<PAGE> 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 September 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
incorporation or organization) Identification No.)
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 November 7, 1996: 4,546,708.
1
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VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 16
Signatures 17
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION; ITEM I: FINANCIAL STATEMENTS
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
(IN THOUSANDS) Sept. 30, 1996 Dec. 31, 1995 Sept. 30, 1995
CURRENT ASSETS: -------------- ------------- --------------
<S> <C> <C> <C>
Cash and cash equivalents $ 7,654 $ 5,080 $ 1,550
Accounts receivable, less allowance of 14,674 6,370 14,061
$200, $170, and $175
Inventories (Note 4) 5,836 4,926 5,928
Prepaid expenses (Note 5) 2,422 2,272 1,940
Deferred sales (Note 6) 1,282 280 927
Refundable income taxes -- 383 --
Deferred tax benefit 223 176 178
-------- -------- --------
TOTAL CURRENT ASSETS 32,091 19,487 24,584
PROPERTY AND EQUIPMENT, less 3,766 3,127 2,968
accumulated depreciation
GOODWILL/OTHER (Note 12) 8,839 6,629 6,517
-------- -------- --------
TOTAL ASSETS $ 44,696 $ 29,243 $ 34,069
======== ======== ========
CURRENT LIABILITIES:
Accounts payable $ 8,945 $ 1,678 $ 4,595
Accruals:
Compensation/payroll taxes 1,538 266 1,296
Income taxes 293 167 850
Other 183 99 185
Customer deposits 2,799 2,065 1,979
Curr. mat. of long-term debt (Note 12) 120 -- --
-------- -------- --------
TOTAL CURRENT LIABILITIES 13,878 4,275 8,905
DEFERRED INCOME TAXES 218 174 180
LONG-TERM DEBT (NOTE 12) 480 -- --
-------- -------- --------
TOTAL LIABILITIES 14,576 4,449 9,085
SHAREHOLDERS' EQUITY (Note 10)
Preferred stock -- -- --
Common stock 47 47 47
Additional paid-in-capital 14,004 13,523 13,470
Exc. of purch. price over pred. basis (2,517) (2,517) (2,517)
Retained earnings 18,616 13,777 14,018
-------- -------- --------
30,150 24,830 25,018
Treasury stock (30) (36) (34)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 30,120 24,794 24,984
-------- -------- --------
TOTAL LIABILITIES AND EQUITY $ 44,696 $ 29,243 $ 34,069
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements (unaudited).
3
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VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Nine Months
Ending Sept. 30, Ending Sept. 30,
1996 1995 1996 1995
---- ---- ---- ----
REVENUES:
<S> <C> <C> <C> <C>
Uniforms and accessories $19,588 $16,646 $42,051 $37,678
Camps and events 19,854 15,736 33,460 26,583
------- ------- ------- -------
39,442 32,382 75,511 64,261
COSTS OF REVENUES:
Uniforms and accessories 9,992 8,167 22,358 19,549
Camps and events 14,208 12,030 23,659 19,969
------- ------- ------- -------
24,200 20,197 46,017 39,518
GROSS PROFIT 15,242 12,185 29,494 24,743
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 8,549 6,885 20,643 17,795
------- ------- ------- -------
Operating income 6,693 5,300 8,851 6,948
OTHER INCOME 42 20 74 81
------- ------- ------- -------
Income before taxes on income 6,735 5,320 8,925 7,029
TAXES ON INCOME (Note 8) 2,674 2,083 3,544 2,760
------- ------- ------- -------
NET INCOME $ 4,061 $ 3,237 $ 5,381 $ 4,269
======= ======= ======= =======
NET INCOME PER SHARE $ 0.86 $ 0.69 $ 1.14 $ 0.91
======= ======= ======= =======
WEIGHTED AVERAGE
COMMON SHARES (Note 9) 4,742 4,718 4,722 4,672
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
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VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months
Ended Sept. 30,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,381 $ 4,269
Deferred income taxes (3) 25
Depreciation 799 570
Amortization 167 148
Change in operating assets and liabilities,
net of business acquired (Note 12):
Accounts receivable (9,276) (9,882)
Inventories (659) (2,041)
Prepaid expenses (15) (527)
Refundable income taxes 383 --
Accounts payable 7,014 3,127
Accruals 1,603 1,088
Customer deposits 636 804
------- -------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 6,030 (2,419)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Varsity USA, Inc. (Note 12) (1,926) --
Purchase of property and equipment (1,318) (1,637)
Increase in other assets (19) (121)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (3,263) (1,758)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (542) (402)
Proceeds from issuance of common stock 349 250
------- -------
NET CASH USED BY FINANCING ACTIVITIES (193) (152)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT (Note 11) 2,574 (4,329)
CASH AND CASH EQUIVALENTS, beginning of period 5,080 5,879
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 7,654 $ 1,550
======= =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE> 6
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Common Additional Excess of Retained Treasury Total
stock stock paid-in purchase Earnings stock
shares amount capital price over
predecessor
basis
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
December 31, 1995
(Note 10) 4,710 $ 47 $13,523 ($2,517) $13,777 ($ 36) $24,794
Net income for the
period 5,381 5,381
Issuance of common
stock upon exercise of
stock options 343 6 349
Tax benefit related to
exercise of stock
options (Note 11) 138 138
Cash dividends ($.04
per share) (542) (542)
BALANCES,
September 30, 1996 4,710 $ 47 $14,004 ($2,517) $18,616 ($ 30) $30,120
======= ======= ======= ======= ======= ======= =======
BALANCES,
December 31, 1994
(Note 10) 4,699 $ 47 $13,102 ($2,517) $10,151 ($ 42) $20,741
Net income for the
period 4,269 4,269
Issuance of common
stock upon exercise of
stock options 242 8 250
Tax benefit related to
exercise of stock
options (Note 11) 126 126
Cash dividends ($.03
per share) (402) (402)
BALANCES,
September 30, 1995 4,699 $ 47 $13,470 ($2,517) $14,018 ($ 34) $24,984
======= ======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
6
<PAGE> 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 nine months ended September
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:
<TABLE>
<CAPTION>
(In thousands) (Unaudited) (Unaudited)
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Finished Goods $4,188 $3,217 $4,080
Raw Materials 1,648 1,709 1,848
------ ------ ------
$5,836 $4,926 $5,928
====== ====== ======
</TABLE>
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method.
7
<PAGE> 8
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Deferred costs:
Catalog/Brochures $ 277 $ 250 $ 278
Camps and clinics 40 120 19
Championships/Events 290 455 56
Supplies and samples 404 342 349
Commissions 273 164 159
Prepaid tour costs 509 339 387
Insurance 394 413 455
Other 235 189 237
------ ------ ------
$2,422 $2,272 $1,940
====== ====== ======
</TABLE>
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 bank line of credit which expired in
July 1996 and was renewed as a $9,000,000 line of credit which
expires June 30, 1997. No balances were outstanding under the
agreement as of September 30, 1996, December 31, 1995, or
September 30, 1995. The agreement requires that the Company
maintain certain financial ratios and maintain a minimum tangible
net worth. The line bears interest at the lower of prime or LIBOR
plus 1%. Weighted average borrowings for the nine month periods
ended September 30, 1996 and 1995 were $451,000 and $480,000,
respectively, and the weighted average interest rates for the same
periods were 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 September 30, 1996 and 1995, net
income per share calculations are based upon weighted average
common and equivalent shares outstanding totaling 4,742,000 and
4,718,000, respectively.
For the nine months ended September 30, 1996 and 1995, net income
per share calculations
8
<PAGE> 9
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are based upon weighted average common and equivalent shares
outstanding totaling 4,722,000 and 4,672,000, respectively.
NOTE 10: In 1996, under the Company's 1991 Stock Option Plan, the Company
granted options to purchase 175,490 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:
<TABLE>
<CAPTION>
Option Price
Shares Per Share
------- ---------
<S> <C> <C>
Outstanding at December 31, 1995 457,508 $5.00 - 13.50
Granted 179,890 14.50 - 15.95
Exercised (49,501) 5.00 - 11.83
Cancelled (2,801) 5.00 - 14.50
-------
Outstanding at September 30, 1996 585,096 $5.00 - 15.95
=======
</TABLE>
As of September 30, 1996, under the Company's 1989 Stock
Option Plan, 21,049 options were available for grant and 173,231
options were outstanding. Under the 1991 Stock Option Plan,
154,958 options were available for grant and 411,865 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 for
the year ending December 31, 1996.
9
<PAGE> 10
NOTE 11: Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Cash paid for:
Income taxes $2,900 $2,191
Interest $27 $31
</TABLE>
Non-cash financing activities:
During the nine month periods ended September 30, 1996 and 1995,
additional paid-in-capital was increased by a reduction in income
taxes payable of $138,000 and $126,000, respectively, 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 35
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 o operations.
10
<PAGE> 11
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND 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 the Company's existing camp
operations.
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 primarily held during the winter and summer months;
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
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
REVENUES
Total revenues increased 17.5% to $75.5 million in the nine months
ended September 30, 1996 from $64.3 million in the nine months ended September
30, 1995.
Revenues from the sale of uniforms and accessories increased by 11.6%
to $42.1 million in the nine months ended September 30, 1996 from $37.7 million
in the nine months ended September 30, 1995. This increase was primarily
attributable to a strong increase in shoe and accessory sales combined with an
8.0% sales growth in other product lines. The overall sales increase is due to
a combination of expansion within existing product lines and the introduction
of new designs, and, to a much lesser extent, a small price increase on certain
items.
Camp and event revenues increased by $6.9 million, or 25.9%, to $33.5
million in the nine months ended September 30, 1996, as compared to the same
period in 1995. This increase was primarily attributable to $4 million of 1996
revenues associated with the USA camp business acquired in May 1996, combined
with higher incremental revenues derived from a 20.5% increase in camp
participants (or 6.4% exclusive of USA participants), and a 2.2% increase in
the average gross tuition per camp participant during the 1996 summer season.
The revenue increase was also attributable to an increase in the number of
participants in the 1996 National High School Dance and Cheerleading
Championships as compared to the same events held in 1995. In addition, the
Company sponsored two new championships,
11
<PAGE> 12
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
the All-Star Championship in March 1996 and the National Jumprope Championship
in June 1996, which also contributed to the revenue increase.
GROSS PROFIT
Gross profit increased by 19.2% to $29.5 million in the nine months
ended September 30, 1996 from $24.7 million in the nine months ended September
30, 1995.
Gross profit from the sale of uniforms and accessories as a percentage
of such sales decreased to 46.8% in the nine months ended September 30, 1996
from 48.1% in the nine months ended September 30, 1995. As a significant
portion of the overall sales increase relates to purchased product lines such
as shoes and accessories, which have lower margins than custom manufactured
goods, a decrease in margin is to be expected. The Company expects this shift
in mix to continue for the forseeable future.
Gross profit margins associated with camps and special events
increased to 29.3% in the nine months ended September 30, 1996 from 24.9% for
the nine month period ended September 30, 1995. This was primarily due to more
efficient staffing at summer camps, resulting in savings in instructor payroll,
travel, and training costs.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses in the nine months ended
September 30, 1996 were $20.6 million as compared to $17.8 million in the nine
months ended September 30, 1995. Selling, general, and administrative expenses
as a percentage of sales decreased to 27.3% for the nine months ended September
30, 1996 from 27.7% in the nine months ended September 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 $2.8 million
in selling, general, and administrative costs was primarily due to increases of
$1.9 million in payroll and personnel costs, including $676,000 in additional
selling commissions and related expenses, $238,000 in additional consulting
fees, partially associated with the additional championships, and $316,000
attributable to USA personnel. There were also increases of $258,000 of
operating costs (excluding payroll) incurred by USA, $206,000 of additional
costs associated with the publication and distribution of the annual catalogs
and brochures, and $208,000 in additional telephone expenses. Additonal
depreciation expense of $198,000, primarily relating to recent acquisitions of
computer equipment and software, also contributed to the increase.
NET INCOME
The net income increased 26.0% to $5.4 million for the nine months
ended September 30, 1996 as compared to $4.3 million in the same period last
year. The increase in income is primarily attributable to an increase of $4.8
million in gross profit, partially offset by an increase of $2.8 million in
selling, general, and administrative expenses. The net income per share for the
period was $1.14 as compared to $.91 for the same period last year.
12
<PAGE> 13
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
REVENUES
Total revenues increased by 21.8% to $39.4 million in the three months
ended September 30, 1996 from $32.4 million in the three months ended September
30, 1995.
Revenues from the sale of uniforms and accessories increased by 17.7%
in the three months ended September 30, 1996, as compared to the same period in
1995. This increase is primarily attributable to a strong increase in shoe and
accessory sales combined with a 14.3% sales growth in other product lines. The
overall sales increase is primarily due to a combination of expansion within
existing product lines, the introduction of new designs and the receipt and
processing of various sales orders in the third quarter that typically have
been received and processed in the second quarter of the year. This delay in
the receipt and processing of sales orders is attributable to training
activities necessary to implement a new order entry system and to inclement
weather in the Midwest and Northeast during the spring of 1996.
Camp and event revenues increased 26.2% in the three months ended
September 30, 1996 as compared to the same period in 1995, primarily due to
$3.7 million of third quarter revenues associated with the USA camp business
acquired in May 1996 combined with higher incremental revenues from a 4.7%
increase in camp participants, exclusive of USA camp participants, and a 1.8%
increase in average gross tuition per camp participant during the third quarter
of 1996.
GROSS PROFIT
Gross profit increased by 25.1% to $15.2 million in the three months
ended September 30, 1996 from $12.2 million in the three months ended September
30, 1995.
Gross profit from the sale of uniforms and accessories as a percentage
of such sales decreased to 49.0% in the three months ended September 30, 1996
from 50.9% in the three months ended September 30, 1995. As a significant
portion of the overall sales increase relates to purchased product lines, such
as shoes and accessories, which have lower margins than custom manufactured
goods, a decrease in margin is to be expected. The Company expects this shift
in mix to continue.
Gross profit associated with camps and special events increased to
28.4% from 23.6% 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.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses in the three months
ended September 30, 1996 were $8.5 million as compared to $6.9 million in the
three months ended September 30, 1995. Selling, general, and administrative
expenses as a percentage of total revenues increased to 21.7% from 21.3%. The
$1.7 million increase in expense was primarily due to increases of $1.2 million
in payroll and personnel costs, including $512,000 in additonal selling
commissions and related expenses and $222,000 attributable to USA personnel.
There were also increases of $214,000 in operating costs (excluding payroll
costs) incurred by USA, $68,000 in costs associated with the publication and
distribution of the
13
<PAGE> 14
annual catalogs, and $83,000 in additional telephone expenses. Additional
depreciation expense of $67,000, primarily relating to recent acquisitions of
computer equipment and software, also contributed to the increase.
NET INCOME
The net income increased 25.5% to $4.1 million for the three months
ended September 30, 1996 as compared to $3.2 million in the same period last
year. The increase in the income is primarily attributable to an increase of
$3.1 million in gross profit, partially offset by an increase of $1.7 milllion
in operating expenses. The net income per share for the period was $.86 as
compared to $.69 for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company's current assets had
increased by 64.7% to $32.1 million from $19.5 million as of December 31, 1995,
and the Company's current liabilities had increased 224.6% to $13.9 million as
of September 30, 1996, as compared to $4.3 million as of December 31, 1995. The
related increase of $3.0 million in working capital is principally attributable
to an increase of $9.3 million in accounts receivable and deferred sales
primarily related to increases in uniform sales, offset by the investment of
$1.9 million of cash to acquire the business of USA, as well as the purchase of
$1.3 million in equipment, primarily computer equipment. As of September 30,
1996, the Company's cash position increased compared to December 31, 1995,
primarily due to a change in timing related to the payment of camp housing
bills (reflected in the increase in accounts payable).
Operating activities for the nine months ended September 30, 1996
provided $6.0 million in cash, an increase of $8.4 million from the nine month
period ended September 30, 1995. This increase was primarily due to an increase
of $3.9 million in accounts payable, due to a change in timing related to the
payment of camp housing bills, $1.4 million related to smaller increases in
inventory levels as compared to last year, $0.6 million related to accounts
receivable collections and $0.5 million related to smaller increases in prepaid
expenses as compared to last year.
Cash used by investing activities for the nine months ended September
30, 1996 increased $1.5 million to $3.3 million from the nine month period
ended September 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 $319,000 in capital expenditures.
As of September 30, 1996, the Company's current assets increased by
30.5% to $32.1 million from $24.6 million as of September 30, 1995. The
Company's current liabilities increased by 55.8% to $13.9 million as compared
to $8.9 million as of September 30, 1995. The 16.2% improvement in the
Company's working capital position from September 30, 1995 to September 30,
1996 is primarily attributable to an increase in cash of $6.1 million,
attributable to increased net income and a change in timing related to the
payment of housing bills, which was offset in part by a $4.4 million increase
in accounts payable.
As discussed in the notes to the consolidated financial statements,
the Company's $6,000,000 bank line of credit expired in July 1996, and was
renewed, on similar terms, in the amount of $9,000,000, expiring June 30, 1997.
Weighted average borrowings for the nine month periods ended September 30, 1996
and 1995 were $451,000 and $480,000 respectively, and the weighted average
interest rate for the same periods was 6.47% and 7.09% respectively. For the
three month periods ended September 30, 1996 and 1995, respectively, weighted
average borrowings were $10,000 and $39,000. No balances were outstanding as of
September 30, 1996, December 31, 1995 or September 30, 1995.
14
<PAGE> 15
As a result of the acquisition of the camp business of USA, the
Company issued a $600,000 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.
15
<PAGE> 16
VARSITY SPIRIT CORPORATION AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit
Number Description
------- -----------
10(c) Loan Agreement dated as of July 1, 1996 between the Company
and Nationsbank of Tennessee, N.A.
27 Financial Data Schedule (for SEC use only)
B. REPORTS ON FORM 8-K
There was no Report on Form 8-K filed by the Company during the three
months ended September 30, 1996.
16
<PAGE> 17
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 11/13/96 By /S/ Jeffrey G. Webb
------------------------------
Jeffrey G. Webb
Chairman, President, and Chief
Executive Officer
Date 11/13/96 By /S/ John M. Nichols
-------------------------------
John M. Nichols
Senior Vice President and Chief
Financial Officer
17
<PAGE> 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
______________________________________________________________________________
______________________________________________________________________________
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
Tennessee 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Number of Business
Notice Days Prior
- - ------------------------------ ------------------
<S> <C>
Termination or reduction of
Commitment 3
Borrowing or prepayment of,
or Conversions into, Base
Rate Loans same day
</TABLE>
10
<PAGE> 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
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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
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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
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(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).
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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;
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(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.
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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.
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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.
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(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;
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(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.
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(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.
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(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.
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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
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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
<PAGE> 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
<PAGE> 30
26
<PAGE> 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: /s/ John M. Nichols
Title: Senior Vice-President, Chief Financial Officer
VARSITY SPIRIT FASHIONS AND SUPPLIES, INC.
By: /s/ John M. Nichols
Title: Senior Vice-President, Chief Financial Officer
VARSITY/INTROPA TOURS, INC.
By: /s/ John M. Nichols
Title: Senior Vice-President, Chief Financial Officer
Address for Notices:
2525 Horizon Lake Drive, #1
Memphis, TN 38133
Facsimile No.: 901-387-4356
Attention: John Nichols
BANK:
NATIONSBANK, N.A.
By: /s/ John E. Ball
Title: Senior Vice-President
27
<PAGE> 32
Address for Notices:
One NationsBank Plaza, 5th Floor
Nashville, TN 37239
Facsimile No.: 615-749-4640
Attention: John E. Ball
28
<PAGE> 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 Tennessee 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
<PAGE> 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: /s/ John M. Nichols
Title: Senior Vice-President, Chief Financial Officer
VARSITY SPIRIT FASHIONS AND SUPPLIES, INC.
By: /s/ John M. Nichols
Title: Senior Vice-President, Chief Financial Officer
VARSITY/INTROPA TOURS, INC.
By: /s/ John M. Nichols
Title: Senior Vice-President, Chief Financial Officer
2
<PAGE> 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 Tennessee 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.
<PAGE> 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,
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<PERIOD-START> JAN-01-1996
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