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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19298
RIDDELL SPORTS INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction 22-2890400
of incorporation or organization) (I.R.S. Employer Identification No.)
1450 BROADWAY, SUITE 2001, NEW YORK, NEW YORK 10018
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (212) 921-8101
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 (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 2001 Annual Meeting of Stockholders to be filed on or
before April 30, 2001 (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 4,794,797 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 21, 2001, is $11,555,461.
As of March 22, 2001, the Registrant had 9,452,250 shares of Common Stock, $.01
par value per share, outstanding.
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;
o a supplier of sports collectible products through retailers in the
United States and internationally; and
o a major provider of studio dance conventions and competitions.
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
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 more high school and college
cheerleaders than any other brand. Our cheerleading camps were attended by more
than 230,000 students in 2000, more than 30,000 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. 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; and
o expanding the size of our sales force.
RECENT DEVELOPMENTS
On March 1, 2001, our subsidiary, Varsity Fashions and Supplies, Inc. filed
a lawsuit in the Southern District of New York against Umbro Worldwide, Ltd. and
its related companies seeking to prevent certain breaches by Umbro of its
agreement with Varsity pertaining to, INTER ALIA, its sale of products into the
United States via the Internet and its threatened change of market positioning
of certain Umbro products previously sold by Signal Apparel, Inc. We do not
believe the lawsuit will have a material adverse effect on the company.
BUSINESS SEGMENTS
We presently employ our sales and marketing strategy and operate our
business through various wholly-owned subsidiaries in three business segments.
EXTRACURRICULAR
Our extracurricular segment, which we have historically referred to as our
institutional segment, markets, manufactures and distributes products and
services primarily through our approximately 340 person direct sales force to
customers such as schools, recreational groups and other organizations. It is
our largest segment, and was responsible for over 91% of our revenues in 2000.
RETAIL
Our retail segment markets products through retailers in the U.S. and
internationally, and was responsible for approximately 8% of our revenues in
2000. 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 a license from Major
League Baseball. 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 2000.
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Financial information for each of our three business segments is presented
in Note 14 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 youth 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 are one of the world's leading manufacturers 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 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 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. In late 1998, we also introduced a line of
custom team uniforms for high school and youth participants.
GAME UNIFORMS
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.
In 1998, we introduced a line of athletic game uniforms for the team sports
market. We are seeking to capitalize on the efficiency and expertise obtained
through the manufacture of our custom-made cheerleading and dance team uniforms
by applying the same design and manufacturing techniques to the production of
athletic game uniforms.
At the end of 1998, we also began offering Umbro team soccer uniforms,
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
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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.
Approximately 100,000 catalogs are mailed annually to schools and school spirit
advisors and coaches containing color photographs and descriptions of our
Varsity Spirit line of uniforms and accessories. We supplement our direct sales
force and catalog sales efforts with a telemarketing sales force of 13 full and
part-time employees.
CHEERLEADER AND DANCE TEAM CAMPS
We operate cheerleader and dance team camps in the United States. Camp
enrollment has increased every year since the camp division commenced operation
in 1975 with 20 cheerleading camps and 4,000 participants. During the 2001 camp
season, approximately 230,000 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 2000, 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)
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These championships and special events have been regularly televised on the
ESPN television network and have been sponsored by various companies and
products, including Nike, Degree, AT&T, Pond's, 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 2000, over 33,000 persons, including cheerleaders and their families,
attended our special events.
OTHER EXTRACURRICULAR OPERATIONS
We are continuing to expand our uniform design, manufacturing and special
event expertise from cheerleading into the private dance studio market through
our venture called Company Dance. In June 2000, we acquired certain of the
assets of the Netherland Corporation ("Starlight Productions"), one of the
larger studio dance competition companies. While Starlight Productions'
historical operations and assets are not material in comparison to our Financial
Statements, we feel that this acquisition combined with our existing Company
Dance convention business will help us to expand our entree into the studio
dance business. Company Dance operates weekend dance conventions and
competitions in twenty-nine U.S. cities, an annual convention championship from
the Walt Disney Resort in Orlando that is televised on ESPN and two annual
competition championships.
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 Internet operations
PROPRIETARY, DIRECT SALES FORCE
Our comprehensive relationship marketing and sales strategy is made
possible by our approximately 340 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. 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.
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Over the last several years, we have been increasing the size of our sales
force, and intend to continue to do so over the next few years. Increasing the
size of the sales force goes hand-in-hand with expanding the array of products
and services marketed by the sales force. In this way, we can shrink the size of
sales territories, while sales people become more efficient and increase their
incomes. As a result, we are seeking to make it easier for each salesperson to
better concentrate on and become more intimate with a smaller sales territory,
while at the same time having more products and services to offer to the
customers in that territory. The desired effect is to enable each salesperson to
generate increased sales by spending less time traveling and more time with
customers selling a greater array of products and services. Increased sales
enables the sales force to increase their incomes, because their compensation is
commission-based and smaller territories can also increase their incomes because
our salespeople pay for all of their travel and other related expenses.
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 national dance competitions 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.
Key marketing alliances
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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 19th 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 Resort 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.
INTERNET OPERATIONS
We believe that our 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 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
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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 2000, we contracted for our production
requirements with eleven 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, Adidas, Converse, Body Wrappers, and Top
Sox, 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 and Major League Baseball.
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.
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.
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.
8
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, footwear and balls.
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 for use 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. Kmart does not intend
to renew the license and we plan to re-license the trademarks. 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. We have agreed with Footstar, in principle, to a
renewal and an amendment to the license, and the documentation is currently
being completed.
In 2000, we granted a license for use of our MacGregor trademark on team
sports products sold to retailers. We also amended an existing MacGregor license
for team sports sold to the extracurricular segment which had been royalty free,
to provide for royalties to be paid to us.
OUR INTERNET OPERATIONS
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.
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. In the third quarter of 2000 we launched
WWW.CODANCE.COM, our website for Company Dance.
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 2000 and 1999. 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.
9
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands)
Year ended December 31, 2000:
Revenues ............................. $39,280 $75,019 $88,180 $32,242
Percent of total annual revenues .. 17% 32% 37% 14%
Operating income (loss) .............. $(2,722) $10,652 $14,373 $(5,290)
Net income (loss) .................... $(6,719) $ 6,441 $10,092 $(9,253)
Year ended December 31, 1999:
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)
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 the end of 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
during the first and second quarter as we prepare for the upcoming
camp season, while most revenue relating to the camps is earned during
the period from June to August. Company Dance competitions and
conventions primarily take place during the first and second quarters
which may temper this segment's seasonality.
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.
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 $20.7 million at February 28, 2001 compared to
$20.6 million at February 29, 2000. We expect substantially all of the backlog
to be shipped within the 2001 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.
10
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.
We compete with Showbiz, Starpower, Showstoppers, Tremaine, West Coast
Dance Explosion, New York City Dance Alliance, and other smaller national and
regional companies in operating studio dance conventions and competitions. We
believe the principal factors governing the selection of a studio dance
convention or competition are the reputation of the dance operator for providing
quality instruction and supervision, location, schedule and tuition charged for
convention/competition.
RETAIL COLLECTIBLE PRODUCTS
Our collectible products compete with a large number and wide array of
manufacturers and sellers of sports and other collectible and memorabilia
products, some of which have greater resources than us. Among our competitors in
this large marketplace are sellers of products such as autographed photographs
and uniforms and other memorabilia and manufacturers of clothing, such as caps
and jackets.
LICENSING
Competition in the licensing of sports equipment, apparel and footwear is
substantial, and the Riddell and MacGregor brands compete with numerous
companies also having significant brand recognition, many of which have greater
financial, distribution, marketing and other resources. Brand recognition and
reputation for quality are important competitive factors in the licensing of
sports apparel and footwear. Competing brands include Adidas(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, Co. Dance, National High School Cheerleading
Championship, the Universal Dance Association, Universal Dance Camps, Varsity
Spirit Fashions and The National Dance Team Championship, among others.
11
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 do not have the MacGregor trademark rights to golf
products.
GOVERNMENTAL REGULATION
Our products and accessories are subject to the Federal Consumer Product
Safety Act, which empowers the Consumer Product Safety Commission to protect
consumers from hazardous sporting goods and other articles. The Consumer Product
Safety Commission has the authority to exclude from the market certain articles
which are found to be hazardous and can require a manufacturer to repurchase
such goods. Similar local laws exist in some states and cities in the United
States, Canada and Europe. We maintain a quality control program for our
protective equipment operations and other products that is designed to comply
with applicable laws. To date, none of our products have been deemed to be
hazardous by any governmental agency.
There is no national governing body regulating cheerleading and dance team
activities at the collegiate level. Although voluntary guidelines relating to
safety and sportsmanship have been issued by the NCAA and some of the athletic
conferences, to date cheerleading and dance teams are generally free from rules
and restrictions similar to those imposed on other competitive athletics at the
college level. However, if rules limiting off-season training are applied to
cheerleading and/or dance teams similar to rules imposed by the NCAA on some
inter-collegiate sports, it is likely that we would be unable to offer a
significant number of our camps either because participants would be prohibited
from participating during the summer or because enough suitable sites would not
be available. Although we are not aware of any school officially adopting these
activities as a competitive sport, recognition of cheerleading and/or dance
teams as "sports" would increase the possibility that cheerleader or dance
activities may become regulated. We currently do not believe that any regulation
of collegiate cheerleading or dance teams as a "sport" is forthcoming in the
foreseeable future, and in the event any rules are proposed to be adopted by
athletic associations, we expect to participate in the formulation of such rules
to the extent permissible.
At the high school level, some state athletic associations have classified
cheerleading as a sport and in some cases have imposed certain restrictions on
off-season practices and out-of-state travel to competitions. However, in all
cases to date, we have been able to work with these state athletic associations
to designate acceptable times for the cheerleaders within these states to attend
camps. We have also signed agreements with several state associations to assist
with sponsoring and executing official competitions within these states. To
date, state regulations have not had a material effect on our ability to conduct
our normal business activities.
Operations at all of our facilities are subject to regulation by the
Occupational Safety and Health Agency and various other regulatory agencies.
Our operations are also subject to environmental regulations and controls.
While some of the raw materials used by us may be potentially hazardous, 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, 2000, we had approximately 1,250 employees. Approximately
1,125 of these employees were employed on a full time basis and approximately
125 were part time or temporary employees. Approximately 41 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 17 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 expires in January
2003. We have been discussing a renewal of this agreement with the union.
During the summer of 2000, we employed approximately 3,000 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.
12
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 $6,300,000, 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. Should either of these $20,000,000 aggregate limits become exhausted or
impaired, in full or in part, the policy provides that Riddell can reinstate the
affected limit back to a full $20,000,000 level upon payment of a reinstatement
premium. Each of the $20,000,000 aggregate limits may only be reinstated once
and the reinstatement premium can vary from $750,000 to $2,500,000 depending on
the amount of the reinstatement and which of the two aggregate limits is to be
reinstated.
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 22, 2001, nine product liability cases were
pending against us.
In March 1999, a jury rendered a verdict against us and two of our wholly
owned subsidiaries, Riddell, Inc. and All American Sports Corporation, in a
Texas lawsuit, in the aggregate amount of $11,450,000, $9,900,000 of which was
awarded on a product liability claim and $1,550,000 of which was awarded on a
bystander emotional distress claim. On February 14, 2001, the United States
Court of Appeals for the Fifth District overturned the bystander emotional
distress claim and held that it could not be re-tried. The jury award on the
product liability claim was also reversed and was remanded to the lower court.
We do not know whether the plaintiff will seek to retry the product liability
case.
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 9 to the Consolidated Financial Statements.
13
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:
Lease
Square Expiration
Location Principal Use Footage Date
- ------------------ ----------------------------- ------- --------------
New York, New York Corporate headquarters 3,476 September 2009
Chicago, Illinois Headquarters of Riddell, Inc. 95,000 Owned
and helmet manufacturing
Elk Grove Village, Warehouse and distribution 105,000 March 2005
Illinois center
Elyria, Ohio Headquarters for All American 2,000 September 2014
Sports Corporation
reconditioning operations and
customer service
Stroudsburg, Reconditioning and shoulder 44,000 October 2001
Pennsylvania pad customizing
Memphis, Tennessee Headquarters for Varsity 50,000 March 2002
Operations
Memphis, Tennessee Headquarters for Varsity 51,045 Commences
Operations December 2001,
Expires
November 2011
Bartlett, Tennessee Warehouse and Manufacturing 205,000 October 2010
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.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock was quoted on The Nasdaq National Stock Market System
under the symbol RIDL 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, 2000, there were approximately 717 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 the period of January 1, 1998
through November 23, 1998, and as reported by the American Stock Exchange for
the rest of 1998, for 1999 and for 2000:
HIGH LOW
Year Ended December 31, 1998:
First Quarter $ 5 5/8 $ 4
Second Quarter 6 3/8 4 7/8
Third Quarter 5 3 3/4
Fourth Quarter 6 5/8 2 5/8
Year Ended December 31, 1999:
First Quarter 7 7/8 3 5/8
Second Quarter 4 3/16 3
Third Quarter 4 2 7/8
Fourth Quarter 3 1/2 2 13/16
Year Ended December 31, 2000:
First Quarter 3 5/8 2 15/16
Second Quarter 4 1/8 2 3/8
Third Quarter 5 3/4 2 15/16
Fourth Quarter 5 2
The closing sale price of the Common Stock on December 31, 2000 was $3.00.
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.
15
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)
STATEMENT OF OPERATIONS DATA (1) YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998(2) 1997 1996
-------- -------- -------- -------- -------
Net revenues $234,721 $208,597 $186,600 $138,273 $72,382
Cost of Revenues 140,790 123,762 113,541 80,675 38,813
-------- -------- -------- -------- -------
Gross profit 93,931 84,835 73,059 57,598 33,569
Selling, general and
administrative expenses 77,072 69,210 64,617 46,278 27,853
Other charges (credits) (3) (154) (60) 925 -- --
-------- -------- -------- -------- -------
Income from operations 17,013 15,685 7,517 11,320 5,716
Interest expense 16,352 15,379 14,656 11,879 2,763
-------- -------- -------- -------- -------
Income (loss) before taxes
and extraordinary item 661 306 (7,139) (559) 2,953
-------- -------- -------- -------- -------
Income taxes 100 905 -- -- 110
-------- -------- -------- -------- -------
Income (loss) before
extraordinary item $ 561 $ (599) $ (7,139) $ (559) $ 2,843
======== ======== ======== ======== =======
Earnings (loss) per share
before extraordinary item:
Basic $ 0.06 $ (0.06) $ (0.78) $ (0.07) $ 0.35
Diluted 0.06 (0.06) (0.78) (0.07) 0.33
BALANCE SHEET DATA (1) (4) DECEMBER 31,
---------------------------------------------------
2000 1999 1998(2) 1997 1996
-------- -------- -------- -------- -------
Working capital $ 56,211 $ 49,908 $ 37,963 $ 37,599 $25,957
Total assets 193,817 194,336 186,211 181,761 76,361
Long-term debt, less
current portion 138,919 136,097 126,900 122,500 29,984
Stockholders' equity 25,872 24,865 25,451 32,125 27,745
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998(2) 1997 1996
-------- -------- -------- -------- -------
STATEMENTS OF CASH FLOWS DATA:
Cash flows from operating
activities (5) $ 1,662 $ (6,655) $ 682 $ 4,361 $(4,584)
Cash flows from investing
activities (5) (4,158) (3,228) (4,479) (93,225) (1,313)
Cash flows from financing
activities (5) 3,099 8,644 4,538 89,518 5,639
OTHER DATA (UNAUDITED):
EBITDA (6) $ 23,157 $ 21,519 $ 13,230 $ 15,330 $ 7,909
- ----------
(1) In June 1997 Riddell acquired Varsity Spirit Corporation.
(2) Operations for 1998 were impacted by $1.5 million of losses relating to new
product initiatives and $3.1 million of costs (including the restructuring
plan costs referred to in note 3 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) 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.
(4) See Note 9 to the consolidated financial statements relating to contingent
liabilities.
(5) For more detail regarding cash flow from these activities see the
Consolidated Statements of Cash Flow on page F-6.
(6) 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
16
companies because EBITDA is not a standardized measure of profitability or
cash flow as defined by generally accepted accounting principals.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of operations
Set forth below is the percentage of our revenues generated by each of our
three business segments in the years ended December 31, 1998, 1999 and 2000.
1998 1999 2000
---- ---- ----
Extracurricular Segment:
Spirit and dance products and services 60.1% 57.7% 57.9%
Team sports products and services 29.3% 33.1% 33.8%
---- ---- ----
Total extracurricular segment 89.4% 90.8% 91.7%
Retail Segment 9.7% 8.7% 7.8%
Licensing Segment 0.9% 0.5% 0.5%
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Overview
In 2000, we achieved our first profitable year since the acquisition of
Varsity Spirit in 1997. Income from operations increased by $1.3 million. This
improvement was achieved in spite of $1.5 million of increased expenses relating
to our Internet operations and costs of a rights offering that was contemplated,
but canceled during the year.
Revenues increased both from the continued strong sales growth of newer
product lines, including Umbro-branded soccer products and athletic game
uniforms, as well as increased volume from our traditional lines of products and
services. We continued to benefit from actions taken in prior years to reduce
costs and from the positive operating leverage that occurs as increased revenues
more efficiently absorb the fixed, and relatively-fixed, portion of operating
costs.
Our extracurricular segment continued to provide the vast majority of our
operating income. Its operating income increased $1.9 million from $18.5 million
in 1999 to $20.4 million in 2000. This was driven by a $2.3 million dollar
increase in the operating income of the school spirit division. Operating income
for our historical team sports operations increased $0.7 million but was offset
by operating losses of $1.1 million from our Umbro soccer operations.
Revenues
Revenues in 2000 increased $26.1 million, or 13%, to $234.7 million in
comparison to revenues of $208.6 million in 1999.
All of the revenue gain came from our extracurricular segment where
revenues increased 14% or $25.8 million, from $189.4 million in 1999 to $215.2
million in 2000. The extracurricular segment includes team sports and school
spirit lines of products and services.
Sales of team sports products and services grew by 15% or $10.1 million,
from $69.1 million in 1999 to $79.2 million in 2000. Sales of our Umbro-branded
team soccer products and our new line of athletic game uniforms generated $5
million of the increase. We also benefited from a continued 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 13% or
$15.7 million, from $120.3 million in 1999 to $136.0 million in 2000. 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 approximately 15,000 to 230,000 in 2000.
17
Revenues from the retail segment were $18.3 million in 2000, increasing
slightly from $18.1 in 1999. The increases related to sales of sports
collectible products which were offset in part, by an internal shift in the
responsibility for certain international customers of athletic equipment to the
extracurricular segment.
Royalty income from trademark licensing increased slightly in 2000 to $1.2
million from just over $1.0 million in 1999.
Gross profit
Gross profit in 2000 increased to $93.9 million from $84.8 million in 1999.
Gross margins decreased as a percentage of revenues to 40.0% in 2000 from 40.7%
in 1999.
The gross margin rate for the extracurricular segment decreased to 39.9% in
2000 from 40.8% in 1999. This decrease was largely due to a shift in product
mix, as a portion of the segment's revenue gains occurred in product lines that
carry below average margins. Margins from reconditioning operations were also
lower in 2000, as we continued to incur expenses from facilities slated for
closure while we brought our new, more-efficient reconditioning facility online.
While selling prices for extracurricular products and services were generally
higher, margins were also negatively impacted by the sale of some discontinued
Umbro products at lower than normal margins.
Gross margins for the retail segment increased to 37.3% of revenues in 2000
from 35.7% of revenues in 1999. The increase in margins in 2000 was principally
due to a shift in product mix.
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 2000 increased by $7.7
million from $69.2 million in 1999 to $76.9 million in 2000. This increase
included $1.7 million of increased commissions relating to higher sales, $1.2
million higher expenses due to the start-up of the athletic game uniform product
line, a $1.2 million increase in internet expenses and $0.3 million relating to
a cancelled rights offering. Despite these costs, selling, general and
administrative expenses decreased as a percentage of sales to 32.8% in 2000 from
33.2% in 1999. This improvement is principally due to the improved absorption of
the relatively fixed portions of selling, general and administrative expenses
resulting from the increases in revenues, a continuation of a trend noted in
prior periods.
Extracurricular segment selling, general and administrative expenses
decreased as a percentage of revenues to 30.4% of revenues in 2000 from 31.1% in
1999. The improvement in the expense ratio was due to the reasons discussed in
the preceding paragraph.
Retail segment selling, general and administrative expenses increased as a
percentage of revenues to 30.3% of revenues in 2000 from 29.2%. Higher marketing
expenses resulted in the increased expense rate.
Licensing segment selling, general and administrative expenses were stable
in comparison to the prior year, at just below $0.8 million in both 2000 and
1999.
Interest expense
Interest expense in 2000 increased 6%, or $1.0 million over 1999 levels.
The increase related to our revolving line of credit and was due to an increase
in average indebtedness and increases in the prime and Libor interest rates.
Outstanding indebtedness increased in line with working capital demands related
to our line of Umbro-branded soccer products, which was still in its initial
start-up phase in the early part of 1999, and volume growth in other product
lines.
Income taxes
Income tax expense in 2000 consisted of a provision for federal alternative
minimum tax, with an offsetting deferred tax benefit, and a provision for
current state income taxes. Income tax expense in 1999 reflects an adjustment
relating to the valuation of deferred taxes. No other net tax expense was
recorded in 2000 or 1999 as we have net operating loss carry forwards which
offset any such taxes.
18
The net loss carry forwards result from unrecognized tax benefits arising
from net operating losses in years prior to 1999. The remaining unrecognized tax
benefit would be utilized with the generation of approximately $1.5 million of
future pre-tax income and adjustments.
We have certain nondeductible annual expenses that 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 10 to our
Consolidated Financial Statements.
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 loss in 1998. These charges included
$925,000 classified as a restructuring charge and are discussed in more detail
below in 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.
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 benefited 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.
19
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 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
20
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 carry
forwards which offset any such taxes, as described above.
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 was royalty-free in 1999. We began 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.
Our subsidiary, Varsity Fashions and Supplies, Inc. has recently filed a
lawsuit in the Southern District of New York against Umbro and its related
companies seeking to prevent certain breaches by Umbro of its agreement with
Varsity pertaining to, INTER ALIA, its sale of products into the United States
via the Internet and its threatened change of market positioning of certain
Umbro products previously sold by Signal Apparel, Inc. We do not believe the
lawsuit will have a material adverse effect on the company.
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, 2000 was approximately
$12.3 million (See Note 5 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
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 included 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. Restructuring savings realized during
2000 were approximately $600,000. It is estimated the remaining annual benefit
will be realized during 2001.
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 was delayed until the second quarter of 2000. The cessation of
reconditioning operations at certain other facilities was delayed to allow
additional time for the new reconditioning facility to reach full capacity. As a
result, while the anticipated senior positions were eliminated in 1998, none of
the employee severance costs related to the elimination of jobs at
reconditioning facilities was expended until 2000. Additionally, one of the
leased reconditioning facilities originally slated for closure is now being
utilized for the alternative purpose of warehousing finished goods.
The initial restructuring charge in 1998 included a provision of $800,000,
included in accrued liabilities at December 31, 1998, for certain lease
termination and employee severance costs. In 1999, approximately $480,000 of
these costs were paid and $60,000 of lease termination costs were reversed to
income when it was determined the facility would be used for alternate purposes,
as discussed above, leaving a balance of $260,000 in accrued liabilities at
December 31, 1998. In 2000, $106,000 of these costs were paid on completion of
the plan and the unused remaining balance of $154,000 was reversed to income.
The unused balance principally related to severance costs that were not needed
as the displaced employees were placed elsewhere in the Company in positions
that became open due to normal attrition and growth in other areas.
21
Liquidity and capital resources
The seasonality of our working capital needs is primarily impacted by three
factors. First, a significant portion of the products we sell into the
extracurricular segment are sold throughout the year on dated-payment terms,
with the related receivables becoming due when the school year begins during the
following July to October period. Second, we incur costs relating to our summer
camp business during the first and 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, 2000 the outstanding balance under the credit facility was
$16.4 million. This compares with outstanding balances of $13.6 million at
December 31, 1999. The increase in outstanding borrowings between December 31,
1999 and December 31, 2000 reflects the factors discussed above in the paragraph
on interest expense in the comparison of results of operations between these
periods.
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.
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 for its 2001 Annual Meeting of Stockholders to be filed on
or before April 30, 2001 (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.
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 29, 2001 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 29, 2001
- --------------------- and Director
David M. Mauer (Principal Executive Officer)
ROBERT NEDERLANDER Chairman of the Board March 29, 2001
- ---------------------
Robert Nederlander
JEFFREY G. WEBB Vice Chairman of the Board March 29, 2001
- --------------------- and Chief Operating Officer
Jeffrey G. Webb
LEONARD TOBOROFF Vice President and Director March 29, 2001
- ---------------------
Leonard Toboroff
DAVID GROELINGER Executive Vice President and March 29, 2001
- --------------------- Chief Financial Officer
David Groelinger (Principal Financial Officer)
LAWRENCE SIMON Senior Vice President March 29, 2001
- --------------------- (Principal Accounting Officer)
Lawrence Simon
DON KORNSTEIN Director March 29, 2001
- ---------------------
Don Kornstein
JOHN MCCONNAUGHY, JR. Director March 29, 2001
- ---------------------
John McConnaughy, Jr.
Director March 29, 2001
- ---------------------
Glenn E. Schembechler
ARTHUR N. SEESSEL Director March 29, 2001
- ---------------------
Arthur N. Seessel
23
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 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).
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).
24
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 (20).
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 (20).
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
(20).
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).
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 (20), as
amended January 1, 2000 (20), as amended December 31, 2000 (1)
and as amended December 31, 2000 (1).
25
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 (20).
10.20 Agreement to Build and Lease dated as of December 30, 1998
between MMCA Development, LLC and All American Sports Corporation
(20), as amended February 1, 2000 (20).
10.21 Employment Agreement, dated as of March 1, 2000, between Riddell
Sports Inc. and Greg Webb (1).
10.22 Industrial Lease Agreement dated August 22, 2000 between Riddell
Sports, Inc. and Belz Investco GP (1), as amended January 24,
2001 (1) and as amended February 13, 2001.
10.23 Lease Agreement dated February 1, 2001 between Riddell Sports
Inc. and Lenox Park Building F Partners (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.
26
(16) Incorporated by reference to Varsity Spirit Corporation Schedule 13D filed
June 25, 1997.
(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 reference to Riddell Sports Inc.'s Form 10-K Report for the
year ended 1998 (File No. 0-19298).
(20) Incorporated by reference to Riddell Sports Inc.'s Form 10-K Report for the
year ended 1999 (File No. 0-19298).
27
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants ..................... F-2
Consolidated Balance Sheets at December 31, 2000 and 1999 .............. F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1998 and 1998 ................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998 ............................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 ................................... 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
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, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. 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 of America. 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, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
GRANT THORNTON LLP
Chicago, Illinois
February 20, 2001
F-2
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash .................................................................... $1,116 $513
Accounts receivable, trade, less allowance for doubtful
accounts ($1,247 and $1,863 respectively) ............................. 35,245 32,524
Inventories ............................................................. 32,807 33,388
Prepaid expenses ........................................................ 6,419 7,578
Other receivables ....................................................... 2,070 2,020
Deferred taxes .......................................................... 2,270 2,076
-------- --------
Total current assets ............................................ 79,927 78,099
Property and equipment, less accumulated depreciation ...................... 8,543 7,771
Intangible assets and deferred charges, less accumulated amortization ...... 102,388 105,952
Other assets ............................................................... 2,959 2,514
-------- --------
Total assets ................................................ $193,817 $194,336
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $7,340 $10,318
Accrued liabilities ..................................................... 10,886 11,783
Customer deposits ....................................................... 5,490 6,090
-------- --------
Total current liabilities ....................................... 23,716 28,191
Long-term debt, less current portion ....................................... 138,919 136,097
Deferred taxes ............................................................. 2,270 2,076
Other liabilities .......................................................... 3,040 3,107
Commitments and contingent liabilities ..................................... -- --
Stockholders' equity:
Preferred stock, $.01 par; authorized 5,000,000 shares; none issued ..... -- --
Common stock, $.01 par; authorized 40,000,000 shares; issued
and outstanding 9,452,250 and 9,263,957 shares, respectively .......... 95 93
Capital in excess of par ................................................ 37,306 36,862
Accumulated deficit ..................................................... (11,529) (12,090)
-------- --------
Total stockholders' equity ...................................... 25,872 24,865
-------- --------
Total liabilities and stockholders' equity .................. $193,817 $194,336
======== ========
See notes to consolidated financial statements
F-3
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Net revenues:
Net sales, products and reconditioning................... $176,659 $156,411 $136,283
Camps and events......................................... 56,856 51,130 48,704
Royalty income........................................... 1,206 1,056 1,613
-------- -------- --------
234,721 208,597 186,600
-------- -------- --------
Costs of revenues:
Products and reconditioning.............................. 102,652 89,166 79,611
Camps and events......................................... 38,138 34,596 33,930
-------- -------- --------
140,790 123,762 113,541
-------- -------- --------
Gross profit................................................ 93,931 84,835 73,059
Selling, general and administrative expenses................ 77,072 69,210 64,617
Other charges (credits)..................................... (154) (60) 925
-------- -------- -------
Income from operations...................................... 17,013 15,685 7,517
Interest expense............................................ 16,352 15,379 14,656
-------- -------- --------
Income (loss) before taxes.................................. 661 306 (7,139)
Income taxes................................................ 100 905 --
-------- -------- --------
Net income (loss)........................................... $561 ($599) ($7,139)
======== ======== ========
Net income (loss) per share, basic and diluted.............. $0.06 ($0.06) ($0.78)
Weighted average number of common and common
equivalent shares outstanding:
Basic.................................................. 9,389 9,260 9,134
Diluted ............................................... 9,471 9,260 9,134
See notes to consolidated financial statements
F-4
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
--------------------- PAID IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
-------- -------- -------- -------- --------
Balance, January 1, 1998 ....... 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
Stock issued to employees ... 54 -- 169 -- 169
Issuance of common stock upon
exercise of stock options . 135 2 275 -- 277
Net income for the year ..... -- -- -- 561 561
-------- -------- -------- -------- --------
Balance, December 31, 2000 ..... 9,452 $95 $37,306 ($11,529) $25,872
======== ======== ======== ======== ========
See notes to consolidated financial statements
F-5
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
------- ------- -------
Cash flows from operating activities:
Net income (loss) ......................................... $561 ($599) ($7,139)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization:
Amortization of debt issue costs ...................... 863 843 803
Other depreciation and amortization ................... 6,144 5,834 5,713
Compensation expense for stock issued to employees ...... -- -- 199
Provision for losses on accounts receivable ............. 1,173 1,196 929
Deferred taxes .......................................... -- 905 --
Change in assets and liabilities (net
of effects from acquisitions):
(Increase) decrease in:
Accounts receivable, trade .......................... (3,894) (5,704) (2,520)
Inventories ......................................... 604 (4,625) (4,697)
Prepaid expenses .................................... 1,167 (1,085) 307
Other receivables ................................... (50) (376) (82)
Other assets ........................................ (445) (830) 212
Increase (decrease) in:
Accounts payable .................................... (3,008) (2,426) 4,367
Accrued liabilities ................................. (741) 530 664
Customer deposits ................................... (645) 129 1,432
Other liabilities ................................... (67) (447) 494
------- ------- -------
Net cash provided by (used in) operating activities 1,662 (6,655) 682
------- ------- -------
Cash flows from investment activities:
Capital expenditures ...................................... (3,511) (2,542) (2,494)
Acquisitions .............................................. (419) -- --
Umbro license acquisition fee ............................. -- -- (500)
Other investments ......................................... (228) (686) (1,485)
------- ------- -------
Net cash used in investing activities ............. (4,158) (3,228) (4,479)
------- ------- -------
Cash flows from financing activities:
Net borrowings under line-of-credit agreement ............. 2,822 9,197 4,400
Debt issue costs .......................................... -- (566) --
Proceeds from issuance of common stock .................... 277 13 138
------- ------- -------
Net cash provided by financing activities ........... 3,099 8,644 4,538
------- ------- -------
Net increase (decrease) in cash .............................. 603 (1,239) 741
Cash, beginning .............................................. 513 1,752 1,011
------- ------- -------
Cash, ending ................................................. $1,116 $513 $1752
======= ======= =======
See notes to consolidated financial statements
F-6
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 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
accounting principles generally accepted in the United States of America,
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
F-7
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reported. Actual results could differ from those estimates. Estimates relating
to contingent liabilities are further discussed in Note 9.
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: Basic earnings (loss) per share amounts have
been computed by dividing earnings (loss) by the weighted average number of
outstanding common shares. Diluted earnings (loss) per share is computed
dividing earnings (loss) by the weighted average number of common shares and
common equivalent shares relating to dilutive securities. The following table
shows a reconciliation of this denominator:
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
------------ ----------- -----------
(IN THOUSANDS)
Weighted average number of outstanding
common shares................................... 9,389 9,260 9,134
Options, assumed exercise of dilutive options,
net of treasury shares which could have
been purchased from the proceeds of
the assumed exercise based on
average market prices........................... 82 -- --
------------ ----------- -----------
Denominator for diluted computation....... 9,471 9,260 9,134
============ =========== ===========
For the year ended December 31, 2000, options to purchase 1,960,450
shares of common stock with a weighted average price of $4.66 and the
convertible debt described in Note 6 were excluded from the computation of
diluted earnings per share, as their inclusion would not have been dilutive. For
the years ended December 31, 1999 and 1998, potentially dilutive securities,
which include convertible debt, common stock options and warrants, were not
dilutive due to the net losses incurred and were excluded from the computation
of diluted earnings per share.
SHIPPING AND HANDLING FEES: In September 2000, the Emerging Issues Task
force ("EITF") reached a consensus with respect to EITF Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs." The purpose of this issue discussion
was to clarify the classification of shipping and handling revenue and costs.
The consensus reached was that all shipping and handling amounts billed to
customers should be classified as revenue. Additionally, a consensus was reached
that the classification of shipping and handling costs is an accounting policy
decision that should be disclosed pursuant to Accounting Principles Board
Opinion No. 22, "Disclosures of Amounting Policies." The Company may adopt a
policy of including shipping and handling costs in cost of sales or in operating
expenses . If shipping costs are material and are not included in costs of
sales, disclosure of both the amount of such costs and the line item on the
income statement is required.
The Company has adopted EITF issue 00-10 and billings to customers for freight
and handling charges are generally included in net sales and cost of goods sold
in the Consolidated Statements of Operations for all periods presented.
F-8
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECEIVABLES
Accounts receivable include unbilled shipments of approximately
$972,000 and $1,315,000 at December 31, 2000 and 1999. 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.
3. INVENTORIES:
Inventories consist of the following:
DECEMBER 31,
---------------------------
2000 1999
----------- ------------
(IN THOUSANDS)
Finished goods $18,591 $20,459
Work-in-process 3,974 3,088
Raw materials 10,242 9,841
----------- ------------
$32,807 $33,388
=========== ============
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31,
2000 1999
----------- ------------
(IN THOUSANDS)
Land $207 $207
Building and improvements 1,694 1,527
Machinery and equipment 19,254 15,760
----------- ------------
21,155 17,494
Less accumulated depreciation 12,612 9,723
----------- ------------
$8,543 $7,771
=========== ============
Depreciation expense relating to all property and equipment amounted to
$2,889,000, $2,642,000 and $2,446,000 for the years ended December 31, 2000,
1999, and 1998, respectively.
F-9
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS AND DEFERRED CHARGES:
Intangible assets and deferred charges consist of the following:
ESTIMATED DECEMBER 31,
LIVES ---------------------------
IN YEARS 2000 1999
-------- ----------- ------------
(IN THOUSANDS)
MacGregor trademark rights 40 $18,040 $18,040
Trademarks 40 3,250 3,250
Goodwill 20 to 40 92,664 92,110
Debt issue costs 8 7,547 7,547
Other 7 to 10 2,898 2,898
----------- ------------
124,399 123,845
Less accumulated amortization 22,011 17,893
----------- ------------
$102,388 $105,952
=========== ============
Amortization expense relating to all intangible assets and deferred
charges amounted to $4,118,000, $4,035,000 and $4,070,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Outstanding balance under a credit facility expiring in 2003, $ 16,419 $ 13,597
the 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%, 7,500 7,500
due 2002 through 2004, terms further described below
---------- ----------
$138,919 $136,097
========== ==========
The aggregate maturities of long-term debt are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
2002 $ 1,875
2003 18,294
2004 3,750
2007 115,000
----------
$138.919
==========
F-10
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Riddell's
eligible receivables and inventory, as defined by the credit facility agreement.
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. The bank can
adjust the margin of interest rate over the related notes on a quarterly basis,
dependant on certain financial ratios. The interest rate margin can vary between
1.75% and 2.75% over LIBOR, 0.25% to 1.25% over the prime rate and 0.75% and
1.75% over the Federal Funds rate. The credit facility agreement contains
covenants which, among other things, require 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.
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). The note is convertible into
shares of common stock based on a conversion price of $5.3763 per share.
F-11
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY AND STOCK OPTION PLANS:
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 2000 and 1998, Riddell issued 54,000 and 81,000 shares,
respectively, 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 $169,000 for the shares issued in 2000
and $328,000 for the shares issued in 1998, based on quoted market values at the
date of grant. The shares issued in 2000 and 27,000 of the shares issued in
1998, valued at $128,000, were granted in satisfaction of accruals for
compensation included in accrued liabilities at December 31, 1999 and 1997,
respectively.
Options granted through December 31, generally have been designated as
non-qualified stock options and have had option prices equal to market values on
the date of grant, except for options for 450,000 shares issued in connection
with the acquisition of Varsity Spirit Corporation in 1997 which were
in-the-money on the measurement date of the grant, have had terms of five or ten
years, and have had vesting periods of one or four years. Information relating
to stock option transactions over the past three years is summarized as follows:
Options Outstanding Options Exercisable
---------------------------- --------------------------
Weighted Weighted
Average Average
Number Price per Number Price per
Outstanding Share Exercisable Share
------------- ----------- ----------- -----------
Balance, January 1, 1998 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
Granted 285,500 $3.85
Exercised (134,270) $2.02
Forfeited (106,325) $5.19
Expired (8,480) $3.38
-------------
Balance, December 31, 2000 2,482,450 $4.34 1,729,988 $4.44
=============
F-12
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Further information about stock options outstanding at December 31, 2000 is
summarized as follows:
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
--------------- ----------- ---------------- -------- ------------ ----------
$3.00 - $4.49 1,341,600 6.4 years $3.58 940,475 $3.76
$4.50 - $6.50 1,140,850 6.9 years $5.24 789,513 $5.26
At December 31, 2000 there were 74,955 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:
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
---------- ---------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Pro forma net (loss) ($294) ($1,725) ($7,953)
Pro forma net (loss) per share,
basic and diluted ($0.03) ($0.19) ($0.87)
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, 2000, 1999 and 1998, respectively: risk-free interest rates of
6.1%, 5.7% and 5.3% ; expected volatility of 50%, 50% and 56%; expected option
life of 7 years and no dividend payments. The weighted average estimated fair
value of options granted during 2000, 1999 and 1998 was $2.29, $1.92 and $3.16
per share, respectively.
F-13
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WARRANTS: During 1999 warrants held by one of Riddell's lenders
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.
8. COMMITMENTS:
LEASES: Riddell leases various facilities and equipment under operating
leases. Rent expense amounted to approximately $4,154,000, $3,105,000 and
$2,792,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Future minimum rental payments for all non-cancelable lease agreements
for periods after December 31, 2000 are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
2001 4,289
2002 4,371
2003 3,827
2004 3,223
2005 2,708
Later years 15,741
---------
Total minimum payments required $ 34,159
=========
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 $63,000, $60,000,
and $200,000 for the years ended December 31, 2000, 1999 and 1998. 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 $194,000, $122,000 and $95,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
F-14
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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)
--------- -----------
(IN THOUSANDS)
December 31, 2000:
Product liability matters, reserves for
pending and other contingencies $ 1,000 $ 3,000
Accrued interest 5,677 --
Other accrued liabilities 4,209 40
----------- ------------
Total of balance sheet category $ 10,886 $ 3,040
=========== ============
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
=========== ============
PRODUCT LIABILITY LITIGATION MATTERS AND CONTINGENCIES:
At December 31, 2000, Riddell was a defendant in 9 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 $4,000,000 and, accordingly, a reserve in this amount is included in the
Consolidated Balance Sheet at December 31, 2000 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-15
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 $6.3
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. Should either of
these $20,000,000 aggregate limits become exhausted or impaired, in full or in
part, the policy provides that Riddell can reinstate the affected limit back to
a full $20,000,000 level upon payment of a reinstatement premium. Each of the
$20,000,000 aggregate limits may only be reinstated once and the reinstatement
premium can vary from $750,000 to $2,500,000 depending on the amount of the
reinstatement and which of the two aggregate limits is to be reinstated.
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. In February 2001, the United Stated Court of Appeals for the
Fifth District reversed this verdict. Claims relating to $9.9 million of the
verdict were remanded for a new trial and the remaining portion of the verdict
was overturned. Riddell does not know whether the plaintiff will seek to retry
the case. The matter is covered by the insurance described in the above
paragraphs.
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.
10. INCOME TAXES:
Income taxes on income (loss), before extraordinary items, for the
years ended December 31, 2000, 1999 and 1998 is summarized below:
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
----------- ----------- -----------
Current tax expense: (IN THOUSANDS)
Federal $ 100 $ -- $ --
State 100 -- --
----------- ------------ -----------
200 -- --
----------- ------------ -----------
Deferred tax expense:
Federal (100) 905 --
State -- -- --
----------- ------------ -----------
(100) 905 --
----------- ------------ -----------
$ 100 $ 905 $ --
=========== ============ ===========
F-16
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income tax expense for 2000 consisted of a provision for federal
alternative minimum tax, with an offsetting deferred tax benefit, and a
provision for current state income taxes. Income tax expense for 1999 was
$905,000 which reflects an adjustment relating to the valuation of deferred
taxes. There was no other current income tax expense for the years ended
December 31, 2000, 1999 and 1998 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, 2000, 1999 and 1998 since there was
generally a full valuation allowance applied to net deferred tax assets. Changes
in the valuation allowance were a decrease of $1,185,000 for 2000, a decrease of
$354,000 (net of the increase of $905,000 relating to the adjustment described
above) for 1999, and an increase of $2,184,000 for 1998.
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, 2000 and 1999 are as follows:
DECEMBER 31,
-----------------------
2000 1999
--------- ---------
Deferred income tax assets: (IN THOUSANDS)
Accrued expenses and reserves $ 2,589 $ 3,190
Inventory 1,165 983
Net operating loss, and credit, carryforwards 3,965 4,812
Other 724 379
--------- ---------
8,443 9,364
Valuation allowances (1,667) (2,861)
--------- ---------
Total deferred income tax assets 6,776 6,503
--------- ---------
Deferred income tax liabilities:
Intangible assets and deductible goodwill 6,166 5,900
Property and equipment 370 380
Prepaid expenses 240 223
--------- ---------
Total deferred income tax liabilities 6,776 6,503
--------- ---------
Total net deferred income tax asset $ -0- $ -0-
========= =========
The net current and non-current components of the deferred income taxes
were recognized in the balance sheet at December 31, 2000 and 1999 as follows:
DECEMBER 31,
-----------------------
2000 1999
--------- ---------
Net current deferred tax assets $2,270 $ 2,076
Net non-current deferred tax liabilities 2,270 2,076
--------- ---------
$ -0- $ -0-
========= =========
F-17
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:
YEARS ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
---------- -------------- -------
(IN THOUSANDS)
Tax expense (benefit) at U.S. statutory rate $ 225 $ 104 ($2,427)
Differences resulting from:
State income tax, net
Of federal tax benefit 70 -- --
Amortization not deductible
for tax purposes 720 721 727
Travel & entertainment expenses
not deductible for tax purposes 330 269 276
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 (1,242) (1,095) --
Valuation allowance adjustment -- 905 --
Other differences (3) 1 (23)
---------- ----------- ----------
Income tax expense $ 100 $ 905 $ -0-
========== =========== ==========
At December 31, 2000 Riddell had estimated net operating loss
carryforwards for federal income tax purposes of approximately $11,000,000
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 $1.5 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.
11. RELATED PARTY TRANSACTIONS:
In 2000, Riddell entered into a sublease for office space from an
entity controlled by a stockholder who is the Chairman of Riddell's Board of
Directors, on substantially the same terms as the over lease. The sublease runs
through September 2009 and provides for annual fixed rent of $116,970 increasing
to an annualized rate of $137,826 at the end of the lease term and additional
rent based on a percentage of tax and operating expense escalation payments made
by the sub-lessor to its landlord. Total payments to this entity for the year
ended December 31, 2000 were approximately $330,000 which included rents as
described above, Riddell's share of utilities and costs of leasehold
improvements of approximately $190,000.
F-18
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest were $15,460,000, $14,600,000 and
$14,700,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Income tax payments, or refunds, were not significant for 2000, 1999 or 1998.
During 2000 and 1998, Riddell issued shares of its common stock valued
at $169,000 and $128,000, respectively, based on quoted market values a the time
of grant, to certain employees in satisfaction of accruals for compensation
included in accrued liabilities at December 31, 1999, and 1997, respectively.
13. 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, 2000 had a
carrying value of $115,000,000 and a fair value, based on quoted market values,
of $93,725,000. 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.
14. 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 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. The extracurricular products and services segment includes the
company's team sports business unit and its school spirit (cheerleading and
dance)
F-19
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
business unit. Information about these two business units has been combined and
reported as the institutional products and services segment as the units have
similar economic and other business traits. 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.
(IN THOUSANDS)
------------------------------------------------
YEARS ENDED DECEMBER 31,
2000 1999 1998
----------- ---------- ----------
NET REVENUES:
Extracurricular products and services $215,234 $189,430 $166,845
Retail products 18,281 18,111 18,142
Trademark licensing and other 1,206 1,056 1,613
----------- ---------- ----------
Consolidated total $234,721 $208,597 $186,600
=========== ========== ==========
INCOME FROM OPERATIONS:
Extracurricular products and services $20,397 $18,487 $11,416
Retail products 1,267 1,176 56
Trademark licensing 462 282 841
Corporate and unallocated expenses (5,113) (4,260) (4,796)
----------- ---------- ----------
Consolidated total $17,013 $15,685 $7,517
=========== ========== ==========
DEPRECIATION AND AMORTIZATION, EXCLUSIVE OF DEBT ISSUE COSTS:
Extracurricular products and services $4,854 $4,678 $4,497
Retail products 579 582 557
Trademark licensing 533 531 614
Corporate and unallocated 178 43 45
----------- ---------- ----------
Consolidated total $6,144 $5,834 $5,713
=========== ========== ==========
CAPITAL EXPENDITURES:
Extracurricular products and services $2,616 $2,079 $2,265
Retail products 173 463 229
Corporate and unallocated 722 - -
----------- ---------- ----------
Consolidated total $3,511 $2,542 $2,494
=========== ========== ==========
TOTAL ASSETS:
Extracurricular products and services $153,407 $155,202 $150,163
Retail products 14,300 14,285 10,253
Trademark licensing 15,222 15,880 16,898
Corporate and unallocated 10,888 8,969 8,897
----------- ---------- ----------
Consolidated total $193,817 $194,336 $186,211
=========== ========== ==========
F-20
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT AND PRODUCT LINE INFORMATION (CONTINUED):
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
2000 1999 1998
----------- ---------- ----------
REVENUES BY PRODUCT LINE FOR ALL REPORTABLE SEGMENTS IN THE AGGREGATE WERE AS FOLLOWS:
Cheerleader and dance products $79,145 $69,155 $63,491
Camps and events 56,856 51,130 48,704
Team sports products 54,510 46,733 34,276
Athletic product reconditioning 25,900 24,564 23,415
Sports collectibles 17,104 15,959 15,101
Trademark licensing 1,206 1,056 1,613
----------- ---------- ----------
Consolidated revenues $234,721 $208,597 $186,600
=========== ========== ==========
15. SUMMARIZED QUARTERLY DATA (UNAUDITED):
-----------------------------------------------------------------
FISCAL QUARTER
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31, 2000:
Net revenues $39,280 $75,019 $88,180 $32,242 $234,721
Gross profit 15,635 31,552 35,687 11,057 93,931
Net income (loss) (6,719) 6,441 10,092 (9,253) 561
Basic earnings (loss) per share (0.72) 0.69 1.07 (0.98) 0.06
Diluted earnings (loss) per share (0.72) 0.61 0.92 (0.98) 0.06
Year ended December 31, 1999:
Net revenues $34,259 $65,526 $79,965 $28,847 $208,597
Gross profit 13,773 28,097 32,911 10,054 84,835
Net income (loss) (6,357) 5,367 9,174 (8,783) (599)
Basic earnings (loss) per share (0.69) 0.58 0.99 (0.95) (0.06)
Diluted earnings (loss) per share (0.69) 0.51 0.86 (0.95) (0.06)
Net income for the third quarter of 1999 includes a charge of $905,000
to reflect an adjustment relating to the valuation of deferred taxes.
Earnings (loss) per share were computed independently for each of the
quarters presented. The sum of the quarters may not equal the total year amount,
due to the impact of computing average quarterly shares outstanding for each
period.
F-21
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
20, 2001, 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, 2000.
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 20, 2001
S-1
SCHEDULE II
RIDDELL SPORTS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
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)
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
Year ended December 31, 2000
Allowance for doubtful accounts $1,863 $1,173 -- $1,789 $1,247
Accrued product liability reserves (b)
Current portion $700 $850 -- $550 $1,000
Long-term portion 3,000 -- -- -- 3,000
- -----------
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.
S-2