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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] for the transition period
from ____________ to ____________
Commission file number: 0-22321
WHEELS SPORTS GROUP, INC.
(Name of small business issuer in its charter)
NORTH CAROLINA 56-2007717
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
149 GASOLINE ALLEY DRIVE
MOORESVILLE, NORTH CAROLINA 28115
(Address of principal executive offices (Zip Code)
Issuer's telephone number: (704) 662-6442
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
N/A NONE
Securities registered pursuant to section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ]
The issuer's revenues for its most recent fiscal year were $7,491,000.
The aggregate market value of the 2,755,416 shares of Common Stock held by
non-affiliates was $17,737,990 as of April 9, 1998. For purposes of the
foregoing calculation only, each of the issuer's officers and directors is
deemed to be an affiliate. The market value of the shares was calculated based
on the closing price of such shares on the Nasdaq National Market(R) on such
date.
As of April 10, 1998, 5,280,253 shares of the issuer's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of this Form 10-KSB is incorporated by
reference to the issuer's definitive proxy statement to be filed with the
Commission on or before April 30, 1998. If such proxy statement is not filed
by such date, the information required by Part III will be filed with the
Commission as an amendment to this Form 10-KSB under cover of Form 10-KSB/A.
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Wheels Sports Group, Inc. ("Wheels") designs, markets and distributes
premium quality collectible sports trading cards primarily featuring race
drivers, team owners and crew chiefs active in NASCAR-sanctioned racing events.
Wheels has license agreements covering its premium quality collectible sports
trading cards with substantially all of NASCAR's top drivers and teams. Wheels
generally produces between three or four premium quality collectible sports
trading card limited issues each year and markets each issue to a network of
distributors, brokers and specialty hobby dealers located principally throughout
the southeast United States. Wheels estimates that customers in the hobby
channel such as distributors and hobby dealers, sports memorabilia shops, sports
trading card stores and toy stores have historically accounted for approximately
85% of sales, with the remaining 15% of sales accounted for by the retail
channel, which consists of distributors and brokers who resell collectible
sports trading cards to mass merchandisers, wholesale clubs and variety stores.
Wheels has also sold its collectible sports trading cards to members of the
Wheels Club, a membership club organized by Wheels, and to businesses for use in
corporate promotions. Wheels' collectible sports trading cards are priced for
sale in the premium and high-priced market. Each issue of Wheels' collectible
sports trading cards includes standard sets and "premium insert" card sets,
which may be divided into "parallel" sets. According to the January 1998
edition of Sports Cards Magazine and Price Guide, seven collectible insert cards
produced by Wheels or Press Pass in 1997 were among the top 10 premium insert
cards for NASCAR race drivers and six standard cards produced in 1997 were among
the top 10 issues for NASCAR race drivers. According to Sports Cards Magazine
and Price Guide, the selection of the top 10 trading cards reflects increasing
retail prices in the secondary market as well as the trading card industry's
most popular and most frequently purchased trading cards. In addition to
NASCAR, Wheels produced a draft pick collectible trading card set in 1997 for
leading college basketball players, which it expects to continue in future
years.
THE ACQUIRED COMPANIES
In order to expand its collectible sports trading card business and to
enter into additional NASCAR-related businesses, Wheels acquired Press Pass
Partners ("Press Pass"), High Performance Sports Marketing, Inc. ("High
Performance"), Green's Racing Souvenirs, Inc. ("GRS") and Diamond Sports Group,
Inc. ("Diamond") (collectively, the "Acquired Companies"). The acquisitions of
all of the Acquired Companies occurred between June 30, 1997 and December 31,
1997. Wheels and the Acquired Companies (collectively, the "Company") have
consolidated their operations. The Company's new principal executive offices
and the consolidated operations are located at 149 Gasoline Alley Drive,
Mooresville, North Carolina 28115, and the telephone number is (704) 662-6442.
In January 1997, Wheels also acquired World of Racing, Inc. ("WOR") to offer
participants the opportunity to play a fantasy NASCAR race game through
telephone, fax and the internet. The Company discontinued the operations of WOR
in August 1997. The Company also acquired Emerald Sports Group, Inc.
("Emerald") in August 1997 through a merger of Emerald into Diamond.
Accordingly, references to Diamond also include Emerald.
Press Pass. On December 31, 1997, Wheels acquired the two corporate
partners of Press Pass, a general partnership based in Dallas, Texas. Press
Pass was formed in 1993 to design, market and distribute collectible sports
trading cards, primarily for the NASCAR market. Press Pass has license
agreements with many of NASCAR's top drivers and teams, including Dale
Earnhardt, Jeff Gordon, Dale Jarrett and Terry LaBonte. Press Pass sells its
collectible sports trading cards to specialty hobby dealers and national mass
market retailers, including Wal-Mart, K-Mart and Target. Press Pass sells to
the hobby channel on a direct basis and also through a network of approximately
30 wholesale distributors. The hobby channel and mass market retail channel
have each historically accounted for approximately 50% of Press Pass' total
revenues. Press Pass also sells collectible sports trading cards through the
Press Pass VIP Club, a membership club
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established by Press Pass which has recently been combined with the Wheels Club
and renamed the VIP Club. In 1996 Sports Cards Magazine and Price Guide
recognized Press Pass cards as insert single of the year, regular issue single
of the year and racing set of the year in the NASCAR category. Also in 1996,
Press Pass received the Sports Cards Magazine and Price Guide award for best
innovation in the sports card trading industry for the "Burning Rubber" issue,
which had pieces of tires used in Winston Cup races imbedded in the premium
insert cards. Press Pass was the third leading producer of NASCAR collectible
trading cards during 1995, the second leading producer during 1996 and the
first leading producer during 1997. In addition to NASCAR, Press Pass has
produced draft pick collectible trading cards for leading college football and
basketball players since 1995.
High Performance. In order to diversify its NASCAR-related business
operations, Wheels acquired High Performance in October 1997. High Performance
is licensed by certain NASCAR race drivers, team owners and sponsors to
distribute t-shirts, hats, apparel, souvenirs and other merchandise to
convenience stores, mass market retailers such as Wal-Mart and K-Mart, grocery
stores, auto dealerships and other retail outlets. High Performance markets
its NASCAR licensed merchandise through its own sales and distribution
personnel and through approximately 40 independent distributors who primarily
service the convenience store channel. As of January 31, 1998, the Company
estimates that its High Performance merchandise was carried in approximately
10,000 of the estimated 125,000 convenience stores located in the United
States. The Company also estimates that the convenience store channel and mass
market retailers each accounted for approximately 25% of High Performance's
total revenues during 1997, with remaining revenues attributable to grocery
stores, drug stores, special promotions, trackside sales and other retail
outlets.
Diamond and GRS. The Company established trackside retail operations
during 1997 through Wheels' acquisition of GRS and Diamond. During the 1997
Winston Cup Series, GRS and Diamond each operated three tractor-trailer rigs
for the trackside sale of NASCAR-related merchandise. The Company expects to
operate 13 trailers at the 33 races which will comprise the 1998 Winston Cup
Series. In 1998, the Company will be the exclusive trackside vendor of
t-shirts, hats, apparel, collectible sports trading cards, die cast vehicle
replicas, souvenirs and other merchandise for 11 NASCAR teams and corporate
sponsors, including the McDonalds' team and driver Bill Elliott, Coors Light
and driver Sterling Marlin, Exide Batteries and driver Jeff Burton, R.J.
Reynolds and driver Jimmy Spencer, First Union and driver Wally Dallenbach and
the Cartoon Network. The Company will also operate the trackside licensed
souvenir programs for both Chevrolet and Ford.
The acquisition of Diamond has also enabled the Company to offer
corporate hospitality programs at certain NASCAR events. During the 1998
Winston Cup Series, the Company will manage the trackside corporate hospitality
programs for Ferguson Enterprises and Goody's Pharmaceuticals, a division of
Block Drug Company, Inc. The Ferguson Enterprises hospitality program will
cover 11 of the Winston Cup races during 1998, while the Goody's program will
cover two races. At each event, the Company will be responsible for
coordinating and obtaining corporate suites or hospitality tents, tickets to
the event, passes to tour the track pits and other track facilities, food and
beverages, and NASCAR-related merchandise and souvenirs for a specified number
of guests. During 1997, Diamond managed corporate hospitality programs at nine
events covering a total of approximately 2,700 guests. During 1998, the
Company expects to manage corporate hospitality programs at 11 events covering
a total of approximately 3,500 guests.
THE PROPOSED ACQUISITION
The Company has entered into an agreement and plan of merger with
Racing Champions Corporation ("Racing Champions"), a leading producer and
marketer of collectibles, including an extensive line of officially licensed
die cast replicas of actual race cars and related vehicles from the five most
popular U.S. professional racing series, including NASCAR. The agreement
contemplates that Racing Champions will acquire the Company as a wholly owned
subsidiary (the "Racing Champions Merger") and that the Company's Common Stock
(other than dissenters' appraisal rights shares) will be converted into the
right to receive a portion of a
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share of Racing Champions' Common Stock in accordance with an exchange ratio
contained in the merger agreement (the "Exchange Ratio"). Shareholder approval
of the agreement by shareholders of both Racing Champions and the Company is
required prior to consummation of the transaction contemplated by the
agreement. The Company and Racing Champions anticipate filing a joint proxy
statement/registration statement describing the transaction with the Securities
and Exchange Commission. Reference is made to such proxy
statement/registration statement for additional information concerning Racing
Champions and the proposed Racing Champions Merger.
INDUSTRY AND MARKET OVERVIEW
The NASCAR Racing Market. NASCAR, which sanctions all races that
constitute the Winston Cup and the Busch Grand National Stock Car Series, has
enjoyed significant increases in popularity and media exposure, leading to
greater visibility for the race drivers, team owners and crew chiefs active in
NASCAR racing. Attendance at NASCAR Winston Cup Series events has
significantly exceeded attendance growth experienced by other major sports.
The entire 1997 Winston Cup Series was broadcast to national television
audiences by television networks and cable channels, and also received
extensive national radio coverage.
Collectible Sports Trading Card Industry. According to the Sports
Card Manufacturers Association, Inc. ("SCMA"), a trade organization comprised
of the four largest manufacturers of collectible sports trading cards, the
collectible sports trading card market generated sales of approximately $560
million in 1995, which equates to retail sales of approximately $900 million.
Sales of collectible sports trading cards are most directly influenced by the
popularity of the related sport, which is most effectively measured by fan
attendance, media ratings and exposure. In the late 1980's, sales of
collectible sports trading cards experienced significant growth, increasing
from $250 million in 1988 to approximately $982 million in 1991. This
significant increase in sales was accompanied by changes in the market, as the
number of distributors and dealers expanded and as demand caused major sports
organizations and players associations to expand the number of licensees
entitled to produce and distribute collectible sports trading cards. The
increase in competition which resulted from an expansion of the number of
licensees was accompanied by entry into the collectible sports trading card
market of speculators who sought to capitalize on increasing values of
collectible sports trading cards. As a result, the collectible sports trading
card market became over-extended, with sales declining from $982 million in
1991 to approximately $767 million in 1993. Thereafter, the Major League
Baseball strike and the National Hockey League work stoppage in 1994 caused a
further decline in sales of collectible sports trading cards, with 1995 sales
declining to approximately $560 million, according to the SCMA.
As a result of the events which took place from 1991 through 1994,
there has been a significant consolidation of the collectible sports trading
card industry. Several collectible sports card manufacturers ceased operations
or declared bankruptcy in 1995 and 1996, and the Company is aware of several
other collectible sports trading card manufacturers experiencing severe
financial difficulties. The Company believes that the industry consolidation,
which is still ongoing, will result in the market being dominated by the four
full line collectible sports trading card manufacturers and certain regional
manufacturers that will target specific sports or types of products in smaller,
segmented markets.
While players associations and participants in sporting events such as
NASCAR races have an incentive to maximize their exposure through media such as
collectible sports trading cards, participants in these sports also recognize
that the ability of collectible sports trading card manufacturers to pay
guaranteed and other royalties is directly related to the level of competition
and profitability of the cards or other media. As a result of the
consolidation in the collectible sports trading card industry, and because the
players associations and sports participants are familiar with the difficulties
encountered by the remaining manufacturers in the industry, the Company
believes it is unlikely that a significant number of additional licenses will
be issued in the near future for manufacturers of collectible sports trading
cards. Consequently, the Company believes that the limited number of licenses
of NASCAR drivers, team owners and crew chiefs available for collectible sports
trading cards will serve as a barrier to additional competition to some degree.
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The Company believes that retail customers for Wheels and Press Pass
premium collectible sports trading cards are primarily comprised of collectors
who select collectible sports trading cards based on their scarcity, creative
design, innovative product attributes and likelihood of higher aftermarket
value. Collectors typically track aftermarket values through Beckett Monthly,
which publishes secondary market values for collectible sports trading cards in
price guides covering baseball, football, basketball, hockey, motor sports and
future stars. Although collectible sports trading cards are sold through
several distribution channels, including hobby dealers, mass merchandisers,
convenience stores and other outlets, the Company believes that the majority of
collectible sports trading cards sold through retail outlets other than hobby
dealers are priced in the low and mid-price market. Conversely, the Company
believes that a majority of sales of premium and high-priced collectible sports
trading cards are made through hobby dealers.
BUSINESS STRATEGY
Wheels' strategy is to enhance its position as a niche designer and
marketer of premium collectible sports trading cards and to expand into
additional NASCAR-related markets to capitalize on the growth now being
experienced in NASCAR racing. Key elements of that strategy include:
o Diversify NASCAR-Related Activities. Wheels has aggressively
diversified its operations through the acquisition of
NASCAR-related businesses in order to capitalize on market
opportunities created by NASCAR's growth. Wheels has executed
its diversification strategy by acquiring Press Pass, a leading
competitor in the collectible trading card market; High
Performance, a distributor of NASCAR licensed merchandise; and
Diamond and GRS, companies engaged in trackside sales and
hospitality management at NASCAR events. The Company has entered
into the agreement with Racing Champions in order to further
diversify the product offerings of the combined companies.
o Exploit Marketing and Distribution Opportunities. The Company
will attempt to increase revenues by exploiting marketing and
distribution opportunities which have been created by the
acquisition of the Acquired Companies. Each of the Acquired
Companies has expertise and relationships covering different
marketing strategies and distribution channels. For example,
High Performance and Press Pass have significant experience and
relationships with mass market retailers, a distribution channel
which the Company has not fully exploited. In addition, Diamond
and GRS are engaged primarily in trackside activities, thereby
providing a distribution channel for all of the Company's NASCAR
products. The Company intends to apply its enhanced marketing
and distribution capabilities across all product lines in order
to increase sales in its distribution channels.
o Integrate Acquired Companies. Execution of Wheels'
diversification strategy required that operations of the Acquired
Companies be effectively integrated with Wheels. Consolidation
of physical facilities is substantially complete, as the Company
and each of the Acquired Companies are now based in Mooresville,
North Carolina. As part of the ongoing integration of the
Acquired Companies, the Company will attempt to identify and
achieve certain economies of scale and operating efficiencies
which would not otherwise be available to Wheels or any of the
Acquired Companies on an individual basis.
o Expand License Arrangements. The Company will seek to preserve
and enhance its relationship with NASCAR team owners and drivers
in order to maintain the license agreements required for
producing and marketing collectible sports trading cards, apparel
and other products. The Company also intends to aggressively
pursue new license arrangements in order to expand the High
Performance product lines and the range of trackside
opportunities which are available to the Company.
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o Emphasize Product Differentiation. Wheels and Press Pass have
each issued their collectible sports trading cards in limited
production runs with Wheels' products generally premium priced and
Press Pass' products covering a wider range of prices. The
Company believes that limited production and high quality have
enhanced the marketability of Wheels and Press Pass collectible
sports trading cards and have enabled both Wheels and Press Pass
to achieve brand recognition among their network of distributors,
brokers and hobby dealers. The Company intends to continue its
emphasis on the collectibility of sports trading cards through
increased penetration of all price segments and limited production
of trading card products.
o Continue Commitment to Creative Design and Latest Production
Technologies. The Company believes that sales of collectible
sports trading cards is significantly influenced by the creative
design of cards and the technologies utilized during the
production process. As a manufacturer of premium priced
collectible sports trading cards, the Company intends to continue
the use of innovative designs and unusual materials in both Wheels
and Press Pass cards. The Company also plans to continue its
practice of using production techniques such as microetching,
embossing and lamination in order to add to the attractiveness and
creative appeal of the Company's collectible sports trading cards.
PRODUCTS AND SERVICES
Collectible Sports Trading Cards. Both Wheels and Press Pass are
leaders in the NASCAR collectible sports trading card market and both have been
innovative in their designs. Each has produced its collectible sports trading
cards using various production techniques and premium quality materials to
enhance the appearance, attractiveness and collectibility of its products. Each
has used materials in its cards consistent with an issue's theme such as
snakeskin in the Viper issue, small precious jewels in the Crown Jewels and
Crown Jewels Elite, sharks teeth in Race Sharks and pieces of rubber taken from
actual NASCAR race car tires in the Burning Rubber issue. They have introduced
innovations such as season-long interactive cards, prism cards, 24-carat gold
signature cards, embossed cards and holofoil cards. According to the January
1998 edition of Sports Cards Magazine and Price Guide, seven collectible insert
cards produced by Wheels or Press Pass in 1997 were among the top 10 premium
insert cards for NASCAR race drivers and six standard cards produced in 1997
were among the top 10 issues for NASCAR race drivers. According to Sports Cards
Magazine and Price Guide, the selection of the top 10 trading cards reflects
increasing retail prices in the secondary market as well as the trading card
industry's most popular and most frequently purchased trading cards. In
addition to NASCAR, Wheels produced draft pick collectible trading card sets in
1997 for leading college basketball and football players, which it expects to
continue in future years. In 1995 and 1996, Wheels also issued two regular sets
of collectible sports trading cards featuring rodeo professionals who were
active in the Professional Rodeo Cowboys Association and other rodeo activities.
Wheels has discontinued its professional rodeo collectible sports trading card
activities. Press Pass is one of the largest producers of National Football
League and National Basketball Association draft pick trading cards. Draft pick
cards feature leading college players who are expected to be selected in the NFL
and the NBA drafts each year.
The following table sets forth information concerning collectible
sports trading card sets produced by Wheels and Press Pass with original issue
dates in 1994 through 1997 which featured NASCAR race drivers, team owners and
crew chiefs or football and basketball draft picks:
<TABLE>
<CAPTION>
WHEELS
- --------------------------------------------------------------------------------------------------------
1994 1995 1996 1997
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<S> <C> <C> <C>
High Gear I High Gear I Viper Race Sharks
Harry Gant Farewell Tour Crown Jewels Crown Jewels Elite Viper
Power Pack Team Sets Knight Quest Predator
High Gear II Jurassic Park Racing
Rookie Thunder
Basketball Draft Picks
</TABLE>
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<TABLE>
<CAPTION>
PRESS PASS
- ----------------------------------------------------------------------------------------------------------
1994 1995 1996 1997
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<S> <C> <C> <C>
Press Pass Race Cards Press Pass Race Cards Press Pass Race Cards Press Pass Race Cards
Press Pass VIP Press Pass Premium Press Pass Premium Press Pass Football
Press Pass Optima XL Press Pass VIP Press Pass Premium Draft Picks
Press Pass Premium Football Draft Picks Press Pass Premium
Basketball Draft Picks Press Pass Paydirt Press Pass VIP
Press Pass Optima XL Press Pass VIP Press Pass Action Vision
Press Pass M Force Press Pass Basketball
Press Pass Basketball Draft Picks
Draft Picks Press Pass Double
Threat Basketball
Draft Picks
</TABLE>
The production of the Company's collectible sports trading cards begins
with the conceptualization and design of a card issue. Management at Wheels and
Press Pass have historically been responsible for the conceptualization of a
card issue, but have also used outside consultants in the design process.
Moreover, both in-house personnel and outside consultants have been used in the
development of mock-ups as the design process nears completion. Each issue of
collectible sports trading cards is produced in standard sets and in "premium
insert" sets. Premium insert sets carry an additional price premium.
During the design process, a photographer secures photographs which
will be used on the sports trading cards. Under certain license agreements,
the Company must have a licensor's approval prior to the use of a particular
photograph and, therefore, the photographer generally secures a wide variety of
photos from which the licensor may choose. After the preparation of a template
of the licensor personality which is then digitized, the Company provides a
computer disk to a printer which includes all images to appear on the cards.
During this time, the Company must coordinate the activities of the printer
with those of other contractors such as foil stampers and inkjetters, who are
responsible for the placement of foil, other special effects and inkjet
numbering on the trading cards. Following printing, foil stamping, inkjetting
and the placement of any other special effects on the cards, the card sheets
are delivered to a packager for cutting, collating and packaging.
The Company relies on outside suppliers for photography and for
printing, foil stamping, inkjetting and cutting, collating and packaging of
trading cards. Although the Company seeks price quotes from several suppliers
for each primary function in order to assure competitive pricing, the Company
has generally found that the establishment of close relationships with its
suppliers has been beneficial both to the Company and to the supplier. The
Company does not maintain written supply agreements with any of its suppliers
and believes that a number of alternate suppliers are available for each of the
primary functions necessary for production of collectible sports trading cards.
The production process generally requires from 90 to 180 days from
conceptualization of a card issue to shipment. Production delays are sometimes
experienced due to a variety of factors such as irregularities in foil
stamping, chipping of trading cards during the cutting process, and printing
errors. Wheels experienced significant returns in 1997 as a result of a
packaging error committed by Wheels' principal supplier of cutting, collating
and packaging services. Wheels has filed suit against the supplier seeking
damages in connection with the excess returns. Should the Company experience
errors in the production process in the future, delivery
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of collectible sports trading cards could be delayed and the Company could
incur additional expenses if it were required to seek an alternate supplier or
to reprint a card.
Due to the 90 to 180 day lead time required for the production of
collectible sports trading cards, the Company is required to develop production
forecasts for the sale of new products. In order to limit the risk of
over-production of a collectible sports trading card issue and in order to
develop accurate production forecasts, the Company develops promotional cards
and sales materials for each trading card issue which are used to solicit
orders from distributors and dealers. The Company generally receives orders
totaling between 85% and 95% of the total number of collectible sports trading
cards to be printed in an issue. Orders are subject to cancellation by the
customer at any time before or after issuance of collectible sports trading
cards. The actual size of the print run varies based on the Company's past
sales experience, anticipated residual sales following an issue, the time of
year in which the issue is to be delivered and other sales-related
considerations. For example, the Company will frequently produce trading cards
in excess of orders for collectible trading card issues which are marketed and
sold during the racing season. Excess production also allows the Company
flexibility in responding to reorders received from distributors or dealers.
While the Company is unable to forecast reorders from distributors or dealers
with respect to any one issue, the Company's prior sales experience has
indicated that the Company will receive reorders from certain of its
distributors or dealers in some trading card issues. In the event production
forecasts do not correctly estimate demand for collectible sports trading
cards, the Company may be required to write down excess inventory or may miss
potential market opportunities. There can be no assurance that production
forecasts will accurately estimate demand for particular trading card issues.
The Company maintains a close relationship with its distributors and
seeks input from its distributors with respect to the design and expected
demand for collectible trading sets. Historically, both Wheels and Press Pass
have held periodic meetings with their respective distributors, attended
industry trade shows and evaluated competitive products in an effort to
identify market opportunities for new products. Although neither Wheels nor
Press Pass has maintained a formal research and development effort, management
has been active in identifying opportunities in collectible sports trading
cards for NASCAR and draft pick personalities on a continuous basis.
The Company anticipates continued limited production runs of each
collectible sports trading card issue and expects to produce collectible sports
trading cards under both the "Press Pass" and "Wheels" brand names. However,
all trading card operations are being consolidated in order to realize certain
efficiencies and economies of scale. For example, Wheels anticipates the
acquisition of Press Pass will result in more efficient use of personnel, a
reduction in royalty costs as a result of certain shared license arrangements, a
reduction in fees payable to independent contractors as a greater portion of
design and production work is performed in-house and possible volume pricing
discounts. The Company intends to coordinate the release of up to ten different
trading card issues throughout each year so as to minimize competition between
cards produced under the "Wheels" and "Press Pass" names. The determination of
the number of issues to be produced in any particular year will depend on a
number of factors including but not limited to, demand for particular trading
card issues and sets within the issue, input received from distributors,
developments in the collectible sports trading card industry and within NASCAR,
and the Company's success in maintaining and securing license agreements from
draft pick athletes and the race drivers, team owners and crew chiefs in NASCAR
racing.
The Company will continue to closely monitor production volume of each
set of trading cards with a view toward maintaining the collectibility of its
trading cards. The Company believes, based on information published by Beckett
Monthly price guides, that both Wheels' and Press Pass' collectible sports
trading cards have competed favorably in the secondary market. The Company
anticipates that production of collectible sports trading cards will continue
to be limited on a per-issue basis to assure maintenance of the brand image
associated with its products. The Company has no control over values of
collectible sports trading cards in the secondary market, which are established
by market forces and which are reported upon by collectible sports card price
guides such as Beckett Monthly. In the event interest among collectors in
Wheels' or Press Pass' sports trading cards declines for any reason, sales
could decrease, perhaps substantially. Moreover, because
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the interest of collectors in Wheels' or Press Pass' collectible sports trading
cards is in part dependent upon interest in NASCAR racing, a decline in
interest in NASCAR racing could directly affect demand for the Company's
products.
NASCAR Merchandise Distribution. As a result of its acquisition of
High Performance in October 1997, the Company distributes NASCAR-related
merchandise to convenience stores, mass market retailers such as Wal-Mart and
K-Mart, grocery stores, drug stores and other retail outlets. During 1997,
merchandise distributed by High Performance included T-shirts, hats, jackets,
die cast vehicle replicas, sunglasses, golf balls, key chains, can coolers,
bumper stickers, license plates and souvenirs. The Company's right to
distribute NASCAR-related merchandise is generally based upon licenses or
sub-licenses granted by NASCAR team owners, drivers or corporate sponsors.
NASCAR-related merchandise is generally designed in-house, subject to final
approval by the respective licensor, but the Company relies on outside
manufacturers for substantially all High Performance production work. The
Company utilizes a number of domestic and Asian manufacturers and suppliers for
High Performance merchandise, and does not believe it is dependent on any
particular manufacturer or supplier.
Trackside Sales and Hospitality Management. The Company established
trackside sales and hospitality management programs during 1997 through its
acquisition of Diamond and GRS. The Company expects to operate 13 trailers at
the 33 races scheduled for the 1998 Winston Cup Series and will be the
exclusive trackside vendor of T-shirts, hats, apparel, collectible sports
trading cards, die cast vehicle replicas, souvenirs and other merchandise for
11 NASCAR teams and corporate sponsors, including the McDonald's team and
driver Bill Elliott, Coors Light and driver Sterling Marlin, Exide Batteries
and driver Jeff Burton, R.J. Reynolds and driver Jimmy Spencer, First Union and
driver Wally Dallenbach and the Cartoon Network. The Company will also operate
the 1998 trackside souvenir programs for Chevrolet and Ford.
During the 1998 Winston Cup Series, the Company will manage the
trackside corporate hospitality programs for Ferguson Enterprises and Goody's
Pharmaceuticals, a division of Block Drug Company, Inc. The Ferguson
Enterprises hospitality program will cover 11 of the Winston Cup races during
1998, while the Goody's program will cover two races. At each event, the
Company will be responsible for coordinating and obtaining corporate suites or
hospitality tents, tickets to the event, passes to tour the racetrack pits and
other track facilities, food and beverages, and NASCAR-related merchandise and
souvenirs for a specified number of guests. During 1997, Diamond managed
corporate hospitality programs at nine events covering a total of approximately
2,700 guests. During 1998, the Company expects to manage corporate hospitality
programs at 11 events for a total of approximately 3,500 guests.
MARKETING AND SALES
Collectible Sports Trading Cards. The Company's marketing strategy with
respect to collectible sports trading cards is to increase sales by selectively
expanding the number of distributors and dealers, increasing penetration of the
retail market, developing new and innovative collectible sports trading card
products for the NASCAR market, and increasing market penetration in the
corporate promotions market. As of January 31, 1998, the Company employed eight
individuals responsible for marketing and sales of collectible sports trading
cards and uses a network of approximately 25 independent manufacturers'
representatives for outside sales. The Company's marketing and sales employees
are responsible for implementing sales programs, coordinating with distributor
and dealer networks, customer service, and participating in industry trade
shows.
Wheels' collectible sports trading card sales have historically been
concentrated in the hobby market, which accounted for approximately 85% of such
revenues during the three year period ended December 31, 1997. The mass market
channel has accounted for the remainder of such revenues. In contrast, Press
Pass revenues have historically been divided approximately equally between the
hobby and mass market channels. Sales to the hobby market are made through
hobby distributors or directly to hobby dealers. As of January 31, 1998,
Wheels and Press Pass each had relationships with approximately 30 hobby
distributors.
-9-
<PAGE> 10
Commencing in 1998, Wheels and Press Pass collectible sports trading
card marketing and distribution activities will be coordinated in order to
realize certain efficiencies and take advantage of their combined resources and
expertise. The release and distribution of new card issues throughout the year
will be timed so as to minimize competition between cards produced under the
"Wheels" and " Press Pass" brand names. In addition, the Company intends to
exploit Press Pass' experience and success with mass market retailers in order
to increase the Company's revenues attributable to the mass market channel.
Wheels and Press Pass have each developed their own membership club.
Members of the Wheels Club and Press Pass VIP Club receive newsletters and other
product materials from Wheels and Press Pass, and are given the ability to
purchase collectible sports trading cards and other products sold exclusively to
members. In January 1998, the Wheels Club and Press Pass VIP Club were combined
and renamed as the VIP Club. The Company expects to continue to develop the VIP
Club as an additional channel through which exclusive collectible sports trading
cards and other NASCAR-related products can be sold.
NASCAR Merchandise Distribution. The Company distributes High
Performance merchandise through a network of independent sales representatives,
independent distributors or "rack jobbers," and in-house sales and marketing
employees. Sales to the convenience store market are made primarily through a
network of approximately 40 rack jobbers, who are responsible for managing, and
generally handle the purchase and delivery of, all products within a specified
category to convenience stores. The rack jobber is assigned certain shelf or
rack space in which to display the products which are managed by the rack
jobber. Rack jobbers purchase merchandise from the Company on a cash basis or
on limited credit terms for resale to the convenience stores which they
service. The Company maintains an "at will" relationship with rack jobbers
which may be terminated at any time by either party.
In addition to rack jobbers, High Performance established a network of
approximately 30 independent sales representatives during the second half of
1997. The independent sales representatives sell merchandise to rack jobbers
or directly to convenience stores on a commission basis. The Company's own
sales and marketing staff oversees the activities of rack jobbers and
independent sales representatives, is generally responsible for direct sales
made to mass market retailers and grocery stores, and creates product
promotions and display stands for use by retail outlets. And finally, High
Performance merchandise will be marketed through the trackside division of the
Company commencing in the 1998 racing season.
High Performance's NASCAR merchandise sales have historically been
concentrated in the southeast United States. The Company estimates that
convenience stores and mass market retailers each accounted for approximately
25% of High Performance's revenues in 1997. High Performance's largest mass
market retail account during the year ended December 31, 1997 was K-Mart, which
accounted for approximately 50% of High Performance's mass market revenues
during such year. The remaining revenues were attributable to other mass market
retail accounts, grocery stores, drug stores, corporate promotions, trackside
events and other retail outlets. The Company estimates that its merchandise is
currently available in approximately 10,000 of the estimated 125,000 convenience
stores located in the United States.
The Company's marketing strategy with respect to NASCAR-related
merchandise is to increase sales in the convenience store and mass market
retail channels by expanding its network of rack jobbers and independent sales
representatives, increasing the number of product promotions which can be
offered throughout the year in order to increase revenues at existing retail
outlets, and obtaining license rights from additional NASCAR race drivers, team
owners and sponsors in order to broaden product lines. Marketing and sales of
NASCAR-related merchandise are coordinated by 14 employees who oversee the
activities of independent rack jobbers and sales representatives, handle direct
sales to mass market retailers, develop and implement sales programs and
participate in convenience store trade shows.
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<PAGE> 11
Trackside Sales and Hospitality Management. The Company's marketing
strategy with respect to trackside retail sales has been to expand the number
of tractor-trailer rigs at each NASCAR event from six to thirteen and to ensure
timely and reliable set-up of trackside retail operations at each event. The
Company has also attempted to increase the variety of the products offered and
offer those products at a competitive price. Obtaining agreements for
trackside hospitality is based primarily on personal relationships within the
NASCAR industry and the quality of the service provided. The trackside
hospitality market generally consists of small, privately-owned operators and
the Company intends to seek additional agreements to expand its presence in the
trackside hospitality market. The Company's personnel manage both the
trackside retail operations and the trackside hospitality.
COMPETITION
Competition in the collectible sports trading card market is intense
and is based primarily on collectibility, brand recognition, product features,
pricing, customer service, quality and creativity. The Company currently views
one of the four full line collectible sports trading card manufacturers, Upper
Deck, as its primary competition. Of the three remaining full line companies,
two recently announced their withdrawal from the NASCAR market and one never
produced NASCAR-related collectible sports trading cards. Upper Deck is larger
than the Company and has a longer operating history, better name recognition,
and greater financial, marketing and other resources than the Company.
Although the number of competitors active in the collectible sports trading
card market has recently declined due to industry consolidation, the Company
does not believe that competition in the trading card industry has lessened.
The NASCAR race drivers, team owners and crew chiefs with whom the Company has
licenses also have the ability to grant additional licenses, thereby increasing
the number of firms active in the Company's primary market. The Company
believes that its ability to compete effectively in the future will be based
more on collectibility, creative design and quality, as opposed to price. The
Company's ability to compete based on these factors will depend to some extent
on its ability to gauge demand and respond to market trends, identify consumer
preferences, and maintain product innovation.
Competition in the distribution of NASCAR-related merchandise to
convenience stores, mass market retailers and other retail outlets is intense
and is primarily based on product appeal, ability to capture shelf or rack
space, timely distribution, price and quality. Competition is also based on
the ability to obtain license agreements with NASCAR race drivers, team owners
and sponsors authorizing the right to use the name, photograph, likeness,
autograph or image of the NASCAR personality on specific product lines to be
sold through specific distribution channels or retail outlets. The Company
considers Action Performance Companies, Inc., a manufacturer of die cast racing
replicas and distributor of other NASCAR-related products, to be a significant
competitor in the distribution of licensed NASCAR-related merchandise. Because
competition for limited shelf and rack space in convenience stores and mass
market retailers is not limited to products in the NASCAR category, the Company
believes that it competes generally with distributors of a wide range of soft
goods, novelties, souvenirs and similar products.
The Company believes that competition in the trackside retail market
is based primarily on the ability to secure license agreements with NASCAR race
drivers, team owners and sponsors, timely and reliable set-up of trackside
retail operations at each event, personal relationships within the NASCAR
industry, quality and variety of product offerings, customer service and price.
Again, the Company considers Action Performance Companies, Inc. as the largest
competitor in the trackside retail market. The Company expects that during the
1998 Winston Cup Series it will be the second largest competitor in this
market. The Company considers the ability to obtain favorable license
agreements and the capital investment required in tractor-trailer rigs to be
the principal barriers to entry in this market. Competition in the trackside
hospitality market is based primarily on customer service and personal
relationships within the NASCAR industry. The trackside hospitality market is
highly fragmented and generally consists of small, privately-owned operators.
The Company believes that it is a significant competitor in the trackside
hospitality market.
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<PAGE> 12
PROPRIETARY RIGHTS
The Company considers its license agreements, trademarks and trade
names to be material to its business. The Wheels and Press Pass names and
logos have been registered with United States Patent and Trademark Office for
trading card applications. Wheels and Press Pass have also registered or filed
trademark applications for various names and logos which relate to various
trading card sets. The Company has not adopted a formal intellectual property
protection program, and currently relies on a combination of trademark,
copyright and trade secret protection and license agreements to establish and
protect its proprietary rights.
All of the Company's business operations are dependent upon the
license agreements it maintains with NASCAR race drivers, team owners and
corporate sponsors. At December 31, 1997, the Company had in effect a total of
over 100 license agreements covering various products and distribution
channels. The Company believes that it has trading card licenses in effect
with substantially all of NASCAR's leading drivers for the 1998 racing season.
The Company also has license arrangements in place covering trackside retail
programs to be operated during 1998 for 11 NASCAR drivers, teams or corporate
sponsors, including Bill Elliott and McDonald's, Sterling Marlin and Coors
Light, Jeff Burton and Exide Batteries, Jimmy Spencer and R.J. Reynolds, Wally
Dallenbach and First Union, Joe Nemechek and Bell South, Jerry Naduee and First
Plus Financial, The Cartoon Network, Ford and Chevrolet. With respect to the
distribution of NASCAR-related merchandise to convenience stores, mass market
retailers and other retail outlets, the Company is licensed to distribute
specified products by various NASCAR drivers, teams and sponsors.
The Company's license agreements generally have a term of one to three
years, with certain agreements, particularly those relating to trading cards,
having provisions for automatic year-to-year extensions unless the licensee or
the licensor provides notice of cancellation. The license agreements grant the
licensee the right to use the licensor's name, picture, facsimile signature and
biographical information during the term of the license on specified products.
In addition, certain licenses are restricted to certain distribution channels
or retail outlets. Licenses relating to trading cards are generally
non-exclusive and may be terminated by the licensor for non-payment of
royalties and for other specified causes. The licenses generally provide for
percentage royalties based on sales, and certain licenses provide for minimum
guaranteed royalties payable during the term of the license. The Company's
ability to secure licenses from the most popular NASCAR race drivers, team
owners and corporate sponsors is material to its business. The expiration or
non-renewal of a material number of license agreements, particularly those with
leading NASCAR drivers or teams, would have a material adverse effect on the
Company.
EMPLOYEES
The Company had 89 full-time employees as of January 31, 1998.
Approximately 14 are engaged in collectible sports trading card operations,
approximately 20 are engaged in NASCAR merchandise distribution operations,
approximately 38 are engaged in trackside retail and hospitality operations and
three are engaged in corporate purchasing activities. In addition, 14 of the
Company's employees are engaged in corporate management and administrative
activities. None of the Company's employees are subject to collective
bargaining agreements and the Company believes its employee relations are good.
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain statements made in this Business section and elsewhere in this
Annual Report on Form 10-KSB are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). These
forward-looking statements involve risks and uncertainties that are based on
certain assumptions that may not be realized. Forward-looking statements
include or relate to the Company's plans or expectations to: (i) capitalize on
its operational capabilities and management team, (ii) successfully assimilate
the operations of the Acquired Companies to achieve certain economies of scale,
(iii) secure additional capital, (iv) expand existing marketing programs and
initiate new marketing programs, (v) continue to obtain license agreements
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<PAGE> 13
with NASCAR drivers, teams owners and crew chiefs and with sanctioning bodies,
(vi) generate additional revenue while controlling the cost of goods produced
and services provided and general administrative expenses as a percentage of
revenues, and (vii) complete the merger with Racing Champions.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties that are based on
assumptions that the Company will continue to be able to design and produce
premium quality sports trading cards that are creative and collectible, that
the expense of increasing trackside marketing and hospitality services will
outweigh the cost of expansion, that the Company will continue to be able to
attract qualified and experienced management personnel, that competitive
conditions within the industry will not change adversely, that demand for the
Company's services and products will remain strong, that the Company will
retain its existing key management personnel, that the Company's forecasts will
accurately anticipate market demand, that the Company will be able to obtain
additional capital, and that there will be no material adverse change in the
Company's operations or business. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company and its management. Although the Company believes
that the assumptions underlying the forward-looking statements made in this
Annual Report on Form 10-KSB are reasonable, any of those assumptions could
prove inaccurate and, therefore, there can be no assurance that the results
contemplated in any of the forward-looking statements made herein will be
realized. In addition, the business and operations of the Company are subject
to substantial risks that increase the uncertainty inherent in such
forward-looking statements. Risk factors relate to (i) continued growing
interest in racing and motor sports; (ii) continued ability to obtain license
agreements or obtain license agreements with minimum guaranteed payments or
royalties that enable the Company's to offer its products and services at
competitive prices; (iii) consumer acceptance of the Company's services and
products; (iv) availability of capital resources, including additional
financing when and as needed, and on terms acceptable to the Company; (iv)
economic considerations, such as potential adverse changes resulting from
general economic downturns and interest rate and cost of funds increases; (v)
consolidation strategy risks, such as availability of acquisitions on
reasonable terms, the addition of debt and amortization of costs related to
goodwill and other intangible assets, and successful integration and management
of acquired operations and personnel; (vi) the ability to manage rapid growth;
(vii) business conditions and growth in the markets for collectible sports
trading cards; (viii) competitive factors, such as the entry of new competitors
into the NASCAR trading card and merchandise markets; (ix) inventory risks due
to shifts in market demand; (x) changes in product mix; and (xi) the risk
factors listed from time to time in the Company's SEC reports, including but
not limited to the Company's reports on Form 10-QSB, 8-K, 10-KSB, Annual
Reports to Shareholders, and reports or other documents filed pursuant to the
Securities Act of 1933 or the Securities Exchange Act of 1934. Any of these
factors could cause the Company's revenues or net income, or the growth in
revenues or net income, to differ materially from prior results. Budgeting and
other management decisions are subjective in many respects and thus susceptible
to interpretations and periodic revisions based on actual experience and
business developments, the impact of which may cause the Company to alter its
funding, marketing, capital expenditure or other budgets, which may in turn
materially affect the Company's results of operations. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person or entity that the objectives
or plans of the Company can or will be achieved.
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<PAGE> 14
ITEM 2. DESCRIPTION OF PROPERTY
The following sets forth certain information with respect to the
facilities currently leased by the Company.
<TABLE>
<CAPTION>
APPROX. CURRENT
SQUARE MONTHLY LEASE
LOCATION FOOTAGE RENTAL LESSOR TERMINATION
-------- ------- ------ ------ -----------
<S> <C> <C> <C> <C>
149 Gasoline Alley Drive 40,000 $ 16,170 Beale Street Realty, Inc. February 28, 2012
Mooresville, North Carolina(1)
224 Rolling Hill Road, Suite 9A 2,830 $ 3,098 Athena Associates April 30, 1998
Mooresville, North Carolina(2)
1727 Seymour Drive 1,600 $ 500 Harold and Rhonda Green October 31, 1998
South Boston, Virginia(3)
123 Associates Lane 8,000 $ 3,633 Nanco I, LLC December 31, 1999
Indian Trail, North Carolina(4)
2079 Highway 601 North 4,000 $ 800 Christy Trucking, Inc. September 1997
Mocksville, North Carolina(5)
1321 Lady Street 1,225 $ 1,047 Carolina Properties October 1999
Columbia, South Carolina(6) Building Partnership
14800 Quorum Drive, Suite 420 2,500 $ 3,920 Transwestern Office January 31, 1999
Dallas, Texas(7) Partners I, LLC
- -------------------------
</TABLE>
(1) Corporate headquarters and warehouse facility for the Company. Beale
Street Realty, Inc. is owned by Randy C.
Baker, an executive officer of the Company.
(2) Office facility originally leased by High Performance.
(3) GRS retail location. Harold Green is the President of GRS and Rhonda
Green is his spouse.
(4) Diamond warehouse facility.
(5) Wheels warehouse facility. The term of this lease has been extended on a
month-to-month basis.
(6) Office facility formerly utilized by WOR. The Company is attempting to
sublease or negotiate a buy-out of the remaining lease term.
(7) Formerly the executive offices of Press Pass. The Company is attempting
to sublease or negotiate a buy-out of the remaining lease term.
The Company also owns two properties, both of which are currently
listed for sale. The Company owns a 13.6 acre parcel of vacant land in
Mocksville, North Carolina which is currently for sale at a price of $170,000
and a 3.6 acre parcel of vacant land in Mocksville which is listed for sale at
a price of $130,000. During the first quarter of 1998, the Company sold a
4,800 square foot building on a two acre parcel of land located in Indian
Trail, North Carolina to an unrelated party at a price of $326,000.
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<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
Except as described below, the Company is not a defendant in any
material litigation and is not aware of any threatened or pending legal action
which would have a material adverse effect on the Company's business,
operations or financial condition.
On May 4, 1997, a proposed class action lawsuit was filed in U.S.
District Court in Georgia against several trackside vendors, including GRS.
The complaint alleges that the defendants have engaged in price fixing
activities at certain NASCAR events in violation of federal anti-trust laws.
Plaintiffs seek an unspecified amount of compensatory and punitive damages and
also an order enjoining the alleged price fixing practices. GRS has entered
into a joint defense agreement with certain co-defendants pursuant to which
defense costs are being reimbursed by defendant Americrown Service Corporation.
The existing joint defense agreement is to remain in effect through class
certification proceedings, which are expected to be completed during late 1998.
The Company expects that the action will be dismissed if class certification is
not obtained. In the event class certification is obtained, the Company
expects that GRS would vigorously defend against the action, although no
assurances can be given as to the outcome of this matter.
The Company is aware of a series of actions filed in the State of New
York in 1996 and 1997 against certain other manufacturers of collectible sports
trading cards which seek damages against such manufacturers based upon
allegations that the practice of randomly inserting premium insert cards in
collectible sports trading card sets constitutes illegal gaming activity in
violation of state and federal law. Neither Wheels nor Press Pass were named
as a defendant in these actions. The Company believes that the use of premium
insert cards is a standard industry practice within the collectible sports
trading card industry and does not constitute gaming activity. In particular,
the Company believes that, in contrast to gaming activities in which the amount
to be won is ascertainable at the time a wager is placed, the value of premium
insert cards is not ascertainable and is not within the Company's control.
While the Company believes that the manufacturers named as defendants in these
actions will vigorously defend the actions, the course of this litigation
cannot presently be determined. Both Wheels and Press Pass have in the past
used premium insert cards in their collectible sports trading card issues and
may continue to do so in the future. The Company may therefore become subject
to litigation of this nature in the future, the outcome of which is not
assured.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this Form 10-KSB to a vote of security holders through the
solicitation of proxies or otherwise.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE
Since its initial public offering in April 1997, the Company's Common
Stock has been quoted on the Nasdaq National Market under the trading symbol
WHEL. Prior to the Initial Public Offering, the Common Stock was not listed or
quoted on any organized market. The following table sets forth for the periods
indicated the high and low closing sales prices of the Common Stock as reported
on the Nasdaq National Market. Such quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
- ----------- ---- ---
<S> <C> <C>
Second Quarter (from April 16, 1997) . . . . . $ 8.25 $ 6.25
Third Quarter . . . . . . . . . . . . . . . . $ 10.50 $ 6.00
Fourth Quarter . . . . . . . . . . . . . . . . $ 11.875 $ 5.50
</TABLE>
On April 9, 1998 the last reported sale price of the Common Stock
reported on the Nasdaq National Market was $6.4375. As of April 10, 1998,
there were approximately 53 holders of record of the Company's Common Stock.
As reflected in the price quotations above, the Company's Common Stock
has experienced significant price fluctuations. Factors that may cause the
market price to fluctuate include purchases or sales of a significant number of
shares during a relatively short time period, quarterly fluctuations in results
of operations, announcements of new services or products by the Company,
announcements of acquisitions involving the Company, market conditions specific
to the Company's industry and market conditions in general. In addition, in
recent years the stock market in general has experienced significant price and
volume fluctuations. These fluctuations, which may be unrelated to the
operating performance of specific companies, have had a substantial effect on
the market price for many small capitalization companies such as the Company.
DIVIDENDS
Holders of Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors. The Company currently intends
to employ all available funds to finance its growth and development and
accordingly, does not anticipate paying any cash dividends in the foreseeable
future. In addition, the Company's revolving credit facilities restrict the
payment of cash dividends by the Company under certain circumstances.
UNREGISTERED SECURITIES
The Company issued unregistered shares of its Common Stock as part of
the purchase price in each of its business acquisitions during the 1997 fiscal
year. Pursuant to the respective agreements, the Company issued 310,000 shares
of Common Stock to two individuals in the acquisition of WOR in January 1997,
485,000 shares of Common Stock to four individuals in the acquisition of Diamond
in June 1997, 65,000 shares of Common Stock to three individuals in the
acquisition of Emerald in August 1997, 175,000 shares of Common Stock to two
individuals in joint tenancy in the acquisition of GRS in October 1997, 444,445
shares of Common Stock to two individuals in the acquisition of High Performance
in October 1997 and 600,000 shares of Common
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<PAGE> 17
Stock to six individuals in the acquisition of Press Pass in December 1997.
All the foregoing issuances were made to individuals who had access to
information enabling them to evaluate the merits and risks of the investment by
virtue of their relationship to the Company and the Acquired Company and their
economic bargaining power. The Company relied on Section 4(2) of the
Securities Act of 1933 for the exemption from the registration requirements
with respect to such issuances.
In connection with the Credit Facility (as defined in "Item 6.
Management's Discussion and Analysis or Plan of Operation"), the Company
granted the Lender a warrant to purchase 509,358 shares of the Company Common
Stock at a price of $3.50 per share. The warrant is exercisable through
December 31, 2007 and the Company has granted "piggyback" and demand
registration rights to the holder of the warrant.
USE OF PROCEEDS
During the 1997 fiscal year, the Company registered 1,035,000 shares
of Common Stock and 1,035,000 warrants to purchase 517,500 shares of Common
Stock for sale to the public at a price of $6.00 per share and warrant on a
Form SB-2 Registration Statement (Reg. No. 333-6340) (the "Registration
Statement") declared effective on April 16, 1997. Two warrants entitle the
holder to purchase one share of Common Stock at a price of $7.08. The Company
also registered the 517,500 shares of Common Stock underlying the public
warrants and 135,000 shares of Common Stock underlying certain warrants issued
or issuable to Schneider Securities, Inc., the underwriter of the public
offering.
Sale of 900,000 shares and 900,000 warrants was completed in April
1997 and the over-allotment closing on 135,000 shares and 135,000 warrants was
completed in May 1997, for aggregate gross proceeds of $6,210,000. Expenses
incurred by the Company for underwriting discounts and commissions were
$621,000, expenses paid to or for underwriters were $186,300, and other
expenses (consisting of registration fees, filing fees, legal fees, printing
and engraving, consulting fees, accounting fees and transfer agent fees) were
$670,440, for total expenses of $1,488,090. None of such expenses were direct
or indirect payments to directors, officers or their associates or to persons
owning ten percent or more of any class of equity securities of the Company or
to affiliates of the Company. The resulting net offering proceeds to the
Company after payment of all expenses was $4,732,260.
From the effective date of the Registration Statement through December
31, 1997, the net offering proceeds have been used by the Company as follows:
purchase of real estate, $459,000; repayment of bank indebtedness, $890,000;
working capital, $1,523,000; cash advanced to WOR for working capital $630,000;
cash invested in joint project with Action Performance $80,000; marketing and
promotion expense $50,000; and reduction in outstanding current liabilities
$1,100,000. All of the proceeds of the offering had been applied by the end of
the 1997 fiscal year. None of such expenditures were direct or indirect
payments to directors, officers or their associates or to persons owning ten
percent or more of any class of equity securities of the Company or to
affiliates of the Company. The approximately $111,000 in proceeds from
exercise of warrants during the 1997 fiscal year was used for working capital.
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<PAGE> 18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Annual Report on Form 10-KSB. Those financial statements include, for all
periods presented, the accounts of Wheels and its subsidiaries Diamond and GRS,
both of which were acquired in 1997 in transactions accounted for as
poolings-of- interests. The accounts of High Performance and Press Pass,
subsidiaries acquired October 24 and December 31, 1997, respectively, in
transactions accounted for as purchases, are included in the Consolidated
Balance Sheet at December 31, 1997. The results of operations of High
Performance for the period after October 24, 1997 are included in the
Consolidated Financial Statements. The Company's financial condition and
operating results for the 1997 fiscal year have been, and for future periods
will continue to be, significantly affected by the operating results of the
Acquired Companies. The matters discussed in this section that are not
historical or current facts deal with potential future circumstances and
developments. Such forward-looking statements include, but are not limited to
trends in the results of the Company's operations and anticipated capital
requirements. Factors that could cause or contribute to a difference between
forward-looking statements and actual results include those discussed below or
elsewhere herein.
OVERVIEW OF WHEELS
Wheels has engaged in the design, marketing and distribution of
premium quality collectible sports trading cards featuring race drivers, team
owners and crew chiefs active in NASCAR-sanctioned racing events since 1992.
Wheels has issued limited production collectible sports trading cards between
three and four times each year and sells its products to a network of
distributors, brokers and approximately 1,200 specialty hobby dealers located
principally throughout the southeast United States. Wheels estimates that
customers in the hobby channel have accounted for approximately 85% of sales
and that customers in the retail channel have accounted for approximately 15%
of sales. Wheels collectible sports trading cards are also sold to members of
a membership club created by Wheels and to businesses for use in corporate
promotions.
Wheels' net sales consist of gross sales less the amount of returns.
Sale terms generally are net 30 days, although Wheels has from time to time
offered extended credit terms to certain of its customers. Sales to hobby
dealers are not generally subject to return privileges, although sales to retail
accounts are generally subject to return privileges. Wheels estimates that a
greater percentage of its returns are accounted for by sales to the retail
channel, even though the retail channel accounts for a significantly smaller
percentage of total net sales. Wheels estimates that approximately 80% to 85%
of its 1996 and 1997 hobby channel sales were made to hobby distributors. Three
of these distributors each accounted for in excess of 5% of Wheels' net sales in
1996 and 1997. Wheels believes the hobby channel accounts for a high percentage
of sales of premium and high priced collectible sports trading cards, and that
margins on sales to this channel are generally higher than margins on sales to
customers in the retail channel. Products sold to the hobby channel are
generally differentiated from products sold to the retail channel by their
higher quality and the inclusion of more attractive and more numerous premium
insert cards.
Revenue is recognized at the time of transfer of title of products to
the customer. For those customers entitled to return privileges, a provision
for estimated returns is made in the period in which the related sale is
recorded. Because actual returns may differ from management's estimates,
Wheels' recorded liability for estimated returns may be revised periodically to
reflect actual return experience. During the year ended December 31, 1996,
Wheels generated sales of $615,000 attributable to collectible sports trading
cards initially issued in 1995 or earlier years. In the year ended December
31, 1997, Wheels generated sales of $96,000 of collectible sports trading cards
initially issued in 1996. A portion of collectible sports trading card sales
generated in subsequent periods is attributable to returns which were
subsequently resold by Wheels. Returns which are resold by Wheels after the
initial six months in which sales are made generally carry closeout prices
-18-
<PAGE> 19
and correspondingly reduced margins. Cost of sales includes both the cost to
produce the collectible sports trading cards and royalties paid to race
drivers, team owners and crew chiefs. Costs allocated to production include
materials, photographs, printing, packaging and fulfillment, and variable
freight charges.
In order to limit the risk of over-production of a collectible sports
trading card issue and in order to develop accurate production forecasts,
Wheels develops promotional cards and sales materials for each trading card
issue which are used to solicit orders from distributors and dealers. Wheels
generally receives orders totaling between 85% and 95% of the total number of
collectible sports trading cards to be printed in an issue. Orders are subject
to cancellation by the customer at any time before or after issuance of
collectible sports trading cards. The actual size of the print run varies
based on Wheels' past sales experience, anticipated residual sales following an
issue, the time of year in which the issue is to be delivered and other
sales-related considerations. For example, Wheels will frequently produce
trading cards in excess of orders for collectible trading card issues which are
marketed and sold during the racing season. Excess production also allows
Wheels flexibility in responding to reorders received from distributors or
dealers. While Wheels is unable to forecast reorders from distributors or
dealers with respect to any one issue, Wheels' prior sales experience has
indicated that Wheels will receive reorders from certain of its distributors or
dealers in some trading card issues. Wheels writes down its inventory of
unsold collectible sports trading cards at the end of each year to estimated
net realizable value. While Wheels may experience some residual sales of
collectible sports trading cards, Wheels has generally found that sales of
NASCAR-related trading cards at full price will take place substantially within
six months of the initial date of issuance.
At December 31, 1997 and December 31, 1996, Wheels had established
reserves for doubtful accounts, returns and allowances of $2,386,000 and
$237,000 respectively. During 1997, it became apparent that a trading card set
issued in late 1996, Crown Jewels Elite, had been improperly packed by Wheels'
contract packer. As a result, substantial quantities of that product which had
been purchased by distributors may not be fit for sale on a retail basis.
Although Wheels has encouraged distributors to continue to sell the product,
Wheels has accepted product returns and issued credits and price concessions.
Wheels recognizes that a significant portion of the improperly packaged card
sets will eventually be returned. Wheels has instituted a suit for damages
against the packager of this card set. Also contributing to the need for an
increased reserve for doubtful accounts, returns and allowances at December 31,
1997 was an overall weakness in the trading card industry which has reduced the
ability of Wheels' major customers to sell through to retail, thereby
increasing the likelihood of returns or other credits. Several major customers
experienced financial difficulties during the later part of the year, also
causing Wheels to increase its reserves accordingly.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net sales for certain items derived from the Company's
consolidated financial statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
--------------------------
<S> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . 90.3 60.7 64.0
----- ----- -----
Gross margin . . . . . . . . . . . . . . . . . . 9.7 39.3 36.0
Selling, general and administrative expenses . . 75.3 28.6 36.9
Other expenses (income), net . . . . . . . . . . 4.3 (0.8)
----- ----- -----
Operating income (loss) . . . . . . . . . . . . (69.9) 11.5 (.9)
Interest expense . . . . . . . . . . . . . . . . 1.3 .6 .5
----- ----- -----
Net income (loss) from continuing operations . . (71.2) 10.9 (1.4)
----- ----- -----
Net income (loss) . . . . . . . . . . . . . . . (90.7) 10.9 (1.4)
----- ----- -----
</TABLE>
-19-
<PAGE> 20
Fiscal Year ended December 31, 1997 compared to Fiscal Year ended
December 31, 1996.
Consolidated net sales for the year ended December 31, 1997 were
$7,491,000 compared to $7,523,000 for the year ended December 31, 1996, a
decrease of $32,000, or 0.4%. Net sales during 1997 consisted of approximately
$2,778,000 in net sales attributable to trading card operations, approximately
$2,113,000 in net sales by Diamond, $1,566,000 in net sales by GRS, and
$1,034,000 in net sales by High Performance subsequent to its acquisition on
October 24, 1997. The decrease in consolidated net sales was attributable to a
decline of $2,005,000 in sales of trading cards, offset by the addition of High
Performance, plus an increase of approximately $1,029,000 in sales by Diamond,
and a decrease of $90,000 in sales by GRS. Trading card sales for 1997
included $480,000 in sales of the basketball set, Rookie Thunder. The year to
year decline in trading card sales reflects credits, returns and price
adjustments of approximately $700,000 relating to Crown Jewels Elite card set,
a reduction of $519,000 in sales of cards produced in prior years, and the
inability of any card set issued in 1997 to match the 1996 record setting
success of the Viper card set.
Consolidated cost of sales increased $2,197,000 to $6,765,000 in 1997
from $4,568,000 in 1996. As a percentage of sales, consolidated cost of sales
increased to 90.3% in 1997 from 60.7% in 1996. The increase in cost of sales as
a percentage of sales is primarily attributable to reduced trading card sales,
production of cards in excess of quantities that could be sold at full price,
and increases in minimum royalties that must be paid regardless of actual sales
levels. The increase in cost of sales as a percentage of sales also reflects
strong sales, and resulting low obsolescence charges, of the Viper card set in
early 1996. Diamond's cost of sales increased $420,000 to $1,254,000 in 1997
from $834,000 in 1996. As a percentage of sales, such costs decreased to 59.3%
in 1997 from 76.9% in 1996. GRS's cost of sales declined $149,000 to 45.5% of
sales in 1997 from 52.0% of sales in 1996. As a result of such factors, the
Company's consolidated gross margin for 1997 was $726,000 compared to $2,955,000
in 1996, a decrease of $2,229,000 or 75.4%. Trading card margin accounted for
96% of that decrease by declining from $1,909,000 to $(933,000). As a percentage
of net sales, consolidated gross margin decreased from 39.3% in 1996 to 9.7% in
1997.
Consolidated selling, general and administrative expenses during 1997
were $5,643,000 compared to $2,153,000 during 1996, an increase of $3,490,000 or
162.1%. Of this increase, $691,000 represents expenses of High Performance,
which was acquired in late 1997, $924,000 represents expenses of Diamond, which
significantly expanded its operations in 1997, and $420,000 is an increase in
Wheel's bad debt expense in the trading card business. The balance of the
increase was primarily attributable to increased expenses associated with the
Company's status as a public company and expenses associated with significant
merger and acquisition activities. As a percentage of sales, consolidated
selling, general and administrative expenses increased to 75.3% in 1997 from
28.6% in 1996.
Other expense for 1997 included a $350,000 write off of unamortized
goodwill related to the Company's acquisition of Emerald. There was no
comparable expense in 1996.
As a result of the above, consolidated net loss from continuing
operations for 1997 was $5,332,000 compared to net income from continuing
operations of $820,000 in 1996. However, in connection with Wheels' decision to
terminate the operations of its World of Racing subsidiary, the creator and
operator of a fantasy race game which had been acquired in January 1997, a
$428,000 loss from discontinued operations and a $1,032,000 loss from
disposition of discontinued operations were incurred in 1997. No similar
charges were incurred in 1996. After giving effect to the losses relating to
discontinued operations, net loss for 1997 was $6,792,000 compared to net income
of $820,000 in 1996.
Fiscal Year ended December 31, 1996 compared to Fiscal Year ended
December 31, 1995.
Consolidated net sales for the year ended December 31, 1996 were
$7,523,000 compared to $4,784,000 in the prior year, an increase of $2,739,000
or 57.3%. Wheels' net sales increased $1,403,000 or 41.5% to $4,783,000 in
1996 from $3,380,000 in 1995; Diamond's net sales increased $1,067,000 to
$1,084,000 in 1996
-20-
<PAGE> 21
from $17,000 in its start-up year of 1995; GRS's net sales increased $269,000
or 19.4% to $1,656,000 in 1996 from $1,387,000 in 1995. The increase in net
sales by Wheels was primarily due to an increase in average revenue per card
set to approximately $800,000 in 1996 from approximately $680,000 in 1995. The
average revenue per card set increased in part due to a higher average price
per box sold, with per-box prices in 1996 ranging from 18% to 45% higher than
the average price per box in 1995. The remaining difference between the sales
per collectible sports trading card issue and the total sales for 1996 and 1995
was attributable to the sale of trading cards sold in one year but produced in
prior years.
Consolidated cost of sales increased $1,506,000 or 49.2% to $4,568,000
in 1996 from $3,062,000 in 1995. As a percentage of sales, consolidated cost
of sales decreased to 60.7% in 1996 from 64.0% in 1995. The decrease in cost
of sales as a percentage of net sales reflects Wheels' securing of lower cost
sources of supply and efficiencies achieved in the production process. In
addition, Wheels was able to negotiate volume discounts with existing suppliers
as a result of increased purchasing levels.
Consolidated gross margin for 1996 was $2,955,000 compared to
$1,722,000 in 1995, an increase of $1,233,000 or 71.6%. Of this increase,
$742,000 was attributable to Wheels, $248,000 was attributable to Diamond, and
$243,000 was attributable to GRS. As a percentage of consolidated net sales,
gross margin increased to 39.3% in 1996 from 36.0% in 1995. The increase in
gross profit margin as a percentage of net sales was primarily attributable to
improved control of cost of sales and the sellout of the 1996 Viper issue, which
experienced a return rate of less than 1%. In contrast to returns experienced
on the Viper issue in 1996, Wheels' 1995 issues experienced an average return
rate of 3%.
Consolidated selling, general and administrative expenses for 1996
were $2,153,000 compared to $1,768,000 for 1995, an increase of $385,000 or
21.8%. As a percentage of sales, these expenses declined to 28.6% in 1996 from
36.9% in 1995. The decline as a percentage of consolidated net sales was
primarily attributable to a reduction in commission expense related to trading
card sales to the retail market, small reductions in salary and advertising
expenses, and the growth of sales.
Other income increased to $60,000 in 1996 from $3,000 in 1995. This
increase was primarily due to a non-recurring charge in 1995 related to
expenses incurred by High Gear Sports, Inc., an affiliate no longer conducting
active operations. Interest expense increased to $42,000 in 1996 from $23,000
in 1995, an increase of $19,000 or 83%. The increase in interest expense
reflects primarily the increase in outstanding indebtedness attributable to
bank borrowings and the capital lease obligation on a building acquired by
Diamond in 1996.
As a result of the above, net income for 1996 was $820,000 compared to
a net loss of $65,000 in 1995. As a percentage of net sales, net income
increased to 10.9% in 1996 as compared to a net loss of (1.4)% in 1995. As a
Subchapter S corporation, Wheels was not subject to federal and state income
taxes prior to 1997.
Fiscal Year ended December 31, 1995 compared to Fiscal Year ended
December 31, 1994.
Net sales increased by $448,000 or 10.3% to $4,784,000 for 1995 from
$4,336,000 for 1994. This increase was primarily attributable to sales of the
Crown Jewels trading card set issued in 1995, which experienced greater sales
than any of the 1994 card sets. Wheels' 1995 card sets also enjoyed a higher
average price per box sold, with Wheels' per-box price for 1995 card sets
ranging from 16% to 33% higher than the average price per box received in 1994.
Cost of sales increased by $167,000, or 5.8% to $3,062,000 in 1995
from $2,895,000 in 1994. Cost of sales as a percentage of net sales decreased
to 64.0% in 1995 from 66.8% in 1994. As a result, gross margin increased to
36.0% in 1995 from 33.2% in 1994. The increase in gross margin was primarily
the result of the higher sales volume and Wheels' success in controlling the
growth in cost of sales.
-21-
<PAGE> 22
Consolidated selling, general and administrative expenses increased
$268,000, or 17.9% to $1,768,000 for 1995 from $1,500,000 for 1994. As a
percentage of net sales, these expenses rose to 36.9% of sales in 1995 from
34.6% of sales in 1994. The increase was primarily attributable to personnel
additions, increased selling expenses incurred in connection with hobby market
sales, and higher advertising and marketing expenditures.
During 1994, Wheels asserted a claim against one of its suppliers in
connection with errors in the cutting and collating process. As a result of
these errors, Wheels shipped only a portion of a NASCAR trading card set and
was prevented from recognizing anticipated revenue from sales of this card set.
In lieu of litigating its claim, Wheels accepted a $500,000 payment from the
insurance company for the supplier in the year ended December 31, 1994. No
comparable amount was received in 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's principal sources of liquidity
included cash of $440,000 and its Credit Facility with the Lender as defined and
discussed below. Under the Credit Facility, the Company may borrow up to $10
million in revolving loans, with actual availability of funds depending on a
borrowing base which includes certain accounts receivable and inventories. As of
December 31, 1997, the date of the establishment of the Credit Facility, the
Company had drawn $1,499,000 under the Facility and had a borrowing base
permitting draws of an additional $97,000. As of such date, current assets were
$8,274,000 as compared to current liabilities of $12,618,000. Current
liabilities included $5,250,000 in notes payable to former stockholders of the
Acquired Companies, of which notes totaling $3,250,000 are to be repaid through
the release of $3,300,000 held pursuant to an escrow agreement with the Lender.
The $3,300,000 appears as restricted cash on Wheels' December 31, 1997 balance
sheet. It is anticipated that working capital requirements will be met by
borrowing under the Credit Facility, and that payments on the debts to former
stockholders and other lenders will be made from escrowed funds and cash flows
generated by operations.
Long-term debt at December 31, 1997, net of current maturities,
totaled $6,080,000, net of unamortized discount of $1,647,300. Of that debt,
$5,907,000 is due to the Lender.
During the year ended December 31, 1997, the Company's financial
condition changed significantly as a result of a successful initial public
offering, which provided net cash proceeds of $4,732,260. The application of
such proceeds included repayment of $890,000 in short-term debt and a
$1,100,000 reduction in accounts payable and accrued expenses. Of the $890,000
in bank borrowings, $400,000 had been incurred to fund a distribution to
stockholders to pay their personal tax liabilities on income of Wheels in
connection with the termination of Wheels' status as an S Corporation.
The activities of the Company's continuing operations used net cash of
$2,815,000 during 1997, comprised of primarily the $5,332,000 net loss from
continuing operations reduced by non-cash charges of $2,115,000 and a reduction
of $411,000 in cash invested in net operating assets and liabilities. Primary
changes in components of working capital include an increase in accounts payable
and accrued expenses of $404,000, an increase in inventories of $285,000 and a
decrease in accounts receivable of $495,000. Capital expenditures were $522,000
during the year. Payments on debt other than that related to acquisitions were
$680,000 and included payment in full of a capitalized lease obligation in the
amount of $301,000. A distribution of $400,000 was made to Wheels' stockholders
prior to the April 16, 1997 initial public offering to allow them to pay their
tax liability resulting from 1996 income under Subchapter S of the Internal
Revenue Code. The Company's subsidiary, World of Racing, which was closed and
is presented in the financial statements as discontinued operations, used net
cash of $630,000. In total, these activities, none of which was related to the
Company's 1997 acquisitions, consumed approximately $4,500,000, or substantially
all of the proceeds of the initial public offering.
The Company's financial condition changed significantly also as a
result of transactions completed in the last quarter of 1997. In particular,
the Company made significant cash payments in its acquisition of High
Performance and Press Pass and incurred significant fees and expenses in
connection with such transactions. A portion of the funds required to complete
such transactions and additional working capital were obtained under a credit
agreement (the "Credit Facility") entered into by the Company on December 31,
1997 with
-22-
<PAGE> 23
Credit Agricole Indosuez (the "Lender"). The material financial terms of the
High Performance and Press Pass acquisitions and the Credit Facility are set
forth below.
High Performance. On October 3, 1997, Wheels entered into an
Agreement and Plan of Reorganization (the "HP Agreement") with High
Performance. The HP Agreement provided for the merger of High Performance into
a wholly-owned subsidiary of Wheels formed for the sole purpose of completing
the merger. The merger was completed on October 24, 1997.
The consideration paid by Wheels pursuant to the HP Agreement consisted
of cash in the amount of $1.7 million (the "Initial Cash Payment"), 444,445
shares of Wheels Common Stock and promissory notes in the aggregate principal
amount of $1.0 million (the "HP Notes"). In addition, the terms of the HP
Agreement required an additional cash payment of $3,250,000 (the "Final Cash
Payment") to be made at closing. Payment is to be made out of escrowed funds
("Escrowed Funds") established in connection with the Credit Facility obtained
December 31, 1997. Escrowed Funds, which are shown as restricted cash on the
consolidated balance sheet at December 31, 1997, are scheduled to be released to
the former stockholders of High Performance upon the occurrence of certain
events, one of which is the consummation of the proposed Racing Champions
Merger. In December 1997, certain officers and directors of the Company executed
a pledge agreement under which an aggregate of approximately 1,000,000 shares of
personally-owned Common Stock of the Company have been pledged to secure payment
of the Final Cash Payment.
In April 1998, the Company negotiated the release of $500,000 of
Escrowed Funds as partial satisfaction of the Final Cash Payment. In addition,
the Company agreed to pay an extension fee of $450,000 to the former High
Performance stockholders $250,000 of which was paid on April 22, 1998. The
remaining $200,000 is to be paid upon payment of the remaining Final Cash
Payment.
In order to fund the Initial Cash Payment, Wheels obtained a $1.7
million unsecured bank loan from the Peoples Bank on October 24, 1997. The
bank loan was paid-down and refinanced on December 31, 1997 using borrowings
under the Credit Facility.
Press Pass. On October 3, 1997, Wheels entered into a Merger
Agreement and Plan of Reorganization with Press Pass (the "Press Pass
Agreement"), which provided for the mergers of the two corporate partners of
Press Pass into wholly-owned subsidiaries of Wheels. The mergers were
completed on December 31, 1997.
The consideration paid by Wheels pursuant to the Press Pass Agreement
consisted of cash in the amount of $3.1 million, 600,000 shares of Wheels Common
Stock and promissory notes in the aggregate principal amount of $1.0 million
(the "Press Pass Notes"). The Press Pass Notes are secured by a subordinated
lien on the assets of Press Pass, are guaranteed by the two Wheels' subsidiaries
which were parties to the mergers and bear interest at 8% per annum. All
principal and interest is due December 31, 1998, subject to prepayment at
Wheels' option; provided, however, that Wheels may make quarterly payments of
interest only, in which case the Press Pass Notes bear interest at the rate of
4% per annum. The cash payment was funded under the Credit Facility.
Credit Facility. On December 31, 1997, Wheels and the Lender entered
into an agreement for the Credit Facility which provides Wheels with a $7.7
million term loan and up to $10.0 million in revolving loans. The availability
of revolving loans is determined by a borrowing base comprised of eligible
inventories and accounts receivable. Borrowings under the Credit Facility are
secured by substantially all of Wheels' assets. Subject to certain mandatory
and voluntary prepayments, the term loan provides for quarterly payments of
principal and interest commencing in December 1998 and ending in September
2003. All revolving loans are payable in December 2002.
Under the terms of the Credit Facility, the Company is required to
comply with certain financial and other covenants which include, among others,
restriction on the payment of dividends and attainment of certain financial
ratios. The Credit Facility also places significant restrictions on the
Company's ability to incur additional indebtedness, to create liens or other
encumbrances, to make certain investments or loans and to sell or otherwise
dispose of a substantial portion of assets. Failure to maintain compliance with
these covenants constitutes a default under terms of the Credit Facility and, as
such, gives the lender the right to accelerate repayment of outstanding
borrowings or seek other remedies of default as provided for in the loan
agreement.
Subsequent to December 31, 1997, the Company was in violation of
substantially all of the financial covenants under the Credit Facility. The
Company has obtained a waiver of these violations from the lender for all
violations through April 22, 1998 and has been successful in obtaining required
amendments to certain of these covenants for fiscal 1998. In management's
opinion, the Company will be able to maintain compliance with all loan
covenants, as amended, of the Credit Facility throughout the remainder of 1998.
At the December 31, 1997 closing under the Credit Facility, Wheels
obtained a $7.7 million term loan and $1.5 million in revolving loans. The
revolving loan proceeds, together with certain existing funds of Wheels, were
used to repay $2.1 million in outstanding secured debt. The term loan proceeds
were used to fund the cash payment made in the Press Pass acquisition, to pay
certain expenses incurred in connection with the Credit Facility, and to fund a
$3.3 million escrow account. Upon the occurrence of certain events, including
the closing of the Racing Champions Merger, the funds held in escrow will be
released to Wheels and used to fund the Final Cash Payment to High Performance
stockholders.
-23-
<PAGE> 24
In connection with the Credit Facility, Wheels granted the Lender a
warrant to purchase 509,358 shares of Wheels Common Stock at a price of $3.50
per share. In the Company's financial statements, the warrant has been valued
at $1,647,300 and a corresponding amount recorded as debt discount. The warrant
is exercisable through December 31, 2007. Wheels has granted "piggyback" and
demand registration rights to the holder of the warrant.
SEASONALITY
Wheels' business exhibits some seasonality. Historically, net sales
have been the highest in spring months following commencement of the NASCAR
racing season in late February of each year. Within the NASCAR season, Wheels'
evaluates when to ship individual products based on a number of factors
including, but not limited to, competitors' announced shipping dates, consumer
demand for similar products and orders received in advance of release of a new
issue. Seasonality in the businesses of the Acquired Companies will likely
increase the effect of seasonal variations in the Company's operations. As a
result of these factors, quarterly net sales in future periods may vary and may
not be indicative of net sales in subsequent comparable periods.
INFLATION
The Company believes that inflation has not had a material effect on
its operating results. However, because future increases in inflation may
cause suppliers to increase prices of materials and services to the Company, an
increase in inflation could increase the Company's cost of sales.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1997, the Company adopted SFAS No. 128, "Earnings per
Share", which establishes standards for computing and presenting earnings per
share. ("EPS") SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
Also in 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 130 and No. 131 are
effective for periods beginning after December 15, 1997. Adoption of these
pronouncements is not expected to have a material impact on the consolidated
financial statements of the Company.
YEAR 2000 COMPLIANCE
The Company is reviewing its current computer applications with
respect to the year 2000 issue. The Company believes that costs associated
with year 2000 compliance will not be material. The Company is currently
unable to determine the effect of year 2000 compliance by its customers or
suppliers.
-24-
<PAGE> 25
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WHEELS SPORTS GROUP, INC. (FORMERLY WHEELS RACING, INC.)
AND SUBSIDIARIES
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . F-1
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . F-4
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-8
</TABLE>
-25-
<PAGE> 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Wheels Sports Group, Inc.:
We have audited the accompanying consolidated balance sheet of Wheels
Sports Group, Inc. (a North Carolina corporation) and subsidiaries as of
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Wheels Sports Group, Inc. and subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
April 22, 1998.
F-1
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Wheels Sports Group, Inc.
We have audited the accompanying consolidated balance sheets of Wheels
Sports Group, Inc. (formerly named Wheels Racing, Inc.) and subsidiaries as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Green's Racing Souvenirs, Inc., a wholly owned subsidiary, which
statements reflect total assets constituting 5.9 percent at December 31, 1996,
and revenues constituting 29.0 and 22.0 percent for the years ended, December
31, 1995 and 1996, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Green's
Racing Souvenirs, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Wheels Sports Group,
Inc. and subsidiaries as of December 31, 1996, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 3a, the consolidated financial statements have been
restated to reflect the merger of Diamond Sports Group, Inc. on June 30, 1997,
and the merger of Green's Racing Souvenirs, Inc. on October 4, 1997, both of
which have been accounted for as poolings of interests.
As discussed in Note 12, on December 4, 1997, the Company signed a
definitive agreement to merge with a wholly owned subsidiary of Racing Champions
Corporation.
Coopers & Lybrand, L.L.P.
Greensboro, North Carolina
January 21, 1997, except for Note 3a.
which is dated October 4, 1997
F-2
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
January 15, 1998
Board of Directors
Green's Racing Souvenirs, Inc.
1727 Seymour Drive
South Boston, Virginia 24592
We have audited the balance sheets of Green's Racing Souvenirs, Inc., as of
December 31, 1996 and 1995, and the related statements of income, retained
earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Green's Racing Souvenirs,
Inc., as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ BURNETT & SNEED
--------------------------------------
Certified Public Accountants
F-3
<PAGE> 29
WHEELS SPORTS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 440,430 $ 317,482
Restricted cash........................................... 3,300,000 --
Accounts receivable, net of allowances of $2,386,000 and
$237,000, respectively................................. 1,247,682 2,123,465
Inventories............................................... 2,710,905 606,406
Prepaid expenses.......................................... 136,342 11,000
Hospitality deposits and other assets..................... 438,289 90,664
----------- ----------
Total current assets................................... 8,273,648 3,149,017
Property and equipment, net................................. 937,770 575,968
Property held for sale...................................... 575,001 127,968
Goodwill, net............................................... 17,204,813 --
Deferred financing costs.................................... 1,679,791 --
Other assets................................................ 128,912 250,961
----------- ----------
Total assets........................................... $28,799,935 $4,103,914
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 265,783 $ 279,768
Current portion of capital lease obligations.............. -- 301,583
Lines of credit........................................... 2,229,776 44,125
Notes and other payables to stockholders.................. 5,250,000 150,000
Accounts payable.......................................... 2,705,249 1,469,624
Accrued expenses.......................................... 1,545,934 388,030
Other current liabilities................................. 621,484 255,844
----------- ----------
Total current liabilities.............................. 12,618,226 2,888,974
Long-term debt, net of unamortized discount of $1,647,300
and $0, respectively...................................... 6,080,290 170,794
Notes payable to stockholders............................... -- 21,635
Capital lease obligations................................... 10,107 12,409
----------- ----------
18,708,623 3,093,812
----------- ----------
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred stock: $0.01 par value, 5,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock: $0.01 par value, 15,000,000 shares
authorized, 5,280,253 and 2,810,000 shares issued and
outstanding, respectively.............................. 52,803 28,100
Additional paid-in capital................................ 14,541,891 350,479
Retained (deficit) earnings............................... (6,879,422) 739,948
Stock warrants outstanding................................ 2,376,040 --
Stockholder loans and notes receivable.................... -- (108,425)
----------- ----------
Total stockholders' equity............................. 10,091,312 1,010,102
----------- ----------
Total liabilities and stockholders' equity............. $28,799,935 $4,103,914
=========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-4
<PAGE> 30
WHEELS SPORTS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales............................................... $ 7,491,309 $7,523,135 $4,783,610
Cost of sales........................................... 6,765,431 4,568,307 3,061,534
----------- ---------- ----------
Gross margin..................................... 725,878 2,954,828 1,722,076
Selling, general and administrative expenses............ 5,642,992 2,152,637 1,767,538
Other expense (income), net............................. 321,390 (60,325) (3,338)
----------- ---------- ----------
Operating (loss) income................................. (5,238,504) 862,516 (42,124)
Interest expense, net................................... 93,900 42,404 22,833
----------- ---------- ----------
(Loss) income from continuing operations
before income taxes.............................. (5,332,404) 820,112 (64,957)
Income tax provision.................................... -- -- --
----------- ---------- ----------
(Loss) income from continuing operations........... (5,332,404) 820,112 (64,957)
Discontinued operations:
Loss from discontinued operations, net of income
tax benefit of $0................................ 427,730 -- --
Loss from disposition of discontinued operations,
net of income tax benefit of $0.................. 1,032,350 -- --
----------- ---------- ----------
Net (loss) income................................ $(6,792,484) $ 820,112 $ (64,957)
=========== ========== ==========
Pro forma data unaudited (Actual for 1997) (Note 2):
Net (loss) income from continuing operations, as
reported......................................... $(5,332,404) $ 820,112 $ (64,957)
Pro forma income tax expense (benefit)............. -- 328,045 (25,983)
----------- ---------- ----------
Pro forma net (loss) income from continuing
operations....................................... $(5,332,404) $ 492,067 $ (38,974)
=========== ========== ==========
Basic per share data (Note 15):
(Loss) income from continuing operations........... $ (1.35) $ 0.29 $ (0.03)
=========== ========== ==========
Pro forma net (loss) income from continuing
operations....................................... $ (1.35) $ 0.18 $ (0.02)
----------- ---------- ----------
Loss from discontinued operations.................. $ (0.37) $ -- $ --
----------- ---------- ----------
Net (loss) income.................................. $ (1.72) $ 0.29 $ (0.03)
=========== ========== ==========
Weighted average number of shares used
to compute basic per share data....................... 3,960,569 2,804,640 2,446,250
=========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE> 31
WHEELS SPORTS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
STOCKHOLDER
ADDITIONAL RETAINED STOCK LOANS AND
PREFERRED COMMON PAID-IN (DEFICIT) WARRANTS TREASURY NOTES
STOCK STOCK CAPITAL EARNINGS OUTSTANDING STOCK RECEIVABLE TOTAL
--------- ------ ---------- --------- ----------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994, as previously
reported................ $-- $ 391,000 $ -- $ 120,573 $ -- $ -- $ -- $ 511,573
Adjustments for Green's
Racing Souvenirs, Inc.
pooling of interests
(175,000 shares)...... -- 1,750 10,809 68,789 -- -- -- 81,348
--- --------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31,
1994, as restated....... -- 392,750 10,809 189,362 -- -- -- 592,921
Net loss................ -- -- -- (64,957) -- -- -- (64,957)
Dividend
distributions......... -- -- -- (183,134) -- -- -- (183,134)
Recapitalizations....... -- (369,500) 369,500 -- -- -- -- --
Common stock issued in
connection with
formation of Diamond
Sports Group, Inc.
(485,000 shares)...... -- 4,850 (4,830) -- -- -- -- 20
--- --------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31,
1995.................... -- 28,100 375,479 (58,729) -- -- -- 344,850
Treasury stock
acquisition........... -- -- -- -- -- (25,000) -- (25,000)
Stockholder loan
receivable............ -- -- -- -- -- -- (12,989) (12,989)
Note receivable......... -- -- -- -- -- -- (95,436) (95,436)
Treasury stock
retirement............ -- -- (25,000) -- -- 25,000 -- --
Net income.............. -- -- -- 820,112 -- -- -- 820,112
Dividends paid.......... -- -- -- (21,435) -- -- -- (21,435)
--- --------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31,
1996.................... -- 28,100 350,479 739,948 -- -- (108,425) 1,010,102
Issuance of common stock
in connection with
purchase of:
World of Racing, Inc.
(310,000 shares).... -- 3,100 616,900 -- -- -- -- 620,000
Emerald Sports Group,
Inc. (65,000
shares)............. -- 650 363,350 -- -- -- -- 364,000
High Performance
Sports Marketing
(444,445 shares).... -- 4,444 3,995,556 -- -- -- -- 4,000,000
Press Pass Partners
(600,000 shares).... -- 6,000 4,194,000 -- -- -- -- 4,200,000
Consolidation of World
of Racing, Inc. ...... -- -- -- -- -- -- 95,436 95,436
Stockholder loan
repayments............ -- -- -- -- -- -- 12,989 12,989
Distribution to
Subchapter S
stockholders.......... -- -- -- (431,337) -- -- -- (431,337)
Adjustment for
converting from
Subchapter S to
Subchapter C for tax
purposes.............. -- -- 395,549 (395,549) -- -- -- --
Issuance of common stock
and stock warrants in
public offering
(1,035,000 shares).... -- 10,350 3,982,784 -- 739,126 -- -- 4,732,260
Issuance of stock
warrants to bank...... -- -- -- -- 1,647,300 -- -- 1,647,300
Stock warrants
exercised............. -- 159 121,587 -- (10,386) -- -- 111,360
Stock options issued.... -- -- 521,686 -- -- -- -- 521,686
Net loss................ -- -- -- (6,792,484) -- -- -- (6,792,484)
--- --------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31,
1997.................... $-- $ 52,803 $14,541,891 $(6,879,422) $2,376,040 $ -- $ -- $10,091,312
=== ========= =========== =========== ========== ======== ========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE> 32
WHEELS SPORTS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(6,792,484) $ 820,112 $ (64,957)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) continuing operations --
Loss from discontinued operations and disposition of
discontinued operations............................... 1,460,080 -- --
Depreciation and amortization........................... 161,081 101,189 74,298
Stock option expense.................................... 521,686 -- --
Provision for (reduction in) uncollectible accounts and
returns and allowances................................ 1,068,000 39,000 (63,165)
Write-off of unamortized goodwill related to Emerald
acquisition........................................... 364,000 -- --
(Gain) loss on disposition of assets.................... (9,530) 1,490 (3,684)
CHANGE IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECT
OF CURRENT YEAR ACQUISITIONS:
Decrease (increase) in accounts receivable............ 495,271 (1,382,249) (175,241)
Decrease (increase) in interest receivable and prepaid
expenses............................................ 11,383 (13,468) --
(Increase) decrease in inventories.................... (285,236) (572,556) 7,952
Increase in hospitality deposits and other current
assets.............................................. (324,595) -- --
(Increase) decrease in other noncurrent assets........ (113,505) 62,096 (145,441)
Increase in accounts payable and accrued expenses..... 404,223 1,009,098 447,014
Increase in other current liabilities................. 225,035 86,994 168,850
----------- ----------- ---------
NET CASH (USED IN) PROVIDED BY CONTINUING
OPERATIONS.......................................... (2,814,591) 151,706 245,626
----------- ----------- ---------
NET CASH USED IN DISCONTINUED OPERATIONS.............. (630,000) -- --
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................ (4,313,575) -- --
Acquisition of property and equipment..................... (371,251) (125,999) (161,438)
Notes receivable originated............................... -- (115,436) --
Notes receivable repayments............................... -- 20,000 --
Acquisition of property held for sale..................... (152,000) -- (115,000)
----------- ----------- ---------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING
OPERATIONS.......................................... (4,836,826) (221,435) (276,438)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving loans............................. 1,498,600 -- --
Net (repayments) borrowings under lines of credit and
notes payable........................................... (12,950) 19,000 9,500
Proceeds from long-term debt, net of restricted cash...... 6,470,783 340,047 168,745
Repayments on long-term debt and capital lease
obligations............................................. (2,674,692) (48,346) (46,801)
Loans and advances from stockholders...................... -- 150,000 32,000
Repayment of loans and advances from stockholders......... (171,635) (20,989) (31,381)
Shares issued on formation of Diamond..................... -- -- 20
Purchase of treasury stock................................ -- (25,000) --
Net proceeds (costs) of initial public offering........... 4,981,038 (248,778) --
Proceeds from exercise of warrants........................ 111,360 -- --
Proceeds from receivable from stockholders................ 12,989 -- --
Payment of deferred financing costs....................... (1,379,791) -- --
Distributions to Subchapter S stockholders................ (431,337) (21,435) (183,134)
----------- ----------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF
CONTINUING OPERATIONS............................... 8,404,365 144,499 (51,051)
----------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 122,948 74,770 (81,863)
Cash and cash equivalents, beginning of period.............. 317,482 242,712 324,575
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 440,430 $ 317,482 $ 242,712
=========== =========== =========
Supplemental disclosure of cash paid for interest........... 149,111 38,183 20,836
=========== =========== =========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Proceeds from long-term debt placed in escrow............. $ 3,330,000 $ -- $ --
=========== =========== =========
Vehicles assumed by stockholders, net book value.......... $ -- $ 2,613 $ 11,038
=========== =========== =========
Vehicle traded in, net book value......................... $ -- $ 18,889 $ 19,704
=========== =========== =========
Long-term debt discharged on vehicle traded in............ $ -- $ 11,237 $ 20,370
=========== =========== =========
Capital lease obligations................................. $ -- $ 314,834 $ --
=========== =========== =========
Long-term debt assumed by stockholders in exchange for
vehicle................................................. $ -- $ -- $ 14,056
=========== =========== =========
Transfer of land improvements to land held for sale....... $ -- $ -- $ 12,968
=========== =========== =========
Acquisitions:
Debt incurred in conjunction with acquisitions............ $ 5,250,000 $ -- $ --
=========== =========== =========
Stock issued to affect acquisitions....................... $ 8,200,000 $ -- $ --
=========== =========== =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE> 33
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
The consolidated financial statements at December 31, 1997, include the
accounts of Wheels Sports Group, Inc. ("Wheels") (formerly Wheels Racing, Inc.)
and its wholly-owned subsidiaries (collectively referred to as the "Company").
All material intercompany balances and transactions have been eliminated. The
Company is a North Carolina corporation originally incorporated in South
Carolina in 1992 under the name of Wheels Racing, Inc. In December 1996, the
Company was reincorporated as a North Carolina corporation under the name Wheels
Sports Group, Inc.
The Company and its subsidiaries are engaged in merchandising NASCAR
oriented products, including apparel, collectible trading cards and accessories
and providing motorsports related hospitality management and corporation
promotions. The Company sells its collectible sports trading cards primarily
through a network of distributors, brokers and specialty hobby dealers located
primarily in the southeast United States. NASCAR oriented apparel includes hats,
shirts and jackets as well as other novelty items which are sold to
mass-merchandise retailers and directly to fans at NASCAR sanctioned events.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Although the Company sells its products to a large number of customers, certain
major third-party distributors comprise a significant portion of the customer
base. If the financial condition of these distributors were to significantly
deteriorate, the Company's operating results could be adversely affected. The
largest customer accounted for 19.2% of net sales during 1997. Although the
Company does not require collateral, the Company does perform ongoing
evaluations of its customers' financial condition to reduce credit risk. At
December 31, 1997 and 1996, the Company had recorded allowances for doubtful
accounts of approximately $1,041,000 and $107,000, respectively.
REVENUE RECOGNITION
Revenues and related costs are recognized upon transfer of title of
products to customers. In the case of hospitality and other services, revenue
and related costs are recognized at the time the NASCAR Racing event takes place
and services are rendered. The Company provides for estimated returns from
certain customers who have a right of return. At December 31, 1997 and 1996, the
Company had recorded allowances for estimated returns of approximately
$1,345,000 and $130,000 respectively.
FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents, receivables, accounts payable,
and accrued expenses approximate their fair values due to the short-term nature
of these items. The carrying amounts of the Company's lines of credit, notes and
other payables to stockholders and long-term term debt also approximate their
fair values due either to their short-term nature or the variable interest rates
associated with these debt instruments.
F-8
<PAGE> 34
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method, and market represents the lower of
replacement cost or estimated net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
principally by using the straight-line method over the estimated useful lives,
ranging from 3 to 20 years.
PROPERTY HELD FOR SALE
Property held for sale consists of land and related improvements and a
building at December 31, 1997, and land and related improvements at December 31,
1996. Property held for sale is stated at the lower of cost or estimated net
realizable value.
INCOME TAXES
The financial statements of the Company for periods prior to 1997 do not
include a provision for income taxes because the taxable income or loss of the
Company was included in the income tax returns of the individual shareholders
under the Company's Subchapter S corporation election. Effective January 1,
1997, the Company converted to Subchapter C corporation status and, as such,
will begin filing federal income tax returns for all periods subsequent to
December 31, 1996. As a result of the conversion to a Subchapter C corporation,
the Company's retained earnings at January 1, 1997, has been reclassified to
additional paid-in capital.
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred income taxes are recognized for the expected future tax
consequences of temporary differences between financial statement carrying
amounts and the tax bases of existing assets and liabilities using enacted tax
rates.
For information purposes, the consolidated statements of operations include
a pro forma income tax provision (benefit) on taxable income (loss) for
financial reporting purposes using statutory federal and state rates that would
have resulted if the Company had filed corporate tax returns during 1996 and
1995.
HOSPITALITY DEPOSITS AND DEFERRED REVENUE
The Company makes advances to sponsors of NASCAR functions and receives
monies in advance from its customers, which are treated as advance hospitality
deposits and deferred revenues, respectively, in the Company's consolidated
balance sheets. Deferred revenue recorded at December 31, 1997 and 1996,
amounted to $277,820 and $255,844, respectively, and is included in other
current liabilities on the accompanying consolidated balance sheets.
OTHER ASSETS
Other assets at December 31, 1997, consist primarily of refundable deposits
for leased vehicles. Other assets at December 31, 1996, consisted primarily of
deferred costs associated with the Company's initial public offering. Costs
deferred in connection with the offering of the Company's common stock were
offset against the proceeds of the offering and included in additional paid-in
capital upon successful completion of the offering.
F-9
<PAGE> 35
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired in connection with the acquisitions of High Performance and
Press Pass (Note 3). Goodwill is being amortized over 40 years on a
straight-line basis. Amortization expense for the year ended December 31, 1997,
was approximately $39,300.
The Company periodically evaluates the carrying value of goodwill and other
long-lived assets for possible impairment based upon expected future
undiscounted operating cash flows. In management's opinion, no impairment to the
recoverability of the carrying value of goodwill or other long-lived assets
exists at December 31, 1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Prior to January 1, 1996, the Company was required to account for stock
option plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Under APB Opinion No. 25, compensation expense related to the
issuance of stock options would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price of the
option.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and to provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
Compensation expense related to stock options granted to nonemployees for
services rendered is recognized over the vesting period based on the fair value
of the options on the date of grant, as prescribed by SFAS No. 123.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1997, the Company adopted SFAS No. 128, "Earnings per Share",
which establishes standards for computing and presenting earnings per share.
SFAS No. 128 replaces the presentation of primary EPS with a presentation of
basic EPS and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
Also in 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information."
F-10
<PAGE> 36
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 130 and No. 131 are effective for periods beginning after December 15,
1997. Adoption of these pronouncements is not expected to have a material impact
on the consolidated financial statements of the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. BUSINESS COMBINATIONS AND RESTATEMENT:
A. DIAMOND SPORTS GROUP, INC. AND GREEN'S RACING SOUVENIRS, INC.
On June 30, 1997, Wheels Sports Group, Inc. acquired 100% of the common
stock of Diamond Sports Group, Inc. ("Diamond"), a privately-held corporation
located in Charlotte, North Carolina, in exchange for 485,000 shares of the
Company's common stock. Diamond is engaged in merchandising NASCAR-oriented
products and providing motorsports related hospitality management and
corporation promotions.
On October 4, 1997, Wheels Sports Group, Inc., acquired 100% of the common
stock of Green's Racing Souvenirs, Inc. ("GRS"), a privately-held company
located in South Boston, Virginia, in exchange for 175,000 shares of the
Company's common stock. Green's is engaged in merchandising NASCAR oriented
racing souvenirs at race tracks and by mail.
The Diamond and GRS transactions constituted tax-free reorganizations and
each has been accounted for using the pooling of interests method of accounting
for business combinations. Accordingly, all prior period consolidated financial
statements have been restated to include the combined results of operations,
financial position and cash flows of Diamond and GRS. There were no material
transactions between or among Diamond, GRS and the Company prior to the
combination. Certain reclassifications have been made to Diamond's and GRS'
financial statements to conform to the Company's basis of presentation.
Prior to the acquisitions, Diamond and GRS were Subchapter S corporations
and, accordingly, did not pay U.S. federal income taxes. Both corporations will
be included in the Company's federal income tax return effective June 30, 1997
and October 4, 1997, respectively. In connection with the conversion of Diamond
and GRS to Subchapter C corporations, the retained earnings of the respective
companies at the date of acquisition have been reclassified to additional
paid-in capital.
B. WORLD OF RACING, INC.
The Company acquired World of Racing, Inc. ("WOR") through a wholly owned
subsidiary on January 28, 1997, by exchanging 310,000 shares of the Company's
common stock valued at $620,000 for 100% of the common stock of WOR. WOR was a
privately-held South Carolina corporation incorporated in August 1996 to operate
a fantasy race game. The transaction resulted in WOR becoming a wholly-owned
subsidiary of the Company.
Effective June 30, 1997, the Company's Board of Directors voted to
discontinue the operations of WOR and dispose of its assets. The acquisition of
WOR was originally accounted for as a pooling of interests, but the
discontinuance of its operations required the use of purchase accounting. The
$561,914 unamortized goodwill, along with property plant and equipment with a
net book value of approximately $132,000, were written off as of June 30, 1997.
In addition, on June 30, 1997, the Company recorded estimated operating losses
from June 30, 1997, through the end of the phase-out period of approximately
$222,000. Net liabilities of WOR at December 31, 1997, amounted to approximately
$116,000 and are included in other current liabilities on the accompanying
consolidated balance sheet. The loss from operations and the loss on disposition
are presented as discontinued operations on the accompanying consolidated
statement of operations for the year ended
F-11
<PAGE> 37
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997. Net sales of WOR amounted to approximately $174,000 for the
year ended December 31, 1997.
C. EMERALD SPORTS GROUP, INC.
On August 5, 1997, the Company acquired 100% of the common stock of Emerald
Sports Group, Inc. ("Emerald") a recently formed privately-held corporation
located in Charlotte, North Carolina, in exchange for 65,000 shares of its
common stock valued at $364,000. The transaction was accounted for as a purchase
and resulted in excess purchase price over the fair value of net assets acquired
of approximately $408,000.
In December 1997, the Company decided to merge the operations of Emerald
into those of Diamond and to dispose of substantially all of Emerald's assets,
with the exception of inventory, as of December 31, 1997. Accordingly, the
Company has recorded provisions to write-off unamortized goodwill related to the
Emerald acquisition of approximately $364,000, which is included in other
expense on the accompanying consolidated statement of operations for the year
ended December 31, 1997. In addition, certain costs totaling approximately
$200,000 related to the disposal have been accrued at December 31, 1997, and are
included in other current liabilities and other expenses in the accompanying
consolidated financial statements.
D. HIGH PERFORMANCE SPORTS MARKETING, INC.
Effective October 24, 1997, the Company consummated the acquisition of High
Performance Sports Marketing, Inc. ("High Performance"). High Performance is
engaged in the merchandising of NASCAR apparel and souvenirs through mass market
retailers and convenience stores. Consideration paid by the Company consisted of
cash in the amount of $1,672,000, promissory notes totaling $1,000,000, and
444,444 shares of the Company's common stock valued at $4,000,000. In addition,
the terms of the merger agreement required an additional cash payment to be made
at closing of $3,250,000 (the Additional Cash Consideration). Payment of the
Additional Cash Consideration has been extended to 1998 and is to be paid out of
escrowed funds ("Escrowed Funds") established in connection with the Company's
Credit Facility obtained December 31, 1997 (Note 10). Escrowed funds, which are
shown as restricted cash on the accompanying consolidated balance sheet at
December 31, 1997, are scheduled to be released to the former stockholders of
High Performance upon the occurrence of certain events, one of which is the
consummation of the proposed merger discussed in Note 16. In December 1997,
certain officers and directors of the Company executed a pledge agreement under
which an aggregate of approximately 1,000,000 shares of personally-owned stock
of the Company have been pledged to secure payment of the Additional Cash
Consideration.
In April 1998, the Company negotiated the release of $500,000 of Escrowed
Funds as partial satisfaction of the Additional Cash Consideration. In addition,
the Company agreed to pay an extension fee of $450,000 to the former High
Performance stockholders, $250,000 of which was paid on April 22, 1998. The
remaining $200,000 is to be paid upon payment of the remaining Additional Cash
Consideration.
E. PRESS PASS PARTNERS
Effective December 31, 1997, the Company consummated the acquisition of
Press Pass Partners, ("Press Pass") through a transaction in which the two
corporate partners of Press Pass were merged into two newly formed subsidiaries
of the Company. Press Pass is a designer and marketer of collectible trading
cards featuring NASCAR and other sports personalities. Consideration paid by the
Company consisted of cash of $3,100,000, promissory notes totaling $1,000,000,
and 600,000 shares of the Company's common stock valued at $4,200,000.
F-12
<PAGE> 38
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisitions of High Performance and Press Pass have been accounted for
as purchases. Accordingly, the results of operations for each of these entities
since the date of acquisition are included in the Company's consolidated
statement of operations for the year ended December 31, 1997. A summary of the
preliminary allocation of total purchase price to net assets acquired, and
resulting goodwill, is shown below (in thousands):
<TABLE>
<CAPTION>
HIGH
PERFORMANCE PRESS PASS TOTAL
----------- ---------- -----
<S> <C> <C> <C>
Purchase price.................................. $ 9,922 $ 8,300 $18,222
Transaction costs............................... 150 42 192
------- ------- -------
10,072 8,342 18,414
------- ------- -------
Assets acquired................................. 2,349 2,074 4,423
Liabilities assumed............................. (1,709) (1,544) (3,253)
------- ------- -------
Net assets acquired........................ 640 530 1,170
------- ------- -------
Goodwill........................................ $ 9,432 $ 7,812 $17,244
======= ======= =======
</TABLE>
The consolidated financial statements include, for the two companies
acquired in transactions accounted for as poolings of interests, the following
results of operations for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales:
Wheels (1996 and 1995 as previously reported)...... $ 3,812 $4,783 $3,381
Diamond............................................ 2,113 1,084 16
GRS................................................ 1,566 1,656 1,387
------- ------ ------
Combined...................................... $ 7,491 $7,523 $4,784
======= ====== ======
Net (loss) income from continuing operations:
Wheels (1996 and 1995 as previously reported)...... $(5,040) $ 828 $ (124)
Diamond............................................ (419) (80) (22)
GRS................................................ 127 72 81
------- ------ ------
Combined...................................... $(5,332) $ 820 $ (65)
======= ====== ======
</TABLE>
Diamond had unaudited net sales and unaudited net income for the period
from the beginning of 1997 to the date of acquisition of $1,211,996 and $77,474,
respectively, while Green's had unaudited net sales and unaudited net income for
the period from the beginning of 1997 to the date of acquisition of $1,188,191
and $96,193, respectively.
The following summarized pro forma financial information assumes the
acquisitions of High Performance and Press Pass had occurred on January 1 of
each year, excluding discontinued operations of WOR (in thousands except per
share data):
<TABLE>
<CAPTION>
1997 1996
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Pro forma net sales..................................... $29,043 $23,780
Pro forma net (loss) income from continuing
operations............................................ $(7,099) $ 259
Pro forma (loss) earnings per share from continuing
operations............................................ $ (1.44) $ 0.07
</TABLE>
F-13
<PAGE> 39
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma amounts reflect the results of operations for the Company,
the acquired businesses and purchase accounting adjustments to reflect the
amortization of goodwill created in the acquisitions and interest expense on the
additional debt incurred to finance the acquisitions, including amortization of
deferred financing costs and the debt discount (Note 10).
4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials and work-in-process....................... $ 197,650 $479,382
Finished goods.......................................... 2,513,255 127,024
---------- --------
$2,710,905 $606,406
========== ========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and improvements.................................. $ 48,331 $ 12,100
Leasehold improvements................................. 29,556 12,745
Office machinery and equipment......................... 483,448 206,868
Equipment.............................................. 342,581 --
Vehicles............................................... 333,826 276,029
Buildings under capital lease.......................... -- 298,879
---------- ---------
1,237,742 806,621
Less accumulated depreciation.......................... (299,972) (230,653)
---------- ---------
$ 937,770 $ 575,968
========== =========
</TABLE>
During 1997, the Company exercised its right to purchase its building under
capital lease for approximately $308,000 and, subsequently, made the building
available for sale. Accordingly, the carrying amount of approximately $308,000
has been reclassified to property held for sale at December 31, 1997. Subsequent
to year-end, the Company sold this building for a purchase price of
approximately $326,000.
6. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Legal and professional fees............................. $ 408,475 $ --
Royalties............................................... 432,852 359,354
Accrued financing costs................................. 300,000 --
Payroll related expenses................................ 280,863 --
Other................................................... 123,744 28,676
---------- --------
$1,545,934 $388,030
========== ========
</TABLE>
7. INCOME TAXES:
The financial statements of the Company for periods prior to 1997 do not
include a provision for income taxes, as the Company had elected to be treated
as a Subchapter S Corporation for federal and state income
F-14
<PAGE> 40
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax purposes. The Company's Subchapter S Corporation election was terminated
effective January 1, 1997, and, upon termination, the Company became fully
subject to federal and state income taxes. In addition, each of the entities
acquired during 1997 was either a Subchapter S Corporation or a partnership
prior to merging with the Company, and as such, the taxable income or loss of
the acquired entities prior to the date of acquisition was included in the
income tax returns of the respective stockholders or corporate partners. Upon
acquisition, the companies are no longer treated as Subchapter S Corporations
for tax purposes and are, therefore, subject to federal and state income taxes.
There was no current or deferred provision for income taxes of continuing
operations for the year ended December 31, 1997. A reconciliation of the
Company's effective income tax rate to the statutory federal income tax rate is
as follows:
<TABLE>
<CAPTION>
1997
------------------
AMOUNT %
------ -
<S> <C> <C>
Amount at statutory federal rate........................... $ 1,866,300 35%
Nondeductible amortization of goodwill..................... (13,800) --
Pooling income, preacquisition............................. 50,200 1
Other...................................................... (7,400) --
Valuation allowance........................................ (1,895,300) (36)
----------- ---
Income tax expense.................................... $ -- 0%
=========== ===
</TABLE>
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities at year-end are as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Deferred tax assets:
Expenses not currently deductible......................... $ 1,317,500
Net operating loss carryforwards.......................... 1,831,900
Other..................................................... 22,500
-----------
3,171,900
Valuation allowance....................................... (3,171,900)
-----------
Net deferred tax assets................................ $ --
===========
</TABLE>
Losses incurred during 1997 may be used to offset future taxable income of
the Company. As of December 31, 1997, the Company had a net operating loss
carryforward of approximately $4,600,000 to offset future taxable income which,
if not utilized, will expire in 2012. U.S. tax rules impose certain limitations
on the use of net operating loss carryforwards following certain "changes in
control", as defined by the IRS. During 1997, the Company experienced a "change
in control" resulting in an annual limitation on the use of available net
operating losses of approximately $1,400,000. Furthermore, future sales of
common stock by the Company, or changes in the composition of the principal
stockholders such as that contemplated in the proposed merger discussed in Note
16, could constitute another "change in control" that could further limit the
use of the Company's net operating loss carryforward.
Realization of future tax benefits related to deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income during the net operating loss carryforward period. As required by SFAS
No. 109, the Company has recorded a valuation allowance of approximately
$3,200,000 at December 31, 1997, because, in the Company's assessment, it is
uncertain whether the deferred tax assets will be realized.
F-15
<PAGE> 41
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LINES OF CREDIT:
Lines of credit are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revolving loan facility, $8,501,400 of additional
borrowings available subject to certain restrictions
($97,000 available at December 31, 1997), used to meet
working capital requirements of the Company, secured by
substantially all the assets of the Company, accrued
interest due periodically at LIBOR plus 3% (8.8% at
December 31, 1997), expiring December 31, 2002, maximum
borrowings of $1,498,600 during 1997................... $1,498,600 $ --
Line of credit with a bank, $300,000 of additional
borrowings available, used to meet working capital
requirements of the Company, personally guaranteed by
three stockholders, with accrued interest due monthly
at the prime rate (8.5% at December 31, 1997) expiring
April 29, 1998, maximum borrowings of $700,000 during
1997................................................... 700,000 --
Line of credit with a bank, $160,000 of additional
borrowings available, used to meet working capital
requirements of the Company, personally guaranteed by
certain officers of the Company, with accrued interest
due monthly at the prime rate (8.25% at December 31,
1996) facility closed at the end of 1997............... -- 40,000
Line of credit with a bank, $18,824 of additional
borrowings available, guaranteed by a stockholder, with
accrued interest due monthly at the prime rate plus 1%
(9.5% at December 31, 1997) expiring July 22, 1999..... 31,176 4,125
---------- -------
$2,229,776 $44,125
========== =======
</TABLE>
See Note 10 for a discussion of terms and conditions under the revolving loan
facility.
9. NOTES AND OTHER PAYABLES TO STOCKHOLDERS:
Notes and other payables to stockholders are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Unsecured notes payable to stockholders, issued in
connection with the acquisition of High Performance
(Note 3), bearing interest at 10.0%, principal and
interest due October 24, 1998......................... $1,000,000 $ --
Notes payable to stockholders, issued in connection with
the acquisition of Press Pass (Note 3), bearing
interest at 8.0%, principal and interest due December
31, 1998, secured by a subordinated lien on the assets
of Press Pass......................................... 1,000,000 --
Additional Cash Consideration payable to stockholders in
connection with the acquisition of High Performance
(Note 3), bearing interest at the Federal Funds rate
(5.5% at December 31, 1997), principal and interest
due upon release of Escrowed Funds (Notes 3 and 10)... 3,250,000 --
Note payable to two stockholders, unsecured, issued in
order to meet working capital needs, bearing interest
at 18.0%, principal and interest repaid in 1997....... -- 150,000
---------- --------
$5,250,000 $150,000
========== ========
</TABLE>
F-16
<PAGE> 42
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unsecured notes payable to stockholders represent notes issued to the
former shareholders of High Performance and Press Pass in connection with the
acquisitions of High Performance and Press Pass in 1997, as discussed in Note 3.
See Note 3 and Note 10 for discussion of terms and conditions of the
Additional Cash Consideration payable to the former stockholders of High
Performance.
10. LONG-TERM DEBT:
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Term loan payable to bank, net of unamortized discount
of $1,647,300, bearing interest at LIBOR plus 3%
(8.8% at December 31, 1997), principal and interest
payments due quarterly beginning December 1998 and
continuing through September 2003, secured by
substantially all assets of the Company.............. $6,100,483 $ --
Note payable to a bank used to meet working capital
needs, secured by accounts receivable and inventory,
bearing interest at the prime rate (8.25% at December
31, 1996), repaid in 1997............................ -- 250,000
Note payable to a bank used to finance the acquisition
of land, secured by the land, with accrued interest
due monthly at the prime rate (8.5% at December 31,
1997), principal due in full on October 31, 2010..... 115,000 115,000
Notes payable to banks and financing institutions used
to finance the acquisition of vehicles and equipment,
generally due in monthly principal payments ranging
from $303 to $806 plus accrued interest at rates
ranging from 4.9% to 10.7%........................... 130,590 85,562
---------- ---------
$6,346,073 $ 450,562
Less -- Amount due within one year..................... (265,783) (279,768)
---------- ---------
$6,080,290 $ 170,794
========== =========
</TABLE>
On December 31, 1997, the Company established a Credit Facility with Credit
Agricole Indosuez providing a $7.7 million term loan and up to $10 million in
revolving loans (Note 8). The availability of the revolving loans is determined
based upon a borrowing base comprised of eligible inventories and accounts
receivable. Borrowings under the Credit Facility are secured by substantially
all of the Company's assets. The term loan provides for quarterly payments of
principal and interest beginning December 1998 and ending September 2003,
subject to certain mandatory and voluntary prepayment provisions. All revolving
loans are payable in December 2002.
At the December 31, 1997 closing of the Credit Facility, the Company
obtained a $7,747,783 term loan and $1,498,600 in revolving loans. The revolving
loan proceeds, together with existing funds of the Company, were used to repay
$2.1 million in outstanding secured debt. Term loan proceeds of $4.4 million
were used to fund the cash consideration payable under terms of the Press Pass
acquisition, and to pay certain expenses incurred in connection with the Press
Pass and High Performance acquisitions. Additional term loan proceeds of $3.3
million were placed in an escrow account to fund the Additional Cash
Consideration incurred in the High Performance acquisition. Escrowed Funds,
which are shown as restricted cash in the accompanying
F-17
<PAGE> 43
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated balance sheet at December 31, 1997, are scheduled to be released
to the former stockholders upon the occurrence of certain events, one of which
is the consummation of the proposed merger discussed in Note 16.
In connection with establishing the Credit Facility, the Company granted to
Credit Agricole Indosuez a warrant to purchase 509,358 shares of the Company's
common stock at a price of $3.50 per share. The warrant is exercisable through
December 31, 2007. The exercise price and number of shares to be purchased are
subject, from time to time, to certain antidilutive adjustments. The Company has
recorded a discount on long term debt obtained under the Credit Facility based
on the estimated fair value of the warrants at December 31, 1997. The discount
will be amortized and included as a component of interest expense over the term
of the term loans using the effective interest rate method.
The Company also incurred financing costs totaling $1,679,791, which have
been deferred and will be amortized over the term of the Credit Facility.
Under the terms of the Credit Facility, the Company is required to comply
with certain financial and other covenants which, among other things, place
restrictions on the payment of dividends and require the Company to achieve
certain financial ratios. The Credit Facility also places significant
restrictions on the Company's ability to incur additional indebtedness, to
create liens or other encumbrances, to make certain investments or loans and to
sell or otherwise dispose of a substantial portion of assets. Failure to
maintain compliance with these covenants constitutes a default under the terms
of the Credit Facility and, as such, gives the lender the right to accelerate
repayment of outstanding borrowings or seek other remedies of default as
provided for in the loan agreement.
Subsequent to December 31, 1997, the Company was in violation of
substantially all of the financial covenants under the Credit Facility. The
Company has obtained a waiver from the lender for all violations through April
22, 1998, and has been successful in obtaining required amendments to certain of
these covenants for fiscal 1998.
Annual principal payments on long-term debt, are approximately as follows:
<TABLE>
<S> <C>
1998........................................................ $ 265,783
1999........................................................ 930,128
2000........................................................ 1,259,015
2001........................................................ 1,646,404
2002........................................................ 2,033,793
Thereafter.................................................. 1,858,250
----------
$7,993,373
==========
</TABLE>
11. TRANSACTIONS WITH RELATED PARTIES:
In 1996, two directors who are stockholders of the Company guaranteed the
$250,000 note payable to a bank (Note 10). This note was repaid in 1997.
At November 30, 1996, two stockholders, one of whom is a director, loaned
the Company $150,000, with an interest rate of 18% per annum. This loan was
repaid in 1997.
One hundred shares of Wheels Racing, Inc. stock were repurchased by the
Company for $25,000, placed in Treasury and retired during 1996.
The Company leases certain buildings which are owned by stockholders and/or
directors of the Company. These leases are accounted for as operating leases and
have terms from 1 to 15 years. The Company incurred rental expense on these
leases of $51,598 and $15,400 during 1997 and 1996, respectively.
Racing Champions Corporation ("Racing Champions") has guaranteed $600,000
of borrowings of the Company under the Credit Facility.
F-18
<PAGE> 44
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into a lease for a building on October 1, 1996, with a
company owned by three of the former stockholders of Diamond. The lease term was
for three years with an option to purchase the building during the lease term
and a mandatory purchase requirement at the end of 1999. The lease was
capitalized using a rate of 9%. Minimum monthly lease payments were $2,400.
Lease payments, representing interest, made during the years ended December 31,
1997 and 1996, were $19,200 and $9,200. In August 1997, the Company exercised
its right to purchase the building for approximately $308,000; accordingly, the
capital lease obligation has been removed from the books at December 31, 1997.
Land owned by certain stockholders was sold to the Company in October 1995
at its original acquisition cost of $115,000 and is now held for sale.
12. COMMITMENTS AND CONTINGENCIES:
The Company's ability to produce and market its trading cards is based on
its license agreements with various parties. The agreements permit the Company,
on a nonexclusive basis, to use logos, trademarks, facsimile signatures,
biographical data and pictures to produce and sell specified products. The terms
of the various license agreements vary and in some cases require the Company to
pay royalties based upon a specified percentage of sales, with aggregate
guaranteed minimum royalties relating to future periods totaling approximately
$2,010,000 through December 2002. Royalty expense for the years ended December
31, 1997, 1996 and 1995, was $1,217,000, $720,000 and $565,000, respectively.
Although there can be no assurance that new licenses will be granted to the
Company upon expiration of the current agreements, the Company anticipates that
it will be able to obtain new licenses on favorable terms.
In May 1997 a proposed class action lawsuit was filed against several
trackside vendors, including GRS. The complaint alleges that the defendants have
engaged in price fixing activities at certain NASCAR events in violation of
federal anti-trust laws. Plaintiffs seek an unspecified amount of compensatory
and punitive damages and also an order enjoining the alleged price fixing
practices. GRS has entered into a joint defense agreement with certain
co-defendants pursuant to which defense costs are being reimbursed by defendant
Americrown Service Corporation. The existing joint defense agreement is to
remain in effect through class certification proceedings, which are expected to
be completed during late 1998. Wheels expects that the action will be dismissed
if class certification is not obtained. In the event class certification is
obtained, the Company expects that GRS would vigorously defend against the
action, although no assurances can be given as to the outcome of this matter.
The Company is also subject, from time to time, to other legal proceedings
and claims which arise in the ordinary course of its business. Based upon
information currently available, the Company is not aware of any such matters
which are expected to have a material adverse effect on the financial position
or results of operations of the Company.
F-19
<PAGE> 45
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASES
Rental expense under cancellable and noncancellable operating leases
amounted to $239,615 for the year ended December 31, 1997. Commitments for
future minimum lease payments with terms extending beyond one year at December
31, 1997, for noncancellable operating leases are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 570,577
1999........................................................ 480,609
2000........................................................ 293,070
2001........................................................ 251,252
2002........................................................ 249,296
Thereafter.................................................. 1,940,297
----------
$3,785,101
==========
</TABLE>
EMPLOYMENT AGREEMENT
The Company maintains employment agreements with certain of its executive
officers, the terms of which expire at various times through December 31, 2000.
The agreements contain certain provisions which entitle the officers to receive
lump-sum severance payments and other benefits upon termination of employment
due to a change in control, as defined. The Company's maximum contingent
liability in such an event is approximately $1,600,000 at December 31, 1997.
13. STOCKHOLDERS' EQUITY:
COMMON STOCK
In connection with the reincorporation as a North Carolina corporation on
December 12, 1996, Wheels Racing, Inc. was merged into Wheels Sports Group,
Inc., a newly formed entity established for the purpose of the reincorporation,
through an exchange of 215 shares of Wheels Sports Group, Inc. for each share of
Wheels Racing, Inc. The treasury stock in Wheels Racing, Inc. was retired. The
merger resulted in the existing shares of common stock (prior to 1997 poolings)
totaling 2,128,500 shares issued to shareholders of record. To attain the
desired capitalization for the offering, the Company effected a forward split of
1.01 to 1 to obtain a total common stock of 2,150,000 (prior to 1997 poolings)
shares issued. Prior year financial statements include the effect of this change
in capital structure.
Holders of the Company's common stock are entitled to one vote for each
share held but do not possess cumulative voting rights in the election of
directors. Subject to preferences that are applicable to outstanding preferred
stock, if any, holders of common stock are entitled to share ratably in all
dividends declared by the Company's Board of Directors. Holders of common stock
have no preemptive, conversion or redemption rights.
INITIAL PUBLIC OFFERING AND STOCK WARRANTS
In April 1997, the Company completed an initial public offering of
1,035,000 shares of common stock at a price of $6.00 per share, resulting in net
proceeds of $4,732,260. Included as part of the offering were warrants for the
purchase of an additional 517,500 shares of common stock at an exercise price of
$7.08 per share. The warrants, which were immediately exercisable, expire in
April 2002 and may be redeemed by the Company beginning April 1998 under certain
terms and conditions at a price of $.05 per warrant. Holders of outstanding
warrants issued in connection with the Company's initial public offering have no
voting or other rights as a stockholder of the Company. In addition, the Company
agreed to issue and sell to the underwriter of its public offering, for nominal
consideration, warrants to purchase an aggregate of 90,000 shares of
F-20
<PAGE> 46
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock and an additional 90,000 warrants at a price of $8.70 per share,
commencing April 1998 and expiring in April 2003. Warrants subject to purchase
under warrants issued to the underwriter have terms identical to those sold as
part of the Company's initial public offering. The Company has assigned $739,126
of the total net proceeds of the offering to the value of stock warrants issued.
Further, the Company has entered into an agreement with the underwriter
which provides that, if the underwriter arranges for the purchase or sale of
substantially all of the assets of the Company, or for a merger, consolidation
or acquisition accepted by the Company during the five-year period ending April
2002, the Company will pay the underwriter a fee ranging from 3%-5% of total
consideration received. In connection with this, the Company agreed to pay the
underwriter a consulting fee of $70,000. This amount was accounted for as a cost
of the initial public offering.
STOCKHOLDER LOANS AND NOTE RECEIVABLE
Stockholder loans and note receivable at December 31, 1996, includes a
$95,436 note receivable from World of Racing, Inc., which accrued interest at
10% and was due October 1997. The amount has been eliminated in consolidation
upon the acquisition of World of Racing, Inc. in 1998 (Note 3). Other loans
outstanding at December 31, 1996, represent noninterest bearing advances to
stockholders. All advances were repaid in 1997.
14. STOCK OPTION PLAN:
In 1996, the Company adopted an Omnibus Stock Plan for its key employees,
under which the Company has reserved 1,100,000 shares of common stock for
issuance under the plan. No awards were made under the plan in 1996. In 1997,
425,000 fair market value options, 90,000 discounted options and 275,000 premium
options were issued to employees to purchase shares of the Company's common
stock. All options were vested at December 31, 1997 and have a maximum term of
ten years.
The Company also issued 127,000 options to nonemployees in 1997. Of the
127,000 options, 43,000 were fully vested at December 31, 1997, with the
remainder vesting over a one-year period. Options granted to nonemployees have a
maximum term of ten years. The Company has recorded expense of approximately
$442,000 related to stock options granted to nonemployees in 1997.
The Company accounts for its employee stock-based compensation plan in
accordance with APB Opinion 25 and related interpretations. Accordingly, no
compensation cost has been recognized for stock options granted to employees
with exercise prices at or greater than the fair market value of the underlying
stock on the grant date. The Company has recorded compensation cost of
approximately $80,000 for the year ended December 31, 1997, related to options
issued to employees at a discount. Had compensation cost for the Company's plan
been determined based on the fair value of the awards at the date of grant
consistent with the methodology of SFAS No. 123, the Company would have
recognized approximately $3,141,000 in additional compensation cost for
stock-based compensation awards. The Company's loss and loss per share from
continuing operations would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997
----
<S> <C> <C>
Net loss from continuing operations.................. As reported $(5,332,404)
Pro forma $(8,473,404)
Basic loss from continuing operations per share...... As reported $(1.35)
Pro forma $(2.14)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1997: divided yield of 0%; expected volatility 50.4%; risk-free
interest rate of 6.4%; and expected life of 10 years.
F-21
<PAGE> 47
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1997 and changes during the year are presented below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
STOCK OPTIONS SHARES EXERCISE PRICE FAIR VALUE
------------- ------ ---------------- ----------------
<S> <C> <C> <C>
Outstanding at the beginning of year................. -- NA --
Options granted at fair market value................. 445,000 $6.76 $6.76
Options granted at a discount........................ 197,000 $5.02 $5.54
Options granted at a premium......................... 275,000 $6.80 $6.43
Forfeited............................................ (500) $5.90 --
Expired.............................................. (2,000) $5.90 --
-------
Outstanding at the end of year....................... 914,500 $6.40
======= =====
Options exercisable at year end...................... 830,500
=======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------ OPTIONS EXERCISABLE
RANGE OF WEIGHTED-AVERAGE ----------------------------------
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$5.02 to $6.38........ 613,500 8.3 $5.91 529,500 $6.05
$7.00 to $8.25........ 301,000 6.0 $7.39 301,000 $7.39
</TABLE>
Subsequent to year-end, the Company canceled 417,000 options issued in
1997. The following table provides pro-forma disclosure of stock options
outstanding at December 31, 1997, after giving effect to the cancelation of
these options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------ OPTIONS EXERCISABLE
RANGE OF WEIGHTED-AVERAGE ----------------------------------
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$5.02 to $6.38........ 372,500 7.3 $5.61 288,500 $5.78
$7.00 to $8.25........ 125,000 6.5 $6.88 125,000 $6.88
</TABLE>
F-22
<PAGE> 48
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. NET INCOME/LOSS PER SHARE:
As discussed in Notes 13 and 14, the Company issued various stock options
and warrants throughout 1997. Because the Company incurred a loss from
continuing operations for the year ended December 31, 1997, these options and
warrants are antidilutive. Thus, the basic earnings per share shown on the face
of the income statement before and including the effects of discontinued
operations and the effect of pro forma income tax adjustments are the same as
diluted earnings per share. However, for a portion of the options and warrants
outstanding at the end of 1997, the exercise price was less than the average
market price of the Company's common stock during the year. As shown below, had
the Company generated net income from continuing operations, these warrants and
options would have increased the number of shares of common stock outstanding by
98,939. The potential exercise of these options and warrants would have no
impact on the total net income amounts used to calculate earnings per share.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES
--------
<S> <C>
Number of shares used to compute basic earnings per share... 3,960,569
Plus effect of dilutive securities:
Stock options............................................. 78,633
Stock warrants............................................ 20,306
---------
Number of shares to be used to compute diluted earnings per
share..................................................... 4,059,508
=========
</TABLE>
For the years ended December 31, 1996 and 1995, the Company had no
outstanding warrants or options. As such, basic earnings per share is equivalent
to diluted earnings per share.
16. PROPOSED MERGER:
On December 5, 1997, the Company announced execution of a definitive
agreement to merge with a wholly owned subsidiary of Racing Champions, a
publicly owned Delaware corporation headquartered in Glen Ellyn, Illinois. The
transaction is planned as a stock-for-stock exchange to be accounted for as a
pooling of interests. Under the terms of the agreement, as amended, each share
of the Company's outstanding common stock will be exchange for 0.51 shares of
Racing Champions common stock. The merger, which is subject to due diligence,
stockholder approval, and other closing conditions, is expected to close in the
first half of 1998. Also, under terms of the agreement, the Company may be
obligated to pay Racing Champions a termination fee of up to $4,000,000 if the
merger is terminated due to the occurrence of certain events or conditions as
specified in the agreement, one of which is the Company's failure to obtain
necessary stockholder approval of the proposed merger. In management's opinion,
the Company will be successful in complying with the terms and conditions of the
merger agreement, as amended, such that management does not expect to incur a
termination fee obligation in the event the proposed merger is not consummated.
In the event such an obligation is incurred, funding of any such liability would
likely require additional working capital financing.
F-23
<PAGE> 49
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Coopers & Lybrand, L.L.P. (the "Former Accountants") resigned as
independent accountants for the Company on December 1, 1997. The Former
Accountants reported on Wheels' financial statements for the fiscal years ended
December 31, 1994, 1995 and 1996. The reports of the Former Accountants on the
financial statements for such years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the year ended December 31, 1994 and during all
subsequent periods, there were no disagreements with the Former Accountants on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of the Former Accountants would have caused them to make
reference thereto in their report on the financial statements for such years.
During each of the three fiscal years in which the Former Accountants
reported on Wheels' financial statements, Wheels had a single product line and
annual revenues of less than $5 million. During 1997, Wheels acquired five
privately-held companies, expanded its product lines and services and increased
its revenues. The financial statements of four of the five Acquired Companies
had not previously been audited, and management of the five Acquired Companies
were not experienced in the preparation of financial statements in accordance
with the rules of the Securities and Exchange Commission. While management
believes that internal financial controls were in place, their adequacy and
reliability were not known to the Former Accountants. As a result of the
changes in the size and complexity of Wheels, the Former Accountants determined
that they would be required to expand significantly the scope of their audit.
However, prior to their December 1, 1997 resignation, the Former Accountants
had no discussions with Wheels' management, Board of Directors or audit
committee on the scope, procedures or any other aspect of the 1997 audit.
Consequently, there were no disagreements between the Wheels and the Former
Accountants with respect to the scope or conduct of the 1997 audit.
Effective January 7, 1998, the Company engaged Arthur Andersen LLP as
its independent public accountants.
-26-
<PAGE> 50
PART III
The information required by Items 9 through 12 of this Part III are omitted
from this Form 10-KSB and will be included in a definitive proxy statement
pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days
after the end of the fiscal year covered by this report. Those sections of the
Proxy Statement that specifically address Items 9 through 12 of this Part III
are incorporated herein by reference. If such definitive Proxy Statement is
not filed with the Commission within 120 days after the end of the fiscal year
covered by this report, then the information required will be filed as an
amendment to this report.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-27-
<PAGE> 51
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following documents are filed herewith or have been included as
exhibits to previous filings with the Securities and Exchange Commission and
are incorporated herein by this reference:
<TABLE>
<CAPTION>
EXHIBIT NO.
- ----------
<S> <C> <C>
xx 2. Articles of Share Exchange as filed on December 20, 1996 with the Secretary of State of the State of
South Carolina.
+ 2.1 Agreement and Plan of Reorganization among Diamond Sports Group, Inc., the Company, Wheels Sports Group
Acquisition, Inc., a wholly owned subsidiary of the Company, and the four shareholders of Diamond Sports
Group, Inc.
x 2.1.2 Amendment to Agreement and Plan of Reorganization among Diamond Sports Group, Inc., the Company, Wheels
Sports Group Acquisition, Inc. and the four shareholders of Diamond Sports Group, Inc.
+ 2.2 Registration Rights Agreement among the Company and Messrs. Randy E. Duncan, H. Edward Hickman, Robert
J. Diachenko and A. Thad Lewallen, III.
* 2.3 Merger Agreement and Plan of Reorganization among SM Acquisition Company, J/B Acquisition Company, the
Company, Synergy Marketing, Inc. and J/B Press Pass, Inc, dated October 3, 1997.
* 2.4 Agreement and Plan of Reorganization among the Company, High Performance Acquisition Company, High
Performance Sports Marketing, Inc., Randy C. Baker and David W. Dupree dated October 3, 1997.
o 2.4.1 Amendment to Merger Agreement and Plan of Reorganization among SM Acquisition Company, J/B Acquisition
Company, the Company, Synergy Marketing, Inc. and J/B Press Pass, Inc., dated December 29, 1997.
o 2.4.2 Registration Rights Agreement, dated December 31, 1997, by and among the Company and the shareholders of the
partners of Press Pass.
# 2.5 First Amendment to Agreement and Plan of Reorganization among the Company, High Performance Acquisition
Company, High Performance Sports Marketing, Inc., Randy C. Baker and David W. Dupree dated October 24,
1997.
oo 2.5.1 Second Amendment to Agreement and Plan of Reorganization among the Company, High Performance Acquisition
Company, High Performance Sports Marketing, Inc., Randy C. Baker and David W. Dupree dated November 26, 1997.
oo 2.5.2 Third Amendment to Agreement and Plan of Reorganization among the Company, High Performance Acquisition
Company, High Performance Sports Marketing, Inc., Randy C. Baker and David W. Dupree dated December 17, 1997.
x 2.5.3 Fourth Amendment to Agreement and Plan of Reorganization among the Company, High Performance Acquisition
Company, High Performance Sports Marketing, Inc., Randy C. Baker and David W. Dupree dated April 22, 1998.
x 2.6 Agreement and Plan of Reorganization among Green's Racing Souvenirs, Inc., the Company, Wheels Sports
Group Acquisition III, a wholly owned subsidiary of the Company, and the shareholders of Green's Racing
Souvenirs, Inc. dated October 17, 1997.
x 2.6.2 Amendment to Agreement and Plan of Reorganization among Green's Racing Souvenirs, Inc., the Company,
Wheels Sports Group Acquisition III, a wholly owned subsidiary of the Company, and the shareholders
of Green's Racing Souvenirs, Inc. dated October 17, 1997.
</TABLE>
-28-
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT NO.
- ----------
<S> <C> <C>
x 2.7 Registration Rights Agreement among the Company, Harold E. Green and Rhonda Green.
xx 3.1.1 Articles of Incorporation of the Company as filed on February 11, 1992 with the Secretary of State of the
State of South Carolina.
xx 3.1.2 Articles of Amendment to Articles of Incorporation of the Company as filed on October 5, 1993 with the
Secretary of State of the State of South Carolina.
xx 3.1.3 Articles of Incorporation of the Company as filed on December 12, 1996 with the Secretary of State of the
State of North Carolina.
xx 3.1.4 Articles of Merger and Share Exchange by and among the Company, Wheels Sports Group Acquisition, Inc., and
World of Racing, Inc.
xx 3.2.1 Form of By-Laws of the Company.
xx 4.1 Form of specimen certificate for Common Stock of the Company.
xx 4.2 Form of specimen certificate for Warrants of the Company.
xx 4.3 Form of Purchase Warrants for warrants to purchase shares of Common Stock to be issued by the Company to
the Representative.
xx 4.4 Form of Purchase Warrants for shares of Common Stock to be issued by the Company to the Representative.
xx 4.5 Form of Warrant Agreement, dated April 16, 1997, by and among the Company, American Securities Transfer
& Trust, Inc. and the Representative.
xx 4.6 Form of Escrow Agreement, effective December 13, 1996, by and among the Company, American Securities
Transfer & Trust, Inc., the Representative and the stockholders of the Company.
xx 10.1.1 Form of Employment Agreement, effective January 1, 1997, by and between Howard L. Correll, Jr. and the
Company.
xx 10.1.2 Form of Employment Agreement, effective January 1, 1997, by and between W. Conrad Powell and the
Company.
xx 10.1.7 Consulting Agreement, effective January 1, 1997, by and between Terry J. Powell and the Company.
# 10.1.8 Employment Agreement dated October 3, 1997, by and between Randy C. Baker and the Company.
# 10.1.9 Employment Agreement dated October 3, 1997, by and between David W. Dupree and the Company.
o 10.1.12 Employment Agreement, dated October 3, 1997 and effective December 31, 1997, by and between Victor
Shaffer and the Company.
</TABLE>
-29-
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT NO.
- ----------
<S> <C> <C>
o 10.1.13 Employment Agreement, dated October 3, 1997 and effective December 31, 1997, by and between Robert Bove
and the Company.
xx 10.2 1996 Omnibus Stock Plan, effective December 13, 1996, authorizing 400,000 shares of Common Stock for
issuance pursuant to the Plan.
xx 10.3.3 Form of License Agreement, dated various dates, by and between NASCAR drivers, team owners and crew
chiefs and the Company.
xx 10.3.4 Form of License Agreement, dated various dates, by and between NASCAR drivers, team owners and crew
chiefs and the Company.
xx 10.3.5 Form of License Agreement, dated various dates, by and between NASCAR drivers, team owners and crew
chiefs and the Company.
xx 10.4.1 Promissory Note, dated September 20, 1996, from the Company to Central Carolina Bank & Trust Company.
xx 10.4.2 Extended date Promissory Note, dated December 19, 1996, from the Company to Central Carolina Bank &
Trust Company.
xx 10.5.1 Promissory Note, effective December 1, 1996, from the Company to Terry J. Powell.
xx 10.5.2 Promissory Note, effective December 1, 1996, from the Company to Stephen M. Zimmerman.
xx 10.6 Promissory Note and Deed of Trust, dated October 30, 1995, from the Company to Central Carolina Bank &
Trust Company.
xx 10.7 Promissory Note, dated September 27, 1996, from World of Racing, Inc. to the Company.
xx 10.9.1 Lease Agreement, dated December 20, 1994, by and between Mocksville Market, Inc. and the Company, as
renewed.
xx 10.9.2 Lease Agreement, effective October 1, 1996, by and between Christy Trucking Company, Inc. and the
Company.
xx 10.9.3 Lease Agreement, dated October 2, 1996, by and between Carolina Properties Building Partnership and the
Company.
# 10.9.4 Lease Agreement dated March 1, 1997, by and between Beale Street Realty, LLC and High Performance Sports
Marketing, Inc.
x 10.9.5 Lease Agreement, dated March 3, 1995, by and between Athena Associates and RCB Enterprises, Inc.
x 10.9.6 Lease Agreement, dated July 30, 1997, by and between Nanco I, LLC and the Diamond Sports Group, Inc.
x 10.9.7 Lease Agreement dated January 7, 1993, by and between New England Mutual Life Insurance Company, as
amended March 16, 1994 and November 28, 1995, and Press Pass Partners.
</TABLE>
-30-
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT NO.
- ----------
<S> <C> <C>
xx 10.10 Creative Services Contract, dated on or about July 1, 1996, by and between Wade Cantrell and the
Company.
xx 10.11.1 License Agreement, dated January 1, 1997, by and between Dale Earnhardt and the Company.
xx 10.11.2 License Agreement, dated January 1, 1997, by and between JG Motorsports, Inc. and the Company.
xx 10.12 Letter of Intent, dated March 14, 1997, by and between Action Performance Companies, Inc. and the
Company.
xx 10.14 Promissory Note and Personal Guarantees, dated April 11, 1997, from the Company to First Union National
Bank of North Carolina.
# 10.15.1 Promissory Note in the principal amount of $850,000 dated October 24, 1997, from the Company to Randy C.
Baker.
# 10.15.2 Promissory Note in the principal amount of $150,000 dated October 24, 1997, from the Company to David W.
Dupree.
# 10.15.3 Promissory Note in the principal amount of $1,672,000 from the Company to Peoples Bank.
o 10.15.4 Form of Promissory Note, issued in the aggregate principal amount of $1,000,000, dated December 31,
1997, from the Company to shareholders of Synergy Marketing, Inc. and J/B Press Pass, Inc.
++ 10.16.1 Credit Agreement, dated December 31, 1997, among the Company and Credit Agricole Indosuez, as agent, and
the lending institutions named therein.
++ 10.16.2 Warrant, dated December 29, 1997, granted by the Company to Credit Agricole Indosuez, to purchase up to
509,358 shares of Common Stock.
x 10.16.3 Amendment to Warrant, effective December 31, 1997, granted by the Company to Credit Agricole Indosuez, to
purchase up to 509,358 shares of Common Stock.
x 21. List of Subsidiaries.
x 27. Financial Data Schedule.
** 99.1 Financial Statements of Diamond Sports Group, Inc.
** 99.2 Proforma Financial Information of Diamond Sports Group, Inc. and the Registrant.
oo 99.3 Financial Statements of High Performance Sports Marketing, Inc.
00 99.4 Proforma Financial Information of High Performance Sports Marketing, Inc. and the Registrant.
## 99.5 Financial Statements of Press Pass Partners.
## 99.6 Proforma Financial Information of Press Pass Partners and the Registrant.
</TABLE>
- --------------
xx Incorporated by reference from the Company's Registration Statement on
Form SB-2 (S.E.C. File No. 333-6340).
+ Previously filed with the Company's Form 8-K filed on July 15, 1997.
* Previously filed with the Company's Form 8-K filed on October 17, 1997.
-31-
<PAGE> 55
EXHIBIT NO.
# Previously filed with the Company's Form 8-K filed on November 7, 1997.
o Previously filed with the Company's Form 8-K filed on January 15, 1998
++ Previously filed with the Company's Form 8-K filed on February 3, 1998.
** Previously filed with the Company's Form 8-K filed on March 31, 1998.
oo Previously filed with the Company's Form 8-K filed on April 22, 1998.
## Previously filed with the Company's Form 8-K filed on April 22, 1998.
x Filed herewith.
(b) REPORTS ON FORM 8-K
The Company filed three reports on Form 8-K during the last quarter of
the fiscal year ended December 31, 1997. A Form 8-K dated October 3, 1997 and
filed on October 17, 1997 announced the agreements with High Performance and
with Press Pass. A Form 8-K dated October 24, 1997 and filed on November 7,
1997 reported the closing of the High Performance acquisition. A Form 8-K
dated December 1, 1997 and filed December 8, 1997, as amended by a filing on
December 19, 1997, reported the resignation of the Company's Former
Accountants.
-32-
<PAGE> 56
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
WHEELS SPORTS GROUP, INC.
By: /s/ VICTOR H. SHAFFER
-------------------------------
Victor H. Shaffer,
Interim Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- -------------------------------------- ---------------
<S> <C> <C>
/s/ Victor H. Shaffer Interim Chief Executive Officer April 22, 1998
- ------------------------ (Principal Executive Officer) and
Victor H. Shaffer Director
Chairman of the Board and President
- ----------------------------- and Director
Howard L. Correll, Jr.
/s/ F. Scott M. Chapman Chief Financial Officer (Principal April 22, 1998
- --------------------------- Accounting Officer and Principal
F. Scott M. Chapman Financial Officer)
/s/ W. Conrad Powell Executive Vice President and April 22, 1998
- ------------------------- Director
W. Conrad Powell
/s/ Randy E. Duncan Vice President and Director April 22, 1998
- ----------------------
Randy E. Duncan
Director
- ----------------------
Terry J. Powell
/s/ Robert G. Tomlinson Director April 22, 1998
- --------------------------
Robert G. Tomlinson
/s/ Steven M. Zimmerman Director April 22, 1998
- --------------------------
Steven M. Zimmerman
Director
- -------------------------
Michael L. Nutting
</TABLE>
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
xx 2. Articles of Share Exchange as filed on December 20, 1996 with the Secretary of State of the State of
South Carolina.
+ 2.1 Agreement and Plan of Reorganization among Diamond Sports Group, Inc., the Company, Wheels Sports Group
Acquisition, Inc., a wholly owned subsidiary of the Company, and the four shareholders of Diamond Sports
Group, Inc.
x 2.1.2 Amendment to Agreement and Plan of Reorganization among Diamond Sports Group, Inc., the Company, Wheels
Sports Group Acquisition, Inc. and the four shareholders of Diamond Sports Group, Inc.
+ 2.2 Registration Rights Agreement among the Company and Messrs. Randy E. Duncan, H. Edward Hickman, Robert
J. Diachenko and A. Thad Lewallen, III.
* 2.3 Merger Agreement and Plan of Reorganization among SM Acquisition Company, J/B Acquisition Company, the
Company, Synergy Marketing, Inc. and J/B Press Pass, Inc, dated October 3, 1997.
* 2.4 Agreement and Plan of Reorganization among the Company, High Performance Acquisition Company, High
Performance Sports Marketing, Inc., Randy C. Baker and David W. Dupree dated October 3, 1997.
o 2.4.1 Amendment to Merger Agreement and Plan of Reorganization among SM Acquisition Company, J/B Acquisition
Company, the Company, Synergy Marketing, Inc. and J/B Press Pass, Inc., dated December 29, 1997.
o 2.4.2 Registration Rights Agreement, dated December 31, 1997, by and among the Company and the shareholders of the
partners of Press Pass.
# 2.5 First Amendment to Agreement and Plan of Reorganization among the Company, High Performance Acquisition
Company, High Performance Sports Marketing, Inc., Randy C. Baker and David W. Dupree dated October 24,
1997.
oo 2.5.1 Second Amendment to Agreement and Plan of Reorganization among the Company, High Performance Acquisition
Company, High Performance Sports Marketing, Inc., Randy C. Baker and David W. Dupree dated November 26, 1997.
oo 2.5.2 Third Amendment to Agreement and Plan of Reorganization among the Company, High Performance Acquisition
Company, High Performance Sports Marketing, Inc., Randy C. Baker and David W. Dupree dated December 17, 1997.
x 2.5.3 Fourth Amendment to Agreement and Plan of Reorganization among the Company, High Performance Acquisition
Company, High Performance Sports Marketing, Inc., Randy C. Baker and David W. Dupree dated April 22, 1998.
x 2.6 Agreement and Plan of Reorganization among Green's Racing Souvenirs, Inc., the Company, Wheels Sports
Group Acquisition III, a wholly owned subsidiary of the Company, and the shareholders of Green's Racing
Souvenirs, Inc. dated October 17, 1997.
x 2.6.2 Amendment to Agreement and Plan of Reorganization among Green's Racing Souvenirs, Inc., the Company,
Wheels Sports Group Acquisition III, a wholly owned subsidiary of the Company, and the shareholders
of Green's Racing Souvenirs, Inc. dated October 17, 1997.
</TABLE>
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
x 2.7 Registration Rights Agreement among the Company, Harold E. Green and Rhonda Green.
xx 3.1.1 Articles of Incorporation of the Company as filed on February 11, 1992 with the Secretary of State of the
State of South Carolina.
xx 3.1.2 Articles of Amendment to Articles of Incorporation of the Company as filed on October 5, 1993 with the
Secretary of State of the State of South Carolina.
xx 3.1.3 Articles of Incorporation of the Company as filed on December 12, 1996 with the Secretary of State of the
State of North Carolina.
xx 3.1.4 Articles of Merger and Share Exchange by and among the Company, Wheels Sports Group Acquisition, Inc., and
World of Racing, Inc.
xx 3.2.1 Form of By-Laws of the Company.
xx 4.1 Form of specimen certificate for Common Stock of the Company.
xx 4.2 Form of specimen certificate for Warrants of the Company.
xx 4.3 Form of Purchase Warrants for warrants to purchase shares of Common Stock to be issued by the Company to
the Representative.
xx 4.4 Form of Purchase Warrants for shares of Common Stock to be issued by the Company to the Representative.
xx 4.5 Form of Warrant Agreement, dated April 16, 1997, by and among the Company, American Securities Transfer
& Trust, Inc. and the Representative.
xx 4.6 Form of Escrow Agreement, effective December 13, 1996, by and among the Company, American Securities
Transfer & Trust, Inc., the Representative and the stockholders of the Company.
xx 10.1.1 Form of Employment Agreement, effective January 1, 1997, by and between Howard L. Correll, Jr. and the
Company.
xx 10.1.2 Form of Employment Agreement, effective January 1, 1997, by and between W. Conrad Powell and the
Company.
xx 10.1.7 Consulting Agreement, effective January 1, 1997, by and between Terry J. Powell and the Company.
# 10.1.8 Employment Agreement dated October 3, 1997, by and between Randy C. Baker and the Company.
# 10.1.9 Employment Agreement dated October 3, 1997, by and between David W. Dupree and the Company.
o 10.1.12 Employment Agreement, dated October 3, 1997 and effective December 31, 1997, by and between Victor
Shaffer and the Company.
</TABLE>
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
o 10.1.13 Employment Agreement, dated October 3, 1997 and effective December 31, 1997, by and between Robert Bove
and the Company.
xx 10.2 1996 Omnibus Stock Plan, effective December 13, 1996, authorizing 400,000 shares of Common Stock for
issuance pursuant to the Plan.
xx 10.3.3 Form of License Agreement, dated various dates, by and between NASCAR drivers, team owners and crew
chiefs and the Company.
xx 10.3.4 Form of License Agreement, dated various dates, by and between NASCAR drivers, team owners and crew
chiefs and the Company.
xx 10.3.5 Form of License Agreement, dated various dates, by and between NASCAR drivers, team owners and crew
chiefs and the Company.
xx 10.4.1 Promissory Note, dated September 20, 1996, from the Company to Central Carolina Bank & Trust Company.
xx 10.4.2 Extended date Promissory Note, dated December 19, 1996, from the Company to Central Carolina Bank &
Trust Company.
xx 10.5.1 Promissory Note, effective December 1, 1996, from the Company to Terry J. Powell.
xx 10.5.2 Promissory Note, effective December 1, 1996, from the Company to Stephen M. Zimmerman.
xx 10.6 Promissory Note and Deed of Trust, dated October 30, 1995, from the Company to Central Carolina Bank &
Trust Company.
xx 10.7 Promissory Note, dated September 27, 1996, from World of Racing, Inc. to the Company.
xx 10.9.1 Lease Agreement, dated December 20, 1994, by and between Mocksville Market, Inc. and the Company, as
renewed.
xx 10.9.2 Lease Agreement, effective October 1, 1996, by and between Christy Trucking Company, Inc. and the
Company.
xx 10.9.3 Lease Agreement, dated October 2, 1996, by and between Carolina Properties Building Partnership and the
Company.
# 10.9.4 Lease Agreement dated March 1, 1997, by and between Beale Street Realty, LLC and High Performance Sports
Marketing, Inc.
x 10.9.5 Lease Agreement, dated March 3, 1995, by and between Athena Associates and RCB Enterprises, Inc.
x 10.9.6 Lease Agreement, dated July 30, 1997, by and between Nanco I, LLC and the Diamond Sports Group, Inc.
x 10.9.7 Lease Agreement dated January 7, 1993, by and between New England Mutual Life Insurance Company, as
amended March 16, 1994 and November 28, 1995, and Press Pass Partners.
</TABLE>
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
xx 10.10 Creative Services Contract, dated on or about July 1, 1996, by and between Wade Cantrell and the
Company.
xx 10.11.1 License Agreement, dated January 1, 1997, by and between Dale Earnhardt and the Company.
xx 10.11.2 License Agreement, dated January 1, 1997, by and between JG Motorsports, Inc. and the Company.
xx 10.12 Letter of Intent, dated March 14, 1997, by and between Action Performance Companies, Inc. and the
Company.
xx 10.14 Promissory Note and Personal Guarantees, dated April 11, 1997, from the Company to First Union National
Bank of North Carolina.
# 10.15.1 Promissory Note in the principal amount of $850,000 dated October 24, 1997, from the Company to Randy C.
Baker.
# 10.15.2 Promissory Note in the principal amount of $150,000 dated October 24, 1997, from the Company to David W.
Dupree.
# 10.15.3 Promissory Note in the principal amount of $1,672,000 from the Company to Peoples Bank.
o 10.15.4 Form of Promissory Note, issued in the aggregate principal amount of $1,000,000, dated December 31,
1997, from the Company to shareholders of Synergy Marketing, Inc. and J/B Press Pass, Inc.
++ 10.16.1 Credit Agreement, dated December 31, 1997, among the Company and Credit Agricole Indosuez, as agent, and
the lending institutions named therein.
++ 10.16.2 Warrant, dated December 29, 1997, granted by the Company to Credit Agricole Indosuez, to purchase up to
509,358 shares of Common Stock.
x 10.16.3 Amendment to Warrant, effective December 31, 1997, granted by the Company to Credit Agricole Indosuez, to
purchase up to 509,358 shares of Common Stock.
x 21. List of Subsidiaries.
x 27. Financial Data Schedule.
** 99.1 Financial Statements of Diamond Sports Group, Inc.
** 99.2 Proforma Financial Information of Diamond Sports Group, Inc. and the Registrant.
oo 99.3 Financial Statements of High Performance Sports Marketing, Inc.
00 99.4 Proforma Financial Information of High Performance Sports Marketing, Inc. and the Registrant.
## 99.5 Financial Statements of Press Pass Partners.
## 99.6 Proforma Financial Information of Press Pass Partners and the Registrant.
</TABLE>
- --------------
xx Incorporated by reference from the Company's Registration Statement on
Form SB-2 (S.E.C. File No. 333-6340).
+ Previously filed with the Company's Form 8-K filed on July 15, 1997.
* Previously filed with the Company's Form 8-K filed on October 17, 1997.
# Previously filed with the Company's Form 8-K filed on November 7, 1997.
o Previously filed with the Company's Form 8-K filed on January 15, 1998
++ Previously filed with the Company's Form 8-K filed on February 3, 1998.
** Previously filed with the Company's Form 8-K filed on March 31, 1998.
oo Previously filed with the Company's Form 8-K filed on April 22, 1998.
## Previously filed with the Company's Form 8-K filed on April 22, 1998.
x Filed herewith.
<PAGE> 1
EXHIBIT 2.1.2
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (the
"First Amendment") is made and entered into effective as of June 30, 1997, by
and among WHEELS SPORTS GROUP, INC., a North Carolina corporation ("Parent"),
DIAMOND SPORTS GROUP, INC., a North Carolina corporation ("DSG"), WHEELS SPORTS
GROUP ACQUISITION II, INC., a North Carolina corporation ("WSGII"), and RANDY
E. DUNCAN, H. EDWARD HICKMAN, ROBERT J. DIACHENKO and A. THAD LEWALLEN, III
(collectively, such individuals are referred to as the "Shareholders").
Statement of Purpose
Parent, DSG, WSGII and the Shareholders are parties to that certain
Agreement and Plan of Reorganization dated as of June 30, 1997 (the
"Agreement") and desire to enter into this First Amendment to amend certain
provisions of the Agreement. All capitalized terms used and not otherwise
defined in this First Amendment have the meaning assigned to them in the
Agreement.
Now, therefore, the parties hereto agree as follows:
1. Amendment to Agreement. Article III, Section 3.1, subsection
(l) of the Agreement shall be deleted in its entirety and the following
substituted in lieu thereof:
(l) Taxes. DSG has filed all federal, state, foreign, local and any
other applicable tax returns, reports or extensions required to be filed, and
has paid in full all taxes and assessments shown due thereon (together with all
interest, penalties, assessments and deficiencies assesses in connection
therewith due through the date hereof). Such tax returns and reports are
correct in all material respects. Federal tax returns of DSG have not been
audited by the Internal Revenue Service.
2. Miscellaneous.
(a) Ratification of Agreement. Other than as modified by this
First Amendment, all terms of the Agreement are hereby affirmed and ratified.
(b) Counterparts. This First Amendment 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.
(c) Governing Law. This First Amendment shall be governed by the
laws of the State of North Carolina applicable to agreements made and to be
performed entirely within North Carolina.
<PAGE> 2
The parties have executed and delivered this First Amendment as of the
date first written above.
WHEELS SPORTS GROUP, INC.
By: /s/ Howard L. Correll, Jr.
------------------------------------
President
DIAMOND SPORTS GROUP, INC.
By: /s/ Randy E. Duncan
------------------------------------
President
WHEELS SPORTS GROUP ACQUISITION II, INC.
By: /s/ Howard L. Correll, Jr.
-----------------------------------
President
SHAREHOLDERS
/s/ Randy E. Duncan
----------------------------------------
Randy E. Duncan
/s/ H. Edward Hickman
----------------------------------------
H. Edward Hickman
/s/ Robert J. Diachenko
----------------------------------------
Robert J. Diachenko
/s/ A. Thad Lewallen, III
----------------------------------------
A. Thad Lewallen, III
-2-
<PAGE> 1
EXHIBIT 2.5.3
FOURTH AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
THIS FOURTH AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (the "Fourth
Amendment") is made and entered into effective as of April 22, 1998, by and
among WHEELS SPORTS GROUP, INC., a North Carolina corporation ("Parent"), High
Performance Sports Marketing, Inc., a North Carolina corporation (formerly HP
ACQUISITION COMPANY) ("HPAC"), RANDY C. BAKER ("Baker"), DAVID W. DUPREE
("Dupree") (Baker and Dupree are hereinafter the "Shareholders"), HOWARD L.
CORRELL, JR. ("Correll"), RANDY E. DUNCAN ("RED"), TERRY J. POWELL ("TJP"), and
W. CONRAD POWELL ("WCP") (Correll, RED, TJP and WCP are hereinafter the
"Obligors").
Statement of Purpose
Parent, HPAC, HIGH PERFORMANCE SPORTS MARKETING, INC., a North Carolina
corporation ("High Performance") and the Shareholders are parties to that
certain Agreement and Plan of Reorganization dated as of October 3, 1997 and as
amended on October 24, 1997, November 26, 1997 and December 17, 1998 (as
amended, the "Agreement"). Parent is unable to make the Cash Payment on or
prior to April 30, 1998, and Parent and Obligors desire under the Pledge
Agreements to release certain rights and modify other rights.
Therefore, the parties hereto agree to enter into this Fourth Amendment to
amend certain provisions of the Agreement as follows:
A. Amendments to Agreement. The following amendments to the Agreement are
effective as of the date of this Fourth Amendment:
1. Defined Terms. All capitalized terms used and not otherwise defined in
this Fourth Amendment have the meaning assigned to them in the Agreement. The
following terms as used in this Fourth Amendment and as used in the Pledge
Agreement, as amended on the same date hereof (the "First Amendment to Pledge
Agreement"), hereby shall have the meanings set forth below:
"Closing Date" means the date on which the merger between Parent and a
wholly owned subsidiary of RCC contemplated by the Merger Agreement is
consummated.
"Escrowed Funds" means the $3,300,000.00 deposited with Credit Agricole
Indosuez (the "Bank") as escrow agent pursuant to the Financing Documents, of
which $500,000 is being paid in partial satisfaction of the Cash Payment as of
the date hereof, and $2,750,000 with interest accrued to date and additional
interest through the date on which such funds are paid to Shareholders shall be
released in satisfaction of the unpaid portion of the Cash Payment, on the
terms and conditions set forth in the Financing Documents.
<PAGE> 2
"Financing Documents" means the Credit Agreement among Parent and the
Bank, as agent, dated December 31, 1997, the Escrow Agreement by and between
Parent and the Bank dated December 31, 1997 and such other documents executed
pursuant to the Credit Agreement.
"Merger Agreement" means the Agreement and Plan of Merger, dated as of
December 4, 1997 among Parent, RCC and WSG Acquisition, Inc., as the same may
be amended from time to time.
2. Modification of Cash Payment Provisions. Subject to the terms herein,
Section 2.6(b) is deleted in its entirety and replaced with the following:
(b)
(i) Notwithstanding any prior provision to the contrary, Parent has
paid a new extension payment of $250,000 to the Shareholders.
(ii) As of the date hereof, the Bank has released $500,000 of the
Escrowed Funds to the Shareholders in partial satisfaction of the Cash Payment.
(iii) Parent shall be obligated to pay the Cash Payment of $2,750,000,
plus interest accrued to date and additional interest through the date of
payment at no less than the federal funds rate in effect from time to time,
(hereinafter the "Remaining Cash Payment"), and an additional extension fee of
$200,000 for the modifications contained in this Fourth Amendment (the
"Extension Fee") and all direct, unreimbursed and documents out-of-pocket
Shareholder Expenses reasonably incurred by the Shareholders (the "Shareholder
Expenses") to the Shareholders in full satisfaction of the Remaining Cash
Payment, Extension Fee and Shareholder Expenses, upon the occurrence of the
earliest of (x) the various dates at which the Escrowed Amount may be released
by the Bank pursuant to the Financing Documents, (y) on the eleventh (11th)
business day following the termination of the Merger Agreement, for whatever
reason, by Parent, RCC or otherwise, or (z) October 31, 1998.
3. Notice of Termination of the Proposed Acquisition of Parent by RCC.
Parent shall immediately notify Shareholders upon the termination of the Merger
Agreement, for whatever reason, by Parent, RCC or otherwise.
4. Pledge of Parent, Shares as Security. Each Obligor shall
simultaneously, with the execution of this Fourth Amendment, execute a First
Amendment to Pledge Agreement amending the existing Pledge Agreement, to secure
the timely payment of the Remaining Cash Payment and Shareholder Expenses in
the event that the transactions contemplated by Merger Agreement do not close
by October 31, 1998 or in the event the Merger Agreement is terminated.
Shareholders agree to exercise their remedies under the Pledge Agreement as
amended by the First Amendment to Pledge Agreement for any failure of Parent or
Obligors to satisfy their obligations under the
2
<PAGE> 3
Agreement, prior to pursuing any other remedies available to them; provided
that if the Pledge Agreement terminates in accordance with its terms,
Shareholders may not exercise any remedies under the Pledge Agreement prior to
pursuing other remedies, and; provided further that upon the consummation of
the transaction contemplated by the Merger Agreement, the Pledge Agreement
shall be automatically terminated and the Shareholders agree not to exercise
their rights under the Pledge Agreement for the failure of the Company to pay
the Shareholders Expenses or for any other reason, but reserve the right to
pursue any and all other remedies against the Company to make such payment of
the Shareholder Expenses and Extension Fee in full. In the event legal action
is required to collect such payment, the Company agrees to pay to the
Shareholders all reasonable costs and expenses, including attorneys fees,
incurred by the Shareholders in securing payments of the Shareholder Expenses
of the Extension Fee.
B. Miscellaneous.
1. Ratification of Agreement. Other than as modified by this Fourth
Amendment, all terms of the Agreement are hereby affirmed and ratified.
2. Counterparts. This Fourth Amendment 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.
3. Governing Law. This Fourth Amendment shall be governed by the laws of
the State of North Carolina applicable to agreements made and to be performed
entirely within North Carolina.
The parties have executed and delivered this Fourth Amendment as of the
date first written above.
WHEELS SPORTS GROUP, INC.
By: /s/ Victor H. Shaffer
----------------------------------
Its: Interim CEO
---------------------------------
HIGH PERFORMANCE SPORTS MARKETING, INC.
(formerly HP ACQUISITION COMPANY)
By: /s/ Victor H. Shaffer
----------------------------------
Its:
---------------------------------
3
<PAGE> 4
SHAREHOLDERS
By: /s/ Randy C. Baker
------------------------------
Randy C. Baker
By: /s/ David W. Dupree
------------------------------
David W. Dupree
OBLIGORS
/s/ Howard L. Correll, Jr.
---------------------------------
Howard L. Correll, Jr.
/s/ Terry J. Powell
---------------------------------
Terry J. Powell
/s/ W. Conrad Powell
---------------------------------
W. Conrad Powell
/s/ Randy E. Duncan
---------------------------------
Randy E. Duncan
4
<PAGE> 1
EXHIBIT 2.6
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION is dated as of October 17,
1997, by and among GREEN'S RACING SOUVENIRS, INC., a Virginia corporation
("GRS"); WHEELS SPORTS GROUP, INC., a North Carolina corporation ("WSG");
WHEELS SPORTS GROUP ACQUISITION III, INC., a North Carolina corporation
("Subsidiary Company"), which is a wholly owned subsidiary of WSG; and HAROLD
E. GREEN and RHONDA R. GREEN (hereinafter collectively referred to as the
"Shareholder").
The Shareholder owns all of the outstanding shares of common stock,
with par value per share of GRS ("GRS Common Stock"), constituting all of the
outstanding capital stock of GRS.
GRS and WSG have engaged in extensive discussions regarding the
combination of their respective businesses through a reverse triangular merger
(the "Merger") of GRS through Subsidiary Company, a wholly owned subsidiary of
WSG formed specifically to consummate the merger.
For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). Specifically, it is
intended that the Merger qualify as a reverse triangular reorganization under
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code.
NOW, THEREFORE, the parties hereto hereby approve and adopt this
Agreement as a Plan of Reorganization and do mutually covenant and agree as
follows:
I. MERGER OF GRS AND SURVIVING COMPANY
1.1 MERGER. On the Effective Date (as hereinafter defined),
Subsidiary Company shall be merged with and into GRS, which shall be the
surviving corporation ("Surviving Company"), pursuant to the Agreement and Plan
of Merger attached as Exhibit A hereto (the "Plan of Merger").
1.2 EFFECT OF THE MERGER. Upon the Merger becoming
effective, the separate existence of Subsidiary Company shall cease, and
Surviving Company shall succeed to and possess all the properties, rights,
privileges, powers, franchises and immunities, of a public as well as of a
private nature, and be subject to all the debts, liabilities, obligations,
restrictions, disabilities and duties of GRS, all without further act or deed,
as provided in the Business Corporation Act of the state of North Carolina.
1.3 NAME OF SURVIVING COMPANY. On the Effective Date, the
name of the Surviving Company shall be "Green's Racing Souvenirs, Inc.".
1.4 ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation and the Bylaws of Surviving Company as in effect on the Effective
Date shall be, from and after the Effective Date, the Articles of Incorporation
and Bylaws of Surviving Company until they are amended.
<PAGE> 2
1.5 DIRECTORS AND OFFICERS. Upon the Merger becoming
effective, the directors and officers of Surviving Company shall be as
identified on Schedule 1.5 hereto, and each shall hold office until his
successor is elected or qualified or until his earlier resignation or removal.
If on the Effective Date a vacancy exists on the Board of Directors of
Surviving Company or in any of the offices of Surviving Company, as the same
are specified on Schedule 1.5 such vacancies may thereafter be filled in the
manner provided by the Bylaws of Surviving Company.
1.6 SERVICE OF PROCESS. Surviving Company hereby agrees that
from and after the Effective Date it may be served with process in the State of
North Carolina in any proceeding for the enforcement of any obligation of GRS
and in any proceeding for the enforcement of the rights of any dissenting GRS
shareholder against Surviving Company. Surviving Company hereby irrevocably
appoints the North Carolina Secretary of State as its agent to accept service
of process in any such proceeding. Surviving Company further agrees that it
will pay to any dissenting shareholder of GRS the amount, if any, to which any
such dissenting shareholder shall be entitled under the North Carolina Business
Corporation Act with respect to the rights of dissenting shareholders, subject
to the limitations of a pooling-of- interest transaction.
1.7 EFFECTIVE DATE. The Merger shall become effective at the
time (the "Effective Time") GRS and Subsidiary Company file the Certificate of
Merger with the Secretary of State of the State of North Carolina and after all
applicable legal requirements have been fulfilled to consummate the Merger.
The parties shall use their best efforts to file the necessary merger documents
on the date of this Agreement to be effective on the date of this Agreement.
II. STATUS AND CONVERSION OF SECURITIES; SHAREHOLDER APPROVALS
2.1 CONVERSION OF GRS STOCK INTO WSG STOCK. Upon the
Effective Date, the GRS Common Stock issued and outstanding by reason of the
Merger and without any action on the part of the holders thereof, shall be
converted into 175,000 shares of WSG Common Stock, par value $.01 per share
("WSG Common Stock"), which shares of WSG Common Stock shall be issued to the
Shareholders as set forth on Schedule 2.1 hereto. Any shares of GRS Common
Stock held in the treasury of GRS shall be canceled and all rights in respect
thereof shall cease to exist and no cash or securities or other property shall
be issued in respect thereof.
2
<PAGE> 3
2.2 FRACTIONAL SHARES. No fractional shares of WSG Common
Stock or interests or rights therein shall be issued upon the conversion of GRS
Common Stock. Instead, any fractions existing upon conversion shall be rounded
up to the next whole share.
2.3 EXCHANGE OF CERTIFICATES. After the Effective Date, each
holder of certificates theretofore representing outstanding shares of GRS
Common Stock ("GRS Stock Certificates"), upon surrender thereof to such bank,
trust company or other person as shall be designated by WSG ("Exchange Agent"),
shall be entitled to receive in exchange therefor a certificate or certificates
representing the number of whole shares of WSG Common Stock into which the
shares of GRS Common Stock theretofore represented by such surrendered
certificate or certificates shall have been converted. After the Effective
Date and until so surrendered, each outstanding certificate theretofore
representing shares of GRS Common Stock shall be deemed for all purposes to
represent the number of whole shares of WSG Common Stock into which the shares
of GRS Common Stock theretofore represented thereby shall have been converted.
2.4 WSG TO MAKE SHARES AVAILABLE. By the Effective Date, WSG
shall make available by transferring to Surviving Company or by transferring
directly to the Exchange Agent, for the benefit of the Shareholders, such
number of shares of WSG Common Stock as shall be required for conversion in
accordance with this Agreement.
2.5 SURVIVING COMPANY CAPITAL STOCK. All authorized shares
of Surviving Company capital stock, par value $.01 per share whether issued or
unissued, outstanding or required, shall continue unchanged as shares of
capital stock of Surviving Company.
2.6 STATUS OF WSG COMMON STOCK. The shares of WSG Common
Stock to be issued to the Shareholders will be "Restricted Stock" and will not
have been registered under the Securities Act of 1933, as amended, or under any
laws of any state, and will bear the following legend in addition to any other
legends required by North Carolina law or by other agreements executed
contemporaneously herewith:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY
STATE SECURITIES ACT, AND ARE "RESTRICTED SECURITIES" WITHIN
THE MEANING OF SUCH ACTS. THE SHARES MAY NOT BE SOLD,
TRANSFERRED, HYPOTHECATED OR OTHERWISE DISTRIBUTED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION UNDER SUCH ACTS OR THE
RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER
THAT SUCH REGISTRATION IS NOT REQUIRED.
3
<PAGE> 4
2.7 REGISTRATION RIGHTS. WSG shall file a Registration
Statement with the Securities and Exchange Commission registering the shares of
WSG Common Stock issued to the Shareholders upon request of the Shareholder
after the "lockup" period imposed by the underwriter expires, and shall use its
best efforts to cause the Registration Statement to be filed not more than six
months after the lockup period expires and to become effective as soon as
practicable thereafter. Furthermore, WSG shall maintain such effectiveness for
a period of two years. WSG shall pay all expenses incident to such
Registration Statement, except for any commissions or taxes related to the sale
of the shares thereunder. Such registration rights shall be in accordance
with, and subject to, the terms and provisions of the form of Registration
Rights Agreement attached as Exhibit B hereto. The remaining shares shall have
"piggy-back" rights, subject to the reasonable approval of any managing
underwriter, to be included in any Registration Statement filed by WSG within
two years as such registration statement relates to an underwritten public
offering of WSG's securities.
2.8 SHAREHOLDER APPROVALS. Meetings of the Shareholders and
the shareholders of the Surviving Company shall be held in accordance with the
laws of their respective states of incorporation concurrent with the effective
date of this Agreement (or such later date or dates as may be approved by their
Board of Directors), in each case, among other things, to consider and act upon
the adoption of this Agreement. In either case, the adoption of this Agreement
may be consented to in writing by the shareholders of the applicable
corporation.
III. REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATION AND WARRANTIES OF THE SHAREHOLDERS.
Except as otherwise set forth in the GRS Disclosures Schedule delivered by the
Shareholders to WSG and Subsidiary Company contemporaneously with the execution
and delivery of this Agreement and attached as Exhibit C hereto, and except for
intercompany transactions or matters among GRS, the Shareholders jointly and
severally represent and warrant to WSG and Subsidiary Company as follows:
(a) DUE INCORPORATION, GOOD STANDING AND
QUALIFICATION. GRS is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation with all
requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as now being conducted. GRS is not
subject to any material disability by reason of the failure to be duly
qualified as a foreign corporation for the transaction of business or to be in
good standing under the laws of any jurisdiction except where such failure
would have a material adverse affect; GRS is not subject to any material
disability by reason of the failure to be duly qualified as a foreign
corporation for the transaction of business or to be in good standing under the
laws of any
4
<PAGE> 5
jurisdiction; GRS has heretofore delivered to WSG a list setting forth, as of
the date of this Agreement, each jurisdiction in which GRS is qualified to do
business.
(b) CORPORATE AUTHORITY. GRS has the corporate
power and authority to enter into this Agreement and (subject to the requisite
approval of the Shareholders) to carry out the transactions contemplated
hereby. The Board of Directors of GRS has duly authorized the execution,
delivery and performance of this Agreement and other documents executed in
connection with this Agreement, including without limitation, the Registration
Rights Agreement.
(c) ENFORCEABILITY. This Agreement and each of the
other agreements referenced herein to which GRS is a party have been duly
executed and delivered by GRS, and constitute legal, valid and binding
obligations of GRS, enforceable against it in accordance with their respective
terms except to the extent that enforceability may be subject to or limited by
bankruptcy, insolvency, reorganization, arrangement, moratorium or other
similar laws relating to or affecting the rights of creditors generally or may
be subject to general principles of equity.
(d) CAPITAL STOCK. As of the date hereof, GRS has
an authorized capital stock consisting of 500 Shares of GRS Common Stock, of
which 100 shares are issued and outstanding (collectively, the "GRS Capital
Stock"). As of such date, there are no shares of GRS Common stock reserved for
issuance upon the exercise of stock options. All of the issued and outstanding
shares of capital stock of GRS and of each of its subsidiaries have been
validly authorized and issued and are fully paid and nonassessable.
(e) OPTIONS, WARRANTS AND RIGHTS. GRS has no
outstanding options, warrants, or other rights to purchase, or convert any
obligation into, any shares of its capital stock.
(f) SUBSIDIARIES. GRS has no subsidiaries.
(g) FINANCIAL STATEMENTS. The Balance Sheet of GRS
and the Statement of Income and Retained Earnings of GRS for the year ended
December 31, 1996 have been delivered to WSG and Subsidiary Company prior to
the date of this Agreement. All of the foregoing financial statements have
been prepared in accordance with generally accepted accounting principles,
except as set forth in the compilation letter attached thereto, which are
applied on a consistent basis, are correct and complete and fairly and
accurately present the financial position, results of operations, and changes
of financial position of GRS as of their respective dates and for the periods
indicated. The foregoing financial statements as of December 31, 1996 have
been prepared by Burnett & Sneed, CPA, independent public accountant. GRS does
not have any
5
<PAGE> 6
material liabilities or obligations of a type that would be included in a
balance sheet prepared in accordance with generally accepted accounting
principles, whether related to tax or non-tax matters, accrued or contingent,
due or not yet due, liquidated or unliquidated, or otherwise, except as and to
the extent disclosed or reflected in the Balance Sheet of GRS as of December
31, 1996 or incurred since then in the ordinary course of business.
(h) NO MATERIAL CHANGE. Since December 31, 1996,
there has not been and there is not threatened (i) any material adverse change
in the financial condition, business, properties, assets or results of
operations of GRS, (ii) any loss or damage (whether or not covered by
insurance) to any of the assets or properties of GRS that materially affects or
impairs its ability to conduct its businesses, (iii) any event or condition of
any character that has materially and adversely affected the business of GRS,
or (iv) any mortgage or pledge of any material amount of the assets or
properties of GRS, or any indebtedness incurred by GRS other than indebtedness,
not material in the aggregate, incurred in the ordinary course of business.
(i) TITLE TO PROPERTIES. GRS has good and
marketable title to all of its real and personal properties, including all
properties reflected in the Balance Sheet as of December 31, 1996, or acquired
subsequent to that date (except properties disposed of subsequent to that date
in the ordinary course of business or properties relating to discontinued
operations). Such assets and properties are not subject to any mortgage,
pledge, lien, claim, encumbrance, charge, security interest or title retention
or other security arrangement except for liens for the payment of federal,
state and other taxes, the payment of which is neither delinquent nor subject
to penalties, and except for other liens and encumbrances incidental to the
conduct of the business of GRS or the ownership of their assets or properties
which were not incurred in connection with the borrowing of money or the
obtaining of advances, and which do not in the aggregate materially detract
from the value of the assets or properties of GRS or materially impair the use
thereof in the operation of their respective businesses, except in each case as
disclosed in the Balance Sheet as of December 31, 1996. All leases pursuant to
which GRS or any of its subsidiaries leases any substantial amount of real or
personal property are valid and effective in accordance with their respective
terms.
(j) LITIGATION. There are no actions, suits,
proceedings or other litigation pending or, to the knowledge of GRS, threatened
against or affecting GRS, at law or in equity, or before or by any federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality which, if determined adversely to GRS, would
individually or in the aggregate have a materially adverse effect on the
business assets, properties, operations or prospects or on the condition,
financial or otherwise, of GRS.
6
<PAGE> 7
(k) NO VIOLATION. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
will not violate or result in a breach by GRS of, or constitute a default
under, or conflict with, or cause any acceleration of any obligation with
respect to (i) any provision or restriction of any charter, bylaw, loan,
indenture or mortgage of GRS, or (ii) any provision or restriction of any lien,
lease agreement, contract, instrument, order, judgment, award, decree,
ordinance or regulation or any other restriction of any kind or character to
which any assets or properties of GRS or any of its subsidiaries is subject or
by which GRS or any of its subsidiaries is bound.
(l) TAXES. GRS has filed all federal, state,
foreign, local and any other applicable tax returns, reports or extensions
required to be filed, and has paid in full all taxes and assessments shown due
thereon (together with all interest, penalties, assessments and deficiencies
assessed in connection therewith due through the date hereof). Such tax
returns and reports are correct in all material respects. Federal tax returns
of GRS have not been audited by the Internal Revenue Service. The Surviving
Company shall distribute cash or cash equivalent equal to the shareholder's
personal federal and state tax liability resulting from the inclusion in
shareholder's taxable income of the income of GRS on the period beginning
January 1, 1997 until the date of Closing. Such distribution shall be made by
April 10, 1998.
(m) CONTRACTS. GRS is not a party to (i) any plan
or contract providing for bonuses, pensions, options, stock purchases, deferred
compensation, retirement payments or profit sharing, (ii) any collective
bargaining or other contract or agreement with any labor union, (iii) any
lease, installment purchase agreement or other contract with respect to any
real or personal property used or proposed to be used in its operations,
except, in each case, items included within aggregate amounts disclosed in
GRS's December 31, 1996 Balance Sheet or incurred in its ordinary course of
business since December 31, 1996, (iv) any employment agreement or other
similar arrangement not terminable upon 30 days or less notice without penalty
to it, (v) any contract or agreement for the purchase of any commodity,
material, fixed asset or equipment in excess of $25,000, (vi) any contract or
agreement creating an obligation of $25,000 or more, (vii) any contract or
agreement which by its terms does not terminate or is not terminable without
penalty to it within one year after the date hereof, (viii) any loan agreement,
indenture, promissory note, conditional sales agreement or other similar type
of arrangement, (ix) any material license agreement. All contracts, agreements
and other arrangements to which GRS is a party are valid and enforceable
against GRS in accordance with their terms; GRS and, to
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GRS's actual knowledge all other parties to each of the foregoing have
performed all obligations required to be performed to date; neither GRS, to
GRS's actual knowledge, nor any such other party is in default or in arrears
under the terms of any of the foregoing; and, to GRS's actual knowledge no
condition exists or event has occurred which, with the giving of notice or
lapse of time or both, would constitute a default under any of them.
(n) COMPLIANCE WITH LAW AND OTHER REGULATIONS. GRS
is not subject to or has not been threatened by written notice with any
material fine, penalty, liability or disability as the result of its failure to
comply with any requirement of federal, state, local or foreign law or
regulation (including those relating to the employment of labor or
environmental matters) or any requirement of any governmental of any
governmental body or agency having jurisdiction over it, the conduct of its
business, the use of its assets and properties or any premises occupied by it.
GRS has complied in all material respects with all applicable provisions of the
Employment Retirement Income Security Act of 1974, as amended ("ERISA") and
with all other applicable federal, state and local laws relating to the
employment of labor including the provisions thereof relative to wages, hours,
collective bargaining, working conditions and payment of taxes of any kind
except where such occurrence would not have a material adverse impact on the
business of GRS. GRS is not liable for any material arrears of wages or any
taxes or penalties for failure to comply with any of the foregoing in any
material way or has any obligations for any vacation, sick leave or other
compensatory time except for such obligations created in the ordinary course of
business. GRS is not in violation of any applicable statute, law, or
regulation relating to the environment, storage of hazardous substances or
occupational health and safety, the violation of which might result in a
material adverse change in the assets, conditions or affairs of GRS, nor has
GRS received any official notice or citation that any of their respective
properties in any way contravenes any federal, state or local law or regulation
relating to environmental, health or safety matters, including without
limitation any requirements of the Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA") or any OSHA requirements, and, to the
knowledge of GRS, no material expenditures are or will be required in order to
comply with any such existing statute, law or regulation. Without limiting the
foregoing, GRS has properly filed all reports, paid all monies and obtained all
licenses, permits, certificates and authorizations needed or required for the
conduct of its business and the use of its assets and properties and the
premises occupied by it in connection therewith and is in compliance in all
material respects with all conditions, restrictions and provisions of all of
the foregoing except where such occurrence would not have a material adverse
effect on the business of GRS.
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(o) ABSENCE OF PRODUCT OR SERVICE WARRANTIES.
Except in the ordinary course of business, to the best knowledge of GRS,
neither GRS nor any of its subsidiaries, nor any officer, director, employee or
agent thereof, has made any written warranties with respect to the quality or
absence of defects of the products or services that GRS has sold or performed,
and that are in force as of the date hereof. There are no material claims
pending or, to the best knowledge of GRS, threatened against GRS with respect
to the quality of or absence of defects in such products or services. GRS has
not been required to pay direct, incidental, or consequential damages to any
person in connection with any of such products or services at any time during
the five year period preceding the date hereof except for warranty remedies
provided in the ordinary course of business.
(p) INSURANCE. GRS maintains in full force and
effect insurance coverage on its assets, properties, premises, operations and
personnel in such amounts and against such risks and losses as are adequate and
customary for the businesses engaged in by GRS.
(q) MINUTE BOOK. The minute books of GRS accurately
record all actions taken by their respective stockholders and directors.
3.2 FURTHER REPRESENTATION AND WARRANTIES OF SHAREHOLDER.
Each Shareholder makes the following further representations and warranties as
to such Shareholder:
(a) OWNERSHIP OF CAPITAL STOCK OF GRS. Such
Shareholder owns the number of shares of GRS Common Stock set forth beside his
signature below. Such Shareholder has good, marketable and unencumbered title
to such shares, and there are no restrictions on such Shareholder's right to
transfer or exchange such shares pursuant to this Agreement, other than
compliance with applicable securities laws.
(b) RIGHTS TO ACQUIRE SHARES. Such Shareholder does
not have any outstanding options, warrants or other rights to purchase or
subscribe for, or contracts or commitments to sell, or any interests,
instruments, evidences of indebtedness or other securities convertible in any
manner into, shares of GRS's capital stock.
(c) POWER TO EXECUTE AGREEMENT. Such Shareholder
has full power and authority to execute, deliver and perform this Agreement and
each of the other agreements referred herein to which such Shareholder is a
party.
(d) ENFORCEABILITY. This Agreement and each of the
other agreements referenced herein to which such Shareholder is a party have
been duly executed and delivered by such Shareholder, and constitute legal,
valid and binding obligations of such Shareholder, enforceable against such
Shareholder in accordance
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with their respective terms except to the extent that enforceability may be
subject to or limited by bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws relating to or affecting the rights of
creditors generally or may be subject to general principles of equity.
(e) AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS.
The execution and delivery of this Agreement, the consummation of the
transactions hereby contemplated, and the fulfillment of the terms hereof, will
not result in the breach of any term or provision of, or constitute a default
under, or conflict with, or cause the acceleration of any obligation under, any
agreement or other instrument of any description to which such Shareholder is a
party or by which such Shareholder is bound, or any judgment, decree, order or
award of any court, governmental body or arbitrator, or any law, rule or
regulation applicable to such Shareholder.
(f) ABILITY TO BEAR RISK; BUSINESS AND FINANCIAL
KNOWLEDGE AND EXPERIENCE. Such Shareholder (i) can bear the economic risk of
the acquisition of the shares of WSG Common Stock to be issued to him (the "WSG
Shares"), including the complete loss of such Shareholder's investment, and
(ii) alone, or together with such Shareholder's purchaser or representative as
appointed in writing by the date of this Agreement, has sufficient knowledge
and experience in business and financial matters as to be capable of evaluating
the merits and risks of the acquisition of the WSG Shares.
(g) KNOWLEDGE RESPECTING WSG. Such Shareholder (i)
knows or has had the opportunity to acquire all information concerning the
business affairs, financial condition, plans and prospects of WSG that such
Shareholder deems relevant to make a fully informed decision respecting the
acquisition of the WSG Shares; (ii) has been encouraged and has had the
opportunity to rely upon the advice of such Shareholder's legal counsel and
accountants and other advisers with respect to the acquisition of the WSG
Shares; and (iii) has had the opportunity to ask such questions and receive
such answers and information respecting, among other things, the business,
affairs, financial condition, plans and prospects of WSG and the terms and
conditions of the acquisition of the WSG Shares as such Shareholder has
requested so as to more fully understand such Shareholder's investment.
Without limiting the foregoing, such Shareholder acknowledges that he has been
provided complete copies of all of the information identified on Schedule
3.2(g) attached hereto.
(h) ABSENCE OF REPRESENTATIONS AND WARRANTIES. Such
Shareholder confirms that neither WSG or Subsidiary Company, nor anyone
purportedly acting on behalf of WSG or Subsidiary Company, has made any
representations, warranties, agreements or statements other than those
contained herein respecting the
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business, affairs, financial condition, plans or prospects of WSG nor has such
Shareholder relied on any representations, warranties, agreements or statements
in the belief that they were made on behalf of the foregoing nor has such
Shareholder relied on the absence of any such representations, warranties,
agreements or statements in reaching such Shareholder's decision to acquire the
WSG Shares.
(i) NO DISTRIBUTION. Such Shareholder is acquiring
the WSG Shares for such Shareholder's own account without a view to public
distribution or resale, and such Shareholder has no contract, undertaking,
agreement or arrangement to transfer, sell or otherwise dispose of any of the
WSG Shares or any interest therein to any other person.
(j) SHARES TO BE RESTRICTED. Such Shareholder
understands that the WSG Shares will remain "restricted securities" within the
meaning of Rule 144 under the Securities Act of 1933, as amended (the "1933
Act") and within the "lockup agreement" required by the underwriter, such
shareholder may demand registration after July 16, 1998, when the lock-up
period ends, pursuant to the Registration Agreement attached hereto as Exhibit
B.
(k) NO REGISTRATION. Such Shareholder understands
that the WSG Shares will not be registered under the 1933 Act, the North
Carolina Securities Act (the "North Carolina Act") or the securities laws of
any other jurisdiction and must be held indefinitely without any transfer, sale
or other disposition unless the WSG Shares are subsequently registered under
the 1933 Act, the North Carolina Act and the securities laws of any other
applicable jurisdictions pursuant to any attaching "piggy-back" rights or, in
the opinion of counsel for WSG, registration is not required under such Acts or
laws as the result of an available exemption.
(l) LEGEND OF CERTIFICATES. Such Shareholder
understands that there shall be endorsed on the certificates evidencing the WSG
Shares a legend substantially to the following effect:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY
STATE SECURITIES ACT, AND ARE "RESTRICTED SECURITIES" WITHIN
THE MEANING OF SUCH ACTS. THE SHARES MAY NOT BE SOLD,
TRANSFERRED, HYPOTHECATED OR OTHERWISE DISTRIBUTED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION UNDER SUCH ACTS OR THE
RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER
THAT SUCH REGISTRATION IS NOT REQUIRED."
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(m) RESTRICTIONS ON OTHER SECURITIES. Such
Shareholder understands that, except upon certain limited circumstances, the
restrictions on the sale, transfer and disposition of the WSG Shares will also
apply to any and all shares of capital stock or other securities issued or
otherwise acquired with respect to the WSG Shares including, without
limitation, shares and securities issued or acquired as a result of any stock
dividend, stock split or exchange or any distribution of shares or securities
pursuant to any corporate reorganization, reclassification or similar event.
(n) NO GOVERNMENTAL APPROVAL. Such Shareholder
understands that no federal or state agency has approved or disapproved the WSG
Shares, passed upon or endorsed the merits of the offering of the WSG Shares,
or made any finding or determination as to the fairness of the WSG Shares for
investment.
3.3 REPRESENTATION AND WARRANTIES OF WSG AND SUBSIDIARY
COMPANY. Except as otherwise set forth in the WSG and Subsidiary Company
Disclosure Schedule delivered by WSG to GRS contemporaneously with the
execution and delivery of this Agreement, and attached as Exhibit D hereto, and
except for matters disclosed in WSG's report filed with the Securities and
Exchange Commission, and except for intercompany transactions or matters among
WSG and/or its subsidiaries, WSG and Subsidiary Company jointly and severally
represent and warrant to GRS as follows:
(a) DUE INCORPORATION, GOOD STANDING AND
QUALIFICATION. WSG and each of its subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation with all requisite corporate power and
authority to own, operate and lease its properties and to carry on its business
as now being conducted. Neither WSG nor any of its subsidiaries is subject to
any material disability by reason of the failure to be duly qualified as a
foreign corporation for the transaction of business or to be in good standing
under the laws of any jurisdiction. WSG has heretofore delivered to GRS a list
setting forth, as of the date of this Agreement, each jurisdiction in which WSG
and its subsidiaries are qualified to do business. Subsidiary Company is a
wholly owned subsidiary of WSG and, apart from matters arising under this
Agreement, has no significant assets, liabilities or business, except as set
forth in this Agreement. (As used in this Agreement with reference to WSG, the
term "subsidiaries" shall include Subsidiary Company and all other direct or
indirect subsidiaries of WSG other than Subsidiary Company.)
(b) CORPORATE AUTHORITY. WSG and Subsidiary Company
have the corporate power and authority subject to requisite approval of
Subsidiary Company shareholder to carry out the transactions contemplated
hereby. The Boards of Directors of WSG and Subsidiary Company have duly
authorized the execution, delivery and performance of this Agreement.
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(c) ENFORCEABILITY. This Agreement and each of the
other agreements referenced herein to which WSG or any subsidiary of WSG is a
party have been duly executed and delivered by WSG or such subsidiary, and
constitute legal, valid and binding obligations of WSG or such subsidiary,
enforceable against is in accordance with their respective terms except to the
extent that enforceability may be subject to or limited by bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
relating to or affecting the rights of creditors generally or may be subject to
general principles of equity.
(d) CAPITAL STOCK. As of the date hereof, WSG has
an authorized capital stock consisting of 15,000,000 shares of WSG Common
Stock, of which 4,080 are outstanding, and no shares of Preferred Stock, no par
value, of which none are issued and outstanding. As of such date, 1,502,500
shares of WSG Common Stock are reserved for issuance upon the exercise of
outstanding WSG stock options and warrants. All of the issued and outstanding
shares of capital stock of WSG and each of its subsidiaries have been validly
authorized and issued and are fully paid and nonassessable.
(e) OPTIONS, WARRANTS AND RIGHTS. Neither WSG nor
any of its subsidiaries has outstanding any options, warrants, or other rights
to purchase, or convert any obligation into, any shares of its capital stock,
other than those referred to in Section 3.3(d).
(f) SUBSIDIARIES. WSG has delivered to GRS a list
setting forth as of the date of this Agreement (i) the name, jurisdiction of
incorporation and list of shareholders of each subsidiary of WSG and (ii) the
name and description of every other person, corporation, partnership, joint
venture or other business association in which WSG directly or indirectly owns
a material interest. The outstanding shares of capital stock of the
subsidiaries of WSG owned by WSG or any of its subsidiaries are owned free and
clear of all claims, liens, charges and encumbrances.
(g) FINANCIAL STATEMENTS. The Consolidated Balance
Sheets of WSG and subsidiaries as of December 31, 1996 and March 31, 1997, and
the Consolidated Statements of Income, Shareholder's Investment and Cash Flows
of WSG and subsidiaries for the 3 months ended March 31, 1997 and the year
ended December 31, 1996, and all related Schedules and notes to the foregoing
were delivered to GRS prior to the date of this Agreement. All of the
foregoing financial statements have been prepared in accordance with generally
accepted accounting principles which were applied on a consistent basis, and
fairly present the financial position, results of operations and changes of
financial position of WSG and its consolidated subsidiaries as of their
respective dates and for the periods indicated. The foregoing financials
statements as of December 31, 1996 have been audited by Coopers & Lybrand,
L.L.P.,
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independent public accountants. Neither WSG nor any of its subsidiaries has
any material liabilities or obligations of a type which would be included in a
balance sheet prepared in accordance with generally accepted accounting
principles, whether related to tax or non-tax matters, accrued or contingent,
due or not yet due, liquidated or unliquidated or otherwise, except as and to
the extent disclosed or reflected in the Consolidated Balance Sheet of WSG and
its consolidated subsidiaries as of December 31, 1996, or incurred since March
31, 1997, in the ordinary course of business.
(h) NO MATERIAL CHANGE. Since March 31, 1997, there
has not been and there is not threatened (i) any material change in the
financial condition, business, properties, assets or results of operations of
WSG and its subsidiaries taken as a whole, (ii) any loss or damage (whether or
not covered by insurance) to any of the assets or properties of WSG or its
subsidiaries that materially affects or impairs their ability to conduct their
respective businesses, (iii) any event or condition of any character that has
materially and adversely affected the business or prospects (financial or
otherwise) of WSG and its subsidiaries taken as a whole, or (iv) any mortgage
or pledge of any material amount of the assets or properties of WSG or any of
its subsidiaries, or any indebtedness incurred by WSG or any of its
subsidiaries, other than indebtedness, not material in the aggregate, incurred
in the ordinary course of business.
(i) TITLE TO PROPERTIES. WSG and its subsidiaries
have good and marketable title to all of their respective real and personal
properties, including all properties reflected in the Consolidated Balance
Sheet as of December 31, 1996, or acquired subsequent to December 31, 1996
(except property disposed of subsequent to that date in the ordinary course of
business or property related to discontinued operations). Such assets and
properties are not subject to any mortgage, pledge, lien, claim, encumbrance,
charge, security interest or title retention or other security arrangement
except for liens for the payment of federal, state and other taxes, the payment
of which is neither delinquent nor subject to penalties and except for other
liens and encumbrances incidental to the conduct of the business of WSG and its
subsidiaries or the ownership of their assets or properties which were not
incurred in connection with the borrowing of money or the obtaining of
advances, and which do not in the aggregate materially detract from the value
of the assets or properties of WSG and its subsidiaries taken as a whole or
materially impair the use thereof in the operation of their respective
businesses, except in each case as disclosed in the Consolidated Balance Sheet
as of December 31, 1996. All leases pursuant to which WSG or any of its
subsidiaries leases any substantial amount of real or personal property are
valid and effective in accordance with their respective terms.
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(j) LITIGATION. There are no actions, suits,
proceedings or other litigation pending or, to the knowledge of WSG, threatened
against or affecting WSG or any of its subsidiaries, at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality which, if determined
adversely to WSG or its subsidiaries, would individually or in the aggregate
have a materially adverse effect on the business, assets, properties,
operations or prospects or on the condition, financial or otherwise, of WSG and
its subsidiaries, taken as a whole.
(k) RIGHTS AND LICENSES. Neither WSG nor any of its
subsidiaries is subject to any material disability or liability by reason of
its failure to possess any trademark, trademark right, trade name right or
license.
(l) NO VIOLATION. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
will not violate or result in a breach by WSG or any of its subsidiaries of, or
constitute a default under, or conflict with or cause any acceleration of any
obligation with respect to (i) any provision or restriction of any charter,
bylaw, loan, indenture or mortgage of WSG or any of its subsidiaries, or (ii)
any provision or restriction of any lien, lease agreement, contract,
instrument, order, judgment, award, decree, ordinance or regulation or any
other restriction of any kind or character to which any assets or properties of
WSG or any of its subsidiaries is subject or by which WSG or any of its
subsidiaries is bound.
(m) TAXES. WSG and its subsidiaries have filed all
federal, state, foreign, local and any other applicable tax returns, reports or
extensions required to be filed, and have paid in full or adequately reserved
for all taxes shown due thereon (together with all interest, penalties,
assessments and deficiencies assessed in connection therewith due through the
date hereof). Such tax returns and reports are correct in all material
respects. Federal tax returns of WSG and its subsidiaries have not been
audited by the Internal Revenue Service.
(n) ACCOUNTS RECEIVABLE. The accounts receivable of
WSG and its subsidiaries have been acquired in the ordinary course of business,
are valid and enforceable and are fully collectible, subject to no known
defense, setoffs or counterclaims, except to the extent of the reserve
reflected in the books of WSG and its subsidiaries or in such other amount
which is not material in the aggregate.
(o) CONTRACTS. Neither WSG nor any of its
subsidiaries is a party to (i) any plan or contract providing for bonuses,
pensions, options, stock purchases, deferred compensation, retirement payments
or profit sharing, (ii) any collective bargaining or other contract or
agreement with any labor union, (iii) any lease, installment purchase agreement
or other contract
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with respect to any real or personal property used or proposed to be used in
its operations, except, in each case, items included within aggregate amounts
disclosed in WSG's 1996 Consolidated Balance Sheet, (iv) any contract or
agreement for the purchase of any commodity, material, fixed asset or equipment
in excess of $25,000, (v) any contract or agreement creating an obligation of
$25,000 or more, (vi) any contract or agreement which by its terms does not
terminate or is not terminable without penalty to it within one year after the
date hereof, (vii) any loan agreement, indenture, promissory note, conditional
sales agreement or other similar type of arrangement, (viii) any material
license agreement, or (ix) any contract which may result in a material loss or
obligation to it. All contracts, agreements and other arrangements to which
WSG or any of its subsidiaries is a party are valid and enforceable in
accordance with their terms; WSG, its subsidiaries and all other parties to
each of the foregoing have performed all obligations required to be performed
to date; neither WSG, nor any of its subsidiaries, nor any such other party is
in default or in arrears under the terms of any of the foregoing; and no
condition exists or event has occurred which, with the giving of notice or
lapse of time or both, would constitute a default under any of them.
(p) COMPLIANCE WITH LAW AND OTHER REGULATION.
Neither WSG nor any of its subsidiaries is subject to or has been threatened by
written notice with any material fine, penalty, liability or disability as the
result of its failure to comply with any requirement of federal, state, local
or foreign law or regulation (including those relating to the employment of
labor or environmental matters) or any requirement of any governmental body or
agency having jurisdiction over it, the conduct of its business, the use of its
assets and properties or any premises occupied by it. WSG and each of its
subsidiaries has complied in all material respects with all applicable
provisions of the Employment Retirement Income Security Act of 1974, as amended
("ERISA") and with all other applicable federal, state and local laws relating
to the employment of labor including the provisions thereof relative to wages,
hours, collective bargaining, working conditions and payment of taxes of any
kind except where such occurrence would not have a material adverse impact on
the business of WSG. Neither WSG nor any of its subsidiaries is liable for any
arrears of wages or any taxes or penalties for failure to comply with any of
the foregoing in any material way or has any obligations for any vacation, sick
leave or other compensatory time except for such obligations created in the
ordinary course of business. Neither WSG nor any of its subsidiaries is in
violation of any applicable statute law, or regulation relating to the
environment, storage of hazardous substances or occupational health and safety,
the violation of which might result in a material adverse change in the assets,
conditions or affairs of WSG, nor has WSG or any of its subsidiaries received
any official notice of citation that any of their respective properties in any
way contravenes any federal,
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state or local law or regulation relating to environmental, health or safety
matters, including without limitation any requirements of the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA") or any OSHA
requirements, and no material expenditures are or will be required in order to
comply with any such existing statute, law, or regulation. Without limiting
the foregoing, each of WSG, and its subsidiaries has properly filed all
reports, paid all monies and obtained all licenses, permits, certificates and
authorizations needed or required for the conduct of its business and the use
of its assets and properties and the premises occupied by it in connection
therewith and is in compliance in all material respects with all conditions,
restrictions and provisions of all of the foregoing except where such
occurrence would not have a material adverse effect on the business of WSG.
(q) ABSENCE OF PRODUCT OR SERVICE WARRANTIES.
Except in the ordinary course of business, to the best knowledge of WSG,
neither WSG nor any of its subsidiaries, nor any officer, director, employee or
agent thereof, has made any written warranties with respect to the quality or
absence of defects of the products or services that WSG or any of its
subsidiaries has sold or performed, and that are in force as of the date
hereof. There are no material claims pending or anticipated or, to the best
knowledge of WSG, threatened against WSG or any of its subsidiaries with
respect to the quality of or absence of defects in such products or services.
Neither WSG nor any of its subsidiaries has been required to pay direct,
incidental, or consequential damages to any person in connection with any of
such products or services at any time during the five year period preceding the
date hereof except for warranty remedies provided in the ordinary course of
business.
(r) INSURANCE. WSG and each of its subsidiaries
maintains in full force and effect insurance coverage on their assets,
properties, premises, operations and personnel in such amounts and against such
risks and losses as are adequate and customary for the respective businesses
engaged in by WSG and its subsidiaries.
(s) MINUTE BOOKS. The minutes books of WSG and each
of its subsidiaries accurately record all actions taken by their respective
shareholders and directors.
(t) SEC REPORTS. WSG's prospectus filed with the
Securities and Exchange Commission and all subsequent reports and proxy
statements filed by WSG thereafter pursuant to Section 13(a) or 14(a) of the
Securities Exchange Act of 1934, as amended, do not contain a misstatement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading as of the time the
document was filed.
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(u) STATUS OF WSG COMMON STOCK TO BE ISSUED. The
shares of WSG Common Stock into which the shares of Surviving Company stock
will be converted pursuant to this Agreement will be, when issued, validly
authorized and issued, fully paid and nonassessable.
(v) ACCURACY OF STATEMENTS. Neither this Agreement
nor any statement, list, certificate or other information furnished or to be
furnished by WSG or Subsidiary Company to GRS or the Shareholders in connection
with this Agreement or any of the transactions contemplated hereby contains or
will contain an untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements contained herein or
therein, in light of the circumstances in which they are made, not misleading.
IV. JOINT OBLIGATIONS
4.1 JOINT OBLIGATIONS. The following shall be the
obligations of all of the parties hereto:
(a) NONDISCLOSURE/CONFIDENTIALITY. From and after
the date of this Agreement until the Effective Date, or in the event that the
Merger shall not occur, then thereafter, no party hereto shall disclose or use,
or permit the disclosure or use of, any proprietary or confidential information
to or by any person, firm, corporation, association or entity (except to its
authorized representatives for use in consummating the Agreement) without the
prior written consent of the other. Copies of all disclosures made by a party
hereto shall be provided to the other party hereto at the time of the
disclosure or, if impracticable, promptly thereafter. Furthermore, if
discussion or negotiations with regard to this Agreement are terminated each
party shall return, or cause to be returned, each to the other, the originals
and all documents containing such confidential information and shall use its
best efforts to keep and maintain confidential all such information.
(b) NOTICE. Each party shall promptly give the
other parties written notice of the existence or occurrence of any condition
that would make any representation or warranty of the notifying party untrue or
that might reasonably be expected to prevent the consummation of the Merger or
the other transactions contemplated herein.
(c) PERFORMANCE. No party shall intentionally
perform or omit to perform any act that, if performed or omitted, would prevent
or excuse the performance of this Agreement by any party hereto or that would
result in any representation or warranty contained herein of that party being
untrue in any material respect as of the date of this Agreement and as if
originally made on and as of the Effective Date.
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<PAGE> 19
(d) PUBLIC ANNOUNCEMENTS. The parties hereto agree
that (i) the existence of this Agreement and the provisions hereof shall not be
disclosed to any person except upon the mutual agreement of WSG and GRS, and
(ii) the consent of all press releases and other communications relating to the
consent of this Agreement shall be subject to the mutual agreement of WSG and
GRS, except WSG may, after consultation with GRS regarding the consent of such
disclosure but without being required to obtain the agreement of GRS, disclose
information relating to the content of this Agreement that WSG determines is
required by applicable securities laws or rules and regulations or
interpretations of the Securities and Exchange Commission or The Nasdaq Stock
Exchange, Inc., WSG shall furnish to GRS copies of any disclosures made without
the agreement of GRS at the time of disclosure or as soon thereafter as may be
practicable.
V. CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF WSG AND
SUBSIDIARY COMPANY. The obligations of WSG and Subsidiary Company under this
Agreement are, at the option of WSG and Subsidiary Company, subject to the
satisfaction of the following conditions on or before the Effective Date:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of GRS herein contained shall have been true and
correct in all material respects when made, and, in addition, shall be true and
correct in all material respects on and as of the Effective Date with the same
force and effect as though made on and as of the Effective Date, except as
affected by transactions contemplated hereby.
(b) PERFORMANCE OF AGREEMENTS. GRS shall have in
all material respects performed all obligations and agreements and complied
with all covenants and conditions contained in this Agreement to be performed
and complied with by it on or prior to the Effective Date.
(c) CORPORATE APPROVALS. All necessary corporate
action on the part of the directors and shareholders of GRS adopting this
Agreement and approving the transactions contemplated hereby shall have been
taken by October 17, 1997.
(d) OPINION OF COUNSEL FOR GRS AND THE SHAREHOLDERS.
WSG shall have received an opinion of Tuch, Dillard, Nelson & Dillard, counsel
for GRS and the Shareholders, dated the Effective Date, in form and substance
satisfactory to WSG and its counsel, to the effect that:
19
<PAGE> 20
(i) GRS is a corporation organized, validly
existing and in good standing under the laws of the State of Virginia, and has
the requisite corporate power and authority under the laws of such state to
own, lease and operate its properties, to carry on its business as then being
conducted and to consummate the Merger contemplated hereby;
(ii) all necessary corporate proceedings of
the Board of Directors and the shareholders of GRS to approve and adopt this
Agreement and to authorize the execution and delivery of this Agreement and the
consummation of the Merger contemplated hereby have been duly and validly
taken;
(iii) GRS has the corporate power and
authority to execute and deliver this Agreement and this Agreement has been
duly authorized, executed and delivered by GRS and each of the Shareholders and
constitutes its or their legal, valid and binding obligation;
(iv) Such counsel knows of no actions, suits
or proceedings pending or threatened against GRS, at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency, or instrumentality that would result in a
breach of the representation and warranty set forth in Section 3.1(j) of this
Agreement; and
With respect to certain of the opinions expressed above, such opinion
may be based upon a certificate or certificates of the Shareholders and an
officer or officers of GRS and its subsidiaries, and such counsel may rely on
opinions of other counsel satisfactory to WSG delivered in connection with this
Agreement.
(e) NO MATERIAL ADVERSE CHANGE. There shall be no
material adverse change in the business, properties, or financial condition of
GRS.
(f) LITIGATION. No action or proceeding by any
governmental agency shall have been instituted or threatened which would
enjoin, restrain or prohibit, or might result in substantial damages in respect
of this Agreement or the consummation of the transactions contemplated by this
Agreement, and would in the reasonable judgment of WSG and Subsidiary Company
make it inadvisable to consummate such transaction, and no court order shall
have been entered in any action or proceeding instituted by any other party
which enjoins, restrains or prohibits this Agreement or consummation of the
transactions contemplated by this Agreement.
(g) PROCEEDINGS SATISFACTORY TO COUNSEL. All
proceedings taken by GRS and all instruments executed and delivered by GRS on
or prior to the Effective Date in connection with the transactions herein
contemplated shall be satisfactory in form and substance to counsel for GRS and
Surviving Company.
20
<PAGE> 21
(h) DISSENTER'S RIGHTS. Dissenter's right of
appraisal under North Carolina law shall not have been effectively preserved as
of the Effective Date by any owners of issued and outstanding shares of GRS
Common Stock.
(i) MERGER DOCUMENTS. The documents necessary to
effect the Merger shall have been filed with and accepted for filing by, the
North Carolina Secretary of State.
(j) POOLING-OF-INTERESTS STATUS. WSG and Surviving
Company shall have been advised by their independent public accountants that,
in such accountant's opinion, the Merger and the other transactions
contemplated herein meet the requirements for treatment as a
"pooling-of-interests" under generally accepted accounting principles, and as
is more specifically set forth in Opinion No. 16, as amended, of the Accounting
Principles of the Board of the American Institute of Certified Public
Accountants.
(k) WAIVER OF DIVIDENDS. All holders of GRS capital
stock as to which any unpaid dividends shall have accrued shall have, prior to
the Effective Date, for consideration satisfactory to such holders, waived and
released all rights to receive those dividends.
5.2 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF GRS. The
obligations of GRS under this Agreement are, at the option of GRS, subject to
the satisfaction of the following conditions on or before the Effective Date
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of WSG and Subsidiary Company herein contained
shall have been true and correct in all material respects when made and, in
addition, shall be true and correct in all material respects on and as of the
Effective Date with the same force and effect as though made on and as of the
Effective Date, except as affected by transactions contemplated hereby.
(b) PERFORMANCE OF AGREEMENTS. WSG and Subsidiary
Company shall have in all material respects performed all obligations and
agreements and complied with all covenants and conditions contained in this
Agreement to be performed and complied with by them or either of them on or
prior to the Effective Date.
(c) CORPORATE APPROVAL. All necessary corporation
action on the part of the directors and shareholders of WSG and Subsidiary
Company approving and adopting this Agreement and approving the transactions
contemplated hereby shall have been taken by October 16, 1997.
(d) Opinion of Counsel for WSG, GRS shall have
received an opinion of Gray, Layton, Kersh, Solomon, Sigmon, Furr & Smith,
P.A., counsel for WSG and Subsidiary Company, dated the Effective Date,
satisfactory in form and substance to GRS and its counsel, to the effect that:
21
<PAGE> 22
(i) WSG and Subsidiary Company are
corporations organized, validly existing and in good standing under the laws of
the State of North Carolina, and have the requisite corporate power and
authority under the law of such state to own, lease and operate their
properties, to carry on their businesses as then being conducted and to
consummate the Merger contemplated hereby;
(ii) all necessary corporate proceedings of
the Boards of Directors and shareholders of WSG and Subsidiary Company to
authorize the execution and delivery of this Agreement and the consummation of
the Merger contemplated by this Agreement have been duly and validly taken;
(iii) WSG and Subsidiary Company have
corporate power and authority to execute and deliver this Agreement and this
Agreement has been duly authorized, executed and delivered by them and
constitutes their legal, valid and binding obligation;
(iv) such counsel knows of no actions, suits
or proceedings pending or threatened against WSG or any of its subsidiaries,
including Surviving Company, at law or in equity, or before or by any federal,
state, municipal or other governmental department, commission, board, bureau,
agency, or instrumentality that would result in a breach of the representation
and warranty set forth in Section 3.3(j) of this Agreement;
(v) the consummation of the transactions
contemplated by this Agreement will not violate or result in a breach of or
constitute a default under any provision of any indenture, mortgage, lien,
lease, agreement, contract, instrument, order, judgment, decree, award,
ordinance, regulation or any other restriction of any kind or character known
to such counsel, to which WSG or Subsidiary Company is a party or by which
either is bound;
(vi) the shares of WSG Common Stock to be
issued in accordance with this Agreement are duly authorized, and will be, upon
the effectiveness of the Merger, validly issued, fully paid, non-assessable.
With respect to certain of the opinions expressed in this
subparagraph, such opinion may be based upon a certificate or certificates of
an officer or officers of WSG or its subsidiaries, including Subsidiary
Company, and such counsel may rely on opinions of others satisfactory to GRS,
delivered in connection with this Agreement.
22
<PAGE> 23
(e) NO MATERIAL ADVERSE CHANGE. There shall be no
material adverse change in the business, properties or financial condition of
WSG or Subsidiary Company.
(f) LITIGATION. No action or proceeding by any
governmental agency shall have been instituted or threatened which would
enjoin, restrain or prohibit, or might result in substantial damages in respect
of this Agreement or the consummation of the transactions contemplated by this
Agreement, and would in the reasonable judgment of GRS make it inadvisable to
consummate such transaction, and no court order shall have been entered in any
action or proceeding instituted by any other party which enjoins, restrains or
prohibits this Agreement or consummation of the transactions contemplated by
this Agreement.
(g) PROCEEDINGS SATISFACTORY TO COUNSEL. All
proceedings taken by WSG and Subsidiary Company and all instruments executed
and delivered by WSG and Subsidiary Company on or prior to the Effective Date
in connection with the transactions herein contemplated shall be satisfactory
in form and substance to counsel for Subsidiary Company.
(h) EMPLOYMENT AGREEMENT. Subsidiary Company and
WSG shall recognize certain employment contracts between GRS and certain GRS
employees as set forth as Exhibit E hereto.
(i) DELIVERY OF CERTIFICATE. WSG shall deliver
stock certificates to shareholders on the date of this Agreement.
(j) REGISTRATION RIGHTS AGREEMENTS. WSG and each of
the holders of GRS Common Stock have entered into Registration Rights
Agreements substantially in the form set forth as Exhibit B hereto.
(k) MERGER DOCUMENTS. The documents necessary to
effect the Merger shall have been filed with and accepted for filing by, the
North Carolina Secretary of State.
VI. WAIVER, MODIFICATION, ABANDONMENT
6.1 WAIVERS. The failure of GRS to comply with any of its
obligations, agreements or conditions as set forth herein may be waived
expressly in writing by WSG and Subsidiary Company, by action of their
respective Boards of Directors without the requirement for a vote of
shareholders. The failure of WSG or Subsidiary Company to comply with any of
their obligations, agreements or conditions as set forth herein may be waived
expressly in writing by GRS, by action of its Board of Directors without the
requirement for a vote of shareholders.
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<PAGE> 24
6.2 MODIFICATION. This Agreement may be modified at any time in any
respect by the mutual consent of all of the parties, notwithstanding prior
approval by the shareholders. Any such modification may be approved for any
party by its Board of Directors, without further shareholder approval, except
that the number of shares of WSG Common Stock to be issued in exchange for the
shares of GRS Common Stock may not be decreased without the consent of the
Shareholders given by the same vote as is required under applicable state law
for approval of this Agreement.
VII. GENERAL
7.1 CONTROLLING LAW; VENUE. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement, shall be
governed by and construed in accordance with the laws of the state of North
Carolina notwithstanding any North Carolina or other conflict-of-law provisions
to the contrary. The parties agree that any action brought by any party
against any of the others in connection with any rights or obligations arising
out of this Agreement or any transaction contemplated hereby shall be
instituted properly in a United States Federal Court or State Court of
competent jurisdiction with venue only in the county of the principle place of
business of the defendant in such action. Each party hereto agrees to submit
personally to the jurisdiction of a court of competent subject matter
jurisdiction located in such county or federal district.
7.2 NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received when delivered against
receipt or when deposited in the United States mails, first class postage
prepaid, addressed as set forth below:
If to WSG or Surviving Company:
Wheels Sports Group, Inc.
1368 Mocksville Marketplace
Mocksville, NC 27028
with a copy given in the manner
prescribed above, to:
Gray, Layton, Kersh, Solomon,
Sigmon, Furr & Smith, P.A.
516 South New Hope Road
Gastonia, NC 28054
Attention: David M. Furr, Esq.
24
<PAGE> 25
If to GRS:
Green's Racing Souvenirs, Inc.
1727 Seymour Drive
South Boston, VA 24942
with a copy given in the manner
prescribed above, to:
Tuck, Dillard, Nelson & Dillard
401 Main Street
Drawer 40
South Boston, VA 24592
Attn: Chandler Nelson
Any party may alter the address to which communications or copies are
to be sent by giving notice to such of change of address in conformity with the
provisions of this paragraph for the giving notice.
7.3 BINDING NATURE OF AGREEMENT; NO ASSIGNMENT. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that no party may assign or transfer
its rights or obligations under this Agreement without the prior written
consent of the other parties hereto.
7.4 ENTIRE AGREEMENT. This Agreement together with the other
documents and agreements referenced herein, contains the entire understanding
among the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as
herein contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms
hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
7.5 PARAGRAPH HEADING. The paragraph headings in this Agreement are
for convenience only; they form no part of this Agreement and shall not affect
its interpretation.
7.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. There are no
survival of representations and warranties.
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<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 17th day of October, 1997.
GREEN'S RACING SOUVENIRS, INC.
By: /s/ Harold Green
-----------------------------
President
ATTEST:
/s/ Rhonda R. Green
- --------------------
Secretary
WHEELS SPORTS GROUP, INC.
By: /s/ Howard L. Correll, Jr.
---------------------------
President
ATTEST:
/s/ David Furr
- ----------------------
Assistant Secretary
WHEELS SPORTS GROUP ACQUISITION
III,INC.
By: /s/ Howard L. Correll, Jr.
--------------------------
President
ATTEST:
/s/ David Furr
- -----------------------
Assistant Secretary
(SEAL)
- ------------------------ ---------------------------
Harold E. Green No. of Shares
(SEAL)
- ------------------------ ---------------------------
Rhonda R. Green No. of Shares
26
<PAGE> 1
EXHIBIT 2.6.2
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (the
"First Amendment") is made and entered into to be effective as of October 17,
1997, by and among WHEELS SPORTS GROUP, INC., a North Carolina corporation
("Parent"), GREEN'S RACING SOUVENIRS, INC., a Virginia corporation ("GRS"),
WHEELS SPORTS GROUP ACQUISITION III, INC., a North Carolina corporation
("WSGIII"), HAROLD E. GREEN ("HEG") and RHONDA R. GREEN ("RRG") (HEG and RRG
are hereinafter referred to as the "Shareholders").
Statement of Purpose
Parent, GRS, WSGIII and the Shareholders are parties to that certain
Agreement and Plan of Reorganization dated as of October 17, 1997 (the
"Agreement") and desire to enter into this First Amendment to amend certain
provisions of the Agreement. All capitalized terms used and not otherwise
defined in this First Amendment have the meaning assigned to them in the
Agreement.
Now, therefore, the parties hereto agree as follows:
1. Amendment to Agreement. Article III, Section 3.1, subsection
(l) of the Agreement is hereby deleted in its entirety and the following
substituted in lieu thereof:
(l) Taxes. GRS has filed all federal, state, foreign, local and any
other applicable tax returns, reports or extensions required to be filed, and
has paid in full all taxes and assessments shown due thereon (together with all
interest, penalties, assessments and deficiencies assesses in connection
therewith due through the date hereof). Such tax returns and reports are
correct in all material respects. Federal tax returns of GRS have not been
audited by the Internal Revenue Service.
2. Miscellaneous.
(a) Ratification of Agreement. Other than as modified by this
First Amendment, all terms of the Agreement are hereby affirmed and ratified.
(b) Counterparts. This First Amendment 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.
(c) Governing Law. This First Amendment shall be governed by the
laws of the State of North Carolina applicable to agreements made and to be
performed entirely within North Carolina.
<PAGE> 2
The parties have executed and delivered this First Amendment as of the
date first written above.
WHEELS SPORTS GROUP, INC.
By: /s/ Howard L. Correll, Jr.
--------------------------------------
President
GREEN'S RACING SOUVENIRS, INC.
By: /s/ Harold E. Green
--------------------------------------
President
WHEELS SPORTS GROUP ACQUISITION III, INC.
By: /s/ Howard L. Correll, Jr.
-------------------------------------
President
SHAREHOLDERS:
/s/ Harold E. Green
------------------------------------------
Harold E. Green
/s/ Rhonda R. Green
------------------------------------------
Rhonda R. Green
-2-
<PAGE> 1
EXHIBIT 2.7
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT dated as of October 17, 1997 by and
among Wheels Sports Group, Inc., a North Carolina corporation (the "Company")
and Harold E. Green and Rhonda R. Green (the "Holders").
The parties agree as follows:
SECTION 1. DEFINITIONS. For purposes of this Agreement:
(a) "Common Stock" means the Company's Common Stock, $.01 par
value;
(b) "Registrable Securities" means 175,000 shares of Common
Stock to be issued to the Holders upon closing of that certain Merger
described in an Agreement and Plan of Reorganization of even date (the
"Agreement"; certain terms not defined herein but used herein are used
as defined in the Agreement);
(c) "register" and "registration" refer to a registration of
the Registrable Securities effected by filing a registration statement
or similar document pursuant to the Securities Act of 1933, as amended
(the "Act") and the declaring or ordering of effectiveness of such
registration statement; and
(d) The "Company" means Wheels Sports Group, Inc., a North
Carolina corporation.
SECTION 2. DEMAND REGISTRATION.
(a) If at any time after July 16, 1998 and before December
31, 1998, the Company receives a written request from a majority of
the Holders that the Company file a registration statement under the
Act covering the registration of Registrable Securities held by them,
then the Company shall, subject to the limitations of this Section 2,
use its best efforts to, within six months of the date of such
request, effect the registration under the Act of all Registrable
Securities and will keep such registration statement effective for a
minimum period of 24 months thereafter. The Company shall be obligated
to effect only one (1) registration pursuant to this Section 2(a).
(b) If the Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they
shall so advise the Company as a part of their request made pursuant
to this Section 2. The Holders shall (together with the Company as
provided in Section 3) enter into an underwriting agreement in
customary form with a mutually acceptable underwriter or underwriters.
<PAGE> 2
SECTION 3. "PIGGYBACK" RIGHTS. If (but without any obligation to do
so) during the period ending, July 16, 1997, the Company proposes to register
any of its securities under the Act in connection with a public offering for
cash proceeds payable in whole or in part to the Company other than with
respect to a Registration Statement filed on Form S-8 or Form S-4 or such other
similar form then tn effect under the Act), the Company shall, at such time,
subject to the provisions of Section 6 and 7 hereof and upon request of the
Holders cause to be registered under the Act all of the Registrable Securities
which the Holders request be registered; provided, however if the managing
underwriter of the public offering of securities proposed to be registered by
the Company advises the Holders in writing that marketing factors require a
limitation of the number of securities to be underwritten, then the number of
Registrable Securities of the Holders that may be included In the underwriting
shall be so limited pro rata. Such "piggyback rights" shall expire on the
registration and sale of the Registrable Securities pursuant to Section 2 above
or upon the sale of the Registrable Securities hereunder, but in no event later
than June 30, 1999.
SECTION 4. REGISTRATION PROCEDURE. Whenever required under this
Agreement to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as is reasonably possible:
(a) Furnish to the Holders of the Registrable Securities
covered by such registration statement such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the
Registrable Securities owned by them.
(b) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in
usual and customary form, with the managing underwriter of such
offering. The Holders participating in such underwriting shall also
enter into and perform their obligations under such agreement.
(c) Notify the Holders of Registrable Securities covered by
such registration statement, at any time when a prospectus relating
thereto covered by such registration statement is required to be
delivered under the Act, of the happening of any event as a result of
which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the
circumstances then existing.
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<PAGE> 3
SECTION 5. FURNISH INFORMATION. The Holders shall promptly furnish
to the Company in writing such reasonable information regarding the Holders,
the Registrable Securities held by the Holders, and the intended method of
disposition of such securities as shall be required to effect the registration
of their Registrable Securities.
SECTION 6. EXPENSES OF REGISTRATION. All of the foregoing expenses
relating to the Registrable Securities incurred in connection with
registration, filing or qualification pursuant to this Agreement, including
(without limitation) all registration, filing and qualification fees, printers'
bills, mailing and delivery expenses, accounting fees, and the fees and
disbursements of counsel for the Company, but excluding underwriting discounts
or fees, shall be borne by the Company.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION. In the event any
Registrable Securities are included in a registration statement under this
Agreement:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the officers and directors of
each Holder, any underwriter (as defined in the Act) for such holder,
and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the Securities Exchange Act of 1934
(the "Exchange Act"), against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under
the Act, the Exchange Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect
thereto) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto,
or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and the
Company will reimburse each such Holder, officer or director,
underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided
however, that the indemnity agreement contained in this Section 7(a)
shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any
such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration
statement,
3
<PAGE> 4
preliminary prospectus or final prospectus or any amendment or
supplement thereto in reliance upon and in conformity with written
information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person;
provided, further, however, that if any losses, claims, damages or
liabilities arise out of or are based upon any untrue statement,
alleged untrue statement, omission or alleged omission contained in
any preliminary prospectus, and made in reliance upon and in
conformity with written information furnished by such Holder expressly
for use therein, which did not appear in the final prospectus, the
Company shall not have any such liability with respect thereto to such
Holder, any person who controls such Holder within the meaning of the
Act, or any director of such Holder, if such Holder delivered a copy
of the preliminary prospectus to the person alleging such losses,
claims, damages or liabilities and failed to deliver a copy of the
final prospectus, as amended or supplemented if it has been amended or
supplemented, to such person at or prior to the written confirmation
of the sale to such person, provided that such Holder had an
obligation to deliver a copy of the final prospectus to such person;
and
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the registration statement, each
person, if any, who controls the Company within the meaning of the
Act, any underwriter and any other Holder selling securities in such
registration statement or any of its directors or officers or any
person who controls such Holder or underwriter against any losses,
claims, damages or liabilities, joint or several) to which the Company
or any such director, officers, controlling person, or underwriter or
controlling person, or other such Holder or director, officer or
controlling person may become subject, under the Act, the Exchange Act
or other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereto) arise out of or are
based upon any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, if the untrue statement or omission or alleged
untrue statement or omission in respect of which such loss, claim,
damage or liability is asserted was made in reliance upon and in
conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder
will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, controlling
4
<PAGE> 5
person, underwriter or controlling person, or other Holder, officer,
director, or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided
however, that the indemnity agreement contained in this Section 7(b)
shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action, if such settlement is effected without
the consent of the Holder (which consent shall not be unreasonably
withheld); provided, further that the maximum liability of any selling
Holder under this Section 7(b) in regard to any registration statement
shall in no event exceed the amount of the proceeds received by such
selling Holder from the sale of securities under such registration
statement; provided, further however, that if any losses, claims,
damages or liabilities arise out of or are based upon an untrue
statement, alleged untrue statement, omission or alleged omission
contained in any preliminary prospectus which did not appear in the
final prospectus, such seller shall not have any such liability with
respect thereto to the Company, any person who controls the Company
within the meaning of the Act, any officer of the Company who signed
the registration statement or any director of the Company, if the
Company delivered a copy of the preliminary prospectus to the person
alleging such losses, claims, damages or liabilities and failed to
deliver a copy of the final prospectus, as amended or supplemented if
it has been amended or supplemented, to such person at or prior to the
written confirmation of the sale to such person, provided that the
Company had an obligation to deliver a copy of the final prospectus to
such person.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under
this Section 7, deliver to the indemnifying party a written notice of
the commencement thereof, and the indemnifying party shall have the
right to participate in and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly notified,
to assume the defense thereof with counsel mutually satisfactory to
the parties. An indemnified party shall have the right to retain its
own counsel, however, the fees and expenses of such counsel shall be
at the expense of the indemnified party, unless (i) the employment of
such counsel has been specifically authorized in writing by the
indemnifying party, (ii) the indemnifying party has failed to assume
the defense and employ counsel, or (iii) the named parties to any such
action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have
been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to
those
5
<PAGE> 6
available to the indemnifying party (in which case the indemnifying
party shall not have the right to assume the defense of such action on
behalf of such indemnified parry, it being understood, however, that
the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more
than one separate firm of attorneys for all indemnified parties). The
failure to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party
under this Agreement.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party in
respect of any losses, claims, damages or liabilities or actions in
respect thereof referred to therein, then each indemnifying party
shall in lieu of; indemnifying such indemnified party contribute to
the amount paid or payable by such indemnified party as a result of
such losses, claims, damages, liabilities or actions in such
proportion as is appropriate to reflect the relative fault of the
Company, on the one hand, and selling Holders, on the other, in
connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or actions as well as any other
relevant equitable considerations, including the failure to give any
required notice The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, on the
one hand, or by such selling Holders on the other, and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The parties hereto
acknowledge and agree that it would not be Just and equitable if
contribution pursuant to this subparagraph (d) were determined by pro
rata allocation (even if all of the selling Holders were treated as
one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred
to above in this subparagraph (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages,
liabilities or actions in respect thereof referred to above in this
subparagraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim.
Notwithstanding the provisions of this subparagraph (d), the amount
the selling Holders shall be required to contribute shall not exceed
the amount, if any, by which the total price at which the securities
sold by each of them were
6
<PAGE> 7
offered to the public exceeds the amount of any damages which they
would have otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, or other
violation of law. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of fraudulent
misrepresentation
SECTION 8. MISCELLANEOUS.
(a) Binding Effect. This Agreement shall be binding upon and
shall inure to the benefit of the Company and to the Holders and their
respective heirs, personal representatives, successors and assigns.
(b) Notices. Except as otherwise provided herein, any
notice, consent or request to be given in connection with any term or
provision of this Agreement shall be deemed to have been given
sufficiently if sent by hand, registered or certified mail, postage
prepaid, facsimile transmission or courier (next day delivery), to the
Company or to the Holders at their respective addresses as provided on
or about the date hereof.
(c) Integration. This Agreement contains the entire
agreement between the parties with respect to the transactions
contemplated hereby and no party shall be bound by, nor shall any
party be deemed to have made, any covenants, representations,
warranties undertakings or agreements except those contained in such
entire Agreement. The section and paragraph headings contained in this
Agreement are for the reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement.
(d) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one and the same agreement.
(e) Amendment. This Agreement may be amended, changed,
waived or terminated only in writing signed by each of the parties.
IN WITNESS WHEREOf, this Agreement has been executed effective as of
the date first above written.
WHEELS SPORTS GROUP, INC.
By: /s/ Howard L. Correll, Jr.
----------------------------------
Howard L. Correll, Jr., President
7
<PAGE> 8
THE HOLDERS
/s/ Harold E. Green
----------------------------------
Harold E. Green
/s/ Rhonda R. Green
----------------------------------
Rhonda R. Green
8
<PAGE> 1
EXHIBIT 10.9.5
NORTH CAROLINA
IREDELL COUNTY LEASE AGREEMENT
THIS LEASE AGREEMENT, made and entered into this 3rd day of March, 1995, by
and between ATHENA ASSOCIATES, a North Carolina general partnership having a
principal office in Iredell County, North Carolina, and the mailing address of
P. O. Box 830, Mooresville, North Carolina, 28115, by and through its Managing
Partner, ROE, LTD., a North Carolina corporation, hereinafter referred to as
"LESSOR," and RCB ENTERPRISES, INC., Suite 9A, 224 Rolling Hill Road,
Mooresville, North Carolina, 28115, hereinafter referred to as "LESSEE";
W I T N E S S E T H:
THAT WHEREAS, the Lessor does this day lease unto said Lessee, and said
Lessee does hereby hire and take as tenant under said Lessor, for the stated
purpose of operating an apparel and souvenir distribution center, and for no
other purpose without the express written approval of the Lessor, the following
described property, hereinafter referred to as the "PREMISES," for the term of
three (3) years, beginning the 1st day of May, 1995, and ending three (3)
years, thereafter; SAID PREMISES BEING A SECTION OF THAT CERTAIN BUILDING KNOWN
AS THE ATHENA BUILDING NUMBER ONE, LOCATED AT #46 ROLLING HILL ROAD, IN
LAKESIDE PARK, IN MOORESVILLE, IREDELL COUNTY, NORTH CAROLINA, SAID SECTION
BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
SUITES 8A, 8B, 9A, 10A AND 10B
NOW THEREFORE, in consideration of the rents and mutual covenants herein
contained, Lessor and Lessee do hereby covenant, promise and agree as follows:
1. RENT:
(a) Lessee agrees to pay to Lessor, during the first year of this
Lease, an annual rent of $37,272 DOLLARS, said rent to be payable at the
rate of $3,106, with each payment to be made on the same day of each and
every month as the date of the beginning of the term as set out hereinabove, in
advance, without demand, at the office of the Lessor, or at such other place and
to such other person as the Lessor may from time to time designate in writing.
This monthly rental rate reflects 3,017.56 base rent for the unit, plus
$24.28 monthly water and sewer charge, $25.43 monthly garbage pick-up charge
and $38.73 monthly CAM charge.
<PAGE> 2
(b) For each succeeding year of this Lease after the first year, the
new, annual-rental rate, beginning with the first day of the second year of the
effective date of this Lease (and on the first day of each succeeding year),
shall be an amount computed by increasing the rental rate for the immediately
preceding period by five (5%) percent (the immediately preceding yearly rent
shall be multiplied by 1.05%.)
(c) It is understood and agreed by the parties hereto that the
Lessee shall deposit one (1) months' rent with the Lessor at the time of
entering this Agreement. This one month's rent shall be for a security deposit
which may be used to satisfy any indebtedness of Lessee to Lessor at the
termination of this Lease. Said deposit shall not be placed in a separate
escrow account, may be commingled with other funds of the Lessor, and shall not
earn any interest for the Lessee. The purpose of said security deposit is to
pay for any damage to the Premises, or it shall be used as reimbursement to
Lessor for any sums owed to it at the termination of the Lease. The Lessee
shall pay the first month's rent prior to occupation of the Premises.
(d) If payment of rent is not made by the 15th of the month in
which it is due, the Lessee will be charged a delinquency fee of four (4%)
percent of the unpaid rental installment, in addition to the base monthly fee.
Acceptance of any late payments and penalties shall only waive the right to
claim breach of contract for such accepted late rental payments and penalties,
but shall not otherwise constitute a waiver of any rights, including the right
to require timely payment in the future.
(e) There will be an additional charge to Lessee of $38.73 per month
for common-area maintenance, which is referenced in paragraph 1(a) hereinabove,
and it shall be the responsibility of Lessor to maintain in a good, safe and
substantial condition, all of the common areas of the Athena Building and
grounds.
(f) If a rental check is returned to Lessor unpaid by the bank, the
Lessee will be charged a service charge in the maximum amount allowed by law.
2. COMPLIANCE WITH LAWS: The Lessee and Lessor shall each promptly
execute and comply with all statutes, ordinances, rules, orders, regulations and
requirements of the federal, state, county and city governments and of any and
all of their departments and bureaus applicable to said Premises (and in the
case of Lessor, to the Athena Building), for the correction, prevention and
statement of nuisances or other
<PAGE> 3
grievances in, upon or connected with said Promises and the Athena building
during said term, or any renewal thereof.
3. PROVISION OBSERVANCE: The prompt payment of the rent for said
Premises upon the dates named, and the faithful observance of the rules and
regulations described within this Lease, whether set out herein or incorporated
herein by reference, and which are hereby made a part of this covenant, are the
conditions upon which this Lease is made and accepted. Any failure on the part
of the Lessee to comply with the terms of said Lease, or any of
said rules and regulations now in existence, shall, at the option of the
Lessor, work a forfeiture of this contract and all of the rights
of the Lessee hereunder; thereupon the Lessor, its agents or attorneys, shall
have all rights at equity or in law to object and remove all persons
therefrom. Lessee expressly agrees that in the event of an uncorrected
violation of any of the terms of this Lease, or of said rules and regulations
now in existence, or which may hereafter be made, said Lessor, its agent or
attorneys, may immediately begin summary ejectment procedures.
4. TAXES: Lessor agrees to pay, before the same shall become
delinquent, all ad valorem taxes and all other charges, fees or costs imposed
by any governmental or quasi-governmental entity pertaining to or based upon
all of the demised Premises. Lessee will pay all such taxes and charges on
all personal property owned or leased by it and located upon the leased
Premises so that no tax lien of any sort or description against the Lessee
shall become a charge against the Premises.
5. REPAIRS AND MAINTENANCE: Lessor shall, at all times during the
term of this Lease, at its own cost and expense, repair and maintain in a good,
safe and substantial condition, the structural shell of the building, including
the roof and exterior walls, HVAC, and electrical and mechanical systems located
on the Premises, except for damages caused thereto by the negligence of the
Lessee, which shall be its expense to repair. Lessor shall also maintain and
repair the utilities up to the point of entrance to the building and will be
responsible for maintaining the outside grounds, including landscaping and any
limited, common areas designated as such for the general use of any and/or all
tenants of the building. Lessee shall maintain and repair any and all
improvements, additions and alterations thereto located upon the demised
Premises. No improvements, additions and/or alterations may be made to the
Premises except in compliance with Paragraph 12 hereof.
6. UTILITIES: All applications and connections for necessary utility
services on the demised Premises shall be made in the name of Lessee; Lessee
shall be solely responsible
<PAGE> 4
for paying utility charges as they become due, including those for gas and
electricity. Lessor shall provide sewer and water for use by the Lessee at the
rate of $24.28 per month [which is referenced hereinabove in paragraph 1(a)],
in addition to the rent set out hereinabove (with the understanding that this
rate may be adjusted once per year, or at any time that there shall be a
general rate increase of the aforesaid utilities). It is further understood and
agreed that other individual services such as telephone, janitorial, equipment
maintenance, etc., necessary for the Lessee in connection with operating its
business, shall be the sole responsibility of the Lessee. Lessor shall provide
weekly garbage pick-up for use by the Lessee at the rate of $25.43 per month
[which is referenced hereinabove in paragraph 1(a)], in addition to the rent
set out hereinabove, which said rate may be varied annually based upon the
actual cost changes to Lessor of such services.
7. INSURANCE: During the term of this Lease, and any renewals
hereof, Lessor and Lessee shall obtain and maintain, each at its own expense,
the following types of insurance as respectively set out hereinbelow; each
shall name the other thereon as a jointly-insured party:
(a) LIABILITY INSURANCE. Both Lessor and Lessee shall maintain,
at all times during the term hereof, with a responsible insurer licensed to do
business in North Carolina, comprehensive, general, liability insurance against
any loss or liability for damages and any expense of defense against any claim
for damages which might result from the use or occupation or condition of the
Premises, in such amount or amounts as shall not be less than is customary and
usual for operations of the type, character and scope to be carried on by
Lessee on the Premises, but in no event in amounts affording protection of less
than One Million Dollars ($1,000,000) of combined, single-limit coverage for
each occurrence.
(b) PERSONAL PROPERTY. It is understood and agreed that Lessee
shall be responsible for providing insurance coverage on its own personal
property, including, but not limited to, fire, theft or extended insurance
coverage on the personal property or equipment it uses and maintains on the
demised Premises for the purpose of carrying on its business.
(c) HAZARD INSURANCE. Lessor agrees to maintain and pay the
premiums for casualty insurance, including fire and extended coverage, on all
improvements on the demised Premises in an amount of not less than the
replacement cost of said improvements, provided Lessee does not engage in any
type of activity which would increase the rate of insurance on the entire
building because of such activity. In the event Lessee shall carry on such an
activity in the demised Premises,
<PAGE> 5
Lessee shall be responsible for the additional cost of the insurance on the
entire building attributable to such activity. Lessor also reserves the right to
demand that Lessee remedy any such condition which shall cause an increase in
the insurance premium, and Lessee shall remedy such condition within five (5)
days of notice thereof, or such failure shall be deemed an action of default of
this Lease Agreement. In the event of damage or destruction to such extent that
repair or replacement could not be completed within a period of sixty (60) days,
Lessor, at its option, may terminate this Lease Agreement; but, in the event
repair or replacement can be completed within a period of sixty (60) days, then
the Lessor shall be required to make repairs and replacements to the demised
Premises to the same or better condition in which they were immediately prior to
such fire or other such damage or destruction, provided that there are at least
two (2) years remaining on any rental term. During any such repair and
replacement period, Lessee's rent shall abate to the extent of interference with
its normal business during such period.
(d) Subrogation. Each party hereby releases the other from any
claim for recovery for any loss or damage to any of its property which is
insured under valid and collectible insurance policies to the extent of any
recovery collectible under such insurance. It is further agreed that this
waiver shall apply only when permitted by the applicable policy of insurance,
which shall contain provisions for mutual waiver of subrogation, if possible.
8. Successors: This contract shall bind the successors, assigns and/or
legal representatives, as the case may be, the Lessee and Lessor.
9. Default or Breach: Each of the following events shall constitute a
default or breach of this Lease by Lessee:
(a) If Lessee, or any successor assignee of Lessee, while in
possession shall file a Petition in Bankruptcy under any Bankruptcy Act, or
shall voluntarily take advantage of any such Act by answer or otherwise, or
shall make an assignment for the benefit of creditors, or enter into any type of
receivership;
(b) If Lessee shall fail to pay Lessor any rent when the rent shall
become due and shall then fail to make any payment within ten (10) days after
receiving notice from Lessor that it is past due and payable;
(c) If Lessee shall vacate or abandon the demised
<PAGE> 6
(d) If Lessee shall fail to perform any of its obligations under this
Agreement.
10. Effect of Default: In the event of any default hereunder, the Lessor
shall have the right to cancel and terminate this Lease, as well as all of the
right, title and interest of Lessee hereunder, by giving to Lessee not less
than ten (10) days' written notice of cancellation and termination. Lessee
shall have the right to cure such default as may have occurred, during this ten
(10) days' notice period, to the satisfaction of Lessor. On expiration of the
time fixed in the notice, this Lease and the right, title and interest of the
Lessee hereunder shall terminate in the same manner and with the same force and
effect as if the date fixed in the notice of default, cancellation and
termination were the end of the term herein originally determined. Nothing
contained herein shall in any way abrogate any rights which the Lessor shall
have at law or in equity for specific performance or damages as a result of a
breach of this Agreement.
11. Environmental Indemnity: Lessor hereby certifies to Lessee that as of
the time of the beginning of this Lease, it has no knowledge of the presence of
any substances on, or any use of, the Premises which have been in conflict with
any of the environmental laws of the state or nation and that Lessor has never
conducted any activity on the said Premises which has in any way been in
conflict with any of the environmental laws of the state or nation. Lessee
shall be responsible for compliance with all state, federal and local
environmental laws and regulations with respect to the business and the
operations of the business on the Premises. Lessee agrees to indemnify and hold
harmless Lessor, its successors or assigns, against and in respect of, any and
all damages, claims, losses, liabilities and expenses, including, without
limitation, reasonable legal, accounting, consulting, engineering and other
expenses which may be imposed upon or incurred by Lessor, its successors or
assigns, or asserted against Lessor, its successors or assigns, by any other
party or parties (including, without limitation, a governmental entity)
arising out of or in connection with any environmental condition caused or
created by Lessee.
12. No Assignment; Additions: The Lessee shall not assign this Lease, nor
sublet the Premises, or any part thereof, nor make any alterations therein, or
any additions thereto, without the written consent of the Lessor; and all
additions, fixtures or improvements which may be made by Lessee, except movable
furniture and Lessee's equipment, shall become the property of the Lessor and
remain upon the Premises as a part thereof, and be surrendered with the
Premises at the termination of this Lease.
<PAGE> 7
conditions as are provided for herein, with a rental for the period of such
holding over at one and one-half (1.5) times the monthly installment of rent
last paid by Lessee during the term of this Lease.
18. Condemnation: If any part of the demised Premises shall be taken or
condemned for public or quasi-public use (or any transfer is made in lieu
thereof) and a part thereof remains which is suitable for the use contemplated
hereunder, this Lease shall, as to the part so taken, terminate as of the date
title shall be taken by the condemnor and the rent payable hereunder shall be
adjusted so that the Lessee shall be required to pay for the remainder of the
term only such portion of such rental as the value of the part remaining after
the condemnation bears to the whole of the demised Premises at the date of
condemnation. Should all of the demised Premises be taken or condemned, or so
much thereof that the use by Lessee shall be substantially impaired, the Lessee
may thereupon terminate this Lease, and any compensation awarded upon such
condemnation or taking shall be the property of the Lessor. Lessee shall in any
event be entitled to its separate award from the condemning authority, for
which Lessee shall make its own application.
19. Severability: If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or further laws effective during the term
of this Lease, or any extensions hereof, then and in that event, it is the
intention of the parties hereto that the remainder of this Lease shall not be
affected thereby; and it is also the intention of the parties to this Lease
that in lieu of each clause or provision of this Lease that is illegal, invalid
or unenforceable, there be added as a part of this Lease a clause or provision
as similar in terms to such illegal, invalid or unenforceable clause or
provision as may be possible and be legal, valid and enforceable.
20. Subordination and Other Agreements: This Lease is and shall remain
subordinate to all prior leases and to all mortgages which now or may hereafter
affect the real property of which the demised Premises form a part and to all
renewals, modifications, replacements and extensions thereof. This clause shall
be self-operative and no further instrument of subordination shall be required
by any mortgagee. The parties hereto shall be bound by all existing easements,
agreements, restrictions, and encumbrances of record relating to the demised
Premises, and Lessor shall not be liable to Lessee for any damages resulting
from any action taken by holder thereunder. Notwithstanding anything herein to
the contrary, so long as Lessee hereunder shall pay the rent reserve and comply
with, _____ by, and discharge the terms, conditions, covenants and
<PAGE> 8
by employees so as to not take all of the prime spaces for potential customers
of other tenants of the Athena Building.
24. Signs: Lessee shall have the right to erect and maintain signs in
or on the demised Premises at such place or places as Lessor shall choose;
however, the same shall be subject to approval by the Lessor and shall be
subject to the ordinances of the City of Mooresville, the rules and regulations
promulgated by the Lessor for signs, and any prior existing leases of other
tenants located in the Athena Building.
25. Peaceful Enjoyment: Lessor covenants that Lessee shall and may
peacefully have, hold and enjoy the demised Premises, subject to the terms of
this Lease, provided Lessee pays the rent and other sums required to be paid by
Lessee and performs all of Lessee's covenants and agreements herein contained.
26. Memorandum of Lease: Should either party decide to place upon the
public records of Iredel County a record of this Lease Agreement, it shall
prepare and the other party shall promptly execute a Memorandum of Lease
suitable for such recordation.
27. Entire Agreement: This Lease contains the entire agreement between
the parties and cannot be changed or terminated except by written instrument
subsequently executed by the parties hereto. This Lease and the terms and
conditions hereof apply to and are binding on the heirs, legal representatives,
successors and assigns of the parties.
IN WITNESS WHEREOF, ATHENA ASSOCIATES, as "LESSOR," has caused this
instrument to be executed in its name by its Managing partner, ROE, LTD., and
RCB ENTERPRISES, INC., as "LESSEE," has caused this Lease Agreement to be
signed in its corporate name by its duly authorized officers and its corporate
seal to be affixed hereto, all done in duplicate originals, with an original
copy being retained by each of the parties hereto, on the day and year first
above written.
ATHENA ASSOCIATES, LESSOR
BY: ROE, LTD., Managing Partner
BY: /s/ CACILE G. EBERT
--------------------------
Cacile G. Ebert, President
(CORPORATE SEAL)
ATTEST:
/s/ WANDA B. EISELE
- --------------------------
Wanda B. Eisele, Secretary
<PAGE> 9
RCB ENTERPRISES, INC.
LESSEE
(CORPORATE SEAL) BY: /s/ RANDY BAKER
----------------------------
Randy Baker, President
ATTEST:
/s/ NANCY S. BEKES
- ------------------------------------
Secretary
- -----------------------
*********************************************
STATE OF NORTH CAROLINA - IREDELL COUNTY
I, Tracy Lyn Bryan, a notary public of the county and state aforesaid,
do hereby certify that Wanda B. Eisele personally appeared before me this day
and acknowledged that she is Secretary of ROE, LTD., a North Carolina
corporation, Managing Partner of ATHENA ASSOCIATES, the "LESSOR" in the
foregoing instrument; that Cecile G. Ebert is President of said corporation;
that said President signed the foregoing instrument in her presence; and that
the said Secretary attested her signature thereto and affixed the corporate
seal.
WITNESS my hand and official seal, this 2nd day of March, 1995.
/s/ TRACY LYN BRYAN
----------------------------
Notary Public
My Commission Expires 12/5/99
--------------
[NOTARY PUBLIC SEAL]
<PAGE> 10
STATE OF NORTH CAROLINA - NEW HANOVER COUNTY:
I, Robert Granberry Goff, Sr., a notary public of the County and State
aforesaid, do hereby certify that Nancy S. Baker and Randy Baker personally
appeared before me this day and acknowledged that (s)he is ____________
Secretary of RCB ENTERPRISES, INC., a North Carolina, corporation, "LESSEE" in
the foregoing instrument; that Randy Baker is the President of said
corporation, that said President signed the foregoing instrument in his(her)
presence; and that the said _____________ Secretary attested his(her) signature
thereto and affixed the corporate seal.
WITNESS my hand and official seal, this 6 day of March, 1995.
/s/ ROBERT GRANBERRY GOFF, SR.
-----------------------------------
Notary Public
My Commission Expires: 6-4-1995
----------
<PAGE> 11
LAKESIDE PARK
LEASE RATE 4,830 SF
SUITES 8A, 8B, 9A, 9B & 10B
3 YEAR LEASE W/ 5% INCREASES YEARLY
1,830 SF OFFICE UPFIT @ $9.50
3,000 SF WAREHOUSE @ $4.50
LEASE RATE = *$2,573.75 MONTHLY
$30,885 YEARLY
* Plus $20.29 monthly water and sewer $21.25 for garbage pick up and $32.36
monthly charge for common area maintenance. Total monthly costs = $2,647.65
- Rent includes: hazard insurance on shell of building and property taxes.
- All utilities are based on individual meters for the separate units with
the exception of water. There will be a $20.29 monthly fee added for
water and sewer charges
- 200 amp electrical with 3 phase capabilities
- Receptacles every 20-25 feet in warehouse
- 3 dock high available
- First months rent and one months security deposit upon signing the lease
agreement
<PAGE> 12
LAKESIDE PARK
ADDENDUM TO LEASE AGREEMENT
BETWEEN ATHENA ASSOCIATES AND RCB ENTERPRISES
It is agreed between Athena Associates and RCB Enterprises that in order to
defray the costs of the additional upfits of the premises to tenant
specifications, tenant agrees to pay the additional sum of $798.00 per
month for the remainder of the lease term.
Acknowledged and agreed by: /s/ CECILE EBERT
---------------------------------------
Cecile Ebert, Pres., ROE Ltd.,
managing partner Athena
Associates
Date: 12/13/95
----------
Acknowledged and agreed by: /s/ RANDY BAKER
---------------------------------------
Randy Baker, Pres., RCB
Enterprises
Date: 12/15/95
----------
<PAGE> 1
EXHIBIT 10.9.6
LEASE AGREEMENT
STATE OF NORTH CAROLINA
COUNTY OF MECKLENBURG
1. PARTIES
This agreement, together with any extensions or amendments, hereinafter
called "LEASE", is entered into this the 30th day of July,1 997, by and between
NANCO I, LLC hereinafter called "LANDLORD" and Diamond Sports Group hereinafter
called "TENANT".
2. PREMISES
Subject to the terms, conditions and agreements to be performed by TENANT
set forth in this LEASE, hereinafter called "Covenants", LANDLORD leases to
TENANT the following premises, ("PREMISES"), for the term provided below. The
PREMISES are located in the Town of Indian Trail, Union County, and State of
North Carolina, and are more particularly described as follows: 123 Associate
Lane, Indian Trail Business Park, Indian Trail, NC 28079. Also described as lot
10 on exhibit A, Indian Trail Business Park, Phase I.
3. COMMON AREAS
3.01 TENANT and its employees, agents, invitees and licensees are granted
the right, in common with others, to the use, as available, of the parking
areas, sidewalks, driveways, loading platforms and ramps and other facilities
located at 123 Associates Lane, Indian Trail Business Park, Indian Trail, NC
28079 and designated for the common use of tenants (collectively called "Common
Areas"). LANDLORD may modify easements relating to or close portions of such
Common Areas, or enlarge, diminish or rearrange the location and arrangement of
the Common Areas, as LANDLORD shall see fit, provided that TENANT's use of the
PREMISES shall not be adversely affected thereby.
3.02 LANDLORD shall have the right to adopt rules and regulations relating
to the use of Common Areas by TENANT, and to modify or amend such rules and
regulations as in its judgment from time to time is necessary for the
preservation of good order.
4. TERM AND POSSESSION
4.01 The term of this LEASE shall be for a period of 29 months to commence
on August 1, 1997, and to terminate on December 31, 1999, unless sooner
terminated as hereinafter provided.
4.02 LANDLORD shall deliver possession of the PREMISES to TENANT on the
commencement date of this LEASE or at such time as this LEASE is fully executed
by both parties, if later.
4.03 The delivery of possession of the PREMISES to TENANT is contingent
upon LANDLORD having lawful possession of the PREMISES as of the commencement
date of this LEASE. If TENANT is not given possession on or before the rent
commencement date, Base Monthly Rent will not commence until the date
possession is delivered to TENANT, but such late delivery shall have no effect
on the expiration date of the LEASE term, and LANDLORD shall have no liability
for the delay.
4.04 TENANT agrees that LANDLORD has no obligation to make any improvement
or modifications to the PREMISES, except those modifications shown on
Attachment C and that TENANT shall accept possession of the PREMISES in an "AS
IS" condition.
4.05 See Attachment B.
5. HOLDING OVER
Holding over after the expiration of the original term of this LEASE, or
after the expiration of any extended term, with the consent of LANDLORD but
1
<PAGE> 2
without a written agreement shall constitute an extension of this LEASE on a
month-to-month basis with either party having the right to terminate this LEASE
at the end of any calendar month upon thirty (30) days prior written notice to
the other. If TENANT holds over without the consent of LANDLORD, there shall be
no extension of this LEASE by operation of law, and TENANT shall be liable to
LANDLORD for all damages resulting from its wrongful holdover. Any holdover
occupancy shall be subject to the same covenants as set forth in this LEASE
except for Base Monthly Rent which shall be equal to 150% of the highest Base
Monthly Rent payable during the original term or immediately preceding extended
term.
6. BASE MONTHLY RENT/ADDITIONAL MONTHLY CHARGES
TENANT agrees to pay LANDLORD "Base Monthly Rent" for the PREMISES,
as well as additional monthly charges payable under Article 8, in accordance
with the following schedule:
<TABLE>
<CAPTION>
BASE
MONTHLY ADDITIONAL MONTHLY
PERIOD RENT CHARGES* TOTAL ANNUALLY
- ------ ---- -------- ----- --------
<S> <C> <C> <C> <C>
8-1-97 to 12-31-99 $ 3,633.33 $ 3,633.33 $ 43,599.96
</TABLE>
7. TIME AND PLACE OF PAYMENT
7.01 Base Monthly Rent and other charges are payable monthly in
advance; THEY ARE DUE THE FIRST DAY OF EACH CALENDAR MONTH. If the rent
commencement date of this LEASE begins on a day other than the first day of a
calendar month, Base Monthly Rent and other charges for the first partial month
shall be prorated on a per diem basis. Notwithstanding anything contained
herein to the contrary, the first partial or full monthly payment shall be paid
upon execution and delivery of this LEASE to LANDLORD.
7.02 Any installment of Base Monthly Rent or other charges due under
the Covenants of this LEASE not paid within ten (10) days of its due date shall
be subject to a late charge of five percent (5%) of the amount due.
7.03 Base Monthly Rent or other charges due under the Covenants of
this LEASE are payable to LANDLORD by mail or hand delivery at 215 QUEENS ROAD,
CHARLOTTE, NC 28204, or at such other place as LANDLORD may designate in
writing to TENANT.
8. TAXES/OTHER ASSESSMENTS
8.01. TENANT shall reimburse LANDLORD for TENANT's share of all
Texas, in excess of the base year taxes, that are payable against the land,
buildings and improvements comprising the PREMISES, and for annual installments
of special assessments (including interest) payable against the PREMISES, during
each calendar year during any part of which the term of this lease is in
effect. The Real Estate Taxes (ad valorem) for the base year is $2,200.00
TENANT's share of such costs shall be based on the ratio the total square foot
area of the leased premises bears to the total square foot, rentable floor area
in the PREMISES, but excluding portions of buildings for which such taxes and
assessments are directly allocated to their tenants. TENANT's share of the
first and last calendar years of the lease term shall be prorated based upon
the number of days of said calendar year during which the term of this lease is
in effect. TENANT shall pay all personal property and other taxes on its
property in the leased premises.
"Real Estate Taxes" shall mean all taxes, assessments, levies, or
charges, whether special, extraordinary, or otherwise and whether foreseen or
unforeseen, which may be levied, assessed or imposed on (1) the ownership of
and/or all other taxable interest in all land upon which the Building is
situated; (2) all Buildings, structures and other improvements situated
thereon; and (3) rents or rental income whether such tax
<PAGE> 3
be levied on the LESSOR or the LESSEE. The amount of Real Estate Taxes upon
which such payment is based shall be the most current notice of assessment or
tax bill concerning the entire Building, or if there are none, such amount as
LESSOR may reasonably estimate. Should the taxing authorities include in such
Real Estate Taxes the value of any improvements made by LESSEE, or include
machinery, equipment, fixtures, inventory, or other personal property of LESSEE,
then LESSEE shall also pay the entire Real Estate Taxes for such items. If the
amount paid by LESSEE for Real Estate Taxes exceeds the actual amount due (as
determined from the notice of assessment or tax bill actually covering the
period in question), the excess shall be credited on LESSEE's next succeeding
payment pursuant to this Section. If the amount paid by LESSEE is less than said
actual amount due, LESSEE shall pay the LESSOR the deficiency within ten (10)
days after notice from LESSOR. A tax bill submitted by LESSOR to LESSEE shall
be conclusive evidence of the amount of taxes assessed or levied, as well as the
items taxed. LESSEE at all times shall be solely responsible for and shall pay
before delinquent all municipal, county or state or federal taxes assessed
against any leasehold interest or any personal property of any kind owned,
installed, or used by LESSEE.
8.03 In addition, LANDLORD shall pay, if billed directly to LANDLORD,
all other fees, taxes, charges, or assessments of any kind (collectively,
"fees") that may be imposed upon the PREMISES by any governmental authority or
public utility, including but not limited to storm water runoff fees and trash
collection fees. TENANT shall pay to LANDLORD, as additional rent, its
proportionate share of such fees, calculated on an equitable basis agreed upon
by LANDLORD and TENANT. If such fees are imposed on a monthly basis by the
governmental authority or public utility, TENANT shall pay its share of such
fees to LANDLORD monthly, together with its monthly installment of Base Monthly
Rent. All fees billed directly to TENANT shall be paid by TENANT. TENANT shall
pay all ad valorem taxes levied upon TENANT'S Personal Property (defined in
Article 17) located in or on the Premises.
8.04 The Base Rental shall be adjusted in accordance with the terms
and conditions of the following.
The Base Rental stated in Section 6 shall be adjusted on each anniversary
of the Commencement Date to reflect any increase (but not any decrease) in the
numerical index of the "Consumer Price Index for Urban Wage Earners and
Clerical Workers - U.S. City Average. All Items" (1982-4 = 100) published by
The Bureau of Labor Statistics of the United States Department of Labor (the
"Index"). Tenant shall pay Landlord such "Adjusted Base Rental" to reflect
increases in the Index in accordance with this Section.
The amount of the Adjusted Base Rental payable during the lease year
commencing on the first anniversary of the Commencement Date shall be calculated
by multiplying the Base Rental by a fraction, the numerator of which is the
Index for the month of the first anniversary of the Commencement Date and the
denominator of which is the Index level for the month of the Commencement Date.
The Adjusted Base Rental for each successive lease year shall be calculated by
multiplying the adjusted Base Rental for the immediately preceding lease year by
a fraction, the numerator of which is the Index for the beginning month of the
new lease year and the denominator of which is the Index for the beginning month
of the immediately preceding lease year. In no event shall the Adjusted Base
Rental for any lease year be less than the Base Rental or Adjusted Base Rental
for the Preceding year.
As soon as practicable after the publication of the Index for the month of
each anniversary of the Commencement Date, Landlord shall furnish to Tenant a
statement setting forth the Adjusted Base Rental payable by Tenant during the
next lease year (or partial lease year) of this Lease. Such adjusted Base
Rental shall be payable in equal monthly installments in advance on the first
day of each calendar month during the next lease year. In the event the
Adjusted Base Rental statement is not furnished Tenant by the anniversary of
the Commencement Date, Tenant shall continue to pay monthly installment of Base
Rental (or Adjusted Base Rental, if applicable); provided, however, once Tenant
is furnished the Adjusted Base Rental statement, Tenant agrees to pay the
Landlord with the
<PAGE> 4
next due rental installment the amount of the rental increase for the previous
months of the lease year for which rental increases were applicable but not
paid.
In the event that the Bureau of Labor Statistics shall change the base
period (now 1982-4 - 100), the new index numbers shall be substituted for the
old index numbers in making the calculations provided for in this Section 8.06.
It is agreed that in the event the aforesaid Index is discontinued or revised,
such other index as replaces the Index shall be used in order to obtain
substantially the same result as would be obtained if there had been no such
discontinuation or revision. If there shall be no such other index, the parties
shall accept a comparable statistical index of the purchasing power of the
consumer dollar as published at the time of such discontinuation or revision
by a responsible financial periodical or recognized authority. Any dispute
between the parties regarding any such discontinuation or revision shall be
determined by arbitration in accordance with the rules of the American
Arbitration Association then prevailing.
9. SECURITY DEPOSIT
9.01 TENANT shall deposit with LANDLORD upon execution of this
LEASE the sum of $3,633.33 as the security deposit for the performance of
TENANT's Covenants hereunder, including the payment of rent. The security
deposit shall not be considered as an advance payment of rent or as a measure of
the loss, cost, damage, or expense which is or may be sustained by LANDLORD. In
the event of a default by TENANT, LANDLORD at its option, may apply all or a
portion of the security deposit as may be necessary to cure the default. If
LANDLORD shall apply any portion of the security deposit to cure a default,
TENANT shall thereupon redeposit with LANDLORD such amount as is required so
that LANDLORD will have the full security deposit on hand at all times during
the term of this LEASE. Upon termination of this LEASE, provided TENANT is not
in default, LANDLORD shall refund to TENANT any then remaining balance of the
security deposit without interest. In case of a sale of the PREMISES, LANDLORD
shall pay over the unapplied portion of the security deposit to the new owner,
and from and after such transfer, LANDLORD shall be relieved of all liability
with respect to the security deposit.
9.02 TENANT shall deposit with LANDLORD upon execution of this
LEASE the sum of $3,633.33 as an additional security deposit for the
performance of TENANT's Covenants hereunder. This additional security deposit
shall apply as the November, 1997 rental payment.
10. USE OF PREMISES / HAZARDOUS MATERIALS
10.01 TENANT shall occupy and use the PREMISES for offices and
warehouse and as a distribution center for sports and corporate properties no
other purpose unless LANDLORD has specifically consented thereto in writing.
10.02 TENANT shall not use the PREMISES for any purpose that will
increase the fire or other insurance rates on the PREMISES above those
established for the use described above, and shall comply with all laws,
ordinances, rules and regulations of any public authority having jurisdiction
over the PREMISES.
10.03 No sound shall be emitted from the PREMISES which is
unreasonably loud or annoying; and no odor shall be emitted from the PREMISES
which is or might be noxious or offensive to others adjacent to the PREMISES
or on contiguous or nearby property.
10.04 TENANT shall not attach anything to the walls or doors of
the PREMISES with double-sided tape, glue or other type adhesives.
10.05 TENANT shall not maintain animals or birds in the PREMISES
or in the Common Areas.
10.06 TENANT shall not use kerosene or similar fluid-type space
heaters in the PREMISES unless specifically approved by LANDLORD in writing.
10.07 TENANT shall not bring onto the PREMISES or Common Areas any
Hazardous Materials (as defined below) without the prior written approval by
LANDLORD. Any approval must be preceded by submission to LANDLORD of appropriate
4
<PAGE> 5
Material Safety Data Sheets (MSD Sheets). In the event of approval by LANDLORD,
TENANT covenants that it will (1) comply with all requirements of any
constituted public authority and all federal, state and local codes, statutes,
ordinances, rules and regulations, and laws, whether now in force or hereafter
adopted relating to TENANT's use of the PREMISES, or relating to the storage,
use, disposal, processing, distribution, shipping or sale of any hazardous,
flammable, toxic, or dangerous materials, waste or substance, the presence of
which is regulated by a federal, state or local law, ruling, rule or regulation
(hereinafter collectively referred to as "Hazardous Materials"); (2) comply
with any reasonable recommendations by the insurance carrier of either LANDLORD
or TENANT relating to the use by TENANT on the PREMISES of such Hazardous
Materials; (3) refrain from unlawfully disposing of or allowing the disposal of
any Hazardous Material upon, within, about or under the PREMISES or Common
Areas; and (4) remove all Hazardous Materials from the PREMISES, either after
their use by TENANT or upon the expiration or earlier termination of this LEASE,
in compliance with all applicable laws.
10.08 TENANT shall be responsible for obtaining all necessary permits in
connection with its use, storage and disposal of Hazardous Materials, and shall
develop and maintain, and where necessary file with the appropriate
authorities, all reports, receipts, manifests, filings, lists and invoices
covering those Hazardous Materials and TENANT shall provide LANDLORD with
copies of all such items upon request. TENANT shall provide within five (5)
days after receipt thereof, copies of all notices, orders, claims or other
correspondence from any federal, state or local government or agency alleging
any violation of any environmental law, or regulation by TENANT, or related in
any manner to Hazardous Materials. In addition, TENANT shall provide LANDLORD
with copies of all responses to such correspondence, at the time of the
response.
10.09 TENANT hereby indemnifies and holds harmless LANDLORD, its
successors and assigns from and against any and all losses, liabilities,
damages, injuries, penalties, fines, costs, expenses and claims of any and
every kind whatsoever (including attorney's fees and costs, expenses or claims
asserted or arising under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, from time to time, and
regulations promulgated thereunder, any so-called state or local "Superfund" or
"Superlien" law, or any other federal, state or local statute, law, ordinance,
code, rule, regulation, order or decree regulating, relating to, or imposing
liability or standards of conduct concerning any Hazardous Materials) paid,
incurred or suffered by, or asserted against, LANDLORD as a result of any
claim, demand or judicial or administrative action by any person or entity
(including governmental or private entities) for, with respect to, or as a
direct or indirect result of, the presence on or under or the escape, seepage,
leekage, spillage, discharge, emission or release from the PREMISES, or Common
Areas of any Hazardous Materials caused by TENANT or TENANT'S agents,
employees, invitees or successors in interest. This indemnity shall also apply
to any release of Hazardous Materials caused by a fire or other casualty to the
PREMISES or Common Areas if such Hazardous Materials were stored on the
PREMISES by TENANT, its agents, employees, invitees, or successors in interest.
10.10 If TENANT fails to comply with the Covenants to be performed
hereunder with respect to Hazardous Materials, or if an environmental protection
lien is filed against the PREMISES or Common Areas as a result of the actions of
TENANT, its agents, employees or invitees, then the occurrence of any of such
events shall be considered a default hereunder, and if such default shall not be
cured as provided in Paragraph 22.01, LANDLORD shall have such rights and be
permitted to exercise such remedies for such default as set forth in Article 22
(DEFAULT AND REMEDIES) of this LEASE.
10.11 TENANT will give LANDLORD prompt notice of any release of Hazardous
Materials, reportable or non-reportable, to federal, state or local authorities,
of any fire, or of any damage occurring on or to the PREMISES, the building of
which the PREMISES are a part, or any portion of the Common Areas.
10.12 TENANT will use and occupy the PREMISES and conduct its business
<PAGE> 6
in such a manner that the PREMISES are neat, clean and orderly at all times
with all chemicals or Hazardous Materials marked for easy identification and
stored according to all codes as outline above.
10.13 The warranties and indemnities contained in this Article 10
shall survive the termination of this LEASE.
11. UTILITIES/SERVICES
11.01 During the term of this LEASE, TENANT shall pay all charges for
utilities and/or services to the PREMISES that are metered separately or that
are available to TENANT. These include, but are not limited to, gas,
electricity, garbage disposal, telephone, and water/sewer charges.
11.02 LANDLORD shall have no liability to TENANT for disruption,
interruption, or curtailment of any utility or service to the PREMISES, whether
or not furnished at LANDLORD's expense.
11.03 TENANT shall take steps to transfer all utilities into its name
effective upon the commencement date of this LEASE, or at such time TENANT is
given possession of the PREMISES, if later.
11.04 Should Utilities be discontinued due to no fault of DSG. Rent
shall be abated accordingly.
12. MAINTENANCE BY LANDLORD
Except as provided in Paragraph 13.01, LANDLORD agrees, at its expense, to
maintain and keep in good repair the structural portions, exterior walls,
roofing and guttering of the PREMISES. LANDLORD shall correct any system that
is defective or deficient (not through the negligence of tenant).
13. MAINTENANCE BY TENANT
13.01 TENANT shall be responsible for the maintenance, repair and/or
replacement of any structural portions, exterior walls, roofing and guttering
of the PREMISES or any portion of the Common Areas if the necessity therefor is
occasioned by or through the negligence, abuse, or omissions of TENANT, its
agents, contractors, and invitees.
13.02 TENANT will maintain and keep the PREMISES in good order,
condition and repair, and will repair and/or replace, if needed, all other
parts of the PREMISES which are not the responsibility of LANDLORD, including,
but not limited to, heating, ventilating, and air conditioning (HVAC)
equipment, plumbing, electrical and other systems, including lighting fixtures,
and windows and doors of all types. The duty of TENANT to maintain the HVAC
systems in good order and repair shall specifically include without limitation
the duty to inspect same and replace filters therein as needed and to perform
regular periodic servicing.
13.03 TENANT shall be responsible for keeping the grounds including
the steps, ramps, loading platforms, etc. immediately in front of the PREMISES
(and to the rear, if applicable) free and clear of trash, debris, and weed
growth, and snow and/or ice at all times in order to keep the PREMISES in a
neat, presentable, and safe condition. TENANT will take steps to keep trash and
debris from blowing onto areas of neighboring tenants. TENANT shall not store
any item or abandon pallets or other unsightly items on the exterior (Common
Areas) of any building of which the premises are a part.
13.04 If damage shall occur to the parking lot and such damage is
caused by trash removal trucks contracted for by TENANT, then TENANT shall pay
to repair such damage.
13.05 If any maintenance or repairs which are required to be
undertaken by TENANT under this LEASE are not completed within ten (10) days
after such need arises or after notice from LANDLORD, or in the event of an
emergency, if such maintenance or repairs are not undertaken immediately, then
LANDLORD shall have the right (but not the obligation) to enter upon the
PREMISES and undertake the necessary maintenance or repairs on behalf of and at
the expense of TENANT. TENANT shall pay to LANDLORD the reasonable costs of
such maintenance or repairs within ten (10) days after written demand therefor,
as additional rent. Notwithstanding the foregoing, if any maintenance or
repairs required to be undertaken by TENANT cannot be completed within ten (10)
days, then LANDLORD shall have no self-help rights so long as TENANT prosecutes
the maintenance or repairs with due diligence and keeps LANDLORD fully informed
on the progress of
6
<PAGE> 7
said maintenance or repairs.
14. RETURN OF PREMISES TO LANDLORD
14.01 TENANT will return the PREMISES peaceably and promptly to
LANDLORD at the expiration of this LEASE, or earlier termination thereof, in as
good condition as they were at the commencement of this LEASE, ordinary wear
and tear and loss by fire and other casualty excepted.
14.02 TENANT will return the PREMISES in "broom-clean" condition
(free and clear of all Personal Property), and return all keys to LANDLORD.
14.03 At termination of this LEASE, all lighting fixtures and
lighting tubes and/or bulbs shall be returned to LANDLORD in good working
order.
14.04 At no time during the term of this LEASE shall TENANT have
the electrical service disconnected without first notifying LANDLORD of its
intent to do so and giving LANDLORD the opportunity to have the service
transferred into its name.
15. PARKING
TENANT understands and agrees that its parking shall be restricted to
the area immediately in front, and if applicable, to the rear of its PREMISES.
TENANT shall not park in a manner which would block or restrict the access of
other tenants to their leased premises.
16. ALTERATIONS
TENANT shall not make any alterations or improvements to the PREMISES
without submitting plans and specifications for such work for the prior written
consent of LANDLORD. In the event of such consent, TENANT will have the work
completed in good and workmanlike manner (meeting all local, state, federal, or
other codes) by a licensed contractor acceptable to LANDLORD, carrying adequate
general comprehensive liability insurance and workmen's compensation insurance.
All alterations and improvements, including any modifications to the electrical
system, will become property of the LANDLORD and shall remain thereon at the
termination of this LEASE unless LANDLORD notifies TENANT that it will be
required to remove alterations or improvements and restore the PREMISES to its
prior condition. TENANT shall pay to LANDLORD as additional rent any increase in
ad valorem taxes as a result of any alterations or improvements.
17. PERSONAL PROPERTY/TRADE FIXTURES
TENANT shall store all of its trade fixtures, inventory,signs and
other personal property (collectively called "Personal Property") at its own
risk. LANDLORD and its agents, employees and contractors shall not be liable
for, and TENANT releases LANDLORD from, all claims for loss or damage to
TENANT'S Personal Property, no matter how caused. Provided TENANT is not then
in default hereunder, TENANT shall have the right to remove all Personal
Property from the PREMISES prior to the termination of this LEASE. If such
removal of TENANT's Personal Property results in any damage to the PREMISES,
TENANT, at its expense, agrees to make repairs needed in order that the
PREMISES shall be restored to the condition in which they were at the
commencement of this LEASE.
18. ABANDONMENT
TENANT shall not abandon the PREMISES at any time during the LEASE
term. If TENANT shall abandon the PREMISES or be dispossessed by process of
law, any Personal Property belonging to TENANT and left on the PREMISES shall,
at the option of LANDLORD, be deemed abandoned, and available to LANDLORD to
use or sell to offset any rent due or any expenses incurred by removing same
and restoring the PREMISES.
19. INSURANCE
19.01 LANDLORD shall keep in force, during the full term of this
LEASE, a policy of fire and extended coverage insurance covering the
building(s) containing the PREMISES with coverage in an amount not less than
90% of the
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<PAGE> 8
replacement cost of the building(s). At LANDLORD's option, LANDLORD shall
maintain additional coverages in order to further protect its interest in the
building, e.g. "special extended perils" coverage or "all-risk" coverage. TENANT
shall pay any increased premiums for LANDLORD's property insurance coverage, if
such increase in caused by TENANT's use or occupancy of the PREMISES.
19.02 TENANT shall keep in force, during the full term of this LEASE, the
following insurance coverage:
(a) workman's compensation insurance in amounts required by law.
(b) a policy of commercial general liability insurance (1986 ISO Form or its
equivalent) with a combined single limit of not less than $1,000,000.00 for
each occurrence and not less than $2,000,000.00 in the aggregate. Said policy
shall also include coverage for fire and extended coverage legal liability with
limits of not less than $50,000.00 for each occurrence. Said policy shall be
issued by a nationally recognized insurance company authorized to do business
in North Carolina with a rating of not less than A:8 by A.M. Best Company. Said
policy shall name LANDLORD as an "additional insured" (with a contractual
liability endorsement) and provide that it shall not be canceled, non-renewed
or modified in any material respect unless and until LANDLORD is given at least
fifteen (15) days' notice in writing by the insurance company.
(c) a "special extended perils" and/or "all risk" policy of insurance covering
TENANT's improvements, trade fixtures, equipment, inventory and other Personal
Property located in or on the PREMISES, providing coverage to the extent of at
least ninety percent (90%) of the replacement cost of such property. LANDLORD
shall not be obligated to insure any Personal Property of TENANT placed in or
on the PREMISES.
19.03 TENANT shall furnish to LANDLORD, prior to occupancy, a copy of the
insurance policy or policies outlined in Paragraph 19.02, or certificates of
insurance evidencing same. At least fifteen (15) days prior to expiration of
any insurance policy, TENANT shall furnish LANDLORD with proof of renewal or
with proof of new coverage.
19.04 TENANT, its assignees and sublessees shall protect, defend,
indemnify and hold LANDLORD harmless from any and all liability, damages and
expenses, including court costs and attorney's fees, arising, directly or
indirectly, from any claim, demands, and judgments related to TENANT's use or
occupancy of the PREMISES and/or Common Areas.
20. MUTUAL WAIVERS; WAIVER OF SUBROGATION
LANDLORD and TENANT hereby release each other from any and all
liability or responsibility to the other or anyone claiming through or under
them by way of subrogation or otherwise for any loss or damage to property
caused by fire or any other perils insured in policies of insurance covering
such property actually maintained by the releasing party, or required to be
maintained by such party under Article 19 above, even if such loss or damage
shall have been caused by the fault or negligence of the other party, or anyone
for whom such party may be responsible. TENANT's policies of hazard insurance
on its Personal Property shall contain a waiver of subrogation endorsement in
favor of LANDLORD and copies of same shall be delivered to LANDLORD upon
request.
<PAGE> 9
21. QUIET POSSESSION
LANDLORD covenants that it is the lawful owner of the PREMISES and has
the authority to enter into this LEASE with TENANT. LANDLORD agrees that TENANT
shall enjoy peaceful and quiet possession of said PREMISES during the term
hereof so long as TENANT performs the Covenants set forth in this LEASE.
22. DEFAULT AND REMEDIES
22.01 If TENANT shall default in payment of any rent or other sum
of money becoming due hereunder for a period of five (5) days after notice of
such default has been given to TENANT, or if TENANT shall default in
performance of any other Covenant of this LEASE and does not remedy such
default within ten (10) days after written notice thereof or does not within
such ten (10) days commence such act or acts as shall be necessary to remedy
such default and complete such act or acts promptly, or if TENANT shall be
adjudicated as bankrupt, or file in any court a petition in bankruptcy, or file
or have filed against it a petition for the appointment of a receiver or
trustee for all or substantially all of the assets of TENANT, or make an
assignment for the benefit of creditors, or if TENANT shall vacate or abandon
the PREMISES or any substantial part thereof, or suffer the LEASE or the
PREMISES, or any substantial part thereof, to be taken or encumbered under any
legal process and such taking or encumbrance is not dissolved within fifteen
(15) days, then in any of such events LANDLORD shall have all of the rights and
remedies permitted by law including, but not limited to, the right to evict
TENANT by summary proceedings and the right and option to remove all persons
and property from the PREMISES and dispose of or store such property as it sees
fit, all in accordance with applicable legal process. Following a default by
TENANT, LANDLORD may either terminate this LEASE, or it may terminate TENANT's
right to possession of the PREMISES, and re-enter the PREMISES, make such
repairs and alterations as are necessary to relet the PREMISES, and relet the
PREMISES for such terms and at such rent and upon such other terms and
conditions as LANDLORD may deem advisable. No re-entry by LANDLORD shall be
construed as an election to terminate this LEASE unless a written notice of
termination is given by LANDLORD to TENANT. In the event of any termination of
this LEASE, LANDLORD may recover from TENANT all damages resulting from the
breach, including, but not limited to, the present value of the difference
between: (1) the Base Monthly Rent and other sums that would be payable by
TENANT for the remainder of the term of this LEASE; and (2) the reasonable
rental value of the PREMISES for the remainder of the term of this LEASE. If
LANDLORD re-enters the PREMISES without terminating this LEASE, TENANT shall
remain liable for the payment of Base Monthly Rent and other sums payable under
this LEASE as and when they come due, but shall be entitled to a credit equal
to the amounts actually received by LANDLORD from reletting the PREMISES (net
of LANDLORD's expenses incurred in recovering possession of and reletting the
PREMISES).
22.02 In the event of any default by TENANT, whether or not
LANDLORD terminates this LEASE or TENANT's right to possession of the PREMISES,
TENANT shall be liable to LANDLORD for all costs LANDLORD shall incur in
repossessing or reletting the PREMISES or collecting sums due to LANDLORD,
including court costs and reasonable attorney's fees, together with interest
thereon at the rate of eighteen (18%) percent per annum from the date upon
which any such expense shall have been incurred.
22.03 TENANT understands and agrees that waiver by LANDLORD of
any default or breach of any Covenant herein shall not be construed to be a
waiver of that Covenant or of any subsequent breach thereof. In particular, the
acceptance of rent by LANDLORD without knowledge of the breach of any Covenant
of this LEASE shall not be deemed a waiver of such breach.
23. DAMAGE OR DESTRUCTION
23.01 If the PREMISES are destroyed or substantially damaged so
that the PREMISES cannot be repaired within sixty (60) days, as determined by
LANDLORD, then LANDLORD may elect to terminate this LEASE by giving written
notice to
9
<PAGE> 10
TENANT within thirty (30) days following the damage. If there are less than six
(6) months remaining under the term of this LEASE as of the date of damage, then
TENANT may elect to terminate this LEASE by giving written notice to LANDLORD
within thirty (30) days following the damage.
23.02 TENANT shall give immediate written notice to LANDLORD of
any damage to the PREMISES caused by fire or other casualty. If LANDLORD or
TENANT does not elect to terminate this LEASE as provided under Paragraph
23.01, LANDLORD shall proceed with reasonable diligence, at LANDLORD's expense,
to repair and rebuild the PREMISES to substantially the same condition which
existed prior to the occurrence of said damage or casualty; provided, however,
that in no event will LANDLORD be required to expend in excess of the fire and
extended coverage insurance proceeds actually received as a result of said
damage or casualty.
23.03 If the LEASE is not terminated as provided under Paragraph
23.01, TENANT shall be entitled to a proportionate abatement of rent to the
extent of area damaged until TENANT regains use of the damaged area.
23.04 If the LEASE is terminated as provided under Paragraph
23.01, all payments of Base Monthly Rent and other sums due shall cease as of
the date of the damage, and all proceeds of any hazard insurance maintained by
LANDLORD under Paragraph 19.01 shall be the exclusive property of LANDLORD.
24. EMINENT DOMAIN
If a portion of the PREMISES or Common Areas is taken for any public
or quasi-public use under any governmental law, ordinance or regulation or by
right of eminent domain or by private purchase in lieu thereof, and such taking
has a material adverse effect on TENANT's operations in the PREMISES, then
either party hereto shall have the right to terminate this LEASE effective on
the date physical possession is taken by the condemning authority, by giving
written notice to the other party within thirty (30) days. If neither party has
elected to terminate this LEASE following such a taking, LANDLORD, at its own
expense (provided LANDLORD's first mortgage lender has made the proceeds of
condemnation available to LANDLORD for rebuilding) will repair and restore the
PREMISES to a tenentable condition, and the rent to be paid by TENANT hereunder
shall be proportionately and equitably reduced. TENANT hereby expressly waives
all rights to an award resulting from an eminent domain action affecting the
PREMISES, whether such award is compensation for damages to LANDLORD's or
TENANT's interest in the PREMISES, except that TENANT shall have the right to
pursue a separate award from the condemning authority for compensation or
damages for its Personal Property.
25. SUBORDINATION
This LEASE is subject and subordinate to any and all mortgages, deeds
of trust, or ground or underlying leases now or hereafter placed on the
PREMISES or the property of which the PREMISES are a part, provided TENANT's
quiet possession of the PREMISES under the Covenants of this LEASE shall not be
disturbed. This Paragraph shall be self-operative without any further
instrument necessary to effect such subordination; provided, however, if
requested by LANDLORD, TENANT shall promptly execute and deliver to LANDLORD
any such instrument evidencing subordination or the assignment of this LEASE as
additional security for any such mortgages, deeds of trust or leases.
26. ESTOPPEL CERTIFICATE
Within ten (10) days after a request by LANDLORD or any lender of
LANDLORD having an interest in the PREMISES, TENANT shall deliver a written
estoppel certificate, in form supplied by or acceptable to LANDLORD or such
lender, certifying any facts that are then true with respect to this LEASE. It
is the intent that any such certificate delivered pursuant hereto may be relied
upon by any prospective purchaser of the interest of LANDLORD in the PREMISES
or any part thereof, or by any lender or prospective lender having or intending
to obtain a security interest in the PREMISES, or by any landlord or
prospective landlord under any ground or underlying lease affecting the
PREMISES.
<PAGE> 11
27. ENTRY BY LANDLORD
LANDLORD and those persons authorized by it shall have the right to enter
the PREMISES at any time in the event of an emergency and at all reasonable
times otherwise for the purposes of inspection or making repairs or alterations
as may be deemed necessary or desirable by LANDLORD. In addition, during the
last six (6) months prior to the expiration of this LEASE, LANDLORD shall have
the right to enter the PREMISES during business hours, upon reasonable advance
notice, for the purpose of exhibiting the PREMISES to prospective tenants or
purchasers. TENANT agrees to cooperate with LANDLORD or LANDLORD's agent in
this respect.
28. SIGNS
28.01 TENANT shall have the right to erect reasonable and normal signage
relating to its business activities. The care and maintenance of such signage
shall be the responsibility of TENANT and shall remain the property of the
TENANT. However, LANDLORD, shall have the sole right to approve the size, type,
placement, and method of installation of any signage.
28.02 It is agreed that TENANT shall not paint any sign or affix any sign
with mastic at similar product on the exterior walls of the PREMISES or the
building of which the PREMISES are a part. If TENANT shall erect or have erected
any sign on an exterior wall or window, and if TENANT shall vacate the PREMISES
for any reason, it shall remove all signs so erected and repair any damage to
the PREMISES occasioned by the installation and removal.
28.03 LANDLORD or its designated agent(s) shall have the right to install
"For Lease" and/or "For Sale" sign(s) on the PREMISES during the last six
months of the LEASE term.
29. ASSIGNING AND SUBLETTING
29.01 TENANT shall not assign, mortgage, or encumber this LEASE, nor
sublet or permit the PREMISES to be used by others, without the prior written
consent of the LANDLORD, which consent shall not be unreasonably withheld.
29.02 Notwithstanding LANDLORD's consent to any such assignment or
subletting, TENANT and said assignee or sublessee shall remain jointly and
severally liable for the performance of all Covenants of this LEASE.
29.03 If TENANT requests LANDLORD to consent to an assignment of LEASE or
to approve a sublease, TENANT shall: (1) furnish LANDLORD with a copy of the
proposed sublease or assignment, which shall contain a provision whereby the
assignee or subtenant agrees to assume and be bound by all the Covenants of
this LEASE; and (2) pay to LANDLORD upon demand therefor, any reasonable legal
or other expenses which LANDLORD incurs in order to protect its interest before
approving or disapproving such request.
30. LIENS
TENANT shall not encumber or subject the interest of LANDLORD in the
PREMISES to any mechanics' or materialmen's or other liens of any nature
whatsoever. If any mechanics' or materialmen's lien is filed against the
PREMISES for work claimed to have been done for, or materials claimed to have
been furnished to, TENANT, TENANT shall discharge the lien, by bonding or
otherwise, within fifteen (15) days after it is filed, and if TENANT fails to
discharge the lien within that period, LANDLORD may do so at TENANT's expense.
31. NOTICES
31.01 Any notice required or provided for in this LEASE shall be in
writing and may be given by hand delivery or by certified or registered mail,
postage prepaid, return receipt requested, addressed to LANDLORD or to TENANT
at the address shown below.
<PAGE> 12
<TABLE>
<CAPTION>
LANDLORD TENANT
- -------- ------
<S> <C>
NANCO I, LLC Diamond Sports Group
215 Queens Road 200 W. Unionville-Indian Trail Rd.
Charlotte, NC 28204 Indian Trail, NC 28079
</TABLE>
31.02 The address of LANDLORD and TENANT may be changed from time to
time by either party serving written notice upon the other in the above
described manner.
32. MEMORANDUM OF LEASE
Upon request by either LANDLORD or TENANT, the parties hereto shall
execute a short form lease (Memorandum of Lease) in recordable form, setting
forth such Covenants hereof (other than the amount of Base Monthly Rent and
other sums due) as either party may wish to incorporate.
33. GOVERNING LAW
This LEASE and the rights of the parties hereunder shall be construed
and enforced in accordance with the laws of the State of North Carolina.
34. SUCCESSORS
This LEASE shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, successors, and permitted
assigns, except as otherwise provided for in this LEASE.
35. LEASE REVIEW
Submission of this LEASE to TENANT for a review does not constitute a
reservation of or option for the PREMISES, and this LEASE shall become
effective as a contract only upon execution and delivery by LANDLORD and TENANT.
36. SEVERABILITY
It is understood that if any of the Covenants contained herein are
ruled to be invalid or unenforceable by a court of competent jurisdiction, the
remaining Covenants shall not be affected and shall remain binding on the
parties hereto.
37. CAPTIONS
The headings and captions contained in this LEASE are for convenience
only and shall not be considered in interpreting the Covenants contained herein.
38. AUTHORIZED LEASE EXECUTION
Each individual executing this LEASE as a director, officer, partner,
or agent of a corporation or partnership represents and warrants that he is
duly authorized to execute and deliver this LEASE on behalf of such corporation
or partnership.
39. ENTIRE AGREEMENT
This LEASE constitutes the entire agreement, intent and understanding
between the parties hereto and shall not be altered or modified except in
writing signed by the parties hereto. Each party agrees that it has not relied
upon or regarded as binding any prior agreements, negotiations, representations,
or understandings, whether oral or written, except as expressly set forth
herein.
40. TRANSFER OF LANDLORD'S INTEREST
In the event of the sale, assignment or transfer by LANDLORD of its
interest in the PREMISES or in this LEASE (other than a collateral assignment
to secure a debt of LANDLORD) to a successor in interest who expressly assumes
the obligations of LANDLORD under this LEASE, LANDLORD shall thereupon be
released and discharged from all of its Covenants and obligations under this
LEASE, except those obligations that have accrued prior to such sale,
assignment or transfer; and TENANT agrees to look solely to the successor in
interest of LANDLORD for the performance of those Covenants accruing after such
sale, assignment or transfer. LANDLORD's assignment of this LEASE, or of any or
all of its rights in this
<PAGE> 13
LEASE, shall not affect TENANT's obligations hereunder, and TENANT shall attorn
and look to the assignee as Landlord, provided TENANT has first received
written notice of the assignment of LANDLORD's interest.
41. LIMITATION OF LANDLORD'S LIABILITY
TENANT agrees that it will look solely to the estate of LANDLORD in
the land and buildings comprising the PREMISES and the rent, issues and profits
arising therefrom for the collection of any judgment (or any other judicial
process requiring the payment of money by LANDLORD) in the event of any default
or breach by LANDLORD with respect to any of the Covenants of this LEASE to be
observed and/or performed by LANDLORD, and no other property or assets of
LANDLORD shall be subject to levy, execution or other procedures for the
satisfaction of TENANT's remedies.
42. FORCE MAJEURE
Neither party shall be liable for breach of contract by reason of any
failure or delay in the performance of any Covenant to be performed by it under
this LEASE if the failure or delay is caused by act of God, war, federal or
state legislation, regulations or orders, fire or other casualty, strikes,
accidents, inability to obtain materials, or from any other cause beyond that
party's reasonable control. The foregoing provisions shall not apply to any
delay or failure by TENANT to pay Base Monthly Rent or any other amounts payable
under this LEASE.
IN TESTIMONY WHEREOF, LANDLORD and TENANT have executed this LEASE under seal
as of the day and year stated above.
LANDLORD:
ATTEST: NANCO I, LLC
By: /s/ DAVID H. NANCE
- --------------------- --------------------------
Secretary David H. Nance
STATE OF NORTH CAROLINA
COUNTY OF MECKLENBURG
This ____ day of _______, 1996, personally came before me __________________
who, being by me duly sworn, says that he is the President of NANCO I, LLC a
North Carolina corporation, and that the seal affixed to the foregoing
instrument in writing is the corporate seal of the company, and that said
writing was signed and sealed by him, in behalf of said corporation, by its
authority duly given. And the said President acknowledged the said writing to
be the act and deed of said corporation.
- -------------------------------------------
Notary Public
My commission expires:
---------------------
<PAGE> 14
CORPORATE SEAL) TENANT:
ATTEST: Diamond Sports Group
/s/ EDDY HICKMAN BY: /s/ ROBERT J. DIACHENKO
- --------------------------------- ---------------------------------
Secretary Vice-President (Corporately &
Individually)
STATE OF
------------------------------
COUNTY OF
-----------------------------
This __________day of ______________, 1996, personally came before me
________________________ who, being by me duly sworn, says that he is the
__________________ President of ___________________ a ___________________
corporation, and that the seal affixed to the foregoing instrument in writing
is the corporate seal of the company, and that said writing was signed and
sealed by him, in behalf of said corporation, by its authority duly given.
And the said __________________________ President acknowledged the said writing
to be the act and deed of said corporation.
- -----------------------------
Notary Public
My commission expires:
- -----------------------------
<PAGE> 1
EXHIBIT 10.9.7
LEASE
THIS LEASE AGREEMENT (hereinafter designated this "Lease" or the "Lease")
is entered into as of the 7th day of January, 1993, in multiple copies, between
New England Mutual Life Insurance Company (herein designated as "Landlord") and
Press Pass, L.P., a Texas limited partnership (herein designated as "Tenant").
DEFINITIONS AND BASIC 1. The definitions and basic provisions set forth in
PROVISIONS the Basic Lease Information (the "Basic Lease
Information") executed by Landlord and Tenant
contemporaneously herewith are incorporated herein
by reference for all purposes and shall be used in
conjunction with and limited by the reference
thereto in the provisions of this Lease.
LEASE GRANT 2. Landlord, in consideration of the covenants and
agreements to be performed by Tenant and upon the
terms and conditions hereinafter stated, does
hereby lease, demise and let unto Tenant the
Demised Premises, as defined in the Basic Lease
Information and generally outlined on the plan
attached hereto as Exhibit "A," commencing on the
Commencement Date (as defined in the Basic Lease
Information) and ending on the last day of the
lease term, unless sooner terminated as herein
provided. If this Lease is executed before the
premises become vacant, or otherwise available and
ready for occupancy, or if any present tenant or
occupant of the Demised Premises holds over and
Landlord cannot acquire possession of the Demised
Premises prior to the Commencement Date of this
Lease, Landlord shall not be deemed to be in
default hereunder, and Tenant agrees to accept
possession of the Demised Premises on such date as
Landlord is able to tender the same, which date
shall be deemed to be the Commencement Date of
this Lease for all purposes, and this Lease shall
continue for the lease term specified in the Basic
Lease Information. By occupying the Demised
Premises, Tenant shall be deemed to have accepted
the same as suitable for the purposes herein
intended and to have acknowledged that the same
comply fully with Landlord's obligations,
notwithstanding that certain "punch list" type
items may not have been completed. In the event
the term of this Lease commences on a date other
than the Commencement Date, Landlord and Tenant
will, at the request of either, execute a
declaration specifying the beginning date of the
term of this Lease, and Tenant's obligations to
pay rent and other sums to Landlord hereunder
shall begin on such revised Commencement Date.
Notwithstanding anything to the contrary contained
in the Lease, neither Landlord nor Tenant shall
have the right to remeasure the current Demised
Premises, being Suite 420 of the Building.
BASIC RENTAL 3. In consideration of this Lease, Tenant promises
and agrees to pay Landlord the Basic Rental
defined in the Basic Lease Information (subject to
adjustment as hereinafter provided), without
deduction or set-off, for each month of the entire
lease term. One such monthly installment shall be
payable by Tenant to Landlord contemporaneously
with the execution of this Lease, and a like
monthly installment shall be due and payable
without demand beginning on the first day of the
calendar month following the expiration of the
first full calendar month of the lease term and on
or before the first day of each succeeding
calendar month thereafter during the term hereof.
Rent for any fractional month at the beginning of
the lease term shall be prorated based on one
three hundred sixty-fifth (1/365) of the current
annual Basic Rental for each day of the partial
month this Lease is in effect, and shall be due
and payable on or before the date on which Tenant
certifies that it has accepted the Demised
Premises pursuant to paragraph 2 hereof. In the
event any installment of the Basic Rental and any
other sums which become owing by Tenant to
Landlord under the provisions hereof are not
received within ten (10) days after the due date
thereof (without in any way implying Landlord's
consent to such late payment). Tenant, to the
extent permitted by law, agrees to pay, in
addition to said installment of the Basic Rental
and any other sums owed, a late payment charge as
determined pursuant to paragraph 24 hereof.
3
<PAGE> 2
SECURITY DEPOSIT 4. The Security Deposit (as defined in the Basic
Lease Information) shall be payable by Tenant to
Landlord contemporaneously with the execution of
this Lease, and shall be held by Landlord without
liability for interest as security for the
performance by Tenant of Tenant's covenants and
obligations under this Lease. It is expressly
understood that such deposit shall not be
considered an advance payment of rent or a measure
of Landlord's damages in case of default by
Tenant. Upon the occurrence of any event of
default by Tenant, Landlord may, from time to
time, without prejudice to any other remedy, use
such deposit to the extent necessary to make good
any arrearages of rent and any other damage,
injury, expense or liability caused to Landlord by
such event of default. Following any such
application of the security deposit, Tenant shall
pay to Landlord on demand the amount so applied in
order to restore the Security Deposit to its
original amount. If Tenant is not then in default
hereunder, any remaining balance of such deposit
shall be returned by Landlord to Tenant upon
termination of this Lease. If Landlord transfers
its interest in the Demised Premises during the
Lease term, Landlord may assign the security
deposit to the transferee and thereafter shall
have no further liability for the return of such
security deposit.
COST AND ESCALATION 5. OPERATING COSTS AND TAXES. (1) On or before
PROVISIONS January 1 of each year after the Commencement
Date, Landlord shall estimate the Operating Costs
and Taxes, as hereinafter defined, for the ensuing
year, per rentable square foot of space in the
Building, as determined by dividing Landlord's
estimate of Operating Costs and Taxes by the
number of rentable square feet of space in the
Building (as specified in the Basic Lease
Information). In addition to Tenant's obligations
to pay the Basic Rental and other sums hereunder,
Tenant shall pay to Landlord without deduction or
set-off (except as hereinafter provided) on each
date a payment of Basic Rental is due, one-twelfth
(1/12) of the amount by which the aforesaid
estimate of per square foot Operating Costs and
Taxes exceeds Tenant's share of the cost, on a per
rentable square foot basis, of the actual
Operating Costs and Taxes incurred by Landlord for
calendar year 1993, multiplied times the number of
rentable square feet in the Demised Premises (as
specified in the Basic Lease Information).
Landlord reserves the right to adjust the estimate
at any time during the year if actual Operating
Costs and Taxes are substantially different from
the earlier estimate, and thereafter, the payments
by Tenant pursuant to this paragraph shall be
adjusted accordingly.
(2) Within ninety (90) days after the expiration
of each calendar year, Landlord shall furnish
Tenant with a statement of the actual Operating
Costs and Taxes of the Building. In the event the
sum of the payments made by Tenant during the
preceding calendar year pursuant to subparagraph
(a) above exceeds the amounts which Tenant would
have been obligated to pay if the actual Operating
Costs and Taxes for such year were used in lieu of
Landlord's estimates thereof in calculating
Tenant's payments under subparagraph (a) above,
the difference shall be credited by Landlord to
Tenant's account against the next payments owed by
Tenant, under the provisions of this paragraph. In
the event the sum of payments made by Tenant
during the preceding calendar year pursuant to
subparagraph (a) above is less than the amount
which Tenant would have been obligated to pay if
the actual Operating Costs and Taxes for such year
were used in lieu of Landlord's estimates thereof
in calculating Tenant's payments under
subparagraph (a) above, Tenant shall pay the
amount of such difference to Landlord in cash
within thirty (30) days after receipt of a demand
by Landlord accompanied by a statement of the
actual Operating Costs and Taxes for such year.
(3) For purposes of this paragraph 5, Operating
Costs and Taxes shall mean and include the total
cost and expenses paid or incurred by Landlord in
connection with the management, operation,
maintenance and repair of the Building and the
land situated beneath the Building including,
without limitation, (i) the cost of water,
electricity, sewage treatment, gas, heating,
mechanical, ventilating, escalator and elevator
systems and the cost of supplies and equipment
<PAGE> 3
and maintenance and service contracts in
connection herewith: (ii) the cost of repairs and
general maintenance cleaning, (iii) the cost of
fire, extended coverage, boiler, sprinkler, public
liability, property damage, rent, earthquake and
other insurance; (iv) wages, salaries and other
labor costs, including taxes, insurance,
retirement, medical and other employee benefits;
(v) fees, charges and other costs, including
management fees, consulting fees, legal fees and
accounting fees, of all independent contractors
engaged by Landlord or reasonably charged by
Landlord if Landlord performs management services
in connection with the Building; (vi) the cost of
supplying, replacing and cleaning employee
uniforms; (vii) the fair market rental value of
Landlord's and the property manager's offices in
the Building; (viii) the cost of any capital
improvements made to the Building after completion
of its construction as a labor-saving device or to
effect other economics in the operation or
maintenance of the Building, or made to the
Building after the date of this Lease, that are
required under any governmental law or regulation
that was not applicable to the Building at the
time that permits for the construction thereof
were obtained, such costs to be amortized over
such reasonable period as Landlord shall
determine, together with interest on the
unamortized balance at the rate of ten percent
(10%) per annum of such higher rate as may have
been paid by Landlord on funds borrowed for the
purpose of constructing such capital improvements;
(ix) the cost of replacing any capital item
capable of being amortized pursuant to generally
accepted accounting principles which replacement
results in economics in the operation or
maintenance of the Building, which costs may be
amortized over such reasonable period as Landlord
may determine and so charged to Operating Costs
and Taxes, but not in an amount in any calendar
year greater than the actual cost saving in that
year; (x) real estate taxes and assessments for
betterments and improvements, levied against the
Building or the land situated beneath the Building
(except taxes to be paid by Tenant pursuant to
paragraph 20 hereof); (xi) any other expenses or
any other kind whatsoever reasonably incurred in
managing, operating, maintaining and repairing the
Building or the land situated beneath the
Building, provided that such expenses are
comparable to the expenses incurred by landlords
of comparable buildings in the north Dallas
suburban area. Operating Costs and Taxes shall be
adjusted to reflect full occupancy of the Building
during any period in which the Building is not
fully occupied; and (xii) Electricity Costs.
USE 6. The Demised Premises shall be used and occupied by
Tenant only for the Permitted Use, as defined in
the Basic Lease Information. Tenant shall not
occupy or use, or permit to be occupied or used,
any portion of the Demised Premises for any other
purpose, or for any business or purpose which is
unlawful in part or in whole or deemed to be
disreputable in any manner, or extra hazardous on
account of fire, nor permit anything to be done
which will in any way increase the rate of fire
insurance on the Building or its contents, and in
the event that there shall be any increase in the
rate of insurance on the Building or its contents,
as a result of Tenant's acts or conduct of
business, then such acts shall be deemed to be an
event of default hereunder and Tenant hereby
agrees to pay the amount of such increase on
demand, and acceptance of such payment shall not
constitute Landlord's waiver of such default or
Tenant or of any of Landlord's rights or remedies
hereunder. Tenant will conduct its business and
control its agents, employees and invitees in such
a manner as not to create any nuisance, nor
interfere with, annoy or disturb other tenants, or
Landlord in the management of the Building, Tenant
will maintain the Demised Premises in a clean and
healthful condition, and comply with all laws,
ordinances, orders, rules and regulations (state,
federal, municipal and other agencies or bodies
having any jurisdiction thereof) with reference to
the use, condition or occupancy of the Demised
Premises.
LANDLORD'S 7. a. Landlord agrees that so long as Tenant is
OBLIGATION occupying the Demised Premises and is not in
default under this Lease, Landlord will furnish
facilities to provide (1) water (hot and cold) at
those points of supply provided for general use by
tenants of the Building; (2) heated and
5
<PAGE> 4
refrigerated air conditioning in season, from 7:00
a.m. to 6:00 p.m. Monday through Friday and 8:00
a.m. to 1:00 p.m. Saturdays, except on holidays,
and at such temperatures and in such amounts as
are reasonably considered by Landlord to be
standard, such service at other times on Saturday
and on Sunday and holidays to be furnished only at
the written request of Tenant, who shall bear the
entire cost thereof; (3) janitorial service to the
premises and common areas on weekdays other than
holidays and such window washings as may from time
to time in Landlord's judgment be reasonably
required; (4) operatorless passenger elevators for
ingress and egress to the floor on which the
Leased Premises are located, in common with other
tenants, provided that Landlord may reasonably
limit the number of elevators to be in operation
at times other than during customary business
hours for the Building and on holidays; and (5)
replacement of Building standard light bulbs and
fluorescent tubes. In addition, Landlord agrees at
its cost and expense to maintain the public and
common areas of the Building, such as lobbies,
stairs, corridors and restrooms, in reasonably
good order and condition, except for damage
occasioned by Tenant, or its employees, agents or
invitees. If Tenant shall desire any of the
services specified in this Paragraph 4 at any time
other than times herein designated, such service
or services shall be supplied to Tenant only at
the written request of Tenant, delivered to
Landlord before 3:00 p.m. on the business day
preceding such extra usage, and Tenant shall pay
to Landlord (in addition to all other sums payable
to Landlord hereunder) the cost of such service or
services within ten (10) days of Tenant's receipt
of a bill therefore.
b. Landlord shall make available to Tenant
facilities to provide all electrical current
required by Tenant in its use and occupancy of the
Demised Premises and further shall make available
electric lighting and current for the common areas
of the Building in the manner and to the extent
deemed by Landlord to be standard. In the event
Tenant's use of electrical current (a) exceeds 110
volt power, or (b) exceeds that required for
routine lighting and operation of general office
machines which use 110 volt electrical power (such
as typewriters, dictating equipment, desk model
adding machines and the like), then Tenant shall
pay on demand the cost of providing such excess.
Without Landlord's prior written consent, Tenant
shall not install in the Leased Premises any data
processing, computer equipment or any other
equipment which it shall require for its operation
other than the normal electrical current or other
utility service. Whenever heat-generating machines
or equipment (other than general office machines
as described hereinbefore) which affect the
temperature otherwise maintained by the air
conditioning system or otherwise overload any
utility are used in the Demised Premises by
Tenant, Landlord shall have the right to install
supplemental air conditioning units or other
supplemental equipment in the Demised Premises,
and the cost thereof, including the cost of
installation, operation, use and maintenance,
shall be paid by Tenant to Landlord on demand. The
obligation of Landlord hereunder to make available
such utilities shall be subject to the rules and
regulations of the supplier of such utilities and
of any municipal or other governmental authority
regulating the business of providing such utility
service. Landlord shall not be liable or
responsible to Tenant for any loss or damage or
expense which Tenant may sustain or incur if
either the quantity or character of any utility
service is changed or is no longer available or is
no longer suitable for Tenant's requirements.
Tenant covenants and agrees that at all times its
use of electric current shall never exceed the
capacity of existing feeders to the Building or
the risers or wiring installations. Any riser or
risers or wiring to meet Tenant's excess
electrical requirements will be installed by
Landlord at the sole cost and expense of Tenant
(if, in Landlord's sole judgment, the same are
necessary and will not cause permanent damage or
injury to the Building or the Demised Premises or
cause or create a dangerous or hazardous condition
or entail excessive or unreasonable alterations,
repairs or expense or interfere with or disturb
other tenants or occupants).
c. Failure to any extent to make available, or
any slow-down,
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stoppage or interruption of, these defined
services resulting from any cause (including, but
not limited to, Landlord's compliance with (1) any
voluntary or similar governmental or business
guideline now or hereafter published or (2) any
requirements now or hereafter established by any
governmental agency, board or bureau having
jurisdiction over the operation and maintenance of
the building) shall not render Landlord liable in
any respect for damages to either person, property
or business, nor be construed as an eviction of
Tenant or work an abatement of rent, nor relieve
Tenant from fulfillment of any covenant or
agreement hereof. Should any equipment or
machinery furnished by Landlord break down or for
any cause cease to function properly, Landlord
shall use reasonable diligence to repair same
promptly, but Tenant shall have no claim for
abatement of rent or damages on account of any
interruptions in service occasioned thereby or
resulting therefrom. Notwithstanding anything to
the contrary contained in this paragraph 7 or
elsewhere in the Lease, in the event that the
Demised Premises are rendered untenantable due to
a failure to provide or interruption of services,
for any reason whatsoever, Tenant shall be
entitled to an equitable abatement of rent after
five (5) days, retroactive to the third (3rd) day
of such untenantability, such equitable abatement
of rent to continue until such services are
restored, but in the event such services are not
restored within ninety (90) consecutive days of
such untenantability, Tenant shall have the right
to terminate this Lease upon written notice to
Landlord within ten (10) days after the expiration
of such ninety (90) day period. In the event the
Lease is terminated pursuant to the aforementioned
sentence, all of Landlord's and Tenant's
obligations pursuant to the Lease shall cease,
except for those matters which expressly survive
the expiration or earlier termination of Lease.
TENANT'S REPAIRS AND 8. Tenant agrees to keep the Demised Premises,
ALTERATIONS including all fixtures installed by Tenant and any
interior plate glass and special store fronts, in
good condition and make all necessary
non-structural repairs except those covered by
fire, casualty or acts of God covered by
Landlord's fire insurance policy covering the
Building. Tenant will not in any manner defease,
damage or injure the building, and will pay the
cost of repairing any damage or injury done to the
Building or any part thereof, including without
limitation, structural damages, by Tenant or
Tenant's agents, employees, licensees and
invitees. Tenant will not make or allow to be made
any alterations or physical additions in or to the
Demised Premises, including without limitation,
painting, installing lighting, decorations, signs,
window or door lettering or advertising media of
any type on or about any portion of the Demised
Premises without the prior written consent of
Landlord, which shall not be unreasonably withheld
or delayed. The performance by Tenant of its
obligations to maintain and make repairs shall be
conducted only by contractors and subcontractors
reasonably approved in writing by Landlord, it
being understood that Tenant shall procure and
maintain and shall cause such contractors and
subcontractors engaged by or on behalf of Tenant
to procure and maintain insurance coverage against
such risks, in such amounts and with such
companies as Landlord may reasonably require in
connection with any such maintenance and repair.
If Tenant fails to make such repairs within
fifteen (15) days after the occurrence of the
damage or injury, Landlord may at its option make
such repair, and Tenant shall, upon demand
therefor, pay Landlord for the cost thereof. At
the end or other termination of this Lease, Tenant
shall deliver up the Demised Premises with all
improvements located thereon (except as otherwise
herein provided) in good repair and condition,
reasonable wear and tear excepted, and shall
deliver to Landlord all keys to the Demised
Premises. All alterations, additions or
improvements (whether temporary or permanent in
character) made in or upon the Demised Premises,
either by Landlord or Tenant, shall be Landlord's
property on termination of this Lease and shall
remain on the Demised Premises without
compensation to Tenant. All furniture, movable
trade fixtures and equipment installed by Tenant
may be removed by Tenant at the termination of
this Lease if Tenant so elects, and shall be so
removed if required by Landlord, or if not so
removed shall, at the option of Landlord,
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<PAGE> 6
become the property of Landlord. All such
installations, removals and restoration shall be
accomplished in a good workmanlike manner so as
not to damage the Demised Premises or the primary
structure or structural qualities of the building
or the plumbing, electrical lines or other
utilities.
INDEMNITY 9. Landlord shall not be liable for and Tenant will
indemnify and save harmless Landlord from any and
all fines, suits, claims, demands, losses and
actions of any kind (including attorney's fees)
for any injury to person or damage to or loss of
property on or about the premises caused by the
negligence, misconduct or any breach, violation or
nonperformance of any covenant hereof on the part
of Tenant, its employees, agents, subtenants,
licensees, invitees or by any other person
entering the premises or the Building under
expressed or implied invitation of Tenant, or
arising out of Tenant's use of the premises.
Landlord shall not be liable or responsible for
any loss or damage to any property or person
occasioned by theft, fire, act of God, public
enemy, injunction, riot, strike, insurrection,
war, court order, requisition or order of
governmental body or authority or other matter
beyond the reasonable control of Landlord, or for
any damage or inconvenience which may arise
through repair or alteration of any part of the
Building (except in the event of Landlord's or its
agent's gross negligence in which event Landlord
shall be liable to Tenant to the extent of any
property damages or bodily injuries), or failure
to make repairs, or from any cause whatever except
Landlord's gross negligence or willful wrong.
ASSIGNMENT AND 10. a. Tenant shall not, without the prior written
SUBLETTING consent of Landlord, not to be reasonably withheld
or delayed, (1) assign or in any manner transfer
this Lease or any estate or interest therein; (2)
permit any assignment of this Lease or any estate
or interest therein by operation of law; (3)
sublet the Demised Premises or any part thereof;
(4) grant any license, concession or other right
of occupancy of any portion of the Demised
Premises; or (5) permit the use of the Demised
Premises by any parties other than Tenant, its
agents and employees and any such acts without
Landlord's prior written consent shall be void and
of no effect. Landlord agrees to consent to any
assignment by Tenant to any corporation succeeding
to substantially all the business and assets of
Tenant by merger, consolidation, purchase of
assets or otherwise, or to any assignment or
subletting to a corporation which is an affiliate
of Tenant. Tenant shall not assign this lease or
sublet all or any portion of the Demised Premises
for any monthly rental which is, or could become,
less than the Basic Rental from time to time due
hereunder, and any such act shall be void and of
no effect. Consent by Landlord to one or more
assignments or sublettings shall not operate as a
waiver of Landlord's rights as to any subsequent
assignments and sublettings. Notwithstanding any
assignment or subletting, Tenant and any guarantor
of Tenant's obligations under this Lease shall at
all times remain fully responsible and liable for
the payment of the rent herein specified and for
compliance with all of Tenant's other obligations
under this Lease. If an event of default, as
hereinafter defined should occur while the Demised
Premises or any part thereof are then assigned or
sublet, Landlord, in addition to any other
remedies herein provided or provided by law, may
at its option collect directly from such assignee
or sublessee all rents becoming due to Tenant
under such assignment or sublease and apply such
rent against any such sums due to Landlord by
Tenant hereunder, and Tenant hereby authorizes and
directs any such assignee or sublessee to make
such payments of rent directly to Landlord upon
receipt of notice from Landlord. No direct
collection by Landlord from any such assignee or
sublessee shall be construed to constitute a
novation or a release of Tenant or any guarantor
of Tenant from the further performance of its
obligations hereunder. Receipt by Landlord of rent
or additional payments from any assignee,
sublessee or occupant of the Demised Premises
shall not be deemed a waiver of the covenant in
this lease contained against assignment and
subletting or a release of Tenant under this
Lease. The receipt by Landlord from any such
assignee or sublessee obligated to make payments
of rent or additional payments shall be a full and
complete release, discharge
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<PAGE> 7
and acquittance to such assignee or sublessee to
the extent of any amount so paid to Landlord.
Landlord is authorized and empowered, on behalf of
Tenant, to endorse the name of Tenant upon any
check, draft or other instrument payable to Tenant
evidencing payment of rent or additional payments,
or any part thereof, and to receive and apply the
proceeds therefrom in accordance with the terms
hereof. Tenant shall not mortgage, pledge or
otherwise encumber its interest in this Lease or
in the Demised Premises.
b. If Tenant requests Landlord's consent to an
assignment of the Lease or subletting of all or a
part of the Demised Premises, it shall submit to
Landlord, in writing, the name of the proposed
assignee or subtenant and the nature and character
of the business of the proposed assignee or
subtenant, the term, use, rental rate and other
particulars of the proposed subletting or
assignment, including without limitation, evidence
reasonably satisfactory to Landlord that the
proposed subtenant or assignee is financially
responsible and will immediately occupy and
thereafter use the Demised Premises (or any sublet
portion thereof) for the remainder of the lease
term (or for the entire term of the sublease ,if
shorter). Landlord shall have the option (to be
exercised within thirty [30] days from submission
of Tenant's written request) to cancel this Lease
(or the applicable portion thereof as to a partial
subletting) as of the Commencement Date stated in
the above-mentioned subletting or assignment. If
Landlord elects to cancel this Lease as stated,
then the terms of this Lease, and the tenancy and
occupancy of the Demised Premises by Tenant
thereunder, shall cease, terminate, expire and
come to an end with respect to that portion of the
Demised Premises so assigned or sublet as if the
cancellation date were the original termination
date of this Lease and Tenant shall pay to
Landlord all costs or charges which are the
responsibility of Tenant hereunder with respect to
that portion of the Demised Premises so assigned
or sublet. Thereafter, Landlord may lease the
Demised Premises or any other portion of the
building to the prospective subtenant or assignee
without liability to Tenant. If Landlord does not
thus cancel this Lease, the terms and provisions
of paragraph "a" hereof will apply.
c. If Landlord consents to any subletting or
assignment by Tenant as hereinabove provided, and
subsequently any rents received by tenant under
any such sublease are in excess of the rent
payable by Tenant under this Lease, or any
additional consideration is paid to Tenant by the
assignee under such assignment, then Landlord may,
at its option, either (i) declare such excess
rents under any sublease or any additional
considerations for an assignment to be due and
payable by Tenant to Landlord as additional rent
hereunder, or (ii) elect to cancel this Lease as
provided in paragraph "b" hereof.
d. Landlord shall have the right to transfer,
assign and convey, in whole or in part, the
Building and any and all of its rights under this
Lease, and in the event Landlord assigns its
rights under this Lease, Landlord shall thereby
be released from any further obligations
hereunder, and Tenant agrees to look solely to
such successor in interest of the Landlord for
performance of such obligations.
INSPECTION 11. Upon reasonable prior notice, except in the case
of an emergency or cleaning of the Demised
Premises where no notice is required, Landlord, or
its agents and representatives, shall have the
right to enter into and upon any and all parts of
the Demised Premises at all reasonable hours (or,
if any emergency, at any hour) to inspect same or
make repairs, alternations or additions as
Landlord may deem necessary, or during business
hours to show the Demised Premises to prospective
tenants during only the last ninety (90) days of
the term, to purchasers or lenders, and Tenant
shall not be entitled to any abatement or
reduction of rent by reason thereof, nor shall
such be deemed to be an actual or constructive
eviction.
SUBORDINATION 12. This Lease and all rights of Tenant hereunder are
subject and subordinate to (i) any and all ground
leases or underlying leases that now or hereafter
affect any portion of the Demised Premises, the
Building or the land situated beneath the
Building; (ii) any and all
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deeds of trust, mortgages and other instruments of
security that now or hereafter affect any portion
of the aforesaid leases, the Demised Premises, the
Building or the land situated beneath the
Building; and (iii) any and all increases,
renewals, modifications, consolidations,
replacements and extensions of any such leases,
deeds of trust, mortgages or instruments of
security, and all advances made on the security of
the foregoing. This provision is hereby declared
by Landlord and Tenant to be self-operative and no
further instrument shall be required to effect
such subordination of this Lease. Tenant, without
expense to Landlord, shall, however, upon demand
at any time or times execute, acknowledge and
deliver to Landlord any and all instruments and
certificates that in the judgment of Landlord may
be necessary or proper to confirm or evidence such
subordination. Notwithstanding the generality of
the foregoing provisions of this paragraph, Tenant
agrees that any lessor or mortgagee described in
this paragraph shall have the right at any time to
subordinate any such ground leases, underlying
leases, deeds of trust, mortgages or other
instruments of security to this Lease on such
terms and subject to such conditions as such
lessor or mortgagee may deem appropriate in its
discretion. Tenant further covenants and agrees
upon demand by Landlord's mortgagee at any time,
before or after the institution of any proceedings
for the foreclosure of any such deeds of trust,
mortgages or other instruments of security, or
sale of the Building pursuant to any such deeds of
trust, mortgages or other instruments of security,
to attorn to such purchaser upon any such sale and
to recognize such purchaser as Landlord under this
Lease, which covenant shall survive any such
foreclosures sale or trustee's sale. Tenant shall,
upon demand at any time or times, before or after
any such foreclosure sale or trustee's sale,
execute, acknowledge and deliver to Landlord's
mortgagee any and all instruments and certificates
that in the judgment of Landlord's mortgagee may
be necessary or proper to confirm or evidence such
attornment, and Tenant hereby irrevocably
authorizes Landlord's mortgagee to execute,
acknowledge and deliver any such instruments and
certificates on Tenant's behalf.
LEASEHOLD IMPROVEMENTS 13. In preparing the Demised Premises for occupancy
by Tenant, Landlord shall be required to bear
certain expenses of installing the items
indicated on Exhibit "C" attached hereto, only
to the extent indicated on said Exhibit "C". All
installations, additions and improvements to the
Demised Premises in excess thereof shall be
installed at the sole cost and expense of Tenant
(which shall be payable on Landlord's demand),
but only in accordance with plans and
specifications which have been previously
submitted to and approved in writing by
Landlord, such work to be performed only by
Landlord or by contractors and subcontractors
approved in writing by Landlord, it being
understood that Tenant shall procure and maintain
and shall cause such contractors, subcontractors
and other persons engaged by or on behalf of
Tenant to procure and maintain insurance coverage
against such risks, in such amounts and with such
companies as Landlord may require in connection
with the installation of such improvements.
Landlord has made no representations as to the
conditions of the Demised Premises or the
building, or to remodel, repair or decorate,
except as expressly set forth herein.
MECHANICS' LIEN 14. Tenant will not permit any mechanic's lien or
liens to be placed upon the Demised Premises or
the Building during the lease term caused by or
resulting from any work performed, materials
furnished or obligation incurred by or at the
request of Tenant, and in the case of the filing
of any such lien Tenant will promptly pay same. If
default in the payment thereof shall continue for
twenty (20) days after written notice thereof from
Landlord to Tenant, Landlord shall have the right
and privilege at Landlord's option of paying the
same or any portion thereof without inquiry as to
the validity thereof, and any amounts so paid,
including expenses and interest, shall be so much
additional indebtedness hereunder due from Tenant
to Landlord and shall be repaid to Landlord
immediately on demand accompanied by a bill
therefor.
SUBROGATION 15. Each party hereto hereby waives any cause of
action it might have against the other party on
account of any loss or damage that is
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insured against under any insurance policy (to the
extent that such loss or damage is recoverable
under such insurance policy) that covers the
Building, the Demised Premises, Landlord's or
Tenant's fixtures, personal property, leasehold
improvements or business and which names Landlord
or Tenant, as the case may be, as a party insured,
it being understood and agreed that this provision
is cumulative of paragraph 8 hereof. Each party
hereto agrees that it will request its insurance
carrier to endorse all applicable policies waiving
the carrier's rights of recovery under subrogation
or otherwise against the other party.
LIABILITY INSURANCE 16. Tenant shall procure and maintain throughout the
lease term a policy or policies of insurance at
its sole cost and expense and in amounts of not
less than a combined single limit of $1,000,000 or
such other amounts as Landlord may from time to
time require, insuring Tenant and Landlord against
any and all liability to the extent obtainable for
injury to or death of a person or persons or
damage to property occasioned by or arising out of
or in connection with the use, operation and
occupancy of the premises. Tenant shall furnish a
certificate of insurance and such other evidence
satisfactory to Landlord of the maintenance of all
insurance coverages required hereunder, and Tenant
shall obtain a written obligation on the part of
each insurance company to notify at least thirty
(30) days prior to cancellation or material change
of any such insurance.
CONDEMNATION 17. If the whole or any substantial part of the
Demised Premises or if the Building or any portion
thereof which would leave the remainder of the
Building unsuitable for use as an office building
comparable to its use on the Commencement Date,
shall be taken or condemned for any public or
quasi-public use under governmental law, ordinance
or regulation, or by right of eminent domain, or
by private purchase in lieu thereof, then Landlord
may, at its option, terminate this Lease and the
rent shall be abated during the unexpired portion
of this Lease, effective when the physical taking
of said Demised Premises shall occur. In the event
this Lease is not terminated, the rent for any
portion of the Demised Premises so taken or
condemned shall be abated during the unexpired
term of this Lease effective when the physical
taking of said portion of the Demised Premises
shall occur. All compensation awarded for any such
taking or condemnation, or sale proceeds in lieu
thereof, shall be the property of Landlord, and
Tenant shall have no claim thereto, the same being
hereby expressly waived by Tenant, except for any
portions of such award or proceeds which are
specifically allocated by the condemning or
purchasing party for the taking of or damage to
trade fixtures of Tenant, which Tenant
specifically reserves to itself.
FIRE & OTHER CASUALTY 18. In the event that the Building or the Demised
Premises is totally destroyed by fire, tornado or
other casualty, or is damaged to the extent that
rebuilding or repairs cannot in Landlord's
reasonable estimation be completed within two
hundred forty (240) days, as to the Building, and
ninety (90) days, as to the Demised Premises,
after the date of such damage, either Tenant or
Landlord may, at its option, terminate this Lease,
in which event the rent shall be abated during the
unexpired portion of this Lease, effective with
the date of occurrence of such damage. In the
event the Building or the Demised Premises is
damaged by fire, tornado or other casualty covered
by Landlord's insurance, but only to such extent
that rebuilding or repairs can in the Landlord's
estimation be completed within two hundred forty
(240) days, as to the Building, and ninety (90)
days, as to the Demised Premises, after the date
of such damage, this Lease shall not terminate and
Landlord shall, within thirty (30) days after the
date of such damage, commence to rebuild or repair
the Building and/or the Demised Premises and shall
proceed with reasonable diligence to restore the
Building and/or the Demised Premises to
substantially the condition which existed
immediately prior to the happening of the
casualty, except that Landlord shall not be
required to rebuild, repair or replace any part of
the partitions, fixtures and other improvements
which may have been placed by Tenant or other
tenants within the Building or the Demised
Premises. Landlord shall allow Tenant a fair
diminution of rent during the time the Demised
Premises are
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unfit for occupancy. In the event any mortgagee
under a deed of trust, mortgage or instrument of
security on any portion of any ground lease or
underlying lease, the Building, or the land
situated beneath the Building should require that
the insurance proceeds be used to retire the debt
secured by such document, Landlord shall have no
obligation to rebuild and this Lease shall
terminate upon notice by Landlord to Tenant.
Except as provided herein, any insurance which may
be carried by Landlord or Tenant against loss or
damage to the Building or to the Demised Premises
shall be for the sole benefit of the party
carrying such insurance and under its sole
control.
HOLDING OVER 19. In the event of any holding over by tenant after
the expiration or termination of this Lease,
unless the parties hereto otherwise agree in
writing such holding over shall constitute and be
construed as a tenancy at will, subject to
termination by Landlord at any time, or by Tenant
at any time upon at least thirty (30) days'
advance written notice, and all of the other
terms and provisions of this Lease shall be
applicable during that period, except that the
daily rent payable by Tenant shall be equal to
the daily rent in effect for the last month of
the term of this Lease, plus 50% of such amount.
The inclusion of the preceding sentence herein
shall not be construed as Landlord's consent for
the Tenant to hold over.
TAXES ON TENANT'S 20. Tenant shall be liable for all taxes levied or
PROPERTY assessed against personal property, furniture,
improvements, additions or fixtures placed by
Tenant in the Demised Premises. If any such taxes
for which Tenant is liable are levied or assessed
against Landlord or Landlord's property and if
Landlord elects to pay the same or if the
assessed value of Landlord's property is
increased by inclusion of personal property,
furniture or fixtures placed by Tenant in the
Demised Premises, and Landlord elects to pay the
taxes based on such increase, Tenant shall pay to
Landlord upon demand that part of such taxes for
which Tenant is primarily liable hereunder.
EVENTS OF DEFAULT 21. The following events shall be deemed to be events
of default by Tenant under this Lease:
a. Tenant shall fail to pay any installment of
rent herein provided for, or any other sums
payable by Tenant hereunder (or under any other
lease now or hereafter executed by Tenant in
connection with space in the Building), and such
failure shall continue for a period of five (5)
days from the due date, provided that no such
failure shall be deemed an event of default until
Landlord has provided Tenant two (2) written
notices of default in any twelve (12) month
period;
b. Tenant shall fail to comply with any term,
provision or covenant of this Lease (or any other
lease now or hereafter executed by Tenant in
connection with space in the building), other
than the payment of rent or other sums payable by
Tenant, and shall not cure such failure within
twenty (20) days after written notice thereof
from Landlord to Tenant;
c. Tenant or any guarantors of Tenant's
obligations hereunder shall make an assignment
for the benefit of creditors;
d. Tenant or any guarantors of Tenant's
obligations hereunder file a petition under any
section or chapter of the Bankruptcy Act of
1978.11 U.S.C. Section Mark 101 et seq., as
amended, or under any similar law or statute of
the United States and/or any State thereof or
Tenant shall be adjudged bankrupt or insolvent in
proceedings filed against Tenant thereunder;
e. A receiver or trustee shall be appointed for
all or substantially all of the assets of Tenant
or any guarantors of Tenant's obligations
hereunder and such receivership shall not be
terminated or stayed within thirty (30) days; or
f. Tenant shall desert or vacate any substantial
portion of the Demised Premises for a period of
thirty (30) days or more without
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Landlord's prior written approval.
REMEDIES 22. Upon the occurrence of any event of default by
Tenant, Landlord shall have the option to pursue
any one or more of the following remedies without
any notice or demand whatsoever:
a. Terminate this Lease in which event Tenant
shall immediately surrender the Demised Premises
to Landlord, and if Tenant fails to so do,
Landlord may, without prejudice to any other
remedy which it may have for possession of the
Demised Premises or arrearages in rent, enter upon
and take possession of the Demised Premises and
expel or remove Tenant and any other person who
may be occupying the Demised Premises or any part
thereof, without being liable for prosecution or
any claim or damages therefor; and Tenant agrees
to pay Landlord on demand the amount of all loss
and damage which Landlord may suffer by reason of
such termination, whether through inability to
relet the Demised Premises on satisfactory terms
or otherwise.
b. Enter upon and take possession of the Demised
Premises and expel or remove Tenant and any other
person who may be occupying the Demised Premises
or any part thereof, by force if necessary,
without being liable for prosecution or any claim
for damages therefor, and if Landlord elects,
relet the Demised Premises and receive the rent
therefor; and Tenant agrees to pay Landlord on
demand any deficiency that may arise by reason of
such reletting.
c. Enter upon the Demised Premises without being
liable for prosecution or any claim for damages
therefor, and do whatever Tenant is obligated to
do under this Lease; and Tenant agrees that
Landlord shall not be liable for any damages
resulting to the Tenant from such action.
No re-entry or taking possession of the
Demised Premises by Landlord shall be construed as
or deemed as an election by Landlord to terminate
this Lease, unless a written notice of such
intention signed by Landlord and addressed to
Tenant be delivered to Tenant. Notwithstanding any
such reletting or re-entry or taking possession,
Landlord may at any time thereafter elect to
terminate this Lease for a previous default.
Pursuit of any of the foregoing remedies shall not
preclude pursuit of any of the other remedies
herein provided or any other remedies provided by
law, nor shall pursuit if any remedy herein
provided constitute a forfeiture or waiver of any
rent due to Landlord hereunder or of any damages
occurring to Landlord by reason of the violation
of any of the terms, provisions and covenants
herein contained. Landlord's acceptance of rent
following an event of default hereunder shall not
be construed as Landlord's waiver of such event of
default. No waiver by Landlord of any violation or
breach of any of the terms, provisions and
covenants herein contained and no failure to give
notice thereof shall be deemed or construed to
constitute a waiver of any other violation or
default. The loss or damage that Landlord may
suffer by reason of termination of this Lease or
the deficiency from any reletting as provided for
above shall include the expense of repossession
and any repairs or remodeling undertaken by
Landlord following possession. Should Landlord at
any time terminate this Lease for any default, in
addition to any other remedy Landlord may have,
Landlord may recover from Tenant all damages
Landlord may incur by reason of such default,
including the cost of recovering the Demised
Premises and the loss of rental for the remainder
of the lease term. Forbearance by Landlord to
enforce one or more of the remedies provided in
this paragraph, paragraph 24, or anywhere else in
this Lease, or at law, upon an event of default
shall not be deemed or construed to constitute a
waiver of such default or remedies.
SURRENDER OF 23. No act or thing done by the Landlord or its agents
PREMISES during the term hereby granted shall be deemed an
acceptance of a surrender of the Demised Premises,
and no agreement to accept a surrender of the
Demised Premises shall be valid unless the same be
made in writing and signed by Landlord, and
addressed to Tenant.
13
<PAGE> 12
ATTORNEY'S FEES AND 24. Should it become necessary for either party,
INTEREST ON PAST DUE because of a default hereunder, to bring any SUMS
SUMS action under this Lease or to consult or place
said Lease with an attorney concerning or for the
enforcement of any of such party's rights
hereunder, the non-prevailing party agrees to pay
the prevailing party's reasonable attorney's fees.
All installments of Basic Rental and other sums
due to Landlord hereunder not paid by Tenant when
due pursuant to the provisions hereof shall bear
interest from the due date until paid, at the rate
(the "Rate") of 5% per annum above the per annum
prime commercial lending rate from time to time
announced by Texas Commerce Bank-Dallas, N.A., or
its successors. In the event Texas Commerce
Bank-Dallas, N.A., or its successors cease to
announce a prime commercial lending rate, or such
figure is otherwise indeterminable, then the Rate
shall be 10% per annum above the per annum rate
from time to time in effect which the Federal
Reserve Bank of the Federal Reserve District which
includes Dallas, Texas, charges for advances to
member banks. In the event the Rate would
otherwise exceed the maximum legal rate of
interest which Tenant could be charged, the Rate
shall be said maximum legal rate for all such
periods of time. Said late payment charge shall
constitute liquidated damages and shall be for the
purpose of reimbursing Landlord for the additional
costs and expenses which Landlord and Tenant
presently expect Landlord to incur in connection
with the handling and processing of late
installment payments of the Basic Rental and such
other sums which become owing by Tenant to
Landlord hereunder. Landlord and Tenant expressly
covenant and agree that in the event of any such
late payment(s) by Tenant, the damages so
resulting to Landlord would be difficult to
ascertain precisely, and that the foregoing charge
constitutes a reasonable and good faith estimate
by the parties of the extent of such damages.
<PAGE> 13
QUIET ENJOYMENT 26. Provided Tenant is not in default (beyond any
period given Tenant to cure such default) in the
performance of any of the terms, covenants or
conditions of this Lease on Tenant's part to be
performed, including the payment of rent or
additional payments, Tenant shall peaceably and
quietly hold and enjoy the Demised Premises during
the term hereof and any extensions thereof, free
from interference or disturbance by Landlord and
other persons subject to the terms and conditions
of this Lease; provided, however, Landlord shall
not be liable for any such interference or
disturbance by other persons, nor shall Tenant be
released from any of its obligations pursuant to
this Lease because of such interference or
disturbance.
NOTICES 27. Each provision of this Lease or of any applicable
governmental laws, ordinances, regulations and
other requirements with reference to the sending,
mailing or delivery of any notice, or with
reference to the making of any payment by Tenant
to Landlord, shall be deemed to be complied with
when and if the following steps are taken:
a. All rent and other payments required to be
made by Tenant to Landlord hereunder shall be
payable to Landlord at the address set forth in
the Basic Lease Information, or at such other
address as Landlord may specify from time to time
by written notice delivered in accordance
herewith; and
b. Any notice or document required to be
delivered hereunder shall be deemed to be
delivered, whether actually received or not, when
deposited in the United States mail, postage
prepaid, certified or registered mail (with or
without return receipt requested), addressed to
the parties hereto at the respective addresses set
forth in the Basic Lease Information, or at such
other address as has been theretofore specified by
written notice delivered in accordance herewith.
FORCE MAJEURE 28. Whenever a period of time is herein prescribed for
action to be taken by Landlord, Landlord shall not
be liable or responsible for, and there shall be
excluded from the computation of any such period
of time, any delays due to strikes, riots, acts of
God, shortages of labor or materials, war,
governmental laws, regulations or restrictions, or
any other causes of any kind whatsoever which are
beyond the control of Landlord.
SEPARABILITY 29. If any clause or provision of this Lease is
illegal, invalid or unenforceable under present or
future laws effective during the term of this
Lease, then and in that event, it is the intention
of the parties hereto that the remainder of this
Lease shall not be affected thereby, and it is
also the intention of the parties to this Lease
that, in lieu of each clause or provision of this
Lease that is illegal, invalid or unenforceable,
there be added as a part of this Lease a clause or
provision as similar in terms to such illegal,
invalid or unenforceable clause or provision as
may be possible and be legal, valid and
enforceable.
AMENDMENTS; BINDING 30. This Lease may not be altered, changed or amended,
EFFECT except by an instrument in writing signed by both
parties hereto. No provision of this Lease shall
be deemed to have been waived by Landlord unless
such waiver is in writing signed by Landlord, and
addressed to Tenant, nor shall any custom or
practice which may evolve between the parties in
the administration of the terms hereof be
construed to waive or lessen the right of Landlord
to insist upon the performance by Tenant in strict
accordance with the terms hereof. The terms,
provisions, covenants and conditions contained in
this Lease shall apply to, inure to the benefit of
and be binding upon the parties hereto, and upon
their respective heirs, successors in interest,
legal representatives and permitted assigns,
except as otherwise herein expressly provided.
15
<PAGE> 14
RULES AND 31. Tenant and Tenant's employees, agents, licensees,
REGULATIONS employees and invitees will comply fully with all
requirements of the rules of the Building
attached hereto as Exhibit "B" and made a part
hereof as though fully set out herein. Landlord
shall at all times have the right to change such
rules and regulations, to amend them or to
promulgate other rules and regulations in such
manner as Landlord shall deem advisable for the
safety, care and cleanliness of the Building and
related facilities, and for preservation of good
order therein, all of which rules and
regulations, changes and amendments will be
forwarded to Tenant in writing and shall be
carried out and observed by Tenant. Tenant shall
further be responsible for compliance with such
rules and regulations by the employees, agents,
licensees, visitors and invitees of Tenant.
SUBSTITUTION OF SPACE 32. At any time after the initial twelve (12) month
term of this Lease, Landlord may substitute for
the Demised Premises other premises in the
Building (the "New Premises") in which event the
New Premises shall be deemed to be the Demised
Premises for all purposes hereunder, provided;
a. The New Premises shall be approximately 2,500
or greater rentable square feet and shall be
similar in appropriateness for Tenant's purposes;
b. Any such substitution shall be effected for the
purpose of accommodating a tenant that will occupy
all or a substantial portion of the floor on
which the Demised Premises are located; and
c. If, at the time of any such substitution,
Tenant is occupying the Demised Premises or has
borne costs for work which will have to be redone
as a result of the relocation, Landlord shall pay
the expense in excess of the amounts Landlord
would have paid if Landlord had not made its
election to substitute the New Premises under
this paragraph; of any architectural plans
required to design such New Premises; of moving
Tenant, its property and equipment from the
Demised Premises to the New Premises; and of
completing the New Premises with improvements at
least equal to those located in the Demised
Premises.
EXHIBITS AND 33. All exhibits, attachments, riders and addenda
ATTACHMENTS referred to in this Lease are incorporated in
this Lease and made a part hereof for all intents
and purposes.
Exhibit A - Outline of Demised Premises
Exhibit B - Building Rules and Regulations
Exhibit C - Tenant Improvements
Exhibit D - Parking Agreement
Exhibit E - Extension Option
GENDER 34. Words of any gender used in this Lease shall be
held and construed to include any other gender,
and words in the singular number shall be held to
include the plural, unless the context requires
otherwise.
CAPTIONS 35. The captions contained in this Lease are for
convenience of reference only and in no way limit
or enlarge the terms and conditions of this Lease.
PREPAYMENTS 36. Tenant shall have no right to make any payment of
rent or nay other payments to Landlord hereunder
more than thirty (30) days in advance of the date
such sums are due to Landlord.
TENANT'S REMEDIES 37. In the event Landlord defaults in the performance
of any of its obligations to Tenant hereunder, or
breaches any warranty or representation, express
or implied, to Tenant in connection with this
Lease or the Demised Premises, Tenant shall have
no right of set-off against payments due to
Landlord hereunder and shall have no right to
terminate this Lease, and Tenant hereby waives
such remedies and Tenant's sole remedy shall be
to bring suit against Landlord for damages.
Landlord shall have no personal liability to
Tenant for any such default or breach by
Landlord, and Tenant specifically agrees to
16
<PAGE> 15
look solely to Landlord's interest in the Building
and the land situated thereunder for payment of any
damages suffered by Tenant. Pending resolution of any
controversy hereunder, Tenant shall continue to pay
to Landlord all sums which are and become due to
Landlord hereunder, without deduction or set-off.
CHANGE OF BUILDING 38. Landlord reserves the right at any time to change
NAME the name by which the Building is designated.
ESTOPPEL CERTIFICATES 39. Tenant agrees to furnish from time to time, when
requested by Landlord, the holder of any deed of
trust, mortgage or other instrument of security, or
by the lessor under any ground lease or underlying
lease covering all or any part of the Building or
the improvements therein or the land situated
beneath the Building, or any interest of Landlord
thereto, a certificate signed by Tenant confirming
and containing such factual certifications and
representations, to the current actual knowledge of
Tenant, deemed appropriate by the party requesting
such certificate, and Tenant shall, within ten (10)
days following receipt of said proposed certificate
from Landlord, return a fully executed copy of said
certificate to Landlord. In the event Tenant shall
fail to return a fully executed copy of such
certificate to Landlord within the foregoing ten-day
period, then Tenant shall be deemed to have approved
and confirmed all of the terms, certifications and
representations contained in such certificate.
JOINT AND SEVERAL 40. If there is more than one Tenant, the obligations
LIABILITY hereunder imposed upon Tenant shall be joint and
several. If there is a guarantor of Tenant's
obligations hereunder, the obligations hereunder
imposed upon Tenant shall be the joint and several
obligations of Tenant and such guarantor, and
Landlord need not first proceed against Tenant
before proceeding against such guarantor nor shall
any such guarantor be released from its guaranty for
any reason whatsoever, including without limitation,
in case of any amendments hereto, waiver hereof or
failure to give such guarantor any notices hereunder.
CERTAIN RIGHTS 41. Landlord shall have the following rights,
RESERVED BY exercisable without notice and without liability to
LANDLORD Tenant for damage or injury to property, persons or
business and without effecting an eviction,
constructive or actual, or disturbance of Tenant's
use or possession or giving rise to any claim or
set-off or abatement of rent:
a. To decorate and to make repairs, alterations,
additions, changes or improvements, whether
structural or otherwise, in and about the Building,
or any part thereof, and for such purposes to enter
upon the Demised Premises, after reasonable prior
notice to Tenant, and, during the continuance of any
such work, to temporarily close doors, entry ways,
public space and corridors in the building, to
interrupt or temporarily suspend Building services
and facilities and to change the arrangement and
location of entrances or passageways, doors and
doorways, corridors, elevators, stairs, toilets or
other public parts of the Building, so long as the
Demised Premises are reasonably accessible.
b. To have and retain a paramount title to the
Demised Premises free and clear of any act of Tenant
purporting to burden or encumber them.
c. To grant to anyone the exclusive right to conduct
any business or render any service in or to the
Building, provided such exclusive right shall not
operate to exclude Tenant from the use expressly
permitted herein.
d. To prohibit the placing of vending or dispensing
machines of any kind in or about the Demised
Premises without the prior written permission of
Landlord.
e. To have access for Landlord and other tenants of
the Building to any mail chutes located on the
Demised Premises according to the rules of the
United States Postal Service.
<PAGE> 16
f. To take all such reasonable measures as
Landlord may deem advisable for the security
of the Building and its occupants, including
without limitation, the search of all persons
entering or leaving the Building, the
evacuation of the Building for cause,
suspected cause, or for drill purposes, the
temporary denial of access to the Building,
and the closing of the Building after normal
business hours and on Saturdays, Sundays and
holidays, subject, however, to Tenant's right
to admittance when the Building is closed
after normal business hours under such
reasonable regulations as Landlord may
prescribe from time to time which may include
by way of example but not of limitation, that
persons entering or leaving the Building,
whether or not during normal business hours,
identify themselves to a security officer by
registration or otherwise and that such
persons establish their right to enter or
leave the Building.
NOTICE TO LENDER 42. If the Demised Premises or the Building or
any part thereof are at any time subject to a
first mortgage or a first deed of trust or
other similar instrument and this Lease or
the rentals are assigned to such mortgagee,
trustee or beneficiary and the Tenant is
given written notice thereof, including the
post office address of such assignee, then
the Tenant shall not take any action to
terminate this Lease or abate rentals for
any default on the part of the Landlord
without first giving written notice by
certified or registered mail, return receipt
requested, to such assignee, specifying the
default in reasonable detail, and affording
such assignee a reasonable opportunity to
make performance, at its election, for and
on behalf of the Landlord.
LOSS OR THEFT 43. Landlord shall not be responsible in any
manner to Tenant, its agents, employees,
licensees or invitees for any property lost
or stolen from the Demised Premises or any
other portion of the Building, the Building's
garage or the land situated beneath the
Building.
PARKING 44. Landlord may make, modify and enforce rules
and regulations relating to the parking of
automobiles in the parking garage adjacent to
the Building, and Tenant agrees to abide by
such rules and regulations. Tenant shall have
the right to use the parking garage adjacent
to the Building in accordance with said rules
and regulations and the provisions of Exhibit
"D" attached hereto.
MISCELLANEOUS 45. a. Any approval by Landlord or Landlord's
architects and/or engineers of any of
Tenant's drawings, plans and specifications
which are prepared in connection with any
construction of improvements in the Demised
Premises shall not in any way be construed or
operate to bind Landlord or to constitute a
representation or warranty of Landlord as to
the adequacy or sufficiency of such drawings,
plans and specifications, or the improvements
to which they relate, for any use, purpose or
condition, but such approval shall merely be
the consent of Landlord as may be required
hereunder in connection with Tenant's
construction of improvements in the Demised
Premises in accordance with such drawings,
plans and specifications.
b. Each and every covenant and agreement
contained in this Lease is, and shall be
construed to be, a separate and independent
covenant and agreement.
c. There shall be no merger of this Lease or
the leasehold estate hereby created with the
fee estate in the Demised Premises or any
part thereof by reason of the fact that the
same person may acquire or hold, directly or
indirectly, this Lease or the leasehold
estate hereby created or any interest in this
Lease or in such leasehold estate as well as
the fee estate in the leasehold premises or
any interest in such fee estate.
d. Neither Landlord nor Landlord's agents or
brokers have made any representations or
promises with respect to the Demised
Premises, the Building or the land except as
herein expressly set forth and no rights,
easements or licenses are acquired by Tenant
by implication or otherwise except as
expressly set forth in the provisions of this
Lease.
18
<PAGE> 17
e. The submission of this Lease to Tenant
shall not be construed as an offer, nor shall
Tenant have any rights with respect thereto
unless and until Landlord shall, or shall
cause its managing agent to, execute a copy
of this Lease and deliver the same to Tenant.
Dated as of the date first above written.
TENANT: LANDLORD:
PRESS PASS, L.P., NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
a Texas limited partnership
By: /s/ Victor H. Shaffer , By: Copley Real Estate Advisors, Inc.
----------------------- asset manager and advisor
General Partner hereunto duly authorized
By: Victor H. Shaffer By: /s/ James D. Flynn
----------------------- ---------------------------------
its duly authorized agent
Title: President JAMES D. FLYNN
-------------------- MANAGING DIRECTOR
<PAGE> 18
FIRST AMENDMENT OF LEASE
This First Amendment of Lease (the "First Amendment") is entered into this
16th day of March, 1994, to be effective as of January 14, 1994 (the "Effective
Date") by and between New England Mutual Life Insurance Company ("Landlord")
and Press Pass, L.P., a Texas limited partnership ("Tenant").
WITNESSETH
WHEREAS, on January 7, 1993, Landlord and Tenant entered into that certain
Lease ("Lease") for premises consisting of 2,500 rentable square feet on the
fourth (4th) floor, Suite 420 ("Demised Premises") of the building located at
14800 Quorum Drive, Dallas, Texas ("Building"), which by this reference the
Lease is incorporated herein for all purposes.
WHEREAS, Tenant desires to extend the Lease Term.
NOW, THEREFORE, for in consideration of mutual terms and conditions
expressed herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. The Lease Term is hereby extended from January 14, 1994, through the
period ending on January 14, 1996 ("Extended Term"). All references in the
Lease to the Lease Term shall refer to the Extended Term expiring on January
14, 1996.
2. Base Rental for the Demised Premises for the Extended Term shall
equal $2,187.50 per month ($10.50 per annum, per rentable square foot of the
Demised Premises) beginning on the Effective Date and ending on January 14,
1996. Section 5. A. of the Lease shall be amended to provide that Tenant shall
pay any Operating Costs and Taxes in excess of 1994 actual Operating Costs and
Taxes.
3. Tenant accepts the Demised Premises for the Extended Term in the
condition as exists on the date of this First Amendment, and Landlord shall
have no obligation to repair, alter, or remodel the Demised Premises.
**See below**
4. Exhibit E ("Extension Option") to the Lease shall be deleted in its
entirety.
5. All the remaining terms and conditions of the Lease shall be
applicable to the Demised Premises.
6. The Lease and this First Amendment shall be governed by all respects
by the laws in the State of Texas.
** Regarding repair of common areas, facilities as well as structural pendages,
all responsibilities as indicated in the previous contract remain in force.
1
<PAGE> 19
7. All capitalized terms used herein, and not otherwise defined
herein, shall have the meanings ascribed to said terms in the Lease.
8. The Lease, as amended herein, is hereby ratified and confirmed
and shall continue in full force and effect.
IN WITNESS WHEREOF, the parties have executed this First Amendment
effective as of the date first set forth above.
LANDLORD:
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
By: COPLEY REAL ESTATE ADVISORS, INC.,
asset manager and agent
By: /s/ DANIEL J. COUGLIN
----------------------------
Name: Daniel J. Couglin
----------------------------
Title: Managing Director
----------------------------
TENANT:
PRESS PASS, L.P.,
a Texas limited partnership
By: Press Pass, Inc.,
general partner
By: /s/ VICTOR H. SHAFFER
----------------------------
Victor H. Shaffer, President
2
<PAGE> 20
Second Amendment to Lease
This Second Amendment to Lease made and entered into this 28th day of
November, 1995 by and between CleveTrust Realty Investors, a Massachusetts
trust, as "Lessor" and Press Pass., LP a Texas limited partnership, as "Lessee".
WITNESSETH
WHEREAS, Lessor leased certain premises in the 14800 Quorum, in the
city of Dallas, State of Texas, to Lessee pursuant to that certain Lease dated
January 7, 1993, and First Amendment of Lease dated March 16, 1994, hereinafter
referred to as the "Lease", the premises being described as suite 420,
consisting of approximately 2,500 sq. ft. and,
WHEREAS, Lessee wishes to extend its lease term for an additional
three years and Lessor is willing to accommodate Lessee in its request.
NOW THEREFORE, in consideration of these presents and the agreements
of each other, Lessor and Lessee agree that said Lease shall be and the same
is hereby amended as of the 15th day of January, 1996 as follows:
(1) The Basic Lease Information regarding tenant shall be ammended
to reflect Press Pass., a general partnership. The Basic Lease Information
regarding rentable square feet in Demised Premises shall be amended to read
4131 rentable square feet.
(2) Section 1, The Lease Term shall be amended to reflect the Lease
Term extended for an additional three years and 1/2 month making the expiration
date of the Lease Agreement January 31, 1999.
(3) Section 2, Basic rental outlined on the First Amendment Lease,
Basic rental, shall be amended to reflect the Basic Rental to be in the amount
of
for the period January 15, 1996--January 31, 1996, the sum of
$1,872.50
for the period February 1, 1996--January 31, 1997, the sum of
$3,745.00 per month
for the period February 1, 1997--January 31, 1998, the sum of
$3,833.00 per month
for the period February 1, 1998--January 31, 1999, the sum of
$3,920.00 per month
The total monthly basic rent for January, 1996 shall be $1,872.50--
The period of 1/1/96 -- 1/14/96 having been paid with the
December 95 payment.
(4) Tenant and Landlord agree that Landlord shall perform tenant finish
in connection with this Lease agreement, per the attached Exhibit A. Tenant is
responsible for relocation of telephone and telephone board in order that
Landlord may commence construction.
(5) Section 45. Miscellaneous, shall be amended to include f.
Notwithstanding anything to the contrary contained herein, Tenant acknowledges
that Landlord makes no warranties either expressed or implied in connection
with this Lease, including but not limited to, warranties of fitness for a
particular purpose, or suitability of the Demised Premises.
(6) Section 18 of the Lease titled "FIRE OR OTHER CASUALTY" shall be
amended by deleting the 20th-24th lines which read "except that Landlord shall
not be required to rebuild, repair or replace any part of the partitions,
fixtures and other improvements which may have been placed by Tenant or other
tenants within the building or the Demised" and replacing it with, "except
that Landlord shall not be required to repair or replace any of Tenant's
supplies, goods, personal property, furniture, fixtures or equipment which may
have been placed by Tenant or other tenants within the building or the Demised".
All other terms, covenants and conditions of the Lease remain in full
force and effect except as heretofore set forth.
IN WITNESS WHEREOF, Lessor and Lessee have executed this instrument by
proper persons thereunto duly authorized to do so on the day and year first
hereinabove written.
CleveTrust Realty Investors is a Massachusetts business trust which
was organized to operate as a real estate investment trust and is governed
by the terms of a Second Amended and Restated Declaration of Trust dated as
of February 21, 1992. No obligation of the Trust is personally binding upon,
nor shall resort be had to the private property of any other Trustees,
shareholders, officers, employees or agents of the Trust, but the Trust
property or a specific portion thereof only shall be bound.
LESSOR: CleveTrust Realty Investors
a Massachusetts business trust
By: Witnesses: /s/ PENNY MEANEY
------------------------- -------------------------
/s/ BRIEN D. GRIESINGER /s/ BARBARA O'BRIEN
------------------------- -------------------------
Brian D. Griesinger, V. President
LESSEE: Press Pass., a general partnership
By: /s/ ILENE HOLCOMB Witnesses: /s/ MARLA ALCORN
------------------------- -------------------------
CFO /s/ PEDEO ARRIAGA
-------------------------
<PAGE> 1
EXHIBIT 10.16.3
FIRST AMENDMENT TO THE
WARRANT
OF
WHEELS SPORTS GROUP, INC.
This FIRST AMENDMENT TO THE WARRANT OF WHEELS SPORTS GROUP, INC.,
dated as of April 14, 1998 (the "First Amendment") is made by Wheels Sports
Group, Inc., a North Carolina corporation (the "Company"), in favor of Indosuez
CM II, Inc. (the "Holder").
WHEREAS, the Company issued a Warrant dated December 31, 1997 (the
"Warrant") to the Holder, entitling the Holder to purchase 509,358 shares of
Common Stock, par value $0.01 per share (the "Common Stock"), of the Company at
an exercise price of $3.50 per share;
WHEREAS, in accordance with Section 6.2 of the Warrant, the Warrant
and any provision thereof may be amended, modified or waived by an instrument
in writing signed by the Company and the Requisite Holders (as defined
therein).
NOW THEREFORE, in consideration of the premises and mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
SECTION I
AMENDMENT TO WARRANT
The second paragraph of the Warrant is hereby deleted in its entirety
and replaced with the following:
"The Warrants granted to the Holder hereunder shall become exercisable
on December 31, 1997."
SECTION II
PROVISIONS OF GENERAL APPLICATION
2.1 Except as otherwise expressly provided by this First
Amendment, all of the terms, conditions and provisions to the Warrant remain
unaltered. The Warrant and this First Amendment shall be read and construed as
one agreement.
2.2 If any of the terms of this First Amendment shall conflict in
any respect with any of the terms of the Warrant, the terms of this First
Amendment shall be controlling.
<PAGE> 2
IN WITNESS WHEREOF, Wheels Sports Group, Inc. has caused this First
Amendment to be executed in its corporate name by one of its officers thereunto
duly authorized, as of the day and year first above written.
WHEELS SPORTS GROUP, INC.
By: /s/ Victor H. Shaffer
---------------------------------------
Name: Victor H. Shaffer
Title: Interim Chief Executive Officer
Agreed to and Accepted:
INDOSUEZ CM II, INC.
By: /s/ Michael Arougheti
--------------------------------
Name: Michael Arougheti
Title: Vice President
2
<PAGE> 1
EXHIBIT 21
WHOLLY-OWNED SUBSIDIARIES OF WHEELS SPORTS GROUP, INC.
1. Diamond Sports Group, Inc., a North Carolina corporation.
2. World of Racing, Inc., a North Carolina corporation.
3. Green's Racing Souvenirs, Inc., a Virginia corporation.
4. SM Acquisition Company, a North Carolina corporation.
5. J/B Acquisition Company, a North Carolina corporation.
6. High Performance Sports Marketing, Inc., a North Carolina corporation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 440,340
<SECURITIES> 0
<RECEIVABLES> 3,633,682
<ALLOWANCES> 2,386,000
<INVENTORY> 2,710,905
<CURRENT-ASSETS> 8,273,648
<PP&E> 1,237,742
<DEPRECIATION> 299,972
<TOTAL-ASSETS> 28,799,935
<CURRENT-LIABILITIES> 12,618,226
<BONDS> 6,090,397
0
0
<COMMON> 52,803
<OTHER-SE> 10,038,509
<TOTAL-LIABILITY-AND-EQUITY> 28,799,935
<SALES> 7,491,309
<TOTAL-REVENUES> 7,491,309
<CGS> 6,765,431
<TOTAL-COSTS> 5,149,992
<OTHER-EXPENSES> 321,390
<LOSS-PROVISION> 493,000
<INTEREST-EXPENSE> 93,900
<INCOME-PRETAX> (5,332,404)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,332,404)
<DISCONTINUED> (1,460,080)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,792,484)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
