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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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.)
50 East 42nd Street, Suite 1808, New York, New York 10017
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (212) 808-5400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
[none] [none]
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [x]
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The Registrant hereby incorporates by reference, in response to Part III, its
Proxy Statement for its 1999 Annual Meeting of Stockholders to be filed on or
before April 30, 1999 (except to the limited extent the rules and regulations
of the Commission authorize certain sections of such Proxy Statement not to be
incorporated herein by reference, as specifically indicated in such Proxy
Statement).
The aggregate market value of the 4,890,553 shares of outstanding voting stock
held by non-affiliates of the Registrant, computed by reference to the last
sale price of the Registrant's Common Stock on March 23, 1999, is $22,007,489.
As of March 23, 1999, the Registrant had 9,258,957 shares of Common Stock,
$.01 par value per share, outstanding.
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SPECIAL CAUTIONARY NOTICE
REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K 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 "Part I--Item 1--Business," and "Part 2--Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
include, without limitation, the Company's expectations and estimates as to: the
Company's dance products and services, and its retail products businesses; the
Company's ability to reduce gross margin declines; the Company's ability to
successfully address Year 2000 issues and the costs and timing of the steps it
expects to take; the Company's future financial performance, including its
ability to generate sufficient cash flow and have funds available under
borrowings to satisfy its debt service and working capital requirements; the
introduction of new products, including but not limited to the introduction of
UMBRO(Registered) branded products; the Company's ability to substantially
realize the benefits from the restructuring and various cost savings programs
that it implemented in 1998; the Company's ability to consummate its proposed
joint venture with respect to the marketing and sale of its products on the
Internet and, if such joint venture is consummated, the success of such joint
venture; and the Company's business operations in general. In addition, in those
and other portions of this Form 10- K, the words "anticipates, "believes"
"estimates," "expects," "plans," "intends" and similar words or phrases, as they
relate to the Company and its subsidiaries, 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 and
uncertainties and that could cause the actual results to differ materially from
those expressed in any forward-looking statements made by the Company. The
Company does not intend to update these forward-looking statements.
PART I
Item 1. BUSINESS
GENERAL
Riddell Sports Inc. (the "Company") is a holding company that operates
through various wholly owned subsidiaries. The Company 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 leading manufacturer and reconditioner of football protective equipment
and the leading supplier of products and services to the school spirit industry.
The Company also markets miniature and full-size helmets for collectors and
licenses the Riddell(Registered) and MacGregor(Registered) trademarks for use on
athletic footwear and apparel.
The Company was organized in April 1988 to acquire substantially all
of the assets and businesses from two subsidiaries of MacGregor Sporting
Goods, Inc. The businesses consisted of manufacturing and selling Riddell
brand football helmets and other protective products and the licensing of the
MacGregor trademark.
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The Company believes that the Riddell brand is one of the best known
and recognizable brand names in the sporting goods industry and that its
Riddell brand football equipment is worn by more than 80% of all professional
NFL players and by more than 50% of all high school and collegiate players.
The Company is also the largest participant in the highly fragmented athletic
equipment reconditioning industry and recently began marketing athletic team
uniforms for youth, high school and college participants.
In June 1997, the Company acquired Varsity Spirit Corporation (the
"Acquisition"). As a result of the Acquisition, the Company became a leading
designer and marketer of innovative cheerleader and dance team uniforms and
accessories for sale to the school spirit industry, as well as a leading
operator of camps for high school and college cheerleader and dance teams. The
Company promotes its Varsity brand products and services, and the school
spirit industry in general, by organizing and producing various nationally
televised cheerleading and dance team championships and other special events.
The Company also designs and markets a line of costumes for private dance
studio participants and produces regional and national dance conventions and
competitions.
In November 1998, as more fully described in "Recent Developments"
below, the Company acquired the right, for five years, to sell UMBRO(Registered)
brand soccer related products to soccer specialty stores and other customers in
the team channel of distribution in the United States, Puerto Rico and the U.S.
Virgin Islands.
The Company's principal offices moved to 50 East 42nd Street, Suite
1808, New York, New York 10017 (212-808-5400) in January 1999.
RECENT DEVELOPMENTS
In November of 1998 the Company entered into a license agreement (the
"UMBRO License") with Umbro International, Inc. ("UMBRO") pursuant to which
the Company acquired the right for five years to manufacture, market and sell
UMBRO branded soccer apparel, footwear, equipment, and accessories on an
exclusive basis to the team channel of distribution throughout the United
States, Puerto Rico and the U.S. Virgin Islands. UMBRO is a privately-owned
U.K. company and its brand is one of the world's leaders in soccer, with sales
of over $500 million. It is recognized among soccer players and fans as a
superior provider of soccer apparel, footwear and equipment. The UMBRO License
is royalty-free for 1999, and the Company is required to begin paying
royalties in the year 2000, at which time it is also required to meet annual
minimum sales figures. In the event that the Company fails to meet required
minimum sales levels subsequent to 1999 for two consecutive annual periods,
UMBRO has the right to terminate the UMBRO License. The UMBRO License, which
expires in November of 2003, may be extended for an additional five years at
the Company's option on or before August 15, 2003, provided that the Company
achieves sales of at least $15 million in any twelve month period commencing
January 1, 2002 through June 30, 2003.
Simultaneously, and in connection with execution of the UMBRO
License, the Company purchased for approximately $3.4 million certain
inventory, promotional materials and other assets.
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Included in the assets purchased was a 15% interest in U.S.I.S.L., Inc.
("USL") and an option to increase the interest to 20%. USL, which does
business as United Soccer Leagues, is a private company which promotes soccer
in the United States and operates several minor league professional and high
level amateur soccer leagues. While the investment in USL is not significant
to the Company's financial position or results of operations, the Company
believes that the relationship with USL could be beneficial in developing
demand for the Company's new line of soccer team products.
At the same time that the Company entered into the UMBRO License,
UMBRO simultaneously entered into a license agreement with the Signal Apparel
Company, Inc. ("Signal") for Signal to sell soccer-style apparel, footwear,
equipment and accessories bearing the UMBRO brand name in retail stores
throughout the United States. In order to coordinate UMBRO brand marketing,
the Company also entered into an expense-sharing agreement with Signal (the
"Signal Agreement") in an effort to jointly develop the UMBRO brand name in
the United States and share certain expenses. The Company previously had a
relationship with Signal independent from UMBRO; Signal was a licensee of the
Company with respect to certain casual athletic wear bearing the logos of NFL
teams and the Company's Riddell trademark.
In the fall of 1998, the Company also commenced the manufacture,
marketing and sale of athletic game uniforms for various team sports. The
Company is seeking to broaden its product line to become a supplier of
athletic game uniforms and equipment for a wide array of sports for both male
and female participants.
In February of 1999, the Company entered into a letter of intent with
the Data Broadcasting Corporation and Dawntreader Fund I LLP to form a joint
venture to market the Company's brands and products on the Internet. The
proposed joint venture is also intended to provide timely and relevant content
for the consumer communities that feature the Company's Riddell, Varsity and
UMBRO brands. The proposed joint venture intends to develop and maintain
various Internet-based communications and information links to its customers
and is subject to the negotiation and completion of documentation acceptable
to each of the joint venture participants. It is presently intended that Data
Broadcasting and Dawntreader Fund I LLP will provide the initial funding
required by the Internet-related joint venture and will be responsible for
implementing and operating the venture. The Company will not have any funding
obligations and will own approximately 49% of the joint venture upon
formation. The joint venture company will initially have an exclusive,
royalty-free license for all of the Company's Internet activities and the
right to use all of the Company's current trademarks on the Internet.
As part of the Company's long term strategy, the Company implemented
several cost-cutting and facility consolidation measures in 1998. The Company
presently believes that its cost cutting measures, combined with the savings
from facility consolidations and staff reductions are likely to result in
annual savings from $2 to $3 million when fully implemented. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
below.
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In November 1998, the Company's Common Stock commenced trading on the
American Stock Exchange. Prior to that time, the Company's Common Stock was
quoted on the Nasdaq National Market System.
INDUSTRY SEGMENTS
The Company operates in the following three business segments:
Institutional products and services: This segment markets products
and services primarily through the Company's direct sales force to
institutional customers such as schools, leagues, recreational groups and
other organizations for competitive and recreational sport and spirit
activities. Operations include the manufacture and sale of athletic products
(including football helmets, and UMBRO team soccer products), spirit products
(including cheerleading and dance uniforms and accessories) and athletic
equipment reconditioning. The segment also operates cheerleader and dance team
camps, clinics and special events. The Institutional products and services
segment is the largest segment of the Company, comprising 89% of consolidated
revenues for the year ended December 31, 1998.
Retail products: This segment markets products through retailers in
the U.S. and internationally. Most of the products sold by this segment are
sports collectible products, such as authentic and replica football helmets
which bear licensed sports team logos. The segment's operations also include
sales of certain recreational football and other athletic products sold
through consumer product retailers and distributors.
Trademark licensing: This segment consists of the licensing of the
Company's Riddell and MacGregor trademark rights to other entities for use in
marketing products such as athletic footwear and apparel.
The Company's reportable segments are strategic business units that
differ and are managed separately because of the nature of their markets and
channels of distribution. The Institutional products and services segment
includes the Company's institutional athletic products business unit and its
spirit (cheerleading and dance) business unit. Information about these two
business units has been combined as the units have similar economic
characteristics and other common business traits.
The organization of the segment information presented in this report
is different from the Company's prior reports. In prior years the Company has
reported segment information along industry lines. The segment information has
been reorganized to conform with the requirements of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("FAS 131") which the Company adopted for this report. FAS 131
requires segment information to be organized under a management approach to
reflect the way an enterprise manages its business.
See Note 16 to the Consolidated Financial Statements for net
revenues, income or loss from operations and identifiable assets attributable
to each of the Company's segments for the last three years.
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INSTITUTIONAL SEGMENT
General
The Company's Institutional segment markets products and services to
schools, leagues, recreational groups and other organizations for competitive
and recreational activities. The segment's products and services are sold to
these institutional customers primarily through its direct sales force. These
products and services fall into two broad lines - athletic products and
services and spirit products and services. Most of the operations relating to
the segment's athletic products and services are conducted by the business
unit which comprised the Company's institutional operations prior to the
Acquisition and which does business principally under the Riddell name. While
operations related to spirit products and services are concentrated in the
segment's business unit acquired in the Acquisition, which continues to do
business under the Varsity name.
The Company's institutional market consists of schools and numerous
youth sports organizations and leagues. The 1998 edition of Patterson's
American Education reported that there are approximately 12,900 junior high
schools, 20,200 high schools, and 6,000 accredited colleges and universities,
community colleges, career schools and other institutions for advanced
education located throughout the United States. According to the National
Federation of State High School Associations, there are more than 6,300,000
students participating in organized athletic programs at high schools located
in the United States, and according to the National Collegiate Athletic
Association, there are approximately 330,000 students participating in
organized athletic programs at NCAA universities and colleges.
Athletic Products and Services
Athletic Products
The Company is the world's leading manufacturer of football helmets,
which it sells under the Riddell brand. For the years ended December 31, 1996,
1997 and 1998 sales of football helmets for competitive use constituted
approximately 9%, 8% and 9%, respectively, of the Company's consolidated
revenues (pro forma giving effect to the Acquisition in 1996 and 1997).
The Company's Riddell brand football helmets are worn by football
players throughout the world, including players on all NFL teams, certain
other professional leagues and on most teams in the NCAA. High school teams,
however, have historically been the largest market segment for the Company's
football helmets. The Company offers several types of varsity and youth
helmets which are different in their configurations and types of padding and
other fitting features. The Company's helmets are known for their quality and
performance and meet the industry standards set by the National Operational
Committee for Safety in Athletic Equipment ("NOCSAE"). NOCSAE, an independent
entity, is organized by various participants from the sporting goods industry
which establishes industry-wide standards for protective athletic equipment.
The Company also sells a professional and collegiate line of shoulder
pads under the Power(Registered) name and several other lines of shoulder pads
under the Riddell name . The shoulder pads are used
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by NFL, college, high school and youth players. Football shoulder pad sales
for each of the years ended December 31, 1996, 1997 and 1998 constituted
approximately 4% of the Company's consolidated revenues (pro forma giving
effect for the Acquisition in 1996 and 1997). Riddell also sells accessory
pads, including thigh, hip, rib and knee pads.
The Company has steadily been increasing the categories of athletic
products its sells to the institutional market. In 1998 the Company introduced
a line of custom team uniforms for high school and youth participants. In
1996, the Company introduced a line of baseball and softball products designed
for high school and college players and expanded this line to the youth market
in 1998. This line includes baseballs and softballs, protective baseball
equipment such as chest protectors, leg guards and catchers' masks and certain
other products including bases, bags and field equipment. The Company also
offers competitive and youth batting helmets including professional quality
models that are similar to the best quality products available from the
Company's competitors. All of the Company's helmets meet the standards
established by NOCSAE. In 1996 the Company also further expanded its line of
institutional products to include practicewear such as t-shirts, shorts,
fleece warm-ups and other basic athletic clothing. Practicewear was the first
broad line of products sold by the Company to the institutional market because
it was designed for both male and female athletes in all sports. The Company
offers customized silkscreen printing as an option for its practicewear line.
UMBRO and Athletic Game Uniforms
The Company is seeking to capitalize on its expertise and efficiency
in producing custom-made cheerleading and dance apparel in connection with its
UMBRO team soccer apparel, applying the same techniques to the design,
manufacture and delivery of soccer team apparel that it applies to its
cheerleading uniforms. The Company believes that by using the suppliers of its
Varsity cheerleader uniforms that it will be able to produce and deliver
competitively priced high quality soccer uniforms faster than its competitors.
The Company will be using a network of independent sales representatives to
market and sell the UMBRO brand soccer apparel, footwear, and equipment to the
team channel of distribution.
In addition, in 1998 the Company also began manufacturing athletic
team uniforms for other sports. The Company believes that the manufacturing
capabilities of its cheerleader uniform operations, coupled with the breadth
and depth of its direct sales organization to schools and youth organizations
across the country, provide the Company with an opportunity to successfully
expand its product line into athletic game uniforms, which is a larger market
than its present athletic product and services line of business. The Company
believes this is a natural extension of its current product lines.
Reconditioning
The Company is the leading national reconditioner of football
helmets, shoulder pads and related equipment with an over 50% share of the
reconditioning market. Reconditioning typically involves the cleaning,
sanitizing, buffing or painting, and recertifying of helmets as conforming to
NOCSAE standards. The Company may also replace face guards, interior pads and
chin straps. The
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Company also reconditions shoulder pads, as well as equipment for other
sports, including baseball and lacrosse helmets, catchers' masks and baseball
gloves. The Company's reconditioning services are sold by its institutional
sales force to the same athletic coaches responsible for equipment purchases.
The Company's reconditioning customers are primarily high schools, colleges
and youth recreational groups. Reconditioning constituted 13% of the Company's
consolidated revenues in each of the years ended December 31, 1996, 1997 and
1998 (pro forma giving effect to the Acquisition in 1996 and 1997).
Spirit Products and Services
As a consequence of the Acquisition in June of 1997, the Company
became a leading provider of products and services to the school spirt
industry. The market for school spirit products and services has evolved and
grown with the development of youth, high school and college athletic
programs.
Cheerleader and Dance Team Uniforms and Accessories
The Company designs and markets cheerleader and dance team uniforms
and accessories, including sweaters, sweatshirts, jumpers, vests, skirts,
warm-up suits, t-shirts, shorts, pompons, socks, jackets, pins and gloves. The
Company markets all of its cheerleading uniforms and accessories under the
Varsity trademark. The distinctive Varsity logo patch appears on the front of
all uniforms manufactured by or for the Company. Over 125,000 catalogs are
mailed annually to schools and school spirit advisors and coaches containing
color photographs and descriptions of the Company's Varsity line of uniforms
and accessories. The Company supplements its direct sales force and catalog
sales efforts with a telemarketing sales force of 13 full and part-time
employees. Spirit uniform and accessory sales accounted for 31%, 32% and 34%
of the Company's consolidated revenues for the year ended December 31, 1996,
1997 and 1998, respectively (pro forma giving effect to the Acquisition for
1996 and 1997).
Cheerleader and Dance Team Camps
The Company operates cheerleader and dance team camps in the United
States. Camp enrollment has increased every year since the Camp division, part
of the Acquisition, commenced operation in 1975 with 20 cheerleading camps and
4,000 participants. During the 1998 camp season, approximately 207,000
participants (consisting of students and their coaches) attended Varsity's
Universal Cheerleader Association ("UCA") and United Spirit Association
("USA") camps, including over 7,000 participants representing colleges and
junior colleges. During 1998, cheerleading and/or dance team squads from
approximately 70% of the universities comprising the Atlantic Coast, Big East,
Big Ten, Big Twelve, Pacific 10 and Southeastern collegiate athletic
conferences attended the Company camps. The Company's camp and event revenues
accounted for 24%, 26% and 26% of the Company's consolidated revenues for the
year ended December 31, 1996, 1997 and 1998 respectively, (pro forma giving
effect to the Acquisition for 1996 and 1997).
Camp sessions for high school and junior high school students are
held primarily in June, July and August while camp sessions for college
cheerleaders and dance team participants are held
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primarily in August. Mascot training clinics are also provided at certain
cheerleader and dance team camps.
A significant majority of the Company's cheerleader and dance team
camps are conducted on college or junior college campuses. The Company
contracts with the colleges and universities for provision of housing, food
and conference facilities. The camps generally are conducted over a four-day
period and are attended by resident and commuting students. The Company
generally markets the camp, establishes and collects participation fees,
registers students, provides instruction and performs all related
administrative services.
The Company emphasizes safety and training for its cheerleaders, dance
and spirit instructors. The Company's instructors are mostly college
cheerleaders who may have previously attended a Company camp, and management
believes that its training of many of the top college cheerleading squads
augments its recruiting of high school and junior high school camp participants.
Prior to the commencement of its camps, instructors participate in an intensive
six-day training session where they are taught new cheerleading and dance
material, as well as up-to-date teaching methods and safety techniques. The
Company hires its instructors by utilizing applications given to talented camp
participants, supervisor evaluations and numerous nationwide tryouts. As a
result of this process, the Company believes it hires the most qualified and
talented instructors available.
The Company was a founding member of and is an active participant in
the American Association of Cheerleading Coaches and Advisors ("AACCA"), an
industry trade group whose mission is to improve the quality of cheerleading
and to maintain established safety standards. In 1990, AACCA published
comprehensive certification and safety guidelines for cheerleading coaches.
The Company follows the AACCA safety guidelines in the training of its
instructional staff and in the conduct of its cheerleader and dance team camps
and competitions.
Special Events
The Company promotes its Varsity brand products and services, as well
as the school spirit industry, through active and visible association with the
following championships and television specials:
o National High School Cheerleading Championship(Registered)
o National Dance Team Championship(Registered)
o College Cheerleading and Dance Team National
Championship(Registered)
o National All Star Cheerleading Championship(Registered)
o Company Dance Championship(Registered)
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These championships and special events have been regularly televised
on the ESPN television network and have been sponsored by various companies
and products, including Nike, Unilever, Sprint, The Walt Disney World Resort,
Johnson & Johnson and Claire's Accessories.
In addition to promoting cheerleading and dance team activities,
these championships, television specials and events are a revenue source to
the Company. In 1998, approximately 31,000 persons, including cheerleaders and
their families, participated in the Company's special events.
Other Institutional Operations
The Company is seeking to expand its uniform design and manufacturing
and special event expertise from cheerleading into the private dance studio
market through a venture called Company Dance. Company Dance operates weekend
dance conventions in seventeen U.S. cities and an annual championship from the
Walt Disney Resort in Orlando that is televised on ESPN. It also provides
costumes for dance recitals.
The Company also operates a tour company, which does business as
Intropa, specializing in organizing trips for cheerleaders, bands, choirs and
orchestras, dance and theater groups and other school affiliated or performing
groups, which tour in the continental United States, Hawaii, Canada, Europe
and Israel.
Marketing, Sales and Promotion
Athletic Products and Services
The Company's athletic products and equipment reconditioning services
are sold directly to schools and other institutions through a direct sales
force of approximately 141 salespeople most of whom are compensated on a
percentage of sales basis and bear their own expenses. Prior to October 1994,
sales of protective athletic equipment to institutional customers had been
made through independent team sports dealers who in turn sold to schools and
other institutions. The Company now markets products to these institutional
customers on a factory-direct basis utilizing its sales force, which
previously sold only the Company's reconditioning services.
The Company's youth football products are principally marketed to
youth recreational groups, such as parks and recreation and Pop Warner
leagues. In 1998 the Company began selling its youth products directly to
those groups through its in-house sales force. This move was part of a renewed
emphasis on the youth market which increased youth product sales in 1998. At
the same time the Company is continuing to sell youth products through retail
stores and other distributors in its Retail Segment.
The Company maintains a promotional rights agreement with the NFL's
licensing division (the "NFL Agreement") which requires that the Company's
Riddell brand name appear on the front and on the chin strap of all of the
Company's helmets used in NFL play. The NFL Agreement further requires all
teams in the NFL to cover any indicia of brand identification of any other
manufacturers which might otherwise appear on helmets, face masks or chin
straps not manufactured
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by the Company, but used during league play. In return, the Company agrees to
supply specified quantities of Riddell helmets, shoulder pads and related
equipment, either at no cost or at reduced cost to each NFL team which has a
requisite percentage of its roster using the Riddell helmet. Presently,
approximately 80% of NFL players wear the Company's Riddell brand football
helmets.
The NFL Agreement, which dates back to April 1989, has a term
expiring in April 1999, which is automatically extended for unlimited
successive five-year periods thereafter, provided that the quality of the
Company's helmets remain comparable to the best available technology as
reasonably determined by the NFL. As a result, the term of the NFL Agreement
will be extended in April 1999 until April 2004. The Company also has supply
agreements with other professional leagues.
The Company utilizes a variety of promotional techniques to build
brand awareness for the Riddell brand, but the NFL Agreement provides the
Company with a unique marketing and promotional tool. The recognition
resulting from the frequent appearance of the Riddell name on helmets in
televised football games as well as in photographs in newspapers and
magazines, such as Sports Illustrated, is viewed by management as important to
its overall sales, marketing and licensing effort. The promotional exposure
from the NFL Agreement also benefits the Company's Retail and Licensing
segments.
To further reinforce and support the Company's brand recognition, the
Company conducts a variety of marketing and promotional events in support of
its line of athletic products. The Company participates in coaches' clinics
and equipment shows throughout the year. At these events, the Company's entire
athletic products line is displayed and promoted along with the Company's
reconditioning services.
Spirit Products and Services
The Company's spirit products and services are sold directly to
schools and other institutional customers through a direct sales force of
approximately 148 full time salespeople who are primarily compensated on a
percentage of sales basis and who bear their own expenses. Products and
services are also sold through catalogs and other direct mail advertising.
The Company has developed various cross-marketing opportunities to
promote its cheerleader and dance team camps and its uniforms and accessories.
In addition to selling uniforms and accessories, the Company's direct sales
force promotes its camps and events, while the approximately 1,800 instructors
at Varsity's cheerleader and dance team camps promote sales of the Company's
Varsity merchandise. The championships, television specials and events discussed
above (See Special Events) also promote consumer awareness of Varsity and
Universal Cheerleader Association products and services, as well as cheerleader
and dance team activities in general.
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Production
Athletic Products
The Company engineers, manufactures and packages all of its full
sized football and baseball batter helmets at its plant in Chicago, Illinois.
Football helmet shells are manufactured by the Company using a custom grade of
plastic resin and precision injection molding techniques. The Company's Elk
Grove, Illinois warehouse facility also has a screen printing operation which
can customize practicewear and uniforms with almost any logo, team name or
other design or numbering that a customer requests.
Power shoulder pads are manufactured for the Company by a single
source in Canada, and the Company has a facility in Pennsylvania which can
customize these shoulder pads. All of the Company's other shoulder pads are
imported as finished products from sources in the Far East.
The Company purchases its baseball products, other than baseball
batter helmets, from suppliers in the Far East and sources its practicewear
from four domestic suppliers. Athletic uniforms are purchased on a
made-to-order basis from domestic suppliers. The Company believes alternative
sources for all of these products are readily available. All of the Company's
sourcing from foreign countries are subject to the risks generally associated
with doing business abroad, such as governmental and economic instability,
changes in import duties, tariffs, foreign governmental regulations, foreign
currency fluctuations and shipment disruptions.
All protective products manufactured by the Company are subjected to
at least four separate quality control procedures. Quality control inspections
for helmets are conducted when the product is molded, when liners are
inserted, when face guards are attached and when the product is finished, and
samples of all models produced are tested in accordance with NOCSAE standards.
The Company continually monitors its products for quality.
All varsity protective football helmet shells are covered by a
five-year warranty and youth football helmet shells are covered by a
three-year warranty. Helmet liners, protective padding and shoulder pads are
covered by a one-year warranty. The cost of warranty claims has averaged under
0.2% of sales per annum over the last three years.
Principal raw materials purchased by the Company for use in its
protective products include various custom and standard grades of resins,
plastic and foam as well as metal fasteners, paints and cardboard. Similar
materials are used in most purchased components and finished products along
with steel wire used in purchased face guard components and textile products
used in purchased practicewear and athletic uniforms. The Company relies on a
single supplier with respect to fulfilling all of its requirements for resin,
which is an integral component in the manufacture of helmets. The Company has
never experienced any difficulty in the past, and does not anticipate that it
will experience any difficulty in the near future, with respect to this single
supplier being able to fulfill all of its requirements for this raw material.
In the event that this single supplier, which is a one of the largest
industrial companies in the world, should fail for whatever reason to continue
to fulfill the Company's resin requirements, such failure could have a
material adverse effect on the
- 13 -
<PAGE>
Company. The Company has not experienced and does not expect in the near
future to experience shortages in any of its raw materials.
The Company employs an engineering staff principally with respect to
the design, development and improvement of its helmets and shoulder pads and
to the testing of raw materials which are used in the Company's products or in
the development of new products. The Company has seven employees devoted
principally to design, development and quality and has several patents and
patents pending that are applicable to its protective products.
Reconditioning
The Company's reconditioning services include the sanitizing, buffing
or painting, replacing certain parts and recertifying of athletic equipment as
conforming to NOCSAE standards. These services are performed at the Company's
reconditioning facilities which are located throughout the United States. As a
policy, the Company does not recondition helmets over 10 years old.
Cheerleading and Dance Team Uniforms and Accessories
Cheerleading and dance team uniforms designed and marketed by the
Company are made to order. During 1998, the Company contracted for its
production requirements with nine independent garment manufacturers;. The
manufacturers provide knitting, cutting, sewing, finishing and shipping for
all orders, and the Company provides the patterns, fabrics, yarn and
manufacturing specifications and quality control supervision. The Company also
provides some cutting, knitting and lettering at two specialized production
facilities. The use of independent manufacturing facilities to fulfill the
Company's production needs affords the Company with flexibility to adjust its
production output to meet its highly seasonal selling cycle. The use of
independent manufacturers also reduces the Company's fixed costs, which the
Company believes is beneficial in a highly seasonal business. The Company
believes that the loss or termination of its relationship with any single
independent manufacturer would not have a material adverse effect on the
Company. The Company also intends to use its suppliers to produce soccer
uniforms under the UMBRO brand.
Cheerleading accessories such as shoes, pompons and campwear are
purchased from various suppliers including Nike(Registered),
Capezio(Registered) and Converse(Registered), among others. The Company has
expanded the variety and number of accessories it markets, which has
contributed to the increase in merchandise sales revenue in recent years. The
Company believes that the loss or termination of a relationship between the
Company and any single supplier would not have a material adverse effect on
the Company.
RETAIL SEGMENT
The Company's retail segment markets its Riddell branded products
through retailers. Most of these products are sports collectible products
which consist primarily of authentic and replica helmets of professional and
college sports teams. These helmets are offered in various miniature and
full-size models bearing the colors and logos of NFL and other professional or
collegiate teams. The Company's full-size authentic football helmets are the
same helmets used by players on these teams.
- 14 -
<PAGE>
Other sports collectible products bearing licensed team logos include lamps
and desk organizers fashioned from miniature helmets and a line of smaller,
less expensive miniature helmets tailored for the mass market. In early 1999
the Company also announced the introduction of a desk organizer bearing logos
and designs licensed from NASCAR. For the years ended December 31, 1996, 1997
and 1998 (pro forma giving effect to the Acquisition in 1996 and 1997) sales
of sports collectible products have constituted approximately 13%, 10% and 8%
of the Company's consolidated revenues.
The Company's retail segment also includes sales of certain
recreational football and baseball products sold through retailers and
distributors in the United States and athletic products sold internationally.
In connection with the sale of the Company's collectible helmets, NFL
Properties Inc. has granted the Company a license to use the names, symbols,
emblems, designs and colors of the member clubs of the NFL and the "League
Marks" (i.e., "National Football League," "NFL," "NFC," "AFC," "Super Bowl,"
"Pro Bowl," the "NFL Shield" design and other insignia adopted by the NFL) on
authentic and replica football helmets sold for display purposes.
Marketing Sales and Promotion
The Company's Retail segment products are sold primarily to retail
stores, and specialty sporting goods stores and distributors through
approximately 55 independent commissioned sales representatives. The Company
strategically targets different channels of trade based on the type and price
of each retail product.
In support of its sports collectible products, the Company has
initiated various advertising and public relations efforts. Advertisements are
placed in publications targeted toward the sports collectible industry as well
as other licensed products retailers. The Company also provides incentives to
retail outlets to advertise and display Riddell products during promotional
periods and participates in a major national sporting goods show where it
promotes these products.
The Retail segment also benefits from the promotional exposure of the
NFL Agreement described above under the Institutional segment.
Production
The Company engineers, manufactures and packages its full size
collectible helmets at its plant in Chicago, Illinois in a process similar to
that used for its competitive helmets. The Company purchases its miniature
helmets and other collectible products principally from two sources in China
and believes that alternative sources for these products are readily
available.
The Company has retained a design company to assist it in developing
new retail collectible products on terms that the Company believes are
customary in the industry and from time to time works with other design
companies.
- 15 -
<PAGE>
Athletic products sold as part of the Retail segment are manufactured
or purchased, together with similar products sold through the Institutional
segment.
LICENSING SEGMENT
The Company licenses its Riddell and MacGregor trademarks in various
categories, including athletic clothing and footwear. For the years ended
1996, 1997 and 1998 (pro forma giving effect to the Acquisition in 1996 and
1997), the Company's revenues from licenses of its trademarks constituted
approximately 2%, 1% and 1% of consolidated revenues.
The Company is continually exploring additional opportunities for
licensing the MacGregor and Riddell trademarks and retains the services of an
independent licensing agent to assist the Company's efforts in this regard.
The Licensing Segment also benefits from the promotional exposure of
the NFL Agreement described above under the Institutional Segment.
Riddell Licensing
The Company licenses the Riddell trademark for certain types of
athletic clothing, socks and athletic footwear.
In 1997, pursuant to an agreement settling an action commenced
against the Company in March 1995 by the trustee for MacGregor Sporting Goods,
Inc. ("Mac I"), which filed for bankruptcy protection in 1989, and certain
other actions (the "Settlement Agreement"), the Company entered into a new
licensing agreement with its "Riddell" footwear licensee on substantially the
same terms as the previous license and assigned to certain parties to the
Settlement Agreement up to $3.0 million of royalties on a present value basis
under the existing or any future "Riddell" footwear license to the extent such
royalties are paid during the 10 year period commencing in mid-1994, which
period is subject to extension if the Company terminates the footwear license.
In January 1998, an affiliate of Enterprise Rent-A-Car Company purchased the
license and assumed the licensee's obligations under the Riddell footwear
license with a slightly higher royalty rate but otherwise on substantially the
same terms as bound the assignor.
MacGregor Licensing
The Company has granted Kmart Corporation a non-exclusive license for
use of the MacGregor trademark on athletic socks under a license expiring on
June 30, 2001. The Company has also granted Footstar, Inc. an exclusive
license to use the MacGregor trademark on athletic footwear sold at Kmart
stores under a license with an initial term expiring on June 30, 2001 and
renewable at Footstar's option for an additional two year period if certain
conditions are satisfied. These licenses are, in effect, renewals of a license
to Kmart which expired on June 30, 1998. Kmart did not renew portions of the
previous license which had granted Kmart use of the MacGregor trademark for
apparel, athletic bags and knapsacks.
- 16 -
<PAGE>
THE COMPANY
Seasonality and Backlog
The Company's operations are highly seasonal. In recent years
operations have been most profitable in the second and third quarters, with
the third quarter typically the strongest and losses have been incurred in the
first and fourth quarters. This seasonal pattern is influenced by the
following factors:
Orders for the institutional segment's athletic products and
reconditioning services are solicited over a sales cycle that begins in the
fall of each year and continues until just before the start of a new school
year at the end of the following summer. Delivery of products and performance
of reconditioning services reach a low point in the fall of each year after
school begins and during the football playing season. These activities
contribute most to profitability in the first through third quarters of each
calender year.
Cheerleading and dance uniforms and accessories are typically ordered
commencing late March through August and are shipped prior to or
contemporaneous with the start of the school year.
Most of the institutional segment's camp revenues relate to its
cheerleading camps. The Company incurs costs relating to its camp business
from the fourth quarter through the second quarter as it prepares for the
upcoming camp season, while most revenue relating to camps is earned during
the June to August period.
The retail segment's sports collectible products are sold to
retailers throughout the year. However, sales are at their peak during the
third and fourth quarters as retailers build inventory in anticipation of both
the football and the holiday shopping seasons.
The Company believes that the sale of UMBRO branded items will also
be seasonal, substantially following the pattern of the Company's existing
institutional products as soccer, like football, is primarily a fall sport.
Soccer, however experiences a spring season as well, which may somewhat temper
the seasonality of the sale of UMBRO branded products.
Backlog for the Company at February 28, 1999 was $17.5 million, a 42%
increase over the February 28, 1998 backlog of $12.4 million. The increase is
the result of a $3.1 million increase in the backlog for institutional
athletic products, which was up 26% to $15.3 million at February 28, 1999 and
$2.0 million of orders for the new line of UMBRO products. Backlog for sales
of cheerleading and dance uniforms and accessories is also up, but is not
meaningful because most orders are received in the second and third quarters,
while backlog for sports collectible products was $1.4 million in both 1998
and 1999.
- 17 -
<PAGE>
Competition
Athletic Products
The Company's principal competitor in the football helmet market is
Schutt, manufacturer of the AIR helmet. The Company competes principally with
Bike Athletic Co., Inc., Douglas, Inc., Gear 2000, Inc. and Rawlings Sporting
Goods Company, Inc. ("Rawlings") in the football shoulder pad business, with
Diamond Sports Co., Rawlings, Wilson Sporting Goods Company and other
companies in baseball and softball products and with Champion Products, Inc.,
Russell Athletic, Inc., and other companies for practicewear and athletic game
uniforms. The Company also competes with numerous independent dealers
throughout the United States who market the competitor's products. Some of the
Company's competitors are substantially larger and have greater resources than
the Company.
The Company believes it competes in the football market on the basis
of quality, price, reliability, service, comfort and ease of maintenance. With
respect to football and other athletic products, the Company believes that its
direct sales force provides a competitive advantage in terms of its ability to
provide superior customer service and a significant price advantage due to the
elimination of independent dealers which are used by the Company's
competitiors.
Reconditioning
Reconditioners compete on the basis of quality, price, reputation,
convenience and customer loyalty. Management believes that the Company is the
largest nationwide participant among the approximately 30 competitors in the
highly fragmented athletic reconditioning industry.
Spirit Products and Services
The Company is one of two major companies that designs and markets
cheerleader, dance team and booster club uniforms and accessories on a
national basis. In addition to the Company and its major national competitor,
National Sprit Group ("NSG"), there are many other smaller regional
competitors serving the uniform and accessories market in the United States.
The Company believes that the principal factors governing the selection of
cheerleader and dance team uniforms and accessories are the quality, variety,
design, delivery, service and, to a lesser extent, price.
The Company is also one of two companies that annually operate a
significant number of cheerleader and dance team camps in the United States
(the other being NSG). There are also many other smaller companies and schools
that operate camps and clinics on a regional basis. The Company believes the
principal factors governing the selection of a cheerleader or dance team camp
or clinic are the reputation of the camp operator for providing quality
instruction and supervision, location, schedule and the tuition charged for
camp participation.
Retail Collectible Products
The Company's sports collectible products compete with a large number
and wide array of
- 18 -
<PAGE>
manufacturers and sellers of sports and other collectible and memorabilia
products, some of which have greater resources than the Company. Among its
competitors in this large marketplace are sellers of products such as
autographed photographs and uniforms and other memorabilia and manufacturers
of clothing, such as caps and jackets.
Licensing
Competition in the licensing of sports equipment, apparel and
footwear is substantial, and the Riddell and MacGregor brands compete with
numerous companies having significant brand recognition, many of which have
greater financial, distribution, marketing and other resources. Brand
recognition and reputation for quality are important competitive factors in
the licensing of sports apparel and footwear. Competing brands include
Adidas(Registered), Champion(Registered), Converse(Registered),
Nike(Registered), Rawlings(Registered), Reebok(Registered),
Russell(Registered) and Wilson(Registered).
Patents and Trade Secrets
Certain of the Company's football helmet liner systems are protected
by patents and trade secrets, including a patent on its inflatable liner
expiring in 2010. Other patents on these liners expired in 1998 and certain
others will expire in 2008. The Company also has patents expiring in 2006,
2007 and 2008 on various components of its shoulder pads which improve
absorption of shock.
Trademarks and Service Marks
The Company owns various trademarks registered with the U.S. Patent
and Trademark Office, including the following: Riddell, MacGregor, ProEdge,
Power, Air Pac, Warrior, Biolite, Maxpro, Universal Cheerleaders Association,
Varsity, United Spirit Association, National High School Cheerleading
Championship, the Universal Dance Association, Universal Dance Camps, Varsity
Spirit Fashions and The National Dance Team Championship, among others. Some
of these trademarks are also registered in certain foreign countries.
The Company's use of the MacGregor trademark is limited by an
agreement with Global Licensing Corporation, which owns a similar McGregor
trademark. Under this agreement, the parties have agreed on certain
restrictions in the use of their respective trademarks. The Company is also
precluded from using the MacGregor trademark in connection with certain team
sports equipment sold to institutional customers because of a prior exclusive
license for this category granted to Sports Supply Group Inc. on a perpetual
royalty-free basis. The Company does not have MacGregor trademark rights to
golf products.
Governmental Regulation
The Company's products and accessories are subject to the Federal
Consumer Product Safety Act, which empowers the Consumer Product Safety
Commission (the "CPSC") to protect consumers from hazardous sporting goods and
other articles. The CPSC has the authority to exclude from the market certain
articles which are found to be hazardous and can require a manufacturer to
repurchase
- 19 -
<PAGE>
such goods. The CPSC's determination is subject to court review. Similar local
laws exist in some states and cities in the United States, Canada and Europe.
The Company maintains a quality control program for its protective equipment
operations and other products that is designed to comply with applicable laws.
To date, none of the Company's products has been deemed to be hazardous by any
governmental agency.
There is no national governing body regulating cheerleading and dance
team activities at the collegiate level. Although voluntary guidelines
relating to safety and sportsmanship have been issued by the NCAA and some of
the athletic conferences, to date cheerleading and dance teams are generally
free from rules and restrictions similar to those imposed on other competitive
athletics at the college level. However, if rules limiting off-season training
are applied to cheerleading and/or dance teams (similar to rules imposed by
the NCAA on certain sports), it is likely that the Company would be unable to
offer a significant number of its camps either because participants would be
prohibited from participating during the summer or because enough suitable
sites would not be available. Although the Company is not aware of any school
officially adopting these activities as a competitive sport, recognition of
cheerleading and/or dance teams as "sports" would increase the possibility
that cheerleader or dance activities may become regulated. If the Company were
restricted from providing its training programs to colleges and high schools,
or if cheerleaders and dance teams were restricted from training during the
off-season, such regulations would likely have a material adverse effect on
the Company's business and operations. However, the Company currently does not
believe that any regulation of collegiate cheerleading or dance teams as a
"sport" is forthcoming in the foreseeable future, and in the event any rules
are proposed to be adopted by athletic associations, the Company expects to
participate in the formulation of such rules to the extent permissible.
At the high school level, some state athletic associations have
classified cheerleading as a sport and in some cases have imposed certain
restrictions on off-season practices and out-of-state travel to competitions.
However, in all cases to date, the Company has been able to work with these
state athletic associations to designate acceptable times for the cheerleaders
within these states to attend camps. The Company has also signed agreements
with several state associations to assist with sponsoring and executing
official competitions within these states. To date, state regulations have not
had a material effect on the Company's ability to conduct its normal business
activities.
Operations at all of the Company's facilities are subject to
regulation by the Occupational Safety and Health Agency and various other
regulatory agencies.
The Company's operations are also subject to environmental
regulations and controls. While some of the raw materials used by the Company
may be potentially hazardous, it has not received any material environmental
citations or violations and has not been required to spend significant amounts
to comply with applicable law.
- 20 -
<PAGE>
Employees
At February 28,1999, the Company had approximately 1,250 employees.
Approximately 1,090 of these employees were employed on a full time basis and
160 were part time or temporary employees. Approximately 37 employees employed
in manufacturing at the Chicago factory are represented by the Chicago and
Central States Joint Board, Amalgamated Clothing and Textile Workers Union,
under a collective bargaining agreement which expired in January 1999 and a
new agreement has been agreed to subject to final documentation. Approximately
30 of the Company's employees working in reconditioning at the Company's New
York facility are represented by the Local #500A United Food and Commercial
Workers Union (AFL-CIO) under a collective bargaining agreement that expires
in January 2000.
During the summer of 1998, the Company employed approximately 1,800
summer camp instructors, trainers and administrators on a seasonal basis.
The Company believes that relations with its employees are
satisfactory.
Product Liability Proceedings and Insurance
As part of its ongoing business, the Company is routinely a defendant
in various product liability law suits arising from personal injuries
allegedly related to the use of Riddell helmets.
The Company maintains product liability insurance under a program
initiated in December 1994. In January 1998, the Company and its insurer
restructured this insurance program replacing the existing policy with a new
policy, extending coverage through January 2005, three years beyond the
previous policy term and providing reduced annual fixed cost with no material
change in the scope of coverage. The policy is an occurrence-based policy
providing coverage against claims currently pending against the Company and
future claims relating to injuries occurring between December 1994 and January
2005 even if such claims are filed after the end of the policy period. The
insurance program provides certain basic and excess coverages with combined
aggregate coverage of over $40,000,000 subject to the limitations described
below.
The first level of insurance coverage under the policy provides
coverage of up to $2,250,000 per claim (with an annual limit of $4,500,000)
("Basic Coverage") in excess of an uninsured retention (deductible) of
$750,000 per occurrence. The Basic Coverage has an aggregate limit which is
currently $4,900,000, but the policy requires the Company to increase this
maximum limit to $7,700,000 by paying a fixed annual payment or by prepaying
the required premium at any time, which counts at 120% of the amount paid
toward the limit.
The insurance program also provides for additional coverage ("Excess
Coverage"), which may be subject to certain state statutes limiting the
applicability of such coverage in certain instances, of up to $20,000,000 per
occurrence, in excess of the first $3,000,000 of each claim which is covered
by the uninsured retention and Basic Coverage, to the extent available. Claims
covered by the Excess Coverage are subject to one of two separate $20,000,000
aggregate policy limits, depending on the date of the related injury. The
first $20,000,000 aggregate limit applies to claims
- 21 -
<PAGE>
for injuries occurring prior to January 31, 1998 while claims occurring
after January 1998, are covered under the second separate $20,000,000
aggregate limit.
In March 1999 a jury rendered a verdict against the Company in a
Texas product liability lawsuit for approximately $11.4 million plus interest
from February 1996. The Company intends to appeal the verdict. If the verdict
was paid in full it would be covered by the insurance described above, except
for an amount equal to the $750,000 uninsured retention. This amount, however,
is already included in the Company's balance sheet reserves. Any such payment
by the insurance company would reduce the aggregate limits of insurance
coverage available for other claims, as discussed above.
There is no certainty that coverage will remain available to the
Company after January 2005 or that the insured amounts will be sufficient to
cover all future claims.
The Company's product liability insurance carrier is a division of
American International Group, Inc., which has been rated A++XV by A.M. Best
Property and Casualty Insurance Rating Company.
The Company carries general liability insurance with coverage limits
which the Company believes are adequate for its business.
Product Liability Proceedings
The Company has historically been a defendant in product liability
personal injury suits allegedly related to the use of football helmets
manufactured or reconditioned by subsidiaries of the Company, including suits
relating to helmets made by BSN Corp.'s helmet division prior to its
acquisition by the Company in 1991. As of March 23, 1999, three product
liability cases were pending against the Company.
The Company has established reserves for pending product liability
claims and determines its reserves based on the level of insurance that is
available and estimates of losses and defense and settlement costs which it
anticipates would result from such claims based on information available at
the time the financial statements are issued. Due to the uncertainty involved
with estimates, actual results have at times varied substantially from earlier
estimates and could do so in the future. Accordingly, there can be no
assurance that the ultimate costs of these claims or potential future claims
will fall within the established reserves. See Note 11 to the Consolidated
Financial Statements.
Item 2: PROPERTIES
The Company owns its principal football helmet manufacturing facility
located in Chicago, Illinois and leases various facilities throughout the U.S.
The Company believes its properties, machinery and equipment are
adequate for its current requirements.
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<PAGE>
Set forth below is certain information regarding the Company's
principal properties:
<TABLE>
<CAPTION>
Square Lease
Location Principal Use Footage Expiration Date
- -------- ------------- ------- ---------------
<S> <C> <C> <C>
New York, New York Corporate headquarters 650 September 2000
Chicago, Illinois Headquarters of Riddell, Inc. 95,000 Owned
and helmet manufacturing
Elk Grove Village, Warehouse and distribution 83,000 March 2000
Illinois center
Elyria, Ohio (1) Headquarters for All American 50,000 May 2000
Sports Corporation
reconditioning operations and
customer service
San Antonio, Texas(2) Reconditioning 27,000 October 2003
Stroudsburg, Reconditioning and shoulder 44,000 October 2001
Pennsylvania(2) pad customizing
Belton, Missouri Reconditioning 6,600 December 1999
Buffalo, New York Warehouse 6,400 vacated February,
1999
Burgettestown, Reconditioning 17,000 September 2013
Pennsylvania
Franklin Park, Illinois Reconditioning 16,000 June 2000
Fort Valley, Georgia(3) Reconditioning 15,000 October 1999
Ft. Erie, Ontario, Reconditioning 5,000 September 1999
Canada
New Rochelle, New Reconditioning 23,000 January 2000
York
San Leandro, Reconditioning 19,600 July 2002
California
Somerville, Reconditioning 8,000 August 2000
Massachusetts
</TABLE>
- 23 -
<PAGE>
<TABLE>
<S> <C> <C> <C>
Memphis, Tennessee Headquarters for Varsity's 63,700 November 2000
Operations and
Manufacturing
Olive Branch, Warehouse 80,000 October 2000
Mississippi
Sunnyvale, California Office/Warehouse 10,030 November 2000
Decatur, Georgia Sport Gym 12,000 July 1999
Carrollton, Texas Sport Gym 11,050 January 2000
Bellaire, Texas Office 2,984 November 2000
</TABLE>
------------------
(1) The Company has entered into a "build and lease" agreement with a new
Landlord under which the Company will lease a new 72,000 square foot
facility beginning in October, 1999 for a period of 15 years. The new
landlord has agreed to assume liability for the remainder of the
existing lease after October 1999.
(2) Lease renewable at the Company's option for three years.
(3) Lease renewable at the Company's option for four years.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries from time to time become involved in
various claims and lawsuits incidental to their businesses including without
limitation, employment related, product liability and personal injury
litigation. See Item I "Product Liability Proceedings and Insurance."
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock was quoted on the The Nasdaq National
Stock Market System under the symbol RIDL in 1997 and through November 20,
1998. Commencing November 23, 1998 the Company's Common Stock was listed on
the American Stock Exchange under the symbol RDL. As of March 18, 1999, there
were approximately 828 holders of record of the Company's Common Stock. The
following table sets forth the high and low sales prices for the Common Stock
as reported by the NASDAQ-NMS for 1997 and through November 23, 1998, and as
reported by the American Stock Exchange for the rest of 1998:
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<PAGE>
High Low
---- ---
Year Ended December 31, 1996:
First Quarter 5 7/8 2 7/8
Second Quarter 6 1/8 4 1/16
Third Quarter 5 1/2 4 1/4
Fourth Quarter 5 1/2 4 1/4
Year Ended December 31, 1997:
First Quarter 5 1/2 3 7/8
Second Quarter 5 7/8 3 5/8
Third Quarter 6 4 5/16
Fourth Quarter 5 3/8 3 7/8
Year Ended December 31, 1998:
First Quarter 5 5/8 4
Second Quarter 6 3/8 4 7/8
Third Quarter 5 3 3/4
Fourth Quarter 6 5/8 2 5/8
The closing sale price of the Common Stock on December 31, 1998 was
$5 5/8.
Dividend Policy
Since its inception, the Company has not declared or paid, and does
not currently intend to declare or pay, any dividends on shares of its Common
Stock, and intends to retain future earnings for reinvestment in its business.
Any future determination to pay cash dividends will be in the discretion of
the Board of Directors and will be dependent upon the Company's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by the Board of Directors. The Company's financing
arrangements under its revolving credit facility and the Senior Notes impose
restrictions on the Company's ability to pay cash dividends or make other
distributions on its Common Stock.
- 25 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related notes
included elsewhere in this report.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Operating Data (1) Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues ...................... $ 186,600 $ 138,273 $ 72,382 $ 67,043 $ 55,412
Cost of revenues .................. 113,541 80,675 38,813 35,794 29,792
--------- --------- --------- --------- ---------
Gross profit ...................... 73,059 57,598 33,569 31,249 25,620
Selling, general and administrative
expenses (2) ...................... 64,617 46,278 27,853 25,983 28,614
Other charges ..................... 925 -- -- -- 1,188
--------- --------- --------- --------- ---------
Income (loss) from operations ..... 7,517 11,320 5,716 5,266 (4,182)
Interest expense .................. 14,656 11,879 2,763 2,795 2,001
--------- --------- --------- --------- ---------
Income (loss) before taxes,
extraordinary item and cumulative
effect of changes in accounting
principles ........................ (7,139) (559) 2,953 2,471 (6,183)
Income taxes (credits) ............ -- -- 110 100 (1,250)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
item (3) .......................... $ (7,139) $ (559) $ 2,843 $ 2,371 $ (4,933)
========= ========= ========= ========= =========
Earnings (loss) per share before
extraordinary item:
Basic ....................... $ (0.78) $ (0.07) $ 0.35 $ 0.29 $ (0.62)
Diluted ..................... $ (0.78) (0.07) 0.33 0.29 (0.62)
</TABLE>
- 26 -
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data (1) (4) December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital ............ $ 37,963 $ 37,599 $ 25,957 $ 19,286 $ 11,036
Total assets ............... 186,211 181,761 76,361 74,125 72,252
Long-term debt, less current
portion .................... 126,900 122,500 29,984 23,600 20,168
Shareholders' equity ....... 25,451 32,125 27,745 24,902 24,431
</TABLE>
- ----------------------------------------
1) In June 1997 the Company acquired Varsity Spirit Corporation.
2) In 1994 selling, general and administrative expenses included an
adjustment to record a $4.6 million charge for a product liability
litigation loss.
3) An extraordinary item in 1995 consisted of a $1,900,000 ($0.23 per
share) provision for costs relating to fraudulent transfer litigation.
4) See Note 11 to the Company's consolidated financial statements relating
to contingent liabilities.
- 27 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Overview
The Company acquired Varsity Spirit Corporation ("Varsity") on June
19, 1997. The Varsity acquisition significantly increased the size of the
Company's business and significantly changed the Company's financial
structure. Varsity's operations include the design and marketing of
cheerleader and dance team uniforms and the operation of cheerleader and dance
team camps, clinics and special events. These operations have become a part of
the Company's institutional products and services segment.
The Varsity acquisition significantly increased the size of the
Company's business. On a pro forma basis, revenue for the Company combined
with Varsity was $174.1 million, more than double the Company's 1996
historical stand alone revenues for the year before the Acquisition. Revenues
have since grown to $186.6 million for 1998.
The Company's historical operating results for 1997 and 1996 do not
include Varsity's operations for the portion of the periods before the Varsity
acquisition. This makes comparisons of operating results less meaningful. In
order to overcome this limitation, the discussion and analysis that follow is
based on comparisons to operating results for 1997 and 1996 adjusted on a pro
forma basis to include Varsity's results for the period before the acquisition
and other matters related to the Varsity acquisition. The pro forma
adjustments are described in Note 2 of the Consolidated Financial Statements
included in this report.
Operations for 1998 resulted in a net loss of $7.1 million. While the
Company achieved satisfactory performance in its core institutional business
it incurred a loss of $1.5 million relating to several new product initiatives
and suffered from weak performance in its retail and licensing segments. The
Company also incurred costs of $3.1 million relating to certain strategic
changes being undertaken to improve future profitability. These factors are
discussed in greater detail in the following paragraphs and comparisons.
The loss of $1.5 million from new initiatives within the Company's
institutional segment included start up operations for a new line of team
soccer apparel, equipment and footwear to be marketed under the newly acquired
license to use the Umbro trademark in the United States; entry into new areas
of the school and private dance studio dance market including the Co. Dance
program; and the introduction of athletic game uniforms. These activities were
unprofitable during 1998 due to start up costs and because some activities
were started too late in the year to generate enough revenues to offset the
costs. The Company believes that the losses incurred for these activities are
valuable investments in the future and views these areas as important to its
future growth potential.
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<PAGE>
Operations for 1998 were also impacted by lower profits from the
trademark licensing and retail product segments. Licensing declined as the
Company's license to Kmart for MacGregor branded apparel and bags was not
renewed when it expired in June 1998, although the license was renewed for
other products. Profitability of the retail segment decreased due to a decline
in sales of sports collectible products.
The Company also initiated a series of strategic actions in late 1998
which it believes will assist in facilitating future profitability. These
actions include the implementation of a restructuring plan involving the
consolidation of several of its reconditioning facilities and the elimination
of approximately 40 jobs including two senior positions. Together these
actions led to a $925,000 restructuring charge in 1998. The charge includes a
provision of $800,000, included in accrued liabilities at December 31, 1998,
for certain lease termination and employee severance costs, most of which will
be expended during 1999. The restructuring actions are expected to yield
annual savings of over $1.0 million after 1999, once facility closures are
completed and new centralized operations are fully implemented.
Other strategic actions generated additional charges in excess of
$2.0 million in 1998. The charges include costs relating to changes in product
lines and marketing materials which are discussed further in the comparisons
of gross margins and selling, general and administrative expenses, below.
Several cost saving measures were also implemented late in 1998 as
part of the Company's strategic review. Areas which should generate future
savings include negotiated vender cost reductions, consolidation of general
insurance policies and a move of the Company's corporate offices in New York
City to smaller, less costly space. The Company believes these cost savings
actions, combined with the benefits from the above mentioned restructuring
plan, should reduce the Company's costs by $2.0 to $3.0 million annually in
1999 and future years.
Year Ended December 31, 1998 compared to Pro forma Year Ended December 31, 1997
Revenues
Revenues for 1998 increased $12.5 million, or 7%, to $186.6 million
in comparison to pro forma revenues of $174.1 million for 1997.
All of the Company's revenue gains came from the Institutional
segment where revenues increased 9% or $13.2 million, from $153.6 million on a
pro forma basis for 1997 to $166.8 million for 1998. Increased volume in
cheerleading and dance uniform and accessory products accounted for the
largest part of this revenue increase, registering a sales increase of $7.1
million, with most of the gain occurring in the line's core products. In
addition, camp and event revenue increased $3.7 million primarily due to a
strong increase in special event attendance. Athletic product volume increased
$2.4 million due largely to expanded offerings of athletic practice wear and a
new emphasis on the youth football market where sales had previously been
declining in recent years.
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<PAGE>
Revenues from the Retail segment were relatively stable with 1998
revenues of $18.1 million compared to 1997 revenues of $18 million. Sales of
athletic products to recreational team dealers and distributors increased,
offsetting declines in the sales of sports collectible products. Sales of
sports collectible products decreased due to lower demand for certain products
introduced in recent years such as miniature hockey and baseball helmets.
Royalty income from trade trademark licensing decreased by $0.8
million to $1.6 million in 1998 in comparison to trademark licensing royalties
of $2.4 million in 1997. This decrease is attributable to the expiration in
June 1998 of a license for MacGregor branded apparel and bags with Kmart.
Gross Profit
Gross profit for 1998 increased to $73.1 million from $71.0 million
on a pro forma basis for 1997. Gross margins decreased as a percentage of
sales to 39.2% for 1998 from 40.8% on a pro forma basis for 1997. Gross
profits were impacted by a 1998 charge to reflect product line changes and
other strategic decisions which affected the realizable value of inventories.
This charge, along with the decrease in royalty income discussed above,
accounted for most of the decline in margins. Margins were also impacted by a
shift in the mix of products sold as most of the year's revenue gains occurred
in product lines that carry lower margins than the average of the Company's
other products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1998 increased by
$1.6 million to $64.6 million from $63.0 million on a pro forma basis for
1997. In addition to a normal level of growth related increases, expenses for
1998 included charges taken late in the year relating to strategic changes in
product lines and marketing materials as discussed above and over $2.0 million
of expenses related to the new initiatives mentioned in the overview above.
Selling, general and administrative expenses decreased as a
percentage of sales to 34.6% for 1998 from 36.2% on a pro forma basis for
1997. However, 1997 expenses included unusual expenses from the Varsity
acquisition and the settlement of certain non-product liability litigation as
discussed below in the comparison of 1997 to 1996.
Interest Expense
Interest expense for 1998 increased 3%, or $0.4 million over 1997
interest computed on a pro forma basis. The increase is due to a higher level
of working capital indebtedness during the year.
Income Taxes
The Company did not recognize income tax benefits arising from the
1998 net loss. The unrecognized tax benefits, together with unrecognized tax
benefits arising from net operating losses
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<PAGE>
in prior years, would be utilized with the generation of approximately $7.0
million in future pre-tax income and adjustments.
The Company has certain nondeductible annual expenses which would be
added as adjustments to pretax income to calculate taxes. These expenses
include nondeductible amortization of approximately $2.1 million, most of
which arises from goodwill associated with the Varsity acquisition.
Pro Forma Year Ended December 31, 1997 Compared to
Pro Forma Year Ended December 31, 1996
Revenues
Pro forma revenues for the year ending December 31, 1997 increased
$13.3 million, or 8%, to $174.1 million from $160.8 million in 1996. The
Company achieved revenue gains in its Institutional segment while experiencing
offsetting declines in the Retail and Licensing segments.
Institutional segment revenues increased 12%, or $16.7 million, from
$136.9 million on a pro forma basis for 1996 to $153.6 million on a pro forma
basis for 1997. Most of the gains related to the operations acquired from
Varsity. Uniforms and accessories sales increased by $7.0 million due to
volume growth. Growth in the number of summer camp participants contributed an
additional $6.0 million to camp and event revenues. Institutional sales of
athletic products and reconditioning services increased $3.7 million as the
Company experienced volume gains from its newly introduced line of athletic
practice clothing and from most of its core football protective product lines.
These gains more than offset a decline in sales of youth athletic products.
Retail segment revenues declined by 15%, or $3.3 million, from $21.4
million for 1996 to $18.1 million for 1997. The decline was principally due to
decreased volume of sports collectible products. The Company believes the
principal reasons for the decline related to an industry-wide cautiousness in
making inventory commitments for licensed sports products.
Royalty income Licensing in 1997 decreased by 4%, or $0.1 million.
The Company recognized gains in MacGregor royalties from Kmart and royalties
from its Riddell apparel and sock licenses. These gains were offset by royalty
declines due to the expiration of a MacGregor license with Thom McAn which had
generated $0.3 million in prior years and the cessation of royalty receipts
from the Company's Riddell footwear licensee. As described elsewhere in this
report, the Company has assigned certain future royalties from its Riddell
footwear licensee, for up to ten years, to other parties to settle certain
litigation. While the license has recently been transferred to a new licensee,
the assignment remains in place.
Gross Profit
Pro forma gross profit for 1997 was $71.0 million, an increase over
pro forma gross profit of $68.4 million for 1996. Gross margins, on a pro
forma basis, decreased as a percentage of revenues to 40.8% in 1997 from 42.5%
for 1996. There were several factors which influenced the
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<PAGE>
decline in gross margin rates. Pro forma gross profit was reduced by $0.8
million of charges stemming from a revaluation of inventory in June 1997 and
included in Varsity's preacquisition results. There was an increase in freight
and overtime costs incurred in the Institutional segment's cheerleading
uniform business in order to overcome certain production delays which occurred
during the year. The decline in sales of sports collectibles discussed above
significantly impacted gross profit and the margins as these products carried
higher than average margins. Sales of the Company's new line of practice wear
reduced gross margins, as expected, since these products carry a lower margin
than the Company's historical product lines. Introduction of the practice wear
line also negatively impacted 1997 margins due to start up costs of related
screen printing operations and introductory pricing. Finally, while the volume
of the Company's reconditioning business increased, margins were down due to
higher costs associated with the initial year of reconditioning work on
equipment from new customers gained during the year and an increase in
material and parts usage.
Selling, General and Administrative Expenses
On a pro forma basis, selling, general and administrative expenses
for 1997 increased by $7.6 million to $63.0 million from pro forma expenses of
$55.5 for 1996. Expenses relating to various litigations (exclusive of product
liability matters) that were resolved during 1997 amounted to $2.8 million for
1997 and $1.2 million for 1996. Expenses for 1997 also included a charge of
$0.6 million relating to in-the-money Riddell stock options contractually
granted to certain of the Company's employees who previously were employed by
Varsity (as further discussed in Note 9 of the Consolidated Financial
Statements) and a charge of $0.4 million stemming from a revaluation of
receivable reserves in June 1997 that was included in Varsity's preacquisition
results. Pro forma selling, general and administrative expenses excluding
these items were relatively stable as a percentage of revenues, increasing
from 33.7% of revenues for 1996 to approximately 34.0% of revenues in 1997.
Interest Expense
Interest expense computed on a pro forma basis for 1997 increased 2%,
or $0.2 million over pro forma 1996 levels. The increase was principally due
to increases in base interest rates relating to the Company's revolving line
of credit. Historical interest expense, excluding any pro forma adjustments
for 1997, included a $3.0 million onetime commitment fee for bridge financing
relating to the Varsity acquisition.
Income Taxes
The pro forma net loss for 1997 did not include any tax benefit. Pro
forma tax expense for 1996 was reduced by the benefit of net operating loss
carryforwards available for recognition during the year. Even though the pro
forma operating results for 1996 resulted in a loss before taxes, tax expense
of approximately $0.6 million would have been included if net operating loss
carryforwards had not been available to offset the expense. The tax would have
been due to adjustments for nondeductible expenses, as discussed above in the
1998 to 1997 comparison of operating results.
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<PAGE>
MacGregor Trademark
The Company acquired certain rights to the MacGregor trademark as
part of an acquisition in 1988 at an allocated cost of approximately $18.0
million. The Company is amortizing the trademark rights over a period of forty
years. The unamortized cost of this asset included in intangible assets at
December 31, 1998 was approximately $13.2 million. ( See Note 7 of the
Consolidated Financial Statements). The Company 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 the Company'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 the Company's financial position and
results of operations.
Liquidity and Capital Resources
Several factors affect the seasonality of the Company's working
capital needs. A significant portion of the products in the Company's
Institutional segment are sold throughout the year on dated payment terms,
with related receivables becoming due during the following July to October
period when the school year begins. The Company incurs costs relating to its
camp business from the fourth quarter and into the second quarter 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
semiannual interest payments on its $115 million of 10.5% Senior Notes come
due each January and July.
To finance these seasonal working capital demands, the Company
maintains a credit facility consisting of a revolving line of credit. 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. At December 31, 1998, the outstanding
balance under the credit facility was $4.4 million. There were no outstanding
borrowings at December 31, 1997 under the credit facility.
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 the Company's control.
Furthermore, due to the seasonality of working capital demands described
above, year over year growth in the Company's business and working capital
could lead to higher debt levels in future periods until the fall of each year
when the majority of dated receivables are collected.
The Company has been in discussions with its bankers, keeping them
informed of its operating results including the strategic changes to its
business made in 1998 and the related impact on profitability and working
capital demand. The Company has obtained modifications to its loan agreement
which included changes to certain financial covenants at December 31, 1998.
Discussions with its bankers remain ongoing regarding similar modifications
for future periods as
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<PAGE>
well as an increase in the revolving line above the current maximum of $35
million. Increases in the line of credit are being sought to provide working
capital needed for new initiatives, primarily products to be marketed under
the new Umbro license. Based upon past experience and its relationship with
its bankers, and based upon discussions to date, the Company believes that it
will be able to obtain modifications to its loan agreements to provide for
these needs.
Year 2000 Issues
The Company, like virtually all companies and organizations, is faced
with addressing the Year 2000 issue which relates to the possibility that
computer systems and embedded computer chips may not be able to properly
process data which utilizes dates after December 31, 1999.
The most significant Year 2000 issues facing the Company are
associated with the computer information systems used to plan, operate and
track its business. The Company has substantially completed the process of
assessing which of its information systems are subject to Year 2000 problems.
The status of corrective action being taken to minimize the impact of Year
2000 problems on each of the Company's four major computer information systems
is as follows:
Helmet manufacturing and Retail segment operations: Year 2000 issues
are being addressed through a program to replace existing hardware and
software. The system replacement is part of an program, initiated in early
1997, to modernize this system and upgrade its capabilities. Thirty-three
percent of the subsystems have been fully implemented and are now operational.
Testing of parts of the remainder of the system has commenced and the
implementation of the system is scheduled for completion in the second quarter
of 1999.
Institutional athletic product distribution and reconditioning
operations: Existing system software was upgraded and modified to address Year
2000 issues. The process is complete and in the fourth quarter of 1998 the
system was tested and certified by the vendor as Year 2000 compliant.
Spirit products: Year 2000 issues are being addressed through a
program to replace existing software. The software replacement is also part of
an overall upgrade of system capabilities. The software has been installed and
the implementation process is underway. Completion of the implementation
process is scheduled for the second half of 1999.
Camps and events: Year 2000 issues are being addressed through
corrective modifications of existing software. This process began in 1997 and
is estimated to be 85% to 90% complete. The remainder of the corrections and
Year 2000 testing of the system, are scheduled for completion in the third
quarter of 1999.
The Company has other minor systems relating to its business for
which Year 2000 corrective action is in various stages of completion.
The Company also faces Year 2000 problems relating to embedded
computer chips which control equipment used within the business such as
telephone equipment and a limited amount of machinery. The Company has
completed assessments of equipment considered most susceptible to
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<PAGE>
Year 2000 issues and repair or replacement has been arranged for equipment
found to have Year 2000 problems. The process of assessing the remaining
equipment remains ongoing.
The Company also faces Year 2000 issues with third parties. These
third parties include customers who purchase the Company's retail products and
suppliers of raw materials and finished goods, among others. The Company's
institutional products and services are sold to a large number of schools and
other customers, making it impractical to poll them in order to determine
their Year 2000 readiness. Because this customer base is large, the potential
of a negative impact may be lowered as none of these customers individually
account for a material portion of the Company's revenues. The Company has had
discussions with certain other key customers and vendors on this issue in
order to assess the impact their Year 2000 problems might have on the Company
and plan accordingly. However, the process of communications with key
customers and vendors remains ongoing.
Expense for Year 2000 remedial programs for the years ended December
31, 1997 and 1998 was $200,000 and $250,000, respectively. A similar level of
annual expense is anticipated for 1999. The Company has also incurred capital
expenditures for computer hardware and software related to the system
replacements described above of approximately $150,000 and $800,000 for the
years ended December 31, 1997 and 1998, respectively. These capital
expenditures include system upgrade and modernization aspects of the
replacement programs. Approximately $650,000 of similar capital expenditures
are anticipated for 1999.
The Company's remedial actions are intended to reduce the possibility
of a disruption of the Company's business due to Year 2000 issues. While the
Company believes these actions will be successful, the issues involved are
full of complexities and uncertainties so there can be no assurance that a
disruption of its business will not occur. If a material disruption of the
Company's business were to occur it could have a material adverse impact on
the Company's results of operations, liquidity and financial condition.
At present, the Company's Year 2000 efforts have been directed toward
the goal of reducing or eliminating the potential for Year 2000 problems. The
Company has not yet established a contingency plan that provides for alternate
procedures should any of its primary efforts fail. The Company does intend to
develop contingency plans as it assesses its progress during the remainder of
1999.
Readers are cautioned that forward-looking statements contained in
the Year 2000 disclosure should be read in conjunction with the Company's
Special Cautionary Notice Regarding Forward-Looking Statements located at the
beginning of this Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) in Part IV and page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
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<PAGE>
None.
PART III
The Registrant hereby incorporates by reference in response to Part
III its Proxy Statement to be filed pursuant to Regulation 14A by April 30,
1999 (except to the limited extent the rules and regulations of the Commission
authorize certain sections of such Proxy Statement not to be incorporated
herein by reference, as specifically indicated in such Proxy Statement).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) and (a) (2) Financial Statements and Schedules to Financial
Statements
The financial statements, notes thereto, financial statement
schedules and accountants' report listed in the "Index to
Financial Statements" on page F-1 of this Report are filed
as part of this Report.
(a)(3) Exhibits
The exhibits listed in the Exhibit Index attached to this
Report are filed as part of this Report.
(b) Reports on Form 8-K
The Company filed a form 8-K on November 23, 1998, dated the
same date with respect to the commencement of trading of the
Company's Common Stock on the American Stock Exchange.
The Company filed a form 8-K on December 1, 1998 dated
November 24, 1998, with respect to the entering into of the
license agreement with UMBRO International, Inc., the entering
into of the expense sharing arrangement with Signal Apparel
Company, Inc. and the resignation of an executive officer.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 30, 1999 By: /s/ DAVID MAUER
----------------------------
David Mauer
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ DAVID MAUER Chief Executive Officer March 30, 1999
- ------------------------------------ and Director
David M. Mauer (Principal Executive Officer)
/s/ ROBERT NEDERLANDER Chairman of the Board March 30, 1999
- ------------------------------------
Robert Nederlander
/s/ JEFFREY G. WEBB Vice Chairman of the Board March 30, 1999
- ------------------------------------ and President and Chief
Jeffrey G. Webb Operating Officer of
Varsity Spirit Corporation
/s/ LEONARD TOBOROFF Vice President and Director March 30, 1999
- ------------------------------------
Leonard Toboroff
/s/ DAVID GROELINGER Executive Vice President and March 30, 1999
- ------------------------------------ Chief Financial Officer
David Groelinger (Principal Financial Officer)
/s/ LAWRENCE SIMON Senior Vice President March 30, 1999
- ------------------------------------ (Principal Accounting Officer)
Lawrence Simon
/s/ DON KORNSTEIN Director March 30, 1999
- ------------------------------------
Don Kornstein
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<PAGE>
/s/ JOHN MCCONNAUGHY, JR. Director March 30, 1999
- ---------------------
John McConnaughy, Jr.
/s/ GLENN E. SCHEMBECHLER Director March 30, 1999
- ----------------------
Glenn E. Schembechler
- --------------------- Director March ___, 1999
Arthur N. Seessel
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<PAGE>
Item 14(c) PART IV
Exhibit Index
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1 Asset Purchase Agreement, dated as of April 11, 1988, among
Riddellink Holding Corporation, EN&T Associates, Inc.,
Netlink Inc., Riddell, Inc. (predecessor corporation),
Equilink Licensing Corp., and MacGregor Sporting Goods, Inc.,
as amended on April 18, 1988 (the formal trademark
assignments and license agreements implementing this
agreement are omitted) (2) and Amendment thereto, dated March
1992. (3)
2.2 Agreement and Plan of Merger, dated as of May 5, 1997, by and among Riddell
Sports Inc., Cheer Acquisition Corp. and Varsity Spirit Corporation. (31)
2.3 Asset Purchase Agreement dated as of December 1, 1994 by and between Intropa
International U.S.A., Inc., Elisabeth Polsterer and Varsity/Tours, Inc. (27)
2.4 Asset Purchase Agreement dated as of May 15, 1996 by and between United
Special Events, Inc., Michael Olmstead and Varsity USA, Inc. (26)
3.1 Amended and Restated Articles of Incorporation of Riddell Sports Inc. (20)
3.2 First Amended and Restated Bylaws of Riddell Sports Inc. (18)
3.3 Certificate of Incorporation of All American Sports Corporation (formerly known
as Ameracq Corp). (33)
3.4 Bylaws of All American Sports Corporation (formerly known as Ameracq Corp).
(33)
3.5 Certificate of Incorporation of Cheer Acquisition Corp. (33)
3.6 Bylaws of Cheer Acquisition Corp. (33)
3.7 Certificate of Incorporation of Equilink Licensing Corporation. (33)
3.8 Bylaws of Equilink Licensing Corporation. (33)
3.9 Certificate of Incorporation of Proacq Corp. (33)
3.10 Bylaws of Proacq Corp. (33)
3.11 Certificate of Incorporation of RHC Licensing Corporation. (33)
3.12 Bylaws of RHC Licensing Corporation. (33)
3.13 Amended and Restated Articles of Incorporation of Riddell, Inc. (formerly
known as EN&T Associates Inc.). (33)
3.14 Bylaws of Riddell, Inc. (formerly known as EN&T Associates Inc.). (33)
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
3.15 Amended and Restated Articles of Incorporation of Ridmark Corporation. (33)
3.16 Bylaws of Ridmark Corporation. (33)
3.17 Charter of International Logos, Inc. (33)
3.18 Bylaws of International Logos, Inc. (33)
3.19 Charter of Varsity/Intropa Tours, Inc. (33)
3.20 Bylaws of Varsity/Intropa Tours, Inc. (33)
3.21 Amended and Restated Charter of Varsity Spirit Fashions & Supplies, Inc. (33)
3.22 Bylaws of Varsity Spirit Fashions & Supplies, Inc. (33)
3.23 Amended and Restated Charter of Varsity USA, Inc. (33)
3.24 Bylaws of Varsity USA, Inc. (33)
4.1 Indenture, dated as of June 19, 1997, between Riddell,
certain subsidiaries of Riddell Sports Inc., as guarantors,
and Marine Midland Bank, as Trustee. (23)
9.1 Voting Trust Agreement dated May 1991. (2)
10.1 Settlement Agreement, dated April 9, 1981, among McGregor-Doniger Inc.,
Brunswick Corporation and The Equilink Corporation. (2)
10.2 1997 Stock Option Plan. (22)
10.3 License Agreement, dated as of April 18, 1988, among MacMark Corporation,
Netlink, Inc. and MacGregor Sporting Goods, Inc. (2) as amended July 30, 1992
(16) and November __, 1992. (16)
10.4 Agreement, made January 23, 1989, between Equilink Licensing Corp. and
Kmart Corporation, with supplemental agreements dated November 16, 1989,
August 30, 1990 (2), June 30, 1994 (12) and June 30, 1998 . (1)
10.5 Lease, dated November 12, 1993, between the International Brotherhood of
Painters and Allied Trade Union and Industry Pension Fund and Riddell, Inc.,
(16); and amendment dated March 20, 1995 (16); and Amendment dated
September 19, 1996. (21)
10.6 Lease Agreement, dated November 2, 1984 by and between ADI Real Estate
Joint Venture No. 2 (predecessor to The School Employees Retirement Board of
Ohio) and Alamo Athletics Inc. (predecessor to All American Sports
Corporation), and Amendments thereto, dated January 30, 1990. (3)
10.7 Lease Agreement, dated as of September 1, 1988 by and between Exeter
Management Corporation and All American. (3)
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.8 Lease Agreement, dated April 1991, by and between Stroudsburg Park
Associates and All American Corp. (3); as amended March 31, 1995. (18)
10.9 Lease, dated as of September 1, 1968, by and between Munro M. Grant and the
All American Company and Extension and Amendment of Lease, dated July 11,
1989. (3)
10.10 Lease dated December 12, 1991, between O'Shanter Resources Inc. and All
American Sports, Inc. (3)
10.11 Lease, dated May 5, 1986, by and between Paul Goldstein,
Nathan Hoffenberg, All American and Medalist Industries, (3);
amendment dated January 30, 1997. (21)
10.12 Lease, dated October 28, 1987, as amended and extended by letter dated October
31, 1991, by and between GABT Developments Ltd. and Marcan Ltd. (a division
of All American ), (3); amendment dated February 6, 1997. (21)
10.13 NFL Promotional Rights Agreement, dated June 1, 1990, and General Retail
Licensing agreement dated March 15, 1990 and referred to in the NFL
Promotional Rights Agreement, each between Riddell Inc. and the National
Football League Properties, Inc. (2); as supplemented January 20, 1994. (9)
10.14 1991 Stock Option Plan (2) as amended by amendments described in Riddell
Sports Inc.'s proxy materials for its annual stockholders meetings held on August
20, 1992, September 30, 1993, June 27, 1996 and June 24, 1997.
10.15 License Agreement dated May 9, 1991 between MacMark
Corporation and MacGregor Sports Products, Inc. (2);
amendment dated February 1992 (3), amendment dated July 30,
1992, amendment dated November 1, 1992 (7) and Memorandum of
Understanding dated July 29, 1996 (21).
10.16 Perpetual License and Trademark Maintenance Agreements among MacMark
Corporation, Equilink Licensing Corporation and BSN Corp. each dated
February 19, 1992 (3) and amendment dated November 1, 1992 (7).
10.17 Master Agreement by and among MacGregor Sports Products, Inc., BSN Corp.
and MacMark Corporation dated February 19, 1992 (3); amendment No. 1 dated
November 1, 1992. (16)
10.18 License Agreement between Equilink Licensing Corporation and MacGregor
Sports Products, Inc. dated May 9, 1991; Amendment thereto dated December 3,
1991 (3) and Amendment dated July 30, 1992 (5); Memorandum of
Understanding dated July 20, 1996 (21).
10.19 Agreement, dated April 1, 1995, between Riddell, Inc. and the Amalgamated
Clothing Textile Workers Union AFL-CIO. (18)
</TABLE>
- 41 -
<PAGE>
<TABLE>
<S> <C>
10.20 Employment Agreement, dated June 22, 1992, between Riddell Sports Inc. and
Robert F. Nederlander (5); amended July 27, 1994 (12).
10.21 Employment Agreement, dated June 22, 1992, between Riddell Sports Inc. and
Leonard Toboroff (5); amended July 27, 1994. (12)
10.22 Lease, dated September 10, 1992, and Amendment, dated October
1, 1992, and Amendment, dated October 22, 1992, between All
American Sports Corporation and Ronald K. Howell d/b/a
Lakewood Land and Cattle Company. (6)
10.23 Lease Addendum letter, dated February 13, 1992, between All American Sports
Corporation and Paul Goldstein and Nathan Hoffenberg. (6)
10.24 License Agreement, dated October 1, 1992, between All American Sports
Corporation and NOCSAE. (7)
10.25 Employment Agreement, dated March 19, 1993, commencing March 25, 1993
between David Mauer and Riddell Sports Inc. (7), as amended January 17, 1994;
November 1, 1994 (14); November 28, 1994 (16)
10.26 Warrant to purchase 150,000 shares of Riddell Sports Inc.'s Common Stock in
favor of M.L.C. Partners Limited Partnership, dated January 16, 1994. (8)
10.27 Settlement agreement, dated February 15, 1994, among Riddell,
Inc., Riddell Sports Inc., RHC Licensing Corporation, Ridmark
Corporation, Pursuit Athletic Footwear, Inc., Riddell
Athletic Footwear, Inc., Ernie Wood, Harry Wood, Silver Eagle
Holdings, Ltd., Save Power, Limited, Extravest Holdings
Limited, Frederic Brooks, Donald Engel, Alan Tessler, Alan
Hirschfield, Jeffrey Steiner, Robert Nederlander, Leonard
Toboroff, Jeffrey Epstein, John McConnaughy, Connecticut
Economics Corporation, Stephen Tannen, Woodco Sports, Inc.,
Arthur Tse, Silver Top Limited, Billion Nominees, Limited,
Weston Holdings Limited. (9)
10.28 Employment Agreement, dated as of February 1, 1994, between Riddell, Inc., and
Dan Cougill (11), as amended February 1, 1995. (17)
10.29 Warrant to Purchase Common Stock in favor of NBD Bank N.A., dated February
10, 1995. (15)
10.30 Employment Agreement, dated as of March 7, 1996, between
Riddell Sports Inc. and David Groelinger (19), as amended
March 7, 1998 (34).
10.31 Note Purchase Agreement, dated October 30, 1996, between Riddell Sports Inc.
and Silver Oak Capital, L.L.C., as amended by letter agreement dated May 2,
1997. (20)
10.32 Subordinated Guaranty, dated November 8, 1996, among Riddell, Inc., Equilink
Licensing Corporation, and RHC Corporation, All American Sports Corporation,
Ridmark Corporation, Proacq Corp. and SharCo Corporation. (20)
</TABLE>
- 42 -
<PAGE>
<TABLE>
<S> <C>
10.33 Registration Rights Agreement, dated November 8, 1996, between Riddell Sports
Inc. and Silver Oak Capital L.L.C. (20)
10.34 Shareholders Agreement, dated as of May 5, 1997, between Riddell Sports Inc.,
Cheer Acquisition Corp. and certain shareholders of Varsity Spirit Corporation.
(32)
10.35 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell Sports
Inc., Cheer Acquisition Corp. and Jeffrey G. Webb (32)
10.36 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell Sports Inc.
and Gregory C. Webb (32)
10.37 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell Sports Inc.
and W. Kline Boyd (32)
10.38 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell Sports Inc.
and J. Kristyn Shepherd (32)
10.39 Employment Agreement, dated as of May 5, 1997, between Riddell Sports Inc.
and Jeffrey G. Webb (32)
10.40 Employment Agreement, dated as of May 5, 1997, between Riddell Sports Inc.
and Gregory C. Webb (32)
10.41 Employment Agreement, dated as of May 5, 1997, between Riddell Sports Inc.
and W. Kline Boyd (32)
10.42 Employment Agreement, dated as of May 5, 1997, between Riddell Sports Inc.
and J. Kristyn Shepherd (32)
10.43 Registration Rights Agreement, dated as of June 19, 1997, between Riddell
Sports Inc., and NationsBanc Capital Markets, Inc. and First Chicago Capital
Markets, Inc., as Purchasers. (23)
10.44 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, dated
as of June 19, 1997 (23), as amended March 31, 1998 (35) and December 31,
1998. (1)
10.45 Sales Representative Agreement between Varsity Spirit Fashions & Supplies,
Inc. and Stuart Educational Products, Inc., along with Security Agreement
between Varsity Spirit Fashions & Supplies, Inc. and Gary Stuart and Patti
Stuart, both individually and collectively doing business as Stuart Educational
Products. (24)
10.46 Programming Agreement between Universal Cheerleaders Association and
ESPN, Inc. (24).
</TABLE>
- 43 -
<PAGE>
<TABLE>
<S> <C>
10.47 Varsity Spirit Corporation 401(k) Profit Sharing Plan. (26)
10.48 Employment Agreement, dated December 1, 1994, between Varsity Spirit
Corporation and Deana Roberts. (27)
10.49 Service Agreement dated as of May 15, 1996 between Varsity Spirit Corporation
and Michael Olmstead. (28)
10.50 Settlement Agreement, dated June 20, 1997, by and among
Riddell Sports Inc., RHC Licensing Corporation, Riddell,
Inc., Equilink Licensing Corporation, Ridmark Corporation,
MacMark Corporation, NBD Bank, f/k/a NBD Bank, N.A., MLC
Partners Limited Partnership, Robert E. Nederlander, Leonard
Toboroff, John McConnaughy, Jr., Lisa J. Marroni, Frederic H.
Brooks, Connecticut Economics Corporation, Robert Weisman,
Bruce H. Levitt, as Bankruptcy Trustee of M. Holdings
Corporation, Paul Swanson, as Bankruptcy Trustee of MGS
Acquisition, Inc. and MacGregor Sports, Inc., Official
Unsecured Creditors' Committee of MacGregor Sporting Goods,
Inc., M. Holdings Corporation, f/k/a MacGregor Sporting Goods
Inc., Innovative Promotions, Inc., Ernest Wood, Jr., Harry
Wood, Pursuit Athletic Footwear, Inc., and Riddell Athletic
Footwear, Inc. (33)
10.51 License Agreement dated March 4, 1998 between Footstar Corp. and Equilink
Licensing Corporation (34)
10.52 Umbro License Agreement, dated as of November 23, 1998, between Umbro
International, Inc. and Varsity Spirit Fashions & Supplies, Inc. (1)
10.53 Asset and USISL Stock Purchase Agreement, dated as of November 1998,
between Umbro International, Inc. and Varsity Spirit Fashions & Supplies, Inc.
(1)
10.54 Signal/Riddell Expense Sharing Arrangement dated November 23, 1998, between
Signal Apparel Company, Inc. and Riddell Sports Inc. (1)
10.55 Industrial Lease and Agreement dated October 1, 1998, between Laphiew Gin
Company and Varsity Spirit Corporation. (1)
21 List of subsidiaries. (33)
23 Consent of Grant Thornton LLP regarding Riddell Sports Inc. (1)
27 Financial data schedule for December 31, 1998 and the year then ended (1).
</TABLE>
- ------------------------
(1) Filed herewith.
(2) Incorporated by reference to Riddell Sports Inc.'s Registration Statement
on Form S-1 (Commission File No. 33-40488) effective June 27, 1991
(including all pre-effective amendments to the Registration Statement).
- 44 -
<PAGE>
<TABLE>
<S> <C>
(3) Incorporated by reference to Riddell Sports Inc.'s Form 10-K report (Commission
File No. 0-19298) for the year ended December 31, 1991.
(4) Incorporated by reference to Riddell Sports Inc.'s Registration Statement on Form S-
1 (Commission File No. 33-40488) effective June 17, 1992 (including all pre-
effective amendments to the Registration Statement).
(5) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q
report (Commission File No. 0-19298) for the quarter ended June
30, 1992.
(6) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q
report (Commission File No. 0-19298) for the quarter ended
September 30, 1992.
(7) Incorporated by reference to Riddell Sports Inc.'s Form 10-K report (Commission File
No. 0-19298) filed on March 30, 1993.
(8) Incorporated by reference to Riddell Sports Inc.'s Post Effective Amendment No. 2
to Form S-1 Registration Statement (Commission File No. 33-47884) filed on
January 28, 1994.
(9) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year ended
December 31, 1993.
(10) Incorporated by reference to Riddell Sports Inc.'s Form 10-K/A
constituting Amendment No. 1 to Form 10-K for the year ended
December 31, 1993, filed June 21, 1994.
(11) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for
the quarter ended March 31, 1994.
(12) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for
the quarter ended June 30, 1994.
(13) Incorporated by reference to Riddell Sports Inc.'s Form 8-K filed July 3,
1994.
(14) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for
the quarter ended
September 30, 1994.
(15) Incorporated by reference to Riddell Sports Inc.'s Form 8-K filed January 11, 1994.
(16) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year ended
December 31, 1994.
(17) Incorporated by reference to Riddell Sports Inc.'s Form 8-K dated June 23, 1995.
(18) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the year ended
December 31, 1995, dated November 11, 1996.
(19) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q dated May
14, 1996.
</TABLE>
- 45 -
<PAGE>
<TABLE>
<S> <C>
(20) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q
dated November 11, 1996.
(21) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for
the year ended December 31, 1996.
(22) Incorporated by reference to Riddell Sports Inc.'s Proxy
Statement filed June 6, 1997.
(23) Incorporated by reference to Riddell Sports Inc..'s Form 8-K dated June
19, 1997.
(24) Incorporated by reference to the Varsity Spirit Corporation's
Registration Statement
on Form S-1 (Registration Statement No. 33-44431) filed on December 10, 1991.
(25) Incorporated by reference to the Varsity Spirit Corporation's Amendment No. 1 to
Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed on
January 21, 1992.
(26) Incorporated by reference to the Varsity Spirit Corporation's
Annual Report on Form 10-K for the year ended March 31, 1993
(File No. 0-19790).
(27) Incorporated by reference to the Varsity Spirit Corporation's
Transition Report on Form 10-K for the transition period April 1,
1994 to December 31, 1994 (File No. 0- 19790)
(28) Incorporated by reference to the Varsity Spirit Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
(File No. 0-19790).
(29) Incorporated by reference to the Varsity Spirit Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996 (File No. 0-19790).
(30) Incorporated by reference to the Varsity Spirit Corporation's
annual Report on Form 10-K for the year ended December 31, 1996
(File No. 0-19790).
(31) Incorporated by reference to Riddell Sports Inc.'s Report on Form
8-K filed May 8, 1996.
(32) Incorporated by reference to Varsity Spirit Corporation Schedule
13D filed June 25, 1997.
(33) Incorporated by reference to Riddell Sports Inc.'s Registration
Statement on Form S- 4 (Registration No. 333-31525) filed July
18, 1997.
(34) Incorporated by reference to Riddell Sports Inc.'s Form 10-K
Report for the year ended 1997 (file No. 0-19298).
(35) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q dated May
15, 1998.
</TABLE>
- 46 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Report of Independent Certified Public Accountants.......................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1997 .................................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 ....................................................... F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 ................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ....................................................... F-6
Notes to Consolidated Financial Statements.................................................. F-7
Financial Statement Schedules
Report of Independent Certified Public Accountants on Schedule.......................... S-1
Schedule II - Valuation and Qualifying Accounts......................................... S-2
All other financial statement schedules are omitted as the required information is
presented in the financial statement or the notes thereto or is not necessary.
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Riddell Sports Inc.
We have audited the accompanying consolidated balance sheets of
Riddell Sports Inc. (a Delaware corporation) and Subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the management of Riddell Sports Inc. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Riddell Sports Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Chicago, Illinois
February 19, 1999, except for Note 17
as to which the date is March 16, 1999
F-2
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS (Note 8)
Current assets:
Cash .............................................................. $ 1,752 $ 1,011
Accounts receivable, trade, less allowance for doubtful
accounts ($1,302 and $824 respectively) (Note 4) ................ 28,016 26,425
Inventories (Note 5) .............................................. 28,763 24,066
Prepaid expenses .................................................. 6,493 6,800
Other receivables ................................................. 1,644 1,562
Deferred taxes (Note 12)........................................... 1,253 1,358
-------- ---------
Total current assets ...................................... 67,921 61,222
Property and equipment, less accumulated depreciation (Note 6) ....... 7,871 7,823
Intangible assets and deferred charges, less accumulated
amortization (Note 7) ............................................. 108,735 112,118
Other assets ......................................................... 1,684 598
-------- ---------
$186,211 $ 181,761
======== =========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable .................................................. $ 12,744 $ 8,377
Accrued liabilities (Note 11) ..................................... 11,253 10,717
Customer deposits ................................................. 5,961 4,529
-------- ----------
Total current liabilities ................................. 29,958 23,623
Long-term debt, less current portion (Note 8) ........................ 126,900 122,500
Deferred taxes (Note 12) ............................................. 348 453
Other liabilities (Note 11) .......................................... 3,554 3,060
Commitments and contingent liabilities (Notes 10 and 11)
Shareholders' equity (Note 9):
Preferred stock, $.01 par; authorized 5,000,000 shares; none issued -- --
Common stock, $.01 par; authorized 40,000,000 shares; issued
and outstanding 9,258,957 and 9,079,154 shares, respectively .... 93 91
Capital in excess of par .......................................... 36,849 36,386
Accumulated deficit ............................................... (11,491) (4,352)
25,451 32,125
-------- ---------
$186,211 $ 181,761
======== =========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
--------- ---------- -------
<S> <C> <C> <C>
Net revenues:
Net sales, products and reconditioning............................ $136,283 $103,583 $69,888
Camps and events.................................................. 48,704 32,302 -
Royalty income.................................................... 1,613 2,388 2,494
--------- ---------- ---------
186,600 138,273 72,382
--------- ---------- ---------
Costs of revenues:
Products and reconditioning....................................... 79,611 58,718 38,813
Camps and events.................................................. 33,930 21,957 -
--------- ---------- --------
113,541 80,675 38,813
--------- ---------- ---------
Gross profit......................................................... 73,059 57,598 33,569
Selling, general and administrative expenses......................... 64,617 46,278 27,853
Other charges........................................................ 925 - -
--------- ---------- --------
Income from operations............................................... 7,517 11,320 5,716
Interest expense (Note 8)............................................ 14,656 11,879 2,763
--------- ---------- ---------
Income (loss) before taxes and extraordinary item.................... (7,139) (559) 2,953
Income taxes......................................................... - - 110
--------- ---------- ---------
Net income (loss).................................................... ($7,139) ($559) $2,843
========= ========== =========
Earnings (loss) per share:
Basic .......................................................... ($0.78) ($0.07) $0.35
Diluted .......................................................... ($0.78) ($0.07) $0.33
Weighted average number of common and
common equivalent shares outstanding
Basic .......................................................... 9,134 8,585 8,068
Diluted......................................................... 9,134 8,585 8,730
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Retained
Common Stock Additional earnings Total
------------------ paid in (Accumulated Shareholders'
Shares Amount capital deficit) equity
------ ------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ........... 8,068 $ 81 $ 31,457 ($ 6,636) $ 24,902
Net income for the year ......... -- -- -- 2,843 2,843
-------- -------- -------- -------- --------
Balance, December 31, 1996 ......... 8,068 81 31,457 (3,793) 27,745
Compensation in connection
with option grants ............ -- -- 559 -- 559
Issuance of common stock upon
exercise of stock options ..... 25 -- 60 -- 60
Sale of common stock,
net of costs .................. 986 10 4,310 -- 4,320
Net (loss) for the year ......... -- -- -- (559) (559)
-------- -------- -------- -------- --------
Balance, December 31, 1997 ......... 9,079 91 36,386 (4,352) 32,125
Issuance of common stock
upon exercise of stock
options and warrants .......... 99 1 136 -- 137
Stock issued to employees ....... 81 1 327 -- 328
Net (loss) for the period ....... -- -- -- (7,139) (7,139)
-------- -------- -------- -------- --------
Balance, December 31, 1998 ......... 9,259 $ 93 $ 36,849 ($11,491) $ 25,451
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1998 1997 1996
--------- ---------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. ($7,139) ($559) $2,843
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization:
Amortization of debt issue costs.............................. 803 502 15
Other depreciation and amortization........................... 5,713 4,010 2,193
Stock options issued............................................ - 559 -
Compensation expense for stock issued to employees.............. 199 - -
Provision for losses on accounts receivable..................... 929 365 436
Change in assets and liabilities (net
of effects from acquisitions):
(Increase) decrease in:
Accounts receivable, trade.................................. (2,520) 6,426 (1,482)
Inventories................................................. (4,697) 1,400 (1,980)
Prepaid expenses............................................ 307 2,304 (10)
Other receivables........................................... (82) 975 199
Other assets................................................ 212 45 39
Increase (decrease) in:
Accounts payable............................................ 4,367 (4,010) (1,437)
Accrued liabilities......................................... 664 (502) (2,842)
Customer deposits........................................... 1,432 (6,167) (2,558)
Other liabilities........................................... 494 (987) -
--------- ---------- --------
Net cash provided by (used in) operating activities....... 682 4,361 (4,584)
--------- ---------- ---------
Cash flows from investment activities:
Capital expenditures.............................................. (2,494) (1,814) (1,139)
Acquisitions ................................................... - (91,245) -
Umbro license acquisition fee..................................... (500) - -
Other investments................................................. (1,298) - -
Contingent "earn-out" payments on prior acquisitions.............. (187) (166) (174)
--------- ---------- ---------
Net cash used in investing activities..................... (4,479) (93,225) (1,313)
--------- ---------- ---------
Cash flows from financing activities:
Net borrowings under line-of-credit agreement..................... 4,400 (17,890) (87)
Proceeds from issuance of long-term debt.......................... - 115,000 7,500
Debt issue costs.................................................. - (6,220) (761)
Principal payments on long-term debt:
Shareholders.................................................... - (439) (871)
Banks and other................................................. - (5,313) (142)
Proceeds from issuance of common stock............................ 138 4,380 -
--------- ---------- --------
Net cash provided by financing activities................... 4,538 89,518 5,639
--------- ---------- ---------
Net increase (decrease) in cash...................................... 741 654 (258)
Cash, beginning...................................................... 1,011 357 615
--------- ---------- ---------
Cash, ending......................................................... $1,752 $1,011 $357
========= ========== =========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies:
Principles of consolidation: The consolidated financial statements
include the accounts of Riddell Sports Inc. and its wholly-owned subsidiaries
(the "Company"). All significant intercompany accounts and transactions have
been eliminated.
Business: The Company 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
leading manufacturer and reconditioner of football protective equipment and the
leading supplier of products and services to the school spirit industry. The
Company also markets miniature and full-size helmets for collectors and licenses
the Riddell and MacGregor trademarks for use on athletic footwear and apparel.
The Company operates primarily throughout the United States.
Inventories: Inventories are stated at the lower of cost (determined
on a first-in, first-out basis) or market and include material, labor and
factory overhead.
Property and equipment: Property and equipment are stated at cost.
Depreciation is being computed using the straight-line method over the
estimated useful lives (principally 30 years for buildings and improvements
and 3 to 7 years for machinery and equipment) of the related assets.
Intangible assets and deferred charges: Debt issue costs are
amortized to interest expense over the term of the related debt. Other
intangibles and deferred charges are being amortized by the straight-line
method over their respective estimated lives.
Long-lived assets including goodwill and other intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the related assets'
carrying value is compared to the undiscounted estimated future cash flows
from the related operations.
Income taxes: Deferred tax liabilities and assets are recognized for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
bases of assets and liabilities (excluding non-deductible goodwill) using
enacted tax rates in effect for the years in which the differences are
expected to become recoverable or payable.
Revenues: Sales of products and reconditioning are generally recorded
upon shipment to customers. Camp and event revenues are recognized over the
term of the respective activity. Royalty income is generally recorded by the
Company when earned based upon contracts with licensees. These contracts
provide for royalties based upon the licensee's sales or purchases of covered
products, subject to periodic minimum amounts of royalties.
Estimates: In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses for the periods reported. Actual results could differ from those
estimates. Estimates relating to contingent liabilities are further discussed
in Note 11.
F-7
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Concentration of credit risk: The Company earns the majority of its
revenues from sales to schools and other institutions. The Company maintains
reserves for potential losses on receivables from these institutions, as well
as receivables from other customers, and such losses have not exceeded
managements expectations.
Earnings (loss) per share: Basic earnings (loss) per share is
computed by dividing earnings (loss) by the weighted average number of
outstanding common shares. Diluted earnings per share is computed by adjusting
earnings for effect of the assumed conversion of dilutive securities and
dividing the result by the weighted average number of common shares and common
equivalent shares relating to dilutive securities. Only outstanding shares are
considered in computing diluted loss per share. A reconciliation between the
numerators and denominators for these calculations follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1998 1997 1996
--------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Earnings (loss) - numerator:
Net income (loss) ($7,139) ($ 559) $ 2,843
Effect of assumed conversion, when dilutive,
of convertible debt - interest savings net of tax - - 61
--------- ---------- ---------
Numerator for diluted per share computation ($7,139) ($ 559) $2,904
========= ========== =========
Shares - denominator:
Weighted average number of outstanding common shares 9,134 8,585 8,068
Weighted average common equivalent shares:
Options and warrants, assumed exercise of dilutive options and
warrants, net of treasury shares which could have been purchased from
the proceeds of
the assumed exercise based on average market prices - - 480
Convertible debt, assumed conversion when dilutive - - 182
--------- ---------- ---------
Denominator for diluted per share computation 9,134 8,585 8,730
========= ========== =========
</TABLE>
The convertible debt, which has been outstanding since November 1996,
is described in Note 8 below. Options and warrants are described in Note 9
below. Options and warrants to purchase 89,500 shares of common stock with a
weighted average exercise price of $10.29 which were outstanding at December
31, 1996 were excluded from the computation of diluted earnings per share for
1996 as their inclusion would not have been dilutive because their exercise
prices were greater than the average market price of common shares for the
year.
Segment information: Effective December 31, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure About
Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing
the "industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. 1996 and 1997
segment disclosure have been restated to conform to SFAS No. 131.
Capitalized software: Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use", is
effective for fiscal years beginning after December
F-8
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15, 1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The Company plans to adopt
SOP 98-1 beginning January 1, 1999.
2. Acquisition
On June 19, 1997 the Company acquired Varsity Spirit Corporation
("Varsity"). Varsity is a leading supplier of cheerleader and dance team
uniforms and accessories to the youth, junior high, high school and college
markets. Varsity is also a leading operator of cheerleader and dance team
camps, clinics and special events. The net purchase price of approximately
$91.2 million, including costs of the acquisition, was paid in cash, and the
acquisition has been accounted for under the purchase method. The purchase
price was allocated based on estimated fair values at the date of acquisition.
This resulted in an excess of the purchase price over the net assets acquired
of $74.8 million, which has been recorded as goodwill and is being amortized
on a straight-line basis over 40 years. A summary of the allocation of the
purchase price to assets acquired based on their estimated fair values
follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Purchase price including costs and
liabilities paid at closing $95,548
Less, cash acquired (4,303)
-----------
Net cash cost 91,245
Current liabilities assumed 23,068
Less, acquired assets:
Current assets, excluding cash (35,055)
Property and Equipment (3,926)
Other assets (577)
-----------
Excess cost over net
assets acquired (goodwill) $ 74,755
=========
</TABLE>
The operating results of Varsity have been included in the
consolidated statements of operations 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
discussed in Note 8, had occurred at the beginning of each of the periods
presented:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------- --------
(In thousands, except per share amounts)
<S> <C> <C>
Net revenues $174,084 $160,831
Cost of revenues 103,076 92,426
---------- -----------
Gross profit 71,008 68,405
Selling, general and administrative expenses 63,048 55,469
--------- -----------
Income from operations 7,960 12,936
Interest expense 14,230 13,988
--------- -----------
Income (loss) before taxes (6,270) (1,052)
Income taxes - -
--------- ----------
Net income (loss) ($6,270) ($1,052)
========= ===========
Earnings (loss) per share:
Basic ($0.69) ($0.12)
Diluted ($0.69) ($0.12)
Depreciation and amortization $5,588 $5,142
</TABLE>
F-9
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
These pro forma results have been presented for comparative purposes
only and include the following pro forma adjustments (amounts shown in
thousands and relate to the years ended December 31, 1997 and 1996,
respectively): (1) additional amortization expense as a result of goodwill
arising from the acquisition ($789 and $1,616); (2) salary increases relating
to contracts entered into in conjunction with the transactions ($75 and $150);
(3) elimination of costs incurred by Varsity in maintaining its status as a
separate public corporation ($165 and $443); (4) adjustments of certain
expenses incurred by the Company or Varsity based on programs existing within
the other company ($38 and $95); (5) elimination of one time charges arising
from the transaction for redeeming Varsity stock options ($4,783 for 1997
only), a change in control payment ($250 for 1997 only) and bridge loan
commitment fees ($3,000 for 1997 only); (6) additional interest on acquisition
debt and related debt changes ($5,401 and $11,391); and (7) the tax effect of
the above ($1,728 credit elimination and $3,524 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.
3. UMBRO license
In November 1998, the Company entered into an license agreement (the
"Umbro License") with Umbro International, Inc. ("UMBRO") pursuant to which
the Company acquired the right for five years to manufacture, market and sell
UMBRO brand soccer team apparel, footwear, equipment, and accessories on an
exclusive basis to the team channel of distribution throughout the United
States, Puerto Rico and the U.S. Virgin Islands. The Umbro License is
royalty-free for 1999. The Company is required to begin paying royalties in
the year 2000, at which time it is also required to meet annual minimum sales
figures. In the event that the Company fails to meet required minimum sales
levels subsequent to 1999 for two consecutive annual periods, UMBRO has the
right to terminate the Umbro License. The Umbro License, which expires in
November of 2003, may be extended for an additional five years at the
Company's option on or before August 15, 2003, provided that the Company
achieves certain performance levels. Simultaneously, the Company acquired
certain inventory, promotional material and a 15% interest in U.S.I.S.L.,
Inc., an organization that promotes soccer in the United States, with an
option to increase its ownership to 20%. The Company incurred costs and
expenses approximating $3.4 million allocated as follows:
(In thousands)
Investment in U.S.I.S.L., Inc. $300
License Rights 500
Inventories 2,500
Other 100
-------------
$3,400
=============
4. Receivables
Accounts receivable include unbilled shipments of approximately
$1,678 and $1,157 at December 31, 1998 and 1997, respectively, principally
relating to Varsity's business. 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 yet 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.
F-10
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
Finished goods $16,584 $12,691
Work-in-process 2,769 3,571
Raw materials 9,410 7,804
------------- -------------
$28,763 $24,066
============= =============
</TABLE>
6. Property and equipment:
Property and equipment consist of the following:
<TABLE>
<Capion>
December 31,
------------------------
1998 1997
---------- ---------
(In thousands)
<S> <C> <C>
Land $ 207 $ 207
Building and improvements 1,527 1,428
Machinery and equipment 13,350 10,955
------------- ------------
15,084 12,590
Less accumulated depreciation 7,213 4,767
------------- ------------
$ 7,871 $7,823
============= =============
</TABLE>
Depreciation expense relating to all property and equipment amounted
to $2,446,000, $1,423,000, and $598,000 the years ended December 31, 1998,
1997 and 1996, respectively.
7. Intangible assets and deferred charges:
Intangible assets and deferred charges consist of the following:
<TABLE>
<CAPTION>
Estimated
Lives December 31,
in years 1998 1997
-------- ----------- ------
(In thousands)
<S> <C> <C> <C>
MacGregor trademark rights 40 $18,040 $18,040
MacGregor license agreements 8 - 2,030
Trademarks 40 3,250 3,250
Goodwill 40 91,479 91,292
Debt issue costs 8 6,981 6,981
Other 7 to 10 2,843 3,773
--------- ---------
122,593 125,366
Less accumulated amortization 13,858 13,248
--------- ---------
$108,735 $112,118
========= =========
</TABLE>
F-11
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Outstanding balance under a credit facility expiring in 2002, $ 4,400 $ -
terms further described below
Senior notes, 10.5%, due 2007, terms further described below 115,000 115,000
Convertible subordinated note payable, interest at 4.1%, due 2002 through
2004, terms further described below 7,500 7,500
------------- ----------
126,900 122,500
Less current portion - -
------------- ----------
$126,900 $122,500
============= ==========
</TABLE>
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Years ending December 31, (In thousands)
<S> <C>
2002 $ 6,275
2003 1,875
2004 3,750
2007 115,000
--------
$126.900
========
</TABLE>
The credit facility consists of a line of credit with the Company's
bankers in a principal amount not to exceed $35 million, expiring in 2002.
Draws under the line of credit are limited under the terms of the related loan
agreement to a percentage of certain receivables and inventory. The
outstanding balance of the line accrues interest, payable monthly, at a rate
of LIBOR plus a margin of 2.5% on draws so designated by the Company, and on
other draws at the higher of the bank's prime rate plus a margin of 1% or the
Federal Funds rate plus 1.5%. At December 31, 1998 LIBOR rates averaged
approximately 4.9% and the prime rate was 7.75%. The credit facility also
calls for a commitment fee equal to an annual rate of 0.5% applied to the
unused portion of the line. The margin of the interest rate over the related
rates, as well as the commitment fee rate, is subject to quarterly adjustment
dependent on certain financial ratios. The interest rate margin can vary
between 1.5% and 2.5% over LIBOR, 0% to 1% over the prime rate, 0.5% and 1.5%
over the Federal Funds rate and 0.4% to 0.5% on the commitment fee. The credit
facility agreement contains certain covenants which, among other things,
require the Company to meet certain ratio and net worth tests, restrict the
level of additional indebtedness the Company may incur, limit payments of
dividends, restrict the sale of assets and restricts investments the Company
may make. The credit facility also requires repayment of the principal amount
upon the occurrence of certain changes in the control of the Company. The
Company has pledged essentially all of its tangible assets as collateral for
the credit facility.
The 10.5% senior notes due 2007 (the "Senior Notes") contain certain
covenants that, among other things, restrict the level of other indebtedness
the Company may incur, the amounts of investments it may make in other
businesses, the sale of assets and use of proceeds therefrom, and the payment
of dividends. The Senior Notes also restrict payment of junior indebtedness
prior to the maturity of the junior indebtedness.
F-12
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The interest on the Senior Notes is payable semiannually on January 15 and
July 15. The holders of the Senior Notes have the right to require the Senior
Notes to be redeemed at 101% of the principal amount in the event of a Change
of Control (as defined). The Senior Notes contain certain prepayment
restrictions and have no mandatory redemption provisions. The Senior Notes are
guaranteed by all of the Company's subsidiaries. Each of these subsidiaries
are wholly-owned subsidiaries of the Company and have fully and
unconditionally guaranteed the Senior Notes on a joint and several basis. The
Company itself is a holding company with no assets or operations other than
those relating to its investments in its subsidiaries. The separate financial
statements of the guaranteeing subsidiaries are not presented in this report
because, considering the facts stated above, the separate financial statements
and other disclosures concerning the guaranteeing subsidiaries are not deemed
material to investors by management.
The 4.1% convertible subordinated note is subordinated in right to
prior payment in full of Senior Indebtedness, which is generally defined in
the governing agreements to include debt under the senior notes and revolving
line of credit described above and any refinancing, renewal or replacement
thereof as well as certain other debt. Repayments of 25% and 33 1/3% of the
then outstanding principal balance is due on November 1, 2002 and 2003,
respectively, with the remaining balance due November 1, 2004. Interest is
payable semiannually each May 1 and November 1. The note limits the Company's
ability to grant certain stock options and requires repayment of 101% of the
principal amount in the event of a change in control (as defined). In
connection with obtaining consents needed for various aspects of the Varsity
acquisition, the Company amended the note to provide for a reduction from
$6.00 to $5.3763 per share in the conversion price.
The Senior Notes were issued and the revolving credit facility was
entered into in connection with the 1997 acquisition of Varsity Spirit
Corporation (see Note 2). In connection with these financing transactions, all
other long-term debt of the Company, except the convertible notes, was repaid.
The Company incurred debt issue costs of approximately $5.4 million in
connection with the Senior Notes and approximately $0.8 million of costs in
connection with the new credit facility. These costs are included with
intangibles and deferred charges (see Note 7) and are being amortized to
interest expense over the life of the related debt. The Company also incurred
costs of $3.0 million in connection with a bridge loan commitment needed to
support the acquisition. The bridge loan was not drawn-down and the commitment
fee was charged to interest expense in June 1997.
9. Shareholders' equity and stock option plans:
In conjunction with the Varsity Acquisition in June 1997, the Company
sold 986,169 shares of its Common Stock to certain key employees of Varsity at
$4.50 per share for an aggregate, net of related costs, of approximately $4.3
million pursuant to Stock Purchase Agreements, dated May 15, 1997.
Stock option plans: The 1991 Stock Option Plan, as amended, and the
1997 Stock Option Plan provide for the granting of options to key employees,
directors, advisors and independent consultants to the Company for the
purchase of up to an aggregate of 2,915,500 shares of the Company's common
stock. Under the 1991 Stock Option Plan, options for an aggregate of 1,415,500
shares may be granted at an option price of no less than 85% of the market
price of the Company's common stock on the date of grant and may be
exercisable between one and ten years from the date of grant. Under the 1997
Stock Option Plan, options or other stock-based awards may be granted for an
aggregate of 1,500,000 shares. The 1997 Stock Option Plan generally does not
restrict the option price or exercise terms of grants.
F-13
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 1998, the Company issued 81,000 shares of its Common Stock to
certain employees for incentive compensation as a stock award under the terms
of the 1997 Stock Option Plan. These shares were recorded at a value of
$328,000 based on quoted market values at the date of grant. The grants
include 27,000 shares, valued at $128,000, granted in consideration for
compensation included in accrued liabilities at December 31, 1997.
During 1997, in connection with the terms of certain agreements
entered into in connection with the Varsity acquisition, the Company issued
options for the purchase of approximately 950,000 shares of its Common Stock
to Varsity employees. Included in this amount are 450,000 options to certain
key employees of Varsity which vested immediately with an option price of
$3.80. A charge of approximately $559,000 was recorded in June, 1997, and
credited to additional paid in capital to reflect the intrinsic value of these
options based on their in-the-money position on the measurement date for this
grant. The remaining 500,000 options were issued to a broad group of Varsity
employees with exercise prices at market. Both of these sets of option grants
are included in the information summarized below.
Options granted through December 31, 1998 generally have been
designated as non-qualified stock options and, except as described above, have
had option prices equal to market values on the date of grant, have had terms
of five or ten years, and have had vesting periods of one or four years.
Information relating to stock option transactions over the past three years is
summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------- -----------------
Weighted Weighted
Average Average
Number Price Per Number Price per
Outstanding Share Exercisable Share
------------ ----- ----------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1996 1,032,050 $4.02 485,775 $5.21
Granted 239,500 $4.57
Forfeited (5,500) $2.89
Expired (80,000) $8.00
---------
Balance, December 31, 1996 1,186,050 $3.87 712,913 $3.79
Granted 1,085,925 $4.75
Exercised (25,000) $2.39
Forfeited (7,000) $4.46
Expired (82,000) $10.75
---------
Balance, December 31, 1997 2,157,975 $4.05 1,284,425 $3.37
Granted 461,600 $5.08
Exercised (58,825) $2.48
Forfeited (291,925) $3.59
Expired (16,300) $4.05
---------
Balance, December 31, 1998 2,252,525 $4.36 1,362,106 $3.81
==========
</TABLE>
Options granted in 1998 include grants for 56,600 shares, granted in
November 1998, to certain employees (none of which were directors of the
Company) in exchange for cancellation of options for 69,850 shares which had
previously been granted to these employees. The canceled options, which are
included in the forfeited category above, would have expired in December 1998
and had a weighted average option price of $2.65 per share. The new grants had
a term of ten years and a weighted average option price of $3.76 per share.
F-14
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Further information about stock options outstanding at December 31, 1998 is
summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Price Per Number Price Per
Exercise Prices Outstanding Contractual Life Share Exercisable Share
--------------- ----------- -------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.80 - $2.49 136,500 2.4 years $1.99 135,000 $1.99
$2.50 - $3.99 764,100 7.2 years $3.56 721,250 $3.54
$4.00 - $5.44 1,351,925 8.9 years $5.05 505,856 $4.67
</TABLE>
At December 31, 1998 there were 498,150 shares available for future
option grants.
In accordance with the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), the Company has elected to continue to account for stock-based
compensation under the intrinsic value based method of accounting prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Under APB 25, generally, no cost is recorded for stock
options issued to employees unless the option price is below market at the
time options are granted. The following pro forma net income and earnings per
share are presented for informational purposes and have been computed using
the fair value method of accounting for stock-based compensation as set forth
in SFAS 123:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1998 1997 1996
--------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Pro forma net income (loss) ($7,953) ($1,973) $2,669
Pro forma earnings (loss) per share
Basic ($0.87) ($0.23) $0.33
Diluted ($0.87) ($0.23) $0.31
</TABLE>
These pro forma amounts may not be representative of future
disclosures because they do not take into effect pro forma compensation
expense related to grants made before 1995. The pro forma results include
expense related to the fair value of stock options estimated at the date of
grant using the Black-Scholes option pricing model and the following weighted
average assumptions for the years ended December 31, 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.3%, 6.4% and 6.6%; expected
volatility of 56%, 50% and 38%; expected option life of 7.0 years,7.0 years
and 6.9 years, and no dividend payments. The weighted average estimated fair
value of options granted during 1998, 1997 and 1996 was $3.16, $3.28 and $2.40
per share, respectively.
Warrants: At December 31, 1998 warrants were outstanding for the
purchase of an aggregate of 172,152 shares of the Company's common stock.
These warrants are held by one of the Company's banks and are exercisable
through October 1999 at an exercise price of $3.72 per share.
During 1998 certain officers and directors of the Company exercised
outstanding warrants for shares of the Company's Common Stock which would have
expired in January 1999. The Company agreed to a cashless exercise of the
warrants, in effect accepting shares issuable upon exercise as payment for the
exercise. As a result, 42,362 shares of Common Stock were issued in exchange
for warrants for 150,000 shares based on an exercise price of $2.96 per share
and an exchange price of $4.125 per share. The
F-15
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
exchange price of $4.125 per share was set on a date when the quoted market
price of a share of Common Stock was $4.00.
10. Commitments:
Leases: The Company leases various facilities and equipment under
operating leases. Rent expense amounted to approximately $2,792,000,
$1,958,000 and $1,451,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Future minimum rental payments for all non-cancelable lease
agreements for periods after December 31, 1998 are as follows:
Years ending December 31, (In thousands)
1999 $ 2,828
2000 2,023
2001 789
2002 557
2003 431
Later years 3,370
---------
Total minimum payments required $ 9,998
=========
Employee benefits: The Company has three noncontributory defined
benefit pension plans that cover, or have covered, certain employee groups.
These plans consist of two "Union Plans" covering certain unionized employees
and a "Non-Union Plan" that covered other employees of certain subsidiaries.
The Non-Union Plan was amended in 1994 to provide that no benefits would
accrue under the plan on or after December 31, 1994. Expense for these plans
for the year ended December 31, 1998 was approximately $200,000 including a
provision for expense of an anticipated termination of the Non-Union Plan.
Total pension expense for these plans was under $50,000 in each of the years
ended December 31, 1997 and 1996.
The Company maintains defined contribution (401-k) plans covering
substantially all of its employees, other than those covered by the Union
Plans. Company contributions to these plans are based on a percentage of
employee contributions and are funded and charged to expense as incurred.
Expenses related to the plans amounted to $95,000, $342,000 and $307,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
F-16
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Accrued liabilities and contingencies:
Recorded liabilities: In regards to the product liability
contingencies discussed below, the Company has recorded certain liabilities.
While these amounts are discussed in the remaining sections of this note, a
summary of these amounts together with other items comprising the balance
sheet line items "accrued liabilities" and "other liabilities" follows:
<TABLE>
<CAPTION>
Accrued
liabilities Other liabilities
(Current) (Non-Current)
-------- -------------
(In thousands)
<S> <C> <C>
December 31, 1998:
Product liability matters, reserves for
pending and other contingencies $ 700 $ 3,300
Accrued interest 5,690 -
Other accrued liabilities 4,863 254
-------------- -----------
Total of balance sheet category $ 11,253 $ 3,554
============== ===========
December 31, 1997:
Product liability matters, reserves for
pending and other contingencies $ 700 $ 3,000
Accrued interest 6,536 -
Other accrued liabilities 3,481 60
-------------- -----------
Total of balance sheet category $ 10,717 $ 3,060
=============== ===========
</TABLE>
Product liability litigation matters and contingencies:
At December 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
ultimate outcome of these claims, or potential future claims, cannot presently
be determined. The Company estimates that the uninsured portion of future
costs and expenses related to these claims, and incurred but not reported
claims, will amount to at least $4,000,000 and, accordingly, a reserve in this
amount is included in the Consolidated Balance Sheet at December 31, 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 actual results have at times varied substantially from earlier
estimates and could do so in the future. Accordingly there can be no assurance
that the ultimate costs of such claims will fall within the established
reserves.
The Company maintains product liability insurance under a policy
expiring in January 2005. The policy is an occurrence-based policy providing
coverage against claims currently pending against the Company and future
claims relating to all injuries occurring prior to January 2005 even if such
claims are filed after the end of the policy period. The insurance program
provides certain basic and excess coverage on product liability claims with a
combined aggregate coverage of over $40,000,000 subject to the limitations
described below.
The first level of insurance coverage under the policy ("Basic
Coverage") provides coverage of up to $2,250,000 per claim in excess of an
uninsured retention (deductible) of $750,000 per occurrence. The
F-17
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Basic Coverage is subject to an aggregate program limit and certain annual
aggregate sub limits. The Basic Coverage, which does not affect the
availability of the excess coverage described below, has an aggregate limit
which is currently $4.9 million, but the policy allows the Company to increase
this maximum limit to $7.7 million at any time by prepaying the required
premium, which counts at 120% of the amount paid toward the limit. The Basic
Coverage, to the extent available, covers the insured portion of the first
$3,000,000 of a claim. The insurance program also provides for additional
coverage ("Excess Coverage") of up to $20,000,000 per occurrence, in excess of
the first $3,000,000 of each claim. Claims covered by the Excess Coverage are
subject to one of two separate $20,000,000 aggregate policy limits, depending
on the date of the related injury. The first $20,000,000 aggregate limit
applies to claims for injuries occurring prior to January 31, 1998, and claims
occurring after January 1998 are covered by the second separate $20,000,000
aggregate limit.
Other contingencies and litigation matters:
In addition to the matters discussed in the preceding paragraphs, the
Company has certain other claims or potential claims against it that may arise
in the normal course of business, including without limitation, claims
relating to personal injury as well as employment related matters. Management
believes that the probable resolution of such matters will not materially
affect the financial position or results of operations of the Company.
12. Income taxes:
Income taxes on income (loss), before extraordinary items, for the
years ended December 31, 1998, 1997 and 1996 is summarized below:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1998 1997 1996
----------- ----------- -------
(In thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ $ - $ 50
State - - 60
----------- ----------- -----------
- - 110
----------- ----------- -----------
Deferred tax expense:
Federal - - -
State - - -
----------- ----------- -----------
- - -
----------- ----------- -----------
$ - $ - $ 110
=========== ============= ===========
</TABLE>
For the years ended December 31, 1997 and 1996, tax expense was
reduced by offsetting tax benefits of approximately $500,000 and $1,200,000,
respectively, of net operating loss carryforwards which were not recognized in
prior years.
F-18
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of deferred income tax assets and liabilities
at December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- -------
Deferred income tax assets: (In thousands)
<S> <C> <C> <C>
Accrued expenses and reserves $ 2,843 $ 2,267 $ 3,509
Inventory 711 733 492
Intangible assets - - 26
Net operating loss, and
credit, carryforwards 6,551 4,832 3,689
Other 308 276 36
----------- ----------- -----------
10,413 8,108 7,752
Valuation allowances (3,215) (1,031) (1,386)
----------- ------------ ------------
Total deferred income tax assets 7,198 7,077 6,366
----------- ----------- -----------
Deferred income tax liabilities:
Intangible assets and deductible goodwill 5,648 5,498 6,014
Property and equipment 442 481 86
Prepaid expenses 203 193 266
----------- ----------- -----------
Total deferred income tax liabilities 6,293 6,172 6,366
----------- ----------- -----------
Total net deferred income tax asset $ 905 $ 905 $ - 0 -
=========== =========== ===========
</TABLE>
The net current and non-current components of the deferred income
taxes were recognized in the balance sheet at December 31, 1998, 1997 and 1996
as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- -------
(In thousands)
<S> <C> <C> <C>
Net current assets, included with
prepaid expenses $ 1,253 $ 1,358 $ 1,820
Net non-current deferred tax liabilities 348 453 1,820
----------- ----------- --------
$ 905 $ 905 $ - 0 -
=========== =========== ========
</TABLE>
A reconciliation of effective tax rates to federal statutory tax rates is as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- -------
<S> <C> <C> <C>
Statutory Federal tax rate (34.0%) (34.0%) 34.0%
Differences resulting from:
Effective state tax rate,
net of federal tax benefit - - 3.1
Amortization not deductible
for tax purposes 10.2 87.1 5.8
Travel & entertainment expenses
not deductible for tax purposes 3.9 33.9 1.2
Losses with no current benefit 20.2
Benefit of prior periods net operating
losses not previously recognized (86.4) (40.2)
Other differences (0.3) (0.6) (0.2)
-------- -------- -------
0.0% 0.0% 3.7%
========= ======== =======
</TABLE>
F-19
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1998 the Company had estimated net operating loss
carryforwards for federal income tax purposes of approximately $17,700,000
expiring between 2008 to 2013. While this loss carryforward is available to
reduce the payment of taxes that might otherwise be payable in future years,
the benefit of most of the net operating losses have been recognized in the
computation of income tax expense reflected in the Company's consolidated
financial statements in prior years. Benefits relating to approximately $7.0
million of net operating loss carryforwards have not yet been recognized in
the computation of income tax expense for financial reporting purposes and
have been reserved for as part of the deferred income tax asset valuation
allowance. These unrecognized carryforwards would be recognized through a
reduction of income tax expense in future periods upon the generation of an
offsetting amount of taxable earnings.
13. Related party transactions:
In 1997, in connection with certain financing transactions occurring
in connection with the Varsity acquisition, notes payable to shareholders of
$439,000 plus accrued interest were repaid in advance of maturity. Interest of
$17,000 and $111,000 on the note was included in interest expense for the
years ended December 31, 1997, and 1996, respectively. In 1996 the Company
paid consulting fees of $75,000 to one director and paid another director
$20,000 for services in connection with a series of promotional football
clinics sponsored by the Company.
14. Supplemental cash flow information:
Cash payments for interest were $14,700,000, $5,260,000 and
$2,662,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Interest payments for 1997 included $3,000,000 relating to bridge financing
commitment fees - see Note 8. Income tax payments, or refunds, were not
significant for 1998, 1997 or 1996.
In 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.
In June 1997, in connection with the Varsity acquisition, the Company
assumed liabilities of $23,068,000.
15. Fair values of financial instruments:
The Company's financial instruments include cash, accounts
receivable, accounts payable and long-term debt. The carrying values of cash,
accounts receivable and accounts payable approximate their fair values. The
Company's long-term debt include the Senior Notes which at December 31, 1998
had a carrying value of $115,000,000 and a fair value, based on quoted market
values, of $109,250,000. The Company's remaining long-term debt is not traded
and has no quoted market value, however management believes any difference
between its carrying value and fair value would not be material in relation to
these Consolidated Financial Statements.
F-20
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Segment and product line information:
The Company has three reportable segments: institutional products and
services, retail products and trademark licensing:
Institutional products and services: This segment markets products
and services primarily through the Company's direct sales force for
institutional customers such as schools, leagues, recreational groups and
other organizations for competitive and recreational sport and spirit
activities. Operations include the manufacture and sale of athletic products
(including football helmets), spirit products (including cheerleading and
dance uniforms and accessories), and athletic equipment reconditioning. The
segment also operates cheerleader and dance team camps, clinics and special
events.
Retail products: This segment markets products through retailers in
the U.S. and internationally. Most of the products sold by this segment are
sports collectible products, such as authentic and replica football helmets,
which bear licensed sports team logos. The segment's operations also include
sales of certain recreational football and other athletic products sold
through consumer product retailers and distributors.
Trademark licensing: This segment consists of the licensing of the
Company's Riddell and MacGregor trademark rights to other entities for use in
marketing products such as athletic footwear and apparel.
The Company's reportable segments are strategic business units that
differ and are managed separately because of the nature of their markets and
channels of distribution. The Institutional products and services segment
includes the company's institutional athletic products business unit and its
spirit (cheerleading and dance) business unit. Information about these two
business units has been combined and reported as the institutional products
and services segment as the units have similar economic and other business
traits.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies except for the
inclusion of operating results for Varsity Spirit Corporation, and related pro
forma adjustments, for the period prior to its acquisition in June 1997 (see
Note 2). The company evaluates performance of the institutional products and
services segment based on these pro forma results. Total assets are as
reported and do not include pro forma amounts or adjustments.
<TABLE>
<CAPTION>
(In thousands)
Years ended December 31,
--------------------------
1998 1997 1996
--------------- --------------- ---------
<S> <C> <C> <C>
Net revenues:
Institutional products and services $166,845 $153,641 $136,974
Retail products 18,142 18,055 21,363
Trademark licensing 1,613 2,388 2,494
----------- ---------- ----------
186,600 174,084 160,831
Less, preacquisition results of Varsity
Spirit Corporation included above - 35,811 88,449
----------- ---------- ----------
Consolidated total $186,600 $138,273 $72,382
=========== ========== ==========
</TABLE>
F-21
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Segment and product line information (continued):
<TABLE>
<CAPTION>
(In thousands)
Years ended December 31,
1998 1997 1996
--------------- --------------- -----------
<S> <C> <C> <C>
Income from Operations:
Institutional products and services $11,416 $10,841 $11,423
Retail products 56 1,742 3,727
Trademark licensing 841 1,476 1,536
Corporate and unallocated expenses (4,796) (6,099) (3,750)
----------- ---------- ----------
7,517 7,960 12,936
Less, preacquisition results of Varsity
Spirit Corporation included above - (3,360) 7,220
----------- ---------- ----------
Consolidated total $7,517 $11,320 $5,716
=========== ========== ==========
Depreciation and amortization, exclusive of
debt issue costs:
Institutional products and services $4,497 $4,253 $3,854
Retail products 557 595 541
Trademark licensing 614 696 702
Corporate and unallocated 45 44 45
----------- ---------- ----------
5,713 5,588 5,142
Less, preacquisition results of Varsity
Spirit Corporation included above - 1,578 2,949
----------- ---------- ----------
Consolidated total $5,713 $4,010 $2,193
=========== ========== ==========
Capital expenditures:
Institutional products and services $2,265 $2,562 $2,698
Retail products 229 139 269
----------- ---------- ----------
2,494 2,701 2,967
Less, preacquisition results of Varsity
Spirit Corporation included above - 887 1,828
----------- ---------- ----------
Consolidated total $2,494 $1,814 $1,139
=========== ========== ==========
Total assets:
Institutional products and services $150,163 $143,414 $ 43,302
Retail products 10,253 11,497 11,468
Trademark licensing 16,898 17,835 17,807
Corporate and unallocated 8,897 9,015 3,784
----------- ---------- ----------
Consolidated total $186,211 $181,761 $76,361
=========== ========== ==========
</TABLE>
F-22
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Segment and product line information (continued):
<TABLE>
<CAPTION>
(In thousands)
Years ended December 31,
1998 1997 1996
--------------- --------------- ---------
<S> <C> <C> <C>
Revenues by product line for all reportable segments in the aggregate
were as follows:
Cheerleader and dance products $63,491 $56,453 $49,472
Camps and events 48,704 44,966 38,977
Athletic products 34,276 30,177 27,884
Athletic product reconditioning 23,415 22,892 21,700
Sports collectibles 15,101 17,208 20,304
Trademark licensing 1,613 2,388 2,494
----------- ---------- ----------
186,600 174,084 160,831
Less, preacquisition results of Varsity
Spirit Corporation included above - 35,811 88,449
----------- ---------- ----------
Consolidated revenues $186,600 $138,273 $72,382
=========== ========== ==========
</TABLE>
17. Subsequent event:
On March 16, 1999, a jury rendered a verdict against the Company in a
Texas product liability lawsuit for approximately $11.4 million plus interest
from February 1996. The Company intends to appeal the verdict. If the verdict
was paid in full it would be covered by the insurance described above, except
for an amount equal to the $750,000 uninsured retention. This amount, however,
is already included in the Company's balance sheet reserves. Any such payment
by the insurance company would reduce the amount of the aggregate limits of
the Company's product liability insurance coverage described in Note 11,
above.
F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE
Board of Directors
Riddell Sports Inc.
In connection with our audit of the consolidated financial statements
of Riddell Sports Inc. and Subsidiaries referred to in our report dated
February 21, 1998, which is included on page F-2 of this Form 10-K, we have
also audited Schedule II for each of the three years in the period ended
December 31, 1998. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Chicago, Illinois
February 19, 1999
S-1
<PAGE>
SCHEDULE II
RIDDELL SPORTS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- --------------------------------- ------------- ----------------------------- ------------- -----------
Additions
-----------------------------
(1) (2)
Charged to Charged to
Balance at Costs Other Balance at
Beginning and Accounts- End of
Description of Period Expenses Describe Deductions Period
- ------------------------- ----------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for
doubtful accounts $620 $436 - $543 $513
(a)
Year ended December 31, 1997
Allowance for
doubtful accounts $513 $365 $325 $379 $824
(b) (a)
Year ended December 31, 1998
Allowance for
doubtful accounts $824 $929 - $451 $1,302
(a)
</TABLE>
- -----------
Notes: (a) Accounts written off net of recoveries
(b) Addition charged to other accounts for 1997 is the initial
balance from the Varsity acquisition.
S-2
<PAGE>
THIRD SUPPLEMENTAL AGREEMENT
AGREEMENT made this 30th day of June, 1998 by and between Equilink Licensing
Corporation, a Delaware corporation, c/o Riddell Sports, Inc., 900 Third Avenue,
27th Floor, New York, New York 10022 ("Licensor") and Kmart Corporation, a
Michigan corporation, 3100 West Big Beaver Road, Troy, Michigan 48084
("Licensee").
WHEREAS, Licensor and Licensee entered into an Agreement dated January 23,
1989 ("Parent Agreement") with respect to the trademark "MacGregor", said Parent
Agreement being amended and supplemented by that First Supplemental Agreement,
Second Supplemental Agreement and Third Supplemental Agreement dated November
15, 1989, August 30, 1990 and June 30, 1994, respectively; and
WHEREAS, Licensor and Licensee have agreed to further amend and supplement the
Parent Agreement effective July 1, 1998 to amend the provisions governing the
categories of licensed goods, royalties and minimum guarantees on the terms and
conditions set forth as follows:
NOW THEREFORE, for good and valuable consideration heretofore
acknowledged the parties agree as follows:
1. This amendment shall be effective July 1, 1998 (the "Effective Date").
2. Commencing on the Effective Date, Section 1 of the Parent Agreement (as
amended by the Third Supplemental Agreement) is further amended
to provide as follows:
"1. Term. This Agreement shall commence January 1, 1992 and
shall be in full force in effect until June 30, 2001 as
long as the following conditions occur or are
maintained."
3. Commencing on the Effective Date, Sections 2 and 3 of the Parent
Agreement are amended to provide in full as follows:
"2. The Exclusive Grant: Intentionally omitted."
"3. The Non-Exclusive Grant: Licensor hereby grants
Licensee a license to use the MacGregor trademark
in connection with the manufacture,
advertisement, promotion and sale of athletic and
sweat socks in the Territory and only in the
distribution channels set forth in Section 10
hereof. Licensor agrees that it shall not grant
any other person a license to use the MacGregor
trademark in connection with the manufacture,
advertisement, promotion and sale of athletic or
sweat socks in the Territory in any national
discount retail store that carries apparel and
non apparel, including Wal-mart and Target
Stores."
<PAGE>
4. Commencing on the Effective Date, Section 6(a) of the Parent Agreement
is amended to provide in full as follows:
"a. Subject to the yearly minimum royalties set forth in paragraph
7, there shall be due and owing and Licensee shall pay to Licensor
in the manner provided in paragraph 8, a royalty equal to 2.0% of
the cost of licensed goods, as such term is defined in paragraph
6(b) below."
5. Commencing on the Effective Date, Section 7 of the Parent Agreement is
amended to provide in full as follows:
"7. Annual Minimum Royalties. Licensee shall pay in the manner
provided in paragraph 8, $200,000 to licensor as a minimum annual
guarantee. These minimum payments are required on an annual basis,
and Licensee is not entitled to any credit for royalties or
payment in different years. However, Licensee is entitled to a
credit applicable to other quarters within the same year."
6. Commencing on the Effective Date, Section 10 of the Parent Agreement is
amended to provide in full as follows:
"10. Limitation on Distribution. Licensee may sell licensed goods
only in either or both the apparel department and sporting goods
department of Kmart Corporation stores and only in the Unites
States. Licensee shall grant no sublicense regarding the MacGregor
trademark, provided that Licensee shall be allowed to purchase and
market products licensed hereunder through its wholly-owned
subsidiary, Kmart Apparel Corp."
7. Commencing on the Effective Date, Section 11(b) of the Parent Agreement
is amended to provide in full as follows:
"b. Suspension and Termination Option. Intentionally omitted."
8. It is hereby acknowledged that the First Supplement Amendment and
Second Supplemental Amendment both have heretofore been terminated
by mutual agreement of the parties and are of no further force or
effect.
9. Commencing on the Effective Date, except as modified herein, the Parent
Agreement, as amended, survives this Fourth Supplemental Agreement and
remains in full force and effect in accordance with its terms.
KMART CORPORATION EQUILINK LICENSING CORPORATION
By: /s/ By: /s/
Its: Its: Chief Executive Officer
<PAGE>
SECOND AMENDMENT TO
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as
of December 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 amended by that certain First Amendment to Credit
Agreement dated as of March 31, 1998 and 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 certain
terms set forth in the Credit Agreement; and
WHEREAS, the Agents and the Lenders have agreed to amend certain terms
set forth in 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 Financial Covenants.
(a) The table set forth in Section 7.2(a) of the Credit
Agreement is amended for the "Fiscal Quarter Ending" December 31, 1998
as follows:
Maximum Maximum Minimum
Adjusted Senior Debt Coverage
Fiscal Quarter Ending Leverage Ratio Leverage Ratio Ratio
- --------------------- -------------- -------------- --------
December 31, 1998 8.50 to 1.0 .50 to 1.0 .80 to 1.0
<PAGE>
(b) The table set forth in Section 7.2(c) of the Credit
Agreement is amended for the "Date" December 31, 1998 as follows:
Date Amount
---- ------
December 31, 1998 $24,250,000
1.2 Clean Down Period. Notwithstanding anything in Section 7.17 of the
Credit Agreement to the contrary, the Credit Parties shall not be required to
comply with the terms of Section 7.17 of the Credit Agreement for the twelve
month period ending December 31, 1998.
1.3 Payment of Expenses. Section 11.5 of the Credit Agreement is
amended by deleting the words "Documentation Agent" in the second line thereof
and substituting the word "Agents" in replacement therefor.
SECTION 2 CONDITIONS PRECEDENT.
2.1 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.
(b) The Agents shall have received such other documents and
information as either deems reasonably necessary.
SECTION 3 MISCELLANEOUS.
3.1 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.
3.2 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.
2
<PAGE>
3.3 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; 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.
3.4 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 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.
3.5 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 (i) bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium or
similar laws affecting creditors' rights generally and (ii) 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.
3
<PAGE>
3.6 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.
3.7 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.
4
<PAGE>
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/
------------------------------
Name:
----------------------------
Title:
---------------------------
GUARANTORS:
RIDDELL, INC.,
a Illinois corporation
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
EQUILINK LICENSING CORPORATION,
a Delaware corporation
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
RHC LICENSING CORPORATION,
a Delaware corporation
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
RIDMARK CORPORATION,
a Delaware corporation
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
ALL AMERICAN SPORTS CORPORATION,
a Delaware corporation
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
VARSITY SPIRIT CORPORATION,
a Tennessee corporation
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
VARSITY SPIRIT FASHIONS &
SUPPLIES, INC.
a Minnesota corporation
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
INTERNATIONAL LOGOS, INC.
a Tennessee corporation
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
VARSITY/INTROPA TOURS, INC.
a Tennessee corporation
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
VARSITY USA, INC.
a Tennessee corporation
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
LENDERS:
NBD BANK
individually in its capacity as a
Lender and in its capacity as
Administrative Agent and Collateral
Agent
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
NATIONSBANK, N.A.,
individually in its capacity as a
Lender and in its capacity as
Documentation Agent
By: /s/
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
UMBRO LICENSE AGREEMENT
THIS UMBRO LICENSE AGREEMENT (this "Agreement") is entered into as of
_________________, 1998 (the "Effective Date"), by and between UMBRO
INTERNATIONAL, INC., a company organized and existing under the laws of the
State of South Carolina, U.S.A., having its principal office at Post Office Box
3725 Park Place, Greenville, South Carolina 29608 ("UMBRO"), and Varsity Spirit
Fashions & Supplies, Inc., a company organized and existing under the laws of
Minnesota, having its principal office at 900 Third Avenue, New York, NY 10022
("Licensee"). Definitions for capitalized terms used in this Agreement and not
otherwise defined are included in the Glossary attached hereto which is
incorporated as part of this Agreement.
Background
UMBRO is a leading world-wide manufacturer and marketer of soccer
equipment and apparel bearing the Trademarks. Licensee has the desire and
capability to market and sell (and to manufacture or arrange for the manufacture
of certain of) the Products bearing the Trademarks within the Territory.
Therefore, UMBRO desires to grant the License to Licensee, and Licensee desires
to accept such License from UMBRO, according to the terms and conditions of this
Agreement.
W I T N E S S E T H
The parties hereto hereby mutually agree as follows:
ARTICLE 1
Appointment; Products; Business Plans; Sponsorships
1.1 Grant of License. UMBRO hereby appoints Licensee, and grants to Licensee
a License to use the Trademarks in the Territory for purposes of the
manufacture, marketing and sale of all of the Products as agreed between
both parties during the Term of this Agreement, all in accordance with
the terms hereof and with the exclusivity set forth in Section 2.1
hereof. Licensee hereby agrees to distribute and supply the Products
under the Trademarks for use in the Territory.
1.2 Products.
1.2.1 The License granted under this Agreement is particular only to
the Products.
1.2.2 Right of First Refusal for Excepted Products.
If after May 31, 1999 UMBRO or any of its Affiliates desires
to use any Trademark on any Excepted Product in any
channel of distribution itself
-1-
<PAGE>
without entering into a license agreement or other
understanding with a third party to market and/or sell
such product bearing any Trademark, it will give Licensee
written notice of such desire and thirty (30) days to
exercise its right of first refusal described below. If
after May 31, 1999 UMBRO desires to grant Licensee a
license to manufacture, sell, or market any Excepted
Product, it will give Licensee written notice of such
desire and thirty (30) days to exercise its right of first
refusal. Licensee will have a right of first refusal for
30 days from receipt of any such notice to advise UMBRO in
writing of Licensee's desire to license the Excepted
Products in the Team Channel of Distribution. Effective
immediately and automatically upon giving written notice
of its desire to license such Excepted Product, such
Excepted Product will be a Product under this Agreement
for manufacture, sale and/or marketing by Licensee in the
Team Channel of Distribution and such other channels of
distribution as UMBRO shall reasonably approve, with no
adjustment to the Minimum Sales, Minimum Royalty, royalty
or other provisions hereof.
UMBRO shall deliver written notice to Licensee at such time
after May 31, 1999 that UMBRO or any of its Affiliates
desires to enter into a license or similar arrangement
granting an Excepted Products Licensee the right to use
any Trademark in connection with the sale and/or marketing
of any Excepted Products in any channel of distribution,
detailing the specifics of the prospective use and the
terms of such proposed license or other arrangement (the
"Excepted Product License Notice"). The following terms
shall govern the parties' rights and obligations in this
connection:
Licensee will have a right of first refusal for 30 days (the
"Exercise Period") from receipt of such Expected Products
License Notice to notify UMBRO in writing that it desires
to manufacture, market and/or sell such Excepted Product
in the Territory in the Team Channel of Distribution upon
substantially the same terms and conditions as set forth
in the Excepted Products License Notice or upon such other
principal business terms as Licensee shall specify in its
notice to UMBRO.
At such time during the Exercise Period that Licensee delivers
written notice to UMBRO of its desire to license such
Excepted Product on substantially the same terms as set
forth in the Excepted
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Products Notice, such Excepted Product shall be deemed a
Product hereunder and may be manufactured, sold and/or
marketed by Licensee thereafter on such terms set forth in
Licensee's notice in the Team Channel of Distribution and
such other channels of distribution as UMBRO shall
reasonably approve.
If Licensee proposes terms for such license that are not
substantially the same terms as set forth in the Expected
Products Licensee Notice, then UMBRO shall negotiate with
Licensee in good faith with respect to any term or
condition that Licensee proposes. If on or before the last
day of the Exercise Period UMBRO and Licensee agree upon
the principal business terms of a license for such
Excepted Product, then effective immediately and
automatically upon such agreement, such Excepted Product
will be a Product under this Agreement for manufacture,
sale and/or marketing by Licensee thereafter upon such
terms and conditions in the Team Channel of Distribution
and such other channels of distribution as UMBRO may
reasonably approve.
In the event Licensee does not desire to license the Excepted
Products or, if applicable, the parties fail to negotiate
the terms of the license, despite their good faith
efforts, UMBRO may proceed with its plans to license (on
no more favorable terms than offered to Licensee) or
market directly the Excepted Products to the Branded
Channel of Distribution.
The following provisions shall apply to the licensing/direct
marketing of Excepted Products:
(i) The licensee must market any Excepted Products it
handles directly and may not sublicensee any
Excepted Products.
(ii) In the event UMBRO fails to market directly or
finalize a license to market the Excepted Products
within 180 days of the expiration of the above 90
day period, the rights to such Excepted Products
will revert to Licensee for the Team Channel of
Distribution.
(iii) No more than one Excepted Product Licensee may be
added in any given calendar year, and no more than
a total of two
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Excepted Product Licensees may be added during the
Term (including any renewal Term).
(iv) The licensing and marketing of Excepted Products
must adhere to the Standards and Marketing Policy.
(v) For Excepted Products, whenever introduced,
Licensee will receive, until the later of December
31, 2003 or the fourth anniversary of the
introduction of the Excepted Product, one (1%)
percent of the higher of (a) the net sales by UMBRO
or Excepted Products Licensee of Excepted Products
or (b) the minimum net sales by Excepted Products
Licensee of Excepted Products. After the later of
the conclusion of the four year anniversary or
December 31, 2003, Licensee will receive until the
end of the renewal term one-half (1/2%) percent of
the higher of (a) the net sales by UMBRO or
Excepted Products Licensee of Excepted Products or
(b) the minimum net sales by Excepted Products
Licensee of Excepted Products. Such receipts shall
be subject to this Agreement being in effect at the
time of payment of such receipts.
(vi) If the Excepted Products Licensee or UMBRO plans to
manufacture, sell or market footwear as used on the
field of play for football or baseball/softball,
either as a single product or along with any number
of Products or product categories, then Licensee
may exercise its right of first refusal as set
forth in Section 1.2.2 with respect to the football
or baseball/softball footwear separately from the
other Excepted Products or product categories to be
manufactured, sold or marketed by the Excepted
Products Licensee or UMBRO.
1.3 Business Plans.
(a) Throughout the Term of this Agreement, UMBRO and Licensee shall
confer at least twice each year in order to update and establish
Licensee's business plans in a manner reasonably acceptable to
UMBRO ("Business Plans"). The Business Plans shall cover
strategies and activities intended to build, strengthen and
protect the value and distinction of the Trademarks, as well as
manage sales volume and profitability for the Products. Licensee
and any sublicensees requested by UMBRO shall also participate at
Licensee's discretion in the review of Strategic
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Planning Systems, which are systems for the analysis of trademark
dynamics, and UMBRO's and competitors' relative market positions,
all with a view to set strategy and initiatives for the ensuing
period as may be scheduled by UMBRO from time to time.
(b) Specific areas to be addressed in the Business Plans shall
generally include the matters described in Sections 3.1, 4.1, and
4.5 hereof.
1.4 Sponsorship Agreements.
(a) Licensee may enter into appropriate sponsorship, promotion or
endorsement agreements with leagues, teams and individual players
operating in the Territory (a "Licensee Sponsorship Agreement").
Licensee agrees to use reasonable efforts to cause each such
Licensee Sponsorship Agreement to be wholly and exclusively
assignable by Licensee to UMBRO or UMBRO's designee without fee
and without the necessity of consent by the sponsor upon
termination of this Agreement.
(b) UMBRO may, exclusively at UMBRO's option, enter into sponsorship,
promotion or endorsement agreements with leagues, teams or
individual players operating in the Territory. If UMBRO does so,
sales of Products in the Territory in connection with such
agreements to the Team Channel of Distribution will be made
exclusively by or through Licensee on such terms as may be agreed
by Licensee and UMBRO, but in no event shall Licensee be required
to sell any Product at an amount that is less than Licensee's
wholesale price for such Product to similar buyers. Except as
otherwise set forth in this Section 1.4, UMBRO shall not take
commercially unreasonable actions with regard to the obligations
listed on The Sports Marketing Financial Obligation Schedules
dated April 13, 1998, a copy of which is attached hereto as
Appendix B, that may adversely impact the global goodwill
associated with the Trademarks.
Deborah Keller.
For the period beginning January 1, 1999 through the end of the term of
the agreement dated July 9, 1997 between UMBRO and Deborah Keller
as in effect on the Effective Date ("Keller Contract"), and
provided UMBRO obtains for Licensee the right to use Keller's
name, likeness, signature and image to the same extent UMBRO has
under the Keller Contract, and subject to the outcome of pending
arbitration proceedings, Licensee will pay to Keller on behalf of
UMBRO 40% of the amounts due under Sections B.1.d, 3(a) and 3(b)
thereof. Notwithstanding the foregoing, Licensee will
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not be obligated to pay any amount relating to the sale of any
Product bearing Keller's endorsement unless such Product is sold
by Licensee. In the event UMBRO is required to advance 1999 or
subsequent sponsorship payments to Keller, Licensee will reimburse
40% of those advanced payments to UMBRO by making such payments to
UMBRO on the same payment schedule set forth in the Keller
Contract
Furthermore, Licensee will supply Keller with up to 40% of the Core
Category Products required to be supplied under the Keller
Contract in accordance with its terms.
In no event shall Licensee be obligated to pay (including the price of
Product) in the aggregate more than US$50,000 per calendar year
with respect to the Keller Contract.
Licensee and the Primary Branded Licensee shall have the sole right to
renew the Keller Contract. UMBRO shall not be a party to any
renewal of the Keller Contract by Licensee and the Primary Branded
Licensee.
(d) USISL.
For the period January 1, 1999 through December 31, 1999 and provided
the consent required by Section 1.4(d)(ii) has been obtained and
the USISL Contract is in effect, Licensee shall pay USISL on
behalf of UMBRO the lesser of $250,000 or 40% of the amounts
required to be paid, including the cost of all Product required to
be supplied (including shipping) by UMBRO under Section 2.3 of the
Sponsorship Agreement dated November 3, 1995 between UMBRO and
USISL, renewed on January 9, 1997 and as amended on or about
November 9, 1998 (the "USISL Contract"), payable at such dates set
forth in Section 2.3 of the USISL Contract. UMBRO further agrees
that any outstanding payable owed to USISL by UMBRO as of the
Effective Date will be paid in full within eighteen months
following the Effective Date. In the event such outstanding
payable is not paid in full within eighteen months of the
Effective Date, Licensee shall have the option to pay to USISL on
UMBRO's behalf the remaining portion of such outstanding balance
and offset all such amounts against royalties due to UMBRO until
such amounts are repaid in full to Licensee.
On or before December 31, 1998 UMBRO shall obtain the written consent of
USISL for Licensee to use the USISL trademarks, logos and other
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intellectual property rights to the same extent as UMBRO is
granted such rights under the USISL Contract.
UMBRO shall notify Licensee in writing promptly upon receipt of notice
of any alleged breach of any provision of the USISL Contract or of
alleged termination or expiration thereof.
(e) Miami Fusion.
Except as set forth herein, UMBRO will be responsible for cash payments
and required products at cost to the Miami Fusion or MLS through
the end of the agreement dated April 15, 1997, between UMBRO and
MLS (the "Fusion Agreement") and will use its commercially
reasonable efforts to renew the Fusion Agreement through the 2003
season.
If the Fusion Agreement is not renewed or maintained during the Initial
Term of this Agreement due to the cost of the Fusion Agreement
exceeding $800,000 per year, then UMBRO may, at its option,
sponsor another team within the MLS at a similar cost. If the
Miami Fusion or such other MLS team is not sponsored by UMBRO or
the cost of sponsoring the Miami Fusion or such other MLS team is
less than $800,000 per year, then during each Annual Period UMBRO
will fund other types of marketing support acceptable to Licensee
through the Initial Term of this Agreement equal to the lesser of
(i) 40% of the difference between $800,000 and the actual annual
sponsorship cost of the Miami Fusion or such other MLS team or
(ii) Licensee's past calendar year royalties less $80,000.
During calendar year 1999, Licensee will advance funds and products at
cost as needed to UMBRO, up to a maximum of $320,000, to satisfy
UMBRO's obligations under the Fusion Agreement. These advanced
funds will be repaid to Licensee in the form of a credit against
royalties, due UMBRO commencing January 1, 2000 and ending when
all advanced Fusion Agreement funds have been recovered. In
addition, the royalty rate for calendar year 2000 as set forth in
Appendix J shall be reduced by 0.6%. Notwithstanding the
foregoing, if this Agreement expires or terminates prior to full
recovery by Licensee, UMBRO shall pay Licensee such shortfall upon
expiration or termination.
UMBRO shall take reasonable efforts to attempt to obtain for Licensee
the right to
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use the Club Badge of the Miami Fusion or any other MLS team
sponsored by UMBRO on the Products and related advertising and
promotional materials in the manner allowed under the Fusion
Agreement or any other agreement with an MLS team sponsored by
UMBRO.
UMBRO shall notify Licensee in writing promptly upon receipt of notice
of any alleged breach of any provision of the Fusion Agreement or
any renewal thereof or of any MLS sponsorship agreement or any
alleged termination or expiration thereof.
1.5 Appendices. The following Appendices attached to this Agreement are
hereby incorporated as part of this Agreement:
Appendix A List of Core Category Products
Appendix B Sports Marketing Obligation Schedule
Appendix C Form of Quarterly Report
Appendix D Notices and Communications
Appendix E Trademarks
Appendix F Standards
Appendix G Application for Authorized Manufacturer
Appendix H (omitted)
Appendix I Authorized Manufacturers
Appendix J Royalty Schedule
Appendix K Manufacturer's Authorization Agreement
Appendix L Approved Team Channel of Distribution Accounts
ARTICLE 2
Exclusive Rights and Limitations
2.1 Scope of Exclusivity in Territory.
(a) During the Term of this Agreement except as provided in Sections 1.2.2,
2.1(c) and 12.1, UMBRO and its Affiliates will not directly and
will not authorize others to sell Products in the Territory under
the Trademarks or variations thereof; however, UMBRO shall have no
responsibility other than stated in Section 2.1(b) as to the sale
of any Products that may occur in the Territory without UMBRO's
authorization.
(b) In the event that UMBRO learns that its other licensees and/or
distributors who are authorized to sell the Products in locations
outside the Territory are in fact directly
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or indirectly, selling the Products in the Territory, UMBRO shall
take all action reasonably and legally available to stop such
sales and to prevent the sales from recurring.
(c) (i) Nothing contained herein shall prohibit UMBRO and its Affiliates
or other licensees from the manufacture and sourcing of Products
in the Territory;
(ii) It is acknowledged that UMBRO may sell and/or ship Core Category
Products from its existing inventory through its historical
channels of distribution, including but not limited to, UMBRO
owned retail stores for (x) orders on hand and (y) until December
31, 1998 from its existing inventory of Core Category Products
which Licensee has not purchased from UMBRO as of the execution of
this Agreement (the "UMBRO Inventory Sales"). UMBRO agrees to
consult with Licensee concerning UMBRO's disposition of Core
Category Products in order to minimize the impact of such
disposition on the image/goodwill of the Trademarks.;
(iii) It is acknowledged that UMBRO will be entering into a license
agreement with the Primary Branded Licensee for the manufacture,
marketing and sale of Branded Products for the Branded Channel of
Distribution (the "Branded License Agreement"). UMBRO agrees that
each of the Primary Branded Licensee and Licensee may sell the
other's respective products in their respective channels of
distribution. Licensee acknowledges that it shall not have the
exclusive right to manufacture or sell Branded Products in the
Territory.
(d) (i) Licensee shall have the exclusive right to market and sell Core
Category Products bearing the Trademarks in the Team Channel of
Distribution in the Territory with the exceptions that the Primary
Branded Licensee may sell Core Category Products in the Branded
Channel of Distribution and that UMBRO may make UMBRO Inventory
Sales under Section 2.1(c)(ii). Licensee shall also have the
non-exclusive right to manufacture Core Category Products bearing
the Trademarks in the Team Channel of Distribution in the
Territory. If Licensee desires to sell Core Category Products to a
sporting goods store which is not already approved and listed on
Appendix L, then it shall request the approval of UMBRO to do so
by sending UMBRO written notice of the identity of such account
and providing such other information as UMBRO shall reasonably
request. UMBRO may disapprove of adding such account to the Team
Channel of Distribution in its reasonable determination. Failure
by UMBRO to give written disapproval of the addition of such new
account providing the reasons therefore within seven (7) days from
the date of receipt of the request by UMBRO will be deemed
approval.
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(ii) Licensee acknowledges it shall not have the right to manufacture
International Licensed Products and must source all International
Licensed Products through UMBRO, except as provided in Section
3.3(a).
(iii) Licensee shall have the right to sub-license the manufacture,
marketing and sale of certain accessory Core Category Products
such as caps and socks subject to UMBRO's right to disapprove the
sub-licensee for just cause.
If Licensee desires to sublicense the manufacture, marketing or sale of
any Core or Non-Core Category Products (other than accessory Core
Category Products including caps and socks), it shall request the
written approval of UMBRO, identifying the Product and proposed
sublicense and providing such other information as UMBRO shall
reasonably request. UMBRO shall have thirty (30) days to approve
or disapprove such request, with the disapproval relating to
Non-Core Category Products being in UMBRO's reasonable judgment.
In the event UMBRO does not notify Licensee of its approval or
disapproval with thirty (30) days, Licensee shall so inform UMBRO.
UMBRO shall then have an additional fifteen (15) days in which to
approve or disapprove such request. Failure by UMBRO to notify
Licensee of its approval or disapproval with such fifteen (15) day
period will be deemed an approval by UMBRO.
(e) (i) Licensee has the exclusive right to manufacture, market and sell
Non-Core Category Products in all channels of distribution in the
Territory. If Licensee desires to sell a Non-Core Category
Product, Licensee shall request the Advance Approval of UMBRO to
sell such Product, identifying the Product and providing such
other information as UMBRO shall reasonably request. UMBRO may
approve or disapprove such request in its reasonable judgment.
(f) (i) Licensee has the non-exclusive right to manufacture and, subject
to the Primary Branded Licensee's rights set forth in Section
2.4(b), the exclusive rights to market and sell Other Goods in all
channels of distribution in the Territory. If Licensee desires to
sell an Other Good, Licensee shall request the Advance Approval of
UMBRO to sell such Product, identifying the Product and providing
such other information as UMBRO shall reasonably request. UMBRO
may approve or disapprove such request in its reasonable judgment.
(ii) Licensee acknowledges that the terms of the Branded License as in
effect on the date hereof grants the Primary Branded Licensee
substantially the same rights to manufacture, sell and market
Other Goods; consequently, in the event that the
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Primary Branded License and Licensee at substantially the same
time request UMBRO's consent to sell the same type of Other Goods,
then UMBRO shall within 14 days after receiving such conflicting
requests determine in its good faith business judgment whether
Licensee or the Primary Branded Licensee shall have the exclusive
license for such Other Goods.
(iii) If Licensee desires to sublicense the manufacture, marketing or
sale of any Other Goods, it shall request the written approval of
UMBRO, identifying the Product and proposed sublicensee and
providing such other information as UMBRO shall reasonably
request. In the exercise of its reasonable business judgment,
UMBRO may approve or disapprove such request and will provide the
reasons, if any, for disapproval in writing. Failure by UMBRO to
give written disapproval of such request within seven (7) days
from the date of submission will be deemed approval.
(iv) If Licensee sublicenses its rights to sell an Other Good, then
Licensee shall pay the Primary Branded Licensee 60% of the
royalties received from such sublicensee, net of any amounts due
to UMBRO hereunder, expenses of Licensee attributable to such
sublicense and any fees and expenses required to be paid by
Licensee to any third party licensing agent with respect to such
sublicense. Licensee shall remit such payments at such times as
royalties are paid to UMBRO with respect to Net Sales by such
sublicensee.
2.2 Limitations on Actions Outside Territory. Licensee agrees not to do any
of the following during the Term of this Agreement without UMBRO's prior
written consent:
(a) advertise the Products outside the Territory, or canvass or
solicit orders for the Products outside the Territory other than
as permitted under Section 13.18;
(b) open sales outlets or distribution depots for the resale of the
Products outside the Territory;
(c) otherwise dispose of the Products or supply the Products to anyone
(inside or outside the Territory) who Licensee knows or should
know intends to resell or distribute the Products outside the
Territory except to other licensees and distributors authorized by
UMBRO to sell the Products in the locations to which such Products
are destined; or
(d) invoice, supply or otherwise dispose of Products to anyone outside
the Territory other than UMBRO or, with UMBRO's written consent,
UMBRO's Affiliates.
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2.3 Branded License Agreement.
(a) In the event the Branded License Agreement is terminated or
expires without renewal for any reason during the Initial Term or
the renewal Term of this Agreement, UMBRO agrees to give Licensee
written notice of any such termination. Licensee will then have
the right to assume responsibility for the Branded License
Agreement at its option by giving written notice to UMBRO and
taking over the Primary Branded Licensee's rights and obligations
within thirty (30) days of receipt of such notice from UMBRO.
Licensee's assumption of the Branded License Agreement shall be on
the following terms:
(i) If the Primary Branded Licensee termination occurs with no
outstanding monetary obligations of the Primary Branded
Licensee to UMBRO, or if Licensee elects to make all payments
due under the Branded License, then Licensee may assume the
Branded License under the same terms and conditions as held by
the Primary Branded Licensee.
If the Primary Branded Licensee has not paid all amounts due under
the Branded License and Licensee elects not to make these
payments, then Licensee may assume the Branded License on the
same terms and conditions as held by the Primary Branded
Licensee, but at a flat 8% royalty rate during the
remainder of the initial Branded License term and at the
"prevailing UMBRO worldwide license rate" if the license
assumption occurs during the Branded License renewal term.
(b) UMBRO shall promptly notify Licensee in writing upon receipt of
notice that the Branded Licensee seeks to assign, sell, dispose of
or otherwise transfer or has so transferred the Branded License.
Licensee shall have the right to disapprove in writing all such
transactions. Licensee shall use its commercially reasonable
judgment in exercising this right. With regard to the successor of
the initial Primary Branded Licensee, Licensee shall not be deemed
unreasonable if it fails to approve such Primary Branded Licensee
that does not agree in a writing acceptable to Licensee to make
the Joint Marketing Fund Allocation payments referenced in section
5.4.
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ARTICLE 3
General Undertakings of Licensee
3.1 Best Efforts.
(a) Licensee agrees to use its best efforts to promote and increase the sale
of the Products throughout the Territory under the Trademarks.
(b) Licensee shall maintain sufficient staff, including a sales force of
sufficient size, to distribute, sell and promote the sale of the
Products throughout the Territory under the Trademarks. Such a
staff shall include a sales manager (who may also have other
duties) whose responsibilities shall include controlling the
distribution of the Products and ensuring that the Products are
distributed only to purchasers whose image and reputation are in
keeping with UMBRO's image and the Marketing Policy. UMBRO agrees
that the purchasers listed on Appendix L are in compliance with
UMBRO's image and Marketing Policy.
(c) Licensee agrees to use its best efforts to ensure that the Products are
not distributed by unsuitable dealers. The criteria for
determining the suitability of a dealer are set forth in the Brand
and Product Marketing Manual, which has been delivered to Licensee
either prior to or contemporaneously with the execution of this
Agreement.
(d) Licensee will ensure that all of its activities hereunder conform in all
material respects with all applicable legislation, rules,
regulations and statutory requirements in relation to its
activities hereunder.
(e) Licensee shall, in its good faith reasonable judgment, maintain
sufficient inventory of Products to satisfy market needs and will
report to UMBRO on a regular basis as requested by UMBRO
concerning Licensee's inventory levels and movements in inventory.
(f) Licensee shall ensure that each invoice for Products as sold hereunder
will reflect the full cost of delivery, if any, charged to the
customer with regard to such Products, and Licensee shall not
charge its customer any additional amount not reflected on the
invoice.
(g) Licensee shall use all reasonable means to offer and maintain the supply
of Products to UMBRO and all its licensees and distributors if
requested to do so by UMBRO with due regard for Licensee's
production capacity, lead times, Territory Product requirements,
minimum order requirements, inventory levels and other similar
factors.
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3.2 Competing Lines.
Except as set forth in Section 3.2(b), Licensee and its Affiliates agree
during the Term of this Agreement not to manufacture, market,
distribute and/or sell any other line of competitive apparel,
footwear or accessories for or to the same channels of
distribution as the Products sold by Licensee in accordance with
this Agreement. Apparel, footwear or accessories handled by
Licensee shall be deemed to be competitive with the Products only
if such goods are intended to be used mainly for on-the-field
soccer participation or if such goods are directly or indirectly
sold by Licensee in marketing channels that cater primarily to
soccer and meet the criteria set forth in the Brand and Product
Marketing Manual for an UMBRO account.
Licensee and its Affiliates agree not to sell any apparel, footwear or
accessories which are competitive with the Products to the extent
set forth in Section 3.2(a). Nonetheless, UMBRO acknowledges that
Licensee and its Affiliates have granted third parties broad
license rights to manufacture, sell and/or market apparel,
footwear, equipment and accessories that bear trademarks and
designs other than the Trademarks and may be used for on-the-field
participation in soccer. Such products are not deemed to be
competitive products and may continue to be manufactured, marketed
and/or sold by licensees of Licensee and its Affiliates. In
addition, UMBRO acknowledges that Licensee and its Affiliates
manufacture, market and/or sell through a direct sales force
practice wear (including without limitation, tee shirts, shorts,
sweats, etc.) bearing trademarks other than the Trademarks which
may be used for on-the-field participation in soccer. Such
products are not deemed to be competitive products and may
continue to be manufactured, sold and/or marketed by Licensee or
its Affiliates so long as such products are sold by the direct
sales force of Licensee and its Affiliates to schools and so long
as the Core Category Products sold to the Team Channel of
Distribution are sold through sales representatives and not by
such sales force.
Notwithstanding Sections 3.2(a) or (b) or any other provision herein,
Licensee shall not be permitted to manufacture, market or sell any
products designed by UMBRO or its Affiliates or designed by
Licensee for use as a Product herein, without such product bearing
one or more of the Trademarks.
3.3 Sourcing of Products.
(a) Licensee shall not carry, market or sell Products other than those
(i) purchased from UMBRO or its Affiliates, (ii) manufactured by
Licensee or its Affiliates (unless
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such manufacture is prohibited under the terms of this Agreement)
(inside or outside the Territory), or (iii) manufactured by an
Authorized Manufacturer (if permitted hereunder) upon terms and
conditions agreed to between Licensee and Authorized Manufacturer
and consistent with the Manufacturer's Authorization Agreement.
Licensee may not manufacture and may not source International
Licensed Products, except for International Licensed Products
bearing the Miami Fusion Club Badge, or the Club Badge of any MLS
team subsequently sponsored by UMBRO, if any, from anyone other
than UMBRO.
(b) Supply, delivery, price and payment terms with respect to Products
purchased from UMBRO will be based upon UMBRO's standard terms and
conditions at the time of order information. Other than for
confirmed orders, Licensee agrees that UMBRO reserves the right
upon 30 day written notice in its absolute discretion to vary up
or down any price to be charged by UMBRO on any purchases
thereafter. In addition, other than for confirmed orders, Licensee
agrees that UMBRO is authorized to apportion Product among UMBRO,
its Affiliates, Licensee, and other licensees and distributors in
UMBRO's sole discretion.
(c) Under the terms of Article 7, Licensee and its Affiliates are
authorized to manufacture Products or, subject to UMBRO's
approval, designate Authorized Manufacturers for the manufacture
of Products.
(d) An intentional and knowing material violation by Licensee of any
of the sourcing requirements contained in this Section 3.3 or
Sections 7.1, 7.3 and 7.5 shall result in a material breach of
this Agreement without the opportunity or right to cure pursuant
to Section 11.2(g) hereof. In this Section 3.3(d), "material"
shall mean a violation that, in UMBRO's reasonable good faith
judgment, undermines the purpose of the Authorized Manufacturer
designation by preventing UMBRO, among other things, from
controlling the source of manufacturing, the quality of
manufacturing, the goodwill of the Trademarks or UMBRO's
reputation in the global marketplace.
(e) In all purchases of Products from Licensee by UMBRO, Licensee's
standard conditions of purchase as may prevail from time to time
shall apply and each such order shall constitute a separate and
distinct contract of purchase.
(f) UMBRO agrees that Licensee reserves the right upon thirty (30)
days written notice in its absolute discretion to vary up or down
any price to be charged by Licensee on any purchase thereafter by
UMBRO.
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3.4 Committees. UMBRO may, subject to Licensee's approval, appoint Licensee
from time to time as a member of various committees or teams related to
the Products or this Agreement. In that event, Licensee will through
suitable personnel attend a reasonable number of the meetings at times
and places selected by UMBRO upon at least 14 days' written notice to
Licensee. Licensee shall pay the cost of its participation in such
meetings.
ARTICLE 4
Marketing; Sales Budget
4.1 Marketing Policy.
(a) Licensee shall market, promote and sell the Products in accordance
with the material and applicable policies and guidelines set forth
in the Marketing Policy. Licensee acknowledges its receipt of
UMBRO's current Brand and Product Marketing Manual prior to or
contemporaneously with the execution of this Agreement. UMBRO
reserves the right to make reasonable modifications to the
Marketing Policy from time to time and shall provide Licensee with
any modifications to the Brand and Product Marketing Manual,
provided any such addition to or modification of the Marketing
Policy will be consistent with UMBRO's global marketing policy and
no change to the Marketing Policy will be primarily applicable
only in the Territory so that it adversely impacts the rights and
obligations of Licensee under this Agreement as of the date of the
change in the Marketing Policy.
(b) UMBRO Products will be sold and distributed by Licensee and its
sublicensees, distributors and wholesalers so as to present an
image of quality and value, consistent with merchandise priced in
the middle-to-upper range among competitive brands in the market.
Bargain sales and non-customary discount retail practices will be
avoided although a reasonable number of such sales may be made to
dispose of overstocks, unpopular styles, seconds, out of season
merchandise or incomplete stock in accordance with general
industry practice.
(c) There will be joint consultation by both parties on the
implementation of the Marketing Policy in the Territory.
4.2 Wholesalers. Licensee may sell the Products to wholesalers for resale in
the Territory provided that Licensee selects and manages such
wholesalers so that they operate in accordance with the Marketing
Policy.
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4.3 Sales Budget. Licensee shall submit to UMBRO on or before October15 of
each Annual Period a schedule in such form as UMBRO may from time to
time by notice to Licensee reasonably require, showing in detail and by
product category the projected sales of the Products hereunder for the
following Annual Period (the "Sales Budget"). In addition, Licensee
shall submit to UMBRO on or before April 15 of each Annual Period a
Sales Budget for the remainder of such Annual Period. Licensee shall
promptly give notice to UMBRO of any changes in circumstances which may
materially affect the information provided in any such schedule.
4.4 Other Sales Information. Licensee shall within thirty (30) days after
the end of each Quarter provide UMBRO with a completed Quarterly Report
and within fifteen (15) days after the end of each month provide UMBRO
with a completed Monthly Report.
4.5 Product Catalog. Licensee shall prepare and submit to UMBRO for UMBRO's
approval Product catalogs in order to support the sale of Products.
ARTICLE 5
Advertising and Promotion
5.1 A&P Expenditure.
(a) Licensee shall be responsible for arranging and conducting
Advertising & Promotion ("A&P") in the Territory. During each
Annual Period, including its commitments under Section 1.4 and
5.1(d), Licensee shall expend at least three (3%) percent of the
greater of (i) Licensee's Annual Net Sales for the preceding
Annual Period, or (ii) the Annual Net Sales which would need to be
achieved in the current Annual Period in order to generate the
Minimum Royalty. This amount shall constitute the "A&P Budget".
(b) The A&P Budget shall be spent in connection with catalogs, public
relations activities, trade shows, sales conferences, exhibitions,
point of sale promotions, advertising displays, media advertising
(including co-op advertising expenditures), promotional samples,
sponsorships and other similar advertising and promotional
activities to promote the UMBRO brand. Production costs in
connection with the preparation of the foregoing materials shall
also be allowable expenditures.
(c) Amounts spent as part of the A&P Budget shall consist of actual
costs of catalogs, public relations activities, trade shows, sales
conferences, exhibitions, point of sale promotions, advertising
displays, media advertising (including co-op advertising
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expenditures), promotional samples, sponsorships and other similar
advertising and promotional activities to promote the UMBRO brand
(but excluding sales meetings, sales commissions, discounts and
rebates).
(d) For calendar year 1999, Licensee agrees to pay, after receipt of
invoices, one-third (1/3) of the Super Show costs up to $150,000
for exhibition space, set-up, rentals, storage and other direct
costs (collectively, the "Direct Costs") and UMBRO agrees to pay a
like amount. Licensee will pay its one-third (1/3) share as funds
are disbursed by UMBRO for the 1999 Super Show and will reimburse
on the Effective Date one-third (1/3) of the amounts already
advanced by UMBRO for the 1999 Super show. Thereafter, Licensee
will consult with UMBRO and any other U.S. licensees to determine
the annual Super Show expense with UMBRO to be responsible for,
but in no event shall Licensee's expense be greater than one-third
(1/3) of the Direct Costs. Licensee and UMBRO agree to share
equally with the Primary Branded Licensee any contribution made to
the Direct Costs by any other U.S. licensees. UMBRO, Licensee and
the Primary Branded Licensee agree to explore opportunities to
reduce their respective Direct Costs with respect to future Super
Shows. In addition, prior to the 1999 Super Show, UMBRO shall
supply Licensee with UMBRO's Super Show materials (banners,
display cases, etc....) on hand.
5.2 Advance Approval of Advertising.
(a) Licensee shall submit in written or printed form to UMBRO, for
UMBRO's Advance Approval, all advertising, packaging and other
promotional material, while still in the conceptual stages and
before such material is used, circulated or displayed. Licensee
shall take reasonable steps to assure that advertising material is
used (by customers and others) only as approved by UMBRO and only
in accordance with applicable laws and regulations.
(b) In the event Licensee offers a cooperative advertising program and
if requested by UMBRO, Licensee shall submit to UMBRO suitable
evidence (such as "tear sheets") to prove that cooperative
advertising material is properly used. If Licensee's publicity
results in any publication or broadcast of the Trademarks,
Licensee shall ensure that the publication or broadcast presents
the Trademarks in an appropriate manner and in accordance with
applicable Standards.
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5.3 Prizes, Contests, etc. Licensee may not use the Products as prizes or in
connection with any contest other than an athletic contest without the
prior written approval of UMBRO. Licensee may not use the Products in
any sweepstakes, lotteries, or games of chance or as an incentive to
purchase any goods or services, except that, upon prior written approval
from UMBRO, the Products may be used in the promotion of, or as an
incentive in, the sale of other Products.
5.4 Joint Marketing Budget.
UMBRO and its Affiliates agree that any Branded License other than the
Branded License with Signal Apparel Company, Inc. shall require
the Primary Branded Licensee to pay the Joint Marketing Fund
Allocation at such times as Licensee and such other licensees
shall agree to be spent promoting the Trademarks and Products in
such a manner as agreed to by Licensee and such other licensees.
(b) In the Event that Licensee and any Primary Branded Licensees other
than Signal Apparel Company, Inc. cannot agree on the manner in
which to spend the Joint Marketing Fund Allocation, UMBRO shall in
writing make such determination by exercising its reasonable
business judgment within 14 days after notice from Licensee of
such failure to agree.
5.5 UMBRO Marketing Support. UMBRO and its Affiliates agree to provide
leadership for design, Product supply, and marketing direction for the
Trademarks and for the benefit of Licensee in the Territory.
ARTICLE 6
Use of Trademarks
6.1 Use on Products. All Products Licensee carries, markets or sells shall
include and display the appropriate Trademarks (printed directly on
Products, and on labels and packaging), in the manner directed by UMBRO.
6.2 Use for Marketing and Distribution. Licensee may use and display the
Trademarks during the Term of this Agreement on signs, letterheads,
packaging materials, and other advertising materials created for
purposes of marketing and distributing the Products.
6.3 Standards. All use and display of the Trademarks by Licensee must be in
conformity with applicable Standards.
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6.4 Right to Review and Approve Usage. At UMBRO's request, Licensee shall
permit UMBRO to examine Licensee's manufacturing, marketing, and
distribution facilities during normal business hours and practices in
order to verify Licensee's conformity with applicable Standards. In
addition, at UMBRO's request, Licensee shall provide UMBRO with samples,
photographs or copies of the use of the Trademarks in connection with
the Products or on signs, letterheads, packaging materials, or other
advertising materials in order to verify Licensee's conformity with
applicable Standards. In the event that UMBRO determines that Licensee's
use of the Trademarks does not satisfy applicable Standards, Licensee
shall immediately, at UMBRO's request, take all steps necessary or
appropriate to ensure that such Standards are met.
6.5 Prohibited Actions.
(a) No goods or materials that Licensee carries, markets or sells may
include or display the Trademarks (in printed form on the
Products, or on labels or packaging), except as authorized by this
Agreement in connection with the advertising, sale and
distribution of the Products.
(b) Licensee shall not engage in any practice or activity likely to
mislead potential purchasers or customers into believing that an
item is one of the Products when in fact it is not. Licensee
agrees not to use, or authorize others to use, the Trademarks in
any way that disparages the Trademarks or the Products, or
otherwise diminishes the stature or image of quality of the
Trademarks and the Products among the public.
(c) Licensee shall not use the name "UMBRO" or any of the Trademarks
as part of Licensee's corporate, business or trading name or
style, except with UMBRO's prior written consent and in
conjunction with appropriate language indicating Licensee is a
licensee of UMBRO. UMBRO acknowledges that Licensee intends to
utilize the tradename "Umbro America" and consents to such use
subject to the terms and conditions of this Agreement. During the
Term, UMBRO shall not grant the right to use a tradename
containing the word "Umbro" to any party for the purpose of
offering goods or services to the Teamwear Channel of Distribution
in the Territory other than Licensee.
(d) In the event Licensee wishes to identify itself, then Licensee
shall only identify itself on the packaging of those Products it
has manufactured solely as UMBRO's licensed manufacturer of such
Products.
(e) Except as otherwise agreed in writing with UMBRO, in no event
shall Licensee
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deviate in any manner in its use of any Trademark from the form of
that Trademark detailed in Appendix E.
6.6 Use of Trademarks in Manufacturing.
(a) In connection with the manufacture of the Products, Licensee may apply
the Trademarks to the Products or their packaging by means of
labels, hang tags, embroidery, imprints or otherwise, provided
that the use and presentation of the Trademarks is approved by
UMBRO in each instance.
(b) Licensee may not apply the Trademarks to any item manufactured by
Licensee or its contractors unless the item is a Product, or
packaging for Products or advertising and promotional materials
approved by UMBRO under Section 5.2.
ARTICLE 7
Manufacturing
7.1 Right to Manufacture. During the Term of this Agreement Licensee and its
Affiliates are authorized to manufacture Products (other than those
International Licensed Products excluded in Section 3.3), either in
their own factories, using their own vendors existing as of the
Effective Date or using Authorized Manufacturers. Vendors which are
approved as of the Effective Date shall remain approved until January
31, 1999. Licensee will submit to UMBRO on or before November 30, 1998 a
request to designate such vendors as Authorized Manufacturers. Such
vendors will be deemed Authorized Manufacturers unless UMBRO, in the
exercise of its reasonable discretion, informs Licensee in writing on or
before December 31, 1998 that such vendor will not be designated as an
Authorized Manufacturer. In the event UMBRO provides such notice to
Licensee, the such vendor's authorization will expire on January 31,
1999. Such manufacturing is not limited to the Territory. All
manufacturing of Products by Licensee and by all Authorized
Manufacturers shall be solely for purposes of distribution and resale of
all resulting Products by Licensee pursuant to this Agreement and/or by
other licensees or distributors approved by UMBRO.
(a) In respect of any technical Product (i.e. any Product for the
sport of soccer which UMBRO considers in its good faith and
reasonable judgment to be technically innovative in that it
contains unique features, construction and/or fabrications not
found in competitive soccer products or any Product incorporating
an UMBRO owned patent ) which UMBRO has designed and developed,
UMBRO reserves the right to nominate an official manufacturer and,
Licensee shall not be entitled to manufacture such Product or
source such Product from any other manufacturer or
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Authorized Manufacturer. UMBRO reserves the right to designate, or
to remove from such designation, Products which must be sourced in
this manner, from time to time. In the event UMBRO, in its sole
discretion, authorizes Licensee to manufacture such Product
described in this Section 7.1(a), UMBRO and Licensee shall enter
into a royalty-free patent license, if necessary, for the
manufacture, sale and use of such patented technology on terms to
be agreed at the time of entering into the patent license; and/or
(b) In respect of any Product for which sales samples have been
supplied to Licensee by UMBRO, Licensee may only order bulk
supplies of such Products, from the manufacturer of such sales
sample. For Products which UMBRO has designed and Licensee has the
right to manufacture, in the event that Licensee does not order
sales samples through UMBRO but reasonably wishes to order sales
samples and bulk supplies of such Products from its own sources,
Umbro will provide Licensee with necessary Product data to enable
Licensee to procure the manufacture of such Product pursuant to
the terms of this Agreement.
7.2 Use of Authorization Statement. Whenever the Trademarks are used on or
with a Product an Authorization Statement will be included with the
Product, wherever aesthetically possible.
7.3 Advance Approval of Product Design. Prior to production and offering for
sale of any Products which are to be manufactured by Licensee or any
Authorized Manufacturer acting for Licensee, Licensee shall obtain
Advance Approval from UMBRO, such approval not to be unreasonably
withheld, with respect to proposed product design, materials, color
palate, "themes", and Trademark usage. Request for Advance Approval
shall be in the form of a full color line drawing or photograph with
product specifications as appropriate. The production runs of each of
the approved designs shall be in accordance with approved line drawings
and specifications in all material respects.
7.4 Advance Approval of First Run Production Samples. Upon the introduction
of a new Product by Licensee or upon Licensee's first time use of a new
Authorized Manufacturer for any Product, Licensee shall submit to UMBRO
first run production samples of each Product manufactured by Licensee or
any Authorized Manufacturer acting for Licensee, together with a request
for Advance Approval of the samples based on applicable Standards. At
the time of submission, Licensee shall indicate any known deviation from
such Standards, it being agreed that minor variations from the Standards
in a previously approved Product or sample made to customize apparel to
identify that team do not constitute "Deviations" from Standards.
Production runs shall not be carried on except based on first run
samples which have received Advance Approval.
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7.5 Use of Authorized Manufacturer. In the event that Licensee desires
to use either its own facilities or an outside contractor to
manufacture the Products, then the Licensee's facilities or the
contractor as the case may be must first be approved as an
Authorized Manufacturer by UMBRO. A form of an application for
approval of a contractor or Licensee as an Authorized Manufacturer
is attached hereto as Appendix G. No contractor may use or
otherwise deal with any of the Trademarks, unless the contractor is
an Authorized Manufacturer. If Licensee wishes to manufacture
Products in its own facilities, Licensee shall provide UMBRO with
the same information described below with regard to an outside
contractor. If a contractor that Licensee desires to use is not
already qualified as an Authorized Manufacturer, Licensee shall
notify UMBRO by giving UMBRO the (1) name and location of the
contractor, (2) if possible, relevant details concerning the
contractor's ownership and operation, (3) a description of the
Products to be manufactured, (4) if possible, the contractor's
capacity and number of operatives, (5) the price and terms of the
agreement between Licensee and contractor, including the intended
duration of the manufacturing contract, and (6) such other
information as UMBRO may reasonably require. UMBRO will approve
Licensee's proposal within twenty (20) days after UMBRO receives
such information, or else provide detailed explanations for its
disapproval of the proposal. Licensee shall not, in any
circumstances, have the right to use the proposed contractor during
the aforementioned twenty (20) day approval period unless and until
such approval has been given. In accordance with the definition of
Authorized Manufacturer contained in the Glossary of this
Agreement, UMBRO shall have the right to de-authorize an Authorized
Manufacturer; provided, however, Licensee and its Affiliates shall
not be de-authorized by UMBRO unless the Products as manufactured
by Licensee or its Affiliates fail to meet the Standards.
7.6 Standards. Licensee shall ensure that it will and will ensure that
any Authorized Manufacturer acting for it will, comply with all
applicable Standards in all material respects.
7.7 Licensee's Responsibility for Authorized Manufacturer's Actions. In
connection with any business done between Licensee and the
Authorized Manufacturer that will manufacture Products, Licensee
shall be responsible for ensuring the Authorized Manufacturer's
performance of all applicable terms of any Manufacturing
Authorization Agreement which UMBRO may require the Authorized
Manufacturer to enter into as a condition to qualifying as an
Authorized Manufacturer. UMBRO will promptly notify Licensee of the
termination of any Authorized Manufacturer's authorization which
UMBRO requires Licensee to use pursuant to Section 7.1(a) and
Appendix A. Licensee shall not be responsible for any actions of
such terminated Authorized Manufacturer which occur between the
termination of such Authorized Manufacturer and Licensee's receipt
of the notice of termination from UMBRO.
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7.8 UMBRO Sourcing from Authorized Manufacturer. Where UMBRO notifies
Licensee of its desire to purchase any Product from any Authorized
Manufacturer other than Licensee for markets other than the
Territory, Licensee shall reasonably cooperate with UMBRO in this
regard.
ARTICLE 8
Ownership and Registration of Trademarks
8.1 Ownership of Trademarks by UMBRO. UMBRO represents and warrants its
Affiliate, Umbro Trademark, Inc. ("Umbro Trademark") is the owner
of the Trademarks in the Territory and that Umbro Trademark has
granted UMBRO an exclusive license to use and/or sublicense others
to use the Trademarks in the Territory as set forth in this
Agreement. Licensee hereby acknowledges that:
(a) UMBRO's Affiliate, Umbro Trademark, is the owner of the
Trademarks in the Territory and any goodwill related thereto
that derives from or is based on the marketing and
distribution of the Products or the use or display of the
Trademarks in the Territory; that Umbro Trademark has granted
UMBRO an exclusive license to use and/or sublicense others to
use the Trademarks in the Territory as set forth in this
Agreement; and that UMBRO has agreed to maintain, or assist
Umbro Trademark to maintain, the Trademarks in the Territory
during the Term;
(b) that Licensee, by reason of this Agreement, does not acquire
any right, title, interest or other claim of ownership to the
Trademarks, other than the License on the terms and conditions
obtained by Licensee hereunder;
(c) all rights not expressly granted by UMBRO to Licensee
hereunder are reserved and retained by UMBRO; and
(d) any rights granted to the Licensee hereunder shall immediately
extinguish upon the expiration or termination of this
Agreement, for whatever reason.
8.2 Licensee's Assistance.
(a) Licensee agrees to cooperate with UMBRO, at UMBRO's request
and expense, with respect to the protection and enforcement of
the Trademarks in the Territory, including through the
registration of the Trademarks in UMBRO's name.
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(b) Licensee agrees not to contest or challenge the validity of
the Trademarks, any registrations of the Trademarks in UMBRO's
name, or the ownership of the Trademarks by UMBRO.
(c) Licensee agrees to assist UMBRO in the registration and
maintenance of the Trademarks in the Territory in the name of
UMBRO or its Affiliates (as UMBRO may designate), but Licensee
shall not be required to share the cost of such registration.
Any secondary trademarks and designs employed or adopted by
Licensee in connection with the Products or in combination
with the Trademarks shall, together with any goodwill related
thereto, be assigned to UMBRO.
(d) Licensee shall follow UMBRO's reasonable instructions with
respect to actions UMBRO may deem necessary or desirable to
perfect registration and protection (and to alter any such
registration as necessary upon termination of this Agreement
or otherwise) in the Territory of the Trademarks and the
exclusivity of their use, in the name of UMBRO, including the
registration of registered user agreements as necessary or
desirable under laws applicable in the Territory, provided
that registered user agreements may be registered under the
names of both UMBRO and Licensee as required by UMBRO. Subject
to the foregoing, UMBRO shall have final responsibility for
the validity, registration and enforcement of the Trademarks
in the Territory.
8.3 Notices and Legends. Licensee agrees to affix to any materials
bearing the Trademarks (including labels, packaging, advertising
and promotional materials) any statutory notices or legends
reasonably required by UMBRO, in advance of production of such
Products.
8.4 Trademark Registrations.
UMBRO, at Licensee's commercially reasonable request, shall use its
best efforts to pursue registration with the United States
Patent and Trademark Office, in the name of Umbro Trademark,
Inc. or other appropriate Affiliate, at UMBRO's cost, of
additional trademarks which Licensee reasonably believes to be
necessary for the marketing and sale of Products under this
Agreement. Licensee agrees to cooperate with UMBRO in the
prosecution of such trademark applications and to supply UMBRO,
free of charge, with sufficient samples as may be required for
the filing of such trademark applications.
(b) UMBRO shall cooperate with Licensee to ensure the proper
filings are made with U.S. Customs so as to provide for Licensee to
be recorded as an authorized importer of UMBRO.
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ARTICLE 9
Infringement of Trademarks
9.1 Notice of Infringement and Notice of Modification. Licensee shall
promptly notify UMBRO in the event that Licensee obtains knowledge
of any unauthorized use of, or unauthorized plans to use, any of
the Trademarks. Licensee shall also promptly notify UMBRO in the
event Licensee obtains knowledge of any allegation that any of the
Trademarks is invalid or claimed to be owned by others, or that the
use of the Trademarks or the manufacturing, marketing or
distribution of the Products authorized by this Agreement infringes
or violates any rights of any other person.
9.2 Legal Proceedings.
(a) UMBRO shall be solely entitled to determine and carry out,
in its discretion, the course of action, if any, that may
be appropriate for responding to instances of infringement
of the Trademarks or violations of UMBRO's or Licensee's
rights with respect to the Products, and UMBRO shall have
no obligation to Licensee regarding UMBRO's decision
whether to take action or regarding any course of action
UMBRO may choose to take, provided that UMBRO shall
exercise sound judgment and take all reasonable care to
protect and defend its rights in the Trademarks in the
Territory and the exclusive rights granted to Licensee
under this Agreement.
(b) If Licensee believes that additional or different action
should be taken against infringement occurring in the
Territory, then Licensee may so notify UMBRO in writing
and, if UMBRO so elects in UMBRO's sole discretion,
Licensee may take action itself, at Licensee's own
expense. If Licensee takes action under such
circumstances, UMBRO may elect at any time to resume
responsibility, at UMBRO's expense, for carrying out or
disposing of such action. Licensee shall keep UMBRO
reasonably and timely informed of any action it takes
hereunder and shall further provide UMBRO with such
specific information as UMBRO may require. Licensee shall
be entitled to retain any damages and other monetary
relief obtained pursuant to any judgment or settlement
relating to such legal proceedings initiated by Licensee
pursuant to this Section 9.2(b).
9.3 Cooperation. At UMBRO's request, Licensee shall cooperate fully
with UMBRO (including by being named as a complainant or
co-complainant) in any action, claim or proceedings brought or
threatened in respect of the Trademarks or the Products in the
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Territory. If Licensee recovers money in such action, Licensee
agrees to pay to UMBRO, and hereby waives all claims to, all
damages or other monetary relief recovered in such action by reason
of a judgment or settlement, up to the total damages and costs
incurred by UMBRO with respect to all legal actions theretofore
taken by UMBRO in the Territory during the Term of this Agreement
with the remaining monetary relief deemed to be "Excess Proceeds".
Licensee shall be entitled to receive or retain Excess Proceeds,
but to the extent such Excess Proceeds exceed any damages or costs
incurred by Licensee, shall pay a royalty to UMBRO on such Excess
Proceeds as though they were Net Sales in the Annual Period
received.
ARTICLE 10
Royalties; Payments; Record Keeping
10.1 Royalty Payments and Rates. Licensee shall pay UMBRO a royalty
calculated on the Net Sales of all invoiced sales of the Products
by Licensee (and on any excess proceeds referred to in Section
9.3). In addition to the standard royalty, International Licensed
Products shall have an additional separate royalty rate as set
forth in Appendix C which rate may be varied upon six (6) months
notice by UMBRO to Licensee. The royalty rate for Products is
indicated in Appendix J hereto.
If Licensee purchases Products from Authorized Manufacturers,
royalties are payable by Licensee and not by the Authorized
Manufacturers with respect to the Net Sales on Licensee's resale of
those Products.
10.2 Calculation and Payment of Royalties. Royalties shall be calculated
based on Net Sales occurring during each Quarter (or portion
thereof). The royalties calculated for each Quarter shall be paid
by Licensee within thirty (30) days following the end of that
Quarter.
10.3 Minimum Royalties.
(a) Licensee shall pay UMBRO royalties pursuant to Articles
10.1 and 10.2 for each Annual Period at least equal to the
Minimum Royalty as set out in Appendix J. Within fourteen
days of receipt of the fourth Quarterly Report of each
Annual Period, UMBRO shall calculate the total royalties
paid by Licensee to UMBRO in respect of such Annual Period
and notify Licensee whether or not Licensee has satisfied
the Minimum Royalty for such Annual Period, and if not,
the extent of the shortfall. In calculating whether or not
the Minimum Royalty has been met, royalties paid to UMBRO
for International Licensed Products or any Excess Proceeds
referred to in Section 9.3 shall not be taken into
account. If the Minimum
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Royalty is not met by Licensee in the Annual Period, then
Licensee shall forthwith pay a sum equal to such shortfall
to UMBRO.
(b) In the event that this Agreement terminates during an
Annual Period, the Minimum Royalty shall be prorated for
the portion of the Annual Period during which this
Agreement was in effect.
(c) Royalty amounts actually paid by Licensee in excess of the
Minimum Royalty as to one Annual Period may not be
credited towards Licensee's Minimum Royalty obligations in
the preceding or following Annual Period(s).
10.4 Quarterly Report; Business Records.
(a) Licensee shall provide UMBRO within fifteen (15) days
after the end of each month during the term, a Monthly
Report containing the information set out in Appendix C,
Part 1, signed by a responsible official of Licensee, and
if there were no invoiced sales of Products, a statement
to that effect.
(b) Licensee shall provide UMBRO within thirty (30) days after
the end of each Quarter, a Quarterly Report containing
such information in the format shown in Appendix C, Part
2, signed by a responsible official of Licensee and
accompanied by payment due, if any. If no invoiced sales
of Products are made by licensee during the relevant
period, a report stating that fact shall be provided.
(c) Licensee shall keep full and accurate records showing the
number, Net Sales, date of shipment or other transfer of
all Products shipped or otherwise transferred by Licensee,
and records of purchase and manufacture and Licensee
warrants the Monthly Reports and Quarterly Reports
produced pursuant to Section 10.4(a) and (b) are accurate.
10.5 Audit Rights. During the Term of this Agreement and for a period of
two (2) years after the termination of this Agreement, Licensee
shall permit UMBRO's representatives to have access, after written
notice to Licensee at least two (2) days prior to such audit, at
all reasonable times during normal business hours, subject to the
confidentiality provisions of Section 13.9 hereof, to Licensee's
business records relating to this Agreement for purposes of
verifying the royalties paid or payable to UMBRO, verifying
information provided to UMBRO by Licensee, and/or obtaining any
other information relevant to the parties' respective rights and
obligations under this Agreement. Licensee acknowledges that this
type of audit is part of standard business practice and that
Licensee shall be audited pursuant to this Section 10.5 at least
once during the Term of this Agreement. Licensee
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shall cooperate with respect to the determination of the amount of
royalties due for the period examined, gross and net sales
(including itemized deductions), promotional spending (measured
media, point of sale, free goods, promotions), reduced margins
goods and current inventory levels. The cost of the audit by
UMBRO's representatives shall be borne by UMBRO unless a deficiency
in royalties is found to exceed by five percent (5%) or more the
royalties previously paid by Licensee for the applicable period, in
which event Licensee shall immediately reimburse to UMBRO the costs
of such audit.
ARTICLE 11
Term, Termination and Renewal
11.1 Term. This Agreement shall commence on the Effective Date. Unless
earlier terminated in accordance with the terms of this Agreement,
this Agreement shall thereafter remain in effect for the Term. The
Agreement may be renewed under the same terms and conditions
(except as set forth below) at Licensee's option exercised in
writing on or before August 15, 2003 for an additional period of
five years through December 31, 2008 provided that:
(a) Licensee has achieved $15,000,000 in sales during any twelve
month period commencing January 1, 2002 and ending June 30, 2003;
and
(b) UMBRO has not in good faith delivered written notice pursuant
to Section 11.2 of a material breach of this Agreement by Licensee
and the breach alleged in such notice remains uncured fifteen (15)
days after Licensee exercises its renewal rights.
If this Agreement is renewed, the Minimum Sales (and corresponding
minimum royalties) during the renewal Term shall be, at UMBRO's
option, either (a) $15 million in year 2004 increasing 10% per
year during the renewal term or (b) 75% of calendar year 2003
Annual Net Sales for each year of the renewal Term.
11.2 Termination by UMBRO upon Default, etc. UMBRO may terminate this
Agreement forthwith upon notice to Licensee if:
(a) Licensee assigns this Agreement or any rights hereunder,
without the prior written consent of UMBRO; UMBRO agrees
to a commercially reasonable standard in deciding whether
to allow an assignment to a wholly-owned Affiliate of
Licensee.
(b) a Competitor acquires more than 30% of the issued and
outstanding shares of Licensee;
(c) Licensee fails to pay in full any sum due UMBRO (whether
under this Agreement or
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any other contract between the parties) when due, and such
delinquency continues for seven (7) days or longer after
UMBRO notifies Licensee of such failure in writing;
(d) Licensee commits a material breach of its material
obligations under this Agreement or any other contract
between the parties, and such breach is not fully cured
within thirty (30) days after UMBRO notifies Licensee of
such breach in writing; provided, however, if such breach
is of a nature that it is unable to be cured within such
thirty (30) day period despite the good faith efforts of
Licensee, then UMBRO may not terminate this Agreement so
long as Licensee is diligently procuring such cure and, in
fact, effects such cure. Nothing in this section, however,
is intended to limit UMBRO's rights under Section 13.16;
(e) Licensee becomes insolvent, or has any distress or
execution levied upon its goods or effects, or initiates
or is the subject of winding up or bankruptcy proceedings,
or a receiver is appointed over its assets, or suffers any
similar action in consequence of debt;
(f) Licensee ceases to do business for any period of thirty
(30) consecutive days (other than for annual holidays) or
otherwise, for any reason, is substantially prevented from
performing or is unable to perform its material
obligations under this Agreement; or
(g) Licensee knowingly and intentionally violates any of the
material sourcing requirements contained in Section 3.3
hereof or any of the provisions contained in Articles 7.1,
7.3 or 7.5 hereof. Any such violation shall constitute a
material breach of this Agreement and Licensee shall not
have the opportunity or right to cure. In this Section
11.2(g), "material" shall mean a violation that, in
UMBRO's reasonable good faith judgment, undermines the
purpose of the Authorized Manufacturer designation by
preventing UMBRO, among other things, from controlling the
source of manufacturing, the quality of manufacturing, the
goodwill of the Trademarks or UMBRO's reputation in the
global marketplace; or
(h) An audit conducted pursuant to section 10.5 reveals a
deficiency in royalties in excess of 5% or more than the
royalties paid by Licensee for the audited quarter and
such underpayment is a knowing and intentional act of
Licensee. Any such violation shall constitute a material
breach of this Agreement and Licensee shall not have the
opportunity or right to cure; or
(i) Licensee ceases to offer for sale or distribute Products
for any period of thirty (30) consecutive days.
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11.3 Termination by Licensee upon Default, etc. Licensee may terminate
this Agreement forthwith upon notice to UMBRO if:
(a) the Trademarks, or any of them that are substantial in
importance, are abandoned or cease to be eligible for
protection in the Territory, despite reasonable effort and
cooperation of the parties;
(b) UMBRO commits a material breach of any its material
obligations under this Agreement, including its
obligations under Section 5.5, and such breach is not
fully cured within thirty (30) days after Licensee
notifies UMBRO of such breach in writing;
(c) UMBRO ceases to do business for any period of thirty (30)
consecutive days (other than for annual holidays) or
otherwise, for any reason, is substantially prevented from
performing or is unable to perform its obligations under
this Agreement; or
any Primary Branded Licensee other than Signal Apparel
Company, Inc. fails to pay the amounts set forth in
Section 5.4 when due if such delinquency continues for
fourteen (14) days or longer after Licensee notifies UMBRO
in writing of same.
11.4 Failure to Meet Minimum Sales. If in any two consecutive Annual
Periods commencing January 1, 2000, Licensee fails to produce the
required Minimum Sales, UMBRO shall have the right to terminate
this Agreement with thirty (30) days prior written notice.
11.5 Cumulative Rights and Remedies. Any right of UMBRO to terminate
this Agreement or obtain other relief as provided in this Article
11 is in addition to and without prejudice to any right or remedy
UMBRO may otherwise have under this Agreement or at law in respect
of any breach of this Agreement.
ARTICLE 12
Consequences of Termination
In connection with any termination of this Agreement
regardless of the reason, including expiration of the Term, the parties agree as
follows:
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12.1 Appointment of Successor. UMBRO may, during the period of twelve
(12) months preceding the prescribed date of termination of this
Agreement, negotiate with and appoint Licensee's successor(s) or
replacement(s) (if any) for the Territory (or any portion thereof)
and authorize such successor(s) or replacement(s), no earlier than
five (5) months preceding the prescribed date of termination of
this Agreement , to make themselves known as authorized licensees
or distributors of UMBRO able to do business with some or all of
the Products in some or all of the Territory and otherwise to take
all actions as a licensee or distributor; provided, however, no
orders shall be solicited or accepted before three (3) months
preceding the prescribed date of termination of this Agreement and
any orders taken during the three months preceding the prescribed
date of termination of this Agreement shall be for delivery after
the end of the Term.
12.2 Option to Purchase Inventory Upon Termination.
(a) Upon termination of this Agreement, Licensee shall
immediately deliver to UMBRO a written statement listing
Licensee's remaining inventory of Products, including raw
materials, work-in-progress and finished goods, as well as
advertising, packaging and other promotional material.
Such statement shall also indicate Licensee's actual cost
for each item (determined consistent with Licensee's
current valuation of such inventory based upon U.S. GAAP).
In the event of the termination of this Agreement, UMBRO
shall have the right to purchase, at its sole option but
subject to the rights of any lenders of Licensee holding
valid liens on Licensee's inventory, some or all (as
chosen by UMBRO) of such items (excluding those items that
Licensee is contractually obligated to supply to existing
customers in the ordinary course of business, as shown in
contractual documentation provided to UMBRO) for an amount
equal to:
(i) Licensee's actual cost for those items that are
then being sold or offered for sale to the trade
at original list wholesale price, except that
the price shall be 75% of actual cost of those
items that are slow moving or obsolete ("slow
moving or obsolete" for that purpose meaning
goods not listed in the most current market
catalog for the Territory, or not purchased or
manufactured within the preceding twelve (12)
months, or exceeding three (3) months' worth of
requirements Licensee normally would have for
the sale of such items) or are being sold or
offered for sale to the trade at a discount from
original list wholesale price of more than 25%;
(ii) for an amount equal to the actual salvage value
for those items that are defective, unsaleable,
discounted for sale by a factor of greater than
50%, or unusable; and
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(iii) an amount for advertising, packaging and other
promotional material shall be the reasonable
original cost for any new material that can be
readily used for the same or similar purposes
within the ensuing six (6) month period by UMBRO
and/or a replacement licensee.
(b) For the purpose of facilitating the operation of this
provision, Licensee shall permit representatives of UMBRO
on fourteen (14) days prior written notice and during
normal business hours to inspect such inventory. If UMBRO
exercises its right to purchase some or all of the
foregoing assets, Licensee agrees that UMBRO may act to
take immediate ownership and possession of them, which
shall be provided unencumbered by other claims or
interests, and UMBRO shall pay Licensee the applicable
purchase price for such assets within ten (10) days after
UMBRO has taken ownership and possession of such assets
and obtained such conveyance instruments and
acknowledgments as UMBRO may reasonably request in order
more properly to evidence UMBRO's ownership thereof.
12.3 Sell-Off of Products. If and to the extent that UMBRO, within
thirty (30) days after termination or expiration, does not exercise
the right to purchase Licensee's remaining inventory of Products
upon termination of this Agreement as provided in Section 12.2
hereof, for a period of six (6) months following the termination or
expiration of this Agreement (or such longer period as the parties
may agree in writing), Licensee shall have a non-exclusive right to
sell any Products remaining in stock at the date of termination of
this Agreement; provided, however, that Licensee may only do so in
compliance with the provisions applicable to the marketing and sale
of Products under this Agreement; and provided, further, that
Licensee shall have the right to sell such Products only if
Licensee has paid all royalties due under this Agreement and
continues to pay royalties on Products then being sold. Except for
the sale of Products remaining in stock, Licensee shall not be
entitled following termination of this Agreement to exercise any
rights granted by this Agreement.
12.4 Removal of Trademarks. Upon termination or expiration of this
Agreement and upon end of sell-off period if applicable, Licensee
shall, at its own expense, immediately remove all Trademarks from
any signs, letterheads, unused packaging materials or other
advertising materials used or created by Licensee. If Licensee
fails to do so, UMBRO may take action as it reasonably requires to
do so, at Licensee's expense.
12.5 Return of Materials. Upon termination or expiration of this
Agreement or the conclusion of any allowed sell-off period under
section 12.3, Licensee shall, at UMBRO's request,
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promptly deliver to UMBRO all materials and media of any nature
whatsoever in Licensee's possession or control relating to the
Products, the Trademarks or UMBRO, or relating to the activities of
Licensee involving the Products, the Trademarks or UMBRO, other
than business records and correspondence between Licensee and UMBRO
which do not relate to technical matters. Such obligation will
apply to advertising, packaging and other promotional material
owned by Licensee only as provided in Section 12.2, but, regardless
of whether such material is provided to UMBRO, Licensee will have
no right to use such material for any purpose so long as it
includes or references the Trademarks, the Products or UMBRO.
12.6 Assignment of Consents, etc. Upon the later of the termination or
expiration of this Agreement or end of the sell-off period, if
applicable, and to the extent permitted by applicable law, Licensee
shall, upon UMBRO's written request, use commercially reasonable
efforts to assign to UMBRO or UMBRO's designee, free of charge,
such permissions, consents, licenses, the Licensee Sponsorship
Agreements, sublicense agreements (to the extent assignable by the
terms thereof or with the applicable sublicensee's consent),
distribution agreements (to the extent assignable by the terms
thereof or with the applicable distributor's consent), and purchase
orders issued by Licensee (if any) as UMBRO may request relating to
the marketing, distribution or sale of the Products, and Licensee
shall execute all documents and do all things necessary to ensure
that UMBRO or its designee shall enjoy the benefit of the same.
UMBRO shall not be obligated to accept assignment of any of the
above, but shall exercise its discretion in requesting assignment
of those items it selects for assignment. Licensee in no event
shall be required to cure any defaults under any such agreement.
12.7 Payments. All outstanding unpaid invoices relating to Products or
other merchandise or materials sold by UMBRO to Licensee shall
continue to be paid when and as due by Licensee. UMBRO may, at its
option, require reasonable assurance of payment for such invoices
and for payment on any orders received from Licensee for Products
or other merchandise or materials which have not yet been shipped.
12.8 No Further Obligations. Provided that UMBRO in its actions
otherwise complies with the terms of this Agreement, Licensee shall
have no claim against UMBRO for compensation for loss of goodwill,
investment of capital or labor, or any similar loss and all
liabilities of UMBRO to the Licensee are excluded to the fullest
extent permitted by law other than its payment obligations under
Section 1.4(e)(iii).
12.9 Survival. Sections 6.3, 6.4, 6.5, and 7.6 and Articles 10, 12 and
13 shall survive and continue in full force and effect in
accordance with their terms, notwithstanding the termination of
this Agreement.
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ARTICLE 13
Miscellaneous
13.1 Affiliates. In undertaking and performing its obligations under
this Agreement, UMBRO shall be entitled to act through or on behalf
of its Affiliates, and shall be entitled to sublicense or assign
its rights and obligations under this Agreement to its Affiliates,
in whole or in part, provided that UMBRO shall remain responsible
to Licensee for the full performance of any such obligations as
required by this Agreement but only to the extent the assignee
fails to perform.
13.2 Governing Law. It is the intent of the parties that the express
terms of this Agreement be given their maximum literal effect. To
the fullest extent not in conflict with the terms of this
Agreement, the rights and obligations of the parties with respect
to the subject of this Agreement, and the validity, construction
and performance of this Agreement, shall be determined exclusively
in accordance with, and governed exclusively by the laws of the
State of South Carolina, USA applicable to contracts executed and
fully performed within that State.
13.3 Arbitration.
(a) In the event of any dispute controversy or claim arising out
of relating to or in connection with this Agreement, including
the breach, termination or validity thereof, such dispute
controversy or claim shall upon demand of either party, be
submitted to final and binding arbitration to be conducted in
accordance with the Rules of Arbitration of the American
Arbitration Association, as then in effect, as modified herein
or by mutual agreement of the parties (the "Rules").
(b) Arbitration hereunder shall be the sole and exclusive forum
for the resolution of such disputes, controversies or claims,
but each party retains the right to seek judicial assistance
(i) to compel arbitration, (ii) to obtain interim measures of
protection pending arbitration, and (iii) to enforce any
decision of the arbitrators, including the final award.
(c) At such time as arbitration is demanded, the parties shall
endeavor to select a single arbitrator to conduct the
arbitration, but if the parties cannot agree on the identity
of a single arbitrator within thirty (30) days of receipt of
the arbitration demand, each of UMBRO and Licensee each shall
appoint one (1) arbitrator and the party-appointed arbitrators
shall appoint within thirty (30) days of their appointment a
third arbitrator. If UMBRO or Licensee fails to nominate an
arbitrator, or the two party-nominated arbitrators are unable
to select a third arbitrator within such thirty (30) days, the
arbitrator or
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arbitrators in question shall be appointed by AAA in
accordance with the Rules.
(d) It is the intention of the parties that the arbitrator or
arbitrators shall forthwith determine the merits of the claim,
controversy or dispute, and shall deliver its or their
decision within ninety (90) days of the date of receipt of the
arbitration demand specifying such remedy (including money
damages) as shall fully implement the intent and purposes of
this Agreement.
(e) In addition to the authority conferred on the arbitrator or
arbitrators by the Rules, the arbitrator or arbitrators shall
have the authority to order such discovery and production of
documents, including the deposition of party witnesses, as it
may deem just and equitable.
(f) The exclusive seat of the arbitration shall be Atlanta, and it
shall be conducted in the English language.
(g) Either party may submit testimony or documentary evidence in
its native language and shall, on the request of the other
party, furnish a translation or interpretation in English of
any such testimony or documentary evidence.
(h) The arbitral award shall be in writing and shall be final and
binding on the parties and may include an award of costs,
including reasonable attorneys' fees and disbursements.
(i) Judgment upon the award may be entered by any court having
jurisdiction thereof or having jurisdiction over the parties
or their assets.
13.4 Entire Agreement. The provisions of this Agreement constitute the
entire agreement between the parties and supersede all prior
agreements, oral or written, and all other communications relating
to the subject matter hereof. Each party acknowledges that, in
entering into this Agreement it does not do so on the basis of, and
does not rely on, any representation, warranty or other provision
except as expressly referred to in this Agreement, and all
conditions, warranties or other terms implied by statute or common
law are excluded to the fullest extent permitted by law.
13.5 Notices. All notices or other communications required or permitted
to be given hereunder shall be given in writing (including in the
form of a telex or a facsimile). All notices or other
communications to a party shall be marked for the attention of the
person, and directed to the address or telex or facsimile number,
specified under the name of that party in Appendix D hereto. Each
notice or other communication shall be either delivered by hand
during normal business hours or sent by telex, registered or
nearest equivalent post
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(where possible by air mail), or facsimile. A notice or other
communication shall be effective for purposes of this Agreement,
and shall be deemed to have been received by the party to whom it
is sent:
(a) If delivered by hand, upon receipt by the person to whose
attention it is properly addressed, or upon receipt by
another person then upon the premises at the relevant
address who reasonably appears to be authorized to receive
post or other messages on behalf of the relevant party;
(b) If sent by registered or nearest equivalent post, seven
(7) days after the date upon the registration receipt
provided by the relevant postal authority;
(c) If sent by facsimile, on the commencement of business of
the next usual business day following the time of
transmission.
Each party shall notify the other party in writing of any change in
address, individual contact, telex, or facsimile number which
differs from the information specified in Appendix D.
13.6 Independent Parties. Licensee and any sublicensee are and will be
considered independent contractors with the entire control and
direction of their business and operations, subject only to the
conditions and obligations established by this Agreement. No
agency, employment or partnership relationship is created by this
Agreement. Licensee's and sublicensees' businesses are separate and
apart from any that may be owned or conducted by UMBRO. No party to
this Agreement shall make any representation intending to create an
apparent agency, employment or partnership with respect to the
other, nor shall any party have authority to act for any other
party in any manner to create obligations or debts binding on any
other party or be responsible for any obligations or expenses
whatsoever of any other party.
13.7 No Waiver, etc. A waiver of enforcement by either party of any
provision of this Agreement shall not be construed as a waiver of
any other provision herein. The terms of this Agreement are
severable. If any term is declared invalid, it shall not affect the
remaining terms which shall continue to be binding and subsisting.
13.8 No Delegation Without UMBRO's Consent.
(a) Licensee shall not delegate its duty or performance or assign
its rights or obligations under this Agreement without first
obtaining the written consent of UMBRO, and any attempted
delegation or assignment without such written consent shall be
a material breach of this Agreement.
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All investment decisions of Licensee are its own voluntary and
independent investment decisions made without any expectancy
of recompense by UMBRO.
This Agreement shall bind and inure to the benefit of Licensee and
UMBRO and their respective successors and assigns.
13.9 Confidentiality.
(a) UMBRO will provide Licensee with information relating to the
business operations, processes, plans, inventions, know-how,
designs, trade secrets, customers, market information and data
relating to its historic United States business in Products.
Each party acknowledges and agrees that all information given
to it by the other party including, without limitation, any
information relating to the other party's business,
operations, processes, plans, inventions, know-how, designs,
trade secrets, customers, market information and data pursuant
to or in connection with this Agreement ("Confidential
Information") is confidential and proprietary to the other
party.
(b) Each party agrees not to use any of the Confidential
Information during the term of this Agreement and for a period
of three (3) consecutive years thereafter for any purpose
other than as permitted or required for performance by the
parties hereunder.
(c) Each party further agrees not to disclose or provide any of
such Confidential Information to any third party and to take
all necessary measures to prevent any such disclosure by its
employees, agents, contractors or consultants during the term
hereof and for a period of three (3) consecutive years
thereafter.
(d) Nothing herein shall prevent either party from using,
disclosing or authorizing disclosure of any Confidential
Information which is, or hereafter becomes, part of the public
domain through no fault of the party or from disclosing
information which it is required to disclose in order to
comply with any applicable law (including without limitations,
securities regulations) or governmental requirement.
Confidential Information provided by UMBRO to other licensees,
distributors, Authorized Manufacturers, Affiliates of either
party or Connected Persons shall not be deemed to be in the
public domain for purposes of this Section 13.9 solely as a
result of such limited disclosure.
13.10 Indemnification by Licensee. Licensee shall at all times be solely
responsible for, and shall defend, indemnify and hold harmless
UMBRO and UMBRO's Affiliates (together with
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their respective officers, directors, agents, and employees) from
and against, any and all liabilities, losses, claims, demands,
causes of action, damages, costs and expenses (including reasonable
attorney's fees) of any nature whatsoever they may incur or suffer
arising out of or in connection with (1) the advertising or
promotion of any Products (excluding products purchased from UMBRO)
by Licensee, (2) Licensee's dealings with any sublicensees and
distributors, and (3) the sale or use of Products manufactured by
Licensee or Authorized Manufacturers (excluding products
manufactured by UMBRO or its Affiliates) selected by Licensee in
each case notwithstanding any approval which may have been given by
UMBRO, exclusive, however, of the matters addressed in Section
13.11 hereof.
13.11 Indemnification by UMBRO.
In the event that Licensee, as a result of its use of the
Trademarks in compliance with this Agreement, is alleged by
any other person to have infringed or violated the trademark
rights of such person in the Territory, UMBRO agrees to
defend, indemnify and hold harmless Licensee and its
Affiliates, their respective officers, directors, agents and
employees from and against any and all liabilities, losses,
claims, demands, causes of action, damages, costs and
expenses (including reasonable attorney's fees) of any nature
whatsoever arising out of such allegation; provided that (a)
Licensee shall promptly give notice of such matter to UMBRO
and (b) Licensee shall give UMBRO immediate and complete
control of, and all reasonable assistance in connection with,
the defense and disposition of such matter, including any
negotiations for its settlement or compromise. Licensee's
right to obtain indemnification with respect to Trademarks
owned by other organizations (such as football leagues, teams
or clubs) and used by UMBRO and/or Licensee under license
from such organizations shall be limited to the
indemnification provided by those organizations. The
foregoing states the entire liability of UMBRO to Licensee in
respect of any infringement of the intellectual property
rights (of whatever nature) of any person.
UMBRO shall at all times be solely responsible for, and shall
defend, indemnify and hold harmless Licensee and its
Affiliates (together with their respective officers,
directors, agents, and employees) from and against, any and
all liabilities, losses, claims, demands, causes of action,
damages, costs and expenses (including reasonable attorney's
fees) of any nature whatsoever they may incur or suffer
arising out of or in connection with manufacturing or design
defects occurring in Products manufactured or designed by
UMBRO or its Affiliates or on their behalf.
(iii) UMBRO's indemnification responsibility under this Section
13.11 shall apply only to such amounts not covered by
insurance under the policies required pursuant to Section
13.12 or otherwise.
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13.12 Insurance by Licensee. Licensee agrees that, throughout the Term of
this Agreement and for two (2) years afterwards, it will maintain
insurance with a reputable insurance company reasonably acceptable
to UMBRO against claims based upon product liability for Products
in the amount of not less than one million US dollars ($1,000,000),
combined single limit. Licensee shall cause its insurance policy to
be endorsed and in force from the Effective Date of this Agreement,
and to name UMBRO and UMBRO's Affiliates (and their respective
officers, directors, employees, and agents) as additional insureds
under such policies of insurance. Such endorsement shall stipulate
that the required coverage will not be reduced or canceled without
sixty (60) days' prior written notice having been provided to
UMBRO. Evidence of such coverage shall be supplied to UMBRO within
30 days of the Effective Date.
13.13 Limitations. Except as provided in Sections 13.10, 13.11, or 13.12,
neither party shall be responsible for special, incidental,
consequential, indirect, punitive or similar damages based on any
claim or proceeding of the other party relating to the subject
matter of this Agreement, regardless of the form of action. This
provision shall not apply, however, to any manufacture or
distribution of Products by Licensee in a manner which is not
authorized by this Agreement.
13.14 Headings for Convenience Only. The headings used in this Agreement
are included for convenience only and are not to be used in
construing or interpreting this Agreement.
13.15 Authorization; Validity. Each party hereto represents and warrants
that this Agreement is legal and binding and enforceable against
such party in accordance with its terms. Each individual signing
this Agreement on behalf of a party hereto represents and warrants
that he has been fully empowered to sign this Agreement and that
all necessary action to authorize his signature of this Agreement
has been taken.
13.16 Force Majeure.
(a) Upon giving notice to the other party, a party affected by
an event of Force Majeure shall be relieved without any
liability on its part from the performance of its
obligations under this Agreement, except for the
obligation to pay any amounts due and owing hereunder, but
only to the extent and only for the period that its
performance of such obligations is prevented by the event
of Force Majeure. Such notice shall include a description
of the nature of the event of Force Majeure, and its cause
and possible consequences. The party claiming Force
Majeure shall
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promptly notify the other party of the termination of such
event.
(b) The party invoking Force Majeure shall provide to the
other party confirmation of the existence of the
circumstances constituting Force Majeure in such detail as
shall reasonably be requested by the other party. Such
evidence, if satisfactory to the other party, may consist
of a statement or certificate of an appropriate
governmental department or agency where available, or a
statement describing in detail the facts claimed to
constitute Force Majeure.
(c) During the period that the performance by one of the
parties of its obligations under this Agreement has been
suspended by reason of an event of Force Majeure, the
other party may likewise suspend the performance of all or
part of its obligations hereunder to the extent that such
suspension is commercially reasonable.
13.17 Currency, Tax, Interest, No Set-Off.
(a) Any payments to be made by Licensee to UMBRO under this
Agreement shall be paid to UMBRO in United States dollars
at such depository as UMBRO may specify
(b) All payments due to UMBRO shall be remitted in full
without charges or deductions of any kind except
withholding taxes levied in accordance with the tax laws
prevailing in the Territory and then only if there is a
treaty or convention in effect at the date of payment
between the government(s) of the Territory, the United
Kingdom or the United States as the case may be, and
allowing UMBRO to offset such withholding tax against tax
UMBRO would otherwise pay in another jurisdiction as tax
on the royalties received and provided that Licensee shall
promptly (and in any event no more than thirty working
days after payment) furnish UMBRO all necessary receipts
and documentation to enable it to file for available tax
credits in applicable jurisdictions.
(c) If Licensee fails to pay any payment due to UMBRO under
this Agreement within the time stipulated in this
Agreement then (in addition to and without prejudice to
any other remedy available to UMBRO) Licensee shall also
pay interest on the amount outstanding at an annual rate
of 3% (three percent) above the base rate of Chase
Manhattan Bank prevailing from time to time, until full
payment of such amount is received by UMBRO.
(d) In no event may Licensee suspend payment of its
obligations due to UMBRO, or set-off such payment against
obligations due to Licensee except to recover unpaid
reimbursement of advances described in Sections 1.4(d)(i)
and 1.4(e)(iii).
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13.18 Electronic Commerce and Catalogs.
(a) The use of Internet or other electronic networks (which
would include internet, television or similar technology)
for the transaction of commerce is a global reality. UMBRO
reserves the right to conduct commerce electronically
through a network site designed for that purpose. Such
commerce has the potential of global reach to various
distribution channels and consumers. It will be UMBRO's
sole decision and right to establish such a site and
conduct electronic commerce in any portion of the global
marketplace. So long as UMBRO maintains such a site, at
Licensee's request, UMBRO shall link its site in a
commercially acceptable manner to the Internet web side
described in Section 13.18(b).
(b) Subject to the terms and conditions of this Agreement,
Licensee may sell all Products through an Internet web
site so long as (i) the Products are shipped to end
customers located within the Territory, (ii) the Products
are accessed from a domain name mutually agreed upon by
UMBRO and Licensee, (iii) Licensee maintains a viable, in
the field, sales force in the Territory which physically
calls on historical customer accounts for Teamwear
Products and (iv) Licensee keeps full and accurate records
of all customer orders made via the Internet and all
Products shipped to fill Internet orders. UMBRO agrees not
to make Internet sales to customers located in the
Territory, or knowingly to customers outside the Territory
that UMBRO knows or reasonably should know intends to sell
in the Territory.
(c) The Internet domain name used by Licensee to sell Products
shall contain the word "Umbro" and shall be owned by and
registered under UMBRO's name. Upon receipt of a notice of
termination of this Agreement, Licensee shall cease
selling Products through the Internet web site within 24
hours of receipt of such notice. Licensee may link such
site to other Internet web sites of Licensee and its
Affiliates.
(d) UMBRO cannot fully control the use of electronic commerce
or catalogues by its customers, nor can it control the use
of electronic commerce or catalogues by other Licensees'
customers. UMBRO is not responsible for Licensee's sales
that are impacted by electronic commerce or catalogs.
13.19 Intranet. UMBRO is developing an internal network that allows UMBRO
Affiliates, licensees and other persons selected by UMBRO to
communicate through computers and may establish other
communications systems in the future (the "UMBRO Intranet"). UMBRO
and Licensee acknowledge and agree that the use of the UMBRO
Intranet by UMBRO, its licensees and other selected persons will
facilitate the sharing of ideas and will increase the speed and
efficiency of communication among the participants. When
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established UMBRO shall offer Licensee the opportunity to
participate actively in the UMBRO Intranet. Licensee may, in its
discretion, choose to participate in the UMBRO Intranet. If it
participates, Licensee shall acquire the compatible technology
necessary to utilize the UMBRO Intranet.
13.20 Interpretations. Each party acknowledges that both parties are
sophisticated in business matters and are represented by legal
counsel, and that this Agreement has been extensively negotiated.
Consequently, no rules of construction shall apply that would favor
one party or the other, regardless of which party has principal
responsibility for drafting or the choice of language. Course of
dealing and trade practice shall not apply to limit or modify terms
which are otherwise clear in this Agreement.
13.21 Governmental Reports. Licensee shall timely file all necessary
governmental reports with the competent governmental authorities in
the Territory arising out of the entering into of this Agreement.
13.22 Severability. In the event that any of the terms of the Agreement
are in conflict with any rule of law or statutory provision or are
otherwise unenforceable under the laws or regulations of any
government or subdivision thereof, such terms shall be deemed
stricken from this Agreement, but such invalidity or
unenforceability shall not invalidate any of the other terms of
this Agreement and this Agreement shall continue in force, unless
the invalidity or unenforceability of any such provisions hereof
does substantial violence to, or where the invalid or unenforceable
provisions comprise an integral part of, or are otherwise
inseparable from, the remainder of this Agreement.
13.23 Lender's Liens on Inventory. Notwithstanding anything to the
contrary contained herein, UMBRO acknowledges that the lenders of
Licensee or its direct or indirect parent may require a lien be
placed on Licensee's inventory of Products, and during the Term and
sell-off period UMBRO agrees to allow such liens with such terms as
are reasonable or are substantially in the form presented to UMBRO
prior to the Effective Date.
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IN WITNESS WHEREOF, this Agreement has been executed and delivered
by authorized representatives of the parties, as of the date first above
written.
UMBRO INTERNATIONAL, INC.
/s/
- --------------------------------------
By:
----------------------------------
Title:
--------------------------------
LICENSEE
/s/
- --------------------------------------
By:
-----------------------------------
Title:
--------------------------------
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GLOSSARY
Capitalized terms used in this Agreement and not elsewhere defined shall have
the following meaning:
"A&P Budget" shall have the meaning set forth in Section 5.1.
"Activities and Events" means activities and events related to the
enjoyment, practice and play of soccer, including without limitation, clinics,
camps, competitions, training programs, education programs, travel tours and
other programs and events as reasonably approved by UMBRO in accordance with
Section 2.1(e).
"Advance Approval" or "Advance Approved" means physical submission by
Licensee to UMBRO of the goods or materials for which approval is sought. In
each case where Advance Approval is required, approval shall be considered given
by UMBRO if UMBRO does not notify Licensee in writing of its disapproval within
seven (7) days after UMBRO's receipt of Licensee's submission. Approval, once
obtained, shall be effective until the termination of this Agreement.
"Affiliate" means any person, corporation, partnership or other entity
that is in or under the direct or indirect control of, or controlling,
controlled by or under common control with, a referenced person or entity. For
such purpose "control" shall exist whenever there is an ownership, profits,
voting or similar interest (including any right or option to obtain such an
interest) representing at least 30% of the total interests of the pertinent
entity then outstanding (treating as outstanding any interests obtainable
pursuant to the exercise of the aforementioned rights or options); and "control"
shall be deemed to exist whenever by agreement or practice the referenced person
or entity has substantial influence or participation in the business affairs of
the pertinent person, corporation, partnership or other entity.
"Annual Net Sales" means the aggregate Net Sales of all Products sold,
transferred, or otherwise disposed of by Licensee during the Annual Period in
question.
"Annual Period" means each period of twelve (12) months, commencing on
January 1 and ending on December 31. The first Annual Period shall begin on
January 1, 1999 and end on December 31, 1999. The last Annual Period shall begin
on January 1, 2003 and ending on December 31, 2003, subject to the renewal of
this Agreement.
"Authorization Statement" means a statement on a label or in packaging
accompanying each Product manufactured by Licensee or any Authorized
Manufacturers that the Product is produced under license and the Trademarks are
the property of UMBRO. UMBRO may specify the wording and placement of the
Authorization Statement.
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"Authorized Manufacturer" means a person or entity that UMBRO has
authorized in writing to manufacture all or certain of the Products for sale to
Licensee for distribution pursuant to this Agreement. Any such person or entity
shall cease to be an Authorized Manufacturer immediately at such time as UMBRO
notifies Licensee to such effect. UMBRO may require the applicable person or
entity to enter into and comply with a Manufacturing Authorization Agreement in
the form requested by UMBRO as a condition to qualifying as an Authorized
Manufacturer. Licensee and its Affiliates shall not be de-authorized by UMBRO
unless the Products as manufactured by Licensee or its Affiliates fail to meet
the Standards. UMBRO reserves the right to authorize and de-authorize other
third-party Authorized Manufacturers in UMBRO's reasonable good faith judgment .
"Branded Channel of Distribution" means sporting goods stores
designated by UMBRO, specialty stores (excluding soccer specialty stores),
department stores, UMBRO owned retail stores, and all other non-team accounts
carrying major athletic brands such as Nike, Adidas, Champion and Reebok
including but not limited to those accounts designated by UMBRO in the Branded
License Agreement as well as accounts previously designated as accounts for the
Branded Channel of Distribution by UMBRO as well as all other accounts having
the same attributes as any of the foregoing.
"Branded License" means that license agreement executed by and between
UMBRO or its Affiliates and the Primary Branded Licensee for Products in the
Branded Channel of Distribution in the Territory and any amendment, renewal or
replacement thereof.
"Club Badge" means the officially adopted badge of teams or leagues
from which UMBRO has licensed the right to use the badge, name, other logos and
marks.
"Collectibles" includes without limitation, the following
soccer-related products (but excluding any such products which are apparel or
footwear) toys, games, back-to-school products, premium and fund-raising
products, lamps, desk accessories, souvenirs and similar products as reasonably
approved by UMBRO and such other products as determined pursuant to Section
2.1(e) hereof.
"Competitor" means any of the eight largest marketers of branded
sporting goods apparel, footwear and accessories in the Territory that
manufactures, markets and/or distributes soccer apparel, footwear and
accessories similar to the Products in the same channels of distribution
including, but not limited to, the brands Nike, adidas, and Reebok.
"Connected Person" means any person who in the reasonable opinion of
UMBRO (with whom Licensee must confer in any case of doubt) is so closely allied
to Licensee, Licensee's owners, or Licensee's personnel as to prevent
arms-length bargaining.
"Consumer Price Index" means the price index issued by the U.S.
Department of Labor in
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January of each Annual Period.
"Core Category Products" means the goods listed in Appendix A.
"Excepted Products" consist of: (i) replica and authentic apparel of
professional teams for sports other than soccer and football, (ii) footwear as
used on the field of play other than for the sport of soccer, (iii) equipment
for team sports other than soccer, football and baseball/softball that is
co-licensed with a sports celebrity and/or sports team and (iv) equipment and
footwear for non-team sports such as golf, tennis, skiing, etc.
"Excepted Products Licensee" means any person or entity to whom a
license is granted by UMBRO or its Affiliates granting such person or entity the
right to use the Trademarks for the manufacture, sale and/or marketing of
Excepted Products in the Territory in any channel of distribution.
"Force Majeure" means any event or condition, not existing as of the
date of signature of this Agreement, not reasonably foreseeable by an ordinary
person as of such date and not reasonably within the control of either party,
which prevents in whole or in material part the performance by one of the
parties of its obligations hereunder or which renders the performance of such
obligations so difficult or costly as to make such performance commercially
unreasonable. Without limiting the foregoing, the following, by way of example,
shall constitute events or conditions of Force Majeure: acts of State,
governmental or political action, riots, disturbance, casualty, war, embargo,
quota, boycott, strikes, lockouts, slowdowns, transportation, supply or
production delay, breakdown, prolonged shortage or inability to secure
materials, energy supplies, supplies, power or shipping space, accident, act of
God, epidemics, fire, flood, hurricane, typhoon, earthquake, lightning and
explosion, or other causes or circumstances beyond either party's reasonable
control affecting transportation or production of the Products.
"Initial Term" means the period from the Effective Date of this
Agreement through December 31, 2003.
"International Licensed Product" means a Core Category Product which
incorporates a Club Badge.
"Joint Marketing Budget" means $600,000, as adjusted commencing January
1, 2000 and each anniversary thereof, by the Consumer Price Index for the
immediately preceding calendar year on a cumulative basis.
"License" means the rights, obligations and license granted to Licensee
under this Agreement.
"Licensee Sponsorship Agreements" as defined in Section 1.4(a) hereof.
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"Manufacturer's Authorization Agreement" means an agreement in the form
set out in Appendix K.
"Marketing Policy" means the set of principles described in a certain
Brand and Product Marketing Manual, which has been provided to Licensee prior to
or contemporaneously with the execution of this Agreement. UMBRO reserves the
right to make reasonable modifications to the Marketing Policy at any time,
provided any such addition or modification will be consistent with UMBRO's
global marketing policy and no change to the Marketing Policy will be primarily
applicable only in the Territory so that it adversely impacts the rights and
obligations of Licensee under this Agreement as of the date of the change in the
Marketing Policy.
"Minimum Royalty" is defined in Appendix J hereof.
"Minimum Sales" means the amount of Net Sales of the Products in an
Annual Period which, pursuant to Section 10.1 hereof, generates sufficient
royalties to meet the Minimum Royalty requirement for the same Annual Period, as
set forth in Appendix J hereof.
"MLS" means Major League Soccer, LLC.
"Monthly Report" means a completed report in the format as set out in
Appendix C, Part 1.
"Net Sales" means the gross invoice price of the Products sold, shipped
or otherwise disposed of by Licensee at wholesale price less only deductions
for:
(a) where shown on the invoice, reasonable shipping cost and all
taxes which are paid to any governmental authority in respect
of the supply of the Products;
(b) credits and allowances actually given for returned or
defective Products;
where shown on the invoice, allowances (other than "Coop"
advertising), quantity discounts and trade and cash discounts
actually granted, or chargebacks; and
where included in the sales price of Products purchased by Licensee
directly from UMBRO or its Affiliates, built in royalties on
such Products.
If the Products are sold, transferred or otherwise disposed of by Licensee to an
Affiliate or Connected Person of Licensee on terms that call for the payment of
less than the ordinary sales price for comparable types and quantities of
Products when sold by Licensee at arm's length, then the invoice price for
purposes of determining Net Sales shall be the greater of the actual invoice
price or the ordinary sales price for comparable types and quantities of
Products.
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"Non-Core Category Products" means Collectibles and Activities and
Events, as reasonably approved by UMBRO as provided in Section 2.1(e).
"Other Goods" means all goods and services not included in the
definition of Core Category Products, Non-Core Category Products or Excepted
Products such as home furnishings and restaurant services.
"Primary Branded Licensee" means Signal Apparel Company, Inc., its
successors and assigns, or any other party to the Branded License.
"Products" means Core Category Products, Non-Core Category Products and
Other Goods bearing one or more of the Trademarks. UMBRO reserves the right to
add to or modify the Products, provided any such addition to or modification of
the Products will be consistent with UMBRO's global product line generally in
effect in all territories where Products are marketed and no change to the
Products will be primarily applicable only in the Territory so that it adversely
impacts the rights and obligations of Licensee under this Agreement as of the
date of the change in the Products.
"Quarter" means each 3 calendar monthly period ending March 31, June
30, September 30 and December 31 in each Annual Period.
"Quarterly Report" means a completed report in the format as set out in
Appendix C, Part 2.
"Sponsorship Agreements" means agreements to use the name, likeness,
trademark, and/or logos of an organization or individual related to the sport of
football for consideration in the manufacture, promotion, and/or sale of
football merchandise.
"Standards" means the standards and specifications for brand image,
quality, consistency and reliability established by UMBRO from time to time for
Brand Positioning, Sports Marketing, Products, Trademarks and Communications,
including those contained in the standards manuals set forth in Appendix F.
Brand Advertising, Sports Sponsorships, Products and Communications must meet
applicable Standards. The Standards require the quality of all Products and
Services to be as good as or better than competitive products and services that
are provided in comparable fashion in the market. All elements of each Product
and Service must reflect those high standards, including design, labeling,
packaging, as well as other forms of marketing communication. UMBRO reserves the
right to add to, modify or delete such standards and specifications in the
ordinary course of its business in the reasonable exercise of its reasonable
judgment, provided any such addition to, modification or deletion of such
standard or specification will be consistent with UMBRO's global Standards
generally in effect in all territories where Products are marketed and no change
to the Standards will be primarily applicable only in the Territory so that it
adversely impacts the rights and obligations of Licensee under this Agreement as
of the date of the change in the Standards.
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"Strategic Planning System" means an UMBRO created format of Business
Planning which analyzes the market place and UMBRO's position in relation to
mainstream competitors, and sets initiatives with associated costs to develop
the business in the short, medium and long term.
"Trademarks" means the registered and unregistered trademarks, service
marks, tradenames, domain names, logos and designs UMBRO notifies Licensee that
Licensee is authorized to use and display on the Products and in related
packaging and advertising, including the trademarks shown in Appendix E. UMBRO
reserves the right to add to or modify the Trademarks in the ordinary course of
its business and to delete any Trademark not used by Licensee for any
consecutive twenty-four month period during the Term of this Agreement, provided
any such addition to or modification or deletion of the Trademarks will be
consistent with UMBRO's global trademark portfolio and no change to the
Trademarks will be primarily applicable only in the Territory so that it
adversely impacts the rights and obligations of Licensee under this Agreement as
of the date of the change in the Trademarks.
"Team Channel of Distribution" means all sporting goods stores which
are approved by UMBRO in accordance with Section 2.1(d)(i) as well as soccer
specialty shops, team dealers, sporting goods stores already listed on Appendix
L and, on a direct basis, all schools, teams, leagues and other institutions
devoted to servicing soccer teams, including without limitation, all accounts
listed on Appendix L.
"Term" means the Initial Term plus any renewal term.
"Territory" means the United States, Puerto Rico and the U.S. Virgin
Islands.
"USISL" means U.S.I.S.L., Inc.
"USISL Contract" has the meaning set forth in Section 1.4(d).
"USISL Stock Purchase Agreement" means that asset and stock purchase
agreement entered into by and between Licensee and UMBRO as of the Effective
Date.
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ASSET AND USISL STOCK PURCHASE AGREEMENT
as of
November __, 1998
UMBRO INTERNATIONAL, INC. -- Seller
VARSITY SPIRIT FASHIONS & SUPPLIES, INC. -- Buyer
CERTAIN PROVISIONS OF THIS AGREEMENT ARE SUBJECT TO ARBITRATION PURSUANT TO THE
UNIFORM ARBITRATION ACT ss. 15-48-10 ET SEQ. OF THE CODE OF LAWS OF SOUTH
CAROLINA.
<PAGE>
INVENTORY AND USISL STOCK PURCHASE AGREEMENT
TABLE OF CONTENTS
Article 1 PURCHASE AND SALE OF ASSETS.................................... 1
1.1 Purchase and Sale of Assets............................. 1
Article 2 PURCHASE PRICE OF ASSETS....................................... 1
2.1. Purchase Price.......................................... 1
2.2 Payment of Purchase Price............................... 2
Article 3 REPRESENTATIONS AND WARRANTIES OF SELLER....................... 2
3.1. Organization............................................ 2
3.2. Power and Authority..................................... 2
3.3. Title to Property....................................... 2
3.4. Inventory............................................... 2
3.5 Broker's or Finder's Fees............................... 3
3.6 No Conflict............................................. 3
3.7 Materiality Defined..................................... 3
Article 4 REPRESENTATIONS AND WARRANTIES OF BUYER........................ 3
4.1 Organization............................................ 3
4.2 Power and Authority..................................... 3
4.3 Broker's or Finder's Fee................................ 4
4.4 No Conflict............................................. 4
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Article 5 CONDITIONS TO SELLER'S OBLIGATIONS.............................. 4
5.1 License Agreement....................................... 4
5.2 USISL Agreement......................................... 4
Article 6 CONDITIONS TO BUYER'S OBLIGATIONS............................... 4
6.1 License Agreement....................................... 4
6.2 USISL Agreement......................................... 4
Article 7 CLOSING......................................................... 5
7.1 Closing................................................. 5
7.2 Actions at Closing...................................... 5
a. Certificates..................................... 5
b. Resolutions...................................... 5
c. License Agreement................................ 5
d. USISL Agreement.................................. 5
e. Other Documents.................................. 5
Article 8 COVENANTS OF SELLER AND BUYER FOLLOWING CLOSING................ 5
8.1 Accounts Receivable..................................... 5
8.2 MIS..................................................... 6
8.3 Personnel and Office Space.............................. 6
8.4 Miscellaneous........................................... 6
Article 9 INDEMNITY...................................................... 6
9.1 Indemnification by Seller............................... 6
9.2 Indemnification by Buyer................................ 7
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9.3 Notice of Claim......................................... 7
9.4 Defense................................................. 7
9.5 Limitations............................................. 7
a. Thresholds....................................... 7
b. Time of Assertion................................ 8
c. Exclusive Remedy................................. 8
9.6 Recovery of Attorney Fees For Frivolous Actions......... 8
Article 10 MISCELLANEOUS.................................................. 8
10.1 Entire Agreement........................................ 8
10.2 Parties Bound by Agreement; Successors and Assigns......
10.3 Counterparts............................................ 8
10.4 Headings................................................ 8
10.5 Modification and Waiver................................. 9
10.6 Expenses................................................ 9
10.7 Notices................................................. 9
10.8 Governing Law and Arbitration........................... 10
10.9 Public Announcements.................................... 11
10.10 Third Party Beneficiaries............................... 11
10.11 "Including"............................................. 11
10.12 References.............................................. 11
10.13 Survival of Agreements.................................. 11
10.14 Severability............................................ 11
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ASSET AND USISL STOCK PURCHASE AGREEMENT
THIS ASSET AND USISL STOCK PURCHASE AGREEMENT (this "Agreement"), made and
entered into as of November __, 1998, by and between UMBRO INTERNATIONAL, INC.,
a South Carolina corporation ("Seller"), and VARSITY SPIRIT FASHIONS & SUPPLIES,
INC., a Minnesota corporation ("Buyer");
WITNESSETH:
WHEREAS, the business conducted by Seller consists primarily of the design,
development, manufacturing and/or sourcing and marketing of soccer related
apparel, footwear, equipment and accessories (the "Business");
WHEREAS, Seller owns sixty (60) shares of the capital stock of U.S.I.S.L.,
Inc. (the "USISL"), constituting 60% of all of the issued and outstanding shares
of capital stock of the USISL (the "Seller Shares"); and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to buy from
Seller, certain team inventory products existing in Seller's inventory (the
"Inventory"), certain items used in the conduct of Seller's U.S. Business
described in Section 8.5 (the "Promotional Materials"), fifteen (15) of the
Seller Shares (the "Buyer Shares"), and an option to purchase an additional five
(5) of the Seller Shares described in Section 8.9 (the "Option Shares") upon the
terms and conditions and subject to the limited exceptions set forth herein;
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, and agreements of the parties hereinafter set forth, the parties
hereto, intending to be legally bound, do hereby agree as follows:
Article 1
PURCHASE AND SALE OF ASSETS
1.1 Purchase and Sale of Assets. Upon the terms and subject to the
conditions of this Agreement, Buyer agrees to purchase, accept, and acquire from
Seller, and Seller agrees to sell, transfer, assign, convey, and deliver to
Buyer, all right, title, and interest of Seller in and to the Inventory listed
on Schedule 1.1 attached hereto, the Promotional Material, the Buyer Shares and
the Option Shares (together, the "Assets"). The parties hereby agree and
acknowledge that Buyer is not assuming any past, present, future, contingent or
other liability of Seller or any of its Affiliates.
CERTAIN PROVISIONS OF THIS AGREEMENT ARE SUBJECT TO ARBITRATION PURSUANT TO THE
UNIFORM ARBITRATION ACT ss. 15-48-10 ET SEQ. OF THE CODE OF LAWS OF SOUTH
CAROLINA.
<PAGE>
1.2 Storage and Distribution of Inventory.
a. Segregation of Inventory. Seller shall segregate the Inventory from
all other inventory controlled by Seller in its Greenville, South Carolina
warehouse.
b. Lease of Warehouse. For the storage and distribution of the
Inventory, unless purchased and paid for by Buyer, Seller will make its
warehouse facilities available to Buyer at no charge; provided, however,
Buyer removes all Inventory from Seller's warehouse facilities within
fourteen (14) days after the Closing Date. In the event Buyer does not
remove the Inventory from Seller's warehouse facilities within fourteen
(14) days after the Closing Date, Buyer shall pay to Selle a lease rate of
$2,000/month plus forty percent (40%) of Seller's actual expenses (the
"Lease Rate") until the Inventory is removed from the Seller's warehouse so
long as the warehouse is available to Seller. Buyer agrees to pay the Lease
Rate upon receipt of an invoice from Seller.
c. Ownership and Movement of Inventory. From the Closing Date until
April 1, 1999, the Inventory will be owned by Seller, whether the Inventory
is held in Seller's warehouse or another warehouse, until purchased and
paid for by Buyer. Within five business days following shipment by Buyer to
end customers or distributors, or from the Buyer's Memphis warehouse, the
Inventory will be purchased and paid for. If and when the Inventory is held
in a warehouse other than the Seller warehouse, Buyer will make
arrangements to provide the same insurance, reports and security interest
to Seller's lenders that Seller has been required to provide; provided,
however, Seller shall retain ownership of such Inventory until purchased
and paid for by Buyer. Buyer shall accept delivery of Inventory which must
be moved to a warehouse designated by Buyer to avoid double shipping costs.
Buyer shall have the risk of loss with regard to the Inventory upon receipt
of the Inventory is its own warehouse or the warehouse designated by Buyer.
d. Counting of Inventory. In conjunction with the delivery of the
Inventory from Seller to Buyer's Memphis warehouse, Buyer will retain an
independent third-party reasonably acceptable to Seller to examine the
Inventory as it is removed from Seller's delivery vehicles (the "Inventory
Counter"). The Inventory Counter will be responsible for confirming the
Inventory is actually delivered by Seller in the quantity described in
Schedule 1.1 and is not damaged. The Inventory Counte shall be the sole
entity to determine the quantity and condition of Inventory delivered by
Seller to Buyer and shall be authorized to modify Schedule 1.1 accordingly.
If the Inventory Counter provides written notice of a deficiency in the
number of products delivered or that products are damaged, then Buyer shall
give Seller written notice of the deficiencies and indicate which of the
following options applies: If the Inventory Counter determined that any
items in the Inventory were missing, the Purchas Price and the letter of
credit described in Section 1.2(d) shall be reduced by the cost of the
missing goods. If the Inventory Counter determined that any items in the
Inventory were damaged in such a manner that can reasonably be expected to
negatively affect the resale value of the goods, then Buyer may at its
option (i) return the damaged goods to Seller in which event the Purchase
Price and letter of credit will be reduced by the cost of the returned
Inventory or (ii) retain the damaged goods in
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which event the Purchase Price and letter of credit will be reduced by such
amounts as Buyer and Seller agree. Seller reserves the right to observe the
Inventory Counter.
e. Letters of Credit. Buyer will provide letters of credit in favor of
Seller's lenders to secure any Assets not purchased as of January 1, 1999
in a form reasonably acceptable to Seller's lenders.
Article 2
PURCHASE PRICE OF ASSETS
2.1 Purchase Price. The aggregate purchase price for the Assets shall be
equal to US$3,385,940.07, subject to any adjustments under Section 1.2(d) (the
"Purchase Price").
2.2 Payment of Purchase Price. The Purchase Price shall be paid as follows:
a. Initial Payment. Buyer shall pay to Seller US$300,000 in immediately
available funds at the Closing (the "Initial Payment").
b. Second Payment. Buyer shall pay to Seller US$350,000 in immediately
available funds on January 5, 1999 (the "January Payment").
c. Third Payment. Buyer shall pay to Seller US$350,000 in immediately
available funds on April 1, 1999 (the "April Payment").
d. Final Payment for Inventory. Buyer shall pay to Seller, in immediately
available funds, Seller's cost of Inventory as listed in Schedule 1.1 within
five (5) business days after such Inventory is shipped by Buyer to customers or
distributors (the "Inventory Payments"). On April 1, 1999, Buyer shall pay to
Seller, in immediately available funds, the Purchase Price less the Initial
Payment, January Payment, April Payment and Inventory Payments.
Article 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
3.1 Organization. Seller is a corporation validly existing and in good
standing under the laws of the State of South Carolina with the corporate power
and authority to conduct the Business and to own and lease its properties and
assets.
3.2 Power and Authority. Seller has the power and authority to execute,
deliver, and perform this Agreement and the other agreements and instruments to
be executed and delivered by it in connection with the transactions contemplated
hereby and thereby, and has taken all necessary corporate action to authorize
the execution and delivery of this Agreement and such other agreements and
instruments and the consummation and performance of the transactions
contemplated hereby and thereby. This Agreement is, and the other agreements and
instruments to be executed and delivered by Seller in connection with the
transactions
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<PAGE>
contemplated hereby shall be the legal, valid, and binding obligations of
Seller, enforceable in accordance with their terms.
3.3 Title to Property. At the time Buyer purchases the Inventory set forth
in Schedule 1.1 and makes the Inventory Payments, Buyer shall obtain good and
marketable title to items purchased, free and clear of all title defects, liens,
restrictions, claims, charges, security interests, or other encumbrances of any
nature whatsoever, including any mortgages, leases, chattel mortgages,
conditional sales contracts, collateral security arrangements, or other title or
interest retention arrangements.
3.4 Inventory. Subject to Section 1.2(d), as of the Closing Date and as of
the date the Inventory is purchased by Buyer, THE INVENTORY SOLD TO BUYER HEREIN
IS SOLD "AS IS, WHERE IS," WITHOUT ANY WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE. The Inventory sold hereunder is not slow moving,
damaged or obsolete nor was sold by Seller prior to Closing to the trade at a
discount from the wholesale price set forth on Schedule 1.1. Any information
regarding number, type, cost or value of the Inventory , and any other financial
or business information of any kind whatsoever, that has heretofore been
provided by Seller to Buyer has been produced in good faith, but Seller shall
have no responsibility or obligation for the accuracy or use of any information
that has been provided or is obtained by Buyer from any source.
3.5 Broker's or Finder's Fees. Seller has not authorized any person to act
as broker or finder or in any other similar capacity in connection with the
transactions contemplated by this Agreement.
3.6 No Conflict. Neither the execution and delivery by Seller of this
Agreement and of the other agreements and instruments to be executed and
delivered by Seller in connection with the transactions contemplated hereby or
thereby, nor the consummation or performance by Seller of the transactions
contemplated hereby or thereby will violate or conflict with (1) any federal,
state, or local law, regulation, ordinance, governmental restriction, order,
judgment, or decree applicable to Seller, (2) any provision of any articles or
certificate of incorporation, charter, bylaw, or other governing or
organizational instrument of Seller or USISL, or (3) any contract or agreement
between Seller and any third party, except where any such violation or conflict
would not prohibit, invalidate, impede or delay Seller's ability to perform its
duties under this Agreement.
3.7 USISL.
a. Organization and Good Standing. USISL is a corporation duly
organized, validly existing, and in good standing under the laws of
Delaware, with full corporate power and authority to conduct its business
as it is now being conducted and to own or use the property and assets that
it owns or uses. To the knowledge of Umbro, USISL is duly qualified to do
business as a foreign corporation and is in good standing under the laws of
each state in which either the ownership or use of the properties or
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<PAGE>
assets owned or used by it, or the nature of the activities conducted by
it, requires such qualification and in which the failure to be so qualified
would have a Material adverse effect.
b. Capitalization.
(i) The issued and outstanding shares of USISL consists of one
hundred (100) shares of no par value common voting stock of which one
hundred (100) shares are issued and outstanding;
(ii) All of the Seller Shares are duly authorized, validly issued and
outstanding, fully paid and nonassessable. Seller owns the Seller Shares
beneficially and of record and has good and marketable title to such
Seller Shares and owns such Seller Shares free and clear of all
encumbrances or other restrictions or claims by any other person. The
Seller Shares constitute Sixty percent (60%) of all of the issued and
outstanding Shares. Except for the transactions contemplated by this
Agreement, neither Seller nor USISL has any commitment or obligation to
issue or sell any issued and outstanding shares of USISL or any
securities or obligations convertible into or exchangeable for, or
giving any person any right to subscribe for, purchase or otherwise
acquire from the USISL or Seller (whether by preemptive right, right of
first refusal or otherwise), any issued and outstanding shares of USISL
and no such securities or obligations are issued or outstanding.
c. Financial Statements. To the knowledge of Seller, the financial
statements previously provided to Buyer and set forth on Schedule 3.7(c)
are in accordance with the books and records of USISL, have been prepared
in accordance with U.S. GAAP consistently applied throughout the periods
indicated and fairly present the financial position of USISL and the
results of its operations as of the dates and throughout the periods
indicated and there has been no Material adverse change in the financial
position of USISL from that reflected in the financial statements except as
described in the resolutions of the board of directors of USISL dated
November 9, 1998 and the amendment to the sponsorship agreement between the
USISL and Seller effective as of January 1, 1998, both included in Schedule
3.7(c).
d. Agreements. Except as set forth on Schedule 3.7(d), there are no
other shareholder agreements, registration rights agreements or other
agreements relating to the ownership of the issued and outstanding shares
of USISL.
3.8 Consents. No approval, authorization, consent, permission, or
waiver to or from, or notice, filing, or recording to or with, any person,
governmental, public or self-regulatory body or authority is necessary for (1)
the execution and delivery of this Agreement and the other agreements and
instruments to be executed and delivered in connection with the transactions
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contemplated hereby or thereby by Seller or the consummation by Seller of the
transactions contemplated hereby; or (2) the transfer and assignment to Buyer at
Closing of the Assets.
3.9 Litigation. No claim, action, suit, proceeding, inquiry, hearing,
arbitration, administrative proceeding, claim, or investigation (collectively,
"Litigation") is pending, or, to Seller's knowledge, threatened against Seller,
its present or former directors, officers, or employees, affecting, involving,
or relating to the Assets. Seller knows of no facts that could reasonably be
expected to serve as the basis for Litigation against itself (or the Buyer upon
acquisition of the Assets), it present or former directors, officers, or
employees, affecting, involving, or relating to the Assets.
3.9 Insolvency. There are no bankruptcy or insolvency proceedings pending
against Seller, the Assets, or, to the best of Seller's knowledge, the USISL.
Seller represents it is receiving reasonably equivalent value from Buyer in
exchange for the Assets.
3.10 Bulk Sales. The sale of the Assets hereunder is not a "bulk sale" as
that term is defined under the Uniform Commercial Code - Bulk Transfer Act of
the South Carolina Code ("Bulk Transfers Act") and Buyer need not comply with
any requirements under the Bulk Transfers Act.
3.11 Liabilities. Buyer will not be responsible for any liability arising
out of Seller's operation of the Business or ownership of the Assets prior to
the Closing, whether accrued, contingent or otherwise, including but not limited
to, any state taxes or product liability claims.
3.12 Materiality Defined. For purposes of this Agreement, each reference to
any "Material" adverse effect upon the Assets or any other reference to a
"Material" deviation, item or circumstance, shall be construed to include any
act, omission, event, or circumstances that would entail loss, liability,
damage, or expense to Buyer (with respect to the rights and benefits expected by
Buyer to be obtained under this Agreement) equal to or in excess of $50,000 in
any single event or circumstance, or $100,000 in the aggregate, whether under
one or more representations, warranties, covenants, or agreements contained
herein, or taken as a whole under all representations, warranties, covenants,
and agreements contained herein. Notwithstanding the foregoing, failure of
Seller to deliver any of the Inventory shall be deemed "Material".
Article 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
4.1 Organization. Buyer is a corporation validly existing and in good
standing under the laws of the State of Minnesota with the corporate power and
authority to conduct its business and to own and lease its properties and
assets.
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4.2 Power and Authority. Buyer has the power and authority to execute,
deliver, and perform this Agreement and the other agreements and instruments to
be executed and delivered by it in connection with the transactions contemplated
hereby and thereby, and has taken all necessary corporate action to authorize
the execution and delivery of this Agreement and such other agreements and
instruments and the consummation of the transactions contemplated hereby and
thereby. This Agreement is, and, the other agreements and instruments to be
executed and delivered by Buyer in connection with the transactions contemplated
hereby shall be the legal, valid, and binding obligation of Buyer, enforceable
in accordance with their terms.
4.3 Broker's or Finder's Fees. Buyer has not authorized any person to act
as broker, finder, or in any other similar capacity in connection with the
transactions contemplated by this Agreement.
4.4 No Conflict. Neither the execution and delivery by Buyer of this
Agreement and of the other agreements and instruments to be executed and
delivered by Buyer in connection with the transactions contemplated hereby or
thereby, nor the consummation or performance by Buyer of the transactions
contemplated hereby or thereby will violate or conflict with (1) any federal,
state, or local law, regulation, ordinance, governmental restriction, order,
judgment, or decree applicable to Buyer, (2) any provision of any articles or
certificate of incorporation, charter, bylaw, or other governing or
organizational instrument of Buyer, or (3) any contract or agreement between
Buyer and any third party, except where any such violation or conflict would not
prohibit, invalidate, impede or delay Buyer's ability to perform its duties
under this Agreement.
4.5 Knowledge; No Reliance. Buyer acknowledges that it possesses such
information as it deems necessary to cause it to make an informed decision to
consummate the transactions contemplated by this Agreement. Accordingly, Buyer
is not relying upon any representations or warranties of any kind whatsoever,
except for those set forth in this Agreement and the Schedules.
4.6 Undisclosed Principals or Agencies. Buyer intends to, and will,
consummate the transactions contemplated by this Agreement for its own account
and is not acting as an agent, broker, "straw-man" or other intermediary or
Representative for any undisclosed Person.
4.7 Financing. Buyer has the financial ability to, or presently has
available to it cash or binding debt/or equity financing commitments sufficient
to, discharge and otherwise pay the Purchase Price in accordance with the terms
and conditions set forth herein and to otherwise consummate the transactions
contemplated by this Agreement in strict accordance with the terms and
conditions of this Agreement.
4.8 Investment Representations.
a. Buyer understands that Seller proposes to deliver to the Buyer the
Buyer Shares without compliance with the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), that for
such purpose Seller will rely upon the representations, warranties,
covenants and agreements contained herein, and that such
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non-compliance with registration is not permissible unless such
representations and warranties are correct and such covenants and
agreements performed.
b. Buyer is a sophisticated investor familiar with the type of risks
inherent in the acquisition of restricted securities such as the Buyer
Shares and Buyer's financial position is such that it can afford to
retain the Buyer Shares for an indefinite period of time without
realizing any direct or indirect cash return on its investment.
c. Buyer is acquiring the Buyer Shares for its own account and not
with a view to, or for sale in connection with, the distribution thereof
within the meaning of the Securities Act.
Article 5
CONDITIONS TO SELLER'S OBLIGATIONS
Each of the obligations of Seller to be performed hereunder shall be
subject to the satisfaction (or the written waiver by Seller) on the Closing
Date of each of the following conditions:
5.1 Representations and Warranties True. Buyer's representations and
warranties contained in this Agreement shall be true in all Material respects on
and as of the Closing Date. Buyer shall have delivered to Seller a certificate
dated the Closing Date and signed by a duly authorized officer of Buyer to all
such effects.
5.2 Performance. Buyer shall have performed and complied with all
covenants, agreements, obligations, and conditions required by this Agreement to
be performed or complied with by it at or prior to the Closing. Buyer shall have
delivered to Seller a certificate dated the Closing Date and signed by a duly
authorized officer of Buyer to all such effects.
5.3 License Agreement. Buyer shall have entered a license agreement with
Seller in a form substantially similar to the license set forth in Schedule 5.3
(the "Varsity License Agreement) contemporaneously with the Closing under this
Agreement.
5.4 USISL Agreement. Buyer shall have entered into an agreement with Seller
and Signal Apparel Company, Inc. ("Signal") in a form substantially similar to
the agreement set forth in Schedule 5.4 (the "USISL Shareholders' Agreement")
contemporaneously with the Closing under this Agreement.
5.5 Signal Agreement. Seller and Signal shall have entered into the Signal
Asset and USISL Stock Purchase Agreement and the Signal License Agreement
contemporaneously with the Closing under this Agreement.
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Article 6
CONDITIONS TO BUYER'S OBLIGATIONS
Each of the obligations of Buyer to be performed hereunder shall be subject
to the satisfaction (or the written waiver by Buyer) on the Closing Date of each
of the following conditions:
6.1 Representations and Warranties True. Seller's representations and
warranties contained in this Agreement shall be true in all Material respects on
and as of the Closing Date. Seller shall have delivered to Buyer a certificate
dated the Closing Date and signed by a duly authorized officer of Seller to all
such effects.
6.2 Performance. Seller shall have performed and complied with all
covenants, agreements, obligations, and conditions required by this Agreement to
be performed or complied with by it at or prior to the Closing. Seller shall
have delivered to Buyer a certificate dated the Closing Date and signed by a
duly authorized officer of Seller to all such effects.
6.3 No Litigation. No Litigation shall be threatened or pending against
Buyer or Seller before any court or governmental agency that, in the reasonable
opinion of counsel for Seller, could result in the restraint or prohibition of
any such party, or the obtaining of damages or other relief from such party in a
material amount, in connection with this Agreement or the consummation of the
transactions contemplated hereby.
6.4 Material Adverse Change.
a. USISL. There shall have been no Material adverse change to USISL
or its business, assets, financial condition, results of operation or
prospects, assets or liabilities (absolute, contingent or otherwise)
between August 1, 1998 and the Closing Date, other than in the ordinary
course of business or as described in the resolutions of the board of
directors of the USISL dated November 9, 1998 and the amendment to the
sponsorship agreement between USISL and Seller effective as of January
1, 1998, both included in Schedule 3.7(c) nor has the USISL declared a
dividend or entered into any Material agreements between August 1, 1998
and the Closing Date, other than in the ordinary course of business.
b. Inventory. There shall have been no Material adverse change to the
Inventory from August 1, 1998 to the Closing Date.
6.5 License Agreement. Buyer and Seller shall have entered into the Varsity
License Agreement contemporaneously with the Closing under this Agreement.
6.6 USISL Agreement. Buyer, Seller and Signal shall have entered into the
USISL Shareholders' Agreement contemporaneously with the Closing under this
Agreement.
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6.7 Signal Agreement. Seller and Signal shall have entered into the Signal
Asset and USISL Stock Purchase Agreement and the Signal License Agreement
contemporaneously with the Closing under this Agreement.
Article 7
CLOSING
7.1 Closing. The closing of the purchase and sale of the Assets (the
"Closing") shall take place at the offices of Alston & Bird, L.L.P., One
Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia 30309-3424 at 5:00
p.m. Eastern Standard Time on November __, 1998, or at such earlier time, date,
and place as the parties may agree (the "Closing Date").
7.2 Actions at Closing. At the Closing, Buyer and Seller shall take the
following actions, in addition to such other actions as may otherwise be
required under this Agreement:
a. Certificates. Each party shall deliver the certificates from the
secretary or other authorized officer of each party (i) certifying the
accuracy of the representations and warranties contained herein, the
compliance with the covenants and agreements contained herein, and the
satisfaction of the conditions to Closing contained herein and (ii)
certifying the names and signatures of the party's officers authorized
to sign this Agreement, the Varsity License Agreement, the USISL
Shareholders' Agreement and any other documents to be executed at
Closing.
b. Resolutions. Each party shall deliver copies of resolutions of the
shareholders, board of directors or any authorized committee thereof
(all of which to the extent necessary), approving, or a certification
from a duly elected officer certifying that the respective body has
approved, the entering into of this Agreement, the Varsity License
Agreement, the USISL Shareholders' Agreement and any other documents to
be executed at Closing.
c. License Agreement. Buyer and Seller shall each deliver to the
other the Varsity License Agreement in the form attached hereto as
Schedule 5.3.
d. USISL Agreement. Buyer and Seller shall each deliver to the other
the USISL Shareholders' Agreement in the form attached hereto as
Schedule 5.4.
e. Other Documents. Buyer and Seller shall deliver other documents as
reasonably requested by the other party to complete the Closing under
the conditions of this Agreement.
f. Buyer Shares. Seller shall deliver the original stock certificates
representing all of the Buyer Shares accompanied by a duly executed
stock transfer powers endorsed in blank
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g. Initial Payment. Buyer shall pay to Seller the Initial Payment in
immediately available funds.
h. Super Show Costs. Buyer shall pay to Seller US$24,310, which is
Buyer's reimbursement to Seller of one-third of the total amount of
exhibition space, rental, storage and other similar direct costs paid by
Seller for the 1999 SuperShow as of the Closing Date which total amount
is US$72,930.
Article 8
COVENANTS OF SELLER AND BUYER FOLLOWING CLOSING
8.1 Accounts Receivable. At Seller's option, Seller may seek the assistance
of Buyer in collecting Seller's accounts receivable existing as of the Closing
Date. In the event Seller makes such request of Buyer, Buyer shall use its
commercially reasonable efforts to collect and remit to Seller all accounts
receivable of Seller for a period of 120 days following the Closing Date for a
3% fee; provided, however, Buyer shall not be liable to Seller for any
write-offs approved in writing by Seller. At the end of the 120 day collection
period, Seller may, at its option, assume the collection of its accounts
receivable or negotiate whether Buyer will continue collectively and remitting
Seller accounts receivable and under what terms.
8.2 MIS. Seller will use its commercially reasonable efforts to make the
computer software and hardware used in the Business in the United States
available to Buyer and Signal so long as available at a cost to Buyer not to
exceed 40% Seller's current costs for such items (approximately $12,000/month).
In the event such computer software and hardware must be relocated to a
different facility, the costs of such relocation shall be borne jointly by Buyer
and Signal. If necessary, and to the extent contractually allowable, Buyer and
Signal shall have the option to assume to the cost of any software and hardware
leases in the event such assumption is required under the terms of any software
or hardware lease or by a provider of services to the software or hardware. In
the event Buyer purchases computer software and hardware other than that
software and hardware used by Seller in the Business, Seller agrees to consult
with Buyer regarding Seller's management information systems used by Seller in
the Business at Buyer's reasonable request.
8.3 Personnel and Office Space. Seller will provide access to all current
United States employees of Seller to facilitate interviews in hiring of all
needed personnel. Seller will provide office space for up to 35 persons in
Seller's United States facilities as long as available to facilitate Buyer's
operations through that date. The Seller's United States telephone system will
remain available through November 30, 1998 at no charge other than long distance
costs. After November 30, 1998 Buyer shall obtain other commercial telephone
service at its own expense. Seller shall maintain ownership of the existing
Seller dedicated telephone numbers "1-800-SOCCER" and "1-864-233-0000". Seller
will allow Buyer and Signal to use these telephone numbers subject to an
agreement between Buyer and Signal on such use. The right to use these telephone
numbers will terminate with the termination the Varsity License Agreement.
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8.4 Warehouse Employees. Buyer shall pay to Seller forty percent (40%) of
the gross pay paid by Seller to its warehouse employees from the date of this
Agreement until all Inventory is transferred from Seller's warehouse to Buyer's
warehouse or a warehouse designated by Buyer. Seller shall invoice Buyer on the
first and fifteenth day of each month after the Closing Date for forty percent
(40%) of the gross pay paid by Seller's to its warehouse employees during the
preceding pay period Buyer shall pay Seller the invoice amount within ten (10)
days of the receipt of such invoice.
8.5 Miscellaneous. Seller shall provide for Buyer's use all designs,
patterns, line drawings, artwork, hangtags, posters, and other materials used by
Seller in connection with the Seller's U.S. Business, which are on hand as of
the Closing Date, the copyrights of which shall remain owned by Seller. Buyer
may use and freely copy the advertising, promotional and other materials
described above.
8.6 Insurance. Seller agrees all insurance policies relating to the
Inventory existing as of the Closing shall remain in existence until the
Inventory is shipped to Buyer's warehouse or a warehouse designated by Buyer.
Buyer agrees that, upon receipt of the Inventory in its warehouse or a warehouse
designated by Buyer, Buyer will provide similar insurance coverage for the
Inventory.
8.7 Access. Seller hereby grants Buyer reasonable access to Seller's
warehouse after Closing for the purpose of processing, distributing and shipping
the Inventory and Buyer shall be able to move the Inventory from Seller's
warehouse under the terms and conditions of this Agreement immediately after the
Closing.
8.8 Buyer not Successor to Seller. The Seller covenants and agrees that,
notwithstanding the execution and delivery of this Agreement and the
consummation and performance of the transactions contemplated hereby, Buyer is
not and under no circumstance or event shall Buyer be considered or deemed to
be, a successor in interest to, or otherwise an affiliate of, Seller. Seller
shall not, and Seller shall not cause or assist any other person or entity to,
make any statement, representation, argument or otherwise conduct itself in any
manner inconsistent with this section.
8.9 Option for USISL Shares. Subject to the terms and conditions of the
USISL Shareholders' Agreement, and at its option, Buyer will receive the Option
Shares if Buyer funds 40% of the USISL's promotional activities from January 1,
2000 through December 31, 2000 in an amount similar to, but not to exceed, the
amount funded by Buyer during calendar year 1999. Buyer may exercise this option
under the terms and conditions set forth in the USISL Shareholders Agreement by
giving written notice to Seller no later than June 30, 1999.
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Article 9
INDEMNITY
9.1 Indemnification by Seller. Seller shall indemnify, defend, and hold
harmless Buyer and its directors, officers, employees, and agents (collectively,
the "Buyer Group"), at, and at any time after, the Closing, pursuant to the time
limits in Section 9.5, from and against any and all demands, claims, actions, or
causes of action, assessments, losses, damages, liabilities, costs, and
expenses, including reasonable fees and expenses of counsel, other expenses of
investigation, handling, and litigation, and settlement amounts, together with
interest and penalties (collectively, a "Loss" or "Losses"), asserted against,
resulting to, imposed upon, or incurred by the Buyer Group, directly or
indirectly, by reason of, resulting from, or arising in connection with
a. any breach of any representation, warranty, covenant or agreement
of Seller contained in this Agreement that survives the Closing; or
b. any past, present, future, known, contingent or other liability of
Seller or any of its Affiliates; or
c. Any alleged violation of the Bulk Transfers Act by Buyer.
Buyer shall be entitled, at Buyer's option, to offset such
Indemnification Claims to be paid by Seller to Buyer against royalty payments
due Seller from Buyer under the Varsity License Agreement upon terms and
conditions as agreed to between Buyer and Seller in writing.
9.2 Indemnification by Buyer. Buyer shall indemnify, defend, and hold
harmless Seller and its successors, assigns and affiliates and the directors,
officers, employees, and agents of each (collectively, the "Seller Group"), at,
and at any time after, the Closing, pursuant to the time limits in Section 9.5,
from and against any and all Losses asserted against, resulting to, imposed
upon, or incurred by the Seller Group, to the extent arising from any breach of
any representation, warranty, or agreement of Buyer contained in this Agreement
or Buyer's ownership, use, operation or sale of the Inventory from and after the
Closing Date. Notwithstanding the foregoing, Seller shall indemnify Buyer with
respect to manufacturing or design defects occurring in the Inventory to the
same extent as set forth in Section 13.4 of the Varsity License Agreement.
9.3 Notice of Claim. The party entitled to indemnification hereunder (the
"Claimant") shall promptly deliver to the party liable for such indemnification
hereunder (the "Obligor") notice in writing (the "Required Notice") of any claim
for recovery under Section 9.1 or Section 9.2, specifying in reasonable detail
the nature of the Loss, and, if known, the amount, or an estimate of the amount,
of the liability arising therefrom (the "Indemnification Claims"). The Claimant
shall provide to th Obligor as promptly as practicable thereafter information
and documentation reasonably requested by the Obligor to support and verify the
claim asserted, provided that, in so doing, it may restrict or condition any
disclosure in the interest of preserving privileges of importance in any
foreseeable litigation.
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9.4 Defense. If the facts pertaining to the Loss arise out of the claim of
any third party (other than a member of the Buyer Group or Seller Group,
whichever is entitled to indemnification for such matter) available by virtue of
the circumstances of the Loss, the Obligor may assume the defense or the
prosecution thereof, including the employment of counsel or accountants, at its
cost and expense. The Claimant shall have the right to employ counsel separate
from counsel employed by the Obligor in any such action and to participate
therein, but the fees and expenses of such counsel employed by the Claimant
shall be at its expense. The Claimant shall have the right to determine and
adopt (or, in the case of a proposal by Obligor, to approve) a settlement of
such matter in its reasonable discretion, except that Claimant need not consent
to any settlement that (1) imposes any nonmonetary obligation or (2) Obligor
does not agree to pay in full. The Obligor shall not be liable for any
settlement of any such claim effected without its prior written consent, which
shall not be unreasonably withheld. Whether or not the Obligor chooses to so
defend or prosecute such claim, all the parties hereto shall cooperate in the
defense or prosecution thereof and shall furnish such records, information, and
testimony, and attend such conferences, discovery proceedings, hearings, trials,
and appeals, as may be reasonably requested in connection therewith.
9.5 Limitations. Notwithstanding anything in this Article 9 to the
contrary:
a. Thresholds. Except for indemnification under Section 9.1(b) and
the last sentence of Section 9.2, no indemnification or any other
Indemnification Claims under this Agreement or any other instrument or
agreement to be executed and delivered by either party in connection
with the transactions contemplated hereby shall be payable until (and
then only to the extent that) the total of all Losses giving rise to
such claim(s) equals or exceeds $25,000.00. Furthermore, except as set
forth in Section 9.5(c), the parties agree that the indemnification
liability of Seller with respect to those items indemnified pursuant to
Section 9.1., and of Buyer with respect to those items indemnified
pursuant to Section 9.2., shall not exceed (a) $500,000 for
Indemnification Claims arising out of Buyer's purchase of the Inventory,
other than Seller's failure to deliver the Inventory as set forth in
Schedule 1.1 or (b) $200,000 for all other Indemnification Claims.
b. Time of Assertion. Except as set forth in Section 9.5(c), no
indemnification shall be payable by either party with respect to
Indemnification Claims as to which the obligor has not received Required
Notice from the Claimant on or before May 1, 1999 except for
Indemnification Claims regarding the purchase of the Buyer's Shares
which Notice must be given by Claimant on or before May 1, 2000.
c. Notwithstanding anything herein to the contrary, Seller shall
indemnify the Buyer Group in full without regard to any limitation
described in Section 9.5(a) or 9.5(b) with respect to the indemnities
provided by Seller under Section 9.1(b) and the last sentence of Section
9.2.
d. Exclusive Remedy. The parties hereto acknowledge and agree that
this Article 9 is the exclusive remedy of the parties hereto for damages
for breach or misrepresentation of or under this Agreement.
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9.6 Recovery of Attorney Fees For Frivolous Actions. Claimant shall be
entitled to recover its reasonable out-of-pocket costs (including court costs
and actual attorney fees) incurred in pursuing any Indemnification Claims
defended by the Obligor on frivolous grounds or opposed for the purpose of delay
or harassment.
Article 10
MISCELLANEOUS
10.1 Entire Agreement. This Agreement (including the Schedules), and the
other certificates, agreements, and other instruments to be executed and
delivered by the parties in connection with the transactions contemplated
hereby, constitute the sole understanding of the parties with respect to the
subject matter hereof. No amendment, modification, or alteration of the terms or
provisions of this Agreement shall be binding unless the same shall be in
writing and duly executed by the parties hereto.
10.2 Parties Bound by Agreement; Successors and Assigns. The terms,
conditions, and obligations of this Agreement shall inure to the benefit of and
be binding upon the parties hereto and the respective successors and assigns
(including but not limited to any trustee or receiver) thereof. Notwithstanding
the execution and delivery of this Agreement and the consummation and
performance of the transactions contemplated hereby, Buyer is not and under no
circumstance or event shall Buyer be considered or deemed to be, a successor in
interest to, or otherwise an affiliate of, Seller. The parties hereto each
acknowledge that they have read this Agreement and have had effective assistance
of counsel in negotiating and drafting the provisions hereof; therefore, each
party agrees that there shall be no presumption regarding any ambiguous term or
provision and the construction or interpretation to be given thereto.
10.3 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
10.4 Headings. The headings of the Articles and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
10.5 Modification and Waiver. Any of the terms or conditions of this
Agreement may be waived in writing at any time by the party that is entitled to
the benefits thereof. No waiver of any of the provisions of this Agreement shall
be deemed to or shall constitute a waiver of any other provision hereof (whether
or not similar).
10.6 Expenses. Except as otherwise expressly set forth in this Agreement,
Seller and Buyer shall each pay all costs and expenses incurred by it or on its
behalf in connection with this Agreement and the transactions contemplated
hereby, including fees and expenses of its own financial consultants,
accountants, and counsel.
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10.7 Notices. Any notice, consent or approval required or permitted to be
given by Buyer under any terms of this Agreement shall be valid (and Seller
shall be entitled to rely thereon) only if given in writing signed by an
executive officer of Buyer; any other purported notice, consent or approval
shall be null and void. Any notice, request, instruction, or other document to
be given hereunder by any party hereto to any other party hereto shall be in
writing and delivered personally, via Federal Express or other similar delivery
service, via facsimile or sent by registered or certified mail, postage prepaid:
If to Seller to:
UMBRO INTERNATIONAL, INC.
C/o Umbro Europe Limited
P.O. Box 33, Dallimore Road
Roundthorn Industrial Estate, Wythenshawe
Manchester M23 9GJ, ENGLAND.
Attn: Tony Hutchinson
Tel: 011-44-161-946-8503
Fax: 011-44-161-946-0966
with a copy to:
Alston & Bird, L.L.P.
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attn: Jay E. Sloman
Tel: 404-881-7000
Fax: 404-881-4777
If to Buyer to:
Varsity Spirit Fashions and Supply, Inc.
2525 Horizon Lake Drive
Memphis, Tennessee 38184-1609
Attn: John Nichols
Tel: 901-387-4370
Fax: 901-387-4356
with a copy to:
Riddell Sports, Inc.
900 Third Avenue, 27th Floor
New York, New York 10022
Attn: David Groelinger
Tel: (212) 826-4300
Fax: (212) 826-5006
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or at such other address for a party as shall be specified by like notice. Any
notice that is delivered personally, via delivery service or facsimile in the
manner provided herein shall be deemed to have been duly given to the party to
whom it is directed upon actual receipt by such party (or its agent for notices
hereunder) . Any notice that is addressed and mailed in the manner herein
provided shall be conclusively presumed to have been duly given to the party to
which it is addressed at the close of business, local time of the recipient, on
the fourth business day after the day it is so placed in the mail.
10.8 Governing Law and Arbitration.
a. This Agreement shall be construed in accordance with and governed
by the laws of the State of South Carolina without giving effect to the
principles of conflicts of law thereof.
b. Any dispute between Buyer or any member of the Buyer Group and
Seller or any member of the Seller Group arising from or in any way
relating to this Agreement or otherwise, shall be resolved by binding
arbitration conducted by the American Arbitration Association ("AAA"),
in accordance with the rules then in effect, conducted in Atlanta,
Georgia. The parties expressly consent to exclusive jurisdiction in
Atlanta, Georgia for such proceeding.
c. Arbitration hereunder shall be the sole and exclusive forum for
the resolution of such disputes, controversies or claims, but each party
retains the right to seek judicial assistance (i) to compel arbitration,
(ii) to obtain interim measures of protection pending arbitration, and
(iii) to enforce any decision of the arbitrators, including the final
award.
d. At such time as arbitration is demanded, the parties shall
endeavor to select a single arbitrator to conduct the arbitration, but
if the parties cannot agree on the identity of a single arbitrator
within thirty (30) days of receipt of the arbitration demand, the
arbitrator in question shall be appointed by the AAA in accordance with
the Rules.
e. It is the intention of the parties that the arbitrator shall
forthwith determine the merits of the claim, controversy or dispute, and
shall deliver its decision within ninety (90) days of the date of
receipt of the arbitration demand specifying such remedy (including
money damages) as shall fully implement the intent and purposes of this
Agreement.
f. In addition to the authority conferred on the arbitrator by the
Rules, the arbitrator shall have the authority to order such discovery
and production of documents, including the deposition of party
witnesses, as it may deem just and equitable.
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g. The arbitral award shall be in writing and shall be final and
binding on the parties and may include an award of costs, including
reasonable attorneys' fees and disbursements.
h. Judgment upon the award may be entered by any court having
jurisdiction thereof or having jurisdiction over the parties or their
assets.
10.9 Public Announcements. Seller and Buyer shall consult with each other
before issuing any press releases or otherwise making any public statements with
respect to this Agreement and the transactions contemplated hereby. Neither
Seller nor Buyer shall issue any such press release or make any public statement
without the agreement of the other party, except as such party's counsel advises
in writing may be required by law.
10.10 Third-Party Beneficiaries. With the exception of (1) the parties to
this Agreement and (2) the Buyer Group and the Seller Group with respect to the
matters inuring to their benefit under Article 9, there shall exist no right of
any person to claim a beneficial interest in this Agreement or any rights
occurring by virtue of this Agreement.
10.11 "Including." Words of inclusion shall not be construed as terms of
limitation herein, so that references to "included" matters shall be regarded as
non-exclusive, noncharacterizing illustrations.
10.12 References. Whenever reference is made in this Agreement to any
Article, Section, or Schedule, such reference shall be deemed to apply to the
specified Article or Section of this Agreement or the specified Schedule to this
Agreement.
10.13 Survival of Agreements. All covenants, agreements, representations,
and warranties made herein shall survive the execution and delivery of this
Agreement and the Closing in accordance with the terms hereof.
10.14 Severability. If any term or other provision of this Agreement is
invalid, illegal or unenforceable, all other provisions of this Agreement shall
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby are not affected in any manner Materially
adverse to any party.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Asset and
USISL Stock Purchase Agreement to be executed on its behalf as of the date
indicated irrespective of the actual date of execution and delivery hereof.
UMBRO INTERNATIONAL, INC.
By: /s/ Lawrence J. Ramaekers
---------------------------------
Title: Lawrence J. Ramaekers, CEO
VARSITY SPIRIT FASHIONS & SUPPLIES,
INC.
By: /s/
---------------------------------
Title: EVP
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SCHEDULE 1.1
(ATTACHED)
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SIGNAL/RIDDELL EXPENSE SHARING ARRANGEMENT
Signal Apparel and Riddell Sport (including its' Varsity subsidiary) have agreed
to a joint operating structure (the "Umbro Group") on a limited basis for the
mutual exploitation of their respective Umbro licenses and the Umbro Brand as
follows.
I. Board - The Umbro Group will be governed by a two man board currently
consisting of John Prutch from Signal and Jeff Webb of Varsity or the parties
replacement designees from time to time. Decisions of the board must be
unanimous to be effective.
II. Term - The Umbro Group arrangement commenced as of September 15, 1998, and
unless renewed in writing by the mutual agreement of the parties, will expire on
September 30, 1999 except for those obligations specifically provided otherwise
herein.
Riddell acknowledges that Umbro International has a buy-out option of the Signal
Umbro license exercisable at any time after September 30, 1999 and that Signal's
obligations for the Umbro Group (other than accrued but unpaid obligations) will
cease as of the closing of any buy-out, except as specifically provided
otherwise in Sections IV and V.
III. Cost Sharing - Both parties must agree on the Umbro Group budget, on any
expense or other obligation of the Umbro Group as well as the terms of all
contractual arrangements applicable to the Umbro Group. The parties agree to
cooperatively provide staffing and other assistance to fulfill the non-monetary
obligations referenced in this agreement.
During 1998 and 1999, unless mutually agreed otherwise for any specific item,
Signal will initially pay 60% of the expenses for any item mutually agreed to be
included in the Umbro Group expenses, and Riddell will pay 40% of those
expenses, subject to a year-end adjustment.
During 1998 and 1999, responsibility for paying each specific expense will be
allocated between the parties as close as possible to the agreed 60/40 split. By
the 15th of each month, each party will provide to the other a statement of the
Umbro Group expenses paid by that party during the preceding month.
No later than the 30th day following each calendar quarter, any party paying
more than their share of the agreed 60/40 split will be reimbursed by the other
for their excess payments.
No later than January 30, 2000, each party will provide to the other their
Annual Net Sales (as defined in the parties' Umbro license agreements) of Umbro
products during 1999.
The expenses of the Umbro Group for 1998 and 1999 will be re-allocated based
upon the percentage that each of Signal's and Riddell's Umbro Annual Net Sales
constitute of the total Signal and Riddell Umbro Annual Net Sales, provided:
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a. Riddell's share of Umbro Group expenses will not exceed 50% of
the total expenses;
b. Signal's share of the expenses will not exceed 60% of the total
expenses.
Any monies owed Signal by Riddell based upon the re-allocation of 1998 and 1999
Umbro Group expenses will be due no later than February 28, 2000.
Should the parties agree to renew the Umbro Group arrangement for 2000, the
final percentage allocation of 1999 expenses will be the allocation for 2000,
again, subject to a year-end adjustment on the same basis as for 1999.
IV. Employees - Attached as Exhibit I are those employees mutually agreed to be
included in the Umbro Group. Notwithstanding the provisions of Section II, and
subject to the renewal of this arrangement, either party's commitment to share
the salary, fringe benefits and related expenses for any employee(s) will end on
the earlier of (a) six months from the date of written notice to the other party
or (b) December 31, 1999, except for those employee's under written contract.
The parties agree to share the expenses on the 60/40 basis described above for
the Umbro Group written contractual arrangements with Ian McLaren, Philip
Holdsworth and Billy Hartman through the terms of those contracts, subject to
year-end adjustment.
At any time after January 1, 1999, at Signal's option, Alan Joyce may be removed
from the Umbro Group and will become the sole financial responsibility of
Riddell.
Any employees not on the attached exhibit are the sole financial responsibility
of the party retaining the employee.
The parties have agreed to contract lease the attached list of employees.
V. Office Space - The parties have agreed to lease office space for the Umbro
Group in Greenville, South Carolina for a two year term. Notwithstanding the
provisions of Section II, the parties jointly agree to be responsible for the
base rent and expenses specifically set forth in the office space lease and any
leased equipment utilized in said office (collectively "lease expenses") as
follows:
a. Signal will be responsible for 60% of lease expenses for the
first year of the office space lease and Riddell will be
responsible for 40% of the lease expenses for the first year of
the office space lease, subject to year-end adjustment.
b. For the second year of the office space lease, the parties
respective shares will be determined as follows: the percentage
of Umbro Group employees to total employees working at the
offices will determine the percentage of lease expenses Signal
will share with Riddell. Of the percentage to be shared, each
party's share will be determined in accordance with the formula
set forth in Section III. The above is subject to year-end
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adjustment at the end of calendar year 2000. The percentage of
lease expenses not allocated to the Umbro Group will be allocated
between the parties based upon their respective number of
party-specific employees.
c. Notwithstanding (a) and (b) above, Signal obligation to share
office expenses will end at the later of (i) the closing of the
buy-out option, or (ii) the end of the first year of the office
space lease, and in any event on the expiration of the two year
term of the office space lease.
VI. Advertising and Promotion - During 1998 and 1999, the parties agree to spend
on brand and sports marketing approximately the amounts set forth on Exhibit II
generally on the activities (or similar activities) listed on Exhibit II.
Commencing January 1, 2000 and during each calendar year of the initial term and
renewal term of the Signal license agreement, Signal will spend $600,000, and
Riddell will spend $400,000 for the promotion of the Umbro Brand. The foregoing
amounts will be pro-rated in the event either party's license agreement is
effective only for a partial calendar year. This amount will be spent
individually or jointly in the parties independent discretion on market
research, creative development, sports marketing, sales meetings, sales
catalogs, public relations activities, sponsorships (including Deborah Keller
and USISL), media advertising, trade show activities (excluding Super Show),
retail promotions and similar activities, provided all such expenditures must
generally be for the development of the Umbro Brand in both the team and branded
markets. Joint expenditures must be approved by the Umbro Group board. The
parties acknowledge and agree that each will continue to exercise its
independent discretion in determining the prices and terms upon which its
products will be sold. The foregoing is subject to year-end adjustment.
VII. Miami Fusion - The parties have certain obligations concerning the Miami
Fushion in their respective Umbro license agreements which they agree to share
on a 60/40 basis subject to year-end adjustment. For products required to be
supplied to the Fusion, the parties will provide products from their respective
product lines as appropriate with the total costs of such products (valued at
cost plus shipping) to be shared on the 60/40 basis, subject to the year-end
adjustment. Any reimbursement of costs necessary to restore product or other
expenses to the 60/40 ratio will be made 30 days following the applicable
calendar quarter. The obligations of the parties will continue for so long as
required in their respective license agreements.
VIII. USISL - The obligations of the parties as set forth in their respective
license agreements with respect to the USISL will be shared on a 50/50 basis
without year-end adjustment. The parties will provide products from their
respective product lines, as appropriate and will be reimbursed 30 days
following the end of the applicable calendar quarter to restore expenses to the
50/50 ratio.
IX. Super Show - The expenses of the Super Show, other than contractual
requirements under the license and expenses specifically attributable to each
party, which the parties agree are Umbro Group Expenses will be shared on a
50/50 basis without year-end adjustment, less contributions to such expenses by
Umbro or other licensees.
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Any reimbursement necessary to restore expenses to the 50/50 ratio will be made
30 days following the end of the applicable calendar quarter.
X. Keller - The parties agree to share the expenses and obligations set forth in
their respective license agreements concerning the Deborah Keller sponsorship on
a 60/40 basis, subject to a year-end adjustment.
XI. MIS/Computer - Attached as Exhibit III are agreed Umbro Group MIS/computer
expenses, which will be shared on a 60/40 basis, subject to year-end adjustment.
XII. General Provisions - Attached as Exhibit IV are additional agreed Umbro
Group expenses to be shared on a 60/40 basis, subject to year-end adjustment.
In addition, the parties agree to establish a bank account for the Umbro Group
with a maximum balance of approximately $5,000 to be used in the discretion of
Ian McLaren for incidental minor expenses. The parties agree to contribute to
such account on a 60/40 basis. Whenever the balance for that account falls to
$2,000 or less, the parties agree to re-fund the account to the $5,000 level on
the 60/40 basis, subject to the year-end adjustment and subject to a joint cap
of $3,000 in re-funding per month.
The parties acknowledge that their respective license agreements specify certain
expenses and obligations are to be shared on a 60/40 Signal/Riddell basis.
Notwithstanding the provisions of the license agreements, as between themselves,
the parties agree that the provisions of this agreement will supercede the
provisions on the sharing of costs and obligations set forth in their respective
license agreements.
The parties specifically incorporate the provisions of their respective license
agreements with respect to the sub-licensing of "Other Goods," as defined in the
license agreements.
The parties may, but are not obligated to, sell Umbro licensed products to each
other. For products, other than products screenprinted by Signal, the parties
agree to sell such products on a purchase cost plus 10% basis, plus shipping.
The sales price of screenprinted products will be mutually agreed between the
parties at the time of sale.
Riddell desires to use the screenprinted graphics developed by Signal for
Riddell's sales to its accounts. The parties agree to share the creative art and
production art expenses incurred through 1999 on a 60/40 basis, subject to
year-end adjustment and subject to a total cap on such expenses of $155,000 for
1998 and 1999 unless a higher amount is approved in writing by Riddell. For such
expenses incurred during 2000, the parties agree to share such expenses in
proportion to their respective screenprinted products sales in 1999, subject to
year-end adjustment for actual screenprinted product sales during 2000.
Any items purchased by the parties for the Umbro Group will be split between the
parties at the termination of this Agreement in proportion to the percentages of
cost sharing in effect between the parties at the date of termination.
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XIII. Arbitration -
(a) In the event of any dispute, in connection with this Agreement,
such dispute shall upon demand of either party, be submitted to
final and binding arbitration to be conducted in accordance with
the Rules of Arbitration of the American Arbitration Association,
as then in effect, as modified herein or by mutual agreement of
the parties (the "Rules") which arbitration shall be the sole and
exclusive forum for the resolution of such dispute, but each
party retains the right to seek judicial assistance (i) to compel
arbitration, (ii) to obtain interim measures of protection
pending arbitration, and (iii) to enforce any decision of the
arbitrators, including the final award.
(b) Each party shall appoint one (1) arbitrator and the
party-appointed arbitrators shall appoint within thirty (30) days
of their appointment a third arbitrator. If Riddell or Signal
fails to nominate an arbitrator, or the two party-nominated
arbitrators are unable to select a third arbitrator within such
thirty (30) days, the arbitrator or arbitrators in question shall
be appointed by AAA in accordance with the Rules.
(c) In addition to the authority conferred on the arbitrator or
arbitrators by the Rules, the parties shall be entitled to
reasonable discovery and the arbitrator or arbitrators shall have
the authority to order such discovery and production of
documents, including the deposition of party witnesses, as it may
deem just and equitable, absent agreement otherwise by the
parties.
(d) The exclusive seat of the arbitration shall be New York City.
(e) The arbitral award shall be in writing and shall be final and
binding on the parties and may include an award of costs,
including reasonable attorneys' fees and disbursements.
(f) Judgment upon the award may be entered by any court having
jurisdiction thereof or having jurisdiction over the parties or
their assets.
Agreed to on behalf of Agreed to on behalf of
SIGNAL APPREL COMPANY, INC. RIDDELL SPORTS, INC./
VARSITY
By: /s/ By: /s/
----------------------------- ----------------------------
Title: Title:
-------------------------- -------------------------
Date: Date:
--------------------------- --------------------------
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2.4(d) Net Retail Sales for purposes of this section only shall mean
gross sales of Umbro Products less (i) cash or credit refunds
to customers for Umbro Products returned or discounts provided
customers in connection with the sale of Umbro Products (ii)
discounts, fees and other charges paid to credit card
companies in connection with purchases of Umbro Products;
(iii) returns and allowances to shippers or manufacturers;
(iv) sales or excise taxes in connection with sales of Umbro
Products; (v) discounts on sales to employees; and (vi)
close-out or bulk sales of merchandise not sold at retail and
at no profit to Licensee.
3.1 provided any such modification (a) will be made in good faith,
(b) will be part of and consistent with Umbro's global
marketing strategy generally in effect in all countries where
Umbro products are marketed and (c) will not be a unilateral
action primarily applicable only in the Territory.
6.4 Approval of First Run Production Samples. Licensee shall
submit to UMBRO first run production samples of each Product
manufactured by Licensee or any Authorized Manufacturer acting
for Licensee. At the time of submission, Licensee shall
indicate any known material deviation from applicable
Standards. Such Products will be deemed approved so long as
such Products comply in all material respects to such
Standards and the approved line drawings and specifications
set forth in Section 7.3
Definition of Standards (page 42) "provided any such addition to,
modification or deletion of such standards and specifications will be
part of and consistent with Umbro's global standards and specifications
generally in effect in all countries where Umbro products are marketed
and no change to standards and specifications will be primarily
applicable only in the Territory."
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EXHIBIT III
Umbro Shared MIS Projects
Listed below are the expected MIS shared projects in Greenville for Umbro:
1. PC's and printer for Customer Service were purchased at the Umbro auction;
2. PC software licenses and network cards;
3. AS/400 one-year lease, including maintenance and operating system software,
for the new office location;
4. Line printer for system;
5. APPCON manufacturing software, one-year lease; and
6. Use of old Umbro computer and software until November 1, 1998.
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EXHIBIT IV
Office moving costs and set-up expenses.
Leased office equipment.
Office utilities and services.
Office supplies.
Travel and entertainment of Umbro Group employees.
Insurance - office equipment.
Taxes/Licenses for office.
Maintenance and repair of office equipment.
Office furniture purchase.
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INDUSTRIAL LEASE AND AGREEMENT
1. PARTIES:
THIS LEASE, dated the 1st day of October 1998, between Laphiaw Gin Company,
Inc., party of the first part, hereinafter called Lessor, and Varsity Spirit
Corporation, a TN Corp., party of the second part, hereinafter called Lessee.
2. CONSIDERATION:
WITNESSETH: That each of the aforesaid parties acknowledge the receipt of a
valuable consideration from the other and that they and each of them act
herein in further consideration of the engagements of the other as herein
stated.
3. PREMISES:
That Lessor has and does hereby grant, demise and lease unto the said Lessee
the following described premises situated in the City of Olive Branch, County
of DeSoto, and State of Mississippi, to-wit:
8760 Cypress Woods, Olive Branch, Mississippi, Zip 38654; being a concrete
tilt-wall distribution center of approximately 80,000 SF, situated on
approximately 5.5 acres.
4. TERM:
For a period of Two (2) Years and days from the 16th day of October,
1998, to the 31st day of October, 2000.
5. BASE RENTAL:
The Lessee agrees to pay to the Lessor a total rental of FOUR HUNDRED
SEVENTY-TWO THOUSAND AND NO/100 DOLLARS ($472,000.00), payable, without
demand by invoice, in advance monthly installments of $19,666.67 on the first
day of each month (beginning November 1, 1998) throughout the term of this
LEASE. BASE RENTAL for the first full month of the term shall be due upon
execution of this LEASE by Lessee. BASE RENTAL for any partial month at the
beginning or end of the term shall be prorated based on the number of days in
such partial month. There shall be no Base Rental or Additional Rental due
for the period between commencement date stated above and November 1, 1998.
All rentals due under this lease payable to the order of WILKINSON & SNOWDEN,
INC. at 3350 MIAC Cove, Suite 3, Memphis, Tennessee 38118-3600, or at a place
Lessor may designate from time to time.
All rental (BASE or Additional Rental items) shall be paid by Lessee when due
and payable without deduction, abatement, or set off. If Lessee shall fail to
pay all such amounts required within ten (10) days after Lessor's invoice,
then Lessee shall be obligated to pay a late payment charge of five percent
(5%) of the amount due to reimburse Lessor for its additional administrative
costs. In addition, any amounts which are not paid within ten (10) days after
same is due, shall bear interest at the rate equal to the lesser of eighteen
percent (18%) per annum or the highest contract rate allowable by the State
in which the Premises is located from the first day until paid.
6. PROOF OF PAYMENT:
The burden of proof of payment of rent in case of controversy shall be upon
the Lessee.
7. NUISANCE, WASTE, ETC.:
The said Lessee covenants and agrees with the said Lessor that the said
premises shall be used and occupied in a careful, safe and proper manner,
that no nuisance, trade, or custom which is unlawful or known in insurance as
extra or especially hazardous shall be permitted therein; that no waste shall
be committed upon, nor any damages be done to said premises.
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8. ALTERATIONS:
The said Lessee shall not make any alterations to said premises without
the written consent of the Lessor first had and obtained, and all
additions and improvements made by the Lessee shall be and remain the
property of the Lessor, with the exception of Lessee's racks. In the
event of any changes, alterations or additions being required by any
law, ordinance or regulation of the Fire Department, Office of
Construction Code Enforcement or municipal authority, then the cost of
such changes, alterations or additions shall be paid by the Lessee.
9. SUBLETTING:
Lessee shall not assign this Lease or sublet all or any part of the
leased premises without the prior written consent of Lessor. Lessor
shall have the option, upon receipt from Lessee of written request for
Lessor's consent to subletting or assignment, to cancel this Lease as of
the date the requested subletting or assignment is to be effective and to
enter into a new lease agreement directly with the sublessee or
assignee. The option shall be exercised, if at all, within fifteen (15)
days following the Lessor's receipt of written notice by delivery to
Lessee of written notice of Lessor's intention to exercise the option.
In the event of any assignment or subletting, Lessee shall nevertheless
at all times, remain fully responsible and liable for the payment of the
rent specified and for compliance with all of its other obligations
under the terms, provisions and covenants of this Lease. Upon the
occurrence of an "event of default" if all or any part of the leased
premises are then assigned or sublet, Lessor, in addition to any other
remedies provided by this Lease or provided by law, may at its option
collect directly from the assignee or sublessee all rents becoming due
to Lessee by reason of the assignment or sublease, and Lessor shall have
a security interest in all properties on the premises to secure payment
of such sums. Any collection directly by Lessor from the assignee or
sublessee shall not be construed to constitute a novation or a release
of Lessee from the further performance of its obligations under this
Lease.
10. DELIVERY AT END OF LEASE:
The said Lessee agrees to deliver up to the said Lessor the said
premises at the expiration of this Lease in good order and condition,
and make good all damages to said premises and also to remain liable for
rent until all the premises, with keys to the same be returned to said
Lessor, in like good order and no demand or notice of such delivery
shall be necessary.
11. INSOLVENCY, ETC., OF LESSEE
That in the event of the insolvency or bankruptcy of the Lessee, or the
filing of any petition under the bankruptcy statute voluntarily or
involuntarily and whether or not resulting in an adjudication in
bankruptcy, or in the event of a partial or general assignment for the
benefit of a creditor, at any time thereafter the Lessor shall have the
right to terminate this lease upon giving written notice thirty days in
advance.
12. DEFAULT OF RENT, ETC.;
All covenants and agreements herein made and obligations assumed are to
be construed also as conditions and these presents are upon the express
condition that if Lessee should fail to pay when due any one of the
aforesaid installments of rent, or should fail to perform or observe any
of the covenants, agreements or obligations herein made or assumed by
said Lessee, then and thenceforth, in any of said events, this lease may
by forfeited and thereby become null and void at the option of the
Lessor, and said Lessor may immediately, or at any time after the
breach of any of said covenants, re-enter said premises and building, or
any part thereof in the name of the whole, and repossess and have the
same as of Lessor's former estate and remove therefrom all goods and
chattels not thereto properly belonging, and expel
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said Lessee and all other persons who may be in possession of said
premises and building, and that, too, without demand or notice.
It is expressly agreed that in the event the Lessee fails to make the
specified monthly rental payment and default continues for a period of
10 days after Lessor provides written notice of said failure, then and
in that event the Lessor shall have the option of declaring this lease
terminated and have the right to make demand and collect from the Lessee
the entire unpaid balance for the entire lease period. Failure on the
part of the Lessor to exercise said option upon any default shall not
preclude him from exercising said option in the event of any subsequent
default.
14. HOLDOVER:
Should the Lessee remain on the premises after the expiration of this
Lease agreement, it shall be at the Lessor's option to interpret such
action as a renewal for one year, at the same rental herein provided for
during the last year of this Lease Agreement, or the Lessor may elect to
interpret the above mentioned action in such a manner as to have the
Lessee become a month to month Lessee at 125% of the above stipulated
figure. Only a new lease agreement shall deprive the Lessor of the
choice of action as outlined above.
15. PROTECTION FROM VIOLATIONS:
The Lessee agrees to save and hold the Lessor harmless from violations
of the laws of the United States, of the State of Mississippi and the
ordinances and laws of the City of Olive Branch and DeSoto County, which
are now in force or which may hereafter be in force. Further, the Lessee
agrees to save hold the Lessor harmless from those violations of the
Occupational Safety and Health Act of 1970 arising out of the Lessee's
use of the Leased Premises.
16. RIGHT TO OFFER FOR LET:
It is understood and agreed that the Lessor shall be permitted to
install on the premises a sign advertising the premises available for
lease or sale for one hundred eighty days prior to the expiration of
this Lease.
17. SIGNAGE:
Unless otherwise agreed in this Lease the Lessee shall not be permitted
to affix or attach, or cause to be affixed or attached, any signs on the
premises herewith leased without the consent, in writing, from the
Lessor. Signage shall conform to the Signage Regulations attached
hereto.
Upon termination of this lease, Lessee shall remove any sign,
advertisement or notice painted on or affixed to the leased premises and
restore the place it occupied in the condition which it existed as of
the date of this lease.
18. INSURANCE:
As Additional Rental, Lessee shall reimburse Lessor, per Paragraph 5,
for the expense of all Risks Insurance, including General Liability,
which Lessor shall obtain on the property.
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19. CONDITION OF PREMISES AND REPAIRS AND MAINTENANCE:
It is hereby further agreed that the Lessee has examined the premises and
is satisfied as to the condition thereof, and the Lessee expressly agrees
that no representation as to the condition of the demised premises, except
as contained herein, has been relied upon by Lessee or made by the Lessor
or Lessor's agents. The Lessor will make necessary repairs to the roof,
structure, foundation walls, gutters, and downspouts during the term of
this Lease, after receiving written notice from the Lessee of the need for
such repairs, and where said repairs are not occasioned by the misuse,
fault or neglect of the Lessee, its employees, agents or assigns, Lessor's
responsibilility and liability being limited to said repairs to said
demised premises, and shall not extend to any personal or other property of
Lessee, its employees, agents of assignees. Where said repairs are
occasioned by the misuse, fault or neglect of the Lessee, its employees,
agents or assignees, same shall be made promptly by Lessee, at its own
expense. All other repairs and replacements to the demised premises of any
kind including but not limited to glass and plate glass, doors any special
store front, interior walls, heating, air conditioning, ventilating, and
fire protection systems, dock boards, plumbing work and futures shall be
made promptly by Lessee, at its own expense, in such manner as to
maintain the premises in good condition and repair. If Lessee fails to
promptly make repairs or replacements that are its repsonsibility
hereunder, Lessor has the right, but not the obligation to have such
repairs or replacements made after notice, and the cost thereof shall be
due and payable by Lessee to Lessor at the next rent due date and failure
to pay same shall be deemed a default in payment of rent. Lessee shall not
be obligated to repair or replace any damage caused by fire, tornado or
other casualty covered by items set forth under the extended coverage
provisions Of Lessor's fire insurance policy. The cost of maintaininng the
grounds adjacent of the herein leased premises and any grounds adjacent to
the parking and loading areas of the herein leased premises shall be borne
by the Lessee, although said grounds may be kept by Lessor as Common Area.
Further, it shall be the sole responsibility of Lessee to keep the parking
and loading areas and said adjacent ground free and clear of all trash,
debris, grass and weeds.
20. COMMON AREA MAINTENANCE
Lessee agrees to perform, at its own expense, all "Common Area
Maintenance", all outside maintenance, lawns, extra land, and ditches, and
to keep these areas in as good a condition as prior to its occupancy.
21. USE OF COMMON AREAS
Lessee, its customers, invitees and licensees shall have the exclusive
right to use in common with the Lessor, its licensees and invitees and in
common with other Lessees or occupants of buildings which are or may be
erected within the area of Lessor's tract, the parking areas, the drives
and sidewalks, now or hereafter constructed, for the purpose of ingress and
egress to or from the demised premises and to the other Lessee areas for
the purpose of parking, and loading and unloading. The Lessor shall have
the right to establish reasonable regulations relating to the use of
parking areas.
22. LIABILITY FOR REPAIRS TO WATER, GAS AND SEWER PIPES:
The water, gas, sewer pipes are in good condition, and if said pipes are
allowed to burst or to become stopped up, the Lessee must repair them at
Lessee's own expense.
23. RIGHT OF ENTRY:
The Lessor may enter said premises at proper times to view and inspect
same, or to make such repairs, additions and alterations or to run such
pipes or electric wire as said Lessor may deem necessary for the safety,
improvement or preservation of the said premises.
24. FIRE CLAUSE:
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In case the said premises shall be so injured or damaged by fire or other
cause as to be rendered untenantable, and so that necessary repairs or
rebuilding cannot be made within 180 days this lease shall terminate and
the Lessee shall be allowed an abatement of rent from the time the
premises were rendered untentantable. However, if the damage is such
that rebuilding and repairs can be completed within 180 days, the Lessor
agrees to make such repairs with reasonable promptness and dispatch, and
to allow Lessee an abatement in rent for such time as the building
remains untenantable and the Lessee covenants and agrees that the terms
of this lease shall not be otherwise affected.
25. DAMAGES, ACCIDENTS, ETC.:
Lessee agrees to hold Lessor harmless against all damages, accidents and
injuries to persons or property caused by or resulting from or in
connection with any power plant, machinery, elevator, elevator shaft,
stairway, signs, awnings, glass, brick, or any other building material,
hatch, coal chute or other openings, flag pole, and any other things in
or pertaining to any other parts of said premises, or things in or
pertaining to or upon the premises during the term of this lease or
while the Lessee is occupying the premises. Lessee agrees to provide
Lessor, within ten (10) days of the execution of this Lease and
Agreement, evidence of liability insurance for personal injury with
coverage limits of $1,000,000.00 and property damage with limits of
$500,000.00
26. UTILITIES:
All heat, water, electric current, gas or other utilities used on the
leased premises to be paid for by Lessee.
27. TAX INCREASES:
As Additional Rental, Lessee agrees to pay, as per Paragraph 5, all
real estate taxes and assessments for the period of its occupancy.
28. ATTORNEY'S FEES
In the event it becomes necessary for the either party to employ an
attorney to enforce the terms and conditions of this Lease, or to
enforce compliance of any of the covenants and agreements herein
contained, the non-prevailing party shall be liable for reasonable
attorney's fees, costs and expenses incurred by the prevailing party.
29. KIND OF BUSINESS:
The business to be conducted in the within leased premises is as
follows: Wareousing and distribution of apparel items.
30. GOING BUSINESS
Lessee covenants that a going business shall be conducted in the within
leased premises throughout the full ten-n of the lease.
31. BANKRUPTCY, ETC.:
Should bankruptcy,insolvency or receivership proceedings of any kind be
instituted by or against Lessee, or any one of the Lessees if more than
one are included in the designation "Lessee" herein, or should Lessee's
interest in this lease, or the interest of any one of the Lessee, if
more than one are included under the designation "Lessee" herein,
devolve or pass by the operation of law to any other person or
corporation, then, at the option of Lessor, that shall be considered a
breach of the terms and conditions of this lease, and Lessor may pursue
the remedies provided for in Paragraph 12 hereof.
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32. NOTICE:
Any notice provided for herein will be deemed to have been given Lessee
when deposited in Registered or Certified mail, or by courier or delivery
service where receipt is acknowledged, addressed to Lessee, or any lessee
if more than one are included under ther designation "Lessee" herein, at
Varsity Spirit Corp.-2525 Horizon Lake Blvd.-Suite 1, Bartlett-TN 38133.
33. EMINENT DOMAIN
If the leased premises be subjected to any eminent domain proceedings,
the lease shall terminate if all of the leased premises are taken if the
portion taken is so extensive that the residue is wholly inadequate for
Lessee's purposes. If the taking be partial, then Lessee's rentals shall be
reduced in the proportion which the space taken bears to the space
originally leased. In such condenmation proceedings Lessee may claim
compensation for the taking of any removal of installations which, by the
terms of this lease, Lessee would be permitted to remove at the expiration
of this lease, but Lessee shall be entitled to no additional award, it
being agreed that all damages allocable to full fee simple ownership of the
entire leased premises shall in any event be payable to Lessor.
34. WAIVER OF BREACH:
It is hereby covenanted and agreed that no waiver of a breach of any of the
covenants of this Lease shall be construed to be a waiver of any succeeding
breach of the same or any other covenant.
35. QUIET POSSESSION:
In consideration of the covenants and agreements herewith contained the
Lessor agrees to warrant and defend the Lessee in the quiet and peaceful
possession of the said premises during the term of this Lease.
36. BINDING ON HEIRS, ETC:
It is further agreed by the parties to this Lease that all of the
covenants and agreements enumerated herein shall be binding upon both
parties' legal representatives, heirs and assigns throughout the life of
this instrument.
37. DELIVERY OF POSSESSION:
Lessee agrees that if the Lessor is not able to deliver possession of the
premises as herein provided, the Lessor shall not be liable for any damages
to Lessee for such failure, but Lessor agrees to use due diligence to
obtain possession for the Lessee at the earliest possible date, and an
abatement of rent shall be allowed for such time as Lessee may be deprived
of possession of said premises.
38. SUBROGATION:
Lessor and Lessee hereby waive any right of subrogation which they may have
against the other for any losses paid to them on policy of policies carried
on the property to the extent permitted by the terms of such policy or
policies.
39. OUTSIDE STORAGE, TRASH, ETC.:
Lessee agrees not to store any merchandise crates or materials of any kind
outside the leased building. Lessee further agrees not to burn trash or
other substances on the leased premises. All trash shall be kept in metal
containers with metal tops which must be kept painted. Their
6
<PAGE>
design and location on the premises must be approved by Lessor.
In the event the Lessee shall be in default in the requirements of this
paragraph then, after written notice to Lessee of the default and the
expiration of five (5) days from the date of said written notice, the
Lessor may remedy such default at the Lessee's expense, and such expense
shall be treated as additional rental owing by the Lessee to the Lessor.
40. SUBORDINATE TO LEASE:
At the option of Lessor's mortgagee, the Lessee agrees to subordinate
this lease to any mortgage, deed of trust or encumbrance which the
Lessor my have placed, or may hereafter place, on the premises. Lessee
agrees to execute, on demand, any instrument which may be deemed
necessary or desirable to render such mortgage, deed of trust or
encumbrance whenever made, superior and prior to this lease.
41. PARKING
Lessee shall cause its employees, agents, vendors, and carriers to park
all carts, trucks and trailers only in parking areas provided with the
premises and shall prohibit on-street parking.
42. AGENCY AND COMMISSION AGREEMENT:
Lessor and Lessee represent and warant to each other that the only
agents in this transaction are:
Threlkeld of Trezvant Realty Corporation for Lessee and Bayard Snowden
of Wilkinson & Snowden, Inc. for Lessor, and no other agent or broker
has a claim to any commissions paid hereunder. Furthermore, Lessor and
Lessee agree that no representations or warranties have been made by
Lessor or its agent which are not herein expressly provided. Lessor
agrees to pay said agents a commission as defined in exhibit "C",
attached and made a part hereof.
43. ENVIRONMENTAL CLAUSE
Lessee shall not cause or permit to occur, and shall not permit to
exist, any condition which may cause a discharge or any Hazardous
Substances at, upon, under or within the Premises or in any contiguous
real estate. Hazardous Substances are defined as being any deposit,
storage, disposal, burial, discharge, spillage, uncontrolled loss,
sepage or filtration of oil, petroleum or chemical liquids or solids,
liquid or gaseous products or any hazardous wastes or hazardous substances
as those terms are used in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 or in any other federal, state or
local law governing hazardous substances, as such laws may be amended
from time to time (collectively, the "Hazardous Waste Laws").
Lessee further represents and warrants that neither Lessee, nor any
other party has been, is or will be involved in operations at or near
the Premises, which operations could lead to (a) the imposition of
liability under the Hazardous Waste Laws on Lessee, or on any subsequent
or former Lessee or Owner of the Premises, or (b) the creation of a
lien on the Premises under the Hazardous Waste Laws or under any similar
laws or regulations, and (c) Lessee has not permitted, and will not
permit, any occupant of the Premises to engage in any activity that
could impose liability under the Hazardous Waste Laws on such Lessee or
occupant, Lessor or any other owner of any of the Premises. Lessee shall
comply strictly and in all respects with the requirements of the
Hazardous Waste Laws and related regulations and with all similar laws
and regulations and shall notify Lessor immediately in the event of any
discharge or discovery of the Hazardous Substance at, upon, under or
within the Premises. Lessee shall promptly forward to Lesser copies of
all orders, notices, permits, applications or other communications and
reports in connection with any discharge or the presence of any
Hazardous Substance or any other matters relating to the Hazardous Waste
Laws or any similar laws or regulations, as they may affect the Premises.
Promptly upon the written request of Lessor from time to time, Lessee
shall provide Lessor,
7
<PAGE>
of Lessee's expense, with an Environmental Site assessment or Environmental
Audit Report prepared by an environmental engineering firm acceptable to Lessor,
to assess with a reasonable degree of certainty the presence or absence of any
Hazardous Substances and the potential costs in connection with abatement,
cleanup or removal of any Hazardous Substances found on, under, at or within the
Premises.
Lessee shall, at all times, indemnify and hold harmless against and from
any and all claims, suits, actions, debts, damages, costs, losses, obligations
judgments charges, and expenses of any nature whatsoever suffered or incurred
by, whether as beneficiary of the mortgage, as mortgagee in possession, or
as successor-in-interest to Lessee by foreclosure deed or deed in lieu of
foreclosure, under or on account of the Hazardous Waste Laws or any similar laws
or regulations, including the assertion of any lien thereunder, with respect to:
(i) any discharge of Hazardous Substances, the threat of discharge of any
Hazardous Substances, or the presence of any Hazardous Substances affecting the
the Premises whether or not the same originates or emanates from the Premises,
including any loss of value of the property as a result of any of the foregoing;
(ii) any costs of removal or remedial action incurred by the United States
Government or any state or local governmental authority, any response costs
incurred by any other person or damages from injury to, destruction of, or loss
of natural resources, including reasonable costs of assessing such injury,
destruction or loss, incurred pursuant to any Hazardous Waste Laws; (iii)
liability for personal injury or property damage arising under any statutory or
common law tort theory, including without limitation, damages assessed for the
maintenance of a public or private nuisance or for the carrying on of an
abnormally dangerous activity at or near the Premises; and/or (iv) any other
environmental matter affecting the Premises within the jurisdication of the
Environmental Protection Agency, any other federal agency or any state or local
environmental agency. All of the foregoing covenants, representations and
warranties shall survivce the term of this Lease.
Lessee's obligations under this Agreement shall arise upon the discovery of the
presence of any Hazardous Substance, whether or not the Environmental
Protection Agency, any other federal agency or any state or local environmental
agency has taken or threatened any action in connection with the presence of any
Hazardous Substances.
In the event of any discharge of Hazardous Substances, the threat of a discharge
of any Hazardous Substances, or the presence of any Hazardous Substances
affecting the Premises, whether or not the same originates or emanates from the
Premises and/or if Lessee shall fail to comply with any of the requirrements of
the Hazardous Waste Laws or related regulations or any other environmnetal law
or regulation, Lessor may, at its election, but without the obligations so to
do, give such notices and/or cause such work to be performed at the Premises
and/or take any and all actions as Lessor shall deem necessary or advisable in
order to abate the discharge of any Hazardous Substances, remove the Hazardous
Substances or cure Lessee's non-compliance.
If Lessor retains the services of an environmental engineer or consultant or an
attorney in connection with the indemnity herein, Lessee shall pay all of
Lessor's costs and fees thereby incurred. Lessor may employ an engineer or
consultant, or an attorney, or both, of Lessor's own choice.
Lessee consents to the exercise of personal jurisdiction over Lessee by any
federal or state court in the State of Tennessee, and consents to a venue in any
jurisdiction or locality in the State of Tennessee.
OPTION:
Provided Lessee is not otherwise in default and that Lessee has given lessor
written notice to extend not less than 120 days in advance of the then expiring
term, Lessor hereby grants Lessee three (3) options to extend for one (1) year
each upon the same terms and conditions.
8
<PAGE>
45. NOTICE TO TERMINATE:
Lessee shall provide to Lessor Lessee's written notice to terminate the
Lease not less than 120 days prior to the then expiring term, or Lessee
shall holdover for a period of one (1) year at the rental defined in
paragraph 14 herein.
46. LESSEE'S CONTINGENCY:
Lessee's execution and acceptance of this Lease is contingent upon Lessee
entering into a Sub-Lease Agreement with Great Lakes Paper Company through
December 1, 1998, which Sub-Lease shall be acceptable to Lessee at its sole
discretion. Lessee shall notify Lessor, in writing, of Lessee's acceptance
of said Sub-Lease not later than Lessor's purchase of the Premises.
47. LESSOR'S CONTINGENCY:
Lessor's execution and acceptance of this Lease is contingent upon Lessor's
acquisition of the Premises. The commencement date of this Lease shall be
the actual date of closing of said purchase. This Lease shall automatically
go into effect as of Lessor's taking title to the Premises, provided Lessee
has given notice to remove Lessee's contingent acceptance as per Paragraph
46 above.
IN WITNESS WHEREOF, the parties of this Lease have set their hand to copies
hereof this day of 1998.
Lephiew Gin Company /s/ LESSOR
---------------
By: LESSOR
-------------------------------
Its:
------------------------------
Varsity Spirit Corporation,/s/ LESSEE
-------
By: LESSEE
-------------------------------
9
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Its: CEO
------------------------------
10
<PAGE>
STATE OF ARKANSAS
COUNTY OF CLUCOT
Personally appeared before me, the undersigned, a Notary Public in and
for said State and County, duly commissioned and qualified, Laphiew
[illegible] the within named bargainer, with whom I am personally
acquainted, and who acknowledged that he executed the within instrument
for the purposes herein contained.
WITNESS my hand and Notarial Seal at office, the 8 day of October, 1998
Notary Public Tina Michelle Thompson
My Commission expires: Jan. 30, 2006 [NOTARY SEAL]
STATE OF TENNESSEE
COUNTY OF SHELBY
day of
Notary Public
Personally appeared before me, the undersigned, a Notary Public in and
for said State and County, duly
commissioned and qualified, Jeffrey G. Webb, the within named bargainer
I with whom I am personally acquainted, and who acknowledged that--he
executed the within instrument for the purposes therein contained.
WITNESS my hand and Notarial Seal at office, 7 day of October 1998
the Notary Public /s/ Teresa B. Kimbrell
My Commission expires: 1-19-01 [NOTARY SEAL]
11
<PAGE>
EXHIBIT "C"
Lessor, for itself and its successors in title and assigns, agree to pay
Wilkinson and Snowden, Inc. and Trezevant Realty Corporation, its successors and
assigns, the following commission: 100% of the first month's rent and 5% of each
month's rent thereafter for services in negotiating this lease, also to pay
Wilkinson & Snowden, Inc. and Trezevant Realty Corporation, its successors or
assigns, the following commission hereafter stated for any extensions, renewals
and/or new Leases, either by the Lessee's exercise of any option provided in
this lease, or otherwise, or for any subsequent lease that may be entered into
by the Lessor, its successors in title and assigns, with the Lessee, Lessee's
successors and assigns, covering the within demised premises or any additional
premises in the same building contiguous thereto: 5% of the first month's rent
and 5% of each month's rent thereafter for services in negotiating this lease.
The Lessor or its successors in title agrees to pay said agent, its successors
or assigns, a sales commission of 6% of the sales price if the within demised
premises is sold to Lessee or its successors or assigns, during the original or
any extended or renewal term of the lease.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Riddell Sports Inc.
We have issued our report dated February 19, 1999, except for Note 17 as to
which the date is March 16, 1999, accompanying the consolidated financial
statements and schedule included in the Annual Report of Riddell Sports Inc. and
Subsidiaries on Form 10-K for the year ended December 31, 1998. We hereby
consent to the incorporation by reference of said report in the Registration
Statements of Riddell Sports Inc. and Subsidiaries on Form S-8 (File No.
333-34355), effective August 25, 1997, on Form S-4 (File No. 333-31525),
effective August 7, 1997, and on Form S-3 (File No. 333-43247), effective
February 13, 1998.
GRANT THORNTON LLP
Chicago, Illinois
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements filed as part of the annual report on Form
10-K for the year ended December 31, 1998 and is qualified in its entirety by
reference to such report
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,752
<SECURITIES> 0
<RECEIVABLES> 29,318
<ALLOWANCES> 1,302
<INVENTORY> 28,763
<CURRENT-ASSETS> 67,921
<PP&E> 15,084
<DEPRECIATION> 7,213
<TOTAL-ASSETS> 186,211
<CURRENT-LIABILITIES> 29,958
<BONDS> 126,900
0
0
<COMMON> 93
<OTHER-SE> 25,358
<TOTAL-LIABILITY-AND-EQUITY> 186,211
<SALES> 136,283
<TOTAL-REVENUES> 186,600
<CGS> 79,611
<TOTAL-COSTS> 113,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 929
<INTEREST-EXPENSE> 14,656
<INCOME-PRETAX> (7,139)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,139)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,139)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
