Schutt Sports Inc. filed for bankruptcy protection one month after being hit with a $29 million patent infringement verdict. The football helmet and team protective equipment maker is asking a Delaware bankruptcy judge to halt enforcement of the patent verdict won by rival Riddell Inc., as well as related litigation, as it decides whether to pursue a sale or reorganization.
In Chapter 11 bankruptcy papers filed in Wilmington, DE, Schutt said the suit was the “proximate cause” of the need to file for Chapter 11 protection and that it would “pursue vigorously” an appeal of the jury verdict. As reported, a Wisconsin jury ruled last month that Schutt's DNA and ION football helmets and REVO faceguard infringed on Riddell patents aimed at reducing concussions. Besides the payout, the judgment prohibited Schutt from selling the helmets involved in the case.
Schutt and Riddell had agreed to a joint stipulation on August 20 that stayed the judgment and other proceedings against Schutt until September 6. The filing will preclude any activity in the Wisconsin patent litigation and ensures that Riddell litigates against Schutt in Delaware.
Schutt said in its bankruptcy filing that it also faces “continued litigation attacks from Riddell,” Jones said. On September 1, Schutt was hit by another lawsuit in Wisconsin claiming that its Air Flex QB/WR Football Shoulder Pad violated Riddell's patented shoulder pad technology.
In addition to the patent lawsuit and Riddell litigation, Schutt noted in its bankruptcy filing that it has struggled with the economic downturn.
“The debtors are faced with a softer demand for their products due to cutbacks in school budgets and, at the same time, operate under an over-leveraged capital structure,” Rollen Jones, Schutt’s chief financial officer, said in court papers.
Schutt also cited costs associated with fraudulent activity by the previous owners of an equipment-reconditioning business in Pennsylvania it acquired in 2005.
But in an interview with Sports Executive Weekly, Robert Erb, president and CEO of Schutt, said the lawsuit verdict was the primary reason. “Our core business, producing team sporting goods equipment, remains successful, as shown by our number one market position in football equipment,” said Erb. “The company will continue normal business operations without interruption to customers. This bankruptcy filing has occurred to address the company’s capital structure and to address the judgment obtained by Riddell.”
Schutt claims to be the world’s No. 1 maker of football helmets. Riddell, a subsidiary of Easton-Bell Sports, Inc., is the official helmet provider for the National Football League.
A Riddell spokesman company policy is not to comment on pending litigation.
Schutt said it has secured $34 million in debtor-in-possession financing from Bank of America to provide it with sufficient funds to continue normal business operations. Chapter 11 bankruptcy papers listed both assets and debt ranging from $50 million to $100 million.
“This process will allow us to continue operating our business as usual and to continue servicing our customers without disruption,” said Erb in a statement. “We have the support of our bank, a great brand and look forward to strengthening our balance sheet and serving our customers for many years to come.”
Schutt said it is also “exploring strategic options,” including selling some or all of the businesses or raising additional equity. The company has received a proposal for a plan of reorganization funded by a rights offering, backstopped by a group of investors. According to the plan, Riddell will not be given the opportunity to invest in the proposed rights offering.
The proposed plan of reorganization is designed to provide for a “significant deleveraging” of the company's balance sheet. While Schutt considers this proposal, it will also seek other equity sponsors and acquirers for Schutt. If any transactions were to materialize, they would be implemented through an auction in bankruptcy court. Schutt has engaged Oppenheimer & Co. as its investment banker to explore these options.
Riddell leads the list of the top unsecured creditors in the bankruptcy, owed $29 million, although the claim is listed in court papers as “Disputed Subject to Setoff.” The second largest unsecured creditor is Windjammer Capital Investors, owed $17.4 million. Four individuals each hold unsecured subordinate notes worth around $500,000 each.
