<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19298
RIDDELL SPORTS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 22-2890400
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
50 East 42nd Street, Suite 1808, New York, New York 10017
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (212) 808-5400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
[none] [none]
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /x/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /x/
The Registrant hereby incorporates by reference, in response to Part III, its
Proxy Statement for its 2000 Annual Meeting of Stockholders to be filed on or
before April 30, 2000 (except to the limited extent the rules and regulations of
the Commission authorize certain sections of such Proxy Statement not to be
incorporated herein by reference, as specifically indicated in such Proxy
Statement).
The aggregate market value of the 4,869,958 shares of outstanding voting stock
held by non-affiliates of the Registrant, computed by reference to the last sale
price of the Registrant's Common Stock on March 28, 2000, is $14,609,874.
As of March 28, 2000, the Registrant had 9,318,957 shares of Common Stock, $.01
par value per share, outstanding.
- 1 -
<PAGE>
SPECIAL CAUTIONARY NOTICE
REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, and
information relating to Riddell that are based on the beliefs of management as
well as assumptions made by and information currently available to management.
Such forward-looking statements are principally contained in the sections "Part
I--Item 1--Business," and "Part 2--Item 7--Management's Discussion and Analysis
of Financial Condition and Results of Operations." Our statements of plans,
intentions, objectives and future economic or operating performance contained in
this report 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." Such statements reflect the
current views of Riddell with respect to future events and are subject to
certain risks and uncertainties and that could cause the actual results to
differ materially from those expressed in any forward-looking statements made by
Riddell. We do not intend to update these forward-looking statements.
PART I
Item 1. 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 exceeds $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.
We have built our various brands and lines of business, in large part,
based upon 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.
We employ our relationship marketing strategy year-round, integrating
it with our other activities, including conducting training camps, clinics and
conventions and producing various nationally-televised and regional
- 2 -
<PAGE>
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 sold 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 than 25,000 people traveled
to the Walt Disney Resort in Orlando, Florida to participate in and view our
various cheerleading and dance competitions.
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
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, 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 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 market additional
products and services to our traditional customers in our team
sports and school spirit business;
o developing 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 expanding the size of our sales force; and
o implementing our Internet operations.
RECENT DEVELOPMENTS
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. Our Internet strategy is to build community sites
while simultaneously establishing complimentary commerce sites. The strategy
allows us to extend our relationship sales and marketing strategy to expand our
core business as well as to develop new lines of business. Over the next two to
three years, we intend to continuously develop additional community-based web
sites expanding from cheerleading to other extracurricular activity such as
football, soccer, and various other team sports and then to further expand into
other extracurricular activities, such as dance, band, etc.
BUSINESS SEGMENTS
We presently employ our sales and marketing strategy and operate our
business through various wholly-owned subsidiaries in three business segments.
- 3 -
<PAGE>
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 over 90% of our revenues in 1999.
Retail
Our retail segment markets products through retailers in the U.S. and
internationally, and was responsible for approximately 9% of our revenues in
1999. Most of the products sold by this segment are sports collectible products,
such as authentic and replica football helmets which bear licensed National
Football League and collegiate team logos. We also have licenses from Major
League Baseball and NASCAR. 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, and was responsible for approximately 1% of
our revenues in 1999.
Financial information for each of our three business segments is
presented in Note 16 to our 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 and is serviced by a highly-fragmented range of
suppliers.
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 20 million participants in team sports in youth
leagues and junior high schools. We also estimate that there are an additional
10 million participants in other extracurricular activities, such as
school-sponsored cheerleading, bands and choirs and youngsters who take dance
lessons at private studios. We estimate that spending by these various
participants on the extracurricular activities that we are already targeting
exceeds $2 billion a year and represents aggregate spending of over $5 billion
annually.
Team sports
We believe that 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 competitive and youth football
helmets which are different in their configurations, padding and other features.
Our helmets meet the industry standards set by the National Operational
Committee for Safety in Athletic Equipment, an independent entity organized by
various
- 4 -
<PAGE>
participants from the sporting goods industry which establishes industry-wide
standards for protective athletic equipment.
We also sell a professional and collegiate line of shoulder pads under
the Power(R) name and several other lines of shoulder pads under the Riddell
name. Our 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 late 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.
In 1998, we 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.
At the end of 1998, we also 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.
Reconditioning
We are the leading national reconditioner of football helmets, shoulder
pads and athletic equipment. We believe that our share of the reconditioning
market exceeds 50%. 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 marketed by our sales force to the same
athletic coaches responsible for equipment purchases. Our reconditioning
customers are primarily high schools, colleges and youth recreational groups.
School spirit
Cheerleader and dance team 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.
- 5 -
<PAGE>
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.
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 athletic facilities. Our
camps generally are conducted over a four-day period and are attended by
resident and commuting students.
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 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(R)
o National Dance Team Championship(R)
o College Cheerleading and Dance Team National Championship(R)
o National All Star Cheerleading Championship(R)
o Company Dance Championship(R)
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.
- 6 -
<PAGE>
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 operate Intropa, a tour company, which specializes 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.
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
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
o Uniforms and accessories
o Key marketing alliances
o New Internet operations
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 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
- 7 -
<PAGE>
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.
Cross marketing and promotional activities
Since 1974, we have conducted, and we continue to refine, profit
generating activities, which are an integral part of our promotional efforts. 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 & Events
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 our relationship
marketing.
Just as our camps build loyalty with respect to 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 are 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
The cheerleaders who participate in our special events, such as
parades, often come from a variety of schools. They each need a uniform for the
special event so that they can 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.
- 8 -
<PAGE>
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.
New Internet operations
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.
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.
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. As is the case with all of our material
suppliers, however, we do not have a long term agreement with Vortex for our
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 we source our practicewear from 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
- 9 -
<PAGE>
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, although we do not have a long term agreement with General Electric. 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 mainly devoted 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
Most of the 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 U.S. garment manufacturers. The
manufacturers provide knitting, cutting, sewing, finishing and shipping, and we
provide the patterns, fabrics, yarn and manufacturing specifications and quality
control supervision. We also provide some cutting, knitting and lettering at two
specialized production facilities. The use of independent manufacturing
facilities to fulfill our production needs affords us with the flexibility to
adjust our production output to meet our highly seasonal selling cycle. The use
of independent manufacturers also reduces our fixed costs, which we believe is
beneficial in a highly seasonal business.
Cheerleading accessories such as shoes, pompons and campwear are
purchased from various suppliers including Nike(R), Capezio(R) and Converse(R),
among others. We have expanded the variety and number of accessories we market,
which has contributed to the increase in our revenues 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 a web site for our
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
The products in our retail segment are primarily sold to retail and
specialty sporting goods stores and distributors through independent
commissioned sales representatives. We use different price points and product
types to strategically target different channels of retail trade.
- 10 -
<PAGE>
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 under
the NFL Agreement described above within the extracurricular segment.
Production
We engineer, manufacture and package our full size collectible helmets
at our plant in Chicago, Illinois in a process similar to that used for our
competitive helmets. We purchase our miniature helmets and other collectible
products principally from two sources in China.
We have retained a design company to assist us in developing new retail
collectible products on terms that we believe are customary in the industry and
from time to time we work with other design companies.
Athletic products sold as part of the retail segment are manufactured
or purchased, together with similar products sold through our extracurricular
segment.
LICENSING SEGMENT
We license our Riddell and MacGregor trademarks to third parties for
use on various products, including 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 worldwide efforts in this regard.
The licensing segment also benefits from the promotional exposure of
our agreement with the NFL because it gives our Riddell 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
casual clothing, socks and athletic footwear.
We license the "Riddell" name to an affiliate of Enterprise Rent-a-Car
for 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., and others, we have ceded all of the 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 to certain third parties.
MacGregor licensing
We have granted Kmart Corporation a non-exclusive license to use the
MacGregor trademark on athletic socks until June 30, 2001. We have also granted
Footstar, Inc. an exclusive license to use the MacGregor trademark on athletic
footwear sold at Kmart stores under a license with an initial term expiring on
June 30, 2001. The license granted to Footstar is renewable at Footstar's option
for an additional two-year period if certain conditions are satisfied.
Our Internet business
We believe that we can take advantage of commercial opportunities
offered by electronic community-building and commerce as it relates to the
extracurricular activities market because we have the largest nationwide
proprietary sales force in the U.S. in the extracurricular activities market. We
believe that our Internet strategy of building community sites and
simultaneously establishing complementary commerce sites affords us an
opportunity to extend our relationship sales and marketing strategy to expand
our core business and to develop new lines of business.
- 11 -
<PAGE>
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 plan to devote a substantial portion of our Internet efforts towards
developing community-based web sites, with dance, football and soccer the most
likely near-term additions.
Unlike the Internet operations of other companies, which are looking
for a portion of a large generic market, such as teenage girls, our approach to
the Internet is to focus on well-defined special interest groups such as
participants in football, soccer, baseball and softball, and cheerleading and
dance teams. We also plan to eventually develop sites for other extracurricular
activities, such as bands and choirs.
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.
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.
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 these 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 coaches 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.
- 12 -
<PAGE>
In addition, we also run cheerleading camps for over 200,000
cheerleaders in the summer, recondition over 600,000 football 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 on a very cost-effective basis.
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 revenue streams from
product sales, advertising and sponsorships and strategic alliances.
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 team sports and
purchase in excess of $1.5 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 very attractive to these individuals. As a consequence, we believe that
electronic commerce can rapidly increase 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 and inventory limitations 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 unlikely 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.
Seasonality and backlog
Our operations are highly seasonal. In recent years, our operations
have been most profitable in the second and third quarters, with the third
quarter typically the strongest, while losses have typically 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
- 13 -
<PAGE>
1999, 1998 and 1997. 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 consolidated financial statements included elsewhere in this
report. You should read this information together with the consolidated
financial statements, the notes related to those financial statements and the
other financial data included elsewhere in this report.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands)
Year ended December 31, 1999:
<S> <C> <C> <C> <C>
Revenues $34,259 $65,526 $79,965 $28,847
Percent of total annual revenues 16% 32% 38% 14%
Operating income (loss) $(2,709) $ 9,464 $14,002 $(5,072)
Net income (loss) (6,367) 5,367 9,174 (8,783)
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 at the end of 1998 as further discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Net income for the third quarter of 1999 included income tax
expense of $905,000 relating to the valuation of deferred taxes.
This seasonal pattern is influenced by the following factors:
o Orders and shipments for our extracurricular segment's
athletic products and reconditioning services are solicited
over a sales cycle that begins late 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.
- 14 -
<PAGE>
o The sale of Umbro branded items is also 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 $20.6 million at February 29, 2000 an 8%
increase over February 28, 1999 backlog of $19.0 million. Backlog increased in
all of our business units. We expect substantially all of the backlog to be
shipped within the 2000 calendar year.
Competition
Athletic products
Our principal competitor in the football helmet market is Schutt,
manufacturer of the AIR helmet. Also, Bike Athletic Co., Inc. has recently
introduced a football 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, we believe that our direct
sales force provides us with a competitive advantage in terms of our ability to
provide superior customer service and that our factory-direct pricing is a
significant price advantage due to the elimination of independent dealers which
are used by our competitors.
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, again the other
being National Spirit Group. There are also many other smaller companies and
schools that operate cheerleading 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.
- 15 -
<PAGE>
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(R), Champion(R),
Converse(R), Nike(R), Rawlings(R), Reebok(R), Russell(R) and Wilson(R).
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, 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
- 16 -
<PAGE>
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, we have not received any material environmental citations or
violations and have not been required to spend significant amounts to comply
with applicable law.
Employees
At December 31, 1999, we had approximately 1,254 employees.
Approximately 1,118 of these employees were employed on a full time basis and
approximately 136 were part time or temporary employees. Approximately 26
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 26 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 which expired in
January 2000. We have been discussing a renewal of this agreement with the
union.
During the summer of 1999, we employed approximately 2,000 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 under an occurrence-based
policy providing coverage against all 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 basic
coverage of up to $2,250,000 per claim(with an annual limit of $4,500,000) in
excess of an uninsured retention (deductible) of $750,000 per occurrence. This
basic coverage has an aggregate limit which is currently $4,900,000, but the
policy requires us to increase this maximum limit to $7,700,000 by paying a
fixed annual payment or by prepaying the required premium at any time, which
counts at 120% of the amount paid toward the limit.
The insurance program also provides for additional coverage, which may
be subject to 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.
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.
- 17 -
<PAGE>
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.
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 March 1, 2000, 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 Consolidated Financial Statements.
- 18 -
<PAGE>
Item 2: 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(1)
Chicago, Illinois Headquarters of Riddell, Inc. 95,000 Owned
and helmet manufacturing
Elk Grove Village, Illinois Warehouse and distribution 105,000 March 2005
center
Elyria, Ohio Headquarters for All 72,000 September 2014
American Sports Corporation
reconditioning operations and
customer service
Stroudsburg, Pennsylvania Reconditioning and shoulder 44,000 October 2001
pad customizing
Memphis, Tennessee Headquarters for Varsity's 64,000 November 2000
Operations and
Manufacturing
Olive Branch, Mississippi Warehouse 80,000 October 2000
</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.
ITEM 3. LEGAL PROCEEDINGS
Riddell and its subsidiaries from time to time become involved in
various claims and lawsuits incidental to their businesses including without
limitation, employment related, product liability and personal injury
litigation. See Item I "Insurance and Product Liability Proceedings."
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
- --------
(1) We currently anticipate that we will be moving our corporate
headquarters in the early part of the second quarter of 2000.
- 19 -
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock was quoted on the The Nasdaq National Stock Market
System under the symbol RIDL in 1997 and through November 20, 1998. Commencing
November 23, 1998 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 our common stock as reported by the NASDAQ-NMS for 1997
and through November 23, 1998, and as reported by the American Stock Exchange
for the rest of 1998 and for 1999:
High Low
Year Ended December 31, 1997:
First Quarter 5 1/2 3 7/8
Second Quarter 5 7/8 3 5/8
Third Quarter 6 4 5/16
Fourth Quarter 5 3/8 3 7/8
Year Ended December 31, 1998:
First Quarter 5 5/8 4
Second Quarter 6 3/8 4 7/8
Third Quarter 5 3 3/4
Fourth Quarter 6 5/8 2 5/8
Year Ended December 31, 1999:
First Quarter 7 7/8 3 5/8
Second Quarter 4 3/16 3
Third Quarter 4 2 7/8
Fourth Quarter 3 1/2 2 13/16
The closing sale price of the Common Stock on December 31, 1999 was $3
7/16.
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.
- 20 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information should be
read in conjunction with the Consolidated Financial Statements and related note
included elsewhere in this report.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Statement of Operations Data (1) Year Ended December 31,
----------------------------------------------------------------------------------
1999 1998 (2) 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net revenues $208,597 $186,600 $138,273 $72,382 $67,043
Cost of revenues 123,762 113,541 80,675 38,813 35,794
-------------- -------------- -------------- -------------- --------------
Gross profit 84,835 73,059 57,598 33,569 31,249
Selling, general and
administrative expenses (3) 69,210 64,617 46,278 27,853 25,983
Other charges (credits) (4) (60) 925 -- -- --
-------------- -------------- -------------- -------------- --------------
Income from operations 15,685 7,517 11,320 5,716 5,266
Interest expense 15,379 14,656 11,879 2,763 2,795
-------------- -------------- -------------- -------------- --------------
Income (loss) before taxes
and extraordinary item 306 (7,139) (559) 2,953 2,471
Income taxes 905 -- -- 110 100
-------------- -------------- -------------- -------------- --------------
Income (loss) before
extraordinary item (5) $(599) $(7,139) $(559) $2,843 $2,371
============== ============== ============== ============== ==============
Earnings (loss) per share before
extraordinary item:
Basic $(0.06) $(0.78) $(0.07) $0.35 $0.29
Diluted (0.06) $(0.78) (0.07) 0.33 0.29
<CAPTION>
Balance Sheet Data (1) (6) December 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Working capital $49,908 $37,963 $37,599 $25,957 $19,286
Total assets 194,336 186,211 181,761 76,361 74,125
Long-term debt, less
current portion 136,097 126,900 122,500 29,984 23,600
Stockholders' equity 24,865 25,451 32,125 27,745 24,902
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Statements of Cash Flows Data:
Cash flows from operating
activities (7) ($6,655) $682 $4,361 ($4,584) ($2,203)
Cash flows from investing
activities (7) (3,228) (4,479) (93,225) (1,313) (1,392)
Cash flows from financing
activities (7) 8,644 4,538 89,518 5,639 (4,020)
Other Data (unaudited):
EBITDA (8) $21,519 $13,230 $15,330 $7,909 $7,433
</TABLE>
- -----------------------
1) In June 1997 Riddell acquired Varsity Spirit Corporation.
- 21 -
<PAGE>
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.
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 the consolidated financial statements relating to
contingent liabilities.
7) For more detail regarding cash flow from these activities see the
Consolidated Statements of Cash Flow on page F-6.
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 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 as defined
by generally accepted accounting principals.
- 22 -
<PAGE>
ITEM 7. 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
are a part of our extracurricular segment.
On a pro forma basis, 1997 revenue for Riddell combined with Varsity
was $174.1 million, more than double our 1996 historical stand alone revenues in
the year before the acquisition. Revenues have since grown to $186.6 million in
1998 and $208.6 million in 1999.
Our historical operating results in 1997 do not include Varsity's
operations for the portion of the period before the Varsity acquisition. This
makes comparisons of operating results for that period less meaningful. In order
to overcome this limitation, part of the discussion and analysis that follow is
based on comparisons to operating results in 1997 adjusted on a pro forma basis
to include Varsity's results for the period before the acquisition and other
matters related to the acquisition as if the acquisition had taken place on
January 1, 1997. The pro forma adjustments are described in Note 2 of the
Consolidated Financial Statements.
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 subsequently revised 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.
Set forth below is the percentage of our revenues generated by each of
our three business segments in the years ended December 31, 1997, 1998 and 1999.
Information for the year ended December 31, 1997 is pro forma, giving effect to
our acquisition of Varsity in June, 1997.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1998 1999
-------- -------- ------
<S> <C> <C> <C>
Extracurricular Segment:
Spirit and dance products and services 58.2% 60.1% 57.7%
Team sports products and services 30.0% 29.3% 33.1%
----- ----- -----
Total extracurricular segment 88.2% 89.4% 90.8%
Retail Segment 10.4% 9.7% 8.7%
Licensing Segment 1.4% 0.9% 0.5%
</TABLE>
Results of operations
Year ended December 31, 1999 compared to the year ended December 31, 1998
Overview
In 1999, we achieved significant improvement in the profitability of
our business. Income before taxes increased $7.4 million, from a $7.1 million
loss in 1998 to a profit before taxes of $0.3 million in 1999.
Revenues increased both from initial sales of new product lines as well
as increased volume from our traditional lines of products and services. We also
began to see benefits from actions taken late in 1998 to reduce costs and
improve profitability. Some of these actions resulted in charges that totaled
$3.1 million, which contributed to our
- 23 -
<PAGE>
loss in 1998. These charges included $925,000 classified as a restructuring
charge and are discussed in more detail below in the overview of 1998 operations
and the discussion of the restructuring plan.
Most of our operating improvement occurred in our extracurricular
segment where operating income increased $7.1 million from $11.4 million in 1998
to $18.5 million in 1999. We also achieved significant improvement in our retail
segment which generated operating income of $1.2 million in 1999, up from
operating income of under $0.1 million in 1998.
Our pre-tax profit in 1999 was achieved notwithstanding expenses and
losses of approximately $1.8 million relating primarily to two new initiatives,
our strategy for the Internet and our entry into the U.S. team-soccer market
through our license from Umbro, both of which provide us with significant growth
potential. The $1.8 million includes approximately $0.5 million of expenses
incurred as we began to develop our internet operations and $1.3 million of
losses relating to the start-up of our line of Umbro branded team soccer
products which began at the end of 1998. Spending on our Internet operations is
likely to continue in 2000 at an increased rate, as we continue to invest in our
Internet strategy. Our Internet operations are still being developed and we do
not yet know the ultimate size and scope of these operations. Consequently, at
the present time we cannot ascertain the ultimate costs for our internet
operations over future periods.
Revenues
Revenues in 1999 increased $22.0 million, or 12%, to $208.6 million in
comparison to revenues of $186.6 million in 1998.
All of the revenue gain came from our extracurricular segment where
revenues increased 14% or $22.6 million, from $166.8 million in 1998 to $189.4
million in 1999. The extracurricular segment includes team sports and school
spirit lines of products and services.
Sales of team sports products and services grew by 27% or $14.5
million, from $54.6 million in 1998 to $69.1 million in 1999. Sales of our new
line of Umbro-branded team soccer products and our new line of athletic game
uniforms generated $9 million of the increase. We also benefitted from increased
focus on sales to youth leagues as well as increased volume and generally higher
selling prices on our traditional team sports products.
Revenues from school spirit lines products and services grew by 7% or
$8.1 million, from $112.2 million in 1998 to $120.3 million in 1999. More than
half of the revenue growth came from increased volume of uniforms and
accessories. Camp and event revenues increased as well with the number of camp
participants growing by 8,000 to 215,000 in 1999 after being relatively flat
between 1997 and 1998.
Revenues from the retail segment were $18.1 million in both 1998 and
1999. Sales of sports collectible products increased while there was an
offsetting decease in the volume of youth football equipment sold to retailers,
as we shifted our youth emphasis to direct sales within our extracurricular
segment.
Royalty income from trademark licensing decreased by $0.6 million to
just over $1.0 million in 1999 in comparison to trademark licensing royalties of
$1.6 million in 1998. The decline was anticipated due to the expiration of
certain licenses in 1998.
Gross profit
Gross profit in 1999 increased to $84.8 million from $73.1 million in
1998. Gross margins increased as a percentage of revenues to 40.7% in 1999 from
39.2% in 1998. Gross margins in 1998 had been negatively impacted by $1.7
million of charges relating to product line changes and other strategic
decisions which affected the realizable value of inventories. Gross margins in
1998 were 40.1% if adjusted to eliminate the impact of these charges.
The gross margin rate for the extracurricular segment increased to
40.8% in 1999 from 39.5% in 1998. Gross margins in 1998 were 40.2% if adjusted
to eliminate the impact of the portion of the 1998 charges discussed above which
related to the extracurricular segment. Margin rates improved in 1999 as a
result of modest increases in selling
- 24 -
<PAGE>
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 reduced costs
in 1999.
Gross margins for the retail segment increased to 35.7% of revenues in
1999 from 31.0% of revenues in 1998. Gross margins in 1998 were 33.7% if
adjusted to eliminate the impact of the portion of the 1998 charges discussed
above which related to the retail segment. The increase in margins in 1999 was
principally due to a shift in product mix as the decline in retail segment
sales, as discussed above, occurred in product lines that carry below average
margins in the segment. Many of the factors contributing to the margin
improvement in the extracurricular segment also contributed to the margin
improvement in 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
Selling, general and administrative expenses in 1999 increased by $4.6
million from $64.6 million in 1998 to $69.2 million in 1999. This increase
included $1.5 million of commissions relating to higher sales and $3.4 million
of expense increases relating to our new line of Umbro-branded team soccer
products leaving a net overall decrease of $0.3 million in all other selling,
general and administrative expenses. Selling, general and administrative
expenses decreased as a percentage of sales to 33.2% in 1999 from 34.6% in 1998.
Selling, general and administrative expenses in 1998 were impacted by $0.4
million of charges relating to strategic changes, as discussed above, and would
have been 34.4% of revenues before consideration of this charge. The improvement
in the expense percentage in 1999 is principally due to the cost saving
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. Expenses in 1999 were negatively
impacted by approximately $0.5 million of expenses incurred in initial
development costs relating to our Internet operations.
Extracurricular segment selling, general and administrative expenses
decreased as a percentage of revenues to 31.1% of revenues in 1999 from 32.5% in
1998. The improvement in the expense ratio was due to the reasons discussed in
the preceding paragraph. Expenses in 1998 included $0.3 million of the charges
relating to strategic changes, as discussed above.
Retail segment selling, general and administrative expenses decreased
as a percentage of revenues to 29.2% of revenues in 1999 from 30.7% in 1998. The
improvement in the expense ratio was due to the cost saving initiatives
implemented at the end of 1998, as well as planned reductions in product
development costs.
Licensing segment selling, general and administrative expenses were
stable in comparison to the prior year, at approximately $0.8 million in both
1999 and 1998.
Interest expense
Interest expense in 1999 increased 5%, or $0.7 million over 1998 levels
due to an increase in average indebtedness. Debt levels were higher in 1999 due
to higher indebtedness at the beginning of 1999 than at the beginning of 1998
and increased working capital demands related to our new line of Umbro-branded
team soccer products and volume growth in other product lines.
Income taxes
Income tax expense in 1999 reflects an adjustment relating to the
valuation of deferred taxes and not a cash payment of taxes. No tax expense,
other than this adjustment, was recorded in 1999, as we have net operating loss
carryforwards which offset any such taxes.
In 1998 we did not recognize income tax benefits arising from the
year's net loss. The unrecognized tax
- 25 -
<PAGE>
benefits, after any amount offset against 1999 taxable income and together with
unrecognized tax benefits arising from net operating losses in earlier years,
would be utilized with the generation of approximately $5.0 million in future
pre-tax income and adjustments.
We have certain nondeductible annual expenses which are added as
adjustments to pretax income to calculate taxes. These expenses include
nondeductible amortization of approximately $2.1 million, much of which arises
from goodwill associated with the Varsity acquisition. The effect of these
adjustments, as well as other items effecting our tax rates, are shown in the
reconciliation of our tax provision to taxes based on statutory rates shown in
Note 11 to our Consolidated Financial Statements.
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
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 view 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 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. 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.
Revenues
Revenues in 1998 increased $12.5 million, or 7%, to $186.6 million in
comparison to pro forma revenues of $174.1 million in 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
in 1997 to $166.8 million in 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 been declining in recent years.
- 26 -
<PAGE>
Revenues from the retail segment were relatively stable with 1998
revenues of $18.1 million compared to 1997 revenues of $18 million. Sales of
athletic products to recreational team dealers and distributors increased,
offsetting declines in the sales of sports collectible products. Sales of sports
collectible products decreased due to lower demand for certain products
introduced in recent years such as miniature hockey and baseball helmets.
Royalty income from 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 in 1998 increased to $73.1 million from $71.0 million on a
pro forma basis in 1997. Gross margins decreased as a percentage of revenues to
39.2% in 1998 from 40.8% on a pro forma basis in 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 retail 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 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 in 1998 increased by $1.6
million to $64.6 million from $63.0 million on a pro forma basis in 1997.
Selling, general and administrative expenses decreased as a percentage of sales
to 34.6% in 1998 from 36.2% on a pro forma basis in 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 in 1998 from 33.2% on
a pro forma basis in 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 including a
charge of $0.6 million for in-the-money Riddell stock options contractually
granted to certain employees who were previously employed by Varsity 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 30.7% of revenues in 1998 from 28.2% in 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 in 1998.
- 27 -
<PAGE>
Interest expense
Interest expense in 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.
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 December 31, 1999 was approximately
$12.8 million (See Note 7 of the 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 restructuring actions resulted
in cost savings of approximately $400,000 in 1999, net of non-recurring current
year expenses of $160,000 for restructuring related costs such as moving
expenses.
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, in the fourth quarter of
1999 accrued restructuring costs were reduced by the $60,000 of accrued lease
termination expenses which will not be incurred.
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 were reversed to income. The remaining
$260,000 is included in accrued liabilities at December 31, 1999 and is
anticipated to be disbursed in 2000.
- 28 -
<PAGE>
Liquidity and capital resources
We have filed a registration statement relating to a proposed rights
offering to Riddell's stockholders and a proposed concurrent offering of
additional shares of our common stock. The rights offering would afford our
current stockholders the right to purchase an aggregate of up to 1,000,000
shares of our common stock. We intend to assemble a standby group of purchasers,
which would include members of our management, our officers and directors, and
certain outside investors, who would agree to purchase a portion, or all, of the
shares in the rights offering not otherwise purchased by our stockholders. The
concurrent offering will seek to sell 250,000 shares of our common stock and
will be underwritten by H.C. Wainwright & Co., Inc., which will also act as our
Solicitation Agent in connection with the rights offering.
We are conducting the rights offering and concurrent offering to
finance our Internet business and for additional working capital. We believe
that we could finance our Internet business at some level from our existing
capital resources. However, the resources provided by the rights offering and
concurrent 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 not likely that our Internet business will be
profitable over the next year, and it could generate losses which could exceed
the proceeds from the rights offering and the concurrent offering. Since our
Internet operations are still being developed we do not yet know the ultimate
size and scope of these operations. Consequently, future development of Internet
operations could possibly require additional capital.
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 December 31, 1999 the outstanding balance under the credit facility
was $13.6 million. This compares with outstanding balances of $4.4 million at
December 31, 1998. The increase in outstanding borrowings between December 31,
1998 and December 31, 1999 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. Starting April 29, 2000, 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 initial adjustment on April 29, 2000, will increase
the margin to its maximum level. 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
- 29 -
<PAGE>
Riddell. We have pledged essentially all of our tangible assets as collateral
for 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.
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 not experienced any Year 2000 problems, at this time we
cannot be sure 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
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
- 30 -
<PAGE>
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, 1998 and 1999 was approximately $200,000, $250,000 and $150,000,
respectively. We have also incurred capital expenditures for computer hardware
and software related to the system replacements described above, of
approximately $150,000, $800,000 and $800,000 for the years ended December 31,
1997, 1998 and 1999, respectively. These capital expenditures include all of the
system upgrade and modernization aspects of the replacement programs discussed
above.
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
report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) in Part IV and page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The Registrant hereby incorporates by reference in response to Part III
its Proxy Statement to be filed pursuant to Regulation 14A by April 17, 2000
(except to the limited extent the rules and regulations of the Commission
authorize certain sections of such Proxy Statement not to be incorporated herein
by reference, as specifically indicated in such Proxy Statement).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) Financial Statements and Schedules to Financial
Statements
The financial statements, notes thereto, financial statement
schedules and accountants' report listed in the "Index to
Financial Statements" on page F-1 of this Report are filed as
part of this Report.
(a)(3) Exhibits
The exhibits listed in the Exhibit Index attached to this
Report are filed as part of this Report.
(b) Reports on Form 8-K
None.
- 31 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RIDDELL SPORTS INC.
Dated: March 28, 2000 By: David Mauer
-----------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DAVID MAUER Chief Executive Officer March 28, 2000
- ------------ and Director
David M. Mauer (Principal Executive Officer)
ROBERT NEDERLANDER Chairman of the Board March 28, 2000
- -------------------
Robert Nederlander
JEFFREY G. WEBB Vice Chairman of the Board March 28, 2000
- --------------- and Chief Operating Officer
Jeffrey G. Webb
LEONARD TOBOROFF Vice President and Director March 28, 2000
- ----------------
Leonard Toboroff
DAVID GROELINGER Executive Vice President and March 28, 2000
- ---------------- Chief Financial Officer
David Groelinger (Principal Financial Officer)
LAWRENCE SIMON Senior Vice President March 28, 2000
- -------------- (Principal Accounting Officer)
Lawrence Simon
DON KORNSTEIN Director March 28, 2000
- -------------
Don Kornstein
JOHN MCCONNAUGHY, JR. Director March 28, 2000
- ---------------------
John McConnaughy, Jr.
Director March 28, 2000
- ---------------------
Glenn E. Schembechler
ARTHUR N. SEESSEL Director March 28, 2000
- -----------------
Arthur N. Seessel
- 32 -
<PAGE>
Item 14(c) PART IV
Exhibit Index
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of May 5, 1997, by and among
Riddell Sports Inc., Cheer Acquisition Corp. and Varsity Spirit
Corporation (15).
3.1 Amended and Restated Articles of Incorporation of Riddell Sports Inc.
(11).
3.2 First Amended and Restated Bylaws of Riddell Sports Inc. (9).
3.3 Certificate of Incorporation of All American Sports Corporation
(formerly known as Ameracq Corp) (17).
3.4 Bylaws of All American Sports Corporation (formerly known as Ameracq
Corp) (17).
3.5 Certificate of Incorporation of Cheer Acquisition Corp. (17).
3.6 Bylaws of Cheer Acquisition Corp. (17).
3.7 Certificate of Incorporation of Equilink Licensing Corporation (17).
3.8 Bylaws of Equilink Licensing Corporation (17).
3.9 Certificate of Incorporation of Proacq Corp. (17).
3.10 Bylaws of Proacq Corp. (17).
3.11 Certificate of Incorporation of RHC Licensing Corporation (17).
3.12 Bylaws of RHC Licensing Corporation (17).
3.13 Amended and Restated Articles of Incorporation of Riddell, Inc.
(formerly known as EN&T Associates Inc.) (17).
3.14 Bylaws of Riddell, Inc. (formerly known as EN&T Associates Inc.) (17).
3.15 Amended and Restated Articles of Incorporation of Ridmark Corporation
(17).
3.16 Bylaws of Ridmark Corporation (17).
3.17 Charter of International Logos, Inc. (17).
3.18 Bylaws of International Logos, Inc. (17).
3.19 Charter of Varsity/Intropa Tours, Inc. (17).
3.20 Bylaws of Varsity/Intropa Tours, Inc. (17).
3.21 Amended and Restated Charter of Varsity Spirit Fashions & Supplies,
Inc. (17).
3.22 Bylaws of Varsity Spirit Fashions & Supplies, Inc. (17).
3.23 Amended and Restated Charter of Varsity USA, Inc. (17).
3.24 Bylaws of Varsity USA, Inc. (17).
- 33 -
<PAGE>
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 (14).
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 (13).
10.3 Lease, dated November 12, 1993, between the International Brotherhood
of Painters and Allied Trade Union and Industry Pension Fund and
Riddell, Inc., (8); and Amendment dated March 20, 1995 (8); and
Amendment dated September 19, 1996 (12); and Amendment dated February
2000 (1).
10.4 Lease Agreement, dated April 1991, by and between Stroudsburg Park
Associates and All American Corp. (3); as amended March 31, 1995 (9).
10.5 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.
10.6 Employment Agreement, dated June 22, 1992, between Riddell Sports Inc.
and Robert F. Nederlander (4); amended July 27, 1994 (6).
10.7 Employment Agreement, dated June 22, 1992, between Riddell Sports Inc.
and Leonard Toboroff (4); amended July 27, 1994 (6).
10.8 Employment Agreement, dated March 19, 1993, commencing March 25, 1993
between David Mauer and Riddell Sports Inc. (5), as amended January 17,
1994; November 1, 1994 (7); November 28, 1994 (8).
10.9 Employment Agreement, dated as of March 7, 1996, between Riddell Sports
Inc. and David Groelinger (10), as amended March 7, 1998 (18) and as
amended March 1, 2000 (1).
10.10 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 (11).
10.11 Registration Rights Agreement, dated November 8, 1996, between Riddell
Sports Inc. and Silver Oak Capital L.L.C. (11).
10.12 Shareholders Agreement, dated as of May 5, 1997, between Riddell Sports
Inc., Cheer Acquisition Corp. and certain shareholders of Varsity
Spirit Corporation (16).
10.13 Employment Agreement, dated as of May 5, 1997, between Riddell Sports
Inc. and Jeffrey G. Webb (16).
10.14 Employment Agreement, dated as of May 5, 1997, between Riddell Sports
Inc. and W. Kline Boyd (16), as amended August 2, 1999 (1).
10.15 Umbro License Agreement, dated as of November 23, 1998, between Umbro
International, Inc. and Varsity Spirit Fashions & Supplies, Inc. (19).
10.16 Asset and USISL Stock Purchase Agreement, dated as of November 1998,
between Umbro International, Inc. and Varsity Spirit Fashions &
Supplies, Inc. (19).
- 34 -
<PAGE>
10.17 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 (19), as amended July 16, 1999 (1) and as amended
January 1, 2000 (1).
10.18 Industrial Lease and Agreement dated October 1, 1998, between Laphiew
Gin Company and Varsity Spirit Corporation (19).
10.19 Sublease between Nederlander Television and Film Production, Inc. and
Riddell Sports Inc., as amended (1).
10.20 Agreement to Build and Lease dated as of December 30, 1998 between MMCA
Development, LLC and All American Sports Corporation (1), as amended
February 1, 2000 (1).
21 List of subsidiaries (17).
23 Consent of Grant Thornton LLP regarding Riddell Sports Inc. (1).
- ------------------------
(1) Filed herewith.
(2) Incorporated by reference to Riddell Sports Inc.'s Registration
Statement on Form S-1 (Commission File No. 33-40488) effective June 27,
1991 (including all pre-effective amendments to the Registration
Statement).
(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 Form 10-Q report
(Commission File No. 0-19298) for the quarter ended June 30, 1992.
(5) Incorporated by reference to Riddell Sorts Inc.'s Form 10-K report
(Commission File No. 0-19298) filed on March 30, 1993.
(6) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for the
quarter ended June 30, 1994.
(7) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q for the
quarter ended September 30, 1994.
(8) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the
year ended December 31, 1994.
(9) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the
year ended December 31, 1995, dated November 11, 1996.
(10) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q dated May
14, 1996.
(11) Incorporated by reference to Riddell Sports Inc.'s Form 10-Q dated
November 11, 1996.
(12) Incorporated by reference to Riddell Sports Inc.'s Form 10-K for the
year ended December 31, 1996.
(13) Incorporated by reference to Riddell Sports Inc.'s Proxy Statement
filed June 6, 1997.
(14) Incorporated by reference to Riddell Sports Inc..'s Form 8-K dated June
19, 1997.
(15) Incorporated by reference to Riddell Sports Inc.'s Report on Form 8-K
filed May 8, 1996.
(16) Incorporated by reference to Varsity Spirit Corporation Schedule 13D
filed June 25, 1997.
- 35 -
<PAGE>
(17) Incorporated by reference to Riddell Sports Inc.'s Registration
Statement on Form S-4 (Registration No. 333-31525) filed July 18, 1997.
(18) Incorporated by reference to Riddell Sports Inc.'s Form 10-K Report for
the year ended 1997 (file No. 0-19298).
(19) Incorporated by referenced to Riddell Sports Inc.'s Form 10-K Report
for the year ended 1998 (File No. 0-19298).
- 36 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants ....................... F-2
Consolidated Balance Sheets at December 31, 1999 and 1998 ................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 ..................................... F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 ............................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 ..................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
Financial Statement Schedules
Report of Independent Certified Public Accountants on Schedule ....... S-1
Schedule II --Valuation and Qualifying Accounts ...................... S-2
All other financial statement schedules are omitted as the required
information is presented in the financial statements or the notes thereto or
is not necessary.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Riddell Sports Inc.
We have audited the accompanying consolidated balance sheets of Riddell
Sports Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
GRANT THORNTON LLP
Chicago, Illinois
February 21, 2000
F-2
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash .............................................................. $ 513 $ 1,752
Accounts receivable, trade, less allowance for doubtful
accounts ($1,863 and $1,302 respectively) (Note 4) .............. 32,524 28,016
Inventories (Note 5) .............................................. 33,388 28,763
Prepaid expenses .................................................. 7,578 6,493
Other receivables ................................................. 2,020 1,644
Deferred taxes (Note 12 ) ......................................... 2,076 1,253
--------- ---------
Total current assets ..................................... 78,099 67,921
Property and equipment, less accumulated depreciation (Note 6) ...... 7,771 7,871
Intangible assets and deferred charges, less accumulated
amortization (Note 7) ............................................. 105,952 108,735
Other assets ........................................................ 2,514 1,684
--------- ---------
Total assets ......................................... $ 194,336 $ 186,211
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 10,318 $ 12,744
Accrued liabilities (Note 11) ..................................... 11,783 11,253
Customer deposits ................................................. 6,090 5,961
--------- ---------
Total current liabilities ................................ 28,191 29,958
Long-term debt, less current portion (Note 8) ....................... 136,097 126,900
Deferred taxes (Note 12) ............................................ 2,076 348
Other liabilities (Note 11) ......................................... 3,107 3,554
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 9,263,957 and 9,258,957 shares, respectively .... 93 93
Capital in excess of par .......................................... 36,862 36,849
Accumulated deficit ............................................... (12,090) (11,491)
--------- ---------
Total shareholders' equity ............................... 24,865 25,451
--------- ---------
Total liabilities and shareholders' equity ........... $ 194,336 $ 186,211
========= =========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net revenues:
Net sales, products and reconditioning ......... $ 156,411 $ 136,283 $ 103,583
Camps and events ............................... 51,130 48,704 32,302
Royalty income ................................. 1,056 1,613 2,388
--------- --------- ---------
208,597 186,600 138,273
--------- --------- ---------
Costs of revenues:
Products and reconditioning .................... 89,166 79,611 58,718
Camps and events ............................... 34,596 33,930 21,957
--------- --------- ---------
123,762 113,541 80,675
--------- --------- ---------
Gross profit ..................................... 84,835 73,059 57,598
Selling, general and administrative expenses ..... 69,210 64,617 46,278
Other charges (credits) .......................... (60) 925 --
--------- --------- ---------
Income from operations ........................... 15,685 7,517 11,320
Interest expense (Note 8) ........................ 15,379 14,656 11,879
- -------------------------------------------------- --------- --------- ---------
Income (loss) before taxes ....................... 306 (7,139) (559)
Income taxes ..................................... 905 -- --
- -------------------------------------------------- --------- --------- ---------
Net (loss) ....................................... ($599) ($7,139) ($559)
========= ========= =========
Net (loss) per share, basic and diluted .......... ($0.06) ($0.78) ($0.07)
Weighted average number of common and common
equivalent shares outstanding, basic and diluted 9,260 9,134 8,585
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Retained
Common Stock Additional earnings Total
------------------- paid in (Accumulated Shareholders'
Shares Amount capital deficit) equity
-------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ............... 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 year .............. -- -- -- (7,139) (7,139)
-------- -------- -------- ---------- ----------
Balance, December 31, 1998 ............. 9,259 93 36,849 (11,491) 25,451
Issuance of common stock
upon exercise of stock options ..... 4 -- 13 -- 13
Net (loss) for the year .............. -- -- -- (599) (599)
-------- -------- -------- ---------- ----------
Balance, December 31, 1999 ............. 9,263 $ 93 $ 36,862 ($12,090) $ 24,865
======== ======== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ................................................. ($ 599) ($ 7,139) ($ 559)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization:
Amortization of debt issue costs ....................... 843 803 502
Other depreciation and amortization .................... 5,834 5,713 4,010
Stock options issued ..................................... -- -- 559
Compensation expense for stock issued to employees ....... -- 199 --
Provision for losses on accounts receivable .............. 1,196 929 365
Deferred taxes ........................................... 905 -- --
Change in assets and liabilities (net
of effects from acquisitions):
(Increase) decrease in:
Accounts receivable, trade ........................... (5,704) (2,520) 6,426
Inventories .......................................... (4,625) (4,697) 1,400
Prepaid expenses ..................................... (1,085) 307 2,304
Other receivables .................................... (376) (82) 975
Other assets ......................................... (830) 212 45
Increase (decrease) in:
Accounts payable ..................................... (2,426) 4,367 (4,010)
Accrued liabilities .................................. 530 664 (502)
Customer deposits .................................... 129 1,432 (6,167)
Other liabilities .................................... (447) 494 (987)
--------- --------- ---------
Net cash provided by (used in) operating activities (6,655) 682 4,361
--------- --------- ---------
Cash flows from investment activities:
Capital expenditures ....................................... (2,542) (2,494) (1,814)
Acquisitions ............................................... -- -- (91,245)
Umbro license acquisition fee .............................. -- (500) --
Other investments .......................................... (686) (1,485) (166)
--------- --------- ---------
Net cash used in investing activities ............. (3,228) (4,479) (93,225)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings under line-of-credit agreement .............. 9,197 4,400 (17,890)
Proceeds from issuance of long-term debt ................... -- -- 115,000
Debt issue costs ........................................... (566) -- (6,220)
Principal payments on long-term debt:
Shareholders ............................................. -- -- (439)
Banks and other .......................................... -- -- (5,313)
Proceeds from issuance of common stock ..................... 13 138 4,380
--------- --------- ---------
Net cash provided by financing activities ............ 8,644 4,538 89,518
--------- --------- ---------
Net increase (decrease) in cash .............................. (1,239) 741 654
Cash, beginning .............................................. 1,752 1,011 357
--------- --------- ---------
Cash, ending ................................................. $ 513 $ 1,752 $ 1,011
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies:
Principles of consolidation: The consolidated financial statements
include the accounts of Riddell Sports Inc. and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Business: Riddell markets and manufactures products and services for
the extracurricular portion of the educational market. The Company owns or
licenses leading brands, such as Riddell(R), Varsity Spirit(R), Umbro(R) and
MacGregor(R) for products and services for team sports and school spirit
activities. Riddell markets its products and services to schools and
recreational organizations and the coaches and participants in the
extracurricular market through its own nationwide sales force, a web site
targeted to specific activities and a year-round marketing cycle of special
events, competitions and instruction.
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, except for
leasehold improvements depreciated over the lessor of the lease term or their
useful life, 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 Riddell 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
F-7
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
could differ from those estimates. Estimates relating to contingent liabilities
are further discussed in Note 11.
Concentration of credit risk: The majority of Riddell's receivables
arise from sales to schools and other institutions. Riddell maintains reserves
for potential losses on receivables from these institutions, as well as
receivables from other customers, and such losses have generally not exceeded
management's expectations.
Earnings (loss) per share: Net loss per share amounts have been
computed by dividing the net loss by the weighted average number of outstanding
common shares. Diluted earnings per share for the years ended December 31, 1999,
1998 and 1997 is equal to basic earnings per share as all of these periods had a
net loss. Potentially dilutive securities, which include convertible debt,
Common Stock options and warrants, were not dilutive due to the net losses
incurred.
Capitalized software costs: Effective January 1, 1999, Riddell adopted
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for internal
use.
2. Acquisition
On June 19, 1997 Riddell acquired Varsity Spirit Corporation. 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
F-8
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Riddell and Varsity as if the
acquisition, and relating financing transactions discussed in Note 8, had
occurred at the beginning of 1997:
Year Ended December 31, 1997 (In thousands, except per share amounts):
Net revenues $174,084
Cost of revenues 103,076
--------
Gross profit 71,008
Selling, general and administrative expenses 63,048
--------
Income from operations 7,960
Interest expense 14,230
--------
Income (loss) before taxes (6,270)
Income taxes --
--------
Net income (loss) ($6,270)
========
Net loss per share, basic and diluted ($0.69)
Depreciation and amortization $5,588
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): (1) additional amortization
expense as a result of goodwill arising from the acquisition ($789); (2) salary
increases relating to contracts entered into in conjunction with the
transactions ($75); (3) elimination of costs incurred by Varsity in maintaining
its status as a separate public corporation ($165); (4) adjustments of certain
expenses incurred by Riddell or Varsity based on programs existing within the
other company ($38); (5) elimination of one time charges arising from the
transaction for redeeming Varsity stock options ($4,783), a change in control
payment ($250) and bridge loan commitment fees ($3,000); (6) additional interest
on acquisition debt and related debt changes ($5,401); and (7) the tax effect of
the above ($1,728 credit 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, Riddell entered into an license agreement with Umbro
International, Inc. pursuant to which Riddell acquired the right to manufacture,
market and sell Umbro brand soccer apparel, footwear, equipment, and accessories
on an exclusive basis to the team channel of distribution throughout the United
States, Puerto Rico and the U.S. Virgin Islands for five years. The Umbro
License is royalty-free for 1999. Riddell 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 Riddell fails to meet required minimum sales levels
subsequent to 1999 for two consecutive annual periods, Umbro International, Inc.
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 Riddell's
option on or before August 15, 2003, provided that Riddell achieves certain
performance levels. Simultaneously with the signing of the license, Riddell
acquired certain inventory, promotional material and a 15% interest in U.S.L.,
Inc., an organization that promotes
F-9
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
soccer in the United States. Riddell incurred costs and expenses in connection
with entering into the license agreement in 1998, approximating $3.4 million,
which were allocated as follows:
(In thousands)
Investment in U.S.L., Inc. $300
License Rights 500
Inventories 2,500
Other 100
------
$3,400
======
4. Receivables
Accounts receivable include unbilled shipments of approximately $1,315
and $1,678 at December 31, 1999 and 1998. It is Riddell's policy to record
revenues when the related goods have been shipped. Unbilled shipments represent
receivables for shipments that have not yet been invoiced. These amounts relate
principally to partial shipments to customers who are not invoiced until their
order is shipped in its entirety or customers with orders containing other terms
that require a deferral in the issuance of an invoice. Management believes that
substantially all of these unbilled receivables will be invoiced within the
current sales season.
5. Inventories:
Inventories consist of the following:
December 31,
-------------------
1999 1998
------- -------
(In thousands)
Finished goods $20,459 $16,584
Work-in-process 3,088 2,769
Raw materials 9,841 9,410
------- -------
$33,388 $28,763
======= =======
6. Property and equipment:
Property and equipment consist of the following:
December 31,
-------------------
1999 1998
------- -------
(In thousands)
Land $207 $207
Building and improvements 1,527 1,527
Machinery and equipment 15,760 13,350
------- -------
17,494 15,084
Less accumulated depreciation 9,723 7,213
------- -------
$7,771 $7,871
======= =======
Depreciation expense relating to all property and equipment amounted to
$2,642,000, $2,446,000 and $1,423,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
F-10
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Intangible assets and deferred charges:
Intangible assets and deferred charges consist of the following:
Estimated December 31,
Lives -------------------
in years 1999 1998
--------- -------- --------
(In thousands)
MacGregor trademark rights 40 $18,040 $18,040
Trademarks 40 3,250 3,250
Goodwill 40 92,110 91,479
Debt issue costs 8 7,547 6,981
Other 7 to 10 2,898 2,843
-------- --------
123,845 122,593
Less accumulated amortization 17,893 13,858
-------- --------
$105,952 $108,735
======== ========
Amortization expense relating to all intangible assets and deferred
charges amounted to $4,035,000, $4,070,000 and $3,089,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
8. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Outstanding balance under a credit facility expiring in 2003, the $ 13,597 $ 4,400
facility was revised in 1999, 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
-------- --------
136,097 126,900
Less current portion -- --
-------- --------
$136,097 $126,900
======== ========
</TABLE>
F-11
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The aggregate maturities of long-term debt are as follows:
Years ending December 31, (In thousands)
2002 $ 1,875
2003 15,472
2004 3,750
2007 115,000
--------
$136.097
========
In April 1999, Riddell entered into a revised credit facility with Bank
of America National Trust and Savings Association. The revised credit facility
replaced Riddell'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 some of
Riddell's 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
Riddell, 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. Starting April 29, 2000, 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 initial adjustment on April 29, 2000,
will increase the margin to its maximum level. The credit facility agreement
contains covenants which, among other things, require Riddell to meet certain
financial ratio and net worth tests, restrict the level of additional
indebtedness Riddell may incur, limit payments of dividends, restrict the sale
of assets and limit investments Riddell 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. Riddell has pledged essentially all of its
tangible assets as collateral for the credit facility.
The 10.5% senior notes contain covenants that, among other things,
restrict the level of other indebtedness Riddell 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 full face value of the senior notes are due on July 15, 2007. 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 Riddell's 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 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.
F-12
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Riddell's 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, Riddell 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 a revolving credit facility (which was
revised in April 1999) 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 Riddell, except the convertible notes,
was repaid. Riddell incurred debt issue costs of approximately $5.4 million in
connection with the senior notes and approximately $1.4 million of costs in
connection with the credit facility and its 1999 revision. 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. Riddell 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, Riddell 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 Riddell for the purchase of
up to an aggregate of 2,915,500 shares of Riddell'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 Riddell'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 exercise price or terms of
grants.
During 1998, Riddell issued 81,000 shares of its Common Stock to
certain employees for incentive compensation as a stock award under the terms of
the 1997 Stock Option Plan. These shares were recorded at a value of $328,000
based on quoted market values at the date of grant. The grants include 27,000
shares, valued at $128,000, granted in satisfaction of an accrual 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, Riddell 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
F-13
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 1999 generally have been
designated as non-qualified stock options and, except as described above, have
had option prices equal to market values on the date of grant, have had terms of
five or ten years, and have had vesting periods of one or four years.
Information relating to stock option transactions over the past three years is
summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------- -----------------------
Weighted Weighted
Average Average
Number Price Per Number Price per
Outstanding Share Exercisable Share
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, 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
Granted 364,000 $3.27
Exercised (5,000) $2.44
Forfeited (64,000) $2.80
Expired (101,500) $2.87
---------
Balance, December 31, 1999 2,446,025 $4.30 1,519,513 $4.22
=========
</TABLE>
Options forfeited in 1999 include options for 60,000 shares surrendered
by four members of the board of directors in exchange for a cash payment. Each
of the four directors 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.
Options granted in 1998 include grants for 56,600 shares, granted in
November 1998, to certain employees (none of which were directors of Riddell) 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 $2.44 per share. The new grants had a term of ten years
and a weighted average option price of $3.76 per share.
F-14
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Further information about stock options outstanding at December 31, 1999 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--$2.99 130,000 2.4 years $1.99 125,000 $1.97
$3.00--$4.49 1,206,100 8.9 years $3.64 810,550 $3.83
$4.50--$6.50 1,109,925 9.6 years $5.29 583,963 $5.23
</TABLE>
At December 31, 1999 there were 299,650 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), Riddell
has elected to continue to account for stock- based compensation under the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under
APB 25, generally, no cost is recorded for stock options issued to employees
unless the option price is below market at the time options are granted. The
following pro forma net income and earnings per share are presented for
informational purposes and have been computed using the fair value method of
accounting for stock-based compensation as set forth in SFAS 123:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Pro forma net (loss) ($1,725) ($7,953) ($1,973)
Pro forma (loss) per share, basic and diluted ($0.19) ($0.87) ($0.23)
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The pro forma results include expense related to the
fair value of stock options estimated at the date of grant using the
Black-Scholes option pricing model and the following weighted average
assumptions for the years ended December 31, 1999, 1998 and 1997, respectively:
risk-free interest rates of 5.7%, 5.3% and 6.4%; expected volatility of 50%, 56%
and 50%; expected option life of 7 years and no dividend payments. The weighted
average estimated fair value of options granted during 1999, 1998 and 1997 was
$1.92, $3.16 and $3.28 per share, respectively.
Warrants: During 1999 warrants held by one of Riddell's bankers
expired. The warrant was for 172,152 shares of Riddell's common stock at $3.72
per share.
During 1998 certain officers and directors of Riddell exercised
outstanding warrants for shares of Riddell's Common Stock which would have
expired in January 1999. Riddell agreed to a cashless exercise of the warrants,
in effect accepting shares issuable upon exercise as payment for the exercise.
As a result, 42,362 shares of Common Stock were issued in exchange for warrants
for 150,000 shares based on an exercise price of $2.96 per share and an exchange
price of $4.125 per share. The exchange price of $4.125 per share was set on a
date when the quoted market price of a share of Common Stock was $4.00.
F-15
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments:
Leases: Riddell leases various facilities and equipment under operating
leases. Rent expense amounted to approximately $3,105,000, $2,792,000 and
$1,958,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum rental payments for all non-cancelable lease agreements
for periods after December 31, 1999 are as follows:
Years ending December 31, (In thousands)
2000 $ 2,937
2001 1,537
2002 1,207
2003 1,002
2004 577
Later years 4,326
-------
Total minimum payments required $11,586
=======
Employee benefits: Riddell has three noncontributory defined benefit
pension plans that cover, or have covered, certain employee groups. These plans
consist of two plans covering certain unionized employees and a plan that
covered non-union employees of one subsidiary. 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 was approximately $60,000, $200,000
and $50,000 for the years ended December 31, 1999, 1998 and 1997. Expenses for
1998 included a provision for costs relating to an anticipated termination of
the non-union plan.
Riddell 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 $122,000, $95,000 and $342,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
F-16
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Accrued liabilities and contingencies:
Recorded liabilities: In regards to the product liability contingencies
discussed below, Riddell 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, 1999: (In thousands)
Product liability matters, reserves for
pending and other contingencies $700 $3,000
Accrued interest 5,648 --
Other accrued liabilities 5,435 107
----------- ------------------
Total of balance sheet category $11,783 $3,107
=========== ==================
December 31, 1998:
Product liability matters, reserves for
pending and other contingencies $700 $3,300
Accrued interest 5,690 --
Other accrued liabilities 4,863 254
----------- ------------------
Total of balance sheet category $11,253 $3,554
=========== ==================
Product liability litigation matters and contingencies:
At December 31, 1999, Riddell 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 Riddell. The ultimate outcome
of these claims, or potential future claims, cannot presently be determined.
Riddell 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 $3,700,000 and, accordingly, a reserve in this amount is included in the
Consolidated Balance Sheet at December 31, 1999 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.
Riddell 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 Riddell 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.
F-17
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The first level of insurance coverage under the policy ("Basic
Coverage") provides coverage of up to $2,250,000 per claim in excess of an
uninsured retention (deductible) of $750,000 per occurrence. The Basic Coverage
is subject to an aggregate program limit and certain annual aggregate sub
limits. The Basic Coverage, which does not affect the availability of the excess
coverage described below, has an aggregate limit which is currently $5.6
million, but the policy allows Riddell 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.
In March 1999, a jury rendered a verdict against Riddell in a Texas
product liability lawsuit for approximately $11.4 million plus interest from
February 1996. Riddell has filed an appeal of the verdict. If the verdict was
paid in full it would be covered by the insurance described above. Any such
payment by the insurance company would reduce the amount of the aggregate limits
of Riddell's product liability insurance coverage described above.
Other contingencies and litigation matters:
In addition to the matters discussed in the preceding paragraphs,
Riddell 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 Riddell.
F-18
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income taxes:
Income tax expense for 1999 was $905,000 which reflects an adjustment
relating to the valuation of deferred taxes. There was no current income tax
expense for the years ended December 31, 1999, 1998 and 1997 due to net
operating losses generated, or carried forward to, these periods. There was no
other deferred tax expense during the years ended December 31, 1999, 1998 and
1997 since there was generally a full valuation allowance applied to net
deferred tax assets. Changes in the valuation allowance were a decrease of
$354,000 (net of the increase of $905,000 relating to the adjustment described
above) for 1999, an increase of $2,184,000 for 1998 and a decrease of $355,000
for 1997.
Deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities. The significant components of deferred income tax assets and
liabilities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred income tax assets:
Accrued expenses and reserves $ 3,190 $ 2,843
Inventory 983 711
Net operating loss, and credit, carryforwards 4,812 6,551
Other 379 308
-------- --------
9,364 10,413
Valuation allowances (2,861) (3,215)
-------- --------
Total deferred income tax assets 6,503 7,198
-------- --------
Deferred income tax liabilities:
Intangible assets and deductible goodwill 5,900 5,648
Property and equipment 380 442
Prepaid expenses 223 203
-------- --------
Total deferred income tax liabilities 6,503 6,293
-------- --------
Total net deferred income tax asset $ -0- $ 905
======== ========
</TABLE>
The net current and non-current components of the deferred income taxes
were recognized in the balance sheet at December 31, 1999 and 1998 as follows:
December 31,
---------------
1999 1998
------ ------
(In thousands)
Net current deferred tax assets $2,076 $1,253
Net non-current deferred tax liabilities 2,076 348
------ ------
$ -0- $ 905
====== ======
F-19
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliations between the actual provision for income taxes and that
computed by applying the U.S. statutory rate to income (loss) before taxes are
as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Tax expense (benefit) at U.S. statutory rate $ 104 ($2,427) ($ 190)
Differences resulting from:
Amortization not deductible
for tax purposes 721 727 487
Travel & entertainment expenses
not deductible for tax purposes 269 276 189
Increase in deferred tax valuation
allowance from non-recognition of net
operating loss tax benefit -- 1,447 --
Benefit of prior periods net operating
losses not previously recognized resulting
in decrease in valuation allowance (1,095) -- (483)
Valuation allowance adjustment 905
Other differences 1 (23) (3)
------- ------- -------
Income tax expense $ 905 $ -0- $ -0-
======= ======= =======
</TABLE>
At December 31, 1999 Riddell had estimated net operating loss
carryforwards for federal income tax purposes of approximately $13,000,000
expiring between 2008 to 2014. 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 Riddell's consolidated financial
statements in prior years. Benefits relating to approximately $5.0 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 on the note was included in interest expense for the year ended December
31, 1997.
Subsequent to December 31, 1999, Riddell entered into a sublease for
office space from an entity controlled by a shareholder who is the Chairman of
Riddell's Board of Directors, on substantially the same terms as the over lease.
The term of the sublease commences on the later of the date the sublease is
consented to by the sub-lessor's landlord or the date certain improvements are
completed and expires in September 2009. The sublease provides for fixed rent
which begins at an annualized rate of $116,970 and increase to an annualized
rate of $137,826 at the end of the lease term and additional rent based on a
F-20
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
percentage of tax and operating expense escalation payments made by the
sub-lessor to its landlord. The sublease also provides for a one time payment of
$175,000 for improvements being constructed for Riddell.
14. Supplemental cash flow information:
Cash payments for interest were $14,600,000, $14,700,000 and
$5,260,000for the years ended December 31, 1999, 1998 and 1997, respectively.
Interest payments for 1997 included $3,000,000 relating to bridge financing
commitment fees as discussed in Note 8 above. Income tax payments, or refunds,
were not significant for 1999, 1998 or 1997.
In 1998, Riddell issued shares of its common stock, valued at $128,000
based on quoted market values at the time of grant, to certain employees in
satisfaction of an accrual for compensation included in accrued liabilities at
December 31, 1997.
In June 1997, in connection with the Varsity acquisition, Riddell
assumed liabilities of $23,068,000.
15. Fair values of financial instruments:
Riddell'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. Riddell's
long-term debt include the senior notes which at December 31, 1999 had a
carrying value of $115,000,000 and a fair value, based on quoted market values,
of $98,037,500. Riddell'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:
Riddell 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 Riddell's direct sales force for extracurricular
customers such as schools, leagues, recreational groups and other organizations
for competitive and recreational sport and school spirit activities. Operations
include the manufacture and sale of team sports products (including football
protective products and team uniforms), school spirit products (including
cheerleading and dance uniforms and accessories), and athletic equipment
reconditioning. The segment also operates cheerleader and dance team camps,
clinics and special events. The extracurricular segment includes Riddell's line
of Umbro branded soccer uniforms, footwear and equipment sold to soccer
specialty stores.
Retail products: This segment markets products through retailers. Most
of the products sold by this segment are sports collectible products, such as
authentic and replica football helmets, which bear licensed
F-21
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
Riddell and MacGregor trademark rights to other entities for use in marketing
products such as athletic footwear and apparel.
Riddell's reportable segments are strategic business units that differ
and are managed separately because of the nature of their markets and channels
of distribution. Riddell has determined these reportable segments in accordance
with the management approach specified in Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosure About Segments of an Enterprise and
Related Information." The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the basis for determination of the Company's reportable
segments.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies except for the inclusion of
operating results for Varsity Spirit Corporation, and related pro forma
adjustments, for the period prior to its acquisition in June 1997 (see Note 2).
Riddell 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,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net revenues:
Extracurricular products and services $189,430 $166,845 $153,641
Retail products 18,111 18,142 18,055
Trademark licensing 1,056 1,613 2,388
--------- --------- ---------
208,597 186,600 174,084
Less, preacquisition results of Varsity
Spirit Corporation included above -- -- 35,811
--------- --------- ---------
Consolidated total $208,597 $186,600 $138,273
========= ========= =========
Income from Operations:
Extracurricular products and services $18,487 $11,416 $10,841
Retail products 1,176 56 1,742
Trademark licensing 282 841 1,476
Corporate and unallocated expenses (4,260) (4,796) (6,099)
--------- --------- ---------
15,685 7,517 7,960
Less, preacquisition results of Varsity
Spirit Corporation included above -- -- (3,360)
--------- --------- ---------
Consolidated total $15,685 $7,517 $11,320
========= ========= =========
</TABLE>
F-22
<PAGE>
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Segment and product line information (continued):
<TABLE>
<CAPTION>
(In thousands)
Years ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Depreciation and amortization, exclusive of
debt issue costs:
Extracurricular products and services $4,678 $4,497 $4,253
Retail products 582 557 595
Trademark licensing 531 614 696
Corporate and unallocated 43 45 44
5,834 5,713 5,588
Less, preacquisition results of Varsity
Spirit Corporation included above -- -- 1,578
-------- -------- --------
Consolidated total $5,834 $5,713 $4,010
======== ======== ========
Capital expenditures:
Extracurricular products and services $2,079 $2,265 $2,562
Retail products 463 229 139
-------- -------- --------
2,542 2,494 2,701
Less, preacquisition results of Varsity
Spirit Corporation included above -- -- 887
-------- -------- --------
Consolidated total $2,542 $2,494 $1,814
======== ======== ========
Total assets:
Extracurricular products and services $155,202 $150,163 $143,414
Retail products 14,285 10,253 11,497
Trademark licensing 15,880 16,898 17,835
Corporate and unallocated 8,969 8,897 9,015
-------- -------- --------
Consolidated total $194,336 $186,211 $181,761
======== ======== ========
Revenues by product line for all reportable
segments in the aggregate were as follows:
Cheerleader and dance products $69,155 $63,491 $56,453
Camps and events 51,130 48,704 44,966
Team sports products 46,733 34,276 30,177
Athletic product reconditioning 24,564 23,415 22,892
Sports collectibles 15,959 15,101 17,208
Trademark licensing 1,056 1,613 2,388
-------- -------- --------
208,597 186,600 174,084
======== ======== ========
Less, preacquisition results of Varsity
Spirit Corporation included above -- -- 35,811
-------- -------- --------
Consolidated revenues $208,597 $186,600 $138,273
======== ======== ========
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE
Board of Directors
Riddell Sports Inc.
In connection with our audit of the consolidated financial statements
of Riddell Sports Inc. and Subsidiaries referred to in our report dated February
21, 2000, which is included on page F-2 of this Form 10-K, we have also audited
Schedule II for each of the three years in the period ended December 31, 1999.
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 21, 2000
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, 1997
Allowance for doubtful accounts $513 $365 $325 $379 $824
(c)
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
Year ended December 31, 1999
Allowance for doubtful accounts $1,302 $1,196 -- $635 $1,863
Accrued product liability reserves (b)
Current portion $709 $853 $300 $1,162 $700
Long-term portion 3,300 (300) 3,000
</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>
THIRD AMENDMENT TO LEASE AGREEMENT
This Third Amendment to Lease Agreement ("Third Amendment") is dated as
of February , 2000, by and between BROADWAY PARTNERS, an Illinois General
Partnership as Landlord and RIDDELL, INC., an Illinois Corporation as Tenant.
WITNESSETH
WHEREAS, on October 8, 1993, International Brotherhood of Painters and
Allied Trades Union and Industry Pension Fund ("Prior Landlord") and Tenant
entered into a Lease ("the Original Lease") for 51,155 square feet of space in
the building located at 2050 Lively Boulevard, Elk Grove Village, Illinois (the
"Building") for a term of April 1, 1994 through March 31, 1997.
WHEREAS, on March 2,1995, prior Landlord and Tenant entered into a
Lease Amendment Agreement whereby Tenant leased the entire 82,620 square feet
(the "Premises") of the Building.
WHEREAS, on September 17, 1996, Landlord and Tenant entered into a
Second Lease Amendment extending the term of the Lease to March 31, 2000, and
amending the rental rate pursuant to the Lease;
(Hereinafter the Original Lease, the Lease Amendment Agreement and
Second Lease Amendment are hereinafter referred to "as the Lease")
WHEREAS, Broadway Partners has succeeded to the interest of Prior
Landlord (hereinafter, Broadway Partners shall be referred to as "Landlord");
WHEREAS, Landlord and Tenant desire to amend the Lease to extend the
term through March 31, 2005, amend the Base Rent to be paid under the Lease,
amend the Security Deposit requirement and to provide at the option of Tenant
for the construction of approximately 2,500 square feet of additional office
space, on the terms and conditions set forth herein.
NOW THEREFORE, in consideration of Ten no/100 dollars and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties, Landlord and Tenant agree as follows:
1. Term. Paragraph 1 of the Lease is amended to provide that the
expiration date of the Lease shall be March 31, 2005.
2. Base Rent. Paragraph 2a is amended to provide that the base
rent to be paid by Tenant to Landlord hereunder
shall be as set forth in the rent schedule attached hereto as
Schedule A.
3. Paragraph 2b of the Lease is hereby amended as follows:
SECURITY DEPOSIT
Landlord presently holds the amount of $30,146.10 as
the Security Deposit. Upon the signing of this Third
Amendment, Tenant shall deposit with Landlord the
1
<PAGE>
amount of $4,967.40, which will increase the Security Deposit
to the sum of $35,113.50 as security for the faithful
performance and observance by Tenant of the terms, conditions
and provisions of this Lease including without limitation, the
surrender of possession of the Premises to Landlord as herein
provided. At the option of Tenant, the Security Deposit may be
in the form of an irrevocable letter of credit ("Letter of
Credit") issued on the account of Tenant by a bank or
financial institution ("Issuer Bank"). The Letter of Credit
must provide for partial draws and that the same may be drawn
upon by Landlord pursuant to the provisions of this Section.
In the event Tenant defaults in respect of any of the terms,
provisions and conditions of this Lease, including, but not
limited to, the payment of Base Rent or Additional Rent, and
fails to cure said default within any applicable cure period,
Landlord may draw down upon said Letter of Credit and apply or
retain the whole or any part of the Security Deposit so
deposited to the extent required for the payment of any Base
Rent and Additional Rent or any other sum as to which Tenant
is in default or for any sum which Landlord may expend or may
be required to expend, as provided in this Lease, by reason of
Tenant's default in respect of any of the terms, covenants and
conditions of this Lease. If Landlord applies or retains any
part of the Security Deposit so deposited, Tenant, upon
demand, shall deposit with Landlord the amount so applied or
retained so that Landlord shall have the full Security Deposit
on hand at all times during the Term. If Tenant shall fully
and faithfully comply with all of the terms, provisions,
covenants and conditions of this Lease, the security shall be
returned to Tenant within ten (10) days after the Expiration
Date and after delivery of the entire possession of the
Premises to Landlord. In the event of a sale of the Building
or leasing of the Building, Landlord shall have the right to
transfer the Security Deposit to the purchaser or lessee and
Landlord shall whereupon be released by Tenant from all
liability for the return of the Security Deposit; and Tenant
agrees to look solely to the new landlord for the return of
the Security Deposit; and it is agreed that the provisions
hereof shall apply to every transfer or assignment made of the
Security Deposit to a new landlord. Tenant further covenants
that it will not assign or encumber or attempt to assign or
encumber the Security Deposit and that neither Landlord nor
its successors or assigns shall be bound by any such
assignment, encumbrance, attempted assignment or attempted
encumbrance.
4. Option to Terminate Lease. Tenant is hereby granted the one
time option to terminate the Lease (the "Termination Option")
effective March 31, 2003, upon the following terms and
conditions:
a. Written notice of the election of Tenant to terminate
the Lease must be given by Tenant to Landlord on or
before October 1, 2002.
b. Tenant's right to exercise the Termination Option
shall be contingent upon no Event of Default being
in existence under this Lease on the date of
exercise of the Termination Option or March 31, 2003,
whichever is applicable.
c. Tenant's right to terminate the Lease shall be
contingent upon Tenant paying to Landlord the
following amounts:
<PAGE>
i. The sum of $105,340.50; and
ii. The unamortized cost of the Tenant
Improvement's performed by Landlord pursuant
to paragraph 5(a) below.
d. Tenant shall make payment of one-half the amount
referred to in subparagraphs c (i) and (ii) above at
the time of delivery of written notice of the
election of the Termination Option, and shall pay the
balance no later than the effective date of
termination of the Lease as set forth in the
termination notice.
5. Tenant Improvements.
(a) Upon written request from Tenant, Landlord at a cost
to Landlord not to exceed the sum of $62,500 will
construct approximately 2,500 square feet of
additional office space in the Premises (the "Tenants
Improvements"). Tenant shall reimburse Landlord for
the cost of the Tenant Improvements by amortizing the
cost thereof over the then remaining months of the
term of the Lease at an interest rate of 11%;
provided, however, Tenant shall reimburse Landlord
within ten days of substantial completion of the
Tenant improvements for any costs thereof in excess
of the sum of $62,500. Landlord shall construct the
Tenant Improvements pursuant to plans prepared by
Tenant (the "Tenant Plans") and reasonably approved
by Landlord. Upon substantial completion of the
Tenant Improvements, Tenant shall be obligated to
reimburse Landlord for said Tenant Improvements as
set forth above. Upon the completion of the Tenant
Improvements, the parties shall execute an agreement
memorializing the amount due from Tenant to Landlord
each month to reimburse Landlord for the Tenant
Improvement Work.
(b) Landlord shall give Tenant not less than 5 days
notice of the date of the expected substantial
completion date of the Tenant Improvements. If Tenant
disputes Landlord's notice that the Tenant
Improvements have been Substantially Completed,
Tenant shall deliver notice of such dispute to
Landlord within five (5) days after Landlord's
delivery to Tenant of Landlords' Notice of
Substantial Completion. The failure of Tenant to
deliver the foregoing Notice within such five (5) day
period shall preclude Tenant from claiming at a later
date that the Tenant Improvements have not been
Substantially Completed. Tenant's Notice disputing
Landlord's notice of Substantial Completion must
state with specificity which items Tenant disputes
are not Substantially Completed. In the event Tenant
delivers the foregoing Notice within such five (5)
day period, and Landlord and Tenant cannot mutually
agree on the date of Substantial Completion within
fifteen (15) days of Tenant's delivery of the
foregoing Notice, or such longer period as Landlord
and Tenant may agree upon, then the parties shall
each select an architect who in turn shall select a
third party licensed architect, whose determination
as to substantial completion shall be binding. The
parties shall each pay for their own architect and
split the cost of the third party architect.
3
<PAGE>
(c) In addition to the office space referred to in
Paragraph 5(a) above, Tenant shall have the option to
construct up to 2,500 square feet of additional
office space (the "Additional Space") pursuant to
plans and specifications prepared by the Tenant and
approved by the Landlord. Payment of the Additional
Space improvements will be the sole responsibility of
the Tenant. Landlord shall have the right to
condition its consent to the work for the Additional
Space upon review of the following information from
Lessee: (i) the names and addresses of all
contractors, subcontractors and material suppliers
who will be present on the Premises; (ii) copies of
all contracts pertaining to the performance of the
work for which such access is being requested; (iii)
copies of all licenses and permits required in
connection with the performance of the work for which
such access is being requested; and (iv) certificates
of insurance and instruments of indemnification
against all claims, costs, expenses, liens, damages,
and liabilities which may arise in connection with
such work in amounts and with companies reasonably
acceptable to Landlord. Tenant agrees that in
accordance with Paragraph 7 of the Original Lease
that upon expiration of the term, upon written notice
from Landlord it will remove the Additional Space and
restore the Premises to its original condition.
6. Tenants Payments for Fire and Casualty Insurance and
Landscaping:
a. Tenant shall pay all costs of Fire and Casualty
Insurance for the Building above the base year for
Fire and Casualty Insurance which for purposes hereof
is deemed to be April 1, 2000 through March 31, 2001.
b. Tenant shall pay Landlord for all landscaping costs
incurred in connection with the Building in each year
of the Lease which exceeds the sum of $4,500 per
year.
c. Tenant shall pay to Landlord the costs set forth in
subparagraphs a and b above within 15 days of receipt
of invoice thereof from Landlord.
7. The parties agree that all other terms and conditions of the
Lease remain in full force and effect.
8. Tenant agrees to provide Landlord with an original copy of
this amendment properly signed and attested to by a duly
authorized officer of the corporation approving this Third
Amendment prior to April 1, 2000, and prior to Landlords
obligation to commence the Tenant Improvements as set forth in
paragraph 5 hereof.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as
of the date set forth above.
LANDLORD: TENANT:
BROADWAY PARTNERS, an Illinois RIDDELL CORPORATION, an Illinois
General Partnership Corporation
By: /s/ William J. O'Neill By: /s/ William Sherman
-------------------------------- ------------------------------
Title: One of its Genera1 Partners Title: Senior Vice President
Print Name: WILLIAM J. O'NEILL Print Name: WILLIAM SHERMAN
Attest:
/s/ Richard A. Lester
---------------------------------
Secretary
5
<PAGE>
RENT SCHEDULE
- --------------------------------------------------------------------------------
Rent per Sq. Ft.* Monthly Rent Annual Rent
- --------------------------------------------------------------------------------
Year 1: 4/1/00 - 3/31/03 $5.10 $35,113.50 $421,362.00
- --------------------------------------------------------------------------------
Year 2: 4/1/03 - 3/31/05 $5.20 $35,802.00 $429,624.00
- --------------------------------------------------------------------------------
* Rent calculated upon 82,620 square feet.
6
<PAGE>
AMENDMENT NO. 3
TO EMPLOYMENT AGREEMENT
Amendment No. 3 to the Employment Agreement dated as of March 7, 1996 (the
"Employment Agreement") between Riddell Sports Inc., a Delaware corporation,
(the "Company") and David Groelinger (the "Executive").
WHEREAS, Mr. Groelinger has been elected Chief Financial Officer and Executive
Vice President of the Company.
WHEREAS, the Employment Agreement, unless extended, expires on March 7, 2001 and
the Company wishes to provide Mr. Groelinger incentives to continue providing
excellent leadership in the Company and to extend the term of the Employment
Agreement.
NOW, THEREFORE, for good and valuable consideration receipt of which is hereby
acknowledged the parties hereto agree as follows:
1. Section 2 of the Employment Agreement be and hereby is amended to
provide in full as follows:
"2. Term. This Agreement is for a term ("Term") commencing on
the date of this Agreement and terminating on March 7, 2002,
or upon the Executive's earlier death, disability or other
termination of employment pursuant to Section 11."
2. All other provisions in the Employment Agreement shall remain in full
force and effect.
Dated: 3/1/2000 RIDDELL SPORTS INC.
-----------
By: /s/ David Mauer
----------------------
David Mauer
Its: CEO and President
EXECUTIVE
/s/ David Groelinger
----------------------
David Groelinger
<PAGE>
AMENDMENT NO. 1
TO EMPLOYMENT AGREEMENT
Amendment No. l to the Employment Agreement dated as of May 5, 1997 (the
"Employment Agreement") between Riddell Sports Inc., a Delaware corporation,
(the "Company") and W. Kline Boyd ("Mr. Boyd")
WHEREAS, Mr. Boyd has been elected Senior Vice President and General Manager -
Varsity Spirit Fashions of Varsity Spirit Corporation ("Varsity").
WHEREAS, the Employment Agreement, unless extended, expires on the June 19, 1999
and the Company wishes to provide Mr. Boyd incentives to continue providing
leadership in the Company and to extend the term of the Employment Agreement.
NOW THEREFORE, for good and valuable consideration, receipt of which is hereby
acknowledged the parties agree as follows:
1. Section 1 of the Employment Agreement be and hereby is
amended to provide in full as follows:
"1. Employment. This agreement is for the
two-year period (the "Employment Period")
commencing on June 19, 1999 and terminating
on June 19, 2001 or upon earlier termination
of the Executive's employment.
2. The Company's obligations under Section 2, "Inducement for
Employment" have been fulfilled by the Company.
Dated: August 2, 1999
RIDDELL SPORTS INC.
By: /s/ David Groelinger
------------------------
David Groelinger
EVP & CFO
EXECUTIVE:
/s/ W. Kline Boyd
----------------------------
<PAGE>
AMENDMENT NO. 1 TO LOAN, GUARANTY AND SECURITY AGREEMENT
This AMENDMENT NO. 1 (the "Amendment") is dated as of July 16,
1999 and entered into by and among Riddell Sports Inc., a Delaware corporation
(the "Parent Guarantor"), each of Riddell, Inc., an Illinois corporation, All
American Sports Corporation, a Delaware corporation, Varsity Spirit Corporation,
a Tennessee corporation, and Varsity Spirit Fashions & Supplies, Inc., a
Minnesota corporation, (collectively, the "Borrower"), each of the Subsidiary
Guarantors (as defined in the Credit Agreement referred to below), each of Bank
of America National Trust and Savings Association and American National Bank and
Trust Company of Chicago (collectively, the "Lenders") and Bank of America
National Trust and Savings Association, as agent (the "Agent").
RECITALS
WHEREAS, the parties hereto entered into the Loan, Guaranty and
Security Agreement (as amended, amended and restated, supplemented or otherwise
modified, the "Credit Agreement") dated as of April 20, 1999. Capitalized terms
used herein without definition shall have the meanings assigned to them in the
Credit Agreement;
WHEREAS, the parties hereto desire to make certain amendments to
the Credit Agreement as set forth below; and
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows;
Article I
AMENDMENTS TO THE CREDIT AGREEMENT
1.01 Amendments to Section 9.25 of the Credit Agreement. Section
9.25 of the Credit Agreement is hereby amended by deleting the amount
"$25,700,000" as it appears in the sixth line from the bottom of said Section
and inserting the amount "$35,700,000" in lieu thereof.
1.02 Amendment to Section 9.28. Section 9.28 of the Credit
Agreement is hereby amended by deleting the number "90" therefrom and inserting
the number "120" in lieu thereof.
1.03 Amendment to Schedule 8.3. Schedule 8.3 to the Credit
Agreement is hereby amended by deleting, in each place it appears, the number
"90" referred to therein and inserting the number "120" in lieu thereof.
<PAGE>
Article II
EFFECTIVENESS OF AMENDMENTS
This Amendment shall become effective on the opening of business
in New York on the Business Day on which the Agent notifies the Borrower that it
has executed a counterpart signature page of this Amendment, and has received
executed counterpart signature pages of this Amendment from the Borrower, the
Parent Guarantor, the Subsidiary Guarantors and the Lenders.
Article III
MISCELLANEOUS
3.01 Reference to and Effect on the Credit Agreement and the Other
Loan Documents.
(a) This Amendment modifies the Credit Agreement to the extent set
forth herein, is hereby incorporated by reference into the Credit Agreement and
is made a part thereof. On and after the effective date, each reference in the
Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words
of like import referring to the Credit Agreement, and each reference in the
other Loan Documents to the "Credit Agreement", "thereunder", "thereof" or words
of like import referring to the Credit Agreement shall mean and be a reference
to the Credit Agreement as amended by this Amendment.
(b) Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Documents shall remain in full force and effect and
are hereby ratified and confirmed.
(c) The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of the
Lenders or the Agent under the Credit Agreement or any of the other Loan
Documents. This Amendment is limited to the precise terms hereof and shall not
operate as a present or future waiver of any similar or other provisions of the
Credit Agreement not expressly provided for herein, nor shall this Amendment
prevent the Agent or the Lenders from exercising any other right, power, remedy
or privilege pursuant to the Credit Agreement.
3.02 No Default or Event of Default. On the date of effectiveness
of the amendments herein, the Parent Guarantor, the Subsidiary Guarantors and
the Borrower shall be deemed to have certified to the Lenders and the Agent
that, after giving effect to the amendments contained herein, on such date no
Default or Event of Default is in existence, and all of their representations
and warranties contained in the Credit Agreement and the other Loan Documents
are true and correct on and as of the date thereof with the same effect as if
made on and as of such date (except to the extent such representations and
warranties expressly refer to an earlier date, in which case they shall be true
and correct as of such earlier date).
-2-
<PAGE>
3.03 Headings. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
3.04 Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
3.05 Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute one and the same instrument.
3.06 Guarantor Consent. Without affecting in any way the
provisions of the Guarantee pursuant to which each of the Guarantors waives its
right to consent to changes in the Loan Documents and agrees that its
obligations under the Guarantee remain in full force and effect notwithstanding
any such change, by its signature below, each Guarantor hereby consents to the
amendments provided for herein and agrees that the Guarantee is and remains in
full force and effect and applies to the Credit Agreement and the other Loan
Documents as amended hereby.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement
on the date first above written.
"PARENT GUARANTOR"
Riddell Sports Inc.
By: /s/ Riddel Sports Inc.
------------------------------------
Title:
"BORROWERS"
Riddell, Inc.
By: /s/ Riddell, Inc.
-------------------------------------
Title:
All American Sports Corporation
By: /s/ All American Sports Corporation
------------------------------------
Title:
Varsity Spirit Fashions & Supplies, Inc.
By: /s/ Varsity Spirit Fashions & Supplies,
Inc.
------------------------------------
Title:
Varsity Spirit Corporation
By: /s/ Varsity Spirit Corporation
------------------------------------
Title:
"SUBSIDIARY GUARANTORS"
Equilink Licensing Corp.
By: /s/ Equilink Licensing Corp.
------------------------------------
Title:
-4-
<PAGE>
MacMark Corporation
By: /s/ MacMark Corporation
------------------------------------
Title:
RHC Licensing Corp.
By: /s/ RHC Licensing Corp.
------------------------------------
Title:
Ridmark Corporation
By: /s/ Ridmark Corporation
------------------------------------
Title:
Proacq. Corp.
By: /s/ Proacq. Corp.
------------------------------------
Title:
Varsity USA, Inc.
By: /s/ Varsity USA, Inc.
------------------------------------
Title:
Varsity/Intropa Tours, Inc.
By: /s/ Varsity/Intropa Tours, Inc.
------------------------------------
Title:
International Logos, Inc.
By: /s/ International Logos, Inc.
------------------------------------
Title:
"LENDERS"
By:
------------------------------------
Title:
-5-
<PAGE>
Bank of America National Trust and Savings
Association, as a Lender
By: /s/ Bank of America National Trust and
Savings Association
------------------------------------
Title: Vice President
American National Bank and Trust Company of
Chicago
By: /s/ American National Bank and Trust
Company of Chicago
------------------------------------
Title:
"AGENT"
Bank of America National Trust and Savings
Association, as the Agent
By: /s/ Bank of America National Trust and
Savings Association
------------------------------------
Title: Vice President
-6-
<PAGE>
AMENDMENT NO. 2 TO LOAN, GUARANTY AND SECURITY AGREEMENT
This AMENDMENT NO. 2 (the "Amendment") is dated as of January 1,
2000 and entered into by and among Riddell Sports Inc., a Delaware corporation
(the "Parent Guarantor"), each of Riddell, Inc., an Illinois corporation, All
American Sports Corporation, a Delaware corporation, Varsity Spirit Corporation,
a Tennessee corporation, and Varsity Spirit Fashions & Supplies, Inc., a
Minnesota corporation, (collectively, the "Borrower"), each of the Subsidiary
Guarantors (as defined in the Credit Agreement referred to below), each of Bank
of America, N.A. (f/k/a Bank of America National Trust and Savings Association)
and American National Bank and Trust Company of Chicago (collectively, the
"Lenders") and Bank of America, N.A., as agent (the "Agent").
RECITALS
WHEREAS, the parties hereto entered into the Loan, Guaranty and
Security Agreement (amended by Amendment No. 1 thereto, and as further amended,
amended and restated, supplemented or otherwise modified, the "Credit
Agreement") dated as of April 20, 1999. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Credit Agreement;
WHEREAS, the parties hereto desire to make certain amendments to
the Credit Agreement as set forth below; and
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
Article I
AMENDMENTS TO THE CREDIT AGREEMENT
1.01 Amendments to Definition of Availability. Clause (a) of the
definition of Availability is hereby amended by adding the following Clause (G)
thereto after "(F) Seasonal Overadvance" and before "; provided":
, or (G) in lieu of and without duplication with any Seasonal
Overadvance, during the period from January 1, 2000 to March 31,
2000 only, the "Winter 2000 Overadvance Availability" (for the
purposes of this Agreement, "Winter 2000 Overadvance Availability"
means (a) the lesser of (i) $5,000,000 or (ii) 30% of the
outstanding amounts due to the Borrower in respect of Accounts
created in the ordinary course of the
<PAGE>
Borrower's business that are not Eligible Accounts, minus (b) the
net proceeds of the rights offering described in the Parent
Guarantor's press release dated December 14, 1999 or any similar
offering of equity interests by the Parent Guarantor or the
Borrower remaining after deduction for expenses incurred in
connection with any such offering and deduction for amounts to be
expended during the first calendar quarter of 2000 for the
Borrower's "Internet venture" previously described to the Lenders
(which net proceeds the Parent Guarantor and the Borrower hereby
agree to use to prepay the Loans based on Availability by use of
the Winter 2000 Overadvance Availability in the amount of such net
proceeds); provided, however that in no event shall the Winter
2000 Overadvance Availability exist or otherwise be in effect once
any Seasonal Overadvance Availability has been utilized on or
after March 15, 2000 or otherwise after March 31, 2000).
1.02 Amendment to Article 3. Article 3 of the Credit Agreement is
hereby amended by adding thereto the following Section 3.9:
3.9 Winter 2000 Overadvance Availability. The Borrower agrees to
pay to the Agent, for the ratable account of the Lenders, on
the date that the Borrower executes Amendment No. 2 to this
Agreement a fee of $25,000, and on the date that the
Borrower's use of Availability based on the Winter 2000
Overadvance Availability exceeds $1,000,000, an additional
fee of $25,000 (making for a total fee under such
circumstances of $50,000), which fees shall be
non-refundable and fully earned on each such payment date.
1.03 Amendment to Section 9.23. Section 9.23 of the Credit
Agreement is hereby amended by deleting the number of "$2,250,000" opposite
"12/31/99" and inserting in lieu thereof the number "$3,000,000".
Article II
EFFECTIVENESS OF AMENDMENTS
This Amendment shall become effective on the opening of
business in New York on the Business Day on which the Agent notifies the
Borrower that it has executed a counterpart signature page of this
Amendment, and has received executed counterpart signature pages of this
Amendment from the Borrower, the Parent Guarantor, the Subsidiary Guarantors and
the Lenders.
<PAGE>
Article III
MISCELLANEOUS
3.01 Reference to and Effect on the Credit Agreement and the Other
Loan Documents.
(a) This Amendment modifies the Credit Agreement to the extent set
forth herein, is hereby incorporated by reference into the Credit Agreement and
is made a part thereof. On and after the effective date, each reference in the
Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words
of like import referring to the Credit Agreement, and each reference in the
other Loan Documents to the "Credit Agreement", "thereunder", "thereof" or words
of like import referring to the Credit Agreement shall mean and be a reference
to the Credit Agreement as amended by this Amendment.
(b) Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Documents shall remain in full force and effect and
are hereby ratified and confirmed.
(c) The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of the
Lenders or the Agent under the Credit Agreement or any of the other Loan
Documents. This Amendment is limited to the precise terms hereof and shall not
operate as a present or future waiver of any similar or other provisions of the
Credit Agreement not expressly provided for herein, nor shall this Amendment
prevent the Agent or the Lenders from exercising any other right, power, remedy
or privilege pursuant to the Credit Agreement.
3.02 No Default or Event of Default. On the date of effectiveness
of the amendments herein, the Parent Guarantor, the Subsidiary Guarantors and
the Borrower shall be deemed to have certified to the Lenders and the Agent
that, after giving effect to the amendments contained herein, on such date no
Default or Event of Default is in existence, and all of their representations
and warranties contained in the Credit Agreement and the other Loan Documents
are true and correct on and as of the date thereof with the same effect as if
made on and as of such date (except to the extent such representations and
warranties expressly refer to an earlier date, in which case they shall be true
and correct as of such earlier date).
<PAGE>
3.03 Headings. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
3.04 Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
3.05 Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute one and the same instrument.
3.06 Guarantor Consent. Without affecting in any way the
provisions of the Guarantee pursuant to which each of the Guarantors waives its
right to consent to changes in the Loan Documents and agrees that its
obligations under the Guarantee remain in full force and effect notwithstanding
any such change, by its signature below, each Guarantor hereby consents to the
amendments provided for herein and agrees that the Guarantee is and remains in
full force and effect and applies to the Credit Agreement and the other Loan
Documents as amended hereby.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement on the date
first above written.
"PARENT GUARANTOR"
Riddell Sports Inc.
By: /s/ Riddell Sports Inc.
---------------------------------------------
Title:
"BORROWERS"
Riddell, Inc.
By: /s/ Riddell, Inc.
---------------------------------------------
Title:
All American Sports Corporation
By: /s/ All American Sports Corporation
---------------------------------------------
Title:
Varsity Spirit Fashions & Supplies, Inc.
By: /s/ Varsity Spirit Fashions & Supplies, Inc.
---------------------------------------------
Title:
Varsity Spirit Corporation
By: /s/ Varsity Spirit Corporation
---------------------------------------------
Title:
<PAGE>
"SUBSIDIARY GUARANTORS"
Equilink Licensing Corp.
By: /s/ Equilink Licensing Corp.
---------------------------------------------
Title:
MacMark Corporation
By: /s/ MacMark Corporation
---------------------------------------------
Title:
RHC Licensing Corp.
By: /s/ RHC Licensing Corp.
---------------------------------------------
Title:
Ridmark Corporation
By: /s/ Ridmark Corporation
---------------------------------------------
Title:
Proacq. Corp.
By: /s/ Proacq. Corp.
---------------------------------------------
Title:
Varsity USA, Inc.
By: /s/ Varsity USA, Inc.
---------------------------------------------
Title:
<PAGE>
Varsity/Intropa Tours, Inc.
By: /s/ Varsity/Intropa Tours, Inc.
---------------------------------------------
Title:
International Logos, Inc.
By: /s/ International Logos, Inc.
---------------------------------------------
Title:
"LENDERS"
Bank of America, N.A. (f/k/a Bank of America
National Trust and Savings Association), as a
Lender
By: /s/ Bank of America, N.A.
---------------------------------------------
Title: Vice President
American National Bank and Trust Company of
Chicago, as a Lender
By: /s/ American National Bank and Trust
Company of Chicago
---------------------------------------------
Title:
"AGENT"
Bank of America, N.A. (f/k/a Bank of America
National Trust and Savings Association), as the
Agent
By: /s/ Bank of America, N.A.
--------------------------------------------
Title: Vice President
<PAGE>
AGREEMENT OF SUBLEASE
between
NEDERLANDER TELEVISION AND FILM PRODUCTION, INC.,
Sublandlord
and
RIDDELL SPORTS INC.,
Subtenant
Premises:
--------
Portion of the 20th Floor
1450 Broadway
New York, New York
<PAGE>
AGREEMENT OF SUBLEASE, made as of the ____ day of February, 2000, between
NEDERLANDER TELEVISION AND FILM PRODUCTION, INC., a New York corporation, having
an office at 1450 Broadway, New York, New York ("Sublandlord"), and RIDDELL
SPORTS INC., a Delaware corporation, having an office at 1450 Broadway, New
York, New York ("Subtenant").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, pursuant to a Lease Agreement (the "Lease"), dated as of August
24, 1999, between BROADWAY AND 41ST ASSOCIATES LIMITED PARTNERSHIP ("Prime
Landlord"), as landlord, and Sublandlord, as tenant, Prime Landlord leased to
Sublandlord certain premises (the "Entire Premises") comprised of the entire
20th Floor of the building known as 1450 Broadway, New York, New York (the
"Building"), as such premises are more particularly described in the Lease; and
WHEREAS, Sublandlord desires to sublease to Subtenant that portion of the
Entire Premises consisting of approximately 3,476 square feet of rentable space
on the 20th Floor (the "Demised Premises"), and Subtenant desires to hire the
Demised Premises from Sublandlord on the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
it is mutually agreed as follows:
1. Subleasing of Demised Premises. Sublandlord hereby subleases to
Subtenant, and Subtenant hereby hires from Sublandlord, the Demised Premises,
upon and subject to the terms and conditions hereinafter set forth, as the
Demised Premises are more particularly depicted on the floor plan annexed hereto
as Exhibit A.
2. Term. Subject to the terms hereof, the term (the "Term") of this
Sublease shall commence on the date (the "Commencement Date") which is the later
to occur of (x) the date upon which the construction work in the Demised
Premises is substantially completed, and (y) the date upon which the Consent (as
defined in Article 8 hereof) is obtained, and shall expire on September 29, 2009
(the "Expiration Date"), or on such earlier date that the Term expires or
terminates pursuant to any of the conditions or covenants of this Sublease or
pursuant to law.
3. Fixed Rent and Additional Rent.
3.1. Subtenant shall pay to Sublandlord, commencing on the Commencement
Date and throughout the Term, in currency which at the time of payment is legal
tender for public and private debts in the United States of America, the fixed
rent ("Fixed Rent"), three (3) business days prior to the first (1st) day of
each month during the Term (except that Subtenant shall pay the first full
monthly installment of Fixed Rent on the execution hereof):
(a) for the period commencing on the Commencement Date and ending on
September 30, 2002, the sum of One Hundred Sixteen Thousand Nine Hundred Seventy
and 00/100 Dollars ($116,970.00) per annum, payable in equal monthly
installments of $9,747.50;
2
<PAGE>
(b) for the period commencing on October 1, 2002, and ending on September
30, 2005, the sum of One Hundred Twenty-Three Thousand Nine Hundred Twenty-Two
and 00/100 Dollars ($123,922.00) per annum, payable in equal monthly
installments of $10,326.83;
(c) for the period commencing on October 1, 2005, and ending on September
30, 2008, the sum of One Hundred Thirty Thousand Eight Hundred Seventy-Four and
00/100 Dollars ($130,874.00) per annum, payable in equal monthly installments of
$10,906.17; and
(d) for the period commencing on October 1, 2008, and ending on September
29, 2009, the sum of One Hundred Thirty-Seven Thousand Eight Hundred Twenty-Six
and 00/100 Dollars ($137,826.00) per annum, payable in equal monthly
installments of $11,485.50.
3.2. For each Tax Year during the Term, Subtenant shall pay to Sublandlord
as and for additional rent an amount equal to thirty-two and four-tenths percent
(32.4%) ("Subtenant's Percentage") of the amount by which Sublandlord's Tax
Payment, as defined in Article 40 of the Lease (the "Tax Payment") exceeds the
Tax Payment for Tax Year 1999/2000. Subtenant's Percentage for each Tax Year
shall be due and payable in installments in the same manner that the Tax Payment
for such Tax Year is due and payable by Sublandlord to Prime Landlord. Subtenant
shall pay the Subtenant's Percentage within ten (10) days after the forwarding
by Sublandlord to Subtenant of a statement furnished to Sublandlord by Prime
Landlord; provided, however, in no event shall Subtenant be required to remit
such amount to Sublandlord more than ten (10) days in advance of when such
amount is due and payable by Sublandlord to Prime Landlord. Subtenant shall be
entitled to Subtenant's Percentage of any refunds of such Tax Payment that are
paid or credited to Sublandlord by Prime Landlord under the Lease. Sublandlord
shall pay or credit Subtenant in respect of any such refunds promptly after
Sublandlord is paid or credited such refunds under the Lease.
3.3. For each Operating Year during the term subsequent to the calendar
year ending December 31, 2000 (the "Base Year"), Subtenant shall pay to
Sublandlord thirty-two and four-tenths percent (32.4%) ("Subtenant's Share") of
the Operating Expenses (as such term is defined in the Article 41 of the Lease)
that are payable by Sublandlord to Prime Landlord under the Lease on the dates
and in the manner provided in the Lease. Subtenant shall pay the Subtenant's
Share to Sublandlord within ten (10) days after the forwarding by Sublandlord to
Subtenant of the Escalation Statement (as such term is defined in Article 41 of
the Lease) or similar statement received by Sublandlord; provided, however, in
no event shall Subtenant be required to remit such amount to Sublandlord more
than ten (10) days in advance of when such amount is due and payable by
Sublandlord to Prime Landlord. Subtenant shall be entitled to Subtenant's Share
of any refunds of such Operating Expenses that are paid or credited to
Sublandlord by Prime Landlord under the Lease. Sublandlord shall pay or credit
Subtenant in respect of any such refunds promptly after Sublandlord is paid or
credited such refunds under the Lease.
3.4. Subtenant shall pay to Sublandlord, on account of electricity consumed
in the Demised Premises, thirty-two and four-tenths percent (32.4%) of the cost
of electricity consumed in the Entire Premises, as measured by a submeter or
submeters as provided in Article 43 of the Lease. Subtenant shall make such
payment on account of electricity to Sublandlord within ten (10) days after
rendition of a bill therefor; provided, however, in no event shall Subtenant be
required
3
<PAGE>
to remit such amount to Sublandlord more than ten (10) days in advance of when
such amount is due and payable by Sublandlord to Prime Landlord.
3.5. All Fixed Rent, Subtenant's Percentage of taxes, Subtenant's Share of
Operating Expenses, additional rent, electricity, and all other costs, charges
and sums payable by Subtenant hereunder (collectively the "Rental"), shall
constitute rent under this Sublease, and shall be payable to Sublandlord at its
address as set forth in Article 13 hereof, unless Sublandlord shall otherwise so
direct in writing.
3.6. Subtenant shall promptly pay the Rental as and when the same shall
become due and payable without set-off, offset or deduction of any kind
whatsoever, except as expressly set forth herein, and, in the event of
Subtenant's failure to pay the same when due (subject to grace periods provided
herein), Sublandlord shall have all of the rights and remedies provided for
herein or at law or in equity, including, without limitation, the right to
collect interest pursuant to Article 39 of the Lease.
3.7. Sublandlord's failure during the Term to prepare and deliver any
statements or bills required to be delivered to Subtenant hereunder, or
Sublandlord's or Subtenant's failure, as the case may be, to make a demand under
this Article 3 or under any other provisions of this Sublease shall not in any
way be deemed to be a waiver of any such breach, agreement, term, covenant or
condition, or cause Sublandlord to forfeit or surrender its rights to collect
any Rental which may have become due pursuant to this Article 3 during the Term.
Subtenant's liability for the Fixed Rent and additional rent due under this
Article 3 accruing during the Term, and Sublandlord's obligation to refund
overpayments of or adjustments of any Rental paid to it by Subtenant, shall
survive the expiration or sooner termination of this Sublease.
3.8. Except as otherwise provided herein, in no event shall any adjustment
of any payments payable by Subtenant result in a decrease in the Fixed Rent, nor
shall any adjustment of any item of additional rent payable by Subtenant result
in a decrease in any other item of additional rent payable by Subtenant, it
being understood and agreed that the payment of any item of additional rent
under this Article 3 is an obligation supplemental to Subtenant's obligations to
pay Fixed Rent and any other item of additional rent. Notwithstanding anything
to the contrary contained in this Article 3, the Fixed Rent payable by Subtenant
to Sublandlord under Section 3.1 hereof shall be abated during the period
commencing on the Commencement Date and ending on the date on which
Sublandlord's abatement of Fixed Rent payable by Sublandlord to Prime Landlord
ends pursuant to Section 39(e) of the Lease (it being understood and agreed that
Sublandlord's rent abatement under Section 39(e) of the Lease ends on March 31,
2000).
4. Subordination to and Incorporation of the Lease.
4.1. This Sublease is in all respects subject and subordinate to the terms
and conditions of the Lease (a true and complete copy of which has been
furnished by Sublandlord to Subtenant), and to all matters to which the Lease is
subject and subordinate. Subtenant shall indemnify Sublandlord for, and shall
hold it harmless from and against, any and all losses, damages, penalties,
liabilities, costs and expenses, including, without limitation, reasonable
attorneys' fees and disbursements, which may be sustained or incurred by
Sublandlord by reason of Subtenant's failure to keep, observe or perform any of
the terms, provisions, covenants, conditions and obligations on
4
<PAGE>
Sublandlord's part to be kept, observed or performed under the Lease to the
extent same shall have been incorporated herein, or otherwise arising out of or
with respect to Subtenant's use and occupancy of the Demised Premises from and
after the Commencement Date.
4.2. Except as otherwise expressly provided in, or otherwise inconsistent
with, this Sublease, or to the extent not applicable to the Demised Premises,
the terms, provisions, covenants, stipulations, conditions, rights, obligations,
remedies and agreements contained in the Lease are incorporated in this Sublease
by reference, and are made a part hereof as if herein set forth at length;
provided that the following portions of the Lease shall not so be incorporated
herein: "Basic Lease Provisions", Section 1, Section 28, Section 34, Section 38,
Section 39(a) and (f), Section 43, Section 47, Section 68(a),(c),(d),(i)-(l),
Section 70, Section 76, and Exhibits A, B, and C; provided further that for
purposes of this Agreement:
(a) the term "Landlord" shall be deemed to refer to Sublandlord;
(b) the term "Tenant" shall be deemed to refer to Subtenant;
(c) the term "Premises" shall be deemed to refer to the Demised Premises;
(d) the term "this Lease" shall be deemed to refer to this Sublease or this
Agreement;
(e) the term the "Fixed Rents" shall be deemed to refer to the Fixed Rent;
(f) in any case in the Lease where Landlord reserves the right to enter the
Demised Premises, for purposes of incorporation herein, such right shall inure
to Sublandlord and to Prime Landlord;
(g) to the extent that the Lease requires Tenant to maintain any insurance
policy naming Landlord as an additional insured thereunder, for purposes of
incorporation herein, Subtenant shall name Sublandlord and Prime Landlord as
additional insureds thereunder; and
5. Security Deposit. Subtenant shall deposit with Sublandlord on the
signing of this Sublease an amount equal to Thirty-Eight Thousand Nine Hundred
Ninety and 00/100 Dollars ($38,990.00) as security for the faithful performance
and observance by Subtenant of the terms, covenants, conditions and provisions
of this Sublease, including, without limitation, the surrender of possession of
the Demised Premises to Sublandlord as herein provided. If an Event of Default
shall occur and be continuing, Sublandlord may apply the whole or any part of
the security so deposited (i) toward the payment of any Fixed Rent, additional
rent or any other item of Rental as to which Subtenant is in default, (ii)
toward any sum which Sublandlord may reasonably expend or be required to expend
by reason of Subtenant's default in respect of any of the terms, covenants and
conditions of this Sublease, including, without limitation, any damage,
liability or expense (including, without limitation, reasonable attorneys' fees
and disbursements) incurred or suffered by Sublandlord, and (iii) toward any
damage or deficiency incurred or suffered by Sublandlord in the re-subletting of
the Demised Premises, whether such damages or deficiency accrue or accrues
before or after summary proceedings or other re-entry by Sublandlord. If
Sublandlord applies or retains any part of the security so deposited in
accordance
5
<PAGE>
with the terms hereof, Subtenant, upon demand, shall deposit with Sublandlord
the amount so applied or retained so that Sublandlord shall have the full
deposit on hand at all times during the Term. If Subtenant shall fully and
faithfully comply with all of the terms, provisions, covenants and conditions of
this Sublease, the security shall be returned to Subtenant within thirty (30)
days after the Expiration Date and after delivery of possession of the Demised
Premises to Sublandlord. Subtenant shall not assign or encumber or attempt to
assign or encumber the monies deposited herein as security and neither
Sublandlord nor its successors or assigns shall be bound by any such assignment,
encumbrance, attempted assignment or attempted encumbrance.
6. Covenants and Representations with Respect to the Lease.
6.1. Subtenant shall not do anything that would constitute a default under
the Lease or omit to do anything that Subtenant is obligated to do under the
terms of this Sublease so as to cause there to be a default under the Lease.
Sublandlord shall not do anything that would constitute a default under the
Lease or omit to do anything that Sublandlord is obligated to do under the terms
of the Lease so as to cause there to be a default under the Lease. Sublandlord
shall not terminate, cancel, surrender, modify or amend the Lease so as to
materially deprive Subtenant of its rights under this Sublease, in each case
without the consent of Subtenant, which consent shall not be unreasonably
withheld. Sublandlord represents and warrants to Subtenant that (i) the Lease is
in full force and effect and has not been modified, supplemented or amended
except as set forth herein, (ii) Sublandlord has received no notice that
Sublandlord is in default under the Lease beyond applicable notice and cure
periods, and (iii) Sublandlord has not entered into any sublease, assignment or
occupancy agreement transferring Sublandlord's interest in the Demised Premises
to any party other than Subtenant.
6.2. The time limits set forth in the Lease for the giving of notices,
making of demands, performance of any act, condition or covenant, or the
exercise of any right, remedy or option, are changed for the purpose of this
Sublease, by lengthening or shortening the same in each instance, as
appropriate, so that notices may be given, demands made, or any act, condition
or covenant performed, or any right, remedy or option hereunder exercised, by
Sublandlord or Subtenant, as the case may be (and each party covenants that it
will do so) within three (3) days prior to the expiration of the time limit,
taking into account the maximum grace period, if any, relating thereto contained
in the Lease. Each party shall promptly deliver to the other party copies of all
notices, requests or demands which relate to the Demised Premises or the use or
occupancy thereof after receipt of same from Prime Landlord.
7. Services and Repairs. Notwithstanding anything to the contrary contained
in this Sublease or in the Lease, Sublandlord shall not be required to provide
any of the services that Prime Landlord has agreed to provide, whether or not
specified in the Lease (or required by law), or make any of the repairs or
restorations that Prime Landlord has agreed to make pursuant to the Lease (or
required by law), or provide the parking access, or comply with any laws or
requirements of any governmental authorities, or take any other action that
Prime Landlord has agreed to provide, furnish, make, comply with, or take, or
cause to be provided, furnished, made, complied with or taken under the Lease,
but Sublandlord agrees to use all diligent efforts, at Subtenant's sole cost and
expense, to obtain the same from Prime Landlord (provided, however, that
Sublandlord shall not be obligated to use such efforts or take any action which
might give rise to a default under the Lease), and Subtenant shall rely upon,
and look solely to, Prime Landlord for the provision,
6
<PAGE>
furnishing or making thereof or compliance therewith. If Prime Landlord shall
default in the performance of any of its obligations under the Lease,
Sublandlord, upon request and at the expense of Subtenant, shall timely
institute and diligently prosecute any action or proceeding which Subtenant, in
its reasonable judgment, deems meritorious, in order to have Prime Landlord make
such repairs, provide such services or comply with any other obligation of Prime
Landlord under the Lease or as required by law.
8. Consents.
8.1. If Prime Landlord shall withhold its consent or approval in connection
with this Sublease or the Demised Premises in any instance where, under the
Lease, the consent or approval of Prime Landlord may not be unreasonably
withheld, Sublandlord, upon the request and at the expense of Subtenant, shall
either (i) timely institute and diligently prosecute any action or proceeding
which Sublandlord, in its reasonable judgment, deems meritorious, in order to
dispute such action by Prime Landlord, or (ii) permit Subtenant, to the extent
allowable under the Lease, to institute and prosecute such action or proceeding
in the name of Sublandlord, provided that Subtenant shall keep Sublandlord
informed of its actions and shall not take any action which might give rise to a
default under the Lease.
8.2. Sublandlord shall not withhold, condition or delay its consent or
approval in connection with any request of Subtenant therefor pursuant to this
Sublease if the Prime Landlord under the Lease has given Prime Landlord's
consent or approval with respect to such request.
8.3. This Sublease shall become effective only if the written consent (the
"Consent") of Prime Landlord is obtained in accordance with the provisions of
the Lease. Upon execution and delivery of this Sublease by Sublandlord and
Subtenant, Sublandlord shall promptly request the consent of Prime Landlord to
this Sublease. Subtenant agrees to cooperate in good faith with Sublandlord and
shall comply with any reasonable requests made of Subtenant by Sublandlord or
Prime Landlord in the procurement of the Consent. If the Consent is not obtained
within sixty (60) days following the execution and delivery of this Sublease
(the "Outside Date") by both parties, then Sublandlord or Subtenant may cancel
this Sublease by giving written notice thereof to the other party not later than
ten (10) days after the Outside Date. Upon either party's receipt of a valid
notice of cancellation, this Sublease shall be null and void and Sublandlord
shall return to Subtenant any amounts theretofore paid by Subtenant to
Sublandlord hereunder, and thereupon neither party shall have any further
obligation to the other under this Sublease. Sublandlord and Subtenant may
agree, upon mutual consent, to postpone the Outside Date. In the event the
parties agree to postpone the Outside Date, Sublandlord and Subtenant shall
execute an agreement confirming the new Outside Date.
9. Termination of Lease. If the Lease is terminated (x) by Prime Landlord
pursuant to the terms thereof with respect to all or any portion of the Entire
Premises prior to the Expiration Date for any reason whatsoever, including,
without limitation, by reason of casualty or condemnation, or (y) by Sublandlord
by reason of casualty or condemnation, then, in either case, this Sublease shall
thereupon terminate with respect to the Demised Premises and (unless such
termination of the Lease shall be as a result of Sublandlord's default
thereunder or a voluntary surrender of the Entire Premises, other than a
surrender of all or any portion of the Entire Premises
7
<PAGE>
permitted under the Lease with respect to a termination of the Lease by reason
of casualty to or condemnation of all or any portion of the Entire Premises or
the Building) Sublandlord shall not be liable to Subtenant by reason thereof. In
the event of such termination, Sublandlord shall return to Subtenant that
portion of any Rental paid in advance by Subtenant with respect to the Demised
Premises, if any, prorated as of the date of such termination.
10. Damage, Destruction, Fire and other Casualty; Condemnation.
Notwithstanding any contrary provisions of the Lease herein incorporated by
reference, Subtenant shall not have the right to terminate this Sublease as to
all or any part of the Demised Premises, or be entitled to an abatement of Fixed
Rent, additional rent or any other item of Rental, by reason of a casualty or
condemnation affecting the Demised Premises, provided that if Sublandlord is
entitled to an abatement of Fixed Rent, additional rent or any other item of
Rental by reason of a casualty or condemnation affecting the Demised Premises,
then Subtenant shall be entitled to a corresponding abatement with respect to
its corresponding obligation under this Sublease.
11. Assignment/Subletting. Notwithstanding anything to the contrary
contained herein or in the Lease as incorporated herein, Sublandlord shall not
unreasonably withhold, condition or delay its consent to a subletting of the
Demised Premises or to an assignment of this Sublease provided that Prime
Landlord has granted its consent to such subletting or such assignment. Upon the
request of Subtenant, Sublandlord, at Subtenant's sole cost and expense, shall
request the consent of Prime Landlord and cooperate with Subtenant in obtaining
such consent.
12. No Waivers. Failure by Sublandlord or Subtenant, as the case may be, in
any instance to insist upon the strict performance of any one or more of the
obligations of the other party under this Sublease, or to exercise any election
herein contained, shall in no manner be or be deemed to be a waiver by such
party of any of the other party's defaults or breaches hereunder or of any of
such party's rights and remedies by reason of such defaults or breaches, or a
waiver or relinquishment for the future of the requirement of strict performance
of any and all of such other party's obligations hereunder. Further, no payment
by Subtenant or receipt by Sublandlord of a lesser amount than the correct
amount or manner of payment of Rental due hereunder shall be deemed to be other
than a payment on account, nor shall any endorsement or statement on any check
or any letter accompanying any check or payment be deemed to effect or evidence
an accord and satisfaction, and Sublandlord may accept any checks or payments as
made without prejudice to Sublandlord's right to recover the balance or pursue
any other remedy in this Sublease or otherwise provided at law or equity.
13. Notices. Any notice, statement, demand, consent, approval, advice or
other communication required or permitted to be given, rendered or made by
either party to the other, pursuant to this Sublease or pursuant to any
applicable law or requirement of public authority (collectively
"Communications") shall be in writing and shall be deemed to have been properly
given, rendered or made only if sent by (x) personal delivery, receipted by the
party to whom addressed, (y) registered or certified mail, return receipt
requested, posted in a United States post office station in the continental
United States, or (z) nationally recognized overnight courier, in each case
addressed (i) to Sublandlord at its address first above written, Attention: Mr.
Robert Nederlander, with a copy to Proskauer Rose LLP, 1585 Broadway, New York,
New York 10036, Attention: Kenneth Hilton, Esq., and (ii) to Subtenant at its
address first above written, Attention:
8
<PAGE>
________________, with a copy to Zukerman Gore & Brandeis, LLP, 900 Third
Avenue, New York, New York 10022, Attention: Jeffrey D. Zukerman, Esq. All such
Communications shall be deemed to have been given, rendered or made when
delivered and receipted by the party to whom addressed, in the case of personal
delivery, or three (3) days after the day so mailed. Either party may, by notice
as aforesaid actually received, designate a different address or addresses for
Communications intended for it.
14. Broker. Each party hereto covenants, warrants and represents to the
other party that it has had no dealings, conversations or negotiations with any
broker concerning the execution and delivery of this Sublease. Subtenant shall
indemnify and hold Sublandlord harmless from and against any and all claims for
commission, fees, or other compensation by any person or entity who shall claim
to have dealt with Subtenant in connection with this Sublease, and for any and
all costs incurred by Sublandlord in connection with such claims, including,
without limitation, reasonable attorneys' fees and disbursements. Sublandlord
shall indemnify and hold Subtenant harmless from and against any and all claims
for commission, fees, or other compensation by any person or entity who shall
claim to have dealt with Sublandlord in connection with this Sublease, and for
any and all costs incurred by Subtenant in connection with such claims,
including, without limitation, reasonable attorneys' fees and disbursements. The
provisions of this Article 14 shall survive the expiration or earlier
termination of the Term hereof.
15. Condition of the Demised Premises. Subtenant agrees to accept the
Demised Premises in its "as is" condition as of the Commencement Date.
Sublandlord has not made and does not make any representations or warranties as
to the physical condition of the Demised Premises, the use to which the Demised
Premises may be put, or any other matter or thing affecting or relating to the
Demised Premises, except as expressly provided in this Sublease. Sublandlord
shall have no obligations whatsoever to alter, improve, decorate, service,
repair or otherwise prepare the Demised Premises or any of the improvements,
equipment, fixtures or other items therein for Subtenant's occupancy, except
that Sublandlord shall construct Subtenant's offices in accordance with the
plans and specifications attached hereto as Exhibit B and made a part hereof
("Subtenant's Plans"). Subtenant, upon the execution of this Sublease, shall pay
to Sublandlord an amount equal to One Hundred Seventy-Five Thousand and 00/100
Dollars ($175,000.00) ("Subtenant's Contribution") as Subtenant's share of the
costs and expenses incurred by Sublandlord in connection with the buildout of
Subtenant's offices (it being agreed that Subtenant's Contribution shall be
increased to the extent that Subtenant or its representatives request changes to
Subtenant's Plans which increase the costs and expenses incurred by Sublandlord
in connection therewith).
16. Compliance with Law. Subtenant shall not do or permit any act or thing
to be done upon the Demised Premises which may subject Sublandlord to any
liability or responsibility for injury, damages to persons or property or to any
liability by reason of any violation of any requirement of law or any
governmental regulation and shall exercise such control over the Demised
Premises as to fully protect Sublandlord against any such liability.
9
<PAGE>
17. Miscellaneous.
17.1. This Sublease contains the entire agreement between the parties and
all prior negotiations and agreements are merged in this Sublease. Any agreement
hereafter made shall be ineffective to change, modify or discharge this Sublease
in whole or in part unless such agreement is in writing and signed by the
parties hereto. No provision of this Sublease shall be deemed to have been
waived by Sublandlord or Subtenant unless such waiver be in writing and signed
by Sublandlord or Subtenant, as the case may be. The covenants and agreements
contained in this Sublease shall bind and inure to the benefit of Sublandlord
and Subtenant and their respective permitted successors and assigns.
17.2. In the event that any provision of this Sublease shall be held to be
invalid or unenforceable in any respect, the validity, legality or
enforceability of the remaining provisions of this Sublease shall be unaffected
thereby.
17.3. The paragraph headings appearing herein are for purposes of
convenience only and are not deemed to be a part of this Sublease.
17.4. Capitalized terms used herein shall have the same meanings as are
ascribed to them in the Lease, unless otherwise expressly defined herein.
17.5. This Sublease is offered to Subtenant for signature with the express
understanding and agreement that this Sublease shall not be binding upon
Sublandlord unless and until Sublandlord shall have executed and delivered a
fully executed copy of this Sublease to Subtenant.
17.6. Neither the partners comprising Sublandlord and Subtenant (if either
Sublandlord or Subtenant is a partnership), nor the shareholders, partners,
directors or officers of Sublandlord and Subtenant or any of the foregoing
(collectively, the "Parties") shall be liable for the performance of the
obligations of Sublandlord and Subtenant, respectively, under this Sublease.
Sublandlord and Subtenant shall look solely to the other party to enforce its
respective obligations hereunder and shall not seek damages against any of the
Parties. Sublandlord and Subtenant shall look only to the assets of the other
party for the satisfaction of its remedies for the collection of a judgment (or
other judicial process) requiring the payment of money by either Sublandlord or
Subtenant in the event of any default by said party hereunder, and no property
or assets of the Parties shall be subject to levy, execution or other
enforcement procedure for the satisfaction of the remedies of either Sublandlord
or Subtenant under or with respect to this Sublease, the relationship of
Sublandlord and Subtenant hereunder or Subtenant's use or occupancy of the
Demised Premises.
17.7. Notwithstanding anything contained herein, this Sublease shall be
deemed to be a sublease of the Premises and not an assignment, in whole or in
part, of Sublandlord's interest in the Lease.
17.8. This Sublease shall be governed by, and construed in accordance with,
the laws of the State of New York.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement of
Sublease as of the day and year first above written.
NEDERLANDER TELEVISION AND FILM PRODUCTION,
INC., Sublandlord
By: /s/ Robert Nederlander
------------------------------------
Name: Robert Nederlander
Title:
RIDDELL SPORTS INC., Subtenant
By: /s/ David Groelinger
------------------------------------
Name: David Groelinger
Title:
11
<PAGE>
Nederlander Television and Film Production, Inc.
1450 Broadway
New York, New York
As of March ___, 2000
Riddell Sports Inc.
1450 Broadway
New York, New York
Re: 1450 Broadway, New York, New York
---------------------------------
Gentlemen:
Reference is made to the Agreement of Sublease, dated as of
______________, 2000, between Nederlander Television and Film Production, Inc.
("Sublandlord"), as sublandlord, and Riddell Sports Inc. ("Subtenant"), as
subtenant, with respect to a portion of the twentieth (20th) floor of the
building located at 1450 Broadway, New York, New York (the "Sublease").
Notwithstanding anything to the contrary contained in the Sublease,
Sublandlord and Subtenant hereby agree as follows:
1. Sublandlord and Subtenant each covenants, warrants and represents to the
other party that it has had no dealings, conversations or negotiations with any
broker concerning the execution and delivery of the Sublease other than
Helmsley-Spear, Inc. ("Broker");
2. Subtenant shall indemnify and hold Sublandlord harmless from and against
any and all claims for commission, fees, or other compensation by any person or
entity (other than Broker) who shall claim to have dealt with Subtenant in
connection with the Sublease, and for any and all costs incurred by Sublandlord
in connection with such claims, including, without limitation, reasonable
attorneys' fees and disbursements;
3. Sublandlord shall indemnify and hold Subtenant harmless from and against
any and all claims for commission, fees, or other compensation by any person or
entity (including Broker) who shall claim to have dealt with Sublandlord in
connection with the Sublease, and for any and all costs incurred by Subtenant in
connection with such claims, including, without limitation, reasonable
attorneys' fees and disbursements;
4. Sublandlord shall pay all commission, fees, or other compensation due to
Broker in connection with the Sublease pursuant to a separate agreement between
Sublandlord and Broker; and
<PAGE>
5. the provisions set forth in this agreement shall survive the expiration
or earlier termination of the term of the Sublease.
Except as modified by this agreement, the Sublease and all covenants,
agreements, terms and conditions thereof shall remain in full force and effect
and are hereby in all respects ratified and confirmed.
Please indicate your agreement with the foregoing by signing in the space
indicated below.
Very truly yours,
Nederlander Television and Film Production, Inc.
By: /s/ Robert Nederlander
--------------------------------------------
Robert Nederlander, President
Agreed to:
Riddell Sports Inc.
By: /s/ David Groelinger
------------------------------
Name: David Groelinger
Title:
<PAGE>
EXHIBIT A
Floor Plan of the Demised Premises
The attached floor plan is annexed to and made a part of this Sublease solely to
indicate the Demised Premises by outlining. All areas, conditions, dimensions,
and location are approximate.
<PAGE>
EXHIBIT B
Subtenant's Plans
See Attached
13
<PAGE>
AGREEMENT TO BUILD AND LEASE
THIS LEASE AGREEMENT, made and entered into this 30 day of December,
1998 by and between MMCA DEVELOPMENT, LLC. or its nominee, hereinafter called
"Lessor", whose address is 1111 East Broad Street, Elyria, Ohio 44035, and ALL
AMERICAN SPORTS CORPORATION, a Delaware Corporation, whose address is 1320
Taylor Street, Elyria, Ohio, together hereinafter called "Lessee".
WITNESSETH:
PREMISES: That in consideration of the covenants and agreements
hereinafter mentioned, and to be performed by the respective parties hereto, and
in payment of rentals hereinafter designated to be paid by Lessee in accordance
with provisions of this Lease, Lessor has leased, rented, let and demised, and
by these presents does lease, rent, let and demise unto said Lessee, its
successors and assigns, and Lessee takes and hires from Lessor that certain
parcel of real property located on Sugar Lane, Elyria, Ohio, together with the
building to be erected thereon, and more particularly described in Exhibit "A"
attached hereto and made a part hereof.
TO HAVE AND TO HOLD, the above-described premises, together with all
and singular tenements, hereditaments and appurtenances thereunto belonging, or
in any way incident or appertaining, together with the rents, issues and profits
thereof (save and except the rents and other amounts due the Lessor from the
Lessee herein), unto said Lessee for a term of years as hereinafter set forth,
beginning with a date as provided in Paragraph 2 hereunder.
The terms, conditions and covenants of this Lease are as follows:
1. CONSTRUCTION BY LESSOR.
(a) Lessor covenants and agrees to construct, and pay for, a building
including site improvement costs on the demised premises according to
plans and specifications as prepared by Lessor and plot plans provided
by Lessee, which plans and specifications and
<PAGE>
plot plans shall be approved in writing by Lessor and Lessee, and which
are incorporated herein by reference. Said construction shall be by the
Lessor, in accordance with the proposal of said Lessor, dated 12/28/98,
which is attached hereto, marked Exhibit "B" and made a part hereof,
together with any amendments or additions thereto, which shall be
initialed by the parties and also made a part hereof. Construction work
shall commence as soon as a building permit can be obtained for said
work and necessary zoning requirements have been satisfied, and shall
be completed as rapidly as conditions permit, but not later than August
15, 1999, subject to delay caused by conditions beyond the control of
the Lessor.
(b) At all times, until the building is complete, Lessee shall have the
right to enter upon the premises for the purpose of inspecting the
construction and progress of the building, provided that Lessee shall
not interfere with the progress of said construction. The Lessor
covenants and agrees to submit to Lessee's construction manager, prior
to the commencement of construction, a tentative inspection schedule
mutually satisfactory to the parties hereto. Said inspection schedule
shall set forth the dates of the following stages of construction so
that the Lessee may inspect and approve each stage of construction. The
stages of construction shall be:
STAGE 1: The period of excavation work or any required or necessary
fill work.
STAGE 2: The period of construction of any necessary or required
retaining wall.
STAGE 3: The time prior to the pouring of any footings or other
foundation.
STAGE 4: The time of completion of the erection of structural steel
framework.
STAGE 5: The time prior to completion and concealment of electrical
wiring, completion or rough plumbing, duct work, roof and partitions
and/or walls.
STAGE 6: The period of preparation of sub-base and base for paving.
STAGE 7: The period after completion of all construction work and
installation of equipment.
(c) The building and parking lot are to be used for sports equipment
renovation, equipment sales and other related uses necessary for
Lessee's business and for no other purpose without the written consent
of Lessor.
(d) All risk of loss to the demised premises prior to commencement date
of the lease term shall remain with the Lessor and any damages shall be
promptly repaired by Lessor, but the costs of builder's risk insurance
shall be included in Lessor's cost of construction.
(e) For a period of one (1) year immediately following the commencement
of the term of this Lease, Lessor shall be liable to Lessee for any
damage or injury to Lessee or Lessee's
<PAGE>
property occasioned by any defect in the materials or labor used in the
construction of said premises.
Should Lessor neglect or refuse to repair any such defect for which
Lessor is responsible, within a reasonable time after notice that such
defect or defects exist, Lessee, without liability or forfeiture of its
terms hereby demised, may, at its option, have such repairs made at the
expense of Lessor and deduct from the rent the cost of repairing such
defect or defects.
2. TERM. The term of this Lease shall commence on the first
day of the month following the date that the building and site
improvements are substantially completed by Lessor in accordance with
the plans and specifications heretofore referred to as determined by
generally accepted construction standards and shall continue for the
full period of fifteen (15) years thereafter. Substantial completion as
used herein shall mean the date after the completion of the building
and land improvements to the extent that Lessee may use and occupy the
same for the conduct of its business. The Lessee shall pay rent for the
fractional month before the commencement date of the term of the Lease
on a prorated basis, beginning on the day following the date of
substantial completion. The teen of the Lease shall not commence before
an occupancy permit has been issued by appropriate governmental
authority and such commencement date shall be documented by letter
signed by both parries to the Lease.
3. POSSESSION. Possession of the leased premises shall be
delivered to the Lessee upon the commencement of the Lease term;
however, Lessee shall have the right prior to the beginning of the term
of this Lease to install its fixtures and equipment at its own risk,
free from rent, provided such installation does not interfere with the
work being done in the construction of the building.
4. (A) RENTAL. Lessee shall pay to Lessor a minimum basic
annual rental at the rate of Four and 50/100 Dollars ($4.50)
per square foot per year of the building constructed in
<PAGE>
accordance with Paragraph 1 above. Said square footage shall be
determined by the exterior dimensions of the building, which shall
include both manufacturing and office space.
(B) ALLOWANCE - Lessor hereby grants to Lessee an allowance
not to exceed the sum of One Hundred Thousand Dollars ($100,000.00) to
be used by Lessee to offset any and all moving expenses that Lessee may
have in moving from their present facilities to the premises
hereinabove described.
5. COST OF CONSTRUCTION. The additional cost of construction
by reason of changes from the original approved plans or specifications
as requested by Lessee which result in additional costs to the Lessor
not reflected in the plans and specifications as approved by Lessee,
which changes must first be approved in writing by the Lessee, shall be
paid by the Lessee to the Lessor, such payment to be made to Lessor
when said changes are completed.
6. TAXES. Lessor agrees to pay promptly and before they become
delinquent, all taxes, general and special, imposed at any time during
the term of this Lease upon or against the Premises, including the land
and all improvements now or hereafter thereon which may be lawfully
assessed in the name of the Lessor.
7. UTILITIES. Lessee agrees to pay for al utilities for the
leased premises during the term of this Lease, including, without
limitation, gas, electricity and water and sewer rental.
8. INDEMNIFICATION OF LESSOR; INSURANCE.
A. The Lesser agrees to indemnify and save harmless the Lessor
from all actions and claims for damages by reason of injury to or the
death of any person and damage to or destruction of any property
arising out of the occupancy of the leased premises and the operation
of the business thereon, including liability for products dispensed
from the leased premises, during the term of the lease.
<PAGE>
B. Lessee, at its own cost and expense, shall keep all
buildings, improvements on, in or appurtenant to the demise premises at
the commencement of the term and thereafter erected thereon or therein,
including alterations, replacements and improvements, insured for the
benefit of Lessor and Lessee against loss or damage by fire, casualty
and all available extended coverage or other hazards and similar
insurance as may from time to time be required in a sum not less than
the full insurable value thereof. Lessee covenants to pay all insurance
premiums when and as the same become due.
C. Lessee covenants to provide on or before the commencement
of the term of this Lease to keep in force during the term, a
comprehensive public liability policy of insurance protecting Lessor
and Lessee against any liability for injury to persons and/or property
occurring in, on or about the demised premises, or any appurtenances
thereto. Lessee covenants to carry such insurance in a solvent company
or companies of recognized standing, licensed to do business in the
state in which the demised premises are located in an amount not less
than $5,000,000.00 combined single limit (bodily injury and property
damage); which policy will be approved by Lessor and be written for the
use and benefit of Lessor and Lessee, with Lessor and Lessee being
assureds. Lessee shall provide Lessor with a copy or certificate of all
insurance policies above referred to.
9. REPAIRS. The Lessee will be responsible for the interior of
the building and for the repair of minor components of the electrical,
plumbing, heating, ventilating/air conditioning, water heating and, if
any, sprinkler systems, fixtures and equipment. "Minor component parts"
shall mean items such as fuses, thermostats, filters, belts, faucets,
sprinkler heads, etc. Lessee shall protect such systems, fixtures and
equipment against freezing and damage due to Lessee's neglect and shall
routinely perform preventative maintenance. Lessee shall be responsible
to
<PAGE>
remove snow and ice from all walks, pavements and parking areas. Lessee
shall also be responsible for repair and maintenance of exit doors,
exit signs and or the replacement of broken door and window glass.
Lessor shall be responsible for all repairs under the normal one year
warranty given by the building contractor. In addition Lessor shall be
responsible for all repairs to the roof.
10. ALTERATIONS. Lessee may, from time to time, at its own
expense, alter, renovate or improve the premises, provided the same be
performed in a good workmanlike manner in accordance with accepted
building practices and so as not to weaken and impair the structure or
substantially lessen the value of the building, provided that any
alterations, additions or improvements of a capital nature be first
approved in writing by Lessor.
11. TITLE. Lessor represents and covenants that it has fee
simple title, free and clear and unencumbered to the premises when this
Lease was executed except as hereinafter set forth and has full right
and authority to execute this Lease for the term and upon the
conditions herein contained, and there are no restrictive covenants,
zoning or other ordinances or regulations prohibiting the Lessee's use
of the premises for the purposes for which the same are hereby leased.
If by reason of any breach by Lessor of the foregoing covenants and
representation or if by reason of any zoning or other regulation or
ordinance hereafter adopted, the use of the premises, in either their
present condition or after any alterations thereof, for the purposes
for which the same are hereby leased is prevented or prohibited, then
at Lessee's option and without prejudice to any right or remedy which
Lessee may have, the Lessee may terminate this Lease and the Lease
shall cease and come to an end on the 10th day following notice by
Lessee to Lessor of Lessee's exercise of such option.
The leased premises are subject to the following liens and
encumbrances:
<PAGE>
(i) current real estate taxes which are a lien but not yet due
and payable;
(ii) a mortgage to ____________________________________in the
current amount of $_____________________;
12. SUBORDINATION. This Lease shall be subordinate to any
mortgage against the premises, the proceeds of which are to be used by
Lessor (for the land purchase, construction of the buildings and other
improvements) to the demised premises. The total monthly payments upon
any such mortgage shall be no greater than the monthly rent heretofore
reserved and any proposed mortgagees must agree that the Lessee herein
and/or its Sub-Lessee shall not be disturbed in its possession of the
premises in the event of a foreclosure suit brought against the
mortgagor, so long as Lessee is not in default of this Lease. Lessee
agrees that it will, upon demand, execute any and all instruments as
may be required to evidence such subordination upon the conditions
herein set forth.
13. COVENANT OF QUIET ENJOYMENT. Lessor covenants that Lessee
on the performance of the terms and conditions of this Lease shall and
may peaceably and quietly have, hold and enjoy the premises for the
term aforesaid.
14. DAMAGE TO PREMISES. If during the term of this Lease the
building, improvements in or appurtenant to the demised premises shall
be destroyed by fire, storm, lightning, earthquake or other casualty,
rental shall abate in such proportion as use of the premises by Lessee
has been destroyed, and Lessor shall restore premises to substantially
the same condition as before damage as speedily as practical but not
exceed six months; whereupon, full rental shall commence. In the event
the building is destroyed to the extent that it is unusable for
Lessee's business operations, then in such event either party shall
have the option to terminate this lease by written notice to the other
given within ten (10) days following the happening of the
<PAGE>
event. If neither party elects to terminate, such loss shall be treated
in the same manner as herein provided for a partial loss.
15. DEFAULT. Upon failure of Lessee to pay the rent at the
time and in the manner hereinbefore provided, or upon the failure of
Lessee to promptly perform any other covenant or agreement hereunder,
Lessor may, at its option, terminate this Lease and the term hereof by
giving Lessee at least thirty (30) days written notice of such
termination, and after the giving of such notice, if such default is
not cured by the date fixed therein for such termination, or if Lessee
is not in the process of curing such default if such default cannot be
reasonably cured within thirty (30) days, this Lease shall cease and
come to an end on such fixed date and thereupon Lessee shall vacate and
surrender the demised premises to Lessor and Lessor may reenter and
repossess itself of the same, discharged of this Lease, and remove all
persons and parties therefrom with of without legal process, and using
such force as may be necessary so to do without being guilty of
trespass, forcible entry or detainer or other tort; that in the event
of any repossession of the demised premises by Lessor because of the
default of Lessee herein, either under the foregoing provisions or in
pursuance of any proceedings under the laws or statutes of the state
within which the demised premises are situated, Lessor may, if it so
elects, re-let the premises or any part thereof, either on its own
account, or as agent for Lessee, and for the balance of the term
hereof, or for a longer or shorter period in the discretion of the
Lessor, and Lessee agrees to pay to Lessor the rent hereinbefore
reserved on the days when the same becomes due and payable, less the
net proceeds of the reletting, if any. Nothing herein shall be
construed to limit the remedies of Lessor in the event of default by
Lessee.
16. MECHANICS LIENS. The Lessor and Lessee covenant, each to
the other, not to permit any lien to be filed against the demised
property on account of non-payment or disputes with
<PAGE>
respect to labor or materials furnished in connection with the
construction as referred to herein, or any subsequent repairs or
modifications or additions thereto, nor shall the parties permit any
judgment, lien or attachment to lie against the property. Should any
lien of any nature, including the foregoing but not limited thereto, be
filed against the property, the party from whose debt or alleged debt
such lien arises, shall within thirty (30) days cause said lien to be
removed by substitution of collateral or otherwise.
17. PERMITS AND LICENSES. This lease and all the terms,
covenants and conditions herein contained, is subject to the obtaining
of building permits and all other permits and licenses necessary for
the erection and opening of a building for Lessee's purposes as set
forth above and in accordance with the plans and specifications
referred to in Paragraph 1(a) above. In the event that all permits and
licenses for the erection and occupation of such building are not
obtainable or available from the appropriate governmental authorities,
then this Lease shall be null and void and of no effect and shall
terminate immediately upon Lessor giving notice to Lessee of the denial
of any issuance of the aforesaid permits and licenses.
18. END OF TERM. Upon expiration of this Lease, Lessee having
fully complied with the terms and conditions, Lessor hereby waives any
right to claim any signs, equipment and fixtures affixed to the demised
property by Lessee and same may be removed by Lessee, as well as any
part of the fixtures that may have been affixed to the real property by
Lessee which Lessee may remove provided that the premises are restored
to its original condition, normal wear and tear excepted.
19. OPTION TO RENEW. Lessor grants Lessee an option to renew
this Lease for a consecutive ten (10) year term, after the expiration
of the original term, on the same terms as this Lease except that the
rental for said term shall be at a rate of Four and 86/100 Dollars
($4.86)
<PAGE>
per square foot per year. Lessee shall give Lessor written notice of
Lessee's intention to renew at least sixty (60) days prior to the
expiration of the term of this Lease. It is clearly understood and
agreed between the parties that any holding over or failure to vacate
the premises at the end of the Lease term or any extension thereof
shall, under no circumstances, be deemed or construed to be an exercise
of the option to renew or a renewal of the Lease, in the absence of
written notice by Lessee to Lessor of the exercise of the option.
20. CONDEMNATION. If the whole of the demised premises shall
be taken or condemned by any competent authority for any public use or
purpose during the term of this Lease, Lessee reserves unto itself the
right to prosecute its claim for an award based upon its leasehold
interest of buildings, alterations and improvements for such taking,
without impairing any rights of Lessor for the taking of or injury to
the reversion.
In the event that a part of the demised premises shall be
taken or condemned, and that:
(a) the part so taken includes the building on the demised
premises or any part thereof; or
(b) the part so taken shall consist of twenty five (25)
percent or more of the total parking area; or
(c) such partial taking shall result in cutting off direct
access from the demised premises to any adjacent public street
or highway;
then and in any such event, the Lessee may at any time either prior to
or within a period of sixty (60) days after the date when possession of
the premises shall be required by the condemning authority, elect to
terminate this Lease. In the event that Lessee shall fail to exercise
any such option to terminate this Lease, or in the event that a part of
the demised premises shall be taken or condemned under circumstances
under which the Lessee will have no such option, then in either such
event this Lease shall continue in effect with respect to the portion
of the demised premises not so taken, and Lessor will, with all due
diligence and at its own cost and expense,
<PAGE>
repair and restore the demised premises or what may remain thereof to
their former condition, and to the extent that the Lessee's possession
of the leased premises may be impaired, and until the completion of
such work, the obligation of the Lessee to pay rent and real estate
taxes shall abate.
21. RIGHTS-OF-WAY, RESTRICTIONS, ETC. Lessor covenants that
the demised premises are free and clear of all encumbrances, easements,
rights-of-way, reservations, restrictions, covenants, limitations and
conditions that would restrict the construction, maintenance and
operation of Lessor's business with its necessary appurtenances as
shown in the plans and specifications prepared by Lessor. In the event
that the demised premises are burdened with any encumbrances,
easements, rights-of-way, reservations, restrictions, covenants,
limitations and conditions that would restrict the construction,
maintenance and operation of Lessee's business with its necessary
appurtenances, then Lessee will have the option of terminating this
contract and all sums paid hereunder will be returned.
22. BROKER COMMISSION. Both parties hereto covenant to the
other that this lease has been entered into by them without the
intervention of a real estate broker or salesman and by reason thereof
no sales commission, compensation or other brokerage expenses are due
or payable by either party.
23. NOTICES. Every notice, approval, consent or other
communication authorized or required by this Lease, shall be effective
if given in writing and sent by United States Registered or Certified
Mail, return receipt requested, with postage prepaid, and addressed
directly to the Lessor and Lessee at their respective addresses, as set
forth in Page 1 of this lease agreement, or such other addresses as
either party may designate by written notice, from time to time.
<PAGE>
24. CONSTRUCTION OF LEASE. In the event that any of the
provisions of this Lease shall be court order be held invalid or in the
contravention of any of the laws of the State of Ohio, such
invalidation shall not serve to affect the remaining portion of this
Lease agreement. The Lease shall be governed and construed by the laws
of the State of Ohio.
25. LEASE BINDING ON SUCCESSOR. This contract shall bind the
Lessor and Lessee, and their successors, heirs, assigns,
administrators, legal representatives, executors or assigns, as the
case may be.
26. HEADINGS. Headings or titles of the paragraphs and
sub-paragraphs are inserted solely for the convenience of reference and
shall not constitute a part of this Lease, nor shall they affect its
meaning, construction or effect.
27. SHORT FORM LEASE. The parties will at any time at the
request of either one promptly execute duplicate originals of an
instrument, in recordable form, which will constitute a short form of
the lease, setting forth a description of the premises, the terms of
this Lease and any other portions hereof, excepting the rental
provisions, as either party may request. If the precise date of
commencement and termination of the term of this Lease are not known at
the time of execution of said short form of Lease, the parties will, as
soon as they are known and at the request of either party, execute a
supplemental instrument in recordable form, setting forth the exact
date of commencement and termination of the terms.
28. ASSUMPTION OF LESSEES' PRESENT RENTAL OBLIGATIONS:
Lessee represents that it is currently obligated on leases for the
premises at 1320 Taylor Street and 1305 Taylor Street in Elyria, Ohio
which expire on May 31, 2000 and August 31, 2000, respectively. Lessor
agrees to assume the balance of these rental obligations from the date
of commencement of this lease through the expiration of the lease at
1320 Taylor Street, Elyria, Ohio and 1305
<PAGE>
Taylor Street, Elyria, Ohio, for a total obligation not to exceed
$45,433.80 for 1320 Taylor Street, Elyria, Ohio and for a total
obligation not to exceed $78,000 for 1305 Taylor Street, Elyria, Ohio.
Following the assumption of these rentals by Lessor, Lessor shall have
the right to have the right to sublet said premises as it may see fit.
29. PERSONAL PROPERTY: Lessor agrees that the Lessee is the
owner of the personal property to be located on the premises to be
occupied by Lessee under the terms of this Lease, whether said personal
property is attached to the premises or not. Lessor further
acknowledges that NBD Bank, 1116 West Long Lake Road, Bloomfied Hills,
MI 48302 has a lien upon or security interest in all of the Lessee's
personal property and that said lien is prior to and superior to any
interest lien or claim of any nature that the Lessor may now have or
hereafter obtain in the personal property, whether by operation of law,
contract or otherwise. Lessor further agrees that NBD Bank and/or
Lessee may remove said personal property from the premises hereinabove
described at any time without hindrance on the part of the Lessor and
upon request of Lessor, will grant to NBD Bank or its representatives
access to the premises so that NBD Bank or its representative may
remove any personal property. Lessor further agrees that said personal
property shall remain personal property and shall not become fixtures,
notwithstanding the manner or mode of the attachment of the personal
property to the land. Lessor waives any rights it may now or hereafter
have in said personal property including, without limitation, any lien
rights available under applicable law.
<PAGE>
IN WITNESS WHEREOF, the Lessor and the Lessee and Guarantors have
respectively signed and sealed this Lease as of the day and year first
above written.
IN THE PRESENCE OF: MMCA DEVELOPMENT, LLC.
/s/ Christina Abraham By: /s/
--------------------------------- ------------------------------
Its: Pres.
/s/ William D. Logan
---------------------------------
ALL AMERICAN SPORTS CORPORATION
/s/ Kelly R. Turner By: /s/ Jay Cromwell
--------------------------------- ------------------------------
Its: VP/Operations
/s/ Robert J. Kelly
--------------------------------- ------------------------------
STATE OF OHIO
SS
LORAIN COUNTY
Before me, a notary public in and for said county and state, personally
appeared MMCA Development, LLC. by _____________________________________ its
________________________ who acknowledged that he did sign the foregoing
instrument and that the same is the free act and deed of said corporation and
the free act and deed of him personally and as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal
at________________________, Ohio this 5 day of Jan (1998.) 1999
/s/ Tammy Sanders
---------------------------------
. Notary Public
Com Exp 6-29-99
<PAGE>
STATE OF OHIO
SS
LORAIN COUNTY
Before me, a notary public in and for said county and state, personally
appeared All American Sports Corporation, by Ray Cromwell its VP/Operations who
acknowledged that he did sign the foregoing instrument and that the same is the
free act and deed of said corporation and the free act and deed of him
personally and as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal at
Lorain Co., Ohio this 30th day of December, 1998.
/s/ Andrea J. DeChant
---------------------------------
Notary Public
ANDREA J. DECHANT
Notary Public. State of Ohio
My Commission Expires 5-21-2000
<PAGE>
GUARANTEE
WHEREAS, All American Sports Corporation is a wholly owned subsidiary
of Riddell Sports, Inc.; and
WHEREAS, MMCA Development, LLC. requires the guarantee of Riddell
Sports, Inc. as an inducement to enter into the lease attached hereto;
IT IS HEREBY AGREED AS FOLLOWS:
Riddell Sports, Inc. hereby does guarantee all of the obligations of
All American Sports Corporation under the terms and conditions of the lease
attached hereto, subject to the following:
In the event that Riddell Sports, Inc., during the term of said lease,
shall sell either the assets of All American Sports Corporation or the corporate
stock of A11 American Sports Corporation to another entity whose purpose shall
be carrying on and continuing the business of All American Sports Corporation
and which entity has the financial capability of doing so (as opposed to the
liquidation of the assets of All American Sports Corporation) and said entity
shall affirmatively, in writing, agree to be obligated upon the attached lease,
then the guarantee of Riddell Sports, Inc. shall thereafter be null and void.
RIDDELL SPORTS, INC.
By: /s/ David Groelinger
--------------------------
Its: EVP & CFO
<PAGE>
EXHIBIT B
65000 SQ FT. Of plant area, building 300'-0" x 175' -0" x 20'-0" and
100'-0 x 125'-0" x20' -0", including (2) truck wells,(]) elevated
dock,(3)large overheads, radiant heat, electric (Minimum 800 amp
service ),mechanical and sprinkler per code, 6" concrete floor,8'-0"
wainscote on (3) walls, and asphalt parking for (120) cars. Building to
be designed for future expansion off rear end wall. Building includes
(2) 1' 2'x35' laundry trenches. Paint booth and stacks to be by
Riddell/All American. Separate men and women's restrooms for plant
employees.
7000 SQ FT. of office space, building to be 35'-0" x 200'-0"x 14'-0"
including all interior finishes, electrical, mechanical, sprinkler and
HVAC systems. Office area to include separate men's and women's
restrooms for office employees (1) large conference room, break room
with kitchenette and (2) small meeting rooms. Office finishes include
commercial grade carpet, painted dry wall and drop in acoustical
ceilings.
NOTES
Comm'l carpet allowance ($18-20) per yd.
800 amp electrical service - 3 phase
110 volt drops @ each outer column & each interior column
(plant area)
Roof system plant area Butler MR24 (20 yr. Warranty)
Roof system office area Butler VSR (20 yr. Warranty)
Office electrical will be adequate circuits for computer use
(on clean lines)
Landscaping provided --$5000 allowance
Riddell\All American will be given opportunity @their expense
to install wiring for computer and phone system prior to
drywall installation
Kitchenette for Lunch Room
ADDITIONS
BY
Riddell/All American
Add lunch room in plant 400 SQ FT
Add factory office 150 SQ FT
Add helmet test room 200 SQ FT
Add overhead storage over factory restrooms, lunch room ,etc.
Add mail room in plant 150 SQ FT
Add walls to enclose buffing room, drying room, and separate
bag storage from balance of plant
Ridell/All American
(Charles - per our conversation NBA
12/28/98 (initialed handwritten note)
<PAGE>
ADDENDUM
THIS ADDENDUM, made and entered into this 1st day of Feb, 2000
is an Addendum to the Agreement to Build and Lease dated October 30,
1998 by and between MMCA Development, LLC. hereinafter referred to as
Lessor, and ALL AMERICAN SPORTS CORPORATION, hereinafter referred to as
"Lessee".
WITNESSETH:
WHEREAS, the parties hereto have entered into an Agreement to
Build and Lease (Lease) dated December 30, 1998 and;
WHEREAS, the parties hereto desire to amend said lease.
NOW, THEREFORE, in consideration of the mutual promises
contained, the parties hereto agree as follows:
1. Exhibit A attached hereto and made a part hereof describes
the premises which Lessor has leased, rented, let and demised to Lessee
pursuant to said Lease.
2. Paragraph 6 of said Lease is amended to read as follows:
"Lessee agrees to pay promptly and before they become
delinquent all taxes, general and special, imposed at any time
during the term of this lease upon or against the premises,
including the land and all improvements now or hereafter
thereon which may be lawfully assessed in the name of Lessor."
3. Lessor has incurred as additional costs of construction by
reason of change of the originally approved plans and specifications of
said Lease as requested by Lessee not reflected in the plans and
specifications as approved by lessee the sum of Two Hundred Sixty Six
Thousand Six Hundred Thirty Five and no/100 Dollars ($266,635.00) which
costs and changes include the sprinkler system. Lessee is entitled to
allowances as set forth Paragraph 4(B) of said
<PAGE>
Lease for a net amount of One Hundred Sixty Six Thousand Six Hundred
Thirty Five and no/100 Dollars ($166,635.00) for said additional costs
of construction
In addition, Lessor has purchased equipment as set forth in
Exhibit B attached hereto for a total costs of Two Hundred Forty Five
Thousand Three Hundred Fourteen Dollars ($245,314.00). Lessee agrees to
lease said equipment from Lessor over the last one hundred seventy six
(176) months of the term of this lease at a monthly rental of Two
Thousand Six Hundred Sixty Three and 52/100 Dollars ($2,663.52). At the
expiration of said equipment lease. Lessee shall have the option to
purchase said equipment for the sum of One Dollar ($1.00).
Accordingly, the Lessee shall pay to Lessor the sum of Four
Thousand Four Hundred Seventy Three and 21/100 Dollars ($4,473.21) per
month in addition to the rental set forth is Paragraph 4(A) of the
Lease, or a total of Thirty One Thousand Six Hundred Forty Two and
21/100 Dollars ($31,642.21) for the last one hundred seventy six months
(176) of the term of said Lease.
IN WITNESS WHEREOF, the parties hereto have set their hands
the day and year first above written.
1N THE PRESENCE OF. MMCA DEVELOPMENT, LLC.
/s/ Gayle L. Redlick By: /s/
--------------------------------- ------------------------------
Its:
/s/ Jay Cromwell
--------------------------------- ALL AMERICAN SPORTS
CORPORATION
/s/ Gayle L. Redlick
-------------------------------- By: /s/ William D. Logan
------------------------------
Its: VP Finance
/s/ Jay Cromwell
---------------------------------
<PAGE>
EXHIBIT B
Paint system - new Elyria Facility
Air compressors/lines
New facility wiring/cabling/alarm system
Racks/shelving
Duct work/air hood unit
Laundry installation excluding machinery
Signs
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Riddell Sports Inc.
We have issued our reports dated February 21, 2000, accompanying the
consolidated financial statements and schedule included in the Annual Report of
Riddell Sports Inc. and Subsidiaries on Form 10-K for the year ended December
31, 1999. We hereby consent to the incorporation by reference of said report in
the Registration Statements of Riddell Sports Inc. and Subsidiaries on Form S-8
(File No. 333-34355), effective August 25, 1997, on Form S-4 (File No.
333-31525), effective August 7, 1997, and on Form S-3 (File No. 333-43247),
effective February 13, 1998.
/s/ Grant Thornton LLP
----------------------
Grant Thornton LLP
Chicago, Illinois
March 30, 1999
