<PAGE>
As Filed with the Securities and Exchange Commission on February 2, 2000
Registration No. 333-92781
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
AMENDMENT NO. 2
TO
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. /x/
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>
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
<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 FEBRUARY 2, 2000
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 non-transferable 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 __________ [ ], 2000, your rights will expire.
Our shares are listed for trading on the American Stock Exchange under the
symbol "RDL." On January 31, 2000, the last reported sale price for our common
stock on the American Stock Exchange was $3.25 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 18 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>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY...........................................................1
THE CONCURRENT OFFERING.....................................................13
TRADE NAMES AND TRADEMARKS..................................................21
FORWARD-LOOKING STATEMENTS..................................................22
THE RIGHTS OFFERING.........................................................23
USE OF PROCEEDS.............................................................33
DILUTION....................................................................34
CAPITALIZATION..............................................................35
SELECTED FINANCIAL DATA.....................................................36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................40
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY.............................52
BUSINESS ...................................................................53
MANAGEMENT..................................................................76
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............81
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................92
PLAN OF DISTRIBUTION........................................................93
DESCRIPTION OF CAPITAL STOCK................................................94
DESCRIPTION OF DEBT SECURITIES..............................................96
FEDERAL INCOME TAX CONSEQUENCES.............................................96
LEGAL MATTERS..............................................................100
EXPERTS....................................................................100
WHERE YOU CAN FIND MORE INFORMATION........................................100
INDEX TO FINANCIAL STATEMENTS..............................................F-1
i
<PAGE>
We have not authorized anyone to provide you with information different
from that contained in this prospectus. You must not rely on any unauthorized
information or representations. 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.
In this prospectus, "Riddell," "we," "us" and "our" refer to Riddell
Sports Inc. and our subsidiaries, unless the context specifically indicates
otherwise. .
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 13, 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 100.
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 an existing
subsidiary or a new subsidiary that we
may establish in the future to conduct
substantially all 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 outstanding 9,263,957 outstanding on January 1,
prior to this offering 2000.
Shares of common stock outstanding 10,513,957. Unless expressly stated
after this offering (assuming to the contrary, the share information
completion of this rights offering in this prospectus excludes:
in full and the sale of 250,000
shares in the concurrent offering o 2,435,025 shares issuable upon
under a separate prospectus) 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
1
<PAGE>
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 _________ __, 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 $____ 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
2
<PAGE>
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 an existing subsidiary
or a new subsidiary that we may establish
in the future to conduct substantially all
of our Internet operations. These warrants
will not be exercisable until the later of
one (A) (1) year after the effective date
of this rights offering, and (B) the
effective date of an initial public
offering of such an Internet subsidiary,
which presently does not exist, and which
initial public offering must occur on or
before December 31, 2002. If we effect an
initial public offering of our Internet
subsidiary after the one (1) year
anniversary of the effective date of this
rights offering, and before December 31,
2002, you will have six months after the
closing of that initial public offering to
exercise your common stock purchase
warrant. If we effect an initial public
offering of the Internet subsidiary prior
to the one (1) year anniversary of this
rights offering, these warrants will not
become exercisable until the one (1) year
anniversary of the effective date of this
rights offering, but you will have six
months commencing on the one (1) year
anniversary of this rights offering to
exercise your common stock purchase
warrant. If we do not establish the
Internet subsidiary before December 31,
2002, or establish the Internet subsidiary
but do not effect an initial public
offering for such subsidiary before
December 31, 2002, the common stock
purchase warrant will never become
exercisable and will automatically expire.
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
3
<PAGE>
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 others with whom
we are currently in discussions regarding
joining this group will standby and agree
to exercise all of the rights granted to
those members of this standby group who
are officers and/or directors of the
Company on the record date. In addition,
this 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 this
standby group. The rights granted to this
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 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
4
<PAGE>
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
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 American Stock Transfer & Trust Company
other stockholders will hold subscription certificates for
stockholders having addresses outside the
United States. In order to exercise
rights, holders with addresses
5
<PAGE>
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.
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.
Riddell
Our Business
6
<PAGE>
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 sold through retailers in
the U.S. and internationally.
We believe that more than 50% of all high school and collegiate football
players either wear our football helmets or use other branded football equipment
made by us. 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 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 215,000 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 strategy
Our strategy is to increase our current market share and broaden the
recognition of our brands in the extracurricular market. We intend to implement
this strategy by:
o continuing to focus on opportunities to add new products within the
array of products and services offered through our traditional team
sports and school spirit business;
7
<PAGE>
o develop special events, competitions and championships to create new
relationships with participants in extracurricular activities that
we are currently not serving effectively, such as youth baseball;
o expand the size of our sales force; and
o implement our Internet operations.
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
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.
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
8
<PAGE>
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. To date, we
have received minimal revenues from our Internet business.
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.
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 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. We believe that many of these community
members, such as cheerleaders and others, are often the leaders and
trend setters in their communities. 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 with respect to the sale of game 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, such as cheerleaders and team sports, to
nonathletic extracurricular activities, such as musical
organizations, drama clubs and dance studios.
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
9
<PAGE>
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
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
11
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
September 30,
-------------------------------------------------------------------------------
1998 1999
---- ----
1994 1995 1996 1997 1998 Unaudited
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of
Cash Flows Data:
Cash flows from
operating
activities (1) $201 ($2,203) ($4,584) $4,361 $682 ($12,469) ($16,547)
Cash flows from
investing activities (1) ($413) (1,392) (1,313) (93,225) (4,479) (1,490) (2,516)
Cash flows from
financing
activities (1) 22 (4,020) 5,639 89,518 4,538 15,772 17,679
Other Data
(unaudited):
EBITDA (2) ($2,299) $7,433 $7,909 $15,330 $13,230 $19,164 $25,042
</TABLE>
- -----------------------
1) For more detail regarding what contributes to our cash flow from these
activities see our Consolidated Statements of Cash Flows on page F-13 and
our Condensed Consolidated Statements of Cash Flows on page F- 5.
2) 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. The measure of
EBITDA presented above may not be comparable to similarly titled measures
reported by other companies because EBITDA is not a standardized measure
of profitability or cash flow aa defined by generally accepted accounting
principals.
12
<PAGE>
THE CONCURRENT OFFERING
Shares offered by Riddell 250,000 shares of common stock
Shares to be outstanding after the 10,513,957.
offering (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"
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 some of our then
outstanding indebtedness. We also have a $48 million revolving credit facility
that 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. This adds up to approximately
$145 million in total outstanding indebtedness as of September 30, 1999.
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.
13
<PAGE>
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 a credit obligation in one or more of these
facilities, and this default is not cured or waived, this default
could result in other debt obligations automatically becoming due
under what are commonly referred to as cross-default provisions.
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-party manufacturers and suppliers for most of our
products and do not have any long-term. We depend on foreign and domestic
third-parties to manufacture most of our products. We also purchase raw
materials used in our protective products from third-party suppliers. We do not
have any formal, written long-term agreements with any of these manufacturers or
suppliers. As a consequence, all of them have the ability to cease doing
business with us for any reason. If this were to occur among a number of
manufacturers and suppliers at one time it could harm us. Our foreign and
domestic third-party manufacturers produce most of our athletic equipment,
practicewear, uniforms, cheerleading accessories and collectible products. We
also 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: (1) changes in import duties;
(2) tariffs; (3) foreign governmental regulations; (4) political unrest; (5)
foreign currency fluctuations; (6) disruptions or delays in shipments; (7)
weather and time risks associated with transoceanic shipping; and (8) additional
U.S. quotas, duties, taxes or other restrictions that could be imposed on
importation of products in the future.
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 product liability insurance coverage
expires in 2005 and we cannot
14
<PAGE>
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 adverse effect on our
business, financial condition or results of operations.
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. In our athletic clothing business, we compete
with national companies such as Champion Products, Inc. and Russell Athletic,
Inc. We also compete 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.
The fragmented nature of many of our markets means that much of our market
share information is extrapolated and may not be dependable. The market share
and other market data contained in this prospectus are based on some 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. As a result, 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 (1) one percent of the outstanding class of such securities, or (2)
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 that these sales might occur.
15
<PAGE>
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 rights offering, over 51% of our
outstanding shares of common stock could be owned by our officers and directors
if all of them exercise all of their rights. Management may also increase their
ownership interest in Riddell by virtue of their 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,
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.
Historically, our cheerleading and dance team activities have only been
subject to relatively minor regulation, and any increase in regulation,
self-regulatory or otherwise, could harm our business. At present, no national
governing body regulates cheerleading and dance team activities at the
collegiate level. Voluntary guidelines relating to safety and sportsmanship have
been issued by the NCAA and some of the athletic conferences. To date, however,
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 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 cheerleaders 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.
While we have yet to experience year 2000 problems we cannot be sure at this
time whether any year 2000 problems will surface and interfere with our business
over the coming months. We believe we have completed
16
<PAGE>
the process of assessing which of our information systems may be subject to year
2000 problems and have taken corrective actions to minimize the potential impact
of year 2000 problems. However, it is too soon to determine whether all of our
corrective actions have been sufficient to protect us from all potential year
2000 problems. It is also too soon to determine whether we no longer face
potential year 2000 issues with third parties such as our customers, suppliers
and manufacturers. 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 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 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 an existing subsidiary or a new subsidiary that we may
establish to conduct substantially all of our Internet operations. If we form an
Internet subsidiary and prior to a public offering of the Internet subsidiary,
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, conduct substantially all
of our Internet operations through an existing or newly-formed 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.
None of management's key executives or other personnel have, until
recently, been engaged in the business of electronic commerce. 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.
17
<PAGE>
Because our targeted communities for many of our web sites are young
adults for whom there are many communication and entertainment alternatives in
today's marketplace, we cannot be sure that we will be able to keep the content
on our web sites sufficiently current to attract sufficient numbers of customers
or advertisers. Our future success on the Internet will depend upon our ability
to attract users to our web sites. 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. We cannot assure you that we will be attractive to a sufficient
number of users or advertisers to generate significant revenues. If we are
unable to develop and keep current 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.
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 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. The most recent session of the
United States Congress resulted in Internet laws regarding children's privacy,
copyrights and taxation. Such legislation could hamper the growth in use of the
Internet generally and
18
<PAGE>
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 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 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.
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 because our
community sites are targeted primarily for young adults. The need to securely
transmit confidential information, such as user identities and addresses, credit
card and other personal information, over the Internet has been a significant
barrier to e-commerce and communications over the Internet. There is a
particular sensitivity where non-adults are involved because of the potential
vulnerability of these
19
<PAGE>
individuals. Any compromise of security could deter the young men and women who
comprise many of our targeted communities 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.
20
<PAGE>
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.
21
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements, which, we
believe, are within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. 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 18. 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.
22
<PAGE>
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
non-transferable common stock purchase warrant that may entitle you to purchase
stock in an existing subsidiary or a new 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", for a more detailed description of
these 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
_____________ __, 2000. 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.
23
<PAGE>
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 presently
existing or newly formed) 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 (1) we use a presently existing
subsidiary to conduct substantially all of our Internet operations, and (2) 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, and after the one (1) year anniversary date of the effective
date of this rights offering, 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 effect an initial public offering of the Internet subsidiary
prior to the one (1) year anniversary of this rights offering, these warrants
will not become exercisable until the one (1) year anniversary of the effective
date of this rights offering. However, in this case, you will have six months
after the one (1) year anniversary of this rights offering to exercise your
common stock purchase warrant. 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 never be exercisable and will expire
on December 31, 2002. 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,
the common stock warrants are subject to dilution, and will only be issued to
those individuals or entities who exercise rights.
General terms and assumptions
Only holders of record of common stock at the close of business on the
record date, December 27, 1999, 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.
24
<PAGE>
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, a group of our directors and executive officers and certain others
will agree to standby and exercise all of the group's rights granted to them by
this prospectus, which is ____% of all rights being offered to stockholders. In
addition, this group will also 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 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.
25
<PAGE>
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:
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
26
<PAGE>
this rights offering at 40 Wall Street, 46th floor, New York, NY
10005, Attention: Mr. Carlos Pinto.
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 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.
27
<PAGE>
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 if you do not wish to exercise any or all of your rights,
but instead, want to find out about how you may be able to sell them.
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 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.
28
<PAGE>
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 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
29
<PAGE>
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:
o the transfer instructions to be received and processed by American
Stock Transfer & Trust Company;
o new subscription certificates to be issued and transmitted; and
o 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, that you may incur in the 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 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
30
<PAGE>
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.
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,
31
<PAGE>
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.
32
<PAGE>
USE OF PROCEEDS
Assuming that the only proceeds Riddell receives from the exercise of
rights in this rights offering is from rights exercised by the standby group,
the aggregate net proceeds to Riddell (A) from this offering, and (B) the sale
of common stock in the concurrent offering will be approximately $____________
(or $___________ if the underwriters' over-allotment option is exercised in
full), after deducting fees and estimated expenses. We currently anticipate that
over the next twelve months will use more than 50% of the net cash proceeds from
the rights offering and the concurrent offering to finance our Internet business
and we will use the balance of the net cash proceeds for additional working
capital purposes.
33
<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.
34
<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.
<TABLE>
<CAPTION>
September 30, 1999
------------------
Actual As Adjusted
------ -----------
(Unaudited)
(In thousands)
<S> <C> <C>
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 shares; 93
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 $
========= =========
</TABLE>
35
<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)
---------------------------------------------------------------------------
Statement of Year Ended December 31, Nine Months Ended
Operations September 30
Data (1)
---------------------------------------------------------------------------
1994 1995 1996 1997 1998 (2) 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
revenues 29,792 35,794 38,813 80,675 113,541 95,239 104,969
-------- -------- -------- -------- -------- -------- --------
Gross profit 25,620 31,249 33,569 57,598 73,059 64,087 74,781
Selling,
general and
administrative
expenses (3) 28,614 25,983 27,853 46,278 64,617 49,169 54,024
Other charges (4) 1,188 -- -- -- 925 -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) (4,182) 5,266 5,716 11,320 7,517 14,918 20,757
from
operations
Interest
expense 2,001 2,795 2,763 11,879 14,656 11,114 11,668
-------- -------- -------- -------- -------- -------- --------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
------------------------------------------------------------------------------------
Statement of Year Ended December 31, Nine Months Ended
Operations September 30
Data (1)
------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 (2) 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
(credits) (1,250) 100 110 -- -- -- 905
--------- --------- --------- ---------
Income (loss)
before
extraordinary
item (5) $ (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
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Balance December 31, September 30,
Sheet Data
(1) (6)
-------------------------------------------------- ----------------------
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
<CAPTION>
Year Ended December 31, Nine Months Ended
September 30,
------------------------------------------------------------------------------
1998 1999
--------------------
1994 1995 1996 1997 1998 Unaudited
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of
Cash Flows Data:
Cash flows from
operating
activities (7) $201 ($2,203) ($4,584) $4,361 $682 ($12,469) ($16,547)
Cash flows from
investing activities (7) (413) (1,392) (1,313) (93,225) (4,479 (1,490) (2,516)
Cash flows from
financing
activities (7) 22 (4,020) 5,639 89,518 4,538 15,772 17,679
Other Data
(unaudited):
EBITDA (8) ($2,299) $7,433 $7,909 $15,330 $13,230 $19,164 $25,042
</TABLE>
- -----------------------
1) In June 1997 Riddell acquired Varsity Spirit Corporation.
2) 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 4 below) relating to certain
strategic changes which were undertaken to improve future profitability,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations, " for greater detail regarding our restructuring.
3) In 1994 selling, general and administrative expenses included an
adjustment to record a $4.6 million charge for a product liability
litigation loss.
38
<PAGE>
4) 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," for greater detail regarding our restructuring.
5) An extraordinary item in 1995 consisted of a $1,900,000 ($0.23 per share)
provision for costs relating to fraudulent transfer litigation.
6) See Note 11 to Riddell's audited consolidated financial statements
relating to contingent liabilities.
7) For more detail regarding what contributes to our cash flow from these
activities see our Consolidated Statements of Cash Flow on page F-13 and
our Condensed Consolidated Statement of Cash Flow on page F-5.
8) 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. The measure of
EBIDTA presented above may not be comparable to similarly titled measures
reported by other companies because EBITDA is not a standardized measure
of profitability or cash flow as defined by generally accepted accounting
principals.
39
<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.
The net purchase price for Varsity Spirit Corporation was $91.2 million,
including costs of the acquisition and was paid in cash. In transactions
directly related to the acquisition, Riddell issued $115 million of 10.5% senior
notes, sold approximately $4.4 million of Riddell common stock to four key
managers of Varsity and entered into a new working capital credit facility,
which was replaced in April 1999. The net proceeds from these transactions were
used to finance the acquisition, to refinance Riddell's former credit agreement,
to pay fees and expenses of the acquisition and to repay $5.6 million of long
term debt.
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.
40
<PAGE>
<TABLE>
<CAPTION>
Nine month
period ended
Year ended December 31, September 30,
----------------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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: (1)
cheerleading uniforms, camps and special events, (2) athletic equipment and
reconditioning lines and a new line of game uniforms and (3) 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.
41
<PAGE>
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 million in 1998. Gross margin rates increased by 1.4 points to 41.6%
for 1999 from 40.2% for the year-to-date period of 1998.
Gross margins for the extracurricular segment increased to 41.7% 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.
Gross margins for the retail segment increased to 36.2% in 1999 from 34.0%
for the year-to-date period of 1998. The increase was principally due to a shift
in product mix as the decline in retail segment sales, as discussed above,
occurred in product lines which carry below average margins for the segment.
Many of the factors contributing to the margin improvement in the
extracurricular segment also contributed to the margin improvement for the
retail segment.
While trademark licensing does have some costs including selling, general
and administrative expenses, there are no costs that are deducted in arriving at
gross profit. Accordingly, any increase or decrease in royalty income results in
a corresponding increase or decrease in gross profit for the licensing segment.
Selling, general and administrative expenses
Overall, 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% with respect to 1998. 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.
For the extracurricular segment, selling, general and administrative
expenses decreased as a percentage of revenues to 28.0% of revenues in the 1999
nine-month period from 29.0% with respect to 1998. The decreases were due to the
reasons discussed in the preceding paragraph.
For the retail segment, selling, general and administrative expenses for
the nine-month period decreased $182,000 from the previous year period. However,
due to the relatively fixed portions of these costs, and the sales decrease for
this segment, selling, general and administrative expenses for the segment
increased as a percentage of revenues to 30.6% of revenues in the 1999
nine-month period from 29.8% with respect to 1998.
42
<PAGE>
Selling, general and administrative expenses for trademark licensing
consist principally of costs which do not vary in relation to revenues. These
costs were stable in the 1999 and 1998 nine-month periods.
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.
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 included
the implementation of a restructuring plan which led to a $925,000 charge in
1998. The consolidation of our reconditioning facilities and
43
<PAGE>
elimination of certain senior positions are expected to yield annual savings of
over $1.0 million in future years, once facility closures are completed and new
centralized operations are fully implemented. See "Restructuring plan" below for
a description of the plan.
Other strategic actions generated additional charges of $2.1 million in
1998. The charges included costs related to product line changes, and were
comprised of $0.1 million for further minimum royalties on products
discontinued, $1.7 million of inventory valuation matters, and $0.3 million for
changes in marketing materials. The impact of these changes is 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 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 revenues 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
impacted margins for both the extracurricular segment and the retails segment
and, 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 by both the extracurricular and retail segments as most
44
<PAGE>
of the year's revenue gains occurred in product lines that carry lower margins
than the average of our other products.
Gross margins for the extracurricular segment decreased to 39.5% of
revenues in 1998 from 40.2% of revenues on a pro forma basis in 1997. The
decrease was due to the factors described in the preceding paragraph. Charges
arising from product line changes and other strategic decisions which impacted
margins for the extracurricular segment in 1998 amounted to $1.2 million.
Gross margins for the retail segment decreased to 31.0% of revenues in
1998 from 37.8% of revenues in 1997. The retail segment's margin decrease was
also due to the factors described above. Charges arising from product line
changes and other strategic decisions which impacted margins for the retail
segment in 1998 amounted to $0.5 million.
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.
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. The comparison to
1997 is affected by $2.8 million of expenses in 1997 relating to the settlement
of certain non-product liability litigation and by the segment related factors
discussed below.
Extracurricular segment selling, general and administrative expenses
decreased as a percentage of revenues to 32.5% of revenues for 1998 from 33.2%
on a pro forma basis for 1997. The total of these expenses increased $3.2
million over pro forma 1997 levels. In addition to a normal level of growth
related expenses, the 1998 expenses included approximately $0.3 million of
expenses relating to strategic changes and over $2.0 million of expenses related
to new initiatives, both of which are discussed in the overview above. The 1997
expenses included unusual expenses from the Varsity acquisition as discussed
below in the comparison of 1997 to 1996.
Retail segment selling, general and administrative expenses increased as a
percentage of revenues to 30.7% of revenues for 1998 from 28.2% for 1997. The
total of these expenses increased $0.5 million over 1997 levels. The expenses
increased due to an increase in marketing and product development costs and also
included expenses relating to the strategic changes discussed above.
Selling, general and administrative expenses relating to trademark
licensing decreased approximately 15% to $0.8 million for 1998.
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.
45
<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.
The components of Riddell's effective tax rate, as shown in the
reconciliation of effective tax rates included in Note 11 of the Audited
Consolidated Financial Statements included in this prospectus, have varied
significantly between 1998 and 1997. These variances reflect the relatively
fixed nature of the nondeductible annual expenses discussed in the preceding
paragraph and the mathematical relationship of these items to Riddell's loss
before taxes, which varied significantly between 1998 and 1997.
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 for 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 in 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 for 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% for 1997 from 42.5% in
1996.
46
<PAGE>
Pro forma gross margins for the extracurricular segment decreased to 40.2%
of revenues for 1997 from 41.5% of revenues 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. 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.
Gross margins for the retail segment decreased to 37.8% of revenues for
1997 from 42.4% of revenues in 1996. The decline in sales of sports collectibles
discussed above significantly impacted gross profit and the margins as these
products carried higher than average margins.
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
million in 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. 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.
Extracurricular segment selling, general and administrative expenses were
33.2% of revenues, on a pro forma basis, for 1997 and 1996. The 1997 pro forma
expenses increased $5.5 million over pro forma 1996 levels. Expenses for 1997
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.
Retail segment selling, general and administrative expenses increased as a
percentage of revenues to 28.2% of revenues for 1997 from 25.0% for 1996. While
expenses decreased $0.2 million from 1996 levels the expense ratio increased due
to the decline in retail segment revenues and the fixed portion of selling,
general and administrative expenses.
Selling, general and administrative expenses relating to trademark
licensing were stable between 1997 and 1996 at just over $0.9 million.
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
47
<PAGE>
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 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.
Restructuring plan
As discussed in the results of operations section above, in the fourth
quarter of 1998 we formulated and initiated 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 were expected to
be expended during 1999. The restructuring actions are expected to yield annual
savings of over $1.0 million once facility closures are completed and new
centralized operations are fully implemented.
The initial restructuring plan called for essentially all of our
restructuring activities to have been completed by the end of 1999. We completed
and commenced operations of a new, larger reconditioning facility in 1999.
However, the consolidation of reconditioning facilities originally scheduled for
the fall of 1999 has been delayed until late in the first quarter or early in
the second quarter of 2000. The cessation of reconditioning operations at
certain other facilities has been delayed to allow additional time for the new
reconditioning facility to reach full capacity. As a result, while the
anticipated senior positions were eliminated, none of the employee severance
costs related to the elimination of jobs at reconditioning facilities was
expended in 1999. We are also now planning to use one of the leased
reconditioning facilities originally slated for closure for the alternative
purpose of warehousing finished goods. Accordingly, we anticipate reversing
accrued lease termination expenses of approximately $60,000 as part of our
fourth quarter 1999 accounting.
48
<PAGE>
Of the $800,000 of restructuring costs included in accrued liabilities at
December 31, 1998, approximately $480,000 was paid in 1999 and, as discussed
above, $60,000 of lease termination costs will be reversed as part of our 1999
accounting. The remaining $260,000 is anticipated to be disbursed in 2000 and
remain in accrued liabilities at December 31, 1999.
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
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 some of our
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 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
49
<PAGE>
the credit 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 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, was 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.
While we have yet to experience year 2000 problems, we cannot be sure at
this time whether any year 2000 problems will surface and interfere with our
business over the coming months. We believe that we completed the process of
assessing which of our information systems were subject to year 2000 problems
and have taken corrective actions to minimize the potential impact of year 2000
problems. However, the issues involved remain full of complexities and
uncertainties, so there can be no assurance that our corrective actions have
been sufficient to protect us from year 2000 problems. We also may still face
potential year 2000 issues with third parties such as our customers and our
suppliers. If year 2000 problems impact our business, our operating results and
financial condition could be materially harmed.
The most significant Year 2000 issues Riddell faced were associated with
the computer information systems used to plan, operate and track our business.
The following is a summary of the actions which were taken for each of our four
major computer information systems:
Helmet manufacturing and retail operations: Year 2000 issues were
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 was tested and certified by our vendor as Year 2000 compliant.
Spirit products: Year 2000 issues were satisfied through corrective
modifications of existing software. The process, including system testing, was
completed early in October 1999. We are also still in the process of replacing
the existing software with a new system, that is certified as Year 2000
50
<PAGE>
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
could not be fully implemented before the end of 1999.
Camps and events: Year 2000 issues were satisfied through corrective
modifications of existing software. The process was completed, including system
testing, early in the second quarter of 1999.
We also faced 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 repaired or replaced equipment found to
have Year 2000 problems.
We also may still 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 has been 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.
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 was incurred in 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 were incurred for
1999.
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.
51
<PAGE>
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 1998 and 1999. Commencing November 23, 1998 our common
stock was listed on the American Stock Exchange under the symbol RDL. As of
December 31, 1999 there were approximately 730 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 through November 23, 1998, and as
reported by the American Stock Exchange for the rest of 1998 and for 1999:
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
Year Ended December 31, 2000:
First Quarter* 3 5/8 3
The last sale price of the common stock on January 31, 2000 was $3.25.
* Represents the period from January 1, 2000 through January 31, 2000
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 revolving credit facility prohibits us from paying any
cash dividends until such time as it has been repaid in full. In addition, the
terms of our senior notes include restrictions which require us to meet certain
financial ratios before cash dividends could be paid and which limit the payment
of cash dividends to 50% of cumulative net income earned while the senior notes
are outstanding.
52
<PAGE>
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 in the U.S. 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 in the extracurricular market and build loyalty to
our brands.
We believe that more than 50% of all high school and collegiate football
players either wear our football helmets or use other branded football equipment
made by us. 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 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 were attended by more
than 200,000 students in 1999, more
53
<PAGE>
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 by applying the same
comprehensive marketing approach to private dance studios that we use in
connection with our other branded products and services.
Our strategy
Our strategy is to increase our current market share and broaden the
recognition of our brands in the extracurricular market. We intend to implement
this strategy by:
o continuing to focus on opportunities to add new products within the
array of products and services offered through our traditional team
sports and school spirit business;
o develop special events, competitions and championships to create new
relationships with participants in extracurricular activities that
we are currently not serving effectively, such as youth baseball;
o expand the size of our sales force; and
o implement our Internet operations.
Opportunities for growth
54
<PAGE>
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 6.5
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 are 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, based upon our experience in the industry and our
success in providing cheerleading uniforms in a timely and efficient
manner, 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 been 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.
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
55
<PAGE>
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 generally 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 in the U.S. 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
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 another direct link to our customers, enhance
our existing relationships with the participants and coaches in various
extracurricular activities and expand our business beyond our historical
football and cheerleading product and service offerings, all in a cost-efficient
manner.
History
We are a Delaware corporation that was formed in 1988 to acquire the
Riddell brand football protective equipment business. In 1991, we effected an
initial public offering of our common stock. Since 1995, we have been
distributing our products to the extracurricular market directly, rather than
going through dealers. In 1997, we acquired Varsity Spirit Corporation, a leader
in the spirit industry, because we believed that there was a natural synergy
between the companies. Since the acquisition,
56
<PAGE>
we have successfully integrated the operations of Riddell and Varsity. At the
end of 1998, we became the exclusive U.S. licensee for Umbro branded soccer team
apparel, footwear, equipment and accessories for the team channel of
distribution. Umbro is one of the leading soccer brands worldwide. We believe
that the Umbro license complements our existing product lines.
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 6.5
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 cheerleading, 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.
Financial information for each of our three business segments is presented
in Note 11 to our audited consolidated financial statements and Note 8 to our
unaudited condensed consolidated financial statements.
Extracurricular segment
We believe that we are a leading marketer and manufacturer of branded
products and services to the extracurricular portion 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 other school- sponsored clubs,
such as drama, debate and chess.
57
<PAGE>
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
6.5 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 participants 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
o Camps and Clinics
o Special events, conventions and competitions
- Uniforms and accessories
o Key marketing alliances
Proprietary, direct sales force
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
58
<PAGE>
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
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.
How we cross-market is evident from our marketing of special events and
competitions for cheerleaders. For example, in order to participate in the
various special events that we offer, 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 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
Our approach to relationship building has inter-related parts. 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
59
<PAGE>
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 next 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 or back of all of
our helmets used in NFL play. Our agreement with the NFL 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. The NFL agreement,
which dates back to 1989, has a term expiring in April 2004, but is
automatically extended for successive five-year periods provided that the
quality of Riddell's helmets remain comparable to the best available technology
as reasonably determined by the NFL.
We also have longstanding marketing alliances with other strategic
partners such as the Walt Disney Company, ESPN and other media and marketing
entities. We are currently in our 17th year of broadcasting championship events
on ESPN and ESPN2, and our current agreement with ESPN extends through the year
2001. We have been holding championship events at the Walt Disney World in
Orlando Florida since 1995, and our current agreement with the Walt Disney
Company extends through the year 2004. All of these alliances serve to further
emphasize the prominence and importance of the activity and the participant. All
of these marketing relationships also 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.
Team sports
60
<PAGE>
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. This Committee, which is
an independent entity, is organized by various participants from the sporting
goods industry. It 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 widening 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
competitively priced, high quality game uniforms faster than our competitors.
At the end of 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 team
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
the standards set by the National Operational Committee for Safety in Athletic
Equipment. 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
61
<PAGE>
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 215,000 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.
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 were a founding member of and remain an active participant in the
American Association of Cheerleading Coaches and Advisors, an industry trade
group whose mission is to improve the quality of cheerleading and to maintain
established safety standards. In 1990, this industry trade group published
comprehensive certification and safety guidelines for cheerleading coaches. We
follow the safety guidelines established by the Association of Cheerleading
Coaches and Advisors in
62
<PAGE>
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.
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,
attended 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
our 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 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.
63
<PAGE>
Power shoulder pads are manufactured for us by a single source in Canada,
Vortex Sales and Marketing, Inc., 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 National Operational Committee for Safety
in Athletic Equipment standards. We continually monitor our products for
quality.
All adult competitive 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 purchase resin, which is an integral
component in the manufacture of helmets, for our competitive helmets from a
single supplier, a division of the General Electric Company. We believe,
however, that alternative sources of supply could be arranged without any
material harm to our business.
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
National Operational Committee for Safety in Athletic Equipment 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.
64
<PAGE>
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 through retailers
and distributors in the United States, and to a lesser extent internationally.
Although we sell some recreational football and baseball equipment, most of the
products sold by our retail segment are sports collectibles. In the fourth
quarter of 1999, we launched our web sites for collectibles, www.riddell.com.
Our sports collectibles are sold under licenses from NFL Properties, which
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" (such as "National
Football League, " "NFL", "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 to fans and collectors. We also have licenses
from most major colleges, Major League Baseball and NASCAR.
We sell football helmets in various miniature and full-sized models. We
also sell lamps and desk organizers bearing the colors and logos of NFL and
college football teams. We sell miniature baseball batter's helmets and lamps
under licenses from Major League Baseball and a desk organizer bearing logos and
designs licensed from NASCAR and various professional drivers.
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.
65
<PAGE>
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
We license the Riddell trademark to third parties for certain types of
athletic clothing, socks and athletic footwear.
We license the "Riddell" name to an affiliate of Enterprise Rent-a-Car.
This license relates to the use of the Riddell brand on footwear. Under the
terms of a settlement agreement reached in 1997 with the bankruptcy trustee for
MacGregor Sporting Goods, Inc., 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
Based upon the fact that we believe that we have the largest nationwide
proprietary sales force which is responsible for developing and maintaining
relationships with the extracurricular activities market at junior and senior
high schools and numerous recreational organizations, we believe that we are
uniquely positioned to take advantage of commercial opportunities offered by
electronic community-building and commerce as it relates to the extracurricular
activities market. 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 continuously develop over the next two to three years
additional community-based web sites expanding from cheerleading to other
extracurricular activities such as football, soccer and various youth team
sports in which there are 20 million participants; and then perhaps
66
<PAGE>
further expand into other extracurricular activities, such as dance, band, etc.
in which there are an additional 10 million participants.
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
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 these activities. As a result of the enthusiasm typically displayed by
these individuals, we believe that we can aggregate a large audience through our
Internet operations by gradually adding additional web sites for distinct
groups.
Our community sites will feature original, frequently-updated,
highly-relevant content that speaks directly to each targeted group's need for
information which helps 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, as a supplement or alternative to traditional
methods of communication, 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. We
believe that a secure Internet site for a cheerleading squad is, in many
instances, a more efficient way for the members of the squad to communicate than
traditional means, such as by telephone or by meeting in person.
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 to sell our traditional products,
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 squad 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.
67
<PAGE>
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 football 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
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 that is
not a part of an organized public or private school system. 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 in excess of $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 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 site 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.
68
<PAGE>
We currently 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.
The following table sets forth selected unaudited operating results of
Riddell for each of the four quarters in 1998 and 1997 and the first three
quarters of 1999. The results presented for the first and second quarter of 1997
have been adjusted on a pro forma basis to include the results of Varsity Sprit
Corporation for the period before its 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 elsewhere in this
prospectus. You should read this information together with the audited
consolidated financial statements, unaudited condensed consolidated financial
statements, the notes related to those financial statements and the other
financial data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Nine months ended September 30, 1999:
Revenues $ 34,259 $ 65,526 $ 79,965 --------
Operating income (loss) (2,709) 9,464 14,002 --------
Net income (loss) (6,367) 5,367 9,174 --------
Year ended December 31, 1998:
Revenues $ 30,979 $ 59,008 $ 69,339 $ 27,274
Percent of total annual revenues 17% 32% 37% 14%
Operating income (loss) $ (3,749) $ 7,965 $ 10,702 $ (7,401)
Net income (loss) (3,409) 2,164 5,049 (10,943)
Year ended December 31, 1997 (first and
second quarter pro forma):
Revenues $ 26,916 $ 56,146 $ 62,974 $ 28,049
Percent of total annual revenues 16% 32% 36% 16%
Operating income (loss) $ (2,571) $ 2,004 $ 9,645 $ (1,118)
Net income (loss) (6,002) (1,821) 6,014 (4,461)
</TABLE>
The loss for the fourth quarter of 1998 included a $3.1 million charge
relating to strategic actions taken in at the end of 1998 as further discussed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
This seasonal pattern is influenced by the following factors:
69
<PAGE>
o 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 calendar
year.
o Cheerleading and dance uniforms and accessories are typically
ordered and shipped between late March, when new cheerleaders are
selected for the coming school year, and August, just before the new
school year begins.
o 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.
o 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. We expect substantially all of the
backlog to be filled within the next twelve months.
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. We compete principally with Diamond
Sports Co., Rawlings Sporting Goods Company, Inc., Wilson Sporting Goods Company
and other companies in baseball and softball products. We also compete with
Champion Products, Inc., Russell Athletic, Inc., and other companies for
practicewear and athletic game uniforms. We principally compete 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 our competitors' 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.
70
<PAGE>
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
Some 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 foreign countries including the following: Riddell, MacGregor, ProEdge,
Power, Air Pac, Warrior, Biolite,
71
<PAGE>
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 some
inter-collegiate 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 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
72
<PAGE>
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 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 of basic coverage (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 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
existing or future claims. Our product liability insurance carrier is a division
of American International Group, Inc.
73
<PAGE>
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.
In March 1999, a jury rendered a verdict against us in a Texas product
liability lawsuit for an accident that occurred prior to January 31, 1998 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.
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Square
------
Location Principal Use Footage Lease Expiration Date
- -------- ------------- ------- ---------------------
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York, New York Corporate headquarters 650 September 2000
- -----------------------------------------------------------------------------------------
Chicago, Illinois Headquarters of Riddell, 95,000 Owned
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
- -----------------------------------------------------------------------------------------
</TABLE>
74
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stroudsburg, Reconditioning and 44,000 October 2001
Pennsylvania shoulder pad customizing
- -----------------------------------------------------------------------------------------
Memphis, Tennessee Headquarters for Varsity's 64,000 November 2000
Operations and
Manufacturing
- -----------------------------------------------------------------------------------------
Olive Branch, Warehouse 80,000 October 2000
Mississippi
- -----------------------------------------------------------------------------------------
</TABLE>
We also lease several smaller facilities throughout the country. With
respect to those facilities whose leases expire later this year, we either have
made or intend to make arrangements to either extend these leases or for
alternate facilities. We do not believe that we will be harmed by any of these
lease expirations.
75
<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 Chief Operating Officer and Vice
Chairman of the Board
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. 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.
76
<PAGE>
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 since
Varsity was acquired by Riddell in June 1997. Mr. Webb became the Chief
Operating Officer in October, 1999. 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 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.
77
<PAGE>
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.
78
<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 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.
79
<PAGE>
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.
80
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 31, 2000
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> <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 87,250(6) * 88,168 *
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
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
</TABLE>
81
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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 15,000(8) * 15,000 *
c/o Seessel's
Supermarkets
1745 Union Avenue
Memphis, TN 38104
All officers and 5,479,497 52.8% 5,951,585 51.2%
directors as a group
(9 individuals)
Angelo, Gordon & Co., 1,395,000(10) 13.1% 1,395,000 11.7%
L.P.
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: (A)
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 January
31, 2000; 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 (B) an 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 some of
the 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 of 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 January
31, 2000.
(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 January 31, 2000.
82
<PAGE>
(6) Includes 78,750 shares underlying that portion of an option granted under
Riddell's 1991 Stock Option Plan that is exercisable within 60 days of
January 31, 2000.
(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 January 31, 2000.
(8) Represents shares underlying options granted under Riddell's 1991 Stock
Option Plan that are exercisable currently or within 60 days of January
31, 2000.
(9) Of the shares of common stock beneficially owned by Mr. McConnaughy: (A)
484,530 are subject to the voting trust; (B) 554,407 are subject to the
stockholders' agreement and (C) 37,500 shares underlie options granted
under Riddell's 1991 Stock Option Plan that are exercisable currently or
within 60 days of January 31, 2000. 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 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 twelve (12) month period ended
December 31, 1999, all filing requirements applicable to such persons were
complied with.
83
<PAGE>
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>
Long Term Compensation
Annual Compensation Awards
----------------------------------------------------------------
Other
Name and Annual Securities All Other
Principal Compen- Underlying Compen-
Position Year Salary Bonus sation (1) Options(2) sation(3)
- -------- ---- ------ ----- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert E.
Nederlander 1998 $196,160 -- -- 7,500 --
Chairman of 1997 189,511 $50,000 -- 7,500 --
the Board 1996 180,656 -- -- 7,500 --
David M.
Mauer 1998 $575,000 -- -- 40,000 $1,000
Chief 1997 550,000 $60,000 -- 50,000 4,750
Executive 1996 500,000 -- 50,000 4,620
Officer
Jeffrey G.
Webb 1998 $375,000 $207,090 -- 35,000 --
Chief 1997 200,914(4) 133,380(5) -- 397,760(4) --
Operating
Officer
David
Groelinger 1998 $220,385 -- -- 15,000 $1,000
Chief 1997 195,977 $50,000 -- 20,000 4,302
Financial 1996 143,308 25,000 -- 65,000 --
Officer and
Executive
Vice
President
since March
7, 1996
Thomas L.
Clark 1998 $132,693 $88,000 $164,467(6) 20,000 --
Senior Vice
President,
Consumer
Products, of
Riddell
Group
Division
since
February 8,
1999
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
----------------------------------------------------------------
Other
Name and Annual Securities All Other
Principal Compen- Underlying Compen-
Position Year Salary Bonus sation (1) Options(2) sation(3)
- -------- ---- ------ ----- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dan Cougill
President and 1998 $252,275 -- -- 45,000 $457,667
Chief 1997 259,231 -- -- 20,000 4,750
Operating 1996 230,000 -- -- 15,000 4,750
Officer of
Riddell
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 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.
85
<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
Options Potential Realizable
Number of Granted Value at Assumed
Securities 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. 40,000 9% $5.38 6/24/2008 135,212 342,655
Mauer (3)
Jeffrey 35,000 8% $5.38 6/24/2008 118,311 299,823
Webb (3)
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 45,000 10% $5.38 6/24/2008 (5) (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 fourth anniversaries of the date of grant. The option is
canceled upon a termination of employment for cause. In
86
<PAGE>
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.
87
<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.
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
- ---- ----------- ------------- ----------- -------------
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
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 death or disability. The agreement
is immediately terminable for cause, as defined in Mauer's agreement. Mr. Mauer
was granted an option for ten years to acquire 300,000 shares of
88
<PAGE>
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 as well as Chief Operating Officer of
Riddell. 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
(1) by Riddell without cause, as defined in Webb's agreement, (2) by Mr. Webb
with good reason, as defined in Webb's agreement, or (3) as a result of a change
in control, as defined in Webb's agreement, Mr. Webb will receive continued
payments of base salary for the longer of the remainder of the term of the
agreement and one year, or two years if as a result of a change of control, as
well as other 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 in Mr. Groelinger's agreement, presently 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, or two years' salary in the event termination
arises in connection with a change of control, as defined in Mr. Groelinger's
agreement, plus a pro rata portion of his bonus through the date of termination.
In addition, 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.
89
<PAGE>
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 January 31, 2000. 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 and the 1997 Riddell Sports Inc. Stock Option Plan pursuant to
which there are 299,650 shares of common stock available for grant of options as
of January 31, 2000. Riddell has granted an aggregate of 2,615,850 shares of
our common stock under options and stock grants made in accordance with the 1991
Plan and 1997 Plan as of January 31, 2000, 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
90
<PAGE>
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.
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:
o the tenth anniversary of the date of grant;
o the second anniversary of the termination of the Eligible Directors'
service on the Board for reasons other than cause; or
o 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,
91
<PAGE>
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 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.
92
<PAGE>
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 27, 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 on a firm commitment basis of 250,000 shares of our common stock, the
concurrent offering. H.C. Wainwright & Co. shall act as underwriter in the
concurrent offering. 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.
93
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 40,000,000 shares of common stock, $0.01 par
value, and 5,000,000 shares of undesignated preferred stock, $0.01 par value.
Common stock
As of December 31, 1999 there were 9,263,957 shares of common stock
outstanding which were held of record by approximately 730 stockholders.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. All matters subject to stockholder
approval require the approval of a simple majority of the issued and outstanding
shares of common stock. There is no cumulative voting with respect to the
Company's common stock. 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.
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 if a class or series of the preferred stock were given super
voting rights, 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 31, 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.
94
<PAGE>
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 (1) we form or use a presently existing
subsidiary to conduct substantially all of our Internet operations, and (2) 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
Some 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 stockholders may be called only by the Board of Directors or certain of
our officers.
95
<PAGE>
DESCRIPTION OF DEBT SECURITIES
The 10.5% senior notes due 2007 contain 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 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. There is currently $115 million of senior notes
outstanding.
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
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.
The convertible debt outstanding is currently $7.5 million.
Riddell also has outstanding indebtedness under a revolving credit
facility as discussed in the liquidity and capital resources section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FEDERAL INCOME TAX CONSEQUENCES
General
This section discusses the material 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, 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.
96
<PAGE>
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
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.
97
<PAGE>
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 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
98
<PAGE>
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.
99
<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.
Valuemetrics, Inc. will pass on certain matters with respect to the warrants in
this offering.
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.
100
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
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-10
Consolidated Balance Sheets at December 31, 1998 and 1997 ............ F-11
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 ................................. F-12
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 ........................... F-13
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ................................. F-14
Notes to Consolidated Financial Statements............................ F-15
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)
Nine Months Ended
September 30,
----------------------
1999 1998
-------- --------
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
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:
Nine months ended
September 30,
-----------------
1999 1998
------- -------
(In thousands)
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
======= =======
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,
F-6
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
4. Inventories
Inventories consist of the following:
(In thousands) September 30, December 31, September 30,
1999 1998 1998
------------- ------------ -------------
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
======= ======= =======
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
F-7
<PAGE>
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.
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:
Nine Months Ended
September 30,
------------------------
1999 1998
--------- ---------
(In thousands)
Net revenues:
Extracurricular 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:
Extracurricular 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
========= =========
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 athletic products and school spirit
products and services to educational and recreational organizations through its
national, direct sales force. The Company is the leading manufacturer and
reconditioner of football protective equipment and the leading supplier of
products and services to the school spirit industry. The Company also markets
miniature and full-size helmets for collectors and licenses the Riddell and
MacGregor trademarks for use on athletic footwear and apparel. The Company
operates primarily throughout the United States.
Inventories: Inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market and include material, labor and factory
overhead.
Property and equipment: Property and equipment are stated at cost.
Depreciation is being computed using the straight-line method over the estimated
useful lives (principally 30 years for buildings and improvements and 3 to 7
years for machinery and equipment) of the related assets.
Intangible assets and deferred charges: Debt issue costs are amortized to
interest expense over the term of the related debt. Other intangibles and
deferred charges are being amortized by the straight-line method over their
respective estimated lives.
Long-lived assets including goodwill and other intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the related assets' carrying
value is compared to the undiscounted estimated future cash flows from the
related operations.
Income taxes: Deferred tax liabilities and assets are recognized for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities (excluding non-deductible goodwill) using enacted tax
rates in effect for the years in which the differences are expected to become
recoverable or payable.
Revenues: Sales of products and reconditioning are generally recorded upon
shipment to customers. Camp and event revenues are recognized over the term of
the respective activity. Royalty income is generally recorded by the Company
when earned based upon contracts with licensees. These contracts provide for
royalties based upon the licensee's sales or purchases of covered products,
subject to periodic minimum amounts of royalties.
Estimates: In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods
reported. Actual results could differ from those estimates. Estimates relating
to contingent liabilities are further discussed in Note 11.
F-14
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Concentration of credit risk: The Company earns the majority of its
revenues from sales to schools and other institutions. The Company maintains
reserves for potential losses on receivables from these institutions, as well as
receivables from other customers, and such losses have not exceeded managements
expectations.
Earnings (loss) per share: Basic earnings (loss) per share is computed by
dividing earnings (loss) by the weighted average number of outstanding common
shares. Diluted earnings per share is computed by adjusting earnings for effect
of the assumed conversion of dilutive securities and dividing the result by the
weighted average number of common shares and common equivalent shares relating
to dilutive securities. Only outstanding shares are considered in computing
diluted loss per share. A reconciliation between the numerators and denominators
for these calculations follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Earnings (loss) - numerator:
Net income (loss) ....................................... ($7,139) ($559) $2,843
Effect of assumed conversion, when dilutive,
of convertible debt - interest savings net of tax ..... -- -- 61
------- ------- -------
Numerator for diluted per share computation ..... ($7,139) ($559) $2,904
======= ======= =======
Shares - denominator:
Weighted average number of outstanding common shares .... 9,134 8,585 8,068
Weighted average common equivalent shares:
Options and warrants, assumed exercise of
dilutive options and warrants, net of treasury shares
which could have been purchased from the proceeds of
the assumed exercise based on average market prices . -- -- 480
Convertible debt, assumed conversion when dilutive .... -- -- 182
------- ------- -------
Denominator for diluted per share computation ... 9,134 8,585 8,730
======= ======= =======
</TABLE>
The convertible debt, which has been outstanding since November 1996, is
described in Note 8 below. Options and warrants are described in Note 9 below.
Options and warrants to purchase 89,500 shares of common stock with a weighted
average exercise price of $10.29 which were outstanding at December 31, 1996
were excluded from the computation of diluted earnings per share for 1996 as
their inclusion would not have been dilutive because their exercise prices were
greater than the average market price of common shares for the year.
Segment information: Effective December 31, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure About
Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing
the "industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. 1996 and 1997
segment disclosure have been restated to conform to SFAS No. 131.
Capitalized software: Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use", is
effective for fiscal years beginning after December
F-15
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15, 1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The Company plans to adopt SOP
98-1 beginning January 1, 1999.
2. Acquisition
On June 19, 1997 the Company acquired Varsity Spirit Corporation
("Varsity"). Varsity is a leading supplier of cheerleader and dance team
uniforms and accessories to the youth, junior high, high school and college
markets. Varsity is also a leading operator of cheerleader and dance team camps,
clinics and special events. The net purchase price of approximately $91.2
million, including costs of the acquisition, was paid in cash, and the
acquisition has been accounted for under the purchase method. The purchase price
was allocated based on estimated fair values at the date of acquisition. This
resulted in an excess of the purchase price over the net assets acquired of
$74.8 million, which has been recorded as goodwill and is being amortized on a
straight-line basis over 40 years. A summary of the allocation of the purchase
price to assets acquired based on their estimated fair values follows:
(In thousands)
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
========
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:
Year Ended December 31,
-----------------------
1997 1996
--------- ---------
(In thousands, except
per share amounts)
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
F-16
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
These pro forma results have been presented for comparative purposes only
and include the following pro forma adjustments (amounts shown in thousands and
relate to the years ended December 31, 1997 and 1996, respectively): (1)
additional amortization expense as a result of goodwill arising from the
acquisition ($789 and $1,616); (2) salary increases relating to contracts
entered into in conjunction with the transactions ($75 and $150); (3)
elimination of costs incurred by Varsity in maintaining its status as a separate
public corporation ($165 and $443); (4) adjustments of certain expenses incurred
by the Company or Varsity based on programs existing within the other company
($38 and $95); (5) elimination of one time charges arising from the transaction
for redeeming Varsity stock options ($4,783 for 1997 only), a change in control
payment ($250 for 1997 only) and bridge loan commitment fees ($3,000 for 1997
only); (6) additional interest on acquisition debt and related debt changes
($5,401 and $11,391); and (7) the tax effect of the above ($1,728 credit
elimination and $3,524 expense elimination). The pro forma results are not
necessarily indicative of results that would have occurred had the combination
been effected at the dates indicated nor of future operating results of the
combined operations.
3. UMBRO license
In November 1998, the Company entered into an license agreement (the
"Umbro License") with Umbro International, Inc. ("UMBRO") pursuant to which the
Company acquired the right for five years to manufacture, market and sell UMBRO
brand soccer team apparel, footwear, equipment, and accessories on an exclusive
basis to the team channel of distribution throughout the United States, Puerto
Rico and the U.S. Virgin Islands. The Umbro License is royalty-free for 1999.
The Company is required to begin paying royalties in the year 2000, at which
time it is also required to meet annual minimum sales figures. In the event that
the Company fails to meet required minimum sales levels subsequent to 1999 for
two consecutive annual periods, UMBRO has the right to terminate the Umbro
License. The Umbro License, which expires in November of 2003, may be extended
for an additional five years at the Company's option on or before August 15,
2003, provided that the Company achieves certain performance levels.
Simultaneously, the Company acquired certain inventory, promotional material and
a 15% interest in U.S.I.S.L., Inc., an organization that promotes soccer in the
United States, with an option to increase its ownership to 20%. The Company
incurred costs and expenses approximating $3.4 million allocated as follows:
(In thousands)
Investment in U.S.I.S.L., Inc. $300
License Rights 500
Inventories 2,500
Other 100
------
$3,400
======
4. Receivables
Accounts receivable include unbilled shipments of approximately $1,678 and
$1,157 at December 31, 1998 and 1997, respectively, principally relating to
Varsity's business. It is the Company's policy to record revenues when the
related goods have been shipped. Unbilled shipments represent receivables for
shipments that have not yet been invoiced. These amounts relate principally to
partial shipments to customers who are not invoiced until their order is shipped
in its entirety or customers with orders containing other terms that require a
deferral in the issuance of an invoice. Management believes that substantially
all of these unbilled receivables will be invoiced within the current sales
season.
F-17
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Inventories:
Inventories consist of the following:
December 31,
---------------------
1998 1997
------- -------
(In thousands)
Finished goods $16,584 $12,691
Work-in-process 2,769 3,571
Raw materials 9,410 7,804
------- -------
$28,763 $24,066
======= =======
6. Property and equipment:
Property and equipment consist of the following:
December 31,
---------------------
1998 1997
------- -------
(In thousands)
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
======= =======
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:
Estimated December 31,
Lives -------------------
in years 1998 1997
-------- -------- --------
(In thousands)
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
======== ========
F-18
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Outstanding balance under a credit facility expiring in 2002, $ 4,400 $ --
terms further described below
Senior notes, 10.5%, due 2007, terms further described below 115,000 115,000
Convertible subordinated note payable, interest at 4.1%, due 2002
through 2004, terms further described below 7,500 7,500
-------- --------
126,900 122,500
Less current portion -- --
-------- --------
$126,900 $122,500
======== ========
</TABLE>
The aggregate maturities of long-term debt are as follows:
Years ending December 31, (In thousands)
2002 $ 6,275
2003 1,875
2004 3,750
2007 115,000
--------
$126.900
========
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
F-19
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the right to require the Senior Notes to be redeemed at 101% of the principal
amount in the event of a Change of Control (as defined). The Senior Notes
contain certain prepayment restrictions and have no mandatory redemption
provisions. The Senior Notes are guaranteed by all of the Company's
subsidiaries. Each of these subsidiaries are wholly-owned subsidiaries of the
Company and have fully and unconditionally guaranteed the Senior Notes on a
joint and several basis. The Company itself is a holding company with no assets
or operations other than those relating to its investments in its subsidiaries.
The separate financial statements of the guaranteeing subsidiaries are not
presented in this report because, considering the facts stated above, the
separate financial statements and other disclosures concerning the guaranteeing
subsidiaries are not deemed material to investors by management.
The 4.1% convertible subordinated note is subordinated in right to prior
payment in full of Senior Indebtedness, which is generally defined in the
governing agreements to include debt under the senior notes and revolving line
of credit described above and any refinancing, renewal or replacement thereof as
well as certain other debt. Repayments of 25% and 33 1/3% of the then
outstanding principal balance is due on November 1, 2002 and 2003, respectively,
with the remaining balance due November 1, 2004. Interest is payable
semiannually each May 1 and November 1. The note limits the Company's ability to
grant certain stock options and requires repayment of 101% of the principal
amount in the event of a change in control (as defined). In connection with
obtaining consents needed for various aspects of the Varsity acquisition, the
Company amended the note to provide for a reduction from $6.00 to $5.3763 per
share in the conversion price.
The Senior Notes were issued and the revolving credit facility was entered
into in connection with the 1997 acquisition of Varsity Spirit Corporation (see
Note 2). In connection with these financing transactions, all other long-term
debt of the Company, except the convertible notes, was repaid. The Company
incurred debt issue costs of approximately $5.4 million in connection with the
Senior Notes and approximately $0.8 million of costs in connection with the new
credit facility. These costs are included with intangibles and deferred charges
(see Note 7) and are being amortized to interest expense over the life of the
related debt. The Company also incurred costs of $3.0 million in connection with
a bridge loan commitment needed to support the acquisition. The bridge loan was
not drawn-down and the commitment fee was charged to interest expense in June
1997.
9. Shareholders' equity and stock option plans:
In conjunction with the Varsity Acquisition in June 1997, the Company sold
986,169 shares of its Common Stock to certain key employees of Varsity at $4.50
per share for an aggregate, net of related costs, of approximately $4.3 million
pursuant to Stock Purchase Agreements, dated May 15, 1997.
Stock option plans: The 1991 Stock Option Plan, as amended, and the 1997
Stock Option Plan provide for the granting of options to key employees,
directors, advisors and independent consultants to the Company for the purchase
of up to an aggregate of 2,915,500 shares of the Company's common stock. Under
the 1991 Stock Option Plan, options for an aggregate of 1,415,500 shares may be
granted at an option price of no less than 85% of the market price of the
Company's common stock on the date of grant and may be exercisable between one
and ten years from the date of grant. Under the 1997 Stock Option Plan, options
or other stock-based awards may be granted for an aggregate of 1,500,000 shares.
The 1997 Stock Option Plan generally does not restrict the option price or
exercise terms of grants.
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
F-20
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
shares, valued at $128,000, granted in consideration for compensation included
in accrued liabilities at December 31, 1997.
During 1997, in connection with the terms of certain agreements entered
into in connection with the Varsity acquisition, the Company issued options for
the purchase of approximately 950,000 shares of its Common Stock to Varsity
employees. Included in this amount are 450,000 options to certain key employees
of Varsity which vested immediately with an option price of $3.80. A charge of
approximately $559,000 was recorded in June, 1997, and credited to additional
paid in capital to reflect the intrinsic value of these options based on their
in-the-money position on the measurement date for this grant. The remaining
500,000 options were issued to a broad group of Varsity employees with exercise
prices at market. Both of these sets of option grants are included in the
information summarized below.
Options granted through December 31, 1998 generally have been designated
as non-qualified stock options and, except as described above, have had option
prices equal to market values on the date of grant, have had terms of five or
ten years, and have had vesting periods of one or four years. Information
relating to stock option transactions over the past three years is summarized as
follows:
Options Outstanding Options Exercisable
----------------------- ----------------------
Weighted Weighted
Average Average
Number Price Per Number Price per
Outstanding Share Exercisable Share
----------- --------- ----------- ---------
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
=========
Options granted in 1998 include grants for 56,600 shares, granted in
November 1998, to certain employees (none of which were directors of the
Company) in exchange for cancellation of options for 69,850 shares which had
previously been granted to these employees. The canceled options, which are
included in the forfeited category above, would have expired in December 1998
and had a weighted average option price of $2.65 per share. The new grants had a
term of ten years and a weighted average option price of $3.76 per share.
F-21
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Further information about stock options outstanding at December 31, 1998 is
summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Price Per Number Price Per
Exercise Prices Outstanding Contractual Life Share Exercisable Share
--------------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.80 - $2.49 136,500 2.4 years $1.99 135,000 $1.99
$2.50 - $3.99 764,100 7.2 years $3.56 721,250 $3.54
$4.00 - $5.44 1,351,925 8.9 years $5.05 505,856 $4.67
</TABLE>
At December 31, 1998 there were 498,150 shares available for future option
grants.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
Company has elected to continue to account for stock-based compensation under
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Under APB 25, generally, no cost is recorded for stock options issued to
employees unless the option price is below market at the time options are
granted. The following pro forma net income and earnings per share are presented
for informational purposes and have been computed using the fair value method of
accounting for stock-based compensation as set forth in SFAS 123:
Years ended December 31,
-----------------------------
1998 1997 1996
-------- ------- ------
(In thousands)
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
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
F-22
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
Years ending December 31, (In thousands)
1999 $ 2,828
2000 2,023
2001 789
2002 557
2003 431
Later years 3,370
-------
Total minimum payments required $ 9,998
=======
Employee benefits: The Company has three noncontributory defined benefit
pension plans that cover, or have covered, certain employee groups. These plans
consist of two "Union Plans" covering certain unionized employees and a
"Non-Union Plan" that covered other employees of certain subsidiaries. The
Non-Union Plan was amended in 1994 to provide that no benefits would accrue
under the plan on or after December 31, 1994. Expense for these plans for the
year ended December 31, 1998 was approximately $200,000 including a provision
for expense of an anticipated termination of the Non-Union Plan. Total pension
expense for these plans was under $50,000 in each of the years ended December
31, 1997 and 1996.
The Company maintains defined contribution (401-k) plans covering
substantially all of its employees, other than those covered by the Union Plans.
Company contributions to these plans are based on a percentage of employee
contributions and are funded and charged to expense as incurred. Expenses
related to the plans amounted to $95,000, $342,000 and $307,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
F-23
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Accrued liabilities and contingencies:
Recorded liabilities: In regards to the product liability contingencies
discussed below, the Company has recorded certain liabilities. While these
amounts are discussed in the remaining sections of this note, a summary of these
amounts together with other items comprising the balance sheet line items
"accrued liabilities" and "other liabilities" follows:
Accrued
liabilities Other liabilities
(Current) (Non-Current)
----------- -----------------
December 31, 1998: (In thousands)
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
======= =======
Product liability litigation matters and contingencies:
At December 31, 1998, the Company was a defendant in 5 product liability
suits relating to personal injuries allegedly related to the use of helmets
manufactured or reconditioned by subsidiaries of the Company. The ultimate
outcome of these claims, or potential future claims, cannot presently be
determined. The Company estimates that the uninsured portion of future costs and
expenses related to these claims, and incurred but not reported claims, will
amount to at least $4,000,000 and, accordingly, a reserve in this amount is
included in the Consolidated Balance Sheet at December 31, 1998 as part of
accrued liabilities and other liabilities. These reserves are based on estimates
of losses and defense costs anticipated to result from such claims, from within
a range of potential outcomes, based on available information, including an
analysis of historical data such as the rate of occurrence and the settlement
amounts of past cases. However, due to the uncertainty involved with estimates
actual results have at times varied substantially from earlier estimates and
could do so in the future. Accordingly there can be no assurance that the
ultimate costs of such claims will fall within the established reserves.
The Company maintains product liability insurance under a policy expiring
in January 2005. The policy is an occurrence-based policy providing coverage
against claims currently pending against the Company and future claims relating
to all injuries occurring prior to January 2005 even if such claims are filed
after the end of the policy period. The insurance program provides certain basic
and excess coverage on product liability claims with a combined aggregate
coverage of over $40,000,000 subject to the limitations described below.
The first level of insurance coverage under the policy ("Basic Coverage")
provides coverage of up to $2,250,000 per claim in excess of an uninsured
retention (deductible) of $750,000 per occurrence. The Basic
F-24
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
Years ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
Current tax expense: (In thousands)
Federal $ $ -- $ 50
State -- -- 60
------- ------- -------
-- -- 110
------- ------- -------
Deferred tax expense:
Federal -- -- --
State -- -- --
------- ------- -------
-- -- --
------- ------- -------
$ -- $ -- $ 110
======= ======= =======
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-25
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of deferred income tax assets and liabilities at
December 31, 1998, 1997 and 1996 are as follows:
Years ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Deferred income tax assets: (In thousands)
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-
======== ======== ========
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:
Years ended December 31,
----------------------------
1998 1997 1996
------ ------ ------
Net current assets, included with (In thousands)
prepaid expenses $1,253 $1,358 $1,820
Net non-current deferred tax liabilities 348 453 1,820
------ ------ ------
$ 905 $ 905 $ -0-
====== ====== ======
F-26
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of effective tax rates to federal statutory tax rates is as
follows:
Years ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
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
Increase in deferred tax valuation
allowance, limiting recognition of net
operating loss tax 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%
======== ======== ========
At December 31, 1998 the Company had estimated net operating loss
carryforwards for federal income tax purposes of approximately $17,700,000
expiring between 2008 to 2013. While this loss carryforward is available to
reduce the payment of taxes that might otherwise be payable in future years, the
benefit of most of the net operating losses have been recognized in the
computation of income tax expense reflected in the Company's consolidated
financial statements in prior years. Benefits relating to approximately $7.0
million of net operating loss carryforwards have not yet been recognized in the
computation of income tax expense for financial reporting purposes and have been
reserved for as part of the deferred income tax asset valuation allowance. These
unrecognized carryforwards would be recognized through a reduction of income tax
expense in future periods upon the generation of an offsetting amount of taxable
earnings.
13. Related party transactions:
In 1997, in connection with certain financing transactions occurring in
connection with the Varsity acquisition, notes payable to shareholders of
$439,000 plus accrued interest were repaid in advance of maturity. Interest of
$17,000 and $111,000 on the note was included in interest expense for the years
ended December 31, 1997, and 1996, respectively. In 1996 the Company paid
consulting fees of $75,000 to one director and paid another director $20,000 for
services in connection with a series of promotional football clinics sponsored
by the Company.
14. Supplemental cash flow information:
Cash payments for interest were $14,700,000, $5,260,000 and $2,662,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. Interest
payments for 1997 included $3,000,000 relating to bridge financing commitment
fees - see Note 8. Income tax payments, or refunds, were not significant for
1998, 1997 or 1996.
F-27
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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: extracurricular products and
services, retail products and trademark licensing:
Extracurricular products and services: This segment markets products and
services primarily through the Company's direct sales force for extracurricular
customers such as schools, leagues, recreational groups and other organizations
for competitive and recreational sport and spirit activities. Operations include
the manufacture and sale of athletic products (including football helmets),
spirit products (including cheerleading and dance uniforms and accessories), and
athletic equipment reconditioning. The segment also operates cheerleader and
dance team camps, clinics and special events.
Retail products: This segment markets products through retailers in the
U.S. and internationally. Most of the products sold by this segment are sports
collectible products, such as authentic and replica football helmets, which bear
licensed sports team logos. The segment's operations also include sales of
certain recreational football and other athletic products sold through consumer
product retailers and distributors.
Trademark licensing: This segment consists of the licensing of the
Company's Riddell and MacGregor trademark rights to other entities for use in
marketing products such as athletic footwear and apparel.
The Company's reportable segments are strategic business units that differ
and are managed separately because of the nature of their markets and channels
of distribution. The Extracurricular products and services segment includes the
company's extracurricular 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 extracurricular 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
F-28
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
forma adjustments, for the period prior to its acquisition in June 1997 (see
Note 2). The company evaluates performance of the extracurricular products and
services segment based on these pro forma results. Total assets are as reported
and do not include pro forma amounts or adjustments.
<TABLE>
<CAPTION>
(In thousands)
Years ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net revenues:
Extracurricular 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:
Extracurricular 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:
Extracurricular products and services $ 4,497 $ 4,253 $ 3,854
Retail products 557 595 541
Trademark licensing 614 696 702
Corporate and unallocated 45 44 45
--------- --------- ---------
5,713 5,588 5,142
Less, preacquisition results of Varsity
Spirit Corporation included above -- 1,578 2,949
--------- --------- ---------
Consolidated total $ 5,713 $ 4,010 $ 2,193
========= ========= =========
Capital expenditures:
Extracurricular 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
========= ========= =========
</TABLE>
F-29
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Segment and product line information (continued):
<TABLE>
<CAPTION>
(In thousands)
Years ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Total assets:
Extracurricular 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-30
<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
--------------------------
(1) (2)
Charged to Charged to
Balance at Costs Other Balance at
Beginning and Accounts- End of
Description of Period Expenses Describe Deductions Period
- ------------------------------------------- ---------- ---------- ----------- ---------- -----------
(a)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts $ 620 $ 436 -- $ 543 $ 513
Accrued product liability reserves (b)
Current portion $ 856 $ 750 $ 700 $1,853 $ 453
Long-term portion 4,200 (700) 3,500
Year ended December 31, 1997
Allowance for doubtful accounts $ 513 $ 365 $ 325 $ 379 $ 824
Accrued product liability reserves (b)
Current portion $ 453 $ 865 $ 500 $1,153 $ 665
Long-term portion 3,500 (500) 3,000
Year ended December 31, 1998
Allowance for doubtful accounts $ 824 $ 929 -- $ 451 $1,302
Accrued product liability reserves (b)
Current portion $ 665 $1,178 ($ 300) $ 834 $ 709
Long-term portion 3,300 300 3,300
</TABLE>
- -----------
Notes: (a) Deductions for the allowance for doubtful accounts consist of
accounts written off net of recoveries; deductions for accrued
product liability reserves consist of payments of claims and
related expenses.
(b) The current portion of accrued product liability reserves is
included within the line item accrued liabilities in the
consolidated balance sheet. The long-term portion of accrued
product liability reserves is included within the line item
other liabilities in the consolidated balance sheet.
(c) Addition charged to other accounts for 1997 is the initial
balance from the Varsity acquisition.
S-2
<PAGE>
================================================================================
Riddell Sports Inc. [Logo]
H.C. Wainwright & Co., Inc.
================================================================================
<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 February 2, 2000
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 January 31, 2000, the last reported sale price for our common
stock on the American Stock Exchange was $3.25 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>
TABLE OF CONTENTS
Page
NO BOARD RECOMMENDATION....................................................
THE QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING........................
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....................................................................
A-2
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION........................................
INDEX TO FINANCIAL STATEMENTS...........................................F-1
A-3
<PAGE>
We have not authorized anyone to provide you with information different
from that contained in this prospectus. You must not rely on any unauthorized
information or representations. 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.
In this prospectus, "Riddell," "we," "us" and "our" refer to Riddell
Sports Inc. and our subsidiaries, unless the context specifically indicates
otherwise.
A-4
<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-5
<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-6
<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 registration fee...............................................$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.
II-1
<PAGE>
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.
(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)
II-2
<PAGE>
3.13 Amended and Restated Articles of Incorporation of Riddell, Inc.
(formerly known as EN&T Associates Inc.). (33)
3.14 Bylaws of Riddell, Inc. (formerly known as EN&T Associates Inc.).
(33)
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-B)
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)
II-3
<PAGE>
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)
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)
II-4
<PAGE>
10.20 License Agreement, dated October 1, 1992, between All American
Sports Corporation and National Operational Committee for Safety in
Athletic Equipment. (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)
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)
II-5
<PAGE>
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)
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-B)
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)
II-6
<PAGE>
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)
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.*
23.1 Consent of Zukerman Gore & Brandeis, LLP (included in Exhibit 5.1)
23.2 Consent of Valuemetrics*
24. Power of Attorney (previously filed as part of signature page)
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)
- ----------
* Filed herewith.
(1) Filed pursuant to Riddell Sports Inc.'s registration on Form S-1
dated December 15, 1999 (Commission File No. 333-92781)
(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.
II-7
<PAGE>
(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.
(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.
II-8
<PAGE>
(20) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q dated
November 11, 1996.
(21) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the
year ended December 31, 1996.
(22) Incorporated by reference to Riddell Sports Inc.'s Proxy Statement
filed June 6, 1997.
(23) Incorporated by reference to Riddell Sports Inc..'s Form 8-K dated
June 19, 1997.
(24) Incorporated by reference to the Varsity Spirit Corporation's
Registration Statement on Form S-1 (Registration Statement No.
33-44431) filed on December 10, 1991.
(25) Incorporated by reference to the Varsity Spirit Corporation's
Amendment No. 1 to Registration Statement on Form S-1 (Registration
Statement No. 33-44431) filed on January 21, 1992.
(26) Incorporated by reference to the Varsity Spirit Corporation's Annual
Report on Form 10-K for the year ended March 31, 1993 (File No.
0-19790).
(27) Incorporated by reference to the Varsity Spirit Corporation's
Transition Report on Form 10-K for the transition period April 1,
1994 to December 31, 1994 (File No. 0-19790)
(28) Incorporated by reference to the Varsity Spirit Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
(File No. 0-19790).
(29) Incorporated by reference to the Varsity Spirit Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996 (File No. 0-19790).
(30) Incorporated by reference to the Varsity Spirit Corporation's annual
Report on Form 10-K for the year ended December 31, 1996 (File No.
0-19790).
(31) Incorporated by reference to Riddell Sports Inc.'s Report on Form
8-K filed May 8, 1996.
(32) Incorporated by reference to Varsity Spirit Corporation Schedule 13D
filed June 25, 1997.
(33) Incorporated by reference to Riddell Sports Inc.'s Registration
Statement on Form S-4 (Registration No. 333-31525) filed July 18,
1997.
(34) Incorporated by reference to Riddell Sports Inc.'s Form 10-K Report
for the year ended 1997 (file No. 0-19298).
(35) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q dated
May 15, 1998.
(36) Incorporated by reference to Riddell Sports Inc's Form 10-Q dated
March 31, 1999.
II-9
<PAGE>
(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) 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.
II-10
<PAGE>
(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.
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 February 1, 2000.
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
II-11
<PAGE>
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 indicated.
/s/ David M. Mauer Chief Executive Officer February 1, 2000
- ------------------------- and Director
David M. Mauer (Principal Executive Officer)
/s/ Robert Nederlander* Chairman of the Board February 1, 2000
- -------------------------
Robert Nederlander
/s/ Jeffrey G. Webb* Vice Chairman of the Board February 1, 2000
- -------------------------
Jeffrey G. Webb
/s/ Leonard Toboroff* Vice President and Director February 1, 2000
- -------------------------
Leonard Toboroff
/s/ David Groelinger* Executive Vice President and February 1, 2000
- ------------------------- Chief Financial Officer
David Groelinger (Principal Financial Officer)
/s/ Lawrence Simon* Senior Vice President February 1, 2000
- ------------------------- (Principal Accounting Officer)
Lawrence Simon
II-12
<PAGE>
/s/ Don Kornstein* Director February 1, 2000
- -------------------------
Don Kornstein
/s/ John McConnaughy, Jr.* Director February 1, 2000
- -------------------------
John McConnaughy, Jr.
/s/ Glenn E. Schembechler* Director February 1, 2000
- -------------------------
Glenn E. Schembechler
/s/ Arthur N. Seessel, III* Director February 1, 2000
- -------------------------
Arthur N. Seessel, III
* By: /s/ David Mauer
---------------
David Mauer
Attorney-in-Fact
II-13
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 19, 1999 (except for Note 17, as to
which the date is March 16, 1999) accompanying the financial statements and
schedules of Riddell Sports, Inc. contained in Amendment No. 2 to the
Registration Statement and Prospectus. We consent to the use of the
aforementioned reports in Amendment No. 2 to the Registration Statement and
Prospectus, and to the use of our name as it appears under the caption
"Experts".
/s/ Grant Thornton, LLP
GRANT THORNTON, LLP
Chicago, Illinois
February 1, 2000
<PAGE>
Exhibit 23.2
[LETTERHEAD OF VALUEMETRICS]
February 1, 2000
Board of Directors
Ridell Sports, Inc.
Gentlemen:
The undersigned hereby consents to the inclusion of its name under the
heading "Experts" in the Company's Amendment No. 2 to its Registration Statement
on Form S-1, registration no. 333-92781.
Very truly yours,
VALUEMETRICS, INC.
By: /s/ John L. Miscione
------------------------------------
John L. Miscione, Managing Director
