SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30,2001
Commission file number: 0-19298
RIDDELL SPORTS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2890400
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2525 HORIZON LAKE DRIVE, SUITE 1, MEMPHIS, TENNESSEE 38133
(Address of principal executive offices) (Zip code)
(901) 387-4300
(Registrant's telephone number, including area code)
1450 BROADWAY, SUITE 2001, NEW YORK, NY 10018
(Former name, former address and former fiscal year,
if changed since last report)
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 1935 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 the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
9,452,250 Common Shares as of August 10, 2001
1
RIDDELL SPORTS INC.
INDEX
Page
Form 10-Q Cover Page 1
Form 10-Q Index 2
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Stockholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information:
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING
STATEMENTS
This report contains certain statements which are "forward-looking"
statements under the federal securities laws that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. Forward-looking statements appear throughout Item 2 of Part I,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" concerning Riddell's seasonal patterns of working capital and
revenue and operating results in its business. Certain factors could cause
actual results to differ materially from those in the forward-looking statements
including without limitation, (i) continuation of historical seasonal patterns
of demand for Riddell's products and Riddell's ability to meet the demand; (ii)
actions by competitors, including without limitation new product introductions;
(iii) the loss of domestic or foreign suppliers; (iv) changes in business
strategy or new product lines and Riddell's ability to successfully implement
these; (v) moderation of uniform and accessories revenue growth; and (vi)
changes in interest rates and general economic conditions. Riddell does not
intend to update these forward-looking statements.
2
Part 1. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
(UNAUDITED)
(IN THOUSANDS)
June 30, December 31, June 30,
2001 2000 2000
--------- ----------- ---------
ASSETS
Current assets:
Cash and investments $ 29,418 $ 109 $ 638
Accounts receivable, trade less
allowance for doubtful accounts
($311, $424 and $518, respectively) 36,918 14,473 31,986
Inventories 19,205 11,642 17,808
Prepaid expenses 4,539 3,709 3,668
Other receivables -- 1,454 1,493
Deferred taxes 2,040 2,270 2,076
Assets held for disposal -- 82,308 101,217
--------- --------- ---------
Total current assets 92,120 115,965 158,886
Property, plant and equipment, less
accumulated depreciation ($8,173,
$7,577 and $6,606, respectively) 4,293 4,349 3,763
Intangibles and deferred charges, less
accumulated amortization ($12,381,
$10,972 and $9,559, respectively) 71,631 73,040 74,410
Other assets 560 463 506
--------- --------- ---------
$ 168,604 $ 193,817 $ 237,565
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,720 $ 4,072 $ 14,817
Accrued liabilities 8,594 7,131 8,543
Customer deposits 14,026 5,490 14,695
Liabilities of discontinued businesses -- 10,063 13,213
--------- --------- ---------
Total current liabilities 39,340 26,756 51,268
Long-term debt 122,500 138,919 159,209
Deferred taxes -- 2,270 2,076
Other liabilities -- -- --
Contingent liabilities -- -- --
Stockholders' equity:
Preferred stock -- -- --
Common stock 95 95 94
Additional paid-in capital 37,306 37,306 37,286
Accumulated deficit (30,637) (11,529) (12,368)
--------- --------- ---------
$ 6,764 $ 25,872 $ 25,012
--------- --------- ---------
$ 168,604 $ 193,817 $ 237,565
========= ========= =========
See notes to condensed consolidated financial statements.
3
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
------------------- -------------------
June 30, June 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues:
Uniforms and accessories $ 41,792 $ 34,473 $ 48,729 $ 41,181
Camps and events 15,073 14,640 26,689 25,195
-------- -------- -------- --------
56,865 49,113 75,418 66,376
Cost of revenues:
Uniforms and accessories 22,336 18,482 27,365 23,407
Camps and events 10,583 10,589 17,450 17,157
-------- -------- -------- --------
Cost of revenues 32,919 29,071 44,815 40,564
-------- -------- -------- --------
Gross profit 23,946 20,042 30,603 25,812
Selling, general and
administrative expenses 14,488 13,010 26,376 23,389
-------- -------- -------- --------
Income from operations 9,458 7,032 4,227 2,423
Other expense
Interest expense, net 2,447 2,562 4,546 4,995
Loss on disposal of fixed assets 142 -- 142 --
-------- -------- -------- --------
Total other expense 2,589 2,562 4,688 4,995
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes
and discontinued operations 6,869 4,470 (461) (2,572)
Incomes taxes (benefit) 4,500 -- -- --
-------- -------- -------- --------
Income (loss) from continuing
operations 2,369 4,470 (461) (2,572)
Discontinued operations:
Income (loss) from operations of
discontinued businesses 28 1,971 (89) 2,294
Loss on disposal of businesses (18,558) -- (18,558) --
-------- -------- -------- --------
Total income (expense) from
discontinued operations (18,530) 1,971 (18,647) 2,294
-------- -------- -------- --------
Net income (loss) $(16,161) $ 6,441 $(19,108) $ (278)
======== ======== ======== ========
Income (loss) from continuing
operations per share
Basic $ 0.25 $ 0.48 $ (0.05) $ (0.28)
Diluted $ 0.21 $ 0.41 $ (0.05) $ (0.28)
Net earnings (loss) per share:
Basic $ (1.71) $ 0.69 $ (2.02) $ (0.03)
Diluted $ (1.71) $ 0.61 $ (2.02) $ (0.03)
Weighted average number common and
common equivalent shares outstanding:
Basic 9,452 9,357 9,452 9,327
Diluted 11,149 10,784 9,452 9,327
See notes to condensed consolidated financial statements.
4
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
Retained
Common Stock Additional Earnings Total
---------------------- paid-in (Accumulated Stockholders'
Shares Amount Capital deficit) equity
-------- -------- -------- -------- --------
FOR THE SIX MONTHS ENDED JUNE 30, 2000
Balance, January 1, 2000 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 131 1 255 -- 256
Net loss for the period -- -- -- (278) (278)
-------- -------- -------- -------- --------
9,448 $ 94 $ 37,286 $(12,368) $ 25,012
======== ======== ======== ======== ========
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Balance, January 1, 2001 9,452 $ 95 $ 37,306 $(11,529) $ 25,872
Net loss for the period -- -- -- (19,108) (19,108)
-------- -------- -------- -------- --------
9,452 $ 95 $ 37,306 $(30,637) $ 6,764
======== ======== ======== ======== ========
See notes to condensed consolidated financial statements.
5
RIDDELL SPORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOW
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended Six Months Ended
------------------ -----------------
June 30, June 30,
----------------- -----------------
2001 2000 2001 2000
-------- ------- -------- -------
Cash flows from operating activities:
Net income (loss) $(16,161) $ 6,441 $(19,108) $ (278)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization
Amortization of debt issue costs 216 216 431 432
Other depreciation and amortization 1,008 920 1,981 1,854
Loss on sale of businesses 18,558 -- 18,558 --
Provision for losses on accounts
receivable 67 15 196 142
Loss on abandonment of fixed assets 142 -- 142 --
Deferred Taxes 2,460 -- (2,040) --
(Increase) decrease in net assets
held for disposal (1,951) (11,108) (8,184) (19,769)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable, trade (28,268) (22,014) (22,641) (20,140)
Inventories (2,214) (453) (7,563) (2,652)
Prepaid expenses (275) 1,885 (830) 1,011
Other receivables -- (76) 1,454 (67)
Other assets 7 (402) (97) (768)
Increase (decrease) in:
Accounts payable 9,006 7,313 12,648 10,134
Accrued liabilities 3,908 4,033 1,463 709
Customer deposits 10,534 10,202 8,536 8,605
Other liabilities -- -- -- --
------ ------- ------- -------
Net cash used in operating
activities (2,963) (3,028) (15,054) (20,787)
Cash flows from investing activities:
Capital expenditures (350) (504) (1,089) (1,193)
Net proceeds received from sale of
Riddell Sports Division 61,871 -- 61,871 --
Other -- (376) -- (376)
------ ------- ------- -------
Net cash provided by (used) in
investing activities 61,521 (880) 60,782 (1,569)
Cash flows from financing activities:
Net borrowings (repayments) under
line-of-credit agreement (29,581) 3,488 (16,419) 23,112
Proceeds from issuance of common stock -- 256 -- 256
------- ------- ------- -------
Net cash provided by (used) in
financing activities (29,581) 3,744 (16,419) 23,368
------- ------- ------- -------
Net increase (decrease) in cash 28,977 (164) 29,309 1,012
Cash, beginning 441 802 109 (374)
------- ------- ------- -------
Cash, end $29,418 $ 638 $29,418 $ 638
======= ======= ======= =======
See notes to condensed consolidated financial statements.
6
RIDDELL SPORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Riddell Sports Inc. ("Riddell" or the "Company") and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. These statements are unaudited, and in the opinion of management
include all adjustments (consisting only of normal recurring adjustments)
necessary for fair presentation of Riddell's condensed consolidated financial
position and the condensed consolidated results of its operations and cash flows
at June 30, 2001 and 2000 and for the periods then ended. Certain information
and footnote disclosures made in Riddell's last Annual Report on Form 10-K have
been condensed or omitted for these interim statements. Accordingly, these
condensed consolidated financial statements should be read in conjunction with
Riddell's Annual Report on Form 10-K for the year ended December 31, 2000.
Operating results for the six months ended June 30, 2001 are not necessarily
indicative of the results to be expected during the remainder of 2001.
2. DISPOSITION OF ASSETS
On June 22, 2001, the Company completed the sale of its Riddell Group
Division to an acquisition affiliate of Lincolnshire Management, Inc.,
("Lincolnshire") a New York based, private-equity fund. The purchase price,
which was determined by an arms-length negotiation, was for approximately $61
million in cash, plus an adjustment to cover seasonal funded indebtedness
incurred by the Riddell Group Division during 2001. The current amount of the
adjustment is estimated at $6.4 million for a total purchase price of
approximately $67.4 million.
The sale was made pursuant to a stock purchase agreement dated April 27,
2001 between Riddell Sports Inc. and Lincolnshire. The Riddell Group Division
included: (i) all of the Company's team sports business, excluding Umbro branded
team soccer products, (ii) the Company's licensing segment, which allows
third-parties to market certain products using the Riddell and MacGregor
trademarks and (iii) the Company's retail segment, including the New York
Executive Office, which managed the retail and licensing segments, which markets
a line of sports collectibles and athletic equipment to retailers in the United
States and to a limited extent internationally. The assets and liabilities
involved in the transaction principally included cash, accounts receivable,
inventories, prepaid expenses, other receivables, property and equipment,
intangible assets, accounts payable, accrued liabilities and other liabilities.
In conjunction with the sale of the Riddell Group Division, the Company has
recognized a decline in value in its net minority investment in a company which
makes game uniforms on behalf of the Riddell Group Division. The Company had
previously accounted for the investment using the equity method of accounting.
As a result of these transactions, the Company recorded a loss on the sale
7
of the Riddell Group Division of $20.6 million ($18.6 million after tax) in the
second quarter of 2001.
The net operating results of the Riddell Group Division are presented as
income from operations of discontinued businesses in the Condensed Consolidated
Statements of Operations. Revenues generated by the Riddell Group Division for
the six-month and three-month periods ended June 30, 2001 and 2000 were $42.4
million, $47.9 million, $20.4 million and $25.9 million, respectively.
3. EARNINGS 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 by adjusting earnings for the
effect of the assumed conversion of dilutive securities and dividing the result
by the weighted average number of common share and common equivalent shares
relating to dilutive securities. A reconciliation between the numerators and
denominators for these calculations follows:
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
-------- ------ -------- -------
(In thousands)
Earnings (loss) - numerator
Net income (loss) ($16,161) $6,441 ($19,108) ($ 278)
Effect of assumed 105 --
conversion of convertible
debt, when dilutive -
interest savings
Numerator for diluted per ($16,161) $6,546 ($19,108) ($ 278)
share computation
Shares - denominator 9,452 9,357 9,452 9,327
Weighted average number
of outstanding common shares
Weighted average common
equivalent shares:
Options, assumed exercise 32 --
of dilutive options, net of
treasury shares which could
have been purchased from
the proceeds of the assumed
exercise based on average
market prices
8
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
-------- ------ -------- -------
(In thousands)
Convertible debt, assumed 1,395 --
conversion when dilutive
Denominator for diluted per 9,452 10,784 9,452 9,327
share computation
Income (loss) from
continuing operations - numerator
Income (loss) from $ 2,369 $4,470 ($ 461) ($2,572)
continuing operations
Effect of assumed 100 105 --
conversion of convertible
debt, when dilutive -
interest savings
Numerator for diluted per $ 2,469 $4,575 ($ 461) ($2,572)
share computation
Shares - denominator 9,452 9,357 9,452 9,327
Weighted average number
of outstanding common shares
Weighted average common
equivalent shares:
Options, assumed exercise 32 --
of dilutive options, net of
treasury shares which could
have been purchased from
the proceeds of the assumed
exercise based on average
market prices
Convertible debt, assumed 1,697 1,395 --
conversion when dilutive
Denominator for diluted per 11,149 10,784 9,452 9,327
share computation
For the six-month periods ended June 30, 2001 and 2000 potentially dilutive
securities, which include convertible debt and common stock options, were not
dilutive due to the net losses incurred and were excluded from the computation
of diluted earnings per share.
9
4. RECEIVABLES
Accounts receivable include unbilled shipments of approximately
$11,249,000, $350,000 and $15,449,000 at June 30, 2001, December 31, 2000 and
June 30, 2000, respectively. 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 the invoice. Management believes that substantially
all of these unbilled receivables will be invoiced within the current sales
season.
5. INVENTORIES
Inventories consist of the following:
(In thousands) June 30, December 31, June 30,
2001 2000 2000
-----------------------------------
Finished goods $14,236 $8,868 $12,858
Raw materials 4,969 2,774 4,950
-----------------------------------
$19,205 $11,642 $ 17,808
===================================
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $1,250,000 and $1,059,000 for the three-month
periods ended June 30, 2001 and 2000, respectively, and $7,569,000 and
$6,968,000 for the six-month periods ended June 30, 2001 and 2000, respectively.
During the six months ended June 30, 2001, Riddell received an income tax refund
of approximately $1,500,000 related to a carry back of net operating losses of
its Varsity Spirit Corporation subsidiary for periods preceding the 1997
acquisition of Varsity Spirit Corporation. This tax refund had been recorded as
a receivable at the time of the acquisition. Other income tax payments, or
refunds, were not significant for the other three periods ended June 30, 2001
and 2000.
During the six-month period ended June 30, 2000, Riddell issued shares of
its common stock, valued at $169,000 based on quoted market values at the time
of grant, to certain employees in satisfaction of an accrual for compensation
included in accrued liabilities at December 31, 1999.
7. INCOME TAXES
Operating results from continuing operations for the six-months ended June
30, 2001 and 2000 included no income tax benefit because management anticipates
net operating loss carryforwards will be available to offset income taxes for
the year ended December 31, 2001. Operating results for the second quarter of
2001 include a reversal of the tax benefit recorded in the first quarter of
2001.
10
A tax benefit of $2,040,000 was recognized in the second quarter of 2001 in
conjunction with the loss realized on the sale of the Riddell Sports Group. This
benefit is included in Discontinued operations - Loss on disposal of businesses
in the Condensed Consolidated Statement of Operations.
8. SEGMENT INFORMATION
Net revenues and income or loss from operations for the Company's two
reportable segments are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
(in thousands)
Net revenues:
Uniforms and accessories ...........$41,792 $34,473 $48,729 $41,181
Camps and events ................... 15,073 14,640 26,689 25,195
------- ------- ------- -------
Consolidated total .................$56,865 $49,113 $75,418 $66,376
======= ======= ======= =======
Income (loss) from operations:
Uniforms and accessories ...........$ 9,450 $ 7,150 $ 4,197 $ 2,554
Camps and events ................... 484 689 1,092 1,043
Corporate and unallocated expenses . (476) (807) (1,062) (1,174)
------- ------- ------- -------
Consolidated total ...............$ 9,458 $ 7,032 $ 4,227 $ 2,423
======= ======= ======= =======
9. RECLASSIFICATION OF PRIOR PERIODS
Certain prior period balances have been reclassified to conform to current
year presentation.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview and seasonality
On June 22, 2001, Riddell Sports Inc. ("Riddell" or the "Company")
completed the sale of its Riddell Group Division ("RGD") to an acquisition
affiliate of Lincolnshire Management, Inc., ("Lincolnshire"). In conjunction
with this sale, Riddell wrote down its net minority investment in a company
which provides game uniforms to the RGD. As a result of these two transactions,
the company recorded a loss of $20.6 million ($18.6 million after tax). RGD's
operating results are shown as income from operations of discontinued businesses
in the Condensed Consolidated Statements of Operations.
11
RGD included: (i) all of the Company's Team Sports business, excluding
Umbro branded team soccer products, (ii) the Company's licensing segment, which
allows third-parties to market certain products using the Riddell and MacGregor
trademarks, and (iii) the Company's retail segment, which markets a line of
sports collectibles and athletic equipment to retailers. As a result of the sale
of RGD, Riddell's continuing financial results consist of operations within the
school spirit industry, the Varsity Spirit Group ("VSG"). VSG includes: (i) the
design, market and manufacture of cheerleader and dance team uniforms and
accessories, (ii) the operation of cheerleading and dance team camps throughout
the United States, (iii) the production of nationally televised cheerleading and
dance team championships and other special events, (iv) the operation of studio
dance competitions and conventions and (v) Umbro branded team-soccer business.
Including the loss on the sale of RGD and the resulting write-down of the
minority investment, the company posted a net loss of $16.2 million, or $1.71
per share, for the second quarter of 2001, compared with earnings of $6.4
million, or $0.61 per diluted share, a year earlier. Excluding the loss, second
quarter net income decreased 63% to $2.4 million from $6.4 million in 2000
primarily due to the reversal of the income tax benefit recognized in the first
quarter of 2001.
Operating income before interest, taxes and discontinued operations for the
second quarter of 2001 increased $2.4 million, or 34%, to $9.4 million from $7.0
million in the second quarter of 2000. For the six-month period, operating
income before taxes, interest and discontinued operations increased $1.8
million, or 74%, in 2001 to $4.2 million from $2.4 million in 2000. Riddell
benefited from increases in revenues and decreases in selling, general and
administrative expenses as a percentage of sales, as described in more detail in
the discussion which follows this overview.
The Company's operations are highly seasonal. In recent years, the
Company's operations have been 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 net operating results of RGD are reported as income from operations of
discontinued businesses in the Condensed Consolidated Statements of Operations.
The accompanying management's discussion and analysis of financial condition
reflects changes occurring in the Company's income from continuing operations.
Revenues
Revenues for the three-month period ended June 30, 2001 increased by
$7.8 million, or 16%, to $56.9 million from $49.1 million in the second quarter
of 2000. For the six-month period ended June 30, 2001, revenues increased by
$9.0 million, or 14%, to $75.4 million from $66.4 million in the first six
months of 2000.
12
Revenues from the sale of uniforms and accessories increased by $7.3
million, or 21%, to $41.8 million in the second quarter of 2001 from $34.5
million in the second quarter of 2000. For the six-month period, uniform and
accessories revenues increased by $7.6 million, or 18%, to $48.7 million in 2001
from $41.1 million in 2000. This increase was attributable to an overall strong
increase in most product categories, primarily uniforms and lettering, offset by
a slight decrease in campwear sales. The significant increase in revenues is a
direct result of quicker delivery of uniforms and accessories during the second
quarter of 2001 as compared to the second quarter of 2000. The improvement in
delivery times is partially attributable to improvements made to the Company's
order entry system combined with better availability of inventory items for
delivery. Management believes that the overall rate of uniform and accessories
revenue growth will moderate in the third quarter of 2001 due to the
acceleration of uniform and accessories deliveries into the second quarter from
the third quarter.
Revenues from camps and events increased by $0.4 million, or 3%, to $15.0
million in the second quarter of 2001 from $14.6 million in the second quarter
of 2000. For the six-month period, camps and events revenues increased by $1.5
million, or 6%, to $26.7 million in 2001 from $25.2 million in 2000. The revenue
increase for both periods is directly attributable to the following: (i) a 64%
revenue growth, or $0.3 million, in our studio dance competitions and
conventions, such growth being directly attributable to the acquisition of the
assets of the Netherland Corporation, an operator of dance competitions, in June
2000, (ii) $0.4 million related to a change in the timing of the Co. Dance
National Finals previously held in the third quarter of 2000 to the second
quarter of 2001, (iii) a 4% increase in camp participants during the second
quarter of 2001 as compared to the second quarter of 2000. Such increases were
offset somewhat by a decrease in the number of choir and band tours handled by
the Company's group tour business during the first half of 2001. Increases in
camp participants during the first six months of 2001 are not necessarily
indicative of the results to be expected during the remainder of 2001.
Gross Profit
Gross profit for the second quarter of 2001 increased by 19% to $23.9
million from $20.0 million in the 2000 quarter and for the six-month period
increased by 19% to $30.6 million in 2001 from $25.8 million in 2000. Gross
margin rates increased by 1.3 points to 42.1% in the second quarter of 2001 from
40.8% in the second quarter of 2000. For the year-to-date period, gross margin
rates increased to 40.6% in 2001 from 38.9% in 2000.
Gross margin rates for the uniforms and accessories segment increased to
46.6% in the second quarter of 2001 from 46.4% in the second quarter of 2000.
For the six-month period the segment's margin rates increased to 43.8% in 2001
from 43.2% in 2000. These increases were a result of the shift in product mix
from lower margin campwear and accessories to higher margin manufactured
uniforms.
13
Gross margin rates for the camps and events segment increased to 29.8% in
the second quarter of 2001 from 27.7% in the second quarter of 2000. For the
six-month period the segment's margin rates increased to 34.6% in 2001 from
31.9% in 2000. These increases are primarily due to the overall decrease in the
Company's 2001 group tour operations, which have historically generated lower
gross margins than the other parts of the Company's business; therefore, the
decrease in group tour operations resulted in an overall increase in the
segment's gross margin rate. The increase is also partially due to increased
participation in the Company's studio dance competitions and conventions which
have generated higher gross margins than the cheerleading and dance camps.
Selling, general and administrative
Selling, general and administrative expenses decreased as a percentage of
revenues to 25.5% in the second quarter of 2001 from 26.5% in the second quarter
of 2000. For the six-month period, selling, general and administrative expense
rates decreased slightly to 35.0% in 2001 from 35.2% in 2000. The improvement is
principally due to economies of scale realized by spreading fixed and relatively
fixed administrative expenses over a greater revenue base.
Selling, general and administrative expense rates for the uniforms and
accessories segment decreased to 23.9% in the second quarter of 2001 from 25.6%
in the second quarter of 2000. For the six-month period the segment's selling,
general and administrative expense rate decreased to 35.2% in 2001 from 37.0% in
2000. These gains were due to improved economies of scale as discussed in the
preceding paragraph.
Selling, general and administrative expense rates for the camps and events
segment increased to 26.6% in the second quarter of 2001 from 23.0% in the
second quarter of 2000. For the six-month period the segment's expense rate
increased to 30.5% in 2001 from 27.8% in 2000. These increases are due to
additional overhead incurred as a result of the acquisition of the assets of the
Netherland Corporation in June 2000. Netherland's management team is responsible
for managing the Company's studio dance competitions and conventions, as well as
the Company's line of performance and recital dance wear, introduced during
fisca1 2000.
Interest Expense
Interest expense for both the three-month and the six-month period ended
June 30, 2001 have been reduced by $1.6 million and $3.1 million, respectively,
as a result of an allocation of interest expense to the discontinued operations
of the RGD. Interest allocated to discontinued operations for the three-month
and six-month period ended June 30, 2000 was $1.6 million and $3.2 million,
respectively.
14
Interest expense, after the allocation of interest to discontinued
operations, decreased by $0.1 million to $2.5 million in the second quarter of
2001 from $2.6 million in the second quarter of 2000. For the six-month period
ended June 30, 2001, interest expense decreased by $0.5 million to $4.5 million
from $5.0 million in the first six months of 2000. Interest expense for both
periods decreased due to lower interest on the revolving line of credit
resulting from lower outstanding indebtedness and decreases in the prime and
LIBOR interest rates during 2001. The net interest expense for the year also
decreased due to the receipt of interest income of approximately $250,000 as
part of a federal tax refund. The tax refund related to a carry back of net
operating losses of Riddell's Varsity Spirit Corporation subsidiaries for
periods preceding the 1997 acquisition of Varsity Spirit Corporation. The tax
refund was for approximately $1.5 million and was recorded as a receivable at
the time of acquisition.
As a result of the sale of the RGD, the Company used a portion of the
proceeds received, approximately $32.7 million, to paydown all of the
indebtedness outstanding on its line of credit agreement.
Income Taxes
Operating results from continuing operations for the three-month period
ended June 30, 2000, and the six-month periods ended June 30, 2001 and 2000
included no income tax expense or credit because of the Company's existing net
operating loss carryforwards. Operating results from continuing operations for
the three-month period ended June 30, 2001 reflect an income tax expense of $4.5
million, or a reversal of the income tax benefit recognized in the first quarter
of 2001. The Company reversed the first quarter's benefit because management
anticipates net operating loss carryforwards will be available to offset income
taxes for the year ended December 31, 2001.
The Company has recorded an income tax benefit of $2.1 million in
conjunction with the loss on sale of the RGD. This benefit is shown as a
reduction of the loss on disposal of businesses in the Condensed Consolidated
Statements of Operations.
Liquidity and Capital Resources
The seasonality of the Company's working capital needs is impacted by three
key factors. First, a significant portion of the products the Company sells in
the uniforms and accessories segment are sold in the late spring and summer,
with the related receivables collected in the fall and early winter after the
new school year begins. Second, the Company incurs costs related to the
Company's summer camp business from the fourth quarter and into the second
quarter as the Company prepares for the upcoming camp season, while camp
revenues are mostly collected in the mid-May to August period. Lastly, the
Company's debt structure impacts working capital requirements, as the
semi-annual interest payments on the Company's $115 million, 10.5% Senior Notes
come due each January and July.
15
To finance these seasonal working capital demands, the Company maintains a
credit facility in the form of a revolving line of credit. Historically, the
outstanding balance on the credit facility usually 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 middle of
the third quarter and into the fourth quarter as collections are used to reduce
the outstanding balance. Such seasonality should continue in the future.
A portion of the proceeds received from the sale of the RGD were used to
repay all of the outstanding indebtedness, approximately $32.7 million, on the
revolving line of credit. Outstanding balances were $16.4 million at December
31, 2000 and $36.7 million at June 30, 2000.
In conjunction with the sale of the RGD and subsequent repayment of the
then existing line of credit facility, the Company amended and reduced its
revolving line of credit agreement from $48 million to $15 million.
According to the terms of the $115 million, 10.5% Senior Notes Agreement,
the use of the proceeds received from the sale of the RGD, net of applicable
expenses, is limited to the reduction of existing senior indebtedness,
reinvestment in the business and/or acquisitions of outside business interests.
Proceeds remaining after the payment of expenses and repayment of existing
borrowings under the revolving line of credit facility are currently estimated
at $31.5 million.
The Company's current debt service obligations are significant and,
accordingly, the Company's ability to meet our debt service and other
obligations will depend on the Company's future performance and is subject to
financial, economic and other factors, some of which are beyond the Company's
control. Furthermore, due to the seasonality of the Company's working capital
demands described above, year-over-year growth in the Company's business and
working capital requirements could lead to higher debt levels in future periods.
Management believes operating cash flow together with funds available from the
Company's credit facility will be sufficient to fund the Company's current debt
service, seasonal capital expenditures and other working capital requirements.
However, many factors, including growth and expansion of the Company's business,
could necessitate the need for increased lines of credit or other changes in the
Company's credit facilities in the future.
Accounting Pronouncements
16
In June 2001, Statement of Financial Accounting Standards No. 141 ("SFAS
141"), "Business Combinations" was issued and is applicable to all business
combinations initiated after June 30, 2001 and to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. SFAS 141 requires all business combinations to be
accounted for by the purchase method of accounting. It also requires separate
recognition of intangible assets that can be identified and named and also
requires disclosure of the primary reasons for the business combination and the
allocation of the purchase price by balance sheet caption. The Company does not
presently expect the adoption of SFAS 141 to have a material effect on the
Company's financial statements taken as a whole.
In June 2001, Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets" was issued and is effective for all
fiscal years beginning after December 15, 2001. SFAS 142 changes the methods of
amortizing goodwill and intangible assets. Goodwill and intangible assets that
have indefinite useful lives will not be amortized but will be tested annually
for impairment. Intangible assets with finite useful lives will continue to be
amortized over their useful lives. The statement provides specific guidance for
testing goodwill for impairment. Goodwill will be tested at least annually with
a two-step process that begins with an estimation of the fair value of the
reporting unit. SFAS 142 is required to be applied at the beginning of an
entity's fiscal year with impairment losses that arise from the initial
application of this Statement to be reported as resulting from a change in
accounting principle. The Company will implement SFAS 142 as of the beginning
of fiscal 2002. The Company has not determined the impact of this statement on
the carrying value of its goodwill and other long-lived intangible assets.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company from time to time becomes involved in various claims and
lawsuits incidental to its business. None of these matters are expected to have
a material adverse effect on the Company's consolidated financial statements.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
17
Item 5. Other Information
In conjunction with the sale of the Riddell Sports Division, the
Company will change its name to Varsity Brands, Inc. from Riddell Sports Inc.
The name change is subject to shareholder approval at the Annual Meeting of
Stockholders' scheduled for September 19, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index:
28 Second Amended and Restated Loan, Guaranty and Security
Agreement between Bank of America, N.A., as agent, and
Riddell Sports Inc., as borrower.
(b) Reports on Form 8-K:
On a Form 8-K, dated June 22, 2001, under Item 2. Acquisition or
Disposition of Assets and Item 7. Financial Statements and Exhibits, filed
by Riddell Sports Inc., pursuant to the consummation of the sale of the
Riddell Sports Group, a pro forma consolidated balance sheet as of March
31, 2001, a pro forma consolidated statement of operations for the year
ended December 31, 2000 and for the quarter ended March 31, 2001.
On a Form 8-K, dated June 22, 2001, under Item 5. Other Events,
filed by Riddell Sports Inc., an announcement of the resignation of David
Mauer as President, Chief Executive Officer and Director of Riddell Sports
Inc. and the promotion of Jeffrey G. Webb to President and Chief Executive
Officer. Also announcing the movement of Riddell Sports Inc.'s Executive
Offices to 2525 Horizon Lake Drive, Suite 1, Memphis, Tennessee 38133 from
1450 Broadway, Suite 2001, New York, New York 10018.
On a Form 8-K, dated August 8, 2001 filed by Riddell Sports Inc.,
Schedule 14A, Preliminary Proxy Statement.
18
SIGNATURES
Pursuant to the requirements 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.
Date: August 14, 2001 By: /s/ Jeffrey G. Webb
President and
Chief Executive Officer
Date: August 14, 2001 By: /s/ John M. Nichols
Chief Financial Officer and
Principal Accounting Officer
19