-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, STiNb/a1JrRcaz491gFpPRixntNYyliCFGB3QnUA6vixgvgEKshf/0eisMaGocQa a7xwarekg8ux5EoIoJDapw== 0000950144-97-003352.txt : 19970401 0000950144-97-003352.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950144-97-003352 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARSITY SPIRIT CORPORATION CENTRAL INDEX KEY: 0000881887 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 621169661 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19790 FILM NUMBER: 97568833 BUSINESS ADDRESS: STREET 1: 2525 HORIZON LAKE DR STREET 2: SUITE 1 CITY: MEMPHIS STATE: TN ZIP: 38133 BUSINESS PHONE: 9013874300 MAIL ADDRESS: STREET 1: PO BOX 341609 CITY: MEMPHIS STATE: TN ZIP: 38184-1609 10-K405 1 VARSITY SPIRIT CORPORATION FORM 10-K405 1 ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 DRAFT: ________________ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996) For the fiscal year ended December 31, 1996 or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _________________ to _________________ Commission file number 0-19790 VARSITY SPIRIT CORPORATION (Exact Name of Registrant as Specified in its Charter) Tennessee 62-1169661 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2525 Horizon Lake Drive 38133 Memphis, Tennessee (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: 901-387-4300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class -------------- Common Stock, $.01 par value per share 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 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 voting stock held by non-affiliates of the registrant as of March 10, 1997 was approximately $39,169,000. ____________ Shares of Common Stock outstanding at March 10, 1997: 4,560,083 ________________________________________________________________________________ 2 PART I Item 1. Business. GENERAL Varsity Spirit Corporation (the "Company" or "VSC") sells products and services to the school spirit industry. The Company designs and markets cheerleader, dance team and booster club uniforms and accessories and is an operator of youth, junior high, high school and college cheerleader and dance team camps, clinics and competitions. The Company promotes its products and services, as well as the school spirit industry, by organizing and producing various nationally-televised cheerleading and dance team championships and other special events. The Company targets the youth market and sells custom-made uniforms and accessories to customers, and operates cheerleader and dance team camps and clinics, in all 50 states, Canada, Japan and Germany. The Company also operates a travel company that organizes group travel tours within the United States and abroad, including tours for school spirit groups. VARSITY CHEERLEADER UNIFORMS AND ACCESSORIES Through its subsidiary, Varsity Spirit Fashions & Supplies, Inc. ("Varsity"), the Company designs and markets cheerleader, dance team and booster club uniforms and accessories, including sweaters, sweatshirts, jumpers, vests, skirts, shorts, warm-up suits, t-shirts, socks, pompons, jackets, pins and gloves. Varsity employs two full-time fashion designers, both of whom are former college cheerleaders, and one of whom received additional training at the Fashion Institute of Technology in New York City. Varsity also utilizes specialized computer software to create its new fashion designs and patterns. Cheerleading and dance team uniforms designed and marketed by Varsity are custom-made. During 1996, Varsity contracted for its production requirements with seven independent garment manufacturers utilizing ten manufacturing facilities. Varsity has exclusive contracts with these manufacturers, under which the manufacturers provide knitting, cutting, sewing, finishing and shipping for all orders. Varsity provides these manufacturers with patterns, fabrics, yarn and manufacturing specifications and quality control supervision. Varsity also provides some cutting, knitting and lettering for the manufacturers at its specialized production facility located at the Company's Memphis headquarters. The use of independent manufacturing facilities to fulfill the Company's production needs affords the Company flexibility to adjust its production output to meet its highly seasonal selling cycle. The use of independent manufacturers also reduces the Company's fixed costs, which the Company believes is beneficial in a highly seasonal business. The Company believes that the loss or termination of its relationship with any single independent manufacturer would not have a material adverse effect on the Company's operations. Varsity purchases from various suppliers many of the cheerleading accessories that it markets, including shoes, pompons and campwear. Varsity purchases products from Nike, Capezio and Converse, among others. Varsity has expanded the variety and number of accessories it markets, which has contributed to the increase in merchandise sales revenue experienced by Varsity in the past 3 five fiscal years. The Company believes that the loss or termination of its relationship with any single supplier would not have a material adverse effect on the Company's operations. The Company markets its Varsity(TM) uniforms, accessories and other merchandise through sales representatives and, to a lesser extent, through its direct mail catalog and telemarketing programs. As of December 31, 1996, Varsity had over 135 sales representatives operating in a total of 50 states. The Company's representatives are employed directly by the Company or are representatives of one of the two marketing firms with which the Company has contracted for marketing services. These sales representatives, who typically cover one or more major metropolitan areas on an exclusive basis, call on substantially all of the junior high, high school and college accounts within their respective territories. The sales representatives are typically compensated on a percentage of sales basis. Varsity closely and continuously monitors the performance of its sales representatives and periodically meets with the representatives to discuss and review sales goals. CHEERLEADER AND DANCE TEAM OPERATIONS Through its Universal Cheerleaders Association ("UCA") division and its wholly owned subsidiary, Varsity USA, Inc. ("USA"), the Company operates cheerleader and dance team camps in the United States. During the 1996 summer camp season, approximately 188,000 participants (consisting of students and their coaches) attended UCA and USA camps, including over 6,300 participants representing colleges and junior colleges. During the summer of 1996, cheerleading and/or dance team squads from approximately 65% of the universities comprising the Atlantic Coast, Big East, Big Ten, Big Twelve, Pac-10 and Southeastern collegiate athletic conferences attended UCA and USA camps. On May 15, 1996, USA acquired the camp business of United Spirit Association from United Special Events, Inc. This business consists of instructional spirit camps and clinics primarily in the western United States. Camp sessions for high school and junior high school students are held primarily in June and July; camp sessions for college cheerleaders and dance team participants are held primarily in August. Mascot training clinics are also provided at certain of the Company's cheerleader and dance team camps. A significant majority of the Company's cheerleader and dance team camps are conducted on college or junior college campuses. The camps generally are conducted over a four-day period and are attended by resident and commuting students. The Company generally markets the camp, establishes registration fees, registers students, collects the registration fees, provides instruction and performs all related administrative services. The Company contracts with the colleges and universities for provision of housing, food and conference facilities. During the summer of 1996, resident fees for high school cheerleader and dance team camps sponsored by the Company ranged from $70 to $236, with commuter fees ranging from $40 to $139. In addition to registration fees, the Company also generates revenues at cheerleading and dance team camps through the sale of t-shirts, shorts, caps, patches and various other accessories. The staff of the Company's summer camps includes instructors, administrators and trainers. On average, one instructor was provided for every 23 students during 1996. Camp staff, including administrators and trainers, were provided at the ratio of approximately one to 75 students during 1996. The -2- 4 Company's instructors, all of whom are required to complete an intensive training session prior to each summer season, typically are college cheerleaders who have also attended camps in the past. The Company also operates two cheerleading practice facilities. These cheer gyms are year-round facilities at which cheerleaders and other spirit group participants can enroll in instructional and recreational programs offered by the Company. OTHER OPERATIONS The Company, through a wholly-owned subsidiary, Varsity/Intropa Tours, Inc. ("Varsity/Intropa"), operates a travel company that specializes in organizing tours primarily for cheerleaders, bands, choirs and other school-affiliated groups. Most tours are planned around a performance event; therefore, the revenues from this business are seasonal. Prices are negotiated on a tour-by-tour basis and fluctuate based on factors such as the availability of discounts on air fares and the exchange rates, in the case of international tours. TRAINING AND EMPLOYEES The Company emphasizes the training of its instructors. Prior to the commencement of the camps, the instructors participate in an intensive seven-day training session where they are taught new cheerleading and dance material, as well as up-to-date teaching and safety techniques. The Company hires its instructors by utilizing applications given to talented camp participants, participant surveys of camp personnel, supervisor evaluations and numerous nationwide tryouts. During the year ending December 31, 1996, the Company employed 428 full-time employees and 219 part-time employees. In addition, during the summer of 1996, the Company employed approximately 1,660 summer camp instructors, trainers and administrators. None of the Company's employees is covered by a collective bargaining agreement. The Company considers its relationship with its employees to be satisfactory. COMPETITION VSC is one of two major companies that designs and markets cheerleader, dance team and booster club uniforms and accessories on a national basis. In addition to VSC and its major national competitor, there are other smaller national and regional competitors serving the uniform and accessories market in the United States. The Company believes 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 of the merchandise. VSC is one of three companies that annually operate a significant number of cheerleader and dance team camps in the United States and is one of two major national operators of camps. There are also many other companies and schools that operate camps and clinics on a regional basis. The Company believes 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, accessibility of camp locations, timing of the camps and the tuition charged for camp participation. -3- 5 TRADEMARKS AND SERVICE MARKS The Company has registered various trademarks with the U.S. Patent and Trademark Office, including the following: the Universal Cheerleaders Association logo, the Varsity logo, the United Spirit Association logo, the National High School Cheerleading Championship logo, the Universal Dance Association logo, Universal Dance Camps, Varsity Spirit Fashions and The National Dance Team Championship. The Company believes that these trademarks have significant value and are important to its marketing efforts. Item 2. Properties. The Company leases the following facilities for its operations. These facilities are considered suitable and adequate for their intended uses.
Description of Facility Square Footage Lease Expiration Date ----------------------- -------------- --------------------- Office/Warehouse/Prduction, Memphis, TN 63,700 November 14, 1997 Warehouse, Memphis, TN 21,500 October 31, 1997 Office/Warehouse, Sunnyvale, CA 10,030 November 30, 2000 Sport Gym, Decatur, GA 12,000 July 31, 1998 Sport Gym, Carrollton, TX 11,050 January 31, 2000 Office, Bellaire, TX 2,984 November 30, 1997
Item 3. Legal Proceedings. The Company is not a party to any litigation that is expected to have a material adverse effect on its business. Item 4. Submissions of Matters To a Vote of Security Holders. Not applicable. -4- 6 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. MARKET AND DIVIDEND INFORMATION The Company's common stock trades on The Nasdaq Stock Market's National Market under the symbol "VARS". The number of shareholders of record as of March 10, 1997, was approximately 247. The Company paid a quarterly dividend of $0.03, or $0.12 annually, and $0.04, or $0.16 annually, for each of the years ended December 31, 1995 and 1996, respectively. On February 13, 1997, the Company declared a quarterly dividend of $0.055 per share, which was paid on March 6, 1997. The following tables set forth the reported high and low sales prices for Varsity's common stock as reported by Nasdaq:
1996 HIGH LOW - ------------------------------------------------------------ For the quarter ended: March 31 15 3/4 14 1/2 June 30 16 3/4 14 1/2 September 30 16 3/4 15 3/4 December 31 16 15 1995 HIGH LOW - ------------------------------------------------------------ For the quarter ended: March 31* 13 3/4 11 3/4 June 30 14 1/4 12 3/4 September 30 18 1/8 13 1/2 December 31 18 13 1/2
- -------------------------- * The sales prices reflect a 3-for-2 stock split effected as a 50% stock dividend, distributed on February 24, 1995, to shareholders of record at the close of business on February 14, 1995. -5- 7 Item 6. Selected Financial Data. SELECTED CONSOLIDATED FINANCIAL DATA ================================================================================ The following selected consolidated financial data are derived from the consolidated financial statements of the Company. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report.
- -------------------------------------------------------------------------------------------------------------------------------- Nine Months Ended Year Ended YEAR ENDED (In thousands, except per share data) Year Ended March 31, December 31, December 31, DECEMBER 31, -------------------- ------------ ------------ ------------ 1993 1994 1994 1995 1996 -------------------------------------------------------------------------------------- INCOME STATEMENT DATA: (1) Revenues: Uniforms and accessories $25,765 $31,193 $35,866 $44,049 $49,472(3) Camps and events 15,822 18,560 23,721(2) 31,449(2) 38,977(3)(2) - -------------------------------------------------------------------------------------------------------------------------------- Total revenues 41,587 49,753 59,587 75,498 88,449 - -------------------------------------------------------------------------------------------------------------------------------- Gross profit 17,509 20,831 24,102 29,005 34,836 - -------------------------------------------------------------------------------------------------------------------------------- Operating income 3,987 4,837 7,985 6,326 8,448 Other income (expense) 37 121 150 178 166 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 2,427 $ 3,022 $ 4,917 $ 4,163 $ 5,200 - -------------------------------------------------------------------------------------------------------------------------------- Net income per share (4) $ 0.53 $ 0.66 $ 1.07 $ 0.89 $ 1.10 - -------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares and equivalents outstanding 4,550 4,565 4,587 4,679 4,734 - -------------------------------------------------------------------------------------------------------------------------------- Cash dividends per share $ - $ - $ - $ 0.12 $ 0.16 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA (at period-end): Total assets $16,045 $18,701 $24,870 $29,243 $37,791 Shareholders' equity 12,678 15,736 20,741 24,794 29,897 - --------------------------------------------------------------------------------------------------------------------------------
(1) The business and results of operations of the Company are highly seasonal. A substantial portion of the Company's annual revenues and all of the Company's net income are generated in the quarters ended June 30 and September 30. The quarters ended March 31 and December 31 have historically resulted in net losses. See "Management Discussion and Analysis of Financial Condition and Results of Operations." (2) Includes travel tour revenues of $2,065, $5,814 and $5,814, respectively, as a result of the December 1, 1994, acquisition of the assets of Intropa International U.S.A., Inc. (3) Includes camp revenues $261 and $4,199, respectively, as a result of the May 15, 1996 acquisition of the camp business of United Special Events, Inc. -6- 8 (4) All references with regard to the numbers of shares of common stock and per share amounts have been retroactively adjusted to reflect the three-for-two stock split effected by a 50% stock dividend on February 24, 1995. ADDITIONAL SELECTED CONSOLIDATED FINANCIAL DATA PRESENTED FOR COMPARATIVE PURPOSES ================================================================================ Effective April 1, 1994, the Company changed its fiscal year-end from March 31 to December 31. To aid in annual comparisons, selected unaudited consolidated financial data have also been presented for the twelve-month periods ended December 31, 1993 and 1994. - --------------------------------------------------------------------------------
(In thousands, except per share data) Twelve Months Ended December 31, ------------------------------------------- 1993 1994 1995 1996 - -------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Revenues: Uniforms and accessories $30,775 $37,635 $44,049 $49,472 Camps and events 18,284 24,968 31,449 38,977 - -------------------------------------------------------------------------------------- Total revenues 49,059 62,603 75,498 88,449 - -------------------------------------------------------------------------------------- Gross profit 20,678 25,040 29,005 34,836 - -------------------------------------------------------------------------------------- Operating income 5,064 6,120 6,326 8,448 Other income 95 183 178 166 - -------------------------------------------------------------------------------------- Net income $ 3,115 $ 3,818 $ 4,163 $ 5,200 - -------------------------------------------------------------------------------------- Net income per share (1) $ 0.68 $ 0.83 $ 0.89 $ 1.10 - -------------------------------------------------------------------------------------- Weighted average shares outstanding 4,551 4,587 4,679 4,734 - -------------------------------------------------------------------------------------- Cash dividends per share $ - $ - $ 0.12 $ 0.16 - -------------------------------------------------------------------------------------- BALANCE SHEET DATA (at period-end): Total assets $21,057 $24,870 $29,243 $37,791 Shareholders' equity 16,821 20,741 24,794 29,897 - --------------------------------------------------------------------------------------
(1) All references with regard to the numbers of shares of common stock and per share amounts have been adjusted to reflect the three-for-two stock split effected by a 50% stock dividend on February 14, 1995. -7- 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Over the past three years, the Company's revenues and net income have grown substantially. Revenues have grown from $62.6 million in the twelve-month period ended December 31, 1994 to $88.4 million in the twelve months ended December 31, 1996, and net income has grown from $3.8 million in the twelve months ended December 31, 1994 to $5.2 million in the twelve months ended December 31, 1996. This growth is due to the Company's strategy of expanding its school spirit product lines and sales force, increasing the number of its cheerleader and dance team camp sessions and visibly promoting its business, as well as the school spirit industry, primarily through nationally televised cheerleading and dance team championships. In addition, in December 1994, the Company acquired the group tour business of Intropa International/USA, Inc., with whom the Company had worked in the past in promoting its international and domestic travel events, further contributing to revenue growth from the Company's special events. In May 1996, through its subsidiary, Varsity USA, Inc. ("USA"), the Company purchased the camp business of United Special Events, Inc., a California-based company with a strong position in the western region of the United States, which complemented the Company's existing camp operations. The Company plans to increase its revenues and market penetration in the future by continuing to implement its growth strategy (primarily focusing on the youth, junior high, high school, and junior college markets) and by utilizing its reputation for quality, design, and on-time delivery of its cheerleading and dance uniforms and for professional instruction and supervision at its cheerleader and dance team camps. The Company is also analyzing new growth opportunities in the school spirit and cheerleading industries. Effective April 1994, the Company changed its fiscal year-end from March 31 to December 31. Therefore, the fiscal period ended December 31, 1994 consists of a nine-month period as compared to the twelve-month period ended December 31, 1995. Accordingly, a discussion of significant changes between the twelve-month periods ended December 31, 1995 and 1994, have also been included herein. Each of these discussions should be read with the discussion set forth below under "Seasonality." YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 Total revenues increased 17.1% to $88.4 million in the year ended December 31, 1996 from $75.5 million in the year ended December 31, 1995. Revenues from the sale of uniforms and accessories increased by 12.3% to $49.5 million in the year ended December 31, 1996 from $44.0 million in the year ended December 31, 1995. The increase was primarily attributable to a strong increase in shoe and accessory sales combined with an 8.5% sales growth in other product lines. Other factors contributing to the sales increase include a combination of expansion within existing product lines and the introduction of new designs, and, to a much lesser extent, a small price increase on certain items. In addition, the Company increased its inventory levels in an effort to service greater anticipated demand. The increased availability of inventory further contributed to the sales volume increases by improving on-time delivery. Camp and event revenues increased by $7.5 million, or 23.9%, to $39.0 million in the year ended December 31, 1996 from $31.5 million in the year ended December 31, 1995. This increase -8- 10 was primarily attributable to $4.2 million of 1996 revenues associated with the USA camp business acquired in May 1996, combined with higher incremental revenues derived from a 21.4% increase in camp participants (or 7.1% exclusive of USA participants), and a 3.7% increase in the average gross tuition per camp participant during the 1996 summer season. The revenue increase was also attributable to an increase in the number of participants in the 1996 National High School Dance and Cheerleading Championships as compared to the same events held in 1995 and to two new Company sponsored championships, the All-Star Championship in March 1996 and the National Jumprope Championship in June 1996. Gross profit increased by 20.1% to $34.8 million in the year ended December 31, 1996 from $29.0 million in the year ended December 31, 1995. Gross profit as a percentage of total revenues increased to 39.4% in the year ended December 31, 1996 from 38.4% in the year ended December 31, 1995. Gross profit from sales of uniforms and accessories as a percentage of such sales decreased to 45.7% in the year ended December 31, 1996 from 46.9% in the year ended December 31, 1995. As a significant portion of the overall sales increase related to purchased product lines, such as shoes and accessories, which have lower margins than custom manufactured goods, such as uniforms, a decrease in margin is to be expected. Specifically, 46.4% of the revenues from merchandise was attributable to the sale of uniforms and 53.6% to the sale of accessories in the year ended December 31, 1996, compared with 47.7% of such revenue attributable to uniforms, and 52.3% to accessories in the year ended December 31, 1995. The Company expects this shift in mix to continue for the foreseeable future. Gross profit margins associated with camps and special events increased to 31.3% in the year ended December 31, 1996 from 26.5% in the year ended December 31, 1995. This increase was primarily due to more efficient staffing at summer camps, resulting in savings in instructor payroll, travel and training costs. The increase is also attributable to economies of scale realized from spreading certain administrative costs over a larger number of camp participants and to decreased travel costs associated with the Company's group tour business. The gross profit margins were negatively impacted in 1996 by the lower gross profit margins realized by the camp business acquired in May 1996 by USA, as compared to the Company's other camp business. Selling, general and administrative expenses in the year ended December 31, 1996 were $26.4 million as compared to $22.7 million in the year ended December 31, 1995. Selling, general and administrative expenses as a percentage of sales decreased to 29.8% for the year ended December 31, 1996 from 30.0% for the year ended December 31, 1995, primarily due to the economies of scale realized by spreading all of the Company's fixed administrative costs over a greater revenue base. The increase of $3.7 million in selling, general and administrative was partially due to increases of $2.8 million in payroll and personnel costs, including $667,000 in additional selling commissions and related expenses, $267,000 in additional consulting fees, partially associated with the additional championships and $487,000 attributable to USA personnel. There were also increases of $364,000 of operating costs (excluding payroll) incurred by USA, $126,000 of additional costs associated with the publication and distribution of annual catalogs and brochures, and $262,000 in additional -9- 11 telephone expenses. Additional depreciation expense of $272,000, primarily related to recent acquisitions of computer equipment and software, contributed to the increase. As a result of the above, income before income taxes increased by 32.4% to $8.6 million for the year ended December 31, 1996 from $6.5 million for the year ended December 31, 1995. The effective income tax rate was 39.6% for the year ended December 31, 1996 compared with 36.0% for the year ended December 31, 1995. The increase in the effective tax rate primarily results from the favorable settlement of a tax matter in the year ended December 31, 1995. Net income increased 25.0% to $5.2 million in the year ended December 31, 1996 from $4.2 million in the year ended December 31, 1995 and net income per share increased by 23.6% to $1.10 per share in the year ended December 31, 1996 from $0.89 per share in the year ended December 31, 1995. The weighted average common shares and equivalent shares increased to 4,734,000 in the year ended December 31, 1996 from 4,679,000 in the year ended December 31, 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1994 Total revenues increased by 26.7% to $75.5 million in the year ended December 31, 1995 ("calendar 1995") from $59.6 million in the nine months ended December 31, 1994 ("short period"). Revenues from the sale of uniforms and accessories increased by 22.8% to $44.0 million in calendar 1995 from $35.9 million in the short period. The increase in uniform and accessory revenues was due to a combination of new designs and expansion within existing product lines, increased unit sales, and, to a much lesser extent, a small price increase on certain items. The Company also continued its early order sales incentive program (first implemented in March 1994 and made available to all customers who submitted orders prior to April 15), resulting in an increased response over the prior year. In addition, the Company increased its inventory levels in an effort to service greater anticipated demand. The increased availability of inventory further contributed to the sales volume increase by improving on-time delivery. Camp and event revenues increased by 32.6% to $31.4 million in calendar 1995 from $23.7 million in the short period. This increase was due to (1) incremental revenues of $3.8 million recognized from the group travel business of Intropa, which was acquired by the Company in December, 1994, and (2) higher revenues derived from a combination of a 13.9% increase in camp participants, to approximately 156,000 in the 1995 summer season from approximately 137,000 in the 1994 summer season and an increase of 1.8% in gross tuition per camp participant during the 1995 summer season. In addition, calendar 1995 included revenues from the National Dance Team Championship held in February, which were not included in the short period. These increases were partially offset by decreases in participation in certain of the Company-sponsored holiday parade and bowl game performances in the last quarter of 1995, as compared to record participation that it experienced at certain of these events in the prior period. Gross profit increased by 20.3% to $29.0 million in calendar 1995 from $24.1 million in the short period. Gross profit as a percentage of total revenues decreased to 38.4% in calendar 1995 from 40.5% in the short period. -10- 12 Gross profit from sales of uniforms and accessories as a percentage of such sales decreased to 46.9% in calendar 1995 from 48.0% in the short period. The percentage decrease was partially attributable to increases in overhead, including additional facilities and warehouse space required to service increased sales volumes. A portion of the remaining decrease was attributable to a shift in the mix of products sold between uniforms, which have higher margins, and accessories, which have lower margins. Specifically, 47.7% of the revenues from merchandise were attributable to the sale of uniforms and 52.3% to the sale of accessories in calendar 1995, compared to 49.4% of such revenue attributable to uniforms and 50.6% to accessories in the short period. The Company expects this shift in mix to continue in the future. Gross profit margins associated with camps and special events decreased to 26.5% in calendar 1995 from 29.1% in the short period. This percentage decrease was partially attributable to greater than anticipated increases in instructor payroll, travel, and training costs, which resulted from the 1995 regionalization of certain administrative functions in the summer camp program. In addition, the gross margin generated by Intropa has historically been and is expected to continue to be lower than the margin generated by the Company in its camps and other special events. Finally, the Company incurred additional student housing costs resulting from camp closings due to Hurricane Erin in the Southeast and intense summer heat in the Midwest and Northeast. In certain instances, the Company was also required to pay guaranteed student housing costs resulting from last-minute cancellations of camp reservations in excess of cancellation fees received from the camp participants. These decreases were partially offset by improved margins earned on certain of the company-sponsored 1995 holiday parade and bowl game performances. Selling, general, and administrative expenses in calendar 1995 were $22.7 million, or 30.0% of revenues, as compared to $16.1 million, or 27.1% of revenues in the short period. This increase as a percentage of revenues primarily reflects that the short period figures do not include the months of January, February, and March, during which revenues are generally nominal and during which considerable fixed selling, general, and administrative expenses are incurred. The increase of $6.6 million in selling, general, and administrative expenses was partially due to an increase of $2.4 million in payroll and personnel costs, including $1.3 million in increased selling commissions, sales representative training, and other expenses which are impacted by increased sales volume, as well as $514,000 in payroll costs attributable to Intropa personnel. The Company's results also include increases of $654,000 attributable to additional fixed costs (including rent, depreciation, and insurance) relating to the expansion of office and storage space, $317,000 associated with the publication and distribution of annual catalogs and brochures, and $452,000 of operating costs (excluding payroll) incurred by Intropa. Postage/express mail and travel increased $400,000 and $290,000, respectively, relating to an increased revenue and customer base. As a result of the above, income before income taxes decreased by 20.0% to $6.5 million in calendar 1995 from $8.1 million in the short period. The effective income tax rate was 36.0% in calendar 1995 compared to 39.6% in the short period. The decrease in the effective tax rate primarily results from the favorable conclusion of an income tax examination and a corresponding reversal reduction in the related tax accrual liability recognized in the short period. Net income decreased by 15.3% to $4.2 million from $4.9 million in the short period and net income per share decreased by 16.8% to $.89 per share in calendar 1995 from $1.07 per share in the short period. The weighted -11- 13 average common shares and equivalent shares outstanding increased to 4,679,000 in calendar 1995 from 4,587,000 in the short period. TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1994 (UNAUDITED) Total revenues increased by 20.6% to $75.5 million in the year ended December 31, 1995 ("calendar 1995") from $62.6 million in the year ended December 31, 1994 ("calendar 1994"). Revenues from the sale of uniforms and accessories increased by 17.0% to $44.0 million in calendar 1995 from $37.6 million in calendar 1994. The increase in uniform and accessory revenues was due to a combination of new designs and expansion within existing product lines, increased unit sales, and, to a much lesser extent, a small price increase on certain items. The Company also continued its early order sales incentive program (first implemented in March, 1994 and made available to all customers who submitted orders prior to April 15), resulting in an increased response over the prior year. In addition, the Company has increased its inventory levels in an effort to service greater anticipated demand. The increased availability of inventory has further contributed to the sales volume increase by improving on-time delivery. Camp and event revenues increased by 26.0% to $31.4 million in calendar 1995 from $25.0 million in calendar 1994. The increase was due to (1) incremental revenues of $3.8 million recognized from the group travel business of Intropa, which was acquired by the Company in December, 1994, and (2) higher incremental revenues derived from a combination of a 13.9% increase in camp participants, to approximately 156,000 in the 1995 summer season from approximately 137,000 in the 1994 summer season, and an increase of 1.8% in gross tuition per camp participant during the 1995 summer season. These increases were partially offset by decreases in participation in certain of the Company-sponsored holiday parade and bowl game performances in the last quarter of 1995, as compared to record participation that it had at certain of these events in the prior year. Gross profit increased by 15.8% to $29.0 million in calendar 1995 from $25.0 million in calendar 1994. Gross profit as a percentage of total revenues decreased to 38.4% in calendar 1995 from 40.0% in calendar 1994. Gross profit from sales of uniforms and accessories as a percentage of such sales decreased to 46.9% in calendar 1995 from 47.2% in calendar 1994. The percentage decrease was partially attributable to increases in overhead, resulting from additional facilities and warehouse space required to service increased sales volumes. A portion of the remaining decrease was attributable to a shift in the mix of products sold between uniforms, which have higher margins, and accessories, which have lower margins. Specifically, 47.7% of the revenues from merchandise were attributable to the sale of uniforms and 52.3% to the sale of accessories in calendar 1995, compared to 49.1% of such revenue attributable to uniforms and 50.9% to accessories in calendar 1994. The Company expects this shift in mix to continue in the future. Gross profit margins associated with camps and special events decreased to 26.5% in calendar 1995 from 29.1% in calendar 1994. This percentage decrease was partially attributable to greater -12- 14 than anticipated increases in instructor payroll, travel, and training costs, resulting from the 1995 regionalization of certain administrative functions in the summer camp program. In addition, the gross margin generated by Intropa has historically been and is expected to continue to be lower than the margin generated by the Company in its camps and other special events. Finally, the Company incurred additional housing costs resulting from camp closings due to Hurricane Erin in the Southeast and intense summer heat in the Midwest and Northeast. In certain instances, the Company was also required to pay guaranteed student housing costs resulting from last-minute cancellations of camp reservations in excess of cancellation fees received from the camp participants. These decreases were partially offset by improved margins earned on certain of the 1995 Company-sponsored holiday parade and bowl game performances. Selling, general, and administrative expenses in calendar 1995 were $22.7 million, or 30.0% of revenues, as compared to $18.9 million, or 30.2% of revenues in calendar 1994. The increase of $3.8 million in selling, general, and administrative expenses was partially due to an increase of $1.7 million in payroll and personnel costs, including $876,000 in increased selling commissions, sales representative training, and other related selling expenses which are impacted by increased sales volume, as well as $514,000 in payroll costs attributable to Intropa personnel. The Company incurred increases of $282,000 attributable to additional fixed costs (including rent, depreciation, and insurance) relating to the expansion of office and storage space, $278,000 associated with the publication and distribution of annual catalogs and brochures, and $452,000 of operating costs (excluding payroll) incurred by Intropa. Postage/express mail and travel increased $248,000 and $183,000, respectively, relating to an increased revenue and customer base. As a result of the above, income before income taxes increased by 3.2% to $6.5 million in calendar 1995 from $6.3 million in calendar 1994. The effective income tax rate was 36.0% in calendar 1995 compared to 39.4% in calendar 1994. The decrease in the effective tax rate primarily results from the favorable conclusion of an income tax examination. Net income increased by 9.0% to $4.2 million from $3.8 million in calendar 1994 and net income per share increased by 7.2% to $.89 per share in calendar 1995 from $.83 per share in calendar 1994. The weighted average common shares and equivalent shares outstanding increased to 4,679,000 in calendar 1995 from 4,587,000 in calendar 1994. SEASONALITY The Company's business and the results of its operations are highly seasonal. The Company's cheerleader and dance team camps are held exclusively in the summer months, and sales of uniforms and accessories occur primarily in the six months prior to the beginning of the school year. A substantial portion of the Company's annual revenues and all of the Company's net income are generated in the quarters ending June 30 and September 30, while the quarters ended March 31 and December 31 have historically resulted in net losses. The following table sets forth certain unaudited operating results for each of the eight consecutive quarters in the period ending December 31, 1996. This information is unaudited but, in the opinion of management of the Company, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods. -13- 15 This information should be read in conjunction with the Company's consolidated financial statements and the notes included thereto. - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------- Twelve months ended December 31, 1996: Total revenues $6,416 $29,653 $39,442 $12,938 Operating income (loss) (2,546) 4,704 6,693 (403) Net income (loss) (1,507) 2,827 4,061 (181) - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Twelve months ended December 31, 1995: Total revenues $4,078 $27,801 $32,382 $11,237 Operating income (loss) (2,348) 3,996 5,300 (622) Net income (loss) (1,386) 2,418 3,237 (106) - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996, the Company's current assets had increased 28.6% to $25.1 million from $19.5 million as of December 31, 1995, and the Company's current liabilities increased 64.9% to $7.0 million from $4.3 million as of December 31, 1995. The related increase of $2.8 million in working capital is principally attributable to an increase in cash and cash equivalents arising from current year increases in net income, offset by the investment of $1.9 million of cash to acquire the camp business of USA from United Special Events, as well as the purchase of $1.8 million in equipment, primarily computer equipment. In the year ended December 31, 1996, operating activities generated net cash of $8.3 million compared to $1.8 million of net cash provided in the year ended December 31, 1995. The increase was due in part to an increase in net income from $4.2 million in the year ended December 31, 1995 to $5.2 million in the year ended December 31, 1996. A change in the timing of the receipt of customer deposits for the Company's national championship competitions accounted for a large portion of the increase in customer deposits of $1.7 million. The remainder of the increase is primarily due to the following: an increase of $741,000 in accruals (primarily compensation and payroll taxes); $1.1 million related to smaller increases in accounts receivable, as compared to 1995; $797,000 related to smaller increases in inventory levels as compared to 1995; $650,000 related to smaller increases in prepaid expenses as compared to 1995; and $326,000 related to increases in depreciation and amortization expenses as compared to 1995. -14- 16 In the year ended December 31, 1996, cash flows from investing activities used cash in the amount of $3.7 million, as compared to $2.3 million in the year ended December 31, 1995. This increase was primarily attributable to cash consideration of $1.9 million related to the acquisition of the camp business of USA, partially offset by a decrease of $156,000 in capital expenditures and a $326,000 decrease in the acquisition of other assets for the year ended December 31, 1996. Cash flows used by financing activities in the year ended December 31, 1996 included the payment of quarterly cash dividends totalling $724,000 offset by proceeds of $459,000 received from the exercise of employee stock options. Historically, the Company's primary source of liquidity has been cash flow generated from its operations. The Company also currently has a line of credit that provides for seasonally adjusted borrowings of up to $9.0 million, of which, none was outstanding at December 31, 1996. Borrowings under the line of credit bear interest at the lower of prime or LIBOR plus 100 basis points. The line of credit is unsecured, but the Company has agreed not to subordinate the line of credit to future debt obligations. The line of credit also requires that the Company maintain certain financial ratios and meet a minimum tangible net worth. Because of the seasonality of its operating cycle, the Company's working capital needs are highest in its quarter ended March 31 (during which the Company generates only nominal revenues) and in the months of April and May (during which the Company generates only nominal revenues and incurs substantial prepaid expenses as it prepares for the approaching business season). Any outstanding borrowings that may be incurred under the Company's line of credit during these periods are subsequently eliminated in the quarter ending June 30 as the Company receives prepayments on camp tuition and fees. Average borrowings on the line for calendar 1996 were $337,000 and the maximum borrowings outstanding at any month-end were $3.4 million. Average borrowings on the line for calendar 1995 were $359,000, and the maximum borrowings outstanding at any month-end were $2.5 million. Although the Company periodically evaluates business expansion opportunities, the Company presently has no commitments to make material additional capital expenditures. The Company's Board of Directors declared a quarterly cash dividend of $.055 per share, or $251,000, payable on March 6, 1997. The dividend will be paid from available cash flows. FORWARD LOOKING STATEMENTS Certain statements in this form 10-K and in the future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made by an authorized executive officer constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may include projections of revenues, income or losses, capital expenditures, plans for future operations, financing plans or requirements, and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. The forward-looking statements made by the Company are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to differ materially from any future results, performance or achievements expressed or implied by the forward-looking statements. The known risks, -15- 17 uncertainties and other factors include, among others, the following: the continuing popularity of school spirit programs in the youth, junior high, high school and college markets; the ability of the Company to adequately anticipate the changing tastes and requirements of its customers; the highly seasonal nature of the Company's operations; the success of the Company's competitors in sponsoring spirit camps and selling uniforms and other accessories; the ability of the Company to secure desirable camp locations and camper accommodations at competitive prices; and the ability of the Company to conduct its camps and events safely and to minimize the incidents of personal injury. IMPACT OF INFLATION Management does not believe that inflation has a material impact on the Company's results of operations. Management believes that it is able to reflect inflationary cost increases in its prices to customers. NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). This statement simplifies the standards for computing EPS previously found in APB Opinion No. 15, "Earnings Per Share" as the presentation of primary and fully-diluted EPS is replaced with Basic and Diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, and applies to entities with publicly-held common stock or potential common stock. The Company will adopt SFAS 128 in financial statements issued for the year ending December 31, 1997. If the provisions of SFAS 128 had been applied to the year ended December 31, 1996, estimated Basic EPS and Diluted EPS would have been $1.15 and $1.10, respectively. Item 8. Financial Statements and Supplementary Data. The Company's financial statements and report thereon of BDO Seidman, LLP dated February 12, 1997, are contained on pages F-1 to F-15 of this Annual 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. -16- 18 DIRECTORS The following table sets forth the name, age, position with the Company, business experience during the past five years and certain other directorships of the current members of the Board of Directors. CLASS 1 DIRECTOR (TERMS EXPIRE IN 1999) GREGORY C. WEBB (45), Senior Vice President and Director of Company (since 1989); General Manager of Universal Cheerleaders Association (since 1986). ROY F. KRAMER (67), Director of Company (since 1995); Commissioner of the Southeastern Athletic Conference (since 1990); Athletic Director of Vanderbilt University (from 1978 to 1990); Head Football Coach of Central Michigan University (from 1967 to 1977). RICHARD F. STRUP (45), Director of Company (since 1995); Senior Vice President - International and Global Properties of Miller Brewing Company (since 1994); various senior executive positions in Marketing, Miller Brewing Company (1990-1994); Vice President, Marketing of PepsiCo Foods International, Inc. (1988-1989); Director, Miller Brewing Company and Associated Bank, Inc. CLASS 2 DIRECTORS (TERMS EXPIRE IN 1997) ALAN D. GORDON (41), Director of Company (since 1989); President of Richland, Gordon & Company, an investment banking concern based in Chicago, Illinois (since 1983). RANDALL S. STURGES (42), Director of Company (since 1989); investor in operating companies (from 1988 to date); General Partner (from 1984 to 1988) with First Chicago Venture Capital. CLASS 3 DIRECTORS (TERMS EXPIRE IN 1998) JEFFREY G. WEBB (47), Chairman, President, Chief Executive Officer and Director of Company (since 1983). Gregory C. Webb and Jeffrey G. Webb are brothers. WILLIAM C. WILLIS, JR. (45), Director of Company (since 1992); Chairman and Chief Executive Officer, Willis & Associates, Inc., a management consulting firm (since December 1995); Executive Vice President and Chief -17- 19 Operating Officer, North America of Tiger Eye Investments Holdings, Ltd. (from May 1995 to June 1996); President, Chief Operating Officer and Director of MBf USA, Inc. (from April 1994 to April 1995); President and Chief Executive Officer (from 1990 to December 1993) of Insituform Technologies, Inc.; President of Paper Art Company, a division of The Mennen Company (from 1986 to 1990). The Company has executed a Consulting Agreement with Willis & Associates, Inc. ("Willis"), a company owned by Mr. William Willis, a director of the Company, pursuant to which Willis provides strategic planning as well as business and product development consulting services. As of March 15, 1997, the Company has paid $54,000 in fees to Willis pursuant to the agreement. For each month that the agreement is extended beyond March 15, 1997, Mr. Willis will receive $10,000 per month. Varsity has the right to terminate the agreement at any time upon 30 days' written notice. OFFICERS The following table sets forth certain information concerning each of the Company's executive officers:
Name Age Position with Company - ------------------- --- ---------------------- Jeffrey G. Webb 47 Chairman, President, Chief Executive Officer and Director Gregory C. Webb 45 Senior Vice President, UCA General Manager and Director W. Kline Boyd 43 Senior Vice President and Varsity Spirit Fashions General Manager John M. Nichols 45 Senior Vice President, Finance and Chief Financial Officer J. Kristyn Shepherd 41 Senior Vice President, UCA Robert Dunseath 43 Secretary Deana Roberts 55 Senior Vice President, Varsity/Intropa Tours
-18- 20 Richard R. Bowers 47 Senior Vice President, Marketing and Strategic Planning
Jeffrey G. Webb has been Chairman, President and Chief Executive Officer and a director of the Company since its formation in 1983 and was the founder and sole general partner of the Company's predecessor, Universal Sports Camps, Ltd., a Texas limited partnership formed in 1974. Prior to founding the Company, Mr. Webb was Vice President/General Manager of the National Cheerleaders Association from January 1972 to September 1974. Gregory C. Webb has been with the Company for over seventeen years, has been a director and a Senior Vice President of the Company since 1989, and General Manager of Universal Cheerleaders Association since 1986. Prior to being named to his present position, Mr. Webb served in various similar capacities for the Company. Jeffrey G. Webb and Gregory C. Webb are brothers. W. Kline Boyd has been with the Company in his present position since March 1989 and has been an investor in the Company and its predecessor since 1974. Prior to joining the Company, Mr. Boyd was, and he continues to be, a partner of Boyd & McWilliams Oil & Gas Properties of Midland, Texas. John M. Nichols joined the Company on April 1, 1992 as Vice President, Accounting and Income Taxes and has been Senior Vice President, Finance 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 the Company. 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. In the late 1980's, Mr. Nichols acquired minority general partnership interests in certain land development and hotel operating partnerships and, in connection with his interest in the land development partnership, guaranteed the repayment of certain bank loans that were made to the partnership. The land development and hotel operating partnerships were not as successful as planned and the partnerships filed petitions under Chapter 11 of the federal bankruptcy laws and, as a consequence of his involvement in the land development partnership, on July 1, 1992, Mr. Nichols filed a petition under Chapter 7 of the federal bankruptcy laws, which petition was certified on February 13, 1997. J. Kristyn Shepherd has been Senior Vice President, UCA since 1989 and has served in various other capacities since joining the Company in 1979. Ms. Shepherd oversees UCA's special events, television productions and video marketing materials. Robert Dunseath has been with the Company for over ten years and has been Secretary since September 1989. From September 1989 to April 1994, Mr. Dunseath also served as Chief Financial Officer of the Company, and, from September 1989 to September 1996, Mr. Dunseath also served as Senior Vice President of the Company, a position which Mr. Dunseath relinquished for medical reasons. Prior to September 1989, Mr. Dunseath served in various other executive capacities with the Company. Prior to affiliating with the Company in 1983, Mr. Dunseath served in various capacities with Taco Hut, Inc. and was a financial analyst with Dobbs Houses, Inc. -19- 21 Deana Roberts joined the Company in December, 1994 as a Senior Vice President concurrent with the acquisition by the Company of the Varsity/Intropa Tours business. Ms. Roberts' responsibilities include the oversight of Varsity/Intropa's operations in San Jose, California and Houston, Texas. Prior to her current position, Ms. Roberts served as President of Intropa from October 1992 to December 1994. From August 1986 to September 1992, she was Director of Sales and Marketing for Intropa International USA, Inc. Prior thereto, she was Vice President of Ace Group Travel for three years and, earlier still, was employed by various airline companies. Richard R. Bowers joined the Company in June 1993 as Senior Vice President - - Marketing and Strategic Planning. Prior to joining the Company, Mr. Bowers served as Senior Vice President with World Cup USA from February 1993 to July 1993. From August 1992 to February 1993, he was Director of Marketing for World Cup USA. Prior thereto, Mr. Bowers spent seven years in international marketing with Mattel Toys, with his most recent position being Director of International Marketing. Mr. Bowers also spent ten years in marketing and operations with Kimberly-Clark's Consumer Products Group. Item 11. Executive Compensation. The table below presents certain specific information regarding the compensation of the Chief Executive Officer and the other four most highly compensated executive officers of the Company for the Company's last three fiscal years (including the nine month transition period ended December 31, 1994). -20- 22
SUMMARY COMPENSATION TABLE =========================================================================================================== Long Term Compensation Annual Compensation Awards ------------------------------------------------------------- Securities ---------- Name and Underlying All Other - -------- ---------- --------- Principal Fiscal Salary Bonus Options/ Compensation - --------- ------ ------ ----- -------- ------------ Position Period (1) ($) ($)(2) SARs (#) ($)(3) - -------- ---------- ------- ------ ----------- ------------ Jeffrey G. Webb 1996 143,534 30,000 14,000 500 President & Chief 1995 135,940 - 18,000 250 Executive Officer SY 1994 101,250 38,000 - 700 Gregory C. Webb 1996 107,700 25,000 9,000 500 Senior Vice 1995 105,940 - 10,500 250 President SY 1994 78,000 21,000 - 700 W. Kline Boyd 1996 107,700 25,000 9,000 500 Senior Vice 1995 105,940 - 10,500 250 President SY 1994 77,500 21,000 - 700 John M. Nichols 1996 97,128 22,000 10,000 500 Senior Vice 1995 96,940 - 12,000 250 President SY 1994 71,500 20,500 - 700 J. Kristin 1996 97,128 22,000 7,000 500 Shepherd 1995 96,940 - 9,000 250 Senior Vice President SY 1994 71,500 22,750 - 700
- --------------------- (1) The fiscal years ended December 31, 1996 and December 31, 1995, are denoted "1996" and "1995", respectively; the nine month period ended December 31, 1994, is denoted "SY 1994". In March 1994, the Board of Directors elected to change the end of the Company's fiscal year from March 31 to December 31. Thus, the period between April 1, 1994 and December 31, 1994, was treated as a shortened fiscal year. (2) Represents discretionary cash bonuses granted by the Company for services rendered in the corresponding fiscal year. The amount and timing of bonuses granted to executive officers are determined by the Compensation Committee and approved by the Board of Directors. (3) Represents amount contributed or accrued by the Company during the corresponding fiscal year on behalf of the named executive officers with respect to the Varsity Spirit Corporation 401(K) Profit Sharing Plan. -21- 23 The Company has written employment agreements with certain of its key officers, including each of the executive officers identified in the above table. Each of these agreements provides for an annual base salary, which is reviewed and adjusted on an annual basis, and an annual bonus to be determined by the Compensation Committee and approved by the Board of Directors. Except for the agreement with Mr. Nichols, each of the agreements with the named executive officers was executed by the Company and the officer upon the consummation of the recapitalization of the Company in 1989 and continues in effect through September 28, 1997. The agreement with Mr. Nichols was executed as of February 28, 1997 and continues in effect until February 28, 1998 and contains, in addition to provisions similar to the agreements with the named executive officers, a one-time bonus of $250,000 payable upon a change in control of the Company, as defined in the agreement. The Company has also executed certain agreements with employees in connection with certain acquisitions by Varsity, which agreements range in term from three to seven years. All the agreements generally contain confidentiality and non-competition provisions and entitle officers whose employment is terminated by the Company without cause to continue to receive their base salary for six months following the termination. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information as to individual option grants to such executive officers during the year ended December 31, 1996, and the potential realized value of the option grants.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term ------------------------------------------------------------------------------------ --------------------- Number of Percent of Total --------- --------------- Securities Options Granted to ----------- ------------------- Underlying Employees in Fiscal Exercise or Base ---------- ------------------- ---------------- Name Options Granted Year (1) Price ($/sh.) (2) Expiration Date (3) 5% ($) (4) 10% ($) (4) ---- --------------- -------- ----------------- ------------------- ---------- ----------- Jeffrey G. Webb 14,000 7.8% 15.95 3/14/01 100,309 $254,202 Gregory C. Webb 9,000 5.0% 14.50 3/14/06 82,071 207,983 W. Kline Boyd 9,000 5.0% 14.50 3/14/06 82,071 207,983 John M. Nichols 10,000 5.6% 14.50 3/14/06 91,190 231,093 J. Kristin Shepherd 7,000 3.9% 14.50 3/14/06 63,833 161,765
(1) The total number of options granted to employees during calendar year 1996 was 179,890. (2) The exercise price is equal to the closing price of the Company's stock on the date of the grant, except for those granted to Mr. Jeffrey G. Webb, which are priced at 110% of the closing price. -22- 24 (3) Options granted under the Company's 1991 Stock Option Plan typically have a ten-year term from the date of the grant and become exercisable over a three-year period from the date of the grant. Options granted to Mr. J. Webb have a five-year term. (4) Potential realizable value is based on an assumption that the market price of the stock appreciates at the stated rate, compounded annually, from the date of grant until the end of the applicable option term. These values are calculated based on requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price appreciation. The following table sets forth information as to option exercises by such executive officers during the fiscal year ended December 31, 1996, and the number and total value of unexercised options as of December 31, 1996. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Value of Unexercised Number of Unexercised In-the-Money Options Options at Year at Year End(#) End($)(1) -------------------------- ------------------------- Shares Acquired on Value Un- Un- Name Exercise(#) Realized($) Exercisable Exercisable Exercisable Exercisable ----- ------------------ ----------------- ----------- -------------- ----------- -------------- Jeffrey G. Webb -- -- 65,325 26,000 597,989 36,580 Gregory C. Webb -- -- 30,875 16,000 281,314 42,690 W. Kline Boyd -- -- 30,875 16,000 281,314 42,690 John M. Nichols 3,250 23,213 4,000 18,000 16,680 48,360 J. Kristin Shepherd -- -- 40,050 13,000 387,030 35,520
(1) Based on the December 31, 1996 closing price of the Company's Common Stock as reported on the National Association of Securities Dealers Automated Quotation National Market System ($16.00). -23- 25 REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION The Company's compensation policies applicable to its executive officers are administered by the Compensation Committee (the "Committee") of the Board of Directors. There are four members of the Compensation Committee, three of which are non-employee directors and the fourth of which is Mr. Jeffrey G. Webb, the Company's President and Chief Executive Officer. These policies are designed to enhance the overall strength and financial performance of the Company by aligning the financial interests of the Company's executive officers with those of its shareholders. The three primary components of executive compensation are base salary, cash bonuses and stock option grants. The Committee recommends to the Board of Directors the salaries, bonuses and stock option grants for the executive officers. BASE SALARY AND CASH BONUSES Base salaries for the fiscal year ended December 31, 1996 were determined by the Committee in January 1996 and cash bonuses for fiscal 1996 were determined by the Committee in March 1997. In determining the appropriate base salary for each executive officer, the Committee considers the recommendations of management, the individual contribution of the officer, compensation of the Company's other executives, external pay practices, overall level of responsibility, time in position, prior experience and knowledge, and the financial performance of the Company. Cash bonuses are paid to executive officers each year from a discretionary bonus pool that is provided throughout the year depending on the financial performance of the Company. The Committee bases individual bonus decisions on the same criteria used to determine an executive officer's base salary. The Chief Executive Officer's current base salary and cash bonus were established based on the foregoing principles, with a particular emphasis on increases in the Company's revenues and net income. -24- 26 STOCK OPTION PLANS In contrast to base salary and cash bonuses, the value to each executive officer of stock option grants is tied directly to stock price performance. Grants of stock options under the Company's two shareholder-approved option plans may be made in the future at an exercise price of not less than the market price of the stock at the time of grant. If there is no appreciation in the market price for the Company's Common Stock, the options are valueless. Compensation Committee Alan D. Gordon Randall S. Sturges Jeffrey G. Webb William C. Willis, Jr. -25- 27 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information as of March 10, 1997, regarding the beneficial ownership of Common Stock by the shareholders who own more than 5% of the outstanding shares, by each director of the Company, by the Chief Executive Officer and the other executive officers of the Company identified under "Executive Compensation," and by all directors and executive officers of the Company as a group. Except as otherwise noted, the persons named in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them.
NUMBER OF SHARES OF COMMON STOCK PERCENT OF NAME (1) BENEFICIALLY OWNED COMMON STOCK - ---- ------------------- ------------ Alan D. Gordon 648,500 14.2 % Randall S. Sturges 460,000 10.1 % William C. Willis, Jr.(2) 8,833 * Roy F. Kramer 666 * Richard F. Strup 666 * Jeffrey G. Webb (3) 635,624 13.9 % Gregory C. Webb (4) 113,950 2.5 % W. Kline Boyd (5) 98,875 2.1 % John M. Nichols (6) 11,333 * J. Kristin Shepherd(7) 77,885 1.7 % All Directors and Executive Officers as a Group (11 persons) (8) 2,151,515 47.2 % Wasatch Investors 748,455 16.5 % Fidelity Management and Research Company 439,750 9.67 % Sun Trust Banks, Inc. 263,078 5.78 % Robert Fleming, Inc. 229,500 5.04 %
- -------------- -26- 28 * Does not exceed 1%. (1) With respect to matters concerning the Company, the address of the Company's Directors and Executive Officers is 2525 Horizon Lake Drive, Memphis, Tennessee 38133; the address of Wasatch Investors is 68 South Main Street, Suite 400, Salt Lake City, Utah 84101; the address of Fidelity Management and Research Company is 82 Devonshire Street, Boston, Massachusetts 02109-3614; the address of Sun Trust Banks, Inc. is 25 Park Place, N.E., Atlanta, Georgia 30303; and the address of Robert Fleming, Inc. is 320 Park Avenue, 11th Floor, New York, New York 10022. (2) Includes 5,833 shares which as of March 10, 1997, could be acquired by Mr. Willis within 60 days upon the exercise of stock options. (3) Includes 6,178 shares held in trust for the benefit of Mr. Webb's minor children and for which Mr. Webb is the trustee; Mr. Webb disclaims beneficial ownership of such shares. Also includes 75,991 shares which as of March 10, 1997, could be acquired by Mr. Webb within 60 days upon the exercise of stock options. (4) Includes 37,375 shares which as of March 10, 1997, could be acquired by Mr. Webb within 60 days upon the exercise of stock options. (5) Includes 1,500 shares owned by Boyd Enterprises, Inc., the majority shareholder and President of which is Mr. Boyd. Also includes 37,375 shares which as of March 10, 1997, could be acquired by Mr. Boyd within 60 days upon the exercise of stock options. (6) Includes 11,333 shares which as of March 10, 1997, could be acquired by Mr. Nichols within 60 days upon the exercise of stock options. (7) Includes 45,383 shares which as of March 10, 1997, could be acquired by Ms. Shepherd within 60 days upon the exercise of stock options. (8) Includes 246,955 shares, which as of March 10, 1997, could be acquired by such directors and executive officers within 60 days upon the exercise of stock options. -27- 29 Item 13. Certain Relationships and Related Transactions. Please refer to "Item 10 -- Directors and Officers of the Registrant" and "Item 11 -- Executive Compensation." PART IV ------- Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. (a)(1) The consolidated financial statements and report thereon of BDO Seidman, LLP dated February 12, 1997 are contained on pages F-1 to F-15 of this Report. (a)(2) The following supplemental financial data should be read in conjunction with the financial statements and comments thereto as included in this Form 10-K Report. Schedules not included with this supplemental financial data have been omitted because they are not applicable, immaterial or the required information is included in the financial statements or the notes thereto.
Schedule No. Page No. ------------ ------ Report of Independent Certified Public S-1 Accountants on Financial Statement Schedule Schedule II - Valuation and Qualifying S-2 Accounts
(a)(3) Exhibits
Exhibit Number Description of Exhibits - ------- ----------------------- 3(a) Amended and Restated Charter of Company filed as Exhibit 3.2 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on January 21, 1992, is incorporated herein by reference. 3(b) Amended and Restated By-Laws of Company filed as Exhibit 3.4 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on January 21, 1992, is incorporated herein by reference. 4(a) Amended and Restated Charter and By-Laws of Company (see Exhibits 3(a) and 3(b) above). 10(a) Registration Rights Agreement between Company and Alan D. Gordon, Randall S. Sturges, Charles Tracy, John Bessone, Bernice Jakstas, Jeffrey G. Webb, Gregory C. Webb, Robert Dunseath, Kline Boyd, Donald Trandem, Kris Shepherd and Kraig Tallman dated September 29, 1989, filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(b) Employment Agreement between Company and W. Kline Boyd, filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference.
-28- 30 Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(c) Employment Agreement between Company and Robert Dunseath, filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(d) Employment Agreement between Company and Kris Shepherd, filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(e) Employment Agreement between Company and Kraig Tallman, filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(f) Employment Agreement between Company and Gregory Webb, filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(g) Employment Agreement between Company and Jeffrey Webb, filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(h) 1989 Non-Qualified Stock Option Plan of Company, filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(i) 1991 Stock Option Plan of Company filed as Exhibit 10.13 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(j) Sales Representative Agreement between Varsity Spirit Fashions & Supplies, Inc. and Stuart Educational Products, Inc., along with Security Agreement between Varsity Spirit Fashions & Supplies, Inc. and Gary Stuart and Patti Stuart, both individually and collectively doing business as Stuart Educational Products, filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(k) Programming Agreement between Universal Cheerleaders Association and ESPN, Inc., filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(l) Varsity Spirit Corporation 401(k) Profit Sharing Plan, filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993 (File No. 0-19790), is incorporated herein by reference. 10(m) Asset Purchase Agreement dated as of December 1, 1994 by and between Intropa International U.S.A., Inc., Elisabeth Polsterer and Varsity/Intropa Tours, Inc.,
-29- 31 filed as Exhibit 10(m) to the Company's Transition Report on Form 10-K for the transition period from April 1, 1994 to December 31, 1994 (File No. 0-19790), is incorporated herein by reference. 10(n) Employment Agreement between the Company and Deana Roberts, filed as Exhibit 10(n) to the Company's Transition Report on Form 10-K for the transition period from April 1, 1994 to December 31, 1994 (File No. 0-19790), is incorporated herein by reference. 10(o) Asset Purchase Agreement dated as of May 15, 1996 by and between United Special Events, Inc., Michael Olmstead and Varsity USA, Inc., filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 0-19790), is incorporated herein by reference. 10(p) Service Agreement dated as of May 15, 1996 between the Company and Michael Olmstead, filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 0-19796), is incorporated herein by reference. 10(q) Form of Loan Agreement dated as of July 1, 1996 between the Company and NationsBank of Tennessee, N.A., filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 0-19790), is incorporated herein by reference. 10(r) Employment Agreement between the Company and John M. Nichols. 10(s) Amendment to Employment Agreement between the Company and Jeffrey Webb. 10(t) Amendment to Employment Agreement between the Company and Gregory Webb. 10(u) Amendment to Employment Agreement between the Company and J. Kristyn Shepard. 10(v) Amendment to Employment Agreement between the Company and W. Kline Boyd. 10(w) Amendment to Employment Agreement between the Company and Kraig Zallman. 10(x) Amendment No. 1 to 1991 Stock Option Plan of Company. 10(y) Amendment No. 2 to 1991 Stock Option Plan of Company. 21 Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP. 24 Powers of Attorney. 27 Financial Data Schedule (For SEC use only) (b) Reports on Form 8-K Not applicable.
-30- 32 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Varsity Spirit Corporation Memphis, Tennessee We have audited the accompanying consolidated balance sheets of Varsity Spirit Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years ended December 31, 1996 and 1995 and the nine-month period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Varsity Spirit Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years ended December 31, 1996 and 1995 and the nine-month period ended December 31, 1994, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Memphis, Tennessee February 12, 1997 F-1 33 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands, except shares) December 31, -------------------- 1995 1996 - ------------------------------------------------------------------------------------------ ASSETS CURRENT: Cash and cash equivalents $ 5,080 $ 9,360 Accounts receivable, less allowance of $170 and $220 for possible losses 6,650 7,162 Inventories (Note 2) 4,926 5,419 Prepaid expenses (Note 3) 2,272 2,616 Refundable income taxes 383 238 Deferred tax benefit (Note 8) 176 259 - ------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 19,487 25,054 PROPERTY AND EQUIPMENT, less accumulated depreciation (Note 4) 3,127 4,010 GOODWILL, less accumulated amortization of $972 and $1,193 (Note 1) 5,929 7,928 OTHER ASSETS 700 799 - ------------------------------------------------------------------------------------------ $ 29,243 $ 37,791 ========================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,678 $ 1,993 Accruals: Compensation and payroll taxes 266 849 Income taxes (Note 8) 167 117 Other 99 156 Customer deposits 2,065 3,813 Current maturities of long-term debt (Note 6) -- 120 - ------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 4,275 7,048 DEFERRED INCOME TAXES (Note 8) 174 366 LONG-TERM DEBT (Notes 1 and 6) -- 480 - ------------------------------------------------------------------------------------------ TOTAL LIABILITIES 4,449 7,894 - ------------------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES (Notes 7 and 10) SHAREHOLDERS' EQUITY (Notes 7 and 11) Preferred stock, $.01 par value - shares authorized 5,000,000; none issued -- -- Common stock, $.01 par value - shares authorized 10,000,000; shares issued 4,710,386 and 4,735,961 47 47 Additional paid-in capital 13,523 14,144 Excess of purchase price over predecessor basis (2,517) (2,517) Retained earnings 13,777 18,253 - ------------------------------------------------------------------------------------------ 24,830 29,927 Treasury stock, at cost, 215,504 and 179,378 shares (36) (30) - ------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 24,794 29,897 - ------------------------------------------------------------------------------------------ $ 29,243 $ 37,791 ==========================================================================================
See accompanying notes to consolidated financial statements. F-2 34 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Nine months Year ended ended December 31, December 31, ---------------- 1994 1995 1996 - --------------------------------------------------------------------------- REVENUES: Uniforms and accessories $35,866 $44,049 $49,472 Camps and events 23,721 31,449 38,977 - --------------------------------------------------------------------------- 59,587 75,498 88,449 - --------------------------------------------------------------------------- COSTS OF REVENUES: Uniforms and accessories 18,659 23,379 26,849 Camps and events 16,826 23,114 26,764 - --------------------------------------------------------------------------- 35,485 46,493 53,613 - --------------------------------------------------------------------------- Gross profit 24,102 29,005 34,836 - --------------------------------------------------------------------------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 16,117 22,679 26,388 - --------------------------------------------------------------------------- Operating income 7,985 6,326 8,448 OTHER Interest income - net 150 178 166 - --------------------------------------------------------------------------- Income before taxes on income 8,135 6,504 8,614 TAXES ON INCOME (Note 8) 3,218 2,341 3,414 - --------------------------------------------------------------------------- NET INCOME $ 4,917 $ 4,163 $ 5,200 =========================================================================== WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENT SHARES OUTSTANDING (Note 7) 4,587 4,679 4,734 =========================================================================== NET INCOME PER SHARE (Note 7) $ 1.07 $ 0.89 $ 1.10 =========================================================================== See accompanying notes to consolidated financial statements. F-3 35 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------- (In thousands) Excess of purchase price Common Stock Additional over pre- -------------- paid-in decessor Retained Treasury Shares Amount capital basis earnings stock TOTAL - ---------------------------------------------------------------------------------------------------------------- BALANCES, March 31, 1994 4,699 $ 47 $ 13,016 $ (2,517) $ 5,234 $ (44) $ 15,736 Net income for the period -- -- -- -- 4,917 -- 4,917 Issuance of common stock upon exercise of stock options -- -- 62 -- -- 2 64 Tax benefit related to exercise of stock options -- -- 24 -- -- -- 24 - ---------------------------------------------------------------------------------------------------------------- BALANCES, December 31, 1994 4,699 47 13,102 (2,517) 10,151 (42) 20,741 Net income for the period -- -- -- -- 4,163 -- 4,163 Issuance of common stock upon exercise of stock options 11 -- 279 -- -- 6 285 Tax benefit related to exercise of stock options -- -- 142 -- -- -- 142 Cash dividends ($.12 per share) -- -- -- -- (537) -- (537) - ----------------------------------------------------------------------------------------------------------------- BALANCES, December 31, 1995 4,710 47 13,523 (2,517) 13,777 (36) 24,794 Net income for the period -- -- -- -- 5,200 -- 5,200 Issuance of common stock upon exercise of stock options 26 -- 453 -- -- 6 459 Tax benefit related to exercise of stock options -- -- 168 -- -- -- 168 Cash dividends ($.16 per share) -- -- -- -- (724) -- (724) - ----------------------------------------------------------------------------------------------------------------- BALANCES, December 31, 1996 4,736 $ 47 $ 14,144 $ (2,517) $ 18,253 (30) $ 29,897 =================================================================================================================
See accompanying notes to consolidated financial statements. F-4 36 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------- (In thousands) Nine months ended Year ended December 31, December 31, -------------------------- 1994 1995 1996 - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,917 $ 4,163 $ 5,200 Deferred income taxes (15) 21 109 Depreciation and amortization 577 992 1,318 Changes in operating assets and liabilities, net of effect of businesses acquired (Note 1) Accounts receivable (3,073) (1,544) (482) Inventories 61 (1,039) (242) Prepaid expenses 3,778 (859) (209) Refundable income taxes - (383) 145 Accounts payable (193) 210 62 Accruals 100 (695) 741 Customer deposits (3,103) 890 1,650 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,049 1,756 8,292 - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of USE (Note 1) - - (1,926) Net cash received upon acquisition of Intropa (Note 1) 764 - - Purchase of property and equipment (667) (1,984) (1,828) Decrease (increase) in other assets 19 (319) 7 - ----------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 116 (2,303) (3,747) - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 64 285 459 Cash dividends - (537) (724) - ----------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 64 (252) (265) - ----------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Note 9) 3,229 (799) 4,280 CASH AND CASH EQUIVALENTS, at beginning of period 2,650 5,879 5,080 - ----------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, at end of period $ 5,879 $ 5,080 $ 9,360 =================================================================================================================
See accompanying notes to consolidated financial statements. F-5 37 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF ACCOUNTING POLICIES BUSINESS Varsity Spirit Corporation (the "Company") is involved in the business of organizing, administering, and producing instructional camps, clinics, and special events predominantly in the United States for spirit groups associated with secondary schools, colleges, and universities through its divisions, Universal Cheerleaders Association ("UCA"), Universal Dance Association ("UDA"), Varsity Sports Gyms ("VSG") and Varsity Deutschland ("VSD") and its wholly-owned subsidiary, Varsity USA, Inc. ("USA"), which acquired the camp business assets of United Special Events, Inc., on May 15, 1986. Instructional camps and clinics include large residential camps and smaller private individual squad level camps. Its wholly-owned subsidiary, Varsity Spirit Fashions & Supplies, Inc. ("Varsity"), designs and markets cheerleader uniforms and accessories to spirit groups associated with secondary schools, colleges and universities primarily in the United States. The selling cycle of the Company is highly seasonal. Varsity/Intropa Tours, Inc. ("Intropa"), a wholly-owned subsidiary acquired December 1, 1994, organizes group performance tours, primarily in Europe, for cheerleaders, bands, orchestras and choirs. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions are eliminated. BUSINESS ACQUISITIONS Effective May 15, 1996, the Company's subsidiary, USA, acquired certain of the assets of United Special Events, Inc. ("USE"), a company which specializes in organizing, administering, and producing instructional camps, clinics, and special events, predominately in the western United States, for spirit groups associated with secondary schools, colleges, and universities. The purchase price was approximately $1.95 million, of which $1.35 million was paid at closing and the $600,000 balance was financed by a five-year unsecured convertible promissory note, bearing interest at 8%. The acquisition was accounted for using the purchase method. The purchase price and liabilities assumed were allocated to assets acquired based on their estimated fair values, as follows:
(In thousands) - ----------------------------------------------------------------------- Purchase price, including out of pocket expenses of $88 $ 2,038 Current liabilities assumed 369 Bank debt retired at closing 644 Current assets (530) Fixed assets (120) Covenant not to compete (120) - ----------------------------------------------------------------------- Goodwill $ 2,281 =======================================================================
The USA operations since the date of acquisition have been included in the Company's consolidated results of operations. The operating results would not have been materially different, if the acquisition had occurred on January 1, 1996. Effective December 1, 1994, a subsidiary acquired certain of the assets of Intropa International U.S.A., Inc. ("Intropa"), a tour company which specializes in performance tours for cheerleaders, bands, orchestras and choruses. Total cash consideration was approximately $1.25 million, of which $961,000 was paid at closing. $240,000 of the balance was included in accounts payable at December 31, 1994 and was paid 120 days after the closing date. The acquisition was accounted for using the purchase method. The Intropa operations since the date of acquisition have been included in the Company's consolidated results of operations. F-6 38 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued) ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, trade receivables, other current assets, accounts payable and accruals meeting the definition of a financial instrument approximate fair value. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method. SAMPLES The Company provides samples of merchandise carried in the catalogs to its sales representatives. All costs related to samples used in the sale of the Company's uniforms and accessories are amortized ratably over three years. PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed using the straight-line and accelerated methods for financial reporting purposes over the following estimated useful lives:
- --------------------------------------------------------------------- Years - --------------------------------------------------------------------- Computer equipment 5 Computer software 3 Machinery and equipment 5-7 Furniture and fixtures 5 Leasehold improvements 2-6 Vehicles 3-5 - ---------------------------------------------------------------------
For income tax purposes, depreciation is computed using primarily accelerated methods. GOODWILL Goodwill, stated at cost less accumulated amortization, represents the purchase cost allocated to the earning capacity of acquired companies, and is amortized over periods from 35 to 40 years on the straight-line basis. The Company continually evaluates the market coverage and earning capacity of its acquirees to determine if the unamortized goodwill can be recovered from their undiscounted future cash flows over the remaining amortization period. Should this evaluation indicate that goodwill will not be recoverable, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of undiscounted cash flows. CATALOG COSTS Cost of producing catalogs are deferred and amortized over the selling season for uniforms and accessories. REVENUE RECOGNITION Revenue is recognized on sales of uniforms at the time of shipment and on camps, clinics, special events and tours on the start date of the respective activity. Expenses incurred and payments received that are associated with the camps, clinics, events or tours are deferred until the revenue is recognized. F-7 39 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued) TAXES ON INCOME Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). NET INCOME PER SHARE Net income per share is computed based on the weighted average number of common shares outstanding during each period, after giving effect to the exercise of dilutive options (see Note 7) and assuming the repurchase, at fair market value of shares using the proceeds from such exercise. STOCK OPTIONS Stock options are granted to certain officers, employees, directors and consultants generally at the prevailing market price on the date of the grant. The Company makes no charge to earnings with respect to stock options, except where the option price is less than the market price at date of grant. Proceeds from the sale of unissued common stock under these options are credited to common stock and additional paid-in capital at the time the options are exercised. If treasury stock is issued, the Company's treasury stock is reduced by the cost of the treasury shares reissued and additional paid-in capital is increased for the excess of the option price over the cost of the treasury stock. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") issued by the Financial Accounting Standards Board is effective for transactions entered into in fiscal years that begin after December 15, 1995. As allowed under the provisions of SFAS No. 123, the Company will continue to measure compensation cost for employee stock-based compensation plans using the intrinsic value based method of accounting prescribed by the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and has made pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied (see Note 7). EMPLOYEE BENEFITS The Company provides a defined contribution retirement plan for substantially all of its full-time employees which meets the requirements of Section 401(k) of the Internal Revenue Code. The Company's policy is to fund the retirement plan costs accrued. FISCAL YEAR END Effective April 1, 1994, the Company's Board of Directors approved a change in the Company's fiscal year from March 31 to December 31. NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). This statement simplifies the standards for computing EPS previously found in APB Opinion No. 15, "Earnings Per Share" as the presentation of primary and fully-diluted EPS is replaced with Basic and Diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, and applies to entities with publicly-held common stock or potential common stock. The Company will adopt SFAS 128 in financial statements issued for the year ending December 31, 1997. If the provisions of SFAS 128 had been applied to the year ended December 31, 1996, estimated Basic EPS and Diluted EPS would have been $1.15 and $1.10, respectively. F-8 40 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 2 - INVENTORIES Inventories are summarized as follows:
- ------------------------------------------------------------ (In thousands) December 31, --------------- 1995 1996 - ------------------------------------------------------------ Finished products $3,217 $3,608 Raw materials 1,709 1,811 - ------------------------------------------------------------ Inventories $4,926 $5,419 ============================================================
NOTE 3 - PREPAID EXPENSES Prepaid expenses consist of the following:
- ------------------------------------------------------------ (In thousands) December 31, -------------- 1995 1996 - ------------------------------------------------------------ Deferred costs: Catalogs $ 250 $ 330 Camps, clinics and championships 575 612 Prepaid insurance 413 218 Supplies and samples 342 414 Prepaid commissions 164 450 Prepaid tour costs 339 207 Other 189 385 - ------------------------------------------------------------ Prepaid expenses $2,272 $2,616 ============================================================
Deferred catalog costs consist of the Company's expenses associated with planning, processing, and distributing the Company's uniform and accessory, danceware and youth catalogs to schools and universities throughout the United States. The catalogs are mailed in the Company's first quarter of the following year and the costs of the catalogs are amortized over the Company's selling season for uniforms and accessories. Deferred camps and clinics costs are costs incurred in connection with the organization of the Company's summer cheerleader camp and clinic programs for the following summer season. These costs are amortized during June, July and August, which are the months in which the cheerleading camps and clinics are held. Deferred championship costs comprise costs associated with organizing and producing the National Dance Team High School and College Cheerleading Championships sponsored by the Company. These costs and associated revenues are recognized in the month the event occurs. Direct costs related to organizing, scheduling and arranging upcoming group tours are recorded as prepaid tour costs and the costs and revenues associated with the tour are recognized when the tour begins. F-9 41 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 4 - PROPERTY AND EQUIPMENT Major classes of property and equipment consist of the following:
- --------------------------------------------------------------------- (In thousands) December 31, --------------- 1995 1996 - --------------------------------------------------------------------- Computer equipment and software $ 2,735 $ 4,013 Machinery and equipment 1,786 1,999 Furniture and fixtures 1,347 1,665 Leasehold improvements 278 414 Vehicles 68 69 - --------------------------------------------------------------------- 6,214 8,160 Less accumulated depreciation (3,087) (4,150) - --------------------------------------------------------------------- Net property and equipment $ 3,127 $ 4,010 =====================================================================
Depreciation expense charged to operations was $793,000 and $1,065,000, respectively, for each of the years ended December 31, 1995 and 1996 and $444,000 for the nine months ended December 31, 1994. NOTE 5 - REVOLVING CREDIT AGREEMENT The Company has a revolving credit agreement with a bank which is available through June 30, 1997, and provides for maximum borrowings of $9,000,000. Under the agreement, outstanding borrowings bear interest at the lower of prime (8.25% at December 31, 1996) or LIBOR plus 1% (6.53% at December 31, 1996). The line of credit is unsecured, but the Company has agreed not to subordinate any additional assets except in the ordinary course of business without the bank's approval. The line of credit also requires that the Company maintain certain financial ratios and meet a minimum tangible net worth. There were no amounts outstanding under this revolving line of credit agreement at December 31, 1995 or 1996. NOTE 6 - LONG-TERM DEBT Long-term debt consists of the following at December 31, 1996:
(In thousands) - ------------------------------------------------------------------------------ Promissory note bearing interest at 8%, payable in annual installments of $120,000, plus interest, through May 2001 $ 600 Current portion (120) - ------------------------------------------------------------------------------ Long-term debt $ 480 ==============================================================================
On any payment date, the holder of the note shall be entitled, at their discretion, to convert not less than 75% of any installment of unpaid principal amount of the note into shares of the Company's common stock based upon a conversion price of $14.97 per share. Management believes the carrying value of the Company's long-term debt approximates fair value based on the current rates offered to the Company. F-10 42 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 7 - COMMON STOCK On January 31, 1995, the Company's Board of Directors authorized a three-for-two stock split to be effected in the form of a 50% stock dividend to be distributed on February 24, 1995 to shareholders of record on February 14, 1995. Shareholders' equity has been restated to give retroactive recognition to the stock split for all periods presented by reclassifying from retained earnings to common stock the par value of the additional shares arising from the split. In addition, all references in the financial statements to number of shares, per share amounts and stock option data of the Company's common stock have been restated. The Company maintains two stock option plans, the 1989 Stock Option Plan and the 1991 Stock Option Plan. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations. Under APB Opinion 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost is recognized. Under the 1989 plan, 270,000 options were granted to certain employees at an initial exercise price of $5.00 per share. The options vested in three equal annual installments ending April 1, 1995 and expire ten years from date of grant. The Company acquired the shares to cover the exercise of the 1989 options from its two largest stockholders for $.17 per share. In November 1991, the 1989 plan was amended to provide that cancelled options would become available for additional grants at an exercise price equal to fair market value of the shares at the date of such grants. The 1991 plan, as amended, provides options to acquire 600,000 shares that may be granted to officers, directors and key employees at an exercise price equal to fair market value at date of grant (110% of fair market value for options issued to holders of more than 10% of Company stock). Options may be exercised for a term determined by the Board of not less than one year or more than ten years from the date of grant. At December 31, 1996, 21,049 options are available for grant under the 1989 plan, and 159,408 options remain available for grants under the 1991 plan, as amended. SFAS No. 123, "Accounting for Stock-Based Compensation" requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS 123. The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the years ended December 31, 1995 and 1996, respectively; dividend yield of 1.8597% for both years; expected volatility of 40.59% for both years; risk-free interest rates of 6.5% for both years; and expected option lives of 7 years for both years. Under the accounting provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
(In thousands, except per share amounts) Year ended December 31, ------------------------- 1995 1996 - -------------------------------------------------------------------------------- Net income - as reported $ 4,163 $ 5,200 Net income - pro forma $ 4,012 $ 4,867 Earnings per share, as reported $ 0.89 $ 1.10 Earnings per share - pro forma $ 0.86 $ 1.03 ================================================================================
F-11 43 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 7 - COMMON STOCK (Continued) Information regarding the status of the Company's two fixed stock option plans as of December 31, 1994, 1995 and 1996 and changes during the nine months ended December 31, 1994 and the years ending December 31, 1995 and 1996 is presented below:
December 31, 1994 1995 1996 - -------------------------------------------------------------------------------------------------------------------- Weighted- Weighted- average average exercise exercise Shares Shares price Shares price - -------------------------------------------------------------------------------------------------------------------- Options outstanding, beginning of period 373,055 353,533 $ 6.40 457,508 $ 8.35 Options granted - 162,475 11.96 179,890 14.63 Options exercised (12,224) (47,878) 5.97 (61,701) 7.44 Options cancelled (7,298) (10,622) 9.23 (7,251) 12.71 - -------------------------------------------------------------------------------------------------------------------- Options outstanding, end of period 353,533 457,508 $ 8.35 568,446 $ 10.36 Option price range at end of period $5.00 to $5.00 to $5.00 TO $9.50 $13.50 $15.95 Option price range for exercised shares $5.00 to $5.00 to $5.00 TO $8.67 $9.34 $9.34 Options available for grant at end of period 204,949 203,096 180,457 - -------------------------------------------------------------------------------------------------------------------- Weighted-average fair value of options, granted during the period $ 5.82 $ 7.14 ====================================================================================================================
The following table summarizes information about fixed-price stock options outstanding at December 31, 1996:
- -------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ----------------------------------------- ---------------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Number Contractual Exercise Number Exercise Range of exercise price Outstanding Life Price Exercisable Price - -------------------------------------------------------------------------------------------------------------------- $5.00-8.67 226,206 5.3 years $ 6.07 226,206 $ 6.07 9.50-9.54 20,475 6.5 years 9.53 20,475 9.53 11.83-13.01 145,775 8.0 years 11.98 48,592 11.98 14.50-15.95 175,990 9.2 years 14.64 N/A - -------------------------------------------------------------------------------------------------------------------- $5.00-15.95 568,446 295,273 ====================================================================================================================
F-12 44 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - TAXES ON INCOME Under FAS 109, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Taxes on income in the consolidated statements of income are made up of the following components:
- -------------------------------------------------------------------- (In thousands) Nine months Year ended ended December 31, December 31, ---------------- 1994 1995 1996 - -------------------------------------------------------------------- Current: Federal $ 2,763 $ 1,950 $ 2,802 State 470 370 499 - -------------------------------------------------------------------- 3,233 2,320 3,301 - -------------------------------------------------------------------- Deferred: Federal (13) 19 96 State (2) 2 17 - -------------------------------------------------------------------- (15) 21 113 - -------------------------------------------------------------------- Taxes on income $ 3,218 $ 2,341 $ 3,414 ===================================================================
Significant components of the Company's deferred tax liabilities and assets are as follows (in thousands):
- ---------------------------------------------------------------- December 31, ------------------------- 1995 1996 - ---------------------------------------------------------------- Deferred tax assets: Inventory $ 109 $ 172 Bad debt allowance 67 87 - ---------------------------------------------------------------- Total deferred tax assets 176 259 Deferred tax liabilities: Property and equipment (174) (329) Goodwill and other assets - (37) - ---------------------------------------------------------------- Total deferred tax liabilities (174) (366) - ---------------------------------------------------------------- Net deferred tax asset (liability) $ 2 $ (107) ================================================================
F-13 45 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- NOTE 8 - TAXES ON INCOME (Continued) The effective tax rate on income was different from the federal statutory tax rate. The following summary reconciles taxes at the federal statutory tax rate with the effective rate:
Year Nine months ended ended December 31, December 31, --------------- 1994 1995 1996 - ------------------------------------------------------------------------------------------------ Taxes on income at federal statutory rate 34.0% 34.0% 34.0% Increase resulting from: State income taxes, net of federal tax benefit 3.8 3.8 3.9 Amortization of goodwill .5 .7 .6 Non-deductible meals and entertainment 1.3 1.9 1.7 Other items -- (4.4) (.6) - ------------------------------------------------------------------------------------------------ Taxes on income at effective rate 39.6% 36.0% 39.6% ================================================================================================
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION For purposes of the consolidated statements of cash flows, the Company considers cash on hand and in checking, savings and money market accounts to be cash equivalents.
- -------------------------------------------------------------------------- (In thousands) Nine months ended Year ended December 31, December 31, -------------------------- 1994 1995 1996 - -------------------------------------------------------------------------- Cash paid for: Income taxes $ 3,186 $ 2,826 $ 3,035 Interest $ 1 $ 28 $ 27 ==========================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES: During the years ended December 31, 1996 and 1995, and the nine-month period ended December 31, 1994, additional paid-in capital was increased by a reduction in income taxes payable of $168,000, $142,000, and $24,000, respectively, arising from the exercise of stock options. In May 1996, the Company purchased certain assets of United Special Events, Inc. for cash consideration of approximately $1.95 million. In conjunction with the acquisition, liabilities were assumed as follows:
(In thousands) - ------------------------------------------------------------------------------ Fair value of assets acquired $ 3,051 Cash paid to seller and transaction costs (2,082) Deferred consideration (Note 6) (600) - ------------------------------------------------------------------------------ Liabilities assumed $ 369 ==============================================================================
In December 1994, the Company purchased all of the assets of Varsity/Intropa Tours for cash consideration of approximately $1.25 million. In conjunction with the acquisition, liabilities were assumed as follows:
(In thousands) - ------------------------------------------------------------------------------- Fair value of assets acquired $ 5,394 Cash paid to the seller and transactions costs (1,018) Deferred consideration (292) - ------------------------------------------------------------------------------- Liabilities assumed $ 4,084 ===============================================================================
F-14 46 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------------------------------- NOTE 10 - COMMITMENTS AND CONTINGENCIES A. LEASES The Company's office facilities and warehouse space are leased under noncancellable operating leases which expire at various times from October 1997 through November 2000. Rent expense for the years ended December 31, 1996 and 1995, and the nine-month period ended December 31, 1994 was $739,000, $684,000, and $388,000, respectively. As of December 31, 1996, future net minimum rental payments required under operating leases that have initial or remaining noncancellable terms in excess of one year are as follows:
- ------------------------------------------------------------------------------- Year ending December 31, (In thousands) - ------------------------------------------------------------------------------- 1997 $ 591 1998 155 1999 142 2000 89 - ------------------------------------------------------------------------------- Total minimum lease payments $ 977 ===============================================================================
B. CONCENTRATION OF CREDIT RISK The Company earns substantially all of its revenues from sales to and events and activities sponsored primarily by secondary schools, colleges and universities throughout the United States. The Company generally requires deposits for mail order sales of merchandise and for camp registrations. The Company maintains reserves for potential losses and such losses have not exceeded management's expectations. C. LITIGATION The Company is involved in various legal matters in the ordinary course of its business. None of these matters are expected to have a material adverse effect on the Company's consolidated financial statements. D. SUPPLIER AGREEMENTS The Company has multi-year agreements with independent manufacturers to produce its uniforms under which garment prices and production levels are negotiated annually. E. RETIREMENT PLAN Effective January 1, 1993, the Company adopted a tax-qualified employee benefit plan which meets the criteria of Section 401(k) of the Internal Revenue Code. Under the Plan, participants may elect to defer from 2% to 15% of their compensation and the Company may make discretionary contributions, as determined annually by the Company's management, of up to 1.25% of the employees' compensation. Each participant is fully vested at all times in their respective contribution. Participants become fully vested in contributions made by the Company on a graduated scale over a seven-year period. Operations were charged with $35,000 related to this plan in the nine-month period ended December 31, 1994, $25,000 for the year ended December 31, 1995 and $27,500 for the year ended December 31, 1996. NOTE 11 - SUBSEQUENT EVENT On February 13, 1997, the Company's Board of Directors declared a $.055 per share cash dividend to be paid on March 6, 1997, to shareholders of record as of February 24, 1997. F-15 47 Report of Independent Certified Public Accountants on Financial Statement Schedule To the Shareholders and Board of Directors of Varsity Spirit Corporation Memphis, Tennessee The audits referred to in our report dated February 12, 1997 relating to the consolidated financial statements of Varsity Spirit Corporation, which is contained in Item 8 of this Form 10-K including the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. BDO SEIDMAN, LLP Memphis, Tennessee February 12, 1997 S-1 48 SCHEDULE II VARSITY SPIRIT CORPORATION VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at charged to Balance at beginning costs and end of of period expenses Deductions period ------------ ------------- ------------- ------------- (In thousands) Transition year ended December 31, 1994: Allowance for possible losses on accounts receivable $ 140 $ 106 $ 106 $ 140 ============= ============= ============= ============= Year ended December 31, 1995: Allowance for possible losses on accounts receivable $ 140 $ 156 $ 126 $ 170 ============= ============= ============= ============= Year ended December 31, 1996: Allowance for possible losses on accounts receivable $ 170 $ 270 $ 220 $ 220 ============= ============= ============= =============
S-2 49 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, in the City of Memphis, State of Tennessee, on March 31, 1997. VARSITY SPIRIT CORPORATION By: /s/ JEFFREY G. WEBB --------------------------- Jeffrey G. Webb Chairman, President and Chief Executive Officer Pursuant to the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----- /s/ JEFFREY G. WEBB Principal Executive March 31, 1997 - ------------------------- Officer and Director Jeffrey G. Webb *GREGORY C. WEBB Senior Vice President March 31, 1997 - ------------------------- and Director Gregory C. Webb /s/ JOHN M. NICHOLS Principal Financial & March 31, 1997 - ------------------------- Accounting Officer John M. Nichols *ALAN D. GORDON Director March 31, 1997 - ------------------------- Alan D. Gordon *RANDALL S. STURGES Director March 31, 1997 - ------------------------- Randall S. Sturges *WILLIAM C. WILLIS, JR. Director March 31, 1997 - ------------------------- William C. Willis, Jr. *ROY F. KRAMER Director March 31, 1997 - ------------------------- Roy F. Kramer *RICHARD F. STRUP Director March 31, 1997 - ------------------------- Richard F. Strup *By: /s/ JEFFREY G. WEBB ---------------------- Jeffrey G. Webb Attorney-in-Fact
Original powers of attorney authorizing John M. Nichols, Gregory C. Webb and Jeffrey G. Webb to sign this Annual Report on Form 10-K and amendments thereto on behalf of the above-named directors and officers of the registrant have been filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K (Exhibit 24). 50
Exhibit Number Exhibit Index - ------- ----------------------- 3(a) Amended and Restated Charter of Company filed as Exhibit 3.2 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on January 21, 1992, is incorporated herein by reference. 3(b) Amended and Restated By-Laws of Company filed as Exhibit 3.4 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on January 21, 1992, is incorporated herein by reference. 4(a) Amended and Restated Charter and By-Laws of Company (see Exhibits 3(a) and 3(b) above). 10(a) Registration Rights Agreement between Company and Alan D. Gordon, Randall S. Sturges, Charles Tracy, John Bessone, Bernice Jakstas, Jeffrey G. Webb, Gregory C. Webb, Robert Dunseath, Kline Boyd, Donald Trandem, Kris Shepherd and Kraig Tallman dated September 29, 1989, filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(b) Employment Agreement between Company and W. Kline Boyd, filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(c) Employment Agreement between Company and Robert Dunseath, filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(d) Employment Agreement between Company and Kris Shepherd, filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(e) Employment Agreement between Company and Kraig Tallman, filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(f) Employment Agreement between Company and Gregory Webb, filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(g) Employment Agreement between Company and Jeffrey Webb, filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(h) 1989 Non-Qualified Stock Option Plan of Company, filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(i) 1991 Stock Option Plan of Company filed as Exhibit 10.13 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(j) Sales Representative Agreement between Varsity Spirit Fashions & Supplies, Inc. and Stuart Educational Products, Inc., along with Security Agreement between Varsity Spirit Fashions & Supplies, Inc. and Gary Stuart and Patti Stuart, both individually and collectively doing business as Stuart Educational Products, filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(k) Programming Agreement between Universal Cheerleaders Association and ESPN, Inc., filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-44431) filed with the Securities and Exchange Commission on December 10, 1991, is incorporated herein by reference. 10(l) Varsity Spirit Corporation 401(k) Profit Sharing Plan, filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993 (File No. 0-19790), is incorporated herein by reference. 10(m) Asset Purchase Agreement dated as of December 1, 1994 by and between Intropa International U.S.A., Inc., Elisabeth Polsterer and Varsity/Intropa Tours, Inc., filed as Exhibit 10(m) to the Company's Transition Report on Form 10-K for the transition period from April 1, 1994 to December 31, 1994 (File No. 0-19790), is incorporated herein by reference. 10(n) Employment Agreement between the Company and Deana Roberts, filed as Exhibit 10(n) to the Company's Transition Report on Form 10-K for the transition period from April 1, 1994 to December 31, 1994 (File No. 0-19790), is incorporated herein by reference. 10(o) Asset Purchase Agreement dated as of May 15, 1996 by and between United Special Events, Inc., Michael Olmstead and Varsity USA, Inc., filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 0-19790), is incorporated herein by reference. 10(p) Service Agreement dated as of May 15, 1996 between the Company and Michael Olmstead, filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 0-19796), is incorporated herein by reference. 10(q) Form of Loan Agreement dated as of July 1, 1996 between the Company and NationsBank of Tennessee, N.A., filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 0-19790), is incorporated herein by reference. 10(r) Employment Agreement between the Company and John M. Nichols. 10(s) Amendment to Employment Agreement between the Company and Jeffrey Webb. 10(t) Amendment to Employment Agreement between the Company and Gregory Webb. 10(u) Amendment to Employment Agreement between the Company and J. Kristyn Shepard. 10(v) Amendment to Employment Agreement between the Company and W. Kline Boyd. 10(w) Amendment to Employment Agreement between the Company and Kraig Zallman. 10(x) Amendment No. 1 to 1991 Stock Option Plan of Company. 10(y Amendment No. 2 to 1991 Stock Option Plan of Company. 21 Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP. 24 Powers of Attorney. 27 Financial Data Schedule (For SEC use only)
EX-10.R 2 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(R) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of February 28, 1997, by and between John M. Nichols ("Employee") and Varsity Spirit Corporation, a Tennessee corporation (the "Company"). R E C I T A L S: A. The Company is a publicly owned entity in the business of (i) designing, marketing and selling products to the school spirit industry, including cheerleader, dance team and booster club uniforms and accessories, (ii) operating high school and college cheerleader and dance team camps and (iii) organizing and facilitating special events, including travel programs, made available to school spirit groups (collectively, the "Business"). B. Employee has been employed by and a financial officer of the Company since April 1992 and has been a Senior Vice President of the Company since July 1992 and the Chief Financial Officer of the Company since April 1994. C. The Company desires to continue to employ Employee as a Senior Vice President and the Chief Financial Officer of the Company and Employee desires to be so employed by the Company on the terms and conditions set forth herein. D. The Company desires to bind Employee to certain restrictive covenants and Employee agrees to be so bound on the terms and conditions set forth herein. A G R E E M E N T: NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Term of Employment. Subject to the terms and conditions set forth herein, including Section 10, the Company will employ Employee and Employee will serve as a Senior Vice President and the Chief Financial Officer of the Company for a term commencing on February 28, 1997 (the "Effective Date") and ending on February 28, 1998 (the "Employment Term"). 2. Employment Duties. During the Employment Term, Employee will serve as a Senior Vice President and the Chief Financial Officer of the Company, subject to the terms of this Agreement and the direction and control of the President and the Board of Directors of the Company. Employee shall, during the Employment Term, serve the Company faithfully, diligently and competently and to the best of his/her ability. -1- 2 3. Compensation. The Company shall have the following compensation obligations, which shall be cumulative: (a) During the Employment Term, the Company shall pay to Employee, as salary (the "Salary") for services rendered by Employee under this Agreement, $115,000 per annum ($9583.33 per month). Such Salary shall be payable in arrears not less frequently than monthly, but otherwise in accordance with the Company's ordinary payment practices; and (b) After the end of each fiscal year of the Company during the Employment Term, Employee shall be eligible for an annual performance bonus, the nature and amount of which shall be determined by the Board of Directors (or any committee thereof) or the President of the Company after reviewing Employee's performance and the Company's results of operations during and for such fiscal year and such other matters deemed appropriate by the Board of Directors (or any committee thereof) or the President; notwithstanding anything else in this Agreement, the declaration and payment of any performance bonus to Employee shall be in the discretion of the Company and Employee shall have no absolute right to a performance bonus in any year. (c) In the event of a Change in Control (as defined below) of the Company during the Employment Term, Employee shall be entitled to and the Company shall pay Employee upon the occurrence of the Change in Control a special one time bonus of $250,000 (payable at Employee's election in full immediately after the Change in Control or in equal monthly installments over the period commencing with the first full month after the date of the Change in Control and continuing through the twenty-fourth (24th) full month after the Change in Control), which bonus (the "Change in Control Bonus") shall be in consideration for (i) services rendered to the Company by Employee prior to and in connection with the Change in Control and (ii) Employee's commitment that, to the extent requested, he will continue his employment after the Change in Control and through February 28, 1998 (the date on which the audit period for fiscal 1997 is expected to be completed) on terms not less favorable to Employee as in existence immediately prior to the Change in Control. For purposes of this paragraph, a "Change in Control" shall be deemed to arise if any one or more of the following has occurred: (a)'the Company is merged, consolidated or reorganized into or with another corporation or other entity and, as a result thereof, less than 50% of the outstanding stock or other capital interests of the surviving, resulting or acquiring corporation, person or other entity is owned, in the aggregate, by the stockholder or stockholders of the Company immediately prior to such merger, consolidation or reorganization or (b) the Company sells all or substantially all of its business or assets (or both) to any other corporation, person or other entity, less than 50% of the outstanding voting stock or other capital interests of which are owned, in the aggregate, by the stockholders of the Company, directly or indirectly, immediately prior to or after such sale. Payments made pursuant to (a), (b) and (c) above while Employee is an employee of the Company shall be treated as wages for withholding and employment tax purposes. -2- 3 4. Insurance. During the Employment Term, the Company shall be entitled to obtain as the beneficiary "key man" or similar other life insurance on Employee in an amount that the Company shall in its discretion deem necessary. Employee shall cooperate with all requirements necessary for obtaining such insurance, including, without limitation, submitting to any tests or physicals reasonably required by the insurers in order to obtain such insurance. 5. Benefits. (a) Employee shall be entitled during the Employment Term to participate in such employee benefit plans and programs, including, without limitation, profit sharing, cafeteria and health insurance plans, as are maintained from time to time for employees of the Company to the extent that his/her position, tenure, compensation, age, health and other qualifications make him eligible to participate. The Company does not promise the adoption or continuance of any particular plan or program during the Employment Term, and Employee's (and his/her dependents') participation in any such plan or program shall be subject to the provisions, rules, regulations and laws applicable thereto. (b) During each twelve month period during the Employment Term, Employee shall be entitled to that number of weeks of paid vacation as authorized under the Company's normal vacation policy to be taken at times mutually acceptable to Employee and the Company, and such holidays as are observed by the Company from time to time. 6. Reimbursement of Expenses. To the extent consistent with the general expense reimbursement policies maintained by the Company from time to time, Employee shall be entitled to prompt reimbursement for ordinary, necessary and reasonable out-of-pocket trade or business expenses which Employee incurs in connection with performing his/her duties under this Agreement, including reasonable travel and meal expenses. The reimbursement of all such expenses shall be made upon presentation of evidence reasonably satisfactory to the Company of the amounts and nature of such expenses and shall be subject to the reasonable approval of the Company's President or Board of Directors, or both. 7. Restrictive Covenants. Employee acknowledges and agrees that (i) through his/her position as a Senior Vice President of the Company, he/she will learn valuable trade secrets and other proprietary information relating to the Business, (ii) Employee's services to the Company are unique in nature, (iii) the Company's Business is international in scope and (iv) the Company would be irreparably damaged if Employee were to provide services to any person or entity in violation of the restrictions contained in this Agreement. Accordingly, as an inducement to the Company to enter into this Agreement, Employee agrees that during the Employment Term and, except as otherwise provided in Sections 10(b) and 10(c) hereof or the last paragraph of this Section 7, for an additional twenty-four (24) months thereafter (such period being referred to herein as the "Restricted Period"), neither Employee nor any Affiliate (as defined below in Section 8) of Employee shall, directly or indirectly, either for himself/herself or for any other person or entity: -3- 4 (a) anywhere in the United States of America or Canada or any other location in which the Company is then doing business, engage or participate in, or assist, advise or be connected with (including as an employee, owner, partner, shareholder, officer, director, advisor, consultant, agent or otherwise), or permit his/her name to be used by or render services for, any person or entity engaged in a Competing Business (as hereinafter defined); provided, however, that nothing in this Agreement shall prevent Employee from acquiring or owning, as a passive investment, up to two percent (2%) of the outstanding voting securities of an entity engaged in a Competing Business which are publicly traded on any recognized national securities market; (b) take any action, in connection with a Competing Business, which might divert from the Company or an Affiliate of the Company any opportunity which would be within the scope of the Company's or such Affiliate's then business; (c) solicit or attempt to solicit any person or entity who is or has been (i) a customer of the Company at any time (A) up to the date hereof or (B) during the Restricted Period to purchase Competing Products or Services (as herein defined) from any person or entity (other than the Company) or (ii) a customer, supplier, licensor, licensee or other business relation of the Company at any time (A) up to the date hereof or (B) during the Restricted Period to cease doing business with the Company; or (d) solicit or hire any person or entity who is a director, officer, employee or agent of the Company or any Affiliate of the Company to perform services for any entity other than the Company and its Affiliates. As used herein, a "Competing Business" shall mean a business which engages or is making plans to engage, in whole or in part, in the manufacturing, marketing or distributing of products, or the performance, marketing and sale of services, which are competitive with, are similar to, may be used as substitutes for, or may detract from any products or services of the Company or any Affiliate thereof during the Restricted Period, whether, in the case of products, such products are or were manufactured by or for the Company for sale by the Company or purchased as finished goods for resale by the Company, or, in the case of services, such services were performed by the Company or by another company or person on behalf of the Company; the products and services subject to these restrictive covenants being herein referred to as "Competing Products and Services." Notwithstanding the provisions of the first paragraph of this Section 7, in the event of a termination of employment as a result of the expiration of the full term of employment contemplated by Section 1 hereof, the Restricted Period shall not extend beyond but rather shall terminate on the last date of the Employment Term except in the case where the Company delivers to Employee not less than ten (10) days prior to the last day of the Employment Term a written offer of continued employment on substantially similar terms (or on terms more favorable to Employee) as then exist, in which case the Restricted Period shall extend to the earlier of (i) twenty-four (24) months after the last day of the Employment Term and (ii) the last day of the term of employment as proposed in such written offer of continued employment. -4- 5 8. Disclosure of Confidential Information. Employee recognizes that he/she possesses or as a result of his/her employment by the Company will become in possession of Confidential Information (as defined below). Accordingly, as an inducement for the Company to enter into this Agreement, Employee agrees that: (a) for the longest period permitted by law from the date of this Agreement, Employee and each Affiliate of Employee shall hold in strictest confidence and shall not, other than as required by law, without the prior written consent of the Company, use for his/her own benefit or that of any third party or intentionally or negligently disclose in a manner which could be harmful to the Company to any person, firm or corporation except the Company, an Affiliate of the Company or employees of the Company or an Affiliate of the Company any Confidential Information (as defined below). For purposes of this Agreement, intending that the term shall be broadly construed to include anything protectible as a trade secret under applicable law, "Confidential Information" shall mean all information, and all documents and other tangible items which record information, relating to the manufacturing and marketing by the Company of products and services, from time to time, which at the time or times concerned is protectible as a trade secret under applicable law, and which has been or is from time to time disclosed to or known by Employee. As used herein, an "Affiliate" shall mean and include any person or entity which controls a party, which such party controls or which is under common control with such party. "Control" means the power, direct or indirect, to influence or cause the direction of the management and policies of a person or entity through voting securities, contract or otherwise; (b) Employee and each Affiliate of Employee (and if deceased, his/her legal representative, who shall be the person set forth as such in Section 12(a) until written notice of a successor is delivered to the Company (the "Representative")) shall promptly following a request therefor from the Company return to the Company, without retaining copies, all tangible items which are or which contain Confidential Information, it being agreed by Employee on behalf of his/her heirs, successors and assigns that the Company shall be entitled to rely on any action taken by the Representative in connection with this paragraph (b); and (c) at the request of the Company made at any time or from time to time hereafter, Employee and each Affiliate of Employee (and if deceased, the Representative) shall make, execute and deliver all applications, papers, assignments, conveyances, instruments or other documents and shall perform or cause to be performed such other lawful acts as the Company may reasonably deem necessary or desirable to implement any of the provisions of this Agreement, and shall give testimony and cooperate with the Company, its Affiliates or its representatives in any controversy or legal proceedings involving the Company, its Affiliates or its representatives with respect to any Confidential Information. -5- 6 9. Specific Performance. Employee agrees that any violation by him/her of Sections 7 or 8 of this Agreement, as applicable, would be highly injurious to the Company and would cause irreparable harm to the Company. By reason of the foregoing, Employee consents and agrees that if he/she violates any provision of Sections 7 or 8 of this Agreement the Company shall be entitled, in addition to any other rights and remedies that it may have, to apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any continuing violation of, the provisions of such Section. In the event Employee breaches a covenant contained in this Agreement, the Restricted Period applicable to Employee with respect to such breached covenant shall be extended for the period of such breach. Employee also recognizes that the territorial, time and scope limitations set for in Section 7 and 8, as applicable, are reasonable and are properly required for the protection of the Company and in the event that any such territorial, time or scope limitation is deemed to be unreasonable by a court of competent jurisdiction, the Company and Employee agrees, and Employee submits, to the reduction of any or all of said territorial, time or scope limitations to such an area, period or scope as said court shall deem reasonable under the circumstances. 10. Termination; Severance. (a) Notwithstanding the provisions of Section 1 and the other provisions of this Agreement, Employee's employment with the Company may be terminated at any time by the Company's President or Board of Directors "for cause," which shall include (i) Employee's conviction for, or plea of nolo contendere to, a felony, (ii) Employee's commission of an act involving self-dealing, fraud or personal profit materially injurious to the Company, (iii) Employee's commission of an act of willful misconduct or gross negligence in the conduct of his/her duties hereunder, (iv) habitual absenteeism or any form of drug addiction or abuse on the part of Employee, (v) Employee's failure to perform his/her duties hereunder in a manner reasonably satisfactory to the Company, (vi) Employee's breach or violation of any internal policies or rules of the Company, including those rules adopted by the Company concerning the purchase and sale of the Company's common stock or other securities by employees of the Company, or (vii) Employee's breach of any material provision of this Agreement. Any termination by the Company under this Section 10(a) shall be in writing and shall set forth the reason for such termination. In the event of termination under this Section 10(a), the Company's obligations under this Agreement shall cease and Employee shall forfeit all right to receive any future compensation or benefits under this Agreement, including, without limitation, any unpaid performance bonus, except that Employee shall be entitled to his/her Salary and benefits (under Section 5) for services already performed as of the date of termination of this Agreement. Without limitation, termination of Employee pursuant to this Section 10(a) shall not relieve Employee of his/her obligations under Sections 7 or 8 hereof. (b) Notwithstanding the provisions of Section 1 and the other provisions of this Agreement, Employee's employment with the Company may be terminated at any time by the Company's President or Board of Directors without cause, provided that in the event of such a termination, Employee shall be entitled to continuation of his/her -6- 7 Salary and benefits (under Section 5) through the period ending three (3) months after the date of such termination (the "Severance Period"). Except as otherwise specifically provided above, the Company's obligations under this Agreement shall cease upon termination and Employee shall forfeit all rights to receive any compensation or benefits under this Agreement. Without limitation, a termination of Employee pursuant to this Section 10(b) shall not relieve Employee of his/her obligations under Sections 7 or 8 hereof, except that the restrictions of Section 7 shall be terminated at the earlier of the termination of the Restricted Period established under Section 7 and any Severance Period established hereby. Any termination by the Company or election by Employee under this Section 10(b) shall be in writing. (c) Notwithstanding the provisions of Section 1 and the other provisions of this Agreement, Employee's employment with the Company may be terminated by the Employee at any time, including after the occurrence of a Change in Control of the Company, provided that Employee agrees to the extent practicable that he/she will provide notice of termination to the Company not less than three (3) weeks prior to the effective date of the termination. Upon any termination of employment by Employee pursuant to this Section 10(c), Employee shall be entitled to his/her Salary and benefits (under Section 5) for services already performed as of the effective date of the termination of this Agreement. A termination of employment by Employee pursuant to this Section 10(c) shall not relieve Employee of his/her obligations under Sections 7 or 8 hereof and, if the effective date of the Employee's termination of employment pursuant to this Section 10(c) is prior to February 28, 1998, Employee shall be obligated to return to the Company any Change in Control Bonus paid to Employee pursuant to Section 3 of this Agreement. Any termination by Employee under this Section 10(c) shall be in writing. (d) The severance payment provisions of this Section 10 (including any Change in Control Bonus payable under Section 3(c)) are intended to comply with Sections 280G and 4999 of the Code and all regulations thereto so that the deductibility by the Company of the severance payments will not be subject to limitation by Section 280G and so that Employee will not be subject to an excise tax upon the receipt of the severance payments under Section 4999. The Company and Employee agree that, prior to the payment by the Company of any severance payments pursuant to this Section 10, the Company's independent public accountants shall review the amounts proposed to be paid, the conformity of the proposed payments with the provisions of this Section 10 and the treatment of the proposed payments under Sections 280G and 4999 of the Code. 11. Death or Disability. (a) If Employee becomes permanently disabled (determined as provided below) during the Employment Term, his/her employment shall terminate as of the date such permanent disability is determined. Employee shall be considered to be permanently disabled for purposes of this Agreement if he/she is unable by reason of accident or illness (including mental illness) to perform the material duties of his/her -7- 8 regular position with the Company and not expected to recover from his/her disability within a period of three (3) months from the commencement of the disability. If at any time Employee claims or is claimed to be permanently disabled, a physician acceptable to both Employee, or the Representative, and the Company (which acceptances shall not be unreasonably withheld) shall be retained by the Company and shall examine Employee. Employee shall cooperate fully with the physician. If the physician determines that Employee is permanently disabled, the physician shall deliver to the Company a certificate certifying both that Employee is permanently disabled and the date upon which the condition of permanent disability commenced. The determination of the physician shall be conclusive. (b) Employee's right to his/her compensation and benefits under this Agreement shall cease upon his/her death or disability, except that (i) Employee (or his/her estate or heirs) shall be entitled to his/her Salary and benefits (under Section 5) for services performed as of the date of his/her death or permanent disability and (ii) in addition, with respect to termination due solely to Employee's permanent disability as determined pursuant to this Section 11, he/she shall also be entitled to his/her Salary and benefits (under Section 5) through the period ending six (6) months after the date such permanent disability began; provided, however, that any such amounts for Salary continuation shall be reduced by any amount received by Employee under any disability insurance policy. 12. Miscellaneous. (a) All notices hereunder shall be in writing and shall be deemed given when delivered in person or when telecopied with hard copy to follow, or three (3) business days after being deposited in the United States mail, postage prepaid, registered or certified mail, or two (2) business days after delivery to a nationally recognized express courier, expenses prepaid, addressed as follows: If to Employee: John M. Nichols 7871 Meadow Trail Drive Cordova, Tennessee 38018 If to the Company: Varsity Spirit Corporation 2525 Horizon Lake Drive Memphis, Tennessee 38133 Attention: Jeffrey G. Webb -8- 9 and/or at such other addresses and/or to such other addressees as may be designated by notice given in accordance with the provisions hereof. (b) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. No party shall assign this Agreement or its rights hereunder without the prior written consent of the other party hereto; provided, however, that the Company may assign this Agreement to any person or entity acquiring all or substantially all of the Business of the Company (whether by sale of stock, sale of assets, merger, consolidation or otherwise). (c) This Agreement contains all of the agreements between the parties with respect to the subject matter hereof and this Agreement supersedes all other agreements, oral or written, between the parties hereto with respect to the subject matter hereof. (d) No change or modification of this Agreement shall be valid unless the same shall be in writing and signed by all of the parties hereto. No waiver of any provisions of this Agreement shall be valid unless in writing and signed by the waiving party. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver, unless so provided in the waiver. (e) If any provisions of this Agreement (or portions thereof) shall, for any reason, be invalid or unenforceable, such provisions (or portions thereof) shall be ineffective only to the extent of such invalidity or unenforceability, and the remaining provisions of this Agreement (or portions thereof) shall nevertheless be valid, enforceable and of full force and effect. The Company's rights under this Agreement shall not be exclusive and shall be in addition to all other rights and remedies available at law or in equity. (f) The section or paragraph headings or titles herein are for convenience of reference only and shall not be deemed a part of this Agreement. (g) This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute a single instrument. (h) This Agreement shall be governed and controlled as to validity, enforcement, interpretation, construction, effect and in all other respects by the laws of the State of Tennessee applicable to contracts made in that State (other than any conflict of laws rule which might result in the application of the laws of any other jurisdiction). Employee hereby expressly submits and consents in advance to the jurisdiction of the federal and state courts of the State of Tennessee for all purposes in connection with any action or proceeding arising out of or relating to this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. -9- 10 VARSITY SPIRIT CORPORATION By: /s/ Jeffrey J. Webb ------------------------------------ Name: Jeffrey J. Webb Title: President JOHN M. NICHOLS /s/ John M. Nichols -------------------------------------- -10- EX-10.S 3 EXTENTION OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10(S) VARSITY SPIRIT CORPORATION 2525 Horizon Lake Drive Memphis, TN 38133 Memphis, TN 38184-1609 901-387-4370 Fax: 901-387-4356 June 4, 1996 Jeffrey G. Webb 2525 Horizon Lake Drive Memphis, TN 38133 RE: Extension of Employment Agreement Dear Jeff: This is to confirm the extension of the term of the Employment Agreement, dated as of September 29, 1989, by and between you and Varsity Spirit Corporation. Section 1 of the Employment Agreement is hereby amended to provide as follows: 1. Employment. The Company agrees to employ Executive and Executive accepts such employment for the initial period beginning as of the date hereof (September 29, 1989) and ending on September 28, 1997, subject to possible earlier termination pursuant to paragraph 1(d) hereof (the "Employment Period"). Please indicate your agreement with the amendment set forth above by executing this extension agreement in the space provided below and returning an executed copy of this agreement to the undersigned. Very truly yours, /s/ Jeffrey G. Webb Jeffrey G. Webb President Varsity Spirit Corporation Accepted and agreed to this day of June, 1996 [NAME OF EMPLOYEE] /s/ Jeffrey G. Webb - --------------------- (Signature) EX-10.T 4 EMPLOYMENT AGREEMENT - WEBB 1 EXHIBIT 10(T) VARSITY SPIRIT CORPORATION 2525 Horizon Lake Drive Memphis, TN 38133 Memphis, TN 38184-1609 901-387-4370 Fax: 901-387-4356 June 4, 1996 Gregory C. Webb 2525 Horizon Lake Drive Memphis, TN 38133 RE: of Employment Agreement Dear Greg: This is to confirm the extension of the term of the Employment Agreement, dated as of September 29, 1989, by and between you and Varsity Spirit Corporation. Section 1 of the Employment Agreement is hereby amended to provide as follows: 1. Employment. The Company agrees to employ Executive and Executive accepts such employment for the initial period beginning as of the date hereof (September 29, 1989) and ending on September 28, 1997, subject to possible earlier termination pursuant to paragraph 1(d) hereof (the "Employment Period"). Please indicate your agreement with the amendment set forth above by executing this extension agreement in the space provided below and returning an executed copy of this agreement to the undersigned. Very truly yours, /s/ Jeffrey G. Webb Jeffrey G. Webb President Varsity Spirit Corporation Accepted and agreed to this 22nd day of June, 1996 [NAME OF EMPLOYEE] /s/ Gregory C. Webb - ----------------------- (Signature) EX-10.U 5 EXTENTION OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10(U) VARSITY SPIRIT CORPORATION 2525 Horizon Lake Drive Memphis, TN 38133 P.O. Box 341609 Memphis, TN 38184-1609 901-387-4370 Fax: 901-387-4356 June 4, 1996 J. Kristyn Shepherd 2525 Horizon Lake Drive Memphis, TN 38133 RE: Extension of Employment Agreement Dear Kris: This is to confirm the extension of the term of the Employment Agreement, dated as of September 29, 1989, by and between you and Varsity Spirit Corporation. Section 1 of the Employment Agreement is hereby amended to provide as follows: 1. Employment. The Company agrees to employ Executive and Executive accepts such employment for the initial period beginning as of the date hereof (September 29, 1989) and ending on September 28, 1997, subject to possible earlier termination pursuant to paragraph 1(d) hereof (the "Employment Period"). Please indicate your agreement with the amendment set forth above by executing this extension agreement in the space provided below and returning an executed copy of this agreement to the undersigned. Very truly yours, /s/ Jeffrey G. Webb Jeffrey G. Webb President Varsity Spirit Corporation Accepted and agreed to this day of June, 1996 [NAME OF EMPLOYEE] /s/ J. Kristyn Shepherd - ------------------------- (Signature) EX-10.V 6 EXTENTION OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10(V) VARSITY SPIRIT CORPORATION 2525 Horizon Lake Drive Memphis, TN 38133 Memphis, TN 38184-1609 901-387-4370 Toll Free: 800-238-0286 Fax: 901-387-4356 June 4, 1996 W. Kline Boyd 2525 Horizon Lake Drive Memphis, TN 38133 RE: Extension of Employment Agreement Dear Kline: This is to confirm the extension of the term of the Employment Agreement, dated as of September 29, 1989, by and between you and Varsity Spirit Corporation. Section 1 of the Employment Agreement is hereby amended to provide as follows: 1. Employment. The Company agrees to employ Executive and Executive accepts such employment for the initial period beginning as of the date hereof (September 29, 1989) and ending on September 28, 1997, subject to possible earlier termination pursuant to paragraph 1(d) hereof (the "Employment Period"). Please indicate your agreement with the amendment set forth above by executing this extension agreement in the space provided below and returning an executed copy of this agreement to the undersigned. Very truly yours, /s/ Jeffrey G. Webb Jeffrey G. Webb President Varsity Spirit Corporation Accepted and agreed to this 20th day of June, 1996 [NAME OF EMPLOYEE] /s/ W. Kline Boyd - -------------------- (Signature) EX-10.W 7 EXTENTION OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10(W) VARSITY SPIRIT CORPORATION 2525 Horizon Lake Drive Memphis, TN 38133 Memphis, TN 38184-1609 901-387-4370 Fax: 901-387-4356 June 4, 1996 Kraig Tallman 2525 Horizon Lake Drive Memphis, TN 38133 RE: Extension of Employment Agreement Dear Kraig: This is to confirm the extension of the term of the Employment Agreement, dated as of September 29, 1989, by and between you and Varsity Spirit Corporation. Section 1 of the Employment Agreement is hereby amended to provide as follows: 1. Employment. The Company agrees to employ Executive and Executive accepts such employment for the initial period beginning as of the date hereof (September 29, 1989) and ending on September 28, 1997, subject to possible earlier termination pursuant to paragraph 1(d) hereof (the "Employment Period"). Please indicate your agreement with the amendment set forth above by executing this extension agreement in the space provided below and returning an executed copy of this agreement to the undersigned. Very truly yours, /s/ Jeffrey G. Webb Jeffrey G. Webb President Varsity Spirit Corporation Accepted and agreed to this 4th day of June, 1996 [NAME OF EMPLOYEE] /s/ Kraig Tallman - ------------------- (Signature) EX-10.X 8 1991 STOCK OPTION PLAN AMEND. #1 1 EXHIBIT 10(X) AMENDMENT NO. 1 TO VARSITY SPIRIT CORPORATION 1991 STOCK OPTION PLAN The Varsity Spirit Corporation 1991 Stock Option Plan, and more particularly Section 5.01 of such Plan, is amended to increase the number of shares of the Company's Common Stock which may be issued or transferred under the Plan from 300,000 shares (after giving effect to a 3-for-2 stock split effected as a 50% stock dividend) to 450,000 shares. EX-10.Y 9 1991 STOCK OPTION PLAN AMENDMENT #2 1 EXHIBIT 10(Y) AMENDMENT NO. 2 TO VARSITY SPIRIT CORPORATION 1991 STOCK OPTION PLAN The Varsity Spirit Corporation 1991 Stock Option Plan, as amended, and more particularly Section 5.01 of such Plan, is amended to increase the number of shares of the Company's Common Stock which may be issued or transferred under the Plan from 450,000 shares to 600,000 shares. EX-21 10 SUBSIDIARIES LIST 1 EXHIBIT 21 SUBSIDIARIES OF VARSITY SPIRIT CORPORATION Varsity Spirit Fashions & Supplies, Inc., a Minnesota corporation. International Logos, Inc., a Tennessee corporation. Varsity/Intropa Tours, Inc., a Tennessee corporation. Varsity USA, Inc., a Tennessee corporation. EX-23 11 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS VARSITY SPIRIT CORPORATION MEMPHIS, TENNESSEE We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-57974) and the Registration Statement on Form S-8 (No. 33-84940) of our reports dated February 12, 1997, related to the consolidated financial statements and schedule of Varsity Spirit Corporation appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. BDO SEIDMAN, LLP Memphis, Tennessee March 28, 1997 EX-24 12 POWERS OF ATTORNEY 1 EXHIBIT 24 POWERS OF ATTORNEY 2 VARSITY SPIRIT CORPORATION Form 10-K Annual Report ------------------------ POWER OF ATTORNEY ------------------------ KNOW ALL MEN BY THESE PRESENTS, that the undersigned whose signature appears below constitutes and appoints John M. Nichols, Gregory C. Webb and Jeffrey G. Webb, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign the Company's Form 10-K Annual Report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has executed this power or attorney this day of 1997. ------ --------------- ___________________________ (signature) ___________________________ (printed name) EX-27 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K. 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 9,360 0 7,382 220 5,419 25,054 8,160 4,150 37,791 7,048 600 0 0 47 29,850 37,791 49,472 88,449 26,849 53,613 26,388 270 57 8,614 3,414 5,200 0 0 0 5,200 1.10 1.10
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