<PAGE>
As Filed with the Securities and Exchange Commission on December 15, 1999
Registration No. _________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------
RIDDELL SPORTS INC.
(Exact name of registrant as specified in its charter)
----------------------------------
Delaware 3949 22-2890400
- ---------------------- --------------------------- ----------------
(State or other juris- primary standard industrial (I.R.S. Employer
diction of incorpora- classification code number identification
tion or organization) number)
50 East 42nd Street, Suite 1808, New York, NY 10017 (212) 808-5400
------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
----------------------------------
DAVID GROELINGER
CHIEF FINANCIAL OFFICER
RIDDELL SPORTS INC.,
50 EAST 42ND STREET, NEW YORK, NY 10017
(212) 808-5400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------------------
COPIES TO:
CLIFFORD A. BRANDEIS, ESQ. RUBI FINKELSTEIN, ESQ.
ZUKERMAN GORE & BRANDEIS, LLP ORRICK HERRINGTON & SUTCLIFFE, LLP
900 THIRD AVENUE 666 FIFTH AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NY 10103
Phone: (212) 223-6700 Phone: (212) 506-5000
Fax: (212) 223-6433 Fax: (212) 506-5151
Approximate date of commencement of proposed sale to the public: As soon
as practicable after effective date of the registration statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. //
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. //
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. //
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. //
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. //
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------
Proposed
Maximum Proposed
Offering Maximum Amount of
Title of Each Class of Amount to be Price Per Aggregate Registration
Securities to Be Registered Registered Unit Offering Price Fee
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 1,287,500 $3.125 $4,023,437.50 $1,062.25(1)
$.01 per share
- ---------------------------------------------------------------------------------------
Rights 1,000,000 N/A N/A (2)
- ---------------------------------------------------------------------------------------
Warrants 1,000,000 .01 $10,000 $2.64(3)
-----
- ---------------------------------------------------------------------------------------
Total $1,064.89
=========
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Calculated pursuant to Rule 457(c), and includes an additional 37,500
shares of Common Stock which the Underwriter has the option to purchase to
cover over-allotments, if any.
(2) Pursuant to Rule 457(3), no registration fee is payable with respect to
the rights since the rights are being registered in the same registration
statement as the securities to be offered pursuant thereto.
(3) Calculated pursuant to Rule 457(g)(i).
<PAGE>
The information in this prospectus is not complete and may be changed. Riddell
Sports may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DECEMBER 15, 1999
Preliminary Prospectus
Subscription Rights
to Purchase
RIDDELL SPORTS INC. [LOGO]
1,000,000 Shares of Common Stock and
Accompanying Distribution of Common Stock Purchase Warrants
We are distributing rights to purchase shares of our common stock to
persons who owned our common stock as of the close of business on December 27,
1999, the record date. We will issue up to 1,000,000 shares of common stock in
the offering. You will have the right to subscribe for 0.10795 shares of common
stock for each share of our common stock that you owned on the record date. You
will not have the right to purchase any fractional shares. The subscription
price is $_______ for each whole share.
If you exercise your rights, you will also receive, for no additional
money, a common stock purchase warrant to purchase, if conditions are met, stock
from Riddell of a new or existing subsidiary that conducts substantially all of
our Internet operations.
If you do not properly exercise your rights before 5:00 p.m., Eastern
Standard Time, on February [ ], 2000, your rights will expire.
Our shares are listed for trading on the American Stock Exchange under the
symbol "RDL." On December 10, 1999, the last reported sale price for our common
stock on the American Stock Exchange was $3.125 per share. The rights will be
transferable, but will not be listed or quoted on a formal exchange.
H.C. Wainwright & Co., Inc. will act as solicitation agent for us in
connection with the rights offering.
Concurrently with the rights offering, we are offering to sell an
additional 250,000 shares of our common stock to the public under a separate
prospectus plus up to an additional 37,500 shares to cover over-allotments.
See "Risk Factors" beginning on page 20 to read about factors you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
Per Share Total
Subscription Price.................................. $ $
Solicitation Agent Fee.............................. $ $
Proceeds, before expenses, to Riddell............... $ $
H.C. Wainwright & Co., Inc.
Prospectus dated [ ], 2000
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy any securities in any state or other
jurisdiction in which the offer or solicitation is not permitted. You should not
assume that the information in this prospectus is accurate as of any date other
than the date of this prospectus.
In this prospectus, "Riddell," "we," "us" and "our" refer to Riddell Sports Inc.
and our subsidiaries, unless the context specifically indicates otherwise.
<PAGE>
TABLE OF CONTENTS
Page
THE BOARD RECOMMENDATION.......................................................1
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING................................1
PROSPECTUS SUMMARY.............................................................7
RISK FACTORS..................................................................20
TRADE NAMES AND TRADEMARKS....................................................31
FORWARD-LOOKING STATEMENTS....................................................32
THE RIGHTS OFFERING...........................................................33
THE CONCURRENT OFFERING.......................................................43
USE OF PROCEEDS...............................................................44
DILUTION .....................................................................45
CAPITALIZATION................................................................46
SELECTED FINANCIAL DATA.......................................................47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................51
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY...............................61
BUSINESS .....................................................................62
MANAGEMENT....................................................................85
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................................90
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................101
PLAN OF DISTRIBUTION.........................................................103
DESCRIPTION OF CAPITAL STOCK.................................................104
DESCRIPTION OF DEBT SECURITIES...............................................106
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......................................107
LEGAL MATTERS................................................................110
EXPERTS......................................................................110
WHERE YOU CAN FIND MORE INFORMATION..........................................110
INDEX TO FINANCIAL STATEMENTS................................................F-1
i
<PAGE>
NO BOARD RECOMMENDATION
Our Board of Directors believes that the rights offering is in our best
interests. The rights offering will enable us to raise capital to finance our
Internet operations and for additional working capital.
Our Board of Directors is not making any recommendation to you as to
whether you should exercise your right to purchase our common stock. You must
make your own decision as to whether to exercise your right. You should not view
the group of certain of Riddell's officers and directors and certain other
individuals who it is currently anticipated will agree to exercise all rights
granted to them and to purchase up to $_______ of the remaining shares offered
under the rights offering, as a recommendation or other indication by Riddell or
our Board of Directors, that the exercise or sale of your rights is in your best
interests. An investment in shares of our common stock must be made according to
your own evaluation of your own best interests.
American Stock Transfer & Trust Company, our transfer agent, has agreed to
provide services to us and act as the subscription agent in connection with the
rights offering. If you require assistance, please contact our subscription
agent toll free at (800) 937-5449.
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
Q: What is the rights offering?
A: The rights offering is a distribution of rights on a pro rata basis
to all of our common stockholders as of December 27, 1999, the
record date. "Pro rata" means in proportion to the number of shares
of our common stock that you and the other stockholders hold on the
record date. We are distributing rights to purchase an aggregate of
1,000,000 shares of common stock. The actual number of rights we
will distribute per share will depend upon the number of shares of
common stock outstanding on the record date for the rights offering.
The number of rights per share will be calculated by dividing (i)
1,000,000, the total number of shares of common stock that may be
purchased in the rights offering, by (ii) the total number of
outstanding shares of common stock as of the record date. Based upon
the number of shares outstanding at December 1, 1999, each share of
common stock would be entitled to 0.10795 of a full right.
Q: How many rights will I receive for each share of common stock that I
own?
A: You will receive 0.10795 of one full right for each share of common
stock that you own. That means for approximately every 10 shares of
common stock that you own you will receive one full right.
Q: What is a right?
A: Each full right is the privilege to purchase one additional share of
Riddell's common stock for the subscription price.
Q: What is the subscription price per share?
2
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A: The subscription price per share is $______________.
Q: What if the exercise of my rights results in a fractional share of
common stock?
A: If the exercise of your rights would result in the purchase of a
fractional share, you may exercise your rights only by rounding down
to and paying for the nearest whole share, or paying for any lesser
number of whole shares. You may not purchase a fractional share.
Q: Why is Riddell offering the rights?
A: Riddell is offering the rights to finance its new Internet business
and for additional working capital.
Q: How soon must I act?
A: Your rights expire at 5:00 p.m., New York City time, on
February______, 2000. The subscription agent must receive all
required documents and payments in good funds before that time and
date.
Q: What documents and form of payment are required to exercise my
rights?
A: If you are a record holder of Riddell common stock on
December 27, 1999, you are receiving with this prospectus a
subscription certificate and instructions on how to exercise your
rights to purchase shares. The subscription certificate must be
properly filled out and delivered with full payment in good funds to
American Stock Transfer & Trust Company before the expiration of the
rights on or before February ______, 2000. The subscription price
must be paid in good funds, which means by wire transfer, certified
or cashier's check drawn on a U.S. bank, or personal check that
clears before expiration of the rights. The instructions also
describe an alternate procedure called "Notice of Guaranteed
Delivery". The "Notice of Guaranteed Delivery" allows an extra three
days for you to deliver the subscription certificate if full payment
in good funds is received on or before the expiration date, February
_____, 2000, and if a securities broker or qualified financial
institution signs the form to guaranty that the subscription
certificate will be timely delivered. Subscription documents and
payments should be sent to American Stock Transfer & Trust Company
at 40 Wall Street, 46th floor, New York, NY 10005.
Q: What if a broker, bank or other nominee is the record holder of my
shares?
A: If you wish to exercise your rights to purchase shares, please
promptly contact the broker, bank or other company holding your
shares. Because your broker or other nominee holder is the record
holder of the shares you own, they must complete the subscription
certificate on your behalf for the shares that you wish to purchase
or arrange for a subscription certificate issued in your name. The
broker, bank or other nominee will be requested to contact you for
instructions on exercising your rights.
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Q: Will our Board of Directors make a recommendation whether I should
exercise my rights?
A: No.
Q: What is the standby group?
A: The standby group is a group of individuals who agree to exercise
all of their rights and who also agree to purchase up to a certain
dollar amount of shares offered under the rights offering that are
not purchased by the other stockholders. We currently anticipate
that a group of our officers, directors and some other individuals
will agree to exercise all of the rights granted to those members of
the standby group who are stockholders as of the record date, and,
in addition, will also agree to purchase up to $__________ worth of
the shares offered under the rights offering that are not purchased
by the other stockholders.
Q: If I have any questions about this rights offering, who should I
contact?
A: For questions about the rights offering or additional copies of
offering documents call the subscription agent, American Stock
Transfer & Trust Company, at (800) 937-5449, (212) 936-5100, or
(718) 921-8200.
For other questions and copies of our recent SEC filings contact
Riddell at (773) 794-1994, extension 307, or refer to other sources,
described under "Where You Can Find More Information" below.
Q: Am I required to exercise my rights?
A: No.
Q: What will happen if I do not exercise my rights?
A: If you do not exercise any rights, the number of shares which you
own will not change, but, if the rights offering is completed, your
percentage ownership of Riddell's total outstanding common stock
will decline. Also, even if you do exercise all of your rights, if
Riddell completes the concurrent offering, your percentage ownership
of Riddell's total outstanding common stock will decline.
Q: What is the concurrent offering?
A: At the same time as we are conducting the rights offering to our
current stockholders we are also offering to sell 250,000 shares of
our common stock to the general public.
Q: Why are we conducting the concurrent offering?
A: For the same reasons that we are conducting the rights offering, to
finance our new Internet business and for additional working
capital.
4
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Q: May I transfer my rights?
A: Yes, rights will be transferable, but it is not anticipated that a
formal market will be made in the rights. Therefore, they will not
be listed for trading on any exchange, although it is possible that
an informal market may develop. We cannot ensure that the rights
will have any value or can be sold. You may also wish to transfer
rights to allow your broker or other person to exercise your rights
for you. The reverse side of the subscription certificate contains
instructions for these types of transfers.
Q: Will my money be returned if the rights offering is cancelled?
A: Yes, but without any payment of interest.
Q: What fees or charges apply if I purchase shares or attempt to sell
my rights?
A: If you exercise rights through a broker or other holder of your
shares, you will be responsible for paying any fees that they may
charge you. If you elect to sell your rights, you are also
responsible for any fees or sales commissions that may apply to that
transaction. We will not be charging you any fee or sales commission
to issue rights to you or to issue shares to you if you exercise
rights. We will be responsible for paying the solicitation agent its
fee.
Q: May I change or cancel my exercise of rights after I send in the
required forms?
A: No.
Q: What is the common stock purchase warrant that Riddell is offering
along with the rights?
A: Attached to each full right is a common stock purchase warrant that
will entitle you to purchase shares of common stock from Riddell if,
in the future, Riddell decides to conduct substantially all of its
Internet operations through a newly formed or existing subsidiary.
All of the warrants received by holders who exercise rights,
collectively, are exercisable for __________% of the common stock
owned by Riddell in this prospective Internet subsidiary at the time
the common stock purchase warrants are exercisable. You will only
receive this common stock purchase warrant if, and to the extent,
you exercise your rights.
Q: When are the common stock purchase warrants exercisable?
A: Assuming that we decide to conduct our Internet operations in the
future through a newly formed or presently existing subsidiary, the
common stock purchase warrants are exercisable if we effect an
initial public offering of the stock of this Internet subsidiary
before December 31, 2002, in which event the warrant will be
exercisable for six months commencing on the closing of the initial
public offering. If we do not establish such an Internet subsidiary
by December 31, 2002, or we establish this subsidiary but do not
take it public by December 31, 2002, your warrants will
automatically expire and will no
5
<PAGE>
longer be exercisable.
Q: What will be the exercise price of the common stock purchase
warrant?
A: The exercise price for the common stock purchase warrant will be
$0.01 per share.
Q: May I transfer the common stock purchase warrants that I receive if
I exercise my rights?
A: No, with one exception. They can be transferred to your estate if
you die.
6
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some of the information provided elsewhere in this
prospectus. The summary is not complete and may not provide all information you
should consider before deciding whether or not to exercise the rights. You
should read the entire prospectus carefully. Portions of this prospectus, such
as the Risk Factors section starting on page 20, are not summarized below.
Riddell also encourages you to review the financial statements and other
information provided in the reports and other documents it files under the
Securities Exchange Act of 1934, as described in the "Where You Can Find More
Information" section in this prospectus at page 110.
Riddell
Our Business
Riddell is a leading marketer and manufacturer of branded products and
services to the extracurricular activities portion of the educational market. We
believe that the extracurricular activities market encompasses approximately 30
million young men and women in the United States who participate in team sports
and other organized activities outside the classroom. We estimate that this
market generates approximately $5 billion in sales annually, including
approximately $2 billion in athletic equipment and uniforms for team sports and
various products and services for cheerleaders and dancers.
Under our many brands, the best known of which are Riddell(Registered) and
Varsity Spirit(Registered) (which we own) and Umbro(Registered) (which we
license), we are:
o A leading provider of equipment and clothing for team sports;
o The only national reconditioner of football protective and other
athletic equipment;
o The largest designer, marketer and supplier of innovative
cheerleader and dance team uniforms and accessories;
o The biggest operator of cheerleading and dance team training camps
and clinics;
o A leading organizer of special events for extracurricular
activities;
o A nationwide provider of soccer apparel, equipment and footwear for
team play; and
o A supplier of sports collectible products through retailers in the
U.S. and internationally.
We believe that Riddell branded football equipment is worn by more than
50% of all high school and collegiate football players. We also have a
longstanding agreement with the NFL for the promotion of our Riddell brand. Over
80% of the NFL players choose to wear
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our helmets. We believe that our Varsity Spirit brand cheerleading uniforms are
worn by approximately 40% of all high school and 75% of all collegiate
cheerleaders. In 1999, our cheerleading camps were attended by more than 217,000
students, and, in 1999, more than 25,000 people traveled to the Walt Disney
Resort in Orlando, Florida to participate in and view our various cheerleading
and dance competitions.
In the fourth quarter of 1998, we became the exclusive U.S. licensee for
Umbro branded soccer apparel, footwear and equipment for the team channel of
distribution. Umbro is one of the leading soccer brands worldwide.
Our objectives and strategies
Our objectives are to increase our current market share and broaden the
recognition of our brands in the extracurricular activities market. We intend to
implement these objectives by continuing to focus on adding new product lines,
developing new special events, competitions and conventions, increasing the size
of our sales force and broadening our already successful integrated marketing
approach. We believe that the implementation of our Internet operations will
enhance our integrated marketing approach.
Our opportunities for growth
Over the past few years we have positioned ourselves for growth in four
areas:
o Football, baseball and softball game uniforms to high school and
collegiate teams
o Football, baseball and softball game uniforms and equipment to
recreational youth leagues
o Apparel, equipment and footwear to the team soccer market
o New Internet operations
Our advantages
We believe that we have three principal advantages that will support our
growth opportunities:
o Our direct, proprietary sales force has approximately 320 people who
are responsible for developing and maintaining relationships among
the 40,000 junior and senior high schools, colleges and numerous
recreational organizations throughout the United States. Our sales
force will be particularly important in connection with sales of
athletic clothing and equipment to high schools, colleges and
recreational youth leagues. We believe that we have the only
national sales force in the U.S. serving the extracurricular market.
o Our efficient manufacturing and sourcing capabilities support our
direct sales effort and enable us to produce and deliver
competitively priced high quality customized products faster than
our competitors.
8
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o Our relationship marketing, which we began 25 years ago, is a
year-round, integrated marketing approach that creates a strong bond
between us and our customers. In the case of cheerleading it
includes conducting training camps, clinics and conventions,
producing various nationally-televised and regional championships
and performance events and selling cheerleading uniforms and
accessories. Our relationship marketing is designed so that each of
our products and services reinforce one another, as well as
strengthen overall brand awareness. We believe that our new Internet
operations are a logical extension of, and will effectively
reinforce, our relationship marketing strategy.
Our Internet operations
Our Internet business, which will be funded, in part, by the proceeds of
this offering, has a community and a commerce orientation. We started our
Internet operations in the fourth quarter of 1999 with our first two web sites:
a community web site with e-commerce elements for cheerleaders, www.varsity.com,
and an e-commerce web site for sports collectibles, www.riddell.com.
o Community: We will be developing web sites for identifiable,
highly-focused communities in the extracurricular activities market.
We believe that the community members in this market, such as
cheerleaders, football players and other participants in
extracurricular activities, often define their lives through their
participation in these activities. As a result, we believe that
these community members will become frequent visitors to our web
sites. Our community web sites will provide these users with
meaningful, timely, activity-specific content. We believe as we
create web sites for these discrete, highly-focused communities,
that our combined group of users will represent a large, sought
after audience for third-party advertisers and marketers.
o Commerce: On our community sites, we anticipate that users will be
able to purchase our products and purchase the products of other
marketers who will want to sell to our community members. We will
offer products that will appeal to the members of our focused
community sites as well as products that will appeal to members of
different communities. We also plan to sell advertising, as we
believe the school leaders and trend setters that use our community
web sites will be an attractive audience to other marketers. We also
believe that our web site for sports collectibles will be attractive
to a broad range of sports fans.
We believe that the Internet will help us expand our traditional business,
increase our brand recognition and give rise to new revenue streams.
o Direct link to our customers: We believe that the content and
community-building aspects of each community web site will enhance
our existing relationships and help us build new relationships with
coaches and participants in various extracurricular activities. The
Internet will also provide us with another way to rapidly
disseminate new product information and promote our camps, clinics,
competitions and performance events.
o Market penetration: We believe that the Internet will be
particularly effective
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with respect to the sale of uniforms and equipment to recreational
youth leagues, a large and highly-fragmented market.
o Expand into new businesses: In addition to new revenue streams from
alliances with other companies and the sale of advertising, we
believe that the Internet will ultimately provide us with a
cost-effective vehicle to begin marketing beyond our traditional
extracurricular groups (i.e., cheerleaders and team sports) to
non-athletic extracurricular activities (e.g., musical
organizations, drama clubs, chess clubs, etc.).
o Broaden distribution of sports collectibles: We believe that the web
site dedicated to our retail products will overcome the geographical
constraints and inventory limitations of retail stores, which
preclude our ability to offer collectibles of every team in every
city. The Internet will also enable us to offer customized products
that cannot readily be sold through traditional commercial channels.
We are a Delaware corporation with our principal offices located at 50
East 42nd Street, Suite 1808, New York, NY 10017. Our phone number is (212)
808-5400. Our current web sites are www.varsity.com and www.riddell.com. The
information contained on our web sites is not intended to be a part of this
prospectus.
10
<PAGE>
Summary Financial Data
The selected financial information set forth below is derived from the
more detailed financial data and related notes thereto included elsewhere in
this prospectus. This information shall be read in conjunction with such
financial data.
(In Thousands, except per share amounts)
--------------------------------------------------------
Year Ended December 31, Nine Months Ended
September 30,
--------------------------------------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
Unaudited
---------
Statements of
Operations
Data:
Net revenues $72,382 $138,273 $186,600 $159,326 $179,750
Gross profit 33,569 57,598 73,059 64,087 74,781
Interest expense 2,763 11,879 14,656 11,114 11,668
Net Income
(loss) 2,843 (559) (7,139) 3,804 8,184
Net Earnings
(loss) per share
Basic $0.35 $(0.07) $(0.78) $0.42 $0.88
Diluted 0.33 (0.07) $(0.78) 0.37 0.78
EBITDA(1) $7,909 $15,330 $13,230 $19,164 $25,042
1) EBITDA is the sum of our earnings or loss before extraordinary items (and
the cumulative effect of changes in accounting principles (as
applicable)), interest, income taxes, depreciation and amortization
expense. EBITDA is a widely accepted financial indicator of a company's
ability to service indebtedness. However, EBITDA should not be considered
as an alternative to income from operations or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of a
our operating performance or as a measure of our liquidity.
11
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December 31, September 30,
-------- --- --------- ---
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
Unaudited
---------
Balance Sheet Data:
Working capital $25,957 $37,599 $37,963 $59,634 $65,110
Total assets 76,361 181,761 186,211 201,942 210,300
Long-term debt, less
current portion 29,984 122,500 126,900 138,200 145,144
Stockholders' equity 27,745 32,125 25,451 36,129 33,635
12
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The Rights Offering
Securities offered Rights to purchase 1,000,000
shares of our common stock.
Further, to those individuals and
entities who exercise rights, we
will issue warrants which, upon
exercise, will represent in the
aggregate, _____ (____%) percent
of Riddell's ownership in a new
or existing subsidiary that we
may establish in the future to
conduct most of our Internet
operations.
Concurrent offering Concurrently with the rights
offering, we are offering 250,000
shares of newly-issued shares of
stock.
Shares of common stock 9,263,957 outstanding on
outstanding prior to this offering December 1, 1999.
Shares of common stock outstanding 10,513,957. Unless expressly
after this offering (assuming completion stated to the contrary, the share
of this rights offering in full and the sale information in this prospectus
of 250,000 shares in the concurrent excludes:
offering under a separate prospectus)
o 2,435,025 shares issuable upon
exercise of options granted
pursuant to Riddell's 1991 Stock
Option Plan and 1997 Stock Option
Plan as of December 1, 1999.
o 1,395,011 shares of common
stock issuable upon conversion at
$5.3763 per share (subject to
certain adjustments) of Riddell's
4.1% Convertible Subordinated
Note due 2004.
o The shares issued upon exercise
of the underwriter's
over-allotment option in the
concurrent offering.
Record date December 27, 1999.
Expiration date and time The rights expire at 5:00 p.m.,
New York City time, on February
__, 2000, unless properly
exercised before that time and
date.
Rights To each record holder of common
stock on December 27, 1999
Riddell is granting 0.10795 of a
right for each share of common
stock held on such date. To
exercise the right, you must
deliver one full right for each
share of common stock you would
like to purchase.
Subscription price The subscription price for each
full right is
13
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$____ per share, payable in cash.
Payment by personal check must
clear payment on or before the
expiration date, which may
require five or more business
days from the date that we
receive your personal check. As a
result, we recommend that
stockholders pay the subscription
price by certified or cashier's
check drawn on a U.S. bank, U.S.
postal money order or wire
transfer of funds.
The subscription price will be
approved by those members of our
Board of Directors that are not
members of the Standby Group.
Transferability of rights The rights are transferable, but
we do not anticipate that a
formal market will be made in the
rights or that they will be
listed for trading on any
exchange; although an informal
market may develop. The rights
are issued in the form of
subscription certificates which
accompany this prospectus sent to
the record holders.
Fractional shares We will not issue fractional
shares. If your rights would
allow you to purchase a
fractional share, you may
exercise your rights only by
rounding down to and paying for
the nearest whole share, or
paying for any lesser number of
whole shares.
No revocation Once you submit the form of
subscription certificate to
exercise any rights, you are not
allowed to revoke, or change the
exercise or request a refund of
monies paid.
Common Stock Purchase Warrant If the right is exercised, the
exercising holder will receive,
for no additional cash, a common
stock purchase warrant that will
entitle the exercising holder to
purchase shares in a new or
existing subsidiary of ours that
we may establish through which we
would conduct substantially all
of our Internet operations. These
warrants will only be exercisable
if we establish an Internet
subsidiary (which presently does
not exist) and we effect an
initial public offering of such
subsidiary on or before December
31, 2002, in which event you will
have six months after the closing
of the initial public offering to
exercise your common stock
purchase warrant. If we do not
establish the Internet subsidiary
before December 31, 2002, or
establish the Internet
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subsidiary but do not effect an
initial public offering for such
subsidiary before December 31,
2002, the common stock purchase
warrant will automatically expire
and will no longer be
exercisable. These warrants have
an exercise price of $0.01 per
share and are non-transferrable
except in the event of the death
of the holder.
Reasons for the rights offering To finance our Internet business
and for additional working
capital.
No board or committee recommendation Our Board of Directors will not
make any recommendation to
stockholders regarding the
exercise of rights under this
offering. Stockholders who do
exercise rights risk investment
loss on new money invested. We do
not assure you that the
subscription price will be below
the market price for the common
stock, or that anyone purchasing
shares at the subscription price
will be able to sell those shares
in the future at a higher price.
See "Risk Factors -- Risks
relating to the rights offering."
Standby purchase commitment It is currently anticipated that
a group to consist of some of
Riddell's officers and directors
and certain other individuals
with whom we are currently in
discussions regarding joining
this group (the "Standby Group")
will agree to exercise all of the
rights granted to those members
of the Standby Group who are
stockholders on the record date.
In addition, the Standby Group
will be contractually bound to
purchase up to $____________ of
the shares offered under the
rights offering that are not
purchased by stockholders who are
not a part of the Standby Group.
The rights granted to the Standby
Group represent ____% of all of
the rights being issued to
stockholders. See "Risk Factors -
Risks Relating to the rights
offering"
Conditions to the rights offering The obligations of the Standby
Group to complete its purchase of
shares under the proposed standby
agreement are subject to certain
conditions described under
"Rights Offering -- Conditions
relating to the rights offering."
If the standby agreement with the
Standby Group is not consummated
in accordance with its terms for
any reason, or if the other
conditions are not satisfied or
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waived, we may terminate the
rights offering and the
concurrent offering in their
entirety. If the rights offering
is terminated, we will refund
without interest to those persons
who subscribed for shares in the
rights offering all payments
received from those subscribers.
Subscription agent American Stock Transfer & Trust
Company
Solicitation agent H.C. Wainwright & Co., Inc.
Procedure for exercising rights To exercise rights, you must
complete the subscription
certificate and deliver it to
American Stock Transfer & Trust
Company with full payment under
the subscription privilege.
American Stock Transfer & Trust
Company must receive the proper
forms and payments in good funds
on or before the expiration date.
You may deliver the documents and
payments by mail or commercial
courier. If regular mail is used
for this purpose, we recommend
using insured, registered mail.
You may use an alternative, the
"Notice of Guaranteed Delivery",
if you are unable to deliver the
subscription certificate before
the expiration date, subject to
the requirements of this
procedure described under "The
Rights Offering--Special
procedure under "Notice of
Guaranteed Delivery Form."
Payment adjustments If you send a payment that is
insufficient to purchase the
number of shares requested, or if
the number of shares requested is
not specified in the forms, the
payment received will be applied
to exercise the subscription
privilege to the extent of the
payment. If the payment exceeds
the subscription price for the
full exercise of the subscription
privilege, the excess will be
refunded to you as soon as it is
practicable. You will not receive
interest on any payments received
under the rights offering.
Nominee accounts If you wish to purchase shares in
this offering and your shares are
held by a securities broker,
bank, trust company or other
nominee, you should promptly
contact your record holder(s) and
request that they exercise rights
on your behalf. You may also
contact the nominee and request
that the nominee send a separate
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<PAGE>
subscription certificate to you.
If you are a record holder who
wishes an institution such as a
broker or bank to exercise your
rights for you, you should
contact that institution promptly
to arrange the method of
exercise. If you are a nominee
who desires subscription
certificates re-issued in smaller
denominations, you must act
promptly under special procedures
described under "The Rights
Offering--How to transfer
rights."
You are responsible for the
payment of any fees that brokers
or other persons holding your
shares may charge.
You are not responsible for any
fees payable to the Subscription
Agent or the solicitation agent.
Exercise by foreign and certain other American Stock Transfer & Trust
stockholders Company will hold subscription
certificates for stockholders
having addresses outside the
United States. In order to
exercise rights, holders with
addresses outside the United
States must notify American Stock
Transfer & Trust Company and
timely follow other procedures on
or before the expiration date of
the rights.
U.S. income tax consequences For United States federal income
tax purposes, we believe that a
stockholder will not recognize
taxable income as a result of the
distribution of the rights. Upon
exercise of the rights, we
believe that receipt of the
common stock purchase warrants
will be treated as a distribution
of property and taxable as a
dividend to the stockholders to
the extent the fair value of the
common stock purchase warrant on
the date of receipt exceeds the
subscription price allocated to
the warrants. See "The Rights
Offering - Federal Income Tax
Consequences" and "Certain
Federal Income Tax Consequences".
Each stockholder should, and is
urged to, consult their own tax
adviser concerning the tax
consequences of this offering
under the holder's own tax
situation. This prospectus does
not summarize tax consequences
arising under state tax laws,
non-U.S. tax laws, or any tax
laws relating to special tax
circumstances or particular types
of taxpayers.
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<PAGE>
Stock certificates We will deliver stock
certificates representing common
stock purchased by the exercise
of rights as soon as practicable
after the expiration date of the
rights.
Warrant certificates We will deliver warrant
certificates representing the
common stock purchase warrants
granted to you upon the exercise
of your rights as soon as
practicable after the expiration
date of the rights.
Amendment, extension and termination We may amend or extend the rights
offering. We reserve the right to
withdraw the rights offering at
any time prior to the expiration
date for any reason, in which
event all funds received in the
rights offering will be returned
without interest to those persons
who subscribed for shares in the
rights offering.
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<PAGE>
The Concurrent Offering
Shares offered by Riddell 250,000 shares of common stock
Shares to be outstanding after the offering 10,513,957.
(and assuming the sale of 1,000,000 shares
of our common stock pursuant to the rights
offering under a separate prospectus)
Use of proceeds To finance our Internet business
and for additional working
capital
American Stock Exchange symbol "RDL"
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<PAGE>
RISK FACTORS
You should carefully consider the risks described below and the other
information in this prospectus before deciding to purchase our shares. Many
factors, including the risks described below and other risks that we have not
recognized, could cause our operating results to be different from our
expectations and plans.
This risk factor section is divided into three sections. The first section
relates to the general business risks associated with Riddell. The second
section relates solely to the risks associated with this offering. The third
section relates to the risks specifically associated with the our Internet
business.
General business risks
Our significant corporate indebtedness could affect our financial health.
We have significant corporate indebtedness. In June of 1997, we borrowed $115
million to acquire the Varsity Spirit Corporation and refinance certain of our
then outstanding indebtedness. We also have a revolving credit facility of $48
million which we use for working capital purposes, primarily to finance
inventory and receivables and a $7.5 million convertible note. As of September
30, 1999, we had $115 million outstanding in respect of the Senior Notes, $22.64
million outstanding in respect of our revolving credit facility and $7.5 million
outstanding in respect of the convertible note, for approximately $145 million
in total outstanding indebtednesss.
Some of the risks associated with our corporate indebtedness include:
o As the amount of money we have borrowed is large relative to our
size, our ability to raise additional capital, if needed, in the
future, may be limited.
o A significant portion of our cash flow is needed to pay interest and
principal on our debt when due. Also, as our revolving credit line
has a variable rate of interest, an increase in interest rates could
be harmful to us.
o We are more vulnerable to economic downturns and more limited in our
ability to withstand competitive pressures, particularly from those
competitors that have not borrowed as much money as we have.
o Our ability to pay principal and interest when it becomes due or to
refinance our debt depends on our future operating performance and
cash flows, which are subject to factors beyond our control, such as
prevailing economic conditions, prevailing interest rate levels and
financial, competitive, business and other factors.
o If we do not have enough cash flow to make principal and interest
payments on our debt obligations when they come due, we may not be
able to raise cash to meet our payment obligations because of the
restrictive agreements in our debt obligations.
o If we default on our credit obligations, and our default is not
cured or waived, our default could result in other debt obligations
automatically becoming due under what are commonly referred to as
cross-default provisions.
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<PAGE>
Restrictive covenants limit our discretion on various business matters.
Our financing agreements contain financial and operating covenants that encumber
our assets and restrict our ability to use our discretion on various business
matters, including our ability to:
o borrow additional money;
o pay dividends and make specified other payments;
o loan money to our subsidiaries or other parties;
o make investments, loans and guaranties; and
o sell our assets.
We depend on third-parties to manufacture most of our products. We depend
on foreign and domestic third-parties to manufacture most of our athletic
equipment, practicewear, uniforms, cheerleading accessories and collectible
products. We do not have any long term contracts with our manufacturers, and we
compete with other companies for third-party production capacity. Our
arrangements with our non-U.S. suppliers are subject to the risks generally
associated with doing business abroad, such as:
o changes in import duties;
o tariffs;
o foreign governmental regulations;
o political unrest;
o foreign currency fluctuations;
o disruptions or delays in shipments;
o weather and time risks associated with transoceanic shipping;
o additional U.S. quotas, duties, taxes or other restrictions that
could be imposed on importation of products in the future; or
o changes in economic conditions in countries in which our
manufacturing sources are located.
If any such factors were to render the conduct of business in a particular
country undesirable or impractical, or if our current foreign or domestic
manufacturers were to cease doing business with us for any reason, our business
and operating results could be severely impacted.
We also purchase raw materials used in our protective products from
third-party suppliers. In particular, we rely on a single supplier to fulfill
our requirements for resin, an integral component in our football and baseball
batters' helmets. If our supplier should fail to continue to fulfill our resin
requirements and a satisfactory alternate supplier could not be found, our
financial results could be materially adversely affected.
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<PAGE>
Our business is highly seasonal and follows an annual pattern. Our working
capital needs vary throughout the year typically requiring us to increase our
debt during the first and most of the second quarters of each year. We then
usually generate cash flow to decrease our indebtedness starting late in the
second quarter and into the fourth quarter of each year. This working capital
pattern is influenced by the following factors:
o We sell our extracurricular products and reconditioning services
throughout the year. However, many schools and colleges do not make
payments for these products and services until the following July to
October period when the school year begins.
o We incur costs in preparing for our cheerleading camps during the
fourth quarter and into the second quarter, while we receive the
revenues from camps during the period from June to August.
o Semiannual interest payments on our $115 million Senior Notes are
due each January and July.
Our quarterly financial results also fluctuate based on the seasonality of
our business. In recent years operations have been most profitable in the second
and third quarters, with the third quarter being the strongest. Losses have been
incurred in the first and fourth quarters. This seasonal profitability pattern
is influenced by the following factors:
o We deliver most of our extracurricular products and reconditioning
services in the first three quarters of each calendar year.
o Most of our camp revenue relates to cheerleading camps held during
the summer. However, we incur costs preparing for the upcoming camp
season during the fourth through second quarter of each year.
o Our sales of sports collectible products are usually at their
highest during the third and fourth quarters as retailers build
inventory in anticipation of both the football and holiday shopping
seasons.
See "Business - Seasonality and Backlog" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
We are subject to product liability and personal injury claims because of
the nature of our products. Given the nature of the products we manufacture,
recondition and sell, particularly our line of football helmets, we have in the
past, and will likely continue in the future, to be subject to product liability
and personal injury claims. Principally these claims have related to head and
neck injuries suffered during the course of a football game. We may also be
subject to personal injury claims arising from our cheerleader and dance team
camps and activities. Due to the uncertainty of litigation, we cannot assure you
that the ultimate cost of these claims will fall within the established reserves
on our financial statements, or that we will have adequate insurance coverage to
cover these claims in the future. Also, our insurance coverage expires in 2005
and we cannot assure you that, subsequent to 2005, our insurer will remain
viable and that future rate increases will not make such insurance uneconomical.
We cannot assure you that one or more meritorious claims against us for product
liability, serious personal, bodily injury will not have a material
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<PAGE>
adverse effect on our business, financial condition or results of operations.
See "Business - Product Liability Proceedings and Insurance."
We operate in a competitive market where there are companies larger than
us. In our team sports business, we compete with several large national
companies, such as Bike Athletic Co, Inc., Douglas, Inc., Gear 2000, Inc.,
Schutt, Inc., Rawlings Sporting Goods Company, Inc., Diamond Sports Co., and
Wilson Sporting Goods Company, and in our athletic clothing business, with
national companies such as Champion Products, Inc. and Russell Athletic, Inc.
and with Adidas, Nike and other companies for soccer team apparel, footwear and
equipment. Some of our competitors offer a broad line of sports equipment and
are significantly larger and have substantially greater financial and other
resources at their disposal than we do. We also compete with numerous
independent dealers who market competitors' products and with numerous smaller
manufacturers and suppliers of sporting goods, reconditoners, services and
collectibles. In particular, the protective equipment reconditioning and the
sports collectibles industries are fragmented.
We compete with one major national company, National Spirit Group Limited,
that markets cheerleader and dance uniforms and accessories and cheerleader and
dance camps. We also compete with other smaller national and regional
competitors that serve the uniform and accessories market or that operate
cheerleader and dance team camps and clinics.
Competitive pressure could have a material adverse effect on our business,
financial condition and results of operations.
Our market share information may not be dependable. The market share and
other market data contained in this prospectus are based on independent industry
publications and our good faith estimates. However, we cannot independently
verify market share data with complete certainty due to the unavailability of
raw data and the voluntary nature of the data gathering process. Further
estimates of market data may be incorrect, possibly to a material degree.
Management's estimates with respect to our market are based only on the limited
data in the public domain and our participation in the team sports and school
spirit industries.
Future sales of our common stock could adversely affect our stock price
and our ability to raise funds in the stock offering. An aggregate of 4,434,119
shares of the our common stock are "restricted securities" as that term is
defined by Rule 144 of the Securities Act of 1933, and may be sold only in
compliance with Rule 144 of the Securities Act. Ordinarily, under Rule 144, a
person who is an affiliate (as that term is defined in Rule 144) of ours and has
beneficially owned restricted securities for a period of one year may, every
three months, sell in brokerage transactions an amount that does not exceed the
greater of (i) one percent of the outstanding class of such securities, or (ii)
the average weekly trading volume in such securities on all national exchanges
and/or reported through the automated quotation system of a registered
securities association during the four weeks prior to the filing of a notice of
sale by a securities holder. A person who is not an affiliate of ours who
beneficially owns restricted securities is also subject to the foregoing volume
limitations but may, after the expiration of two years, sell unlimited amounts
of such securities under certain circumstances. Possible or actual sales of our
outstanding common stock by our stockholders under Rule 144 could have a
depressive effect on the price of the our common stock. There are currently
4,380,119 shares of our common stock eligible for sale pursuant to Rule 144, 97%
of which are owned by our officers and directors. The market price of our common
stock could drop due to sales of a large number of shares of our common stock or
the perception
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<PAGE>
that these sales might occur. These factors could also make it more difficult to
raise funds through future offerings of common stock or other equity.
Directors and officers control over 50% of Riddell; their interests may be
different and conflict with yours. After the offering, over 51% of outstanding
shares of common stock could be owned by our officers and directors assuming all
exercise their rights on a pro-rata basis. Management may also increase their
holdings as a result of the offering and participation in the standby group. See
"Security Ownership of Certain Beneficial Owners and Management" As a result,
certain officers and directors will own a sufficient number of shares of the
outstanding voting stock of Riddell to elect the directors of Riddell and
approve corporate actions and transactions on behalf of Riddell and otherwise
control the business and operations of the Riddell. The interest of management
could conflict with yours.
Increased government regulation could harm our business. At present, no
national governing body regulates cheerleading and dance team activities at the
collegiate level. Although voluntary guidelines relating to safety and
sportsmanship have been issued by the NCAA and some of the athletic conferences,
to date, cheerleading and dance teams generally are free from rules and
restrictions similar to those imposed on other competitive athletics at the
college level. However, if rules limiting off-season training are applied to
cheerleading and/or dance teams (similar to rules imposed by the NCAA on other
sports), it is likely that we would be unable to offer a significant number of
our camps either because participants would be prohibited from participating
during the summer or because suitable sites would not be available. Although we
are not aware of any school officially adopting these activities as a
competitive sport, recognition of cheerleading and/or dance teams as "sports"
would increase the possibility that these activities may become regulated. If we
were restricted from training during the off-season, such regulations would
likely have a material adverse effect on our business, financial condition and
results of operations.
At the high school level, some state athletic associations have classified
cheerleading as a sport and have in some cases imposed certain restrictions on
off-season practices and out-of-state travel to competitions. However, in all
cases to date, we have been able to work with these state athletic associations
to designate acceptable times for the cheerleaders within these states to attend
camps. We have agreements with several state associations to assist with
sponsoring and execution of official competitions with these states. To date,
state regulations have not had a material effect on our ability to conduct
normal business activities within those states.
Our success depends on our key personnel. Our executive officers and other
key employees have been primarily responsible for the development and expansion
of our business and the loss of services of one or more of these individuals
could have a material adverse effect on our financial condition.
A material decline in revenues from the MacGregor trademark could hurt our
business. 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 our financial position and results of operations.
Our information systems may be subject to potential year 2000 problems. We
have substantially completed the process of assessing which of our information
systems may
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<PAGE>
be subject to year 2000 problems and are taking corrective actions to minimize
the potential impact of year 2000 problems. Our corrective actions may not be
sufficient to protect us from year 2000 problems and all of the corrective
actions may not be completed. We also face potential year 2000 issues with third
parties such as our customers, our suppliers and travel systems. If year 2000
problems impact our business, our operating results and financial condition
could be materially harmed.
Risks relating to the rights offering
We cannot assure you that the subscription price set by the rights
offering will be below the trading price for our stock, or that the trading
price for our stock will not decline during or after the rights offering.
You are not allowed to revoke or change your exercise of rights after you
send in your subscription forms and payment. If the rights offering is canceled,
we are obligated only to refund payments actually received, without interest.
You need to act promptly and follow subscription instructions to exercise
your rights. Stockholders who desire to purchase shares in the rights offering
or to transfer or sell their rights must act promptly to ensure that all
required forms and payments are actually received by American Stock Transfer &
Trust Company prior to the expiration date. If you fail to complete and sign the
required subscription forms, send an incorrect payment amount, or otherwise fail
to follow the subscription procedures that apply to your desired transaction,
American Stock Transfer & Trust Company may, depending on the circumstances,
reject your subscription or accept it to the full extent of the payment
received. Neither Riddell, the solicitation agent, nor American Stock Transfer &
Trust Company undertakes to contact you concerning, or attempt to correct, an
incomplete or incorrect subscription form. We have the sole discretion to
determine whether a subscription exercise properly follows the subscription
procedures.
If you use a personal check to pay for shares, the check must clear prior
to the expiration date, and the clearing process may require 5 or more business
days.
There may be a delay in your ability to resell the shares that you
purchase. If you exercise rights, you may not be able to resell the new shares
purchased until you (or your broker or other nominee) have received a stock
certificate for the shares purchased. Although we will endeavor to issue the
appropriate certificates as soon as practicable after completion of the rights
offering, there may be some delay between the expiration date and the time we
are able to issue the new stock certificates.
Our failure to meet certain conditions of the standby commitment may
result in a failure to have a standby commitment. To enable us to receive gross
proceeds of approximately $______________ from the rights offering, a group
consisting of certain of our officers and directors and certain outsiders has
agreed to act as a standby purchaser and purchase up to $____________ of our
common stock offered hereby, less amounts subscribed for by other holders of
rights. However, this commitment is subject to certain conditions to closing.
Our failure to meet any of these conditions, unless waived, may result in the
failure to have a standby commitment.
You will experience dilution in your ownership of Riddell. In the event
that the rights offering is completed and you do not exercise all of the rights
that have been issued to
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<PAGE>
you in the rights offering, your percentage ownership of Riddell will decline
because those who do exercise rights will receive additional shares of common
stock of Riddell. Further, even if the rights offering is not completed, or it
is completed and you do exercise all of your rights, if we complete the
concurrent offering in which we are selling additional shares of our common
stock to the general public, your percentage ownership in Riddell will decline.
Your potential interest in an Internet subsidiary is subject to future
dilution. If you exercise your rights you will receive common stock purchase
warrants which, upon exercise, will represent your pro rata portion of _______%
of our ownership of a new or existing subsidiary through which we will conduct
substantially all of our Internet operations. If we form an Internet subsidiary
and prior to a public offering, we issue shares of common stock or other
securities issuable or convertible into shares of common stock of the subsidiary
to third parties to raise capital, or issue warrants or options to employees,
consultants or directors of the Internet subsidiary, your pro rata interest of
the Internet subsidiary will be diluted. Therefore, any interest that you may
have in our Internet subsidiary by virtue of your common stock purchase warrants
may be substantially diluted.
We cannot assure you that your common stock purchase warrants will be of
any value. In the event that we do not, in the future, decide to conduct
substantially all of our Internet operations through a newly-formed or existing
subsidiary and effect an initial public offering of that subsidiary by December
31, 2002 your warrants will expire and will be of no value. Even if we do
establish such a subsidiary and effect an initial public offering by December
31, 2002, there can be no assurance that your warrants will have any value, or
that the shares underlying the warrants issuable to you upon your exercise of
the warrants will have any value. Even if we do establish an Internet subsidiary
and take it public by December 31, 2002 we cannot assure you that our Internet
subsidiary will be successful.
Risks relating to the Internet business
We face difficulties typically encountered by development stage companies
in new and rapidly evolving markets because of our new Internet initiative. We
have just recently begun developing our web sites. An investor purchasing our
common stock must therefore consider the risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets, such
as online commerce. These risks include our ability to:
o develop our web sites;
o acquire rights to content for our web sites;
o create a customer base for our web sites;
o respond to changes in a rapidly evolving and unpredictable business
environment;
o maintain current and develop new strategic relationships;
o manage growth;
o continue to develop and upgrade our technology; and
o attract, retain and motivate qualified personnel to run our web
sites.
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We cannot assure you that our sale of products and offering of services on
the Internet will achieve market acceptance with customers.
We do not yet have all of our planned web sites operational. We are in the
process of building additional web sites. Our initial web sites became
operational in the fourth quarter of 1999 and may encounter programming and
other problems. We have not sold any advertising and, as a result, our revenues
from our Internet business may be low for some time.
We have never been engaged in electronic commerce. In addition, none of
the management's key executives or other personnel have, until recently, been
engaged in the business of electronic commerce. Accordingly, we cannot assure
you that we will be able to establish and maintain an Internet business that
will be successful. In order to successfully establish and operate an electronic
commerce, or Internet related business, we have to attract and retain a number
of individuals who are capable of effectively helping to formulate the Internet
business plan and thereafter establish, maintain and expand the Internet
operations. There is heavy competition for these individuals and there can be no
assurances that we will be able to attract and retain qualified individuals.
Content on our web sites may not attract sufficient numbers of customers
and advertisers. Our future success on the Internet will depend upon our ability
to attract users to our web sites to purchase our merchandise and to attract
advertisers to our web sites. We cannot assure you that we will be attractive to
a sufficient number of users or advertisers to generate significant revenues. We
cannot assure you that we will be able to anticipate, develop, monitor and
successfully respond to rapidly changing consumer tastes and preferences to
continually attract large numbers of users to our web sites. If we are unable to
develop Internet content that allows us to attract, retain and expand a loyal
user base, our operating results and financial condition could be materially
adversely affected.
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We will rely, in part, on licensed third-party content on our web sites.
We plan to license some of the content for our web sites to build communities
and attract and retain customers, users and advertisers. If we are unable to
obtain desirable content from current licensors or from new licensors, it will
affect the number of visitors to our web sites, which could materially harm our
Internet business. In addition, if we are unable to obtain content at an
acceptable cost, it could materially harm our ability to compete in our Internet
business and our operating results and financial condition could be materially
adversely affected.
Our success depends on the continued growth of online commerce. Use of the
Internet by consumers is in its early stages and, as a result, the degree of
acceptance of the Internet as a medium for commerce is uncertain. If online
commerce does not continue to grow or grows more slowly than expected, our
Internet business will be materially harmed. A number of factors could slow the
growth of online commerce, including the following:
o the network infrastructure required to support a substantially
larger volume of transactions may not be developed;
o government regulation may increase;
o telecommunications capacity problems may result in slower response
times; and
o consumers may have concerns about the security and privacy of online
commerce transactions.
We may not be able to compete successfully against current and future
competitors on the Internet. Our success will depend upon our ability to attract
customers by providing efficient means to buy our products and providing
high-quality content and value-added services to build our communities for
advertising revenues and the sale of additional products. The market for our
products and services is intensely competitive. In addition, the online commerce
market for our products and services is new, rapidly evolving and competitive.
There are no substantial barriers to entry in electronic commerce. Many of our
competitors have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing and other
resources than we have. If we are unable to successfully compete, our operating
results and financial condition could be materially adversely affected.
If we fail to keep pace with rapid technological changes on the Internet,
it could materially harm our ability to attract and retain customers. Internet
technology, commercial applications and online uses are all rapidly evolving. If
we do not successfully respond to rapid changes involving the Internet, our
Internet business will be materially harmed. In this regard, we must continue to
develop, enhance and improve the responsiveness and features of our web sites
and develop new features to meet customer needs. We also must respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis.
We are subject to government regulation and legal liabilities that may be
costly and may interfere with our ability to conduct business on the Internet.
Laws and regulations directly applicable to online commerce or Internet
communications are becoming more prevalent. Laws and regulations directly
applicable to Internet communications, commerce and advertising are becoming
more prevalent. The most recent session of the United States Congress resulted
in Internet laws regarding children's privacy, copyrights and
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taxation. Such legislation could hamper the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications,
commercial and advertising medium. Although our transmissions originate in New
York, the governments of other states or foreign countries might attempt to
regulate our transmissions or levy sales or other taxes relating to our
activities. The European Union recently enacted its own privacy regulations that
may result in limits on the collection and use of certain user information. The
laws governing the Internet, however, remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation apply to the Internet and Internet advertising. In
addition, the growth and development of the market for Internet commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on companies conducting
business over the Internet. Furthermore, the Federal Trade Commission has
recently investigated the disclosure of personal identifying information
obtained from individuals by Internet companies. In the event the Federal Trade
Commission or other governmental authorities adopt or modify laws or regulations
relating to the Internet, our business, results of operations and financial
condition could be adversely affected.
We may be subject to liability for sales and other taxes. We do not plan
to collect sales or other similar taxes in most states for sales on the
Internet. Our Internet business could be materially harmed if additional sales
and similar taxes are imposed on us, or if penalties are assessed on us for past
nonpayment of these taxes. Recently adopted legislation provides that, prior to
November 2001, a state cannot impose sales taxes on products sold on the
Internet unless these taxes could be charged on non-Internet transactions
involving the products. During this moratorium, it is possible that taxing
mechanisms may be developed that would, following the moratorium, impose
increasing sales and similar tax burdens on us. If these burdens are placed on
us, our Internet business could be materially harmed and there could be a
material adverse effect on our operating results and financial condition.
We may experience problems from computer systems that are not ready on a
timely basis to process information associated with the year 2000. Many existing
software programs may not accurately process dates arising in the year 2000 and
after because they use only two digits to identify a year and assume that the
two missing digits are always "19." We cannot assure you that all of the
computer systems and related products and software that are important to our
Internet business will be ready by the deadline to address the concerns arising
from the year 2000 problem. If they are not ready, we may experience difficulty
in properly managing our web sites and face the possibility of business
interruptions, financial loss, reputational harm and legal liability. Any of
these could materially harm our Internet business, operating results and
financial condition.
Our Internet business will depend upon the operations and technology of
various other Internet sites, credit card issuers, as well as other third
parties. Our Internet business, operating results and financial condition may be
materially harmed if these or other third parties are not year 2000 compliant on
a timely basis. We have not developed any contingency plans to address the worst
case scenario that might if occur if year 2000 issues make the Internet or our
web sites unavailable.
We may be subject to privacy regulations which could limit the
effectiveness of our Internet sales and marketing efforts. Web sites typically
place certain "cookies" on a user's hard drive without the user's knowledge or
express consent. Our web sites and other web sites use cookies for a variety of
reasons, including for the collection of data derived
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from the user's Internet activity. Most currently available web browsers allow
users to remove cookies at any time or to prevent cookies from being stored on
their hard drive. In addition, some commentators, privacy advocates and
governmental bodies have suggested limiting or eliminating the use of cookies.
Any reduction or limitation in the use of cookies could limit the effectiveness
of our sales and marketing efforts. In addition, the European Union recently
adopted a directive addressing data privacy that may limit the collection and
use of certain information regarding Internet users. This directive may limit
our ability to target advertising or collect and use information in certain
European countries.
We display a privacy policy on our web sites. The policy is accessible to
all users of our sites. Notwithstanding this policy, any penetration of our
network security or other misappropriation of our users' personal or credit card
information could subject us to liability. We may be liable for claims based on
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. Claims could also be based on other misuses of personal
information, such as misuses for unauthorized marketing purposes. These claims
could result in litigation. In addition, the Federal Trade Commission and
several states have investigated the use by certain Internet companies of
personal information. We could incur expenses if new regulations regarding the
use of personal information are introduced or if our privacy practices are
investigated.
In 1998, the U.S. Congress enacted the Children's Online Privacy
Protection Act of 1998. The principal provisions of the law are to become
effective on April 21, 2000. Among other things, subject to certain limited
exceptions, this act:
o makes it unlawful for an operator of a web site or online service
directed to children under age 13, and for any operator that has
actual knowledge that it is collecting personal information from
such a child, to collect personal information from the child without
having obtained verifiable parental consent; and
o prohibits conditioning the participation of a child under age 13 in
a game, the offering of a prize, or another activity on the child
disclosing more personal information than is reasonably necessary to
participate in such activity.
The Federal Trade Commission has not yet promulgated regulations
interpreting this act. We depend upon collecting personal information from our
customers. We believe that the promulgation of regulations under this act will
make it more difficult for us to collect personal information from certain users
of a community web site.
General security concerns could affect our Internet business. The need to
securely transmit confidential information (such as credit card and other
personal information) over the Internet has been a significant barrier to
e-commerce and communications over the Internet. Any compromise of security
could deter more people from using the Internet or from using it to transmit
confidential information. Furthermore, decreased traffic and e-commerce sales as
a result of general security concerns could cause advertisers to reduce their
amount of online spending. Such security concerns could reduce our market for
e-commerce and indirectly influence our ability to sell online advertising. We
may also incur significant costs to protect Riddell against the threat of
problems caused by such security breaches. Further, if third parties were to
misappropriate our users' personal information or credit card information, users
could possibly bring claims against us.
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TRADE NAMES AND TRADEMARKS
This prospectus also includes trade names and trademarks of other
companies. Our use or display of other parties' trade names, trademarks or
products is not intended to and does not imply a relationship with, or
endorsement or sponsorship of Riddell by, the trade name or trademark owners.
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FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Our statements of plans,
intentions, objectives and future economic or operating performance contained in
this prospectus are forward-looking statements. Forward-looking statements
include but are not limited to statements containing terms such as "believes,"
"does not believe," "no reason to believe," "expects," "plans," "intends,"
"estimates," "will," "would," "anticipated" or "anticipates."
Forward-looking statements involve known and unknown risks and
uncertainties which may cause our actual results in future periods to differ
materially from results anticipated in the forward-looking statements. We make
cautionary statements in certain sections of this prospectus, including in the
Risk Factors beginning on page 20. You should read these cautionary statements
as being applicable to all related forward-looking statements wherever they
appear in this prospectus, the materials referred to in this prospectus. No
forward-looking statement is a guarantee or promise of future performance. We
undertake no obligation to update publicly any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
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THE RIGHTS OFFERING
Basic Subscription Right
As soon as practicable after the date of this prospectus, Riddell is
distributing, at no charge, to holders of our common stock on the record date,
December 27, 1999, rights to purchase additional shares of its common stock. We
are distributing 0.10795 of a right for each share of common stock held on the
record date. Each full right is exercisable for one share of common stock at a
subscription price of $___________ per share. We have reserved a total of
1,000,000 shares of common stock for the exercise of the rights. Further, if you
exercise your rights, you will also receive, for no additional money, a common
stock purchase warrant that may entitle you to purchase stock in a new or
existing subsidiary of ours that may be created sometime in the future to
conduct substantially all of our Internet operations. All of the warrants that
are issued to those individuals and entities who exercise rights will, in the
aggregate, be exercisable for __________ of our ownership interest in such
subsidiary at the time the warrants first become exercisable. See "Common stock
purchase warrants" in this section below and "Description of Securities --
Warrants".
We are sending a subscription certificate and related instructions to each
record holder along with this prospectus to evidence the rights. In order to
exercise rights, you must fill out and sign the appropriate subscription
certificate and timely deliver it with full payment for the shares to be
purchased.
A depository bank, trust company or securities broker or dealer which is a
record holder for more than one beneficial owner of shares may divide or
consolidate subscription certificates to represent shares held on the record
date by their beneficial owners, upon proper showing to American Stock Transfer
& Trust Company.
Fractional shares
We will not issue any fractional shares. If your rights would allow you to
purchase a fractional share, you may exercise your rights only by rounding down
to and paying for the nearest whole share, or paying for any lesser number of
whole shares. We will accept any inadvertent subscription indicating a purchase
of fractional shares by rounding downward to the nearest number of whole shares
and refunding without interest any payment received for a fractional share as
soon as practicable.
Expiration time and date
The subscription privilege expires at 5:00 p.m., New York City time, on
February __, 1999. After the expiration date, rights will no longer be
exercisable by anyone.
In order to exercise rights in a timely manner, you must assure that
American Stock Transfer & Trust Company actually receives, prior to expiration
of the rights, the properly executed and completed subscription certificate (or
form of "Notice of Guaranteed Delivery"), together with full payment in good
funds for all shares you wish to purchase.
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Reasons for the rights offering
We are offering the rights to finance our Internet business and for
additional working capital.
No Board investment recommendation to stockholders
Our Board of Directors does not make any recommendation to you about
whether you should exercise any rights. If you do not exercise all of your
rights, you will own a smaller percentage of the total outstanding common stock
after completion of the rights offering. If you exercise rights, you risk
investment loss on new money invested. We can not ensure that the subscription
price will be below the market price for the common stock during the rights
offering, or that anyone purchasing shares will be able to sell those shares in
the future at a higher price.
Common stock purchase warrants
Holders who exercise their rights shall receive, for no additional
consideration, common stock purchase warrants that are exercisable for a portion
of Riddell's ownership interest in a future subsidiary (either newly formed or
presently existing) whose principal business is Riddell's Internet operations.
All of the warrants issued, in the aggregate, will represent the right to
purchase ______ (_____%) percent of Riddell's ownership interest in this
Internet subsidiary at the time the warrants first become exercisable. These
warrants will only become exercisable if (i) we form or use a presently existing
subsidiary to conduct substantially all of our Internet operations, and (ii) we
effect an initial public offering for this subsidiary on or before December 31,
2002. If we effect an initial public offering of our Internet subsidiary by
December 31, 2002, the warrants will be exercisable for six (6) months after the
closing of the initial public offering, after which time they will expire. If we
do not establish an Internet subsidiary by December 31, 2002, or establish such
a subsidiary but do not effect an initial public offering for our Internet
subsidiary on or before December 31, 2002, these common stock purchase warrants
shall expire on December 31, 2002 and shall no longer be exercisable. If we do
effect an initial public offering of our Internet subsidiary on or before
December 31, 2002 we will also register at that time the shares of common stock
issuable to you upon your exercise of the common stock purchase warrants. The
common stock purchase warrants will have an exercise price of $.01 per share,
are not transferable (except in the event of the death of the holder, in which
event they are transferable to the estate of the holder), are subject to
dilution, and will only be issued to those individuals or entities who exercise
rights.
General terms and assumptions
The record date is December 27, 1999.
Only holders of record of common stock at the close of business on the
record date, or those to whom rights have been validly transferred, may exercise
rights. You are a record holder for this purpose only if your name is registered
as a stockholder with our transfer agent, American Stock Transfer & Trust
Company, as of the record date.
o The text below generally assumes that you are a record holder of
shares, unless otherwise noted.
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o If you own shares held in a brokerage, bank or other custodial or
nominee account, you should promptly send the proper instruction
form to your broker or other person holding your shares, in order to
exercise rights. Your broker or other person holding your shares is
the record holder and will have to act in order for you to exercise
rights. We have asked the securities brokers and other nominee
holders of our stock to contact you to obtain your instructions
concerning rights you are entitled to exercise.
o No interest will be paid on your funds delivered to exercise rights,
regardless of whether the funds are applied to the purchase of
shares or returned for any reason.
American Stock Transfer & Trust Company
American Stock Transfer & Trust Company is acting as the subscription
agent for the rights offering under an agreement with Riddell.
All subscription certificates, payments of the subscription price, nominee
holder certifications and notices of guaranteed delivery, to the extent
applicable to your exercise of rights, must be delivered to:
American Stock Transfer & Trust Company
40 Wall Street, 46th floor
New York, NY 10005
We will pay the fees and expenses of American Stock Transfer & Trust
Company, except applicable brokerage commissions, taxes and other expenses
relating to the sale of rights for your account by American Stock Transfer &
Trust Company. Riddell has also agreed to indemnify American Stock Transfer &
Trust Company against certain liabilities in connection with the rights
offering.
Solicitation agent
We have engaged the services of H.C. Wainwright & Co., Inc. to act as
solicitation agent in the rights offering. See "Plan of Distribution."
Standby purchase
It is currently anticipated that, pursuant to a Standby Purchase
Agreement, certain of our directors and executive officers and certain other
individuals (the "Standby Group"), will agree to exercise all of their
respective rights granted to them by this prospectus, which is ____% of all
rights being offered to stockholders, and to stand by to purchase up to
$___________ worth of the shares that are offered by this prospectus that are
not purchased by the other stockholders who have failed to exercise their
rights.
Conditions relating to the rights offering
If the proposed Standby Purchase Agreement is not consummated in
accordance with its terms for any reason, including the failure to satisfy
applicable conditions specified in the agreement, we may terminate the rights
offering in its entirety. If the rights offering is terminated for this or any
other reason, we will instruct American Stock Transfer & Trust
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Company to refund without interest to those persons who subscribed for shares in
the rights offering all payments received by American Stock Transfer & Trust
Company.
The material conditions to the Standby Purchase Agreement will likely
include the following, which must be satisfied or waived as of the date and time
the rights expire:
o we must not have experienced any material adverse change affecting
our business, prospects, financial position, stockholders' equity or
results of operations;
o the Securities and Exchange Commission must not have issued a stop
order relating to the registration statement filed with the
Securities and Exchange Commission relating to this prospectus;
o representations made by the parties in the agreement must be true
and correct; and
o the rights offering must have been completed in the manner described
in this prospectus.
Method of exercise of rights
Please do not send subscription certificates or related forms to Riddell.
Please send the properly completed and executed form of subscription
certificates with full payment to American Stock Transfer & Trust Company at:
American Stock Transfer & Trust Company
40 Wall Street, 46th floor
New York, NY 10005
You should read carefully the subscription certificates and related
instructions and forms which accompany this prospectus. You should call American
Stock Transfer & Trust Company or the solicitation agent promptly with any
questions you may have.
You may exercise your rights by delivering to American Stock Transfer &
Trust Company, at the address specified in the instructions accompanying this
prospectus, at or prior to expiration of the rights:
o the properly completed and executed subscription certificate(s)
which evidence the rights that you wish to exercise, and
o payment in full in good funds of the subscription price for each
share you wish to purchase under the subscription privilege.
If you are not a broker, bank or other eligible institution, you must
obtain a signature guarantee on the subscription certificates from a broker,
bank or other institution eligible to guarantee signatures in order to transfer
the subscription certificates in whole or to transfer a portion of your rights.
Required forms of payment for exercise
If you exercise any rights, you must deliver full payment in the form of:
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o a check or bank draft drawn upon a U.S. bank, or U.S. postal money
order, payable to American Stock Transfer & Trust Company
Subscription Agent, or by wire transfer of funds to the account
maintained by the American Stock Transfer & Trust Company for this
rights offering at _______________________, Attention:
_____________________.
In order for you to timely exercise your rights, American Stock Transfer &
Trust Company must actually receive the subscription price before expiration of
the rights in the form of:
o a personal check which must have timely cleared payment, or
o a certified or cashier's check or bank draft drawn upon a U.S. bank
or a U.S. postal money order, or collected funds in American Stock
Transfer & Trust Company's account designated above.
Funds paid by uncertified personal check may take at least five business
days to clear. Accordingly, if you pay the subscription price by means of
uncertified personal check, you should make payment sufficiently in advance of
the expiration time to ensure that your check actually clears and the payment is
received before that time. We are not responsible for any delay in payment by
you and suggest that you consider payment by means of certified or cashier's
check, money order or wire transfer of funds.
Special procedure under "Notice of Guaranteed Delivery" form
If you wish to exercise rights but cannot ensure that American Stock
Transfer & Trust Company will actually receive the executed subscription
certificate before the expiration of the rights, you may alternatively exercise
rights by causing all of the following to occur within the time prescribed:
o American Stock Transfer & Trust Company must receive full payment
prior to the expiration time for all shares you desire to purchase
under the subscription privilege.
o American Stock Transfer & Trust Company must receive a properly
executed "Notice of Guaranteed Delivery" substantially in the form
distributed by us with your subscription certificate at or prior to
the expiration time.
o The "Notice of Guaranteed Delivery" must be executed by both you and
one of the following: a member firm of a registered national
securities exchange, an NASD member, a commercial bank or trust
company having an office or correspondent in the United States, or
other eligible guarantor institution qualified under a guarantee
program acceptable to American Stock Transfer & Trust Company. The
cosigning institution must guarantee in the Notice of Guaranteed
Delivery that the subscription certificate will be delivered to
American Stock Transfer & Trust Company within three AMEX trading
days after the date of the form. You must also provide in that form
other relevant details concerning the intended exercise of rights.
o American Stock Transfer & Trust Company must receive the properly
completed
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subscription certificate(s) with any required signature guarantee
within three AMEX trading days following the date of the related
Notice of Guaranteed Delivery.
o If you are a nominee holder of rights, the "Nominee Holder
Certification" must also accompany the Notice of Guaranteed
Delivery.
A Notice of Guaranteed Delivery may be delivered to American Stock
Transfer & Trust Company in the same manner as subscription certificates at the
address set forth above under "The Rights Offering--American Stock Transfer &
Trust Company," or may be delivered by telegram or facsimile transmission
(telecopier no. (718) 234-5001).
Additional copies of the form of Notice of Guaranteed Delivery are
available upon request from American Stock Transfer & Trust Company.
Incomplete forms; insufficient or excess payment
If you do not indicate the number of rights being exercised, or do not
forward sufficient payment for the number of rights that you indicate are being
exercised, then we are entitled to accept the subscription forms and payment for
the maximum number of rights that may be exercised based on the actual payment
delivered.
If your payment exceeds the amount required to pay for the shares you
indicate in your subscription certificate, then we will return any payment not
applied to the purchase of shares under the rights offering procedures without
interest to those who made these payments as soon as practicable by mail.
Exercise of less than all rights
If you subscribe for fewer than all of the shares represented by your
subscription certificate, you may (1) attempt to sell your remaining rights, or
(2) receive from American Stock Transfer & Trust Company a new subscription
certificate representing the unused rights. See "The Rights Offering-how to
transfer rights" below.
Instructions to nominee holders
If you are a broker, trustee or depository for securities or other nominee
holder of common stock for beneficial owners of our stock, we are requesting
that you contact the beneficial owners as soon as possible to obtain
instructions and related certifications concerning their rights. Our request to
you is further explained in the suggested form of letter of instructions from
nominee holders to beneficial owners accompanying this prospectus.
To the extent so instructed, nominee holders should complete appropriate
subscription certificates on behalf of beneficial owners and submit them on a
timely basis to American Stock Transfer & Trust Company with the proper payment.
Risk of loss on delivery of subscription certificate forms and payments
Each holder of rights bears all risk of the method of delivery to American
Stock Transfer & Trust Company of subscription certificates and payments of the
subscription
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price.
If subscription certificates and payments are sent by mail, you are urged
to send these by registered mail, properly insured, with return receipt
requested, and to allow a sufficient number of days to ensure delivery to
American Stock Transfer & Trust Company and clearance of payment prior to the
expiration time.
Because uncertified personal checks may take at least five business days
to clear, you are strongly urged to pay, or arrange for payment, by means of
certified or cashier's check, money order or wire transfer of funds.
How procedural and other questions are resolved
Riddell is entitled to decide all questions concerning the timeliness,
validity, form and eligibility of any exercise of rights. Any such determination
will be final and binding. Riddell, in our sole discretion, may waive any defect
or irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise or any right because
of any defect or irregularity.
Subscription certificates will not be considered received or accepted
until all irregularities have been waived or cured within such time as Riddell
determines, in our sole discretion. Neither Riddell nor American Stock Transfer
& Trust Company have any duty to give notification of any defect or irregularity
in connection with the submission of subscription certificates or any other
required document. They will not incur any liability for failure to give such
notification.
Riddell reserves the right to reject any exercise of rights if the
exercise does not comply with the terms of the rights offering or is not in
proper form or if the exercise of rights would be unlawful or materially
burdensome. See "The Rights Offering-right to block exercise due to regulatory
issues" below.
Questions and assistance concerning the rights
You should direct any questions or requests for assistance concerning the
method of exercising rights or requests for additional copies of this
prospectus, forms of instructions or the Notice of Guaranteed Delivery to
American Stock Transfer & Trust Company, at 40 Wall Street, 46th floor, New
York, NY 10005, (800) 937-5449, (212) 936-5100 or (718) 921-8200.
No revocation
Once you have exercised the subscription privilege, you may not revoke or
change your exercise.
How to transfer rights
It is not anticipated that a formal market will be made in the rights or
that they will be traded on any exchange. Although an informal market may
develop, there is no assurance that any market will develop for the rights.
You may transfer all of the rights evidenced by a single subscription
certificate by
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signing the subscription certificate for transfer in accordance with the
appropriate form printed on the subscription certificate.
You may transfer a portion of the rights evidenced by a single
subscription certificate by delivering to American Stock Transfer & Trust
Company the subscription certificate properly signed for transfer, with separate
written instructions to register a portion of the rights in the name of your
transferee and to issue a new subscription certificate to the transferee
covering the transferred rights. In that event and by appropriate written
instructions, you may elect to receive a new subscription certificate covering
the rights you did not transfer, or may request that American Stock Transfer &
Trust Company sell your retained rights in the manner described below.
If you wish to transfer all or a portion of your rights, you should allow
a sufficient amount of time prior to the expiration time for (1) the transfer
instructions to be received and processed by American Stock Transfer & Trust
Company, (2) new subscription certificates to be issued and transmitted and (3)
the rights evidenced by the new subscription certificates to be exercised or
sold by the intended recipients.
It may require from two to ten business days, or more, to complete
transfers of rights, depending upon how you deliver the subscription certificate
and payment and the number of transactions you request. Neither Riddell nor
American Stock Transfer & Trust Company will be liable to you or any transferee
of rights if subscription certificates or any other required documents are not
received in time for exercise or sale prior to the expiration time.
If you exercise or sell rights in part, a new subscription certificate for
the remaining rights will be issued to you only if American Stock Transfer &
Trust Company receives a properly endorsed subscription certificate from you no
later than 5:00 p.m., New York City time, on the fifth business day prior to the
expiration date. It will not issue new subscription certificates for partially
exercised or sold warrants submitted after that time and date. If you do submit
a partial exercise or sale after that time and date, you will not be able to
exercise the unexercised or unsold rights.
Unless you make other arrangements with American Stock Transfer & Trust
Company, a new subscription certificate issued after 5:00 p.m., New York City
time, on the fifth business day before the expiration date will be held for
pick-up by you at American Stock Transfer & Trust Company.
If you request a reissuance of a subscription certificate, the delivery of
that document will be at your risk.
You, and not Riddell or American Stock Transfer & Trust Company, will be
responsible for paying any commissions, fees and other expenses (including
brokerage commissions and transfer taxes) you may incur for a purchase, sale or
exercise of rights.
If you do not exercise your rights prior to the expiration time, those
rights will expire and will no longer be exercisable by you.
Foreign and unknown addresses
Riddell is not mailing subscription certificates to stockholders whose
addresses are
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outside the United States or who have an APO or FPO address. In those cases, the
subscription certificates will be held by American Stock Transfer & Trust
Company for those stockholders. To exercise their rights, these stockholders
must notify American Stock Transfer & Trust Company prior to 11:00 a.m., New
York City time, on _____________, 2000. At that time, if a foreign holder has
not given any other instructions, these rights will be sold, subject to
availability of buyers. If the rights can be sold, a check for the proceeds from
the sale of these rights, less a pro rata portion of any applicable brokerage
commissions, taxes and other expenses, will be sent by mail to the foreign
holders. These sales for foreign holders will be aggregated so that each foreign
holder will receive a weighted average price for the sales, if any.
If you have sold rights through American Stock Transfer & Trust Company
but it does not know your address or cannot otherwise make delivery of sale
proceeds to you, your sale proceeds will be held in a special account. These
proceeds will be delivered to Riddell if you do not claim them within two years
after the expiration date of the rights offering.
Right to block exercise due to regulatory issues
We reserve the right to refuse the exercise of rights by any holder of
rights who would, in our opinion, be required to obtain prior clearance or
approval from any state, federal or foreign regulatory authorities for the
exercise of rights or ownership of additional shares if, at the expiration date,
this clearance or approval has not been obtained. We are not undertaking to pay
for any expenses incurred in seeking that clearance or approval.
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We are not offering or selling, or soliciting any purchase of, rights or
underlying shares in any state or other jurisdiction in which this is not
permitted. We reserve the right to delay the commencement of the rights offering
in certain states or other jurisdictions if necessary to comply with local laws.
However, we may elect not to offer rights to residents of any state or other
jurisdiction whose law would require a change in the rights offering in order to
carry out the rights offering in that state or jurisdiction.
No adjustment to outstanding stock options or other stock awards
Riddell will not, solely as a result of the rights offering, adjust the
number of shares of common stock reserved for issuance under our stock award
plans for employees and other eligible participants, the number of shares
subject to outstanding awards of stock options or awards of restricted stock.
Riddell may, as a result of the rights offering, be required to adjust the
number of shares of common stock reserved in the event of the conversion of the
outstanding Convertible Note into shares of common stock.
Amendment, extension and withdrawal
If the standby agreement with the Standby Group is not consummated, we may
terminate the rights offering in its entirety and, if we do, we will refund all
funds received for the exercise of rights, as described under "The Rights
Offering - conditions relating to the rights offering."
Subject to the foregoing, Riddell reserves the right to withdraw the
rights offering at any time prior to the expiration date for any reason, in
which event all funds received in the rights offering will be returned to those
persons who subscribed for shares in the rights offering.
Issuance of stock certificates
Stock certificates for shares purchased in the rights offering will be
issued to you as soon as practicable after the expiration date. American Stock
Transfer & Trust Company will deliver subscription payments to Riddell only
after consummation of the rights offering and the issuance of stock certificates
to those exercising rights.
If you exercise rights, you will have no rights as a stockholder until
certificates representing shares you purchased are issued. Unless otherwise
instructed in your subscription certificate form, shares purchased by the
exercise of rights will be registered in the name of the person exercising the
rights.
Issuance of warrant certificates
Warrant certificates representing the common stock purchase warrants
granted to you upon the exercise of your rights will be issued to you as soon as
practicable after the expiration date.
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<PAGE>
THE CONCURRENT OFFERING
In addition to the rights offering, we are also selling an additional
250,000 shares of our common stock for $_________ per share. There will be
10,513,957 shares outstanding after the concurrent offering and assuming the
sale of 1,000,000 shares pursuant to the rights offering. The proceeds generated
by the concurrent offering shall be used to finance our Internet business and
for additional working capital.
Riddell's common stock is traded on the American Stock Exchange under the
symbol "RDL".
43
<PAGE>
USE OF PROCEEDS
The net proceeds to Riddell from the exercise of rights in the rights
offering and the sale of common stock in the concurrent offering are
approximately $____________ (or $___________ if the underwriters' over-allotment
option is exercised in full), after deducting fees and estimated expenses. We
will use the net cash proceeds from the rights offering and the concurrent
offering to finance our Internet business and for additional working capital
purposes.
44
<PAGE>
DILUTION
Our net tangible book value, as of September 30, 1999, was $(73,039,000),
or $(7.89) per share of common stock. Net tangible book value per share
represents the amount of total tangible assets less total liabilities divided by
the number of shares of common stock outstanding at September 30, 1999.
After giving effect to our sale of the 1,250,000 shares of common stock in
this rights offering and the concurrent offering, at an assumed offering price
of $_____ per share, and after deducting estimated expenses related to this
rights offering and the concurrent offering, our pro forma net tangible book
value as of September 30, 1999, would have been $________, or $_____ per share.
This represents an immediate increase in pro forma net tangible book value of
$_____ per share to existing shares, and an immediate dilution of $____ per
share to new shares.
The following table illustrates this per share dilution:
Assumed offering price per share $
Net tangible book value per share at
September 30, 1999 $ (7.89)
Increase per share attributable to new shares ______
Pro forma net tangible book value
per share after the offering __________
Dilution per share to new shares $
==========
Assuming the exercise in full of the underwriter's over-allotment option,
the pro forma as adjusted net tangible book value of Riddell at September 30,
1999 would have been approximately $____ per share, representing an immediate
increase in net tangible book value of $___ per share to Riddell's existing
stockholders and an immediate dilution in net tangible book value of $___ per
share to new investors.
The foregoing discussion and tables assume no exercise of any outstanding
stock options. As of December 1, 1999 there were outstanding options to purchase
2,435,025 shares of common stock at a weighted average exercise price of $4.28
per share. The discussion and table also assumes no conversion of the
Convertible Subordinated Note. Riddell's 4.1% Convertible Subordinated Note is
convertible into 1,395,011 shares of common stock at a conversion rate of
$5.3763 per share, subject to certain adjustments.
45
<PAGE>
CAPITALIZATION
The table also shows, in the column labeled "As Adjusted", our
capitalization as adjusted for the completion of the rights offering at a
subscription price of $_____ per share and the concurrent offering at a price of
$_____ per share and includes the application of the net cash proceeds from the
offering.
You should read this table in conjunction with the consolidated financial
statements and the notes to those statements which are included elsewhere in
this prospectus.
September 30, 1999
--------- --- ----
Actual As Adjusted
------ -- --------
(Unaudited)
(In thousands)
Long-term debt $145,144 $
Stockholders' equity (Note 8):
Preferred stock, $0.01 par; authorized 5,000,000 -- --
shares; none issued
Common stock, $0.01 par; authorized 40,000,000 93
shares; issued and outstanding 9,258,957 and
__________shares, respectively
Capital in excess of par 36,849
Accumulated deficit (3,307) (3,307)
--------- ---------
Total Stockholders' equity 33,635
---------
Total capitalization $178,779 $
=========
46
<PAGE>
SELECTED FINANCIAL DATA
Our selected consolidated financial information presented below as of and
for the years ended, December 31, 1994, 1995, 1996, 1997 and 1998 has been
derived from our audited consolidated financial statements. The selected
financial information as of and for the nine months ended, September 30, 1998
and September 30, 1999 has been derived from our unaudited condensed
consolidated financial statements, which, in our opinion, reflect all
adjustments, consisting only of adjustments of a normal and recurring nature,
necessary for a fair presentation of our financial position and results of
operations information for such periods. Our historical results are not
necessarily indicative of future operating results or financial position. You
should read this information together with the other information contained under
the captions "Capitalization," "Management's Discussion and the Analysis of
Financial Condition and Results of Operations" and with our audited consolidated
financial statements and unaudited condensed consolidated financial statements
and related notes to those financial statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
----------------------------------------------------------------------------------
Operating Data Year Ended December 31, Nine Months Ended
(1) September 30
----------------------------------------------------------------------------------
1994 1995 1996 1997 1998(7) 1998 1999
--------- --------- --------- --------- --------- --------- ---------
Unaudited
---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $55,412 $67,043 $72,382 $138,273 $186,600 $159,326 $179,750
Cost of 29,792 35,794 38,813 80,675 113,541 95,239 104,969
revenues --------- --------- --------- --------- --------- --------- ---------
Gross profit 25,620 31,249 33,569 57,598 73,059 64,087 74,781
Selling,
general and
administrative
expenses (2) 28,614 25,983 27,853 46,278 64,617 49,169 54,024
Other charges 1,188 -- -- -- 925 -- --
(6) --------- --------- --------- --------- --------- --------- ---------
Income (loss) (4,182) 5,266 5,716 11,320 7,517 14,918 20,757
from
operations
Interest 2,001 2,795 2,763 11,879 14,656 11,114 11,668
expense --------- --------- --------- --------- --------- --------- ---------
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
----------------------------------------------------------------------------------
Operating Data Year Ended December 31, Nine Months Ended
(1) September 30
----------------------------------------------------------------------------------
1994 1995 1996 1997 1998(7) 1998 1999
--------- --------- --------- --------- --------- --------- ---------
Unaudited
---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss)
before taxes,
extraordinary
item and
cumulative
effect of
changes in
accounting
principles (6,183) 2,471 2,953 (559) (7,139) 3,804 9,089
Income taxes (1,250) 100 110 -- -- -- 905
(credits) -------- -------- -------- -------- -------- -------- --------
Income (loss)
before
extraordinary
item(3) $(4,933) $2,371 $2,843 $(559) $(7,139) $3,804 $8,184
======== ======== ======== ======== ======== ======== ========
Earnings
(loss) per
share before
extraordinary
item:
Basic $(0.62) $0.29 $0.35 $(0.07) $(0.78) $0.42 $0.88
Diluted (0.62) 0.29 0.33 (0.07) $(0.78) 0.37 0.78
EBITDA(5) $(2,229) $7,433 $7,909 $15,330 $13,230 $19,164 $25,042
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Balance December 31, September 30,
Sheet Data ------------ -------------
(1)(4)
-------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
Unaudited
---------
<S> <C> <C> <C> <C> <C> <C> <C>
Working $11,036 $19,286 $25,957 $37,599 $37,963 $59,634 $65,110
capital
Total assets 72,252 74,125 76,361 181,761 186,211 201,942 210,300
Long-term
debt, less
current
portion 20,168 23,600 29,984 122,500 126,900 138,200 145,144
Stockholders' 24,431 24,902 27,745 32,125 25,451 36,129 33,635
equity
</TABLE>
1) In June 1997 Riddell 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 Riddell's audited consolidated financial statements
relating to contingent liabilities.
5) EBITDA is the sum of our earnings or loss before extraordinary items (and
the cumulative effect of changes in accounting principles (as
applicable)), interest, income taxes, depreciation and amortization
expense. EBITDA is a widely accepted financial indicator of a company's
ability to service indebtedness. However, EBITDA should not be considered
as an alternative to income from operations or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of our
operating performance or as a measure of our liquidity.
(6) Other charges of $1,188,000 in 1994 consisted of certain costs relating to
a change in Riddell's method of distributing team sports products. Other
charges of $925,000 in 1998 consisted of lease termination and employee
severance costs related to a restructuring plan adopted in 1998, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(7) Operations for 1998 were impacted by $1.5 million of losses relating to
new product initiatives and $3.1 million of costs (including the
restructuring plan costs referred to in note 6 above) relating to certain
strategic changes which were undertaken to
49
<PAGE>
improve future profitability, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
50
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We acquired Varsity Spirit Corporation on June 19, 1997. The Varsity
acquisition significantly increased the size of our business and significantly
changed our 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 our extracurricular segment which we have previously
referred to as the institutional segment. Accordingly, references to our
extracurricular segment in this prospectus refers to that portion of our
business that we have historically referred to as our institutional segment.
The Varsity acquisition significantly increased the size of our business.
On a pro forma basis, revenue for Riddell combined with Varsity was $174.1
million, more than double our 1996 historical stand alone revenues for the year
before the acquisition. Revenues have since grown to $186.6 million for the year
ended December 31, 1998.
Our 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, part of 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 Audited Consolidated Financial
Statements included in this prospectus.
Set forth below is the percentage of our revenues generated by each of our
three principal segments for each of the twelve month periods ending December
31, 1996, 1997 and 1998 and for each of the nine month periods ended September
30, 1998 and 1999. Information for each of the twelve month periods ending
December 31, 1996 and 1997 is pro forma, giving effect to our acquisition of
Varsity in June, 1997.
Year ended December 31, Nine month
period ended
September 30,
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
Extracurricular Segment:
Spirit and dance products and services 55.0% 58.2% 60.1% 60.8% 58.8%
Team Sports products and services 30.2% 30.0% 29.3% 30.1% 34.0%
---- ---- ---- ---- ----
Total extracurricular segment 85.2% 88.2% 89.4% 90.9% 92.8%
Retail Segment 13.3% 10.4% 9.7% 8.2% 6.8%
Licensing Segment 1.5% 1.4% 0.9% 0.9% 0.4%
51
<PAGE>
Results of Operations
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Overview
Operations for the nine-month period ended September 30, 1999 resulted in
net income of $8.1 million, or $0.78 per share on a diluted basis as compared to
$3.8 million, or $0.37 per share on a diluted basis, for the first nine-months
of 1998.
Tax expense for the nine-month period was higher in 1999 than 1998 because
of an adjustment arising from certain changes in estimates.
Income before taxes for the nine-month period increased $5.3 million to
$9.1 million, a 139% improvement in comparison to $3.8 million of income before
taxes for the 1998 year-to-date period. The improvement was principally due to
increased revenues and related improvements in gross margin and operating
expense rates.
Revenues
Revenues for the nine-month period ended September 30, 1999 increased 13%,
or $20.4 million, to $179.7 million from $159.3 million for the year-to-date
period of 1998.
The revenue gain came from our extracurricular segment which includes: (i)
cheerleading uniforms, camps and special events, (ii) athletic equipment and
reconditioning lines and a new line of game uniforms and (iii) Umbro-branded
team soccer apparel, equipment and footwear. For the nine-month period,
extracurricular revenues increased 15%, or $22.0 million, to $166.8 million for
1999 from $144.8 million for the year-to-date period of 1998. All
extracurricular product lines showed sales volume increases over the year ago
period and generally higher selling prices also contributed to the revenue
increases. Revenues also benefitted from first year sales of our new line of
Umbro-branded team soccer products and our new line of athletic game uniforms.
These two new product lines generated 37% of the revenue growth for the
nine-month period.
Revenues from the retail segment were $12.2 million for the first nine
months of 1999, down $0.9 million from the year-ago period. The declines were
anticipated as part of a strategy which called for lower sales and higher
profitability and are principally the result of a decrease in the volume of
youth football equipment sold to retailers because we are shifting our emphasis
on youth football equipment sales to the direct sales force within our
extracurricular segment.
Revenues from trademark licensing declined to $0.2 million in the third
quarter of 1999 from $0.3 million for the third quarter of 1998. For the
nine-month period royalty revenues declined to $0.8 million for the nine-month
period of 1999 from $1.4 million for the 1998 period. The decline was
anticipated due to the expiration of certain licenses in 1998.
Gross profit
Gross profit increased to $74.8 million for the nine-month period of 1999
from $64.1
52
<PAGE>
million in 1998. Gross margins improved in both the extracurricular and retail
segments. Gross margin rates increased by 1.4 points to 41.6% for 1999 from
40.2% for the year-to-date period of 1998. Margin rates improved as a result of
modest increases in selling prices, favorable negotiations with vendors and
contractors, improved leverage due to higher absorption of the fixed portion of
operating costs against higher revenue and certain other actions taken at the
end of 1998 which also reduced costs for 1999.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased as a percentage of
revenues for the third quarter and the year-to-date period.
Selling, general and administrative expenses decreased as a percentage of
revenues to 30.1% of revenues in the 1999 nine-month period from 30.9% last
year. The improvement is principally the result of cost savings initiatives
implemented at the end of 1998 and improved absorption of the relatively fixed
portions of selling, general and administrative expenses resulting from the
increase in revenues.
Interest expense
Interest expense increased by $0.6 million to $11.7 million for the
nine-month period ended September 30, 1999 from $11.1 million for the first nine
months of 1998. The increase is attributable to an increase in average
indebtedness which was principally due to higher indebtedness at the beginning
of 1999 than at the beginning of 1998, increased working capital demands related
our new line of Umbro-branded team soccer products and volume growth in other
product lines.
Income taxes
Income tax expense for the nine-month period ending September 30, 1999
reflects an adjustment relating to the valuation of deferred taxes. No tax
expense, other than this adjustment, has been recorded for the 1999 period as we
have net operating loss carryforwards which offset any such taxes. As a result,
tax expense is not comparable between the nine-month periods of 1999 and 1998.
We have net operating loss carryforwards that offset most income tax
payments which would otherwise be due for the year.
Year Ended December 31, 1998 compared to Pro forma Year Ended December 31,
1997
Overview
Operations for 1998 resulted in a net loss of $7.1 million. While we
achieved satisfactory performance in our core extracurricular business, we
incurred a loss of $1.5 million relating to several new product initiatives and
suffered from weak performance in our retail and licensing segments. We 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.
53
<PAGE>
The loss of $1.5 million from new initiatives within our extracurricular
segment included start up costs 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 Company Dance(Registered) 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. We believe
that the losses incurred for these activities are valuable investments in the
future and views these areas as important to our future growth potential.
Operations for 1998 were also impacted by lower profits from the trademark
licensing and retail product segments. Licensing declined as our license to
Kmart for MacGregor(Registered) 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.
We also initiated a series of strategic actions in late 1998 which we
believe will assist in facilitating future profitability. These actions include
the implementation of a restructuring plan involving the consolidation of
several of our 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
our strategic review. Areas which should generate future savings include
negotiated vender cost reductions, consolidation of general insurance policies
and a move of our corporate offices in New York City to smaller, less costly
space. We believe these cost savings actions, combined with the benefits from
the above mentioned restructuring plan, should reduce our costs by $2.0 to $3.0
million annually in 1999 and future years.
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 our revenue gains came from the extracurricular 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
54
<PAGE>
of athletic practice wear and a new emphasis on the youth football market where
sales had previously been declining in recent years.
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 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 our 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
We 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 in prior years, would be utilized with the generation
of approximately $7.0 million in future pre-tax income and adjustments.
55
<PAGE>
We have 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. We achieved
revenue gains in our extracurricular segment while experiencing offsetting
declines in the Retail and Licensing segments.
Extracurricular 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. Extracurricular sales of
athletic products and reconditioning services increased $3.7 million as we
experienced volume gains from our newly introduced line of athletic practice
clothing and from most of our 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. We believe the principal
reasons for the decline are related to an industry-wide cautiousness in making
inventory commitments for licensed sports products.
Royalty income from licensing in 1997 decreased by 4%, or $0.1 million. We
recognized gains in MacGregor royalties from Kmart and royalties from our
Riddell apparel and sock licenses. These gains were offset by royalty declines
due to the expiration of a MacGregor license with Thom McAnn which had generated
$0.3 million in prior years and the temporary cessation of royalty receipts from
our Riddell footwear licensee. As described elsewhere in this prospectus, we
have assigned certain portions of the future royalties from our Riddell footwear
licensee, for up to ten years, to other parties to settle certain litigation.
While the license was transferred to a new licensee in 1998, 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 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 extracurricular 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
56
<PAGE>
products carried higher than average margins. Sales of our new line of practice
wear reduced gross margins, as expected, since these products carry a lower
margin than our historical product lines. Introduction of our 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 our
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 our 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 our 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.
Umbro license
In 1998, we entered into a license agreement with Umbro International,
Inc. which entitles us to market and manufacture 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 term of the license is five years with an option to renew
for an additional five-year period if we achieve certain performance levels. The
license is royalty-free in 1999. We are required to begin paying royalties in
the year 2000, at which time we are also required to meet annual minimum sales
figures. If we fail to meet required minimum sales levels subsequent to 1999
57
<PAGE>
for two consecutive annual periods, Umbro has the right to terminate the
license.
MacGregor trademark
We acquired certain rights to the MacGregor trademark as part of an
acquisition in 1988 at an allocated cost of approximately $18.0 million. We are
amortizing the trademark over a period of forty years. The unamortized cost of
this asset included in intangible assets at September 30, 1999 was approximately
$12.9 million (See Note 7 of the Audited Consolidated Financial Statements). 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 our financial position and results of operations.
Liquidity and capital resources
The seasonality of our working capital needs is primarily impacted by
three factors. First, a significant portion of the products we sell into the
extracurricular segment are sold throughout the year on dated-payment terms,
with the related receivables becoming due when the school year begins during the
following July to October period. Second, we incur costs relating to our summer
camp business from the fourth quarter and into the second quarter as we prepare
for the upcoming camp season, while camp revenues are mostly collected in the
June to August period. Lastly, our debt structure impacts our working capital
requirements as the semi-annual interest payments on our $115 million, 10.5%
Senior Notes come due each January and July.
To finance these seasonal working capital demands, we maintain a credit
facility in the form 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 third quarter and into the fourth quarter
as collections are used to reduce the outstanding balance.
At September 30, 1999 the outstanding balance under the credit facility
was $22.6 million. This compares with outstanding balances of $4.4 million at
December 31, 1998 and $15.7 million at September 30, 1998. The change in the
outstanding balance between December 31, 1998 and September 30, 1999 reflects
the seasonal working capital pattern presented above, while the increase in
outstanding borrowings between September 30, 1999 and September 30, 1998
reflects the factors discussed above in the paragraph on interest expense in the
comparison of results of operations between these periods.
In April 1999, we entered into a revised credit facility with Bank of
America National Trust and Savings Association. The revised credit facility
matures at the end of December 2003 and provides for borrowings of up to $48
million depending on certain levels of receivables and inventories. The revised
credit facility replaced our $35 million credit facility with NationsBank, now
named Bank of America, and NBD Bank. NBD Bank subsequently became a participant
in the new facility. We sought the increased size of the credit facility to
provide working capital for new initiatives, especially our new line of
Umbro-branded team soccer products.
Our current debt service obligations are significant and, accordingly, our
ability to meet our debt service and other obligations will depend on our future
performance and is
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subject to financial, economic and other factors, some of which are beyond our
control. Furthermore, due to the seasonality of working capital demands
described above, year-over-year growth in our business and working capital could
lead to higher debt levels in future periods. We believe that operating cash
flow together with funds available from our credit facility will be sufficient
to fund our current debt service, seasonal and other current working capital
requirements.
We are conducting the rights offering and concurrent offering to finance
our Internet business and for additional working capital. We believe we could
finance our Internet business from the existing capital resources described
above. However, the resources provided by the offering will provide us with
greater flexibility in developing our Internet business and not require that we
divert capital that we would otherwise use for our base business. It is likely
that our Internet business will not be profitable and could generate losses
which could exceed the proceeds from the rights offering and the concurrent
offering.
Year 2000 issues
Riddell, like virtually all companies and organizations, is faced with
addressing the Year 2000 issue which relates to the possibility that computer
systems and computer chips embedded in equipment may not be able to properly
process data after December 31, 1999.
The most significant Year 2000 issues facing Riddell are associated with
the computer information systems used to plan, operate and track our business.
We have substantially completed the process of assessing which of our
information systems are subject to potential Year 2000 problems and of taking
corrective action to minimize the potential impact of Year 2000 problems. The
status of this program on each of our four major computer information systems
follows:
Helmet manufacturing and retail operations: Year 2000 issues have been
addressed by replacing hardware and software with new systems certified as Year
2000 compliant by the vendor. The system replacement is part of a modernization
effort that was initiated in early 1997 and was completed in November 1999.
Extracurricular athletic product distribution and reconditioning
operations: Existing system software was upgraded and modified to address Year
2000 issues. The process was completed in the fourth quarter of 1998, and the
system has been tested and certified by our vendor as Year 2000 compliant.
Spirit products: Year 2000 issues have been satisfied through corrective
modifications of existing software. The process was completed early in October
1999 and we have tested the software. We are also in the process of replacing
the existing software with a new system, that is certified as Year 2000
compliant by the vendor, as part of an overall upgrade of system capabilities,
but we made the Year 2000 corrections to the existing software as the new system
will not be fully implemented before the end of 1999.
Camps and events: Year 2000 issues have been satisfied through corrective
modifications of existing software. The process was completed early in the
second quarter of 1999 and has been tested by Riddell.
We have other minor systems for which Year 2000 corrective action is in
various
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stages of completion, all scheduled for completion before the end of 1999.
We face potential Year 2000 problems relating to embedded computer chips
which control equipment used in our business, such as telephone equipment and a
limited amount of machinery. We have completed assessments of equipment
considered most susceptible to Year 2000 issues and repair or replacement has
been arranged for equipment found to have Year 2000 problems.
We also face potential Year 2000 issues with third parties. These third
parties include customers who purchase our extracurricular and retail products
and suppliers of raw materials and finished goods, among others. Because our
extracurricular products and services are sold to a large number of schools and
other customers, it is impractical to poll them all in order to determine their
Year 2000 readiness. However, because this customer base is large, the potential
of a negative impact on us may be lowered as none of these customers
individually account for a material portion of our revenues. Third parties also
include airlines and air transportation systems. A disruption of domestic or
foreign air travel systems, or fear of such a disruption among our customers,
could have a negative impact on our special events, many of which occur at the
end of the calendar year or shortly thereafter. We have had discussions with
certain other key customers and vendors in order to assess the potential impact
that their Year 2000 problems might have on us. However, the process of
communications with key customers and vendors and planning for the impact of any
problems arising from their systems are ongoing.
Expense for Year 2000 remedial programs for the years ended December 31,
1997 and 1998 was $200,000 and $250,000, respectively, and a similar level of
expense is anticipated for 1999. We have 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 all of the
system upgrade and modernization aspects of the replacement programs discussed
above. Approximately $700,000 of similar capital expenditures are anticipated
for 1999.
Our remedial actions are intended to reduce the possibility of a
disruption of our business due to Year 2000 issues. While we believe these
actions will be successful, the issues involved are full of complexities and
uncertainties, so there can be no assurance that a disruption of our business
will not occur. If a material disruption of our business were to occur, it could
have a material adverse impact on our results of operations, liquidity and
financial condition.
Readers are cautioned that forward-looking statements contained in the
Year 2000 disclosure should be read in conjunction with our Special Cautionary
Notice Regarding Forward-Looking Statements located at the beginning of this
prospectus.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock was quoted on The Nasdaq National Stock Market System
under the symbol RIDL in 1997 and through November 20, 1998. Commencing November
23, 1998 our common stock was listed on the American Stock Exchange under the
symbol RDL. As of December 10, 1999, there were approximately 732 holders of
record of our 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 and for 1999:
Year Ended December 31, 1997: High Low
---- ---
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
Year Ended December 31, 1999:
First Quarter 7 7/8 3 5/8
Second Quarter 4 3/16 3
Third Quarter 4 2 7/8
Fourth Quarter* 3 1/2 2 13/16
The last sale price of the common stock on December 10, 1999 was $3.125.
* Represents the period from September 1, 1999 through December 10, 1999.
Dividend Policy
Since our inception, we have not declared or paid, and do not currently
intend to declare or pay, any dividends on shares of our common stock, and
intend to retain future earnings for reinvestment in our business. Any future
determination to pay cash dividends will be at the discretion of our Board of
Directors and will be dependent upon our results of operations, financial
condition, contractual restrictions and other factors deemed relevant by our
Board of Directors. Our financing arrangements impose restrictions on our
ability to pay cash dividends or make other distributions on our common stock.
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BUSINESS
General
Riddell is a leading marketer and manufacturer of branded products and
services to the extracurricular activities portion of the educational market. We
believe that the extracurricular activities market encompasses approximately 30
million young men and women in the United States who participate in team sports
and other organized activities outside the classroom. We estimate that this
market generates approximately $5 billion in sales annually, including
approximately $2 billion of sales in athletic equipment and uniforms for team
sports and various products and services for cheerleaders and dancers.
Under our many brands, the best known of which are Riddell and Varsity
Spirit (which we own) and Umbro (which we license), we are:
o a leading provider of athletic equipment and clothing for team
sports;
o the only national reconditioner of football protective and other
athletic equipment;
o The largest designer, marketer and supplier of innovative
cheerleader and dance team uniforms and accessories;
o The biggest operator of cheerleading and dance team training camps
and clinics;
o A leading organizer of special events for extracurricular
activities;
o A major provider of soccer apparel, equipment and footwear for team
play; and
o A supplier of sports collectible products through retailers in the
United States and internationally.
Our success in building our various brands and lines of business is due,
in large part, to our long-standing marketing strategy through which our direct,
proprietary sales force establishes and builds relationships with the
participants, coaches and instructors among the 40,000 junior and senior high
schools, colleges and various youth organizations throughout the United States.
We believe that our sales force is unique within the extracurricular activities
market and provides us with a significant competitive advantage.
Our relationship marketing strategy is a year-round, integrated approach,
which includes conducting training camps, clinics and conventions and producing
various nationally-televised and regional championships and performance events
in the U.S. and Europe. These activities, which are in themselves profitable,
reinforce each other and the sale of our products, while they enhance
participation and build loyalty to our brands.
We believe that Riddell branded football equipment is worn by more than
50% of all high school and collegiate football players. We also have a
longstanding agreement with the NFL for the promotion of our Riddell brand. Over
80% of the NFL players choose to wear
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our helmets. We also use the Riddell brand to sell sports collectible products
through retailers in the U.S. and internationally. We believe that our Varsity
Spirit brand cheerleading uniforms are worn by approximately 40% of all high
school and 75% of all collegiate cheerleaders. Our cheerleading camps are
attended by more than 200,000 students annually, and in 1999, more than 25,000
people traveled to the Walt Disney Resort in Orlando, Florida to participate in
and view our various cheerleading and dance competitions.
In the fourth quarter of 1998, we became the exclusive U.S. licensee for
Umbro branded soccer apparel, footwear, equipment and accessories for team
channel distribution. Umbro is one of the leading soccer brands worldwide.
Over the last few years, we have expanded the array of products and
services for the extracurricular activities market that can be readily sold
using our comprehensive marketing strategy. We have added:
o baseballs and baseball equipment in 1996
o practice wear (silk-screened t-shirts, shorts and sweat pants and
shirts) in 1997
o instructional conventions and competitions for young participants
from private dance studios in late 1997
o game uniforms for football and baseball in late 1998
o team soccer apparel, equipment and footwear in 1999
Game clothing represents the largest category of sporting goods in the
extracurricular activities market. Based on the results in our first full year
of selling football uniforms, which exceeded our expectations, we believe that
the game uniform market has significant growth potential for us because we
presently have such a small share of this large market. As a result, we plan on
increasing our athletic game uniform production capabilities and expanding our
product offerings to other men's and women's sports, such as basketball and
softball.
We also plan to build upon our presence in dance through a comprehensive
marketing approach to private dance studios.
Our objectives and strategy
We believe that these actions will enable us to:
o expand the sales of our traditional team sports and school spirit
products and services
o develop relationships with participants in other team sports and
additional extracurricular activities that we are not currently
servicing effectively, such as youth baseball
o establish new Internet-based revenue streams, through our sale of
advertising, product sales and third-party alliances
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Our business strategy is to further capitalize on our relationship
marketing strategy by:
o adding sales people and shrinking sales territories, while having
more product lines to sell at each school or organization
o developing new special events, competitions and conventions to
reinforce and promote participation in each extracurricular activity
o implementing our Internet plans
Opportunities for growth
We believe that we are poised to experience significant growth in three
product categories over the next twelve months:
Game uniforms to high schools
According to the National Federation of High Schools, there are 6.3
million high school athletes who play team sports in the United States. We
believe that the market for game uniforms and practice wear (t-shirts, sweat
shirts, shorts, etc.) exceeds $500 million in the U.S. and that we can capture
an increasing share of this market over each of the next few years.
This market is a natural extension of our core business because:
o the decision-makers for the purchase of these products is often the
same person that our sales force already calls upon to sell football
equipment and reconditioning services
o we have in-house expertise in the manufacturing of cheerleading
uniforms which is readily transferable to game uniforms
o we believe that we can provide faster service than our competitors
as a result of our efficient manufacturing and outsourcing
capabilities
Game uniforms and equipment for recreational youth leagues
We estimate that the market for game uniforms and equipment for
recreational youth leagues is a $750 million market in the U.S. and that it
consists of approximately 15 million participants in organized youth leagues,
such as Little League, Pop Warner and parks and recreational leagues for
football, baseball, softball and basketball. This market is currently serviced
by a highly fragmented range of suppliers. To address this market, we are using
our in-house sales force and have recently established a dedicated sales force
to service this market in major metropolitan areas. We also plan to continue to
add sales people for this market.
Apparel, equipment and footwear to the team soccer market
Soccer has recently become the fastest growing sport in the U.S. among
boys and girls. We believe that there are over 4 million participants from high
school teams and youth leagues nationwide who spend $750 million annually for
apparel, equipment and footwear.
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o the Umbro brand, which we license, is one of the leading soccer
brands worldwide
o our expertise in manufacturing uniforms for cheerleaders, coupled
with our ability to out-service our competitors gives us a
competitive advantage
Our advantages
We believe that we have four advantages that will support our growth.
Direct, proprietary sales force
Our direct, proprietary sales force is comprised of approximately 320
people who are responsible for developing and maintaining relationships among
the 40,000 junior and senior high schools, colleges and numerous recreational
youth organizations throughout the United States. As the only national,
factory-direct marketer of athletic products and services in the extracurricular
activities market, we are able to bypass the middlemen and independent dealer
networks used by our competitors. As a result, we can provide competitive
pricing and enhanced services to our customers.
Efficient manufacturing and outsourcing capabilities
Our efficient manufacturing and outsourcing capabilities support our
direct sales force and enable us to produce and deliver competitively priced
high quality customized products faster than our competitors. We accomplish our
efficiencies by manufacturing only those low labor-intensive items and
components that are difficult for outsourcing partners to make, thereby allowing
us to avoid bottlenecks in the production process. By outsourcing the
manufacturing of most of the items that we sell, we are able to focus on design,
marketing, sales and new product development. The result is that we are able to
minimize our capital commitments, operate more efficiently and be better
positioned to respond to changing market conditions.
Relationship marketing
Our relationship marketing, which we began 25 years ago, is a year-round,
integrated marketing approach. We enjoy longstanding relationships with the
participants, coaches and instructors of various team sports, school spirit
programs and other extracurricular activities in youth leagues and
organizations. Our sales force develops relationships with coaches and athletic
directors throughout the U.S. by providing value-added services that enhance the
coach's ability to efficiently manage his or her team. Examples of this include
fitting of football helmets and other equipment, quick repair service, and the
design and fitting of custom-uniforms for participants in cheerleading and team
sports. In the case of cheerleading, it also includes conducting training camps,
clinics and conventions, and producing various nationally-televised and regional
championships and performance events in the U.S. and Europe. Our relationship
marketing is designed so that each of our products and services reinforce one
another, as well as strengthen our overall brand awareness. We believe that our
new Internet operations are a logical extension of, and will effectively
reinforce, this marketing strategy.
Internet operations
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Our Internet operations began in the fourth quarter of 1999. We believe it
is a logical extension and application of our sales and marketing strategy. We
believe that our Internet operations, which have a community and a commerce
orientation, will provide us with a direct link to our customers, enhance our
existing relationships with the participants and coaches in the various
extracurricular activities and expand our business beyond our historical
football and cheerleading product and service offerings, all in a cost-efficient
manner.
Our business segments
We presently employ our sales and marketing strategy and operate our
business through various wholly-owned subsidiaries in three business segments:
Extracurricular
Our extracurricular segment, which we have historically referred to as our
institutional segment, markets, manufactures and distributes products and
services primarily through our 320 person direct sales force to customers such
as schools, recreational groups and other organizations. It is our largest
segment, and was responsible for almost 90% of our revenues in 1998 and
approximately 93% of our revenues for the first nine months of 1999. Over 6.3
million boys and girls participate in team sports in high schools within the
U.S. We estimate that there are an additional 15 million team sports
participants in organized youth leagues and an additional 10 million
participants in school-sponsored bands and choirs and youngsters who take dance
lessons at private studios.
Retail
Our retail 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 NFL and collegiate team logos. This segment's operations also include
sales of a limited amount of recreational football, baseball and other athletic
products sold internationally and in the U.S. through consumer product retailers
and distributors.
Licensing
Our licensing segment consists of the licensing of our Riddell and
MacGregor trademark rights to other entities for use in marketing products such
as athletic footwear and equipment.
Extracurricular segment
We believe that we are a leading marketer and manufacturer of branded
products and services to the extracurricular branch of the U.S. educational
market. Today, our extracurricular products and services segment includes our
team sports and school spirit business units.
The extracurricular activities market includes most of the organized
activities for children that take place outside of classrooms in the United
States. It includes team sports, school spirit activities, private dance groups,
bands, orchestras, choirs and a wide variety of
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other school- sponsored clubs, such as drama, debate and chess.
These activities take place in approximately 40,000 junior and senior high
schools and in colleges, as well as in youth leagues and organizations like
Little League, Pop Warner and parks and recreation leagues. In addition to the
6.3 million participants in high school team sports in the U.S., we estimate
that there are an additional 15 million participants in team sports at junior
high schools and youth leagues. We also estimate that there are an additional 10
million participates in other extracurricular activities. We estimate that
spending by these various participants on the extracurricular activities that we
are already targeting exceeds $2 billion a year and that the extracurricular
industry is highly-fragmented and represents aggregate spending of $5 billion
annually.
Relationship marketing
Our marketing model is based upon our longstanding relationships with
three distinct but equally important groups. First, our direct sales
organization, through personalized service, creates an important connection to
the participants, coaches and instructors of various team sports, school spirit
activities and other extracurricular activities in schools, youth leagues and
organizations and colleges. Second, instructors and staff at our camps, clinics
and performance tours and events motivate participants to get more instruction
and become better competitors. Third, we increase our brand awareness and
enhance our relationships with our customers through our affiliations with
strategic partners such as the Walt Disney Company, ESPN and other media and
marketing entities. These strategic relationships and the televised shows that
we produce reinforce the importance of our events and competitions.
Our cheerleading operations serve as the template for our
relationship-based marketing strategy. We intend to develop similar events,
conventions and competitions for other extracurricular activities, with soccer
and dance the most likely near-term extensions of our integrated marketing
approach. The marketing of our various activities is designed to provide logical
extensions to basic participation and to encourage participants as they improve
to increasingly utilize more of our products and services.
Our extracurricular segment is supported and based upon our sales and
marketing strategy, which we believe provides us with a competitive advantage,
and features the following key components.
o Our proprietary, direct sales force
o Cross marketing of products and promotional activities
- Camps
- Special events, conventions and competitions
- Uniforms and accessories
o Key marketing alliances
Proprietary, direct sales force
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Our comprehensive relationship marketing and sales strategy is made
possible by our 320 person direct sales force who are responsible for developing
and maintaining relationships among the 40,000 junior and senior high schools,
and colleges in the United States, visiting between 10,000 and 15,000 schools
every five weeks during the sales season. We believe that there is no other
nationwide direct sales force focusing on the product lines that we sell to the
extracurricular branch of the educational market and that this gives us a
significant competitive advantage. Our sales force develops relationships with
coaches and athletic directors throughout the U.S. by providing value-added
services that enhance the coach's management of his team. Examples of this
include: providing clinics, fitting football helmets and equipment, and quickly
servicing, designing and fitting custom-uniforms for participants in
cheerleading and team sports.
Over the last several years, we have been increasing the size of our sales
force, and intend to continue to do so over the next few years. Increasing the
size of the sales force goes hand-in-hand with expanding the array of products
and services marketed by the sales force. In this way, we can shrink the size of
sales territories, while sales people become more efficient and increase their
incomes. As a result, we are seeking to make it easier for each salesperson to
better concentrate on and become more intimate with a smaller sales territory,
while at the same time having more products and services to offer to the
customers in that territory. The desired effect is to enable each salesperson to
generate increased sales by spending less time traveling and more time with
customers selling a greater array of products and services. Increased sales
enables the sales force to increase their incomes, because their compensation is
commission-based and smaller territories can also increase their incomes because
the our salespeople pay for all of their travel and other related expenses.
Promotional activities
Since 1974, we have conducted (and we continue to refine) profit
generating activities, which are an integral part of our promotional efforts.
Our sales and marketing strategy, as we have developed it for the school spirit
industry, is illustrated in the diagram below. We create relationships through
our camps and events and believe that these relationships naturally translate to
a sales opportunity for our cheerleading uniforms or dance costumes when the
campers return to school. When the sales force interacts with cheerleaders or
dance team participants and their coaches during the design and fitting of
custom uniforms, they also have the opportunity to reinforce participation in
our camps and special events. We intend to extend this strategy to other
extracurricular activities. The marketing of our various activities is designed
to provide logical extensions to basic participation and to encourage
participants, as they improve, to increasingly utilize more of our products and
services. All of our marketing activities are designed so that each of our
various products and services reinforce one another, as well as strengthen
overall brand awareness and loyalty.
[INSERT BASIC MARKETING TEMPLATE DIAGRAM WHICH DEPICTS THE CROSS-MARKETING
ASPECT OF EACH OF THE THREE ELEMENTS OF OUR INTEGRATED MARKETING STRATEGY]
How we cross-market is evident from our marketing of special events and
competitions for cheerleaders. For example, in order to attend and participate
in the various special events that we run, such as the nationally-televised
Macy's Thanksgiving Day parade in New York City, a cheerleader must attend and
excel at one of our camps. Our camps are
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the only place that a cheerleader can get an invitation to appear in one of our
special events. Similarly, we hold local cheerleading competitions that progress
to various regional levels during the course of the fall, which are the only way
for a team to qualify for our championships which are held at the Walt Disney
Resort in Orlando, Florida and nationally-televised on ESPN.
Camps
Because our approach to relationship building has inter-related parts, the
marketing process can begin at any point on the above diagram, but in the case
of cheerleading it is our camps which, more than anything else, build brand
loyalty.
Special events, conventions and competitions enhance relationship
marketing
Just as our camps build loyalty to us in cheerleading, special events,
conventions and competitions for other extracurricular activities can build new
allegiances from participants in a wide variety of other extracurricular
activities. We run regional and national cheerleading and dance team
competitions, organize a national dance competition for young individuals and
sponsor youth soccer tournaments. The national competitions and finals for these
activities are typically held at The Walt Disney Resort in Orlando, Florida and
televised on ESPN and/or ESPN2. Participants in the school spirit activities
that we target are also given the opportunity to take part in various
performance events in the U.S. and Europe. These events include parades, such as
the annual Macy's Thanksgiving Day parade in New York City and year-end parades
in London and Paris. We also arrange half-time shows for college football bowl
games. We intend to extend our promotional activities to a greater number of
extracurricular activities with soccer and dance the most likely first
additions.
Uniforms and accessories
In addition, the cheerleaders who participant in our special events, such
as parades, often come from a variety of schools, they need a uniform for the
special event so they portray a unified appearance. We design and sell such
uniforms and also sell a travel package, including hotel arrangements, to the
participants in our special events.
At the same time, because participation in our various promotional
activities enhances our bond with cheerleaders, we believe that their team is
more likely to buy our uniforms and accessories.
Key Marketing Alliances
We have a promotional rights agreement with the NFL's licensing division
which requires that our Riddell brand name appear on the front and on the chin
strap of all of our helmets used in NFL play. Our agreement with the NFL further
requires all teams in the NFL to cover any indicia of brand identification of
any other manufacturers that might otherwise appear on helmets, face masks or
chin straps not manufactured by us, but used during league play. In return, we
agree 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,
over 80% of NFL players choose to wear our Riddell brand football helmets.
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We also have longstanding marketing alliances with other strategic
partners such as the Walt Disney Company, ESPN and other media and marketing
entities through which we create visibility on nationally-televised shows. These
shows further reinforce the importance of the activity and competitor. All of
these relationships enhance one another and serve to reinforce and cross-market
our products and services.
We believe that our new Internet operations, which are described further
below, are a logical extension and application of this approach and are designed
to enhance our contact with customers and build brand loyalty.
[INSERT DIAGRAM OF MARKETING TEMPLATE WITH INTERNET ADD-ON WHICH DEPICTS
HOW OUR NEW INTERNET OPERATIONS FIT INTO AND AUGMENT THE CROSS MARKETING ASPECTS
OF OUR INTEGRATED MARKETING STRATEGY]
Our extracurricular segment, which we have historically referred to as our
institutional segment, is comprised of two divisions that relate to the sales of
products for both team sports and the school spirit industry.
Team Sports
We are the world's leading manufacturer of football helmets, which we sell
under our Riddell brand. Our 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 for our football helmets. We offer
several types of varsity and youth helmets which are different in their
configurations, padding and other features. Our 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.
We also sell 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 by NFL, college, high school and youth
players.
We have been steadily increasing the categories of athletic products we
sell to the extracurricular market. In 1998, we introduced a line of custom team
uniforms for high school and youth participants. In 1996, we 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.
Game Uniforms
We are seeking to capitalize on the same expertise and efficiency, and
apply the same design and manufacturing techniques that we have employed in
producing custom-made cheerleading and dance apparel in connection with
producing game uniforms for various team sports. We believe that the game
uniform market for team sports is a larger market than our other team sports
products and services lines of business. We believe that by using the suppliers
of our Varsity cheerleader uniforms we will be able to produce and deliver
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competitively priced, high quality game uniforms faster than our competitors.
In 1998, we began offering our Umbro team soccer uniforms, along with a
line of equipment and apparel, through a network of independent sales
representatives. These independent sales representatives market and sell Umbro
team soccer apparel, footwear and equipment to the team channel of distribution
in the United States.
In 1998, we also began manufacturing athletic team uniforms for other
sports. We believe that the manufacturing capabilities of our cheerleader
uniform operations, coupled with the breadth and depth of our direct sales
organization to schools and youth organizations across the country, provide us
with an opportunity to successfully expand our historical line of athletic
equipment into game uniforms.
Reconditioning
We are the leading national reconditioner of football helmets, shoulder
pads and related equipment with what we believe to be 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. Reconditioning may also include replacing face guards,
interior pads and chin straps. We also recondition shoulder pads, as well as
equipment for other sports, including baseball and lacrosse helmets, catchers'
masks and baseball gloves. Our reconditioning services are sold by our sales
force to the same athletic coaches responsible for equipment purchases. Our
reconditioning customers are primarily high schools, colleges and youth
recreational groups.
School Spirit
Cheerleader Dance Team and Game Uniforms and Accessories
We design, market and manufacture 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. We market all
of our cheerleading uniforms and accessories under the Varsity Spirit trademark.
Over 100,000 catalogs are mailed annually to schools and school spirit advisors
and coaches containing color photographs and descriptions of our Varsity Spirit
line of uniforms and accessories. We supplement our direct sales force and
catalog sales efforts with a telemarketing sales force of 13 full and part-time
employees.
Cheerleader and Dance Team Camps
We operate cheerleader and dance team camps in the United States. Camp
enrollment has increased every year since the camp division commenced operation
in 1975 with 20 cheerleading camps and 4,000 participants. During the 1999 camp
season, approximately 218,000 participants (consisting of students and their
coaches) attended Varsity's Universal Cheerleader Association and United Spirit
Association camps, including over 8,000 participants representing colleges and
junior colleges. During 1999, cheerleading and/or dance team squads from
approximately 75% of the universities comprising the Atlantic Coast, Big East,
Big Ten, Big Twelve, Pacific 10 and Southeastern collegiate athletic conferences
attended our camps.
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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 primarily in August. We also offer mascot
training clinics at certain cheerleader and dance team camps.
A significant majority of our cheerleader and dance team camps are
conducted on college or junior college campuses. We contract with the colleges
and universities for the 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. We generally market the camp, establish and
collect participation fees, register students, provide instruction and perform
all related administrative services.
Our instructors are mostly college cheerleaders who may have previously
attended our camp, and we believe that our training of many of the top college
cheerleading squads augments our recruiting of high school and junior high
school camp participants. Prior to the commencement of our camps, instructors
participate in an intensive six-day training session where they are taught new
cheerleading and dance material. We also place a high degree of emphasis on
teaching our instructors the most up-to-date teaching, training and safety
techniques. We hire instructors by utilizing applications given to talented camp
participants, supervisor evaluations and numerous nationwide tryouts. As a
result of this process, we believe that we hire the most qualified and talented
instructors available.
We were a founding member of and remain 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. We follow the
AACCA safety guidelines in the training of our instructional staff and in the
conduct of our cheerleader and dance team camps and competitions.
Special Events
We promote our Varsity Spirit brand products and services, as well as the
school spirit industry, through active and visible association with the
following annual 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)
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.
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In addition to promoting cheerleading and dance team activities, these
championships, television specials and events are a source of revenues for us.
In 1999, over 25,000 persons, including cheerleaders and their families,
participated in our special events.
Other Extracurricular Operations
We are seeking to expand our uniform design, 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. We also design, manufacture and market
costumes for dance recitals.
We also operate 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.
Production
Team Sports Products
We design, manufacture and package all of our full sized football and
baseball batting helmets at our plant in Chicago, Illinois. Our 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 us by a single source in Canada,
and we have a facility in Pennsylvania that can customize these shoulder pads.
All of our other shoulder pads are imported as finished products from sources in
the Far East.
We purchase our baseball products, other than baseball batting helmets,
from suppliers in the Far East and source our practicewear from four domestic
suppliers. Athletic uniforms are purchased on a made-to-order basis from
domestic suppliers.
All of our manufactured protective products 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. We continually monitor
our 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.
Principal raw materials purchased by us for use in our 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. We rely on a single supplier with respect to
fulfilling all of our requirements for resin, which is an integral component in
the
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manufacture of helmets.
We employ an engineering staff principally with respect to the design,
development and improvement of our helmets and shoulder pads and to the testing
of raw materials which are used in our products or in the development of new
products. We have eight employees devoted principally to design, development and
quality and have several patents and patents pending that are applicable to our
protective products.
Reconditioning
Our 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 our reconditioning facilities
which are located throughout the United States.
Cheerleading and Dance Team Uniforms and Accessories
Cheerleading and dance team uniforms designed, manufactured and marketed
by us are made to order. During 1999, we contracted for our production
requirements with nine independent garment manufacturers. The manufacturers
provide knitting, cutting, sewing, finishing and shipping for all orders, and we
provide the patterns, fabrics, yarn and manufacturing specifications and quality
control supervision. We also provide some cutting, knitting and lettering at two
specialized production facilities. The use of independent manufacturing
facilities to fulfill our production needs affords us with the flexibility to
adjust our production output to meet our highly seasonal selling cycle. The use
of independent manufacturers also reduces our fixed costs, which we believe is
beneficial in a highly seasonal business.
Cheerleading accessories such as shoes, pompons and campwear are purchased
from various suppliers including Nike(Registered), Capezio(Registered) and
Converse(Registered), among others. We have expanded the variety and number of
accessories we market, which has contributed to the increase in our merchandise
sales revenue in recent years.
Retail Segment
Our retail segment markets our Riddell branded products primarily through
retailers. In the fourth quarter of 1999, we launched our collectible web site,
www.riddell.com. Most of our branded retail 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. Our full-size authentic football helmets are
the same helmets used by players on these teams. 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, we also announced the introduction
of a desk organizer bearing logos and designs licensed from NASCAR and various
professional drivers.
Our 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.
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In connection with the sale of our collectible helmets, NFL Properties
Inc. has granted us 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
Our retail segment products are sold primarily to retail and specialty
sporting goods stores and distributors through approximately 57 independent
commissioned sales representatives. We strategically target different channels
of trade based on the type and price of each retail product.
In support of our sports collectible products, we have 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. We also provide incentives to retail outlets to
advertise and display Riddell products during promotional periods and
participate in a major national sporting goods show where we promote our
products.
The retail segment also benefits from the promotional exposure of the NFL
Agreement described above under the extracurricular segment.
Production
We engineer, manufacture and package our full size collectible helmets at
our plant in Chicago, Illinois in a process similar to that used for our
competitive helmets. We purchase our miniature helmets and other collectible
products principally from two sources in China.
We have retained a design company to assist us in developing new retail
collectible products on terms that we believe are customary in the industry and
from time to time we work with other design companies.
Athletic products sold as part of the retail segment are manufactured or
purchased, together with similar products sold through our extracurricular
segment.
Licensing Segment
We license our Riddell and MacGregor trademarks to third parties for use
on various products, including athletic clothing and footwear.
We are continually exploring additional opportunities for licensing the
MacGregor and Riddell trademarks and retain the services of an independent
licensing agent to assist our efforts in this regard worldwide.
The licensing segment also benefits from the promotional exposure of our
agreement with the NFL because it gives our brand national television exposure
on a weekly basis during the football season.
Riddell licensing
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We license the Riddell trademark to third parties for certain types of
athletic clothing, socks and athletic footwear.
Pursuant to an agreement settling an action commenced against us in March
1995 by the trustee for MacGregor Sporting Goods, Inc., which filed for
bankruptcy protection in 1989, we license the "Riddell" name to an affiliate of
Enterprise Rent-a-Car, which purchased this license from the party with whom we
initially settled. This license relates to the use of the Riddell brand on
footwear. We will not receive any royalties from this license until the earlier
of the second half of 2007 or such time as the license produces $3.0 million
(plus interest) of royalties.
MacGregor licensing
We have granted Kmart Corporation a non-exclusive license to use the
MacGregor trademark on athletic socks until June 30, 2001. We have 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. The license granted to Footstar is renewable at Footstar's option
for an additional two-year period if certain conditions are satisfied.
Our Internet business
We believe that we are uniquely positioned to take advantage of commercial
opportunities offered by electronic community-building and commerce. We believe
that our Internet strategy of building community sites and simultaneously
establishing complementary commerce sites affords us a unique opportunity to
extend our relationship sales and marketing strategy to expand our core business
as well as develop new lines of business.
We plan to devote a substantial portion of our initial efforts towards
developing community sites. We launched our Internet business in the fourth
quarter of 1999 with our first two web sites: a community web site with
e-commerce elements for cheerleaders, www.varsity.com, and our e-commerce web
site for our sports collectibles, www.riddell.com.
We intend to develop additional community sites, for various activities,
expanding to the 20 million young men and women who participate in team sports
in schools, colleges and various recreational leagues and organizations
throughout the U.S. It is likely that future Internet sites will include the 10
million other young men and women who participate in other extracurricular
activities, such as dance, band, etc.
Unlike the Internet operations of other companies, which are looking for a
portion of a large, often ill-defined market, such as teenage girls, our
approach to the Internet is to focus on well-defined distinct special interest
groups (such as participants in team sports, including football, soccer,
baseball and softball, and cheerleading and dance teams). We also plan to
develop sites for communities that participate in other extracurricular
activities. The age group of our target market includes the demographic sector
commonly called Generation Y, the 56 million boys and girls between the ages of
10 and 24.
Our Internet advantages
Strong community identification
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We believe that our target customers are so dedicated to the
extracurricular activities in which they participate that the activity often
becomes a defining aspect of their lives. For example, cheerleaders, football
players and other high school and youth athletes are typically very enthusiastic
about their activities. We believe that we can aggregate a large audience
through our Internet operations by gradually adding additional web sites for
each distinct group.
Our community sites will feature original, frequently-updated,
highly-relevant content that speaks directly to each targeted group's need for
information which help individuals improve the quality of their participation
and increase their enjoyment of their activity. Through their involvement with
our Internet sites, community members will not only be able to get information,
but will also have the opportunity to be interactively involved to benefit
themselves and their teams. They will be encouraged to submit articles and
pictures, ask questions of the experts, make postings on various message boards,
enter contests, play games, etc.
For example, for cheerleaders, there would be information on new routines,
safety tips, upcoming competitions, etc., as well as discussions of other
logical outside interests of cheerleaders, such as beauty, fashion, style, etc.
The site will also serve as a secure Intranet among the cheerleading squad
itself, allowing the squad to post the schedule of games and practices, letting
the coach communicate with the cheerleading squad, and permit squad members to
exchange ideas, schedule practice times, and otherwise chat or communicate.
Cost-effective web site promotion
We will use our direct sales force to promote our web sites. When the
sales force is calling on coaches and squads, they will be educating them about
the benefits of our web sites. In addition the sales force will be able to help
them to get their own pages up on our site at no cost to the team, group or
school.
We believe that we have a marketing advantage as compared to other
Internet companies in promoting our web sites, because we already have our own
320 salespeople calling on 10,000 to 15,000 high schools every four or five
weeks during our sales season.
In addition, we also run cheerleading camps for over 200,000 cheerleaders
in the summer, recondition approximately 600,000 helmets, and sell approximately
200,000 new helmets and approximately 2,200,000 million pieces of cheerleading
and team sport clothing, equipment and accessories each year. In connection with
all of these activities, we plan to gather e-mail addresses, distribute fliers
at schools and cheerleading camps and attach hang tags on all of our uniforms,
equipment and accessories, promoting the appropriate community web site. We
believe these efforts will increase the awareness of our brands and web sites.
We believe that the coaches and instructors who have come to rely on us
for various goods and services will find that their jobs can be made easier by
our Internet offerings and therefore are likely to become even more supportive
of us and our products.
Internet Benefits
New Revenue Streams
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We believe that the Internet will give rise to new streams of revenue and
help us expand and enhance the relationships in our traditional business.
Direct link to our customers
The content and community-building aspects of our web sites will enhance
existing relationships with coaches and participants in extracurricular
activities.
Market penetration
We believe that the Internet will be particularly effective in selling
uniforms and equipment to the recreational youth leagues, a large market. In
particular, we believe that the greatest potential for expanding our traditional
sales through electronic commerce is the recreational youth sports market. This
is a highly fragmented market which we believe includes approximately 20 million
boys and girls between the ages of 5-18 who participate in a variety of sports
and purchase approximately $1 billion of athletic equipment and clothing for use
in these activities each year. The coaches and parents who typically organize
and are in charge of these various recreational youth leagues (i.e., not
directly a part of a public or private school system) are typically pressed for
time. The ability of these individuals to readily access, order and purchase
uniforms, equipment and accessories easily over the Internet in a single
transaction will be highly attractive to these individuals. As a consequence, we
believe that electronic commerce can rapidly increase the our sales to this
market.
Broaden distribution of sports collectibles and customized products
We believe that our web sites dedicated to our retail products will
overcome the geographical limitation of stores, which preclude our ability to
offer collectibles of every team in every city. Over the Internet, our extensive
line of NFL, MLB and collegiate full and miniature size helmets and other
collectibles (such as our lamps and desk organizers) will be far more readily
available to consumers. For instance, on the Internet, even a Cincinnati Bengals
fan living in Phoenix, Arizona can readily obtain any of the Cincinnati Bengals
collectible items, many if not all of which are not likely to be carried in the
local Phoenix stores. The Internet will also enable us to offer customized
products (i.e., your high school team's helmet for Father's Day with a memento
printed on the helmet) that cannot readily be sold through traditional
commercial channels. Further, orders for customized versions of our full size
and miniature, authentic and replica collectibles can easily be ordered and
delivered through our Internet site.
We operate our electronic commerce business through several of our
existing subsidiaries, although we may at some future date establish a separate
subsidiary to run our Internet business.
Seasonality and backlog
Our 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:
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Orders for the extracurricular 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 extracurricular segment's camp revenues relate to our
cheerleading camps. We incur costs relating to our camp business from the fourth
quarter through the second quarter as we prepares for the upcoming camp season,
while most revenue relating to camps is earned during the June to August period.
Our retail segment's sports collectible products are sold to retailers
throughout the year. However, sales are usually at their highest during the
third and fourth quarters as retailers build inventory in anticipation of both
the football and the holiday shopping seasons.
We believe that the sale of Umbro branded items will also be seasonal,
substantially following the pattern of our existing extracurricular athletic
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.
Our sales order backlog was $9.4 million at October 31, 1999, a 69%
increase over October 31, 1998 backlog of $5.6 million. Backlog increased in all
areas of our business. The increase includes $2.1 million of orders for our line
of Umbro soccer products, introduced in 1999.
Competition
Athletic Products
Our principal competitor in the football helmet market is Schutt,
manufacturer of the AIR helmet. We compete principally with Bike Athletic Co.,
Inc., Douglas, Inc., Gear 2000, Inc. and Rawlings Sporting Goods Company, Inc.
in the football shoulder pad business, with Diamond Sports Co., Rawlings
Sporting Goods Company, Inc., Wilson Sporting Goods Company and other companies
in baseball and softball products, with Champion Products, Inc., Russell
Athletic, Inc., and other companies for practicewear and athletic game uniforms
and with Adidas, Nike, and other companies for soccer team apparel, footwear and
equipment. We also compete with numerous independent dealers throughout the
United States who market the competitor's products. Some of our competitors are
substantially larger and have greater resources than us.
We believe that we compete 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, our believe that our direct sales force
provides us with a competitive advantage in terms of our ability to provide
superior customer service and a significant price advantage due to the
elimination of independent dealers which are used by our competitors.
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Reconditioning
Reconditioners compete on the basis of quality, price, reputation,
convenience and customer loyalty. We believe that we are the largest nationwide
participant among the approximately 30 competitors in the highly fragmented
athletic reconditioning industry.
Spirit products and services
We are one of two major companies that design and market cheerleader,
dance team and booster club uniforms and accessories on a national basis.
Besides us and our major national competitor, National Spirit Group, there are
many other smaller regional competitors serving the uniform and accessories
market in the United States. We believe 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.
We are also one of two companies that annually operate a significant
number of cheerleader and dance team camps in the United States (the other being
National Spirit Group). There are also many other smaller companies and schools
that operate camps and clinics on a regional basis. We believe that 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
Our collectible products compete with a large number and wide array of
manufacturers and sellers of sports and other collectible and memorabilia
products, some of which have greater resources than us. Among our 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 also 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 our football helmet liner systems and other items are protected
by patents and trade secrets, including a patent on our inflatable liner
expiring in 2010. Other patents on the liners will expire in 2008. We also have
patents expiring in 2006, 2007 and 2008 on various components of our shoulder
pads which improve absorption of shock.
Trademarks and service marks
We own various common law and registered trademarks in the U.S. and
various
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foreign countries including the following: Riddell, MacGregor, ProEdge, Power,
Air Pac, Warrior, Biolite, Maxpro, Universal Cheerleaders Association, Varsity
Spirit, 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.
Our use of the MacGregor trademark is limited by an agreement with Global
Licensing Corporation, which owns the similar trademark McGregor. Under this
agreement, the parties have agreed on certain restrictions in the use of their
respective trademarks. We have licensed the MacGregor trademark in connection
with certain team sports items sold to extracurricular customers. We do not have
the MacGregor trademark rights to golf products.
Governmental regulation
Our products and accessories are subject to the Federal Consumer Product
Safety Act, which empowers the Consumer Product Safety Commission to protect
consumers from hazardous sporting goods and other articles. The Consumer Product
Safety Commission has the authority to exclude from the market certain articles
which are found to be hazardous and can require a manufacturer to repurchase
such goods. Similar local laws exist in some states and cities in the United
States, Canada and Europe. We maintain a quality control program for our
protective equipment operations and other products that is designed to comply
with applicable laws. To date, none of our products have 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 we would be unable to offer a significant number of
our camps either because participants would be prohibited from participating
during the summer or because enough suitable sites would not be available.
Although we are 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. We currently do 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, we expect 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, we have been able to work with these state athletic associations
to designate acceptable times for the cheerleaders within these states to attend
camps. We have 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 our ability to conduct
our normal business activities.
Operations at all of our facilities are subject to regulation by the
Occupational Safety
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and Health Agency and various other regulatory agencies.
Our operations are also subject to environmental regulations and controls.
While some of the raw materials used by us may be potentially hazardous, it has
not received any material environmental citations or violations and has not been
required to spend significant amounts to comply with applicable law.
Employees
At October 31, 1999, we had approximately 1,230 employees. Approximately
1,035 of these employees were employed on a full time basis and 195 were part
time or temporary employees. Approximately 34 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 expires in March 2002. Approximately 28 of
our employees working in reconditioning at our 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, but is presently
being renegotiated.
During the summer of 1999, we employed approximately 1,900 summer camp
instructors, trainers and administrators on a seasonal basis.
We believe that our relations with our employees are satisfactory.
Insurance and product liability proceedings
Insurance
We also carry general liability insurance with coverage limits which we
believe is adequate for our business.
We also maintain product liability insurance. The policy is an
occurrence-based policy providing coverage against claims currently pending
against us 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) in excess of
an uninsured retention (deductible) of $750,000 per occurrence. This basic
coverage has an aggregate limit which is currently $4,900,000, but the policy
requires us 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, which may be
subject to
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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 this 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 while claims occurring
after January 1998, are covered under the second separate $20,000,000 aggregate
limit.
There is no certainty that coverage will remain available to us after
January 2005 or that the insured amounts will be sufficient to cover all future
claims.
Our 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.
In March 1999, a jury rendered a verdict against us in a Texas product
liability lawsuit for approximately $11.4 million plus interest from February
1996. We have filed an appeal of 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
our 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.
Product Liability Proceedings
We have historically been a defendant in product liability personal injury
suits allegedly related to the use of football helmets manufactured or
reconditioned by us. As of November 30, 1999, five product liability cases were
pending against us.
We have established reserves for pending product liability claims and
determine our reserves based on the level of insurance that is available and
estimates of losses and defense and settlement costs which we anticipate 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 Audited Consolidated Financial Statements.
Properties
We own our principal football helmet manufacturing facility located in
Chicago, Illinois and we lease various facilities throughout the U.S.
We believe our properties, machinery and equipment are adequate for our
current requirements.
Set forth below is information regarding our principal properties:
83
<PAGE>
- --------------------------------------------------------------------------------
Square
Location Principal Use Footage Lease Expiration Date
- -------- ------------- ------- ---------------------
- --------------------------------------------------------------------------------
New York, New Corporate headquarters 650 September 2000
York
- --------------------------------------------------------------------------------
Chicago, Illinois Headquarters of 95,000 Owned
Riddell, Inc. and helmet
manufacturing
- --------------------------------------------------------------------------------
Elk Grove Village, Warehouse and 105,000 March 2000
Illinois distribution center
- --------------------------------------------------------------------------------
Elyria, Ohio Headquarters for All 72,000 September 2014
American Sports
Corporation
reconditioning
operations and
customer service
- --------------------------------------------------------------------------------
Stroudsburg, Reconditioning and 44,000 October 2001
Pennsylvania shoulder pad
customizing
- --------------------------------------------------------------------------------
Memphis, Tennessee Headquarters for 64,000 November 2000
Varsity's Operations
and Manufacturing
- --------------------------------------------------------------------------------
Olive Branch, Warehouse 80,000 October 2000
Mississippi
- --------------------------------------------------------------------------------
We also lease several smaller facilities throughout the country.
84
<PAGE>
MANAGEMENT
Our directors and executive officers are set forth below as of December
10, 1999.
Positions
Name Age with Riddell
- ---- --- ------------
Robert E. Nederlander (1) 67 Chairman of the Board
David M. Mauer (1) 51 Director, President and Chief
Executive Officer
Jeffrey G. Webb (1) (2) 49 Vice Chairman of the Board of
Riddell, President and Chief
Operating Officer of the Varsity
Group Division
David Groelinger 49 Executive Vice President and
Chief Financial Officer
Leonard Toboroff (1) 67 Director and Vice President
Don R. Kornstein 48 Director
John McConnaughy, Jr. (1) 71 Director
Glenn E. "Bo" Schembechler 70 Director
Arthur N. Seessel, III (2) 61 Director
- --------------------
(1) Messrs. Nederlander, Mauer, Webb, Toboroff and McConnaughy and certain
entities controlled by them, are parties to a shareholders' agreement that
requires the parties thereto to vote the shares of Riddell's common stock
owned by them directly and beneficially in the same manner as does Mr.
Nederlander and for the election of Mr. Webb and his designee as members
of our Board of Directors during the term of Mr. Webb's employment
agreement. See "Employment Agreements and Change of Control Arrangements."
In addition, the shareholders' agreement generally provides that the
voting restrictions are terminated when a party transfers his shares. The
Shareholders' Agreement expires on the earlier of May 28, 2001 or upon Mr.
Nederlander's death.
(2) In accordance with the agreements entered into in connection with
Riddell's acquisition of Varsity in 1997, our Board of Directors increased
the number of its members from seven to eight and agreed to nominate Mr.
Webb and his designee to become members of the Board for the three-year
period commencing at June 1997 and terminating on the third anniversary of
such date or upon earlier termination of Mr. Webb's employment. Mr.
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<PAGE>
Webb, who was elected a member of our Board at our 1998 annual meeting of
stockholders and is our Vice Chairman, has named Arthur N. Seessel, III to
serve on our Board as his designee.
Set forth below is biographical information regarding each director and
executive officer of Riddell based on information supplied by them.
Robert E. Nederlander. Mr. Nederlander has been Chairman of the Board of
Riddell since April 1988 and was Riddell's Chief Executive Officer from April
1988 through April 1, 1993. Mr. Nederlander has been President and/or a Director
since November 1981 of the Nederlander Organization, Inc., owner and operator of
one of the world's largest chains of live theaters. Since December 1998 Mr.
Nederlander has been a co-managing member of the Nederlander Company LLC, an
operator of live theaters outside of New York City. He served as the Managing
General Partner of the New York Yankees from August 1990 until December 1991,
and has been a limited partner since 1973. Mr. Nederlander has been President
since October 1985 of the Nederlander Television and Film Productions, Inc. and
Chairman of the Board since January 1988 of Mego Financial Corporation. Mr.
Nederlander was a director of Mego Mortgage Corporation from December 1996 until
June 1998. Mr. Nederlander became Chairman of the Board of Allis-Chalmers Corp.
in May 1989; from 1993 through October 1996 he was Vice Chairman, and thereafter
he remained solely a director. In 1995, Mr. Nederlander became a director of HFS
Incorporated, which recently merged into Cendant Corporation. In October 1996
Mr. Nederlander became a director of News Communications, Inc., a publisher of
community-oriented free circulation newspapers.
David M. Mauer. Mr. Mauer became Riddell's Chief Executive Officer on
April 1, 1993, succeeding Mr. Nederlander. Mr. Mauer was President of Mattel
U.S.A. from late 1990 through the beginning of 1993 and was President of Tonka
U.S.A. Toy Group from 1988 until 1990. In 1995, Mr. Mauer was elected a member
of the Board of Directors of The Topps Company, Inc. Mr. Mauer is also a
director of the National Center for Missing and Exploited Children.
Jeffrey G. Webb. Mr. Webb has been the Vice Chairman of the Board of
Riddell and the President and Chief Operating Officer of the Varsity Group
Division since Varsity was acquired by Riddell in June 1997. Prior to the
Varsity acquisition, Mr. Webb was Chairman of the Board, President and Chief
Executive Officer of Varsity Spirit Corporation since our formation in 1974.
David Groelinger. In March of 1996, Mr. David Groelinger was appointed
Riddell's Chief Financial Officer, and in June 1996 our Executive Vice
President. From 1994 to 1995 he was a member of the Board of Directors,
Executive Vice President and Chief Financial Officer of Regency Holdings
(Cayman) Inc., which owned and operated a major international cruise line. Prior
to 1994 Mr. Groelinger served in various senior financial capacities during his
twelve years at Chiquita Brands International, Inc. In 1990, he was promoted to
Vice President reporting to the Chiquita's President and Chief Operating
Officer. Regency Holdings (Cayman) Inc. filed a petition to reorganize under
Chapter 11 of the United States Bankruptcy Code in November 1995.
Leonard Toboroff. Mr. Toboroff has been Vice President of Riddell since
April 1988. Since May 1989, Mr. Toboroff has been a Vice President and Vice
Chairman of the Board of Allis-Chalmers Corp. Mr. Toboroff has been a practicing
attorney since 1961 and from
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<PAGE>
January 1, 1988 to December 31, 1990, was counsel to Summit Solomon & Feldesman
in New York City, which was counsel to Riddell from April 1988 through February
1993. He has been a Director since August 1987 and was Chairman and Chief
Executive Officer from December 1987 to May 1988 of Ameriscribe Corp. Mr.
Toboroff was Chairman and Chief Executive Officer from May through July 1982,
and then was Vice Chairman from July 1982 through September 1988 of American
Bakeries Company. Mr. Toboroff has been a director of Banner Aerospace, Inc., a
supplier of aircraft parts, since September 1992. He has been a director of
Engex, Inc. and director of Saratoga Springs Beverage Co. since 1993, and a
director of Hi Rise Recycling since March 1999.
Don R. Kornstein. Mr. Kornstein has been a member of the Board of
Directors, Chief Executive Officer and President of Jackpot Enterprises, Inc.
since September 1994. Prior to this Mr. Kornstein was a Senior Managing Director
at Bear, Stearns & Co. Inc. for 17 years through September 1994. Mr. Kornstein
has been a director of Riddell since April 1995.
John McConnaughy, Jr. Mr. McConnaughy has been Chairman and Chief
Executive Officer of JEMC Corp. since 1988. From 1969 to 1986, Mr. McConnaughy
served as Chairman and Chief Executive Officer of Peabody International Corp.
("Peabody"). From 1981 to 1992, he served as Chairman and Chief Executive
Officer of GEO International Corp. when it was spun off from Peabody in 1981.
Mr. McConnaughy is a Director of DeVlieg Bullard Inc., Mego Financial
Corporation, Transact International, Inc., Levcor International, Inc., Wave
Systems, Inc. and Adrien Arpel, Inc. He has been a director of Riddell since
September 1989.
Glenn E. "Bo" Schembechler. Mr. Schembechler was President of the Detroit
Tigers from January 1990 through August 1992 and a member of the Tigers Board of
Directors from 1989 through 1990. He is also a Director of Midland Company. From
1968 through 1989, Mr. Schembechler was head football coach of the University of
Michigan and served as its Athletic Director in 1988 and 1989. He has been a
director of Riddell since September 1991.
Arthur N. Seessel, III. Mr. Seessel was the Chief Executive Officer of
Seessel Holdings Inc., a supermarket chain located in Memphis, Tennessee, until
the company was sold in 1996. Mr. Seessel currently serves as a consultant to
Albertson's Inc. and is a member of the Board of Directors of Red River
Bankshares and Auto Radio Inc. He has been a director of Riddell since February
1999.
87
<PAGE>
Structure and Compensation of Board of Directors
Directors' fees and board meeting attendance
Directors who are not officers of Riddell received a fee in 1999 of
$20,000 per annum. In 1999, directors who were members of the Audit and
Compensation Committees of the Board (Messrs. McConnaughy, Kornstein,
Schembechler and Seessel) were also each paid an aggregate additional amount of
$5,000 per annum for their Committee memberships.
During 1999, Messrs. Nederlander, Toboroff, McConnaughy, Kornstein and
Schembechler were each granted an option to purchase up to 7,500 shares of
Riddell's common stock at an exercise price of $3.125 per share and Mr. Seessel
was granted an option to purchase up to 15,000 shares of Riddell's common stock
at an exercise price of $6.50 per share. These grants were pursuant to
provisions of the 1991 and 1997 Stock Option Plans which provide for fixed
automatic grants of options to eligible directors as described below under
"General Description of 1997 Stock Option Plan." In 1999, Messrs. Nederlander,
McConnaughy, Toboroff and Schembechler each received a payment of $16,875 in
exchange for the surrender of stock options granted to them in 1994 for 15,000
shares each, at an exercise price of $2.625. The payment was computed based on
the "in the money" value of the options at the time of the payments.
See "Summary Compensation Table" and "Options Granted in 1999" for a
discussion of compensation paid to Mr. Mauer, a director and Riddell's Chief
Executive Officer and Mr. Webb, Riddell's Vice Chairman and the President and
Chief Operating Officer of our Varsity Group Division.
Riddell has agreed to indemnify each director and officer against certain
claims and expenses for which the director might be held liable in connection
with service on the Board. In addition, Riddell maintains an insurance policy
insuring our directors and officers against such liabilities.
During calendar year ended December 31, 1999, there were four meetings of
the Board of Directors. One meeting was attended by all of the members of the
Board of Directors, one meeting was attended by all of the members other than
Mr. Schembechler, one meeting was attended by all of the members other than Mr.
Webb and one meeting was attended by all of the members other than Mr.
McConnaughy.
Committee Structure and Meetings
The Board of Directors maintains an Executive Committee consisting of Mr.
Nederlander, the Committee's Chairman, Mr. Mauer, Mr. Toboroff and Mr. Webb.
Under Riddell's bylaws the Executive Committee has the power of the full Board.
The Executive Committee did not hold any meetings in 1999.
The Board of Directors also maintains a Compensation Committee comprised
in 1999 of Messrs. McConnaughy, Schembechler, Seessel and Kornstein. Mr.
Kornstein was Chairman of the Committee in 1999. None of these individuals has
ever been an officer of Riddell. The Compensation Committee reviews and
establishes the cash and non cash compensation of key employees and recommends
grants of options under Riddell's 1991 Stock Option Plan and 1997 Stock Option
Plan. It considers recommendations of
88
<PAGE>
management and, when it deems appropriate, the advice of outside experts in
connection with these determinations. The Compensation Committee had one
meeting, which was attended by all of the members of the Compensation Committee.
The Board of Directors has established an Audit Committee which in 1999
consisted of Messrs. McConnaughy, Schembechler, Seessel and Kornstein. Mr.
Kornstein was Chairman of the Committee in 1999. No member of the Audit
Committee has ever been an officer of Riddell. The Audit Committee reviews
Riddell's internal controls and the objectivity of our financial reporting and
the scope and results of the auditing engagement. It meets with appropriate
Riddell financial personnel and independent public accountants in connection
with these reviews. The auditors have access to such Committee at any time. The
Audit Committee had one meeting in 1999 which was attended by all of the members
of the Audit Committee.
The members of each committee are appointed by the Board of Directors for
a term beginning after the first regular meeting of the Board following the
Annual Meeting and until their respective successors are elected and qualified.
Each committee elects its own Chairman.
89
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 12, 1999
pertaining to ownership of the Riddell's common stock by persons known to
Riddell to own 5% or more of Riddell's common stock and common stock owned
beneficially by each director and named executive officer of Riddell and by
directors and named executive officers of Riddell as a group.
The information contained herein has been obtained from Riddell's records,
or from information furnished directly by the individual or entity to Riddell
made by such persons with the U.S. Securities and Exchange Commission.
<TABLE>
<CAPTION>
Percent
of
Shares Owned Common As Adjusted (Assuming Completion of Rights
Beneficially Stock Offering and Concurrent Offering)
------------ ----- ---------------------------------
Minimum (1) Maximum (2)
----------- -----------
Shares Percentage Shares Percentage
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Robert E. Nederlander 5,289,747(3) 51.9% 5,760,917 50.4%
810 Seventh Avenue
New York, NY 10019
David M. Mauer 480,645(4) 5.0% 486,921 4.5%
c/o Riddell Sports Inc
50 East 42nd Street, Suite
1808
New York, NY 10017
Jeffrey G. Webb 1,214,370(5) 12.6% 1,303,374 12.0%
c/o Varsity Spirit
Corporation
2525 Horizon Lake Drive
Memphis, TN 38133
David Groelinger 71,000(6) * 71,918 *
c/o Riddell Sports Inc.
50 East 42nd Street, Suite
1808
New York, NY 10017
Leonard Toboroff 1,303,585(7) 14.0% 1,440,253 13.6%
c/o Riddell Sports Inc.
50 East 42nd Street, Suite
1808
New York, NY 10017
</TABLE>
90
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Don R. Kornstein 50,000(8) * 50,000 *
c/o Riddell Sports Inc.
50 East 42nd Street, Suite
1808
New York, NY 10017
John McConnaughy, Jr. 1,038,937(9) 11.2% 1,147,037 10.9*
c/o JEMC Corp.
1011 High Ridge Road
Stamford, CT 06905
Glenn E. "Bo" 37,500(8) * 37,500 *
Schembechler
c/o Riddell Sports Inc.
50 East 42nd Street, Suite
1808
New York, NY 10017
Arthur N. Seessel, II None None None None
c/o Seessel's Supermarkets
1745 Union Avenue
Memphis, TN 38104
All officers and directors as 5,448,247 52.7% 5,920,335 51.1%
a group (9 individuals)
Angelo, Gordon & Co., L.P. 1,395,000(10) 13.1% 1,395,000 11.7%
245 Park Avenue,
26th Fl.
New York, NY 10167
</TABLE>
--------------------
* Less than 1%
(1) Adjusted to reflect the assumed exercise of each individual's pro
rata rights granted pursuant to the rights offering and assuming no
shares of common stock are purchased by the standby group pursuant
to rights issued to other stockholders.
(2) Adjusted to reflect the assumed exercise of each individual's pro
rata rights granted pursuant to the rights offering and assuming the
standby group purchases all of the shares of common stock pursuant
to the standby purchase commitment.
(3) Of the 5,289,747 shares beneficially owned by Mr. Nederlander: (i)
1,252,210 shares are owned by Mr. Nederlander directly or through
entities controlled by him having dispositive power over these
shares (37,500 of these 1,252,210 shares underlie options granted
under Riddell's 1991 Stock Option Plan that are exercisable
currently or within 60 days of November 12, 1999; 646,037 of such
1,252,210 shares are subject to a voting trust expiring May 29, 2001
pursuant to which Robert Nederlander is voting trustee and has sole
voting power (except to the limited extent described in Note 6
below) and (ii) an
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<PAGE>
additional 4,037,537 shares are beneficially owned by Mr.
Nederlander as voting trustee under the voting trust and pursuant to
a shareholders' agreement to which Mr. Nederlander and certain other
officers and directors of Riddell and their affiliates are parties.
Under Rule 13-d of the Securities Exchange Act of 1934, Mr.
Nederlander is deemed to beneficially own the shares of stock
subject to the voting trust and the stockholders' agreement. The
stockholders' agreement terminates upon the earliest May 28, 2001 or
the death of Mr. Nederlander, or the date of the transfer of shares
subject to the stockholders' agreement (other than to certain
parties) as to the shares transferred.
(4) The shares of common stock beneficially owned by Mr. Mauer are
subject to the stockholders' agreement and 422,500 of these shares
are issuable in connection with options granted under Riddell's 1991
Stock Option Plan and the warrant that are exercisable currently or
within 60 days of November 12, 1999.
(5) The shares of common stock beneficially owned by Mr. Webb are
subject to the stockholders' agreement and 389,843 of these shares
underlie options granted under Riddell's 1997 Stock Option Plan that
are exercisable currently or within 60 days of November 12, 1999.
(6) Includes 62,500 shares underlying that portion of an option granted
under Riddell's 1991 Stock Option Plan that is exercisable within 60
days of November 12, 1999.
(7) The shares of common stock beneficially owned by Mr. Toboroff are
subject to the stockholders' agreement and 37,500 shares underlie
options granted under Riddell's 1991 Stock Option Plan that are
exercisable currently or within 60 days of November 12, 1999
(8) Represents shares underlying options granted under Riddell's 1991
Stock Option Plan that are exercisable currently or within 60 days
of November 12, 1999.
(9) Of the shares of common stock beneficially owned by Mr. McConnaughy:
(i) 484,530 are subject to the voting trust; (ii) 554,407 are
subject to the stockholders' agreement and (iii) 37,500 shares
underlie options granted under Riddell's 1991 Stock Option Plan that
are exercisable currently or within 60 days of November 12, 1999.
Mr. McConnaughy has pledged his interest in 989,155 shares of
Riddell's common stock to financial institutions to secure loans.
The voting trust provides that if Mr. McConnaughy defaults on the
loan pursuant to which the pledge was made, the voting restrictions
are removed from the pledged shares.
(10) Based on a Schedule 13G filed February 13, 1997, Angelo, Gordon &
Co., L.P. may be deemed to be the beneficial owner of 1,395,000
shares as a result of voting and dispositive powers it holds with
respect to $1,000,000 principal amount of Riddell's 4.10%
Convertible Subordinated Note due November 1, 2004 (the "Notes")
convertible at $5.3763 per share into 186,000 shares of
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<PAGE>
Riddell's common stock held for its own account and $6,500,000
principal amount of Notes convertible into 1,209,000 shares of
common stock which it holds for the account of private investment
funds for which it acts a general partner and/or investment advisor
or investment manager.
Section 16(a) Disclosure
Riddell believes, based solely on our review of the copies of the Forms 3,
4 and 5 required to be filed with Riddell pursuant to Section 16(a) of the
Exchange Act by our officers, directors and beneficial owners of more than 10%
of Riddell's common stock, that during the eleven (11) month period ended
December 1, 1999, all filing requirements applicable to such persons were
complied with.
Executive Compensation Summary Compensation Table
The table below sets forth the cash compensation paid to or accrued for
Riddell's Chief Executive Officer and our five other most highly paid executive
officers in 1998 for services rendered in all capacities to Riddell and our
subsidiaries during the fiscal years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
---------------------------------------------------------------------------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation (1) Options(2) Compensation (3)
- ------------------ ---- ------ ----- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert E.
Nederlander 1998 $196,160 - - 7,500 -
Chairman of the 1997 189,511 $50,000 - 7,500 -
Board 1996 180,656 - - 7,500 -
David M. Mauer
Chief Executive 1998 $575,000 - - 40,000 $1,000
Officer 1997 550,000 $60,000 - 50,000 4,750
1996 500,000 - 50,000 4,620
Jeffrey G. Webb
President and 1998 $375,000 $207,090 - 35,000 -
Chief Operating 1997 200,914(4) 133,380(5) - 397,760(4) -
Officer of The
Varsity Group
Division since the
Varsity
Acquisition date
of June 19, 1997
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
---------------------------------------------------------------------------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation (1) Options(2) Compensation (3)
- ------------------ ---- ------ ----- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
David Groelinger
Chief Financial 1998 $220,385 - - 15,000 $1,000
Officer and 1997 195,977 $50,000 - 20,000 4,302
Executive Vice 1996 143,308 25,000 - 65,000 -
President since
March 7, 1996
Thomas L. Clark
Senior Vice 1998 $132,693 $88,000 $164,467(6) 20,000 -
President,
Consumer
Products, of
Riddell Group
Division since
February 8, 1999
Dan Cougill
President and 1998 $252,275 - - 45,000 $457,667
Chief Operating 1997 259,231 - - 20,000 4,750
Officer of Riddell 1996 230,000 - - 15,000 4,750
Group Division
until November
27, 1998
</TABLE>
- ---------------------------
(1) Other perquisites and other personal benefits paid for the named executive
officers are omitted from the table as permitted by the rules of the U.S.
Securities and Exchange Commission because they aggregated less than the
lesser of $50,000 and 10% of the total annual salary and bonus set forth
in the columns entitled, "Salary" and "Bonus" for each named executive
officer.
(2) These options were issued under Riddell's 1991 Stock Option Plan or 1997
Stock Option Plan. Options granted to Mr. Cougill were forfeited upon his
separation from Riddell.
(3) Represents Riddell's contribution to a 401(k) plan on behalf of the
employee and in the case of Mr. Cougill, also includes $456,667 of
separation payments paid or accrued in 1998.
(4) Pursuant to an employment agreement between Riddell and Mr. Webb effective
in June 1997 which provides for an annual base salary of $375,000 and
certain stock options to be granted in 1997. See "Employment Agreements
and Change of Control Arrangements."
(5) Includes unrestricted stock awards of Riddell's common stock valued at
$153,400 for 1998 and $98,800 for 1997 based on quoted market values on
the date the awards were granted. The 1998 award of 41,600 was valued at
approximately $3.69 per
94
<PAGE>
share and the 1997 award of 20,800 shares was valued at $4.75 per share.
(6) Includes one-time relocation related expenses of $164,467 for Mr. Clark.
95
<PAGE>
Stock Options Granted in 1998
The following table sets forth information concerning individual grants of
stock options made during 1998 to each executive officer listed below pursuant
to Riddell's 1991 and 1997 Stock Option Plans.
<TABLE>
<CAPTION>
% of Total Potential Realizable
Number of Options Value at Assumed
Securities Granted to Annual Rates of
Underlying Employees Exercise Stock Price
Options In Fiscal Price Per Expiration Appreciation for
Name Granted Year Share Date Option Term (1)
- ---- ------- ---- ----- ---- ---
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
Robert 7,500 2% $5.38 6/24/2008 $25,352 $64,248
Nederlander (2)
David M. Mauer 40,000 9% $5.38 6/24/2008 135,212 342,655
(3)
Jeffrey Webb (3) 35,000 8% $5.38 6/24/2008 118,311 299,823
David 15,000 3% $5.38 6/24/2008 50,705 128,495
Groelinger (3)
Thomas L. 20,000 4% $4.88 2/9/2008 61,317 155,390
Clark (4)
Dan Cougill (5) 45,000 10% $5.38 6/24/2008 (5) (5)
</TABLE>
(1) Based upon the per share market price on the date of grant and an annual
appreciation of such market price at the rate stated in the table through
the expiration date of such options. Gains, if any, are dependent upon the
actual performance of the common stock, as well as the continued
employment of the executive officers through the vesting period. The
potential realizable values indicated have not taken into account amounts
required to be paid as income tax under the Internal Revenue Code and any
applicable state laws.
(2) This option was granted pursuant to provisions of the 1991 Stock Options
Plan which provides for annual fixed automatic grants of options to
certain eligible directors. The option is fully exercisable commencing
June 24, 1999 through June 24, 2008. In the event Mr. Nederlander's Board
membership terminates, generally, other than for cause, the option becomes
fully exercisable for 90 days. The option terminates if Mr. Nederlander's
Board membership terminates for cause.
(3) This option vests as to 25% of the underlying shares on each of the first,
second, third and
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<PAGE>
fourth anniversaries of the date of grant. The option is canceled upon a
termination of employment for cause. In the event the employee's
employment is terminated by Riddell, generally, other than for cause, this
stock option becomes fully exercisable for one year. The option fully
vests immediately upon a change in control.
(4) This option vests as to 25% of the underlying shares on each of the first,
second, third and fourth anniversaries of the date of grant. The option is
canceled upon a termination of employment for cause. In the event the
employee's employment is terminated by Riddell, generally, other than for
cause, the stock option remains exercisable for 90 days to the extent of
any underlying shares which were vested on the termination date.
(5) Options granted to Mr. Cougill were forfeited upon his separation from
Riddell.
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<PAGE>
Stock Options Held at End of 1998
The following table indicates the total number of exercisable and
unexercisable stock options held by each executive officer listed below on
December 31, 1998. No options to purchase Riddell's common stock were exercised
by any of these individuals during 1998. On December 31, 1998, the last sale
price of the common stock on the American Stock Exchange was $5.625 per share.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at in-the-Money Options at
December 31, 1998 December 31, 1998
----------------- -----------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert Nederlander 45,000 7,500 $107,325 $1,875
David M. Mauer 387,500 102,500 741,188 45,063
Jeffrey G. Webb 364,427 68,333 638,079 15,583
David Groelinger 37,500 7,500 33,425 39,025
Thomas L. Clark -- 20,000 -- 15,000
</TABLE>
Employment Agreements and Change of Control Arrangements
In June 1992, Riddell entered into an employment agreement with each of
Messrs. Nederlander and Toboroff. Each agreement continues until terminated by
Riddell, with termination effective three years after Riddell delivers notice of
termination or, if earlier, until the death or disability of the employee. The
agreements are immediately terminable by Riddell for cause (as defined therein).
Bonuses are at the discretion of the board. Each agreement provides a base
salary of $162,500 which may be increased in the discretion of the board,
provided that in any event each year the salaries are increased at least by the
percentage increase in the Consumer Price Index. Each agreement provides that in
the event Riddell terminates the employee's employment, generally, other than
for cause, the employee will receive his full salary through the end of the term
of his agreement and annual bonuses for the remainder of the term equal to the
average of the annual bonuses awarded to the employee prior to termination. Each
agreement acknowledges that the employee will devote time and provide services
to entities other than Riddell.
In April 1993, Riddell entered into an employment agreement with Mr.
Mauer. The agreement, as amended in 1994, provides an annual base salary in such
amount in excess of $400,000 as the Board of Directors may determine from time
to time. The agreement provides for the years subsequent to 1993, that the Board
of Directors and Mr. Mauer establish target bonuses based upon measures to be
agreed upon before the beginning of each calendar year, and that Mr. Mauer's
bonus will be a percentage, not to exceed 100%, of his base salary based upon
the percent of the targets achieved. The agreement continues until terminated by
Riddell, with termination effective three years after Riddell delivers notice of
termination or, if earlier, until Mr. Mauer's
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death or disability. The agreement is immediately terminable for cause (as
defined therein). Mr. Mauer was granted an option for ten years to acquire
300,000 shares of Riddell's common stock pursuant to the Agreement at an average
price of $3.63 per share. In the event Mr. Mauer's employment is terminated,
generally, other than for cause, Mr. Mauer will receive his salary for a period
of three years plus a pro rata portion of the bonus earned through the date of
termination, and his options become fully exercisable for one year.
In addition, in connection with the acquisition of Varsity Spirit
Corporation, Riddell entered into an employment agreement with Mr. Webb
effective June 1997. Under the provisions of such agreement Mr. Webb serves as
Vice Chairman of the Board of Directors of Riddell as well as President and
Chief Operating Officer of the Varsity Group Division. Mr. Webb is entitled to a
base salary of no less than $375,000 per year and is eligible to participate in
those bonus arrangements which are made available to other senior officers of
Riddell at a target level of 40% of his base salary. Pursuant to his employment
agreement, Mr. Webb received options to purchase 50,000 shares of common stock
of Riddell with a per share exercise price of $5.44 and "special options" to
purchase an additional 347,760 shares at a per share exercise price of $3.80.
Upon termination of Mr. Webb's employment (i) by Riddell without cause (as
defined therein), (ii) by Mr. Webb with good reason (as defined therein,
including a material adverse alteration in his status or responsibilities and
relocation more than 50 miles from Memphis, Tennessee), or (iii) following a
change in control (as defined therein), Mr. Webb will receive continued payments
of base salary for the longer of the remainder of the term and one year (two
years in case of termination following a change in control), as well as certain
benefits. Mr. Webb is subject to a non-competition covenant generally for a
period of two years following the termination of his employment for any reason.
Pursuant to his employment agreement, Mr. Webb agreed to become a party to the
Shareholders' Agreement to which Messrs. Mauer, Nederlander, Toboroff and
McConnaughy are parties.
Riddell entered into an employment agreement with Mr. Groelinger effective
March 1996 in connection with his joining Riddell as Chief Financial Officer.
The agreement provides for an annual base salary of $180,000 and a guaranteed
minimum bonus for 1996 of $25,000. Thereafter, bonuses will be a percentage of
his salary, with a target of 40%. Pursuant to the Agreement, Mr. Groelinger was
granted a ten-year option to purchase 65,000 shares of Riddell's common stock at
an exercise price of $4.63 per share. The agreement is immediately terminable
for cause (as defined therein) and expires, unless renewed, in March 2001. The
agreement provides, generally, that if Mr. Groelinger's employment is terminated
other than for cause he will be paid no less than one year's salary (two years'
salary in the event termination arises in connection with a change of control
(as defined therein)) plus a pro rata portion of his bonus through the date of
termination and his stock options become immediately exercisable for one year to
the extent then vested.
The stock options granted to Messrs. Mauer, Webb and Groelinger in
connection with their employment become immediately exercisable in the event a
change of control of Riddell occurs.
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Compensation committee interlocks and insider participation
Mr. McConnaughy is a member of Riddell's Board of Directors and our
Compensation and Audit Committees and a member of a group of stockholders who
may be deemed to beneficially own and exercise control over approximately 52% of
Riddell's outstanding common stock as of November 12, 1999. See "Security
Ownership of Certain Beneficial Owners and Management."
Our 1991 Stock Option Plan and 1997 Stock Option Plan
Introduction
Riddell maintains two stock option plans: the 1991 Riddell Sports Inc.
Stock Option Plan (the "1991 Plan") and the 1997 Riddell Sports Inc. Stock
Option Plan (the "1997 Plan") pursuant to which there are 305,650 shares of
common stock available for grant of options as of November 12, 1999. Riddell has
granted an aggregate of 2,609,850 shares of our common stock under options and
stock grants made in accordance with the 1991 Plan and 1997 Plan as of November
12, 1999 (net of past grants canceled or expired).
1991 Stock Option Plan
Riddell's Board of Directors adopted the 1991 Stock Option Plan, which was
approved by Riddell's stockholders, to attract and retain qualified management.
Options to acquire an aggregate of 1,415,500 shares of common stock were
originally reserved for issuance under the 1991 Plan
Under the 1991 Plan, options may be granted from time to time to key
employees, including officers, directors, advisors and independent consultants
to Riddell or to any of our subsidiaries. The board is generally empowered to
interpret the 1991 Plan, to determine the terms of the option agreements, to
determine the employees to whom options are to be granted, and to determine the
number of shares subject to each option and the exercise price thereof. Upon
exercise of an option, the optionee may pay the purchase price with previously
acquired securities of Riddell, or at the discretion of the Board, Riddell may
loan some or all of the purchase price to the optionee.
Each Riddell director other than any director who is also a Chief
Executive Officer, President, Executive Vice President or Senior Vice President
of Riddell or any of our subsidiaries will receive an option to acquire 7,500
shares of common stock each year. In addition, each such individual (other than
current directors) will receive an option to acquire 15,000 shares of common
stock upon becoming a member of the board and, after the first anniversary of
his joining the board, the annual grant of an option to acquire 7,500 shares
concurrently with the grants to the other directors. All such directors' options
will become exercisable in full on the first anniversary of the date of grant
will have an exercise price equal to the fair market value of the common stock
on the date of grant, which will be the closing price of the common stock on the
date of each annual meeting of stockholders. For tax reasons, the 1991 Plan
limits the number of shares of common stock with respect to which options may be
granted to any individual in any year to no more than 150,000.
'The board may modify, suspend or terminate the 1991 Plan, provided
however, that certain material modifications affecting the 1991 Plan must be
approved by the stockholders, and any change in the 1991 Plan that may adversely
affect an optionee's rights under an option previously granted under the 1991
Plan requires the consent of the optionee.
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1997 Stock Option Plan
Under the 1997 Plan a maximum of 1,500,000 shares of common stock has been
reserved for issuance, subject to equitable adjustment upon the occurrence of
any stock dividend, stock split, recapitalization, combination or exchange of
shares.
Unless otherwise determined by the board, the 1997 Plan shall be
administered by a committee appointed by the board, which shall consist of two
or more members of the board who are "outside directors" within the meaning of
section 162(m) of the Internal Revenue Code. The full board shall also have the
authority, in its discretion, to grant stock options or other stock-based awards
under the 1997 Plan and to administer the 1997 Plan. For all purposes under the
1997 Plan, any entity which performs the duties described, shall be referred to
as the "Committee." The Committee shall have full authority, subject to the
provisions of the 1997 Plan, among other things, to determine the persons to
whom options or other stock-based awards will be granted, to determine the
exercise price of the stock options and to prescribe, amend and rescind rules
and regulations relating to the 1997 Plan. Grants of stock options or other
stock-based awards may be made under the 1997 Plan to selected employees,
directors (including directors who are not employees) and consultants of Riddell
and our present or future affiliates, in the discretion of the Committee.
The 1997 Plan also provides for automatic grants of stock options (with an
exercise price equal to the fair market value of a share of common stock on the
date of grant) to each member of the board who is not a Chief Executive Officer,
President, Senior Vice President or Executive Vice President of Riddell or our
subsidiaries ("Eligible Directors"). Except as otherwise determined by the
Committee, options to purchase 15,000 shares of common stock will be
automatically granted to Eligible Directors upon commencement of their service
on the board, except with respect to Eligible Directors serving on the date of
the 1997 annual stockholders meeting. Thereafter Eligible Directors are granted
an option to purchase 7,500 shares of common stock on the date of each
subsequent annual meeting of stockholders (unless such Eligible Director has
received an initial option grant less than one year prior to the date of such
meeting). Options automatically granted to Eligible Directors become exercisable
as to all shares on the first anniversary of the date of grant or on the
retirement of the Eligible Director from the Board, whichever is first. Options
automatically granted to Eligible Directors expire on the earliest of (i) the
tenth anniversary of the date of grant, (ii) the second anniversary of the
termination of the Eligible Directors' service on the Board for reasons other
than cause, or (iii) thirty days after the termination of the Eligible
Directors' service on the Board of Directors for cause (as defined in the 1997
Plan).
Except to the extent the committee provides otherwise, stock options
granted under the 1997 Plan shall not be transferable otherwise than by will or
by the laws of descent and distribution. The 1997 Plan may, at any time and from
time to time, be altered, amended, suspended, or terminated by the board, in
whole or in part; provided that, unless otherwise determined by the board, an
amendment that requires stockholder approval in order for the 1997 Plan to
continue to comply with Section 162(m) of the Internal Revenue Code or any other
law, regulation or stock exchange requirement shall not be effective unless
approved by the requisite vote of stockholders. In addition, no amendment may be
made which adversely affects any of the rights of a optionee under any award
theretofore granted, without such grantee's written consent.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1994 Riddell granted a common stock purchase warrant to a limited
partnership owned in part by Messrs. Nederlander, Toboroff and McConnaughy to
purchase 150,000 shares of our
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common stock in consideration for the extension of a note in the amount of
$2,000,000 issued by the partnership in favor of Riddell. In August 1995 certain
of the original partners withdrew from the partnership, and Messrs. Cougill,
Mauer, McConnaughy, Nederlander and Toboroff or entities controlled by them
acquired their interests in the warrant.
In 1998, based on a resolution of the Compensation Committee with Mr.
McConnaughy abstaining, Riddell allowed the holders of the warrant to effect a
cashless exercise of the warrant, in effect accepting shares issuable upon
exercise as payment for the exercise based on per share value one-eighth of a
point higher than the quoted market value. As a result, 42,362 shares of common
stock were issued in exchange for the 150,000 share warrant based on an exercise
price of $2.96 per share and an exchange price of $4.125 per share. The 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.
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PLAN OF DISTRIBUTION
We are offering the shares of common stock in the rights offering directly
to holders of our common stock.
As soon as practicable after the date of this prospectus, we will
distribute the rights and copies of this prospectus to individuals who owned
shares of common stock on December ___, 1999.
We currently anticipate that a group of our officers, directors and some
other individuals will agree to exercise all of the rights granted to those
members of the standby group who are stockholders as of the record date, and, in
addition, will also agree to purchase up to $__________ worth of the shares
offered under the rights offering that are not purchased by the other
stockholders.
We will pay the fees and expenses of American Stock Transfer & Trust
Company, as subscription agent in the rights offering. We have also have agreed
to indemnify the subscription agent from any liability which it may incur in
connection with the rights offering, including liabilities under the Securities
Act of 1933.
We will pay H.C. Wainwright & Co., Inc., as solicitation agent, an agency
fee equal to 3% of the gross proceeds received upon the exercise of rights in
the rights offering.
In addition to the rights offering, we are also conducting an underwritten
offering of 250,000 shares of our common stock, the concurrent offering. In the
concurrent offering, H.C. Wainwright & Co. shall act as underwriter. In its
capacity as underwriter, H.C. Wainwright & Co., Inc. shall receive a 7% discount
on all shares underwritten in the concurrent offering. We have also granted the
underwriter an option, exercisable during the 45-day period commencing on the
date of this prospectus, to purchase at the public offering price per share,
less the underwriting discount, up to an aggregate of 37,500 shares of common
stock. In addition, we have agreed to issue to H.C. Wainwright & Co. as
underwriter of the concurrent offering, five-year warrants to purchase up to
_____% of the number of shares of common stock sold in the concurrent offering.
We have also agreed to reimburse H.C. Wainwright & Co. for its actual
out-of-pocket expenses incurred in connection with the rights offering and the
concurrent offering, including the fees and expenses of its counsel.
In addition, we have agreed to indemnify H.C. Wainwright & Co. against
some liabilities, including civil liabilities under the Securities Act, or to
contribute to payments H.C. Wainwright & Co. may be required to make in this
respect.
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DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 45,000,000 shares of common stock, $0.01 par
value, and 5,000,000 shares of undesignated preferred stock, $0.01 par value.
The following description of our capital stock does not purport to be complete
and is subject to and qualified by our certificate of incorporation and by-laws,
which are included as exhibits to the Registration Statement of which this
prospectus forms a part of, and by the provisions of applicable Delaware law.
Common stock
As of December 10, 1999 there were 9,263,957 shares of common stock
outstanding which were held of record by approximately 732 stockholders.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The holders of common stock are
entitled to receive ratably dividends, if any, as may be declared from time to
time by the Board of Directors out of funds legally available for such purpose.
In the event of a liquidation, dissolution or winding up of Riddell, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities subject to prior distribution rights of preferred stock,
if any, then outstanding. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and non-assessable, and the shares of common stock to be
issued upon the closing of this offering will be fully paid and non-assessable.
Preferred stock
As the proper language was inadvertently omitted from our certificate of
incorporation in connection with a previous amendment, we are currently amending
our certificate of incorporation to provide the Board of Directors with the
authority, without action by the stockholders, to designate and issue preferred
stock in one or more series and to designate the rights, preferences and
privileges of each series, any or all of which may be greater than the rights of
the common stock. We cannot state the actual effect of the issuance of any
shares of preferred stock upon the rights of holders of common stock until the
Board determines the specific rights of the holders of such preferred stock.
However, effects on the holders of common stock might include, among other
things, restricting dividends on a common stock, deleting the voting power of
the common stock, and paring the liquidation rights of the common stock and
delaying or preventing a change of control of Riddell without further action by
the stockholders. As of December ____, 1999, there are 5,000,000 shares of
preferred stock authorized, although none were issued and outstanding. We have
no present plans to issue any shares of preferred stock.
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Common stock purchase warrants
Holders who exercise their rights shall receive, for no additional
consideration, common stock purchase warrants that are exercisable for a portion
of Riddell's ownership interest in a future subsidiary (either newly formed or
presently existing) whose principal business is Riddell's Internet operations.
All of the warrants issued, in the aggregate, will represent the right to
purchase ______ (____%) percent of Riddell's ownership interest in this Internet
subsidiary at the time the warrants first become exercisable. These warrants
will only become exercisable if (i) we form or use a presently existing
subsidiary to conduct substantially all of our Internet operations, and (ii) we
effect an initial public offering for this subsidiary on or before December 31,
2002. If we close on an initial public offering of our Internet subsidiary by
December 31, 2002, the warrants will be exercisable for six (6) months after the
closing of the initial public offering, after which time they will expire. If we
do not form an Internet subsidiary by December 31, 2002, or form such a
subsidiary but do not effect an initial public offering for our Internet
subsidiary on or before December 31, 2002, these common stock purchase warrants
shall expire on December 31, 2002 and shall no longer be exercisable. If we do
effect an initial public offering of our Internet subsidiary on or before
December 31, 2002 we will also register at that time the shares of common stock
issuable to you upon your exercise of the common stock purchase warrants. The
common stock purchase warrants will have an exercise price of $.01 per share,
are not transferable (except in the event of the death of the holder, in which
event they are transferable to the estate of the holder), are subject to
dilution, and will only be issued to those individuals or entities who exercise
rights.
Delaware anti-takeover law and certain charter and bylaw provisions
Certain provisions of Delaware law and our certificate of incorporation
and by-laws could make it more difficult to acquire us by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions, summarized below, are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of us to first negotiate with us.
We believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure us outweigh the disadvantages of discouraging takeover or
acquisition proposals because, among other things, negotiation of these
proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of interested
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by the Board of Directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Our certificate of incorporation and by-laws require that special meetings
of our
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stockholders may be called only by the Board of Directors or certain of our
officers.
DESCRIPTION OF DEBT SECURITIES
In April 1999, we entered into a revised credit facility with Bank of
America National Trust and Savings Association. The revised credit facility
replaced our $35 million credit facility with NationsBank (now named Bank of
America) and NBD Bank which subsequently became a participant in the revised
facility. The revised credit facility consists of a line of credit in a
principal amount not to exceed $48 million, expiring at the end of December
2003. Draws under the line of credit are limited to a percentage of certain
receivables and inventory. The outstanding balance of the line accrues interest
at a rate of LIBOR plus a margin of 2.25% on draws so designated by us, payable
at the end of the applicable interest period, but not less frequently than
quarterly, and on other draws at the higher of the bank's prime rate plus a
margin of 0.75% or the Federal Funds rate plus 1.25%, payable monthly. The
credit facility also calls for an unused line fee equal to an annual rate of
0.375% applied to the amount by which the lesser of $40 million and the then
maximum revolving amount exceeds the average daily balance of outstanding
borrowings under the line. After December 31, 1999, the margin of the interest
rate over the related rates is subject to quarterly adjustment dependent on
certain financial ratios. The interest rate margin can vary between 1.75% and
2.75% over LIBOR, 0.25% to 1.25% over the prime rate and 0.75% and 1.75% over
the Federal Funds rate. The credit facility agreement contains certain covenants
which, among other things, require us to meet certain financial ratio and net
worth tests, restrict the level of additional indebtedness we may incur, limit
payments of dividends, restrict the sale of assets and limit investments we may
make. The credit facility also requires repayment of the principal amount upon
the occurrence of a change in the control, as defined, of Riddell. We have
pledged essentially all of our tangible assets as collateral for the credit
facility.
The 10.5% Senior Notes due 2007 contain certain covenants that, among
other things, restrict the level of other indebtedness we may incur, the amounts
of investments we 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.
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 in the Senior Notes). The Senior Notes contain certain
prepayment restrictions and have no mandatory redemption provisions. The Senior
Notes are guaranteed by all of our subsidiaries. Each of these subsidiaries are
wholly-owned subsidiaries of Riddell and have fully and unconditionally
guaranteed the Senior Notes on a joint and several basis. Riddell itself is a
holding company with no assets or operations other than those relating to our
investments in our subsidiaries.
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 our 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, we amended the
note to provide for a reduction from $6.00 to $5.3763 per share in the
conversion price.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
This section discusses certain federal income tax consequences of the
rights offering to (1) beneficial owners of our common stock upon distribution
of the rights, (2) holders of rights upon the exercise and disposition of the
rights, and (3) holders of common stock purchase warrants. The discussion is
based on the Internal Revenue Code of 1986, as amended, the Treasury regulations
thereunder, judicial authority, and current administrative rulings and practice,
all of which are subject to change prospectively or retroactively. The
discussion is limited to U.S. taxpayers who hold our common stock, and will hold
the rights and common stock purchase warrants and any shares acquired upon the
exercise of such rights or warrants, as capital assets (generally, property held
for investment). This discussion deals only with stockholders who receive the
rights in the initial offering and does not include any tax consequences under
state, local and foreign law. Financial institutions, broker-dealers, nominee
holders of our common stock or rights or common stock purchase warrants, life
insurance companies, tax-exempt organizations and possibly other types of
taxpayers may be subject to special provisions of the tax law or subject to
other tax considerations not discussed below.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THEIR OWN
RESPECTIVE TAX SITUATIONS OR SPECIAL TAX CONSIDERATIONS THAT MAY APPLY TO THEM,
INCLUDING WITHOUT LIMITATION FOREIGN, STATE AND LOCAL LAWS THAT MAY APPLY.
Tax Consequences of Rights
Distribution of rights
Owners of our common stock will not recognize taxable income as a result
of the distribution of the rights.
Basis and holding period of the rights
The tax basis of the rights received by an owner of our common stock will
be zero, unless the stockholder elects to allocate a portion of the tax basis of
the common stock to the rights received in proportion to their respective fair
market values. The election to allocate a portion of the tax basis to the rights
must be made on the holders federal income tax return for the taxable year in
which the rights are received.
The holding period of a stockholder with respect to the rights received as
a distribution on such stockholders common stock will include the stockholders
holding period for the common stock with respect to which the rights were
distributed.
Transfer of the rights
A holder of rights who sells the rights prior to exercise will recognize
capital gain or loss equal to the difference between the sale proceeds and the
tax basis (if any) in the rights sold.
Lapse of the rights
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If rights expire prior to their sale or other disposition, the holders of
those rights will not recognize any gain or loss, assuming the holder did not
elect to allocate tax basis to the rights upon the initial distribution;
therefore no adjustment will be made to the tax basis of our common stock, if
any, owned by such holders.
Exercise of the rights and basis and holding period of the common stock
Holders of rights will not recognize any gain or loss upon the exercise of
rights except as discussed below with respect to the common stock purchase
warrants. The tax basis of our common stock acquired through exercise of the
rights will be equal to the sum of the subscription price allocated to our
common stock received upon exercise and the holders tax basis (if any) in the
rights. We believe that a holder should first allocate a portion of the
subscription price to the common stock purchase warrants received based upon the
proportion of the fair market value of such warrants on the date of receipt to
the sum of the fair market value of the common stock purchase warrants and the
common stock. A holder should allocate the remainder of the subscription price
to our common stock acquired through exercise of the rights. An independent
appraiser retained by us has determined the fair market value of the common
stock purchase warrants to be $_______ per warrant as of _______________.
Holders of rights should consult with their own tax advisors regarding the tax
consequences of exercising the rights and the tax basis of our common stock
received upon exercise.
The holding period for our common stock acquired through exercise of the
rights will begin on the date the rights are exercised.
Sale of common stock
A stockholder will recognize gain or loss upon the sale of our common
stock acquired by exercise of rights in an amount equal to the difference
between the amount realized and the stockholders tax basis in the shares. The
gain or loss so recognized will be long-term or short-term capital gain or loss,
depending on whether the shares have been held for more than one year.
Tax Consequences of Common Stock Purchase Warrants
Distribution of common stock purchase warrants
Upon exercise of the rights, we believe that receipt of the common stock
purchase warrants will be treated as a distribution of property and taxable as a
dividend to the stockholders upon receipt to the extent the fair market value of
the common stock purchase warrants on the date of receipt exceeds the
subscription price allocated to said warrants. An independent appraiser retained
by us has determined the fair market value of the common stock purchase warrant
to be $_______ per warrant as of __________.
The tax basis of the common stock purchase warrants will be equal to the
allocated portion of the subscription price plus the amount of dividend
resulting thereon; accordingly, Riddell believes that the total tax basis of the
common stock purchase warrants will be equal to the fair market value of the
common stock purchase warrants as of the date of receipt.
We believe that the proper measurement date to value the common stock
purchase warrant is the date the warrant is issued (i.e., the date the rights
are exercised). However, the Internal Revenue Service may assert that the proper
date of measurement occurs on the date of exercise of
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the common stock purchase warrant, in which case the exercise of the common
stock purchase warrants would be treated as a distribution of property and
taxable as a dividend to the stockholders to the extent that the fair market
value of the shares received upon exercise of the warrants exceeds the amount
paid for such shares, subject to the current and accumulated earnings and
profits of Riddell. We will aggressively contest any such assertion by the
Internal Revenue Service. Holders of common stock purchase warrants should
consult with their own tax advisors regarding the tax consequences of exercising
the warrants.
Holding period of common stock purchase warrants
The holding period of the common stock purchase warrants will begin on the
date following the day of distribution.
Lapse of common stock purchase warrants
In the event the common stock purchase warrants expire, the holder will
recognize a loss to the extent of the tax basis allocated to the common stock
purchase warrant. Such a loss would be a capital loss.
Exercise of the common stock purchase warrant
To the extent the common stock purchase warrant is exercised, there should
not be a taxable event. The tax basis in the shares received would be the basis
of the warrant and the exercise price paid for the shares of stock.
109
<PAGE>
LEGAL MATTERS
The validity of the common stock, the rights and warrants in this offering
will be passed upon for Riddell by Zukerman Gore & Brandeis, LLP, New York, New
York. Orrick, Herrington & Sutcliffe LLP will pass upon various legal matters
for the underwriter.
EXPERTS
The consolidated financial statements and schedules as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1996 included in this prospectus and elsewhere in this registration statement
have been audited by Grant Thornton LLP independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information with
the Securities and Exchange Commission. You may read and copy any document we
file at the SEC's public reference rooms in Washington, D.C., New York, New York
and Chicago, Illinois. You may call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our recent SEC filings also are
available to you at the SEC's web site at http://www.sec.gov.
This prospectus, which constitutes a part of a registration statement on
Form S-1 filed by us with the Securities and Exchange Commission under the
Securities Act of 1933, omits certain of the information set forth in the
registration statement. Accordingly, for further information, you should refer
to the registration statement and its exhibits on file with the Securities and
Exchange Commission. Furthermore, statements contained in this prospectus
concerning any document filed as an exhibit are not necessarily complete and, in
each instance, we refer you to the copy of such document filed as an exhibit to
the registration statement.
110
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Condensed Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1999,
December 31, 1998 and September 30, 1998.............................................................. F-2
Condensed Consolidated Statements of Operations for the nine months
ended September 30, 1999 and 1998..................................................................... F-3
Condensed Consolidated Statements of Stockholders' Equity for the nine months
ended September 30, 1999 and 1998..................................................................... F-4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998..................................................................... F-5
Notes to Condensed Consolidated Financial Statements..................................................... F-6
Audited Consolidated Financial Statements:
Report of Independent Certified Public Accountants....................................................... F-9
Consolidated Balance Sheets at December 31, 1998 and 1997................................................ F-10
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996...................................................................... F-11
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996................................................................ F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996...................................................................... F-13
Notes to Consolidated Financial Statements............................................................... F-14
</TABLE>
F-1
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 368 $ 1,752 $ 2,824
Accounts receivable, trade, less allowance for doubtful accounts
($1,619, $1,302 and $933 respectively) (Note 3)................. 56,064 28,016 48,761
Inventories (Note 4)............................................... 30,356 28,763 24,608
Prepaid expenses................................................... 4,435 6,493 4,393
Other receivables.................................................. 1,612 1,644 1,790
Deferred taxes..................................................... 271 1,253 1,358
--------- -------- ---------
Total current assets............................................ 93,106 67,921 83,734
Property, plant and equipment, less accumulated depreciation ($9,086,
$7,213 and $6,532 respectively).................................... 8,095 7,871 7,548
Intangibles and deferred charges, less accumulated amortization
($16,903, $13,858 and $16,331 respectively)........................ 106,674 108,735 109,035
Other assets......................................................... 2,425 1,684 1,625
--------- --------
$ 210,300 $186,211 $ 201,942
--------- -------- ---------
--------- -------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 14,224 $ 12,744 $ 12,432
Accrued liabilities................................................ 10,876 11,253 9,016
Customer deposits.................................................. 2,896 5,961 2,652
--------- -------- ---------
Total current liabilities....................................... 27,996 29,958 24,100
Long-term debt, less current portion:................................ 145,144 126,900 138,200
Deferred taxes....................................................... 271 348 453
Other Liabilities.................................................... 3,254 3,554 3,060
Contingent liabilities (Note 6)...................................... -- -- --
Stockholders' equity
Common stock....................................................... 93 93 91
Additional paid in capital......................................... 36,849 36,849 36,586
Accumulated deficit.................................................. (3,307) (11,491) (548)
--------- -------- ---------
33,635 25,451 36,129
--------- -------- ---------
$ 210,300 $186,211 $ 201,942
--------- -------- ---------
--------- -------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Net revenues:
Net sales, products and reconditioning............................................... $132,767 $115,310
Camps and events..................................................................... 46,219 42,615
Royalty income....................................................................... 764 1,401
-------- --------
179,750 159,326
-------- --------
Cost of revenues:
Products and reconditioning.......................................................... 72,993 65,217
Camps and events..................................................................... 31,976 30,022
-------- --------
Cost of sales.......................................................................... 104,969 95,239
-------- --------
Gross profit........................................................................... 74,781 64,087
Selling, general and administrative expenses........................................... 54,024 49,169
-------- --------
Income from operations................................................................. 20,757 14,918
Interest expense....................................................................... 11,668 11,114
-------- --------
Income before taxes.................................................................... 9,089 3,804
Income taxes........................................................................... 905 --
-------- --------
Net income............................................................................. $ 8,184 $ 3,804
-------- --------
-------- --------
Net earnings per share:
Basic................................................................................ $ 0.88 $ 0.42
Diluted.............................................................................. $ 0.78 $ 0.37
Weighted average number of common and common equivalent shares outstanding:
Basic................................................................................ 9,259 9,122
Diluted.............................................................................. 10,862 11,066
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
---------------- PAID IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------ ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998:
Balance, January 1, 1998............................ 9,079 $ 91 $ 36,386 $ (4,352) $32,125
Issuance of common stock upon
exercise of stock options...................... 28 -- 72 -- 72
Stock issued to employees........................ 27 -- 128 -- 128
Net income for the period........................ -- -- -- 3,804 3,804
------ ---- -------- -------- -------
Balance, September 30, 1998......................... 9,134 $ 91 $ 36,586 $ (548) $36,129
------ ---- -------- -------- -------
------ ---- -------- -------- -------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
Balance, January 1, 1999............................ 9,259 $ 93 $ 36,849 $(11,491) $25,451
Net income for the period........................ -- -- -- 8,184 8,184
------ ---- -------- -------- -------
Balance, September 30, 1999......................... 9,259 $ 93 $ 36,849 $ (3,307) $33,635
------ ---- -------- -------- -------
------ ---- -------- -------- -------
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................... $ 8,184 $ 3,804
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization:
Amortization of debt issue costs.................................................... 633 602
Other depreciation and amortization................................................. 4,285 4,246
Provision for losses on accounts receivable........................................... 718 442
Deferred taxes........................................................................ 905 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable, trade....................................................... (28,766) (22,778)
Inventories...................................................................... (1,593) (542)
Prepaid expenses................................................................. 2,058 2,407
Other receivables................................................................ 32 (228)
Other assets..................................................................... (741) (1,027)
Increase (decrease) in:
Accounts payable................................................................. 1,480 4,055
Accrued liabilities.............................................................. (377) (1,573)
Customer deposits................................................................ (3,065) (1,877)
Other liabilities................................................................ (300) --
-------- --------
Net cash provided by (used in) operating activities............................ (16,547) (12,469)
-------- --------
Cash flows from investing activities:
Capital expenditures..................................................................... (2,097) (1,490)
Other.................................................................................... (419) --
-------- --------
Net cash used in investing activities.......................................... (2,516) (1,490)
-------- --------
Cash flows from financing activities:
Net borrowings under line-of-credit agreement............................................ 18,244 15,700
Debt issue costs......................................................................... (565) --
Proceeds from issuance of common stock................................................... -- 72
-------- --------
Net cash provided by financing activities...................................... 17,679 15,772
-------- --------
Net increase (decrease) in cash............................................................ (1,384) 1,813
Cash, beginning............................................................................ 1,752 1,011
-------- --------
Cash, end.................................................................................. $ 368 $ 2,824
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. These statements are unaudited, and in
the opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary for the fair presentation of the Company's
consolidated financial position and the consolidated results of its operations
and cash flows at September 30, 1999 and 1998 and for the periods then ended.
Certain information and footnote disclosures made in the Company's annual
audited consolidated financial statements have been condensed or omitted from
these interim statements. Accordingly, these condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements appearing elsewhere in this prospectus. Operating results for the
nine months ended September 30, 1999 are not indicative of the results to be
expected during the remainder of 1999.
Income tax expense for the nine-month period ending September 30, 1999
reflect an adjustment relating to the valuation of deferred taxes. No tax
expense, other than this adjustment, has been recorded for the 1999 period as
the Company has net operating loss carryforwards which offset any such taxes.
2. EARNINGS PER SHARE
Basic earnings per share amounts have been computed by dividing earnings by
the weighted average number of outstanding common shares. Diluted earnings per
share is computed by adjusting earnings for the 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. A
reconciliation between the numerators and denominators for these calculations
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Earnings--numerator:
Net income..................................................................... $ 8,184 $ 3,804
Effect of assumed conversion of convertible debt,
interest savings net of tax................................................. 314 314
------- -------
Numerator for diluted per share computation................................. $ 8,498 $ 4,118
------- -------
------- -------
Shares--denominator:
Weighted average number of outstanding common shares........................... 9,259 9,122
Weighted average common equivalent shares:
Options, assumed exercise of dilutive options net of treasury shares which
could have been purchased from the proceeds of the
assumed exercise based on average market prices........................... 208 549
Convertible debt, assumed conversion........................................ 1,395 1,395
------- -------
Denominator for diluted per share computation............................. $10,862 $11,066
------- -------
------- -------
</TABLE>
3. RECEIVABLES
The Company's policy is to record revenues when goods have been shipped.
Accounts receivable include unbilled shipments of approximately $3,053,000,
$1,678,000 and $1,683,000 at September 30, 1999, December 31, 1998 and
September 30, 1998, respectively. Unbilled shipments represent receivables for
shipments that have not been invoiced. These amounts relate principally to
partial shipments to customers who are not invoiced until their order is shipped
in its entirety or customers with orders containing other terms that require a
deferral in the issuance of an invoice. Management believes that substantially
all of the unbilled receivables at September 30, 1999 will be invoiced before
the end of the calendar year.
F-6
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVENTORIES
Inventories consist of the following (In thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Finished goods.......................................... $18,696 $16,584 $13,078
Work-in-process......................................... 1,878 2,769 2,361
Raw materials........................................... 9,782 9,410 9,169
------- ------- -------
$30,356 $28,763 $24,608
------- ------- -------
------- ------- -------
</TABLE>
5. LONG TERM DEBT
In April 1999, the Company entered into a revised credit facility with Bank
of America National Trust and Savings Association. The revised credit facility
replaced the Company's $35 million credit facility with NationsBank (now named
Bank of America ) and NBD Bank which subsequently became a participant in the
revised facility. The revised credit facility consists of a line of credit in a
principal amount not to exceed $48 million, expiring at the end of December
2003. Draws under the line of credit are limited to a percentage of certain
receivables and inventory. The outstanding balance of the line accrues interest
at a rate of LIBOR plus a margin of 2.25% on draws so designated by the Company,
payable at the end of the applicable interest period, but not less frequently
than quarterly, and on other draws at the higher of the bank's prime rate plus a
margin of 0.75% or the Federal Funds rate plus 1.25%, payable monthly. The
credit facility also calls for an unused line fee equal to an annual rate of
0.375% applied to the amount by which the lesser of $40 million and the then
maximum revolving amount exceeds the average daily balance of outstanding
borrowings under the line. After December 31, 1999 the margin of the interest
rate over the related rates is subject to quarterly adjustment dependent on
certain financial ratios. The interest rate margin can vary between 1.75% and
2.75% over LIBOR, 0.25% to 1.25% over the prime rate and 0.75% and 1.75% over
the Federal Funds rate. The credit facility agreement contains certain covenants
which, among other things, require the Company to meet certain financial 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 limit
investments the Company may make. The credit facility also requires repayment of
the principal amount upon the occurrence of a change in the control, as defined,
of the Company. The Company has pledged essentially all of its tangible assets
as collateral for the credit facility.
6. LITIGATION MATTERS AND CONTINGENCIES
At September30, 1999, the Company was a defendant in 4 product liability
suits relating to personal injuries allegedly related to the use of helmets
manufactured or reconditioned by subsidiaries of the Company. The Company
estimates that the uninsured portion of future costs and expenses related to
these claims and incurred but not reported claims will amount to at least
$3,800,000, and accordingly, a reserve in this amount is included in the
Condensed Consolidated Balance Sheet at September 30, 1999 as part of accrued
liabilities and other liabilities. These reserves are based on estimates of
losses and defense costs not covered by insurance that are anticipated to result
from such claims, from within a range of potential outcomes, based on available
information, including an analysis of historical data such as the rate of
occurrence and the settlement amounts of past cases. However, due to the
uncertainty involved with estimates, the ultimate outcome of these claims, or
potential future claims, cannot presently be determined and actual results on
certain claims 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.
F-7
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $14,043,000 and $14,330,000 for the nine-month
periods ended September 30, 1999 and 1998, respectively. Income tax payments or
refunds were not significant for the nine-month periods ended September 30, 1999
and 1998.
During the nine-month period ended September 30, 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.
8. SEGMENT INFORMATION:
Net revenues and income or loss from operations for the Company's three
reportable segments are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net revenues:
Institutional products and services............................................ $166,786 $144,790
Retail products................................................................ 12,200 13,135
Trademark licensing............................................................ 764 1,401
------- -------
Consolidated total.......................................................... $179,750 $159,326
------- -------
------- -------
Income (loss) from operations:
Institutional products and services............................................ $22,946 $16,261
Retail products................................................................ 676 551
Trademark licensing............................................................ 191 787
Corporate and unallocated expenses............................................. (3,056) (2,681)
------- -------
Consolidated total.......................................................... $20,757 $14,918
------- -------
------- -------
</TABLE>
F-8
<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-9
<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
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
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-10
<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-11
<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-12
<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-13
<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.
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
F-14
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 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-
F-15
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION--(CONTINUED)
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>
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
F-16
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION--(CONTINUED)
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Investment in U.S.I.S.L., Inc.................................................. $ 300
License Rights................................................................. 500
Inventories.................................................................... 2,500
Other.......................................................................... 100
------
$3,400
------
------
</TABLE>
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.
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>
F-17
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
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 DECEMBER 31,
LIVES --------------------
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>
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, terms further described
below................................................................................... $ 4,400 $ --
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>
F-18
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT--(CONTINUED)
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------- --------------
<S> <C> <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. 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.
F-19
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT--(CONTINUED)
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.
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
F-20
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS--(CONTINUED)
terms of five or ten years, and have had vesting periods of one or four years.
Information relating to stock option transactions over the past three years is
summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
PRICE PRICE
NUMBER PER NUMBER PER
OUTSTANDING SHARE EXERCISABLE SHARE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Balance, 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.
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
REMAINING PRICE PRICE
RANGE OF NUMBER CONTRACTUAL PER NUMBER PER
EXERCISE PRICES OUTSTANDING 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
F-21
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS--(CONTINUED)
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 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:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------- --------------
<S> <C> <C>
1999 ..................................................................... $ 2,828
2000 ..................................................................... 2,023
2001 ..................................................................... 789
2002 ..................................................................... 557
2003 ..................................................................... 431
Later years ..................................................................... 3,370
--------
Total minimum payments required........................................................ $ 9,998
--------
--------
</TABLE>
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
F-22
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS--(CONTINUED)
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.
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 OTHER
LIABILITIES 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
F-23
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. ACCRUED LIABILITIES AND CONTINGENCIES--(CONTINUED)
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 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-24
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES--(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
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred income tax assets:
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>
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
F-25
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES--(CONTINUED)
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.
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,
F-26
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SEGMENT AND PRODUCT LINE INFORMATION--(CONTINUED)
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>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<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
-------- -------- --------
-------- -------- --------
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
-------- -------- --------
-------- -------- --------
</TABLE>
F-27
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SEGMENT AND PRODUCT LINE INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Capital expenditures:
<S> <C> <C> <C>
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
-------- -------- --------
-------- -------- --------
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-28
<PAGE>
================================================================================
Riddell Sports Inc. [Logo]
H.C. Wainwright & Co., Inc.
================================================================================
<PAGE>
[Alternate Page]
The information in this prospectus is not complete and may be changed. Riddell
Sports may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DECEMBER 15, 1999
Preliminary Prospectus
250,000 Shares of Common Stock
RIDDELL SPORTS INC. [LOGO]
We are a leading marketer and distributor of branded products and services
to the extracurricular portion of the educational market. We are selling 250,000
shares of our common stock.
Our shares are listed for trading on the American Stock Exchange under the
symbol "RDL." On December 10, 1999, the last reported sale price for our common
stock on the American Stock Exchange was $3.125 per share.
Simultaneously with this underwritten offering, we are conducting a rights
offering to our stockholders to sell an additional 1,000,000 shares of our
common stock under a separate prospectus.
See "Risk Factors" beginning on page [ ] to read about factors you
should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
Per Share Total
Public offering price........................ $ $
Underwriting discounts and commissions....... $ $
Proceeds, before expenses, to Riddell........ $ $
Delivery and payment for the shares will be on [ ], 2000.
The underwriter may, under some circumstances, for 45 days after the date
of this prospectus, purchase up to an additional 37,500 shares of our common
stock from us at the public offering price, less underwriting discounts and
commissions.
H.C. Wainwright & Co., Inc.
Prospectus dated [ ], 2000
A-1
<PAGE>
[Alternate Page]
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy any securities in any state or other
jurisdiction in which the offer or solicitation is not permitted. You should not
assume that the information in this prospectus is accurate as of any date other
than the date of this prospectus.
In this prospectus, "Riddell," "we," "us" and "our" refer to Riddell
Sports Inc. and our subsidiaries, unless the context specifically indicates
otherwise.
A-2
<PAGE>
[Alternate Page]
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY.........................................................
RISK FACTORS...............................................................
TRADE NAMES AND TRADEMARKS.................................................
FORWARD-LOOKING STATEMENTS.................................................
THE CONCURRENT OFFERING....................................................
THE RIGHTS OFFERING........................................................
USE OF PROCEEDS............................................................
DILUTION...................................................................
CAPITALIZATION.............................................................
SELECTED FINANCIAL DATA....................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY............................
BUSINESS ..................................................................
MANAGEMENT.................................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................
UNDERWRITING...............................................................
DESCRIPTION OF CAPITAL STOCK...............................................
DESCRIPTION OF DEBT SECURITIES.............................................
LEGAL MATTERS..............................................................
EXPERTS....................................................................
WHERE YOU CAN FIND MORE INFORMATION........................................
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
A-3
<PAGE>
[Alternate Page]
RIGHTS OFFERING
Securities Offered Rights to purchase 1,000,000
shares of our common stock at
$___ per share pro rata to all of
our common stockholders as of
December 27, 1999. Further, to
those individuals and entities
who exercise rights, we will
issue warrants which, upon
exercise, will represent in the
aggregate, _____ (____%) percent
of Riddell's ownership in a new
or existing subsidiary that we
may establish in the future to
conduct most of our Internet
operations.
A-4
<PAGE>
[Alternate Page]
RIGHTS OFFERING
In addition to the concurrent offering, we are also granting rights to
purchase 1,000,000 additional shares of our common stock at $________ per share
pro rata to all of our common stockholders as of December 27, 1999, the record
date. Each stockholder has been granted 0.10795 rights for every share of common
stock they hold on the record date. Further, if the stockholders exercise their
rights, they will also receive, for no additional money, the right, if certain
conditions are met, to purchase stock from Riddell of a new or existing
subsidiary that will conduct substantially all of our Internet operations.
A-5
<PAGE>
[Alternate Page]
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement, we have agreed to sell to H.C. Wainwright & Co., Inc. and H.C.
Wainwright & Co., Inc. has agreed to purchase on a firm commitment basis 250,000
shares of our common stock offered in this offering.
A copy of the underwriting agreement has been filed as an exhibit to this
registration statement.
The underwriter has advised us that it proposes to offer the shares to the
public at the initial public offering price on the cover page of this prospectus
and that it may allow some dealers who are members of the NASD, concessions not
in excess of $ per share and the dealers who receive concessions may reallow a
sum not in excess of $ per share to other dealers who are members of the NASD
and to some foreign dealers. Upon completion of this offering, the offering
price, the concession to selected dealers, and the reallowance to other dealers
may be changed by the underwriter. The underwriter has informed us that it does
not expect discretionary sales by the underwriter to exceed five percent of the
shares offered by this prospectus.
The underwriter shall also receive a discount of 7% per share for all
shares underwritten in this offering. We have also granted the underwriter an
option, exercisable during the 45-day period commencing an the date of this
prospectus, to purchase at the public offering price per share, less the
underwriting discount, up to an aggregate of 37,500 shares of common stock. The
underwriter may exercise this right of purchase only for the purpose of covering
over-allotments, if any, made in connection with the sale of shares.
We have also agreed to sell to the underwriter, for nominal consideration,
the underwriters warrants to purchase up to ___% of the number of shares of
common stock sold in the concurrent offering. The underwriter's warrants are
exercisable for a period of four years commencing one year after the date of
this prospectus at an exercise price per share equal to $____ (_____% of the
public offering price).
We have granted demand registration rights at our expense for a period of
five years from the effective date of this offering upon the written demand of
holder(s) representing a majority of the warrants and piggyback registration
rights for a period of seven years from the effective date of this offering with
respect to registration under the Securities Act of the securities directly or
indirectly issuable upon exercise of the underwriter's warrants. In addition,
for a period of five years from the effective date of this offering, we have
agreed, on one occasion and upon the written request of any holder(s), to
promptly register the underlying securities for purposes of a public offering,
solely at the expense of the requesting holder(s).
The underwriter's warrants contain anti-dilution provisions providing for
adjustments of the exercise price and number of shares issuable on exercise of
the underwriter's warrants, upon the occurrence of some events, including stock
dividends, stock splits, and recapitalizations. The holders of the underwriter's
warrants have no voting, dividend, or other rights as a stockholder with respect
to shares of common stock underlying the underwriter's warrants, unless the
underwriter's warrants shall have been exercised.
A-6
<PAGE>
[Alternate Page]
In connection with this underwritten offering, we are also conducting a
rights offering in which we are offering right evidenced by subscription
certificates to purchase shares of our common stock to our existing
shareholders. H.C. Wainwright & Co. is also acting as solicitation agent in the
rights offering and shall receive an agency fee equal to 3% of the gross
proceeds we receive upon the exercise of certain rights in that offering.
We have also agreed to reimburse H.C. Wainwright & Co. for its actual
out-of-pocket expenses incurred in connection with the rights offering and the
concurrent offering, including the fees and expenses of its counsel.
Rules of the Securities and Exchange Commission may limit the ability of
the underwriter to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriter may engage in the following
activities in accordance with the rules:
Stabilizing transactions. The underwriter may make bids or purchases for
the purpose of pegging, fixing or maintaining the price of the shares, so long
as stabilizing bids do not exceed a specified maximum.
Over-allotments and coverage transactions. The underwriter may create a
short position in the shares by selling more shares than are set forth on the
cover page of this prospectus. If a short position is created in connection with
the offering, the underwriter may engage in covering transactions by purchasing
shares in the open market. The underwriter may also elect to reduce any short
position by exercising all or part of the over-allotment option.
Stabilization and covering transactions may cause the price of the shares
to be higher than it would be in the absence of such transactions.
Neither we nor the underwriter makes any representation or prediction as
to the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the American Stock Exchange, in the
over-the-counter market or on any trading market. If such transactions are
commenced, they may be discontinued without notice at any time.
We have agreed to indemnify H.C. Wainwright & Co. against some
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments H.C. Wainwright & Co. may be required to make in this
respect.
A-7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth expenses in connection with the issuance and
distribution of the securities being registered. All amounts shown are
estimated, except the SEC registration fee.
SEC registrationfee..................................................$1064.89
NASD filing fee......................................................$903
Subscription Agent fees and expenses.................................$35,000
Information Agent fees and expenses..................................NA
Registration Agent fees and expenses.................................NA
Legal fees and expenses (including blue sky fees and expenses).......$180,000
Accounting fees......................................................$20,000
Printing and mailing expenses........................................$100,000
Miscellaneous........................................................$113,032.11
Total................................................................$450,000
Item 15. Indemnification of Directors and Officers.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the
"DGCL"), the Certificate of Incorporation of the Registrant contains provisions
which eliminate the personal liability of our directors for monetary damages
resulting from breaches of their fiduciary duty other than liability for
breaches of the duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, violations under
Section 174 of the DGCL or any transaction from which the director derived an
improper personal benefit.
Section 145 of the DGCL permits, and under certain circumstances requires,
the Registrant to indemnify our directors, officers, employees, and agents
subject to certain conditions and limitations. The Registrant's Bylaws contain
provisions to indemnify our directors and officers to the fullest extent
permitted by Section 145 of the DGCL, including circumstances in which
indemnification is otherwise discretionary. In addition, the Registrant
maintains officers' and directors' liability insurance which insures against
liabilities that our officers and directors may incur in such capacities.
Item 16. Exhibits and financial statement schedules.
A list of the exhibits included as part of this Registration Statement is
set forth in the Exhibit Index that immediately precedes such exhibits and is
incorporated herein by this reference.
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<PAGE>
(a) EXHIBIT
NUMBER DESCRIPTION
1.1 Form of Underwriting Agreement, by and between Riddell and H.C.
Wainwright & Co., Inc. (1)
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)
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<PAGE>
3.14 Bylaws of Riddell, Inc. (formerly known as EN&T Associates Inc.).
(33)
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)
4.2 Form of Underwriter's Warrant Agreement by and between Riddell and
H.C. Wainwright & Co., Inc. (1-A)
4.3 Form of Common Stock Purchase Warrant. (1-A)
4.4 Form of Warrant Agreement between Riddell and American Stock
Transfer & Trust Company. (1-A)
5.1 Opinion of Zukerman Gore & Brandeis, LLP (1-A)
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 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)
10.4 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)
10.5 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)
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<PAGE>
10.6 Lease Agreement, dated as of September 1, 1988 by and between Exeter
Management Corporation and All American. (3)
10.7 Lease Agreement, dated April 1991, by and between Stroudsburg Park
Associates and All American Corp. (3); as amended March 31, 1995.
(18)
10.8 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)
10.9 Lease dated December 12, 1991, between O'Shanter Resources Inc. and
All American Sports, Inc. (3)
10.10 Lease, dated May 5, 1986, by and between Paul Goldstein, Nathan
Hoffenberg, All American and Medalist Industries, (3); amendment
dated January 30, 1997. (21)
10.11 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 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.
10.14 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).
10.15 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)
10.16 Employment Agreement, dated June 22, 1992, between Riddell Sports
Inc. and Robert Nederlander (5); amended July 27, 1994. (12)
10.17 Employment Agreement, dated June 22, 1992, between Riddell Sports
Inc. and Leonard Toboroff (5); amended July 27, 1994. (12)
10.18 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)
10.19 Lease Addendum letter, dated February 13, 1992, between All American
Sports Corporation and Paul Goldstein and Nathan Hoffenberg. (6)
10.20 License Agreement, dated October 1, 1992, between All American
Sports Corporation and NOCSAE. (7)
10.21 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)
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<PAGE>
10.22 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)
10.23 Employment Agreement, dated as of February 1, 1994, between Riddell
Inc. and Dan Cougill (11), as amended February 1, 1995 (17).
10.24 Employment Agreement, dated as of March 7, 1996, between Riddell
Sports Inc. and David Groelinger (19), as amended March 7, 1998
(34).
10.25 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)
10.26 Registration Rights Agreement, dated November 8, 1996, between
Riddell Sports Inc. and Silver Oak Capital L.L.C. (20)
10.27 Shareholders Agreement, dated as of May 5, 1997, between Riddell
Sports Inc., Cheer Acquisition Corp. and certain shareholders of
Varsity Spirit Corporation. (32)
10.28 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc., Cheer Acquisition Corp. and Jeffrey G. Webb (32)
10.29 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and Gregory C. Webb (32)
10.30 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and W. Kline Boyd (32)
10.31 Stock Purchase Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and J. Kristyn Shepherd (32)
10.32 Employment Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and Jeffrey G. Webb (32)
10.33 Employment Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and Gregory C. Webb (32)
10.34 Employment Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and W. Kline Boyd (32)
10.35 Employment Agreement, dated as of May 5, 1997, between Riddell
Sports Inc. and J. Kristyn Shepherd (32)
10.36 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)
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<PAGE>
10.37 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)
10.38 Programming Agreement between Universal Cheerleaders Association and
ESPN, Inc. (24).
10.39 Employment Agreement, dated December 1, 1994, between Varsity Spirit
Corporation and Deana Roberts. (27)
10.40 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)
10.41 License Agreement dated March 4, 1998 between Footstar Corp. and
Equilink Licensing Corporation (34)
10.42 Umbro License Agreement, dated as of November 23, 1998, between
Umbro International, Inc. and Varsity Spirit Fashions & Supplies,
Inc. (1-B)
10.43 Asset and USISL Stock Purchase Agreement, dated as of November 1998,
between Umbro International, Inc. and Varsity Spirit Fashions &
Supplies, Inc. (1-A)
10.44 Signal/Riddell Expense Sharing Arrangement dated November 23, 1998,
between Signal Apparel Company, Inc. and Riddell Sports Inc. (1-B)
10.45 Industrial Lease and Agreement dated October 1, 1998, between
Laphiew Gin Company and Varsity Spirit Corporation. (1-B)
10.46 Amended and Restated Loan, Guaranty And Security Agreement dated as
of April 20, 1999 among the financial institutions named therein, as
the Lenders, Bank of America National Trust and Savings Association,
as the Agent, Riddell Sports Inc., as the Parent Guarantor, Riddell,
Inc., All American Sports Corporation, Varsity Spirit Corporation,
and Varsity Spirit Fashions & Supplies, Inc. collectively, as the
Borrower and all other subsidiaries of the Parent Guarantor,
collectively, as the Subsidiary Guarantors. (36)
10.47 Form of Subscription Agent Agreement, by and between Riddell and
American Stock Transfer & Trust Company. (1-A)
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<PAGE>
10.48 Form of Solicitation Agent's Agreement by and between Riddell and
H.C. Wainwright & Co., Inc. (1)
21 List of subsidiaries. (33)
23 Consent of Grant Thornton LLP regarding Riddell Sports Inc. (1-A)
23.1 Consent of Zukerman Gore & Brandeis, LLP (included in Exhibit 5.1)
99.1 Form of Instructions for Use of Riddell Rights Certificates. (1-A)
99.2 Form of Notice of Guaranteed Delivery for Subscription Rights. (1-A)
99.3 Form of Letter to Stockholders Who Are Record Holders. (1-A)
99.4 Form of Letter to Stockholders Who Are Beneficial Holders. (1-A)
99.5 Form of Letter to Clients of Stockholders Who Are Beneficial
Holders. (1-A)
99.6 Form of Nominee Holder Certification Form. (1-A)
99.7 Substitute Form W-9 for Use with the Rights Offering. (1-A)
99.8 Form of Beneficial Owner Election Form. (1-A)
- ----------
(1) Filed herewith.
(1-A) To be filed by amendment.
(1-B) Incorporated by reference to Riddell Sports Inc.'s Form 10K report
(Commission File No. 001-14629) for the year ended December 31,
1998.
(2) Incorporated by reference to Riddell Sports Inc.'s Registration
Statement on Form S-1 (Commission File No. 33-40488) effective June
27, 1991 (including all pre-effective amendments to the Registration
Statement).
(3) Incorporated by reference to Riddell Sports Inc.'s Form 10-K report
(Commission File No. 0-19298) for the year ended December 31, 1991.
(4) Incorporated by reference to Riddell Sports Inc.'s Registration
Statement on Form S-1 (Commission File No. 33-40488) effective June
17, 1992 (including all pre-effective amendments to the Registration
Statement).
(5) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q report
(Commission File No. 0-19298) for the quarter ended June 30, 1992.
(6) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q report
(Commission File No. 0-19298) for the quarter ended September 30,
1992.
(7) Incorporated by reference to Riddell Sorts Inc.'s Form 10-K report
(Commission File No. 0-19298) filed on March 30, 1993.
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<PAGE>
(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.
(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.
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<PAGE>
(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.
(36) Incorporated by reference to Riddell Sports Inc's Form 10-Q dated
March 31, 1999.
(b) Financial Statement Schedules
Report of Independent Certified Public Accountants on Schedules
Schedule II - Valuation and Qualifying Accounts
All other financial statement schedules are omitted as the required
information is presented in the financial statements or the notes
thereto or is not necessary.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
II-9
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(4) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(5) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to section
13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(6) The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the standby group during
the subscription period, the amount of unsubscribed securities to be purchased
by the standby group, and the terms of any subsequent reoffering thereof. If any
public offering by the standby group is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
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<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Signatures
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on December 14, 1999.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
RIDDELL SPORTS INC.
By: /s/ David Mauer
------------------------
David Mauer
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints DAVID M. MAUER and DAVID GROELINGER and each of
them, as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully as to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or any of them, or his
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates
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<PAGE>
indicated.
/s/ David M. Mauer Chief Executive Officer December 14, 1999
- --- ----- -- ----- and Director David M. Mauer
(Principal Executive Officer)
/s/ Robert Nederlander Chairman of the Board December 14, 1999
- --- ------ -----------
Robert Nederlander
/s/ Jeffrey G. Webb Vice Chairman of the Board December 14, 1999
- --- ------- -- ---- and President and Chief
Jeffrey G. Webb Operating Officer of
Varsity Spirit Corporation
/s/ Leonard Toboroff Vice President and Director December 14, 1999
- --- ------- --------
Leonard Toboroff
/s/ David Groelinger Executive Vice President and December 14, 1999
- --- ----- ---------- Chief Financial Officer
David Groelinger (Principal Financial Officer)
/s/ Lawrence Simon Senior Vice President December 14, 1999
- --- -------- ----- (Principal Accounting Officer)
Lawrence Simon
/s/ Don Kornstein Director December 14, 1999
- --- --- ---------
Don Kornstein
/s/ John McConnaughy, Jr. Director December 14, 1999
- --- ---- ------------ ---
John McConnaughy, Jr.
/s/ Glenn E. Schembechler Director December 14, 1999
- --- ----- -- ------------
Glenn E. Schembechler
/s/ Arthur N. Seessel, III Director December 14, 1999
- --- ------ -- -------- ---
Arthur N. Seessel, III
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<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 in the prospectus constituting Part I of this
Registration Statement, 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
-----------------------
(2)
(1) CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE AT
BEGINNING COSTS 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(a) $ 513
Year ended December 31, 1997
Allowance for doubtful accounts................ $513 $365 $ 325(b) $379(a) $ 824
Year ended December 31, 1998
Allowance for doubtful accounts................ $824 $929 -- $451(a) $1,302
</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>
OH&S DRAFT 12/14/99
[FORM OF UNDERWRITING AGREEMENT]
250,000 Shares of
Common Stock
RIDDELL SPORTS, INC.
UNDERWRITING AGREEMENT
New York, New York
___________ __, 2000
H.C. WAINWRIGHT & CO., INC.
245 Park Avenue, 44th Floor
New York, New York 10167
Ladies and Gentlemen:
Riddell Sports, Inc., a Delaware corporation (the "Company"),
confirms its agreement with H.C. Wainwright & Co., Inc. ("Wainwright")
(hereinafter referred to as "you" or the "Underwriter"), with respect to the
sale by the Company and the purchase by the Underwriter of 250,000 shares of
common stock, $0.01 par value (the "Common Stock"). Such 250,000 shares are
hereinafter referred to as the "Firm Shares." Upon the Underwriter's request, as
provided in Section 2(b) of this Agreement, the Company shall also issue and
sell to the Underwriter up to an additional 37,500 shares for the purpose of
covering over-allotments, if any. Such 37,500 shares are hereinafter
collectively referred to as the "Option Shares." The Company also proposes to
issue and sell to the Underwriter or its designees warrants (the "Underwriter's
Warrants"), pursuant to the Underwriter's Warrant Agreement (the "Underwriter's
Warrant Agreement"), for the purchase of an additional ________ Shares (the
"Underwriter's Shares"). The Firm Shares and the Option Shares are hereinafter
collectively referred to as the "Shares." The Shares, the Underwriter's Warrants
and the Underwriter's Shares are hereinafter collectively referred to as the
"Securities" and are more fully described in the Registration Statement and the
Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and covenants and agrees with, the Underwriter as of
the date hereof, and as of the Closing Date (hereinafter defined) and the Option
Closing Date (hereinafter defined), if any, as follows:
<PAGE>
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and amendments
thereto, on Form S-1 (Registration No. 333-______________), including any
related preliminary prospectus or prospectuses (each a "Preliminary
Prospectus"), for the registration of the Securities, under the Securities Act
of 1933, as amended (the "Act"), which registration statement and amendment or
amendments have been prepared by the Company in conformity with the requirements
of the Act, and the rules and regulations of the Commission under the Act. The
Company will not file any other amendment to such registration statement which
the Underwriter shall have objected to in writing after having been furnished
with a copy thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time it
becomes effective (including the prospectus, financial statements, schedules,
exhibits and all other documents filed as a part thereof or incorporated therein
(including, but not limited to, those documents or that information incorporated
by reference therein) and all information deemed to be a part thereof as of such
time pursuant to paragraph (b) of Rule 430A of the rules and regulations under
the Act), is hereinafter called the "Registration Statement," and the form of
prospectus in the form first filed with the Commission pursuant to Rule 424(b)
of the rules and regulations under the Act is hereinafter called the
"Prospectus." For purposes hereof, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or the Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or threatened. Each of the Preliminary Prospectus, the Registration Statement
and the Prospectus, at the respective times of filing thereof, conformed with
the requirements of the Act and the Rules and Regulations, and none of the
Preliminary Prospectus, the Registration Statement nor the Prospectus, at the
respective times of filing thereof, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading; provided, however, that this representation and
warranty does not apply to statements made or statements omitted in reliance
upon and in conformity with written information furnished to the Company with
respect to the Underwriter by or on behalf of the Underwriter expressly for use
in such Preliminary Prospectus, the Registration Statement or the Prospectus.
The Company has filed all reports, forms or other documents required to be filed
under the Act and the Exchange Act and the respective Rules and Regulations
thereunder, and all such reports, forms or other documents, when so filed or as
subsequently amended, complied in all material respects with the Act and the
Exchange Act and the respective Rules and Regulations thereunder.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date and each Option Closing Date, if
any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriter or a dealer, the
Registration Statement and the Prospectus will contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and will conform to the requirements of the Act and the Rules and
Regulations; and, at and through such dates, neither the Registration Statement
nor the Prospectus, nor any amendment or
2
<PAGE>
supplement thereto, will contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading; provided, however, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company with respect to the
Underwriter by or on behalf of the Underwriter expressly for use in the
Preliminary Prospectus, Registration Statement or the Prospectus or any
amendment thereof or supplement thereto.
(d) Each of the Company and its subsidiaries, __________, a
______________ corporation ("_____") and ______________, a _________ corporation
("____" and together with "_____, the "Subsidiaries"), has been duly organized
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation. Each of the Company and the Subsidiaries is
duly qualified and licensed and in good standing as a foreign corporation in
each jurisdiction in which its ownership or leasing of any properties or the
character of its operations require such qualification or licensing. Except as
set forth in the Prospectus, neither the Company nor any of the Subsidiaries
owns, directly or indirectly, an interest in any corporation, partnership,
trust, joint venture or other business entity. Each of the Company and the
Subsidiaries has all requisite power and authority (corporate and other), and
has obtained any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having jurisdiction
over environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; each of the Company and the
Subsidiaries is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and with all federal, state, local and foreign laws, rules and
regulations to which it is subject; and neither the Company nor any of the
Subsidiaries has received any notice of proceedings relating to the revocation
or modification of any such authorization, approval, order, license,
certificate, franchise or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
prospects, stockholders' equity, value, operations, properties, business or
results of operations of the Company or any of the Subsidiaries. The disclosure
in the Registration Statement concerning the effects of federal, state, local
and foreign laws, rules and regulations on each of the Company's and the
Subsidiaries' business as currently conducted and as contemplated are correct in
all respects and do not omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set forth
therein on the Closing Date and the Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement
and the Underwriter's Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all respects to all statements
with respect thereto contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of the Company have been
3
<PAGE>
duly authorized and validly issued and are fully paid and non-assessable and the
holders thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company or similar contractual rights granted by the
Company. The Securities to be sold by the Company hereunder and pursuant to the
Underwriter's Warrant Agreement are not and will not be subject to any
preemptive or other similar rights of any stockholder, have been duly authorized
and, when issued, paid for and delivered in accordance with the terms hereof,
will be validly issued, fully paid and non-assessable and will conform to the
description thereof contained in the Prospectus; the holders thereof will not be
subject to any liability solely as such holders; all corporate action required
to be taken for the authorization, issue and sale of the Securities has been
duly and validly taken; and the certificates representing the Securities will be
in due and proper form. Upon the issuance and delivery pursuant to the terms
hereof and the Underwriter's Warrant Agreement of the Securities to be sold by
the Company hereunder, the Underwriters will acquire good and marketable title
to such Securities free and clear of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any kind
whatsoever asserted against the Company or any affiliate of the Company.
(f) The audited consolidated financial statements of the Company
together with the related notes thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, income, changes in stockholders' equity and the results of operations
of the Company on a consolidated basis at the respective dates and for the
respective periods to which they apply. Such financial statements have been
prepared in conformity with generally accepted accounting principles and the
Rules and Regulations, consistently applied throughout the periods involved.
There has been no adverse change or development involving a material prospective
change in the condition, financial or otherwise, or in the earnings, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company or any of the Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus;
and the outstanding debt, the property, both tangible and intangible, and the
businesses of each of the Company and the Subsidiaries conform in all respects
to the descriptions thereof contained in the Registration Statement and the
Prospectus. The financial information set forth in the Prospectus under the
headings "Summary Financial Information," "Capitalization," "Selected Financial
Information" and "Management's Discussion and Analysis of Results of Operations
and Financial Condition" fairly presents, on the basis stated in the Prospectus,
the information set forth therein and such financial information has been
derived from or compiled on a basis consistent with that of the audited
consolidated financial statements included in the Prospectus.
(g) Each of the Company and the Subsidiaries (i) has paid all
federal, state, local and foreign taxes for which it is liable, including, but
not limited to, withholding taxes and amounts payable under Chapters 21 through
24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has
furnished all information returns it is required to furnish pursuant to the
Code, (ii) has established adequate reserves for such taxes which are not due
and payable, and (iii) does not have any tax deficiency or claims outstanding,
proposed or assessed against it.
4
<PAGE>
(h) No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriter in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase by the Underwriter of the
Securities from the Company, (iii) the consummation by the Company of any of its
obligations under this Agreement or the Underwriter's Warrant Agreement, or (iv)
resales of the Securities in connection with the distribution contemplated
hereby.
(i) Each of the Company and the Subsidiaries maintains insurance
policies, including, but not limited to, general liability, property, personal
and product liability insurance, and surety bonds which insure the Company and
the Subsidiaries and the employees of each against such losses and risks
generally insured against by comparable businesses. Neither the Company nor any
of the Subsidiaries (i) has failed to give notice or present any insurance claim
with respect to any insurable matter under the appropriate insurance policy or
surety bond in a due and timely manner, (ii) does have any disputes or claims
against any underwriter of such insurance policies or surety bonds, or has
failed to pay any premiums due and payable thereunder, or (iii) has failed to
comply with all conditions contained in such insurance policies and surety
bonds. There are no facts or circumstances under any such insurance policy or
surety bond which would relieve any insurer of its obligation to satisfy in full
any valid claim of the Company or any of the Subsidiaries.
(j) Except as disclosed in the Registration Statement, there is no
action, suit, proceeding, inquiry, arbitration, investigation, litigation or
governmental proceeding (including, without limitation, those pertaining to
environmental or similar matters), domestic or foreign, pending or threatened
against (or circumstances that may give rise to the same), or involving the
properties or business of, the Company or any of the Subsidiaries which (i)
questions the validity of the capital stock of the Company, this Agreement and
the Underwriter's Warrant Agreement or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement or the Underwriter's
Warrant Agreement, (ii) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are summarized in
the Registration Statement are accurately summarized in all respects), or (iii)
might materially and adversely affect the condition, financial or otherwise, or
the earnings, prospects, stockholders' equity, value, operations, properties,
business or results of operations of the Company and the Subsidiaries taken as a
whole.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, to enter into this Agreement
and the Underwriter's Warrant Agreement and to consummate the transactions
provided for in such agreements; and each of this Agreement and the
Underwriter's Warrant Agreement have been duly and properly authorized, executed
and delivered by the Company. Each of this Agreement and the Underwriter's
Warrant Agreement constitutes a legal, valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting the enforcement of creditors' rights and the application of equitable
principles in any motion, legal or equitable, and except as obligations to
indemnify or contribute to losses may be limited by applicable law). None of the
Company's issue and sale of the Securities, execution or delivery of this
Agreement, the Underwriter's Warrant Agreement, its performance hereunder and
thereunder, its consummation of the transactions contemplated
5
<PAGE>
herein and therein, or the conduct of its business as described in the
Registration Statement and the Prospectus and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company or any of the Subsidiaries pursuant to
the terms of (i) the certificate of incorporation or by-laws of the Company or
any of the Subsidiaries, (ii) any license, contract, indenture, mortgage, lease,
deed of trust, voting trust agreement, stockholders' agreement, note, loan or
credit agreement or other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which either the Company
or any of the Subsidiaries is a party or by which it is or may be bound or to
which its properties or assets (tangible or intangible) are or may be subject,
or (iii) any statute, judgment, decree, order, rule or regulation applicable to
the Company or any of the Subsidiaries of any arbitrator, court, regulatory body
or administrative agency or other governmental agency or body (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company or any of
the Subsidiaries or any of their activities or properties.
(l) No consent, approval, authorization or order of, and no filing
with, any arbitrator, court, regulatory body, administrative agency, government
agency or other body, domestic or foreign, is required for the issuance of the
Securities pursuant to the Prospectus and the Registration Statement, this
Agreement and the Underwriter's Warrant Agreement, the performance of this
Agreement and the Underwriter's Warrant Agreement and the transactions
contemplated hereby and thereby, except such as have been obtained under the
Act, state securities laws and the rules of the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the Underwriter's
purchase and distribution of the Securities.
(m) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company or any of the Subsidiaries is a
party or by which any of such entities may be bound or to which any of such
entities' assets, properties or business may be subject have been duly and
validly authorized, executed and delivered by the Company or the Subsidiaries,
and constitute legal, valid and binding agreements of the Company and the
Subsidiaries, as the case may be, enforceable against the Company or any of the
Subsidiaries, as the case may be, in accordance with their respective terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting the enforcement of creditors' rights and the
application of equitable principles in any motion, legal or equitable, and
except as obligations to indemnify or contribute to losses may be limited by
applicable law). The descriptions in the Registration Statement of agreements,
contracts and other documents are accurate and fairly present the information
required to be shown with respect thereto by Form S-1; and there are no
agreements, contracts or other documents which are required by the Act to be
described in the Registration Statement or filed as exhibits to the Registration
Statement which are not described or filed as required; and the exhibits which
have been filed are complete and correct copies of the documents of which they
purport to be copies.
6
<PAGE>
(n) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and the Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, neither the Company
nor any of the Subsidiaries has (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money, (ii) entered
into any transaction other than in the ordinary course of business, or (iii)
declared or paid any dividend or made any other distribution on or in respect of
any class of its capital stock; and, subsequent to such dates, and except as may
otherwise be disclosed in the Prospectus, there has not been any change in the
capital stock, debt (long or short term) or liabilities or any material change
in the condition, financial or otherwise, or the earnings, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company and the Subsidiaries taken as a whole.
(o) No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, indenture, mortgage,
lease, deed of trust, voting trust agreement, stockholders' agreement, note,
loan or credit agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which the
Company or any of the Subsidiaries is a party or by which the Company or any of
the Subsidiaries is or may be bound or to which the property or assets (tangible
or intangible) of the Company or any of the Subsidiaries is or may be subject.
(p) Each of the Company and the Subsidiaries has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance with all federal, state, local and foreign laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours. There are no pending investigations involving
the Company or any of the Subsidiaries by the United States Department of Labor
or any other governmental agency responsible for the enforcement of any federal,
state, local or foreign laws, rules and regulations relating to employment.
There is no unfair labor practice charge or complaint against the Company or any
of the Subsidiaries pending before the National Labor Relations Board or any
strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened
against or involving the Company or any of the Subsidiaries, or any predecessor
entity, and none has ever occurred. No representation question exists respecting
the employees of the Company or any of the Subsidiaries, and, except as
disclosed in the Registration Statement, no collective bargaining agreement or
modification thereof is currently being negotiated by the Company or any of the
Subsidiaries. No grievance or arbitration proceeding is pending under any
expired or existing collective bargaining agreements of the Company or any of
the Subsidiaries. No labor dispute with the employees of the Company or any of
the Subsidiaries exists or is imminent.
(q) Neither the Company nor any of the Subsidiaries maintains,
sponsors or contributes to any program or arrangement that is an "employee
pension benefit plan," an "employee welfare benefit plan" or a "multiemployer
plan," as such terms are defined in Sections 3(2), 3(l) and 3(37), respectively,
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
("ERISA Plans"). Neither the Company nor any of the Subsidiaries maintains or
contributes, now or at any time previously, to a defined benefit plan, as
defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code which could subject the Company
or any of the Subsidiaries to any tax penalty
7
<PAGE>
on prohibited transactions and which has not adequately been corrected. Each
ERISA Plan is in compliance with all material reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified thereunder.
Neither the Company nor any of the Subsidiaries has ever completely or partially
withdrawn from a "multiemployer plan."
(r) Neither the Company nor any of the Subsidiaries, nor any of
their respective employees, directors, stockholders or affiliates (within the
meaning of the Rules and Regulations), has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act or otherwise, the
stabilization or manipulation of the price of any security of the Company,
whether to facilitate the sale or resale of the Securities or otherwise.
(s) To the best knowledge of the Company and the Subsidiaries, none
of the trademarks, trade names, service marks, service names, copyrights,
patents and patent applications, and none of the licenses and rights to the
foregoing, presently owned or held by the Company or any of the Subsidiaries are
in dispute or are in conflict with the right of any other person or entity. Each
of the Company and the Subsidiaries (i) owns or has the right to use, free and
clear of all liens, charges, claims, encumbrances, pledges, security interests,
defects or other restrictions or equities of any kind whatsoever, all
trademarks, trade names, service marks, service names, copyrights, patents and
patent applications, and licenses and rights with respect to the foregoing, used
in the conduct of its business as now conducted or proposed to be conducted
without infringing upon or otherwise acting adversely to the right or claimed
right of any person, corporation or other entity under or with respect to any of
the foregoing and (ii) is not obligated or under any liability whatsoever to
make any payments by way of royalties, fees or otherwise to any owner or
licensee of, or other claimant to, any trademark, trade name, service mark,
service name, copyright, patent or patent application except as set forth in the
Registration Statement or the Prospectus. There is no action, suit, proceeding,
inquiry, arbitration, investigation, litigation or governmental or other
proceeding, domestic or foreign, pending or threatened (or circumstances that
may give rise to the same) against the Company or any of the Subsidiaries that
challenges the exclusive rights of the Company or any of the Subsidiaries with
respect to any trademarks, trade names, service marks, service names,
copyrights, patents, patent applications or licenses or rights to the foregoing
used in the conduct of its business.
(t) Each of the Company and the Subsidiaries owns and has the
unrestricted right to use all trade secrets, know-how (including all unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), inventions, technology, designs, processes, works of authorship,
computer programs and technical data and information that are material to the
development, manufacture, operation and sale of all products and services sold
or proposed to be sold by the Company or any of the Subsidiaries, free and clear
of and without violating any right, lien, or claim of others, including, without
limitation, former employers of its employees.
(u) Each of the Company and the Subsidiaries has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real and
personal property stated in the Prospectus to be owned or leased by it, free and
clear of all liens, charges, claims,
8
<PAGE>
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, other than liens for taxes not yet due and
payable.
(v) Grant Thornton LLP, whose reports are filed with the Commission
as a part of the Registration Statement, are independent certified public
accountants as required by the Act and the Rules and Regulations.
(w) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuances
that may affect the Underwriter's compensation, as determined by the NASD.
(x) The Common Stock is listed for quotation on the American Stock
Exchange ("AMEX") and the Company is in compliance with the maintenance
requirements of AMEX.
(y) Neither the Company, nor any of the Subsidiaries, nor any of
their respective directors, officers, stockholders, employees, agents or any
other person acting on behalf of the Company or any of the Subsidiaries has,
directly or indirectly, given or agreed to give any money, gift or similar
benefit (other than legal price concessions to customers in the ordinary course
of business) to any customer, supplier, employee or agent of a customer or
supplier, or any official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or any other person who was, is or may be in a
position to help or hinder the business of the Company or any of the
Subsidiaries (or assist the Company or any of the Subsidiaries in connection
with any actual or proposed transaction) which (i) might subject the Company or
any of the Subsidiaries, or any other such person to any damage or penalty in
any civil, criminal or governmental litigation or proceeding (domestic or
foreign), (ii) if not given in the past, might have had a material and adverse
effect on the condition, financial or otherwise, or the earnings, business
affairs, prospects, stockholders' equity, value, operations, properties,
business or results of operations of the Company or any of the Subsidiaries, or
(iii) if not continued in the future, might materially and adversely affect the
condition, financial or otherwise, or the earnings, business affairs, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company or any of the Subsidiaries. The Company's and each of
the Subsidiaries' internal accounting controls are sufficient to cause each of
the Company and the Subsidiaries to comply with the Foreign Corrupt Practices
Act of 1977, as amended.
(z) Each of the Company and the Subsidiaries is in compliance with
all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating
to Disclosure of Doing Business with Cuba, and each of the Company and the
Subsidiaries further agrees that if it or any affiliate commences engaging in
business with the government of Cuba or with any person or affiliate located in
Cuba after the date the Registration Statement becomes or has become effective
with the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's,
or any affiliate's, business with
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<PAGE>
Cuba or with any person or affiliate located in Cuba changes in any material
way, the Company will provide the Department notice of such business or change,
as appropriate, in a form acceptable to the Department.
(aa) Except as set forth in the Prospectus, no officer, director or
stockholder of the Company or any of the Subsidiaries, and no affiliate or
associate (as these terms are defined in the Rules and Regulations) of any of
the foregoing persons or entities, has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company or any of the Subsidiaries, or (B) purchases from or
sells or furnishes to the Company or any of the Subsidiaries any goods or
services, or (ii) a beneficial interest in any contract or agreement to which
the Company or any of the Subsidiaries is a party or by which the Company or any
of the Subsidiaries may be bound. Except as set forth in the Prospectus under
"Certain Transactions," there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company or any of the
Subsidiaries, and any officer, director or any person listed in the "Principal
Stockholders" section of the Prospectus or any affiliate or associate of any of
the foregoing persons or entities.
(bb) The minute books of the Company and each of the Subsidiaries
that have been made available to the Underwriter, contain a complete summary of
all meetings and actions of the directors and stockholders of the Company and
each of the Subsidiaries since the time of its incorporation, and reflect all
transactions referred to in such minutes accurately in all respects.
(cc) Except and to the extent described in the Prospectus, no holder
of any securities of the Company or any of the Subsidiaries or of any options,
warrants or other convertible or exchangeable securities of the Company or any
of the Subsidiaries has the right to include any securities issued by the
Company or any of the Subsidiaries in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement. Except as set forth in the Prospectus, no person
or entity holds any anti-dilution rights with respect to any securities of the
Company or any of the Subsidiaries.
(dd) Any certificate signed by any officer of the Company or any
Subsidiary, and delivered to the Underwriter or to Underwriter's Counsel (as
defined in Section 4(d) hereof), shall be deemed a representation and warranty
by the Company to the Underwriter as to the matters covered thereby.
(ee) The Company has filed a Form 8-A with the Commission providing
for the registration under the Exchange Act of the Securities and such Form 8-A
has been declared effective by the Commission and the Company has complied with
all of its reporting obligations under the Exchange Act subsequent thereto.
2. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to
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<PAGE>
sell to the Underwriter, and the Underwriter agrees to purchase from the
Company, the Firm Shares at a price equal to $_____ per Share [93% of the public
offering price].
(b) In addition, on the basis of the representations, warranties,
covenants and agreement, herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriter to purchase all or any part of the Option Shares at a price equal to
$______ per Share [93% of the public offering price]. The option granted hereby
will expire forty-five (45) days after (i) the date the Registration Statement
becomes effective, if the Company has elected not to rely on Rule 430A under the
Rules and Regulations, or (ii) the date of this Agreement if the Company has
elected to rely upon Rule 430A under the Rules and Regulations, and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Firm Shares upon notice by the Underwriter to the Company
setting forth the number of Option Shares as to which the Underwriter is then
exercising the option and the time and date of payment and delivery for any such
Option Shares. Any such time and date of delivery (an "Option Closing Date")
shall be determined by the Underwriter, but shall not be later than seven (7)
full business days after the exercise of said option, nor in any event prior to
the Closing Date, unless otherwise agreed upon by the Underwriter and the
Company. Nothing herein contained shall obligate the Underwriter to exercise the
option granted hereby. No Option Shares shall be delivered unless the Firm
Shares shall be simultaneously delivered or shall theretofore have been
delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares shall be made at the offices of counsel to the Underwriter
at, 666 Fifth Avenue, New York, New York 10103, or at such other place as shall
be agreed upon by the Underwriter and the Company. Such delivery and payment
shall be made at 10:00 a.m. (New York City time) on ____________ __, 2000 or at
such other time and date as shall be agreed upon by the Underwriter and the
Company, but not less than three (3) nor more than seven (7) full business days
after the effective date of the Registration Statement (such time and date of
payment and delivery being herein called the "Closing Date"). In addition, in
the event that any or all of the Option Shares are purchased by the Underwriter,
payment of the purchase price for, and delivery of certificates for, such Option
Shares shall be made at the above mentioned office of the Underwriter or at such
other place as shall be agreed upon by the Underwriter and the Company. Delivery
of the certificates for the Firm Shares and the Option Shares, if any, shall be
made to the Underwriter against payment by the Underwriter of the purchase price
for the Firm Shares and the Option Shares, if any, to the order of the Company
by New York Clearing House funds. Certificates for the Firm Shares and the
Option Shares, if any, shall be in definitive, fully registered form, shall bear
no restrictive legends and shall be in such denominations and registered in such
names as the Underwriter may request in writing at least two (2) business days
prior to the Closing Date or the relevant Option Closing Date, as the case may
be. The certificates for the Firm Shares and the Option Shares, if any, shall be
made available to the Underwriter at such offices or such other place as the
Underwriter may designate for inspection, checking and packaging no later than
9:30 a.m. on the last business day prior to the Closing Date or the relevant
Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Underwriter or its designees the Underwriter's Warrants for an aggregate
purchase price of $.0001 per
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<PAGE>
warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of an additional _____ shares of Common Stock. The Underwriter's
Warrants shall be exercisable for a period of four (4) years commencing one (1)
year from the effective date of the Registration Statement at a price equaling
_______ percent (_____%) of the public offering price of the Shares. The
Underwriter's Warrant Agreement and the form of the certificates for the
Underwriter's Warrant shall be substantially in the form filed as Exhibit ____
to the Registration Statement. Payment for the Underwriter's Warrants shall be
made on the Closing Date.
3. Public Offering of the Shares. As soon after the Registration
Statement becomes effective as the Underwriter deems advisable, the Underwriter
shall make a public offering of the Firm Shares and such of the Option Shares as
the Underwriter may determine (other than to residents of or in any jurisdiction
in which qualification of the Shares is required and has not become effective)
at the price and upon the other terms set forth in the Prospectus. The
Underwriter may from time to time increase or decrease the public offering price
after distribution of the Shares has been completed to such extent as the
Underwriter, in its sole discretion, deems advisable. The Underwriter may enter
into one or more agreements as the Underwriter, in its sole discretion, deems
advisable with one or more broker-dealers who shall act as dealers in connection
with such public offering.
4. Covenants and Agreements of the Company. The Company covenants
and agrees with the Underwriter as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or the
Exchange Act before termination of the offering of the Securities to the public
by the Underwriter of which the Underwriter shall not previously have been
advised and furnished with a copy, or to which the Underwriter shall have
objected or which is not in compliance with the Act, the Exchange Act and the
Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Underwriter and confirm the same in writing, (i)
when the Registration Statement, as amended, becomes effective, when any
post-effective amendment to the Registration Statement becomes effective and, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A, (ii) of the
issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding the outcome of which may result in the suspension
of the effectiveness of the Registration Statement or any order preventing or
suspending the use of the Preliminary Prospectus or the Prospectus, or any
amendment or supplement thereto, or the institution of any proceedings for that
purpose, (iii) of the issuance by the Commission or by any state securities
commission of any proceedings for the suspension of the qualification of any of
the Securities for offering or sale in any jurisdiction or of the initiation, or
the threatening, of any proceeding for that purpose, (iv) of the receipt of any
comments from the Commission, and (v) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to the
Prospectus or for additional information. If the Commission or
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<PAGE>
any state securities regulatory authority shall enter a stop order or suspend
such qualification at any time, the Company will make every effort to obtain
promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Underwriter) with the Commission, or transmit the Prospectus
by a means reasonably calculated to result in filing the same with the
Commission, pursuant to Rule 424(b)(1) of the Rules and Regulations (or, if
applicable and if consented to by the Underwriter, pursuant to Rule 424(b)(4) of
the Rules and Regulations) within the time period specified in Rule 424(b)(1)
(or, if applicable and if consented to by the Underwriter, Rule 424(b)(4)).
(d) The Company will give the Underwriter notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use in
connection with the offering of any of the Securities which differs from the
corresponding prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) of the Rules and Regulations), and will
furnish the Underwriter with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such amendment or supplement to which the Underwriter
or Orrick, Herrington & Sutcliffe LLP, its counsel ("Underwriter's Counsel"),
shall object.
(e) The Company shall endeavor in good faith, in cooperation with
the Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Underwriter may reasonably designate to permit
the continuance of sales and dealings therein for as long as may be necessary to
complete the distribution contemplated hereby, and shall make such applications,
file such documents and furnish such information as may be required for such
purpose; provided, however, the Company shall not be required to qualify as a
foreign corporation or file a general or limited consent to service of process
in any such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may reasonably be
required by the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act, the Exchange Act and the Rules and
Regulations so far as necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and the
Prospectus, or any amendments or supplements thereto. If, at any time when a
prospectus relating to the Securities is required to be delivered under the Act,
any event shall have occurred as a result of which, in the opinion of counsel
for the Company or Underwriter's Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading, or if it is necessary at any time to amend or supplement the
prospectus to comply with the Act, the Company will notify the Underwriter
promptly and prepare and file with the Commission an
13
<PAGE>
appropriate amendment or supplement in accordance with Section 10 of the Act,
each such amendment or supplement to be satisfactory to Underwriter's Counsel,
and the Company will furnish to the Underwriter copies of such amendment or
supplement as soon as available and in such quantities as the Underwriter may
request.
(g) As soon as practicable, but in any event not later than forty
five (45) days after the end of the 12-month period beginning on the day after
the end of the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (ninety (90) days in the event that the end of
such fiscal quarter is the end of the Company's fiscal year), the Company shall
make generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Underwriter, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least twelve (12) consecutive months after the effective
date of the Registration Statement.
(h) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings and will deliver to the Underwriter:
i) concurrently with furnishing such quarterly reports to its
stockholders statements of income of the Company for such quarter in the
form furnished to the Company's stockholders and certified by the
Company's principal financial and accounting officer;
ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity and cash flows of the Company for such fiscal year,
accompanied by a copy of the report thereon of the Company's independent
certified public accountants;
iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD
or any securities exchange;
v) every press release and every material news item or article
of interest to the financial community in respect of the Company, the
Subsidiaries or their respective affairs which was released or prepared by
or on behalf of the Company or any of the Subsidiaries; and
vi) any additional information of a public nature concerning
the Company or any of the Subsidiaries (and any future subsidiaries) or
their respective business which the Underwriter may request.
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<PAGE>
During such five-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated basis
to the extent that the accounts of the Company and its subsidiaries are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(i) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for the Common Stock.
(j) The Company will furnish to the Underwriter, without charge and
at such place as the Underwriter may designate, copies of each Preliminary
Prospectus, the Registration Statement and any pre-effective or post-effective
amendments thereto (one of which will be signed and will include all financial
statements and exhibits), the Prospectus, and all amendments and supplements
thereto, including any prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and in such quantities
as the Underwriter may request.
(k) None of the Company, the Subsidiaries, nor any of their
respective officers, directors, stockholders or affiliates (within the meaning
of the Rules and Regulations) will take, directly or indirectly, any action
designed to stabilize or manipulate the price of any securities of the Company,
or which might in the future reasonably be expected to cause or result in the
stabilization or manipulation of the price of any such securities.
(l) The Company shall apply the net proceeds from the sale of the
Securities offered to the public in the manner set forth under "Use of Proceeds"
in the Prospectus. No portion of the net proceeds will be used, directly or
indirectly, to acquire any securities issued by the Company.
(m) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, any Form SR
required by Rule 463 under the Act) from time to time under the Act, the
Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents will comply as to form and substance with the applicable requirements
under the Act, the Exchange Act and the Rules and Regulations.
(n) The Company shall furnish to the Underwriter as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in their letters to be
furnished pursuant to Section 6(j) hereof.
(o) The Company shall for a period of five (5) years from the date
hereof, use its best efforts to maintain the AMEX quotation of the Common Stock
to the extent outstanding.
(p) For a period of five (5) years from the Closing Date, the
Company shall at the request of the Underwriter, furnish or cause to be
furnished to the Underwriter and at the
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<PAGE>
Company's sole expense, (i) daily consolidated transfer sheets relating to the
Common Stock and (ii) a list of holders of all of the Company's securities.
(q) For a period of five (5) years from the Closing Date, the
Company shall, at the Company's sole expense, (i) promptly provide the
Underwriter, upon any and all requests of the Underwriter, with a "blue sky
trading survey" for secondary sales of the Company's securities, prepared by
counsel to the Company, and (ii) take all necessary and appropriate actions to
further qualify the Company's securities in all jurisdictions of the United
States in order to permit secondary sales of such securities pursuant to the
"blue sky" laws of those jurisdictions, provided that such jurisdictions do not
require the Company to qualify as a foreign corporation.
(r) As soon as practicable, but in no event more than thirty (30)
days after the effective date of the Registration Statement, the Company agrees
to take all necessary and appropriate actions to be included in Standard and
Poor's Corporation Descriptions and Moody's OTC Manual and to continue such
inclusion for a period of not less than five (5) years.
(s) Until the completion of the distribution of the shares of Common
Stock to the public, and during any period during which a prospectus is required
to be delivered, the Company shall not, without the prior written consent of the
Underwriter, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
(t) For a period equal to the lesser of (i) five (5) years from the
date hereof, and (ii) the sale to the public of the Underwriter's Securities,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Form S-3 (or other appropriate form) for the registration
under the Act of the Underwriter's Shares.
(u) For a period of twenty four (24) months after the effective date
of the Registration Statement, the Company shall not restate, amend or alter any
term of any written employment, consulting or similar agreement entered into
between the Company and any officer, director or key employee as of the
effective date of the Registration Statement in a manner which is more favorable
to such officer, director or key employee, without the prior written consent of
the Underwriter.
(v) The Company will use its best efforts to maintain the
effectiveness of the Registration Statement for a period of five years after the
date hereof.
(w) The Company agrees that, from the effective date of the
Registration Statement, it shall retain the services of a public relations firm,
reasonably acceptable to Wainwright.
(x) The Company shall have entered into an agreement with certain
individuals and/or institutions who (i) may be current shareholders of the
Company and (ii) shall have agreed to exercise any and all rights not exercised
by the stockholders of the Company in the rights offering described in the
Registration Statement.
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<PAGE>
5. Payment of Expenses.
(a) The Company hereby agrees to pay (such payment to be made, at
the discretion of the Underwriter, on the Closing Date and any Option Closing
Date (to the extent not paid on the Closing Date or a previous Option Closing
Date)) all expenses and fees (other than fees of Underwriter's Counsel, except
as set forth in clause (iv) below), incident to the performance of the
obligations of the Company under this Agreement and the Underwriter's Warrant
Agreement, including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses incurred in
connection with the preparation, duplication, printing, (including mailing and
handling charges) filing, delivery and mailing (including the payment of
postage, overnight delivery or courier charges with respect thereto) of the
Registration Statement and the Prospectus and any amendments and supplements
thereto and the printing, mailing (including the payment of postage, overnight
delivery or courier charges with respect thereto) and delivery of this
Agreement, the Underwriter's Warrant Agreement and agreements with selected
dealers, and related documents, including the cost of all copies thereof and of
each Preliminary Prospectus and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriter and such dealers as the
Underwriter may request, in such quantities as the Underwriter may request,
(iii) the printing, engraving, issuance and delivery of the Securities, (iv) the
qualification of the Securities under state or foreign securities or "blue sky"
laws and determination of the status of such securities under legal investment
laws, including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments
Survey," if any, and disbursements, expenses and fees of counsel in connection
therewith, (v) advertising costs and expenses, including, but not limited to
costs and expenses in connection with "road shows," information meetings and
presentations, information agent fees, bound volumes and prospectus memorabilia
and "tombstone" advertisement expenses, (vi) costs and expenses in connection
with due diligence investigations, including, but not limited to, the fees of
any independent counsel or consultants, (vii) fees and expenses of a transfer
and warrant agent and registrar for the Securities, (viii) applications for
assignments of a rating of the Securities by qualified rating agencies, (ix)
issue and transfer taxes, if any, (x) the fees payable to the Commission and the
NASD, (xi) the fees and expenses incurred in connection with the listing of the
Securities on AMEX and any other exchange and (x) legal fees (not to exceed
$75,000 taken together with such fees incurred in connection with the rights
offering described in the Registration Statement) and expenses of Underwriter's
Counsel in addition to any legal fees and expenses of Underwriter's counsel
related to blue sky laws in (iv) above.
(b) If this Agreement is terminated by the Underwriter in accordance
with the provisions of Section 6 or Section 10(a) hereof, the Company shall
reimburse and indemnify the Underwriter for all of its actual out-of-pocket
expenses, including the fees and disbursements of Underwriter's Counsel.
6. Conditions of the Underwriter's Obligations. The obligations of
the Underwriter hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date and each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date and each Option Closing Date, if
any, of the statements of officers of the Company made pursuant to the
17
<PAGE>
provisions hereof; the performance by the Company on and as of the Closing Date
and each Option Closing Date, if any, of its covenants and obligations
hereunder; and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 noon, New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Underwriter, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriter's Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the shares of Common Stock
and any price-related information previously omitted from the effective
Registration Statement pursuant to such Rule 430A shall have been transmitted to
the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Underwriter of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
(b) The Underwriter shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Underwriter's opinion, is material, or omits to state a
fact which, in the Underwriter's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances in which they were made not misleading, or that the Prospectus, or
any supplement thereto, contains an untrue statement of fact which, in the
Underwriter's opinion, is material, or omits to state a fact which, in the
Underwriter's opinion, is material and is required to be stated therein or is
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriter shall have
received from Underwriter's Counsel such opinion or opinions with respect to the
organization of the Company, the validity of the Securities, the Registration
Statement, the Prospectus and such other related matters as the Underwriter may
request and Underwriter's Counsel shall have received such papers and
information as they may request in order to enable them to pass upon such
matters.
(d) On the Closing Date, the Underwriter shall have received the
favorable opinion of Zuckerman Gore and Brandeis LLP, counsel to the Company,
dated the Closing Date, addressed to the Underwriter, in form and substance
satisfactory to Underwriter's Counsel, to the effect that:
i) Each of the Company and the Subsidiaries (A) has been duly
organized and is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation (Delaware [and ________],
respectively), (B) is duly qualified and licensed and in good standing as
a foreign corporation in each jurisdiction in which its ownership or
leasing of any properties or the character of its operations
18
<PAGE>
requires such qualification or licensing, and (C) has all requisite power
and authority (corporate and other) and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus. To the best of its
knowledge, each of the Company and the Subsidiaries is and has been doing
business in compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits obtained by it from
governmental or regulatory officials and agencies and all federal, state,
local and foreign laws, rules and regulations to which it is subject; and,
neither the Company nor the Subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect the
condition, financial or otherwise, or the earnings, prospects,
stockholders' equity, value, operations, properties, business or results
of operations of the Company or the Subsidiaries. The disclosure in the
Registration Statement concerning the effects of federal, state, local and
foreign laws, rules and regulations on the Company's and the Subsidiaries'
business as currently conducted and as contemplated are correct in all
respects and do not omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading;
ii) neither the Company nor the Subsidiaries owns, directly or
indirectly, an interest in any corporation, partnership, joint venture,
trust or other business entity, other than its subsidiaries _________ , as
described in the Registration Statement and the Prospectus. The Company is
the registered owner of one hundred percent (100%) of the outstanding
capital stock of the Subsidiaries, and all such shares have been validly
issued, are fully paid and non-assessable, were not issued in violation of
any preemptive rights, and except as set forth in the Prospectus, are
owned free and clear of any liens, charges, claims, encumbrances, pledges,
security interests, defects or other restrictions or equities of any kind
whatsoever;
iii) the Company has a duly authorized, issued and outstanding
capitalization and as set forth in the Prospectus under "Capitalization,"
and except as set forth in the Prospectus, neither the Company nor any of
the Subsidiaries is a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement and the
Underwriter's Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company
conform, or when issued and paid for, will conform, in all respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of each of the Company
and the Subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of
rescission with respect thereto and are not subject to personal liability
by reason of being such holders; and none of such securities were issued
in violation of the preemptive rights of any holders of any security of
the Company or any of the Subsidiaries or any similar contractual right
granted by the Company or any of the Subsidiaries. The Securities to be
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sold by the Company hereunder and under the Underwriter's Warrant
Agreement are not and will not be subject to any preemptive or other
similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof and
thereof, will be validly issued, fully paid and non-assessable and conform
to the descriptions thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and
sale of the Securities has been duly and validly taken; and the
certificates representing the Securities are in due and proper form. The
Underwriter's Warrants constitute valid and binding obligations of the
Company to issue and sell, upon exercise thereof and payment therefor, the
number and type of securities of the Company called for thereby. Upon the
issuance and delivery pursuant to this Agreement and the Underwriter's
Warrant Agreement of the Securities to be sold by the Company hereunder
and thereunder, the Underwriter will acquire good and marketable title to
such Securities, free and clear of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any
kind whatsoever asserted against the Company or any affiliate (within the
meaning of the Rules and Regulations) of the Company. No transfer tax is
payable by or on behalf of the Underwriter in connection with (A) the
issuance by the Company of the Securities, (B) the purchase by the
Underwriter of the Securities from the Company, (C) the consummation by
the Company of any of its obligations under this Agreement or the
Underwriter's Warrant Agreement, or (D) resales of the Securities in
connection with the distribution contemplated hereby;
iv) the Registration Statement is effective under the Act,
and, if applicable, filing of all pricing information has been timely made
in the appropriate form under Rule 430A, and no stop order suspending the
use of the Preliminary Prospectus, the Registration Statement or the
Prospectus or any part of any thereof or suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending, threatened or contemplated
under the Act;
v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements thereto
(other than the financial statements and schedules and other financial and
statistical data included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the requirements
of the Act and the Rules and Regulations;
vi) to such counsel's knowledge, (A) there are no agreements,
contracts or other documents required by the Act to be described in the
Registration Statement and the Prospectus or required to be filed as
exhibits to the Registration Statement (or required to be filed under the
Exchange Act if upon such filing they would be incorporated, in whole or
in part, by reference therein) other than those described in the
Registration Statement and the Prospectus and filed as exhibits thereto,
and the exhibits which have been filed are correct copies of the documents
of which they purport to be copies; (B) the descriptions in the
Registration Statement and the Prospectus and any supplement or amendment
thereto of agreements, contracts and other documents to which the Company
is a party or by which it is bound are accurate and fairly represent the
information required to be shown by Form S-1; (C) except as disclosed in
the
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Registration Statement and the Prospectus, there is no action, suit,
proceeding, inquiry, arbitration, investigation, litigation or
governmental proceeding (including, without limitation, those pertaining
to environmental or similar matters), domestic or foreign, pending or
threatened against (or circumstances that may give rise to the same), or
involving the properties or business of, the Company and the Subsidiaries
which (I) is required to be disclosed in the Registration Statement which
is not so disclosed (and such proceedings as are summarized in the
Registration Statement are accurately summarized in all respects), or (II)
questions the validity of the capital stock of the Company or of this
Agreement or the Underwriter's Warrant Agreement or of any action taken or
to be taken by the Company pursuant to or in connection with any of the
foregoing; (D) no statute or regulation or legal or governmental
proceeding required to be described in the Prospectus is not described as
required; and (E) there is no action, suit or proceeding pending or
threatened against or affecting the Company before any court, arbitrator
or governmental body, agency or official (or any basis thereof known to
such counsel) in which there is a reasonable possibility of an adverse
decision which may result in a material adverse change in the condition,
financial or otherwise, or the earnings, prospects, stockholders' equity,
value, operation, properties, business or results of operations of the
Company taken as a whole, which could adversely affect the present or
prospective ability of the Company to perform its obligations under this
Agreement or the Underwriter's Warrant Agreement or which in any manner
draws into question the validity or enforceability of this Agreement or
the Underwriter's Warrant Agreement;
vii) the Company has full legal right, power and authority to
enter into each of this Agreement and the Underwriter's Warrant Agreement
and to consummate the transactions provided for herein and therein; and
each of this Agreement and the Underwriter's Warrant Agreement has been
duly authorized, executed and delivered by the Company. Each of this
Agreement and the Underwriter's Warrant Agreement, assuming due
authorization, execution and delivery by each other party thereto,
constitutes a legal, valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating
to or affecting the enforcement of creditors' rights and the application
of equitable principles in any action, legal or equitable, and except as
obligations to indemnify or contribute to losses may be limited by
applicable law). None of the Company's execution or delivery of this
Agreement and the Underwriter's Warrant Agreement, its performance
hereunder and thereunder, its consummation of the transactions
contemplated herein and therein, or the conduct of its business as
described in the Registration Statement and the Prospectus and any
amendments or supplements thereto, conflicts with or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or
result in the creation or imposition of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company or any of the Subsidiaries pursuant to the
terms of (A) the certificate of incorporation or bylaws of the Company or
any of the Subsidiaries, (B) any license, contract, indenture, mortgage,
lease, deed of trust, voting trust agreement, stockholders' agreement,
note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed
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money, or any other agreement or instrument to which the Company or any of
the Subsidiaries is a party or by which any is or may be bound or to which
the properties or assets (tangible or intangible) of either are or may be
subject, (C) any statute applicable to the Company or any of the
Subsidiaries or (D) any judgment, decree, order, rule or regulation
applicable to the Company or any of the Subsidiaries of any arbitrator,
court, regulatory body or administrative agency or other governmental
agency or body (including, without limitation, those having jurisdiction
over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of the Subsidiaries or any of their
activities or properties;
viii) no consent, approval, authorization or order of, and no
filing with, any arbitrator, court, regulatory body, administrative
agency, government agency or other body, domestic or foreign (other than
such as may be required under "blue sky" laws and the rules of the NASD,
as to which no opinion need be rendered), is required in connection with
the issuance of the Securities pursuant to the Prospectus, the
Registration Statement, this Agreement and the Underwriter's Warrant
Agreement, or the performance of this Agreement and the Underwriter's
Warrant Agreement and the transactions contemplated hereby and thereby;
ix) the properties and business of each of the Company and the
Subsidiaries conform to the description thereof contained in the
Registration Statement and the Prospectus; and each of the Company and the
Subsidiaries has good and marketable title to, or valid and enforceable
leasehold estates in, all items of real and personal property stated in
the Prospectus to be owned or leased by it, in each case free and clear of
all liens, charges, claims, encumbrances, pledges, security interests,
defects or other restrictions or equities of any kind whatsoever, other
than those referred to in the Prospectus and liens for taxes not yet due
and payable;
x) to the best of such counsel's knowledge, neither the
Company nor any of the Subsidiaries is in breach of, or in default under,
any term or provision of any license, contract, indenture, mortgage,
lease, deed of trust, voting trust agreement, stockholders' agreement,
note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company or any of the Subsidiaries is a party or
by which it is or may be bound or to which its property or assets
(tangible or intangible) are or may be subject; and none of the Company or
any of the Subsidiaries is in violation of any term or provision of (A)
its certificate of incorporation or by-laws, (B) any authorization,
approval, order, license, certificate, franchise or permit of any
governmental or regulatory official or body, or (C) any judgement, decree,
order, statute, rule or regulation to which it is subject;
xi) the statements in the Prospectus under "Prospectus
Summary," "Risk Factors," "The Company," "Business," "Management,"
"Principal Stockholders," "Certain Transactions," "Shares Eligible For
Future Sale," and "Description of Capital Stock" have been reviewed by
such counsel, and insofar as they refer to statements of law, descriptions
of statutes, licenses, rules or regulations or legal conclusions, are
correct in all material respects;
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<PAGE>
xii) to the best of our knowledge, the Company meets all the
maintenance requirements for continued quotation on AMEX and has complied
with all reporting obligations under the Exchange Act;
xiii) each of the Company and the Subsidiaries owns or
possesses, free and clear of all liens or encumbrances and right thereto
or therein by third parties, the requisite licenses or other rights to use
all trademarks, service marks, copyrights, service names, tradenames,
patents, patent applications and licenses necessary to conduct its
business (including without limitation any such licenses or rights
described in the Prospectus as being owned or possessed by the Company or
any of the Subsidiaries) and there is no claim or action by any person
pertaining to, or proceeding, pending or threatened, which challenges the
rights of the Company or any of the Subsidiaries with respect to any
trademarks, service marks, copyrights, service names, trade names,
patents, patent applications and licenses used in the conduct of the
Company's or any of the Subsidiaries' business (including, without
limitation, any such licenses or rights described in the Prospectus as
being owned or possessed by the Company or any of the Subsidiaries);
xiv) the persons listed under the captions "Principal
Stockholders" and in the Prospectus are the respective "beneficial owners"
(as such phrase is defined in Rule 13d-3 under the Exchange Act) of the
securities set forth opposite their respective names thereunder as and to
the extent set forth therein;
xv) except as disclosed in the Prospectus, no person,
corporation, trust, partnership, association or other entity has the right
to include and/or register any securities of the Company or any of the
Subsidiaries in the Registration Statement, require the Company to file
any registration statement or, if filed, to include any security in such
registration statement; and
xvi) there are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities
hereunder or financial consulting arrangement or any other arrangements,
agreements, understandings, payments or issuances that may affect the
Underwriter's compensation, as determined by the NASD.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company and each of
the Subsidiaries and representatives of the independent public accountants for
the Company, at which conferences such counsel made inquiries of such officers,
representatives and accountants and discussed the contents of the Preliminary
Prospectus, the Registration Statement, the Prospectus and related matters and,
although such counsel is not passing upon and does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement or the Prospectus, on the
basis of the foregoing, no facts have come to the attention of such counsel
which lead them to believe that either the Registration Statement or any
amendment thereto, at the time such Registration Statement or amendment became
effective, or the Preliminary Prospectus or the Prospectus, or any amendment or
supplement thereto, as of the date of the Preliminary Prospectus and the
Prospectus, and as of the
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<PAGE>
date of such opinion, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading (it being understood that such counsel need express no
opinion with respect to the financial statements and schedules and other
financial and statistical data included in the Preliminary Prospectus, the
Registration Statement or the Prospectus, or any supplements or amendments
thereto).
In rendering such opinion, such counsel may rely (a) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriter's Counsel) of
other counsel acceptable to Underwriter's Counsel, familiar with the applicable
laws; and (b) as to matters of fact, to the extent they deem proper, on
certificates and written statements of responsible officers of the Company or
the Subsidiaries and certificates or other written statements of officers of
departments of jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company or the Subsidiaries,
provided that copies of any such statements or certificates shall be delivered
to Underwriter's Counsel, if requested. The opinion of such counsel for the
Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and that the Underwriter and they are justified in
relying thereon. Such opinion shall also state that the Underwriters' Counsel is
entitled to rely thereon. Such opinion shall not state that it is to be governed
or qualified by, or that it is otherwise subject to, any treatise, written
policy or other document relating to legal opinions, including without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991)
or any comparable state accord.
(e) At each Option Closing Date, if any, the Underwriter shall have
received the favorable opinion of Zuckerman Gore & Brandeis LLP, counsel to the
Company, dated the relevant Option Closing Date, addressed to the Underwriter,
and in form and substance satisfactory to Underwriter's Counsel confirming as of
the Option Closing Date, the statements made by Zuckerman Gore & Brandeis LLP,
in its opinion delivered on the Closing Date.
(f) On or prior to each of the Closing Date and each Option Closing
Date, if any, Underwriter's Counsel shall have been furnished with such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
Section 6(g) hereof, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company herein contained.
(g) Prior to the Closing Date and each Option Closing Date, if any,
(i) there shall have been no material adverse change or development involving a
prospective adverse change in the condition, financial or otherwise, or the
earnings, stockholders' equity, value, operations, properties, business or
results of operations of the Company or any of the Subsidiaries, whether or not
in the ordinary course of business, from the latest dates as of which such
matters are set forth in the Registration Statement and the Prospectus; (ii)
there shall have been no transaction, not in the ordinary course of business,
entered into by the Company or any of the Subsidiaries from the latest date as
of which the financial condition of the Company and the Subsidiaries is set
forth in the Registration Statement and the Prospectus; (iii) neither the
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Company nor any of the Subsidiaries shall be in default under any provision of
any instrument relating to any outstanding indebtedness; (iv) neither the
Company nor any of the Subsidiaries shall have issued any securities (other than
the Securities) or declared or paid any dividend or made any distribution in
respect of its capital stock of any class and there shall not have been any
change in the capital stock, debt (long or short term) or liabilities or
obligations of the Company or any of the Subsidiaries (contingent or otherwise)
from the latest dates as of which such matters are set forth in the Registration
Statement and the Prospectus; (v) no material amount of the assets of the
Company or any of the Subsidiaries shall have been pledged or mortgaged, except
as set forth in the Registration Statement and the Prospectus; (vi) no action,
suit, proceeding, inquiry, arbitration, investigation, litigation or
governmental or other proceeding, domestic or foreign, shall be pending or
threatened (or circumstances giving rise to same) against the Company or any of
the Subsidiaries or affecting any of its properties or business before or by any
court or federal, state or foreign commission, board or other administrative
agency wherein an unfavorable decision, ruling or finding may materially and
adversely affect the condition, financial or otherwise, or the earnings,
stockholders' equity, value, operations, properties, business or results of
operations of the Company and the Subsidiaries taken as a whole, except as set
forth in the Registration Statement and Prospectus; and (vii) no stop order
shall have been issued under the Act with respect to the Registration Statement
and no proceedings therefor shall have been initiated, threatened or
contemplated by the Commission.
(h) At the Closing Date and each Option Closing Date, if any, the
Underwriter shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or the relevant Option Closing
Date, as the case may be, to the effect that each of such persons has carefully
examined the Registration Statement, the Prospectus and this Agreement, and
that:
i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date
or the Option Closing Date, as the case may be, and the Company has
complied with all agreements and covenants and satisfied all conditions
contained in this Agreement on its part to be performed or satisfied at or
prior to such Closing Date or Option Closing Date, as the case may be;
ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or, to
the best of each of such person's knowledge, are contemplated or
threatened under the Act;
iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto contain all statements and
information required to be included therein, and none of the Registration
Statement, the Prospectus or any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading and neither the Preliminary Prospectus nor any supplement
thereto included any untrue statement of a material fact or omitted to
state any material fact required to be stated
25
<PAGE>
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; and
iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (A) neither the
Company nor any of the Subsidiaries has incurred any material liabilities
or obligations, direct or contingent; (B) neither the Company nor any of
the Subsidiaries has not paid or declared any dividends or other
distributions on its capital stock; (C) neither the Company nor any of the
Subsidiaries has entered into any transactions not in the ordinary course
of business; (D) there has not been any change in the capital stock or
long-term debt or any increase in the short-term borrowings (other than
any increase in short-term borrowings in the ordinary course of business)
of the Company (E) neither the Company nor any of the Subsidiaries has
sustained any material loss or damage to its property or assets, whether
or not insured; (F) there is no litigation which is pending or threatened
(or circumstances giving rise to same) against the Company or any
affiliate (within the meaning of the Rules and Regulations) of the
foregoing which is required to be set forth in an amended or supplemented
Prospectus which has not been set forth; and (G) there has occurred no
event required to be set forth in an amended or supplemented Prospectus
which has not been set forth.
References to the Registration Statement and the Prospectus in this
Section 6(h) are to such documents as amended and supplemented at the date of
such certificate.
(i) By the Closing Date, the Underwriter will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriter, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriter shall
have received a letter, dated such date, addressed to the Underwriter and in
form and substance satisfactory in all respects (including the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
to the Underwriter and Underwriter's Counsel, from Grant Thornton LLP.
i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and
the Rules and Regulations;
ii) stating that it is their opinion that the financial
statements of the Company included in the Registration Statement comply as
to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations and that the
Underwriter may rely upon the opinion of Grant Thornton LLP with respect
to such financial statements and supporting schedules included in the
Registration Statement;
iii) stating that, on the basis of a limited review which
included a reading of the latest unaudited interim consolidated financial
statements of the Company and the Subsidiaries, a reading of the latest
available minutes of the stockholders and
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board of directors and the various committees of the board of directors of
the Company and the Subsidiaries, consultations with officers and other
employees of the Company and the Subsidiaries responsible for financial
and accounting matters and other specified procedures and inquiries,
nothing has come to their attention which would lead them to believe that
(A) the unaudited consolidated financial statements and supporting
schedules of the Company included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
consolidated financial statements of the Company included in the
Registration Statement, or (B) at a specified date nor more than five (5)
days prior to the effective date of the Registration Statement, there has
been any change in the capital stock or long-term debt of the Company and
the Subsidiaries, or any decrease in the stockholders' equity or net
current assets or net assets of the Company and the Subsidiaries as
compared with amounts shown in the September 30, 1999 balance sheet
included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any change or
decrease, setting forth the amount of such change or decrease, and (C)
during the period from September 30, 1999 to a specified date not more
than five (5) days prior to the effective date of the Registration
Statement, there was any decrease in net revenues, net earnings or net
earnings per share of Common Stock, in each case as compared with the
corresponding period beginning September 30, 1998, other than as set forth
in or contemplated by the Registration Statement, or, if there was any
such decrease, setting forth the amount of such decrease;
iv) setting forth, at a date not later than five (5) days
prior to the effective date of the Registration Statement, the amount of
liabilities of the Company and the Subsidiaries (including a break-down of
commercial paper and notes payable to banks);
v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company and the Subsidiaries
set forth in the Prospectus, in each case to the extent that such amounts,
numbers, percentages, statements and information may be derived from the
general accounting records, including work sheets, of the Company and the
Subsidiaries and excluding any questions requiring an interpretation by
legal counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do
not constitute an audit in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement; and
vi) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriter may request.
(k) At the Closing Date and each Option Closing Date, if any, the
Underwriter shall have received from Grant Thornton LLP a letter, dated as of
the Closing Date or the relevant Option Closing Date, as the case may be, to the
effect that (i) it reaffirms the statements made in the letter furnished
pursuant to Section 6(j), (ii) if the Company has elected to rely on
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Rule 430A of the Rules and Regulations, to the further effect that Grant
Thornton LLP has carried out procedures as specified in clause (v) of Section
6(j) hereof with respect to certain amounts, percentages and financial
information as specified by the Underwriter and deemed to be a part of the
Registration Statement pursuant to Rule 430A(b) and have found such amounts,
percentages and financial information to be in agreement with the records
specified in such clause (v).
(l) The Company shall have received a letter, dated such date,
addressed to the Company, in form and substance satisfactory in all respects to
the Underwriter, from Grant Thornton LLP stating that they have not during the
immediately preceding five (5) year period brought to the attention of the
Company's management any "weakness," as defined in Statement of Auditing
Standard No. 60 "Communication of Internal Control Structure Related Matters
Noted in an Audit," in any of the Company's internal controls.
(m) On each of Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Underwriter the appropriate number of
Securities.
(n) No order suspending the sale of the Securities in any
jurisdiction designated by the Underwriter pursuant to Section 4(e) hereof shall
have been issued on either the Closing Date or the Option Closing Date, if any,
and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(o) On or before the effective date of the Registration Statement,
the Company shall have executed and delivered to the Underwriter, the
Underwriter's Warrant Agreement, substantially in the form filed as Exhibit ____
to the Registration Statement. On or before the Closing Date, the Company shall
have executed and delivered to the Underwriter the Underwriter's Warrants in
such denominations and to such designees as shall have been provided to the
Company.
(p) On or before Closing Date, the Common Stock shall be in good
standing with respect to its continued listing on AMEX.
(q) At least two (2) full business days prior to the date hereof,
the Closing Date and each Option Closing Date, if any, the Company shall have
delivered to the Underwriter the unaudited interim consolidated financial
statements required to be so delivered pursuant to Section 4(n) of this
Agreement.
If any condition to the Underwriter's or the Underwriter's
obligations hereunder to be fulfilled prior to or at the Closing Date or at any
Option Closing Date, as the case may be, is not so fulfilled, the Underwriter
may terminate this Agreement or, if the Underwriter so elects, it may waive any
such conditions which have not been fulfilled or extend the time for their
fulfillment.
7. Indemnification
(a) The Company agrees to indemnify and hold harmless each
Underwriter (for purposes of this Section 7, "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
and each person, if any, who controls the
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Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries and suits in respect thereof), whatsoever
(including but not limited to any and all costs and expenses whatsoever
reasonably incurred in investigating, preparing or defending against such
action, proceeding, investigation, inquiry or suit commenced or threatened, or
any claim whatsoever), as such are incurred, to which the Underwriter or such
controlling person may become subject under the Act, the Exchange Act or any
other statute or at common law or otherwise or under the laws of foreign
countries, arising out of or based upon (A) any untrue statement or alleged
untrue statement of a material fact contained (i) in any Preliminary Prospectus,
the Registration Statement or the Prospectus (as from time to time amended and
supplemented); (ii) in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included securities of the
Company issued or issuable upon exercise of the Securities; or (iii) in any
application or other document or written communication (in this Section 7,
collectively referred to as "applications") executed by the Company or based
upon written information furnished by the Company filed, delivered or used in
any jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
the NASD, AMEX or any securities exchange; (B) the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading (in the case of the Prospectus, in light
of the circumstances in which they were made); or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or any Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be. The indemnity agreement in
this Section 7(a) shall be in addition to any liability which the Company may
have at common law or otherwise.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Act, to the same extent as the foregoing indemnity from the Company to
the Underwriter but only with respect to statements or omissions, if any, made
in any Preliminary Prospectus, the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto or in any application made in
reliance upon, and in strict conformity with, written information furnished to
the Company with respect to any Underwriter by such Underwriter expressly for
use in such Preliminary Prospectus, the Registration Statement or Prospectus or
any amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or the Prospectus directly
relating to the transactions effected by the Underwriter in connection with the
offering contemplated hereby. The Company acknowledges that the statements with
respect to the public offering of the Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriter expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriter for
inclusion in any Preliminary Prospectus, the Registration Statement or the
Prospectus. The indemnity agreement
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in this Section 7(b) shall be in addition to any liability which the Underwriter
may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 7, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure to so notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 (except to the extent that it
has been prejudiced in any material respect by such failure) or from any
liability which it may have otherwise). In case any such action, investigation,
inquiry, suit or proceeding is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it or they may elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, an indemnified party shall
have the right to employ its own counsel in any such case but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the employment of such counsel shall have been authorized in writing
by the indemnifying parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party shall have
reasonably concluded that there may be defenses available to it which are
different from or additional to those available to one or all of the
indemnifying parties (in which event the indemnifying parties shall not have the
right to direct the defense of such action, investigation, inquiry, suit or
proceeding on behalf of the indemnified party or parties), in any of which
events such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action, investigation, inquiry, suit or proceeding or separate but
similar or related actions, investigations, inquiries, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances. An indemnifying party will not, without the prior written consent
of the indemnified parties, settle, compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action), unless such settlement, compromise or consent
(i) includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party. Anything in this Section 7 to
the contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent may not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes a claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent
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jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Section 7 provide
for indemnification in such case, or (ii) contribution under the Act may be
required on the part of any indemnified party, then each indemnifying party
shall contribute to the amount paid as a result of such losses, claims, damages,
expenses or liabilities (or actions, investigations, inquiries, suits or
proceedings in respect thereof) (A) in such proportion as is appropriate to
reflect the relative benefits received by each of the contributing parties, on
the one hand, and the party to be indemnified, on the other hand, from the
offering of the Securities or (B) if the allocation provided by clause (A) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (A) above but also
the relative fault of each of the contributing parties, on the one hand, and the
party to be indemnified, on the other hand, in connection with the statements or
omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. In any case
where the Company is a contributing party and the Underwriter is the indemnified
party, the relative benefits received by the Company, on the one hand, and the
Underwriter, on the other, shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Securities (before deducting
expenses) bear to the total underwriting discounts received by the Underwriter
hereunder, in each case as set forth in the table on the cover page of the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriter, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages, expenses or liabilities (or actions,
investigations, inquiries, suits or proceedings in respect thereof) referred to
in the first (1st) sentence of this Section 7(d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action, claim,
investigation, inquiry suit or proceeding. Notwithstanding the provisions of
this Section 7(d), the Underwriter shall not be required to contribute any
amount in excess of the underwriting discount applicable to the Securities
purchased by the Underwriter hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 12(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7(d), each person, if any, who
controls the Company or the Underwriter within the meaning of the Act, each
officer of the Company who has signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company or the Underwriter, as the case may be, subject in each case to this
Section 7(d). Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit, inquiry, investigation or
proceeding, against such party in respect to which a claim for contribution may
be made against another party or parties under this Section 7(d), notify such
party or parties from whom contribution may be sought, but the omission to so
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this Section 7(d), or to the extent that such party or
parties were not adversely affected by such omission. Notwithstanding anything
in this Section 7 to the contrary, no party will be liable for contribution with
respect to the settlement of any action or claim
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<PAGE>
effected without its written consent. The contribution agreement set forth above
shall be in addition to any liabilities which any indemnifying party may have at
common law or otherwise.
8. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company contained in this Agreement, or contained in certificates of officers of
the Company submitted pursuant hereto, shall be deemed to be representations,
warranties, covenants and agreements at the Closing Date and each Option Closing
Date, if any, and such representations, warranties, covenants and agreements of
the Company, and the respective indemnity and contribution agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter, the
Company, any controlling person of any Underwriter or the Company, and shall
survive the termination of this Agreement or the issuance and delivery of the
Securities to the Underwriter.
9. Effective Date. This Agreement shall become effective at 10:00
a.m., New York City time, on the next full business day following the date
hereof, or at such earlier time after the Registration Statement becomes
effective as the Underwriter, in its discretion, shall release the Securities
for sale to the public; provided, however, that the provisions of Sections 5, 7
and 10 of this Agreement shall at all times be effective. For purposes of this
Section 9, the Securities to be purchased hereunder shall be deemed to have been
so released upon the earlier of dispatch by the Underwriter of telegrams to
securities dealers releasing such shares for offering or the release by the
Underwriter for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. Termination.
(a) Subject to Section 10(b) hereof, the Underwriter shall have the
right to terminate this Agreement: (i) if any domestic or international event or
act or occurrence has materially adversely disrupted, or in the Underwriter's
opinion will in the immediate future materially adversely disrupt, the financial
markets; or (ii) if any material adverse change in the financial markets shall
have occurred; or (iii) if trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, AMEX, the Nasdaq Stock Market, the NASD, the Boston Stock Exchange,
the Commission or any governmental authority having jurisdiction over such
matters; or (iv) if trading of any of the securities of the Company shall have
been suspended, or if any of the securities of the Company shall have been
delisted, on any exchange or in any over-the-counter market; or (v) if the
United States shall have become involved in a war or major hostilities, or if
there shall have been an escalation in an existing war or major hostilities, or
a national emergency shall have been declared in the United States; or (vi) if a
banking moratorium shall have been declared by any state or federal authority;
or (vii) if the Company shall have sustained a material or substantial loss by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in the Underwriter's opinion, make it inadvisable to proceed with the delivery
of the Securities; or (ix) if there shall have occurred any outbreak or
escalation of hostilities or any calamity or crisis or there shall have been
such a material adverse change in the conditions or prospects of the Company, or
if there shall have been such a material adverse change in the general market,
political or economic
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<PAGE>
conditions, in the United States or elsewhere, as in the Underwriter's judgment
would make it inadvisable to proceed with the offering, sale and/or delivery of
the Securities.
(b) If this Agreement is terminated by the Underwriter in accordance
with the provisions of Section 6 or Section 10(a) hereof the Company shall
promptly reimburse and indemnify the Underwriter for all its actual
out-of-pocket expenses, including the fees and disbursements of Underwriter's
Counsel, less amounts previously paid pursuant to Section 5(c) hereof. In
addition, the Company shall remain liable for all "blue sky" counsel fees and
expenses and "blue sky" filing fees. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections 6 and 10(a)
hereof), and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 and Section 7 shall not be in any way be affected by
such election or termination or failure to carry out the terms of this Agreement
or any part hereof.
11. Default by the Company. If the Company shall fail at the Closing
Date or any Option Closing Date, as applicable, to sell and deliver the number
of Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Shares to be purchased on an Option Closing Date, the Underwriter may, at
its option, by notice from the Underwriter to the Company, terminate the
Underwriter's obligation to purchase Option Shares from the Company on such
date) without any liability on the part of any non-defaulting party other than
pursuant to Section 5, Section 7 and Section 10 hereof. No action taken pursuant
to this Section 11 shall relieve the Company from liability, if any, in respect
of such default.
12. Notices. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriter shall be directed to the
Underwriter at H.C. Wainwright & Co., Inc., 245 Park Avenue, 44th Floor, New
York, New York 10167, Attention: Mr. Scott Weisman, with a copy to Orrick,
Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, New York 10103,
Attention: Rubi Finkelstein, Esq. Notices to the Company shall be directed to
the Company at Riddell Sports, Inc., 50 East 42nd Street, Suite 1808, New York,
New York 10017, Attention: Mr. David Mauer, with a copy to, Zuckerman Gore &
Brandeis LLP, 900 Third Avenue, 8th Floor, New York, New York 10022, Attention:
Clifford A. Brandeis, Esq.
13. Parties. This Agreement shall inure solely to the benefit of,
and shall be binding upon, the Underwriter, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Shares from the Underwriter shall be deemed to be a
successor by reason merely of such purchase.
14. Construction. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York, without
giving effect to choice of law or conflict of laws principles.
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<PAGE>
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
16. Entire Agreement; Amendments. This Agreement and the
Underwriter's Warrant Agreement constitute the entire agreement of the parties
hereto and supersede all prior written or oral agreements, understandings and
negotiations with respect to the subject matter hereof and thereof. This
Agreement may not be amended except in a writing signed by the Underwriter and
the Company.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
RIDDELL SPORTS, INC.
By:___________________________________
Name:
Title:
Confirmed and accepted as of the date first above written.
H.C. WAINWRIGHT & CO., INC.
By:________________________
Name:
Title:
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OH&S DRAFT 12/14/99
[FORM OF SOLICITATION AGENT AGREEMENT]
SOLICITATION AGENT AGREEMENT
January __, 2000
H.C. WAINWRIGHT & CO., INC.,
as Solicitation Agent
245 Park Avenue, 44th Floor
New York, New York 10167
Ladies and Gentlemen:
Riddell Sports, Inc. (the "Company") plans to issue to holders of its
common stock, par value $0.01 per share (the "Common Stock"), as of December __,
1999 (the "Record Date") rights (the "Rights") to purchase shares (the "Shares")
of Common Stock and a common stock purchase warrant (the "Warrants") to
purchase, if certain conditions are met, common stock from the Company of a new
or existing subsidiary that conducts substantially all of the Company's Internet
operations (the "Rights Offering"). The Rights Offering is being made upon the
terms and subject to the conditions set forth in the Prospectus and the
Subscription Certificate attached hereto as Exhibit A (collectively, the
"Solicitation Documents"). The Shares and the Warrants are collectively
sometimes referred to herein as the "Securities."
The Company hereby appoints H.C. Wainwright & Co., Inc. ("Wainwright")
as solicitation agent (the "Solicitation Agent") in connection with the Rights
Offering and authorizes the Solicitation Agent to act on its behalf in
accordance with this agreement (the "Agreement") and the terms of the
Solicitation Documents, which Solicitation Documents have been approved by the
Company and which the Solicitation Agent is authorized to use in connection with
the solicitation (the "Solicitation") to exercise the Rights. The Solicitation
Agent agrees to furnish no written material to holders in connection with the
Solicitation other than the Solicitation Documents.
1. Solicitation of Subscriptions.
(a) The Solicitation Agent will use its best efforts to solicit
the exercise of the Rights. The Solicitation Agent shall have no liability to
the Company hereunder or for any act or omission except for the gross negligence
or willful misconduct of the Solicitation Agent.
(b) The Company will not use or publish any material in connection
with the Solicitation, or refer to the Solicitation Agent in any such material,
without first obtaining the written consent of the Solicitation Agent. The
Company will promptly inform the Solicitation Agent of any events known to the
Company that might require any change in the Solicitation Documents. The Company
will promptly inform the Solicitation Agent of any litigation or administrative
action known to the Company with respect to the Solicitation.
<PAGE>
(c) The Company agrees to furnish to the Solicitation Agent, to
the extent the same is available to the Company, the names and addresses of, and
the number of shares of Common Stock held by, the registered holders and
beneficial owners of the Common Stock or interests therein as of the Record
Date. The Solicitation Agent will use such information only in connection with
the Solicitation and will not furnish such information to any other person
except in connection with the Solicitation.
2. Compensation and Expenses.
(a) The Company shall pay to Wainwright, as compensation for its
services as Solicitation Agent, an advisory fee equal to three percent (3%) of
the gross proceeds received by the Company upon exercise of the Rights
(including, without limitaton, the exercise of rights from any standby group).
Separately, Wainwright may receive, for its services as Underwriter pursuant to
the Underwriting Agreement that may be executed between the parties on a
separate date, certain additional compensation to be set forth therein.
(b) Whether or not any Securities are purchased pursuant to the
Solicitation, the Company shall pay all expenses in connection with the
Solicitation. Such expenses shall include, but not be limited to the following:
the preparation, printing, duplicating, postage and mailing expenses related to
the Solicitation Documents and otherwise; registrar, subscription, information
and transfer agent fees; all filing fees for the Solicitation Documents;
advertising costs and expenses; "road show" and information meetings and
presentations; bound volumes and prospectus memorabilia costs; fees and expense
of its own counsel and accountants; issue and transfer taxes, if any, and all
other expenses in connection with the Solicitation. The expenses paid by the
Company shall also include Wainwright's actual out-of-pocket expenses, legal
fees (such legal fees not to exceed $75,000 taken together with such fees
incurred in connection with the concurrent offering described in the
Registration Statement (defined below)) and expenses of Wainwright's counsel and
"Blue Sky" legal fees and expenses. Wainwright's counsel shall perform the
required "Blue Sky" legal services for the Company's account. In this connection
Blue Sky applications, to the extent required, shall be made in such states and
jurisdictions as shall be requested by Wainwright.
3. Representations and Warranties of the Company.
The Company represents and warrants to the Solicitation Agent as
follows:
(a) The Company is validly existing as a Delaware corporation in
good standing under the laws of the State of Delaware.
(b) The Company has duly taken all necessary corporate action to
authorize the making of the Solicitation and the execution, delivery and
performance of this Agreement; and this Agreement has been duly executed and
delivered by the Company.
(c) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and amendments
thereto, on Form S-1 (Registration No. 333-______________), including any
related preliminary prospectus or prospectuses (each a "Preliminary
Prospectus"), for the registration of the Securities, under the Securities Act
of 1933, as amended (the "Securities Act"), which registration statement and
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<PAGE>
amendment or amendments have been prepared by the Company in conformity with the
requirements of the Securities Act, and the rules and regulations of the
Commission under the Securities Act. The Company will not file any other
amendment to such registration statement which the Underwriter shall have
objected to in writing after having been furnished with a copy thereof. Except
as the context may otherwise require, such registration statement, as amended,
on file with the Commission at the time it becomes effective (including the
prospectus, financial statements, schedules, exhibits and all other documents
filed as a part thereof or incorporated therein (including, but not limited to,
those documents or that information incorporated by reference therein) and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430A of the rules and regulations under the Securities Act), is
hereinafter called the "Registration Statement," and the form of prospectus in
the form first filed with the Commission pursuant to Rule 424(b) of the rules
and regulations under the Securities Act is hereinafter called the "Prospectus."
For purposes hereof, "Rules and Regulations" mean the rules and regulations
adopted by the Commission under either the Act or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as applicable
(d) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or the Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or threatened. Each of the Preliminary Prospectus, the Registration Statement
and the Prospectus, at the respective times of filing thereof, conformed with
the requirements of the Act and the Rules and Regulations. The Solicitation
Documents do not and (as amended or supplemented, if amended or supplemented)
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made, in the light of the circumstances under which they were made,
not misleading.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Securities" and will, at the time set forth therein, have the
adjusted capitalization set forth therein based upon the assumptions set forth
therein, and the Company is not a party to or bound by any instrument, agreement
or other arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement as described in
the Prospectus. The Securities and all other securities issued or issuable by
the Company conform or, when issued and paid for, will conform, in all respects
to all statements with respect thereto contained in the Registration Statement
and the Prospectus. All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and non-assessable
and the holders thereof have no rights of rescission with respect thereto, and
are not subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of any
holders of any security of the Company or similar contractual rights granted by
the Company. The Securities to be sold by the Company hereunder are not and will
not be subject to any preemptive or other similar rights of any stockholder,
have been duly authorized and, when issued, paid for and delivered in accordance
with the terms hereof, will be validly issued, fully paid and non-assessable and
will conform to the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and sale of
the
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Securities has been duly and validly taken; and the certificates representing
the Securities will be in due and proper form.
(f) The making and consummation of the Solicitation and the
execution, delivery and performance by the Company of this Agreement do not and
will not conflict with, or result in the acceleration of any obligation under or
in a breach of, or constitute a default under, any of the provisions of any
material resolution, indenture, loan agreement or mortgage to which the Company
is a party or by which it is bound or to which any material part of its property
or assets is subject, and do not and will not contravene in any material
respect, any Federal, state or local law, rule or regulation known to the
Company, or any order applicable to the Company of any court or of any other
governmental agency or instrumentality having jurisdiction over it or any
material part of its property.
4. Certain Representations and Warranties by the Solicitation Agent.
The Solicitation Agent represents and warrants to the Company
that:
(a) All actions taken by it as Solicitation Agent will comply in
all material respects with all applicable laws, regulations and rules of the
United States, including, without limitation, the applicable rules and
regulations of the registered national securities exchanges of which the
Solicitation Agent is a member, the National Association of Securities Dealers,
Inc. and state securities laws.
(b) During the period of the Solicitation, none of the
Solicitation Agent nor any of its affiliates shall effect any transactions in
the Securities listed on the cover page of the Prospectus related to the
Solicitation, for the purpose of creating actual, or apparent, active trading
in, or raising or depressing the price of, the Securities.
5. Conditions of Obligation.
The obligation to act as Solicitation Agent hereunder shall at all
times be subject, in its discretion, to the conditions that:
(a) All representations, warranties and other statements of the
Company contained herein are now, and at all times during the Solicitation will
be, true and correct in all material respects.
(b) The Company at all times during the Solicitation shall have
performed all of its material obligations hereunder and theretofore required to
have been performed
(c) The Registration Statement shall be declared effective by the
Commission.
(d) Zuckerman, Gore & Brandeis LLP, legal counsel to the Company,
shall have furnished to the Solicitation Agent, concurrently with the execution
of this Agreement, an opinion, dated the date hereof, substantially in the form
of Exhibit B hereto.
6. Indemnification.
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(a) The Company agrees to indemnify and hold harmless the
Solicitation Agent and any person, if any, who controls the Solicitation Agent
within the meaning of Section 20 of the Securities Exchange Act of 1934, as
amended, or Section 15 of the Securities Act from and against any and all
claims, damages, losses, liabilities, costs or expenses (including attorneys'
fees) to which the Solicitation Agent may become subject by reason of or in
connection with (i) the Solicitation, (ii) the execution and delivery of this
Agreement or the performance, or failure to perform, by the Solicitation Agent
of its obligations hereunder, (iii) any breach by the Company of any warranty,
covenant, term or condition in, or the occurrence of any default under, this
Agreement, and (iv) any untrue statement or alleged untrue statement of a
material fact in the Solicitation Documents or the omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (v) any other event or transaction
contemplated by any of the foregoing; provided, however, the Solicitation Agent
shall not be indemnified for any claims, damages, losses, liabilities, costs or
expenses (i) caused by an untrue statement of a material fact or omission to
state a material fact by the Solicitation Agent or such controlling person of
the Solicitation Agent and (ii) to the extent, but only to the extent, caused by
the willful misconduct or gross negligence of the Solicitation Agent.
(b) The Company agrees to assume the defense of any action against
the Solicitation Agent based upon allegations of any such loss, claim, damage,
liability or action, including the retaining of counsel satisfactory to the
Solicitation Agent and the payment of counsel fees and all other expenses
relating to such defense; provided, however, that the Solicitation Agent may
retain separate counsel in any such action and may participate in the defense
thereof at the expense of the Solicitation Agent; and provided further, that if
the Solicitation Agent shall have been advised by counsel that there may be
legal defenses available to the Solicitation Agent which are different from or
additional to those available to the Company, then the Company shall not have
the right to assume the defense of the action on behalf of such Solicitation
Agent, and in such event the said fees and expenses of the Solicitation Agent in
defending such action shall be borne by the Company. The indemnity agreement
contained in Section 6(a) hereof will be in addition to any liability which the
Company may otherwise have.
Promptly after receipt by any indemnified party under this
Agreement of notice of the commencement of any action, suit or proceeding, such
party will, if a claim in respect thereof is to be made against the Company,
notify the Company of the commencement thereof, but the omission to notify the
Company will not relieve the Company from any liability which it may have to the
indemnified party.
(c) In order to provide for just and equitable contribution in any
case in which (a) the Solicitation Agent (or any person who controls the
Solicitation Agent within the meaning of Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended) would otherwise
be entitled to indemnification pursuant to Section 6(a) hereof but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that Section 6(a) provides for indemnification in such
case or (b) contribution may be required on the part of the Solicitation Agent
or any such controlling person in circumstances for which indemnification is
5
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provided under Section 6(a); in each such case, the Company and the Solicitation
Agent shall contribute to the amount paid as a result of such losses, claims,
expenses, damages or liabilities (or actions in respect thereof) (A) in such
proportion as is appropriate to reflect the relative benefits received by each
of the contributing parties on the one hand, and the party to be indemnified on
the other hand, from the Solicitation or (B) if the allocation provided by
clause (A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (A)
above but also the relative fault of each of the contributing parties on the one
hand and the party to be indemnified on the other hand in connection with
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations;
provided, however, that, in any such case (x) the Solicitation Agent shall not
be required to contribute any amount in excess of the compensation paid to the
Solicitation Agent as compensation for its services as Solicitation Agent
pursuant to Section 2 hereof, and (y) no person guilty of a fraudulent
misrepresentation shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
Promptly after receipt by any party to this Agreement of notice of
the commencement of any action, suit or proceeding, such party will, if a claim
for contribution in respect thereof is to be made against another party (the
"Contributing Party"), notify the Contributing Party of the commencement
thereof, but the omission to notify the Contributing Party will not relieve it
from any liability which it may have to any other party. In case any such
action, suit or proceeding is brought against any party, and such party notifies
a Contributing Party of the commencement thereof, the Contributing Party will be
entitled to participate therein with the notifying party and any other
Contributing Party similarly notified.
7. Miscellaneous.
(a) The Company shall advise the Solicitation Agent promptly of
the occurrence of any event which, in the Company's judgment, could cause the
Company to withdraw, rescind or modify the Solicitation.
(b) This Agreement is made solely for the benefit of the
Solicitation Agent and the Company and their respective successors, assigns, and
legal representatives, and no other person shall acquire or have any right under
or by virtue of this agreement.
(c) Except as otherwise expressly provided in this Agreement,
whenever notice is required by the provisions of this Agreement to be given to
(i) the Company, such notice shall be in writing addressed to the Company, at
its office at Riddell Sports, Inc., 50 East 42nd Street, Suite 1808, New York,
New York 10017, Attention: Mr. David Mauer, with a copy to, Zuckerman Gore &
Brandeis, LLP, 900 Third Avenue, 8th Floor, New York, New York 10022, Attention:
Clifford A. Brandeis, Esq.; and (ii) the Solicitation Agent, such notice shall
be in writing addressed to the Solicitation Agent, at H.C. Wainwright & Co.,
Inc., 245 Park Avenue, 44th Floor, New York, New York 10167, Attention: Mr.
Scott A. Weisman, with a copy to Orrick, Herrington & Sutcliffe LLP, 666 Fifth
Avenue, New York, New York 10103, Attention: Rubi Finkelstein, Esq.
6
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(d) This Agreement contains the entire understanding of the
parties with respect to Wainwright acting as Solicitation Agent of the
Solicitation, superseding all prior agreements, understandings and negotiations
with respect to such activities by Wainwright, and shall be governed by and
construed in accordance with the laws of the State of New York. This Agreement
may be executed in any number of separate counterparts, each of which shall be
an original, but all such counterparts shall together constitute one and the
same agreement.
7
<PAGE>
Please sign and return to us a duplicate of this letter, whereupon it
will become a binding agreement.
Very truly yours,
RIDDELL SPORTS, INC.
By:
----------------------
Name: David Mauer
Title: Chief Executive Officer
The undersigned hereby confirms that the foregoing letter, as of the date
thereof, correctly sets forth the agreement between the Company and the
undersigned.
H.C. WAINWRIGHT & CO., INC.
By:
------------------------
Name: Scott A. Weisman
Title: Managing Director
8
<PAGE>
EXHIBIT A
Subscription Certificate and Prospectus
<PAGE>
EXHIBIT B
January __, 2000
H.C. Wainwright & Co., Inc.,
as Solicitation Agent
245 Park Avenue, 44th Floor
New York, New York 10167
Ladies and Gentlemen:
We have acted as counsel to Riddell Sports, Inc. (the
"Company"), in connection with the issuance to holders of its common stock, par
value $0.01 per share (the "Common Stock") as of December __, 1999 (the "Record
Date") of rights to purchase shares (the "Shares") of Common Stock and a common
stock purchase warrant (the "Warrants") to purchase, if certain conditions are
met, common stock from the Company of a new or existing subsidiary that conducts
substantially all of the Company's Internet operations (the "Rights Offering").
The Shares and the Warrants are sometimes collectively referred to herein as the
"Securities."
Such Solicitation was made on the terms and subject to the
conditions set forth in those certain documents which are attached as Exhibit
A to the Solicitation Agent Agreement referred to below (said documents are
collectively referred to as the "Solicitation Documents").
In that connection, we have examined the Solicitation
Documents, a signed copy of the Solicitation Agent Agreement dated January __,
2000, between the Company and you providing for your services as Solicitation
Agent for the Solicitation (the "Solicitation Agent Agreement") and such other
documents as we have deemed appropriate for the purpose of this opinion.
Capitalized terms used, but not defined herein shall have the respective
meanings ascribed thereto in the Solicitation Agreement.
We have not undertaken any independent review or investigation
of the foregoing facts. In our examination, we have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as originals,
the conformity to originals of all documents submitted to us as photocopies and
the authenticity of the originals of such photocopies. We have also assumed,
with your consent and without undertaking, or having any duty to undertake any
independent investigation, that the representations, warranties, statements and
information as to factual matters made in the agreements and documents mentioned
above or otherwise furnished to us are true and correct.
Based upon such examination and in reliance thereon and having
regard for legal considerations which we deem relevant, we are of the opinion
that:
<PAGE>
(i) The Company is validly existing and in good
standing under laws of the State of Delaware.
(ii) The Company has duly taken all necessary
corporate action to authorize the making and consummation of the Solicitation
and the execution, delivery and performance of the Solicitation Agent Agreement,
and the Solicitation Agent Agreement has been duly executed and delivered by the
Company.
(iii) The making and consummation of the Solicitation
and the execution, delivery and performance by the Company of the Solicitation
Agent Agreement do not and will not violate or conflict with, result in a breach
of, constitute a default under, or result in the creation of any lien upon any
property of the Company under (a) the Certificate of Incorporation or the
By-Laws of the Company or (b) Applicable Law (defined below).
(iv) The Company has a duly authorized, issued and
outstanding capitalization and as set forth in the Prospectus under
"Capitalization," and except as set forth in the Prospectus, neither the Company
nor any of the Subsidiaries is a party to or bound by any instrument, agreement
or other arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement and as
described in the Prospectus. The Securities and all other securities issued or
issuable by the Company conform, or when issued and paid for, will conform, in
all respects to the descriptions thereof contained in the Registration Statement
and the Prospectus. All issued and outstanding securities of each of the Company
and the Subsidiaries have been duly authorized and validly issued and are fully
paid and non-assessable; the holders thereof have no rights of rescission with
respect thereto and are not subject to personal liability by reason of being
such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or any of the
Subsidiaries or any similar contractual right granted by the Company or any of
the Subsidiaries. The Securities to be sold by the Company hereunder are not and
will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and delivered
in accordance with the terms hereof and thereof, will be validly issued, fully
paid and non-assessable and conform to the descriptions thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for the authorization,
issue and sale of the Securities has been duly and validly taken; and the
certificates representing the Securities are in due and proper form. No transfer
tax is payable by or on behalf of the Solicitation Agent in connection with (A)
the issuance by the Company of the Securities, (B) the purchase of the
Securities from the Company, (C) the consummation by the Company of any of its
obligations under this Agreement, or (D) resales of the Securities in connection
with the distribution contemplated hereby.
(v) The Registration Statement is effective under the
Act, and, if applicable, filing of all pricing information has been timely made
in the appropriate form under Rule 430A, and no stop order suspending the use of
the Preliminary Prospectus, the Registration Statement or the Prospectus or any
part of any thereof or suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending, threatened or contemplated under the Act.
<PAGE>
(vi) Each of the Preliminary Prospectus, the
Registration Statement, and the Prospectus and any amendments or supplements
thereto (other than the financial statements and schedules and other financial
and statistical data included therein, as to which no opinion need be rendered)
comply as to form in all material respects with the requirements of the Act and
the Rules and Regulations.
The opinions herein are further subject to the following
limitations and qualifications:
(a) We express no opinion as to matters of law in jurisdictions
other than the State of New York and the federal laws of the United States.
(b) We express no opinion insofar as to compliance with applicable
anti-fraud statutes, rules or regulations of state, and federal law.
(c) We have assumed, without investigation, there was and will be
no misrepresentation, omission, fraud, duress, undue influence, bad faith or
deceit in connection with the Solicitation.
For purposes of rendering the opinions expressed above the term
"Applicable Laws" means those laws, rules or regulations of the State of New
York and the federal laws, rules or regulations of the United States of America
that, in our experience, are normally applicable to transactions of the type
contemplated by the Solicitation Documents.
We are not passing upon and do not assume any responsibility for
the accuracy, completeness or fairness of any of the statements contained in the
Solicitation Documents and make no representation that we have independently
verified the accuracy, completeness or fairness of any such statements. In our
capacity as counsel to the Company, however, we had conferences and
teleconferences with the Company and representatives of the Solicitation Agent
and others, during which conferences and teleconferences the contents of the
Solicitation Documents and related matters were discussed. Based on our
participation in the above-mentioned conferences and in reliance thereon and on
the records, documents, certificates and opinions herein mentioned above, we
advise you that, during the course of our representation of the Company as
counsel on this matter, no information came to the attention of the attorneys in
our firm rendering legal services in connection with such representation which
caused us to believe that the Solicitation Documents at its date and as of the
date of this opinion contained or contains any untrue statements of a material
fact or omitted or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
This opinion is intended for your use and neither this opinion nor
any part hereof may be delivered to, used or relied upon by any other person or
entity, without our prior written consent.
This opinion is given as of the date hereof and we assume no
obligation to update or supplement this opinion to reflect any facts or
circumstances which may hereafter come to our attention or any changes in law
which may hereafter occur.
<PAGE>
Very truly yours,
<PAGE>
We have issued our reports dated February , accompanying the financial
statements and schedules Riddell Sports, Inc. contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned reports in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
GRANT THORNTON LLP (manually)
Chicago, Illinois
December 15, 1999
