-----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, L3Sc4+VGAXT4l7xe1/APXnh9H0gn59prcQHbmyX4Ej3hYblRgEisSyB+3L4+X9uT lqIXqQM4wmdWjPuvRsz9Ig== 0000930413-02-003225.txt : 20021114 0000930413-02-003225.hdr.sgml : 20021114 20021114144246 ACCESSION NUMBER: 0000930413-02-003225 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARSITY BRANDS INC CENTRAL INDEX KEY: 0000874786 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 222890400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14629 FILM NUMBER: 02824441 BUSINESS ADDRESS: STREET 1: 6745 LENOX CENTER CT STREET 2: STE 300 CITY: MEMPHIS STATE: TN ZIP: 38115 BUSINESS PHONE: 9013874300 MAIL ADDRESS: STREET 1: 6745 LENOX CENTER CT STREET 2: STE 300 CITY: MEMPHIS STATE: TN ZIP: 38115 FORMER COMPANY: FORMER CONFORMED NAME: RIDDELL SPORTS INC DATE OF NAME CHANGE: 19930328 10-Q 1 c26142_10q-.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2002 Commission file number: 0-19298 VARSITY BRANDS, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2890400 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 6745 LENOX CENTER COURT, SUITE 300, MEMPHIS, TN 38115 (Address of principal executive offices) (Zip code) (901) 387-4300 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1935 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 9,522,250 Common Shares as of November 12, 2002 1 VARSITY BRANDS, INC. INDEX PAGE Form 10-Q Cover Page 1 Form 10-Q Index 2 Part I. Financial Information: Item 1. Financial Statements: Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Stockholders' Equity 5 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 4. Controls and Procedures 20 Part II. Other Information: Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This report contains certain statements which are "forward-looking" statements under the federal securities laws that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements appear throughout Item 2 of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations" concerning the Company's seasonal patterns of working capital and revenue and operating results in its business. Certain factors could cause actual results to differ materially from those in the forward-looking statements including without limitation, (i) continuation of historical seasonal patterns of demand for the Company's products and the Company's ability to meet the demand; (ii) actions by competitors, including without limitation new product introductions; (iii) the loss of domestic or foreign suppliers; (iv) changes in business strategy or new product lines and the Company's ability to successfully implement these; (v) moderation of uniform and accessories revenue growth; and (vi) changes in interest rates and general economic conditions. These "forward-looking statements" are based on currently available information and plans. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from the Company's expectations. 2 Part I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS VARSITY BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) September 30, December 31, September 30, 2002 2001 2001 -------- -------- -------- ASSETS Current assets: Cash and cash equivalents $ 10,631 $ 14,397 $ 26,299 Accounts receivable, trade less allowance for doubtful accounts ($578, $429 and $394, respectively) 26,941 12,161 27,710 Inventories 9,543 7,863 9,148 Prepaid expenses 1,948 3,937 1,636 Other receivables 23 3,555 3,205 Deferred taxes 1,483 2,383 2,040 Assets held for disposal -- -- 5,830 -------- -------- -------- Total current assets 50,569 44,296 75,868 Property, plant and equipment, less accumulated depreciation ($5,290, $4,929 and $8,616, respectively) 3,588 4,387 4,129 Goodwill, less accumulated amortization ($9,595, $9,595 and $9,123, respectively) 66,596 66,596 67,067 Intangibles and deferred charges, less accumulated amortization ($3,371, $3,048 and $2,950, respectively) 2,085 2,793 3,775 Other assets 623 559 614 -------- -------- -------- $123,461 $118,631 $151,453 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,894 $ 5,891 $ 11,289 Accrued liabililties 6,588 8,258 8,907 Customer deposits 3,817 5,132 3,275 Current portion of long-term debt 1,375 1,375 -- -------- -------- -------- Total current liabilities 20,674 20,656 23,471 Long-term debt 72,160 80,410 112,500 Deferred taxes 188 188 -- Contingent liabilities -- -- -- Stockholders' equity: Preferred stock -- -- -- Common stock 95 95 95 Additional paid-in capital 37,499 37,306 37,306 Accumulated deficit (7,155) (20,024) (21,919) -------- -------- -------- 30,439 17,377 15,482 -------- -------- -------- $123,461 $118,631 $151,453 ======== ======== ======== See notes to condensed consolidated financial statements. 3 VARSITY BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ------------------ SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2002 2001 2002 2001 ------- ------- ------- -------- Net revenues: Uniforms and accessories $32,913 $32,049 $80,614 $ 76,030 Camps and events 28,283 28,077 56,645 54,766 ------- ------- ------- -------- Net revenues 61,196 60,126 137,259 130,796 Cost of revenues: Uniforms and accessories 16,422 16,390 41,888 40,383 Camps and events 19,509 19,248 38,241 36,698 ------- ------- ------- -------- Cost of revenues 35,931 35,638 80,129 77,081 ------- ------- ------- -------- Gross profit 25,265 24,488 57,130 53,715 Selling, general and administrative expenses 12,612 12,697 37,362 36,551 ------- ------- ------- -------- Income from operations 12,653 11,791 19,768 17,164 Other expense Interest expense, net 1,975 2,990 6,149 7,536 ------- ------- ------- -------- Total other expense 1,975 2,990 6,149 7,536 ------- ------- ------- -------- Income from continuing operations before income taxes, discontinued operations and extraordinary items 10,678 8,801 13,619 9,628 Income taxes 690 2,948 890 3,225 ------- ------- ------- -------- Income from continuing operations 9,988 5,853 12,729 6,403 Discontinued operations: Income (loss) from operations of discontinued businesses -- -- -- (1,358) Gain (loss) on disposal of businesses -- 1,379 -- (16,921) ------- ------- ------- -------- Income (loss) from operations before extraordinary items 9,988 7,232 12,729 (11,876) Extraordinary item - gain on retirement of bonds, net of tax -- 1,486 140 1,486 ------- ------- ------- -------- Net income (loss) $ 9,988 $ 8,718 $12,869 $(10,390) ======= ======= ======= ======== Income from continuing operations per share Basic $ 1.05 $ 0.62 $ 1.34 $ 0.68 Diluted $ 0.89 $ 0.53 $ 1.16 $ 0.61 Income (loss) per share: Basic $ 1.05 $ 0.92 $ 1.36 $ (1.10) Diluted $ 0.89 $ 0.79 $ 1.17 $ (1.10) Weighted average number common and common equivalent shares outstanding: Basic 9,488 9,452 9,464 9,452 Diluted 11,382 11,149 11,203 11,048 See notes to condensed consolidated financial statements. 4 VARSITY BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS) Retained Total Common Stock Additional Earnings Stock- --------------- paid-in (Accumulated holders' Shares Amount Capital deficit) Equity ------ ------ -------- ----------- -------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 Balance, January 1, 2001 9,452 $ 95 $ 37,306 $(11,529) $25,872 Net loss for the period -- -- (10,390) (10,390) ------ ------ -------- -------- ------- 9,452 $ 95 $ 37,306 $(21,919) $15,482 ====== ====== ======== ======== ======= FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Balance, January 1, 2002 9,452 $ 95 $ 37,306 $(20,024) $17,377 Issuance of common stock for stock option exercise 60 -- 193 -- 193 Net income for the period -- -- 12,869 12,869 ------ ------ -------- -------- ------- 9,512 $ 95 $ 37,499 $ (7,155) $30,439 ====== ====== ======== ======== ======= See notes to condensed consolidated financial statements. 5 VARSITY BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 ------- ------- ------- ------- Cash flows from operating activities: Net income (loss) $ 9,988 $ 8,718 $12,869 $(10,390) Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Loss from operations of discontinued businesses -- -- -- 1,358 (Gain) loss on sale of businesses -- (1,379) -- 16,921 Extraordinary gain -- (1,486) (140) (1,486) Depreciation and amortization: Amortization of debt issue costs 122 173 375 605 Other depreciation and amortization 467 1,041 1,456 2,946 Provision for losses on accounts receivable 280 150 386 275 Deferred taxes 690 -- 900 (2,040) Changes in assets and liabilities, net of assets held for disposal: (Increase) decrease in: Accounts receivable, trade 7,028 6,603 (15,166) (13,512) Inventories 4,578 4,236 (1,680) (1,946) Prepaid expenses 2,627 2,586 1,989 1,614 Other receivables 103 (750) 3,532 (1,751) Other assets 9 (54) (64) (151) Increase (decrease) in: Accounts payable (7,314) (5,431) 3,003 7,217 Accrued liabilities (2,012) 313 (1,670) 1,776 Customer deposits (9,283) (10,751) (1,315) (2,215) ------- ------- ------- ------- Net cash provided by (used in) continuing operations 7,283 3,969 4,475 (779) Cash flows from discontinued operations and extraordinary item Net change in assets held for disposal -- 1,159 -- (9,335) Costs associated with bond redemption -- (270) (51) (270) ------- ------- ------- ------- Net cash provided by (used by) discontinued operations and extraordinary item -- 889 (51) (9,605) Cash flows from investing activities: Capital expenditures (204) (344) (522) (1,245) Other assets -- (360) -- (360) Net proceeds received from the sale of businesses -- -- -- 61,871 ------- ------- ------- ------- Net cash provided by (used in) investing activities (204) (704) (522) 60,266 Cash flows from financing activities: Net repayments under line-of-credit agreement -- -- -- (16,419) Redemption of senior bonds -- (7,050) (7,858) (7,050) Debt issue costs -- (223) (3) (223) Proceeds from issuance of common stock 193 -- 193 -- ------- ------- ------- ------- Net cash provided by (used) by financing activities 193 (7,273) (7,668) (23,692) ------- ------- ------- ------- Net increase (decrease) in cash 7,272 (3,119) (3,766) 26,190 Cash, beginning 3,359 29,418 14,397 109 ------- ------- ------- ------- Cash, ending $10,631 $26,299 $10,631 $26,299 ======= ======= ======= =======
See notes to consolidated financial statements. 6 VARSITY BRANDS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The condensed consolidated financial statements represent Varsity Brands, Inc. ("Varsity" or the "Company") and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. These statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for fair presentation of the Company's condensed consolidated financial position and the condensed consolidated results of its operations and cash flows at September 30, 2002 and 2001 and for the periods then ended. Certain information and footnote disclosures made in the Company's last Annual Report on Form 10-K have been condensed or omitted for these interim statements. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results to be expected during the remainder of 2002. 2. DISPOSITION OF ASSETS In June 2001, the Company sold its Riddell Group Division to an affiliate of Lincolnshire Management, Inc. ("Lincolnshire"), a private-equity fund. The purchase price, which was determined by an arms-length negotiation, was approximately $67.5 million. The sale was made pursuant to a stock purchase agreement dated April 27, 2001 between the Company and Lincolnshire. The Riddell Group Division included: (i) all of the Company's team sports business, excluding Umbro branded team soccer products, (ii) the Company's licensing segment, which allows third-parties to market certain products using the Riddell and MacGregor trademarks, and (iii) the Company's retail segment, including the New York Executive Office, which managed the retail and licensing segments, and marketed a line of sports collectibles and athletic equipment, principally to retailers in the United States, and to a limited extent internationally. In conjunction with the sale of the Riddell Group Division, the Company recognized a decline in value in its net minority investment in a company that made game uniforms on behalf of the Riddell Group Division. The Company had previously accounted for its investment in the game uniform company using the equity method of accounting. As a result of the sale of the Riddell Group Division and the write-down in the value of its minority investment in the game uniform company, the Company recorded a loss on the sale of the Riddell Group Division of $20.5 million ($16.9 million after tax) in the second quarter of 2001. The net operating results of the Riddell Group Division for the periods ending September 30, 2001 are presented as income from operations of discontinued 7 businesses in the Condensed Consolidated Statements of Operations. Revenues generated by the Riddell Group Division for the nine-month and three-month periods ended September 30, 2001 were $42.4 million and $0.0 million, respectively. In September 2001, the Company settled the litigation that it had brought earlier that year against Umbro Worldwide, Ltd. ("Umbro Worldwide") involving the licensing agreement between the Company and Umbro Worldwide. The license agreement allowed Varsity to sell Umbro branded soccer apparel, equipment and footwear to soccer specialty stores and others in the team channel of distribution, principally in the United States. In connection with the settlement the Company voluntarily terminated its license effective November 30, 2001 in exchange for a lump sum payment to the Company of $5.5 million and Umbro Worldwide's agreement to make certain payments to the Company in the future, including the purchase, for $2.6 million, of certain inventory from the Company. As a result of the early termination of the Umbro license, the Company recognized a gain of approximately $4.9 million ($2.9 million after tax) during the fourth quarter of 2001. The net operating results of the Umbro Division for the periods ended September 30, 2001 are presented in income from discontinued operations of discontinued businesses in the Condensed Consolidated Statements of Operations. Revenues generated by the Umbro division for the nine-month and three-month periods ended September 30, 2001 were $8.6 million and $3.9 million, respectively. 3. EARNINGS PER SHARE Basic earnings (loss) per share amounts have been computed by dividing earnings (loss) by the weighted average number of outstanding common shares. Diluted earnings (loss) per share is computed by adjusting earnings for the effect of the assumed conversion of dilutive securities and dividing the result by the weighted average number of common share and common equivalent shares to dilutive securities. A reconciliation between the numerators and denominators for these calculations follows: Three months ended Nine months ended ------------------ ------------------- September 30, September 30, 2002 2001 2002 2001 ------- ------- ------- -------- NET INCOME EARNINGS (LOSS) - NUMERATOR Net income (loss) $ 9,988 $ 8,718 $12,869 $(10,390) 8 Effect of assumed conversion of convertible debt, when dilutive - interest savings 94 105 282 -- ------- ------- ------- -------- Numerator for diluted per share computation $10,082 $ 8,823 $13,151 $(10,390) ======= ======= ======= ======== SHARES - DENOMINATOR Weighted average number of outstanding common shares 9,488 9,452 9,464 9,452 Weighted average common equivalent shares: Options, assumed exercise of dilutive options, net of treasury shares which could have been purchased from the proceeds of the assumed exercise based on average market prices 197 -- 42 -- Convertible debt, assumed conversion when dilutive 1,697 1,697 1,697 -- ------- ------- ------- -------- Denominator for diluted per share computation 11,382 11,149 11,203 9,452 ======= ======= ======= ======== INCOME FROM CONTINUING OPERATIONS INCOME FROM CONTINUING OPERATIONS - NUMERATOR Income from continuing operations $ 9,988 $ 5,853 $12,729 $ 6,403 Effect of assumed conversion of convertible debt, when dilutive - interest savings 94 105 282 315 ------- ------- ------- -------- Numerator for diluted per share computation $10,082 $ 5,958 $13,011 $ 6,718 ======= ======= ======= ======== SHARES - DENOMINATOR Weighted average number of outstanding common shares 9,488 9,452 9,464 9,452 9 Weighted average common equivalent shares: Options, assumed exercise of dilutive options, net of treasury shares which could have been purchased from the proceeds of the assumed exercise based on average market prices 197 -- 42 -- Convertible debt, assumed conversion when dilutive 1,697 1,697 1,697 1,596 ------- ------- ------- -------- Denominator for diluted per share computation 11,382 11,149 11,203 11,048 ======= ======= ======= ======== For the nine months ended September 30, 2001, potentially dilutive securities, which include convertible debt and common stock options, were not dilutive and were excluded from the computation of diluted earnings per share. 4. RECEIVABLES Accounts receivable include unbilled shipments of approximately $1,704,000, $610,000 and $1,636,000 at September 30, 2002, December 31, 2001 and September 30, 2001, respectively. It is the Company's policy to record revenues when the related goods have been shipped. Unbilled shipments represent receivables for shipments that have not yet been invoiced. These amounts relate principally to partial shipments to customers who are not invoiced until their order is shipped in its entirety or customers with orders containing other terms that require a deferral in the issuance of the invoice. Management believes that substantially all of these unbilled receivables will be invoiced within the current sales season. 5. INVENTORIES Inventories consist of the following: (In thousands) September 30, December 31, September 30, 2002 2001 2001 ----------------------------------------- Finished goods $6,111 $5,904 $6,893 Raw materials 3,432 1,959 2,255 ----------------------------------------- $9,543 $7,863 $9,148 ========================================= 6. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest was $3,530,000 and $6,780,000 for the three-month periods ended September 30, 2002 and 2001, respectively, and $7,914,000 and $14,349,000 for the nine-month periods ended September 30, 2002 and 2001, respectively. During the nine months ended September 30, 2001, the Company received an income tax refund of approximately $1,500,000 related to a carry back of net operating losses of its Varsity Spirit Corporation subsidiary for periods preceding the 1997 acquisition of Varsity Spirit Corporation. This tax refund had been recorded as a receivable at the time of the acquisition. Other income tax payments, or refunds, were not significant for the three and nine month periods ended September 30, 2002. 10 7. INCOME TAXES Operating results from continuing operations for the three-month and nine-month periods ended September 30, 2002 reflect a tax expense based on the anticipated effective annual tax rate for 2002. The anticipated effective annual tax rate is estimated based on remaining net operating loss carryforwards and anticipated income and non-deductible expenses for the year. The actual tax rate for the year could vary substantially from the anticipated rate due to the use of these estimates. Operating results from continuing operations for the nine month period ended September 30, 2001 reflect a tax expense based on the anticipated effective annual tax rate for 2001. 8. SEGMENT INFORMATION Net revenues and income or loss from operations for the Company's two reportable segments are as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ -------------------- 2002 2001 2002 2001 ------- ------- -------- -------- (In thousands) (In thousands) Net revenues: Uniforms and accessories $32,913 $32,049 $ 80,614 $ 76,030 Camps and events 28,283 28,077 56,645 54,766 ------- ------- -------- -------- Consolidated total $61,196 $60,126 $137,259 $130,796 ======= ======= ======== ======== Income from operations Uniforms and accessories $ 8,434 $ 7,314 $ 15,325 $ 12,798 Camps and events 4,582 4,920 5,794 5,872 Corporate and unallocated expenses (363) (443) (1,351) (1,506) ------- ------- -------- -------- Consolidated total $12,653 $11,791 $ 19,768 $ 17,164 ======= ======= ======== ======== 9. ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 was effective January 1, 2002. Under the new rules, goodwill and indefinite lived intangible assets will no longer be amortized, but will be reviewed annually for impairment. Intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. 11 The adoption of SFAS No. 142 requires that an initial impairment assessment be performed on all goodwill and indefinite lived intangible assets. The Company completed its initial evaluation of its goodwill in accordance with the provisions of SFAS No. 142 as of January 1, 2002 and has determined that, at present, goodwill was not impaired and there is no change in its carrying value or corresponding charge to the Company's earnings. Fair values were derived using cash flow analysis. The assumptions used in this cash flow analysis were consistent with the Company's internal planning. The adoption of the new standard will benefit earnings beginning in 2002 by approximately $1.9 million in reduced goodwill amortization. The Company will continue to evaluate the carrying value of its goodwill in accordance with SFAS No. 142. The Financial Accounting Standards Board has issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 will be effective January 1, 2003. The new rules apply to all entities that have legal obligations associated with the retirement of a tangible long-lived asset. The entity should recognize a liability for an asset retirement obligation if (a) the entity has a duty or responsibility to settle an asset retirement obligation, (b) the entity has little or no discretion to avoid the future transfer or use of the assets, and (c) the transaction or other event obligating the entity has occurred. The Company does not believe this pronouncement will have a material impact on its financial statements. Effective January 1, 2002, the Financial Accounting Standards Board issued SFAS No. 144, "Impairment or Disposal of Long-Lived Assets." Under the provisions of SFAS No. 144, an entity should recognize an impairment loss if the carrying amount of a long-lived asset or asset group if it is not recoverable and exceeds its fair value. An entity must test an asset or asset group for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. SFAS No. 144 also includes criteria for classifying a long-lived asset or asset group as held for sale. Assets held for sale must be shown at the lower of its carrying amount or fair value less cost to sell. The Company does not believe SFAS No. 144 will have a material impact on its financial statements. Effective January 1, 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses the accounting and reporting for costs associated with exit or disposal activities. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. 12 10. SUBSEQUENT EVENTS On November 1, 2002, the Company's convertible debt holder elected to receive their scheduled $1,375,000 debt repayment. The debt holder did not elect to exercise their right to convert this repayment into equity. 11. RECLASSIFICATION OF PRIOR PERIODS Certain prior period balances have been reclassified to conform to current year presentation. 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Overview and seasonality In June 2001, the Company sold its Riddell Group Division ("RGD") to an affiliate of Lincolnshire Management, Inc., a private-equity fund. In conjunction with this sale, the Company wrote down its net minority investment in an entity that provided game uniforms to RGD. As a result of these two transactions, the Company recorded a loss of $20.5 million ($16.9 million after tax). In September 2001, the Company settled the litigation that had been brought earlier that year against Umbro Worldwide, Ltd. ("Umbro Worldwide") involving its licensing agreement between the Company and Umbro Worldwide. In connection with the settlement and in exchange for an upfront payment and Umbro Worldwide's agreement to make certain additional payments to the Company, the Company voluntarily agreed to terminate its license effective November 30, 2001. The Company recorded the transaction during the fourth quarter of 2001, establishing the reserves necessary to record the purchase of inventory by Umbro Worldwide. In April 2002, the Company received a Settlement Agreement from Umbro Worldwide in which the final selling price of the Umbro-related inventory was set at $2.6 million. RGD's and Umbro's operating results are shown as income from operations of discontinued businesses in the Condensed Consolidated Statements of Operations. RGD included: (i) all of the Company's Team Sports business, excluding Umbro branded team soccer products, (ii) the Company's licensing segment, which allowed third-parties to market certain products using the Riddell and MacGregor trademarks, and (iii) the Company's retail segment, which marketed a line of sports collectibles and athletic equipment to retailers. The Umbro operations that were discontinued as a result of the termination of the license with Umbro Worldwide included sales of Umbro branded soccer apparel, equipment and footwear to soccer specialty stores and others within the team channel of distribution, primarily in the United States. As a result of the sale of RGD and the discontinuance of the Umbro license, the Company's continuing financial results consist of operations within the school spirit industry, including: (i) the design, market and manufacture of cheerleader and dance team uniforms and accessories, (ii) the operation of cheerleading and dance team camps throughout the United States, (iii) the production of nationally televised cheerleading and dance team championships and other special events and (iv) the operation of studio dance competitions and conventions. 14 Operations for the three-month period ended September 30, 2002 resulted in a net income of $10.0 million, or $0.89 per share on a diluted basis, as compared to a net income of $8.7 million, or $0.79 per share on a diluted basis, for the third quarter of 2001. The primary reasons for the increase in net income is increased gross margins realized on uniform and accessories sales combined with a decrease in net interest expense offset by an extraordinary gain realized on the early retirement of senior bonds in the third quarter of 2001. Operating income before interest, taxes, discontinued operations and extraordinary items for the third quarter of 2002 increased $0.9 million, or 7.3%, to $12.7 million from $11.8 million in the third quarter of 2001. For the nine-month period, operating income before taxes, interest, discontinued operations and extraordinary items increased $2.6 million, or 15.2%, in 2002 to $19.8 million from $17.2 million in 2001. The Company benefited from increases in revenues and gross margins and decreases in selling, general and administrative expenses as a percentage of sales, as described in more detail in the discussion which follows this overview. The Company's operations are highly seasonal. In recent years, the Company's operations have been profitable in the second and third quarters, with the third quarter typically the strongest, while losses have typically been incurred in the first and fourth quarters. The factors influencing this seasonal pattern were discussed in the Company's last Annual Report on Form 10-K. The operating results of RGD and the Umbro Division are reported as income from operations of discontinued businesses in the Condensed Consolidated Statements of Operations. The following management's discussion and analysis of financial condition reflects changes occurring in the Company's income from continuing operations, exclusive of the discontinued operations of RGD and the Umbro division. Revenues Revenues for the three-month period ended September 30, 2002 increased by $1.1 million, or 1.8%, to $61.2 million from $60.1 million in the third quarter of 2001. For the nine-month period ended September 30, 2002, revenues increased by $6.5 million, or 4.9%, to $137.3 million from $130.8 million in the first nine months of 2001. Revenues from the sale of uniforms and accessories increased by $0.9 million, or 2.7%, to $32.9 million in the third quarter of 2002 from $32.0 million for the third quarter of 2001. For the nine-month period, uniform and accessories revenues increased by $4.6 million, or 6.0%, to $80.6 million from $76.0 million in 2001. The revenue increase in the third quarter was attributable to overall increases in all product categories. Revenue increases for the nine-month period ended September 30, 2002 are also partially due to increases in uniform sales and product sales at the Company's national championships combined with increased sales of dance and recital wear to the studio dance market. 15 Revenues from camps and events increased by $0.2 million, or 0.7%, to $28.3 million in the third quarter of 2002 from $28.1 million in the third quarter of 2001. For the nine-month period, camps and events revenues increased $1.8 million, or 3.4%, to $56.6 million in 2002 from $54.8 million in 2001. The increase in revenues for the three-month period is attributable to an 1.2% increase in summer camp revenue and a change in the timing of the Co. Dance National Finals from June 2001 to July 2002. These increases are offset by significant decreases in the Company's group tour business, caused by groups either delaying or cancelling their 2002 tours as a result of the events of September 11. The increase in revenues for the nine-month period is also attributable to an increase in the number of participants at the Company's regional and national cheerleading and dance team championships and at the Company's studio dance competitions and conventions, as compared to the prior year. Exclusive of the effects of September 11 on the group tour business, the Company's camps and events segment experienced revenue increases of 2.8% and 6.9%, respectively, for the three and nine month periods ended September 30, 2002. Gross Profit Gross profit for the third quarter of 2002 increased by 3.2% to $25.3 million from $24.5 million in the third quarter of 2001 and for the nine-month period increased by 6.4% to $57.1 million in 2002 from $53.7 million in 2001. Gross margin rates increased by 0.6 percentage points to 41.3% in the third quarter of 2002 from 40.7% in the third quarter of 2001. For the nine-month period, gross margin rates increased to 41.6% in 2002 from 41.1% in 2001. Gross margin rates for the uniforms and accessories segment increased to 50.1% in the third quarter of 2002 from 48.9% in the third quarter of 2001. For the nine-month period the segment's margin rates increased to 48.0% in 2002 from 46.9% in 2001. These increases are a result of the shift in product mix from lower margin campwear and accessories to higher margin manufactured uniforms and special event merchandise combined with manufacturing efficiencies realized through improvements made in the Company's uniform manufacturing process. Gross margin rates for the camps and events segment decreased slightly to 31.0% in the third quarter of 2002 from 31.4% in the third quarter of 2001. For the nine-month period the segment's margin rates decreased to 32.5% in 2002 from 33.0% in 2001. The decrease in the gross margin rate for the third quarter is primarily attributable to higher housing, personnel and program support expenses associated with higher anticipated revenue growth for the Company's summer camp operations. The overall decrease for the nine-month period is primarily due to increased venue and production costs at the Company's special events held during the first quarter of 2002, combined with higher personnel and program support expenses associated with higher anticipated revenue growth for the Company's summer camp operations. 16 Selling, General and Administrative Selling, general and administrative expenses decreased as a percentage of revenues to 20.6% in the third quarter of 2002 from 21.1% in the third quarter of 2001. For the nine-month period, selling, general and administrative expense rates decreased to 27.2% in 2002 from 27.9% in 2001. The improvement is principally due to economies of scale realized by spreading fixed and certain variable administrative expenses over a greater revenue base combined with a reduction in amortization expense as a result of adopting the standards of Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Selling, general and administrative expenses as a percentage of revenues with respect to the uniforms and accessories segment decreased to 24.1% in the third quarter of 2002 from 26.4% in the third quarter of 2001. For the nine-month period the segment's selling, general and administrative expense rate decreased to 28.4% in 2002 from 30.3% in 2001. These gains were due to improved economies of scale and reductions in amortization expense as discussed in the preceding paragraph. Selling, general and administrative expense ratios for the camps and events segment increased to 16.6% in the third quarter of 2002 from 14.6% in the third quarter of 2001. For the nine-month period the segment's selling, general and administrative expense rate increased to 23.2% in 2002 from 22.4% in 2001. The increases in the three-month and nine-month expense ratios are attributable to the segment's slight revenue gains during these periods as compared to changes in the Company's adminstrative expenditures. Specifically, the Company has realized a significant decrease in group tour revenues as a result of the September 11 tragedy, while group tour administrative expenditures have remained relatively flat on a comparative basis. These increases are partially offset by reductions in amortization expense as discussed in the above paragraph. Interest Expense Interest expense for the nine-month period ended September 30, 2001 has been reduced by $3.1 million, as a result of an allocation of interest expense to the discontinued operations of RGD. 17 Interest expense, decreased to $2.0 million in the third quarter of 2002 from $3.0 million in the third quarter of 2001. For the nine-month period ended September 30, 2002, interest expense decreased by $1.4 million to $6.1 million from $7.5 million in the first nine-months of 2001. Total interest expense for the nine-month period decreased by $4.5 million due to lower interest on the senior notes and the revolving line of credit resulting from lower outstanding indebtedness in 2002 as compared to 2001. The net interest expense for the nine-month period ended September 30, 2001 included approximately $250,000 of interest received as part of a federal income tax refund. The refund, which included approximately $1.5 million in taxes, related to a carryback of net operating losses of the Company's Varsity Spirit Corporation subsidiary for periods preceding the 1997 acquisition of Varsity Spirit Corporation and had been recorded as a receivable at the time of acquisition. As a result of the sale of RGD, the Company used a portion of the proceeds received, approximately $32.7 million, to paydown all of the indebtedness then outstanding on its line of credit agreement. (See "Liquidity and Capital Resources" below.) During 2001, the Company used a portion of the net proceeds received from the sale of RGD to repurchase $40.7 million of its 10.5% Senior Notes for a total cost, including commissions, of $32.0 million. In April 2002, the Company repurchased $8.25 million of its 10.5% Senior Notes for a total cost, including commissions, of $7.9 million resulting in an extraordinary gain of $0.1 million, net of taxes. Income Taxes Operating results from continuing operations for the three-month and nine-month periods ended September 30, 2002 include an income tax expense based on the anticipated effective annual tax rate for 2002. The anticipated effective annual tax rate is estimated based on the expected utilization of remaining net operating loss carryforwards and anticipated income and non-deductible expenses for the year. The actual tax rate for the year could vary substantially from the anticipated rate due to the use of these estimates. Operating results from continuing operations for the nine-month period ended September 30, 2001 reflected a tax expense based on the anticipated effective annual tax rate for 2001. 18 Liquidity and Capital Resources The seasonality of the Company's working capital needs is impacted by three key factors. First, a significant portion of the Company's products are shipped during the late spring, summer and early fall period, with the related receivables being paid when the school year begins during the following July to October period. Second, the Company incurs costs related to the Company's summer camp business during the first and second quarters as the Company prepares for the upcoming camp season, while camp revenues are mostly collected in the June to August period. Lastly, the Company's debt structure impacts working capital requirements, as the semi-annual interest payments on the Company's 10.5% Senior Notes come due each January and July. To finance these seasonal working capital demands, the Company maintains a credit facility in the form of a $15 million revolving line of credit. Historically, the outstanding balance on the credit facility usually follows the seasonal cycles described above, increasing during the early part of the operating cycle in the first and second quarters of each year and then decreasing from the middle of the third quarter and into the fourth quarter as collections are used to reduce the outstanding balance. Such seasonality should continue in the future. There were no outstanding balances due under the credit facility as of September 30, 2002 and 2001. In April 2002, in accordance with the terms of the Company's debt instruments, including the Indenture in respect of its 10.5% Senior Notes, the Company used $7.9 million aggregate net proceeds received in the Umbro settlement to repurchase $8.25 million aggregate principal amount of its Senior Notes. As a result of this transaction, the Company recognized an extraordinary gain, before related income taxes, of $0.2 million. Had the Company not used the proceeds from the Umbro settlement to repurchase the Senior Notes, the Company may have had to offer to repurchase a portion of the Senior Notes at par. The Company's current debt service obligations are significant and, accordingly, the Company's ability to meet its debt service and other obligations will depend on the Company's future performance and is subject to financial, economic and other factors, some of which are beyond the Company's control. Furthermore, due to the seasonality of the Company's working capital demands described above, year-over-year growth in the Company's business and working capital requirements could lead to higher debt levels in future periods. Management believes operating cash flow together with funds available from the Company's credit facility will be sufficient to fund the Company's current debt service, seasonal capital expenditures and other working capital requirements. However, many factors, including growth and expansion of the Company's business, could necessitate the need for increased lines of credit or other changes in the Company's credit facilities in the future. 19 Item 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures. Based upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to timely alert them to material information required to be included in the Company's Exchange Act filings. In addition, there have been no changes in internal controls, or in other factors that could significantly affect internal controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. 20 Part II OTHER INFORMATION Item 1. Legal Proceedings The Company from time to time becomes involved in various claims and lawsuits incidental to its business. None of these matters are expected to have a material adverse effect on the Company's consolidated financial statements. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibit index: 99.3 Second Amendment to Second Amended and Restated Loan Guaranty and Security Agreement between Bank America N.A. and Varsity Brands, Inc. 99.4 John M. Nichols Employment Agreement dated as of November 1, 2002 99.5 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.6 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: None 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VARSITY BRANDS, INC. Date: November 14, 2002 By: /s/ Jeffrey G. Webb ---------------------------- President and Chief Executive Officer Date: November 14, 2002 By: /s/ John M. Nichols ---------------------------- Chief Financial Officer and Principal Accounting Officer 22 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION I, Jeffrey G. Webb, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Varsity Brands, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the quarterly report; 4. The registrants's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 23 (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 /s/ Jeffrey G. Webb President Chief Executive Officer 24 CERTIFICATION I, John M. Nichols, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Varsity Brands, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the quarterly report; 4. The registrants's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 25 (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 /s/ John M. Nichols Senior Vice President Chief Financial Officer 26 EX-99.3 3 c26142_ex99-3.txt SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN, GUARANTY AND SECURITY AGREEMENT THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN, GUARANTY AND SECURITY AGREEMENT (the "Amendment"), dated September 6, 2002, is among the financial institutions listed on the signature pages hereof (such financial institutions, together with their respective successors and assigns (provided such assignees satisfy the conditions set forth in Section 13.3 of the Loan Agreement (defined below)), are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), Bank America, N.A., a national banking association, as successor in interest to Bank of America National Trust and Savings Association, a national banking association ("Bank of America") with an office at 6060 Poplar Avenue, Memphis, Tennessee 38119, as agent for the Lenders (in its capacity as agent), together with its successors in its capacity as agent (the "Agent"), Varsity Brands, Inc., a Delaware corporation (f/k/a "Riddell Sports Inc."), with offices at 6745 Lenox Center Court, Suite 300, Memphis, TN 38115 (the "Parent Guarantor"), and each of Varsity Spirit Corporation, a Tennessee corporation ("Spirit"), with offices at 6745 Lenox Center Court, Suite 300, Memphis, TN 38115, Varsity Spirit Fashions & Supplies, Inc., a Minnesota corporation ("Fashions"), with offices at 6745 Lenox Center Court, Suite 300, Memphis, TN 38115, Varsity USA, Inc., a Tennessee corporation ("USA"), with offices at 6745 Lenox Center Court, Suite 300, Memphis, TN 38115, Varsity/Intropa Tours, Inc., a Tennessee corporation ("Intropa"), with offices at 6745 Lenox Center Court, Suite 300, Memphis, TN 38115, and International Logos, Inc., a Tennessee corporation ("Logos"), with offices at 6745 Lenox Center Court, Suite 300, Memphis, TN 38115 (Spirit, Fashions, USA, Intropa and Logos are collectively referred to as the "Borrower"). W I T N E S S E T H WHEREAS, the Lenders, the Agent, the Parent Guarantor, and the Borrower entered into a Second Amended and Restated Loan, Guaranty and Security Agreement dated as of July 23, 2001, as previously amended by that certain First Amendment to Second Amended and Restated Loan, Guaranty and Security Agreement dated November 20, 2001 (the "LOAN AGREEMENT"); and WHEREAS, the Lenders, the Agent, the Parent Guarantor, and the Borrower desire to amend the Loan Agreement to extend the Stated Termination Date to September 15, 2003, to secure the Credit Card Facility with the Collateral, and to reduce the interest rate on Base Rate Loans and to eliminate certain fees, all on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth in this Amendment, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Lenders, the Agent, the Parent Guarantor and the Borrower hereby agree as follows: 1. AMENDED DEFINITIONS. (a) Section 1.1 of the Loan Agreement, "Definitions", is hereby amended to delete the definitions of "Applicable Margin", "Maximum Revolver Amount", "Obligations", and "Stated Termination Date" in their entirety and to substitute the following in lieu thereof: "'Applicable Margin' means, for the period from the date hereof to and including the Stated Termination Date, negative one-quarter percent (negative .25%) for Base Rate Loans and positive two and one-half percent (2 1/2 %) for Letter of Credit Fees." "'Fee Letter' means the letter dated as of the date of this Amendment by and between Bank of America and Borrower with respect to the Agent's Fee." "'Maximum Revolver Amount' means $15,000,000.00 (or such lesser amount to which the Total Facility may be permanently reduced by the Borrower pursuant to SECTION 4.2 hereof); provided, however, that during the term of the Credit Card Facility, and for so long as any sums remain outstanding thereunder, the Maximum Revolver Amount shall not exceed $14,900,000.00 notwithstanding anything in this Agreement to the contrary." "'Obligations' means without duplication all present and future loans, advances, liabilities, obligations, covenants, duties, and debts owing by the Borrower or any other Loan Party to the Agent and/or any Lender, arising under or pursuant to this Agreement or any of the other Loan Documents, or any Hedge Agreement, or the Credit Card Facility, whether or not evidenced by any note, or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment from others), absolute or contingent, due or to become due, primary or secondary, as principal or guarantor, and including, without limitation, all principal, interest, charges, expenses, fees, attorneys' fees, filing fees and any other sums chargeable to the Borrower or any other Loan Party hereunder or under any of the other Loan Documents. "Obligations" includes, without limitation or duplication, all debts, liabilities, and obligations now or hereafter owing from the Borrower to the Agent and/or any Lender under or in connection with the Letters of Credit and includes, without limitation, all interest that would have accrued but for the commencement of any Insolvency Proceeding with respect to any Person." "'Stated Termination Date' means September 15, 2003." (b) Section 1.1 of the Loan Agreement is hereby further amended to add the following definition thereto: "'Credit Card Facility' means that certain credit card facility maintained by Spirit with Bank of America designated by account number #4798-0901-0002-1673 and having a maximum principal indebtedness limit of $100,000.00. Notwithstanding anything in the Loan Agreement to the contrary, the Credit Card Facility shall bear interest and be payable as set forth in the Bank of America, N.A. (USA) Business Card Agreement set forth on EXHIBIT A to the Second 2 Amendment to Second Amended and Restated Loan, Guaranty and Security Agreement which is hereby incorporated herein by reference.'" 2. AMENDMENT OF SECTION 2.1. Section 2.1 of the Loan Agreement, "Total Facility", is hereby amended to delete the last sentence thereof and to substitute the following in lieu thereof. "The Total Facility shall be comprised of a revolving line of credit consisting of revolving loans and letters of credit up to the Maximum Revolver Amount, as described on SECTIONS 2.2 and 2.4, and the Credit Card Facility." 3. AMENDMENT OF SECTION 3.7. Section 3.7 of the Loan Agreement, "Agent's Fee", is hereby amended to delete the words "plus an asset based monitoring fee of $17,000 per year" in the second line thereof. 4. AMENDMENT OF SECTION 9.25. Section 9.25 of the Loan Agreement, "Net Worth," is hereby amended to delete the same in its entirety and to substitute the following in lieu thereof: "The Parent Guarantor will maintain a consolidated Net Worth, determined as of the last day of each calendar quarter, of not less than the amount set forth below for such calendar quarter. The calendar quarter ending 6/30/02 and $8,500,000 plus (i) 75% each subsequent calendar quarter of Parent Guarantor's thereafter. net income, determined in accordance with GAAP, and (ii) 100% of any equity capital contributions to Parent Guarantor, in both cases for the period from 1/01/02 through and including 6/30/02." 5. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. As an inducement to the Agent and Lenders to enter into this Amendment, the Borrower and the Parent Guarantor hereby confirm and affirm to the Agent and the Lenders that except as set forth on EXHIBIT B, which is hereby attached hereto and incorporated herein by reference, the representations and warranties of the Borrower and the Parent Guarantor contained in the Loan Agreement (including without limitation in Articles 6 and 8 thereof) are true and correct in all respects on and as of the date hereof as to each Loan Party with the same effect as though such representations and warranties are made on and as of the date hereof. 6. CONDITIONS TO AMENDMENT. The obligation of the Agent and Lenders to enter into this Amendment renewing the loan facility pursuant to the Loan Agreement and making certain other modifications thereto is subject to the following conditions precedent having been satisfied in a manner satisfactory to the Agent and each Lender as of the date hereof: 3 (a) This Amendment has been executed by each party thereto and each Loan Party shall have performed and complied with all covenants, agreements and conditions contained herein and the other Loan Documents which are required to be performed or complied with by the Borrower before or on the date hereof. (b) Except as set forth on EXHIBIT B, all representations and warranties made under the Loan Agreement and in the other Loan Documents shall be true and correct in all material respects as of the date hereof as if made on the date hereof. (c) No Default or Event of Default shall exist on the date hereof, or would exist after giving effect to the Loans to be made on such date. (d) The Agent and the Lenders shall have received such opinions of counsel for the Loan Parties as the Agent or any Lender shall request, each such opinion to be in a form, scope, and substance satisfactory to the Agent, the Lenders, and their respective counsel. (e) The Borrower shall have paid all fees and expenses of the Agent and the Attorney Costs incurred in connection with this Amendment and any of the Loan Documents and the transactions contemplated thereby to the extent invoiced. (f) The Agent shall have received evidence, in form, scope, and substance, reasonably satisfactory to the Agent, of all insurance coverage as required by this Agreement. (g) The Agent and the Lenders shall have had an opportunity, if they so choose, to examine the books of account and other records and files of the Borrower and to make copies thereof, and to conduct a pre-closing audit which shall include, without limitation, verification of Inventory, Accounts, and Availability, and the results of such examination and audit shall have been satisfactory to the Agent and the Lenders in all respects. (h) The Agent and the Lenders shall have received copies certified as being correct and complete of all documentation related to the Senior Notes, the Subordinated Debt and the Material License Agreements and such documentation shall be satisfactory to the Agent and the Lenders in all respects. (i) All proceedings taken in connection with the execution of this Amendment, all other Loan Documents and all documents and papers relating thereto shall be satisfactory in form, scope, and substance to the Agent and the Lenders. (j) No Material Adverse Effect shall have occurred since the Financial Statements dated June 30, 2002. 7. Execution and delivery to the Agent by a Lender of a counterpart of this Amendment shall be deemed confirmation by such Lender that (i) all conditions precedent in this SECTION 7 have been fulfilled to the satisfaction of such Lender and (ii) the decision of such Lender to execute and deliver to the Agent an executed counterpart of this Agreement was made 4 by such Lender independently and without reliance on the Agent or any other Lender as to the satisfaction of any condition precedent set forth in this SECTION 7. 8. FULL FORCE AND EFFECT; AFFIRMATION OF SECURITY INTERESTS; DEFINED TERMS. Except as expressly modified and amended by this Amendment, all of the terms, covenants and conditions of the Loan Agreement and other Loan Documents are hereby ratified and confirmed and shall continue to be and remain in full force and effect as originally executed. The parties to this Amendment acknowledge and agree that the security interests created pursuant to the Loan Agreement and/or any other Loan Document shall remain in full force and effect and shall constitute the legal, valid, binding and enforceable obligations of each Loan Party, as applicable. Without limiting the foregoing in any way, the parties expressly do not intend to extinguish any security interests created pursuant to the Loan Agreement and/or any other Loan Document. Instead, it is the express intention of the parties to affirm each and every security interest created thereby. Any capitalized term used but not defined in this Amendment shall have the meaning ascribed to it in the Loan Agreement. [SIGNATURE PAGE FOLLOWS.] 5 IN WITNESS WHEREOF, the parties have entered into this Agreement on the date first above written. "PARENT GUARANTOR" VARSITY BRANDS, INC. (F/K/A "RIDDELL SPORTS INC.") By: /s/ John M. Nichols ---------------------------------------------- Title: Chief Financial Officer ------------------------------------------- "BORROWERS" VARSITY SPIRIT CORPORATION By: /s/ John M. Nichols ---------------------------------------------- Title: Chief Financial Officer ------------------------------------------- VARSITY SPIRIT FASHIONS & SUPPLIES, INC. By: /s/ John M. Nichols ---------------------------------------------- Title: Chief Financial Officer ------------------------------------------- VARSITY USA, INC. By: /s/ John M. Nichols ---------------------------------------------- Title: Chief Financial Officer ------------------------------------------- 6 VARSITY/INTROPA TOURS, INC. By: /s/ John M. Nichols ---------------------------------------------- Title: Chief Financial Officer ------------------------------------------- INTERNATIONAL LOGOS, INC. By: /s/ John M. Nichols ---------------------------------------------- Title: Chief Financial Officer ------------------------------------------- "AGENT" BANK OF AMERICA, N.A., AS THE AGENT By: /s/ Thomas Branyan ---------------------------------------------- Thomas Branyan, Senior Vice President "LENDERS" BANK OF AMERICA, N.A., AS A LENDER By: /s/ Thomas Branyan ---------------------------------------------- Thomas Branyan, Senior Vice President 7 EXHIBIT A --------- BANK OF AMERICA, N.A. (USA) BUSINESS CARD AGREEMENT SEE ATTACHED. 8 EXHIBIT B --------- CHANGES TO REPRESENTATIONS AND WARRANTIES SEE ATTACHED. EX-99.4 4 c26142_ex99-4.txt EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made as of November 1, 2002, by and between VARSITY BRANDS, INC., a Delaware corporation (the "Company"), and JOHN M. NICHOLS (the "Executive"). WHEREAS, pursuant to an Employment Agreement dated as of September 1, 1999 (the "Former Agreement"), the Executive was employed as the Senior Vice President and Chief Financial Officer of Varsity Spirit Corporation, a Tennessee corporation ("Varsity Spirit") and, at the time, a wholly owned subsidiary of Riddell Sports, Inc., a Delaware corporation, Varsity Spirit having merged with and into a subsidiary of Riddell Sports, Inc. as of June 20, 1997 (the "Merger Date"); WHEREAS, following such merger, the Executive also served as an executive officer of Riddell Sports, Inc.; WHEREAS, as of September 2001, the corporate name of Riddell Sports, Inc., was changed to Varsity Brands, Inc. and the Company currently operates under such corporate name; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company. NOW, THEREFORE, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive, and the Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. TERM. This Agreement is for a two-year period (the "Term") commencing as of November 1, 2002 (the "Effective Date") and, unless terminated, extended or renewed by the parties, shall expire on October 31, 2004 (the "Expiration Date"). The Company shall notify Executive no later than April 30, 2004 whether it wishes to extend or renew this Agreement, either pursuant to the same or different terms. In the event that the Company shall so notify Executive (the "Extension Notification"), each of the Company and Executive shall seek to renew or extend this Agreement prior to the Expiration Date, upon mutually agreed to terms and conditions. 3. POSITION. During the Term, the Executive shall serve as Senior Vice President and Chief Financial Officer of the Company. 4. DUTIES AND REPORTING RELATIONSHIP. During the Term, the Executive shall, on a full-time basis, use his skills and render services to the best of his abilities in supervising and conducting the financial operations of the Company. As part of his duties the Executive shall be responsible for and have supervisory control over the financial operations of the Company and shall report to, and be subject to supervision by, the Company's Chief Executive Officer. The Executive will also perform such other duties for the Company as are consistent with his position as the Chief Executive Officer shall reasonably assign. Nothing in this Agreement shall be deemed to prevent the Executive from participating in, or serving on (a) the governing body of any civic, community or charitable organization with which the Executive may currently be or hereafter become involved, or (b) the board of directors or governing body of another business entity; PROVIDED, HOWEVER, that such participation or service may not interfere with Executive performing his duties hereunder. 5. PLACE OF PERFORMANCE. The Executive shall perform his duties and conduct his business at the principal offices of the Company in Memphis, Tennessee except for reasonably required travel on the Company's business. 6. INDUCEMENT FOR EMPLOYMENT. (a) The Company has previously granted to the Executive options (the "Options") pursuant to the Company's 1997 Stock Option Plan (the "Plan") to purchase (i) up to 35,000 shares of common stock, $0.01 par value ("Common Stock"), of the Company at an original exercise price of $5.42 per share, (ii) up to 13,500 shares of Common Stock at an original exercise price of $5.375 per share, (iii) up to 10,000 shares of Common Stock at an original exercise price of $3.125 per share, and (iv) up to 10,000 shares of Common Stock at an original exercise price of $4.81 per share, such exercise prices being subject to adjustment as set forth in the respective Options and the Plan. Such Options continue in effect as of the date hereof. (b) The Options are hereby amended by the Company and Executive to provide that such Options each expire on the earlier of the tenth anniversary of the Grant Date or three (3) months following the date the Executive's employment is terminated for any reason other than for Cause. The Options are hereby amended by the Company and Executive to provide that each such Option may be exercised (to the extent it has vested) at any time prior to such expiration; PROVIDED, HOWEVER, that if, (i) prior to the expiration of the Term, the Company terminates the Executive's employment in breach of this Agreement, or (ii) subsequent to the expiration of the Term, the Company terminates the Executive's employment in a manner that would have been a breach of this Agreement had the Term not expired, then the Options shall become fully vested and exercisable and shall remain exercisable for a period of six (6) months following such termination of employment; and, provided further, that, if the Executive's employment is terminated on account of his death or Disability (as defined below), then upon such termination the Options shall become fully vested and exercisable and shall remain exercisable for a period of six (6) months following such termination of employment. The Options shall become fully vested and exercisable upon the occurrence of a Change in Control (defined below) and shall remain exercisable for a period of six (6) months following Executive's termination of employment upon or after a Change of Control. 2 7. SALARY AND ANNUAL BONUS. (a) BASE SALARY. During the Term, the Executive's base salary (the "Base Salary") hereunder shall be no less than Two Hundred Ten Thousand Dollars ($210,000) per year, payable no less often than in monthly installments. The Base Salary shall be subject to review and increase by an amount determined by the Compensation Committee of the Company Board after taking into consideration the Executive's performance, the Company's performance, increases in the cost of living and such other factors as the Company Board or such committee deems relevant, which review shall be conducted no less frequently than once during any calendar year at the same time the Company conducts its review of the compensation of the Company's other senior executive officers. In addition, in the event and to the extent that the Company actually increases the salary of any other executive employees of the Company to take into account an increase in the Consumer Price Index-Urban Consumer as reprinted by the Bureau of Labor Statistics of the U.S. Department of Labor ("CPI") or any superseding index or report whether published by the U.S. Department of Labor or otherwise, Executive's Base Salary shall automatically be similarly increased. (b) ANNUAL BONUS. During the Term, the Executive will participate in any bonus plan established by the Company at a target level of thirty-five percent (35%) of his Base Salary. Such bonus shall be payable at such time as bonuses are paid to other senior executive officers who participate therein. 8. VACATION, HOLIDAYS AND SICK LEAVE. During the Term, the Executive shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior executive officers, which policies shall provide the Executive with (a) benefits no less favorable than those provided to any other senior executive officer of the Company and (b) no fewer than four (4) weeks of paid vacation per year, unless otherwise agreed between the Executive and the Company. 9. BUSINESS EXPENSES. During the Term, the Executive will be reimbursed for all ordinary and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedure; the determination of such reimbursement to also be consistent with the Company's past practices with respect to the Executive. 10. PENSION AND WELFARE BENEFITS. During the Term, the Executive shall be eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements (collectively, the "Employee Benefits") available to officers of the Company generally, which Employee Benefits shall provide the Executive with benefits no less favorable than those provided to any other senior executive officer of the Company. The Executive's service with Varsity Spirit prior to the Merger Date shall be taken into account for the purpose of determining eligibility for participation and vesting (but not benefit accrual) under any such employee plan, program or policy to the same extent that service with the Company is so taken into account for the executives of the Company. 3 11. TERMINATION OF EMPLOYMENT. (a) GENERAL. The Executive's employment hereunder may be terminated without any breach of this Agreement only under the circumstances provided in this paragraph 11(a). (i) DEATH OR DISABILITY. (A) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (B) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall be "Disabled" for any six (6) months (whether or not consecutive) during any twelve (12) month period, the Executive's employment hereunder may thereafter be terminated by the Company for "Disability." For purposes of this Agreement, the Executive shall be deemed to be "Disabled" if, during the period referred to in the immediately preceding sentence (i) his condition is such that it would have qualified him for disability benefits under the Company's long-term disability plan, or (ii) he had a physical or mental disability which rendered him incapable, after the provision of reasonable accommodations, of performing substantially all of his duties hereunder. In the event of a dispute as to whether the Executive is Disabled, the Company may, at its expense, refer him to a licensed practicing physician of the Company's choice and the Executive agrees to submit to such tests and examination as such physician shall deem appropriate. (ii) CAUSE. The Executive's employment hereunder may be terminated for Cause. For purposes of this Agreement, "Cause" shall mean (A) gross neglect by the Executive of the Executive's duties hereunder, (B) conviction of the Executive of any felony, (C) gross or intentional misconduct by the Executive in connection with the performance of any material portion of the Executive's duties hereunder, or (D) breach by the Executive of any material portion of this Agreement (including, but not limited to, Sections 15, 16 and 17 hereof) or of any other material agreement between the Executive and the Company. (iii) VOLUNTARY RESIGNATION. Should the Executive wish to resign from his position provided for herein or terminate his employment other than in connection with, or following, a Change in Control during the Term, the Executive may do so by giving sixty (60) days' written notice to the Company setting forth the reasons and specifying the date as of which his resignation is to become effective. (iv) CHANGE IN CONTROL. The Executive shall be entitled to terminate his employment upon the occurrence of, or any time after, a Change in Control. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of any of the following: (a) a majority of the members of the Company Board are representatives or designees of any "Person" or "Group" (as such terms are used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), excluding Robert E. Nederlander, Leonard Toboroff and John McConnaughy, Jr. and/or entities controlled by such individuals (collectively, the "Nederlander/Toboroff/McConnaughy Group"), provided that any such representatives or 4 designees of the Nederlander/Toboroff/McConnaughy Group shall be their good faith, bona fide representatives and designees who are not otherwise nominated in contemplation of or in connection with a transaction that would otherwise constitute a Change in Control hereunder; it being understood that it shall not be deemed to be a Change in Control if no Person or Group shall have designated or nominated a majority of the members of the Company Board; (b) any "Person" or "Group" is or becomes the "beneficial owner" (as defined in Rule 13D-3 under the Exchange Act as in effect on the date hereof, except that a person shall be deemed to be the "beneficial owner" of all shares that any such Person or Group has the right to acquire pursuant to any agreement or arrangement or upon exercise of conversion rights, warrants, options or otherwise, without regard to the sixty (60) day period referred to in such Rule), directly or indirectly, of securities representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities, (c) the Company shall consolidate, merge or exchange securities with any other entity and the stockholders of the Company immediately before the effective time of such transaction do not beneficially own, immediately after the effective time of such transaction, shares entitling such stockholders to a majority of all votes (without consideration of the rights of any class of stock entitled to elect directors by a separate class vote) to which all stockholders of the corporation issuing cash or securities in the consolidation, merger or share exchange would be entitled for the purpose of electing directors, or (d) any Person or Group acquires more than fifty percent (50%) by value of the Company's assets. Notwithstanding anything set forth herein to the contrary, in the event that immediately subsequent to the occurrence of any of the events set forth in Sections 11(a)(iv)(b) through (d), (i) the Company is an entity whose equity securities are registered under Section 12(b) or 12(g) of the Exchange Act, or the Company is a reporting entity under Section 15(d) of the Exchange Act as a result of its outstanding equity securities, and (ii) no Person or Group owns shares of the Company representing more than seventy-five percent (75%) of all shares entitled to vote for the purpose of electing directors (without consideration of the rights of any class of stock entitled to elect directors by a separate class vote), then for purposes of this Agreement, no Change in Control shall be deemed to have occurred. (b) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 21. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (c) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date the Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection 11(a)(ii), (iii) or (iv) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination (which shall not be less than thirty (30) days from the date such Notice of Termination is given in the case of a termination under Section 11(a)(ii) hereof (other than Section 11 (a)(ii)(B), in which event, notice shall not be less than five (5) days), sixty (60) days in the case of a termination under Section 11(a)(iii) hereof, and ten (10) days in the case of a 5 termination under Section 11(a)(iv) hereof). The Agreement shall not be terminated under Subsections 11(a)(ii)(A), (C) or (D) if the Executive cures such breach prior to the effective date of termination set forth in the Notice of Termination. (d) OUTPLACEMENT SERVICES. If, (i) prior to the expiration of the Term, the Company terminates the Executive's employment in breach of this Agreement or the Executive terminates his employment upon or following a Change in Control, or (ii) subsequent to the expiration of the Term, the Company terminates the Executive's employment in a manner that would have been in breach of this Agreement had the Term not expired or the Executive terminates his employment upon or following a Change in Control had the Term not expired, then the Executive shall be entitled to the services of an outplacement firm for a period of six (6) months following such termination, which outplacement firm shall be selected by the Executive and the reasonable fees and expenses for which shall be paid by the Company. 12. COMPENSATION DURING DISABILITY, OR UPON DEATH OR OTHER TERMINATION. (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, the Executive shall continue to receive (i) his full salary at the rate then in effect until his employment is terminated pursuant to Section 11(a)(i)(B) hereof and (ii) a pro rata portion of his bonus that would have been payable pursuant to Section 7(b) above with respect to the calendar year in which the termination pursuant to Section 11(a)(i)(B) occurs provided that such payments shall be reduced by the sum of the amounts, if any, paid to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any amounts due to the Executive under Section 7 through the Date of Termination (including a pro rata portion of his bonus, if any, that would have been payable pursuant to Section 7(b) above with respect to the calendar year in which the termination occurs) and (ii) his Base Salary that would have become due (and at the time such amounts would have become due) to the Executive under Section 7 had the Executive's employment hereunder continued for a period of one year after the Date of Termination. (c) If the Executive's employment shall be terminated by the Company for Cause, or by the Executive other than upon or following a Change in Control, the Company shall pay the Executive his full Base Salary, under Section 7, and benefits through the Date of Termination as in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement, except as otherwise provided, including Section 16. (d) If the Company shall terminate the Executive's employment in breach of this Agreement, then (A) the Company shall pay the Executive (x) his full salary, under Section 7, through the Date of Termination at the rate in effect at the time Notice of 6 Termination is given, (y) all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due and (z) a pro rata portion of the bonus that would have been payable to the Executive pursuant to Section 7(b) above with respect to the calendar year in which the Date of Termination occurs had the Executive's employment not terminated at the time such bonus would otherwise have become payable; and (B) the Company shall also (i) pay to Executive on the Date of Termination a lump sum payment equal to fifty percent (50%) of Executive's Base Salary then in effect plus fifty percent (50%) of his bonus, if any, relating to the calendar year immediately preceding the Date of Termination, and (ii) pay to Executive his Base Salary then effect plus his bonus, if any, relating to the calendar year immediately preceding the Date of Termination, in eighteen (18) equal monthly installments commencing on the Date of Termination; and (C) the Company shall, on terms no less favorable to the Executive than if the Executive had continued in the employ of the Company, (x) continue coverage for the Executive under the Company's life insurance, medical, health, disability and similar welfare benefit plans (or, if continued coverage is barred under such plans, the Company shall provide to the Executive substantially similar benefits) for the period beginning on the Date of Termination and continuing for eighteen (18) months thereafter (the "Continuation Period"), and (y) provide the benefits which the Executive would have been entitled to receive pursuant to any supplemental retirement plan maintained by the Company had his employment continued at the rate of compensation specified herein for the Continuation Period. Benefits otherwise receivable by the Executive pursuant to clause (x) of this Subsection 12(d)(C) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer (at such subsequent employer's expense) during the Continuation Period, and the Executive shall report any such benefits actually received to the Company. (e) If (i) the Executive shall terminate his employment upon a Change in Control, (ii) the Company shall terminate the Executive's employment upon a Change in Control, (iii) the Company shall consummate a "Change in Control Transaction" (as that term is defined in Section 12(e)(C) below) at any time during or after the expiration of this Agreement, discussions with respect to which commenced during the Term of this Agreement, and the Company had given the Extension Notification, or (iv) the Company shall consummate a Change in Control Transaction at any time during the Term of this Agreement or within six (6) months after the expiration of this Agreement, discussions with respect to which commenced during the Term of this Agreement, and the Company did not give the Extension Notification; then (A) the Company shall pay the Executive (x) his full Base Salary, under Section 7, through the Date of Termination at the rate in effect at the time Notice of Termination is given, (y) all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due and (z) a pro rata portion of the bonus that would have been payable to the Executive pursuant to Section 7(b) above with respect to the calendar year in which the Date of Termination occurs had the Executive's employment not terminated at the time such bonus would otherwise have become payable; and 7 (B) the Company shall also pay to Executive (i) in a lump sum due on the Date of Termination, an amount equal to the sum of the Executive's annual Base Salary then in effect plus Executive's bonus, if any, relating to the calendar year immediately preceding the Date of Termination; (ii) an amount equal to forty percent (40%) of Executive's Base Salary as of the Date of Termination plus forty percent (40%) of Executive's bonus, if any, relating to the calendar year immediately preceding the Date of Termination in twelve (12) equal monthly installments commencing as of the Date of Termination and ending on the one (1) year anniversary thereof, and (iii) an amount equal to ten percent (10%) of the Executive's Base Salary as of the Date of Termination plus ten percent (10%) of Executive's bonus, if any, relating to the calendar year immediately preceding the Date of Termination in twelve (12) equal monthly installments commencing on the thirteenth (13th) month following the date of Termination and ending on the twenty-fourth (24th) month thereafter. (C) It is expressly understood and agreed that notwithstanding anything set forth herein to the contrary, in the event that Executive, upon a transaction that constitutes a Change in Control (the "Change in Control Transaction"), continues to be employed by the Company (or its successor-in-interest, if applicable), then Executive shall not be entitled to receive any of the consideration referred to in Section 12(e)(A) or Section 12(e)(B) above solely with respect to such Change in Control Transaction; PROVIDED, HOWEVER, that Executive shall be entitled to receive the consideration referred to in Section 12(e)(A) and 12(e)(B) above, in accordance with the terms and conditions thereof, pursuant to any subsequent, separate event that constitutes a Change in Control following the consummation of the Change in Control Transaction. (D) the Company shall, on terms no less favorable to the Executive than if the Executive had continued in the employ of the Company, (x) continue coverage for the Executive under the Company's life insurance, medical, health, disability and similar welfare benefit plans (or, if continued coverage is barred under such plans, the Company shall provide to the Executive substantially similar benefits) for the Continuation Period, and (y) provide the benefits which the Executive would have been entitled to receive pursuant to any supplemental retirement plan maintained by the Company had his employment continued at the rate of compensation specified herein for the Continuation Period. Benefits otherwise receivable by the Executive pursuant to clause (x) of this Subsection 12(e)(D) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer (at such subsequent employer's expense) during the Continuation Period, and the Executive shall report any such benefits actually received to the Company; and (E) the parties agree that any payments to Executive under this Section 12(e) which are contingent upon a Change in Control be limited to the maximum amount which would not result in the payment to Executive of an "excess parachute payment" (within the meaning of Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended (the "Code")), it being the intent of the parties that all payments to Executive hereunder be fully deductible by the Company and that Executive not be subject to any excise tax under Code Section 4999. The Company and Executive agree that prior to the payment to Executive of any amounts which are contingent upon a Change in Control, the Company's regular outside auditor 8 shall review the payments and advise the Company and the Executive as to the amount of such payments, if any, which will constitute excess parachute payments. (f) In the event of the expiration of this Agreement, the Company shall pay (i) any amounts due to the Executive under Section 7 through the date of such expiration (including a pro rata portion of his bonus that would have been payable pursuant to Section 7(b) above with respect to the calendar year in which the expiration occurs) and (ii) all such amounts that would have become due (and at the time such amounts would have become due) to the Executive under Section 7 had the Executive's employment hereunder continued for a period of one year after the date upon which such expiration of employment occurred. In addition, the Company shall, on terms no less favorable to the Executive than if the Executive had continued in the employ of the Company, (x) continue coverage for the Executive under the Company's life insurance, medical, health, disability and similar welfare benefit plans (or, if continued coverage is barred under such plans, the Company shall provide to the Executive substantially similar benefits) for the Continuation Period, and (y) provide the benefits which the Executive would have been entitled to receive pursuant to any supplemental retirement plan maintained by the Company had his employment continued at the rate of compensation specified herein for the Continuation Period. Benefits otherwise receivable by the Executive pursuant to clause (x) of this Subsection 12(f) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer (at such subsequent employer's expense) during the Continuation Period, and the Executive shall report any such benefits actually received to the Company. 13. REPRESENTATIONS. (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. 14. SUCCESSORS; BINDING AGREEMENT. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets thereof to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, 9 distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live all such amounts shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. CONFIDENTIALITY. The Executive covenants and agrees that he will not at any time during and after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) of the Company. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company or its subsidiaries, which information is not generally known to the public or to the businesses in which the Company or its subsidiaries are engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. 16. NONCOMPETITION. During his employment with the Company or any of its affiliates, and for the Continuation Period, which, in the event of a termination or expiration of this Agreement as a result of a Change in Control shall be deemed to be an additional six (6) months (the "Noncompete Period"), the Executive shall not, directly or indirectly, enter the employ of, or render any services to, any person, firm or corporation engaged in any business which competes in the business conducted or engaged in by the Company (during the Term or on the Date of Termination, as the case may be) (the "Business") including, but not limited to, any business which provides products and services to the school spirit industry (including but not limited to design, marketing or sales of cheerleader, dance team and booster club uniforms and accessories and design, operation or marketing of cheerleader and dance team camps, clinics, competitions or tours); and the Executive shall not become interested in any such business, directly or indirectly, as an individual, partner, shareholder, director, officer, principal, agent, employee, trustee, consultant, or in any other relationship or capacity; PROVIDED, HOWEVER, that (A) nothing contained in this Section 16 shall be deemed to prohibit the Executive from acquiring, solely as an investment, up to five percent (5%) of the outstanding shares of capital stock of any public corporation; and (B) if any compensation due to the Executive under Section 12 hereof is not paid, the Noncompete Period shall terminate upon failure to cure such non-payment after fifteen (15) days' notice (which termination shall not relieve the Company of its obligation to pay any amounts due hereunder). Notwithstanding anything in this Section 16 and Section 12(c) to the contrary, the foregoing provisions of this Section 16 shall not apply to the Executive after the termination of the Executive's employment unless the Company shall have paid all compensation due to Executive as provided in Section 12 hereof. 17. NONSOLICITATION. During the Noncompete Period, the Executive shall not, directly or indirectly, for his benefit or for the benefit of any other person, firm or entity, do any of the following: (a) solicit from any known potential customer of the Company business of the same or of a similar nature (with respect to the Business) to that which has been the subject of a 10 known written or oral bid, offer or proposal by the Company, or of substantial preparation with a view to making such a bid, proposal or offer, within six (6) months prior to the expiration or Date of Termination hereof; (b) solicit the employment of services of, or hire, any person who, upon the Date of Termination or expiration of the Executive's employment, or within six (6) months prior thereto, was known to be (i) employed by the Company or (ii) a consultant to the Company with respect to the Business; or (c) otherwise directly or indirectly interfere with the Business or accounts of the Company in a manner which directly results in material harm (economic or otherwise) to the Company or any of its affiliates. 18. INDEMNIFICATION. The Company shall indemnify the Executive from and against any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by, or in the right of, the Company), brought to impose a liability or penalty on the Executive in his capacity of director, if applicable, officer, employee or agent of the Company or of any other corporation or entity which he serves as such at the request of the Company, against judgments, fines, amounts paid in settlement and expenses, including attorneys' fees actually and reasonably incurred as a result of such action, suit or proceeding, or any appeal thereof, if he acted in good faith in the reasonable belief that such action was in the best interests of this Company, and in criminal actions or proceedings without reasonable ground for belief that such action was unlawful. The termination of any such civil or criminal action, suit or proceeding by judgment, settlement, conviction or upon a plea of nolo contendere shall not in itself create a presumption that the Executive did not act in good faith in the reasonable belief that such action was in the best interests of the Company or that he had reasonable ground for belief that such action was unlawful. The foregoing rights of indemnification shall apply to the heirs and personal representatives of the Executive and shall not be exclusive of other rights to which he may be entitled. The Company shall advance all costs and expenses of defense as well as any amounts paid in settlement to any party. The Executive shall reimburse the Company for any amounts advanced in his defense or paid on his behalf if it is determined by a final judgment of a court of competent jurisdiction that the Executive's actions were intentionally contrary to the best interests of the Company or intentionally unlawful. It is intended that the indemnity provisions contained in this section shall permit the Company to indemnify the Executive to the fullest extent permitted by law. This indemnification shall survive termination of this Agreement. In no event shall Company's indemnification obligation to the Executive hereunder be less than that provided by the Company to members of the Company Board and other officers of the Company with respect to occurrences while Executive is or was a member of the Company Board or an officer of the Company. 19. ENTIRE AGREEMENT. This Agreement contains all the understandings between the parties hereto pertaining to the matters referred to herein, and supersedes all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto (except this Agreement does not modify the terms of any options or benefit plans referenced in this Agreement except as specifically set forth). The Executive represents that, in executing this 11 Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, basis or effect of this Agreement or otherwise. The Executive further agrees and represents that all promises, representations, understandings, arrangements and prior agreements, including the Former Agreement, between the Executive and the Company are merged into, and are superseded by, this Agreement (except this Agreement does not modify the terms of any options or benefit plans referenced in this Agreement except as specifically set forth). 20. AMENDMENT OR MODIFICATION; WAIVER. No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 21. NOTICES. Any notice to be given hereunder shall be in writing and shall be deemed given when delivered personally, sent by nationally recognized courier service or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: 6745 Lenox Center Court Suite 300 Memphis, TN 38115 To the Company at: Varsity Brands, Inc. 6745 Lenox Center Court Suite 300 Memphis, TN 38115 Attn: Jeffrey G. Webb Any notice delivered personally or by courier under this Section 21 shall be deemed given on the date delivered, any notice sent by nationally recognized courier service shall be deemed given on the second day after being given to the courier service and any notice sent by registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the fifth day after being given to the U.S. mail. 22. SEVERABILITY. If any provision of this Agreement (including without limitation Section 16) or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall 12 not be affected thereby, and each provision hereof shall be validated and shall be enforceable to the fullest extent permitted by law. 23. SURVIVORSHIP. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 24. GOVERNING LAW; SPECIFIC PERFORMANCE; CERTAIN ACKNOWLEDGEMENTS. (a) This Agreement will be governed by and construed in accordance with the laws of the State of Tennessee, without regard to its conflicts of laws principles. (b) The Executive acknowledges that the services to be rendered by him are of a special and unique character which gives this Agreement a peculiar value to the Company, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by him of any of the provisions contained in Sections 15, 16 and 17 hereof will cause the Company irreparable injury. The Executive therefore agrees that the Company shall be entitled, in addition to any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining the Executive from any such violation or threatened violations. (c) The Executive further acknowledges and agrees that due to the uniqueness of his services and confidential nature of the information he will possess, the covenants set forth in Sections 15, 16 and 17 are reasonable and necessary for the protection of the business and goodwill of the Company. 25. NO SET-OFF; MITIGATION. The obligation of the Company to make the payments provided in this Agreement and otherwise to perform its or their obligations hereunder shall not be affected by any set-off, counterclaim, defense, or other claim, right or action which the Company may have or may allege to have against the Executive or others. The Executive shall have no duty to mitigate the amount of any payment provided for in Section 12 herein by seeking other employment, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the date of termination of the Executive's employment with the Company, or otherwise. 26. ARBITRATION. Any dispute arising under or in connection with this Agreement shall be settled exclusively by arbitration in Memphis, Tennessee in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. All costs and expenses of any such arbitration (including all legal fees and expenses incurred by the Executive) shall be borne by the Company; PROVIDED, HOWEVER, that the legal fees and expenses incurred by the Executive shall be borne by the Executive and not by the Company if such arbitration results in a determination (a) in the case of a dispute with respect to termination of the Executive's employment by the Company for Cause or upon Disability, that a proper basis for such termination did exist and appropriate procedures 13 were followed by the Company, or (b) in the case of any other dispute, that the position taken by the Executive was incorrect. 27. LEGAL FEES. Subject to Section 26 hereof, the Company shall pay the Executive all reasonable, documented legal and professional fees and expenses incurred by the Executive in seeking to obtain or enforce any rights provided for under this Agreement, provided that the Company shall not be required to pay any such legal fees or expenses relating to obtaining or enforcing any rights if the Company affords the Executive the rights under this Agreement within ten days after notification from the Executive that the Company is in breach under this Agreement. Any such notification shall set forth in reasonable detail the rights to which the Executive believes he is entitled and the provisions of this Agreement under which he believes afford such rights. 28. HEADINGS. All descriptive headings of sections and paragraphs in this Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 29. WITHHOLDINGS. All payments to the Executive under this Agreement shall be reduced by all applicable withholdings required by Federal, state or local law. 30. COUNTERPARTS; FACSIMILE. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Executed copies of this Agreement sent by facsimile shall have the same effect as originally executed copies of this Agreement. [SIGNATURES ON NEXT PAGE] 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. VARSITY BRANDS, INC. By: /s/ JEFFREY G. WEBB -------------------------------- Name: Jeffrey G. Webb Title: Chief Executive Officer /s/ JOHN NICHOLS ------------------------------------ John M. Nichols 15 EX-99.5 5 c26142_ex99-5.txt EXHIBIT 99.5 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 ------------------------------------- I, Jeffrey G. Webb, President and Chief Executive Officer of Varsity Brands, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2002 /s/ Jeffrey G. Webb President Chief Executive Officer EX-99.6 6 c26142_ex99-6.txt EXHIBIT 99.6 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 ------------------------------------- I, John M. Nichols, Chief Financial Officer of Varsity Brands, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 3) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 4) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2002 /s/ John M. Nichols Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----