SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2002
Commission file number: 0-19298
VARSITY BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2890400
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6745 LENOX CENTER COURT, SUITE 300, MEMPHIS, TN 38115
(Address of principal executive offices) (Zip code)
(901) 387-4300
(Registrant's telephone number, including area code)
2525 HORIZON LAKE DRIVE, SUITE 1, MEMPHIS, TN 38133
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1935 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
9,452,250 Common Shares as of April 19, 2002
1
VARSITY BRANDS, INC.
INDEX
PAGE
Form 10-Q Cover Page 1
Form 10-Q Index 2
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Stockholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information:
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain statements which are "forward-looking"
statements under the federal securities laws that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. Forward-looking statements appear throughout Item 2 of Part I,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" concerning the Company's seasonal patterns of working capital and
revenue and operating results in its business. Certain factors could cause
actual results to differ materially from those in the forward-looking statements
including without limitation, (i) continuation of historical seasonal patterns
of demand for the Company's products and the Company's ability to meet the
demand; (ii) actions by competitors, including without limitation new product
introductions; (iii) the loss of domestic or foreign suppliers; (iv) changes in
business strategy or new product lines and the Company's ability to successfully
implement these; (v) moderation of uniform and accessories revenue growth; and
(vi) changes in interest rates and general economic conditions. These
"forward-looking statements" are based on currently available information and
plans. They are inherently uncertain, and investors must recognize that events
could turn out to be significantly different from the Company's expectations.
2
Part I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
March 31, December 31, March 31,
2002 2001 2001
--------- ------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 7,386 $ 14,397 $ 441
Accounts receivable, trade less allowance for doubtful
accounts ($295, $429 and $345, respectively) 6,140 12,161 7,244
Inventories 12,457 7,863 12,456
Prepaid expenses 4,997 3,937 3,915
Other receivables 3,106 3,555 1,473
Deferred taxes 2,793 2,383 6,770
Assets held for disposal -- -- 92,942
--------- --------- ---------
Total current assets 36,879 44,296 125,241
Property, plant and equipment, less accumulated
depreciation ( $5,382, $4,929 and $7,590, respectively) 4,116 4,387 4,605
Goodwill, less accumulated amortization
($9,595, $9,595 and $8,182, respectively) 66,596 66,596 68,009
Intangibles and deferred charges, less accumulated
amortization ($3,224, $3,048 and $3,360, respectively) 2,620 2,793 3,900
Other assets 561 559 1,104
--------- --------- ---------
$ 110,772 $ 118,631 $ 202,859
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,363 $ 5,891 $ 7,714
Accrued liabililties 4,980 8,258 4,686
Customer deposits 2,946 5,132 3,492
Current portion of long-term debt 1,375 1,375 --
Liabilities of discontinued businesses -- -- 9,690
--------- --------- ---------
Total current liabilities 18,664 20,656 25,582
Long-term debt 80,410 80,410 152,081
Deferred taxes 188 188 2,270
Contingent liabilities -- -- --
Stockholders' equity:
Preferred stock -- -- --
Common stock 95 95 95
Additional paid-in capital 37,306 37,306 37,306
Accumulated deficit (25,891) (20,024) (14,475)
--------- --------- ---------
11,510 17,377 22,926
--------- --------- ---------
$ 110,772 $ 118,631 $ 202,859
========= ========= =========
See notes to condensed consolidated financial statements.
3
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
THREE MONTHS ENDED
---------------------
MARCH 31,
---------------------
2002 2001
-------- --------
Net revenues:
Uniforms and accessories $ 5,654 $ 5,043
Camps and events 13,039 11,616
-------- --------
18,693 16,659
Cost of revenues:
Uniforms and accessories 4,066 3,731
Camps and events 8,063 6,867
-------- --------
Cost of revenues 12,129 10,598
-------- --------
Gross profit 6,564 6,061
Selling, general and
administrative expenses 10,715 10,446
-------- --------
Loss from operations (4,151) (4,385)
Other expense
Interest expense, net 2,126 2,099
-------- --------
Total other expense 2,126 2,099
-------- --------
Loss from continuing operations before
income taxes and discontinued operations (6,277) (6,484)
Incomes taxes (benefit) (410) (2,172)
-------- --------
Loss from continuing operations (5,867) (4,312)
Discontinued operations:
Income (loss) from operations of discontinued businesses -- 1,366
-------- --------
Net loss $ (5,867) $ (2,946)
======== ========
Loss from continuing operations per share
Basic and diluted $ (0.62) $ (0.46)
Loss per share:
Basic and diluted $ (0.62) $ (0.31)
Weighted average number common and
common equivalent shares outstanding:
Basic and diluted 9,452 9,452
See notes to condensed consolidated financial statements.
4
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
Retained
Common Stock Additional Earnings Total
--------------------- paid-in (Accumulated Stockholders'
Shares Amount Capital deficit) Equity
-------- -------- ---------- ------------ -------------
FOR THE THREE MONTHS ENDED MARCH 31, 2001
Balance, January 1, 2001 9,452 $ 95 $ 37,306 $(11,529) $ 25,872
Net loss for the period -- -- -- (2,946) (2,946)
-------- -------- -------- -------- --------
9,452 $ 95 $ 37,306 $(14,475) $ 22,926
======== ======== ======== ======== ========
FOR THE THREE MONTHS ENDED MARCH 31, 2002
Balance, January 1, 2002 9,452 $ 95 $ 37,306 $(20,024) $ 17,377
Net loss for the period -- -- -- (5,867) (5,867)
-------- -------- -------- -------- --------
9,452 $ 95 $ 37,306 $(25,891) $ 11,510
======== ======== ======== ======== ========
See notes to condensed consolidated financial statements.
5
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $ (5,867) $ (2,946)
Adjustments to reconcile net loss to net
cash provided by (used in) continuing operations:
Income from operations of discontinued businesses -- (1,366)
Depreciation and amortization:
Amortization of debt issue costs 161 231
Other depreciation and amortization 468 950
Provision for losses on accounts receivable 42 50
Deferred taxes (410) (4,500)
Changes in assets and liabilities, net of assets held
for disposal:
(Increase) decrease in:
Accounts receivable, trade 5,979 7,179
Inventories (4,594) (5,254)
Prepaid expenses (1,060) (665)
Other receivables 449 (19)
Other assets (2) (641)
Increase (decrease) in:
Accounts payable 3,472 3,642
Accrued liabilities (3,278) (2,445)
Customer deposits (2,186) (1,998)
-------- --------
Net cash used in continuing operations (6,826) (7,782)
Cash flows from discontinued operations and extraordinary item:
Net change in assets held for disposal -- (4,317)
-------- --------
Net cash used by discontinued operations and extraordinary item -- (4,317)
Cash flows from investing activities:
Capital expenditures (182) (731)
-------- --------
Net cash used in investing activities (182) (731)
Cash flows from financing activities:
Net borrowings under line-of-credit agreement -- 13,162
Debt issue costs (3) --
-------- --------
Net cash provided in (used by) financing activities (3) 13,162
-------- --------
Net increase (decrease) in cash (7,011) 332
Cash, beginning 14,397 109
-------- --------
Cash, ending $ 7,386 $ 441
======== ========
See notes to consolidated financial statements.
6
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements represent Varsity
Brands, Inc. ("Varsity" or the "Company") and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. These
statements are unaudited, and in the opinion of management include all
adjustments (consisting only of normal recurring adjustments) necessary for fair
presentation of the Company's condensed consolidated financial position and the
condensed consolidated results of its operations and cash flows at March 31,
2002 and 2001 and for the periods then ended. Certain information and footnote
disclosures made in the Company's last Annual Report on Form 10-K have been
condensed or omitted for these interim statements. Accordingly, these condensed
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Operating results for the three months ended March 31, 2002 are not necessarily
indicative of the results to be expected during the remainder of 2002.
2. DISPOSITION OF ASSETS
In June 2001, the Company sold its Riddell Group Division to an
affiliate of Lincolnshire Management, Inc. ("Lincolnshire"), a private-equity
fund. The purchase price, which was determined by an arms-length negotiation,
was approximately $67.5 million.
The sale was made pursuant to a stock purchase agreement dated April
27, 2001 between the Company and Lincolnshire. The Riddell Group Division
included: (i) all of the Company's team sports business, excluding Umbro branded
team soccer products, (ii) the Company's licensing segment, which allows
third-parties to market certain products using the Riddell and MacGregor
trademarks, and (iii) the Company's retail segment, including the New York
Executive Office, which managed the retail and licensing segments, and marketed
a line of sports collectibles and athletic equipment, principally to retailers
in the United States, and to a limited extent internationally. In conjunction
with the sale of the Riddell Group Division, the Company recognized a decline in
value in its net minority investment in a company which makes game uniforms on
behalf of the Riddell Group Division. The Company had previously accounted for
its investment in the game uniform company using the equity method of
accounting. As a result of the sale of the Riddell Group Division and the
write-down in the value of its minority investment in the game uniform company,
the Company recorded a loss on the sale of the Riddell Group Division of $20.5
million ($12.2 million after tax) in the second quarter of 2001.
The net operating results of the Riddell Group Division for the quarter
ending March 31, 2001 are presented as income from operations of discontinued
businesses
7
in the Condensed Consolidated Statements of Operations. Revenues generated by
the Riddell Group Division for the three-month period ended March 31, 2001 were
$22.0 million.
In September 2001, the Company settled the litigation that it had
brought earlier in the year against Umbro Worldwide, Ltd. ("Umbro Worldwide")
involving the licensing agreement between the Company and Umbro Worldwide. The
license agreement allowed Varsity to sell Umbro branded soccer apparel,
equipment and footwear to soccer specialty stores and others in the team channel
of distribution, principally in the United States.
In connection with the settlement the Company voluntarily terminated
its license effective November 30, 2001 in exchange for a lump sum payment to
the Company of $5.5 million and Umbro Worldwide's agreement to make certain
payments to the Company in the future, including the purchase, at net realizable
value, of certain inventory from the Company. As a result of the early
termination of the Umbro license, the Company recognized a gain of approximately
$4.9 million ($2.9 million after tax) during the fourth quarter of 2001.
Subsequent to March 31, 2002, the parties agreed that the final proceeds to be
received by the Company for the Umbro-related inventory was $2.6 million.
The net operating results of the Umbro Division for the quarter ended
March 31, 2001 are presented in income from discontinued operations of
discontinued businesses in the Condensed Consolidated Statements of Operations.
Revenues generated by the Umbro division for the three-month period ended March
31, 2001 were $1.9 million.
3. EARNINGS PER SHARE
Net loss per share amounts have been computed by dividing the net loss
by the weighted average number of outstanding common shares. Diluted earnings
per share for the three months ended March 31, 2002 and 2001 is equal to basic
earnings per share since potentially dilutive securities, which include
convertible debt and Common Stock options, were not dilutive due to the net
losses incurred.
4. RECEIVABLES
Accounts receivable include unbilled shipments of approximately
$966,000, $610,000 and $1,247,000 at March 31, 2002, December 31, 2001 and March
31, 2001, respectively. It is the Company's policy to record revenues when the
related goods have been shipped. Unbilled shipments represent receivables for
shipments that have not yet been invoiced. These amounts relate principally to
partial shipments to customers who are not invoiced until their order is shipped
in its entirety or customers with orders containing other terms that require a
deferral in the issuance of the invoice. Management believes that substantially
all of these unbilled receivables will be invoiced within the current sales
season.
8
5. INVENTORIES
Inventories consist of the following:
(In thousands) March 31, December 31, March 31,
2002 2001 2001
-------------------------------------------
Finished goods $9,220 $5,904 $9,580
Raw materials 3,237 1,959 2,876
-------------------------------------------
$12,457 $7,863 $12,456
===========================================
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $3,921,000 and $6,319,000 for the
three-month periods ended March 31, 2002 and 2001, respectively. During the
three months ended March 31, 2001, the Company received an income tax refund of
approximately $1,500,000 related to a carry back of net operating losses of its
Varsity Spirit Corporation subsidiary for periods preceding the 1997 acquisition
of Varsity Spirit Corporation. This tax refund had been recorded as a receivable
at the time of the acquisition. Other income tax payments, or refunds, were not
significant for the three month period ended March 31, 2002.
7. INCOME TAXES
Operating results from continuing operations for the three-month period
ended March 31, 2002 reflect a tax benefit based on the anticipated effective
annual tax rate for 2002. The anticipated effective annual tax rate is estimated
based on remaining net operating loss carryforwards and anticipated income and
non-deductible expenses for the year. The actual tax rate for the year could
vary substantially from the anticipated rate due to the use of these estimates.
The Company recorded a $4.5 million income tax benefit for the
three-month period ended March 31, 2001. This benefit was based on the
anticipated income tax rate for 2001. The income tax benefit was allocated as
follows: 1) $2.2 million to continuing operations and 2) $2.3 million to
discontinued operations.
8. SEGMENT INFORMATION
Net revenues and income or loss from operations for the Company's two
reportable segments are as follows:
9
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
----------------------------
(In thousands)
Net revenues:
Uniforms and accessories $ 5,654 $ 5,043
Camps and events 13,039 11,616
----------------------------
Consolidated total $ 18,693 $ 16,659
============================
Income (loss) from operations:
Uniforms and accessories $ (4,332) $ (4,522)
Camps and events 696 574
Corporate and unallocated expenses (515) (437)
----------------------------
Consolidated total $ (4,151) $ (4,385)
============================
9. ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 was effective
January 1, 2002. Under the new rules, goodwill and indefinite lived intangible
assets will no longer be amortized, but will be reviewed annually for
impairment. Intangible assets that are not deemed to have an indefinite life
will continue to be amortized over their useful lives.
The adoption of SFAS No. 142 requires that an initial impairment
assessment be performed on all goodwill and indefinite lived intangible assets.
The Company has completed its initial evaluation of its goodwill in accrdance
with the provisions of SFAS No. 142 as of January 1, 2002 and has determined
that, at present, goodwill was not impaired and there is no change in its
carrying value or corresponding charge to the Company's earnings. Fair values
were derived using cash flow analysis. The assumptions used in this cash flow
analysis were consistent with the Company's internal planning. The adoption of
the new standard will benefit earnings beginning in 2002 by approximately $1.9
million in reduced goodwill amortization. The Company will continue to evaluate
the carrying value of its goodwill in accordance with SFAS No. 142.
10. SUBSEQUENT EVENTS
Subsequent to March 31, 2002, the Company repurchased $8.25 million of
its 10.5% Senior Notes for a total cost, including commissions, of $7.9 million.
As a result of these purchases, the Company will recognize an extraordinary
gain, before tax, of approximately $0.2 million.
10
Subsequent to March 31, 2002, the Company and Umbro Worldwide reached
an agreement as to the final selling price of Umbro-related inventory which was
$2.6 million. The settlement amount approximated the final inventory net of
applicable reserves as of December 31, 2001. Proceeds received as a result of
the early termination of the Umbro License total $8.1 million, before expenses,
and consist of the $5.5 million lump sum payment described in Note 2 plus the
$2.6 million inventory payment.
11. RECLASSIFICATION OF PRIOR PERIODS
Certain prior period balances have been reclassified to conform to
current year presentation.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview and seasonality
In June 2001, the Company sold its Riddell Group Division ("RGD") to an
affiliate of Lincolnshire Management, Inc., a private-equity fund. In
conjunction with this sale, the Company wrote down its net minority investment
in an entity that provides game uniforms to RGD. As a result of these two
transactions, the Company recorded a loss of $20.5 million ($12.2 million after
tax). In September 2001, the Company settled the litigation that had been
brought earlier that year against Umbro Worldwide, Ltd. ("Umbro Worldwide")
involving its licensing agreement between the Company and Umbro Worldwide. In
connection with the settlement and in exchange for an upfront payment and Umbro
Worldwide's agreement to make certain additional payments to the Company, the
Company voluntarily agreed to terminate its license effective November 30, 2001.
The Company recorded the transaction during the fourth quarter of 2001,
establishing the reserves necessary to record the purchase of inventory by Umbro
Worldwide. Subsequent to March 31, 2002, the Company received a Settlement
Agreement from Umbro Worldwide in which the final selling price of the
Umbro-related inventory was set at $2.6 million. RGD's and Umbro's operating
results are shown as income from operations of discontinued businesses in the
Condensed Consolidated Statements of Operations.
RGD included: (i) all of the Company's Team Sports business, excluding
Umbro branded team soccer products, (ii) the Company's licensing segment, which
allowed third-parties to market certain products using the Riddell and MacGregor
trademarks, and (iii) the Company's retail segment, which marketed a line of
sports collectibles and athletic equipment to retailers.
The Umbro operations that were discontinued as a result of the
termination of the license with Umbro Worldwide included sales of Umbro branded
soccer apparel, equipment and footwear to soccer specialty stores and others in
the team channel of distribution, primarily in the United States.
As a result of the sale of RGD and the discontinuance of the Umbro
license, the Company's continuing financial results consist of operations within
the school spirit industry, including: (i) the design, market and manufacture of
cheerleader and dance team uniforms and accessories, (ii) the operation of
cheerleading and dance team camps throughout the United States, (iii) the
production of nationally televised cheerleading and dance team championships and
other special events and (iv) the operation of studio dance competitions and
conventions.
12
Operations for the three-month period ended March 31, 2002 resulted in
a net loss of $5.9 million, or $0.62 per share, as compared to a net loss of
$2.9 million, or $0.31 per share, for the first quarter of 2001. The primary
reasons for the increased net loss are differences in the Company's expected
effective income tax rate for the first quarter of 2002 as compared to the first
quarter of 2001 and the gain from discontinued operations recorded in 2001.
The operating loss before interest, taxes and discontinued operations
for the first quarter of 2002 narrowed by $0.2 million, or 5%, to $4.2 million
from $4.4 million in the first quarter of 2001. The Company benefited from
increases in revenues and decreases in selling, general and administrative
expenses as a percentage of sales, as described in more detail in the discussion
which follows this overview.
The loss in the first quarter of 2002 was anticipated and is consistent
with the seasonality of the Company's business. In recent years, the Company's
operations have been profitable in the second and third quarters, with the third
quarter typically the strongest, while losses have typically been incurred in
the first and fourth quarters. The factors influencing this seasonal pattern
were discussed in the Company's last Annual Report on Form 10-K.
The operating results of RGD and the Umbro Division are reported as
income from operations of discontinued businesses in the Condensed Consolidated
Statements of Operations. The following management's discussion and analysis of
financial condition reflects changes occurring in the Company's income from
continuing operations, exclusive of the discontinued operations of RGD and the
Umbro division.
Revenues
Revenues for the three-month period ended March 31, 2002 increased by
$2.0 million, or 12%, to $18.7 million from $16.7 million in the first quarter
of 2001.
Revenues from the sale of uniforms and accessories increased by $0.6
million, or 12%, to $5.6 million in the first quarter of 2002 from $5.0 million
for the first quarter of 2001. This increase was attributable to an overall
strong increase in product sales at the Company's national championships
combined with increased sales of dance and recital wear to the studio dance
market. These increases were offset by slight decreases in sales of the
Company's campwear and dance lines. The increase in special event product sales
is directly attributable to an increase in the number of participants at these
events. The increase in studio dance and recital sales is attributable to
increased market penetration of the Company's studio dance line. The Company is
currently in its second year of offering dance and recital apparel to the studio
dance market.
13
Revenues from camps and events increased by $1.4 million, or 12%, to
$13.0 million in the first quarter of 2002 from $11.6 million in the first
quarter of 2001. The increase in revenues for the three-month period is directly
attributable to an increase in the number of participants at the Company's
regional and national cheerleading and dance team championships and at the
Company's studio dance competitions and conventions, as compared to the prior
year.
Gross Profit
Gross profit for the first quarter of 2002 increased by 8% to $6.6
million from $6.1 million in the first quarter of 2001. Gross margin rates
decreased by 1.3 percentage points to 35.1% in the first quarter of 2002 from
36.4% in the first quarter of 2001.
Gross margin rates for the uniforms and accessories segment increased
to 28.1% in the first quarter of 2002 from 26.0% in the first quarter of 2001.
These increases are a result of higher margins earned on the special event
merchandise as compared to our other uniform lines offset by slightly higher
manufacturing costs associated with the new warehouse and production facility.
Gross margin rates for the camps and events segment decreased to 38.2%
in the first quarter of 2002 from 40.9% in the first quarter of 2000. The
decrease is primarily due to increased venue and production costs at the
Company's special events.
Selling, general and administrative
Selling, general and administrative expenses decreased as a percentage
of revenues to 57.3% in the first quarter of 2002 from 62.7% in the first
quarter of 2001. The improvement is principally due to economies of scale
realized by spreading fixed and certain variable administrative expenses over a
greater revenue base combined with a reduction in amortization expense as a
result of adopting the standards of Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets."
Selling, general and administrative expenses as a percentage of
revenues with respect to the uniforms and accessories segment decreased to 101%
in the first quarter of 2002 from 115% in the first quarter of 2001. The high
level of selling, general and administrative costs as a percentage of uniforms
and accessories revenue is expected during the first quarter due to the
seasonality of the segment's operations combined with the recognition of
expenses, during the first quarter, associated with producing and mailing the
Company's catalogs. These gains were due to improved economies of scale and
reductions in amortization expense as discussed in the preceding paragraph.
14
Selling, general and administrative expense ratios for the camps and
events segment improved to 32.8% in the first quarter of 2002 from 36.0% in the
first quarter of 2001. These gains are due to improved economies of scale and
reductions in amortization expense as discussed in the above paragraph.
Interest Expense
Interest expense for the three-month period ended March 31, 2001 has
been reduced by $1.5 million as a result of an allocation of interest expense to
the discontinued operations of RGD.
Interest expense, after the allocation of interest to discontinued
operations, increased slightly to $2.13 million in the first quarter of 2002
from $2.10 million in the first quarter of 2001. Total interest expense for
period decreased by $1.5 million due to lower interest on the revolving line of
credit resulting from lower outstanding indebtedness in 2002 as compared to
2001. The net interest expense for the quarter also decreased due to interest
earned on the net cash proceeds received from the sale of RGD. The net interest
expense for the first quarter of 2001 included approximately $250,000 of
interest received as part of a federal income tax refund. The refund, which
included approximately $1.5 million in taxes, related to a carryback of net
operating losses of the Company's Varsity Spirit Corporation subsidiary for
periods preceding the 1997 acquisition of Varsity Spirit Corporation and had
been recorded as a receivable at the time of acquisition.
As a result of the sale of RGD, the Company used a portion of the
proceeds received, approximately $32.7 million, to paydown all of the
indebtedness then outstanding on its line of credit agreement. (See "Liquidity
and Capital Resources" below.)
During 2001, the Company used a portion of the net proceeds received
from the sale of RGD to repurchase $40.7 million of its 10.5% Senior Notes for a
total cost, including commissions, of $32.0 million.
Income Taxes
Operating results from continuing operations for the three-month period
ended March 31, 2002 include an income tax benefit based on the anticipated
effective annual tax rate for 2002. The anticipated effective annual tax rate is
estimated based on the expected utilization of remaining net operating loss
carryforwards and anticipated income and non-deductible expenses for the year.
The actual tax rate for the year could vary substantially from the anticipated
rate due to the use of these estimates.
The Company recorded a $4.5 million income tax benefit for the
three-month period ended March 31, 2001. This benefit was based on the
anticipated income tax rate for 2001. The income tax benefit was allocated as
follows: 1) $2.2 million to continuing operations and 2) $2.3 million to
discontinued operations.
Liquidity and Capital Resources
15
The seasonality of the Company's working capital needs is impacted by
three key factors. First, a significant portion of the Company's products are
shipped during the late spring, summer and early fall period, with the related
receivables being paid when the school year begins during the following July to
October period. Second, the Company incurs costs related to the Company's summer
camp business during the first and second quarters as the Company prepares for
the upcoming camp season, while camp revenues are mostly collected in the June
to August period. Lastly, the Company's debt structure impacts working capital
requirements, as the semi-annual interest payments on the Company's 10.5% Senior
Notes come due each January and July.
To finance these seasonal working capital demands, the Company
maintains a credit facility in the form of a $15 million revolving line of
credit. Historically, the outstanding balance on the credit facility usually
follows the seasonal cycles described above, increasing during the early part of
the operating cycle in the first and second quarters of each year and then
decreasing from the middle of the third quarter and into the fourth quarter as
collections are used to reduce the outstanding balance. Such seasonality should
continue in the future.
At March 31, 2002, there were no outstanding balances due under the
credit facility. This compares with an outstanding balance of $29.6 million as
of March 31, 2001.
In April, 2002, in accordance with the terms of the Company's debt
instruments, including the Indenture in respect of its 10.5% Senior Notes, the
Company used $7.9 million aggregate net proceeds received in the Umbro
settlement to repurchase $8.25 million aggregate principal amount of its Senior
Notes. As a result of this transaction, the Company will recognize an
extraordinary gain, before related income taxes, of $0.2 million. Had the
Company not used the proceeds from the Umbro settlement to repurchase the Senior
Notes, the Company may have had to offer to repurchase a portion of the Senior
Notes at par.
The Company's current debt service obligations are significant and,
accordingly, the Company's ability to meet its debt service and other
obligations will depend on the Company's future performance and is subject to
financial, economic and other factors, some of which are beyond the Company's
control. Furthermore, due to the seasonality of the Company's working capital
demands described above, year-over-year growth in the Company's business and
working capital requirements could lead to higher debt levels in future periods.
Management believes operating cash flow together with funds available from the
Company's credit facility will be sufficient to fund the Company's current debt
service, seasonal capital expenditures and other working capital requirements.
However, many factors, including growth and expansion of the Company's business,
could necessitate the need for increased lines of credit or other changes in the
Company's credit facilities in the future.
16
Part II OTHER INFORMATION
Item 1. Legal Proceedings
The Company from time to time becomes involved in various claims and
lawsuits incidental to its business. None of these matters are expected to have
a material adverse effect on the Company's consolidated financial statements.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index:
10.22 First Amendment to Second Amended and Restated Loan,
Guaranty and Security Agreement, dated November 20, 2001
10.23 Waiver and Consent Agreement between Varsity Brands, Inc.
and Bank of America, N.A., dated April 18, 2002
10.24 Agreement between Umbro International Limited ("Umbro") and
Varsity Spirit Fashions & Supplies, Inc. ("Varsity")
pursuant to a settlement agreement dated 26th September
2001 (the "Settlement Agreement")
(b) Reports on Form 8-K:
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VARSITY BRANDS, INC.
Date: May 13, 2002 By: /s/ Jeffrey G. Webb
President and
Chief Executive Officer
Date: May 13, 2002 By: /s/ John M. Nichols
Chief Financial Officer and
Principal Accounting Officer
18