SPORTS INC.
OFFER TO EXCHANGE
10 1/2% SENIOR NOTES DUE 2007, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, FOR ANY AND ALL OUTSTANDING
10 1/2% SENIOR NOTES DUE 2007
To: BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES:
Riddell Sports Inc. (the 'Company') is offering, upon and subject to the
terms and conditions set forth in the Prospectus, dated August 7, 1997 (the
'Prospectus'), and the enclosed Letter of Transmittal (the 'Letter of
Transmittal'), to exchange (the 'Exchange Offer') its 10 1/2% Senior Notes Due
2007, which have been registered under the Securities Act of 1933, as amended,
for its outstanding 10 1/2% Senior Notes Due 2007 (the 'Old Senior Notes'). The
Exchange Offer is being made in order to satisfy certain obligations of the
Company contained in the Registration Rights Agreement dated June 19, 1997, by
and among the Company, the subsidiary guarantors referrred to therein and the
initial purchasers referred to therein.
We are requesting that you contact your clients for whom you hold Old
Senior Notes regarding the Exchange Offer. For your information and for
forwarding to your clients for whom you hold Old Senior Notes registered in your
name or in the name of your nominee, or who hold Old Senior Notes registered in
their own names, we are enclosing the following documents:
1. Prospectus dated August 7, 1997;
2. The Letter of Transmittal for your use and for the information of
your clients;
3. A Notice of Guaranteed Delivery to be used to accept the Exchange
Offer if certificates for Old Senior Notes are not immediately available or
time will not permit all required documents to reach the Exchange Agent
prior to the Expiration Date (as defined below) or if the procedure for
book-entry transfer cannot be completed on a timely basis;
4. A form of letter which may be sent to your clients for whose
account you hold Old Senior Notes registered in your name or the name of
your nominee, with space provided for obtaining such clients' instructions
with regard to the Exchange Offer; and
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON SEPTEMBER 9, 1997, UNLESS EXTENDED BY THE COMPANY
(THE 'EXPIRATION DATE'). OLD SENIOR NOTES TENDERED PURSUANT TO THE EXCHANGE
OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE.
To participate in the Exchange Offer, a duly executed and properly
completed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, should be sent to the
Exchange Agent and certificates representing the Old Senior Notes should be
delivered to the Exchange Agent, all in accordance with the instructions set
forth in the Letter of Transmittal and the Prospectus.
If holders of Old Senior Notes wish to tender, but it is impracticable for
them to forward their certificates for Old Senior Notes prior to the expiration
of the Exchange Offer or to comply with the book-entry transfer procedures on a
timely basis, a tender may be effected by following the guaranteed delivery
procedures described in the Prospectus under 'The Exchange Offer--Guaranteed
Delivery Procedures.'
The Company will, upon request, reimburse brokers, dealers, commercial
banks and trust companies for reasonable and necessary costs and expenses
incurred by them in forwarding the Prospectus and the related documents to the
beneficial owners of Old Senior Notes held by them as nominee or in a fiduciary
capacity. The Company will pay or cause to be paid all stock transfer taxes
applicable to the exchange of
<PAGE>
Old Senior Notes pursuant to the Exchange Offer, except as set forth in
Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to Marine
Midland Bank, the Exchange Agent for the Old Senior Notes, at its address and
telephone number set forth on the front of the Letter of Transmittal.
Very truly yours,
RIDDELL SPORTS INC.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY
OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER OF
THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN
THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
<PAGE>
RIDDELL SPORTS
OFFER TO EXCHANGE
10 1/2% SENIOR NOTES DUE 2007, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
10 1/2% SENIOR NOTES DUE 2007
TO OUR CLIENTS:
Enclosed for your consideration is a Prospectus, dated August 7, 1997 (the
'Prospectus'), and the related Letter of Transmittal (the 'Letter of
Transmittal'), relating to the offer (the 'Exchange Offer') of Riddell Sports
Inc. (the 'Company') to exchange its 10 1/2% Senior Notes Due 2007, which have
been registered under the Securities Act of 1933, as amended (the 'New Senior
Notes'), for any and all outstanding 10 1/2% Senior Notes Due 2007 (the 'Old
Senior Notes'), upon the terms and subject to the conditions described in the
Prospectus and the Letter of Transmittal. The Exchange Offer is being made in
order to satisfy certain obligations of the Company contained in the
Registration Rights Agreement dated June 19, 1997, by and among the Company, the
subsidiary guarantors referred to therein and the initial purchasers referred to
therein.
This material is being forwarded to you as the beneficial owner of the Old
Senior Notes carried by us in your account but not registered in your name. A
TENDER OF SUCH OLD SENIOR NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD
AND PURSUANT TO YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to tender on
your behalf the Old Senior Notes held by us for your account, pursuant to the
terms and conditions set forth in the enclosed Prospectus and Letter of
Transmittal.
Your instructions should be forwarded to us as promptly as possible in
order to permit us to tender the Old Senior Notes on your behalf in accordance
with the provisions of the Exchange Offer. The Exchange Offer will expire at
5:00 p.m., New York City time, on September 9, 1997, unless extended by the
Company. Any Old Senior Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time before the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Old Senior Notes.
2. The Exchange Offer is subject to certain conditions set forth in
the Prospectus in the section captioned 'The Exchange Offer--Certain
Conditions to the Exchange Offer.'
3. Any transfer taxes incident to the transfer of Old Senior Notes
from the holder to the Company will be paid by the Company, except as
otherwise provided in the Instructions in the Letter of Transmittal.
4. The Exchange Offer expires at 5:00 p.m., New York City time, on
September 9, 1997, unless extended by the Company.
If you wish to have us tender your Old Senior Notes, please so instruct us
by completing, executing and returning to us the instruction form on the back of
this letter. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION ONLY
AND MAY NOT BE USED DIRECTLY BY YOU TO TENDER OLD SENIOR NOTES.
<PAGE>
INSTRUCTIONS WITH RESPECT TO
THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer made by Riddell
Sports Inc. with respect to its Old Senior Notes.
This will instruct you to tender the Old Senior Notes held by you for the
account of the undersigned, upon and subject to the terms and conditions set
forth in the Prospectus and the related Letter of Transmittal.
Please tender the Old Senior Notes held by you for my account as indicated
below:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AMOUNT OF OLD SENIOR NOTES
------------------------------------------------------
<S> <C>
10 1/2% Senior Notes Due 2007......................... ________________________________________________________________
/ / Please do not tender any Old Senior Notes held by
you for my account.
Dated:________________________________________, 1997 ________________________________________________________________
________________________________________________________________
Signature(s)
________________________________________________________________
________________________________________________________________
________________________________________________________________
Please print name(s) here
________________________________________________________________
________________________________________________________________
Address(es)
________________________________________________________________
Area Code and Telephone Number
________________________________________________________________
Tax Identification or Social Security No(s).
</TABLE>
None of the Old Senior Notes held by us for your account will be tendered
unless we receive written instructions from you to do so. Unless a specific
contrary instruction is given in the space provided, your signature(s) hereon
shall constitute an instruction to us to tender all the Old Senior Notes held by
us for your account.
