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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, 2002
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.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2890400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
[NONE]
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 aggregate market value of the 5,004,893 shares of outstanding voting stock
held by non-affiliates of the Registrant, computed by reference to the last sale
price of the Registrant's Common Stock on March 21, 2003, is $23,472,948.
As of March 21, 2003, the Registrant had 9,592,250 shares of Common Stock, $.01
par value per share, outstanding.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained or incorporated by reference in this
Annual Report on Form 10-K is forward-looking in nature. All statements included
or incorporated by reference in this Annual Report or made by management of
Varsity Brands, Inc. and its subsidiaries, other than statements of historical
fact, are forward-looking statements. Examples of forward-looking statements
include statements regarding Varsity's future financial results, operating
results, business strategies, projected costs, products, competitive positions
and plans and objectives of management for future operations. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "would," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue," or the negative of
these terms or other comparable terminology. Forward-looking statements also
include the assumptions that underlie such statements. Any expectations based on
these forward-looking statements are subject to risks and uncertainties and
other important factors, including those discussed in the sections entitled
"Part I - Item 1 - Business and "Part I - " "Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations." These and many other
factors could affect Varsity's future financial and operating results, and could
cause actual results to differ materially from expectations based on
forward-looking statements made in this document or elsewhere by Varsity or on
its behalf. As used herein, except as the context otherwise requires, "Varsity"
or the "Company" shall mean Varsity Brands, Inc. and its subsidiaries.
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-eight (28) 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. Approximately 250,000 participants attended the Company's cheerleading
and dance team camps during 2002. Approximately 42,000 people traveled to the
Walt Disney Resorts in Orlando, Florida and Anaheim, California to participate
in and view our various 2002 cheerleading and dance competitions.
1
SIGNIFICANT DEVELOPMENTS
In December 2002, the Company entered into a license agreement with
Select Sport A/S. Under the terms of the license agreement, the Company has the
right to manufacture and distribute Select Sport soccer team uniforms, apparel
and equipment within 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.
For the past three years, our uniforms and accessories segment has been
responsible for approximately sixty percent (60%) of total revenues, with our
camps and events segment contributing the balance of total revenues. For
additional information regarding revenues, profit and loss, and total assets for
the past three years, please refer to pages F-3 to F-6 of the Company's attached
financial statements, which information is incorporated herein by reference.
UNIFORMS AND ACCESSORIES
We design, market and manufacture cheerleader and dance team uniforms
and accessories, including skirts, shell-tops, sweaters, sweatshirts, jumpers,
warm-up suits, t-shirts, shorts, pompons, socks, jackets, pins and gloves. We
market 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.
The Company also markets and manufactures a line of recital wear for
the studio dance market under the Co. Dance trademark. The Company has printed
and distributed approximately 25,000 catalogs to dance studios and studio owners
during the past year. Orders are placed and processed through the Company's
customer service department in Edmond, Oklahoma.
In conjunction with the acquisition of the Select Sport license, we
will also begin to design, market and manufacture soccer uniforms and
accessories, including jerseys, shorts, warm-up suits, outerwear, t-shirts and
sports bags.
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
2002 camp season, approximately 250,000 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 2002, cheerleading and/or dance team squads
from approximately 75% of the universities comprising the ATLANTIC COAST, BIG
EAST, BIG TEN, BIG TWELVE, PACIFIC 10 and SOUTHEASTERN collegiate athletic
conferences attended our camps.
Most of our cheerleader and dance team camps are conducted on college
or junior college campuses. We contract with the colleges and universities for
the provision of housing, food and athletic facilities. Our camps generally are
conducted over a four-day period and are attended by resident and commuting
students.
Our instructors are mostly college cheerleaders who may have
previously attended our 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 American 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.
2
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, Got Milk?, 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 2002, over 46,000 persons, including cheerleaders and their families,
attended the Company's 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. Company Dance operates weekend dance
conventions and competitions, under the Co. Dance and Starlight names, in
approximately thirty U.S. cities, an annual convention championship from the
Walt Disney World Resort in Orlando that is televised on ESPN and one annual
competition championship.
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:
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
3
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 World 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 produce regional and national cheerleading and
dance team competitions and organize national dance competitions for young
individuals through our studio dance division. The national competitions and
finals for these activities are typically held at the Walt Disney World 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.
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 21st 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.
4
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 approximately 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. In the first quarter of 2003, we launched www.selectgear.com, our
website for our new line of Select branded soccer uniforms and accessories.
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 2002 and 2001,
excluding the operating results of the two business units discontinued in 2001,
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
------- ------- ------- -------
(In thousands)
Year ended December 31, 2002:
Revenues $18,693 $57,370 $61,196 $19,145
Percent of total annual revenues 11.9% 36.7% 39.1% 12.3%
Income (loss) from continuing operations $(5,867) $8,608 $9,988 $(2,942)
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 $(4,312) $4,862 $5,853 $(5,772)
5
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
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, Star Power, 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 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 could, under certain circumstances,
have a material adverse affect on Varsity's business, financial condition and
results of operations. Although we are not aware of any school officially
adopting these activities as a competitive sport, recognition of cheerleading
and/or dance teams as a sport 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.
6
Operations at all of our facilities are subject to regulation by the
Occupational Safety and Health Agency and various other regulatory agencies.
See Part II -- Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- "Risk Factors -- Regulation"
below.
EMPLOYEES
At March 21, 2003, we had approximately 540 employees. Approximately
475 of these employees were employed on a full time basis and approximately 65
were part time or temporary employees.
During the summer of 2002, we employed approximately 2,600 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.
7
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:
Square
Location Principal Use Footage Lease Expiration Date
- --------------------- ---------------------------------------- ------- ---------------------
Memphis, Tennessee Headquarters for Varsity Operations - 51,045 November 2011
all segments
Bartlett, Tennessee Warehouse and Manufacturing - both 205,000 October 2010
segments
Sunnyvale, California Offices - Camps and events 5,200 May 2003
Cypress, California Offices - Camps and events 8,500 February 2008
Houston, Texas Offices - Camps and events 2,500 November 2003
Edmund, Oklahoma Offices and Warehouse - Camps and events 7,000 Month to month
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company becomes involved in various claims and
lawsuits incidental to its 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 Annual Meeting of Stockholders, held on August 29, 2002,
8,103,740 shares were present in person or by proxy, constituting 85.6% of the
outstanding common stock entitled to vote. Two matters were submitted for
stockholder vote at the annual meeting: 1. The re-election of Varsity's
Directors; and 2. The reappointment of Varsity's Auditors. Each of the seven
directors was re-elected. The Company's Auditors were reappointed.
1. The following votes were cast in connection with the re-election
of the Company's Directors:
Total Votes Votes Percent Votes Percent Votes Percent
Name Cast For of Total Against of Total Withheld of Total
- ------------------------- ----------- --------- -------- ------- -------- -------- --------
Robert E. Nederlander 8,103,740 7,920,743 97.74% 182,997 2.26% 0 0.00%
Jeffrey G. Webb 8,103,740 7,638,843 94.26% 464,897 5.74% 0 0.00%
Leonard Toboroff 8,103,740 7,674,853 94.71% 428,887 5.29% 0 0.00%
Don R. Kornstein 8,103,740 7,674,853 94.71% 428,887 5.29% 0 0.00%
John McConnaughy, Jr. 8,103,740 7,638,843 94.26% 464,897 5.74% 0 0.00%
Glenn E. "Bo" Schembechler 8,103,740 7,674,841 94.71% 428,899 5.29% 0 0.00%
Arthur N. Seessel, III 8,103,740 7,956,753 98.19% 146,987 1.81% 0 0.00%
8
2. The following votes were cast in connection with the reappointment
of Varsity's Auditors:
Total Votes Votes Percent Votes Percent Votes Percent
Cast For of Total Against of Total Withheld of Total
----------- --------- -------- ------- -------- -------- --------
For the Reappointment of 8,103,740 8,100,423 99.96% 3,026 0.04% 291 0.00%
Auditors
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is listed on the American Stock Exchange under the
symbol "VBR". As of March 21, 2003, there were approximately 690 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
2001 and for 2002:
2002 Quarters
-------------
1 2 3 4
----- ---- ---- ----
High: $2.45 4.49 4.75 4.75
Low: 1.85 2.00 3.85 3.70
2001 Quarters
-------------
1 2 3 4
---- ---- ---- ----
High: 3.25 2.69 2.24 2.20
Low: 2.25 1.25 1.56 1.40
The closing sale price of the Common Stock on December 31, 2002 was
$4.75.
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.
10
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information should be
read in conjunction with the Consolidated Financial Statements and related notes
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,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Net revenues $ 156,404 $ 147,549 $ 136,035 $ 120,285 $ 112,195
Cost of revenues 91,916 86,968 81,347 71,657 67,924
--------- --------- --------- --------- ---------
Gross profit 64,488 60,581 54,688 48,628 44,271
Selling, general and
administrative expenses 47,396 46,594 42,146 39,831 38,552
--------- --------- --------- --------- ---------
Income from operations 17,092 13,987 12,542 8,797 5,719
Interest expense, net 8,040 10,346 13,139 12,347 11,786
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes, discontinued
operations and extraordinary item 9,052 3,641 (597) (3,550) (6,067)
Income taxes (benefit) (735) 3,010 -- 905 --
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before discontinued operations and
extraordinary item $ 9,787 $ 631 $ (597) $ (4,455) $ (6,067)
========= ========= ========= ========= =========
Earnings (loss) from continuing
operations per share before
discontinued operations and
extraordinary item:
Basic $ 1.03 $ .07 $ (.06) $ (.48) $ (.66)
Diluted $ .91 $ .07 $ (.06) $ (.48) $ (.66)
Cash dividends per share (1) -- -- -- -- --
BALANCE SHEET DATE (EXCLUSIVE OF ASSETS
HELD FOR DISPOSAL)(2) DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Working capital $ 24,074 $ 23,640 $ 12,065 $ 10,084 $ 6,238
Total assets 119,558 118,631 106,185 109,433 108,586
Long-term debt, less
current portion 69,785 80,410 138,919 136,097 126,900
Stockholders' equity 27,787 17,377 25,872 24,865 25,451
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
STATEMENTS OF CASH FLOWS DATA:
Cash flows from continuing operations (3) $ 14,315 $ 4,239 $ 4,221 $ (5,690) $ (2,847)
Cash flows from investing
activities (3) $ (812) $ 65,219 $ (2,638) $ (1,384) $ (647)
Cash flows from financing
activities (3) $ (9,028) $ (48,082) $ 3,099 $ 8,644 $ 4,538
OTHER DATA (UNAUDITED):
EBITDA from continuing operations (4) $ 19,012 $ 18,034 $ 16,248 $ 12,378 $ 9,271
- ----------
(1) The Company's line of credit facility and Senior Note Agreement restrict
the Company's ability to pay dividends.
(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
11
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.
The following is a reconciliation of net income (loss) to EBITDA.
(IN THOUSANDS)
RECONCILIATION OF NET INCOME (LOSS) TO
EBITDA YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Net income (loss) $ 9,927 $ (8,495) $ 561 $ (599) $ (7,139)
Adjustments:
Extraordinary item (140) (4,047) -- -- --
Loss on disposal of businesses -- 9,326 -- -- --
(Income) loss from operations of
discontinued businesses -- 3,847 (1,158) (3,856) 1,072
Income taxes (benefit) (735) 3,010 -- 905 --
Net interest expense 8,040 10,346 13,139 12,347 11,786
Depreciation and amortization, other than
debt issue costs 1,920 4,047 3,706 3,581 3,552
-------- -------- -------- -------- --------
EBITDA $ 19,012 $ 18,034 $ 16,248 $ 12,378 $ 9,271
======== ======== ======== ======== ========
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, 2002, 2001 and
2000.
(IN THOUSANDS)
2002 % 2001 % 2000 %
------- ---- ------- ---- ------- ----
Uniforms and Accessories $93,848 60.0% $88,131 59.7% $79,179 58.2%
Camps and Events $62,556 40.0% $59,418 40.3% $56,856 41.8%
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31,
2001
Overview
2002 represented the first full year of operations since the sale of
the Riddell Group Division and the termination of the Umbro soccer license
during 2001. As a result of these transactions, the Company was able to
significantly reduce its overall debt load and allow management to concentrate
on the remaining facets of the Company's business. These factors, combined with
continued growth, resulted in significant changes in the Company's profitability
as compared to 2001.
The Company posted net income of $9.9 million, or $0.92 per share on
a fully diluted basis, for 2002 as compared to a net loss of $8.5 million, or
$(0.90) per share, for 2001.
Income from continuing operations before interest expense, income
taxes, discontinued operations and extraordinary items increased $3.1 million,
or 22%, to $17.1 million from $14.0 million in the year ending December 31,
2001. The Company benefited from revenue increases combined with decreases in
selling, general and administrative expenses as a percentage of sales. Such
changes will be discussed in greater detail in the following paragraphs in this
Section.
12
In April 2002, the Company used the net proceeds it received from the
Umbro settlement to repurchase $8.25 million of its 10.5% Senior Notes for a
total cost, including commissions, of $7.9 million. This transaction resulted in
an extraordinary gain of $0.1 million, net of applicable taxes.
In December 2002, the Company entered into a license agreement with
Select Sport A/S. Under the terms of the license agreement, the Company has the
right to manufacture and distribute Select Sport soccer team uniforms, apparel
and equipment within the United States.
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.
During 2001, the Company sold its Riddell Group Division and
terminated its Umbro soccer license. The results of these business segments are
reported as income from operations of discontinued businesses in the
Consolidated Statements of Operations. The following management's discussion and
analysis of financial condition and results of operations reflects changes that
occurred with respect to the Company's income from continuing operations,
exclusive of the discontinued operations of the Riddell Group Division and with
respect to the Umbro soccer license.
Revenues
Revenues for the year ended December 31, 2002 increased by $8.9
million, or 6.0%, to $156.4 million from $147.5 million for the year ended
December 31, 2001.
Revenues from the sale of the uniforms and accessories increased by
$5.7 million, or 6.5%, to $93.8 million for the year ended December 31, 2002
from $88.1 million for the year ended December 31, 2001. The 2002 revenue
increase was attributable to overall increases in all product categories, except
campwear. The Company also experienced growth in sales of dance and recital wear
to the studio dance market. The Company's uniform and accessories revenue
growth, as compared to revenue growth for 2001, was tempered by the country's
overall economic condition which resulted in smaller squad sizes and deferment
of certain uniform purchases.
Revenues from camps and events increased by $3.1 million, or 5.2%, to
$62.5 million for the year ended December 31, 2002 from $59.4 million for the
year ended December 31, 2001. The increase in revenues for the year is directly
attributable to the following: (i) a 2% increase in the number of participants
attending our summer camps; (ii) a 15% increase in revenues generated at the
Company's regional and national cheerleading and dance team championships,
primarily due to an increase in the number of participants attending these
events; and (iii) a 32% revenue growth, or $0.7 million, in our studio dance
competitions and conventions. These increases were offset by significant
decreases in the Company's group tour business, caused by groups either delaying
or canceling their 2002 tours as a result of the events of September 11, 2001.
Exclusive of the effects of September 11th on the group tour business, the
Company's camps and events segment experienced a 8.0% revenue increase for the
year ended December 31, 2002.
Gross profit
Gross profit for the year ended December 31, 2002 increased by 6.4%,
to $64.5 million from $60.6 million for the year ended December 31, 2001. Gross
margin rates stayed relatively flat as compared to the prior year with a 0.1
percentage point increase to 41.2% for the year ended December 31, 2002 from
41.1% in the year ended December 31, 2001.
Gross margins rates for the uniforms and accessories segment
increased to 47.0% for the year ended December 31, 2002 from 46.4% for the year
ended December 31, 2001. The percentage increase was primarily due to a
continuance in the shift of the segment's product mix away from lower margin
campwear and accessories to higher margin manufactured uniforms and special
event merchandise, combined with manufacturing efficiencies realized through
improvements made in the Company's uniform manufacturing processes.
Gross margin rates for the camps and events segment decreased to
32.6% in the year ended December 31, 2002 from 33.2% for the year ended December
31, 2001. The overall decrease in the gross margin rate is due to higher
housing, personnel and program support expenses associated with higher
anticipated revenue growth for the Company's
13
summer camp operations combined with higher venue and production costs at the
Company's special events held during the first quarter of 2002.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased as a
percentage of revenues to 30.3% for the year ended December 31, 2002 from 31.6%
for the year ended December 31, 2001. The improvement is principally due to
economies of scale realized by spreading certain fixed and variable
administrative expenses over a greater revenue base combined with a reduction in
amortization expense of approximately $1.9 million as a result of adopting the
standards of Statement of Financial Accounting Standards No. 142 ("SFAS 142").
"Goodwill and Other Intangible Assets."
Selling, general and administrative expenses as a percentage of
revenues with respect to the uniforms and accessories segment decreased to 30.2%
for the year ended December 31, 2002 from 32.8% in the year ended December 31,
2001. These gains were due to improved economies of scale and reductions in
amortization expense as discussed in the preceding paragraph.
Selling, general and administrative expense ratios for the camps and
events segment remained consistent with the previous year with a slight increase
of 0.1% to 27.0% for the year ended December 31, 2002 from 26.9% for the year
ended December 31, 2001. The change in the selling, general and administrative
expense ratio is due to overhead costs incurred related to the Company's new
soccer business and the increase in the ratio of administrative expenses at the
Company's group tour business. Group tour revenues decreased as a result of
September 11th, while administrative expenses remained flat on a comparative
basis. These increases were partially offset by reductions in amortization
expense as discussed in the above paragraph.
Interest expense
Interest expenses for the year ended December 31, 2001 was reduced by
$3.1 million, as a result of an allocation of interest expense to the
discontinued operations of the Riddell Group Division.
Net interest expense decreased $2.3 million to $8.0 million in the
year ended December 31, 2002 from $10.3 million in the year ended December 31,
2001. Total interest expense, before the allocation to discontinued operations,
decreased by $5.4 million due to reduced interest on the senior notes and with
respect to the Company's revolving line of credit as a result of lower
outstanding indebtedness in 2002 as compared to 2001. The net interest expense
for the year ended December 31, 2001 included approximately $0.3 million
received as part of a federal tax refund. The refund, which included
approximately $1.5 million in taxes, related to a carryback of net operating
losses of the Company's Varsity Spirit Corporation subsidiary for periods
preceding the 1997 acquisition of Varsity Spirit Corporation and had been
recorded as a receivable at the time of the acquisition.
Income taxes
The income tax benefit for 2002 consists of a current state income
tax provision of $520,000 offset by a deferred tax benefit of $1.2 million
resulting from the utilization of net operating loss carryforwards and the
reversal of the Company's remaining deferred tax asset valuation allowance. The
2002 benefit has been allocated to the income statement as follows: 1) $735,000
benefit to continuing operations; and 2) $10,000 expense to extraordinary gain.
The deferred tax benefit was a result of the reversal of the Company's valuation
allowance on its available federal net operating loss carryforward. Based upon
normal operating conditions, the Company expects to fully utilize its remaining
available federal net operating loss carryforwards during 2003.
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, 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
14
wrote down its net minority investment in an entity that provided game uniforms
to the 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 that 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 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. The 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.
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 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, and 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 the 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, marketing and manufacturing 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
manufacturing 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 the 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 share, a year
earlier.
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 were 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 the 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 the 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
15
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
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% 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 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 the Company's other uniform lines combined with slightly higher
manufacturing costs associated with the Company's 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
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 former 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 former 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 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.
16
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 the 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 the acquisition.
During the year, the Company used a portion of the net proceeds
received from the sale of the 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.
Liquidity and capital resources
The seasonality of the Company's working capital needs is primarily
impacted by three factors. First, a significant portion of the products the
Company sells 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, the Company incurs costs relating to
the Company's summer camp business during the first and second quarter as the
Company prepares for the upcoming camp season, while camp revenues are mostly
collected in the June to August time period. Lastly, the outstanding balance of
the Company's publicly held debt impacts the Company's working capital
requirements as semi-annual interest payments on our currently $66.0 million of
10.5% Senior Notes outstanding come due each January and July. Prior to the
consummation of the sale of the 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 $49.0
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, $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, and $8.25
million in principal amount of Senior Notes in an open market purchase in April
2002 for an aggregate purchase price of $8.1 million.
To finance the Company's seasonal working capital demands, the
Company maintains a credit facility in the form of a $15 million revolving line
of credit, less a $100,000 reserve established by the bank. The line of credit
agreement is available from January 15 - September 15. Historically, 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 middle of
third quarter and into the fourth quarter as collections are used to reduce the
outstanding balance. 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 that the Company may
incur, limit payments of dividends, restrict the sale of assets and limit
investments that the Company may make. The Company has pledged essentially all
of its tangible assets as collateral for the credit facility.
There were no outstanding balances due under the credit facility as
of December 31, 2002 and 2001. The Company had approximately $716,000 of open
letter of credit agreements outstanding as of March 21, 2003.
The 10.5% Senior Notes contain covenants that, among other things,
restrict the level of other indebtedness that the Company may incur, the amount
of investments it may make in other businesses, the sale of assets and use of
proceeds therefrom and the payments of dividends. The senior notes also restrict
payment of junior indebtedness prior to the maturity of the junior indebtedness.
17
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 demands could lead to higher debt levels in
future periods. We presently 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.
Net cash provided from operations increased from $4.2 million for the
year ended December 31, 2001 to $14.3 million for the year ended December 31,
2002. This increase is primarily due to an improvement in the Company's overall
profitability combined with the collection of the Umbro settlement receivable
and a change in the timing of the receipt of customer deposits for the Company's
regional and national championships. Such increases were offset by reductions in
debt amortization and accrued interest, due to debt retirements in 2001 and
2002.
Net cash from investing activities decreased from $65.2 provided from
investing activities in the year ended December 31, 2001 to $0.8 million used by
investing activities in the year ended December 31, 2002. This decrease is due
by the receipt of $67.3 million in 2001 in net proceeds from the sale of the
Riddell Group Division and from the early termination of the Umbro license. This
decrease was offset by a reduction in capital expenditures during 2002 as
compared to 2001. The decrease in capital expenditures was caused by additional
capital expenditures incurred as a result of the Company's relocation of its
corporate office in the fourth quarter of 2001; there were no comparable
expenditures in 2002. The Company expects 2003 capital expenditures to exceed
2002's capital expenditures as the Company will be upgrading its computer
system.
The amount of net cash used by financing activities decreased from a
usage of $48.1 million in the year ended December 31, 2001 to a usage of $9.0
million in the year ended December 31, 2002. This decrease is due to the
reduction in the Company's overall debt level during 2001 as a result of using
the net cash proceeds received as a result of the sale of the Riddell Group
Division in 2001.
Critical Accounting Policies
ACCOUNTS RECEIVABLE: The majority of the Company's accounts
receivables arise from the sale of cheerleading and dance team uniforms and
accessories to high schools, junior high schools and all-star/youth groups
throughout the United States. Except as described in Note 3 to the financial
statements, as incorporated herein by reference, accounts receivable are due
within 30 days and are stated at amounts due from customers net of an allowance
for doubtful accounts. Accounts outstanding longer than the contractual payment
terms are considered past due. The Company determines its allowance by
considering a number of factors, including the length of time trade accounts
receivable are past due and the Company's previous loss history. The Company
writes-off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. The company fully reserves all service charges assessed on
past due accounts. Service charge payments subsequently received are recognized
as income at the time of payment.
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, net of an allowance for discontinued inventory. The Company
determines its allowance based a variety of factors, the most important of which
being the inclusion/exclusion of the inventory item from the Company's current
catalog. Items no longer included in the catalog are reserved at 100% of cost.
INTANGIBLE ASSETS, GOODWILL 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.
Goodwill and indefinite lived intangible assets are reviewed annually
for impairment. The impairment assessment is derived using discounted cash flow
analysis to calculate fair value. The Company will compare the calculated fair
value to the carrying value of goodwill. Any impairment charges will be charged
against operations at the time the impairment is determined.
Effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 provides that goodwill, as well as
identifiable intangible assets, should not be amortized. Accordingly, with the
adoption of SFAS 142, the Company discontinued the amortization of goodwill as
of January 1, 2002. Goodwill amortization expense for the years ended December
31, 2001 and 2000 was $1,882,000 and $1,876,000, respectively.
18
REVENUES: Sales of products are recorded upon shipment to customers.
Camp and event revenues are recognized over the term of the respective activity.
Contractual obligations and commercial commitments
The following is a summary of the Company's long-term contractual
obligations as of December 31, 2002:
Payments Due by Period (in thousands)
--------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
- ----------------------- ------- ---------------- ----------- ----------- -------------
Long-term debt $72,160 $ 2,375 $ 3,550 $66,235 $ --
Operating leases 19,711 2,461 4,670 4,805 7,775
Other long-term
obligations 3,030 365 790 750 1,125
------- ------- ------- ------- -------
Total contractual
obligations $94,901 $ 5,201 $ 9,010 $71,790 $ 8,900
======= ======= ======= ======= =======
The following is a summary of the Company's contractual commercial
commitments outstanding as of December 31, 2002:
Amount of Commitment Expiration per Period
(amounts in thousands)
------------------------------------------------------
Commitment
Other Total Outstanding
Commercial Amounts as of Less than
Commitments Committed December 31, 2002 1 year 1 - 3 years 4 - 5 years Over 5 years
--------- ----------------- --------- ----------- ----------- ------------
Lines of credit $15,000 $ -- $15,000 $ -- $ -- $ --
Standby letters of
credit $ 716 $ 716 $ 716 $ -- $ -- $ --
------- ------- ------- ---- ---- ----
Total commercial
commitments $15,716 $ 716 $15,716 $ -- $ -- $ --
======= ======= ======= ==== ==== ====
Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 will be effective
January 1, 2003. The new rules apply to all entities that have legal obligations
associated with the retirement of a tangible long-lived asset. The entity should
recognize a liability for an asset retirement obligation if (a) the entity has a
duty or responsibility to settle an asset retirement obligation, (b) the entity
has little or no discretion to avoid the future transfer or use of the assets,
and (c) the transaction or other event obligating the entity has occurred. The
Company does not believe this pronouncement will have a material impact on its
financial statements.
19
Effective January 1, 2002, the Financial Accounting Standards Board
issued SFAS No. 144, "Impairment or Disposal of Long-Lived Assets." Under the
provisions of SFAS No. 144, an entity should recognize an impairment loss if the
carrying amount of a long-lived asset or asset group if it is not recoverable
and exceeds its fair value. An entity must test an asset or asset group for
impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. SFAS No. 144 also includes criteria for
classifying a long-lived asset or asset group as held for sale. Assets held for
sale must be shown at the lower of its carrying amount or fair value less cost
to sell. The Company adopted SFAS No. 144 effective January 1, 2002.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Recission of FASB Statements 4, 44 and 64, Amendment of FASB Statement 13,
and Technical Corrections" ("SFAS No. 145"). Among other provisions, SFAS No.
145 rescinds FASB Statement 4 "Reporting Gains and Losses from Extinguishment of
Debt." Accordingly, gains or losses from extinguishment of debt should not be
reported as extraordinary items unless the extinguishment qualifies as an
extraordinary item under the criteria of Accounting Principles Board Opinion 30,
"Reporting the Results of Operations - Reportinig the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("APB 30"). Gains and losses from extinguishment of
debt, which do not meet the criteria of APB 30, should be reclassified to income
from continuing operations in all prior periods presented. The provisions of
SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002.
Upon adoption, the Company anticipates that it will reclassify gains on early
extinguishment of debt and related taxes previously recorded as extraordinary
items to other income and provision for taxes, respectively.
On June 1, 2002, the Financial Accounting Standards Board issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS No. 146 addresses the accounting and reporting for costs associated with
exit or disposal activities. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. This pronouncement
will become effective as of January 1, 2003 and will impact any exit or disposal
activities the Company initiates after that date.
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure: an
amendment of FASB Statement 123" ("SFAS No. 148"). SFAS No. 148 provides
alternative transition methods for a voluntary change in the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in annual financial statements about the method of accounting for
stock-based employee compensation and the pro forma effect on reported results
of applying the fair value based method for entities that use the intrinsic
value method of accounting. The pro forma effect disclosures are also required
to be prominently disclosed in the interim period financial statements. This
provisons of SFAS No. 148 become effective for financial statements for fiscal
years ending after December 15, 2002 and are effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002.
In January 2003, the Financial Accounting Standards Board issued FIN 46,
"Consolidation of Variable Interest Entities - An Interpretation of ARB 51"
("FIN 46"). FIN 46 is effective immediately for any variable interest entity
created after January 31, 2003 and to variable interest entities that an
enterprise acquires an interest in after that date. The statement includes
disclosure requirements that must be met and may require the reporting entity to
consolidate those variable interest entities which meet certain requirements.
This pronouncement will become effective as of the first interim or fiscal
period beginning after June 15, 2003 and will impact any variable interest
entity activities the Company inititates after that date.
Risk Factors
Restrictive Covenants and Asset Encumbrances
The Company's debt instruments contain numerous restrictive covenants
that limit the discretion of the management of the Company with respect to
certain business matters. These covenants place significant restrictions on,
among other things, the ability of the Company to incur additional indebtedness,
to create liens or other encumbrances, to pay dividends or make other restricted
payments, to make investments, loans and guarantees and to sell or otherwise
dispose of a substantial portion of assets to, or merge or consolidate with,
another entity. The Company's debt instruments also contain a number of
financial covenants that require the Company to meet certain financial ratios
and tests and provide that a Change of Control (as defined therein) constitutes
an event of default. A failure to comply with
20
the obligations contained therein, if not cured or waived, could permit
acceleration of the related indebtedness and acceleration of indebtedness under
other instruments that contain cross-acceleration or cross-default provisions.
In addition, the Company has pledged substantially all of its assets to secure
its senior bank debt, which is a revolving line of credit. In the case of an
event of default under the Company's senior bank debt, the lenders thereunder
would be entitled to exercise the remedies available to a secured lender under
applicable law. If the Company were obligated to repay all or a significant
portion of its indebtedness, there can be no assurance that the Company would
have sufficient cash to do so or that the Company could successfully refinance
such indebtedness. Other indebtedness of the Company that may be incurred in the
future may contain financial or other covenants more restrictive than those
applicable to the Company's debt instruments.
Seasonality and Quarterly Fluctuations
Varsity's business and results of operations are highly seasonal and
follow a similar annual pattern. With respect to Varsity's cheerleader and dance
team camps, such camps are held exclusively in the summer months. Sales of
Varsity's cheerleader, dance team and booster club uniforms and accessories
primarily occur prior to the beginning of the school year. Accordingly, a
substantial portion of Varsity's annual revenues and all of its net income is
generated in the second and third quarters of each calendar year, while the
first and fourth quarters have historically resulted in net losses. Varsity's
working capital needs have generally followed a similar pattern reaching their
peak at the end of the first calendar quarter and continuing through the second
quarter. This period follows Varsity's off-season period during which it
generates only nominal revenues while incurring expenditures in preparation for
its approaching peak season. Varsity has typically incurred seasonal borrowings
during this period which it has historically eliminated during the third quarter
as it receives prepayments on camp tuition and fees. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
Uncertainty of Insurance Coverage; Personal Injury Claims
Cheerleading is a vigorous athletic activity involving jumps,
tumbling, partner stunts and pyramids, with which there are associated risks of
personal injury. Varsity actively promotes safety among cheerleaders, dance team
participants and coaches and was a founding member of and is 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. From time to time, Varsity is subject
to personal injury claims arising from its cheerleader and dance team camps,
none of which was or is material to Varsity's operations. Varsity believes it is
adequately insured against such risks. There can be no assurances, however, that
one or more meritorious claims against Varsity for serious personal injury would
not have an adverse effect upon the Company's business, financial condition and
results of operations.
Risk of Loss of Material Contractual Relationships; Competition
Varsity organizes and produces various national cheerleading and
dance team championships for exclusive broadcast on the ESPN, Inc. ("ESPN")
cable channel. Varsity's current agreement with ESPN expires in October of 2003.
Varsity has entered into several agreements with Walt Disney Attractions, Inc.
("Walt Disney Attractions") pursuant to which its national cheerleading and
dance team championships through 2004 will be held at the Walt Disney World
Resort in Florida. While the Company believes that it will be successful in
renewing or replacing the agreements with ESPN and Walt Disney Attractions in a
manner which will continue to promote the Company's products and services, there
can be no assurances that it will be successful in doing so or that it will be
able to do so on economically favorable terms. Although the Company believes
that the failure to renew any one of the agreements with ESPN and Walt Disney
Attractions would not have a material effect on the Company, there can be no
assurances that the loss of all or any combination of such agreements would not
have a material adverse effect on the Company's business, financial condition
and results of operations.
Varsity is one of two major national companies that designs and
markets cheerleader, dance team and booster club uniforms and accessories and is
one of two major national operators of camps. While Varsity's only national
competitor is National Spirit Group Limited, it also competes with other smaller
national and regional competitors that serve the uniform and accessories market
or that operate cheerleader and dance team camps and clinics.
Regulation
At present, no national governing body regulates 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
21
athletic conferences, to date cheerleading and dance teams generally are free
from rules and restrictions similar to those imposed on other competitive
athletics at the college level. However, if rules limiting off-season training
are applied to cheerleading and/or dance teams (similar to rules imposed by the
NCAA on other sports) and the Company is unable to work with the NCAA and its
member institutions, or any other applicable regulatory body, to designate
acceptable times and sites regarding when and where camps with respect to
cheerleading and/or dance teams can be conducted, Varsity might not be able to
offer a significant number of its camps either because participants might be
prohibited from participating during the summer or because suitable sites might
not be available. Although the Company is 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 these
activities may become regulated. If Varsity were restricted from providing its
training programs to colleges and high schools, or if cheerleaders and dance
teams were restricted from training during the off-season, such regulations
would likely have a material adverse affect on Varsity's business, financial
condition and results of operations. However, the Company currently does 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, the Company expects 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 have in some cases imposed certain
restrictions on off-season practices and out-of-state travel to competitions.
However, in all cases to date, Varsity has been able to work with these state
athletic associations to designate acceptable times for the cheerleaders within
these states to attend camps. Accordingly, at the present time, state
regulations have not had a material adverse effect on Varsity's ability to
conduct its normal business activities within those states. Varsity has also
signed agreements with several state associations to assist with sponsoring and
execution of official competitions with these states.
Dependence on Key Personnel
The Company's executive officers and certain other key employees of
Varsity have been primarily responsible for the development and expansion of
their respective business, and the loss of the services of one or more of these
individuals could have a material adverse effect on the Company. The Company has
employment and non-competition agreements with certain key personnel, although
it currently does not have an employment agreement or a non-competition
agreement with Jeffrey G. Webb, the Company's founder, President and Chief
Executive Officer.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Varsity is exposed to some market risk from changes in foreign
currency rates, in connection with the Company's sale of travel packages for
trips outside of the United States, however, such risk has never been, and the
Company does not believe that it currently is, material to its business
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 16(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
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors and the executive officers
of Varsity Brands, Inc. ("Varsity") is set forth below as of March 21, 2003 and
is based upon the records of Varsity and information furnished to it by the
directors and executive officers. See "Security Ownership of Certain Beneficial
Owners and Management" for information pertaining to the Common Stock owned by
the directors.
22
HAS SERVED AS
NAME AGE POSITION WITH VARSITY DIRECTOR SINCE
- ------------------------------- --- --------------------------------------- ---------------
Robert E. Nederlander.......... 70 Chairman of the Board April 1988
Jeffrey G. Webb................ 53 Chief Executive Officer and Vice June 1997
Chairman of the Board
Leonard Toboroff............... 70 Director and Vice President April 1988
Don R. Kornstein............... 51 Director April 1995
John McConnaughy, Jr........... 74 Director September 1989
Glenn E. "Bo" Schembechler..... 74 Director September 1991
Arthur N. Seessel, III......... 64 Director February 1999
OTHER EXECUTIVE OFFICERS:
John M. Nichols................ 51 Chief Financial Officer
David Groelinger............... 52 Executive Vice President
W. Kline Boyd.................. 49 Senior Vice President, Apparel and
Accessories
Gregory C. Webb................ 51 Senior Vice President, Camps and Events
J. Kristyn Shepherd............ 47 Senior Vice President, Special Events
Set forth below is biographical information regarding each director
and executive officer of Varsity based on information supplied by them.
ROBERT E. NEDERLANDER. Mr. Nederlander has been Chairman of the Board
of Varsity since April 1988 and was Varsity's Chief Executive Officer from April
1988 through April 1, 1993. Mr. Nederlander has been President and/or a Director
since November 1981 of the Nederlander Organization, Inc., owner and operator of
one of the world's largest chains of live theaters. Since December 1998 Mr.
Nederlander has been managing member of the Nederlander Company LLC, an operator
of live theaters outside of New York City. He served as the Managing General
Partner of the New York Yankees from August 1990 until December 1991, and has
been a limited partner and a Director since 1973. Mr. Nederlander has been
President since October 1985 of the Nederlander Television and Film Productions,
Inc. and Chairman of the Board and Chief Executive Officer from January 1985 to
January 2002 of MEGO Financial Corporation. Mr. Nederlander was a director of
MEGO Mortgage Corporation from December 1996 until June 1998. Mr. Nederlander
became Chairman of the Board of Allis-Chalmers Corp. in May 1989; from 1993
through October 1996 he was Vice Chairman, and thereafter he remained solely a
director. In 1995, Mr. Nederlander became a director of HFS Incorporated, which
later merged into Cendant Corporation. Mr. Nederlander also served as a director
of News Communications, Inc., a publisher of community-oriented free circulation
newspapers, from October 1996 until June 2002.
JEFFREY G. WEBB. Mr. Webb has been the Vice Chairman of the Board
since Varsity was acquired by Riddell in June 1997. Mr. Webb was appointed
Varsity's Chief Executive Officer and President in June 2001, and previously
served as Varsity's Chief Operating Officer from October 1999 through June 2001.
Prior to the Varsity acquisition, Mr. Webb was Chairman of the Board, President
and Chief Executive Officer of Varsity Spirit Corporation since its formation in
1974.
JOHN M. NICHOLS. Mr. Nichols has been Chief Financial Officer,
Secretary and Treasurer of Varsity since June 2001. Mr. Nichols joined Varsity
Spirit Corporation, Varsity's wholly owned subsidiary, on April 1, 1992 as Vice
23
President, Accounting and Income Taxes and served as Senior Vice President,
Finance of Varsity Spirit Corporation since July 1992 and Chief Financial
Officer since April 1994. From October 1988 through March 1992, Mr. Nichols
owned and operated an independent certified public accounting practice, during
the course of which he provided accounting and financial consulting services to
Varsity Spirit Corporation. Prior to October 1988, Mr. Nichols was Chief
Financial Officer of French Quarter Inn, Inc. and a partner with the independent
certified public accounting firm of BDO Seidman, LLP.
LEONARD TOBOROFF. Mr. Toboroff has been Vice President of Varsity
since April 1988. Since May 1989, Mr. Toboroff has been a Vice President and
Vice Chairman of the Board of Allis-Chalmers Corp. Mr. Toboroff has been a
practicing attorney since 1961 and from January 1, 1988 to December 31, 1990,
was counsel to Summit Solomon & Feldesman in New York City, which was counsel to
Varsity from April 1988 through February 1993. He has been a Director since
August 1987 and was Chairman and Chief Executive Officer from December 1987 to
May 1988 of Ameriscribe Corp. Mr. Toboroff was Chairman and Chief Executive
Officer from May through July 1982, and then was Vice Chairman from July 1982
through September 1988 of American Bakeries Company. Mr. Toboroff has been a
director of Engex, Inc. since March 1999.
DAVID GROELINGER. Mr. David Groelinger has been Executive Vice
President of Varsity since June 1996, and previously served as Varsity's Chief
Financial Officer from March 1996 through June 2001. From 1994 to 1995 he was a
member of the Board of Directors, Executive Vice President and Chief Financial
Officer of Regency Holdings (Cayman) Inc., which owned and operated a major
international cruise line. Prior to 1994 Mr. Groelinger served in various senior
financial capacities during his twelve years at Chiquita Brands International,
Inc. In 1990, he was promoted to Vice President reporting to Chiquita's
President and Chief Operating Officer. From 2000 until 2001 Mr. Groelinger was a
Director and chaired the audit committee of Applied Theory, a NASDAQ-listed
internet solutions company.
DON R. KORNSTEIN. Mr. Kornstein is currently President of Alpine
Advisors LLC, a company engaged in strategic, management and financial
consulting. Prior to this Mr. Kornstein was a member of the Board of Directors,
Chief Executive Officer and President of Jackpot Enterprises, Inc. from
September 1994 through February 2000. Prior to this Mr. Kornstein was a Senior
Managing Director at Bear, Stearns & Co. Inc. for 17 years through September
1994. Mr. Kornstein has been a director of Varsity since April 1995.
JOHN MCCONNAUGHY, JR. Mr. McConnaughy has been Chairman and Chief
Executive Officer of JEMC Corp. since 1988. Mr. McConnaughy was the Chairman of
the Board of the Excellence Group, LLC, which filed a petition for bankruptcy
under Chapter 11 of the Bankruptcy Code on January 13, 1999. The Excellence
Group's subsidiaries produced labels for a variety of customers. From 1969 to
1986, Mr. McConnaughy served as Chairman and Chief Executive Officer of Peabody
International Corp. ("Peabody"). From 1981 to 1992, he served as Chairman and
Chief Executive Officer of GEO International Corp. when it was spun off from
Peabody in 1981. Mr. McConnaughy is a Director of Fortune Natural Resources,
Levcor International, Inc., Wave Systems, Inc., Consumer Portfolio Services Inc.
and Overhill Farms Inc. He has been a director of Varsity since September 1989.
GLENN E. "BO" SCHEMBECHLER. Mr. Schembechler was President of the
Detroit Tigers from January 1990 through August 1992 and a member of the Tigers
Board of Directors from 1989 through 1990. He is also a Director of Midland
Company. From 1968 through 1989, Mr. Schembechler was head football coach of the
University of Michigan and served as its Athletic Director in 1988 and 1989. He
has been a director of Varsity since September 1991.
ARTHUR N. SEESSEL, III. Mr. Seessel was the Chief Executive Officer
of Seessel Holdings Inc., a supermarket chain located in Memphis, Tennessee,
until the company was sold in 1996. Mr. Seessel currently serves as a consultant
to Schnuck Markets, Inc. and is a member of the Board of Directors of 1st Trust
Bank, Wunderlich Securities, Land O'Frost, Inc. and Auto Radio Inc. He has been
a director of Varsity since February 1999.
W. KLINE BOYD. Mr. Boyd has been Senior Vice President and General
Manager - Varsity Spirit Fashions since March 1989, a date which precedes the
June 1997 acquisition of Varsity. Mr. Boyd has been a member of the Board of
Directors of Boyd & McWilliams Energy Group, Inc. since 1978 and has been a
member of the Board of Directors of Smith Oil Company, Inc. since 1988.
GREGORY C. WEBB. Mr. Webb has been Senior Vice President and General
Manager - Universal Cheerleaders Association since 1989, a date which precedes
the June 1997 acquisition of Varsity. Mr. Webb has been general manager of the
Universal Cheerleaders Association operations since 1986 and had previously
served in similar capacities since joining Varsity in 1976. Mr. Webb is the
brother of Jeffrey G. Web, the Varsity's Chief Executive Officer and President
and Vice Chairman of the Board.
24
J. KRISTYN SHEPHERD. Ms. Shepherd has been Senior Vice-President -
Universal Cheerleaders Association since 1989, a date which precedes the June
1997 acquisition of Varsity, and has served in various other capacities since
joining the Company in 1979. Ms. Shepherd oversees the Company's special events
and studio dance operations as well as television productions.
SECTION 16(A) DISCLOSURE
Varsity believes, based solely on its review of the copies of the
Forms 3, 4 and 5 required to be filed with Varsity pursuant to Section 16(a) of
the Exchange Act by its officers, directors and beneficial owners of more than
10% of Varsity's Common Stock ("insiders"), that during the fiscal year ended
December 31, 2002, all filing requirements applicable to its insiders were
complied with.
25
ITEM 11. SUMMARY COMPENSATION TABLE
The table below sets forth the cash compensation paid to or accrued
for Varsity's Chief Executive Officer and its four other most highly paid
executive officers in 2002 for services rendered in all capacities to Varsity
and its subsidiaries during the fiscal years ended December 31, 2002, 2001 and
2000.
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ----------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (1) COMPENSATION (2)
- -------------------------------------- ---- -------- -------- ------------ ----------- ----------------
Jeffrey G. Webb....................... 2002 $485,000 $120,000 $ -- -- $ 442
Chief Executive Officer and President 2001 409,500 100,000 -- -- 200
2000 397,688 -- -- -- 200
David Groelinger...................... 2002 $124,279 $ -- $ -- -- $180,000(3)
Executive Vice President (3) 2001 255,631 -- -- -- 251,386(3)
2000 233,133 -- -- -- 2,040
W. Kline Boyd........................ 2002 $210,000 $ 56,000 $ -- -- $ 442
Senior Vice President 2001 215,000 50,000 -- -- 200
2000 202,717 -- -- 8,000 200
John M. Nichols...................... 2002 $210,000 $ 70,000 $ -- -- $ 442
Chief Financial Officer, Senior 2001 186,240 45,000 -- -- 200
Vice-President 2000 156,000 -- -- 10,000 200
Gregory C. Webb....................... 2002 $210,000 $ 45,000 $ -- -- $ 442
Executive Vice President 2001 192,780 45,000 -- -- 200
2000 189,000 -- -- 5,225 200
- ----------
(1) These options were issued under Varsity's 1991 Stock Option Plan or 1997
Stock Option Plan.
(2) Represents Varsity's contribution to a 401(k) plan on behalf of the
employee, except for the payments described below in Note (3).
(3) David Groelinger resigned as Chief Financial Officer on June 22, 2001, in
connection with the sale of the Riddell Group Division, but continues to
serve as Executive Vice President pursuant to an employment agreement that
terminates on March 31, 2003. Mr. Groelinger received payments totaling
$180,000 and $250,000 for the years ended December 31, 2002 and 2001,
respectively, related to the sale of the Riddell Group Division in 2001.
OPTIONS GRANTED IN 2002
The following table sets forth information concerning individual
grants of stock options made during 2002 to each named executive officer listed
below pursuant to the Company's 1997 Stock Option Plan.
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF STOCK
SECURITIES OPTIONS GRANTED APPRECIATION FOR OPTIONS TERM (1)
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE PRICE ---------------------------------
NAME GRANTED FISCAL YEAR PER SHARE EXPIRATION DATE 5% 10%
- ---------------- ------------------ --------------- -------------- --------------- ------ --------
Jeffrey G. Webb -- -- -- -- -- --
David Groelinger -- -- -- -- -- --
W. Kline Boyd -- -- -- -- -- --
John M. Nichols -- -- -- -- -- --
Gregory C. Webb -- -- -- -- -- --
26
1) Based upon the per share market price on the date of grant and an annual
appreciation of such market price at the rate stated in the table through
the expiration of such options. Gains, if any, are dependent upon the
actual performance of the common stock, as well as the continued employment
of the executive officers through the vesting period. The potential
realizable values indicated have not taken into account amounts required to
be paid as income tax under the Internal Revenue Code and any applicable
state laws.
STOCK OPTION EXERCISES AND STOCK OPTIONS HELD AT END OF 2002
The following table indicates the total number of exercisable and
unexercisable stock options held by each named executive officer listed below on
December 31, 2002. No options to purchase Varsity's Common Stock were exercised
by any of these individuals during 2002. On December 31, 2002, the last sale
price of the Common Stock on the American Stock Exchange was $4.75 per share.
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
DECEMBER 31, 2002 OPTIONS AT DECEMBER 31, 2002
---------------------------- ---------------------------------
SHARES ACQUIRED VALUE REALIZED
NAME ON EXERCISE (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- --------------- -------------- ----------- ------------- ----------- -------------
Jeffrey G. Webb........... -- -- 459,010 8,750 $373,028 $14,219
David Groelinger.......... -- -- 141,250 3,750 26,406 6,094
W. Kline Boyd............. -- -- 105,990 9,000 59,516 8,125
John Nichols.............. -- -- 61,000 7,500 12,188 4,063
Robert E. Nederlander..... -- -- 37,500 15,000 25,313 25,875
Leonard Toboroff.......... -- -- 37,500 15,000 25,313 25,875
Gregory C. Webb........... -- -- 93,863 6,362 61,031 6,094
- ----------
(1) Value realized is based upon the fair market value of common stock on the
date of exercise less the exercise price, and does not necessarily indicate
that the optionee sold such stock.
COMPENSATION OF BOARD OF DIRECTORS
Directors who are not officers of Varsity received a fee in 2002 of
$21,250 per annum. In 2002, directors who were members of the Audit and
Compensation Committees of the Board (Messrs. McConnaughy, Kornstein,
Schembechler and Seessel) were also each paid an aggregate additional amount of
$6,250 per annum for their Committee memberships. In 2003, directors who are not
officers of the Company will receive a fee of $25,000 per annum; committee
members will receive $5,000 per annum for each committee on which they serve;
and committee chairpersons will each receive an additional fee of $5,000 per
annum.
See "Summary Compensation Table" for a discussion of compensation
paid to Mr. Webb, Varsity's Vice Chairman and Chief Executive Officer.
Varsity has agreed to indemnify each director and officer against
certain claims and expenses for which the director might be held liable in
connection with service on the Board. In addition, Varsity maintains an
insurance policy insuring our directors and officers against such liabilities.
27
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
In June 1992, Varsity entered into an employment agreement with each
of Messrs. Nederlander and Toboroff. Each agreement continues until terminated
by Varsity, with termination effective three years after Varsity delivers notice
of termination or, if earlier, until the death or disability of the employee.
The agreements are immediately terminable by Varsity for cause (as defined
therein). Bonuses are at the discretion of the board. Each agreement provides a
base salary of $162,500 which may be increased in the discretion of the board,
provided that in any event each year the salaries are increased at least by the
percentage increase in the Consumer Price Index. Each agreement provides that in
the event Varsity terminates the employee's employment, generally, other than
for cause, the employee will receive his full salary through the end of the term
of his agreement and annual bonuses for the remainder of the term equal to the
average of the annual bonuses awarded to the employee prior to termination. Each
agreement acknowledges that the employee will devote time and provide services
to entities other than Varsity. In April 2002, Varsity amended its agreements
with each of Messrs. Nederlander and Toboroff whereby each of Messrs.
Nederlander and Toboroff agreed to waive the percentage Consumer Price Index
increase with respect to their base salary of $162,500 as of June 22, 1999 for
each annual period from June 22, 1999 to June 21, 2000, June 22, 2000 to June
21, 2001 and June 22, 2001 to June 21, 2002, and Varsity agreed to pay to each
of Messrs. Nederlander and Toboroff (i) a bonus of $12,241, and (ii) increase
their base salary to $223,841 effective January 1, 2002, and for each twelve
(12) month period thereafter.
In connection with the acquisition of Varsity Spirit Corporation,
Varsity entered into an employment agreement with Mr. Jeffrey G. Webb effective
June 1997. Under the provisions of such agreement Mr. Webb serves as Vice
Chairman of the Board of Directors as well as Chief Operating Officer of
Varsity. Mr. Webb is entitled to a base salary of no less than $375,000 per year
and is eligible to participate in those bonus arrangements which are made
available to other senior officers of Varsity at a target level of 40% of his
base salary. Pursuant to his employment agreement, Mr. Webb received options to
purchase 50,000 shares of common stock of Varsity with a per share exercise
price of $5.44 and "special options" to purchase an additional 347,760 shares at
a per share exercise price of $3.80. Upon termination of Mr. Webb's employment
(1) by Varsity without cause, as defined in Webb's agreement, (2) by Mr. Webb
with good reason, as defined in Webb's agreement, or (3) as a result of a change
in control, as defined in Webb's agreement, Mr. Webb will receive continued
payments of base salary for the longer of the remainder of the term of the
agreement and one year, or two years if as a result of a change of control, as
well as other benefits. Mr. Webb is subject to a non-competition covenant
generally for a period of two years following the termination of his employment
for any reason. Mr. Webb's Employment Agreement has by its terms expired.
Varsity and Mr. Webb continue to operate substantially in accordance with the
expired Employment Agreement. Subsequent to the sale by Varsity of its Riddell
Group Division, Mr. Webb was elevated to the positions of President and Chief
Executive Officer of Varsity.
The Company entered into an employment agreement with Mr. Nichols
effective November 1, 2002 in connection with his duties as the Company's Chief
Financial Officer and Executive Vice President. The agreement provides for an
initial annual base salary of $210,000 and allows Mr. Nichols to participate in
the Company's bonus pool at a target level of 35% of his base salary. The
agreement is immediately terminable for cause, as defined in Mr. Nichols'
agreement. Mr. Nichols' agreement presently expires, unless renewed, in October
2004. The agreement provides, generally, that if Mr. Nichols' employment is
terminated other than for cause, including a change of control (in which event,
it may be terminated at Mr. Nichols' option or the option of the Company), he
will be paid no less than one and one-half year's salary and bonus, if
applicable. In addition, his stock options become fully vested and immediately
exercisable for a six-month period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 2002 there were no Compensation Committee interlocks and no
insider participation in Compensation Committee decisions that were required to
be reported under the rules and regulations of the Exchange Act.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of March 21,
2003 pertaining to ownership of Varsity's common stock by persons known to
Varsity to own 5% or more of Varsity's common stock and common stock owned
beneficially by each director and named executive officer of Varsity and by
directors and named executive officers of Varsity as a group.
28
The information contained herein has been obtained from Varsity's
records, or from information furnished directly by the individual or entity to
Varsity made by such persons with the U.S. Securities and Exchange Commission.
Shares Owned Percent of
Beneficially Common Stock
------------- ------------
Robert E. Nederlander 1,274,710(1) 13.2%
c/o Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
Jeffrey G. Webb 1,333,887(2) 13.3%
Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
John M. Nichols 63,500(3) *
Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
David Groelinger 123,500(4) 1.3%
Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
Leonard Toboroff 1,326,085(5) 13.8%
c/o Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
Don R. Kornstein 67,437(6) *
c/o Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
John McConnaughy, Jr. 1,061,437(7) 11.0%
c/o Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
Glenn E. "Bo" Schembechler 60,000(8) *
c/o Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
Arthur N. Seessel, III 30,000(9) *
c/o Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
29
W. Kline Boyd 143,985(10) 1.5%
Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
Gregory C. Webb 162,230(11) 1.7%
Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
J. Kristyn Shepherd 117,312(12) 1.2%
Varsity Brands, Inc.
6745 Lenox Center Court, Suite 300
Memphis, TN 38115
All officers and directors as a group 5,764,083(13) 53.5%
12 individuals)
Angelo, Gordon & Co., L.P. 1,385,747(14) 12.6%
245 Park Avenue, 26th Fl.
New York, NY 10167
Bedford Oak Partners 592,500(15) 6.2%
100 South Bedford Road
Mt. Kisco, NY 10549
Dimensional Fund Advisors Inc. 501,508(16) 5.6%
1299 Ocean Ave., 11th fl.
Santa Monica, CA
90401
- ----------
* Less than 1%
(1) 1,274,710 shares are owned by Mr. Nederlander directly or through entities
controlled by him having dispositive power over these shares, and 37,500 of
these 1,274,710 shares are issueable upon the exercise of options granted
under Varsity's 1991 Stock Option Plan and 7,500 of these shares underlie
options granted under Varsity's 1997 Stock Option Plan that are exercisable
currently.
(2) Includes 467,760 shares issueable upon the exercise of options granted
under Varsity's 1997 Stock Option Plan that are exercisable currently or
within 60 days of March 21, 2003.
(3) Includes 5,000 shares underlying options granted under Varsity's 1991 Stock
Option Plan and 58,500 shares underlying options granted under Varsity's
1997 Stock Option Plan that are exercisable currently or within 60 days of
March 21, 2003.
(4) Includes 115,000 shares underlying options granted under Varsity's 1991
Stock Option Plan that are exercisable currently or within 60 days of March
21, 2003.
(5) Includes 37,500 shares underlying options granted under Varsity's 1991
Stock Option Plan and 7,500 shares underlying options granted under
Varsity's 1997 Stock Option Plan that are exercisable currently.
(6) Includes 37,500 shares underlying options granted under Varsity's 1991
Stock Option Plan and 7,500 shares underlying options granted under
Varsity's 1997 Stock Option Plan that are exercisable currently.
30
(7) Includes 37,500 shares underlying options granted under Varsity's 1991
Stock Option Plan and 7,500 shares underlying options granted under
Varsity's 1997 Stock Option Plan that are exercisable currently. Mr.
McConnaughy has pledged his interest in 1,016,437 shares of Varsity's
common stock to financial institutions to secure loans.
(8) Includes 37,500 shares underlying options granted under Varsity's 1991
Stock Option Plan and 7,500 shares underlying options granted under
Varsity's 1997 Stock Option Plan that are exercisable currently.
(9) Includes 22,500 shares underlying options granted under Varsity's 1991
Stock Option Plan and 7,500 shares underlying options granted under
Varsity's 1997 Stock Option Plan that are exercisable currently.
(10) Includes 110,990 shares underlying options granted under Varsity's 1997
Stock Option Plan that are exercisable currently or within 60 days of March
21, 2003.
(11) Includes 97,613 shares underlying options granted under Varsity's 1997
Stock Option Plan that are exercisable currently or within 60 days of March
21, 2003.
(12) Includes 66,863 shares underlying options granted under Varsity's 1997
Stock Option Plan that are exercisable currently or within 60 days of March
21, 2003.
(13) The aggregate number of shares beneficially owned and percent of common
stock beneficially owned by all officers and directors as a group does it
include an aggregate of 505,299 shares of underlying option granted under
Varsity's 1991 Stock Option Plan and 1997 Stock Option Plan.
(14) Based on a Schedule 13G filed February 13, 1997, Angelo, Gordon & Co., L.P.
may be deemed to be the beneficial owner of 1,385,747 shares as a result of
voting and dispositive powers it holds with respect to $6,125,000 principal
amount of Varsity's 4.10% Convertible Subordinated Note due November 1,
2007 (the "Notes") convertible at $4.42 per share into 1,385,747 shares of
common stock which it holds for the account of private investment funds for
which it acts a general partner and/or investment advisor or investment
manager.
(15) Based on amounts reported by the American Stock Exchange as of February 14,
2003.
(16) Based on a Schedule 13G filed February 3, 2003, Dimensional Fund Advisors
Inc. may be deemed to be the beneficial owner of 501,508 shares.
EQUITY COMPENSATION PLAN INFORMATION
Plan category Number of securities to be Weighted average exercise Number of securities
Issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants warrants and rights future issuance
and rights
- -------------------------------------- ----------------------------- ----------------------------- -----------------------
Equity compensation plans approved by
security holders 1,682,025 $4.35 17,975
Equity compensation plans not approved
by security holders 0 0 0
Total 1,682,025 $4.35 17,975
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 25, 2000, the Company entered into a nine (9) year six
(6) month sublease with a company owned and controlled by Varsity's chairman,
Mr. Robert Nederlander, for premises to serve as the Company's corporate offices
located in New York City. Pursuant to the sublease, the Company will pay a base
rent of approximately $117,000 per annum which will rise to approximately
$138,000 per annum during the term of the sublease. The Company will also pay
our pro rata share (approximately 33%) of operating expenses during the term of
the sublease. Management believes that the terms of the sublease are at least
equivalent to what the Company could reasonably expect to receive from an
unrelated third party. In connection with the Company's sale of its Riddell
Group Division, the Company has
31
moved its corporate offices to Memphis, Tennessee, and is currently subleasing
the premises to a third party. During the year ended December 31, 2002, the
Company paid approximately $14,000 to Mr. Nederlander under this lease
agreement. Subsequent to December 31, 2002, the tenant who was sub-subleasing
the office space stopped paying rent on a current basis, although the Company
still has four (4) months worth of rent payments from such tenant representing
the balance of the security deposit that the Company received from such tenant.
At the current time, the Company is in discussions with the current tenant and
others with respect to the letting of the space.
ITEM 14: CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Annual Report on
Form 10-K, the Company carried out an evaluation, under the supervision and with
the participation of management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures. Based upon the evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective to timely alert them to
material information required to be included in the Company's Exchange Act
filings. In addition, there have been no changes in internal controls, or in
other factors that could significantly affect internal controls subsequent to
the date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
ITEM 15: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of fees paid to the Company's independent
accountants during the year ended December 31, 2002:
Audit Fees (1) $154,574
Financial Information Systems Design and Implementation Fees $ -0-
All Other Fees (2) $ 83,378
--------
$237,952
========
- ----------
(1) Audit fees billed by Grant Thornton LLP consisted of the examination of the
Company's Annual Report on Form 10-K for the years ended December 31, 2001
and 2002 and review of other Company filings with the Securities and
Exchange Commission.
(2) "All Other Fees" by Grant Thornton LLP for non-audit services included
$32,460 for consulting services related to the disposition of the Riddell
Group and Umbro Divisions and $50,918 for tax planning services.
32
PART IV
ITEM 16. 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.
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).
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).
33
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. 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
34
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).
10.22 Supply and Purchase Agreement between Varsity Spirit
Fashions & Supplies, Inc. and Select Sport America Inc.
(1).
10.23 Trademark License Agreement between Select Sport A/S and
Varsity Spirit Fashions & Supplies, Inc. (1).
21 List of subsidiaries (17).
23 Consent of Grant Thornton LLP regarding Varsity Brands,
Inc. (1).
99.1 Certification by Chief Executive Officer Pursuant to
section 906 of the Sarbanes-Oxley act of 2002(1).
99.2 Certification by Chief Financial Officer Pursuant to
section 906 of the Sarbanes-Oxley act of 2002(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.
35
(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).
(b) Reports on Form 8-K
One Report on Form 8-K was filed on May 5, 2002.
36
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: March 31, 2003 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 Vice Chairman of the Board March 31, 2003
- --------------------------- and Chief Executive Officer
Jeffrey G. Webb
/s/ Robert E. Nederlander Chairman of the Board March 31, 2003
- ---------------------------
Robert E. Nederlander
/s/ Leonard Toboroff Vice President and Director March 31, 2003
- ---------------------------
Leonard Toboroff
/s/ John M. Nichols Chief Financial Officer March 31, 2003
- ---------------------------
John M. Nichols
/s/ John McConnaughy, Jr. Director March 31, 2003
- ---------------------------
John McConnaughy, Jr.
/s/ Glen E. Schembechler Director March 31, 2003
- ---------------------------
Glen E. Schembechler
/s/ Don R. Kornstein Director March 31, 2003
- ---------------------------
Don R. Kornstein
/s/ Arthur N. Seessel, III Director March 31, 2003
- ---------------------------
Arthur N. Seessel, III
37
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Jeffrey G. Webb, certify that:
1. I have reviewed this annual report on Form 10-K of Varsity Brands, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrants's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 31, 2003 /s/ Jeffrey G. Webb
President
Chief Executive Officer
38
CERTIFICATION
I, John M. Nichols, certify that:
1. I have reviewed this annaul report on Form 10-K of Varsity Brands, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrants's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 31, 2003 /s/ John M. Nichols
Senior Vice President
Chief Financial Officer
39
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants......................... F-2
Consolidated Balance Sheets at December 31, 2002 and 2001 ................. F-3
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 ..................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000 ............................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000...................................... 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. (a Delaware corporation) and Subsidiaries as of December
31, 2002 and 2001, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. 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.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and other Intangible Assets" ("SFAS 142") on January 1, 2002.
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, 2002 and 2001, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
GRANT THORNTON LLP
Chicago, Illinois
February 14, 2003
F-2
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31, December 31,
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 18,821 $ 14,397
Accounts receivable, trade less allowance for
doubtful accounts ($441 and $429, respectively) 12,321 12,161
Inventories 7,811 7,863
Prepaid expenses 4,337 3,937
Other receivables -- 3,555
Deferred taxes 2,770 2,383
--------- ---------
Total current assets 46,060 44,296
Property, plant and equipment, less accumulated
depreciation ( $5,081 and $4,929, respectively) 3,459 4,387
Deferred taxes 660 --
Goodwill, less accumulated amortization
($9,595 and $9,595, respectively) 66,596 66,596
Intangibles and deferred charges, less accumulated
amortization ($3,545 and $3,048, respectively) 2,186 2,793
Other assets 597 559
--------- ---------
$ 119,558 $ 118,631
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,225 $ 5,891
Accrued liabililties 7,068 8,258
Customer deposits 7,318 5,132
Current portion of long-term debt 2,375 1,375
--------- ---------
Total current liabilities 21,986 20,656
Long-term debt 69,785 80,410
Deferred taxes -- 188
Contingent liabilities -- --
Stockholders' equity:
Preferred stock, $.01 par; authorized 5,000,000
shares; none issued -- --
Common stock, $.01 par; authorized 40,000,000;
outstanding 9,592,250, and 9,452,250, respectively 96 95
Additional paid-in capital 37,788 37,306
Accumulated deficit (10,097) (20,024)
--------- ---------
27,787 17,377
--------- ---------
$ 119,558 $ 118,631
========= =========
See notes to condensed consolidated financial statements.
F-3
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS,EXCEPT PER SHARE AMOUNTS)
Years ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Net revenues:
Uniforms and accessories $ 93,848 $ 88,131 $ 79,179
Camps and events 62,556 59,418 56,856
--------- --------- ---------
156,404 147,549 136,035
Cost of revenues:
Uniforms and accessories 49,767 47,279 43,209
Camps and events 42,149 39,689 38,138
--------- --------- ---------
91,916 86,968 81,347
--------- --------- ---------
Gross profit 64,488 60,581 54,688
Selling, general and
administrative expenses 47,396 46,594 42,146
--------- --------- ---------
Income from operations 17,092 13,987 12,542
Other expense:
Interest expense 8,183 11,096 13,139
Interest income (143) (750) --
--------- --------- ---------
Total other expense 8,040 10,346 13,139
--------- --------- ---------
Income (loss) from continuing operations before
income taxes, discontinued operations and
extraordinary items 9,052 3,641 (597)
Income taxes (benefit) (735) 3,010 --
--------- --------- ---------
Income (loss) from continuing operations 9,787 631 (597)
Discontinued operations:
Income (loss) from operations of discontinued businesses -- (3,847) 1,158
Loss on disposal of businesses -- (9,326)
--------- --------- ---------
Income (loss) before extraordinary items 9,787 (12,542) 561
Extraordinary items - Gain on retirement of bonds 140 4,047
--------- --------- ---------
Net income (loss) $ 9,927 $ (8,495) $ 561
========= ========= =========
Income (loss) from continuing operations per share:
Basic $ 1.03 $ 0.07 $ (0.06)
Diluted $ 0.91 $ 0.07 $ (0.06)
Net earnings (loss) per share:
Basic $ 1.05 $ (0.90) $ 0.06
Diluted $ 0.92 $ (0.90) $ 0.06
Weighted average number common and common
equivalent shares outstanding
Basic 9,483 9,452 9,389
Diluted 11,187 9,452 9,471
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, 2000 9,263 $ 93 $ 36,862 $(12,090) $ 24,865
Stock issued to employees 54 169 169
Issuance of common stock upon
exercise of stock options 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
Issuance of common stock upon
exercise of stock options 140 1 482 -- 483
Net income for the year -- -- -- 9,927 9,927
-------- -------- -------- -------- --------
Balance December 31, 2002 9,592 $ 96 $ 37,788 $(10,097) $ 27,787
======== ======== ======== ======== ========
See notes to consolidated financial statements
F-5
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 9,927 $ (8,495) $ 561
Adjustments to reconcile net income (loss) to net
cash provided by continuing operations:
(Income) loss from operations of discontinued businesses -- 3,847 (1,158)
Loss on disposal of businesses -- 9,326 --
Extraordinary gain on retirement of bonds (140) (4,047) --
Depreciation and amortization:
Amortization of debt issue costs 504 761 863
Other depreciation and amortization 1,920 4,047 3,706
Provision for losses on accounts receivable 307 325 417
Deferred taxes (1,235) (2,195) --
Changes in assets and liabilities, net of assets sold
and extraordinary items:
(Increase) decrease in:
Accounts receivable, trade (467) 1,987 (2,902)
Inventories 52 (661) 2,126
Prepaid expenses (400) (687) 997
Other receivables 3,555 (2,101) (28)
Other assets (38) (456) 1,384
Increase (decrease) in:
Accounts payable (666) 1,819 (611)
Accrued liabilities (1,190) 1,127 (534)
Customer deposits 2,186 (358) (600)
-------- -------- --------
Net cash provided by continuing operations 14,315 4,239 4,221
Cash flows from discontinued operations and extraordinary item
Net change in assets held for disposal -- (6,021) (4,199)
Deferred bond costs associated with extraordinary gain (51) (1,067) --
-------- -------- --------
Net cash used by discontinued operations and extraordinary item (51) (7,088) (4,199)
Cash flows from investing activities:
Capital expenditures (812) (2,089) (2,306)
Net proceeds received from sale of businesses -- 67,308 --
Other assets -- -- (332)
-------- -------- --------
Net cash provided by (used in) investing activities (812) 65,219 (2,638)
Cash flows from financing activities:
Net borrowings under line-of-credit agreement 7,400 16,309 2,822
Repayment of line of credit agreement (7,400) (32,728) --
Redemption of senior bonds (7,858) (31,425) --
Debt repayments (1,375) -- --
Debt issue costs (278) (238) --
Proceeds from issuance of common stock 483 -- 277
-------- -------- --------
Net cash provided in (used by) financing activities (9,028) (48,082) 3,099
-------- -------- --------
Net increase in cash 4,424 14,288 483
Cash, beginning 14,397 109 (374)
-------- -------- --------
Cash, ending $ 18,821 $ 14,397 $ 109
======== ======== ========
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.
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 date of three months or less when purchased to be
cash equivalents.
ACCOUNTS RECEIVABLE: The majority of the Company's accounts
receivables arise from the sale of cheerleading and dance team uniforms and
accessories to high schools, junior high schools and all-star/youth groups
throughout the United States. Except as described in Note 3, accounts receivable
are due within 30 days and are stated at amounts due from customers net of an
allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due. The Company determines its
allowance by considering a number of factors, including the length of time trade
accounts receivable are past due and the Company's previous loss history. The
Company writes-off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts. The company fully reserves all service charges assessed
on past due accounts. Service charge payments subsequently received are
recognized as income at the time of payment.
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, net of an allowance for discontinued inventory. The Company
determines its allowance based a variety of factors, the most important of which
being the inclusion/exclusion of the inventory item from the Company's current
catalog. Items no longer included in the catalog are reserved at 100% of cost.
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, GOODWILL 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.
Goodwill and indefinite lived intangible assets are reviewed annually
for impairment. The impairment assessment is derived using discounted cash flow
analysis to calculate fair value. The Company will compare the calculated fair
value to the carrying value of goodwill. Any impairment charges will be charged
against operations at the time the impairment is determined.
F-7
Effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 provides that goodwill, as well as
identifiable intangible assets, should not be amortized. Accordingly, with the
adoption of SFAS 142, the Company discontinued the amortization of goodwill as
of January 1, 2002. Goodwill amortization expense for the years ended December
31, 2001 and 2000 was $1,882,000 and $1,876,000, respectively.
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 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,
------------------------
2002 2001 2000
------ ------ ------
(IN THOUSANDS)
Weighted average number of outstanding
common shares ................................. 9,483 9,452 9,389
Weighted average of shares issued under
convertible debt agreement .................... 1,645 -- --
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 ......................... 59 -- 82
------ ------ ------
Denominator for diluted computation .... 11,187 9,452 9,471
====== ====== ======
For the year ended December 31, 2002, options to purchase 1,331,025
shares of common stock with a weighted average price of $4.72 were excluded from
the computation of diluted earnings per share. 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 have been anti-dilutive. For the year ended December
F-8
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.
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 has adopted EITF issue 00-10 and billings to customers for
freight and handling charges and freight costs are generally included in net
sales and cost of goods sold, respectively, in the Consolidated Statements of
Operations for all periods presented.
NEW ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards
Board has issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
SFAS No. 143 will be effective January 1, 2003. The new rules apply to all
entities that have legal obligations associated with the retirement of a
tangible long-lived asset. The entity should recognize a liability for an asset
retirement obligation if (a) the entity has a duty or responsibility to settle
an asset retirement obligation, (b) the entity has little or no discretion to
avoid the future transfer or use of the assets, and (c) the transaction or other
event obligating the entity has occurred.
In June 2002, the Financial Accounting Standards Board issued SFAS
No. 144, "Impairment or Disposal of Long-Lived Assets." Under the provisions of
SFAS No. 144, an entity should recognize an impairment loss if the carrying
amount of a long-lived asset or asset group if it is not recoverable and exceeds
its fair value. An entity must test an asset or asset group for impairment
whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable. SFAS No. 144 also includes criteria for classifying a
long-lived asset or asset group as held for sale. Assets held for sale must be
shown at the lower of its carrying amount or fair value less cost to sell. The
Company does not believe SFAS No. 144 will have a material impact on its
financial statements. SFAS No. 144 will become effective January 1, 2003.
In April 2002, the Financial Accounting Standards Board issued SFAS
No. 145, "Recission of FASB Statements 4, 44 and 64, Amendment of FASB Statement
13, and Technical Corrections" ("SFAS No. 145"). Among other provisions, SFAS
No. 145 rescinds FASB Statement 4 "Reporting Gains and Losses from
Extinguishment of Debt." Accordingly, gains or losses from extinguishment of
debt should not be reported as extraordinary items unless the extinguishment
qualifies as an extraordinary item under the criteria of Accounting Principles
Board Opinion 30, "Reporting the Results of Operations - Reportinig the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions ("APB 30"). Gains and losses from
extinguishment of debt, which do not meet the criteria of APB 30, should be
reclassified to income from continuing operations in all prior periods
presented. The provisions of SFAS No. 145 will be effective for fiscal years
beginning after May 15, 2002. Upon adoption, the Company anticipates that it
will reclassify gains on early extinguishment of debt and related taxes
previously recorded as extraordinary items to other income and provision for
taxes, respectively.
F-9
Effective June 1, 2002, the Financial Accounting Standards Board
issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses the accounting and reporting for costs
associated with exit or disposal activities. This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. This
pronouncement will become effective as of January 1, 2003 and will impact any
exit or disposal activities the Company inititates after that date.
In December 2002, the Financial Accounting Standards Board issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure: an amendment of FASB Statement 123" ("SFAS No. 148"). SFAS No. 148
provides alternative transition methods for a voluntary change in the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in annual financial statements about the method of
accounting for stock-based employee compensation and the pro forma effect on
reported results of applying the fair value based method for entities that use
the intrinsic value method of accounting. The pro forma effect disclosures are
also required to be prominently disclosed in the interim period financial
statements. This provisons of SFAS No. 148 become effective for financial
statements for fiscal years ending after December 15, 2002 and are effective for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002.
In January 2003, the Financial Accounting Standards Board issued FIN
46, "Consolidation of Variable Interest Entities - An Interpretation of ARB 51"
("(FIN 46"). FIN 46 is effective immediately for any variable interest entity
created after January 31, 2003 and to variable interest entities that an
enterprise acquires an interest in after that date. The statement includes
disclosure requirements that must be met and may require the reporting entity to
consolidate those variable interest entities which meet certain requirements.
This pronouncement will become effective as of the first interim or fiscal
period beginning after June 15, 2003 and will impact any variable interest
entity activities the Company inititates after that date.
2. DISPOSITION OF ASSETS
In June 2001, the Company sold its Riddell Group Division to an
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 $67.5 million in cash.
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 allowed
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 made 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 and 2000 were $42.4 million and $89.3 million,
respectively.
F-10
In September 2001, the Company settled the litigation that it had
brought earlier that 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 the Company voluntarily terminated
its license effective November 30, 2001 in exchange for a lump sum payment to
the Company and Umbro Worldwide's agreement to make certain payments to the
Company in the future. Such payments included the purchase, for $2.6 million, of
certain inventory from the Company. As a result of the early termination of the
Umbro license, the Company recognized a gain of approximately $4.9 million ($2.9
million after tax) during the fourth quarter of 2001.
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 and 2000 were $9.3 million and $9.4
million, respectively.
3. RECEIVABLES
Accounts receivable include unbilled shipments of approximately
$639,000 and $610,000 at December 31, 2002 and 2001. 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,
----------------------
2002 2001
------ ------
(IN THOUSANDS)
Finished goods $5,012 $5,904
Raw materials 2,799 1,959
------ ------
$7,811 $7,863
====== ======
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31,
----------------------
2002 2001
------ ------
(IN THOUSANDS)
Machinery and equipment $5,443 $6,157
Furniture and fixtures 2,830 2,861
Leasehold improvements 267 298
------ ------
8,540 9,316
Less accumulated depreciation 5,081 4,929
------ ------
$3,459 $4,387
====== ======
F-11
Depreciation expense from continuing operations relating to all
property and equipment amounted to $1,740,000, $2,051,000 and $1,806,000 for the
years ended December 31, 2002, 2001, and 2000, respectively.
6. INTANGIBLE ASSETS AND DEFERRED CHARGES:
Intangible assets and deferred charges consist of the following:
ESTIMATED DECEMBER 31,
LIVES ---------------------
IN YEARS 2002 2001
--------- ------- -------
(IN THOUSANDS)
Goodwill -- $76,191 $76,191
Debt issue costs 5 to 8 5,113 5,481
Other 2 to 5 618 360
------- -------
81,922 82,032
Less accumulated amortization 13,140 12,643
------- -------
$68,782 $69,389
======= =======
Amortization expense relating to all intangible assets and deferred
charges amounted to $684,000, $2,757,000 and $2,763,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
7. LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31,
--------------------
2002 2001
------- -------
(IN THOUSANDS)
Outstanding balance under a credit facility
expiring in 2003, the facility was revised
in 2001, terms further described below $ -- $ --
Senior notes, 10.5%, due 2007, terms further
described below 66,035 74,285
Convertible subordinated note payable,
interest at 4.1%, due 2002 through 2007,
terms further described below 6,125 7,500
------- -------
$72,160 $81,785
======= =======
The aggregate maturities of long-term debt are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
2003 $ 2,375
2004 3,450
2005 100
2006 100
2007 66,135
-------
$72,160
=======
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, less a $100,000 reserve established
by the bank, during the period from January 15 through
F-12
September 15. The credit facility is to be used to support the Company's working
capital and letter of credit requirements. The credit facility expires on
September 15, 2003. 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. As of December 31, 2002, irrevocable standby letters of credit in the
principal amount of approximately $716,000 were outstanding.
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 the Company's businesses, 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.
A portion of the proceeds received from the sale of the Riddell Group
Division 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, approximately
$7.9 million, were used to redeem a face amount of $8.25 million of the 10.5%
Senior Notes during April 2002. As a result of this transaction, the Company
recognized an extraordinary gain of approximately $0.1 million, net of taxes,
commissions, expenses and debt issue costs.
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
F-13
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 the Riddell Group Division, the
Company and the debtholder entered into a Note Exchange Agreement. The note is
convertible into shares of common stock based on a conversion price of $4.42 per
share.
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.
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, 2002 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, 2000 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
Granted 90,000 $3.03
Exercised (140,000) $3.45
Forfeited (398,850) $4.32
---------
Balance, December 31, 2002 1,682,025 $4.35 1,466,775 $4.48
=========
In conjunction with the sale of the Riddell Group Division during 2001,
all employees of the Riddell Group Division 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.
F-14
Further information about stock options outstanding at December 31, 2002
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
--------------- ----------- ---------------- --------- ----------- ---------
$1.85 - $4.49 861,000 5.8 years $3.48 697,625 $3.58
$4.50 - $6.50 821,025 4.9 years $5.26 769,150 $5.29
At December 31, 2002 there were 17,975 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), the Company 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,
------------------------------
2002 2001 2000
------ -------- ------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Pro forma net income (loss) $9,434 ($9,242) ($294)
Pro forma net income (loss) per share, basic $ 0.99 ($0.98) ($0.03)
Pro forma net income (loss) per share, diluted $ 0.88 ($0.98) ($0.03)
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, 2002 and 2000, 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 2002 and 2000 was $3.37 and $2.29 per share, respectively. There were no
options granted during 2001.
F-15
9. COMMITMENTS:
LEASES: The Company leases various facilities and equipment under
operating leases. Rent expense in continuing operations amounted to
approximately $2,476,000, $2,110,000 and $1,835,000 for the years ended December
31, 2002, 2001 and 2000, respectively.
Future minimum rental payments for all non-cancelable lease
agreements for periods after December 31, 2002 are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
2003 $ 2,461
2004 2,354
2005 2,316
2006 2,389
2007 2,416
Later years 7,775
--------
Total minimum payments required $ 19,711
========
During 2001, 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 a period of
at least five (5) years. The Company included a $570,000 charge for the
abandoned property in the income (loss) from operations of discontinued
businesses in the Consolidated Statements of Operations.
STRATEGIC ALLIANCE: In September 2002, the Company entered into a
strategic alliance with the National Federation of State High School
Associations (the "Federation"). In exchange for the Federation endorsing the
Company's cheerleading and dance team championships, the Company is obligated to
pay the Federation annual license and educational fees over the term of the
agreement. In addition to these fees, the Company will pay the Federation
contingent fees based on membership and participant increases over an
established base level. The agreement will expire on December 31, 2010.
Future minimum license and educational fees under the Federation
agreement for periods after 2002 are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
2003 $ 350
2004 350
2005 350
2006 375
2007 375
Later years 1,125
-------
Total minimum payments required $ 2,925
=======
LICENSE FEE: In December 2002, the Company entered into a trademark
license agreement with Select Sport A/S, ("Select") a Danish company, under
which the Company has the right to utilize the Select trademark in connection
with the Company's plans to sell Select branded soccer uniforms and equipment
within the United Sates. The license agreement will expire on December 31, 2005
unless the agreement is extended for an additional five (5) year term. Under the
terms of the license agreement, the Company is required to make minimum royalty
payments under this agreement of $15,000, $30,000 and $60,000 for the years
ending December 31, 2003, 2004 and 2005, respectively.
F-16
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 $30,000, $70,000 and $30,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
DISCONTINUED OPERATIONS: As of December 31, 2002, the Company has
approximately $251,000 of accruals related to the sale of the Riddell Group
Division and the discontinuance of the Umbro license. These accruals consist of
remaining severance payments to a former executive and accruals related to
potential state tax issues associated with the sale of the Riddell Group
Division. Accrued liabilities related to discontinued operations were
approximately $710,000 as of December 31, 2001.
10. ACCRUED LIABILITIES AND CONTINGENCIES:
Accrued liabilities consist of the following:
DECEMBER 31,
----------------------
2002 2001
------- -------
(IN THOUSANDS)
Accrued interest $ 3,365 $ 3,786
Accrued compensation 1,308 1,665
Accrued rent 955 1,030
Accrued income taxes 923 900
Other accrued liabilities 517 877
------- -------
Total $ 7,068 $ 8,258
======= =======
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, 2002, 2001 and 2000 is summarized
below:
YEARS ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Current tax expense:
Federal $ -- $ -- $ 100
State 520 900 --
------- ------- -------
520 900 100
------- ------- -------
Deferred tax expense (benefit):
Federal (1,245) (2,195) (100)
State -- -- --
------- ------- -------
(1,245) (2,195) (100)
------- ------- -------
$ (725) $(1,295) $ --
======= ======= =======
The income tax benefit for 2002 consists of a current state income
tax provision of $520,000, offset by a deferred tax benefit of $1.2 million
resulting from net operating loss carryforward utilization and the reversal of
the Company's remaining deferred tax asset valuation reserve. The 2002 benefit
has been allocated to the income
F-17
statement as follows: 1) $735,000 benefit to continuing operations and 2)
$10,000 expense to extraordinary gain. 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 expense 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 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. There was no other current income tax
expense for the year ended December 31, 2000 due to net operating losses
generated, or carried forward to, these periods. There was no other deferred tax
expense during the year ended December 31, 2000 since there was generally a full
valuation allowance applied to net deferred tax assets. Changes in the valuation
allowance were a decrease of $4,279,000 and $156,000 for each 2002 and 2001, and
an increase of $1,185,000 for 2000.
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, 2002 and 2001 are as follows:
DECEMBER 31,
------------------
2002 2001
------- -------
(IN THOUSANDS)
Deferred income tax assets:
Accrued expenses and reserves $ 500 $ 756
Inventory 585 695
Intangible assets and deductible goodwill 717 808
Net operating loss, and credit, carryforwards 1,971 4,279
Other -- 124
------- -------
3,773 6,662
Valuation allowances -- (4,279)
------- -------
Total deferred income tax assets 3,773 2,383
------- -------
Deferred income tax liabilities:
Property and equipment 343 188
------- -------
Total deferred income tax liabilities 343 188
------- -------
Total net deferred income tax asset $ 3,430 $ 2,195
======= =======
The net current and non-current components of the deferred income
taxes were recognized in the balance sheet at December 31, 2002 and 2001 as
follows:
DECEMBER 31,
------------------
2002 2001
------- -------
(IN THOUSANDS)
Net current deferred tax assets $ 2,770 $ 2,383
Net non-current deferred tax assets 660 --
Net non-current deferred tax liabilities -- (188)
------- -------
$ 3,430 $ 2,195
======= =======
F-18
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,
-------------------------------
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Tax expense (benefit) at U.S. statutory rate $ 3,643 $(3,364) $ 225
Differences resulting from:
State income tax, net
of federal tax benefit 314 544 --
Amortization of goodwill not deductible
for tax purposes -- 829 720
Travel & entertainment expenses
not deductible for tax purposes 86 392 330
Benefit of prior periods net operating
losses not previously recognized resulting
in decrease in valuation allowance (3,157) -- (1,242)
Valuation allowance adjustment (1,694) -- --
Other differences 83 304 (33)
------- ------- -------
Income tax expense $ (725) $(1,295) $ -0-
======= ======= =======
At December 31, 2002 the Company had estimated net operating loss
carryforwards for federal income tax purposes of approximately $4.6 million
expiring between 2012 and 2016. While this loss carryforward is available to
reduce the payment of taxes that might otherwise be payable in future years, the
benefit 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.
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 the Riddell Group Division, this space was sub-subleased
to a third party for the remaining lease term. Total payments to the shareholder
controlled entity for the years ended December 31, 2002 and 2001 were
approximately $14,000 and $90,000 which included rents as described above and
the Company's share of utilities. Subsequent to December 31, 2002, the tenant
who was sub-subleasing the office space terminated their sub-sublease agreement.
At the current time, the Company is looking for another tenant for this space.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest were $8,100,000, $15,333,000 and
$15,460,000 for the years ended December 31, 2002, 2001 and 2000, 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 2002 or 2000.
F-19
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 include the senior notes which at December 31, 2002 had
a carrying value of $66,035,000 and a fair value, based on quoted market values,
of $62,568,000. 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-20
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
NET REVENUES:
Uniforms and accessories $ 93,848 $ 88,131 $ 79,179
Camps and events 62,556 59,418 56,856
--------- --------- ---------
Consolidated total $ 156,404 $ 147,549 $ 136,035
========= ========= =========
INCOME FROM OPERATIONS:
Uniforms and accessories $ 15,734 $ 11,952 $ 10,443
Camps and events 3,544 3,729 5,034
Corporate and unallocated expenses (2,186) (1,694) (2,935)
--------- --------- ---------
Consolidated total $ 17,092 $ 13,987 $ 12,542
========= ========= =========
DEPRECIATION AND AMORTIZATION, EXCLUSIVE OF DEBT ISSUE COSTS:
Uniforms and accessories $ 1,242 $ 2,818 $ 2,620
Camps and events 426 1,065 1,050
Corporate and unallocated 252 164 36
--------- --------- ---------
Consolidated total $ 1,920 $ 4,047 $ 3,706
========= ========= =========
CAPITAL EXPENDITURES:
Uniforms and accessories $ 506 $ 1,478 $ 1,470
Camps and events 306 611 472
Corporate and unallocated -- -- 364
--------- --------- ---------
Consolidated total $ 812 $ 2,089 $ 2,306
========= ========= =========
TOTAL ASSETS:
Uniforms and accessories $ 80,301 $ 81,238 $ 72,724
Camps and events 33,580 31,975 28,090
Corporate and unallocated 5,677 5,418 5,371
Discontinued operations -- -- 87,632
--------- --------- ---------
Consolidated total $ 119,558 $ 118,631 $ 193,817
========= ========= =========
16. SUMMARIZED QUARTERLY DATA (UNAUDITED):
FISCAL QUARTER
----------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31, 2002:
Net revenues $18,693 $57,370 $61,196 $19,145 $156,404
Gross profit 6,564 25,301 25,265 7,358 64,488
Income (loss) from
continuing operations (5,867) 8,608 9,988 (2,942) 9,787
Basic earnings (loss) per share ($0.62) $0.91 $1.05 ($0.31) $1.03
Diluted earnings (loss) per share ($0.62) $0.78 $0.89 ($0.31) $0.91
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 (4,312) 4,862 5,853 (5,772) 631
Basic earnings (loss) per share ($0.46) $0.51 $0.62 ($0.61) $0.07
Diluted earnings (loss) per share ($0.46) $0.45 $0.53 ($0.61) $0.07
F-21
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-22
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 14, 2003, 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, 2002. In our opinion, this schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information therein.
GRANT THORNTON LLP
Chicago, Illinois
February 14, 2003
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, 2000
Allowance for doubtful accounts $1,000 $ 417 -- $1,017 $ 400
Year ended December 31, 2001
Allowance for doubtful accounts $ 400 $ 325 -- $ 296 $ 429
Year ended December 31, 2002
Allowance for doubtful accounts $ 429 $ 307 -- $ 295 $ 441
- ---------
Notes: (a) Deductions for the allowance for doubtful accounts consist of
accounts written off net of recoveries.
S-2