-----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, SSX53mgQBBH0lacZL9a97Grpzlk4yzOkKXorSuIg5vNYiF+vt7FESt4rX7nihEDX +3KJO9fKcDC4KM5drB2oOg== 0000950144-96-005268.txt : 19960903 0000950144-96-005268.hdr.sgml : 19960903 ACCESSION NUMBER: 0000950144-96-005268 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARSITY SPIRIT CORPORATION CENTRAL INDEX KEY: 0000881887 STANDARD INDUSTRIAL CLASSIFICATION: 2330 IRS NUMBER: 621169661 STATE OF INCORPORATION: TN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19790 FILM NUMBER: 96609653 BUSINESS ADDRESS: STREET 1: 2525 HORIZON LAKE DR STREET 2: SUITE 1 CITY: MEMPHIS STATE: TN ZIP: 38133 BUSINESS PHONE: 9013874300 MAIL ADDRESS: STREET 1: PO BOX 341609 CITY: MEMPHIS STATE: TN ZIP: 38184-1609 10-Q 1 VARSITY SPIRIT CORPORATION FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ............ to ............ Commission file number 0-19790 Varsity Spirit Corporation ----------------------------------------------------- (Exact name of registrant as specified in its charter) Tennessee 62-1169661 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2525 Horizon Lake Drive, Suite 1, Memphis, TN 38133 (Address of principal executive offices) (Zip Code) (901)387-4300 (Registrant's telephone number, including area code) 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of shares of Registrant's Common Stock, $.01 par value, outstanding at July 31, 1996: 4,528,707. 1 2 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES INDEX
Page ---- Part I: Financial Information: Item I: Consolidated Financial Statements Balance Sheets 3 Statements of Income (Unaudited) 4 Statements of Cash Flows (Unaudited) 5 Statements of Stockholders' Equity (Unaudited) 6 Notes to Consolidated Financial Statements 7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II: Other Information Item 6: Exhibits and Reports on Form 8-K 15 Signatures 16
2 3 PART I: FINANCIAL INFORMATION; ITEM I: FINANCIAL STATEMENTS VARSITY SPIRIT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
(Unaudited) (Unaudited) (IN THOUSANDS) June 30,1996 Dec.31, 1995 June 30,1995 ------------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,323 $ 5,080 $ 1,280 Accounts receivable, less allowance of 10,495 6,370 10,542 $200, $170, and $175 Inventories (Note 4) 7,066 4,926 6,939 Prepaid expenses (Note 5) 7,247 2,272 5,696 Deferred sales (Note 6) 7,353 280 5,683 Refundable income taxes --- 383 --- Deferred tax benefit 208 176 168 --- --- --- TOTAL CURRENT ASSETS 33,692 19,487 30,308 PROPERTY AND EQUIPMENT, less accumulated 3,685 3,127 2,971 depreciation GOODWILL/OTHER (Note 12) 8,887 6,629 6,464 ----- ----- ---- TOTAL ASSETS $46,264 $29,243 $39,743 ======= ======= ======= CURRENT LIABILITIES: Accounts payable $ 7,610 $ 1,678 $ 8,041 Notes payable (Note 7) 250 --- --- Accruals: Compensation/payroll taxes 1,624 266 1,457 Income taxes 569 167 818 Other 194 99 180 Customer Deposits 9,276 2,065 7,504 Curr. mat. of long-term debt (Note 12) 120 --- --- --- --- --- TOTAL CURRENT LIABILITIES 19,643 4,275 18,000 DEFERRED INCOME TAXES 190 174 143 LONG-TERM DEBT (NOTE 12) 480 --- --- --- --- --- TOTAL LIABILITIES 20,313 4,449 18,143 SHAREHOLDERS' EQUITY (Note 10) Preferred stock --- --- --- Common stock 47 47 47 Additional paid-in-capital 13,718 13,523 13,193 Exc. of purch. price over pred. basis (2,517) (2,517) (2,517) Retained earnings 14,736 13,777 10,915 ------- ------- ------- 25,984 24,830 21,638 Treasury stock (33) (36) (38) ---- ---- ---- TOTAL EQUITY 25,951 24,794 21,600 ------- ------- ------- TOTAL LIABILITIES AND EQUITY $46,264 $29,243 $39,743 ======= ======= =======
See accompanying notes to the consolidated financial statements (unaudited). 3 4 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Six Months Ending June 30, Ending June 30, 1996 1995 1996 1995 ---- ---- ---- ---- REVENUES: Uniforms and accessories $20,186 $18,907 $22,463 $21,032 Camps and events 9,467 8,894 13,606 10,847 ------- ------- ------- ------- 29,653 27,801 36,069 31,879 COSTS OF REVENUES: Uniforms and accessories 10,748 9,933 12,366 11,382 Camps and events 6,357 6,660 9,451 7,939 ------- ------- ------- ------- 17,105 16,593 21,817 19,321 GROSS PROFIT 12,548 11,208 14,252 12,558 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 7,844 7,212 12,094 10,910 ------- ------- ------- ------ Operating income 4,704 3,996 2,158 1,648 OTHER INCOME (EXPENSE) (15) (15) 32 61 Income before taxes on income 4,689 3,981 2,190 1,709 TAXES ON INCOME (Note 8) 1,862 1,563 870 677 NET INCOME $ 2,827 $ 2,418 $ 1,320 $ 1,032 ======= ======= ======= ======= NET INCOME PER SHARE $ 0.60 $ 0.52 $ 0.28 $ 0.22 ======= ======= ======= ======= WEIGHTED AVERAGE COMMON SHARES (Note 9) 4,726 4,662 4,715 4,650 ======= ======= ======= =======
See accompanying notes to consolidated financial statements (unaudited). 4 5 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Six Months Ended June 30, 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,320 $ 1,032 Deferred income taxes (16) (2) Depreciation 493 360 Amortization 109 99 Change in operating assets and liabilities, net of business acquired (Note 12): Accounts receivable (11,168) (11,119) Inventories (1,889) (3,052) Prepaid expenses (4,840) (4,283) Refundable income taxes 383 --- Accounts payable 5,679 6,573 Accruals 1,897 1,086 Customer deposits 7,113 6,329 ------- ------- NET CASH USED BY OPERATING ACTIVITIES (919) (2,977) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Varsity USA, Inc. (Note 12) (1,926) --- Purchase of property and equipment (931) (1,395) Increase in other assets (9) (54) --- ---- NET CASH USED BY INVESTING ACTIVITIES (2,866) (1,449) CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid (361) (268) Increase in notes payable 250 --- Proceeds from issuance of common stock 139 95 --- --- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 28 (173) DECREASE IN CASH AND CASH EQUIVALENTS (Note 11) (3,757) (4,599) CASH AND CASH EQUIVALENTS, beginning of period 5,080 5,879 ------- ------- CASH AND CASH EQUIVALENTS, end of period $ 1,323 $ 1,280 ======= =======
See accompanying notes to consolidated financial statements (unaudited). 5 6 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS)
Common Common Additional Excess of Retained Treasury Total stock stock paid-in purchase Earnings stock shares amount capital price over predecessor basis BALANCES, December 31, 4,710 $47 $13,523 ($2,517) $13,777 ($36) $24,794 1995 (Note 10) Net income for the period 1,320 1,320 Issuance of common 136 3 139 stock upon exercise of stock options Tax benefit related to 59 59 exercise of stock options (Note 11) Cash dividend ($.04 per (361) (361) share) BALANCES, June 30, 1996 4,710 $47 $13,718 ($2,517) $14,736 ($33) $25,951 ===== === ======= ======== ======= ===== ======= BALANCES, December 31, 4,699 $47 $13,102 ($2,517) $10,151 ($42) $20,741 1994 (Note 10) Net income for the 1,032 1,032 period Issuance of common 91 4 95 stock upon exercise of stock options Cash dividend ($.03 per (268) (268) share) BALANCES, June 30, 1995 4,699 $47 $13,193 $2,517 $10,915 ($38) $21,600 ===== === ======= ====== ======= ===== =======
See accompanying notes to consolidated financial statements (unaudited). 6 7 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: The interim statements are prepared pursuant to the requirements for reporting on Form 10-Q. The December 31, 1995 balance sheet presented was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The interim financial statements and notes thereto should be read in conjunction with the Company's latest annual report on Form 10-K. In the opinion of management, the interim financial statements reflect all adjustments necessary for a fair presentation of financial position and operating results for the interim periods. The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions that effect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2: The results of operations for the six months ended June 30, 1996 and 1995 are not necessarily indicative of results to be expected for the full year. NOTE 3: The consolidated financial statements include the accounts of Varsity Spirit Corporation and its subsidiaries. All material intercompany accounts and transactions are eliminated. NOTE 4: Inventories are summarized as follows:
(In thousands) (Unaudited) (Unaudited) June 30, December 31, June 30, 1996 1995 1995 ------ ------ ------ Finished Goods $5,035 $3,217 $5,281 Raw Materials 2,031 1,709 1,658 ------ ------ ------ $7,066 $4,926 $6,939 ====== ====== ======
Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method. 7 8 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: Prepaid expenses consist of the following:
(Unaudited) (Unaudited) June 30, December 31, June 30, 1996 1995 1995 ---- ---- ---- Deferred costs: Catalog $ 668 $ 250 $ 495 Camps and clinics 2,070 120 2,275 Championships 98 455 31 Supplies and samples 694 342 300 Commissions 830 164 409 Prepaid tour costs 2,000 339 1,392 Insurance 505 413 512 Other 382 189 282 ------ ------ ------ $7,247 $2,272 $5,696 ====== ====== ======
NOTE 6: Deferred sales consist of shipped uniform and accessory finished goods that have not been invoiced. It is the policy of the Company to reflect the sale in the financial statements during the month in which the finished goods are shipped to the customer, but not to invoice the sale until the customer's entire order has been shipped. NOTE 7: The Company had a $6,000,000 line of credit which expired in July, 1996 and was renewed as a $9,000,000 line of credit which expires July, 1997. As of June 30, 1996, $250,000 was outstanding. No balances were outstanding under the agreement as of December 31, 1995 or June 30, 1995. The agreement requires that the Company maintain certain financial ratios and meet a minimum tangible net worth and bears interest at the lower of prime or LIBOR plus 1%. Weighted average borrowings for the six month periods ended June 30, 1996 and 1995 were $1.3 million and $1.5 million respectively, and the weighted average interest rate for the same periods was 6.47% and 7.09% respectively. NOTE 8: Income taxes have been provided based on the estimated annual effective tax rates for the periods. NOTE 9: For the three months ended June 30, 1996 and 1995, net income per share calculations are based upon weighted average common and equivalent shares outstanding totaling 4,726,000 and 4,662,000, respectively. For the six months ended June 30, 1996 and 1995, net income per share calculations are based upon weighted average common and equivalent shares outstanding totaling 4,715,000 and 4,650,000, respectively. 8 9 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: In February and March 1996, under the Company's 1991 Stock Option Plan, the Company granted options to purchase 172,490 shares of Common Stock to certain officers and employees. These options are designated as incentive stock options. Under the same plan, the Company also granted options to purchase 4,400 shares of Common Stock to certain directors and non-employees. Under the terms of the plan, these options are designated as non-qualified stock options. All options under the plan are exercisable at a price equal to the fair market value on the date of the grant, except for options to purchase 14,000 shares granted to executives owning more than 10% of the Company's voting stock, which are exercisable at a price equal to 110% of the fair market value on the date of grant. Changes in options outstanding are summarized as follows:
Option Price Shares Per Share ------ --------- Outstanding at December 31, 1995 457,508 $ 5.00 - 13.50 Granted 176,890 14.50 - 15.95 Exercised (21,100) 5.00 - 11.83 Cancelled (3,051) 5.00 - 11.83 ------- Outstanding at June 30, 1996 610,347 $ 5.00 - 15.95 =======
As of June 30, 1996, under the Company's 1989 Stock Option Plan, 21,349 options were available for grant and 186,482 options were outstanding. Under the 1991 Stock Option Plan, 157,908 options were available for grant and 423,765 options were outstanding. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") issued by the FASB is effective for fiscal years beginning after December 15, 1995, and encourages companies to adopt a fair value method of accounting for employee stock-based compensation plans and requires such accounting for transactions in which an entity acquires goods or services from non- employees through the issuance of equity instruments. As allowed under the provisions of SFAS No. 123, the Company plans to make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied in its Annual Report dated December 31, 1996. 9 10 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: Supplemental cash flow information is as follows:
Year to Date June 30, 1996 1995 ---- ---- Cash paid for: Income taxes $42 $291 Interest $23 $ 22
Non-cash financing activities: During the six month period ended June 30, 1996, additional paid-in-capital was increased by a reduction in income taxes payable of $59,000, arising from the exercise of stock options. NOTE 12: Effective May 15, 1996, the Company's subsidiary, Varsity USA, Inc., acquired certain of the assets of United Special Events, Inc. ("USA"), an operator of spirit camps with a strong market position in the western region of the United States. Total cash consideration was approximately $2.5 million, of which approximately $1.9 million was paid at closing and $600,000 was issued in the form of a five-year, 8% note payable. The note payable provides for a conversion feature whereby the holder could choose to receive a number of shares of Company common stock as determined using the average of the closing market prices of the Company's stock in the twenty days prior to the acquisition. The acquisition has been accounted for using the purchase method. The purchase price was allocated to assets based on their currently estimated fair values, as follows: (In Thousands) Purchase price, including out-of-pocket expenses $2,526 Current liabilities assumed 368 Current assets (416) Fixed assets (120) Covenant not to compete (120) ---- Cost in excess of assets acquired $2,238 ======
The cost in excess of assets acquired will be amortized over 40 years on a straight-line basis for financial statement purposes. The Company continually evaluates the market coverage and earnings capacity of its acquirees to determine if the unamortized goodwill can be recovered through undiscounted cash flows over the remaining amortization period. Should this evaluation indicate that the goodwill will not be recoverable, the Company's carrying value of the goodwill will be reduced by the estimated short fall of undiscounted cash flows. The USA operations since the date of acquisition have been included in the Company's consolidated results of operations. 10 11 PART I: FINANCIAL INFORMATION ITEM 2: MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Varsity Spirit Corporation (the "Company") sells products and services to the school spirit industry. The Company designs and markets cheerleader, dance team, and booster club uniforms and accessories and operates secondary school, high school, and college cheerleader and dance team camps. The Company promotes its products and services, as well as the school spirit industry, by organizing and producing various nationally televised cheerleading and dance team championships and other special events. Since its December 1994 acquisition of Intropa USA, the Company has also operated a tour business that organizes group travel tours within the United States and abroad, including tours for school spirit groups. In May, 1996, through its subsidiary, Varsity USA, Inc. ("USA"), the Company purchased the camp business of United Special Events, Inc., a California-based company with a strong position in the western region of the United States to complement its existing camp operations. The impact of the operations of USA since the date of acquisition on the Company's financial statements is immaterial for the six months and the three months ending June 30, 1996, as the USA camp operations historically take place later in the summer. The business and results of operations of the Company are highly seasonal. The Company's cheerleader and dance team camps are held almost exclusively in the summer months. Sales of the Company's cheerleader, dance team, and booster club uniforms and accessories primarily occur prior to the beginning of the school year. Most of the group travel tours are planned around performance events; therefore, the revenues from the Company's travel tour activities are also seasonal. Accordingly, a substantial portion of the Company's annual revenues and all of the Company's net income have historically been generated in the Company's quarters ending June 30 and September 30. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 REVENUES Total revenues increased 13.1% to $36.1 million in the six months ended June 30, 1996 from $31.9 million in the six months ended June 30, 1995. Revenues from the sale of uniforms and accessories increased by 6.8% to $22.5 million in the six months ended June 30, 1996 from $21.0 million in the six months ended June 30, 1995. This increase was primarily attributable to a strong increase in shoe and accessory sales. However, sales growth in other product lines was not as significant. The receipt and processing of sales orders has been delayed by training activities necessary to implement a new order entry system and by inclement spring weather in the Midwest and Northeast. Camp and event revenues increased by $2.8 million to $13.6 million, or 25.4% in the six months ended June 30, 1996, as compared to the same period in 1995. The revenue increase was attributable to an increase in the number of participants in the 1996 National High School Dance and Cheerleading Championships as compared to the same events held in 1995. In addition, the Company sponsored two new championships, the All-Star Championship in March 1996 and the National Jumprope Championship in June 1996, which also contributed to the revenue increase. These increases, combined with higher incremental revenues derived from a 15.4% increase in camp participants and a 1.4% increase in average gross tuition per camp participant during the 1996 summer season, were offset by a decrease in revenues generated by Varsity/Intropa Tours, attributable to the timing of current year tours as compared to the prior 11 12 PART I: FINANCIAL INFORMATION ITEM 2: MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS year. The 15.4% increase in camp participants is partially due to the fact that certain camp sessions were scheduled earlier in 1996 as compared to 1995. GROSS PROFIT Gross profit increased by 13.5% to $14.3 million in the six months ended June 30, 1996 from $12.6 million in the six months ended June 30, 1995. Gross profit from the sale of uniforms and accessories as a percentage of such sales decreased to 45.0% in the six months ended June 30, 1996 from 45.9% in the six months ended June 30, 1995. As the largest portion of the sales increase relates to purchased goods such as shoes and accessories, which have lower margins than manufactured goods, a decrease in margin is expected, and the Company expects this shift in mix to continue. In addition, a portion of the decrease in margin results from the writeoff in the first quarter of certain camp store inventory items deemed to be obsolete. Gross profit margins associated with camps and special events increased to 30.5% in the six months ended June 30, 1996 from 26.8% for the six month period ended June 30, 1995. This was primarily due to more efficient staffing at summer camps, resulting in savings in instructor payroll, travel, and training costs. In addition, as the margin generated by the Intropa tour business has historically been lower than that earned on other events, the decrease in Intropa revenues has resulted in an overall increase in margin. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses in the six months ended June 30, 1996 were $12.1 million as compared to $10.9 million in the six months ended June 30, 1995. Selling, general, and administrative expenses as a percentage of sales decreased to 33.5% for the six months ended June 30, 1996 from 34.2% in the six months ended June 30, 1995, primarily due to the economies of scale realized by spreading all of the Company's fixed administrative costs over a greater revenue base. The increase of $1.2 million in selling, general, and administrative costs was primarily due to increases of $721,000 in payroll and personnel costs, including $162,000 in additional selling commissions and related expenses, $150,000 in additional consulting fees, partially associated with the additional championships, and $93,000 attributable to USA personnel. There were also increases of $138,000 of costs associated with the publication and distribution of the annual catalogs and brochures, and $126,000 in additional telephone expenses. Additonal depreciation expense of $133,000, primarily relating to recent acquisitions of computer equipment and software, also contributed to the increase. NET INCOME The net income increased 27.9% to $1.3 million for the six months ended June 30, 1996 as compared to $1.0 million in the same period last year. The increase in income is primarily attributable to an increase of $1.7 million in gross profit, partially offset by an increase of $1.2 million in selling, general, and administrative expenses. The net income per share for the period was $.28 as compared to $.22 for the same period last year. 12 13 PART I: FINANCIAL INFORMATION ITEM 2: MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995 REVENUES Total revenues increased by 6.7% to $29.7 million in the three months ended June 30, 1996 from $27.8 million in the three months ended June 30, 1995. Revenues from the sale of uniforms and accessories increased by 6.8% in the three months ended June 30, 1996, as compared to the same period in 1995, primarily attributable to a strong increase in shoe and accessory sales, However, sales growth in other product lines was not as significant. The receipt and processing of sales orders has been delayed by training activities necessary to implement a new order entry system and by inclement spring weather in the Midwest and Northeast. Camp and event revenues increased 6.4% in the three months ended June 30, 1996 as compared to the same period in 1995, primarily due to higher incremental revenues from a 15.4% increase in camp participants and a 1.4% increase in average gross tuition per camp participant during the 1996 summer season, partially offset by a decrease in revenues generated by Varsity/Intropa Tours, attributable to the timing of current year tours. The 15.4% increase in camp participants was partially due to the fact that certain camps were scheduled earlier in 1996 than in 1995. Revenues from the National High School Cheerleading Championship and the National Jumprope Championship contributed to the increase. GROSS PROFIT Gross profit increased by 12.0% to $12.5 million in the three months ended June 30, 1996 from $11.2 million in the three months ended June 30, 1995. Gross profit from the sale of uniforms and accessories as a percentage of such sales decreased to 46.8% in the three months ended June 30, 1996 from 47.5% in the three months ended June 30, 1995. As the largest portion of the sales increase relates to purchased goods, such as shoes and accessories, which have lower margins than manufactured goods, a decrease in margin is expected, and the Company expects this shift in mix to continue. Gross profit associated with camps and special events increased to 32.9% from 25.1% in the prior year. This was primarily due to more efficient staffing at summer camps, resulting in savings in instructor payroll, travel, and training costs. The increased management fee received for the National High School Cheerleading Championship in June, 1996, which has no associated costs, contributed to the margin increase. Further, as the margin generated by the Intropa tour business has historically been lower than that earned on the Company's other events, the decrease in Intropa revenues has resulted in an overall increase in margin. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses in the three months ended June 30, 1996 were $7.8 million as compared to $7.2 million in the three months ended June 30, 1995. Selling, general, and administrative expenses as a percentage of total revenues increased to 26.5% from 25.9%. The $632,000 increase in expense was primarily due to increases of $374,000 in payroll and personnel costs, including $135,000 in additonal selling commissions and related expenses and $93,000 attributable to USA 13 14 PART I: FINANCIAL INFORMATION ITEM 2: MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS personnel. There were also increases of $127,000 in costs associated with the publication and distribution of the annual catalogs, and $57,000 in additional telephone expenses. Additional depreciation expense of $68,000, primarily relating to recent acquisitions of computer equipment and software, also contributed to the increase. NET INCOME The net income increased 16.9% to $2.8 million for the three months ended June 30, 1996 as compared to $2.4 million in the same period last year. The increase in the income is primarily attributable to an increase of $1.3 million in gross profit, partially offset by an increase of $632,000 in operating expenses. The net income per share for the period was $.60 as compared to $.52 for the same period last year. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1996, the Company's current assets had increased by 72.9% to $33.7 million from $19.5 million as of December 31, 1995, and the Company's current liabilities had increased 359.5% to $19.6 million as of June 30, 1996, as compared to $4.3 million as of December 31, 1995. The related decrease of $1.2 million in working capital is principally attributable to the purchase of $931,000 of equipment and software, the payment of approximately $361,000 in cash dividends, and the investment of $1.9 million in cash to acquire the business of USA. As of June 30, 1996, the Company's cash position decreased compared to December 31, 1995 primarily due to the seasonal buildup of deferred sales and prepaid expenses as well as the aforementioned capital expenditures and cash dividends. Cash used by operating activities for the six months ended June 30, 1996 decreased $2.1 million to $919,000 from the six month period ended June 30, 1995. This decrease was primarily due to an increase in customer deposits, primarily related to Intropa and the acquisition of USA, and a more gradual buildup in inventory levels in the first six months of 1996 as compared to the same period last year. Cash used by investing activities for the six months ended June 30, 1996 increased $1.4 million to $2.9 million from the six month period ended June 30, 1995. This increase was primarily attributable to cash consideration of $1.9 million related to the acquisition of USA, partially offset by a decrease of $464,000 in capital expenditures. As of June 30, 1996, the Company's current assets increased by 11.2% to $33.7 million from $30.3 million as of June 30, 1995. The Company's current liabilities increased by 9.1% to $19.6 million as compared to $18.0 million as of June 30, 1995. The 14.1% improvement in the Company's working capital position from June 30, 1995 to June 30, 1996 is attributable to an increase in deferred sales of $1.7 million, attributable to increased sales volume, as well as increases in prepaid expenses, related to prepaid tour costs and selling commissions. As discussed in the notes to the financial statements, the Company had a $6,000,000 line of credit which expired in July, 1996, and was renewed as a $9,000,000 line of credit which expires July, 1997, with similar terms. Weighted average borrowings for the six month periods ended June 30, 1996 and 1995 were $1.3 million and $1.5 million respectively, and the weighted average interest rate for the same periods was 6.47% and 7.09% respectively. As of June 30, 1996, $250,000 was outstanding under the agreement, but no balances were outstanding as of December 31, 1995 or June 30, 1995. 14 15 VARSITY SPIRIT CORPORATION AND SUBSIDIARIES PART II: OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS Exhibit Number Description ------- ----------- 10(a) Asset Purchase Agreement dated as of May 15, 1996 by and between United Special Events, Inc., Michael Olmstead, and Varsity/USA, Inc. 10(b) Services Agreement dated as of May 15, 1996 between the Company and Michael Olmstead. 10(c) Form of Loan Agreement dated as of July 1, 1996 between the Company and Nationsbank of Tennessee, N.A. 27 Financial Data Schedule (SEC Use Only) B. REPORTS ON FORM 8-K There was no Form 8-K filed by the Company during the six months ended June 30, 1996. 15 16 PART II: SIGNATURES VARSITY SPIRIT CORPORATION AND SUBSIDIARIES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Varsity Spirit Corporation (Registrant) Date 8/13/96 By /S/ Jeffrey G. Webb ------- ----------------------------------------------- Jeffrey G. Webb Chairman, President, and Chief Executive Officer Date 8/13/96 By /S/ John M. Nichols ------- ------------------------------------------------ John M. Nichols Senior Vice President and Chief Financial Officer 16 EX-10.(A) 2 ASSET PURCHASE AGREEMENT 1 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT (the "Agreement"), entered into as of the 15th day of May 1996, by and between UNITED SPECIAL EVENTS, INC., a California corporation ("Seller"), and MICHAEL J. OLMSTEAD, an individual (the "Stockholder"), on the one hand, and VARSITY USA, INC., a Tennessee corporation ("Buyer"), and VARSITY SPIRIT CORPORATION, a Tennessee corporation ("Parent"), on the other hand. WITNESSETH: WHEREAS, Seller is the owner and operator of a business engaged in (i) the organization and operation of camps and clinics for cheerleaders, dance teams, songleaders, drill teams, drum majors, color guards and mascots, and their choreographers, coaches and faculty advisors (such groups being referred to herein as "Spirit Groups" and such camps being referred to herein as "Spirit Camps"), (ii) the organization and operation of competitions and other special events for Spirit Groups, including travel programs and tours for Spirit Groups ("Spirit Events"), and (iii) the designing, marketing, distribution and sale of uniforms, accessories and other goods selected for Spirit Groups (the "Uniform Business" and collectively with Spirit Camps and Spirit Events, the "Business"); WHEREAS, the Stockholder is the owner of all of the issued and outstanding capital stock of Seller; WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, substantially all of the assets utilized in the conduct of the Business, upon the terms and conditions contained herein; WHEREAS, Seller is also engaged in a business consisting of (i) the organization, production and marketing of special events (the "Special Event Business"), including, without limitation, pre-game or intermission shows and similar other forms of entertainment in connection with sporting events, corporate events, civic celebrations, multi-media productions, festivals, fairs, parades and stage productions and the operation of such Special Event Business may include music production, video production, show design, field charting, show direction and event management and (ii) the production and management of cheerleader and dance teams or professional sports teams (the "Pro Cheerleader Business" and together with the Special Event Business, the "Retained Business"), which Retained Business is not being acquired by Buyer and will continue to be operated by Seller subsequent to the consummation of the transactions contemplated hereby; WHEREAS, in connection with the purchase of assets of the Business, Buyer desires to obtain the covenant not-to-compete of Seller and Stockholder and Seller and Stockholder desire to 2 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) enter into a covenant not-to-compete upon the terms and conditions contained herein; and WHEREAS, in connection with the execution of this Agreement, Buyer and Stockholder are entering into a Services Agreement and Buyer is entering into Employment Agreements with certain other of Seller's employees. NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, the parties hereby agree as follows: 1. Assets Sold and Purchased. At the Closing on the Closing Date (as such terms are hereinafter defined), Seller shall, and Stockholder shall cause Seller to, convey, sell, assign, transfer and deliver to Buyer, free and clear of all liens, claims and encumbrances except as specifically permitted herein, all of the Seller's right, title and interest in and to all assets utilized in the conduct of the Business, including without limitation, those assets related to the Business listed on the balance sheet of Seller dated September 30, 1995 (the "1995 Balance Sheet") attached hereto as Annex A and all assets acquired by Seller, or which otherwise arose, in the ordinary course of the Business since September 30, 1995, but excluding those assets disposed of by Seller in the ordinary course of the Business since September 30, 1995 and the Excluded Assets identified in Section 2 hereof (the "Purchased Assets"). The Purchased Assets include, without limitation, the following: (a) The equipment, furniture, signs and trade fixtures used in the Business and listed on Annex B hereto; (b) The inventory of merchandise, office and other goods and supplies that are held for use or consumption in the Business and listed on Annex C hereto (the "Inventory"); (c) The following current assets of Seller: cash on hand or on deposit in or with financial institutions relating to the Business, accounts receivable relating to the Business, employee advances relating to the Business, prepaid expenses relating to the Business, all camp deposits, and security deposits relating to the Business; (d) Any contract with any camp participant, any supplier of Seller or any university or other school at which Seller conducts cheerleader or spirit camps, each to the extent such contract was entered into in the ordinary course of the Business and is not fulfilled by the camp participant, supplier or university or other school on the Closing Date; and (e) The Seller's rights to the name "United Spirit Association" and the acronym "USA" (and all variations and expansions thereof and logos used in connection therewith, except for "USA Productions," which neither Seller nor Buyer shall use or claim any right to use after the Closing) and all other copyrights, trademarks, services marks and trade names identified on Schedule 7(w) hereto, whether used by Seller in the Business, as part of its corporate name or otherwise, and all goodwill, trade names, trademarks, customer lists, franchises, books and records, business accounts, licenses, authorizations, permits, telephone -2- 3 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) numbers and other proprietary information or intellectual property relating to the Business, including but not limited to all rights and interests of Seller in any and all spirit industry trade groups. 2. Excluded Assets. The Seller shall not sell to Buyer and the Buyer shall not purchase from Seller (a) Seller's minute books, stock books and federal, state, local and foreign tax returns which Seller is required to retain (the "Records"), provided, however, that complete copies of such Records shall be provided to Buyer at or prior to the Closing; and (b) any and all assets used by Seller in the operation of its Retained Business and agreed by Buyer and Seller at or prior to the Closing to be properly attributable to the Retained Business (the "Excluded Assets"). 3. Assumption of Liabilities. Buyer is not assuming any liabilities or obligations of Seller or Stockholder (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due and regardless of when asserted, and including without limitation any liability arising out of or from the claims, actions, suits and proceedings identified on Schedule 7(h) hereto or arising under any loan or advance to Seller from Olmstead or any agreement between Seller and Olmstead identified on Schedule 7(q) hereto), except for the following current liabilities of Seller to the extent they are of the same general nature as those reflected on the 1995 Balance Sheet: accounts payable relating to: (i) facilities, meals and conference center charges incurred in connection with the operation of camps in 1995 and (ii) the Business insofar as such payables are of a type and amount customarily incurred in preparation for the immediately upcoming summer camp season; commissions and bonuses payable relating to the Business; sixty percent (60%) of Seller's total general and administrative expenses payable; one hundred percent (100%) of Seller's accrued but unpaid vacation time and other employee benefits relating to the Business; one hundred percent (100%) of Seller's refundable customer deposits relating to the Business; one hundred percent (100%) of those amounts (i) outstanding under the $700,000 line of credit maintained with Silicon Valley Bank and (ii) outstanding under the $50,000 term note maintained with Silicon Valley Bank relating to the purchase of computer equipment, but only to the extent those amounts were incurred solely to discharge obligations or commitments of the Business (together, the "Assumed Secured Liabilities") and sixty percent (60%) of any amount outstanding under the $700,000 line of credit that relate to Seller's general and administrative expenses (collectively, the "Assumed Liabilities"). The Assumed Liabilities shall not include any liability or obligation of Seller or Stockholder (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due and regardless of when asserted) (a) relating to any Welfare Plan or Pension Plan of Seller (as such terms are defined herein), (b) relating to any federal, state, local or foreign individual, corporate or local income tax or any property, sales or other tax, or (c) arising under any statute, law, rule, regulation or ruling relating to the conduct or operation of the Business, the Retained Business or any other activities of Seller prior to the Closing Date, including those relating to environmental, health and safety matters. 4. Purchase Price. Subject to the adjustment described in Section 5, the aggregate consideration payable to Seller and Stockholder (the "Purchase Price") shall be One Million Nine Hundred Fifty Thousand Dollars ($1,950,000.00) plus the assumption of the Assumed Liabilities. -3- 4 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) 5. Payment of Purchase Price. The Purchase Price shall be payable as follows: (a) One Million Three Hundred Fifty Thousand Dollars ($1,350,000.00) minus the aggregate dollar amount on the Closing Date of all indebtedness or other liabilities not included as part of the Assumed Liabilities that are secured by or otherwise encumber the Purchased Assets (the "Unassumed Secured Liabilities") shall be payable at Closing by delivery by Buyer of a bank wire transfer of immediately available funds to such account or accounts designated by Seller; and (b) The full amount of the Unassumed Secured Liabilities shall be payable at Closing by delivery by Buyer of a bank wire transfer of immediately available funds to such account or accounts designated by the person(s) to whom the Unassumed Secured Liabilities are then owed; (c) The full amount of the Assumed Secured Liabilities shall be payable at Closing by delivery by Buyer of a bank wire transfer of immediately available funds to Silicon Valley Bank for allocation to the line of credit and the term note, respectively; and (d) Delivery by Buyer at Closing of an unsecured promissory note in the aggregate principal amount of Six Hundred Thousand Dollars ($600,000.00) (the "Note") made payable to the order of Seller, which Note shall be reduced in principal amount by the product of $100 times any decrease from 1995 to 1996 in the number of summer camp enrollees at camps operated in connection with the Business; provided, however, that the principal amount of the Note shall in no event be reduced by an amount greater than Three Hundred Thousand Dollars ($300,000.00). For purposes of this calculation, the number of enrollees in 1995 was 22,551 and the number of enrollees for 1996 shall be determined as of September 30, 1996 by Buyer in a manner consistent with the method used to determine the 1995 figure; provided, however, that Buyer shall (i) disclose the number to Seller and Stockholder before any adjustment occurs and adjust the figure in good faith based upon Seller's and Stockholder's input and (ii) at all times comply with the terms of Section 10(a) and Section 25 of this Agreement. The Note shall be in the form attached hereto as Annex D. 6. Closing. The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place at 10:00 a.m., on July 11, 1996 (the "Closing Date"), at the offices of Ferrari, Olsen, Ottoboni & Bebb, San Jose, California, or at such earlier or later time or date and such other place as the parties may agree. Notwithstanding the Closing Date provided for above the parties hereto acknowledge their mutual intent to effect the Closing as early as practicable after all the conditions set forth in Section 11 and Section 12 hereof are satisfied. The effective time of the transfer of legal title to the Purchased Assets and the assumption of the Assumed Liabilities shall be as of the close of business on the Closing Date. Except as otherwise provided herein, either party may terminate this Agreement in its entirety if the Closing does not occur on or before July 31, 1996. 7. Representations and Warranties of Seller and Stockholder. Seller and Stockholder, -4- 5 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) jointly and severally, represent and warrant to Buyer that the following are true and correct: (a) Seller is a corporation, duly organized, validly existing and in good standing under the laws of the State of California, and has all necessary corporate powers to own (or hold under lease or license) its properties and assets and to carry on the Business as now conducted. Seller is qualified to transact business in each jurisdiction in which such qualification is necessary, which jurisdictions are set forth in Schedule 7(a) attached hereto. Stockholder is the sole record and beneficial owner of the issued and outstanding capital stock of Seller and, except as set forth in Schedule 7(a) attached hereto, no third party has any rights to buy the stock or assets of Seller, including first refusal, option or similar rights. (b) Seller and Stockholder, as applicable, each have full power and authority to execute, deliver and perform this Agreement and all other documents and agreements contemplated herein and have taken all action required by law, the charter or bylaws of Seller or otherwise, to authorize the execution and delivery of this Agreement and all other documents and agreements contemplated herein and to consummate the transactions contemplated hereby and thereby. (c) Seller neither owns or holds the right to acquire any stock, partnership interest, joint venture interest or other equity ownership interest in any other corporation, organization or entity of any nature whatsoever. (d) This Agreement and all other documents and agreements contemplated herein constitute the valid and binding agreements of Seller and Stockholder, as applicable, enforceable against them in accordance with their terms. (e) Except as specifically identified on Schedule 7(e) hereto, the execution and delivery of this Agreement and all other documents and agreements contemplated herein and the consummation of the transactions contemplated hereby and thereby will not violate any provision of, or result in the breach of, or accelerate or permit the acceleration of any obligation relating to the Business or the Purchased Assets, or result in the creation of any lien, claim or encumbrance thereon under any applicable law, rule or regulation (including but not limited to any Bulk Sales laws) of any governmental body having jurisdiction, court order, the charter or bylaws of Seller, any agreement to which either Seller or Stockholder is a party or by which either of them may be bound, or any order, judgment or decree applicable to either of them. (f) Seller has and shall deliver to Buyer at Closing good and marketable title to the Purchased Assets, free and clear of all liens, claims, encumbrances and restrictions on transfer of any nature except for those which are specifically identified on Schedule 7(f) hereto as being assumed and which specifically relate to the Assumed Liabilities. (g) Seller is not and has not been in violation in any material respect of any law, rule, regulation or order of any court or any federal, state, municipal or other governmental -5- 6 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) department, commission, board, bureau, agency or instrumentality, wherever located, relating to the Business or the Purchased Assets, including but not limited to environmental, health and safety laws. Seller has not received any notice that it is in violation of any applicable law, rule, regulation, ordinance, restriction, covenant or other governmental requirement in connection with the Business or the Purchased Assets, unless such notice and violation has been duly responded to and fully corrected and is specifically identified on Schedule 7(g) hereto. Without limiting the generality of the foregoing, each of Seller and Stockholder has obtained and is and has been in compliance in all material respects with all terms and conditions of all permits, licenses and other authorizations that are required under, and has complied in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables that are contained in, all environmental, health and safety laws applicable to the Business or the Purchased Assets. (h) No claims, actions, suits or proceedings are pending or, to Seller's or Stockholder's knowledge, threatened at law or in equity before any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, wherever located, against the Seller or relating to the Business or the Purchased Assets. Schedule 7(h) specifically identifies all claims or charges made against Seller, Stockholder or any employee, independent contractor or representative of Seller since January 1, 1992, including but not limited to claims for injuries or harassment. (i) Seller has delivered to Buyer, the 1995 Balance Sheet, the Seller's balance sheet as of February 29, 1996 and Seller's financial statements as of and for the twelve months ended September 30, 1994 as internally compiled by Seller and as of and for the twelve months ended September 30, 1995 as reviewed by Seller's independent certified public accountants, which are attached hereto as Schedule 7(i)-1 (the 1994 Balance Sheet, the February 29, 1996 balance sheet and such other financial statements are collectively referred to herein as the "Financial Statements"). Except as otherwise disclosed in Schedule 7(i)-2, the Financial Statements have been prepared from and in accordance with the books and records of Seller in accordance with generally accepted accounting principles consistently applied (except as indicated in the notes thereto), are accurate and complete in all material respects and fairly present the financial position and results of operations of the Seller as it relates to the Business at and for the respective dates and periods indicated. On September 30, 1995, Seller had no liabilities of any nature whatsoever, whether accrued, absolute, contingent or otherwise, not reserved for or reflected on the 1995 Balance Sheet, and Seller has subsequently not incurred any such liabilities other than those incurred in the ordinary course of the Business and of the same nature and general amount as those reflected on the 1995 Balance Sheet. (j) Except as otherwise disclosed in Schedule 7(j), since September 30, 1995, up to and including Closing, there has not been any: (i) transaction or other action by Seller relating to the Business except in the ordinary course of business; -6- 7 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) (ii) material and adverse change in the financial condition, liabilities, assets, business or prospects of the Business; (iii) sale, assignment, transfer or abandonment of any trademark, tradename, copyright, license or other intangible asset; nor any sale, assignment, transfer or abandonment of any other asset other than in the ordinary course of business for fair value; (iv) destruction, damage or loss (whether or not insured) of any assets that materially and adversely affect the financial condition, liabilities, assets, business or prospects of the Business; (v) increase in the salary, fees, benefits, or other compensation payable to or to become payable by Seller to any officers, employees or independent contractors of the Business, or the declaration, payment or commitment for the payment by Seller, of a bonus or other additional salary or compensation to any such person other than in the ordinary course of business consistent with past practice; (vi) execution or entering into or amendment or termination of any new or existing, as the case may be, contract, agreement or license that is material to the financial condition, liabilities, assets, business or prospects of the Business; (vii) payment or declaration of any dividend or distribution on or with respect to the capital stock of Seller or any redemption or agreement to redeem any such capital stock, or any loan, distribution or other transfer, or commitment therefor, to Stockholder or any affiliate thereof; or (viii) other event or condition of any character that has, or reasonably could be expected to have, a material and adverse effect on the financial condition, liabilities, assets or prospects of the Business. (k) The Purchased Assets constitute all of the property and assets, real, personal and mixed, tangible and intangible, and all leases, licenses, authorizations, permits, business accounts and agreements necessary to permit Buyer to carry on the Business as presently conducted and such property, assets, leases, licenses, authorizations, permits, business accounts and agreements, are transferable without restriction to Buyer except as specifically identified on Schedule 7(k) hereto. The office space to be leased to Buyer pursuant to the Sublease referred to in Section 9(h) will be sufficient to conduct the Business in the manner presently conducted. (l) All of the equipment, furniture, signs, trade fixtures and other tangible property that are a part of the Purchased Assets, and the real property and improvements used in the Business, are in good operating condition and repair, ordinary wear and tear only -7- 8 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) excepted. (m) Except as otherwise disclosed in Schedule 7(m), the accounts receivable relating to the Business reflected on the 1995 Balance Sheet and those which have arisen after September 30, 1995 were acquired in the ordinary and regular course of business, arose from valid sales, are free of rights of set-off and are current and collectible, net of reserves, in the ordinary course of business. (n) All of the Inventory is in good and merchantable condition, fit for the purpose for which it was procured, and is not damaged or defective. The parties hereto agree that no adjustment to the Purchase Price shall be made in connection with the representation made under this paragraph (n). (o) No insolvency proceedings of any character including, without limitation, bankruptcy, receivership, reorganization, composition or arrangement with creditors, are pending or, to the best of Seller's and Stockholder's knowledge, threatened by or with respect to the Seller, the Stockholder, the Business or the Purchased Assets. (p) Schedule 7(p) hereto identifies and describes the responsibilities of each employee, consultant and agent involved or associated with the Business. Seller is in compliance in all material respects with all federal, state, local and foreign laws respecting employment and employment practices, terms and conditions of employment, and wages and hours, and is not engaged in any unfair labor practice. Seller is not a party to any collective bargaining or other employee or labor agreement, and, except as otherwise specifically identified on Schedule 7(p), Seller has no written understanding or agreement with any employee, consultant or agent and all employees, consultants and agents of Seller are employed or retained on an at-will basis. None of Seller's employees is represented by any labor union and there is no labor strike or other employee or labor controversy or dispute pending (including, without limitation, any organizational drive), or to Seller's knowledge threatened, which may affect the operations or employees of the Business. (q) Schedule 7(q) hereto identifies and describes all contracts, agreements, leases, commitments, instruments, plans, permits or licenses (written or oral) to which Seller is party or is bound, of the type described below: (i) All contracts, agreements or commitments for the sale by Seller of products or services, or the purchase by Seller of materials, products or services, other than contracts, agreements or commitments involving future payments or receipts of less than $2,500 in the aggregate in any single case or which may be terminated without penalty by Seller without prior notice; (ii) All loan agreements, indentures, guarantees, mortgages, capitalized leases, pledges or conditional sale agreements; -8- 9 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) (iii) All contracts, agreements or arrangements pursuant to which Seller has obtained use of university or other school facilities for the conduct of Spirit Camps conducted by Seller, including a complete list of all schools and other facilities where Spirit Camps are being conducted, which list shall designate the length of all arrangements with such facilities and the facilities with which Seller has an exclusive relationship. (iv) All contracts or agreements relating to the lease of real or personal property (whether Seller is lessee, sublessee, lessor or sublessor), including without limitation, leases of office or other facilities and leases of equipment, data processing equipment and vehicles; (v) All contracts, arrangements or commitments under which products or services are provided to Seller by, or by Seller to, the Stockholder, his family members or other affiliated parties; and (vi) All contracts and agreements other than those covered by clauses (i) through (v) above, involving payment or receipt by Seller of more than $2,500 in the aggregate and not terminable without penalty by Seller without prior notice, or which otherwise could materially affect the Business. Seller is not in, nor has Seller given or received notice of, any default or facts that, with notice or lapse of time, would constitute a default on the part of any party under any of the contracts, leases, agreements, commitments, instruments, plans or licenses described above. (r) All federal, state, local and foreign tax returns and reports of the Seller required by law to be filed have been duly filed, and all federal, state, local, foreign and any other taxes, assessments, fees and other governmental charges with respect to the employees, properties, assets, income, sales or franchises shown on such returns and reports to be due and payable, or which are otherwise due and payable, have been paid. (s) The Assumed Liabilities reflected in the 1995 Balance Sheet, and those made thereafter which are assumed by Buyer, were incurred or assumed by Seller in the ordinary course of the Business. (t) Schedule 7(t) identifies and describes all of Seller's insurance policies and the claims pending or, to Seller's knowledge, threatened under any of Seller's insurance policies, or any disputes with underwriters. (u) Schedule 7(u) sets forth a list of all bank accounts, borrowing resolutions and deposit boxes maintained by Seller and the persons authorized to effect transactions in such accounts. Neither Seller nor Stockholder has received any notice or has any knowledge to the effect that any bank account maintained by Seller will be unavailable for use by Buyer on or after the Closing. -9- 10 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) (v) Except as disclosed in Schedule 7(v) hereto, since its formation the Seller (either directly or indirectly through any other person) has not sponsored, established, maintained, contributed to or become obligated under in any respect any pension, retirement, savings, disability, medical, dental, health or life plan or arrangement (including any individual life, death benefit, group insurance, profit sharing, deferred compensation, stock option, bonus, incentive, vacation, severance, or other employee benefit plan, trust, arrangement, contract, agreement, policy or commitment (including without limitation, any pension plan ("Pension Plan") as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any welfare plan as defined in Section 3(1) of ERISA ("Welfare Plan")), whether funded, insured or self-funded or whether written or oral. (w) Schedule 7(w) hereto contains a list of all copyrights, trademarks, tradenames, trade secrets and other similar proprietary rights of Seller used in the Business and identifies all United States, state and foreign trademark and tradename applications made by and registrations of Seller including those relating to the "United Spirit Association" mark and any related design or logo. Except as otherwise disclosed in Schedule 7(w), Seller has good and marketable title, free and clear of all liens, claims, restrictions and encumbrances with respect to all proprietary rights of the Business. None of the copyrights, trademarks or tradenames or other proprietary rights of Seller are invalid or not in compliance with governing legal requirements. Seller has taken all necessary action to protect the proprietary rights necessary or reasonably desirable to conduct the Business. Neither Seller nor Stockholder has received any notice or has any knowledge of any infringement, misappropriation or conflict with respect to the proprietary rights material to the Business (by Seller or Stockholder or by third parties), and Seller has not infringed the rights of any third parties in any material respect. (x) Neither Seller nor Stockholder has engaged or utilized the services of any broker, finder, or similar agent in connection with this Agreement or the transactions contemplated hereby. (y) No representation or warranty made by Seller or Stockholder in this Agreement and no statement in this Agreement or any other document or certificate furnished or to be furnished to Buyer pursuant hereto contains any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements made herein and therein, when taken as a whole, not misleading. (z) The number of summer camp enrollees in Seller's camps during 1995, which number is set forth in Section 5(b) hereof, is true and accurate, and Schedule 7(z) hereto sets forth the procedures used to calculate such number. 8. Representations and Warranties of Buyer and Parent. Buyer and Parent represent and warrant to Seller and Stockholder that the following are true and correct: -10- 11 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) (a) Buyer is a corporation, duly organized and existing under the laws of the State of Tennessee, and has all necessary power to own (or hold under lease or license) its properties and assets and to carry on its business as now conducted. (b) Buyer has full power and authority to execute, deliver and perform this Agreement and all other documents and agreements contemplated herein, has taken all action required by law, the organizational documents of Buyer or otherwise, to authorize the execution and delivery of this Agreement, and all other documents and agreements contemplated herein and the consummation of the transactions contemplated hereby and thereby. (c) Buyer is not in violation of any law, rule, regulation or order of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, wherever located, that would prevent Buyer from consummating the transactions contemplated herein and performing its obligations hereunder. Buyer has not received any notice that it is in violation of any applicable law, rule, regulation, ordinance, restrictions, covenant or other governmental requirement that would prevent Buyer from consummating the transactions contemplated herein and performing its obligations hereunder. (d) No claims, actions, suits or proceedings are pending or, to Buyer's knowledge, threatened at law or in equity before any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, wherever located, against the Buyer that would prevent Buyer from consummating the transactions contemplated herein and performing its obligations hereunder. (e) This Agreement and all other documents and agreements contemplated herein constitute the valid and binding agreements of Buyer, enforceable in accordance with their terms. (f) The execution and delivery of this Agreement and all other documents and agreements contemplated herein and the consummation of the transactions contemplated hereby and thereby will not violate any provision of, or result in the breach of, or accelerate or permit the acceleration of any obligation relating to Buyer's business, or result in the creation of any lien, claim or encumbrance thereon under any applicable law, rule or regulation of any governmental body having jurisdiction, court order, the charter or bylaws of Buyer, any agreement to which Buyer is a party or may be bound (except for the conflict regarding incidental registration rights referred to in the Note and the Conversion and Registration Agreement referenced in and attached to the Note), or any order, judgment or decree applicable to Buyer. (g) Buyer has not engaged or utilized the services of any broker, finder, or similar agent in connection with this Agreement or the transactions contemplated hereby. -11- 12 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) 9. Covenants of Seller and Stockholder. Seller and Stockholder hereby covenant to Buyer as follows: (a) Between the date hereof and the Closing Date, Seller shall give Buyer, and its agents and representatives, reasonable access, during normal business hours, to the Business, the Purchased Assets and all of Seller's employees, books, accounts, records and documents relating to the Business or the Purchased Assets. (b) Between the date hereof and the Closing Date, Seller and Stockholder shall give prompt notice to Buyer, but in no event later than two (2) days after discovery, of any material change to the disclosure contained in the Schedules attached hereto. (c) Between the date hereof and the Closing Date, Seller shall conduct the Business in the ordinary course consistent with past practices and in a manner that the representations and warranties contained in Section 7 hereof shall be true and correct on the Closing Date. (d) Between the date hereof and the Closing Date, Seller shall extinguish its liabilities in a manner such that payment will be made first on expenses fundamental to the continuing operations of the Business and the Retained Business (including but not limited to, salaries, rent, phone and utility bills) and second on outstanding accounts payable relating to facilities, meals, conference center, promotional and other charges incurred in connection with the Business. Only after the first two categories of liabilities referred to above are extinguished may Seller pay off other categories of liabilities, provided that any such pay-off shall be approved by Buyer. (e) Between the date hereof and the Closing Date, Seller and Stockholder shall not solicit or request from third Persons any offers to purchase or acquire through any means all or substantially all of the Business, nor participate in any discussions or negotiations related to any offers received from third Persons or any plan of reorganization relating to the Business. (f) Seller and Stockholder shall take all actions necessary to obtain all consents, approvals, amendments and agreements required of them in order to duly and validly carry out the transactions contemplated by this Agreement and to satisfy the conditions precedent herein, including but not limited to obtaining written consents, approvals, amendments and agreements necessary or appropriate under or relating to those agreements, licenses and arrangements identified on Schedule 7(e), Schedule 7(k) and Schedule 7(q) hereto. (g) As a material inducement for Buyer to enter into and consummate the transactions contemplated by this Agreement, Seller and Stockholder shall not, for the period set forth below (the "Non-Compete Period"): -12- 13 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) (i) Directly or indirectly, on their own behalf, or on behalf of any other person, firm, corporation, trust, or other entity, and whether acting as an officer, director, employee, partner, agent, consultant or otherwise, engage in, or assist in any way, financially or otherwise, any person, firm, corporation, trust or other entity that is engaged, or which proposes to engage, in the Business within the United States or any other place where the Business has been conducted prior to or is conducted or proposed to be conducted on the Closing Date (the "Territory"), provided that the foregoing shall not prohibit activities of USE undertaken in accordance with the terms of the Marketing Agreement attached hereto as Annex E (the "Marketing Agreement") in connection with the Retained Business; (ii) Directly or indirectly solicit, attempt to solicit, or otherwise divert, or attempt to divert, any participant, supplier or customer of the Business for a purpose or with a result that is competitive with the Business, except as permitted by the Marketing Agreement in connection with the Retained Business; (iii) Without the prior written consent of Buyer, employ, engage or contract for the services of any person who is employed by Buyer on the Closing Date, unless the employment of such person is thereafter terminated without cause by Buyer or unless such employment, engagement or contracting, as the case may be, is undertaken in accordance with the terms of the Marketing Agreement in connection with the Retained Business; (iv) Knowingly or intentionally damage or destroy the goodwill of the Business with its suppliers, employees, patrons, customers and others who may at any time have or have had relations with the Business; (v) Encourage, recommend, or approve the use at any time of the services of any competitor of the Business within the Territory provided that the foregoing shall not prohibit activities of USE undertaken in accordance with the terms of the Marketing Agreement in connection with the Retained Business; or (vi) Except as may be necessary to enforce rights under this Agreement, reveal to any third person any difference of opinion between Stockholder and the management of the Business. The Non-Compete Period shall be five (5) years from the Closing Date in the case of the Seller and Stockholder. If any court of competent jurisdiction shall finally hold that the time, territory or any other provision set forth in this Section 9(g) constitutes an unreasonable restriction, such provision of this Section 9(g) shall not be rendered void, but shall apply as to such time, territory or to such other extent as such court may determine constitutes a reasonable restriction under the circumstances involved. Seller and Stockholder -13- 14 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) acknowledge that the restrictions contained in this Section 9(g) are reasonable and necessary to protect the legitimate interests of Buyer and that any breach by Seller or Stockholder of any provision hereof will result in irreparable injury to Buyer. Seller and Stockholder acknowledge that Buyer shall be entitled to preliminary and permanent injunctive relief in any action seeking to enforce the provisions of this Section 9(g). Seller and Stockholder acknowledge that Buyer shall be entitled to an equitable accounting of all earnings, profits or other benefits arising from such breach and shall be entitled to receive such other damages, direct or consequential, as may be appropriate. The provisions of this Section 9(g) shall automatically terminate if: (i) Buyer and its affiliates discontinue operation of the Business, or (ii) Buyer is in material default of any of its obligations hereunder or under the Term Note. (h) The real properties necessary for and used by the Seller in the operation of the Business are identified and described in Schedule 9(h) hereto (the "Properties"). At the Closing, Seller shall enter into a sublease with Buyer on the principal terms set forth in and in substantially the form attached hereto as Annex F (the "Sublease"), which Sublease shall contain appropriate environmental representations by Seller. (i) Stockholder shall enter into a Services Agreement with Buyer or an Affiliate of Buyer in the form attached hereto as Annex G-1, and Seller and Stockholder shall use their reasonable efforts to cause Bobbi Brodt, Mary Sparacino, Douglas Olmstead, Paul Marks, James Sanford, Kari Cuatero and Marci Papadopoulos, all of whom are employees of Seller, to enter into Employment Agreements with Buyer or an Affiliate of Buyer in the forms attached hereto as Annex G-2 through G-3, respectively (collectively, the "Employment Agreements"). (j) Between the date hereof and the third anniversary of the Closing Date, upon any request of Buyer during such period Seller and Stockholder shall promptly and fully cooperate with Buyer, and shall cause Seller's independent public accountants to so cooperate with Buyer at Buyer's expense, in connection with the preparation of financial statements and related schedules and reports required in the judgment of Buyer to be prepared by Buyer, including but not limited to Buyer's audited annual financial statements, unaudited quarterly financial statements and other financial and statistical information required to be filed by Buyer with the Securities and Exchange Commission. (k) Between the date hereof and the first anniversary of the Closing Date, upon any request of Buyer during such period Seller and Stockholder shall promptly take such actions as may be requested by Buyer that Buyer reasonably determines are necessary or appropriate to transfer and perfect in Buyer on or after the Closing Date undisputed rights to the name "United Spirit Association" (and all variations and expansions thereof) and all other proprietary information or intellectual property relating to the Business, which actions may include but are not limited to those necessary to assign Seller's rights to the name "United Spirit Association", to enable Buyer, at its expense, to register the mark "United -14- 15 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) Spirit Association" and any related designs or logos under United States, state and foreign trademark laws and to change the corporate name of Seller so as to not include or otherwise make use of the name "United Special Events"; Seller and Stockholder further agree to cooperate with Buyer during the above referenced period in discharging any dispute or conflict that may arise with regard to the name "United Spirit Association" and other intellectual property relating to the Business. (l) Between the date hereof and the third anniversary of the Closing Date, upon any request of Buyer during such period Seller and Stockholder shall cooperate with and take such actions necessary for Buyer to obtain all consents to the assignment of, and all rights and benefits under, any contract or agreement constituting part of the Purchased Assets and during that period Seller and Stockholder shall not take and shall refrain from taking any action (including any action that would result in the discontinuance of Seller's corporate existence) that could reasonably be expected to adversely affect any rights or benefits under any such contract. (m) Seller and Stockholder shall maintain adequate and appropriate insurance coverage for any and all claims that have been made to date, or may be made in the future, relating to the operation of the Business prior to the Closing Date. (n) Between the date hereof and the Closing Date, Seller and Stockholder shall take all action necessary to extinguish any rights or options to purchase or otherwise obtain Seller's stock held by the individuals listed on Schedule 7(a) provided that any cost or payments associated with any such extinguishment shall be borne entirely by Stockholder. 10. Covenants of Buyer and Parent. Buyer and Parent hereby covenant to Seller and Stockholder as follows: (a) Buyer and Parent shall operate the cheerleader and spirit group camps that are part of the Business and that are conducted by Buyer during the summer of 1996 in a manner consistent with the manner in which such camps were operated by Seller during the summer of 1995, provided that the foregoing shall not prohibit or restrict Buyer from making operational changes that could not reasonably be expected to adversely affect camp enrollment. (b) If for any reason this Agreement shall be terminated before Closing, between the date of such termination and 180 days after such date, neither Buyer nor Parent shall solicit or otherwise attempt to retain the services of any employee of Seller. 11. Conditions Precedent to the Obligations of Seller and Stockholder. All obligations of Seller and Stockholder under this Agreement are subject to the performance, at or prior to Closing, of the following conditions, unless expressly waived in writing by Seller or Stockholder at or prior to Closing: -15- 16 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) (a) All of the representations and warranties made by Buyer shall be true and correct as of the date of this Agreement and shall be true and correct at the Closing Date as if made again at and as of the Closing. (b) All of the covenants undertaken herein by Buyer shall be satisfied to the extent required hereunder to be satisfied on the Closing Date. (c) No action or proceeding shall have been instituted against, and no order, decree or judgment of any court, agency, commission or governmental authority shall be in existence against Seller, Stockholder or Buyer which seeks to, or would, render it unlawful as of the Closing Date to effect the transactions contemplated hereby. (d) All consents, approvals, amendments and agreements required to duly and validly carry out the transactions contemplated by this Agreement shall have been obtained, including but not limited to those arising under or relating to the agreements, licenses and arrangements identified on Schedule 7(e), Schedule 7(k) and Schedule 7(q) hereto. (e) Buyer and Parent shall have duly executed and delivered to Seller an assumption of the Assumed Liabilities and such other closing documents, instruments and certificates as shall have been reasonably and customarily requested by Seller and Stockholder, and shall have otherwise paid the Purchase Price as herein provided. (f) The Sublease shall have been duly executed and delivered by Buyer. (g) Parent shall have executed and delivered to Seller and Stockholder a Marketing Agreement in the form attached hereto as Annex E. (h) Seller shall have received an opinion of Buyer's counsel, in form and substance satisfactory to Seller. (i) There shall have been no material adverse change in the financial condition or results of operations of Parent. (j) Parent shall have in place an effective Resale Certificate for the State of California and shall provide a copy of such Certificate to Seller. (k) Buyer and Seller shall have agreed on the assets to be treated as Excluded Assets under Section 2 of this Agreement and on the liabilities to be treated as Assumed Liabilities under Section 3 of this Agreement. 12. Conditions Precedent to the Obligations of Buyer and Parent. All obligations of Buyer and Parent under this Agreement are subject to the performance, at or prior to Closing, of the following conditions, unless expressly waived in writing by Buyer at or prior to Closing: -16- 17 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) (a) All of the representations and warranties made by Seller and Stockholder shall be true and correct as of the date of this Agreement and shall be true and correct at the Closing Date as if made again at and as of the Closing. (b) All of the covenants undertaken herein by Seller and Stockholder shall be satisfied to the extent required hereunder to be satisfied on the Closing Date. (c) No action or proceeding shall have been instituted against, and no order, decree or judgment of any court, agency, commission or governmental authority shall be in existence against Seller, Stockholder or Buyer which seeks to, or would, render it unlawful as of the Closing Date to effect the transactions contemplated hereby. (d) All consents, approvals, amendments and agreements required to duly and validly carry out the transactions contemplated by this Agreement shall have been obtained. (e) The Seller and Stockholder shall have duly executed and delivered to Buyer all documents and instruments necessary or desirable to transfer the Purchased Assets to Buyer and such other closing documents, instruments and certificates as shall have been reasonably and customarily requested by Buyer. (f) Buyer shall have received an opinion of Seller's counsel, in form and substance satisfactory to Buyer. (g) Buyer shall have received satisfactory evidence of the preparation for filing by Seller immediately after the Closing Date of documents changing Seller's corporate name to a name not including the phrase "United Special Events" or "United Spirit Association" or any other phrase not consented to by Buyer. (h) Buyer shall have received UCC termination statements and other applicable documentation necessary to release any interest of any third party in the Purchased Assets, to the extent not relating to or arising from the Assumed Liabilities. (i) The Sublease shall have been duly executed by Seller and delivered to Buyer. (j) The Services Agreement shall have been duly executed by Olmstead and the Employment Agreements shall have been duly executed by Bobbi Brodt, Mary Sparacino, Douglas Olmstead, Paul Marks, James Sanford, Kari Cuatero and Marci Papadopoulos, and all such agreements shall have been delivered to Buyer or an Affiliate of Buyer. (k) Seller shall have executed contracts entitling the Business to continued use of college, university and other facilities suitable to conduct the cheerleader, spirit group and special event activities of the Business, which contracts are satisfactory to Buyer and assignable to Buyer. -17- 18 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) (l) Seller and Stockholder shall have executed and delivered to Buyer a Marketing Agreement in the form attached hereto as Annex E. (m) Buyer and its independent certified public accountants shall have completed to Buyer's satisfaction (i) a review of Seller's books and records as of and for the twelve months ended September 30, 1995, provided that if Buyer or its representative has not delivered written notice to Seller of the unsatisfactory review of Seller's books and records on or before May 9, 1996 then the condition to Closing of this Section 12(m)(i) shall be deemed to be irrevocably waived by Buyer, and (ii) such review of Seller's operations subsequent to that date as Buyer or its independent certified public accountant may deem necessary to verify that the Business has been conducted in the ordinary course. (n) Buyer shall have received satisfactory evidence that Seller has substantially complied with the terms of Section 9(d). (o) Buyer shall have received satisfactory evidence that Seller and Stockholder have in place adequate and appropriate insurance coverage for any and all claims that have been made to date, or may be made in the future, relating to the operation of the Business prior to the Closing Date. (p) No individual or entity shall retain any rights or options to purchase or otherwise obtain Seller's stock. (q) Buyer and Seller shall have agreed on the assets to be treated as Excluded Assets under Section 2 of this Agreement and on the liabilities to be treated as Assumed Liabilities under Section 3 of this Agreement. (r) Seller shall have entered into a binding agreement, freely assignable or assigned to Buyer, satisfactory to Buyer in its discretion that will entitle Buyer to the use of the Fransisco Torres facilities used and to be used in the Business for the operation of Spirit Camps, which agreement shall also permit Buyer to operate other Spirit Camps in the general vicinity of the Francisco Torres facilities. 13. Indemnification; Set-Off Rights. (a) Seller and Stockholder, jointly and severally, shall indemnify, defend and hold Buyer harmless from and against any and all losses, liabilities and expenses, including reasonable attorneys' fees and other costs ("Claim(s)"), arising out of: (i) the assertion against Buyer or Parent by any third party of any liability of Seller or Stockholder (including any liabilities arising due to failure to comply with any applicable Bulk Sales laws) other than the Assumed Liabilities; (ii) the breach of or any inaccuracy in any representation, warranty or -18- 19 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) covenant of Seller or Stockholder; or (iii) any violation of, or obligation imposed by, any federal, state, local or foreign law or regulation which results from or is caused by, or which is alleged to have resulted from or been caused by, any activity, event, condition or occurrence prior to the Closing Date (a) conducted by Seller or Stockholder, (b) related to the operation of Business, or (c) related to the ownership of the Purchased Assets prior to the Closing Date, including without limitation any liability or obligation arising under any environmental, health or safety law applicable to the Business or the Purchased Assets. Notwithstanding the foregoing provisions of this paragraph (a), Buyer or Parent shall not be entitled to make any Claim for indemnification under this Agreement until the aggregate amount of indemnification Claims of Buyer and Parent under this Agreement total $10,000, at which time Buyer and Parent shall have the right to claim indemnification for all Claims for which one or both of them are otherwise entitled to indemnification under this Agreement. (b) Buyer and Parent shall indemnify, defend and hold Seller and Stockholder harmless from and against any and all losses, liabilities and expenses, including reasonable attorneys' fees and other costs ("Claim(s)"), arising out of: (i) the assertion against Seller or Stockholder of any liability relating to the Assumed Liabilities; (ii) the breach of or any inaccuracy in any representation, warranty or covenant of Buyer; or (iii) any liability or obligation of Buyer or Parent relating to Buyer's operation of the Business from and after the Closing Date. Notwithstanding the foregoing provisions of this paragraph (b), Seller and Stockholder shall not be entitled to make any Claim for indemnification under this Agreement until the aggregate amount of indemnification Claims of Seller and Stockholder under this Agreement total $10,000, at which time Seller and Stockholder shall have the right to claim indemnification for all Claims for which it is otherwise entitled to indemnification under this Agreement. (c) The representations and warranties of the parties herein shall survive the Closing for three (3) years, except for Section 7(r) which shall survive for the applicable statute of limitations. (d) The fact that any party has been given the opportunity to investigate the accuracy of any representation or warranty hereunder shall not affect such party's right to -19- 20 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) indemnification for a breach of such representation or warranty. (e) In the event that Seller or Stockholder, or both of them, become liable or obligated to Buyer or Parent under the indemnification provisions contained in this Section 13, Buyer and Parent shall have the right, subject to the procedures set forth in paragraph (f) of this Section 13, in addition to any other rights or remedies available to them, to set-off the amount of any Claim arising hereunder against the outstanding principal amount of the Note described in Section 5(b). (f) No party shall be liable for any Claim for indemnification under this Section unless written notice of a Claim for indemnification is delivered by the person seeking indemnification to the person from whom indemnification is sought within thirty (30) days following the third anniversary of the Closing Date. All notices given pursuant to this Section shall set forth with reasonable specificity the basis for the Claim for indemnification. Promptly after the assertion by any third party of any claim (a "Third Party Claim") against any person entitled to indemnification under this Section 13 ("Indemnitee") that results or may result in any Claim for which such Indemnitee would be entitled to indemnification pursuant to this Agreement, such Indemnitee shall give reasonable notice to the parties from whom such indemnification could be sought (the "Indemnitors") of such Third Party Claim. Any Indemnitee shall have the right to employ separate counsel in any such Third Party Claim and to participate in the defense thereof, but the fees and expenses of such counsel shall not be included as part of any Claim by the Indemnitee unless (i) the Indemnitor shall have failed, within a reasonable time after having been notified by the Indemnitee of the existence of such Third Party Claim as provided in the preceding sentence, to assume in writing the defense of such Third Party Claim, (ii) the Indemnitor has retained legal counsel satisfactory to Indemnitee and (iii) the defense of such Claim by Indemnitor and its counsel is reasonably satisfactory to Indemnitee. Promptly after the date upon which Buyer or Parent has actual knowledge of any fact or circumstance that results or may result in the incurrence by Buyer or Parent of any Claim for which Buyer or Parent would be entitled to indemnification pursuant to this Agreement, Buyer shall give reasonable written notice to Seller and Stockholder thereof. Thereafter, Buyer shall be entitled, pursuant to paragraph (e) of this Section 13, to set-off the amount of any Claim arising hereunder against the outstanding principal amount of the Note described in Section 5(b). Such reduction shall be executed in a manner consistent with the terms of the Note. In the event that it shall ultimately be determined that neither Buyer nor Parent is entitled to indemnification for the Claim or Claims pursuant to which they have exercised their right to set-off, the outstanding principal amount of the Note shall be increased by the amount of such reduction and paid according to the terms of the Note. The parties hereto agree that disputes concerning any set-off made by Buyer or Parent shall be subject to the arbitration provisions of Section 25 hereof. 14. Further Assurances; Survival. At and after the Closing, the parties hereto will, -20- 21 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) without further consideration, execute and deliver such further documents and take such other actions as may be necessary or desirable to consummate and perfect the transactions contemplated hereby. The Buyer, Seller and Stockholder each agree to furnish each other and the Internal Revenue Service with such applicable information as may be required under Section 1060 of the Internal Revenue Code of 1986, as amended, and to cooperate in the completion and timely filing of IRS Form 8594 (Asset Acquisition Statement), which shall be substantially in the form of Annex H hereto, together with such changes or additions to, or deletions from, such form as the parties may agree. After the Closing, Seller and Stockholder agree to make the Records (or copies thereof) reasonably available to Buyer as Buyer may reasonably require for tax, accounting or other business purposes and Buyer, Seller and Stockholder agree to cooperate in the completion and timely filing of any additional or supplemental filings on IRS Form 8594. 15. Risk of Loss. At Closing, the Purchased Assets shall be delivered to Buyer in the same condition as at the commencement of the Business on the date of this Agreement, except for ordinary use and wear thereof, changes occurring in the ordinary course of the Business between the date of this Agreement and the Closing Date (none of which shall be materially adverse), and damage or loss from causes beyond the reasonable power and control of Seller and the Stockholder; provided, however, that if on the Closing Date the tangible property to be sold hereunder shall have suffered loss or damage on account of fire, flood, accident, act of war, civil commotion or any other cause or event to an extent that substantially affects the value of the Purchased Assets, Buyer shall have the right at its election to complete the purchase, in which event it shall be entitled to all insurance proceeds collectible by reason of such loss or damage, or if it does not so elect, it shall have the right, which shall be in lieu of any other right or remedy whatsoever, to terminate this Agreement. In the latter event, all parties shall be released from any obligations or liabilities hereunder. 16. Notices. Any notice, consent, waiver, or other communication that is required or permitted hereunder shall be sufficient if it is in writing, signed by or on behalf of the party giving such notice, consent, waiver or other communication, and delivered by both facsimile and either personally or by Federal Express or similar overnight courier, postage prepaid, to the addresses set forth below, or to such other addressee or address as shall be set forth in a notice given in the same manner: If to Seller or Stockholder: Mr. Michael J. Olmstead 521 E. Weddell Drive Suite 110 Sunnyvale, California 94089 Facsimile: 408-734-4415 With a copy to: Ferrari, Olsen, Ottoboni & Bebb -21- 22 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) 333 West Santa Clara Street, Suite 700 San Jose, California 95113 Facsimile: 408-280-0151 Attention: Richard S. Bebb If to Buyer or Parent: Varsity USA, Inc. c/o Varsity Spirit Corporation 2525 Horizon Lake Memphis, Tennessee 38133 Facsimile: 901-387-4356 Attention: Jeffrey G. Webb and John M. Nichols With a copy to: Gardner, Carton & Douglas 321 North Clark Street Suite 3300 Chicago, Illinois 60610 Facsimile: 312-644-3381 Attention: Glenn W. Reed and Edgar F. Heizer, III Any such notice shall be deemed to have been given upon delivery if delivered personally, or three (3) days after it has been provided to Federal Express or a similar overnight courier for delivery thereby. 17. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 18. Binding Effect; Assignment. This Agreement shall be binding upon, and inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives. No party, without the consent of all other parties, may assign its rights or obligations under or related to this Agreement whether voluntarily, involuntarily, by operation of law, transfer of the capital stock or assets of Seller or otherwise, except that Buyer may, without any consent, either prior to, at or after the Closing assign its rights and obligations under or related to this Agreement to any affiliated entity of Buyer, but no such assignment by Buyer shall relieve Buyer of its obligations hereunder. Nothing herein, expressed or implied, is intended or shall be construed to confer upon or give any person, other than the Buyer, the Seller, the Stockholder and their respective heirs, legal representatives or successors and assigns any rights or remedies under or by reason of this Agreement. -22- 23 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) 19. Scope of Agreement. This Agreement and the other documents and instrument's referred to herein embodies the entire agreement and understanding of the parties hereto. 20. Amendment. No alteration, modification or change in this Agreement shall be valid unless executed in writing by all of the parties hereto. 21. Counterparts. This Agreement may be executed in two (2) or more counterparts, but all of which together shall constitute one and the same instrument. 22. Section Headings. The Section headings herein have been inserted for convenience of reference only and shall in no way modify or restrict any of the terms and provisions hereof. 23. Expenses. Stockholder shall pay its and Seller's expenses, including, without limitation, the expenses of its and Seller's legal counsel and its and Seller's accountants, incurred in connection with the consummation of the transactions contemplated by this Agreement. Buyer shall pay its own expenses, including, without limitation, the expenses of its own legal counsel and its own accountants, incurred in connection with the consummation of the transactions contemplated by this Agreement. In the event Seller has paid any such expenses prior to the date hereof or the Closing Date from sources included in the Purchased Assets, the full amount of all such payments shall reduce the Purchase Price determined under Section 4 hereof in a corresponding amount. 24. Public Announcements. No party shall publicly disclose this Agreement or any dealings between and among the parties in connection with the subject matter hereof without the prior approval of the other party, except as may be required by law. 25. Arbitration. With the exception of injunctive and other equitable relief that might be obtained for any violation of the non-competition or other provisions of this Agreement, any controversy or claim arising out of or relating to this Agreement, or the making, performance or interpretation thereof, shall be settled by binding arbitration in Santa Clara County, California by a panel of three arbitrators in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon any arbitration award may be entered in any court having jurisdiction thereof and the parties consent to the jurisdiction of the courts of the State of California for this purpose. 26. Preparation of Documents. This Agreement is the joint work product of the parties hereto and, in the event of any ambiguity herein, no inference shall be drawn against a party by reason of document preparation. -23- 24 VARSITY SPIRIT CORPORATION EXHIBIT 10(A) IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. BUYER: SELLER: VARSITY USA, INC. UNITED SPECIAL EVENTS, INC. By: /s/ JEFFREY G. WEBB By: /s/ MICHAEL J. OLMSTEAD ------------------- ----------------------- Jeffrey G. Webb Michael J. Olmstead Its: President Its: President PARENT: STOCKHOLDER: VARSITY SPIRIT CORPORATION MICHAEL J. OLMSTEAD By: /s/ JEFFREY G. WEBB /s/ MICHAEL J. OLMSTEAD ------------------- ----------------------- Jeffrey G. Webb Its: President -24- EX-10.(B) 3 SERVICES AGREEMENT 1 VARSITY SPIRIT CORPORATION EXHIBIT 10(B) SERVICES AGREEMENT THIS SERVICES AGREEMENT ("Agreement") is entered into as of May __, 1996, by and between Michael J. Olmstead ("Olmstead") and VARSITY USA, INC., a Tennessee corporation (the "Company"). R E C I T A L S: A. The Company either directly or indirectly through its parent, Varsity Spirit Corporation, a Tennessee corporation ("Varsity"), is in the business of (i) designing, marketing and selling products to the school spirit industry, including cheerleader, dance team and booster club uniforms and accessories, (ii) operating youth, junior high, high school and college cheerleader and dance team camps, clinics and competitions and (iii) organizing and facilitating special events, including travel programs and tour packages offered to school spirit groups. B. United Special Events, Inc. has been an owner and operator of a business engaged in (i) organizing and operating camps and clinics for cheerleaders, dance teams, song leaders, drill teams, drum majors, color guards and mascots, and their choreographers, coaches and faculty advisors (such groups being referred to herein as "Spirit Groups" and such camps being referred to herein as "Spirit Camps"), (ii) organizing and operating competitions and other special events for Spirit Groups, including travel programs and tours for Spirit Groups ("Spirit Events"), and (iii) designing, marketing, distributing and selling uniforms, accessories and other goods selected for Spirit Groups (the "Uniform Business" and collectively with Spirit Camps and Spirit Events, the "Business"). C. The Company purchased immediately prior to execution of this Agreement various assets and rights used in the Business of United Special Events, Inc., a company that employed Olmstead prior to such acquisition and in which Olmstead had a significant ownership interest at the time of such acquisition, and intends to utilize such assets and rights in connection with the school spirit and cheerleader and dance team camp operations of the Company. D. As a result of his prior employment and ownership, Olmstead has acquired confidential proprietary business information and trade secrets of the Business and which information and trade secrets form a substantial and valuable asset to the Company. E. The Company desires to retain Olmstead as its President for a term of one (1) year and as a consultant for four (4) years thereafter, and Olmstead desires to be so employed by the Company and to provide such consulting services to the Company, and to work with the Company's affiliates, on the terms and conditions set forth herein. F. As a condition of the Company's purchase of assets and rights relating to the Business, the Company desires to bind Olmstead to certain restrictive covenants and Olmstead agrees to be so bound, on the terms and conditions set forth herein. 2 NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Terms of Services. Subject to the terms and conditions set forth herein, including Section 10: (a) the Company will employ Olmstead and Olmstead will serve as President of the Company for a term commencing as of May 15, 1996 (the "Effective Date") and ending on May 15, 1997 (the "Employment Term"); and (b) the Company will engage Olmstead as a consultant and Olmstead will provide consulting services to Company for a term commencing as of May 15, 1997 and ending on May 15, 2001 (the "Consulting Term"). 2. Duties. During the Employment Term, Olmstead will serve as President of the Company, subject to the terms of this Agreement and the direction and control of the Chief Executive Officer and the Board of Directors of the Company and their duly appointed designees. While the Company recognizes that Olmstead will continue to manage United Special Events, Inc. under another name and such entity will require certain commitments on the part of Olmstead which commitments the Company understands and consents to, Olmstead shall nevertheless, during the Employment Term, serve the Company on a full time basis faithfully, diligently and competently and to the best of his ability. During the Consulting Term, Olmstead will provide consulting services to the Company on such matters pertaining to the Business that may be reasonably identified from time to time by reasonable advance notice from the Company's Chief Executive Officer or Board of Directors or their duly appointed designees. Olmstead shall, during the Consulting Term, advise the Company on a part time basis faithfully, diligently and competently and to the best of his ability. It is understood and agreed by the parties hereto that the above referenced part time consulting commitment of Olmstead to the Company on an annualized basis shall (a) during the entire Consulting Term not involve more than approximately twenty (20) business days per annum of out-of-town travel by Olmstead and (b) during the first and second years of the Consulting Term be approximately twenty-five percent (25%) of a full time business commitment and during the third and fourth years of the Consulting Term approximately twenty percent (20%) of a full time business commitment. For tax and all other purposes, Olmstead shall be an employee of the Company during the Employment Term and an independent contractor of the Company during the Consulting Term. 3. Compensation. The Company shall have the following compensation obligations, which shall be cumulative: (a) During the Employment Term, the Company shall pay to Olmstead for services rendered by Olmstead under this Agreement, a salary at a rate of $70,000.00 per annum ($5,833.33 per month). Such amount shall be payable in arrears not less frequently 2 3 than monthly, but otherwise in accordance with the Company's ordinary payroll practices. Payments made pursuant to this paragraph (a) while Olmstead is an employee of the Company (which are sometimes referred to herein as the "Salary") shall be treated as wages for withholding and employment tax purposes; and (b) During the Consulting Term, the Company shall pay to Olmstead for consulting services rendered by Olmstead under this Agreement consulting fees of $20,000.00 per annum ($1,666.67 per month). Such amount shall be payable in arrears on the last day of each month during the Consulting Term. Payments made pursuant to this paragraph (b) while Olmstead is a consultant to the Company (which are sometimes referred to herein as the "Consulting Fees") shall not, unless otherwise required by law, be treated as wages for withholding and employment tax purposes. 4. Insurance. During the Employment Term and Consulting Term, the Company shall be entitled to obtain as the beneficiary "key man" or similar other life insurance on Olmstead in an amount that the Company shall in its discretion deem necessary or appropriate. Olmstead shall cooperate with all requirements necessary for obtaining such insurance, including, without limitation, submitting to any tests or physicals reasonably required by the insurers in order to obtain and maintain such insurance. 5. Benefits. (a) Olmstead shall be entitled during the Employment Term to participate in such employee benefit plans and programs, including, without limitation, profit sharing, cafeteria and health insurance plans, as are maintained from time to time for employees of the Company to the extent that his position, tenure, compensation, age, health and other qualifications make him eligible to participate. The Company does not promise the adoption or continuance of any particular plan or program during the Employment Term, and Olmstead's (and his dependents') participation in any such plan or program shall be subject to the provisions, rules, regulations and laws applicable from time to time thereto. (b) During the Employment Term, Olmstead shall be entitled to that number of weeks of paid vacation as authorized under the Company's normal vacation policy in effect from time to time, such vacation to be taken at times mutually acceptable to Olmstead and the Company, and such holidays as are observed by the Company from time to time. Accrued, unused vacation may not be carried over from one year to the next, and Olmstead shall not be entitled to pay in lieu of vacation. (c) During the Consulting Term, Olmstead shall not be entitled to participate or otherwise rely upon any benefit plans or programs of the Company and shall have no entitlement to any paid vacation or holidays. 6. Reimbursement of Expenses. To the extent consistent with the general expense reimbursement policies maintained by the Company from time to time, during the Employment 3 4 Term and the Consulting Term, Olmstead shall be entitled to reimbursement for ordinary, necessary and reasonable out-of-pocket trade or business expenses which Olmstead incurs in connection with performing his duties under this Agreement, including reasonable travel and meal expenses. The reimbursement of all such expenses shall be made upon presentation of evidence reasonably satisfactory to the Company of the amounts and nature of such expenses and shall be subject to approval prior to their incurrence of the Company's Board of Directors or Chief Executive Officer or their duly appointed designees. 7. Restrictive Covenants. Olmstead acknowledges and agrees that (i) by virtue of his past ownership and employment by the Business he has learned, and by virtue of his employment and consulting relationship with the Company he will learn, valuable trade secrets and other proprietary information, including but not limited to the Company's customer lists, relating to the Business, (ii) Olmstead's skills, knowledge and services to the Company are unique in nature, (iii) the Business is international in scope and (iv) the Company would be irreparably damaged if Olmstead were to provide services to any person or entity in violation of the restrictions contained in this Agreement. Accordingly, as a condition of and inducement to the Company's purchase of the Business and as an inducement to the Company to enter into this Agreement, and in addition to any other restrictions to which Olmstead shall have agreed to be subject pursuant to the asset acquisition referred to in Recital C hereto, Olmstead agrees that during the Employment Term and the Consulting Term (collectively, the "Restricted Period"), neither Olmstead nor any Affiliate of Olmstead (as defined below) shall: (a) directly or indirectly, on his own behalf, or on behalf of any other person, firm, corporation, trust, or other entity, and whether acting as an officer, director, employee, partner, agent, consultant or otherwise, engage in, or assist in any way, financially or otherwise, any person, firm, corporation, trust or other entity that is engaged, or which proposes to engage, in the Business within the United States or any other place where the Business has been conducted prior to or is conducted or proposed to be conducted on the Closing Date (the "Territory"), provided that the foregoing shall not prohibit activities of USE undertaken in accordance with the terms of the Marketing Agreement in connection with the Retained Business; (b) directly or indirectly solicit, attempt to solicit, or otherwise divert, or attempt to divert, any participant, supplier or customer of the Business for a purpose or with a result that is competitive with the Business except as permitted by the Marketing Agreement in connection with the Retained Business; (c) employ, engage or contract for the services of any person who is employed in the Business as of the date hereof, unless the employment of such person is thereafter terminated without cause by Buyer or unless such employment, engagement or contracting, as the case may be, is undertaken in accordance with the terms of the Marketing Agreement in connection with the Retained Business; (d) knowingly or intentionally damage or destroy the goodwill of the Business 4 5 with its suppliers, employees, patrons, customers and others who may at any time have or have had relations with the Business; (e) encourage, recommend, or approve the use at any time of the services of any competitor of the Business within the Territory, provided that the foregoing shall not prohibit activities of USE undertaken in accordance with the terms of the Marketing Agreement in connection with the Retained Business; or (f) except as may be necessary to enforce rights under this Agreement, reveal to any third person any difference of opinion between Olmstead and the management of the Business. If any court of competent jurisdiction shall finally hold that the time, territory or any other provision set forth in this Section 7 constitutes an unreasonable restriction, such provision of this Section 7 shall not be rendered void, but shall apply as to such time, territory or to such other extent as such court may determine constitutes a reasonable restriction under the circumstances involved. Olmstead acknowledges that the restrictions contained in this Section 7 are reasonable and necessary to protect the legitimate interests of the Company and Varsity and that any breach by Olmstead of any provision hereof will result in irreparable injury to the Company and Varsity. Olmstead acknowledges that the Company and Varsity shall be entitled to preliminary and permanent injunctive relief in any action seeking to enforce the provisions of this Section 7. Olmstead acknowledges that the Company and Varsity shall be entitled to an equitable accounting of all earnings, profits or other benefits arising from such breach and shall be entitled to receive such other damages, direct or consequential, as may be appropriate. 8. Disclosure of Confidential Information. Olmstead recognizes that as a result of his prior employment by and ownership of the Business he possesses or as a result of his employment by and consulting relationship with the Company he will become in possession of Confidential Information (as defined below). Accordingly, as an inducement for the Company to purchase such assets and to enter into this Agreement, Olmstead agrees that: (a) for the longest period permitted by law from the date of this Agreement, Olmstead and each Affiliate of Olmstead shall hold in strictest confidence and shall not, other than as required by law, without the prior written consent of the Company, use for his own benefit or that of any third party or entity or intentionally or negligently disclose in a manner which could be harmful to the Company to any person, firm or corporation except the Company, an Affiliate of the Company or employees of the Company or an Affiliate of the Company any Confidential Information (as defined below). For purposes of this Agreement, intending that the term shall be broadly construed to include anything protectible as a trade secret under applicable law, "Confidential Information" shall mean all information, and all documents and other tangible items which record information, including but not limited to customer lists, relating to the manufacturing and marketing by the Company or any Affiliate thereof of products and services, from time to time, which at the time or times 5 6 concerned is protectible as a trade secret under applicable law, and which has been or is from time to time disclosed to or known by Olmstead. As used herein, an "Affiliate" shall mean and include any person or entity which controls a party, which such party controls or which is under common control with such party. "Control" means the power, direct or indirect, to influence or cause the direction of the management and policies of a person or entity through voting securities, contract or otherwise; (b) Olmstead and each Affiliate of Olmstead (and if deceased, his legal representative, who shall be the person set forth as such in Section 12(a) until written notice of a successor is delivered to the Company (the "Representative")) shall promptly following a request therefor from the Company return to the Company, without retaining copies, all property of the Company, including but not limited to all letters, lists, notes, reports, memorandums, documents, data and computer programs which are or which contain Confidential Information, it being agreed by Olmstead on behalf of his heirs, successors and assigns that the Company shall be entitled to rely on any action taken by the Representative in connection with this paragraph (b); and (c) at the request of the Company made at any time or from time to time hereafter, Olmstead and each Affiliate of Olmstead (and if deceased, the Representative) shall make, execute and deliver all applications, papers, assignments, conveyances, instruments or other documents and shall perform or cause to be performed such other lawful acts as the Company may reasonably deem necessary or desirable to implement any of the provisions of this Agreement, and shall give testimony and cooperate with the Company, its Affiliates or its representatives in any controversy or legal proceedings involving the Company, its Affiliates or its representatives with respect to any Confidential Information. 9. Specific Performance. Olmstead agrees that any violation by him of Sections 7 or 8 of this Agreement, as applicable, would be highly injurious to the Company and its Affiliates and would cause irreparable harm thereto. By reason of the foregoing, Olmstead consents and agrees that if he violates any provision of Sections 7 or 8 of this Agreement the Company shall be entitled, in addition to any other rights and remedies that it may have, to apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any threatened or actual continuing violation of, the provisions of such Section. In the event Olmstead breaches a covenant contained in this Agreement, the Restricted Period applicable to Olmstead with respect to such breached covenant shall be extended for the period of such breach. Olmstead also recognizes that the territorial, time and scope limitations set for in Section 7 and 8, as applicable, are reasonable and are properly required for the protection of the Company. In the event any territorial, time or scope limitation contained in this Agreement is deemed to be unreasonable by a court of competent jurisdiction, the Company and Olmstead agree, and Olmstead submits, to the reduction of any or all of said territorial, time or scope limitations to such an area, period or scope as said court shall deem reasonable under the circumstances. 10. Termination; Severance. 6 7 (a) Notwithstanding the provisions of Section 1 and the other provisions of this Agreement, Olmstead's employment and consulting relationship with the Company may be terminated at any time by the Company's Chief Executive Officer or Board of Directors "for cause," which shall include (i) Olmstead's conviction for, or plea of nolo contendere to, a felony, (ii) Olmstead's commission of an act involving self-dealing, fraud or personal profit materially injurious to the Company or any of its Affiliates, (iii) Olmstead's commission of an act of willful misconduct or gross negligence in the conduct of his duties hereunder, (iv) habitual absenteeism or any illegal use, sale manufacture or dispensing of controlled substances on the part of Olmstead, (v) Olmstead's failure to perform his duties hereunder in a manner reasonably satisfactory to the Company, (vi) Olmstead's breach or violation of any internal policies or rules of the Company, including but not limited to those rules adopted by the Company concerning the purchase and sale of the Company's or any of its Affiliate's common stock or other securities by employees of the Company, or (vii) Olmstead's breach of any material provision of this Agreement. Any termination by the Company under this Section 10(a) shall be in writing and shall set forth the reason for such termination. In the event of termination under this Section 10(a), the Company's obligations under this Agreement shall cease and Olmstead shall forfeit all right to receive any compensation or benefits under this Agreement, except that Olmstead shall be entitled to his Salary and benefits (under Section 5) and Consulting Fees for services already performed as of the date of termination of this Agreement. Without limitation, termination of Olmstead pursuant to this Section 10(a) shall not relieve Olmstead of his obligations under Sections 7 or 8 hereof. The parties hereto agree that in the event Olmstead notifies the Company within thirty (30) days of any termination pursuant to this paragraph (a) that he disagrees with the Company's "for cause" determination that such controversy shall be settled by binding arbitration in Santa Clara County, California by a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association. If after review it is determined that the termination was not made "for cause" then the termination shall be deemed to have been made pursuant to paragraph (b) of this Section 10 and Olmstead shall be entitled to the compensation and other benefits provided for thereby. (b) Notwithstanding the provisions of Section 1 and the other provisions of this Agreement, Olmstead's employment with the Company may be terminated at any time by the Company's Chief Executive Officer or Board of Directors without cause, provided that in the event of such a termination, Olmstead shall be entitled to his Salary and benefits (under Section 5) through the end of the Employment Term and continuation of his Consulting Fees through the end of the Consulting Term (the "Severance Period"). Olmstead shall use reasonable efforts during the Severance Period to find alternate employment in the event his employment hereunder is terminated without cause and the obligations of the Company as to Salary continuation hereunder during the Employment Term (but not the Consulting Term) shall be less any income received by Olmstead from such alternate employment (other than income received from the Retained Business) and the obligation of the Company to continue benefits hereunder shall be reduced to the extent comparable benefits are available to Olmstead in connection with such alternate employment. Except as otherwise specifically provided above, the Company's obligations under this Agreement 7 8 shall cease upon termination and Olmstead shall forfeit all other rights and benefits under this Agreement. Without limitation, a termination of Olmstead pursuant to this Section 10(b) shall not relieve Olmstead of his obligations under Sections 7 or 8 hereof. Any termination by the Company under this Section 10(b) shall be in writing. 11. Death or Disability. (a) If Olmstead becomes permanently disabled (determined as provided below) during the Employment Term or the Consulting Term, his employment or consulting relationship, as the case may be, shall terminate as of the date such permanent disability is determined. Olmstead shall be considered to be permanently disabled for purposes of this Agreement if he is unable by reason of accident or illness (including mental illness) to perform the material duties of his regular position with the Company and not expected to recover from his disability within a period of three (3) months from the commencement of the disability. If at any time Olmstead claims or is claimed to be permanently disabled, a physician acceptable to both Olmstead, or the Representative, and the Company (which acceptances shall not be unreasonably withheld) shall be retained by the Company and shall examine Olmstead. Olmstead shall cooperate fully with the physician. If the physician determines that Olmstead is permanently disabled, the physician shall deliver to the Company a certificate certifying both that Olmstead is permanently disabled and the date upon which the condition of permanent disability commenced. The determination of the physician shall be conclusive. (b) Olmstead's right to his compensation and benefits under this Agreement shall cease upon his death or disability, except that (i) Olmstead (or his estate or heirs) shall be entitled to his Salary and benefits (under Section 5) and Consulting Fees for services performed as of the date of his death or permanent disability, (ii) with respect to termination due solely to Olmstead's permanent disability as determined pursuant to this Section 11, he shall also be entitled to his Salary and benefits (under Section 5) and Consulting Fees through the period ending nine (9) months after the date such permanent disability began; provided, however, that any such amounts for Salary continuation shall be reduced by any amount received by Olmstead under any governmental program and/or any disability insurance policy or program and (iii) with respect to termination due solely to Olmstead's death, his estate or heirs shall be entitled to Olmstead's Salary and Consulting Fee through the period ending six (6) months after the date of Olmstead's death. 12. Miscellaneous. (a) All notices hereunder shall be in writing and shall be deemed given when delivered in person or when telecopied with hard copy to follow, or three (3) business days after being deposited in the United States mail, postage prepaid, registered or certified mail, or two (2) business days after delivery to a nationally recognized express courier, expenses prepaid, addressed as follows: 8 9 If to Olmstead: Michael J. Olmstead 3825 Middlefield Road Palo Alto, California 94303 If to the Representative: Michelle Olmstead 3825 Middlefield Road Palo Alto, California 94303 If to the Company: Varsity USA, Inc. c/o Varsity Spirit Corporation 2525 Horizon Lake Drive Memphis, Tennessee 38133 Attention: Jeffrey G. Webb John M. Nichols and/or at such other addresses and/or to such other addressees as may be designated by notice given in accordance with the provisions hereof. (b) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. No party shall assign this Agreement or its rights hereunder without the prior written consent of the other party hereto; provided, however, that the Company may assign this Agreement to any person or entity acquiring all or substantially all of the Business of the Company (whether by sale of stock, sale of assets, merger, consolidation or otherwise). (c) This Agreement contains all of the agreements between the parties with respect to the subject matter hereof and this Agreement supersedes all other agreements, oral or written, between the parties hereto with respect to the subject matter hereof. (d) No change or modification of this Agreement shall be valid unless the same shall be in writing and signed by all of the parties hereto. No waiver of any provisions of this Agreement shall be valid unless in writing and signed by the waiving party. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver, unless so provided in the waiver. 9 10 (e) If any provisions of this Agreement (or portions thereof) shall, for any reason, be deemed invalid or unenforceable by any court of competent jurisdiction, such provisions (or portions thereof) shall be ineffective only to the extent of such invalidity or unenforceability, and the remaining provisions of this Agreement (or portions thereof) shall nevertheless be valid, enforceable and of full force and effect. The Company's rights under this Agreement shall not be exclusive and shall be in addition to all other rights and remedies available at law or in equity. (f) The section or paragraph headings or titles herein are for convenience of reference only and shall not be deemed a part of this Agreement. (g) This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute a single instrument. (h) This Agreement shall be governed and controlled as to validity, enforcement, interpretation, construction, effect and in all other respects by the laws of the State of California applicable to contracts made in that State (other than any conflict of laws rule which might result in the application of the laws of any other jurisdiction). IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. VARSITY USA, INC. By: /s/ JOHN M. NICHOLS ---------------------------------- Name: John M. Nichols Title: Senior Vice President - Chief Financial Officer MICHAEL J. OLMSTEAD /s/ MICHAEL J. OLMSTEAD - - ------------------------------------------------------------------------------- 10 EX-10.(C) 4 FORM OF LOAN AGREEMENT 1 EXHIBIT 10(c) CREDIT AGREEMENT ______________________________________________________________________________ ______________________________________________________________________________ CREDIT AGREEMENT Dated as of July 1, 1996 Between Varsity Spirit Corporation and Varsity Spirit Fashions and Supplies, Inc. and Varsity/Intropa Tours, Inc. as Borrowers and NATIONSBANK, N.A. as Lender U.S.$9,000,000 ______________________________________________________________________________ ______________________________________________________________________________ 2 TABLE OF CONTENTS This Table of Contents is not part of the Agreement to which it is attached but is for convenience of reference. ARTICLE I DEFINITIONS SECTION 1.01. Basic Definitions 1 SECTION 1.02. Additional Definitions 2 ARTICLE II LOANS SECTION 2.01. Committed Loans 7 SECTION 2.02. Intentionally Left Blank 7 SECTION 2.03. Note 8 SECTION 2.04. Repayment of Loans 8 SECTION 2.05. Interest 8 SECTION 2.06. Borrowing Procedure 8 SECTION 2.07. Prepayments, Conversions, and Continuations of Loans 8 SECTION 2.08. Minimum Amounts 9 SECTION 2.09. Certain Notices 9 SECTION 2.10. Use of Proceeds 10 SECTION 2.11. Fees 10 SECTION 2.12. Computations 10 SECTION 2.13. Reduction or Termination of Commitment 10 SECTION 2.14. Payments 10 SECTION 2.15. Mandatory Prepayment 10 ARTICLE III CHANGE IN CIRCUMSTANCES SECTION 3.01. Increased Cost and Reduced Return 11 SECTION 3.02. Limitation on Types of Loans 12 SECTION 3.03. Illegality 12 SECTION 3.04. Compensation 12 SECTION 3.05 Taxes 13 ARTICLE IV CONDITIONS SECTION 4.01. Initial Loan 13 SECTION 4.02. Each Loan 14 3 ARTICLE V REPRESENTATIONS AND WARRANTIES SECTION 5.01. Existence 14 SECTION 5.02. Financial Statements 14 SECTION 5.03. Authorization; No Breach 14 SECTION 5.04. Litigation 15 SECTION 5.05. Enforceability 15 SECTION 5.06. Approvals 15 SECTION 5.07. Disclosure 15 ARTICLE VI COVENANTS SECTION 6.01. Information 15 SECTION 6.02. Current Ratio 16 SECTION 6.03. Minimum Tangible Net Worth 16 SECTION 6.04. Maximum Funded Liabilities to Tangible Net Worth 17 SECTION 6.05. Maximum Funded Liabilities to Consolidated EBITDA Ratio 17 SECTION 6.06. Obligations 17 ARTICLE VII DEFAULT SECTION 7.01. Events of Default 17 SECTION 7.02. Remedies 19 ARTICLE VIII MISCELLANEOUS SECTION 8.01. Expenses 19 SECTION 8.02. Indemnification 19 SECTION 8.03. Right of Set-off. 20 SECTION 8.04. No Waiver; Cumulative Remedies 20 SECTION 8.05. Successors and Assigns 20 SECTION 8.06. Amendments 20 SECTION 8.07. Notices 21 4 SECTION 8.08. Counterparts 21 SECTION 8.09. Severability 21 SECTION 8.10. Controlling Agreement 21 SECTION 8.11. Survival 21 SECTION 8.12. Governing Law 21 SECTION 8.13. WAIVER OF JURY TRIAL 22 SECTION 8.14. ENTIRE AGREEMENT 22 Exhibit A - Note Exhibit B - Opinion of Counsel for the Loan Parties 5 CREDIT AGREEMENT CREDIT AGREEMENT (the "Agreement") dated as of July 1, 1996, between VARSITY SPIRIT CORPORATION, a Tennessee Corporation and VARSITY SPIRIT FASHIONS AND SUPPLIES, INC., a Tennessee Corporation and VARSITY/INTROPA TOURS, INC., a ________ company(the "Borrowers"), and NATIONSBANK, N.A., a national banking association (the "Bank"). The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Basic Definitions. As used in this Agreement, the following terms have the following meanings: "Applicable Margin" means: (i) with respect to Base Rate Loans, Zero percent (0%); (ii) with respect to Eurodollar Loans, One percent (1%); and "Commitment" means the obligation of the Bank to make Committed Loans in an aggregate principal amount at any time outstanding up to but not exceeding $9,000,000, as the same may be reduced or terminated pursuant to this Agreement. "Fees" means: (ii) a commitment fee on the daily average unused amount of the Commitment from and including the date of this Agreement to but excluding the Termination Date, at the rate of One Eighth percent (.125%) per annum, payable on each Quarterly Date "Principal Office" means the office of the Bank located at One NationsBank Plaza, Fifth Floor Nashville, TN 37239. "Termination Date" means June 30, 1997. 1 6 SECTION 1.02. Additional Definitions. As used in this Agreement, the following terms have the following meanings. "Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Bank to be equal to the quotient obtained by dividing (a) the Eurodollar Rate for such Eurodollar Loan for such Interest Period by (b) 1 minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. "Assessment Rate" means, for any day, the annual assessment rate (rounded upwards, if necessary, to the nearest 1/100 of 1%) which is payable by the Bank to the Federal Deposit Insurance Corporation (or any successor) for deposit insurance for Dollar time deposits with the Bank at its Principal Office as determined by the Bank "Base Rate" means, for any day, the rate per annum equal to the higher of (a) the Federal Funds Rate for such day plus one-half of one percent (.5%) and (b) the Prime Rate for such day. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or Federal Funds Rate. "Base Rate Loans" means Loans that bear interest at rates based upon the Base Rate. "Business Day" means any day except a Saturday, Sunday, or other day on which banks in the State where the Principal Office is located are authorized by law to close and, if the applicable Business Day relates to Eurodollar Loans, on which commercial banks in London are open for international business (including dealings in Dollar deposits in the London interbank market). "Commitment" means the commitment by NationsBank, N.A. to make Loans to the Borrowers hereunder in the maximum principal amount of $9,000,000. "Committed Loans" has the meaning specified in Section 2.01. 2 7 "Consolidated Depreciation and Amortization" means, for any period, the depreciation and amortization of the Borrowers and its Subsidiaries on a consolidated basis determined in conformity with GAAP. "Consolidated EBITDA" means, with respect to any Person, the Consolidated Net Income of such Person for such period adjusted to exclude (to the extent included therein) (i) Consolidated Total Income Tax Expense, (ii) Consolidated Depreciation and Amortization, (iii) Consolidated Total Net Interest Expense and (iv) other non-cash charges or credits which increased or decreased Consolidated Net Income, in each case determined for such period on a consolidated basis for such person and its Subsidiaries in accordance with GAAP, except as otherwise specifically provided herein, and to subtract therefrom the amount of all cash payments, and to add thereto the amount of all cash receipts relating to non-cash charges or credits, as the case may be, made in any period after the Closing Date that do not relate to events that occurred prior to the Closing Date and were either (A) excluded as losses or gains in the calculation of Consolidated Net Income in any period after the Closing Date or (B) which were or would have been adjustments to Consolidated EBITDA as a result of clause (iv) above in any period after the Closing Date. ""Consolidated Total Income Tax Expense" means, for any period, the total income tax expense of the Borrowers and its Subsidiaries for such period, on a consolidated basis determined in accordance with GAAP. "Consolidated Interest Income means, for any period, aggregate interest income for the Borrowers and its Subsidiaries for the period. "Consolidated Net Income" means, for any period, the net earnings (or loss) of the Borrowers and its Subsidiaries on a consolidated basis for such period taken as a single accounting period, but excluding extraordinary items of gain or loss, all as determined in conformity with GAAP. "Consolidated Total Interest Expense" means, for any period, the total interest expense of the Borrowers and its Subsidiaries, for such period, on a consolidated basis determined in accordance with GAAP. "Consolidated Net Interest Expense" means, for any period, Consolidated Total Interest Expense less Consolidated Interest Income. 3 8 "Continue", "Continuation", and "Continued" shall refer to a continuation pursuant to Section 2.07 of a Fixed Rate Loan as a Loan of the same Type from one Interest Period to the next Interest Period. "Convert", "Conversion", and "Converted" shall refer to the conversion pursuant to Section 2.07 or Article III of one Type of Loan into another Type of Loan. "Current Assets", shall mean all items which, in accordance with Generally Accepted Accounting Principles, would be classified as current assets on a consolidated balance sheet of the Borrowers and their subsidiaries. "Current Liabilities", shall mean all items which, in accordance with Generally Accepted Accounting Principles, would be classified as current liabilities on a consolidated balance sheet of the Borrowers and their subsidiaries. "Debtor Relief Laws" means the Bankruptcy Code of the United States of America and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, or similar debtor relief laws from time to time in effect affecting the rights of creditors generally. "Default" means an Event of Default or the occurrence of an event or condition that with notice or lapse of time or both would become an Event of Default. "Default Rate" means, with respect to any principal of any Loan or any other amount payable by the Borrowers under this Agreement or any other Loan Document that is not paid when due (whether at stated maturity, by acceleration, or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to two percent (2%) plus the Base Rate as in effect from time to time plus the Applicable Margin for Base Rate Loans (provided that, if the amount in default is principal of a Fixed Rate Loan and the due date thereof is a day other than the last day of the Interest Period therefor, the "Default Rate" for such principal shall be, for the period from and including the due date and to but excluding the last day of the Interest Period therefor, two percent (2%) plus the interest rate for such Loan as provided in Section 2.05(b), as the case may be, and, thereafter, the rate provided for above in this definition). "Dollars" and "$" mean lawful money of the United States of America. "Eurodollar Loans" means Loans that bear interest at rates based upon the Adjusted Eurodollar Rate. 4 9 "Event of Default" has the meaning specified in Section 7.01. "Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for any Eurodollar Loan for any Interest Period therefor, the rate per annum appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to the Bank on such day on such transactions as determined by the Bank. "Financial Statements" means the financial statements of the Borrowers and the Subsidiaries most recently furnished to the Bank prior to the date of this Agreement. "Fixed Rate Loans" means Eurodollar Loans. "Funded Liabilities" means, at any date of determination, all Indebtedness of any Person that has an original maturity date in excess of one year. "Governmental Authority" means any nation or government, any state or political subdivision thereof, any central bank (or similar monetary or regulatory authority), and any entity exercising executive, legislative, judicial, regulatory, or administrative functions of or pertaining to government. 5 10 "Indebtedness" as applied to any Person, means (i) all indebtedness for borrowed money, (ii) that portion of obligations with respect to Capital Leases. which is capitalized on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether of not representing obligations for borrowed money, including, without limitation, any indebtedness evidenced by notes issued pursuant to note agreements or indentures, (iv) any obligation owed for all or any part of the deferred purchase price of property of services which purchase price is (x) due more than six months from the date of incurrence of the obligation in respect thereof, or (y) evidenced by a note or similar written instrument, and (v) all indebtedness secured by any mortgage, pledge, Lien, security interest or vendor's interest under any conditional sale or other title retention agreement existing on any property of asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person and, without duplication, all drafts drawn thereunder of (to the extent not theretofore reimbursed); provided, however, that Indebtedness shall not include (i) trade payables and accrued expenses, in each case arising in the ordinary course of business. "Intangible Assets" means:, as of the date of any determination thereof, the total amount of all assets of the Borrowers and their Subsidiaries consisting of goodwill, patents, trade names, trade marks, copyrights, franchises, experimental expense, organization expense, deferred assets other than prepaid insurance and prepaid taxes, the excess of cost of shares acquired over book value of related assets and such other assets as are properly classified as "intangible assets" in accordance with Generally Accepted Accounting Principles. "Interest Period" means: (i) with respect to any Eurodollar Loan, each period commencing on the date such Loan is made or Converted from a Loan of another Type or the last day of the next preceding Interest Period with respect to such Loan, and ending on the numerically corresponding day in the first, second, third, or sixth calendar month thereafter, as the Borrowers may select as provided in Section 2.09, except that each such Interest Period which commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; Notwithstanding the foregoing: (a) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, in the case of an Interest Period for Eurodollar Loans, if such succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); (b) any Interest Period which would otherwise extend beyond the Termination Date shall end on the Termination 6 11 Date; (c) no more than 5 Interest Periods for each Type of Fixed Rate Loan shall be in effect at the same time; and (d) no Interest Period for any Fixed Rate Loan shall have a duration of less than 1 month (in the case of Eurodollar Loans) and if the Interest Period for any Fixed Rate Loan would otherwise be a shorter period, such Loan shall not be available hereunder. "Lien" means any lien, mortgage, pledge, security interest, charge or encumbrance, of any kind to secure the payment, performance or discharge of any liability (as determined in accordance with GAAP) including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest. "Loan Documents" means this Agreement, the Note, and all other documents, instruments, and agreements executed or delivered pursuant to or in connection with this Agreement, as the same may be amended, modified, renewed, extended, or supplemented. "Loan Party" means the Borrowers or any Person that guaranties or secures any or all of the Borrower's obligations under the Loan Documents. "Loans" means Committed Loans and Money Market Loans. "Material Adverse Effect" means a material adverse effect on (a) the properties, prospects, business, operations, financial condition, liabilities, or capitalization of the Borrowers and the Subsidiaries taken as a whole, (b) the ability of any Loan Party to pay and perform its obligations under any Loan Document, or (c) the validity or enforceability of any Loan Document or the rights and remedies of the Bank thereunder. "Note" has the meaning specified in Section 2.03. "Person" means any individual, corporation, company, joint venture, association, partnership, trust, unincorporated organization, Governmental Authority, or other entity. "Prime Rate" means the per annum rate of interest established from time to time by the Bank as its prime rate, which rate may not be the lowest rate of interest charged by the Bank to its customers. "Quarterly Date" means the last day of each March, June, September, and December of each year, the first of which shall be the first such day after the date of this Agreement. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. 7 12 "Reserve Requirement" means, at any time, the maximum rate at which reserves (including any marginal, special, supplemental, or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System in New York City with deposits exceeding one billion Dollars against (a) in the case of Eurodollar Loans, "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Adjusted Eurodollar or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. The Adjusted Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Requirement. "Subsidiary" means, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned by the Borrowers. "Tangible Net Worth" means, at any time, consolidated net shareholder's equity of the Borrowers determined in accordance with Generally Accepted Accounting Principles applied on a consistent basis with no upward adjustments due to a revaluation of assets, minus all Intangible Assets of the Borrowers and their Subsidiaries and minus all amounts due from employees, officers, directors, shareholders and affiliates of the Borrowers and their Subsidiaries. "Type" means any type of Loan (i.e., Base Rate Loan, Eurodollar Loan, CD Loan, or Money Market Loan). "Unused Amount" means the Committed Amount minus the then outstanding principal amount of the Committed Loans. ARTICLE II LOANS SECTION 2.01. Committed Loans. Subject to the terms and conditions of this Agreement, the Bank agrees to make one or more loans ("Committed Loans") to the Borrower from time to time from and including the date hereof to but excluding the Termination Date, provided that 8 13 the aggregate principal amount of the Loans at any time outstanding shall not exceed the amount of the Commitment. Subject to the foregoing limitations, and the other terms and provisions of this Agreement, the Borrower may borrow, repay, and reborrow hereunder the amount of the Commitment by means of Base Rate Loans and Eurodollar Loans. SECTION 2.02. [Intentionally Left Blank]. SECTION 2.03. Note. The Loans made by the Bank shall be evidenced by a single promissory note of the Borrower in substantially the form of Exhibit A, dated the date hereof, payable to the order of the Bank in a principal amount equal to the Commitment as originally in effect and otherwise duly completed (as from time to time amended, modified, renewed, or extended, the "Note"). SECTION 2.04. Repayment of Loans. The Borrower shall pay to the Bank the outstanding principal amount of the Loans on or before the Termination Date. SECTION 2.05. Interest. The Borrower shall pay to the Bank interest on the unpaid principal amount of each Loan for the period commencing on the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (a) during the periods such Loan is a Base Rate Loan, the Base Rate plus the Applicable Margin; (b) during the periods such Loan is a Eurodollar Loan, the Adjusted Eurodollar Rate plus the Applicable Margin; Notwithstanding the foregoing, the Borrower shall pay to the Bank interest at the Default Rate on any principal of any Loan and (to the fullest extent permitted by law) on any other amount payable by the Borrower under this Agreement or any other Loan Document which is not paid in full when due (whether at stated maturity, by acceleration, or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on the Loans shall be due and payable as follows: (i) in the case of Base Rate Loans, on each Quarterly Date; (ii) in the case of each Eurodollar Loan, on the last day of the Interest Period with respect thereto and, in the case of an Interest Period greater than three months, at three-month intervals after the first day of such Interest Period; (iii) upon the payment or prepayment of any Loan or the Conversion of any Loan to a Loan of another Type (but only on the principal amount so paid, prepaid, or Converted); and (iv) on the Termination Date; provided that interest payable at the Default Rate shall be payable from time to time on demand. SECTION 2.06. Borrowing Procedure. The Borrower shall give the Bank notice of each borrowing hereunder in accordance with Section 2.09. Not later than 2:00 p.m. (local time at 9 14 the Principal Office) on the date specified for each borrowing hereunder, the Bank will make available the amount of the Loan to be made by it on such date to the Borrower by depositing the same, in immediately available funds, in an account of the Borrower (designated by the Borrower) maintained with the Bank at the Principal Office or as otherwise directed by the Borrower. SECTION 2.07. Prepayments, Conversions, and Continuations of Loans. Subject to Section 2.08, the Borrower shall have the right from time to time to prepay the Loans, or to Convert all or part of a Loan of one Type into a Loan of another Type or to Continue Fixed Rate Loans of one Type as Fixed Rate Loans of the same Type, provided that: (a) the Borrower shall give the Bank notice of each such prepayment, Conversion, or Continuation as provided in Section 2.09, (b) Fixed Rate Loans may only be Converted on the last day of the Interest Period, and (c) except for Conversions into Base Rate Loans, no Conversions or Continuations shall be made while a Default has occurred and is continuing. SECTION 2.08. Minimum Amounts. Except for Conversions and prepayments pursuant to Section 2.15 and Article III, each borrowing, each Conversion, and each prepayment of principal of the Loans shall be in an amount at least equal to $100,000. Anything in this Agreement to the contrary notwithstanding, the aggregate principal amount of Fixed Rate Loans of the same Type having the same Interest Period shall be at least equal to $100,000. SECTION 2.09. Certain Notices. Notices by the Borrower to the Bank of a termination or reduction of the Commitment, of borrowings, Conversions, Continuations and optional prepayments of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Bank not later than 12:00 noon (Charlotte, North Carolina time ) on the number of Business Days prior to the date of the relevant termination, reduction, borrowing, Conversion, Continuation, or prepayment or the first day of such Interest Period specified below:
Number of Business Notice Days Prior - - ------------------------------ ------------------ Termination or reduction of Commitment 3 Borrowing or prepayment of, or Conversions into, Base Rate Loans same day
10 15 Borrowing or prepayment of, Conversions into, Continuations as, or duration of Interest Periods for, Eurodollar Loans 3 Each such notice of termination or reduction shall specify the amount of the Commitment to be terminated or reduced. Each such notice of borrowing, Conversion, Continuation, or optional prepayment shall specify (a) the amount and Type of the Loan to be borrowed, Converted, Continued, or prepaid (and, in the case of a Conversion, the Type of Loan to result from such Conversion), (b) the date of borrowing, Conversion, Continuation, or prepayment (which shall be a Business Day), and (c) in the case of a borrowing of a Fixed Rate Loan, Conversion, or Continuation, the duration of the Interest Period. In the event the Borrower fails to select the Type of Loan, or the duration of any Interest Period for any Fixed Rate Loan, within the time period and otherwise as provided in this Section 2.09, such Loan (if outstanding as a Fixed Rate Loan) will be automatically Converted into a Base Rate Loan on the last day of the preceding Interest Period for such Loan or (if outstanding as a Base Rate Loan) will remain as, or (if not then outstanding) will be made as, a Base Rate Loan. SECTION 2.10. Use of Proceeds. The proceeds of the Loans shall be used by the Borrower for working capital in the ordinary course of business. The Borrower will not, directly or indirectly, use any part of such proceeds for the purpose of purchasing or carrying any margin stock within the meaning of Regulations G, U, T, or X of the Board of Governors of the Federal Reserve System. SECTION 2.11. Fees. The Borrower agrees to pay to the Bank the Fees as specified herein. (a) Commitment Fee The Borrower shall pay to the Bank on the daily average Unused Amount at a rate equal to .125% per annum of such Unused Amount. SECTION 2.12. Computations. Interest and Fees payable by the Borrower hereunder and under the other Loan Documents shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) occurring in the period for which payable. SECTION 2.13. Reduction or Termination of Commitment. The Borrower shall have the right to irrevocably terminate or reduce in part the unused portion of the Commitment at any time 11 16 and from time to time, provided that: (a) the Borrower shall give notice of each such termination or reduction as provided in Section 2.09; and (b) each partial reduction shall be in an aggregate amount at least equal to $1,000,000 SECTION 2.14. Payments. All payments of principal, interest, and other amounts to be made by the Borrower under this Agreement and other Loan Documents shall be made to the Bank at the Principal Office in Dollars and in immediately available funds, without setoff, deduction, or counterclaim. Whenever any payment under this Agreement or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time in such case shall be included in the computation of interest and Fees, as applicable and as the case may be. SECTION 2.15. Mandatory Prepayment. If at any time the outstanding principal amount of the Loans exceeds the Commitment, the Borrower shall immediately make a prepayment of the Loans in an amount equal to the excess. ARTICLE III CHANGE IN CIRCUMSTANCES SECTION 3.01. Increased Cost and Reduced Return. (a) If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive (whether or not having the force of law) of any such Governmental Authority: (i) shall subject the Bank to any tax, duty, or other charge with respect to any Fixed Rate Loans, the Note, or its obligation to make Fixed Rate Loans, or change the basis of taxation of any amounts payable to the Bank under this Agreement or the Note in respect of any Fixed Rate Loans (other than taxes imposed on the overall net income of the Bank by the jurisdiction in which the Bank has its Principal Office); (ii) shall impose or modify any reserve, special deposit, or similar requirement (other than the Reserve Requirement utilized in the determination of the Adjusted Eurodollar Rate ) relating to any 12 17 extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, the Bank (including the Commitment); or (iii) shall impose on the Bank or on the United States market for certificates of deposit or the London interbank market any other condition affecting this Agreement or the Note or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to the Bank of making, Converting into, Continuing, or maintaining any Fixed Rate Loans or to reduce any sum received or receivable by the Bank under this Agreement or the Note with respect to any Fixed Rate Loans, then the Borrower shall pay to the Bank on demand such amount or amounts as will compensate the Bank for such increased cost or reduction. (b) If the Bank shall have determined that the adoption of any applicable law, rule, or regulation regarding capital adequacy or any change therein or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, has or would have the effect of reducing the rate of return on the capital of the Bank or any corporation controlling the Bank as a consequence of the Bank's obligations hereunder to a level below that which the Bank or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time upon demand the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. (c) A certificate of the Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of clearly demonstrable error. In determining such amount, the Bank may use any reasonable averaging and attribution methods. SECTION 3.02. Limitation on Types of Loans. If on or prior to the first day of any Interest Period for any Eurodollar Loan : (a) the Bank determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate , as the case may be, for such Interest Period; or 13 18 (b) the Bank determines (which determination shall be conclusive) that the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to the Bank of funding Eurodollar Loans or, as the case may be, for such Interest Period; then the Bank shall give the Borrower prompt notice thereof specifying the relevant Type of Loans and the relevant amounts or periods, and so long as such condition remains in effect, the Bank shall be under no obligation to make additional Loans of such Type, Continue Loans of such Type, or to Convert Loans of any other Type into Loans of such Type and the Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Loans of the affected Type, either prepay such Loans or Convert such Loans into another Type of Loan in accordance with the terms of this Agreement. SECTION 3.03. Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for the Bank to make, maintain, or fund Eurodollar Loans hereunder, then the Bank shall promptly notify the Borrower thereof and the Bank's obligation to make or Continue Eurodollar Loans and to Convert other Types of Loans into Eurodollar Loans shall be suspended until such time as the Bank may again make, maintain, and fund Eurodollar Loans and the Borrower shall, on the last day of the Interest Period for each outstanding Eurodollar Loan (or earlier, if required by law), either prepay such Loans or Convert such Loans into Base Rate Loans in accordance with the terms of this Agreement. SECTION 3.04. Compensation. Upon the request of the Bank, the Borrower shall pay to the Bank such amount or amounts as shall be sufficient (in the reasonable opinion of the Bank) to compensate it for any loss, cost, or expense incurred by it as a result of: (a) any payment, prepayment or Conversion of a Fixed Rate Loan for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 7.02) on a date other than the last day of an Interest Period for such Loan; or (b) any failure by the Borrower for any reason (including, without limitation, the failure of any conditions precedent specified in Article IV to be satisfied) to borrow, Convert, Continue, or prepay a Fixed Rate Loan on the date for such borrowing, Conversion, Continuation, or prepayment specified in the relevant notice of borrowing, prepayment, Continuation, or Conversion under this Agreement. Without limiting the effect of the preceding sentence, such compensation shall include any loss, cost, or expense incurred in obtaining, liquidating, or employing deposits from third parties (including loss of margin). 14 19 SECTION 3.05 Taxes. (a) Any and all payments by the Borrower to or for the account of the Bank hereunder or under any other Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of the Bank, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which the Bank is organized or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Loan Document to the Bank, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.05) the Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) the Borrower shall furnish to the Bank, at its address referred to in Section 8.06, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made hereunder or under any other Loan Document or from the execution or delivery of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) The Borrower agrees to indemnify the Bank for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 3.05) paid by the Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. ARTICLE IV CONDITIONS SECTION 4.01. Initial Loan. The obligation of the Bank to make the initial Loan hereunder is subject to the satisfaction of the following conditions: (a) receipt by the Bank of the duly executed Note, complying with the provisions of Section 2.03, and such other Loan Documents as the Bank may reasonably request; 15 20 (b) receipt by the Bank of an opinion of counsel for the Loan Parties, substantially in the form of Exhibit B and covering such additional matters as the Bank may reasonably request; and (c) receipt by the Bank of all documents that the Bank may request relating to the existence of the Loan Parties, the authorization for and the validity of the Loan Documents, and any other matters relevant thereto, all in form and substance satisfactory to the Bank. SECTION 4.02. Each Loan. The obligation of the Bank to make any Loan (including the initial Loan) is subject to the satisfaction of the following conditions precedent: (a) receipt by the Bank of a notice of borrowing in accordance with Section 2.06; (b) the fact that immediately after the making of such Loan, the aggregate outstanding principal amount of the Loans will not exceed the amount of the Commitment; (c) the fact that, immediately before and after such Loan, no Default shall have occurred and be continuing; and (d) the fact that the representations and warranties of the Borrower contained in this Agreement and the other Loan Documents shall be true and correct on and as of the date of such Loan. Each borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such borrowing that the conditions precedent specified in clauses (b), (c), and (d) of this Section have been satisfied. ARTICLE V REPRESENTATIONS AND WARRANTIES To induce the Bank to enter into this Agreement, the Borrower represents and warrants to the Bank that: SECTION 5.01. Existence. The Borrower and each Subsidiary (a) is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its organization; and (b) has the requisite power and authority and legal right to own its assets and carry on its business as now being or as proposed to be conducted. The Borrower has the power, authority, and legal right to execute, deliver, and perform its obligations under the Loan Documents. 16 21 SECTION 5.02. Financial Statements. The Financial Statements are complete and correct, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, and fairly and accurately present the financial condition of the Borrower and the Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. Since the effective date of the Financial Statements, no event or condition has occurred that could have a Material Adverse Effect. SECTION 5.03. Authorization; No Breach. The execution, delivery, and performance by the Borrower of the Loan Documents to which it is a party and compliance with the terms and provisions thereof have been duly authorized by all requisite action on the part of the Borrower and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) the articles of incorporation, bylaws, or other organizational documents of the Borrower or any of the Subsidiaries, (ii) any applicable law, rule, or regulation or any order, writ, injunction, or decree of any Governmental Authority or arbitrator, or (iii) any agreement or instrument to which the Borrower or any of the Subsidiaries is a party or by which any of them or any of their property is bound or subject, or (b) constitute a default under any such agreement or instrument. SECTION 5.04. Litigation. There is no action, suit, investigation, or proceeding before or by any Governmental Authority or arbitrator pending, or to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary, that could, if adversely determined, have a Material Adverse Effect. SECTION 5.05. Enforceability. This Agreement constitutes, and the other Loan Documents when executed and delivered by the Borrower shall constitute, the legal, valid, and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except as limited by applicable Debtor Relief Laws and general principles of equity. SECTION 5.06. Approvals. No authorization, approval, or consent of, and no filing or registration with, any Governmental Authority or third party is or will be necessary for the execution, delivery, or performance by the Borrower of any of the Loan Documents to which it is a party or for the validity or enforceability thereof. SECTION 5.07. Disclosure. No statement, information, report, representation, or warranty made by the Borrower in any Loan Document or furnished to the Bank in connection with any Loan Document contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. 17 22 ARTICLE VI COVENANTS The Borrower agrees that, so long as the Bank has any Commitment hereunder or any amount payable under the Note remains unpaid: SECTION 6.01. Information. The Borrower shall deliver to the Bank: (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower a consolidated balance sheet of the Borrower and the Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all prepared in accordance with generally accepted accounting principles applied on a consistent basis and certified by independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower a consolidated balance sheet of the Borrower and the Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all in reasonable detail and duly certified (subject to normal year-end adjustments) by the chief financial officer of the Borrower as having been prepared in accordance with generally accepted accounting principles applied on a consistent basis; (c) at the time of delivery of the financial statements provided for in Sections 6.01(a) and(b) hereof, a certificate of an authorized financial officer of each of the Borrowers to the effect that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and that such Borrower is in compliance with the terms of the Credit Agreement and the other Loan Documents and no Default or Event of Default exists, or if any Default or Event of Default does exist specifying the nature and extent thereof and what action such Borrower proposes to take with respect thereto. In addition, such officer's certificate shall demonstrate compliance of the financial covenants contained in Sections 6.02, 6.03, 6.04, and 6.05 by calculation thereof as of the end of each such fiscal period. 18 23 (d) within the period for delivery of the annual financial statements provided in Section 6.01 (a), a certificate of the accountants conducting the annual audit stating that they have reviewed this Credit Agreement and stating further whether, in the course of their audit, they have become aware of any Default or Event of Default (insofar as any such terms or provisions pertain to accounting matters) and, if any such Default or Event of Default exists, specifying the nature and extent thereof. (e) within three (3) days after any officer of the Borrower obtains knowledge of any Default, a certificate of the chief financial officer of the Borrower setting forth the details thereof and any action that the Borrower is taking or proposes to take with respect thereto; and (f) from time to time such additional information regarding the financial condition or business of the Borrower and the Subsidiaries as the Bank may reasonably request. SECTION 6.02. Current Ratio. The Borrower shall maintain a ratio of Current Assets to Current Liabilities of not less than 1.0 to 1.0. SECTION 6.03. Minimum Tangible Net Worth. The Borrower shall maintain at all times Tangible Net Worth of at least $14,000,000, provided, however, on December 31, 1996 and the last day of each fiscal year thereafter such required amount shall be increased by an amount that is the greater of $2,000,000 or 50% of the net income of the Borrowers for the fiscal year then ending, with such increases to be cumulative. SECTION 6.04. Maximum Funded Liabilities to Tangible Net Worth. The Borrower shall maintain a ratio of total Funded Liabilities to Tangible Net Worth of not more than .75 to 1.0. SECTION 6.05. Maximum Funded Liabilities to Consolidated EBITDA Ratio The Borrower shall maintain a ratio of Funded Liabilities to Consolidated EBITDA of not more than 2.0 to 1.0 for the fiscal year ending December 31, 1996. SECTION 6.06. Obligations. The Borrower shall, and shall cause each of the Subsidiaries to: (a) preserve and maintain all of its rights, privileges, and franchises necessary or desirable in the normal conduct of its business; 19 24 (b) comply with the requirements of all applicable laws, rules, regulations, and orders of Governmental Authorities; (c) pay and discharge when due all taxes, assessments, and governmental charges or levies imposed on it or on its income or profits or any of its property, except for any such tax, assessment, charge, or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; (d) maintain all of its properties owned or used in its business in good working order and condition ordinary wear and tear excepted; (e) permit representatives of the Bank, during normal business hours, to examine, copy, and make extracts from its books and records, to inspect its properties, and to discuss its business and affairs with its officers, directors, and accountants; and (f) maintain insurance in such amounts, with such deductibles, and against such risks as is customary for similarly situated businesses. ARTICLE VII DEFAULT SECTION 7.01. Events of Default. Each of the following shall constitute an "Event of Default": (a) the Borrower shall fail to pay when due any principal of or interest on any Loan, or any Loan Party shall fail to pay when due any other amount payable under any Loan Document. (b) any representation, warranty, certification, or statement made or deemed made by any Loan Party (or any of its officers) in any Loan Document or in any certificate, financial statement, or other document delivered pursuant thereto shall be false, misleading, or incorrect in any material respect when made or deemed made. (c) the Borrower shall fail to perform, observe, or comply with any covenant, agreement, or term contained in Section 6.01 of this Agreement. 20 25 (d) any Loan Party shall fail to perform, observe, or comply with any other covenant, agreement, or term contained in any Loan Document (other than a failure covered elsewhere in this Section 7.01) and such failure shall continue for a period of thirty (30) days after notice thereof to such Loan Party by the Bank. (e) any Loan Party or any Subsidiary shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due. (f) any voluntary or involuntary proceeding under any Debtor Relief Law shall be commenced by or against any Loan Party or any Subsidiary or any of their respective assets, and if an involuntary proceeding is commenced, such proceeding shall not be dismissed within thirty (30) days after the commencement thereof. (g) any Loan Party or any Subsidiary shall fail to pay when due any principal of or interest on any indebtedness for borrowed money (other than the Note) having an outstanding principal amount greater than $250,000, whether as principal obligor, guarantor, or otherwise, or the maturity of any such indebtedness shall have been accelerated, or any event shall have occurred that permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such indebtedness or any Person acting on behalf of such holder or holders to accelerate the maturity thereof. (h) any judgment or order for the payment of money in excess of $250,000 shall be rendered against any Loan Party or any Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect. (i) any Loan Party shall dissolve, liquidate, or terminate its legal existence or shall convey, transfer, lease, or dispose of (whether in one transaction or a series of transactions) all or substantially all of its assets to any Person. (j) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 20% or more of the outstanding shares of common stock of the Borrower; or during any period of 12 consecutive calendar months, individuals who were directors of the Borrower on the first day of such period shall cease to constitute a majority of the board of directors of the Borrower. 21 26 (k) any event or condition shall occur that could reasonably be expected to have a Material Adverse Effect. SECTION 7.02. Remedies. If any Event of Default shall occur and be continuing, the Bank may do any one or more of the following: (a) Acceleration. Declare all outstanding principal of and accrued and unpaid interest on the Note and all other amounts payable by the Borrower under the Loan Documents immediately due and payable, and the same shall thereupon become immediately due and payable, without presentment, demand, protest, notice of acceleration, notice of intent to accelerate, or other notices or formalities of any kind, all of which are hereby expressly waived by the Borrower. (b) Termination of Commitment. Terminate the Commitment without notice to the Borrower. (c) Rights. Exercise any and all rights and remedies afforded by applicable law or otherwise. Notwithstanding the foregoing, upon the occurrence of an Event of Default under Section 7.01(f), the Commitment shall automatically terminate, and the outstanding principal of and accrued and unpaid interest on the Note and all other amounts payable by the Borrower under the Loan Documents shall thereupon become immediately due and payable without presentment, demand, protest, notice of acceleration, notice of intent to accelerate, or other notices or formalities of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Expenses. The Borrower shall on demand pay or reimburse the Bank for paying (a) all reasonable costs and expenses of the Bank, including the fees and disbursements of counsel for the Bank (including the allocated cost of internal counsel), in connection with the administration of the Loan Documents, the preparation of any waiver or consent thereunder or any amendment thereof or any Default or alleged Default and (b) if an Event of Default occurs, all costs and expenses incurred by the Bank, including the fees and disbursements of counsel (including the allocated cost of internal counsel), in connection with such Event of Default and any collection, bankruptcy, insolvency, and other enforcement proceedings resulting therefrom. 22 27 SECTION 8.02. INDEMNIFICATION. THE BORROWER AGREES TO INDEMNIFY THE BANK AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS (EACH AN "INDEMNIFIED PERSON") FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES, INCLUDING ALL FEES AND DISBURSEMENTS OF COUNSEL (INCLUDING THE ALLOCATED COST OF INTERNAL COUNSEL) (COLLECTIVELY THE "INDEMNIFIED LIABILITIES"), WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO ANY LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY, BUT EXCLUDING ANY OF THE FOREGOING TO THE EXTENT CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE INDEMNIFIED PERSON. WITHOUT LIMITING ANY PROVISION OF ANY LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH INDEMNIFIED PERSON SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL INDEMNIFIED LIABILITIES ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE INDEMNIFIED PERSON. SECTION 8.03. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, the Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank (or any of its affiliates) to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under the Loan Documents, irrespective of whether the Bank shall have made any demand under the Loan Documents and although such obligations may be unmatured. The Bank agrees promptly to notify the Borrower after any such set-off and application made by the Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that the Bank may have. SECTION 8.04. No Waiver; Cumulative Remedies. No failure on the part of the Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in the Loan Documents are cumulative and not exclusive of any rights and remedies provided by law. SECTION 8.05. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Bank. The Bank may at any time and from time to time (a) grant participating interests in the 23 28 Commitment and the Loans to any Person(s), and (b) assign all or any portion of its rights and/or obligations under the Loan Documents to any Person(s); provided, that the Bank may not assign its Commitment to any Person (other than an affiliate of the Bank) without the prior written consent of the Borrower. All information provided by the Borrower to the Bank may be furnished by the Bank to its affiliates and to any actual or proposed assignee or participant. SECTION 8.06. Amendments. No amendment or waiver of any provision of any Loan Document to which the Borrower is a party, nor any consent to any departure by the Borrower therefrom, shall be effective unless the same shall be agreed or consented to in writing by the Bank and the Borrower, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 8.07. Notices. All notices, requests, and other communications to either party hereunder shall be in writing (including facsimile transmission) and shall be given to such party at its address or facsimile number set forth on the signature pages hereof. Each such notice, request, or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number referred to in this Section and confirmation of receipt is received, (ii) if given by mail, three (3) Business Days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered at the address referred to in this Section; provided that notices to the Bank shall not be effective until received. SECTION 8.08. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 8.09. Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. SECTION 8.10. Controlling Agreement. Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable law (the "Maximum Rate"). If the Bank shall receive interest in an amount that exceeds the Maximum Rate, the excessive interest shall be applied to the principal of the Loans or, if it exceeds the unpaid principal, refunded to the Borrower. In determining whether the interest contracted for, charged, or received by the Bank exceeds the Maximum Rate, the Bank may, to the extent permitted by applicable law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) 24 29 exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Loans. SECTION 8.11. Survival. All representations and warranties made or deemed made by the Borrower in the Loan Documents shall survive the execution and delivery thereof and the making of the Loans, and no investigation by the Bank or any closing shall affect the representations and warranties by the Borrower or the right of the Bank to rely upon them. Without prejudice to the survival of any other obligation of the Borrower hereunder, the obligations of the Borrower under Article III and Sections 8.01 and 8.02 shall survive repayment of the Note and termination of the Commitment. SECTION 8.12. Governing Law. This Agreement and the Note shall be governed by and construed in accordance with, the law of the State where the Principal Office is located and the applicable laws of the United States of America. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court and each state court in the city where the Principal Office is located for the purposes of all legal proceedings arising out of or relating to any of the Loan Documents or the transactions contemplated thereby. The Borrower irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to the Borrower at its address set forth underneath its signature hereto. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 8.13. WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF THE BANK IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. SECTION 8.14. ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 25 30 26 31 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. BORROWERS: VARSITY SPIRIT CORPORATION By: Title: VARSITY SPIRIT FASHIONS AND SUPPLIES, INC. By: Title: VARSITY/INTROPA TOURS, INC. By: Title: Address for Notices: 2525 Horizon Lake Drive, #1 Memphis, TN 38133 Facsimile No.: 901-387-4356 Attention: John Nichols BANK: NATIONSBANK, N.A. By: Title: 27 32 Address for Notices: One NationsBank Plaza, 5th Floor Nashville, TN 37239 Facsimile No.: 615-749-4640 Attention: John E. Ball 28 33 EXHIBIT A PROMISSORY NOTE $9,000,000 JULY 1, 1996 FOR VALUE RECEIVED, the undersigned, VARSITY SPIRIT CORPORATION and VARSITY SPIRIT FASHIONS AND SUPPLIES, INC., both Tennessee Corporations and VARSITY/INTROPA TOURS, INC. a _________________ corporation (the "Borrowers"), hereby promises to pay to the order of NATIONSBANK, N.A. (the "Bank"), at the Principal Office, in lawful money of the United States of America and in immediately available funds, the principal amount of NINE MILLION AND NO/100---------------- Dollars ($9,000,000) or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by the Bank to the Borrower under the Credit Agreement referred to below, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The books and records of the Bank shall be prima facie evidence of all amounts outstanding hereunder. This Note is the Note referred to in the Credit Agreement of even date herewith, between the Borrower and the Bank (such Credit Agreement, as the same may be amended, modified, or supplemented from time to time, being referred to herein as the "Credit Agreement"), and evidences Loans made by the Bank thereunder. The Credit Agreement, among other things, contains provisions for acceleration of the maturity of this Note upon the happening of certain stated events and for prepayments of Loans prior to the maturity of this Note upon the terms and conditions specified in the Credit Agreement. Capitalized terms used in this Note have the respective meanings assigned to them in the Credit Agreement. 1 34 This Note shall be governed by and construed in accordance with the laws of the State where the Principal Office is located and the applicable laws of the United States of America. VARSITY SPIRIT CORPORATION By: Title: VARSITY SPIRIT FASHIONS AND SUPPLIES, INC. By: Title: VARSITY/INTROPA TOURS, INC. By: Title: 2 35 EXHIBIT B OPINION OF COUNSEL FOR THE LOAN PARTIES JULY 1, 1996 To NationsBank, N.A. One NationsBank Plaza, 5th Floor Nashville, TN 37239 Gentlemen: We have acted as counsel for VARSITY SPIRIT CORPORATION and VARSITY SPIRIT FASHIONS AND SUPPLIES, INC., both Tennessee Corporations and VARSITY/INTROPA TOURS, INC. a ________________ corporation (the "Borrowers"), in connection with the Credit Agreement (the "Credit Agreement") dated as of July 1, 1996, between the Borrower and NationsBank, N.A. (the "Bank"). Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of the Borrower pursuant to Section 4.01(b) of the Credit Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials, and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. Each Loan Party is duly organized, validly existing and in good standing under the laws of the State of its organization and has all corporate powers and all governmental licenses, authorizations, consents, and approvals required to carry on its business as now conducted. 36 2. The execution, delivery, and performance by each Loan Party of the Loan Documents to which it is a party and compliance with the terms and provisions thereof do not and will not (a) violate any provision of the charter, by-laws, or other organizational documents of such Loan Party, (b) violate any applicable law, rule, or regulation, (c) violate any order, writ, injunction, or decree of any Governmental Authority or arbitral award applicable to such Loan Party, or (d) result in a breach of, constitute a default under, require any consent under, or result in the acceleration or require prepayment of any indebtedness pursuant to the terms of any agreement or instrument to which such Loan Party is a party or by which it is bound, or result in the creation or imposition of any lien or other encumbrance upon any property of such Loan Party pursuant to the terms of any such agreement or instrument. 3. The Loan Documents have been duly executed and delivered by the Loan Parties, constitute the valid and binding obligations of the Loan Parties, and are enforceable against the Loan Parties in accordance with their respective terms, except as the enforceability thereof may be limited by applicable Debtor Relief Laws and general principles of equity. 4. There is no action, suit, or proceeding pending against, or to the best of our knowledge threatened against or affecting, any Loan Party or Subsidiary before any arbitrator or Governmental Authority in which an adverse decision could have a Material Adverse Effect or which in any manner draws into question the validity or enforceability of any Loan Document. 5. No authorization, consent, or approval of, or filing or registration with, any Governmental Authority is required for the execution, delivery, or performance by any Loan Party of the Loan Documents to which it is a party or for the validity or enforceability thereof. Very truly yours, EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 1,323 0 10,695 200 7,066 33,692 7,277 3,592 46,264 19,643 850 0 0 47 25,904 46,264 22,463 36,069 12,366 21,817 12,094 60 23 2,190 870 1,320 0 0 0 1,320 .28 .28
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