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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, 2001
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
VARSITY BRANDS, INC. (FORMERLY 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)
6745 LENOX CENTER COURT, SUITE 300, MEMPHIS, TENNESSEE 38115
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (901) 387-4300
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 2002 Annual Meeting of Stockholders to be filed on or
before April 30, 2002 (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 4,853,493 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 20, 2002, is $10,871,824.
As of March 20, 2002, 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 Varsity Brands, Inc., formerly known as Riddell Sports
Inc., ("Varsity" or the "Company") 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 Varsity 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 Varsity. We do not intend to update these forward-looking
statements.
We were previously known as Riddell Sports Inc. 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. In 1997, we acquired Varsity Spirit Corporation, a leader
in the spirit industry. In June 2001 we sold the Riddell Group Division and in
September 2001 we changed our name to Varsity Brands, Inc.
PART I
ITEM 1. BUSINESS
GENERAL
Varsity is the leading marketer and manufacturer of branded products
and services to the school spirit industry, and is also a leading provider of
branded services to various other extracurricular activities.
Under our many brands, the best known of which are Varsity Spirit
Fashions and Universal Cheerleaders Association, all of which we own, we are:
o the largest designer, marketer and supplier of 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 studio dance conventions and competitions;
o a producer of studio dance apparel for studio dance competitions.
We have built our various brands and lines of business, in large part,
based upon our year-round relationship marketing strategy, which we have
established and refined during the course of our twenty-seven (27) years in the
school spirit industry. This strategy involves integrating our core cheerleading
business 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. Each of
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 our Varsity Spirit Fashions brand cheerleading uniforms
are worn by more high school and college cheerleaders than any other brand. Our
cheerleading camps were attended by more than 245,000 students in 2001, more
than 40,000 people traveled to the Walt Disney Resorts in Orlando, Florida and
Anaheim, California to participate in and view our various cheerleading and
dance competitions.
SIGNIFICANT DEVELOPMENTS
As noted above, 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 sale was
effected pursuant to a stock purchase agreement dated April 27, 2001 between the
Company 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, and marketed a line of sports collectibles
and athletic equipment, principally to retailers in the United States, and to a
limited extent internationally.
In conjunction with the sale of the Riddell Group Division, the Company
recognized a decline in value of its net minority investment in a company who
makes game uniforms on behalf of the Riddell Group Division. The Company had
previously accounted for its investment in the game uniform company using the
equity method of accounting. As a result of the sale of the Riddell Group
Division and the write-down in the value of its minority investment in the game
uniform company, the Company recorded a loss on the sale of the Riddell Group
Division of $20.5 million ($12.2 million after tax) in 2001 (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
below).
In September 2001, the Company settled the litigation that it had
brought in March 2001 against Umbro Worldwide, Ltd. and its related companies
("Umbro") involving the licensing agreement that the Company had entered into
with Umbro in November 1998 (the "Umbro License"). Specifically, the Company
brought suit in the Southern District of New York seeking to prevent certain
breaches by Umbro of its agreement with Varsity pertaining to, INTER ALIA, its
sale of products in the United States via the Internet and its threatened change
of market positioning of certain Umbro products previously sold by Signal
Apparel, Inc. In connection with settling this litigation, the Umbro License was
terminated, pursuant to which the Company received, among other things, a cash
payment of $5.5 million. In addition, the Company is collecting its outstanding
receivables under the Umbro License, and has sold its remaining inventory back
to Umbro. The amount for which the Company is to receive from the sale of
inventory is currently in dispute and will be resolved by a third party
arbitrator. The final amount to be received from the sale of Umbro inventory is
not known at this time; currently the final settlement can range from $2 million
to $3.7 million. Under the Umbro License, Varsity had the exclusive right to
sell Umbro branded soccer apparel, equipment and footwear to soccer specialty
stores and others in the team channel of distribution, principally in the United
States.
BUSINESS SEGMENTS
We presently employ our integrated sales and marketing strategy and
operate our business through various wholly-owned subsidiaries in principally
two business segments; (i) uniforms and accessories, and (ii) camps and events.
Historically, our uniforms and accessories segment has been responsible for
revenues in slightly more than fifty-eight percent (58%) of total revenues, and
our camps and events segment has contributed the balance of the revenues.
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 110,000 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 eleven
(11) full and part-time employees.
CAMPS AND EVENTS
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 245,000 participants, consisting of students and their
coaches, attended Varsity's Universal Cheerleader Association and United Spirit
Association camps, including over 9,000 participants representing colleges and
junior colleges. During 2001, cheerleading and/or dance team squads from
approximately 72% 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.
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Our instructors are mostly college cheerleaders who may have previously
attended our camps, 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.
We promote our Varsity Spirit brand products and services, as well as
the school spirit industry, through active and visible association with the
following annual championships and television specials:
o National High School Cheerleading Championship(R)
o National Dance Team Championship(R)
o College Cheerleading and Dance Team National Championship(R)
o National All Star Cheerleading Championship(R)
o Company Dance Championship(R)
These championships and special events have been regularly televised on
the ESPN television network and have been sponsored by various companies and
products, including Nike, Degree, AT&T, Dell, The Walt Disney World Resort, and
Gillette.
In addition to promoting cheerleading and dance team activities, these
championships, television specials and events are a source of revenues for us.
In 2001, over 44,000 persons, including cheerleaders and their families,
attended our special events.
OTHER
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 thirty 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 efforts,
through personalized service, creates an important connection to the
participants, coaches and instructors of school spirit activities and other
extracurricular activities primarily in junior and senior high schools. 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. We believe that our sales and marketing strategy
provides us with a competitive advantage, and features the following key
components:
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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
o Direct Sales Force
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
through our studio dance division; 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 United States 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 pre-game and 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.
4
KEY MARKETING ALLIANCES
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 20th year of broadcasting championship events
on ESPN and ESPN2, and our current agreement with ESPN extends through the year
2003. 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.
DIRECT SALES FORCE
Our comprehensive relationship marketing and sales strategy is made
possible by our comprehensive sales efforts which are responsible for developing
and maintaining relationships among the 40,000 junior and senior high schools,
and colleges in the United States. Our sales force develops relationships with
participants, coaches and instructors of school spirit activities throughout the
U.S. by providing value-added services that enhance participation in the
activities. Examples of this include: providing clinics, and quickly servicing,
designing and fitting custom-uniforms for participants in cheerleading.
PRODUCTION
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. 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, 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.
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 a
community web site with e-commerce elements for cheerleaders, WWW.VARSITY.COM.
In the third quarter of 2000 we launched WWW.CODANCE.COM, our website for
Company Dance.
SEASONALITY
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
continuing Varsity operations for each of the four quarters in 2001 and 2000,
not including the operating results of the two business units discontinued in
2001,
5
the Riddell Group and Umbro divisions, and the extraordinary gain on bond
redemption. 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.
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Year ended December 31, 2001:
Revenues $16,659 $54,011 $60,126 $16,753
Percent of total annual revenues 11.3% 36.6% 40.7% 11.4%
Income (loss) from continuing operations $(6,484) $7,311 $7,201 $(7,397)
Year ended December 31, 2000:
Revenues $14,665 $46,999 $57,650 $16,721
Percent of total annual revenues 10.8% 34.5% 42.4% 12.3%
Income (loss) from continuing operations $(6,806) $4,687 $7,637 $(6,115)
This seasonal pattern is influenced by the following factors:
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 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.
COMPETITION
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.
TRADEMARKS AND SERVICE MARKS
We own various common law and registered trademarks in the U.S. and
various foreign countries including the following: 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.
REGULATION
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
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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.
EMPLOYEES
At December 31, 2001, we had approximately 570 employees. Approximately
480 of these employees were employed on a full time basis and approximately 90
were part time or temporary employees.
During the summer of 2001, we employed approximately 2,400 summer camp
instructors, trainers and administrators on a seasonal basis.
We believe that our relations with our employees are satisfactory.
INSURANCE
We carry general liability insurance with coverage limits which we
believe is adequate for our business.
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ITEM 2: PROPERTIES
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:
Location Principal Use Square Footage Lease Expiration Date
- ------------------------------- ----------------------------------- -------------- ---------------------
Memphis, Tennessee Headquarters for Varsity 51,045 November 2011
Operations
Bartlett, Tennessee Warehouse and Manufacturing 205,000 October 2010
Sunnyvale, California Offices 5,200 May 2003
Houston, Texas Offices 2,500 November 2002
Edmund, Oklahoma Offices and Warehouse 7,000 February 2003
ITEM 3. LEGAL PROCEEDINGS
Varsity and its subsidiaries from time to time become involved in
various claims and lawsuits incidental to their businesses. The Company does not
believe that it is currently involved in any legal proceedings, either
individually or in the aggregate, that could have a material adverse effect on
its business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At the Company's annual stockholders' meeting held on September 19,
2001, stockholders representing a majority of the issued and outstanding voting
securities of the Company voted to amend the Company's Articles of Incorporation
to change the name of the Company from Riddell Sports Inc. to Varsity Brands,
Inc.
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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, 2001, there were approximately 706 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 American Stock Exchange for 1999, for 2000
and for 2001:
HIGH LOW
Year Ended December 31, 1999:
First Quarter $ 7.88 $ 3.63
Second Quarter 4.19 3.00
Third Quarter 4.00 2.88
Fourth Quarter 3.50 2.81
Year Ended December 31, 2000:
First Quarter 3.63 2.94
Second Quarter 4.13 2.38
Third Quarter 5.75 2.94
Fourth Quarter 5.00 2.00
Year Ended December 31, 2001:
First Quarter 3.25 2.25
Second Quarter 2.69 1.25
Third Quarter 2.24 1.56
Fourth Quarter 2.20 1.40
The closing sale price of the Common Stock on December 31, 2001 was
$2.20.
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.
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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.
The following selected consolidated financial information includes only
the results of the Company's continuing operations. The selected consolidated
financial information does not include the operating results of the Riddell
Group and Umbro divisions, which were sold/terminated during 2001.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997(1)
-------- -------- -------- -------- -------
Net revenues $147,549 $136,035 $120,285 $112,195 $65,608
Cost of revenues 86,968 81,347 71,657 69,641 40,173
-------- -------- -------- -------- -------
Gross profit 60,581 54,688 48,628 42,554 25,435
Selling, general and
administrative expenses 46,594 42,146 39,831 39,602 21,178
Income from operations 13,987 12,542 8,797 2,952 4,257
Interest expense, net 10,346 13,139 12,347 11,786 6,974
-------- -------- -------- -------- -------
Income (loss) from continuing
operations before income taxes,
discontinued operations and
extraordinary item 3,641 (597) (3,550) (8,834) (2,717)
Income taxes (benefit) 3,010 __ 905 __ __
-------- -------- -------- -------- -------
Income (loss) from continuing
operations before discontinued
operations and extraordinary item $631 $(597) $(4,455) $(8,834) $(2,717)
======== ======== ======== ======== ========
Earnings (loss) per share before
discontinued operations and
extraordinary item:
Basic $.07 $(.06) $(.48) $(.97) $(.32)
Diluted $.07 $(.06) $(.48) $(.97) $(.32)
BALANCE SHEET DATA (EXCLUSIVE OF
ASSETS HELD FOR DISPOSAL) (2) DECEMBER 31,
-----------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Working capital $23,640 $12,065 $10,084 $5,438 $5,451
Total assets 118,631 106,185 109,433 108,856 106,050
Long-term debt, less
current portion 80,410 138,919 136,097 126,900 122,500
Stockholders' equity 17,377 25,872 24,865 25,451 32,125
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
STATEMENTS OF CASH FLOWS DATA:
Cash flows from continuing
operations (3) $4,239 $4,221 $(5,690) $(4,814) $134
Cash flows from investing
activities (3) $65,219 $(2,638) $(1,384) $(647) $(91,245)
Cash flows from financing
activities (3) $(48,082) $3,099 $8,644 $4,538 $89,518
OTHER DATA (UNAUDITED):
EBITDA from continuing operations (4) $18,008 $16,248 $12,379 $6,504 $5,957
- ----------
(1) In 1997, the Company acquired Varsity Spirit Corporation. The
operating results of Varsity have been included in the consolidated
financial information from the date of acquisition.
(2) See Note 10 to the consolidated financial statements relating to
contingent liabilities.
(3) For more detail regarding cash flow from these activities see the
Consolidated Statements of Cash Flow on Page F-6.
(4) EBITDA from continuing operations is the sum of our earnings or loss
before discontinued operations, 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
10
not be comparable to similarly titled measures reported by other
companies because EBITDA is not a standardized measure of
profitability or cash flow as defined by generally accepted accounting
principals.
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 two business segments in the years ended December 31, 1999, 2000 and 2001.
1999 2000 2001
Uniforms and Accessories $69,155 $79,179 $88,131
Camps and Events $51,130 $56,856 $59,418
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31,
2000
Overview
On June 22, 2001, the Company completed the sale of its Riddell Group
Division to an acquisition affiliate of Lincolnshire Management, Inc., a New
York based private equity fund. In conjunction with this sale, the Company wrote
down its net minority investment in an entity that provides game uniforms to
Riddell Group Division. As a result of the two transactions, the Company
recorded a loss of $20.5 million ($12.2 million after tax). In September 2001,
the Company settled the litigation that had been brought earlier this year
against Umbro Worldwide, Ltd. ("Umbro Worldwide") involving its licensing
agreement between the Company and Umbro Worldwide. In connection with the
settlement and in exchange for an upfront payment and Umbro Worldwide's
agreement to make certain additional payments to the Company, until the third
quarter of 2002, the Company has voluntarily agreed to terminate its license
effective November 30, 2001. The Company reflected the transaction during the
fourth quarter of 2001 with the reserves necessary in conjunction with the
purchase of inventory by Umbro Worldwide. Riddell Group Division's and Umbro's
operating results are shown as income from operations of discontinued business
in the Condensed Consolidated Statements of Operations.
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 allowed third-parties to market certain products using
the Riddell and MacGregor trademarks, and (iii) the Company's retail segment,
which marketed a line of sports collectibles and athletic equipment to
retailers.
The Umbro operations that were discontinued as a result of the
termination of the license with Umbro Worldwide included sales of Umbro soccer
apparel, equipment and footwear to soccer specialty stores and others in the
team channel of distribution, primarily in the United States.
As a result of the sale of Riddell Group Division and the
discontinuance of the Umbro license, Varsity's continuing financial results
consist of operations within the school spirit industry, including: (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) the design, marketing and manufacture
of dance and recital apparel for the studio dance market.
During 2001, the Company used a portion of the proceeds received from
the sale of Riddell Group Division to repurchase $40.7 million in face amount of
its 10.5% Senior Notes for a total cost, including commissions, of $32 million.
As a result of the repurchase, the Company recognized an extraordinary gain of
approximately $4.0 million, net of income taxes, commissions and related debt
acquisition costs.
The Company posted a net loss of $8.5 million, or $(0.90) per share,
for 2001, compared with earnings of $.6 million, or $0.06 per diluted share, a
year earlier.
11
Operating income before interest, taxes, discontinued operations and
extraordinary items for 2001 increased $1.5 million, or 12%, to $14.0 million
from $12.5 million in the year ended 2000. Varsity benefited from increases in
revenues which was offset by increases 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 operating results of Riddell Group Division and the Umbro Division
are reported as income from operations of discontinued businesses in the
Condensed Consolidated Statements of Operations. The following management's
discussion and analysis of financial condition reflects changes occurring in the
Company's income from continuing operations, exclusive of the discontinued
operations of Riddell Group Division and the Umbro division.
Revenues
Revenues for the year ended December 31, 2001 increased by $11.5
million, or 8.5%, to $147.5 million from $136.0 million for the year ended
December 31, 2000.
Revenues from the sale of the uniforms and accessories increased by
$8.9 million, or 11.3%, to $88.1 million for the year ended December 31, 2001
from $79.2 million for the year ended December 31, 2000. The increase was
attributable to an overall strong increase in most product categories, primarily
uniforms and lettering, offset by a slight decrease in campwear and shoe sales.
The significant increase in revenues is a direct result of quicker delivery of
uniforms and accessories combined with higher merchandise sales generated at our
instructional camps. 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. The improvement in camp
merchandise sales is partially attributable to the consolidation of
merchandising and warehousing activities within our camps and events division.
Revenues from camps and events increased by $2.6 million, or 4.5%, to
$59.4 million for the year ended December 31, 2001 from $56.8 million for the
year ended December 31, 2000. The increase in revenues for the year is directly
attributable to the following: (i) a 50% revenue growth, or $0.6 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, and (ii) a 6.5% increase in camp
participants during the year of 2001 as compared to the same period in 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 2001.
Gross profit
Gross profit for the year ended December 31, 2001 increased by 10.8% to
$60.6 million from $54.7 million for the year ended December 31, 2000. Gross
margin rates increased by 0.9 percentage points to 41.1% for the year ended
December 31, 2001 from 40.2% in the year ended December 31, 2000.
Gross margins rates for the uniforms and accessories segment increased
to 46.4% for the year ended December 31, 2001 from 45.4% for the year ended
December 31, 2000. The percentage increase was primarily due to a shift in the
mix of products sold from lower margin stockable items to higher margin custom
uniforms, combined with excellent on-time delivery of production and piece goods
which resulted in lower delivery costs and sales discounts. These increases were
offset by lower margins earned on the new performance dance wear line as
compared to our other uniform lines combined with slightly higher manufacturing
costs associated with the new warehouse and production facility.
Gross margin rates for the camps and events segment increased slightly
to 33.2% in the year ended December 31, 2001 from 32.9% for the year ended
December 31, 2000. The increase in the gross margin rate is 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 historically generated higher gross
margins than the cheerleading and dance camps.
Selling, general and administrative expenses
12
Selling, general and administrative expenses increased as a percentage
of revenues to 31.6% for the year ended December 31, 2001 from 31.0% for the
year ended December 31, 2000. This increase is primarily due to the following
factors: 1) In 2001, the Company accrued a $900,000 bonus; no such bonus was
accrued in 2000, 2) The Company recognized approximately $250,000 in costs
associated with abandoning its old corporate headquarters; and 3) certain
corporate administrative expenses are now being allocated over a smaller revenue
basis.
Selling, general and administrative expenses as a percentage of
revenues with respect to the uniforms and accessories segment increased to 32.8%
for the year ended December 31, 2001 from 32.2% in the year ended December 31,
2000. The decrease is primarily due to increased rent and occupancy costs,
including property taxes, incurred as a result of moving into the Company's new
warehouse in October 1999, plus additional costs associated with abandoning the
Company's old headquarters.
Selling, general and administrative expense ratios for the camps and
events segment increased to 26.9% for the year ended December 31, 2001 from
24.1% for the year ended December 31, 2000. The 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 fiscal
2000.
Interest Expense
Interest expense for the years ended December 31, 2000 and 2001 has
been reduced by $3.1 million and $3.2 million, respectively, as a result of an
allocation of interest expense to the discontinued operations of the Riddell
Group Division.
Net interest expense, after the allocation of interest to discontinued
operations, decreased by $2.8 million to $10.3 million for the year ended
December 31, 2001 from $13.1 million for the year ended December 31, 2000.
Interest expense 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 and interest earned on the net cash proceeds
received from the sale of Riddell Group Division. The tax refund related to a
carry back of net operating losses of the Company'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.
During the year, the Company used a portion of the net proceeds
received from the sale of Riddell Group Division to repurchase $40.7 million in
face amount of its 10.5% Senior Notes for a total cost, including commissions,
of $32.0 million. As a result of the repurchase, the Company recognized an
extraordinary gain of approximately $4.0 million, net of income taxes,
commissions and related debt acquisition costs.
Income taxes
Income tax expense for 2001 consisted of a current state income tax
provision of $900,000, offset by a deferred tax benefit of $2.2 million, for a
net benefit of $1.3 million. The 2001 income tax expense has been allocated as
follows: 1) $3.0 million income tax expense to continuing operations; 2) $1.5
million benefit to income (loss) from operations of discontinued business; 3)
$6.3 million benefit to loss on disposal of business; and 4) $3.5 million
expense to extraordinary gain on retirement of bonds.
YEAR ENDED DECEMBER 31,2000 COMPARED TO THE YEAR ENDED DECEMBER 31,
1999
Comparative results for this period have been restated to reflect the
Company's actual, continuing operations after giving effect to the sale of the
Riddell Group Division and the discontinuance of the Umbro operations.
Overview
The Company posted net income of $561,000 or $0.06 per share, for the
year ended December 31, 2000 as compared with a net loss of $599,000 or $0.06
per share, for the year ended December 31, 1999.
Operating income before interest, taxes, discontinued operations and
extraordinary items for the year ended December 31, 2000 increased $3.7 million,
or 42.6%, to $12.5 million from $8.8 million in the year ended December 31,
1999.
13
The operating results of the Riddell Group Division and the Umbro
Division are reported as income from operations of discontinued businesses in
the Consolidated Statements of Operations. The following management discussion
and analysis of financial conditions reflects changes occurring in the Company's
income from continuing operations, exclusive of the discontinued operations of
the Riddell Group Division and the Umbro Division.
Revenues
Revenues for the year ended December 31, 2000 increased by $15.7
million, or 13.1%, to $136.0 million from $120.3 million for the year ended
December 31, 1999.
Revenues from the sale of uniforms and accessories increased by $10.0
million, or 14.5%, to $79.2 million for the year ended December 31, 2000 from
$69.2 million in the year ended December 31, 1999. The increase was attributable
to an overall strong increase in most product categories, primarily uniforms,
lettering and accessories, offset by a slight decrease in dance and shoe sales.
The significant increase in revenues is a direct result of expansion within our
existing product lines and increased unit sales.
Revenues from camps and events increased by $5.8 million, or 11.2% to
$56.9 million for the year ended December 31, 2000 from $51.1 million for the
year ended December 31, 1999. The increase in revenues is directly attributable
to the followings (i) a 15,000 increase or 7%, in the number of camp
participants, as compared to the previous year. Camp participants increased to
230,000 for the year ended December 31, 2000 from 215,000 for the year ended
December 31, 1999; (ii) an increase in the number of choir and band tours
handled by the Company's group tour business during 2000; such increase being
related to additional travel related to the 2000 millennium celebrations.
Gross profit
Gross profit for the year ended December 31, 2000 increased by $6.1
million, or 12.5% to $54.7 million from $48.6 million for the year ended
December 31, 1999. Gross margin rates decreased slightly by 0.2 percentage
points to 40.2% for the year ended December 31, 2000 from 40.4% in the year
ended December 31, 1999.
Gross margin rates for the uniforms and accessories segment decreased
to 45.4% for the year ended December 31, 2000 from 46.4% for the year ended
December 31, 1999. The percentage decrease was primarily due to increased
shipping costs and discounts given as a result of production delays caused by
the significant increase in the order volume, combined with slightly higher
manufacturing costs associated with new warehouse facilities and increased
inventory costs associated with merchandise sales generated at our instructional
camps.
Gross margin rates for the camps and events segment increased to 32.9%
for the year ended December 31, 2000 from 32.3% for the year ended December 31,
1999. The percentage increase is primarily due to the spreading of certain fixed
and variable costs over a greater revenue base. In 1999, the Company added an
additional layer of employees, who were responsible for recruiting camp
participants. Such payroll and related costs were spread over a larger revenue
base in 2000.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased as a percentage
of revenues to 31.0% for the year ended December 31, 2000 from 33.1% for the
year ended December 31, 1999. The 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.
Selling, general and administrative expenses as a percentage of
revenues with respect to the uniforms and accessories segment decreased to 32.2%
in the year ended December 31, 2000 from 33.5% in the year ended December 31,
1999. The decrease is primarily due to the improved absorption of the relatively
fixed portions of selling, general and administrative expenses resulting from
the increases in revenues realized in 2000.
Selling, general and administrative expenses as a percentage of
revenues with respect to the camps and events segment decreased to 24.1% in the
year ended December 31, 2000 from 26.3% in the year ended December 31, 1999. The
decrease is primarily due to the improved absorption of the relatively fixed
portions of selling, general and administrative expenses resulting from the
increases in revenues realized in 2000.
Interest expense
14
Interest expense for the years ended December 31, 2000 and 1999 has
been reduced by $3.2 million and $3.0 million, respectively, as a result of
allocation of interest expense to the discontinued operations of Riddell Group
Division.
Net interest expense, after the allocation of interest to discontinued
operations, increased by $0.8 million to $13.1 million for the year ended
December 31, 2000 from $12.3 million for the year ended December 31, 1999. The
increase in interest expense was due to an increase in the average borrowings on
the Company's line of credit facility and increases in the prime and LIBOR
interest rates.
Income taxes
Interest tax expense in 2000 consisted of a provision for federal
alternative minimum tax, with an offsetting deferred tax benefit. 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.
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 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, outstanding
balance of our debt structure impacts our working capital requirements as the
semi-annual interest payments on our currently $74.3 million of 10.5% Senior
Notes outstanding come due each January and July. Prior to the consummation of
the sale of Riddell Group Division, there were $115 million of 10.5% of Senior
Notes outstanding. In accordance with certain provisions of the Senior Notes,
the Company subsequently repurchased an aggregate of $40.7 million in principal
amount of Senior Notes following the sale of the Riddell Group Division.
Specifically, $11.8 million in principal amount of Senior Notes in open market
purchases in the third and fourth quarters of 2001 for an aggregate purchase
price of $8.4 million, and $28.9 million in principal amount of Senior Notes in
the Company's "Modified Dutch Auction" tender offer completed in December 2001
for an aggregate purchase price of $23.1 million.
To finance the Company's seasonal working capital demands, we maintain
a credit facility in the form of a revolving line of credit. Upon the sale of
the Riddell Group Division, the Company repaid all indebtedness then outstanding
under its credit facility, approximately $32.7 million, and in conjunction
therewith, the Company amended and reduced its revolving credit facility from
$48 million to $15 million. The outstanding balance on the Company's 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, 2001 there was no outstanding balance under the credit
facility. This compares with outstanding balances of $16.4 million at December
31, 2000.
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.
Accounting Pronouncements
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.
15
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 arises 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. The adoptions of the new standard will also
benefit earnings beginning in 2002 by approximately $1.9 million in reduced
goodwill amortization.
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 2002 Annual Meeting of Stockholders to be filed
on or before April 30, 2002 (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.
16
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.
VARSITY BRANDS, INC.
Dated: April 1, 2002 By: /s/ Jeffrey G. Webb
----------------------------------------
Jeffrey G. Webb 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.
/s/ Jeffrey G. Webb
- -------------------------
Jeffrey G. Webb Vice Chairman of the Board April 1, 2002
and Chief Executive Officer
/s/ Robert E. Nederlander
- -------------------------
Robert E. Nederlander Chairman of the Board April 1, 2002
/s/ Leonard Toboroff
- -------------------------
Leonard Toboroff Vice President and Director April 1, 2002
/s/ John M. Nichols
- -------------------------
John M. Nichols Chief Financial Officer April 1, 2002
/s/ John McConnaughy, Jr.
- -------------------------
John McConnaughy, Jr. Director April 1, 2002
/s/ Glen E. Schembechler
- -------------------------
Glen E. Schembechler Director April 1, 2002
/s/ Don R. Kornstein
- -------------------------
Don R. Kornstein Director April 1, 2002
/s/ Arthur N. Seessel, III
- -------------------------
Arthur N. Seessel, III Director April 1, 2002
Item 14(c) PART IV
Exhibit Index
Note: All references to "Riddell Sports Inc." refer to the
Company, currently known as "Varsity Brands, Inc."
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).
17
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).
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 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.
10.4 Employment Agreement, dated June 22, 1992, between Riddell
Sports Inc. and Robert F.
18
Nederlander (4); amended July 27, 1994 (6).
10.5 Employment Agreement, dated June 22, 1992, between Riddell
Sports Inc. and Leonard Toboroff (4); amended July 27, 1994
(6).
10.6 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).
10.7 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).
10.8 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).
10.9 Registration Rights Agreement, dated November 8, 1996,
between Riddell Sports Inc. and Silver Oak Capital L.L.C.
(11).
10.10 Shareholders Agreement, dated as of May 5, 1997, between
Riddell Sports Inc., Cheer Acquisition Corp. and certain
shareholders of Varsity Spirit Corporation (16).
10.11 Employment Agreement, dated as of May 5, 1997, between
Riddell Sports Inc. and Jeffrey G. Webb (16).
10.12 Employment Agreement, dated as of May 5, 1997, between
Riddell Sports Inc. and W. Kline Boyd (16), as amended
August 2, 1999 (20).
10.13 Umbro License Agreement, dated as of November 23, 1998,
between Umbro International, Inc. and Varsity Spirit
Fashions & Supplies, Inc. (19).
10.14 Asset and USISL Stock Purchase Agreement, dated as of
November 1998, between Umbro International, Inc. and Varsity
Spirit Fashions & Supplies, Inc. (19).
10.15 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 (21) and as amended December 31,
2000 (21).
10.16 Sublease between Nederlander Television and Film Production,
Inc. and Riddell Sports Inc., as amended (20).
10.17 Employment Agreement, dated as of March 1, 2000, between
Riddell Sports Inc. and Greg Webb (21).
10.18 Industrial Lease Agreement dated August 22, 2000 between
Riddell Sports, Inc. and Belz Investco GP (21), as amended
January 24, 2001 (21) and as amended February 13, 2001.
10.19 Lease Agreement dated February 1, 2001 between Riddell
Sports Inc. and Lenox Park Building F Partners (21).
10.20 Second Amended and Restated Loan, Guaranty And Security
Agreement dated as of July 23, 2001 among the financial
institutions named therein, as the Lenders, Bank of America,
N.A., as the Agent, Riddell Sports Inc., as the Parent
Guarantor, Varsity Spirit Corporation, Varsity Spirit
Fashions & Supplies, Inc., Varsity USA, Inc.,
Varsity/Intropa Tours, Inc. and International Logos, Inc.
collectively, as the Borrower (22).
10.21 4.10% Convertible Subordinated Note, dated August 16, 2001,
between Riddell Sports Inc. and Silver Oak Capital, L.L.C.
(23).
19
21 List of subsidiaries (17).
23 Consent of Grant Thornton LLP regarding Varsity Brands, 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) Intentionally omitted.
(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) Intentionally omitted.
(13) Incorporated by reference to Riddell Sports Inc.'s Proxy
Statement filed June 6, 1997.
(14) Incorporated by reference to Riddell Sports Inc.'s Form 8-K
dated June 19, 1997.
(15) Incorporated by reference to Riddell Sports Inc.'s Report on Form
8-K filed May 8, 1996.
(16) Incorporated by reference to Varsity Spirit Corporation Schedule
13D filed June 25, 1997.
(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).
(21) Incorporated by reference to Riddell Sports Inc.'s Form 10-K
Report for the year ended 2000 (File No. 0-19298).
(22) Incorporated by reference to Varsity Brands, Inc.'s Form 10-Q
Report for the quarter ended June 30, 2001 (File No. 0-19298).
(23) Incorporated by reference to Varsity Brands, Inc.'s Form 10-Q
Report for the quarter ended September 30, 2001 (File No.
0-19298).
20
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants.......................................... F-2
Consolidated Balance Sheets at December 31, 2001 and 2000 .................................. F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 ....................................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999 ................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999........................................................ 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
Varsity Brands, Inc.
We have audited the accompanying consolidated balance sheets of Varsity
Brands, Inc. (formerly Riddell Sports Inc.) (a Delaware corporation) and
Subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the management of Varsity Brands, 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 our 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 Varsity
Brands, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
GRANT THORNTON LLP
Chicago, Illinois
February 20, 2002
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31,
------------------------------
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $14,397 $ 109
Accounts receivable, trade, less allowance for doubtful
accounts ($429 and $400, respectively) 12,161 14,473
Inventories 7,863 7,202
Prepaid expenses 3,937 3,250
Other receivables 3,555 1,454
Deferred income taxes 2,383 2,270
Assets held for disposal - 87,632
------------- ------------
Total current assets 44,296 116,390
Property and equipment, less accumulated depreciation 4,387 4,349
Intangible assets and deferred charges, less accumulated amortization 69,389 72,615
Other assets 559 463
------------- ------------
Total assets $118,631 $193,817
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,891 $ 4,072
Accrued liabilities 8,258 7,131
Customer deposits 5,132 5,490
Current portion of long-term debt 1,375 -
Liabilities of discontinued businesses - 10,063
------------- ------------
Total current liabilities 20,656 26,756
Long-term debt, less current portion 80,410 138,919
Deferred income taxes 188 2,270
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
outstanding 9,452,250 95 95
Capital in excess of par 37,306 37,306
Accumulated deficit (20,024) (11,529)
------------- ------------
Total stockholders' equity 17,377 25,872
------------- ------------
Total liabilities and stockholders' equity $118,631 $193,817
============= ============
See notes to consolidated financial statements
F-3
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS,EXCEPT PER SHARE AMOUNTS)
Years ended December 31,
2001 2000 1999
----------- ----------- -----------
Net revenues:
Uniforms and accessories $ 88,131 $ 79,179 $ 69,155
Camps and events 59,418 56,856 51,130
--------- --------- ---------
147,549 136,035 120,285
Cost of revenues:
Uniforms and accessories 47,279 43,209 37,061
Camps and events 39,689 38,138 34,596
--------- --------- ---------
86,968 81,347 71,657
--------- --------- ---------
Gross profit 60,581 54,688 48,628
Selling, general and
administrative expenses 46,594 42,146 39,831
--------- --------- ---------
Income from operations 13,987 12,542 8,797
Other expense:
Interest expense 11,096 13,139 12,347
Interest income (750) -- --
--------- --------- ---------
Total other expense 10,346 13,139 12,347
--------- --------- ---------
Income (loss) from continuing operations before
income taxes, discontinued operations and
extraordinary items 3,641 (597) (3,550)
Income taxes (benefit) 3,010 -- 905
--------- --------- ---------
Income (loss) from continuing operations 631 (597) (4,455)
Discontinued operations:
Income (loss) from operations of discontinued businesses (3,847) 1,158 3,856
Loss on disposal of businesses (9,326) -- --
--------- --------- ---------
Total income (expense) from discontinued operations
before extraordinary items (12,542) 561 (599)
Extraordinary items - Gain on retirement of bonds 4,047 -- --
--------- --------- ---------
Net income (loss) $ (8,495) $ 561 $ (599)
========= ========= =========
Income (loss) from continuing operations per share:
Basic $ 0.07 $ (0.06) $ (0.48)
Diluted $ 0.07 $ (0.06) $ (0.48)
Net earnings (loss) per share:
Basic $ (0.90) $ 0.06 $ (0.06)
Diluted $ (0.90) $ 0.06 $ (0.06)
Weighted average number common and common
equivalent shares outstanding
Basic 9,452 9,389 9,260
Diluted 9,452 9,471 9,260
See notes to consolidated financial statements
F-4
VARSITY BRANDS, 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, 1999 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
Net (loss) for the year - - - (8,495) (8,495)
------------ ----------- ----------- ---------------- ----------------
Balance December 31, 2001 9,452 $ 95 $37,306 $ (20,024) $ 17,377
============ =========== =========== ================ ================
See notes to consolidated financial statements
F-5
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ (8,495) $ 561 $ (599)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing operations:
(Income) loss from operations of discontinued businesses 3,847 (1,158) (3,856)
Loss on disposal of businesses 9,326 - -
Extraordinary gain on retirement of bonds (4,047) - -
Depreciation and amortization:
Amortization of debt issue costs 761 863 843
Other depreciation and amortization 4,047 3,706 3,581
Provision for losses on accounts receivable 325 417 584
Deferred income taxes (2,195) - 905
Changes in assets and liabilities, net of assets sold
and extraordinary items:
(Increase) decrease in:
Accounts receivable, trade 1,987 (2,902) (1,625)
Inventories (661) 2,126 (1,430)
Prepaid expenses (687) 997 (516)
Other receivables (2,101) (28) 25
Other assets (456) 1,384 (1,139)
Increase (decrease) in:
Accounts payable 1,819 (611) (3,623)
Accrued liabilities 1,127 (534) 1,031
Customer deposits (358) (600) 129
----------- ----------- -----------
Net cash provided by (used in) continuing operations 4,239 4,221 (5,690)
Cash flows from discontinued operations and extraordinary item
Net change in assets held for disposal (6,021) (4,199) (3,172)
Deferred bond costs associated with extraordinary gain (1,067) - -
----------- ----------- -----------
Net cash used by discontinued operations and extraordinary item (7,088) (4,199) (3,172)
Cash flows from investing activities:
Capital expenditures (2,089) (2,306) (1,384)
Net proceeds received from sale of businesses 67,308 - -
Other assets - (332) -
----------- ----------- -----------
Net cash provided by (used in) investing activities 65,219 (2,638) (1,384)
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement (16,419) 2,822 9,197
Redemption of senior bonds (31,425) - -
Debt issue costs (238) - (566)
Proceeds from issuance of common stock - 277 13
----------- ----------- -----------
Net cash provided in (used by) financing activities (48,082) 3,099 8,644
----------- ----------- -----------
Net increase in cash 14,288 483 (1,602)
Cash, beginning 109 (374) 1,228
----------- ----------- -----------
Cash, ending $14,397 $ 109 $ (374)
=========== =========== ===========
See notes to consolidated financial statements
F-6
VARSITY BRANDS, 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 Varsity Brands, Inc. and its wholly owned subsidiaries
("the Company"). All significant intercompany accounts and transactions have
been eliminated. The Company changed its name to Varsity Brands, Inc. from
Riddell Sports Inc. in September 2001 in conjunction with the sale of the
Riddell Group Division ("RGD") in June 2001.
BUSINESS: The Company designs and markets cheerleading and dance team
uniforms and accessories; operates cheerleading and dance team camps, clinics
and special events; and provides studio dance conventions and competitions. The
Company 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.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
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 leasehold improvements are depreciated over the lesser
of the lease term or their useful life, and 3 to 7 years for machinery and
equipment and furniture and fixtures) 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 are recorded upon shipment to customers.
Camp and event revenues are recognized over the term of the respective activity.
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
F-7
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods
reported. Actual results could differ from those estimates. Estimates relating
to contingent liabilities are further discussed in Note 10.
CONCENTRATION OF CREDIT RISK: The majority of the Company's receivables
arise from sales to schools and other institutions. The Company maintains
reserves for potential losses on receivables from these institutions, as well as
receivables from other customers, and such losses have 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 are 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,
-----------------------------------
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Weighted average number of outstanding
common shares................................... 9,452 9,389 9,260
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....... 9,452 9,471 9,260
====== ====== =====
For the year ended December 31, 2001, options to purchase 2,130,875
shares of common stock with a weighted average price of $4.34 and the
convertible debt described in Note 7 were excluded from the computation of
diluted earnings per share, as their inclusion would not have been dilutive. 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 7 were excluded from the computation of diluted earnings per share, as
their inclusion would not have been dilutive. For the year ended December 31,
1999, 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
F-8
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 is effective for
the Company as of January 1, 2002. Under the new rules, goodwill and indefinite
lived intangible assets will no longer be amortized but will be reviewed
annually for impairment. Intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives.
The adoption of SFAS No. 142 requires that an initial impairment
assessment be performed on all goodwill and indefinite lived intangible assets.
To complete this assessment, the Company will compare the fair value to the
current carrying value of goodwill. Fair values will be derived using cash flow
analysis. The assumptions used in this cash flow analysis will be consistent
with the Company's internal planning. Any impairment charge resulting from the
initial assessment will be recorded as a cumulative effect of an accounting
change. The Company will implement SFAS 142 as of the beginning of fiscal 2002.
The Company has not yet determined the impact of this statement on the carrying
value of its goodwill. The adoption of the new standard will benefit earnings
beginning in 2002 by approximately $1.9 million in reduced goodwill
amortization.
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 of $6.5 million to cover seasonal funded
indebtedness incurred by the Riddell Group Division during 2001 for a total
purchase price of approximately $67.5 million.
The sale was made pursuant to a stock purchase agreement dated April
27, 2001 between the Company 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, and marketed
a line of sports collectibles and athletic equipment, principally to retailers
in the United States, and to a limited extent internationally. In conjunction
with the sale of the Riddell Group Division, the Company recognized a decline in
value in its net minority investment in a company who makes game uniforms on
behalf of the Riddell Group Division. The Company had previously accounted for
its investment in the game uniform company using the equity method of
accounting. As a result of the sale of the Riddell Group Division and the
write-down in the value of its minority investment in the game uniform company,
the Company recorded a loss on the sale of the Riddell Group Division of $20.5
million ($12.2 million after tax) in 2001.
The net operating results of the Riddell Group Division are presented
as income from operations of discontinued businesses in the Consolidated
Statements of Operations. Revenues generated by the Riddell Group Division for
the years ended December 31, 2001, 2000 and 1999 were $42.4 million, $89.3
million and $81.6 million, respectively.
F-9
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 2001, the Company settled the litigation that it had
brought earlier in the year against Umbro Worldwide, Ltd. ("Umbro Worldwide")
involving the licensing agreement between the Company and Umbro Worldwide. The
license agreement allowed Varsity to sell Umbro branded soccer apparel,
equipment and footwear to soccer specialty stores and others in the team channel
of distribution, principally in the United States.
In connection with the settlement and in exchange for a lump sum
payment of $5.5 million and Umbro Worldwide's agreement to make certain payments
to the Company in the future, including the purchase, at net realizable value,
of certain inventory from the Company, the Company has voluntarily agreed to
terminate its license effective November 30, 2001. As a result of the early
termination of the Umbro license, the Company has recognized a gain of
approximately $4.9 million ($2.9 million after tax) during 2001. The amount for
which the Company is to receive from the sale on inventory is currently in
dispute and will be resolved by a third party arbitrator. The final amount to be
received from the sale of Umbro inventory is not known at this time with the
final settlement ranging from a low of $2 million to high of $3.7 million.
The net operating results of the Umbro Division are presented in income
from discontinued operations of discontinued businesses in the Consolidated
Statements of Operations. Revenues generated by the Umbro division for the years
ended December 31, 2001, 2000 and 1999 were $9.3 million, $9.4 million and $6.8
million, respectively.
3. RECEIVABLES
Accounts receivable include unbilled shipments of approximately
$610,000 and $349,000 at December 31, 2001 and 2000. It is the Company's policy
to record revenues when the related goods have been shipped. Unbilled shipments
represent receivables for shipments that have not yet been invoiced. These
amounts relate principally to partial shipments to customers, who are not
invoiced until their order is shipped in its entirety or customers with orders
containing other terms that require a deferral in the issuance of an invoice.
Management believes that substantially all of these unbilled receivables will be
invoiced within the current sales season.
4. INVENTORIES:
Inventories consist of the following:
DECEMBER 31,
-------------------
2001 2000
------ ------
(IN THOUSANDS)
Finished goods $5,904 $5,355
Work-in-process 175 171
Raw materials 1,784 1,676
------ ------
$7,863 $7,202
====== ======
F-10
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31,
2001 2000
---- ----
(IN THOUSANDS)
Machinery and equipment $ 6,157 $ 8,663
Furniture and fixtures 2,861 2,724
Leasehold improvements 298 539
------- -------
9,316 11,926
Less accumulated depreciation 4,929 7,577
------- -------
$ 4,387 $ 4,349
======= =======
Depreciation expense from continuing operations relating to all
property and equipment amounted to $2,051,000, $1,806,000 and $1,691,000 for the
years ended December 31, 2001, 2000, and 1999, respectively.
6. INTANGIBLE ASSETS AND DEFERRED CHARGES:
Intangible assets and deferred charges consist of the following:
ESTIMATED
LIVES DECEMBER 31,
IN YEARS 2001 2000
-------- ---------- ---------
(IN THOUSANDS)
Goodwill 20 to 40 $76,191 $76,191
Debt issue costs 5 to 8 5,481 7,155
Other 2 to 5 360 120
---------- ---------
82,032 83,466
Less accumulated amortization 12,643 10,851
---------- ---------
$69,389 $72,615
========== =========
Amortization expense relating to all intangible assets and deferred
charges amounted to $2,757,000, $2,763,000 and $2,733,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
7. LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31,
2001 2000
-------- --------
(IN THOUSANDS)
Outstanding balance under a credit facility expiring in 2002, the $ -- $ 16,419
facility was revised in 2001, terms further described below
Senior notes, 10.5%, due 2007, terms further described below 74,285 115,000
Convertible subordinated note payable, interest at 4.1%, due 2002
through 2007, terms further described below 7,500 7,500
-------- --------
$ 81,785 $138,919
======== ========
F-11
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate maturities of long-term debt are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
2002 $ 1,375
2003 2,375
2004 3,450
2005 100
2006 100
2007 74,385
----------------
$81,785
================
In July 2001, the Company entered into a revised credit facility with
Bank of America, N.A. The revised credit facility replaced the Company's $48
million credit facility with Bank of America National Trust and Savings
Association. The revised credit facility consists of a line of credit in a
principal amount not to exceed $15 million during the period from January 15
through September 15. The credit facility expires on September 15, 2002. Draws
under the line of credit are limited to a percentage of the Company's eligible
receivables and inventory, as defined by the credit facility agreement. The
outstanding balance of the line accrues interest at a rate of prime plus 1%,
payable monthly. The credit facility also calls for an unused line fee equal to
an annual rate of 0.5% applied to the amount by which the lesser of $15 million
and the then maximum revolving amount exceeds the average daily balance of
outstanding borrowings under the line. The credit facility agreement contains
covenants which, among other things, require the Company to meet certain
financial ratio and net worth tests, restrict the level of additional
indebtedness the Company may incur, limit payments of dividends, restrict the
sale of assets and limit investments the Company may make. The credit facility
also requires repayment of the principal amount upon the occurrence of a change
in the control, as defined, of the Company. The Company has pledged essentially
all of its tangible assets as collateral for the credit facility.
The 10.5% senior notes contain covenants that, among other things,
restrict the level of other indebtedness the Company may incur, the amounts of
investments it may make in other businesses, the sale of assets and use of
proceeds therefrom and the payment of dividends. The senior notes also restrict
payment of junior indebtedness prior to the maturity of the junior indebtedness.
The full face value of the senior notes is 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 the
Company's subsidiaries. Each of these subsidiaries is wholly owned subsidiary of
the Company and has fully and unconditionally guaranteed the senior notes on a
joint and several basis. The Company itself is a holding company with no assets
or operations other than those relating to its investments in its subsidiaries.
The separate financial statements of the guaranteeing subsidiaries are not
presented in this report because, considering the facts stated above, the
separate financial statements and other disclosures concerning the guaranteeing
subsidiaries are not deemed material to investors by management.
According to the terms of the 10.5% Senior Notes Agreement, the use of
proceeds received from the sale of RGD and the early termination of the Umbro
license agreement, net of applicable expenses, is limited to the reduction of
existing senior indebtedness, reinvestment in the business and/or the
acquisitions of outside business interests. In the event that the Company has
not executed a reinvestment in the business and/or acquisition(s) of outside
business interests within two hundred and seventy days (270) after the receipt
of proceeds from the transaction, the Company is required, under the terms of
the 10.5% Senior Notes Agreement, to offer to repurchase the Senior Notes at
par.
F-12
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A portion of the proceeds received from the sale of RGD was used to
repay all of the then outstanding indebtedness, approximately $32.7 million, on
the revolving line of credit. The remaining cash proceeds, approximately $31.5
million, were used to redeem a face amount of approximately $40.7 million of the
10.5% Senior Notes in a series of transactions during 2001. As a result of these
transactions, the Company recognized an extraordinary gain of approximately $4.0
million, net of income taxes, commissions, expenses and debt issue costs.
Net cash proceeds received from the Umbro settlement consist of the
$5.5 million upfront payment plus proceeds to be received from the sale of Umbro
related inventory to the licensor. The proceeds to be received from the sale of
the Umbro related inventory is presently in dispute and will be determined by a
third party arbitrator. Net cash proceeds to be realized from the Umbro
settlement currently ranges from $6.9 million to $8.6 million. (See Note 2 for
further discussion of the Umbro settlement.)
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. The note limits the Company's ability to grant stock
options and requires repayment of 101% of the principal in the event of a change
in control (as defined). In conjunction with the sale of RGD, the Company and
the debtholder entered into a Note Exchange Agreement. Under the terms of the
Note Exchange Agreement, which was completed in August 2001, the Company
exchanged the existing convertible subordinated note for a new convertible
subordinated note having the same terms as the existing note with the following
exceptions; 1) the conversion price at which the note is convertible into shares
of Company common stock was reduced from $5.7363 per share to $4.42 per share;
2) the timing of principal repayments was changed as follows:
DATE EXISTING NOTE NEW NOTE
---------------- ------------- ---------
November 1, 2002 $1,875,000 $1,375,000
November 1, 2003 $1,875,000 $2,375,000
November 1, 2004 $3,750,000 $3,450,000
November 1, 2005 - $100,000
November 1, 2006 - $100,000
November 1, 2007 - $100,000
---------- ----------
$7,500,000 $7,500,000
8. 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 the Company for the purchase
of up to an aggregate of 2,915,500 shares of the Company's common stock. Under
the 1991 Stock Option Plan, options for an aggregate of 1,415,500 shares may be
granted at an option price of no less than 85% of the market price of the
Company's common stock on the date of grant and may be exercisable between one
and ten years from the date of grant. Under the 1997 Stock Option Plan, options
or other stock-based awards may be granted for an aggregate of 1,500,000 shares.
The 1997 Stock Option Plan generally does not restrict the exercise price or
terms of grants. During fiscal 2001, the 1991 Stock Option Plan expired and as
such no further options may be granted from the 1991 Plan.
F-13
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 2000 the Company issued 54,000 shares of its common stock to
certain employees for incentive compensation as a stock award under the terms of
the 1997 Stock Option Plan. These shares were recorded at a value of $169,000
based on quoted market values at the date of grant. The shares issued in 2000
were granted in satisfaction of accruals for compensation included in accrued
liabilities at December 31, 1999.
Options granted through December 31, 2001 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, 1999 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
Forfeited (351,575) $ 4.33
--------
Balance, December 31, 2001 2,130,875 $ 4.34 1,882,063 $ 4.38
==========
In conjunction with the sale of RGD during 2001, all employees of RGD who
held options to purchase shares of the Company received a termination payment of
$1 per option held. Such termination payment is included in the income (loss)
from operations of discontinued businesses in the Consolidated Statements of
Operations.
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.
Further information about stock options outstanding at December 31, 2001 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 1,124,010 6.7 years $3.59 991,010 $3.64
$4.50 - $6.50 1,006,865 6.2 years $5.18 891,052 $5.21
F-14
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2001 there were 49,125 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,
-----------------------------------
2001 2000 1999
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Pro forma net (loss) ($9,242) ($294) ($1,725)
Pro forma net (loss) per share, basic ($0.98) ($0.03) ($0.19)
Pro forma net (loss) per share, diluted ($0.98) ($0.03) ($0.19)
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 and 1999, respectively: risk-free interest rates of 6.1% and
5.7%; expected volatility of 50%, expected option life of 7 years and no
dividend payments. The weighted average estimated fair value of options granted
during 2000 and 1999 was $2.29 and $1.92 per share, respectively. There were no
options granted during 2001.
WARRANTS: During 1999 warrants held by one of the Company's lenders
expired. The warrant was for 172,152 shares of the Company's common stock at
$3.72 per share.
9. COMMITMENTS:
LEASES: The Company leases various facilities and equipment under
operating leases. Rent expense in continuing operations amounted to
approximately $2,110,000, $1,835,000 and $1,412,000 for the years ended December
31, 2001, 2000 and 1999, respectively.
Future minimum rental payments for all non-cancelable lease agreements
for periods after December 31, 2001 are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
2002 2,396
2003 2,201
2004 2,110
2005 2,065
2006 2,128
Later years 9,665
---------
Total minimum payments required $ 20,565
=========
In conjunction with the termination of the Umbro license and resulting
sale of all Umbro related inventory, as further discussed in Note 2, the Company
abandoned a portion of its leased warehouse space for of
F-15
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
a period of at least five (5) years. The Company has included a $570,000 charge
for the abandoned property in the income (loss) from operations of discontinued
businesses in the Consolidated Statements of Operations.
EMPLOYEE BENEFITS: The Company maintains a defined contribution 401(k)
plan covering substantially all of its employees. Discretionary 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 $70,000, $30,000 and $30,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
10. ACCRUED LIABILITIES AND CONTINGENCIES:
Accrued liabilities consist of the following:
DECEMBER 31,
2001 2000
---- ----
(IN THOUSANDS)
Accrued interest $3,786 $5,677
Accrued compensation 1,665 338
Accrued income taxes 900 300
Accrued rent 1,030 --
Other accrued liabilities 877 816
------ ------
Total $8,258 $7,131
====== ======
OTHER CONTINGENCIES AND LITIGATION MATTERS:
In addition to the matters discussed in the preceding paragraphs, the
Company has certain other claims or potential claims against it that may arise
in the normal course of business, including without limitation, claims relating
to personal injury as well as employment related matters. Management believes
that the probable resolution of such matters will not materially affect the
financial position or results of operations of the Company.
11. INCOME TAXES:
Income taxes on income (loss), before extraordinary items, for the
years ended December 31, 2001, 2000 and 1999 is summarized below:
YEARS ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
---- ---- ----
Current tax expense: (IN THOUSANDS)
Federal $ -- $ 100 $ --
State 900 -- --
------- ------- -----
900 100 --
------- ------- -----
Deferred tax expense:
Federal (2,195) (100) 905
State -- -- --
------- ------- -----
(2,195) (100) 905
------- ------- -----
$(1,295) $ _ $ 905
======= ======= =====
Income tax expense for 2001 consists of a current state income tax
provision of $900,000, offset by a deferred tax benefit of $2.2 million. The
2001 income tax expenses has been allocated to the income statement as follows:
1) $3.0 million income tax expense to continuing operations; 2) $1.5 million
benefit to income (loss) from operations of discontinued businesses; 3) $6.3
million benefit to loss on disposal of businesses; and 4) $3.5
F-16
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
million expense to extraordinary gain. Income tax expense for 2000 consisted of
a provision for federal alternative minimum tax, with an offsetting deferred tax
benefit. 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 and 1999 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 and 1999 since
there was generally a full valuation allowance applied to net deferred tax
assets. Changes in the valuation allowance were a decrease of $156,000 for 2001,
$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.
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, 2001 and 2000 are as follows:
DECEMBER 31,
2001 2000
----------- -----------
Deferred income tax assets: (IN THOUSANDS)
Accrued expenses and reserves $ 756 $ 2,589
Inventory 695 1,165
Intangible assets and deductible goodwill 808 -
Net operating loss, and credit, carryforwards 4,279 3,965
Other 124 724
----------- -----------
6,662 8,443
Valuation allowances (4,279) (1,667)
----------- -----------
Total deferred income tax assets 2,383 6,776
----------- -----------
Deferred income tax liabilities:
Intangible assets and deductible goodwill - 6,166
Property and equipment 188 370
Prepaid expenses - 240
----------- -----------
Total deferred income tax liabilities 188 6,776
----------- -----------
Total net deferred income tax asset $ 2,195 $ - 0-
============ =============
The net current and non-current components of the deferred income taxes
were recognized in the balance sheet at December 31, 2001 and 2000 as follows:
DECEMBER 31,
2001 2000
----------- -----------
(IN THOUSANDS)
Net current deferred tax assets $2,383 $ 2,270
Net non-current deferred tax liabilities 188 2,270
----------- -----------
$ 2,195 $ - 0 -
=========== =============
F-17
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reconciliation 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,
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Tax expense (benefit) at U.S. statutory rate $ (3,364) $ 225 $104
Differences resulting from:
State income tax, net
Of federal tax benefit 544 - -
Amortization not deductible
for tax purposes 829 720 721
Travel & entertainment expenses
not deductible for tax purposes 392 330 269
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 304 (33) 1
----------- ------------ -----------
Income tax expense $ (1,295) $ -0- $ 905
============ ============ ===========
At December 31, 2001, the Company had estimated net operating loss
carry forwards for federal income tax purposes of approximately $3.8 million
expiring between 2008 to 2014. The Company also has additional loss carry
forwards of approximately $8.8 million associated with the final purchase price
allocation of assets sold as a result of the sale of the Riddell Group Division.
The character of the $8.8 million of losses relative to the sale of the Riddell
Group Division, as either an operating or a capital loss, is currently in
dispute. This dispute may ultimately be resolved pursuant to an independent,
third-party dispute resolution mechanism that has already been agreed to by the
parties to the sale of the Riddell Group Division. While this loss carryforward
is available to reduce the payment of taxes that might otherwise be payable in
future years, the benefit of most of the net operating losses have been
recognized in the computation of income tax expense reflected in the Company's
consolidated financial statements in prior years. Benefits relating to the 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.
12. RELATED PARTY TRANSACTIONS:
In 2000, the Company entered into a sublease for office space from an
entity controlled by a stockholder who is the Chairman of the Company'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. During 2001, as a result of the sale of RGD,
this space was sub-subleased to a third party for the remaining lease term.
Total payments to this entity for the year ended December 31, 2001 and 2000 were
approximately $90,000 and $330,000 which included rents as described above, the
Company's share of utilities and costs of leasehold improvements of
approximately $190,000 in 2000.
F-18
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest were $15,333,000, $15,460,000 and
$14,600,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company received an income tax refund of approximately $1.5 million during
2001. This refund related to a carryback of net operating losses of its Varsity
Spirit Corporation subsidiary for periods preceding the 1997 acquisition of
Varsity Spirit Corporation. Income tax payments, or refunds, were not
significant for 2000 or 1999.
During 2000, the Company issued shares of its common stock valued at
$169,000 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.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The Company's financial instruments include cash, accounts receivable,
accounts payable and long-term debt. The carrying values of cash, accounts
receivable and accounts payable approximate their fair values. The Company's
long-term debt includes the senior notes which at December 31, 2001 had a
carrying value of $74,285,000 and a fair value, based on quoted market values,
of $59,428,000. The Company's remaining long-term debt is not traded and has no
quoted market value, however management believes any difference between its
carrying value and fair value would not be material in relation to these
Consolidated Financial Statements.
15. SEGMENT AND PRODUCT LINE INFORMATION:
The Company has two reportable segments: uniforms and accessories and
camps and events.
Uniforms and accessories: This segment primarily designs, markets and
manufactures cheerleader and dance team uniforms and accessories to colleges,
high schools, junior high schools and youth groups throughout the United States.
Products are marketed through the annual mailing of a full color catalog to
schools and school spirit advisors and through the Company's direct sales force.
This segment also includes a line of performance and recital dance apparel for
the studio dance market and merchandise sales by the Company's camps and events
segment.
Camps and events: This segment operates cheerleader and dance team
camps and studio dance competitions and conventions throughout the United
States. This segment also includes cheerleading and dance team related special
events and specialized group tours for cheerleaders, bands, choirs, orchestras
and dance and theater groups.
The Company's reportable segments are strategic business units that
differ and are managed separately because of the nature of their markets and
channels of distribution. The Company has determined these reportable segments
in accordance with the management approach specified in Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosure About Segments of an Enterprise
and Related Information." The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the basis for determination of the Company's reportable
segments.
The following segment information represents results for the Company's
continuing operations and does not include activity of businesses discontinued
during 2001 (the Riddell Group and Umbro divisions).
F-19
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
2001 2000 1999
--------------- --------------- ---------------
NET REVENUES:
Uniforms and accessories $88,131 $79,179 $69,155
Camps and events 59,418 56,856 51,130
----------- ---------- ----------
Consolidated total $147,549 $136,035 $120,285
=========== ========== ==========
INCOME FROM OPERATIONS:
Uniforms and accessories $11,952 $10,443 $8,965
Camps and events 3,729 5,034 3,089
Corporate and unallocated expenses (1,694) (2,935) (3,257)
------------ ---------- ----------
Consolidated total $13,987 $12,542 $8,797
=========== ========== ==========
DEPRECIATION AND AMORTIZATION, EXCLUSIVE OF DEBT ISSUE COSTS:
Uniforms and accessories $2,818 $2,620 $2,599
Camps and events 1,065 1,050 982
Corporate and unallocated 164 36 -
----------- ---------- ----------
Consolidated total $4,047 $3,706 $3,581
=========== ========== ==========
CAPITAL EXPENDITURES:
Uniforms and accessories $1,478 $1,470 $1,066
Camps and events 611 472 318
Corporate and unallocated - 364 -
----------- ----------- ----------
Consolidated total $2,089 $2,306 $1,384
=========== ========== ==========
TOTAL ASSETS:
Uniforms and accessories $81,238 $72,724 $74,930
Camps and events 31,975 28,090 28,971
Corporate and unallocated 5,418 5,371 5,532
Discontinued operations - 87,632 84,903
----------- ---------- ----------
Consolidated total $118,631 $193,817 $194,336
=========== ========== ==========
16. SUMMARIZED QUARTERLY DATA (UNAUDITED):
FISCAL QUARTER
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31, 2001:
Net revenues $16,659 $54,011 $60,126 $16,753 $147,549
Gross profit 6,061 23,166 24,488 6,866 60,581
Income (loss) from
continuing operations (6,484) 7,311 7,201 (7,397) 631
Basic earnings (loss) per share ($0.69) $0.77 $0.76 ($0.78) $0.07
Diluted earnings (loss) per share ($0.69) $0.77 $0.76 ($0.78) $0.09
Year ended December 31, 2000:
Net revenues $14,665 $46,999 $57,650 $16,721 $136,035
Gross profit 5,114 19,466 23,800 6,308 54,688
F-20
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income (loss) from
continuing operations (6,806) 4,687 7,637 (6,115) (597)
Basic earnings (loss) per share ($0.73) $0.50 $0.81 ($0.65) ($0.06)
Diluted earnings (loss) per share ($0.73) $0.44 $0.70 ($0.65) ($0.06)
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
Varsity Brands, Inc.
In connection with our audit of the consolidated financial statements
of Varsity Brands, Inc. (formerly Riddell Sports Inc.) and Subsidiaries referred
to in our report dated February 20, 2002, 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, 2001. 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, 2002
S-1
SCHEDULE II
VARSITY BRANDS, 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, 1999
Allowance for doubtful accounts $485 $584 - $69 $1,000
Year ended December 31, 2000
Allowance for doubtful accounts $1,000 $417 - $1,017 $400
Year ended December 31, 2001
Allowance for doubtful accounts $400 $325 - $296 $429
- -----------
Notes: (a) Deductions for the allowance for doubtful accounts consist
of accounts written off net of recoveries.
S-2