<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 2059
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 23, 1997
RIDDELL SPORTS INC.
- -----------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-19298 22-2890400
- -------- ------- ----------
(State or Other Jurisdiction (Commission IRS Employer
of Incorporation) File Number) Identification No.)
900 Third Avenue, 27th Floor, New York, New York 10022
------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 826 4300
--------------
N/A
- ------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 5. OTHER EVENTS
Reference is made to the Company's Registration Statement on Form S-4
initially filed with the Securities and Exchange Commission on July 17, 1997
(the "Registration Statement"). The sections contained in the Registration
Statement entitled, "Special Cautionary Notice Regarding Forward Looking
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," "Management," "Principal Stockholders" and
"Certain Transactions" are incorporated by reference herein and filed as Exhibit
99.1 to this report.
Reference is also made to the Company's Press Release dated October 30,
1997 announcing the Company's results of operations for the third quarter of
1997 (the "Press Release"). The Press Release is incorporated by reference
herein and filed as Exhibit 20.1 to this report.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) EXHIBITS
20.1 Press Release dated October 30, 1997 of Riddell Sports Inc.
announcing third quarter 1997 results.
99.1 The following sections contained in the Registration Statement on
Form S-4 of Riddell Sports Inc. filed with the Securities and
Exchange Commission on July 17, 1997: "Special Cautionary Notice
Regarding Forward Looking Statements," "Management's Discussion
and Analysis of Financial Condition and Results of Operations,"
"Business," "Management," "Principal Stockholders" and "Certain
Transactions."
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RIDDELL SPORTS INC.
DATED: December 23, 1997 By:/s/ LISA MARRONI
----------------
Lisa Marroni
Vice President
<PAGE>
Exhibit 20.1
RIDDELL SPORTS INC.
ANNOUNCES THIRD QUARTER RESULTS
* * *
Combined Revenues and Operating Income
Rise 9% and 20%
New York, N.Y., October 30, 1997, -- Riddell Sports Inc. (NASDAQ: RIDL) today
announced net income of $5,864,000 or $0.54 per share in the third quarter of
1997 as compared to $965,000 and $0.11 in the third quarter of 1996. For the
nine-month period ended September 30, 1997 the Company reported net income of
$3,752,000 or $0.42 per share as compared to $4,134,000 and $0.48 for the first
nine months in 1996. The Company noted that the 1997 year-to-date results
include charges from the settlement of certain litigation (recorded in previous
periods) and the purchase and related financing of Varsity Spirit Corporation.
Varsity's results are included from the date of the June 20, 1997 acquisition.
The Company also noted that Varsity has historically posted its strongest
results in the third quarter and that either the second or third quarter has
been the most important for Riddell.
Revenues in the third quarter of 1997 totaled $62,974,000 or 9% above Riddell
and Varsity's combined revenues of $57,779,000 during the same period last year.
Third quarter operating income rose almost 20% from $8,079,000 on an adjusted
combined basis in 1996 to $9,645,000 in 1997.
Third quarter 1997 revenues for the Company's institutional products and
services rose by 19% at Riddell and 11% at Varsity as compared to the third
quarter of 1996. For the same periods, Riddell's Institutional division
delivered an operating income increase of 50%, while Varsity's operating income
increased by 36%. Offsetting these increases was a decline in revenues and
operating income in Riddell's retail collectible products.
While third quarter 1997 financial performance exceeded the combined results for
the same period in 1996, the Company reported that it was lowering its 1997
combined full-year revenue and operating income projections, which were made
earlier this year in connection with the acquisition of Varsity. Combined
revenues which were previously forecasted at $189,600,000 are now forecasted to
be between $170,000,000 and $175,000,000. The primary reasons for the reduction
in the combined revenue forecast are: the shift from1997 to 1998 of certain
cross-marketing programs for strategic reasons and a decline in anticipated
demand for retail collectibles as a result of cautious industry-wide inventory
commitments for licensed sports products. Combined operating income, after
adjusting for the effect of certain non-recurring charges from the acquisition
of Varsity and the settlement of certain litigation is expected to be between
$14,000,000 and $14,500,000. However, without Varsity's operations during most
of the first half of 1997 and before any
<PAGE>
adjustments, the Company expects to report operating income between $11,500,000
and $12,000,000.
After announcing the third quarter results, David Mauer, Riddell's President and
CEO said, " I am pleased to report that every part of our business continues to
contribute to our bottom line. While we have not achieved the results we had
hoped for in retail collectibles, our across the counter sales continue to be
healthy, and we are looking forward to launching new product extensions for the
1998 sales year. Third quarter results in our Institutional business were most
gratifying, and we believe the Company will continue to build upon our unique,
direct sales and distribution system which was recently strengthened by the
combination of Riddell and Varsity." Mr. Mauer continued, "Our decision to
postpone Varsity's introduction of practice wear for female athletes until next
year in order to combine its introduction with uniforms is a sound strategic
decision. The two organizations have demonstrated a commitment to work together
and implement comprehensive sales and marketing programs."
Riddell Sports Inc. provides institutional sporting goods and school spirit
products and services to educational and recreational organizations through its
national, direct sales force. The Company is the world's leading manufacturer
and reconditioner of football protective equipment and the nation's leading
manufacturer of uniforms and operator of camps for high school and college
cheerleaders and dance teams. The Company's consumer products group markets
miniature and full-size helmets for collectors and licenses the Riddell and
MacGregor trademarks for use on athletic footwear, leisure apparel and sports
equipment.
- tables following -
- --------------------------------------------------------------------------------
Certain statements made above may be "forward looking" statements under the
federal securities laws that are based upon the beliefs of management as well as
assumptions made by and information currently available to management. Certain
factors could cause the Company not to attain the goals presented and could
cause actual results to differ materially from those expressed in any forward
looking statement, including without limitation, (i) difficulties or delays in
developing, producing or introducing cross marketing programs (including game
uniforms and women's practice wear); (ii) difficulties in marketing the
Company's products through new channels; (iii) actions by competitors, including
new product offerings, marketing and promotional success, and a willingness to
cut prices; (iv) changes in the patterns and trends of sales and customer
orders; (v) difficulties in integrating the business and operations of Varsity
Spirit Corporation, the Company's newly acquired subsidiary, including
activities of the Varsity sales force and implementation of cross-selling
opportunities; and (vi) the effects of general economic conditions.
<PAGE>
RIDDELL SPORTS INC.
Financial Highlights
(Dollars in thousands except per share data)
OPERATING RESULTS: Third Quarter Nine Months
Ended Sept. 30, Ended Sept. 30,
-------------------- ---------------------
1997 1996 1997 1996
-------- -------- --------- --------
Net Sales $62,437 $17,782 $108,277 $57,663
Royalties 537 555 1,948 2,130
-------- -------- --------- --------
Net revenues 62,974 18,337 110,225 59,793
Cost of goods sold 38,278 10,100 64,123 31,316
-------- -------- --------- --------
Gross margin 24,696 8,237 46,102 28,477
Operating expenses 15,051 6,447 33,664 21,977
-------- -------- --------- --------
Operating income 9,645 1,790 12,438 6,500
Interest expense 3,631 785 8,536 2,176
-------- -------- --------- --------
Income before taxes 6,014 1,005 3,902 4,324
Income taxes 150 40 150 190
-------- -------- --------- --------
Net income $5,864 $965 $3,752 $4,134
======== ======== ========= ========
Net income per share $0.54 $0.11 $0.42 $0.48
Average common and
common equivalent
shares outstanding 11,069 8,568 9,094 8,548
BALANCE SHEET DATA: Sept. 30, Dec. 31,
1997 1996
---------- ----------
Total current assets $75,579 $38,722
Property and equipment, net 7,337 3,507
Intangibles and deferred charges, net 113,353 34,067
Other assets 605 65
---------- ----------
$ 196,874 $ 76,361
========== ==========
Current liabilities $ 26,367 $ 12,765
Long-term debt 129,100 29,984
Deferred taxes 1,897 1,820
Other liabilities 3,120 4,047
Shareholders' equity 36,390 27,745
---------- ----------
$ 196,874 $ 76,361
========== ==========
The Company has contingent liabilities which are described in its Annual Report
and its Quarterly Report for the period ended September 30, 1997, copies of
which are available upon request.
<PAGE>
PRO FORMA FINANCIAL DATA:
The operating results of Varsity Spirit Corporation have been included
in the operating results of the Company from the date of acquisition. The
following pro forma information presents the combined operations of the Company
and Varsity as if the acquisition, and relating financing transactions had
occurred at the beginning of each of the periods presented:
Nine Months Ended Sept. 30,
(In thousands) 1997 1996
--------- ---------
Net revenues $146,036 $135,304
Cost of sales 86,524 77,333
--------- ---------
Gross profit 59,512 57,971
Operating expenses 50,542 43,551
--------- ---------
Income from operations 8,970 14,420
Interest expense 11,317 10,683
--------- ---------
Income (loss) before taxes (2,347) 3,737
Income taxes - 160
--------- ---------
Net income (loss) ($2,347) $3,577
========= =========
Earnings (loss) per share ($0.26) $0.38
========= =========
Depreciation and amortization $4,035 $3,849
These pro forma results have been presented for comparative purposes
only and include the following adjustments (amounts shown relate to the nine
month periods ended September 30, 1997 and 1996, respectively): (1) additional
amortization expense as a result of goodwill arising from the acquisition ($790
and $1,235); (2) salary increases relating to contracts entered into in
conjunction with the transactions ($75 and $113); (3) elimination of costs
incurred by Varsity in maintaining its status as a separate public corporation
($165 and $341); (4) adjustments reducing certain freight and travel expenses
incurred by the Company or Varsity based on programs existing within the other
company ($38 and $76); (5) elimination of one time charges arising from the
transaction for redeeming Varsity stock options ($4,676 and $-0-), a change in
control payment ($250 and $-0-) and bridge loan commitment fees ($3,000 and
$-0-); (6) additional interest on acquisition debt and related debt changes
($5,831 and $8,581); and (7) the tax effect of the above ($1,578 net credit
eliminations and $3,574 expense elimination). The pro forma results are not
necessarily indicative of results that would have occurred had the combination
been effected at the dates indicated nor of future operating results of the
combined operations.
<PAGE>
EXHIBIT 99.1
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>
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.
44
<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
45
<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,
46
<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.
47
<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.
48
<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
<PAGE>
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
50
<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
51
<PAGE>
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
52
<PAGE>
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.
53
<PAGE>
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
54
<PAGE>
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
<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
85
<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.
91
<PAGE>
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.
92
