<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998
Commission file number: 0-19298
RIDDELL SPORTS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2890400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Third Avenue, New York, New York, 10022
(Address of principal executive offices) (Zip code)
(212) 826-4300
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[ X ] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
9,129,154 Common Shares as of May 12, 1998
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RIDDELL SPORTS INC.
INDEX
Page
Form 10-Q Cover Page . . . . . . . . . . . . . . . . . . . . . 1
Form 10-Q Index . . . . . . . . . . . . . . . . . . . . . . . . 2
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations . . . . . . 4
Condensed Consolidated Statements of Shareholders' Equity . 5
Condensed Consolidated Statements of Cash Flows . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 10
Part II. Other Information:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities . . . . . . . . . . . . . . . 13
Item 3. Defaults upon Senior Securities . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information:
Recent events . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
This Report contains certain statements which may be "forward looking"
statements under the federal securities laws that are based on the beliefs of
management as well as assumptions made by and information currently available
to management. Forward looking statements appear in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" concerning tax
loss carryforwards and the Company's tax rates. Such statements contain
uncertainties including without limitation, changes in tax laws and the levels
and components of taxable income achieved by the Company in the future, which
in turn is dependent on many things as are described in reports and other
documents filed by the Company from time to time.
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Part 1. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTIONS>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1998 1997
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $925 $ 1,011
Accounts receivable, trade, less allowance for doubtful
accounts ($930 and $824 respectively) (Note 4) . . . . . . . . . . . 28,993 26,425
Inventories (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . 26,592 24,066
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,462 6,800
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 1,628 1,562
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,058 1,358
------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 70,658 61,222
Property, plant and equipment, less accumulated
depreciation ($5,239 and $4,767 respectively) . . . . . . . . . . . . 7,903 7,823
Intangibles and deferred charges, less accumulated
amortization ($14,309 and $13,248 respectively) . . . . . . . . . . . 111,057 112,118
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 639 598
------------- --------------
$ 190,257 $ 181,761
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,927 $8,377
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 6,484 10,717
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 2,744 4,529
------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . 18,155 23,623
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . 139,700 122,500
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 453
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,060 3,060
Contingent liabilities (Note 6) . . . . . . . . . . . . . . . . . . . . . - -
Shareholders' equity
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 91
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . 36,559 36,386
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (7,761) (4,352)
------------- --------------
28,889 32,125
------------- --------------
$ 190,257 $ 181,761
============= ==============
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTIONS>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended
March 31,
----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . . . . $ 30,979 $ 18,575
Cost of revenues . . . . . . . . . . . . . . . . . . . . . 19,010 10,094
------------- ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 11,969 8,481
Selling, general and administrative expenses . . . . . . . 15,718 7,832
------------- ------------
Income (loss) from operations . . . . . . . . . . . . . . . (3,749) 649
Interest expense . . . . . . . . . . . . . . . . . . . . . 3,360 666
------------- ------------
Loss before taxes . . . . . . . . . . . . . . . . . . . . . (7,109) (17)
Income tax benefit . . . . . . . . . . . . . . . . . . . . (3,700) -
------------- ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . ($ 3,409) ($ 17)
============= ============
Net loss per share, basic and diluted . . . . . . . . . . . ($0.37) ($0.00)
Weighted average number of common
shares outstanding . . . . . . . . . . . . . . . . . . . 9,105 8,068
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTIONS>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Retained
Common Stock Additional earnings Total
--------------------- paid in (Accumulated Shareholders'
Shares Amount capital deficit) equity
----------- -------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
For the three months ended March 31, 1997:
Balance, January 1, 1997 . . . 8,068 $ 81 $ 31,457 ($ 3,793) $ 27,745
Net loss for the period . . . - - - (17) (17)
----------- -------- -------------- ------------- --------------
Balance, March 31,1997 . . . . . 8,068 $ 81 $ 31,457 ($ 3,810) $ 27,728
=========== ======== ============== ============= ==============
For the three months ended March 31, 1998:
Balance, January 1, 1998 . . . . 9,079 $ 91 $ 36,386 ($ 4,352) $ 32,125
Issuance of common stock upon
exercise of stock options . 17 - 45 - 45
Stock issued to employees . . 27 - 128 - 128
Net loss for the period . . . - - - (3,409) (3,409)
----------- -------- -------------- ------------- --------------
Balance, March 31, 1998 . . . . 9,123 $ 91 $ 36,559 ($ 7,761) $ 28,889
=========== ======== ============== ============= ==============
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTIONS>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . ($ 3,409) ($ 17)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization:
Amortization of debt issue costs . . . . . . . . . 203 23
Other depreciation and amortization . . . . . . . 1,330 554
Provision for losses on accounts receivable . . . . . 194 81
Deferred taxes . . . . . . . . . . . . . . . . . . . (3,700) -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable, trade . . . . . . . . . . . (2,762) (6,080)
Inventories . . . . . . . . . . . . . . . . . . (2,526) 1,786
Prepaid expenses . . . . . . . . . . . . . . . . (662) 605
Other receivables . . . . . . . . . . . . . . . (66) (86)
Other assets . . . . . . . . . . . . . . . . . . (41) -
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . 550 (818)
Accrued liabilities . . . . . . . . . . . . . . (4,105) 104
Customer deposits . . . . . . . . . . . . . . . (1,785) (108)
------------- ------------
Net cash used in operating activities . . . (16,779) (3,956)
------------- ------------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . (552) (70)
------------- ------------
Net cash used in investing activities . . . (552) (70)
------------- ------------
Cash flows from financing activities:
Net borrowings under line-of-credit agreement . . . . 17,200 4,131
Principal payments on long-term debt . . . . . . . . . - (158)
Proceeds from issuance of common stock . . . . . . . . 45 -
------------- ------------
Net cash provided by financing activities . 17,245 3,973
------------- ------------
Net increase (decrease) in cash . . . . . . . . . . . . . (86) (53)
Cash, beginning . . . . . . . . . . . . . . . . . . . . . . 1,011 357
------------- ------------
Cash, ending . . . . . . . . . . . . . . . . . . . . . . . $ 925 $ 304
============= ============
See notes to condensed consolidated financial statements.
</TABLE>
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RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. These statements are
unaudited, and in the opinion of management include all adjustments (consisting
only of normal recurring adjustments) necessary for fair presentation of the
Company's consolidated financial position and the consolidated results of its
operations and cash flows at March 31, 1998 and 1997 and for the periods then
ended. Certain information and footnote disclosures made in the Company's last
Annual Report on Form 10-K have been condensed or omitted for these interim
statements. Accordingly, these condensed consolidated financial statements
should be read in conjunction with the December 31, 1997 Annual Report on Form
10-K. Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected during the remainder of
1998.
2. Acquisition and pro forma information
As discussed in prior reports, the Company acquired Varsity Spirit
Corporation ("Varsity") in June 1997. The acquisition was accounted for as a
purchase and, accordingly, the operating results of Varsity have been included
in the consolidated statements of operations from the date of acquisition. The
following pro forma information for the three months ended March 31, 1997
presents the combined operations of the Company and Varsity as if the
acquisition and relating financing transactions had occurred at the beginning
of 1997:
Pro Forma Three Months Ended March 31, 1997
(In thousands)
Net revenues $ 26,916
Cost of sales 15,881
--------
Gross profit 11,035
Selling, general
and administrative expenses 13,606
--------
Loss from operations (2,571)
Interest expense 3,431
--------
Loss before taxes (6,002)
Income taxes -
--------
Net loss ($ 6,002)
========
Net loss per share ($0.66)
========
Depreciation and amortization $1,351
These pro forma results have been presented for comparative purposes only
and include certain pro forma adjustments including: (1) additional
amortization expense as a result of goodwill arising from the acquisition
($386); (2) salary increases relating to contracts entered into in conjunction
with the transactions
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RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
($38); (3) elimination of costs incurred by Varsity in maintaining its status
as a separate public corporation ($88); (4) adjustments of certain expenses
incurred by the Company or Varsity based on programs existing within the other
company ($17); (5) additional interest on acquisition debt and related debt
changes ($2,827); and (7) the tax effect of the above ($1,125 net credit
elimination). The pro forma results are not necessarily indicative of results
that would have occurred had the combination been effected at the date
indicated nor of future operating results of the combined operations.
3. Earnings per share
The Company's net loss per share amounts have been computed by dividing
its net loss by the weighted average number of outstanding common shares.
Diluted earnings per share for the three month periods ended March 31, 1998 and
1997 is equal to basic earnings per share as both periods resulted in a net
loss. Potentially dilutive securities, which would include convertible debt,
Common Stock options and warrants, were not dilutive due to the net losses
incurred.
4. Receivables
Accounts receivable include unbilled shipments of approximately $2,441,000
and $1,157,000 at March 31, 1998 and December 31, 1997, respectively. It is
the Company's policy to record revenues when the related goods have been
shipped. Unbilled shipments represent receivables for shipments that have not
been invoiced. These amounts relate principally to partial shipments to
customers who are not invoiced until their order is shipped in its entirety or
customers with orders containing other terms that require a deferral in the
issuance of an invoice. Management believes that substantially all of these
unbilled receivables will be invoiced within the current sales season.
5. Inventories
Inventories consist of the following:
(In thousands) March 31, December 31,
1998 1997
--------- ---------
Finished goods $ 14,812 $ 12,691
Work-in-process 2,980 3,571
Raw materials 8,800 7,804
--------- ---------
$ 26,592 $ 24,066
========= =========
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RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Litigation matters and contingencies
At March 31, 1998, the Company was a defendant in 5 product liability
suits relating to personal injuries allegedly related to the use of helmets
manufactured or reconditioned by subsidiaries of the Company. The Company
estimates that the uninsured portion of future costs and expenses related to
these claims, and incurred but not reported claims, will amount to at least
$3,900,000, and accordingly, a reserve in this amount is included in the
Condensed Consolidated Balance Sheet at March 31, 1998 as part of accrued
liabilities and other liabilities. These reserves are based on estimates of
losses and defense costs anticipated to result from such claims, from within a
range of potential outcomes, based on available information, including an
analysis of historical data such as the rate of occurrence and the settlement
amounts of past cases. However, due to the uncertainty involved with
estimates, the ultimate outcome of these claims, or potential future claims,
cannot presently be determined and actual results have at times varied
substantially from earlier estimates and could do so in the future.
Accordingly, there can be no assurance that the ultimate costs of such claims
will fall within the established reserves.
7. Supplemental cash flow information
During the three month period ended March 31, 1998 the Company issued
shares of its Common Stock, valued at $128,000 based on quoted market values at
the time of grant, to certain employees as consideration for compensation
included in accrued liabilities at December 31, 1997.
Cash paid for interest was $7,014,000 and $585,000 for the three month
periods ended March 31, 1998 and 1997, respectively. Income tax payments, or
refunds, were not significant for the three periods ended March 31, 1998 and
1997.
9
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview and seasonality
As discussed in prior reports, the Company acquired Varsity Spirit
Corporation (the "Acquisition" and "Varsity") in June 1997. The Acquisition
significantly increased the size of the Company's business and significantly
changed the Company's financial structure.
Operating results for the first quarter 1997 do not include Varsity's
operations or other effects of the Acquisition, since this period preceded the
Acquisition. As a result, the Company's operating results for the first
quarter of 1998, which reflect the acquired operations, are not comparable to
its operating results for the first quarter of 1997. To assist in overcoming
this comparability limitation, the following discussion includes a comparison
of certain pro forma operating results for the first quarter of 1997. As used
in this discussion, the pro forma results are on the basis described and
presented in Note 2 of the Consolidated Financial Statements and include
Varsity's preacquisition results together with certain pro forma adjustments.
Operations for the three month periods ended March 31, 1998 and 1997
resulted in net losses. The net loss for the first quarter of 1998 was $3.4
million while the pro forma net loss for the first quarter of 1997 was $6.0
million. However, the decrease in the loss is due to the recognition of a tax
benefit for the 1998 period whereas no benefit is reflected for the pro forma
1997 quarterly period. The difference in taxes is further discussed below.
Losses before tax benefits were $7.1 million for the first quarter of 1998 and
$6.0 million for the pro forma 1997 period.
The first quarter revenue increase and loss was anticipated and is
consistent with the seasonality of the Company's business. The combined
operations of the Company and Varsity have been most profitable in the second
and third quarters of recent years. Increasing losses in the first quarter can
be expected as the Company incurs a high level of marketing and other costs in
preparation for the upcoming season. At the same time, sales volume is at a
seasonal low.
The Company's institutional business lines are at a one of the low points
in their annual business cycle during the first quarter because customers
typically do not need these products until just before the school year begins.
The institutional business lines consist of products and services sold by the
Company's sales force directly to customers in the educational and
extracurricular markets. These include the Company's historical lines of
football and other athletic products and the lines of school spirit and dance
uniforms and accessory products and camp and event services acquired from
Varsity. While many of the Company's special events occur in the first
quarter, nearly all of its camp activities are conducted during the summer.
Sales of the Company's institutional products, while not as seasonal as the
camp business, occur at seasonally low levels through the first quarter before
delivery demand increases in the second and third quarter as the football
season and the new school year approach.
The Company's retail business is also at a seasonal low-point during the
first quarter. This business line consists of sports collectibles and other
products sold to retailers. Sales of these lines reach their peak
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during the summer and fall periods as retailers build inventory in anticipation
of both the football and holiday shopping seasons.
Revenues
Revenues for the three month period ended March 31, 1998 increased $4.1
million, or 15%, to $31.0 million in comparison to pro forma revenues of $26.9
million for first quarter of 1997.
Most of the revenue gains came from the Company's institutional businesses
which increased by 16%, or $3.7 million, from $23.4 million on a pro forma
basis for the first quarter of 1997 to $27.2 million for the first quarter of
1998. The increase was principally due to an increase in camp and event
revenues resulting from increased attendance at special events. Attendance at
the Company's all-star high school and college cheerleading and dance
championships held at the Walt Disney Resort in Orlando increased approximately
30% over 1997 levels with approximately 26,000 people attending. Co. Dance,
the Company's venture into the private dance market in collaboration with Paula
Abdul which commenced operations at the end of last year, also contributed to
this year's revenue increase.
Revenues from sports collectibles and other products sold to retail
channels increased 14%, or $0.4 million, to $3.3 million for the three months
ended March 31, 1998 from $2.9 million in the first quarter of 1997. As
discussed above, most sales of the Company's retail business occur later in
each calendar year and the first quarter period is generally too early in the
annual cycle to be representative of the year. During the first quarter the
Company generally introduces new products at industry shows and works on new
product introductions with a goal of generating sales and shipments later in
the year. New products recently introduced for 1998 include a desk-top
organizer and a goose neck lamp, both made from a miniature football helmet, a
player specific version of the Company's Pocket Pro (a 2 inch size replica
football helmet) called "Game Greats" and a baseball batter's helmet version of
the Pocket Pro.
Revenue from trademark licensing was stable in comparison to the first
quarter of 1997 at approximately $0.5 million in both quarterly periods.
Royalties are anticipated to decline in the second half of 1998 with the
expiration of certain licenses, as discussed in prior reports.
Gross Profit
Gross profit for the three months ended March 31, 1998 was $12.0 million,
an 8% increase over pro forma gross profit of $11.0 million for the three
months ended March 31, 1997. Gross margins decreased as a percentage of sales
from 41.0% on a pro forma basis for the first quarter of 1997 to 38.6% for the
first quarter of 1998. Margin rates were lower due to a shift in product mix
as most revenue increases related to products and services which have
relatively low margins. Margins for the first quarter of 1998 were also
impacted by pricing relating to certain promotional programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
March 31, 1998 were $15.7 million, a 16% increase over pro forma expenses of
$13.6 million for the three months ended March 31,
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1997. The overall expense increase is due to new product development costs,
new strategic initiatives and normal cost increases as well as proportional
increases in variable selling expenses. As a percentage of sales, selling
general and administrative expenses remained relatively stable at 50.7% for the
first quarter of 1998 and 50.5% on a pro forma basis for the first quarter of
1997.
Interest Expense
Interest expense for the first quarter of 1998 reflects increased costs
associated with the additional debt incurred, in June 1997, to finance the
Varsity acquisition. Interest expense for the quarter was stable in relation
to interest computed on a pro forma basis for the first quarter of 1997.
Income Taxes
The tax benefit for the first quarter of 1998 reflects the estimated
overall tax rate for 1998 operating results applied to the first quarter loss.
As discussed in prior reports, the goodwill recorded in connection with the
Varsity acquisition will generate approximately $1.7 million in incremental
annual amortization charges that are not deductible for income tax purposes.
The resulting increase in the amount of permanent differences between income
or loss computed for financial reporting purposes and for income tax purposes
has the effect of increasing the Company's effective tax rate. The permanent
differences are expected to amount to approximately $2.8 million for the year.
The tax rate has also been impacted by the anticipated utilization of loss
carryforwards. The effect of the permanent differences and the recognition of
loss carryforwards on the overall tax rate for the year can vary significantly
depending on levels of taxable income and other factors used in estimating the
tax rate. Accordingly, the final tax rate determined for 1998 could vary
significantly from the estimate used for the quarter.
As discussed in prior reports, the Company has certain tax net operating
loss carryforwards available to offset the payment of income taxes in future
periods.
No income tax benefit was reflected for the Company's historical or pro
forma results for 1997 due to losses, including certain nonrecurring costs,
incurred during the year and the availability of operating loss carryforwards.
Accordingly, taxes and the related impact on earnings are not comparable
between the first quarter of 1998 and the first quarter of 1997.
Liquidity and Capital Resources
Several factors have a significant effect on the seasonality of the
Company's working capital needs. A significant portion of the Company's
institutional products and reconditioning services are sold throughout the year
on dated payment terms, with related receivables becoming due during the
following July to October period. The Company incurs costs relating to its
camp business throughout the fourth quarter to second quarter time period as it
prepares for the upcoming camp season, while most revenue relating to camps is
collected in the June to August period. Additionally, the Company's debt
structure impacts the seasonality of its working capital demands as the semi-
annual interest payments on its $115 million of 10.5% Senior Notes come due
each January and July.
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In order to finance these seasonal working capital demands, the Company
maintains a revolving line of credit (the "Credit Facility"). The outstanding
balance on the Credit Facility follows the seasonal cycles described above,
increasing during the early part of the operating cycle in the first and second
quarters of each year and then decreasing from the late second quarter and
into the fourth quarter each year as collections are used to reduce the
outstanding balance. There were no outstanding borrowings at December 31, 1997
under the Credit Facility. At March 31, 1998 the outstanding balance under the
Credit Facility was $17.2 million.
There are no principal payments due on the Senior Notes until they mature
in 2007. The Credit Facility matures in 2002 and provides for borrowings of up
to $35 million, dependant on certain levels of receivables and inventories. The
Company has recently amended the Credit Facility to modify certain financial
covenants. The amendment did not change any provision of the Credit Facility
affecting interest rates or other loan costs.
The Company's current debt service obligations are significant and,
accordingly, the ability of the Company to meet its debt service and other
obligations will depend on its future performance and is subject to financial,
economic and other factors, some of which are beyond its control. However, the
Company believes that operating cash flow together with funds available from
the Credit Facility will be sufficient to fund its debt service and seasonal
and other working capital requirements in the foreseeable future.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in certain product liability proceedings and
from time to time becomes involved in various claims and lawsuits incidental to
its business including, without limitation, employment related litigation. See
Note 6 of "Notes to Condensed Consolidated Financial Statements".
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index:
10.1 Amendment No. 1, dated as of March 31, 1998 to Credit
Agreement among Riddell Sports Inc., as Borrower, the
subsidiaries of Riddell, as Guarantors, and the Lenders
identified therein, and NBD Bank, as Administrative Agent,
and Nations Bank, N.A., as Documentation Agent
27 Financial Data Schedule (submitted in electronic form to
SEC only)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIDDELL SPORTS INC.
Date: May 14, 1998 By /s/ DAVID MAUER
----------------------------
David Mauer
President and
Chief Executive Officer
Date: May 14, 1998 By /s/ DAVID GROELINGER
----------------------------
David Groelinger
Executive Vice President and
Chief Financial Officer
Date: May 14, 1998 By /s/ LAWRENCE F. SIMON
----------------------------
Lawrence F. Simon
Senior Vice President
(Principal Accounting Officer)
14
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO
CREDIT AGREEMENT
------------------
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
March 31, 1998, is entered into among RIDDELL SPORTS INC., a Delaware
corporation (the "Borrower"), each of the Borrower s Material Subsidiaries
(individually a "Guarantor" and collectively the "Guarantors"), the Lenders
party to the Credit Agreement defined below (the "Lenders"), NBD BANK, as
Administrative Agent (the "Administrative Agent") for the Lenders and
NATIONSBANK, N.A., as Documentation Agent (the "Documentation Agent") for the
Lenders (the Documentation Agent, together with the Administrative Agent,
collectively the "Agents"). Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings given to them in the Credit
Agreement.
RECITALS
--------
WHEREAS, the Borrower, the Guarantors, the Administrative Agent, the
Documentation Agent and the Lenders are parties to that certain Credit
Agreement dated as of June 19, 1997 (as may be amended, modified, supplemented,
extended or restated from time to time, the "Credit Agreement");
WHEREAS, the Borrower has requested that the Lenders amend the terms of
the Credit Agreement; and
WHEREAS, the Agents and the Lenders have agreed to amend the terms of the
Credit Agreement, as more fully set forth below.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1 AMENDMENTS TO CREDIT AGREEMENT.
-------------------------------
1.1 The following new definitions are added to Section 1.1 of the
Credit Agreement to read as follows:
"Adjusted Leverage Ratio" means, as of the end of each fiscal quarter of
the Borrower, the ratio of (a) Funded Debt on such date (provided that in
calculating the Funded Debt incurred under this Credit Agreement, the
amount of such Funded Debt shall be equal to the lowest average 30 day
outstanding balance during the most recent prior twelve month period) less
cash and Cash Equivalents of the Credit Parties and their Subsidiaries on
such date to (b) EBITDA for the twelve month period ending on such date
"chief financial officer" means the chief financial officer or the chief
accounting officer of the Borrower.
1
<PAGE> 2
"Senior Debt Leverage Ratio" means, as of the end of each fiscal quarter,
the ratio of (a) the principal balance of all amounts outstanding under
this Credit Agreement on such date to (b) EBITDA for the twelve month
period ending on such date.
1.2 Exhibit 7.1(d) to the Credit Agreement is amended and restated
in its entirety in the form attached hereto.
1.3 Sections 7.2(a) and 7.2(b) of the Credit Agreement are amended
and restated in their entirety to read as follows:
(a) As of the end of each fiscal quarter of the Borrower set
forth below, the Adjusted Leverage Ratio, the Senior Debt Leverage
Ratio and the Coverage Ratio shall satisfy the following minimum and
maximum requirements:
Fiscal Quarter Maximum Maximum Minimum
Ending Adjusted Senior Debt Coverage
Leverage Ratio Leverage Ratio Ratio
----------------- -------------- --------------- ---------
March 31, 1998 7.50 to 1.0 1.50 to 1.0 1.15 to 1.0
June 30, 1998 7.50 to 1.0 2.00 to 1.0 1.10 to 1.0
September 30, 1998 6.50 to 1.0 1.00 to 1.0 1.15 to 1.0
December 31, 1998 6.50 to 1.0 .50 to 1.0 1.15 to 1.0
March 31, 1999 6.00 to 1.0 1.50 to 1.0 1.15 to 1.0
June 30, 1999 6.00 to 1.0 2.00 to 1.0 1.15 to 1.0
September 30, 1999 6.00 to 1.0 1.00 to 1.0 1.15 to 1.0
December 31, 1999 6.00 to 1.0 .50 to 1.0 1.15 to 1.0
March 31, 2000 6.00 to 1.0 1.50 to 1.0 1.25 to 1.0
June 30, 2000 5.75 to 1.0 2.00 to 1.0 1.25 to 1.0
September 30, 2000 5.50 to 1.0 1.00 to 1.0 1.25 to 1.0
December 31, 2000 5.50 to 1.0 .50 to 1.0 1.25 to 1.0
March 31, 2001 5.50 to 1.0 1.50 to 1.0 1.25 to 1.0
June 30, 2001 5.50 to 1.0 2.00 to 1.0 1.50 to 1.0
September 30, 2001 5.00 to 1.0 1.00 to 1.0 1.50 to 1.0
December 31, 2001 5.00 to 1.0 .50 to 1.0 1.50 to 1.0
March 31, 2002 5.00 to 1.0 1.50 to 1.0 1.50 to 1.0
June 30, 2002 5.00 to 1.0 2.00 to 1.0 1.50 to 1.0
(b) intentionally omitted
2
<PAGE> 3
1.4 A new Section 7.17 is added to the Credit Agreement to read as
follows:
7.17 Clean Down Period, The Credit Parties shall cause the average
maximum amount outstanding under this Credit Agreement to be less than or
equal to $5,000,000 during at least one 30 day consecutive period within
any twelve month period ending on the last day of each fiscal quarter of
the Borrower. Notwithstanding the above, the Credit Parties shall not
have to adhere to this covenant if for two consecutive fiscal quarters
they can satisfy the following Leverage Ratio maximum requirements:
Fiscal Quarter Maximum
Ending Leverage Ratio
---------------------- ----------------
March 31, 1998 6.50 to 1.0
June 30, 1998 6.50 to 1.0
September 30, 1998 5.50 to 1.0
December 31, 1998 5.50 to 1.0
March 31, 1999 5.50 to 1.0
June 30, 1999 5.50 to 1.0
September 30, 1999 5.50 to 1.0
December 31, 1999 4.50 to 1.0
March 31, 2000 4.50 to 1.0
June 30, 2000 4.50 to 1.0
September 30, 2000 4.50 to 1.0
December 31, 2000 3.50 to 1.0
March 31, 2001 3.50 to 1.0
June 30, 2001 3.50 to 1.0
September 30, 2001 3.50 to 1.0
December 31, 2001 3.50 to 1.0
March 31, 2002 3.50 to 1.0
June 30, 2002 3.50 to 1.0
September 30, 2002 3.50 to 1.0
December 31, 2002 3.50 to 1.0
SECTION 2 AUDIT/INSPECTIONS.
------------------
It is understood and agreed by the Credit Parties
that the Agents plan to conduct a field audit of the Credit Parties' inventory
and accounts receivable, at the expense of the Credit Parties, in conformance
with the terms of Section 7.12 of the Credit Agreement.
SECTION 3 CONDITIONS PRECEDENT.
---------------------
3.1 The effectiveness of this Amendment is subject to the satisfaction of
each of the following conditions:
(a) The Agents shall have received copies of this Amendment duly
executed by the Credit Parties, the Agents and the Lenders.
3
<PAGE> 4
(b) The Agents shall have received copies of resolutions of
the
Board of Directors of each Credit Party approving and adopting this
Amendment, the transactions contemplated herein and authorizing execution
and delivery hereof, certified by a secretary or assistant secretary of
such Credit Party to be true and correct and in force and effect as of the
date hereof.
(c) The Agents shall have received an opinion, reasonably
satisfactory to the Agents, from legal counsel to the Credit Parties.
(d) The Agents shall have received such other documents and
information as either deems reasonably necessary.
SECTION 4 MISCELLANEOUS.
--------------
4.1 The term "Credit Agreement" as used in each of the Credit
Documents shall hereafter mean the Credit Agreement as amended by this
Amendment. Except as herein specifically agreed, the Credit Agreement,
and the obligations of the Credit Parties thereunder and under the other
Credit Documents, are hereby ratified and confirmed and shall remain in
full force and effect according to their terms.
4.2 The Borrower and the Guarantors, as applicable, affirm the liens
and security interests created and granted in the Credit Agreement and the
Credit Documents and agree that this Amendment shall in no manner
adversely affect or impair such liens and security interests.
4.3 The Borrower hereby represents and warrants to the Lenders and
the Agents that (a) no Default or Event of Default exists and is
continuing under the Credit Agreement; (b) all of the representations and
warranties made in the Credit Documents are true and correct in all
material respects as of the date hereof (noting that Cheer Acquisition
Corporation has merged with Varsity Spirit Corporation and changed its
name to Varsity Spirit Corporation); and (c) the Borrower has no claims,
counterclaims, offsets, credits or defenses to the Credit Documents and
the performance of its obligations thereunder, or if the Borrower has any
such claims, counterclaims, offsets, credits or defenses to the Credit
Documents or any transaction related to the Credit Documents, same are
hereby waived, relinquished and released in consideration of the Lenders'
execution and delivery of this Amendment.
4.4 The Guarantors (a) acknowledge and consent to all of the terms
and conditions of this Amendment, (b) affirm all of their obligations
under the Credit Documents and (c) agree that this Amendment and all
documents executed in connection herewith do not operate to reduce or
discharge the Guarantors' obligations under the Credit Agreement or the
other Credit Documents. The Guarantors acknowledge and agree that the
Guarantors have no claims, counterclaims, offsets, credits or defenses to
the Credit Documents and the performance of the Guarantors' obligations
thereunder, or if a Guarantor
4
<PAGE> 5
did have any such claims, counterclaims, offsets, credits or defenses to
the Credit Documents or any transaction related to the Credit Documents,
the same are hereby waived, relinquished and released in consideration of
the Lenders' execution and delivery of this Amendment.
4.5 Each of the Borrower, the Guarantors, the Agents and the Lenders
party hereto represents and warrants as follows:
(a) It has taken all necessary action to authorize the
execution, delivery and performance of this Amendment.
(b) This Amendment has been duly executed and delivered by such
party and constitutes such party's legal, valid and binding obligations,
enforceable in accordance with its terms, except as such enforceability
may be subject to (a) bankruptcy, insolvency, reorganization, fraudulent
conveyance or transfer, moratorium or similar laws affecting creditors'
rights generally and (b) general principles of equity (regardless of
whether such enforceability is considered in a proceeding at law or in
equity).
(c) No consent, approval, authorization or order of, or filing,
registration or qualification with, any court or governmental authority or
third party is required in connection with the execution, delivery or
performance by such party of this Amendment.
4.6 This Amendment may be executed in any number of counterparts,
each of which when so executed and delivered shall be an original, but all
of which shall constitute one and the same instrument.
4.7 THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
5
<PAGE> 6
Each of the parties hereto has caused a counterpart of this Amendment to
be duly executed and delivered as of the date first above written.
BORROWER:
RIDDELL SPORTS INC.,
a Delaware corporation
By: /s/ DAVID GROELINGER
----------------------------------------------
Name: David Groelinger
--------------------------------------------
Title: EVP
-------------------------------------------
GUARANTORS:
RIDDELL, INC.,
a Illinois corporation
By: /s/ DAVID GROELINGER
----------------------------------------------
Name: David Groelinger
--------------------------------------------
Title: EVP
-------------------------------------------
EQUILINK LICENSING CORPORATION,
a Delaware corporation
By: /s/ DAVID GROELINGER
----------------------------------------------
Name: David Groelinger
--------------------------------------------
Title: EVP
-------------------------------------------
RHC LICENSING CORPORATION,
a Delaware corporation
By: /s/ DAVID GROELINGER
----------------------------------------------
Name: David Groelinger
--------------------------------------------
Title: EVP
-------------------------------------------
RIDMARK CORPORATION,
a Delaware corporation
By: /s/ DAVID GROELINGER
----------------------------------------------
Name: David Groelinger
--------------------------------------------
Title: EVP
-------------------------------------------
<PAGE> 7
ALL AMERICAN SPORTS CORPORATION,
a Delaware corporation
By: /s/ DAVID GROELINGER
----------------------------------------------
Name: David Groelinger
--------------------------------------------
Title: EVP
-------------------------------------------
VARSITY SPIRIT CORPORATION,
a Tennessee corporation
By: /s/ JOHN M. NICHOLS
----------------------------------------------
Name: John M. Nichols
--------------------------------------------
Title: Senior Vice President
-------------------------------------------
VARSITY SPIRIT FASHIONS & SUPPLIES, INC.
a Minnesota corporation
By: /s/ JOHN M. NICHOLS
----------------------------------------------
Name: John M. Nichols
--------------------------------------------
Title: Senior Vice President
-------------------------------------------
INTERNATIONAL LOGOS, INC.
a Tennessee corporation
By: /s/ JOHN M. NICHOLS
----------------------------------------------
Name: John M. Nichols
--------------------------------------------
Title: Senior Vice President
-------------------------------------------
VARSITY/INTROPA TOURS, INC.
a Tennessee corporation
By: /s/ JOHN M. NICHOLS
----------------------------------------------
Name: John M. Nichols
--------------------------------------------
Title: Senior Vice President
-------------------------------------------
<PAGE> 8
VARSITY USA, INC.
a Tennessee corporation
By: /s/ JOHN M. NICHOLS
----------------------------------------------
Name: John M. Nichols
--------------------------------------------
Title: Senior Vice President
-------------------------------------------
<PAGE> 9
LENDERS:
NBD BANK
individually in its capacity as a
Lender and in its capacity as Administrative Agent and
Collateral Agent
By: /s/ JON P. DADY
----------------------------------------------
Name: Jon P. Dady
--------------------------------------------
Title: First Vice President
-------------------------------------------
NATIONSBANK, N.A.,
individually in its capacity as a Lender and in its
capacity as Documentation Agent
By: JE-- E. BALL
----------------------------------------------
Name: J. E. Ball
--------------------------------------------
Title: Senior Vice President
-------------------------------------------
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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<PP&E> 13,142
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<BONDS> 139,700
0
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<COMMON> 81
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<TOTAL-LIABILITY-AND-EQUITY> 190,257
<SALES> 21,827
<TOTAL-REVENUES> 30,979
<CGS> 13,429
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